WWI vs WWII on consequent economic depression/growth

World War I

Economic Impact of World War I

When the United States entered the conflict in 1914, the economy was already at full employment. The United States sent 4 million men across the ocean which was a small amount of the current workforce. While the amount of men fighting was not significant the cost to the economy was still about $.2 billion. Coupled with other expenses, including transfer payments to other nations that would never be repaid, the total cost of World War I in was $32 billion dollars[2000 base year] (%52 of GDP). . After World War I, the U.S. chose to de-mobilize, resulting in a small recession. The number of people employed by the military quickly declined. Along with the decline in manpower, there was a decline in wage hours since wartime production was no longer necessary. During this time, the U.S. added 3.5 million workers in the federal sector alone which allowed the economy to come close to full employment.

Economic Legacies of World War I

The most important economic legacy of World War I was the breakthrough of the United States as a major industrial nation in the world. Prior to the war, the nation was considered a debtor nation on international capital markets, but this status changed soon afterwards. Much of this is attributed to the damage sustained by England. After the war, England had trouble returning to the Gold standard, and the physical infrastructure of the country had suffered major war damages. The United States, on the strength of its geographic location was able to succeed England as a new economic giant. New York City came to rival London as the Global finance center. The other lasting legacy of the War was the creation of liberal economists. Prior to the 1920’s, very few people were advocates of central Government being involved in economic decisions.

The Roaring Twenties

Prosperity in America

Following World War I, there was a slight recession until 1922. There had never been so much wealth in so many hands. The amount of millionaires grew from 75 to 283 in the middle of the decade. Starting in 1922, the amount of savings was 17,579(million) 1922 dollars. By the year 1930, as the Depression was just starting to begin, the amount of savings had grown to 28,479(million) 1930 dollars. This reflects the amount of money Americans had started to make in the 1920s. There were eight straight years in which saving deposits at American banks increased. Another example of the prosperity was the numerous industries that grew that had not existed prior to the outbreak of World War I. These included the radio industry, the mass production of passenger automobiles, the growth of new fabrics, and chain stores.

Contributors to Success

As mentioned before, the growth in the savings rate and of new industry were key contributors. Also, Harry Ford's original vision of high standard of living for manufacturing workers began to take hold. The average wage of manufacturing workers in 1922 was $90.70/month (1922). By the time the “Bull Market” of 1929 rose to prominence the average wage of the manufacturing worker was $106/month (1929). The technological increases made it much easier for workers to increase output and push for higher wages. While there was an increase in wages, prices held fairly steady until they began to decline in 1930. This helped to improve the purchasing power of the dollar.

The Bull Market

The primary reason for this growth was due to the acceptance of the corporate culture in America. Towns were increasingly ceding local control of establishments and in doing so, allowing big business an opportunity to profit. Investors would borrow money from banks in order to buy securities from large companies which in turn would build movie theaters, department stores and other such retail outlets. This was a major way in which speculation drove the consumption and investment sectors of the economy in the 1920s. As most people know, the economy of the 1920s was bolstered by the existence of a “Bull-Market.” People would speculate on the price of stocks, borrowing thousands of dollars in order to purchase stock. The money would then be repaid back to the broker and the investor would keep the profit. There were several reasons that margin spending was able to happen. A primary reason for the growth of margin spending was the growth of holding companies. Holding companies were a front for corporations i.e. one railroad company would form a holding company which would use the reputation of the original corporation to gain credit towards buying another company. After an acquisition of a new company, the rise in stock prices would cause people to speculate with regard these holding companies. Utilities, railroads, steel: almost every industry had some sort of holding company associated with it. The stock market was intertwined with the banking system as well. The loans from the banks went to brokers who forwarded the loan to investors. The stock market was essentially liquid making it easy for a person to recoup their money in the event they needed it. People were increasing the cost of stock despite the fact that the parent company may not have done anything to put faith in the stock The amount of money loaned grew to 6 billion dollars (1928) from about 1.5 billion in 1922. This was all money that became a liability of the fractious banking system that existed at this time in the United States. During this time period, there was only a limited amount of ownership available in a given company. As companies grew they became more popular, and people desired to have a piece of the success. For this reason, the price of common stocks such as U.S. Steel were pushed levels above $200.00. It was essentially a supply-demand issue. Demand was much higher than the supply available and as a consequence of this shortage, stock prices rose to coincide with demand.

Data from http://www.measuringworth.com/DJA/result.php. It is a yearly average of the DJA.

Depression Strikes

Causes of the Depression

Monetary policy was also integral in the development of the depression due to various events of 1929. While there was an increase in demand for money, there was no increase in supply in order to negate the impact excess demand would have. As a result, interest rates decreased. Following the interest rate decrease, there was a negative shift in the demand for borrowed reserves which caused the money multiplier to constantly fall during the first years of the Great depression.

Economic impact of the depression

• Reduced National income
• Reduced National savings
• Dollar devaluation
• Reduced Exports

Data from http://www.nber.org/databases/macrohistory/rectdata/08/m08084a.dat. Bureau of labor statistics was original source data.

A New War

Economic Help is on the Way

• The show must go on
• Growth of the Federal workforce
• Mobilizing for War
• Solutions to a problem

Data from Louis D. Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1790 - Present." Economic History Services, October 2005, URL : http://www.eh.net/hmit/gdp/

The end of war

• Income equality returns
• Market to the World
• Continued Federal and defense employment

Post War Economy and the reasons for Success

• G.I. Bill
• Creation of FDIC
• Global integration
• Foreign Success

Conclusion

• More extreme business cycle swings
• A change in Landscape
• Growth of a power