The Economic Impact of World War I

How It Changed America

American soldiers in WWI

 Photo by Hulton Archives/Getty Images

World War I was a global military conflict from 1914 through 1918. It killed 9 million soldiers, wounded 21 million, and left 7 million disabled. Another 10 million civilians died. Germany and France each lost 80% of their male population aged between 15 and 49.

It was called the Great War because it affected people in every continent. It was supposed to be the "War to End All Wars." Instead, it set the stage for World War II thirty years later. It had 10 lasting impacts that changed the world forever.

Key Takeaways

  • The assassination of Archduke Franz Ferdinand by a Serbian nationalist ignited WW1.
  • President Wilson declared war on Germany in 1917 after it sank 128 U.S. passengers aboard the British ocean liner Lusitania and four U.S. boats.
  • World War 1 was caused by four factors: imperialism, nationalism, militarism, and a lack of international mediation groups.
  • Germany was blamed for the war and so was saddled by the war reparations it was forced to sign in the Treaty of Versailles. The resulting runaway inflation paved the way for German retribution in WWII.

World War I Countries

The War was between the Central Powers and the Allied Powers. The Central Powers were Germany, Austria-Hungary, Bulgaria, and the Ottoman Empire. The Triple Alliance was Germany, Austria-Hungary, and Italy.

The Allied Powers were Belgium, Great Britain, France, Italy, Japan, Montenegro, Romania, Russia, Serbia, and the United States. The Triple Entente was Great Britain, France, and Russia.

The war had three fronts. The Western Front was a series of trenches in France. German troops were on the east side, and French and British troops were on the west. Germans had dug in to avoid losing further ground. The Allies couldn't break through. Infantry attacks were no match against the heavy artillery that defended the trenches. When Allies built their own trenches, it created a stalemate that lasted for three years. Soldiers lived in them, making them easy targets for poison gas. The Allies finally broke the stalemate by using tanks in the last year of the war.

The Eastern front was in the German-held regions of East Prussia and Poland. Germany was on the west, and Russian troops were on the east. Russia had a hard time holding the front because of the two revolutions it experienced.

The Middle Eastern front opened in 1914 when the Ottoman Empire attacked Russia. Great Britain promised independence to Arab rebels in the region. The combined forces entered the war to protect British interests in the Suez Canal. Turkey signed a treaty with the Allies in October 1918.

In 1915, German U-Boats sank the British ocean liner Lusitania. It killed 128 American passengers. U.S. President Woodrow Wilson warned any further attacks would cause the United States to enter World War I. Germany sunk four more U.S. ships. On April 6, 1917, Wilson declared war.

Why Did World War I Start?

On July 28, 1914, Austria-Hungary declared war on Serbia. A nationalist Gavrilo Princip had assassinated Archduke Franz Ferdinand and his wife, Sophie, on June 28, 1914. They were visiting Sarajevo in Bosnia.

The Serbian nationalists wanted to end Austro-Hungarian rule over Bosnia and Herzegovina. He thought Serbia should control Bosnia instead. As a result, Austria-Hungary declared war on Serbia.

How did this singular event lead to a world war? There were four underlying causes that led to the start of World War I.

Germany, Austria-Hungary, France, Russia, and Great Britain had relied on imperialism to build their wealth. The Austro-Hungarian Empire included countries in south-eastern Europe bordering Russia. Germany's empire included the formerly French regions of Alsace and Lorraine. Germany's and Italy's empire included countries in Africa.

On the Allied side, the Russian Empire included most of Eastern Europe, including Serbia. The British Empire included countries in Africa, Asia, and the Americas. The French Empire included Vietnam and most of northern Africa.

The lands of the Middle East and Africa were hotly contested among the Allies and Central Powers. Leaders of the Allied empires saw it as a threat to their sovereignty when Germany and Austria-Hungary took over small countries like Bosnia and Morocco.

Nationalism was increasing among countries that resented their inclusion in empires. Poles, Czechs, and Slovaks wanted their own nations. They were tired of being a minority in the Austro-Hungarian and German empires. 

There were no governing international organizations to maintain a stable world order.

