The Korean War

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The Korean War was a major conflict that came after the end of the Second World War. This conflict was the initial test of the United Nations which was created to prevent future conflicts or wars from arising by using dialogue, negotiations and sometimes through the use of force by using the army of the member nations. In the year 1950, North Korea invasion of the South Korea lead to the production of heavy naval and military involvement by the United States. Throughout the year, the United States struggled to contain the North Korea’s army, organize the forces that were required to defeat it alongside responding to a global military challenge that came from the communist world. Due to long lasting suffering of the American’s army from the fiscal constraints, the end of the Second World War earlier had left a vast recovery potential.

The United States reserves had many modern aircraft, military equipments, ships and production capability that could be re-utilized in a very short time to rebuild them. Further, the United States forces included many trained personnel whose experience from the Second World War was still reasonable and fresh. In the middle of the year 1950, the invasion at the Inchon fractured the North Korean war machine and the United Nations army pushed through the North Korea in the following two months. However, there was an open and non-open intervention from china and the Soviet Union on the side of their communist counterpart. Then, the United Nations was thrown to South Korea and the Chinese army was in turn contained and compelled to retreat early the following year.

In the middle of the year 1951, the front line forces had gained stability near where the war broke out twelve months earlier.  Various negotiations were started alongside the hope that an early treaty could be arranged. Unfortunately, this process took two more difficult years whereby the opposing forces was involved in a fight with the united states giving extensive air and gunfire support, relentless minesweeping, constant amphibious threat and large logistics effort. In 1953, with the blunting of the final communist offensive and the USSR’s new regime, the negotiations ended and the war/fight was put to an end.

Due to the fact that the war was a one of the global challenges of the communist, the United States together with its supporters undertook an extensive military build up to the levels that had been unacceptable previously. With reference to this, the shortages of materiel and men that were required in Korea had to be addressed. In 1950, the naval reservists let their occupations and returned to the war active duties and the transportation systems and industrial productions in the United States were enhanced and increase respectively. In addition, the military hospitals operations were expanded to serve the many injured men who were brought back home for medical attention. From the political perspective, the policy of limiting the war in Korea by the Truman Administration while directing many resources to the European defenses provoked a great controversy whereby the national attitude soured to a resigned sense that Korea was a war. This paper outlines the various economic effects of the Korean War on the United States.

Causes of the Korean War

The underlying reason that led to the Korean War was because it was one episode of the cold war between the United States and the USSR. On the ground, this war seemed to be between the North and South Korea, but the nations which were super powers used the war as a suitable front to combat each other without necessarily going into hot war. The United States was involved in the Korean War because of the following factors. Domino theory was the first reason.  The salami tactics in the Eastern Europe was not the only avenue where the communists were rising to power. In the Far East, the nations were also becoming powerful. President Truman believed that many countries could become communists if one fell into communism and his doctrine had been the one trying to stop the communists from gaining more territory. In the year 1950, the American Security Council issued a report that recommended the United States start rolling back communism and hence Truman considered driving out the communists from Korea.   In addition, Truman realized that the United States was competing to dominate the world with other nations such as the USSR. Then, it gave support to the South Korea in fighting communism without attacking Russia directly.

Effects of the Korean War

In the year 1954, the United States of America was compelled to consider the military intervention in order to prevent the victory of the communist. Although the United States policy was to be changed by the war, there were some considerations that made it impossible. First, a greater percentage of the United States involvement followed and it was partly caused by the war. As the United States became against the Chinese, it defined a threat to its security and more funds were made available and thus it was easy and necessary to halt the Viet-Minh. Secondly, without the United States’ involvement, the fall of Indochina would have not produced the necessary shock that could gain the support for the disarmament of the United States. If the troops were in from China, the United States could have responded with much force as it did in Korea.  

The Korean War altered the United States economy and other important processes. The most pronounced effect of the Korean War in the United States of America was the vast increase of the defense budget in order to allow for the making of other policies. Some American officials such as the NSC-68 authors wanted a major increase in budget before because it was difficult for Truman since he might have not discovered this by himself. Due to the fact that the budgetary increment was impossible from the political perspective, Truman had no reason to do according to his own preferences. However, Truman accepted the threat analysis that was in the NSC-68 and wanted more spending in defense contrary to the allowance given by the political climate in the country. There was a great support for the increased budget from Korea because the communist threat was more vivid and more money was required in maintaining the troops who were participating in the war. Through the increase of the budget, much of the resistance collapsed and the economy did not fall apart. The militarization of NATO also led to the significant change in the United States economy. America had to invest a lot in transforming the paper organization which was made on a symbolic commitment to a force that could be able to resist the soviet attack.

