World War I Summary

  • Last updated on November 10, 2022

During the war, the United States government dramatically increased taxes and expanded economic controls over business and industry. Despite its great expense, the war spurred American economic growth and enhanced the country’s financial status in the world.

When World War I began, President Woodrow Wilson, WoodrowWilson officially declared neutrality, but he was determined to assert the rights of the United States to conduct commercial relations with belligerent countries to the maximum extent possible. The resulting maritime conflict with Germany finally persuaded Wilson to ask Congress for a declaration of war. If the United States had not intervened in the war, it appears likely that the Central Powers would have prevailed.World War I[World War 01]

The nineteen months of American participation in the conflict were extremely costly, in terms of both military personnel and war materials. In 1914, the armed forces of the United States included only about 200,000 men, but by the war’s end, about 4 million men had served in the army, and about 2 million had served overseas. The total deaths for the armed forces were 12,432, with more half caused by disease–a large percentage from the influenza pandemic. Battle casualties included 48,909 deaths and 230,074 seriously wounded. U.S. government expenditures for the war totaled approximately $35.5 billion, which included almost $10 billion in loans to the Allies. The public debt reached more than $26 billion in August, 1919, or about $242 per person.

Early Effects of the European War

In June and July of 1914, as the European countries were in the process of going to war, the initial impact on the United States was a financial crisis. Numerous European investors sold their American securities, causing a rapid drop in the price. Responding to the panic, the New York Stock Exchange (NYSE) closed its doors on July 31 and did not fully reopen for four and a half months, the longest shutdown in the exchange’s history. Most Europeans were anxious to convert their American investments into gold, but a scarcity of ships put a limit on gold exports, resulting in a drastic decline in the dollar’s exchange value. The financial panic produced a short but rather severe recession, in which the number of unemployed Americans more than doubled–from about 1 million in 1913 to 2.2 million in 1914.

The economic crisis, however, continued only for a few months. By early 1915, the recession had been replaced by a business boom, generated by the growth in European demand for all kinds of goods and products. American annual exports to Europe grew from about $1.5 billion in 1913 to $3.8 billion in 1916. During these same years, annual imports from Europe declined from $900 million to approximately $633 million. The decline in European exports expanded the demand for American products in many parts of the world. Total exports, therefore, more than doubled between 1913 and 1916, from about $2.5 billion to about $5.5 billion.

This poster announced the launching of ninety-five ships by the Shipping Board Emergency Fleet Corporation on July 4, 1918.

(Library of Congress)

The increased demand for American goods had a beneficial effect on almost all segments of the economy. In 1916, the index of manufacturing production was 30 percent higher than in 1913. During this period, bank deposits also grew 30 percent, and bank loans increased from $14.6 million to $17.9 million. The nation’s annual steel production grew from 31.3 million tons to 42.8 million tons. Opportunities for workers expanded greatly, primarily in northern factories. Many southerners, especially African Americans, moved from the rural South to the urban North in search of jobs. The numbers of unemployed Americans declined to about 200,000 in 1916 from the 2.2 million who were unemployed in 1914.

During the three years before the United States entered the war, the economic boom resulted in an increase in prices. The index of wholesale prices increased almost 24 percent, and consumer prices went up about 11 percent. Hourly wages of manufacturing workers rose from 29 cents in 1913 to 31 cents three years later, and their annual wages went from about $578 to $651, which was very similar to the increase in the prices of consumer goods. Gross farm income grew from about $7.6 billion to $9.5 billion. At least half of this increase, however, was offset by inflation, and the parity ratio of farm prices actually declined from 100 to 94.

U.S. Intervention

Early in the war, the British severely restricted the right of neutral countries to trade with Germany. When Secretary of State William Jennings Bryan called on belligerents to accept the liberal principles in the Declaration of London of 1906, the British government insisted on an expanded list of contraband goods. The U.S. State Department issued a mild protest on September 28, 1914, but to no avail. Later that year, the British added to the number of contraband items and revived the doctrine of continuous voyage, which authorized the seizure of neutral ships going to the Baltic area under control of the German navy. On November 3, 1914, the British government announced the mining of the North Sea. On March 11, it proclaimed a blockade of all German ports and authorized the seizure and confiscation of all merchant vessels entering or coming from a German port. U.S. exports to Germany dropped from $169.3 million in 1914 to less than $1.2 million in 1916. During the same period, trade with the Allies exploded from $800 million to $3 billion.

