How the War Changed the Economy for Good (2024)

When war broke out in Europe in the summer of 1914, a sense of dread rippled through the American business community. So great was the fear of contagion from tumbling European markets that the New York Stock Exchange was closed for more than three months, the longest suspension of trade in its history.

At the same time, businesses could see the enormous potential the war might bring to their bottom lines. The economy was mired in recession in 1914, and the war quickly opened up new markets for American manufacturers. In the end, World War I set off a 44-month period of growth for the United States and solidified its power in the world economy.

A War of Production

World War I was the first modern mechanized war, requiring vast amounts of resources to equip and provision massive armies and provide them with the tools of combat. The shooting war was dependent on what historians have termed a parallel “war of production” that kept the military machine running.

During the first two and a half years of combat, the United States was a neutral party and the economic boom came primarily from exports. The total value of U.S. exports grew from $2.4 billion in 1913 to $6.2 billion in 1917. Most of that went to major Allied powers like Great Britain, France, and Russia, which scrambled to secure American cotton, wheat, brass, rubber, automobiles, machinery, wheat, and thousands of other raw and finished goods.

According to a 1917 study, exports of metals, machines, and automobiles rose from $480 million in 1913 to $1.6 billion in 1916; food exports climbed from $190 million to $510 million in that same period. Gunpowder sold for 33 cents a pound in 1914; by 1916, it was up to 83 cents a pound.

America Joins the Fight

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Neutrality came to an end when Congress declared war on Germany on April 4, 1917, and the United States began a rapid expansion and mobilization of more than 3 million men.

Economic historian Hugh Rockoff writes:

“The long period of U.S neutrality made the ultimate conversion of the economy to a wartime basis easier than it otherwise would have. Real plant and equipment were added, and because they were added in response to demands from other countries already at war, they were added in precisely those sectors where they would be needed once the U.S. entered the war.”

By the end of 1918, American factories had produced 3.5 million rifles, 20 million artillery rounds, 633 million pounds of smokeless gunpowder, 376 million pounds of high explosives, 21,000 airplane engines, and large amounts of poison gas.

The flood of money into the manufacturing sector from both home and abroad led to a welcome rise in employment for American workers. The U.S. unemployment rate dropped from 16.4% in 1914 to 6.3% in 1916.

This fall in unemployment reflected not only an increase in available jobs but a shrinking labor pool. Immigration dropped from 1.2 million in 1914 to 300,000 in 1916 and bottomed out at 140,000 in 1919. Once America entered the war, around 3 million working-age men joined the military. About 1 million women ended up joining the workforce to compensate for the loss of so many men.

Manufacturing wages increased dramatically, doubling from an average $11 a week in 1914 up to $22 a week in 1919. This increased consumer buying power helped stimulate the national economy in the later stages of the war.

Funding the Fight

The total cost of America’s 19 months of combat was $32 billion. Economist Hugh Rockoff estimates that 22 percent was raised through taxes on corporate profits and high-income earners, 20 percent was raised through the creation of new money, and 58% was raised through borrowing from the public, mainly through the sale of “Liberty” Bonds.

The government also made its first foray into price controls with the establishment of the War Industries Board (WIB), which attempted to create a priority system for the fulfillment of government contracts, set quotas and efficiency standards, and allocated raw materials based on needs. American involvement in the war was so short that the impact of the WIB was limited, but the lessons learned in the process would have an impact on future military planning.

A World Power

The war ended on November 11, 1918, and America’s economic boom quickly faded. Factories began to ramp down production lines in the summer of 1918, leading to job losses and fewer opportunities for returning soldiers. This led to a short recession in 1918–19, followed by a stronger one in 1920–21.

In the long term, World War I was a net positive for the American economy. No longer was the United States a nation on the periphery of the world stage; it was a cash-rich nation that could transition from a debtor to a global creditor. America had proved it could fight the war of production and finance and field a modern volunteer military force. All of these factors would come into play at the start of the next global conflict less than a quarter-century later.

Test your knowledge of the homefront during WWI.


How the War Changed the Economy for Good (2024)
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