Why We Still Have a War Economy
I…had a purpose now
To lead out many to the Holy Land,
Lest rest and lying still might make them look
Too near unto my state. Therefore, my Harry,
Be it thy course, to busy giddy minds
With foreign quarrels; that action, hence borne out,
May waste the memory of the former days.
—Henry IV, Act IV
War is the health of the State.
—Randolph Bourne
Franklin D. Roosevelt was elected President of the United States in 1932 primarily because it was thought that he could end the Great Depression engulfing the country. His plan was to put forth myriads of economic programs known as the New Deal in order to end the stagnation. This effort was largely a failure. Roosevelt himself realized this by 1937 when the economy began to lose all it had gained in his first term and slid back to slightly above where it was when he took office in 1933. The stock market fell nearly 50 percent, from 190.38 in August 1937 to 97.46 in March 1938. Over the same period, the index of industrial production fell by 34.5 percent. This was a recession within a depression!
The President was utterly baffled by the cause of this setback. Secretary of the Treasury Henry Morgenthau even noted in his diary that Roosevelt was calling it a conspiracy by business deliberately to destroy the New Deal. This view was encouraged by the strength of a so-called conservative revolt within his own administration. Usually led by Postmaster General James A. Farley and backed by Vice-President John Nance Garner, Secretary of State Cordell Hull, and Morgenthau, it was further enhanced by Roosevelt's nagging fear that the nation distrusted him and would turn to the Republicans in 1940, who would then dismantle the New Deal. To head off this possibility, desperate measures were needed.
Up until 1937 Roosevelt had been very dubious about budget deficits—he had even campaigned against Herbert Hoover on a balanced-budget platform. But under the force of necessity, the deficits slowly ballooned. In November 1937, however, having become suspicious of their effect on the economy and looking for a way to satiate conservative critics, Roosevelt agreed to go along with Morgenthau on a budget-balancing plan for the next fiscal year.
Then, in the spring of 1938, Roosevelt suddenly threw out the balancing plan and on April 2 announced a new program calling for large-scale spending based on the economic theories of John Maynard Keynes. He was constrained by the Congress, however, which had not yet seen the light of Keynesian wisdom. Forced to cast about for some legitimate justification for the spending, Roosevelt soon found it in the realm of foreign policy.
At approximately this same time, there was a perceptible change in the basic focus of the Roosevelt Administration. Until then it had largely been occupied with domestic affairs. Now, foreign policy came to the fore. While this was certainly due primarily to changing world conditions, one cannot deny that there was also a political motivation. As Basil Rauch put it in President Roosevelt from Munich to Pearl Harbor: "The President effectively checked the growth of opposition by reducing domestic affairs to a secondary position and working for party and national unity on a program of foreign policy."
This shift had been hinted at in the famous "quarantine" speech of October 1937 but was suspended when the public reaction proved hostile. By 1938, however, the situation had changed and Roosevelt also needed a way to justify the vast increase in his budget, which he chose to do through armament spending. The connection was not lost upon commentators at the time. John T. Flynn, for example, writing in the New Republic noticed the way in which Roosevelt accompanied his call for new arms expenditures with a large dose of war scare, and he concluded: "We are now to attempt to make a great arms program the basis for our recovery effort instead of depending on consumer-goods production. If there is in this world a more dangerous strategum [sic] than this I cannot imagine what it may be."
In spite of the danger, however, the increasing shift to a war economy did seem to be lifting the nation out of its doldrums. Roosevelt, apparently, had perceived this possibility as soon as the first orders from Europe for war materiel began to come through after the rise of Adolf Hitler. As he told Morgenthau: "These foreign orders mean prosperity in this country and we can't elect a Democratic Party unless we get prosperity and these foreign orders are of the greatest importance.…Let's be perfectly frank." Morgenthau could only add, "And he's right!"
Furthermore, Roosevelt noted that the conservative revolt, which had shown such strength in the 1938 congressional elections, began to weaken as the war orders poured in. Once again, Flynn saw the connection. As he put it in his column:
I find among conservative groups a phenomenon which is worth noting. It is that while there is a growing feeling against the use of deficit financing for recovery or relief purposes, there is a very strong feeling in favor of spending money for national defense, despite the fact that it must be done with borrowed funds.