There was no United Nations to establish agreed-upon rules and no North Atlantic Treaty Organization to enforce them. The Hague Court of Arbitration existed, but compliance was voluntary.

Instead, countries relied on bilateral agreements that often conflicted with other treaties. As a result, the war against Serbia brought in Russia. Germany declared war on Russia because it had a treaty with Austria-Hungary. After Germany attacked Belgium, Great Britain entered the war to defend its ally.

Instead, European nations relied on militarism to feel protected. For example, Great Britain felt threatened by Germany's growing navy.

How the War Ended

By the end of 1917, France had lost 3 million soldiers. Half of its force had mutinied. There were few reserves left, so there were no fresh troops. Great Britain had lost 2 million and was 25% below its normal strength. It was planning to reduce its divisions and abandon the ground war.

Germany had defeated the Russians and Italians. It was able to send 3.5 million Germans against the 2.5 million British and French. In 1917, Russia left the war.

In early 1918, the United States deployed 1 million fresh troops to Europe. In November 1918, they severed a critical German railway supply track at Meuse-Argonne. That crippled the German offensive.

In the fall of 1918, Germany began to collapse. German Kaiser Wilhelm abdicated on November 9, 1918. The Austro-Hungarian Empire was dissolving, as its member countries revolted. On November 4, it agreed to an armistice.

Who Won World War I?

Technically, the Allied Powers won. But they gained no ground and were saddled with debt.

On January 18, 1918, President Wilson promoted the Fourteen Points.  It called for the establishment of the League of Nations and independence for the smaller countries in the war. It didn't promote war reparations from Germany. Wilson received a Nobel Prize for his efforts to promote peace. On Nov. 11, 1918, a German delegation signed the Treaty of Versailles inside railroad car 2419D. It was also signed by the United States, Britain, France, Italy, and Russia.

But the Allies wanted to punish Germany. The Treaty forced the Germans to accept full blame and pay reparations. It limited the German army to 100,000 members. It also divided the former German territories among the Allied Nations. That included 10% of its European holdings and all overseas colonies. This harsh treatment eventually led to World War II.


Before World War I, the global economy was growing robustly. Technology, like steamships, the telegraph, and the telephone, expanded global travel and communication.  There were no limits on immigration and no need for passports. Governments were small and kept their budgets balanced.

The world changed after World War I. There were at least 10 major effects.

Countries imposed restrictions on trade, capital flow, and immigration. People became suspicious of foreigners. This protectionism set the stage for the Great Depression

The war weakened the gold standard. Countries suspended it to pay for the war but suffered from hyperinflation. They reinstated a modified gold standard afterward, but became less attached to it and eventually dropped it.

During WWI, governments learned their people would submit to taxation and conscription if it meant protection from outside forces. The U.S. top tax rate rose from 7% in 1915 to 77% in 1918. In World War II, it rose above 90% in 1944 and remained there until President Johnson reduced it in 1964. Lenin called the rise of government influence during the war as "wartime socialism." He used it as the basis for the Soviet Union.

Russia's commitment to the war created food shortages. Starving people were open to the promises of communism. In 1917, the Russian Revolution ended the czarist regime and Russia's involvement in the war.

Troops helped the spread of the 1918 influenza pandemic. Worldwide, one out of three or 500 million people got sick. Of those, 50 million died, some within hours. In the United States, one out of four got sick. Of those, 675,000 died.

The German government printed money to pay for the war. It increased the number of Deutschmarks in circulation from 13 billion to 60 billion. Germany's sovereign debt went from 5 billion to 100 billion marks. Germany also printed money to meet the 132 billion marks of Treaty of Versailles' reparations.

As a result, Germany experienced hyperinflation.

Production collapsed, leading to a shortage of goods, especially food. Because there was excess cash in circulation, and few goods, the price of everyday items doubled every 3.7 days. As Germans rapidly lost buying power, they began looking to anyone who offered a solution. Adolf Hitler was a World War I veteran. He blamed Jews for Germany's defeat. In 1940, he forced the French to surrender in the same railroad car used for the Treaty of Versailles.