From the war’s outbreak in July, 1914, until April, 1917, the European nations ran a balance-of-payments deficit of about $5.5 billion, creating substantial financial strains. The British and French governments met part of this deficit with gold shipments, of which about $1 billion came to the United States. They also financed the deficits by borrowing from private creditors. In August, 1914, the U.S. government announced that bank loans to countries at war were “inconsistent with the true spirit of neutrality.” Three months later, however, the policy was modified, and the National City Bank was allowed to loan $10 million to the French government. In September, 1915, the Wilson administration reluctantly approved the floating of a loan of $500 million to France and Great Britain. By April, 1917, American investors had purchased almost $2.5 billion in bonds from the Allies, in contrast to only $20 million in German bonds.

By early 1917, American prosperity had become somewhat dependent on a continuation of export markets. Many financial experts feared that the defeat of England and France would have grave consequences for the U.S. economy. Unquestionably, the United States’ close financial relationship with the Allies predisposed the country to favor the Allies and to oppose German policies. The majority of historians, however, agree that an even more important reason for U.S. hostility to Germany was its use of submarines to sink merchant ships. Two days after Germany resumed its policy of unrestricted U-boat warfare on February 1, 1917, President Wilson broke off diplomatic relations. The sinking of five American ships, combined with the Zimmermann note, in which the German foreign minister proposed an anti-U.S. alliance with Mexico and Japan, brought about a declaration of war on April 6, 1917.

Financing the War

Even before the United States entered the war, Congress, in September, 1916, doubled the lowest personal Income tax;World War Iincome tax rate from 1 to 2 percent, increasing the maximum tax to 15 percent on incomes of more than $1.5 million. The minimum corporate income tax was increased from 1 to 2 percent, with a special 12.5 percent tax on profits from munitions manufacturing. In March, 1917, a second revenue act required businesses to pay an 8 percent tax on excess profits, which was defined as more than 8 percent return on invested capital.

After entering the war, Congress in 1918 raised the lowest personal income tax rate to 6 percent and raised the maximum to 77 percent on taxable income. The minimum corporate income tax was increased from 2 to 6 percent, with an increase in the excess profits tax from 20 to 60 percent. The law also increased the estate tax rate to a maximum of 25 percent and increased excise taxes on alcoholic beverages, transportation, and many other items. Based on these changes, tax revenues grew from $716 million in 1916 to about $3.6 billion in 1918, which constituted some 25 percent of the gross domestic product.

The government financed about one-third of the war by taxation and two-thirds by selling bonds and Treasury notes, paying interest rates of between 3.5 and 4.5 percent. Emphasis was on the sale of Liberty and Victory Bond industry;World War Ibonds, sold in small denominations to citizens. To encourage sales, the government sponsored five Liberty Loan Campaigns, which brought celebrities such as Charlie Chaplin, Babe Ruth, and Enrico Caruso to appear before huge and enthusiastic crowds, resulting in sales of about $19 billion. The total public debt of the country grew from $1.3 billion in April, 1917, to $25.5 billion in January, 1919.

During the war, the Federal Reserve;World War IFederal Reserve focused on the credit demands of government and business rather than attempting to check inflation. The general reserve requirements for member banks were reduced by 50 percent, and the banks were permitted to increase their reserves by borrowing from the Federal Reserve Banks at low interest rates. The exportation of gold was prohibited except by a special license, so as to protect the credit base by conserving gold. The Federal Reserve note circulation, moreover, increased from $150 million to approximately $2.5 billion. The expansion in credit and currency resulted in a 25 percent increase in total deposits. Not surprisingly, the inflation rate soared; from 1915 to 1918 the consumer price index rose about 50 percent and consumer prices more than doubled.

Wartime Economic Regulations

Because of the great costs of the newer military technologies, victory to a large extent depended on the efficient management of the economy. In August, 1916, Congress began the process of developing controls with the Council of National DefenseCouncil of National Defense, which was charged with investigating the nation’s defense and preparing for the possibility of war. The council was made up of six cabinet members and an advisory commission of seven people appointed by the president. In early 1917, the council established the Munitions Standards Board, soon replaced by the General Munitions Board, which attempted to coordinate the purchases of the Army, Navy, and Allies. Because the two agencies lacked enforcement powers, however, their recommendations were frequently ignored.

