War and The Economy (Issue)
WAR AND THE ECONOMY (ISSUE)
Perhaps no other single activity has had a greater impact on the economy of the United States than war. But how war affected the economy of the nation changed drastically between the nineteenth and twentieth centuries. During the late eighteenth and nineteenth century, war sometimes obstructed and other times invigorated the national economy. But in the twentieth century war provided a consistent impetus for prosperity, at the same time that it tied the U.S. economy closer and more intricately to a global market, a world alliance, and a defense industry.
For many U.S citizens independence from Britain didn't provide all the solutions it appeared to have promised. For some it only made things worse. The British Navigation Acts, although no longer restricting trade outside the Empire, were now applied against U.S. merchants who wished to trade inside the Empire. Moreover the mercantilist regulations of other European countries were often more stringent than the British laws had been. When the war ended the English proceeded to "dump" low-priced goods on the still infant American industries which had began to establish themselves during the years when the British Navy blockaded American ports. War-born industries found it impossible to compete against England's more mature industrial efficiency and economies of scale. Cheap British manufactured goods began reappearing on the U.S. market and the protection that U.S. industries had enjoyed due to trade disruptions during the war disappeared. Trade came to a standstill, domestic prices fell; farm produce also sold at the lower prices; consequently, unemployment rose sharply among urban and rural laborers.
In 1790 Secretary of the Treasury, Alexander Hamilton (1789–1795), convinced Congress to assume the debts incurred by the individual states during and after the American Revolution (1775–1783). According to Hamilton, this plan would bind wealthy citizens to the new federal government, establish it as a good credit risk internationally, and provide a compelling rationale for an immediate and effective federal tax system. The funding and assumption of this enormous debt would serve several purposes. If the debt were gathered together as the sole responsibility of the federal government, the credit of the nation would be restored at home and abroad. As capital came out of hiding, interest rates would be lowered. With lower interest rates investments in land, commerce, and industry would increase, and capital would multiply along with wages and jobs. All that would then be required was a national bank to provide internal control of finances and national programs to stimulate commerce and industry within the nation.
The outcome of the American Civil War (1861–1865) was determined in large part by the economic disparity between the two regions in their manpower and their industrial resources. In 1860 the North had a population of about 19.5 million to the South's 11 million, about four million of which were slaves. Estimates placed the size of the northern armies at about 1.5 million to the Confederacy's nine hundred thousand. But the system of volunteers, even with the offer of bounties, proved to be unreliable to furnish the numbers needed to keep the armies up to strength and both the North and South were forced to use conscription.
An essential part of the war involved transportation of men and material. In 1859 the North had about 21,900 miles of railroads to the South's 6,600. In the North railroads connected the agricultural and manufacturing centers, but in the South railroads were inadequate in quality and lacked direct connections between major cities, thus there were problems getting supplies to where they were needed. The federal government also controlled the Navy and most of the merchant marine, which placed the South at a disadvantage in purchasing needed goods abroad and selling surplus agricultural products in foreign markets. While the North had 90 percent of the nation's industrial capacity, the South's lack of a developed industrial base created serious problems in acquiring sufficient supplies of arms and ammunition. Food supplies for the army were an even greater problem than equipment. The South's poor transportation system failed to get needed food to the armies in the field.
Perhaps one of the most telling reasons for the South's inability to win its independence was its inadequate financial system. There were no significant financial institutions in the Confederacy. At the close of the war the South would still depend upon banks in the North and in England for loans to rebuild the southern economy. The predominantly agricultural economy made it difficult to raise taxes or large sums of money. The devastation of a four-year war fought mainly in the South made this even harder. The provisional government finally resorted to printing paper money, but the currency came to have so little value that people eventually turned to barter. Ultimately the South was unable to raise the capital it needed to support the war effort. And its inability to amass capital continued well after the war was over. Some observers likened the post-Civil War South to a colony of the North: low-wage labor was there in abundance, but capital was lacking. Some historians note the attempt of the South to build a "New South" with developing industry over the next thirty years. But for much of the South the Civil War probably set things back a generation.
Statistics also tell the story of the effect of the Civil War on the economies of the South and of the North. From the South, 258,000 men died in the war. The North lost more—362,000. Those that survived were frequently maimed for life and rendered incapable of supporting themselves. In several southern states, the busiest manufacturing industries for several years after the war were producing prosthetic devices, such as wooden legs, for the wounded. The South also lost much of its livestock as well as its farm implements. Most significantly, the South lost its slave labor force, variously estimated at around 4 billion dollars (more expensive than all the land in the South).
