Economy and War

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Economy and War. This essay offers a historical description of both the economic consequences of American wars and the manner in which the state of the economy and its mobilization sustained or hindered war's conduct. That approach reveals that war sometimes produced a prosperity that reduced the harmful economic effects of population loss, destruction of capital, disruption of trade, and financial distress.

During the seventeenth century, Native Americans posed the principal military threat to European colonists, who lived mostly in isolated frontier villages. An agricultural economy and physical dispersion left the colonists unable to maintain trained forces. Because Native Americans refused to fight in a European manner, the colonists' slim technological advantages were negated, causing poorly trained militia to adopt savage economic warfare. They attacked the Native Americans in their winter quarters, endangering families and food stocks. The Indians had to submit or starve. Economically, Indian attacks on frontier settlements meant loss of life and destruction of property. In addition to the expense of largely ineffective stockades, countering Indian raids entailed outlays for military supplies and indirect losses when extended conflict took males from farms and shops.

During the late colonial period, Great Britain began calling upon colonists to supply expeditionary forces for imperial campaigns in Canada and the Caribbean. The wartime infusion of British gold and colonial issuance of paper money to pay volunteers and buy supplies usually brought temporary prosperity, and war's death and destruction affected only small bodies of soldiers and a few frontier communities. The imperial wars left Britain deeply in debt and possessed of a vast undefended territory, which prompted its attempts to impose on the colonists the policies that led to the Revolutionary War.

By 1775, American farmers and craftsmen could provide nearly all of the military goods for American ground forces of sufficient size to counter the army that Britain could maintain in North America. Unable to mobilize those resources, however, Congress failed to bring the Revolutionary War to a speedy conclusion, compounding the loss of life and property.

With foreign loans difficult to obtain and citizens reluctant to buy its bonds, Congress mobilized economic resources by printing bills of credit—paper money—with which to pay troops and purchase supplies. Because state governments failed to impose taxes to return those notes to Philadelphia—and instead issued fiat money of their own—military reverses caused the value on paper money to decline precipitously.

Unable to buy supplies, military commanders resorted to impressment (seizure) of food and animals, undermining civilian morale and burdening farmers nearest the troops. When a forty to one devaluation and specie loans from foreign sources failed to stem inflation the Continental army remained ill‐clothed, ill‐shod, and ill‐fed.

Independence, once gained, injured the economy by ending British subsidies and American access to British markets, but brought benefits by freeing Americans to sell their goods in any open port. Without access to British merchants, businessmen created new networks within the United States, and tapped a promising national market. Wartime self‐sufficiency had forced Americans to manufacturing as never before—at least until postwar British dumping undermined that activity. The war's principal economic victims were the infrequently paid Continental soldiers and their families.

Although the United States lacked the ability to mobilize the necessary resources to achieve its goal of conquering Canada in the War of 1812, the nation suffered little loss of life and—despite the burning of Washington—property destruction. Financed mostly by the sale of bonds and new excise duties, the war also created relatively few financial problems. The British blockade and prewar trade embargoes led to a revival of American manufacturing and a postwar commitment to maintain self‐sufficiency with protective tariffs.

A stronger administration and an improved economy enabled the United States in 1846 to project its military power deep into Mexico and the Pacific coast. With all but two battles fought on Mexican territory, the United States suffered little property damage during the Mexican War. Its casualties were light as was the financial cost of a war that increased the national domain by over a half million square miles.

To achieve its aims during the Civil War, the Federal government relied upon bond sales, heavy taxes, minimal issue of “greenbacks,” and generous contracts to mobilize its superior economy sufficiently to defeat and occupy an area roughly equal to western Europe. Despite unprecedented governmental controls over railroads, foreign trade, agriculture, and business, the Confederacy repeated Revolutionary War financial errors and failed to make effective use of its limited resources.

Along with 260,000 deaths, the Confederacy suffered virtual economic collapse. Military operations and the end of slavery devastated Southern agriculture and destroyed its rail net and nascent industry. Despite a slowdown in the growth rate of the entire nation's economy, wartime inflation created the illusion of greater growth in the Union, whose farmers, meat packers, canneries, railroads, canals, and farm implement makers made substantial profits.