After the United States entered the war in April, 1917, the existing agencies and departments were unable to effectively deal with the growing shortages. President Wilson responded in July with an executive order creating the War Industries BoardWar Industries Board (WIB), which was reorganized with greater powers under the leadership of Bernard Mannes Baruch, Bernard MannesBaruch in March, 1918. The WIB set production quotas, allocated raw resources, and encouraged businesses to increase production though standardization. Whenever possible, the WIB tried to obtain cooperation through persuasion, but when necessary, it possessed the power to set priorities for the purchase of scarce materials, so that failure to comply with a WIB directive could result in the inability to obtain materials. No steel, copper, cement, or other important materials could be used without WIB approval. In his autobiography, Baruch relates how he coerced Henry Ford, John Dodge, and other executives at automakers to curtail the production of automobiles in favor of tanks and military trucks. In extreme cases, the WIB even had the power to seize property.

The WIB’s price-fixing committee attempted to stabilize prices by negotiating three-month agreements for maximum prices that companies might charge the government. It preferred to obtain “agreed rather than decreed prices.” The committee concentrated on prices for the government, and it gave relatively little attention to the prices charged to civilian consumers. The committee had no power to restrain labor costs. Although the committee promoted stable prices for short-term periods, it was unable to effectively control inflation during the last year of the war.

The war created critical shortages in many consumer areas but especially in food. In August, 1917, Congress passed the Lever Food and Fuel Control Act of 1917Lever Food and Fuel Control Act, which gave President Wilson broad regulatory powers. Wilson then created the Food AdministrationFood Administration (FA) and appointed Herbert Hoover as its head. Hoover conducted an educational program to urge citizens to reduce their consumption, calling for meatless Mondays and wheatless Wednesdays. The program resulted in a 15 percent reduction in consumption without rationing. In addition to persuasion, the FA had the power to license producers, distributors, and retailers of food products. Failure to follow an FA regulation could result in the cancellation of a company’s license, thus forcing it to discontinue operations. The FA’s specialized agencies set the “fair prices” the government would pay for various foods, and because the government was the largest single purchaser, food prices remained relatively stable. Food exports increased from 7 million tons per year before the war to 19 million tons in 1919.

Railroad Railroads;temporary nationalization oftransportation was a special problem. The three thousand private railroad companies were unable to cope with the unprecedented growth in passengers and materials transported. On January 26, 1918, President Wilson ordered the temporary nationalization of the railroads as an emergency measure. The U.S. Railroad Administration, headed by Secretary of the Treasury William Gibbs McAdoo, William GibbsMcAdoo, was in charge of the operation. Congress enacted the Railroad Control Act of 1918Railroad Control Act in March, 1918, which fixed the compensation for each company and specified that government control would end twenty-one months following ratification of a peace treaty. Experts disagree about whether government operations were efficient.

During the war, organized labor, for the first time, was given equal recognition with industry. Unions;warsLabor representatives were represented in most of the powerful regulatory agencies. In April, 1918, President Wilson created the War Labor BoardWar Labor Board (WLB), which had the purpose of arbitrating disputes between employers and workers. After the American Federation of Labor, led by Samuel Gompers, pledged to support the war and avoid strikes, the WLB upheld the right of workers to join unions and bargain collectively and encouraged contracts based on a living wage, which helped workers but worsened the problem of inflation. Union membership almost doubled during the course of the war.

A number of other agencies were created during the war. The War Trade Board had almost complete control over trade and commercial relations with other counties. The Bureau of War Risk Insurance provided marine insurance because the risks of oceanic transportation were too great to be handled by private companies. The War Finance Corporation provided for businesses that were considered vitally necessary for the progress of the war.

During the war, the federal government established agencies for the regulation of all major sectors of the economy, and the imposition of so many regulations was a new experience for American businesses. By 1918, it is estimated that between 20 and 25 percent of the nation’s output in goods and services was devoted to the war. When the war ended, the government generally yielded to pressure and quickly terminated the regulatory agencies. As a result, the country faced severe problems of inflation, reconversion, and labor-management conflict. These experiences motivated the government to seek a more gradual termination of wartime programs following World War II.

