The Effect of War on

The Economy
Michael Baxas, Antony Blyakher
What is War?

War is a state of armed conflict between different nations or states or

different groups within a nation or state

A conflict often involves a large amount of the country's population

participating, whether it be in preparation of, or actively fighting of the war.

There are many economic driving factors behind war and conflict

Examples of wars: War of 1812, American Revolutionary war, American Civil

War, WWI, WWII, Korean War, Vietnam war, Iraq war, GWOT
In this photo, soldiers lay dead upon the field of Gettysburg after the battle. The
American Civil War was caused by economic dispute between the Northern States
and the Southern States and once it was over it had long lasting economic
destruction in the Southern States
Source:. https://tinyurl.com/y7t3lw65
 This image is of French soldiers assaulting a German held line during
World War One, WWI was one of the first wars in history to mobilize the
entire world for war and the economic impacts lasted for the next century.
Source: https://tinyurl.com/ycrp98e8
This image is of B-24Ds over Polesti during the 2nd World War, the effects of this war
would last just as long as the first, and would shape the world as we know it now
including the development of the world's first super powers
Source: https://tinyurl.com/y9b5tkch
This photo is of a burning village from a napalm strike during the Korean War, This war is
responsible for shaping the economy of Korea from an all capitalist Korea to a split between
communist (North Korea) and capitalist (South Korea)
Source: https://tinyurl.com/ydxky36s
This photo is of C-130s dropping Agent Orange over the jungles of Vietnam, The war
itself created imbalances in American investing and a lack of industrial investment, but
left a lasting impression on the american public and those involved and was one of the
first Televised wars
Source: https://tinyurl.com/yblyyxra
This photo is of American soldiers standing in what is left of a house in Iraq. The war in
Iraq caused much controversy in the American public because many believe this war was
fought to gain control over valuable oil resources in the Middle East

Source: https://tinyurl.com/y8wmj5wh
What is The Economy?
An economy includes the wealth and resources of a country or region,
especially in terms of the production and consumption of goods and services
and careful management of available resources.

A countries success is often measured by the state of its economy as well as its
growth over time and its diversity.

The economy often follows trends and economists analyze these trends to
help predict how the economy will be affected, war is one of the biggest
influencers.
How Does War Affect the Economy?
War can affect many different factors of
the economy including the following:
Debt
decrease in consumption
lack of investment
no jobs
high taxes
government deficits
Inflation
psychological costs
decrease in economic development. Source: https://tinyurl.com/yamphvcz
Does war spending help or hurt the economy?
This is a controversial topic that many economists do not always agree on. It
tends to be unclear on whether war helps or hurts national economic
prospects.

For example, during World War II the US national defense significantly

increased spending which is sometimes given credit to restoring the US
economy after the Great Depression. Other economists would say that the
growth can be credited to the population growth during the war rather than
war spending.
An Economist's View

https://youtu.be/71tPBjrTeJU?t=31s

(This video shows an economist Tom Woods who has a strong opinion on how
military spending during World War II did not help the economy)
0:31 - 2:08
How is Production Affected?

The action of making or manufacturing from components or raw materials, or

the process of being so manufactured, known more simply as production, is
changed drastically during a time of war. All efforts will be shifted to
providing for the war and civilian life will feel that shift.

During WWII the US was producing a record amount of war materials and
vehicles however, from February 1942 until later 1945, not a single american
car was manufactured to be bought by the public, a similar situation
happened in Japan as civilians began to starve and food rations were
prioritized to military personnel
Debt
Debt is one of the most common effects on the economy of a country
following a conflict. When a country incurs a large amount of wartime debt,
the economy is often put on hold and development is minimal and the
country will, in most cases, enter an economic depression.