The loss of over 600,000 lives and the intangibles make it difficult to assess precisely the Civil War's economic legacy. What talents fell on the battlefield? What benefits resulted from postwar investment of wartime profits? From skills businessmen acquired when filling large military contracts and distributing goods to far flung armies? From wartime legislative enactment of protective tariffs, a national banking system, a transcontinental railroad, and free homesteads? From the electoral triumph of a political party committed to using Federal power to promote economic development?

Despite the greater intensity of World War II the parallel circumstances, policies, and consequences of both it and World War I justify joint assessment. Particularly in World War II, an effective, if gradual, mobilization of its industrialized economy offered the United States a range of strategic options and permitted it to fight a modern, mechanized war, eventually on several global fronts, while also sustaining the military efforts of its allies.

The United States, confounded by economic downturns in 1914 and 1938, first felt the economic stimulation of war while still a neutral. By wars' end, the nation enjoyed unprecedented prosperity, a booming economy pressing on the short‐term limits of its capacity, and a vast improvement in its global economic and financial position. In nominal terms, both wars doubled the gross national product. By 1916, the United States had become a creditor nation and seized many formerly European markets in Latin America. By the end of World War II, due to allied losses, America's wartime industrial expansion, and new technology resulting from scientific research and engineering development, the United States dominated its former economic competitors.

While most traditional economic sectors benefited from mobilization, World War I prompted the United States to create a chemical industry, and both wars led to vast expansions of shipbuilding and aircraft production. To meet the wars' demands and compensate for loss of workers to the armed forces, agriculture increased its mechanization and applied new technologies that boosted output. Though making limited use of government corporations, Washington gained the compliance of private producers largely through controlling scarce raw materials, banning production of inessential goods, offering lucrative contracts, subsidies, and tax breaks; patriotic appeals, and suspending antitrust laws. To win workers' cooperation, the government encouraged unionization and placed labor leaders on various government boards, while overlooking use of various devices to escape the worst effects of wage controls. By wars' end, the War Industries Board of World War I and the World War II's Office of War Mobilization sought to coordinate economy and allocate production among the armed forces, the civilian sector, and the Allies. Washington financed both world wars largely through new taxes and loans. Though applied too gradually in both cases, government management of the economy—to include rationing of consumer goods in World War II—reinforced sound war finance and helped limit wartime inflation.

Although early Cold War programs like the Marshall Plan had a limited stimulative effect on the economy, the four‐decade confrontation with the Soviet bloc began to produce significant economic effects with the onset of the Korean War and concurrent American rearmament, which led to sustained high levels of defense spending and the nation's first large peacetime armaments industry. Many feared this military‐industrial complex might threaten democracy or prolong Soviet‐American hostility for the benefit of the military, arms manufacturers, defense workers.

When the Cold War turned “hot” in Korea, defense spending, a civilian buying spree prompted by recent memories of wartime shortages, and a delay in tax increases and governmental controls resulted in a burst of inflation. By 1951, however, a tax hike, wage and price controls, and a significant spending‐induced increase in the gross national product (25 percent above the 1948 level) kept inflation below 3 percent.

Sharp limits on defense spending during the administration of President Dwight D. Eisenhower cut that rate in half—and contributed to three recessions—until the Vietnam War, when President Lyndon B. Johnson sought to manage the Southeast Asian conflict and the Great Society domestic programs without resort to typical wartime economic controls. By war's end, with the economy no longer booming and the fight against inflation seemingly lost, government offered automatic cost of living adjustments for workers and government beneficiaries until, in the Cold War's final decade—the 1980s—high interest rates and limits on social programs helped tame inflation even as defense spending surged during the presidency of Ronald Reagan. With the reduction of military spending at the end of the Cold War, many feared a major recession, but the American economy boomed throughout most of the 1990s.
[See also Agriculture and War; Finance and War; Industry and War.]


Ralph L. Andreano, ed., The Economic Impact of the American Civil War, 1967.
Robert D. Cuff , The War Industries Board: Business‐Government Relations During World War I, 1973.
Harold G. Vatter , The U.S. Economy in World War II, 1985.
Harold G. Vatter and John F. Walker, eds., History of the U.S. Economy Since World War II, 1996.
Paul A. C. Koistinen , Beating Plowshares into Swords: The Political Economy of American Warfare, 1606–1985, 1996.
Paul A. C. Koistinen , Mobilizing for Modern War: The Political Economy of American Warfare, 1865–1919, 1997.
Paul A. C. Koistinen , Planning War, Pursuing Peace: The Political Economy of American Warfare, 1920–1939, 1998.

James L. Abrahamson