The object of deficit financing may be twofold. One is to meet the expenditures of the government without resort to taxes. The other is, by the very process of borrowing, to flood the economic system with purchasing power. Up to now the latter reason has been the popular one. And conservative groups have grumbled in their beards. But now the expenditures seem to them desirable in themselves. The conservative element has always been the big army and navy bulwark. It is interested in its property. It lives in fear of attacks from within and without on its possessions.
But, in this case, this works in favor of continued borrowing, which is the thing the President is interested in. If the conservative objectors to deficits do not like the WPA, very well, he will give them what they like—battleships, armies. He will create an industry for them: the armament industry, which henceforth is to become one of the props of our national economy. A short time ago the liberals were trying to invent some reasons for further support of government deficits. But now the President has found one which the tory elements will applaud. It remains to be seen how the liberals will like, under the leadership of their new Messiah, what they have always denounced.
In spite of the large deficits and the commitment to Keynesian theories, little happened right away to make the policy seem successful. Keynes himself believed that this was because Roosevelt was too timid in applying his medicine. As late as 1940 Keynes lamented that "it seems politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiment which would prove my case—except in war conditions." This is quite consistent with The General Theory, in which Keynes maintained that "pyramid building, earthquakes, even wars may serve to increase wealth."
It is impossible to say, of course, to what extent Roosevelt and his advisors were guided toward war by Keynes's ideas. Nevertheless, it is clear that a fundamental change was taking place in the perception of the relationship between war and the economy. War was no longer seen as a roadblock to recovery, but rather as an encouragement. Though America would probably have entered World War II just as soon without inducement from Keynesian economics, the real significance of the new perception of war and the economy would come afterward.
One must keep clearly in mind the fact that the Great Depression did not really end until 1942, when the United States was completely involved in the war. The almost miraculous transformation of the country from a lethargic giant wallowing in a decade of economic stagnation to the mightiest military and industrial machine on earth—within virtually a matter of months and as a direct result of the war—could not fail to have significance even in the absence of Keynes.
The connection was quite clear to politicians, businessmen, and workers alike: war ended the depression. This was not true, of course, any more than breaking windows increases wealth (to use Frederick Bastiat's famous example). The fact is that many factors entered into play, particularly the government-imposed wage and price controls, which were largely adhered to for patriotic reasons.
Though this feeling that war was now beneficial to the economy was more intuitive than expressed, there was some recognition of the changed attitude toward war, particularly among the masses. One of those who saw it was E.H. Carr, who wrote in 1942, in his book Conditions of Peace:
While the intellectuals and the well-to-do classes everywhere continued to regard the war of 1914-18 as an unmitigated disaster, large masses of the people learned during the next twenty years to look back on it as a time of secure and profitable employment. In the present war ample employment has been accompanied by the profound and widespread fear—such as hardly existed last time—of a return to unemployment after the war. The association between full employment and war is now fully understood; and the psychological reactions to this understanding are wholly incalculable.
The connection between the war and prosperity was also understood by American policymakers, who realized that the war not only ended the depression but provided a golden opportunity to create a system that would prevent another depression. Almost as soon as the war began, the United States started to use its power to remake the world economic system. "It is none too early," Cordell Hull said in a radio address in 1941, "to lay down at least some of the principles by which policies must be guided at the conclusion of the war, to press for a broad program of world economic reconstruction and to consider tentative plans for the application of those policies." In the case of Great Britain, for example, this meant that the United States would insist that the system of Imperial Preference, which prevented American trade with the British Empire, be abolished before Lend-Lease aid would be sent.
As the end of the war approached, the problem of maintaining wartime prosperity became more acute. As John T. Flynn put it in 1944 in As We Go Marching: "The great and glamorous industry is here—the industry of militarism. And when the war is ended the country is going to be asked if it seriously wishes to demobilize an industry that can employ so many men, create so much national income when the nation is faced with the probability of vast unemployment in industry."
The specter of widespread unemployment resulting from the return of veterans and the demobilization of war industries was constantly alluded to as the problem of war-induced prosperity. Roosevelt warned that the cutback in military spending when peace came would throw at least four and a half million people out of work. "Unless steps are taken to cushion the effects of this sharp cut in total spending," he said, "the decline in business activity—in production, incomes and employment—may snowball to alarming proportions."