An example of this happening is post war Germany after WWI, Germany was
forced to pay back the majority of the damage caused during the Weimar
Republic, and as a result the economy incurred heavy debt, severe over-
inflation, and other negative consequences of the debt owed. November
1923, the US dollar was worth 4.2 trillion German marks
Crowding-out Effect
A situation when increased interest rates lead to a reduction in private
investment to a point that it dampens the initial increase of total
investment spending is called crowding out effect. This effect can
often be an effect of war as the interest rates on many loans are
raised to help pay for the war but this has a very negative effect on
the private sector and households in general.
 Psychological Costs of War
There are many economic costs of war such
as debt, inflation, gdp which can be
estimated in dollars and cents. Psychological
costs of war is a factor that can be difficult to
estimate because its costs are in the pain of
death, suffering, fear and disability.

A common example would be post-traumatic

stress disorder that soldiers develop during
war. This can cause returning troops to have
a difficult time reentering the civilian life and
joining the workforce to be part of the
economy.
Source: https://tinyurl.com/y7rhsaew
PTSD

This video gives an in-depth explanation of what PTSD is and how

war and conflict leads to the development of the disorder and the
effect it has on the people that experience it

https://www.youtube.com/watch?v=-Fc6_aTnRXQ

0:00 - 0:40 , 2:28 - 3:04

Humanitarian effects

Though war has many effects on the economy that are measured in numbers
and figures there are often many things that have no way to measure that are
equally as impactful, damage to surrounding civilian life is often physical as
well as psychological, some of the best examples include conflicts in Africa as
they included a strong focus on some of the following: mutilation, severe drug
use, burning housing and infrastructure, as well as child soldiers.
Sources as they appear: 1. https://tinyurl.com/ycrs45n4, 2. https://tinyurl.com/y86ktq3b, 3. https://tinyurl.com/y8ffmjdb
Reviewing Economic Consequences
of War using Examples of United
States War History
World War II (1939 - 1945)

War was financed through debt and

higher taxes
Gdp growth skyrocketed even though
consumption and investment
decreased. This was because of
increased government spending and
controlling the raw resources and
materials.
Unemployment was virtually
eliminated Source: Economic Consequences of War
on the U.S. Economy.
The Korean War (1950 - 1953)

Largely financed by higher taxes

GDP growth average was 5.8% during
the war with a peak of 11.4%.
Investment and consumption was
constrained
Inflation was significant enough that the
government needed to implement price
and wage controls
Stock market rose during the war
Source: Economic Consequences of War
on the U.S. Economy.
The Vietnam War (1955 - 1975)

The Vietnam war was a Police action that took place in Vietnam during the
1960s which aimed to defeat the communist Vietcong and prevent the spread
of communism through something called The domino effect. The war was
widely unpopular, and often protested.

Largely funded by increases in tax rate paired with an expansive monetary

policy which led to inflation

GDP growth increases, peaking at 7.3%.

Consumption remained unaltered while investment fell during the war.

The Cold War (1947 - 1991)
The cold war was a growing military tension between the Worlds
superpowers: The United States and the U.S.S.R, though this was a war with
no casualties and no fighting, it was one of the most tense and well funded.

This period contained consistent increases in military spending paired with tax
cuts resulting in a significant budget deficit.

There was a boom in consumption which was caused by increased deficit

spending and high government debt. This caused interest rate to increase

Substantial trade deficit

Stock market grew quickly after the war ended

The Afghanistan and Iraq Wars (2001-)
These wars are included in the GWOT (GlobalWarOnTerroism) It was a war
with the intentions to end terrorism in the Middle East as well as to set up a
democracy in several places in the Middle East and to destroy the
dictatorships in place.

War started with very weak economic conditions.

Taxes were being cut which resulted in both wars completely financed by
deficit spending.

Interest rates were kept low and banking regulations were relaxed to
stimulate the economy
Examples Summary

The purpose of reviewing these wars was to compare and contrast the
macroeconomic effects of war spending.

Its evident that every war is very different and for that reason, the
consequences of war can be very different.
Project Conclusion

War and conflict has one of the largest effects on a country's economy
compared to any other cause and that has been seen time and time again.

Whether or not war is a positive or negative on the economy is still heavily

debated but its effect is obvious regardless of it being beneficial or not to a
country.
Annotated Bibliography