Economics of WWI

RedemptionJon Nacionales

Overview of the WarO Please don’t ask me what WWI was

because then I’ll be pretty disappointed. We studied the background in the social science packet. If you still don’t know anything read the Social Science packet and DemiDec and go to this really cool website that has information all about WWI:

O https://www.google.com

Total War

Total War

Food & Agriculture

Manufacturing &

Production

Military & Medical

GAINS vs. LOSSES

AMERICABRITAIN

EVERYONEELSE

*Most

O Established naval blockade of Germany, effectively stopping ALL* American trade with the Central Powers.

O Germany use U-Boats in effort to isolate Britain

British Economic Warfare

BritainBefore WWI Britain has a lot of ££££

Britain uses 40% of

economic output for WWI. They

produce war stuff.

Entente win and Britain is

13% more richer

• STEEL OUTPUT• Rose by 25%

• MUNITIONS OUTPUT• Slowly at first but the fast because of Ministry of

Munitions (1915)

• COAL OUTPUT• Dropped. Where did all the miners go? War.

FranceO “France suffered the greatest cost,

the most extensive physical damage, and the most significant economic disruptions.”

O Army of 5 million men (most came from private industry)

O 1913 government spending raises by 10%

O 1918 government spending raises by 53.5%

ItalyO Italy had a relatively underdeveloped economy

to begin with=limited mobilizationO Supreme Committee of Ministers & Under-

Secretariat for Arms and Munitions took over private factories and forced private firms for war benefit.

O The mechanical and engineering industries and hydroelectricity experience greatest gains. Automotive industry : FIAT

O “the output increases in war- related sectors were obtained largely at the cost of running down stock elsewhere”

RussiaO “Backwards economy”O 1914—Income per capita was 11-

30% of United StatesO August 1914-December 1917—24%

in annual national income goes to war

O Russia leaves in 1917 and America enters=limited consequences

More RussiaResourc

esProblem

s

EFFECTIVELY

ORGANIZE

CANNOT

PEOPLE

LAND

1917—Enter AmericaO Lusitania—May 17, 1915O Sussex—1916O Sussex Pledge—March 1917O Zimmerman—March 1, 1917O America Enters—April 6, 1917

American MobilizationO America faces same production goals as

Europe + Atlantic OceanO 24.2M men register, 2.8 fightO men received 6 mo. training prior and 2

mo. afterO America sent 7.5 million tons of cargo,

only 200,000 was lostO How to transport men? ½ British Ships +

½ Emergency Fleet Corporation = 2M tons of ships

The War Industries Board (WIB) Est. July 1917

O In charge of the government’s procurement of war goods

O Set very high prices on goods (Price Fixing Committee aka PFC)

O Bulk-line pricing systemO “Under such a pricing strategy, the

government would decide what fraction of an industry’s total output it needed for the war effort, and it would set a price just high enough to reach that level of output.”

Bulk Line PricingO Demand was more than

supply=ShortagesO In free market prices would increaseO War market prices are fixedO Government sets priority system

(AA, A, B, C, D)

Parts WIBO Price Fixing CommitteeO The Food AdministrationO The Railroad AdministrationO The Fuel Administration

The Food Administratrion

O Lever Food and Fuel Act in August 1917—Herbert Hoover

O NO food rationing and price controlO YES volunteer

O Meatless MondaysO Wheatless daysO Porkless days

O Food licensingO No volunteers? No license.

The Railroad AdministrationO President Wilson nationalized the railway

system from 1917-1920O “unable to earn net income sufficient for

them to maintain their credit and to attract new capital for needed enlargements and improvements in facilities...”

O Make railroads more efficient for transporting war goods and TROOPS.

O 610,000 troops every monthO 13,912 trains over 800 miles

The Fuel Administration

O Created by President Wilson from August 1917-1919

O Set coal pricesO Work with Railroad Administration to

deliver coal and fuel.

Costs of WarO Net cost = Gross cost –

“advances”/loans to AlliancesO Total cost = indirect + directO Total cost = $337,850,000,000

Indirect CostsO opportunity costsO property losses, shipping and cargo

losses, lost production, war relief, and the capitalized value of civilian and soldier deaths

O what they could’ve earned

War FinancingO BorrowingO TaxationO Printing of money

United States FinancingO $19 Billion from Government Borrowing:

Liberty Bonds (Interest rate at 3.5-4.25%)O First Liberty Loan (April 24, 1917)—$5B at

3.5% interestO Second Liberty Loan (October 1, 1917)—

$3B at 4% interestO Third Liberty Loan (April 5, 1918)—$3B at

4.5% interestO Fourth Liberty Loan (September 28, 1918)

—$6B at 4.25% interest

Who do you think made this?

Income TaxO 1913—16th Amendment is federal

income tax saying, “We will tax your income.”

O Raised 24.5% of American war spending ($7.B)

1913 7%

191615%

191767%

191877%

US Top Income Tax Rates Over WWI

The Federal ReserveO Established December 1913O Printed $4,400,000,000 (14.1

percent of total war expenditures) in paper money during WWI

O Where did all the money go?O Buy Liberty Bonds.