The urgency of the situation was compounded by dire predictions from labor leaders. The War Manpower Commission estimated that some five million munitions workers would lose their jobs within two months of the defeat of Japan. Sidney Hillman, chairman of the CIO political action committee, further added to the gloom by predicting in August 1945 that over 10 million people would be unemployed by Christmas. This compares with nine million unemployed in 1940 and one million at the height of the war boom.
At this point, the Keynesian economists, who increasingly dominated all economic thinking, came forward with their plans for maintaining employment through continued government spending. Once again the problem was how to justify such spending; once again, as matters developed, international affairs paved the way for adoption of the Keynesian policies. The economists said that there was no economic difference between war spending and other government spending. As long as total deficits were large enough, full employment could be maintained. When the Soviet Union conveniently emerged as the new enemy, the problem was solved. As D.F. Fleming put it in The Cold War and Its Origins:
Every army must have an enemy, if it is to thrive or even survive. Now there was only one possible enemy left in the world, so duty was perfectly plain. The situation was simple, as it had never been before. Of course the clash would come, especially since the new enemy was an upstart, with false ideas and bad practices.…Once started, a vicious circle of recriminations would feed on itself. More and more people would conclude that this Russian outfit had to be dealt with.
Consequently, the war industries never had to cut back their production, as they had after previous wars. Nor did the government have to pare down its military force to any great degree. While the number of active soldiers did, of course, decline, the great expense involved in building new weapons for the nuclear age kept defense spending at not far below the wartime level. This was accepted by the public because of the Communist threat and because, as Carr put it, "war is still the only state enterprise which is not subject to the criticism that it is too expensive."
The Keynesian economists, therefore, by denying any economic difference between military and other government spending and insisting that spending had to be kept up in order to head off a postwar depression, gave vital support to the emerging doctrine of a permanent war economy and the cold war. "The war pointed a sharp Keynesian moral," said Keynesian economist Robert Lekachman. "As a public works project, all wars (before the nuclear era) are ideal. Since all war production is sheer economic waste, there is never a danger of producing too much."
This fact was common knowledge among economists and government policymakers in the postwar era—though only intuitively. It was never openly discussed except in reference to the reconversion of war industries. Instead, the permanent war economy, based firmly on Keynesian economic theory, simply adapted itself naturally to the increasingly strained relations between the United States and the Soviet Union. The cold war proved to be the perfect vehicle for maintaining government spending at nearly the wartime level almost infinitely. The extent to which this was realized and accepted can be inferred from a great many discussions of postwar employment problems. For example, in 1948 economist Robert Heilbroner wrote in Harper's:
Real support for the boom lies in the projected expenditures of the Federal government. Armament spending, as now budgeted, will begin to take hold on the economy just as private expenditures are beginning to threaten a decline. Over the year past the cash outlay of the Federal government was $38,600,000,000; it will be $43,000,000,000 in the year ahead.…Of course, if our government went back to a prewar $8 billion budget, we should suffer the severest depression we have ever known. But that is a political, as well as practical, impossibility.
By 1950 the cold war had escalated into a shooting war in Korea. This further helped to increase government spending at a time when it threatened to slack off. Thus U.S. News and World Report confidently predicted that year: "Business won't go to pot so long as war is a threat, so long as every alarm can be used to step up spending—lending for defense at home and for aid abroad. Cold War is almost a guarantee against a bad depression" (emphasis added).
The extent to which defense spending was becoming a prop for the American economy was also admitted by veteran liberal Chester Bowles in 1954, when he wrote in the Reporter: "One of the first things we must realize is that in the 1930's we never really did find the answer to full employment. Only the defense program in 1940 put our people to work and only the war and the cold war that followed have kept them at work."
The point was further emphasized by controversial sociologist C. Wright Mills in The Causes of World War Three.
Since the end of World War II many in elite circles have felt that economic prosperity in the U.S. is immediately underpinned by the war economy and that desperate economic—and so political—problems might well arise should there be disarmament and genuine peace. Conciliatory gestures by the Russians are followed by stock-market selling.…When unemployment increases and there is a demand that something be done, government spokesmen regularly justify themselves by referring first of all to increases in the money spent and to be spent for war preparations.…Leading corporations now profit from the preparation of war. Insofar as the business elite are aware of their profit interests—and that is their responsible business—they press for a continuation of their sources of profit, which often means a continuation of the preparation for war.