Whereas the Southern economy had suffered a major set-back as a result of the war, the North had continued to advance. One important feature of this advance in the North was that, when the South seceded, the Northern Republicans, now in control of the 37th Congress, in 1862 proceeded to pass the elements of the Republican program that the southern Democrats in Congress had been impeding. The Homestead Act of 1862 provided free government land to farm families in the north and west. The Morrill Land Grant Act of 1862 set aside new money to build colleges for agriculture and industrial sciences. Subsidies for the transcontinental rail lines were also voted in, as was a National Banking Act to standardize the national currency. All of these measures pointed in the direction of a post-war program for farming, industrial expansion, and wage labor (as opposed to slavery). It was only through the Civil War that these advances were possible.
In the case of both the Spanish-American War (1898) and World War I (1914–1918) war now became a stimulus to economic development. World War I initially cost the United States government about $33 billion plus interest. But rather than hurting the domestic economy, the war effort strengthened and improved the United State's competitive position in the world. Farmers enjoyed boom years as agricultural prices rose and the international market for their products expanded. Real wages for blue-collar workers increased modestly and all sectors profited from the war. Wartime demands for industrial products raised profits for many companies. The DuPont Company's stock multiplied by 1600 percent between 1914 and 1918 and DuPont grew from a debtor company to one with a surplus of $68 million at the end of the war. Steel production reached twice its prewar level by 1917. The standardization effort during the war led to greater postwar industrial efficiency and production.
President Woodrow Wilson (1913–1921) did much to encourage the United State's changing role in the world economy. In Wilson's view free trade promoted both universal prosperity and universal peace and democracy. International commerce led to a strong domestic economy and exports were essential for continued U.S. economic growth. Wilson felt that restrictions on trade, such as tariffs and trade agreements, hindered efficiency and denied the natural cycle of the international economy. Wilson firmly believed that goodwill flowed along with goods and that commercial contacts were effective guarantors of peaceful relations among states.
The war almost instantly reversed the credit standing of the United States. The nation, by the war's end, held billions of dollars in European debt obligations and was the globe's greatest creditor as well as its greatest economic power. By forcing the Europeans to accept goods instead of loans, the Wilson administration guaranteed that the country would be banker, arsenal, and breadbasket to the Allies. World War I set the foundation for the prosperity of the twenties and some economists argue, the background for the Great Depression (1929–1939) as well.
The outbreak of World War II (1939–1945) began the United State's climb out of the depths of the Depression. U.S. businesses profited from increased orders for military and non-military goods by European nations engaged in the conflict. Industries such as steel sold war goods to all parties and reaped a handsome profit. Later as the Europeans ran short of cash, President Franklin D. Roosevelt (1933–1945) developed a policy of U.S. funding for allied purchases. The policy was announced as a means whereby the United States would become the "arsenal of democracy," and was designed to advance U.S. political and economic interests without involving the nation in war. But even policy supporters within the Roosevelt administration doubted that the United States could stay out of the conflict and they began preparing the United States for war. The government increased its purchases of military goods from private industry, spurring production and creating jobs.
Despite the Roosevelt administration's friendly attitude toward big business, an unregulated marketplace approach to the war economy was impossible. Shortages and allocations of vital raw materials required economic oversight and coordination. By executive order Roosevelt created a variety of new agencies to oversee mobilization. Among these agencies were the War Production Board (WPB), which coordinated war-related industries, and the Office of Price Administration (OPA), which set prices on thousands of items to control inflation. There was also the National War Labor Board (NWLB), which set wages, monitored working conditions, and, if necessary, seized industrial plants in the event of labor strife. Roosevelt also converted older New Deal agencies into wartime organizations. The Reconstruction Finance Corporation (RFC) made loans to small businesses and homeowners during the Depression. During World War II the RFC loaned money at excellent terms to industries expanding to meet wartime demand.
The administration's combination of private capitalism and public stimulus accomplished exactly what the government intended: it made the United States the largest arms manufacturer in world history. U.S. labor built nearly 300,000 airplanes, nearly 400,000 pieces of artillery, 47 million tons of artillery ammunition, 44 billion rounds of small arms ammo, 86,000 tanks, and 6,500 ships. Many of these planes, tanks, and ships were used in the European and Pacific theaters of war, often with Russian, British, or other Allied soldiers using them. Frequently the infusion of U.S.-made material proved decisive in battle.