Debt FinancingO Debt financing is selling bonds.O Debt financing = selling bonds.O Debt financing 是 selling bonds

BritainO Debt financing or selling bonds was

the most important means of financing war expenditures.

O 1918 – British goods and services is worth £5.866 Billion. British national debt is £7.481 Billion. Debt is 127.5% of goods and services.

O War loans in 1914, 1915, 1917O Borrow from United States of

America

British TaxesO Taxes raised 24.5% of war

expenditures and 40% of first year war expenditures.

O Raise property and income taxes.O Excise Taxes on alcohol, tobacco,

tea, automobiles, and musical instruments.

FranceO France spent a lot of monies.O Government spending went from

10% to 50%O At first short term debt, but then

long term every year.O Pre-war debt: 65% of GDPO Post-war debt: 124% of GDP

ImpôtsO French income taxes stayed relatively

low because of opposition.O 1916—”Extraordinary War Profits” Tax

has high rate, but does not make significant revenue until after the war.

O “Inflation Tax”O 1915-1919: Money supply rises 20%O 1915-1919: Prices rise 19.7%O France tries stopping inflation by setting

price controls, but fails.

“Inflation Tax”Inflation

Prices rise faster than

income

Purchasing power drops

Less consumption

Money supply rises

GermanyO Relies on debt financing (81 percent

of war expenditures) more than Britain

O War expenditures account for more than half of total spending

An OmenGerman money supply

increases nearly 5x (400%)

German prices

exceed 2x (200%)

1920-1923 German

Hyperinflation

1920-1923 German

Hyperinflation

Nazis

GDP RefresherO GDP is the dollar value of all goods

and services produced within an economy in a year. There are 2 ways to measure it.O The expenditure approach is

calculating total spending of different economic sectors (private households, business firms, governments, and foreign buyers).

O The income approach is adding up total income in a year.

GDP and WarO Wartime may experience an appearance

of an increase in GDP because of the increase of war stuffs production.

O NOT a good thing because it’s using capital to destroy other capital and not being detected.

O Economists look at the “real” or “inflation-adjusted” in which the price level is kept constant.

O http://data.bls.gov/cgi-bin/cpicalc.pl

1913

1914

1915

1916

1917

1918

60708090

100110120

Changes in Real GDP, 1913-1918, by Country

UKUSGermanyAustriaRussiaFrance

Year

Perc

enta

ge o

f the

191

3 G

DP

What am the drawbacks to this graph?

American GrowthO Pre-War recessionO Onset of war leads to economic

BOOM because European purchasesO 1917—America enters war and boom

slows down.O 2/3 of American WWI economic

growth happened during neutrality

British GrowthO 1913-1915—British economy

contractsO 1916-End of War—Growth spurtO Overall Growth 15%

European Ungrowth

Germany contracts sharply

Austria contracts sharply

Russia, already poor,

reduces 70%

France reduces

64%

Demobilization

11/11/1918

Armistice

04/1919 2,000,000 American soldiers

demobilized

mid-1920 4,000,000 American soldiers return to

labor market

American economy experiences short

shock and downturn

Boom, EconomicallyO The boom is

not because of consumers, but because of government

“Roaring Twenties”

New equipment and

technology

Foreign market

and loans

Discharged

servicemen

GermanyO Shock

O Human capitalO IndustryO AgricultureO 1919 inflation-adjusted income is

55%-72% 1913 incomeO War-related industry declines until 1915

The War EndsO June 28, 1919—Versailles Treaty

O France. George ClemenceauO United States. Woodrow WilsonO England. David Lloyd George

O Germans say treaty is unfair, but signs its own death warrant anyway.

O Allies won, but at what cost?

The 2 Sided “Ratchet Effect”

Increased government involvement

Debt service payments

America, the Leader

O The peace of WWI leads to the war of WWII

WWI and WWII

O Powerful militaryO Powerful resourcesO Helps in aftermath

Versailles Treaty Reparations

O Germany must pay $33 Billion in reparations for “all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air” at a rate of $375 Million per year until 1925 and $900 Million in interest after 1925.

O Wilson’s 14 Points said that Germany would pay, but not for losses at sea by submarine, bombardments from the sea, or damage from air raids.

Keynes and VersaillesO The British economist John Maynard

Keynes (1883-1946) wrote The Consequences of the Peace (1919).

O “the terms of the treaty prevented an integrated and unified Europe”

O Keynes liked the 14 Points, but not Versailles Treaty

O Did not like generalizationsO $10 Billion should be sufficientO Focus on food, coal, and transport

Other Economists…O argued Germany could pay, but

didn’t want to.O argued that the reparations asked

from Germany were less than the reparations Germany demanded from France after the Franco-Prussian war of 1871.

ConclusionO Technological advances

O Machine guns used in trench warfareO TanksO Attack aircraftsO Poison gasO 9 million combat deaths

O WWI was very economic.O WWI did not end all wars. Instead, it

lead to WWII.

Final SlideO Test is on Friday