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World War- II – Aftermath & Analysis

Large portions of Europe and Asia were in ruins at the end of World War II. Homecomings, expulsions, and burials took place as borders were redrawn.

World War- II – Aftermath & Analysis

Large portions of Europe and Asia were in ruins at the end of World War II. Homecomings, expulsions, and burials took place as borders were redrawn. But the extensive rebuilding efforts have just started. 

The population of the world was about 2 billion people when the war started in the late 1930s. Approximately 4% of the world's population had perished as a result of the Axis vs. Allied powers war's 80 million fatalities in less than ten years. 

With control over Germany, Japan, and a large portion of the area they had previously ruled, Allied forces now held occupied positions. As factories were destroyed and former leadership was ousted or brought to justice, efforts were made to permanently undermine those countries' capacity to wage war. In Europe and Asia, war crimes trials resulted in numerous hangings and prison terms. 

German and Japanese citizens by the millions were forcibly driven from the countries they called home. A number of long-lasting issues were caused by Allied occupations and United Nations decisions, such as the tensions that resulted in the creation of East and West Germany and the divergent plans on the Korean Peninsula that caused the Korean War in 1950. 

The 1948 Israeli declaration of independence was made possible by the United Nations Partition Plan for Palestine, which also signaled the beginning of the ongoing Arab-Israeli conflict. The Cold War was born out of the escalating tensions between Western powers and the Soviet Eastern Bloc, and if a solution to this conflict could not be found, the development and spread of nuclear weapons raised the very real threat of an unthinkable World War III. The greatest event of the 20th century, World War II, has had a profound impact on society for more than 65 years. 

In both the literal and figurative senses, much of Europe was burned during World War II (WWII). Cities were completely destroyed, economies fell apart, and the geopolitical landscape of the continent was forever altered. In this lesson, we'll look at those weeks, months, and years that followed one of the biggest wars in Western history, as well as the politics and challenges that post-war Europe faced.

Cold War

When World War II came to an end, the Soviet Union, the United States, and the United Kingdom had already decided how post-war Europe would look. The three powers divided Germany and its capital, Berlin, in half at various conferences, the most significant of which were at Yalta and Potsdam. The Soviet Union controlled the eastern half, and the United States, the United Kingdom, and France shared control of the western half.

The Soviet Union was also granted "influence" over the governments of a number of Eastern European nations, where they quickly installed obedient, communist puppet regimes. Although technically independent, these client states shared the Soviet Union's communist system of government and single-party system of governance despite being technically independent.

The United States and the West were concerned about the formation of this Eastern Bloc, as it was referred to by Western media and government officials, as well as the spread of communism and/or totalitarianism throughout the rest of the world. The goal of U.S. foreign policy changed to containment, which essentially meant halting communism's spread wherever possible. This was in stark contrast to the Soviet Union's strategy of encouraging communism to spread, particularly among its Asian neighbors.

In China, for instance, where communism eventually won out and gave rise to the People's Republic of China in 1949, Soviet agents had spent a lot of time with Mao Zedong's fledgling Communist Party in the 1930s and 1940s. The United States' containment strategy resulted in a number of wars against communist uprisings over the following decades, most notably in Korea and Vietnam.

Economic Impact of war on the banking and monetary system

The Federal Reserve System was expected to function as the country's central bank in a period when US involvement in the conflict was imminent, but expectations were significantly altered when war broke out in Europe. The system's biggest problem was how to handle the potential for very large fiscal deficits brought on by increased war spending.

The expansion of the defense program and the decision to assist in financing allies' purchases of war equipment from the US (under the so-called lend-lease program) significantly increased the US government's financial needs even before the period of active US participation in the conflict. The US government significantly increased its spending after deciding to actively participate in the conflict, supporting earlier predictions. The active involvement in the war led to a sharp rise in the federal deficit even though the Treasury relied more heavily on taxation than it did during World War I and despite increased tax revenue from the significant expansion of industrial production.

The system's efforts to maintain stable financial markets by regulating the price of government bonds and, more crucially, to assist in lowering interest rates on financing the astronomically high fiscal deficits brought on by active participation in the war, were perhaps its most significant actions during the conflict. The System made some open-market purchases in 1939, just before the European conflict broke out, in an effort to affect the yields on short-term government bonds. The objective was to encourage market stability in the short-term funding markets and avoid market chaos in the face of ambiguity at the beginning of the war. 

The system firmly committed to supporting government bond prices once the United States formally entered the conflict. The Federal Open Market Committee declared in April 1942 that it would buy or sell any quantity of Treasury bills offered or demanded at that rate to maintain the annual rate on Treasury bills at three-eighths of 1 percent. The System also established a maximum yield (or a minimum price) for longer-maturity government securities by making a commitment to buy enough of these securities to keep their yields from exceeding the maximum yield. A significant amount of government securities had to be bought as a result of the commitment to maintain low yields (high prices) on government bills and bonds, which significantly increased the balance sheet of the system and, in particular, the monetary base. In fact, between August 1939 and August 1948, the monetary base increased by 149%.

The acceleration of gold inflows as Britain and other allies shipped gold to the United States to pay for war supplies and other domestically produced goods was another factor that contributed to the growth of the monetary base and came as an immediate result of the outbreak of war in Europe. The monetary base and money supply underwent a significant expansion as a result of these two factors. Therefore, during that time, inflation significantly increased. This occurred in spite of restrictions on prices, wages, and consumer credit, as well as a rise in the nonbank public's willingness to hold a sizable portion of their wealth in the form of monetary assets, as evidenced by the sharp decline in money velocity seen during the war.