All along, the underlying assumption has been that something drastic would happen to the economy if government spending were ever cut. Conversely, whenever the economy begins to drag a little, the only cure ever considered is to increase spending still more. This spending is increasingly justified through greater defense spending.
The fallacy in all of this involves several distinct factors. In the first place, government spending is not, nor has it ever been, necessary for prosperity. Second, it is naive to think that military spending, as opposed to nonmilitary government spending, has only a benign effect on the economy. Finally, it becomes necessary to justify such spending with the constant threat of war. Eventually this must result in actual war, for the more prepared you are to fight, the more likely it is that a provocation will lead to open conflict.
There is no evidence in either world economic history or American economic history to suggest that government spending is good for the economy. In 1929 Federal government expenditures amounted to only three percent of the gross national product. Then, in the 1930's, it became fashionable to argue that the American economy had matured, or stagnated. It was believed that there would be a perpetual glut of goods on the market, leading to a permanent body of unemployed workers. Many people began taking seriously the notion that the only course left was to divide up the remaining wealth and learn to live at a subsistence level forever.
In this gloomy atmosphere, John Maynard Keynes's theories appeared like a breath of fresh air. He argued that government could get the economy moving by absorbing the surplus and spending it. The only problem being that if the stagnation thesis was true, it would be necessary to maintain government spending at an ever-higher level forever. This is clearly not true and would not be put forth by any competent economist today. For one thing, it completely ignores the serious side-effects of government spending: inflation and loss of liberty through an ever-expanding public sector.
World War II increased government spending spectacularly. The Keynesian economists argued that this explained why the war was able to end the depression. They also argued, however, that the depression was not an isolated problem but part of a long-range process of stagnation. Consequently, they warned that as soon as the war spending ended, the depression would simply start up again where it left off.
The politicians who were in office as the war drew to a close were essentially the same ones who had led the country through the worst years of the depression, that is, the Roosevelt administration. These men were profoundly affected by the experience of the depression and extremely thankful that the war had saved them. Naturally enough, anything seemed preferable to another depression. Yet this is exactly what they were told was inevitable by the Keynesian economists unless government spending was kept at wartime levels.
The fact that the cold war began almost before the last shot of World War II was fired does not mean that it was prearranged to solve the domestic economic crisis. But the state of urgency created by the dire warnings of a new depression could not fail to have an impact. Joseph Stalin, for one, did all he could to increase American fears of a new economic crisis. In 1944 Eric Johnston, head of the U.S. Chamber of Commerce, talked with Stalin about the chances of Soviet-American trade after the war. It was Stalin's opinion that American industry was desperate to get Soviet trade in order to absorb the expected surplus and prevent vast unemployment. While Johnston disagreed, it is interesting to note that in terms of communist theory, Stalin thought he could do more harm to the United States by refusing trade than by accepting it—even when the United States offered to finance such trade to the extent of six billion dollars in credits.
Until the actual breakdown of the wartime alliance between the United States and the Soviet Union in 1947 with the failure of the Moscow Foreign Minister's Conference, the emergence of a crisis over Germany, and the announcement of the Marshall Plan, there was a period of rapid military demobilization. With military spending dropping proportionately, the promotion of foreign trade was considered critical—even if the United States had to finance it itself. Benjamin V. Cohen, counselor to the State Department, admitted that of America's $15 billion foreign trade in 1946, "six billion dollars of these exports were financed directly or indirectly by loans and grants in aid by the United States Government."
This was simply another aspect of the Keynesian notion that the economy could not survive without government stimulus. The foreign trade idea never worked too well because the Soviet Union would not accept American benevolence and soon succeeded in closing off a large portion of the world behind an "iron curtain," in Churchill's words. Fortunately, as we have seen, the emergence of this new enemy allowed for an alternative way to keep American industry operating through ever-larger spending on defense.
