Industry and War
The key economic fact about the American Revolutionary War is how little it affected industrial production. Since the Continental army never exceeded 20,000 men, its material demands were comparatively small. Because a majority of Americans had no strong preference as to the outcome, major sacrifices were not to be expected, and little time was spent in actual combat. The southern plantation economy was of course disrupted, but exports still remained substantial. Although the government built armories, nevertheless, about 60 percent of U.S. gunpowder was imported. The Revolutionary War did retard the development of the iron industry, and the gross domestic product (GDP)—which at this time can only be very crudely estimated—probably declined somewhat during and immediately following that war.
Of somewhat greater significance was the impact of the War of 1812. British blockades of U.S. ports almost dried up American exports. This also meant that foreigners could not trade with the United States—hence encouraging import substitutes, especially textiles. Some see this development as the first faint beginnings of industrialization in America.
The impact of the Civil War on industrial growth has been much studied. Traditionally (that is, in major studies of the topic from the 1920s to the 1950s), the Civil War was seen as a spur to industrialization. Charles and Mary Beard as well as Louis Hacker took this position, arguing that by destroying the Southern slaveocracy, the Civil War shifted the balance of political power to the industrial North, and the Northern Republicans passed laws that stimulated industrialization. In a classic article in 1961, Thomas Cochran argued that the rate of real growth in value added in U.S. manufacturing actually slowed during the Civil War decade. Pig iron and bituminous coal production—key elements in the manufacturing process—also declined or showed little growth during the war years. Railroad track growth rates were retarded, immigration declined, bank loans dropped, construction slowed. Nor did freeing the slaves help industrialization because former slaves largely became sharecroppers.
Other writers have emphasized the continuity of industrial development prior to and after the Civil War. Factory building and mechanized transportation were continuous and rapid, both before the war and after. Industrial “takeoff” was well underway before the war started, Walt Rostow has argued, and industrial profits during the war largely lagged behind price increases. Real wages fell about 20 percent during the war. Government borrowing certainly drove up interest rates, as public debt rose from $65 million in 1860 to $2,678 million in 1865. In short, Cochran's position that the Civil War actually retarded industrial growth has become the dominant one, but it needs to be modified by the less quantifiable view that changes wrought by the rise of the Republican Party probably did enhance the “capitalist spirit,” and certainly a host of Supreme Court decisions over the next three decades favored industrialists over labor and farmers and legitimized a high protective tariff.
World War I marked the transfer of world economic leadership from Europe, and especially Great Britain, to the United States, and quickly proved a boon to U.S. industrial economy. Early on, America became the arsenal as well as the granary for the Allied powers. To achieve this end, the government quickly seized control of the economy and passed laws to fix prices, shifted plants to war needs, established minimum wages and maximum hours, and imposed controls on foreign commerce. By 1918, the government had absolute control over industrial raw materials, the railway system had been nationalized, and marginal mines had been brought into production. Estimates of the growth of GDP during wartime are controversial, ranging from 5 to 18 percent, but by 1920 the high levels of wartime employment in manufacturing had been reached again, thus preparing the nation for a period of prosperity. Finally, World War I changed America's role in the world economy from a debtor nation to a creditor nation, and clearly established the United States as the foremost industrial nation in the world.
World War II solved the problem of the Great Depression, the greatest economic calamity America has ever faced. Even before the attack on Pearl Harbor, unemployment and industrial sluggishness had almost vanished in the wave of increased defense spending, and by 1945 the real GDP per capita had almost doubled from its prewar base. Expenditures of the War Department rose from $2 billion in 1939 to $80 billion in 1945. The impact of industrial war spending was most dramatic in the Far West, and especially California, which became the fulcrum for the naval war against Japan. By the end of the war, California was the center of the aircraft industry and Los Angeles had risen from a film industry city to a center of shipyards and aircraft plants. In fact, World War II really set the stage for the West to become the fastest‐growing region in America since 1945. Overall, by 1944 the United States had indeed become the “arsenal of democracy,” outproducing both Germany and Japan almost twofold, boasting the world's largest navy and air force and one of the world's largest armies.
The War Production Board controlled all raw materials and finished goods, both military and civilian, and the Office of War Mobilization and Reconversion served as an umpire over conflicting claims of government agencies. Under their guidance unemployment fell to 1 percent by 1944; industrial employment for blacks and other minorities jumped dramatically; and about half of all new civilian jobs were filled by women. Almost half of all men over the age of sixty‐five were in the workforce during that war, compared to 2 percent in the 1990s. The war also saw a tremendous increase in union membership, but union leaders had to accept modest wage increases and agree to a “no‐strike” pledge. A government freeze on prices, wages, salaries, and rents made inflation less of a problem than in World War I, but these controls were widely resented and a black market of troubling proportions emerged.
