Chapter 21 World War 1

Chapter 21 Overview:
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 from the enemy; (3) receiving voluntary contributions from citizens or allies; (4) selling existing assets such as land owned by the government; (5) taxing; (6) borrowing; and (7) printing money. The latter three methods—taxing, borrowing, and printing money—are often singled out as the three ways of financing wars. They are by far the main ways that the United States has acquired the money required to mobilize its resources for war. * In 1916, Congress levied an estate tax to help finance rearmament. * On October 3, 1917, after considerable wrangling, Congress passed the War Revenue Act. This act increased corporate and personal income taxes (the rate in the top bracket was raised to 70 percent) and established excise, excess profits (for business), and luxury taxes. Table 21.1 shows the total financial cost of the war and how it was distributed among various sources of finance. Taxation was important, but borrowing was far more important, accounting for 61 percent of total financing.

* Why did Congress prefer to borrow? One reason may be that borrowing concealed some of the costs of the war. When taxes are raised, it is altogether too clear who is doing what to whom. It could also be argued that the war was an investment—“to make the world safe for democracy,” in President Wilson’s phrase. Since future generations would benefit, why should the current generation bear all the burden of the war? Raising taxes high enough to finance all of the war, moreover, would have reduced work effort. It is better, many economists now believe, to use borrowing to “smooth” taxes over time. * War Bonds were marketed to capitalize on patriotism. Celebrities were used to help sell War Bonds. Even with all the hoopla, the government could not sell bonds that paid much below the going market rate. * The government also relied on creating new money. * The net result of financing part of the war by creating money was a substantial increase in the stock of money and the price level. As Table 21.2 shows, the stock of money about doubled between 1914 and 1920, as did the level of prices. * Inflation is a tax on money.
Replacement of the Market with a Command System: * During World War I (unlike the Civil War), attempts were made to direct the economy from the top. * By the end of the war, Washington was bulging with agencies set up to cope with a vast array of economic problems, including a Capital Issues Committee designed to limit issues of securities by the private sector, a War Trade Board with powers over imports and exports, an Emergency Fleet Corporation and a War Shipping Board designed to produce ships and to control their use, and about 150 others.
The War Industries Board: * March 1918 President Woodrow Wilson reorganized the most ambitious war agency, The War Industries Board which: * Negotiated prices of key industrial raw materials. * “Bulkline pricing” * A Priorities system (rating system) for government contracts
The Food and Fuel Administrations: * August 1917 congress passed the Lever Food and Fuel Control Act, establishing wartime Food Administration and a Fuel Administration. Herbert Hoover was appointed the food administrator. His job was to maintain an adequate supply of food to the domestic market and to our allies while preventing excessive increases in prices. The food administrator was given the power to license food dealers. This license could be revoked if the dealer failed to go along with Food Administration price policies.
Rationing:
* In place of formal rationing, Hoover called for voluntary conservation. “Meatless Mondays” and “Wheatless Wednesdays” were promoted as ways of reducing domestic demand and leaving more for exports. * Formal rationing was used for sugar (after long waiting lines became intolerable). * Hoover clearly believed that appeals to moral principles could influence behavior. Retailers, moreover, were encouraged (or permitted, depending on how you look at it) to sell wheat flour along with what were then considered less desirable substitutes such as rye or potato flour. The resulting mixture could be baked into a loaf of “Victory bread.” By such half-measures, food prices were controlled and output rationed.
Labor during the War: * The demand for labor was increased by government contracts and the supply of labor was reduced by the cutoff of immigration and by the drafting of men into the armed forces. * Real wages fell. It is not surprising, then, that 1917 was a year of strikes—4,450 of them, which was a record. Strikes were particularly acute west of the Mississippi, where a combination of low wages, harsh working conditions, uncompromising employers, and radical unions produced bitter labor disputes. When a strike of railroad workers threatened to disrupt the industry that was at the heart of the war effort, the administration nationalized the railroads. * According to Table 21.3, money earnings leaped upward in 1918 by some 22.6 percent, outrunning the cost of living. Both nominal and real earnings increased substantially.