It is only now becoming obvious that this vast spending on maintaining a huge military machine has had serious detrimental effects on the economy quite apart from the inflation and taxation needed to pay for it. For military production is by its nature purely parasitic. It does nothing to increase well-being. Goods and services that could satisfy the wants and needs of millions of people are squandered on increasingly expensive weapons systems that are obsolete before they are even built. This contributes to a serious drain on the research and development capability of the nation as a whole. Contrary to popular belief, very little of the technology developed as a result of military research can ever be translated into useful consumer-goods production. As a result, industries that are almost wholly dependent upon military spending are also almost totally incapable of converting to any other sort of production.
A list of the myriad detrimental effects that a vast military-industrial complex imposes on society could go on and on. There would, for example, be no national debt and no inflation, and the United States would be infinitely wealthier for not having wasted so much of its scarce national resources on production yielding no return. This has all been carefully examined by economists such as Seymour Melman, who has also noted the crucial role played by Keynesian economics in supporting this system. In The Permanent War Economy he noted that "among the liberals and those of the political center, war economy is supported as a solid application of Keynesian economic strategy which had not been given a real try by the too timid policies of civilian intervention before 1929."
It is unfortunate that criticism of this system has been so badly distorted by making potential allies into bitter enemies. Left-liberals, antiwar activists, and pacifists naturally tend to oppose the proliferation of the military-industrial complex. Unfortunately, they are under many of the same delusions about government spending as are the Keynesians. Whenever unemployment rises, they are the first to call for public service jobs. When inflation occurs and deficits go up, they are strangely quiet. Business, on the other hand, loudly bewails inflation and debt, saying that it stifles productivity. Businessmen will attack Keynes and pay lip service to free-market economists like F.A. Hayek, but when it comes down to cutting fat out of the defense budget, they too are strangely quiet. John T. Flynn saw this phenomenon in the 1930's, and in the 1960's it was observed by John Kenneth Galbraith in The New Industrial State.
All business objection to public expenditure automatically exempts expenditures for defense or those, as for space exploration, which are held to serve equivalent goals of international policy. It is these expenditures which account for by far the largest part of the increase in Federal expenditure over the past thirty-five years. Accordingly they account for most of the expansion in the role of the Federal Government in the economy.…If a large public sector of the economy, supported by personal and corporate income taxation, is the fulcrum for the regulation of demand, plainly military expenditures are the pivot on which the fulcrum rests.…Those who have thought it suspicious of Keynesian fiscal policy have failed to see how precisely it has identified and supported what is essential for that policy.
Virtually no one denies that there is a threat from the Soviet Union, of course, but it is foolish to believe that it is only a one-way street. The United States carries its share of blame for starting the cold war and consistently judging its own actions by one standard and Communist actions by another. This has been shown time and again by competent historians like William Appleman Williams, Lloyd Gardner, and Gabriel Kolko. More recently, the revelations about the FBI, the CIA, and various "dirty tricks" organizations in the government have to make one further question the one-sided view of our "enemy."
Neither does anyone claim that the United States is motivated only by crass economic considerations engineered by a Keynesian conspiracy. What has been shown is that there were lessons drawn from the experience of the Great Depression and World War II, lessons which convinced many people that war brings prosperity. This, in turn, was a teaching of Keynesian economics, which has dominated all economic thinking since the war. The economists who spread dire predictions of stagnation and argued that military spending was good for the economy must share the blame for creation of a permanent war economy.
It is a time-honored practice for political leaders to take their subjects' attention away from their mistakes by encouraging an external threat. Machiavelli, for example, tells us about King Ferdinand of Spain, who "has continually contrived great things, which have kept his subjects' minds uncertain and astonished, and occupied in watching their result." Thus the constant threat of war serves the dual purpose of propping up the economy while disguising its bad effects. It is unfortunate that the idea of pulling the plug on this system is never seriously entertained. The conservatives fear Communist domination, while the liberals are firmly wedded to the need for-large government spending. This is a terrible disservice to a country that has paid so dearly in depletion of its wealth, destruction of its liberties, and the blood of its sons.
Bruce Bartlett holds a B.A. from Rutgers and an M.A. from Georgetown, where he continues work on his doctorate in history. He is currently on the staff of a member of the U.S. House of Representatives. Bartlett contributed "The Pearl Harbor Cover-up" to REASON's February 1976 issue.