Time Line of the Recessions and their succeeding Wars
WORLD WAR I
1929 TO MID 1940’S
WORLD WAR II
1937 TO 1938
1949 TO 1950
POST KOREAN WAR
RECESSION ( 1953
1957 TO 1961
POST GULF WAR
1990 TO MARCH
DOT COM CRISIS
(1997 TO 2000)
THE RELATIONSHIP BETWEEN RECESSION AND WAR CANNOT BE DISCUSSED , TOLD ,
EXPRESSED . BUT IT CAN BE SEEN -- Vivek Kumar
WHEN THE WORLD WAR I BEGAN, THE U.S. ECONOMY WAS IN RECESSION
AND THE TIME PERIOD FOR RECESSION WAS 1912-14 .
1912 – 28 JULY 1914
PRODUCTIONS AND REAL INCOME DECLINED DURING THIS PERIOD AND WERE NOT
OFFSET UNTIL THE START OF WORLD WAR I INCREASED DEMAND.
THE PANIC OF 1910 ENDED IN JANUARY 1912. JUST A YEAR LATER, IN
JANUARY 1913, ANOTHER LONG RECESSION STARTED. FEW REASONS FOR
PRE-WORLD WAR RECESSION
THERE WAS NO CENTRAL BANK
JUST YET TO ACT AS A SHOCK
ABSORBER TO WILD SWINGS IN
MONEY AVAILABILITY IN THE
ECONOMY AND SUPPORT BANKS;
THE ACT THAT CREATED IT WASN'T
THE PROGRESSIVE GOVERNMENT
WAS STILL TRYING TO BRING
INTO LINE AND ESTABLISH
PROTECTIONS FOR LABORERS
THE REVERBERATIONS OF THE
PANICS OF 1907 AND 1910 WERE
STILL BOUNCING AROUND. ALL OF
THIS LED TO A FRAGILE ECONOMY
BEFORE 1914 UNEMPLOYMENT RATE WAS
INCREASING BUT, AS THE WORLD WAR - I
STARTED THE UNEMPLOYMENT RATE
STARTED TO DECLINE
AFTER THE START OF
WORLD WAR – I THE
GDP STARTED TO
According to Paul Krugman, ““The Great
Depression in the United States was brought to an
end by a massive deficit-financed public works
program: World War II.”
War production expanded from roughly 2% of
GDP to almost 40%, statistically.
Unemployment rates fell from 19% in 1939 to
below 2% in 1945.
In 1940 dollars, GDP shot from $101.4 billion to
$120.7 billion in 1941 up to $174.8 billion by 1945
Going beyond the numbers..
• GDP measures only the total monetary value
of production while ignoring what is actually
• A rise in government spending increases
output but crowds out private investments
Cause of the War and PreWar Scenario in USA
The Korean War broke out because
it was just another episode in the on
going Cold War between the USA
and the USSR. On the surface, the
Korean War seemed to be a war
between South Korea and North
Korea, but really the superpowers
were just using it as a front to
combat each other without actually
going into a ‘hot war’ which – as
both had the atomic bomb – would
have been MAD (mutually assured
Before the Korean War had started,
USA was in a period of recession,
when unemployment reached a peak
of 7.9% , GDP fell 0.5% for the year.
Similar to World War II, the Korean
War had potential to boost GDP
growth via government spending.
Consequences of the War
• As can be seen in the next figure, as
in World War II, there is an increase
in the growth of GDP, albeit smaller,
for the 1950-53 time period.
flattened while the overall growth
rate was driven by government
• The economy experienced real GDP
growth of over 11% in 1951 with
inflation increasing to 5.3% in 1951.
• Notably, the year after the conflict
ended, 1954, there was a short
recession in spite of the fact military
outlays still constituted 13% of GDP.
National GDP fell to be effectively
the same as it had been two years
prior, in the middle of the war in
1952. Beginning in July 1953, lasted
10 months, as a result of the end of
the Korean War. Unemployment did
not reach its peak of 6.1% until
September 1954, two months after
the recession ended. GDP was down
to 6.2% in Q4 of 1953.
During the Korean War, GDP was boosted by government spending financed
by taxation which constrained investment and consumption.
After World War II and the Korean War, the key components of GDP, consumption and
investment did not return to the pre-war level.
As we can conclude from the above slides, that
although there has been no mention of the fact
that wars and recession are related but from the
previous data we have observed that there is a
relationship between recession both pre war and
USA financing South Korea during the war was a
clear example of government financing, which in
turn led USA to get out of its recession period.
Thus, proving the fact that there is an underlying
truth which clearly states that wars and recession
The Vietnam War was the longest war ever fought by the United States. It lasted more
than 15 years, from 1959 to 1975. It was also the first war that the United States lost.
WHY DID US ENTER THE WAR:
To stop the spread of Communism in Southeast Asia.
American leaders feared that Communist forces would gain control of Vietnam. After
that, nation after nation might fall to Communism.
Communism is a political and economic system that the United States strongly
South Vietnam had a non-Communist government. This government was weak which
United States supported it in order to keep the Communists from taking control of all of
RECESSION OF 1957–1961 :
High levels of unemployment and demand was higher than the supply.
Thus idle plants and machinery meant that industrial sector could now grow rapidly to
meet the demand.
Early 1960s witnessed a boom by change in their govt. policies(tax cut) and by financing
the Vietnam war.
War did mean that a growing portion of the industrial capacity and labor force of the
US economy had to be devoted to meet the needs of the war.
From 1965, US could no longer expand its production and thus demand was reduced to
meet the supply by increasing the prices thus the boom of 1960s was on.
END OF THE WAR
Although Nixon increased the bombing of North Vietnam, he began withdrawing U.S.