At the end of the war U.S. business and the economy were radically different than they were before Pearl Harbor. U.S. citizens enjoyed unprecedented prosperity. Corporate profits had skyrocketed. In 1943 alone earnings jumped $2.1 million over the prewar level. Workers' wages on average doubled; they increased from almost $25 a week to $50 a week and many people earned hefty overtime bonuses. Even farm income increased an incredible 250 percent, despite the loss of nearly 800,000 agricultural workers during the war.
The character of the economy also changed due to war. Despite administration attempts to distribute the benefits of government contracts broadly, 71 percent of all contracts went to the 100 largest U.S. corporations. By the end of 1942 there were 300,000 fewer small companies than there had been before the war, and fewer small farms. Labor also got bigger. The total labor force increased by 22 percent during the war, which along with the draft eliminated unemployment. Labor unions grew from 10.5 million members in 1939 to 14.75 million members in 1945 and they intended to make up for wages lost due to the "wage freeze" of the war years. As in the case of the post-World War I strike wave in 1919, there was a tremendous strike upheaval in 1945 and 1946.
An acknowledged power in the U.S. marketplace, big labor insured that many of the wage and benefit gains of the war years would continue into the next decades. Moreover because of wartime labor shortages the workforce was more diverse than before. Almost 60 percent of women in the United States were employed during the war. Industry, which for so long had closed its doors to African Americans, during the war employed 1.2 million. Sixty thousand African Americans migrated to Detroit alone during the war. The one problem with all this prosperity was that it was purchased with government deficits justified by the pressure of war.
The new administration under President Harry S. Truman (1945–1953) was faced with a significant economic problem: how to maintain wartime prosperity without a war. But the potential military confrontation with the Soviet Union not only cemented U.S. economic ties with Western Europe and increased U.S. trade, it also provided Truman with the perfect solution—a viable rationale for increased military expenditures. By the end of the 1940s, prosperity was insured by the twin forces of expansive U.S. trade and the growth of what President Dwight D. Eisenhower (1953–1961) would later term "the military industrial complex."
See also: Civil War, (Economic Causes of), Civil War (Economic Impact of), Economic Development (Federal Involvement in), Military-Industrial Complex)
Fearon, Peter. War, Prosperity and Depression: The U.S. Economy 1917–1945. Lawrence: University Press of Kansas, 1987.
Higgs, Robert, ed. Arms, Politics, and the Economy: Historical and Contemporary Perspectives. New York: Holmes and Meier, 1990.
Nelson, Donald. Arsenal of Democracy: The Story of American War Production. New York: Harcourt, Brace, 1946.
War and the Economy
War and the Economy
War’s Effects. The Revolutionary War did not significantly affect all Americans. Even at its peak in 1776, the American army numbered fewer than ninety thousand men, or only about one-eighth of the total number of military-age men. In 1779 and 1780 the army shrank to about half that size. Many people felt no strong loyalty either to the patriotic or the British cause. Some were opportunistic, selling to whichever side happened to be buying or paying the best prices. The war did not affect the rate of population growth either. Owing to Americans’ high rate of natural increase, the population grew by 83 percent between 1770 and 1790, a rate nearly identical to the one for the period 1750 to 1770. Nevertheless, the War of Independence was different from previous colonial wars, in which the colonists participated as British subjects. This time the Americans were fighting their old protector with the backing of a former enemy, France. Although France provided important support to the American cause, the French entered the war for their own, and not the Americans’, benefit. The French were never as successful at defending their new ally as the British had been. These dramatically changed circumstances meant that the War of Independence disrupted the American economy more severely than had previous wars.
