Download Economic History of the US

Economic History of the US
Depression and the World Wars, 1914-1946
Lecture #1
Peter Allen
Econ 120
1
World War I, 1914-18
 June 1914
 Financial panic in US
 Banks issued “Emergency
Currency,” Aldrich-Vreeland
Act, 1908
 US entered war in April 1917
 War ended November 1918
 Est. 10mm. casualties
 117,000 US casualties, most
from flu
2
US becomes a World Power
 US neutral, 1914-17
 First global, industrial war =
expensive
 Huge profits for US industries
 Combatants buying munitions/food
 US now with large bop surpluses
 US exports > imports
 Europeans liquidating gold and
other assets
 US became a large net creditor
nation by 1918
3
United States Status as a…
“World Power” (i.e.
ability to influence
world politics)
…coincided with
 …becoming a net
creditor to other
industrial countries
 …building up large
net assets vis-à-vis
the rest of the world
 During World War I
4
World War I Financing
 High cost of “industrialized”
warfare
 Tax
 Estate tax, 1916
 Income tax, 70%
World War I, Financing
($ billion)
War Spending
Taxes
Borrowing
Money Creation
 Borrowing
 Monetization
 First use of Fed. “open market
operations”
 $4.4 billion
 US only power to stay on goldstandard
 US a world power
1914
1915
1916
1917
1918
1919
1920
$
Monetary Base
$ bn.
% chg.
16.39
17.59
7.3%
20.85
18.5%
24.37
16.9%
26.73
9.7%
31.01
16.0%
34.8
12.2%
31
7.6
19
4.4
100%
25%
61%
14%
Inflation
% chg.
3.1%
13.0%
23.5%
15.0%
1.5%
14.1%
5
U.S. Government Debt, % of GDP 1790-2007
120%
WW2
100%
80%
60%
40%
Revolutionary
War
Civil
War
WW1
20%
0%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
6
6
Money and Prices, World War I
7
Experiment with Command Economy
 Fashion of the times
 Bolshevik revolution in Russia, 1917
 Food and Fuel Administration
 H. Hoover
 Food rationing or voluntary conservation?
 War Industries Board
 Price controls on industrial products
 Nationalization of railroads
8
Economic Insight 21.1
Effects of Rationing
9
Bitter Peace, Versailles 1919
 Disastrous…
 Treaty of Versailles…
 European allies wanted Germany
to be punished
 League of Nations…
 …rejected by the Senate
 Economic terms were punitive
 New monetary system…
 …and especially debt payments
between industrial power
governments…
 Depended on punitive reparation
payments by Germany…
 …well beyond Germany’s
maximum capacity to pay
 …basis for allies’ debt payments
to the US
10
Bitter Peace, Versailles 1919




Woodrow Wilson…
First president to influence global politics
Fourteen Points
His ides dominated the conference…





US constitution
National self-determination
Fairness
League of Nations…
…rejected by the Senate
 US a world power, but not ready to accept
responsibilities
 WW personally inexperienced in diplomacy
 Couldn’t convince other allies for a fair
peace
11
Wilson
12
Economic Consequences of the Peace
 “The financial position of
France and Italy was so bad
that it was impossible to
make them listen to reason
on the subject of German
Indemnity…”
 “To what a different future
Europe might have looked if
either Lloyd George or Mr.
Wilson had apprehended
that the most serious of the
problems…were not political
nor territorial but financial
and economic…” JMK
13
“Economic Consequences of the Peace”





“The Allied and Associated
Governments…require, and Germany
undertakes, that she will make
compensation for all damages done to
the civilian population of the Allied and
Associated Powers and to their
property…” Treaty, Article 232
JMK estimated this at $40-75 bn
“…$10 billion is a safe maximum figure
of Germany’s capacity to pay.
“I believe that the campaign for securing
the general costs of the war was one of
the most serious acts of political
unwisdom for which our statesmen have
ever been responsible.” JMK
“…a scientific consideration of Germany’s
capacity to pay was from the outset out
of court. On the basis of so much
falsehood it became impossible to erect
any constructive financial policy which
was workable.”
14
Settlement of WWI
 Set up a ticking time bomb in
the global economy
 Keynes description made him
famous
 Led to…
 Great Depression
 WWII
15