Korea had resolved the ambivalence that was felt by many decision makers and allowed the embracing of a policy that some of them had already come to favor. The NSC-68 argued that because the Russians were willing to run significant risks in order to expand, and because they would soon have a significant nuclear stockpile, the West required the ability for the conventional defense. Korea appeared to prove this point and the Russians tried to gain a small prize in spite of America's strong atomic weapons and mobilization base; would they not be tempted to gain a much greater one unless the local imbalance were corrected. In addition, Korea was an unlikable reminder of the deficiencies of having to mobilize an army after the war had begun. The allied forces were nearly pushed off the peninsula just before adequate reinforcements could arrive, and the same thing could happen in Europe. The only solution to this was more United States troops in Europe and the proper functioning of the infrastructure which put more constraints on the American economy/budget.

The economy of the United States was affected in that Truman depended greatly on taxation and reduction of the non-military outlays instead of borrowing the funds from money creation or the public to finance the Korean War. There were budget deficits and there was low inflation. However, the economic growth was above its sustainable rate throughout the Korean War. In the year 1951, the inflation that existed forced the United States government to resort to the widespread price and wage controls. However, the government did not regress to the rationing system for the private consumption of commodities and services. The Federal Reserve policy was changed in 1951 which guaranteed that the inflation would be under control.  When the Second World War came to an end, the United States’ treasury had maintained that the Federal Reserve monetary policy was to be directed to keeping the treasury securities stable and to keep the debt financing costs at manageable levels while limiting the availability of the reserves to banks only.

It was discovered in the year 1951 that the maintenance of this policy was to be inflationary and due to the fact that inflation remained the Truman administration’s primary concern, the Federal Reserve and Treasury reached an agreement to allow the Fed to focus on maintaining the stability of prices and steadily allowing the yields on Treasury securities to be determined by market. As a matter of fact, the United States economy experienced a short recession immediately the Korean War came to an end. Just before the start of the Korean War, the 1950’s Revenue Act was enacted. This resurrected the Second World War’s income tax rates by about 1.3 percent of the GDP. Later, the Revenue Act of the 1951 raised individual income and taxes, for an estimated revenue increase of 1.9 percent of the GDP. The increase in individual and corporate taxes would have led to high revenues, but the 1951 act had several narrow-based reductions on taxes. During the Korean War in the United States, the tax revenues jumped from 15.2 percent of GNP in the year 1950 to about 19.5 percent in the financial year 1952. Also, the corporate and individual income tax revenues that made up the federal receipts doubled between the year 1950 and 1952.

The occurrence of the Korean War led to the involvement of the United States in South Korea. In fact, the United States was forced to make an alliance with South Korea and many other countries that were caught up in the cold war chose to be under the influence of the Soviet. This alliance has made Korea to enjoy peace and stability for a long time and it has especially enhanced economic prosperity.


In conclusion, the Korean War was an episode of the cold war and it was a war between north and South Korea but other countries such as the United States used it to fight without engaging in hot wars. The reasons why the United States went into the Korea war include the Domino theory, to undermine the communism and the fact that Truman discovered that the United States was in the competition with the USSR to dominate the world. It should not be believed that the military outlays increment associated with a war leads to recession. Instead, the increment is predicted to lead to an increase in the aggregate demand. Even if the spending is shifted away from the non-monetary goods and services by the war, there is no reason to believe that the overall GDP would go down because it included the GDP. It is evident that the high government outlays that are associated with wars are normally financed through reductions in government spending, higher taxes, the sale of the United States treasuries/creation of money and government borrowing from the public. It can be seen that a sound military campaign can be financed without having a big impact on the economy or budget.

For instance, the campaign during the Korean War did not engage the increase in the overall military as part of GDP and it is evident that the tax increases becomes necessary when the wars gets larger. The big wars such as the Korean War brought about economic booms because the sale of treasuries and borrowing from the public expands the general demand. Making the choice on how to finance a war is entirely a question of equity which is naturally a political question and the financing through borrowing can be justifiable on the grounds that the future generations may benefit from the sacrifices that the existing generations come up with when fighting the war. On the grounds of smoothing consumption, borrowing has been justified and it is ideal to defray the temporary expenses over time than all at the same time. Among the above for methods of financing, the economists tends to reject the money creation method and they argue that the inflation tax is the most arbitrary taxes due to the fact that the government cannot democratically specify its occurrence. The financing method can lead to large efficiency losses very fast because it reduces the helpful functions of money in the market economy and it leads to the undermining of the effectiveness of the monetary policy as a macroeconomic stabilization tool.

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