Overseas Trade. By January 1776, nine months after the fighting began, both Congress and Great Britain had prohibited all trade between the mother country and its former mainland colonies. The disruption of overseas trade had serious effects on the American economy. With independence, American merchants lost their large and lucrative markets in Great Britain and the Caribbean. They also forfeited the British bounties on goods that had made products such as indigo and naval stores so profitable. Overall earnings from the export sector fell dramatically, with the trade in foodstuffs and shipbuilding particularly hard hit. Although large quantities of American tobacco, flour, and a few other foodstuffs made it to foreign ports, the overall levels remained well below those of the early 1770s. Americans offset some of the losses in income by engaging in privateering, through loans and subsidies from European allies, especially France, and by selling goods and services to the British and French military. Despite these alternative sources, the disruption in overseas trade sharply curtailed the incomes of many Americans. They also had to get by with much smaller quantities of foreignmade goods and paid higher prices for them. Lower-quality textiles from France and Germany, for example, sold at double or triple the prices of prewar English imports. Recovery occurred slowly, and the American economy probably did not regain its former levels of income and wealth until the end of the eighteenth century. The level of deprivation varied throughout the course of the war because American policies and tactics went through several different stages. From late 1774 to April 1776 the colonies engaged in nonimportation agreements that resulted in serious shortages of imported goods. Congress allowed a limited amount of trade with foreign nations once fighting began in April 1775, and in April 1776 it removed all
restrictions on foreign trade. Until the middle of 1778 the British navy largely succeeded in blocking shipments from France and the West Indies. However, the situation for the Americans brightened from mid 1778 to early 1782, when the French, Spanish, and Dutch entered the war and the Royal Navy’s attention shifted to the fighting itself. During this period Americans were able to obtain significant quantities of British-made goods from Dutch traders who ran the blockades. The Royal Navy could not mount an effective blockade because it did not have sufficient troops to occupy simultaneously the major ports of Halifax, Boston, Newport, New York, Philadelphia, Norfolk, and Charleston. Besides, the Americans’ trading partners in Europe and in the French, Spanish, and Dutch West Indies were themselves either hostile or indifferent to Great Britain. In 1782 overseas trade suffered again, as the British turned their attention to intercepting American shipments. By then, however, the war had turned to favor the Americans, and shortages never again became severe.
Other Disruptions. Fighting occurred in many densely populated areas and interfered with farming and production. Warfare in frontier regions destroyed the Indian trade; maritime fighting weakened New England’s commerce in fish; and ships and other peacetime resources were converted into war materiel. Southern farmers generally felt the effects more acutely than did their Northern brethren. During the 1781 campaign British soldiers destroyed thousands of hogsheads of Virginia tobacco and freed slaves in an attempt to disrupt
the Southern economy. Virginia estimated that it lost thirty thousand slaves, and South Carolina claimed losses totaling twenty-five thousand. The supply of labor, already inadequate, shrank further as men were called into military service. Many American women were forced to take over the responsibilities of operating farms, businesses, and plantations from absent husbands, fathers, and brothers. “I find it necessary to be the directress of our husbandry,” Abigail Adams wrote to her husband, John, who was frequently in Philadelphia and abroad during the war. “I hope in time to have the reputation of being as good a farmeress as my partner had of being a good statesman.” The war also interfered with normal mercantile activities. Commercial credit from England and Europe, formerly generous, became more difficult to obtain. The war disrupted the court system, so debts became harder to collect. One Philadelphia merchant wrote in 1783 that the “Face of trade has greatly altered here in the Course of the war, many people are ruined & others next door to it.” Ordinary people suffered when both British and American troops stripped the countryside of food and fuel. The Continental Army requisitioned goods from farmers and paid with currency whose value shrank dramatically and wreaked havoc on local economies. Despite the bravado of women such as Abigail Adams, many people found themselves in desperate straits. In 1777 a newspaper reported that twenty women in East Hartford, Connecticut, “attacked and carried without opposition from powder, law or conscience, Mr. Perkin’s store, in which was lodged a quantity of sugar designed for the army of which they plundered and bore away in triumph 218 Ib.”
Privateering. Finding themselves shut out of the imperial trade, Americans turned to other means of securing income. They hired privateers, merchant-ship captains who received a letter of marque from state or national authorities that allowed them to raid enemy shipping, strip the vessels of their cargo, and then sell the goods. Privateering became a major American enterprise during the war, and Britain lost some two thousand vessels (worth an estimated £18 million sterling) to these predators. Overall the privateers’ successes surpassed those of the government’s vessels and took a greater toll on the enemy. Privateers captured enemy ships off the coast of North America and in the Caribbean Sea. They preyed upon British shipping in the English Channel and in the waters between Britain and Ireland. Some privateers went as far as the Spanish port of Bilbao and the French coastal towns of Brest, Le Havre, Nantes, and Bordeaux. In addition to capturing enemy ships and diverting the British Navy away from military action, privateering stimulated the economy. Privateers made scarce imported goods available to American consumers, who eagerly bought them. The activity employed many commercial vessels that would otherwise have remained idle, and it helped to sustain the American shipbuilding industry. Privateering gave employment to seamen and fishermen, especially those in New England, whose trade had been disrupted by the war. In 1778 alone an estimated ten thousand men were employed in privateering, nearly as many as served in the army. Enterprising merchants, sea captains, and even entire towns made substantial profits from the activity. In a twelve-month period Providence, Rhode Island, earned about £300,000 from privateering and shipbuilding—about double the total value of the town’s property in 1774. John Adams wrote in 1776 that “Thousands of schemes of privateering are afloat in American imaginations.” Wealthy individuals treated it as a business investment. A group bought shares in a vessel, sometimes even trading the shares with each other much like stocks are traded today. The investors took on all the expenses and gave a bond to a Continental or state agent as assurance that they would capture only enemy ships. Nearly seventeen hundred of these bonds were issued during the war. Prominent Americans eagerly joined in these ventures. While serving as ambassador to France, Benjamin Franklin commissioned three raiders: the Black Prince, the Black Princess, and the Fearnot. Philadelphia merchant and congressional leader Robert Morris reportedly made between £300,000 and £400,000 by such ventures.