Labor during the War: (CONT) * Organized labor was extremely optimistic in the immediate postwar period. Labor union membership was up, as was the public’s view of organized labor. * Women were one potential source of labor tapped during the war. Some women served with the armed forces in Europe, usually as nurses or telephone operators. Women also made important contributions in industry, with about a million taking up war work. However, the war did not mean a breakthrough in the economic role of women. Few took jobs in heavy industry, and first-time hires were relatively few. Many married women who entered the labor force had been previously employed while single; they returned temporarily to help their families cope with war. When the war ended, the role of women in the labor force returned to what it had been before the war. Partly this was the result of pressure from labor unions and other sectors for women to make room for returning veterans; partly it was the result of older economic pressures. The labor force participation rates for married and single women were both a bit lower in 1920 than they had been in 1910. On the political front, the Wilson administration strongly supported the right of women to vote, calling their contributions “vital to the winning of the war.” As a result, the Nineteenth Amendment to the Constitution, giving women the right to vote, was finally adopted in 1920. * Perhaps no group of workers seized the opportunities provided by the war more eagerly than African Americans. With factories operating at full capacity and deprived of a steady stream of immigrants from Europe, northern industry at last looked to African-Americans for a supply of labor. Beginning in 1914, agents for northern industries fanned out across the South to recruit workers, who were often given free transportation north. There began a mass exodus of African American workers from the rural South: New York, Detroit, St. Louis, Cleveland, Chicago, and other industrial cities saw a steady stream of newcomers. In a few places in the South, the new shortage of labor actually led to improved race relations; but elsewhere, the South reacted in the old way, with harassment, detentions, and beatings. Some southerners also tried to prevent northern agents from recruiting black workers, but nothing could stem the tide: Northern industry provided higher wages, and northern cities a greater measure of freedom. * White workers, however, reacted negatively, sometimes violently, to the immigrants from the South. Competition between African American and white workers soon exploded in violent race riots: In East St. Louis in July 1917, nine whites and a larger but undetermined number of African Americans were killed; in Chicago in July 1919, 13 whites and 23 African Americans were killed. But the result was not always so negative. In Cincinnati, we know, thanks to the work of Warren Whateley (1990), that the employment of African Americans during the war led to permanent changes in employment practices—the war provided the chance for African Americans to, in Whateley’s phrase, “get a foot in the door.”

The Costs of the War: * The major part of the war’s cost was borne by the soldiers, sailors, and airmen, and their families. To some extent, we can think of these costs in economic terms. The draft can be thought of as a tax. The amount of the tax was the difference between what the government would have had to pay a soldier to get him to volunteer for military service and what it actually paid. When a soldier received a non-mortal wound or died there was a further loss: the discounted value of the lost future income. * These losses, it was widely recognized, created an obligation of the United States to the veterans and their families. Partly, these obligations were made good through veterans’ benefits paid after the war. * Payments to veterans or their families do not change the loss of resources and output that the economy as a whole sustained. These payments merely redistribute the burden of the losses. * In the end, it is impossible to put dollar signs on all of the human costs, costs that were high for the United States and staggering for the European belligerents. * The most careful and detailed estimate of the cost of the war was made by John Maurice Clark (1931) in his classic book, The Costs of the War to the American People. Clark put the total cost at $31 billion. This was about 44 percent of average GDP during the war period (1917–1920). Today, a similar share of GDP would be about $6 trillion.
The Legacies of the War: * Demobilization followed the simplest possible path after the Armistice. Soldiers were mustered out of the army as fast as possible. War contracts were canceled. Government bureaus were closed. Despite the rapid demobilization, however, the economy never returned to what it had been before the war.
Post-War Recession: * The immediate effect of the Armistice was a slowdown in the economy. Prices remained roughly level for some months. Then, in 1919, a vigorous boom began, and prices began to rise rapidly. * The Federal Reserve continued to follow a policy of keeping its discount rate (lending rate) below market rates. So Banks were finding it profitable to borrow from the Federal Reserve and then expand their own lending. As reserves of gold were becoming depleted, the Federal Reserve acted. In late 1919 and early 1920, the Federal Reserve raised its discount rate. These increases sent a strong signal to the market that credit would soon be tight. As a result, the economy went into a severe recession.
The Domestic Legacies: * The war also left many domestic legacies, such as increased federal spending for interest on the national debt, veterans’ benefits, and other long term costs. * New Deal Administrations were patterned after War programs
The International Legacies: The Treaty of Versailles * Some of the most important legacies of the war were in the international sphere. Shortly after the war ended, the Treaty of Versailles treaty was hammered out by the Big Four: Britain, France, Italy, and the United States. The United States, however, never ratified the treaty. Under the treaty, Germany was forced to admit responsibility for the war, to transfer land and other resources to the allies, and to pay reparations that were later set at $56 billion in gold dollars.