World War I, 1914-1918
* The United States entered World War I in April 1917. Although the United States was actively engaged for only 19 months, labor and capital were quickly mobilized on an impressive scale. * The armed forces increased from 180,000 in 1916 to nearly 3 million in 1918. * Scores of new agencies attempted to regulate prices, set priorities, and allocate resources. * To pay for the war taxes were raised, the money supply was expanded, and billions of dollars’ worth of bonds was sold to the public. At the start of the war, the national debt was equal to 3 percent of gross domestic product (GDP); by the end of the war, the national debt was equal to 32 percent of GDP. * When the war ended, most wartime controls were abandoned, and most wartime agencies were dismantled. Nevertheless, the war provided a precedent for the federal government’s increased role in the economy that emerged in the 1930s; the lesson that many people drew from the war, that the government could play a powerful positive role in meeting a crisis, would be remembered when the nation faced the Great Depression. The Origins of the War:
* By 1914 Europe is in a sustained arms race and nations link together in military alliances * The assassination of Austrian Archduke Ferdinand by a Serbian revolutionary on June 28, 1914, set off a chain reaction that soon engulfed Europe * On one side were the Allies: Britain, France, Italy, and Russia, and several smaller nations. On the other side were the Central Powers: Germany, Austria-Hungary, and their associates. The US later joins with the Allies * Casualties of War: Conservative estimates are that 10 Million people died and 20 Million people were wounded in the War * The first economic reaction in the US was financial panic. The stock market closed for 4 month and banks had crisis with depositor’s trying to convert money into gold. To overcome this banks issued emergency currency, which put an end to the crisis. * The period of American neutrality (from 1914 until 1917) would be immensely profitable for American business. German imports from the United States fell to practically nothing because of the British naval blockade; but Britain, France, and other European countries began to purchase large amounts of food and munitions at ever-rising prices from the United States. * When the war began, the United States was a debtor, the normal status for a developing country. When the war ended, the United States was a creditor that held much of the world’s stock of monetary gold. Before the war, the world’s financial center was London; after the war, it was New York. * Germany’s unrestricted use of submarine warfare (IE. The 1915 sinking of the Lusitania, killing 124 Americans) pushed the US to side with the Allies along with cultural and linguistic ties with Britain
The US goes to War:
* America’s involvement in the war would be brief but decisive. The United States declared war on April 17, 1917. The armistice with Germany was signed on November 11, 1918, 19 months later. * A military draft was instituted in April 1917, with a system of deferments for skilled workers. The armed forces of the United States increased from 179,000 in 1916 to nearly 3 million in 1918. * The United States produced vast amounts of arms and weapons, including a new instrument of war, the airplane, and launched a great shipbuilding program. The financial reflection of the military effort was a tremendous increase in spending by the federal government, from 1.5 percent of GNP in 1916 to 24.2 percent in 1918. American involvement began with the country operating at close to full employment Financing the War:
* Governments can obtain the resources needed to fight a war in many ways: (1) commandeering, including drafting soldiers, confiscating food and other raw materials, and appropriating living quarters for soldiers; (2) capturing resources...