The United States became a world power. It ramped up its large natural resources in a short time. U.S economic output doubled in four years. As a result, America had developed a comparative advantage in the mass production of goods. It had also become a major military power. Wilson was the first U.S. president to visit Europe when he attended the Paris Peace Conference. He was also the first to claim the U.S. role of making the world "safe for democracy."

The war changed the face of the Middle East. In 1916, the Sykes-Picot agreement divided the Ottoman Empire's Middle Eastern territory between the British and French. It did not grant the Arabs the independence they were promised. Instead, the French controlled Lebanon and southern Turkey. It oversaw Arab-controlled Syria and northern Iraq. The British controlled Iraq bordering Iran and a portion of Palestine. It oversaw Arab-controlled western Iraq, Jordan, and a portion of Egypt. Its goal was to control the Suez Canal. The rest of Palestine fell under international control. These new countries did not reflect the Arab world's makeup, already complicated by the Sunni-Shia split. In 1917, Great Britain issued the Balfour Declaration that supported a Jewish state in Palestine.

Women began working. This led to their advocating and receiving the right to vote.

It changed how wars were fought. Civilians suffered from bombing, blockades, and attacks on commercial ships. It made war more expensive by introducing the power of heavy equipment and technology versus troops. Both sides used tanks, submarines, and planes. Long-range artillery, flamethrowers, steel helmets, and aircraft carriers were used for the first time. Most importantly, so was chemical warfare.

Impact of Chemical Warfare

Chemical warfare was widely used in World War I, despite being banned in the 1899 Hague Convention. More than 100,000 tons of poison gases were used, killing 90,000 people.  Its terrifying effects were even more damaging.

  • The French used tear gas in August 1914. But its impact was temporary.
  • In 1915, the Germans fired 150 tons of chlorine gas on the French. It burned the lungs, killing 1,100 in that attack.
  • In 1915, the Germans attacked with phosgene. It suffocated at least 77,000 soldiers. It could take hours or days to take effect.
  • The Germans introduced mustard gas in 1917. Although it wasn't deadly, it blistered the eyes, skin, and lungs. Soldiers had to remove their clothing to avoid burns. They spent six to eight weeks in the hospital.
  • Americans used chloropicrin, which irritated soldiers using gas masks. When they removed their masks, they were hit with other gases.

Fritz Haber led the German chemical weapons program. He also perfected Zyklon B, used to kill millions of Jews in the Nazi death camps. Some were Haber's relatives.

This cruelty of these weapons created bitterness among nations, leading the way to WWII. In 1925, the Geneva Convention banned these weapons again.

Economic Impact on the United States

World War I took the United States out of a recession into a 44-month economic boom. Before the war, America had been a debtor nation. After the war, it became a lender, especially to Latin America.

U.S. exports to Europe increased as those countries geared up for war. Later, U.S. spending increased as it prepared to enter the war itself. It cost $32 billion or 52% of the gross domestic product. Here's how it was paid for:

  • 22% from higher taxes.
  • 58% from war bonds and Treasury notes.
  • 20% addition to the money supply.

Three million citizens joined the military. The federal government hired another 500,000. Unemployment fell from 7.9%-1.4%.

Before World War I, at least 90% of American Blacks remained in the South. They were illiterate and poor due to Jim Crow laws. After the war, Blacks moved north in the Great Migration. The war had slowed immigration from Europe, creating a labor shortage in the North. Companies began recruiting Black Southerners to work in their factories. Returning Black veterans were open to a new way of life. By the 1970s, 47% of Blacks lived in big cities in the North and West.

In 1916, Wilson signed the Adamson Act to create an eight-hour workday for railroad workers. Wilson wanted to avoid a strike by the railroad unions while the country was gearing up. That set the standard for Ford Motor Company to do the same 10 years later.

The Federal Farm Loan Act set up government loans to farmers to develop and expand their businesses. That made sure there was enough food during the crisis.

World War I set the stage for the New Deal that fought the Great Depression. During the war, economist John Maynard Keynes was Treasury Secretary for the United Kingdom. Franklin D. Roosevelt was running the U.S. Navy. They learned the government could and felt it should control the economy in peacetime as it did in wartime. Most people running the New Deal had ramped up government programs during WWI.