Great advances in technology and scientific research were achieved through war expenditures—most notably jet engines, rocket propulsion, plastics and other synthetics, and television and radar. Many if not all of these products would have come about anyway, but World War II certainly speeded their development. Medical breakthroughs, including sulfa drugs, penicillin, and quinine, were also a consequence of the war. Most obviously, nuclear energy, with all its positive and negative consequences, was a direct result of the development of the atomic bomb.
World War II industrial mobilization was paid for by taxes and borrowing in about equal proportions. The national debt rose from $41 billion in 1941 to $271 billion in 1946, or 114 percent of GDP. It has never been paid off, although it has been paid down to 52 percent of GDP (which includes nonwar debt as well). Few have questioned the value of this investment. The war also altered fundamentally our attitude toward government, making Keynesian fiscal policy the preferred approach to industrial development. With the passage of the Employment Act (1946), the federal government became responsible for maximum industrial development, employment, and purchasing power. Consequently, the public has come to expect full employment and an ever‐growing economy.
The cost and consequences of the Cold War, including the Korean and Vietnam conflicts, for industrial development have been substantial. Defense purchases as a percent of GDP reached 14 percent at the peak of the Korean War and 10 percent during the Vietnam War. During the Reagan defense buildup of the 1980s, military purchases peaked at 7 percent, and by the mid‐1990s they were still in the 4 percent range. In the 1950s and 1960s, defense spending represented about one‐half of all federal government outlays; in the 1970s and 1980s, it fell to about 25 percent; and by the mid‐1990s, the figure had fallen to about 15 percent, not because defense expenditures plummeted but because social spending rose dramatically. This military spending created powerful vested interest groups, sometimes referred to as the military‐industrial complex. Aerospace, electronics, shipbuilding, and computer industries benefited substantially from defense spending during these years, as did the interstate highway system and higher education. The great majority of America's largest corporations, however, derived only a small portion of their revenues from defense spending in this period, and the so‐called “military‐industrial complex” was and is only one of numerous and powerful interest groups with conflicting goals in the American system. Nor has defense spending had much influence on the stock market, which in recent years has boomed as defense has declined relative to other outlays.
Defense infusions into the American industrial base since 1950 correlate closely with the prevalence of fear of an external threat to U.S. security, principally from the former Soviet Union. Looking back, the level of fear was not irrational, and careful studies of congressional voting patterns in heavily defense‐oriented districts show that the representatives in these districts were not more hawkish than those with little defense spending. On the contrary, big spenders in both parties tended to be those who were in Congress the longest.
During the 1990s, defense spending has tended to be highly concentrated by industry, with major impacts in ordnance, aircraft, and shipbuilding. Less than 100 companies dominated the market, most of them middle‐sized corporations, and there has been little turnover and few failures for these businesses. Nor has there been much spillover to the private economy. The geographic impact industrially has tended to concentrate in a handful of states, notably California, Texas, and Massachusetts. At its last peak, in 1967, defense spending represented about 10 percent of U.S. industrial output and employed about 7.5 million workers. At that time, about one in every five scientists and engineers in private industry were employed in defense industries. By 1995, defense outlays amounted to $272 billion, which was 18 percent of federal expenditures and 3.9 percent of GDP. Of this, about $110 billion was in military prime contracts to industry, employing 800,000 civilians, about half of whom lived in the South.
[See also Defense, Department of; Labor and War; World War I: Postwar Impact; World War II: Domestic Course; World War : Postwar Impact.II]
Charles and and Mary Beard , The Rise of American Civilization, 1927.
Louis Hacker , The Triumph of American Capitalism, 1940.
Chester W. Wright , The More Enduring Economic Consequences of America's Wars, Journal of Economic History, Supp. 3 (1943).
Walter Rostow , The Stages of Economic Growth, 1960.
Thomas C. Cochran , Did the Civil War Retard Industrialization? Mississippi Valley Historical Review, 1961.
James L. Clayton, ed., The Economic Impact of the Cold War, 1970.
Adam Yarmolinsky , The Military Establishment, 1971.
Steven Rosen, ed. Testing the Theory of the Military‐Industrial Complex, 1973.
Murray Weidenbaum , Military Spending and the Myth of Global Overstretch, 1989.
Glen Pascall and and Robert Lamson , Beyond Guns and Butter, 1991.
Jeremy Atack and and Peter Passell , The Economics of the Civil War, in An Economic View of American History for Colonial Times to 1940, eds. Susan P. Lee and Peter Passell, 1979; 2nd ed., 1994.
James L. Clayton