Without U.S. support, South Vietnam's government collapsed. North Vietnam won the
war in 1975. Vietnam was reunited as a Communist nation.
A quadrupling of oil prices by OPEC coupled with high government spending because of
the Vietnam War led to stagflation in the United States.
The period was also marked by the 1973 oil crisis and the 1973–1974 stock market crash.
The period is remarkable for rising unemployment coinciding with rising inflation.
The Vietnam War had a lasting fiscal legacy due to the increased levels of government
expenditure which was financed by increases in taxation from 1968 to 1970.
The blowout in budget deficits was driven by both military and non-military outlays in
combination with an expansionary monetary policy that led to rapidly rising inflation in
Figure in the next slide shows the increase in government spending which peaked in
1968. Consumption remained constant and investment remained flat.
The slight fall in government spending after 1969 and up to 1973 can be attributed to
falling military expenditure that outweighed the increases in non-military expenditure.
Consumption was negatively affected by rising unemployment and inflation after the
1973 oil shock, while prior government attempts to rein in inflation with price and wage
controls also kept investment almost flat through most of the 1970s.
The financing method of the Vietnam War via inflation did not help policymakers who
later had to deal with stagflation brought on by the 1973 oil crisis.
During the VIETNAM War, GDP was boosted by government spending
financed by taxation and increase in inflation which constrained
investment and consumption.
• IN FINANCE, BLACK MONDAY REFERS TO MONDAY, OCTOBER 19,
1987, WHEN STOCK MARKETS AROUND THE WORLD CRASHED,
SHEDDING A HUGE VALUE IN A VERY SHORT TIME.
• THE CRASH BEGAN IN HONG KONG AND SPREAD WEST
TO EUROPE, HITTING THEUNITED STATES AFTER OTHER MARKETS
HAD ALREADY DECLINED BY A SIGNIFICANT MARGIN.
THE POST-1987 PERIOD IS MARKED BY ECONOMIC STAGNATION. IN
THE OECD COUNTRIES, GDP GROWTH HAS FALLEN FROM 3.1% PER
ANNUM IN THE 1980S TO A MEAGRE 1.7% IN THE 1990S.
JUST BEFORE 1990
THERE WAS A
RECESSION BUT AFTER
THE WAR THERE WAS A
YHTHIS REGION IS DUE TO THE
1987 FINANCIAL CRISIS
Some critics of the official account of 9/11, provide evidence that
the Bush administration intentionally allowed the attacks of 9/11.
One way to approach this question would be to ask whether these
attacks brought benefits to this administration.
President Bush himself declared that the attacks provide “a great
Donald Rumsfeld stated that 9/11 created “the kind of
opportunities that World War II offered, to refashion the world.”
Condoleeza Rice had said the same thing in mind, telling senior
members of the National Security Council to “think about „how do
you capitalize on these opportunities‟ to fundamentally
change…the shape of the world.
A pre-9/11 document that speaks of benefits that could accrue from
•In the fall of 2000, a year before 9/11, a document entitled
Rebuilding America’s Defenses was published by an organization
calling itself the Project for the New American Century (PNAC).
•PNAC argues that it is necessary for defense spending to be greatly
increased if the “American peace is to be maintained, and expanded.
•This transformation of US military forces will, however, probably
be a long, slow process, partly because it will be very expensive.
However, the document suggests, the process could occur more
quickly if America suffered “some catastrophic and catalyzing event
like a new Pearl Harbor.
•The Bush-Cheney administration endorsed a document indicating
that “a new Pearl Harbor” would be helpful for furthering its aims
and provide opportunities.
One of the important dimensions of PNAC is the militarization of
space, the US space command.
Govt describes spending for the US Space
Command as spending for “missile defense”
making its mission sound purely defensive,
augmenting a feeling of “homeland security”.
Its primary purpose was not to protect the American homeland but to
protect American investments abroad.
Another possible motive on the part of the Bush administration was
its desire to attack Afghanistan so as to replace the Taliban with a
US-friendly government to further US economic and geopolitical
Economists go further. Many are now quietly suggesting that if 11
September hadn't happened America would not have recovered so
quickly from its recession. 'On the one hand 11 September was the
last thing the economy needed, but with hindsight it may well have
accelerated the healing process, awful as it was. Talking about it
from a purely economic standpoint, not from the moral or the
political, it did bring forward much of the creative destruction that
recessions wreak,' said Danny Gabay, economist with JP Morgan.
Bush administration was able to use the tragic events to get through
Congress a $1.35 trillion tax cut, something that looked
inconceivable before 11 September.
The relaxation of fiscal policy - coupled with aggressive interest rate
cuts by the Federal Reserve - provided a strong, immediate stimulus
to the economy. The rebate made consumers feel wealthier - in the
third quarter of 2001 some $40bn found its way back to them - and
they kept shopping, spurred on by patriotic appeals to spend, spend,
spend from the likes of Mayor Rudolph Giuliani and General Motors.
His was the first war in history paid for entirely on credit. As America went
into battle, with deficits already soaring from his 2001 tax cut, Bush decided to
plunge ahead with yet another round of tax “relief” for the wealthy.
Since the wars are being financed primarily though borrowing, the added $2.4
trillion would worsen an already staggeringly $13.5 trillion national debt. This
massive national debt increases interest rates on loans.
Americans may not necessarily feel this tax burden now, but eventually the
government will need to raise taxes to pay off the increasing interest on
“The Joint Economic Committee, which estimated a $3.5-trillion cost through
2017, indicated that the wars would cost the average American family $46,400
[in increased taxes]” causing AD and thereby output to fall.
Evidently, the Iraq war is indeed forcing oil prices upward, decreasing the
ability and willingness of consumers to spend money on other items.