Economic Consequences

The majority of American businesses became more prosperous during the war. Companies selling munitions to the government did particularly well. The American International Shipbuilding Corporation, for instance, organized the largest shipyard in the world at Hog Island near Philadelphia, where it built 122 large ships. The assets of the DuPont Company increased fourfold. The index of manufacturing production showed that most of the growth occurred from 1913 to 1916, and there was almost no growth in production from 1916 to 1918. Much of the increased profits in the latter years resulted from higher prices. The index of wholesale prices grew from 85.5 in 1916 to 131.3 in 1918, reflecting the problem of inflation. Although many companies reported large increases in before-tax profits, sharp increases in corporate income taxes substantially limited their after-tax profits. The United States Steel Corporation reported sales of $561 million and after-tax profits of $81 million in 1913, compared with sales of $1.3 billion and after-tax profits of $125 million in 1918. The after-tax earnings of Swift and Company, which were $9.25 million in 1913, rose to about $35 million in 1917. They declined, however, to $28 million in 1918, even though sales that year grew by almost 40 percent.

Most workers benefited moderately from the war. Employment;World War IUnemployment almost disappeared, and the number of employed workers expanded from 38 million in 1914 to 44 million in 1918. The average annual wage in manufacturing, which was about $580 in 1914, grew to about $950 in 1918. A substantial part of the increase, however, was offset by the growth in the cost of living. For many workers outside manufacturing, wages just barely kept up with inflation. The average number of hours worked per week decreased from 55 hours to about 52 hours. Union membership grew from 2.5 million in 1914 to about 3.4 million by late 1918. Because of the no-strike pledge, not many labor strikes occurred before armistice.

The war years did not see much change in the number of farms or in agricultural output, except for substantial increases in hogs and wheat. Because of the increased demand, gross farm income grew from $7.6 billion in 1914 to $17.7 billion in 1917. The parity ratio (ratio of prices received index to the prices paid index, based on the years 1910-1914) rose from 94 in 1916 to a peak of 118 in 1918, although nonfarm prices began to outstrip farm prices the next year.

One of the significant long-term changes from the war was the shift from an economy with relatively few governmental regulations to an economy almost entirely planned and controlled by the government. Although the majority of these controls ended with the return of peace, they provided a repertoire of precedents that would later be drawn on in designing the programs of the New Deal and World War II.

From the perspective of international history, probably the most significant change from the war was the shift in the economic balance of power. The war accentuated the favorable balance of trade in the United States, with exports growing twice as large as imports. As a result, the United States shifted from a debtor status to the world’s greatest creditor. Investments in other countries doubled from $3.5 billion to about $7 billion, whereas foreign investments in the United States decreased from $7.2 billion to $3.3 billion.

Further Reading
  • Baruch, Bernard. American Industry in the War: A Report of the War Industries Board. New York: Prentice-Hall, 1941. Detailed information about the WIB’s regulations and relations with businesses. Not for beginners.
  • _______. Baruch: The Public Years. New York: Holt, Rinehart and Winston, 1960. A personal and interesting summary of Baruch’s career, including his direction of the WIB.
  • Cuff, Robert. The War Industries Board: Business-Government Relations During World War I. Baltimore: Johns Hopkins University Press, 1973. A scholarly work emphasizing that the WIB “never overcame its diversity to win centralized, autonomous power.”
  • Hawley, Ellis. The Great War and the Search for a Modern Order: A History of the American People and Their Institutions, 1917-1933. 2d ed. Long Grove, Ill.: Waveland Press, 1992. Argues that the country instituted a modern managerial order and the world’s first mass consumption society after World War I.
  • Hughes, Jonathan, and Louis Cain. American Economic History. 6th ed. Reading, Pa.: Addison-Wesley, 2006. A clearly written, standard textbook that includes an excellent chapter on how World War I affected business and industry.
  • Kennedy, David. Over Here: The First World War and American Society. 2d ed. New York: Oxford University Press, 2004. A comprehensive, highly acclaimed book that includes an excellent chapter on political economics.
  • Schaffer, Ronald. America in the Great War: The Rise of the War Welfare State. New York: Oxford University Press, 1994. Describes how the demands of the war resulted in an unprecedented extension of governmental controls over the economy.

Arms industry

Great Migration

Inflation

Military-industrial complex

Taxation

War surplus

Wars

World War II

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