Curtis P. Nettels, The Emergence of a National Economy, 1775—1815 New York: Holt, Rinehart & Winston, 1962);
Jacob M. Price, “Reflections on the Economy of Revolutionary America,” in The Economy of Early America: The Revolutionary Period, 1763-1790, edited by Ronald Hoffman and others (Charlottesville: University Press of Virginia, 1988), pp. 303-322.
The German invasion of June 22, 1941, was an event for which the Soviet Union had been preparing for fifteen years. Soviet war preparations were started in the mid-1920s at a time when no immediate threat of war existed. Stalin and other Bolshevik leaders were preoccupied by the fate of the Russian Empire in World War I. Although Russia entered that war with a substantial food surplus, its economy was destabilized by the mobilization of industry; this deprived the countryside of manufactured commodities, and peasant farmers ceased to sell food in exchange. As a result, the towns and military units went increasingly hungry to a point where industry and the army collapsed. Stalin intended to avoid a repetition. Forced industrialization would raise the economy's capacity for producing weapons, while farm collectivization would prevent the peasants from retreating again into self-sufficiency. Although brutally and wastefully executed, these policies contributed significantly to Soviet resistance when Germany attacked.
At first the war went worse than envisaged in the most pessimistic prewar plans. Soviet territory was deeply invaded; the real output of the territory under Soviet control fell by one-third; and the burdens of defense increased both relatively and absolutely. By 1943 three-fifths of Soviet output was devoted to the war effort, the highest proportion observed at the time in any economy that did not subsequently collapse under the strain. A railway evacuation of factories and machinery from the zones threatened by occupation shifted the geographical center of the war economy hundreds of kilometers to the east. The production of weapons rose to a level that exceeded Germany's throughout the war.
There was little detailed planning behind this; the important decisions were made in a chaotic, uncoordinated sequence. The civilian economy was neglected and it declined rapidly. By 1942, food, fuels, and metals produced had fallen by half or more. Living standards fell on average by two-fifths while millions were severely overworked and under-nourished; however, the state procurement of food from collective farms ensured that industrial workers and soldiers were less likely to starve than peasants. Still the process might have ended in another economic collapse without the stunning victory over the German army at Stalingrad at the end of 1942. This enabled a return to economic planning and a partial restoration of resources to civilian uses. Foreign (mostly American) aid, which added about 5 percent to Soviet resources in 1942 and 10 percent in 1943 and 1944, also relieved the pressure.
The war had lasting economic consequences. It took the lives of one in six Soviet citizens living at its outset, and destroyed perhaps one quarter of the Soviet prewar capital stock. Economic and demographic recovery took decades. The success of the war effort also had lasting consequences: It confirmed the authority of Stalin, as well as that of a new generation of wartime industrial and political managers who survived him and remained in power for thirty more years. The success of the war economy was used to discourage critical thinking about basic economic policies and institutions. For example, Stalin claimed that the war demonstrated the superiority of the Soviet system over capitalism for organizing economic life in both wartime and peacetime.
See also: collectivization of agriculture; stalingrad, battle of; stalin, josef vissarionovich; world war i; world war ii
Barber, John, and Harrison, Mark. (1991). The Soviet Home Front: A Social and Economic History of the USSR, 1941–1945. London: Longman.
Harrison, Mark. (1996). Accounting for War: Soviet Production, Employment, and the Defence Burden, 1940–1945. Cambridge, UK: Cambridge University Press.
Samuelson, Lennart. (2000). Plans for Stalin's War Machine: Tukhachevskii and Military-Economic Planning, 1925-1941. London: Macmillan.
Simonov, Nikolai S. (1996). "'Strengthen the Defence of the Land of the Soviets': The 1927 'War Alarm' and Its Consequences." Europe-Asia Studies 48 (8): 1355–64.