The economic lessons of World War II

by John Q on December 7, 2008

As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression, there has been a lot of debate about the lessons to be learned from the responses to the Depression in the US, most notably the various policies that made up the New Deal. There’s a lot to be learned there, but it’s also important to remember that the Depression, in the US and elsewhere, continued throughout the 1930s before being brought to an abrupt end by the outbreak of World War II.[1]

Not only did the slump end when the war began, it did not return when the war ended – a huge difference from previous major wars. Instead the three decades beginning in 1940 were a period of unparalleled prosperity for developed countries, with economic growth higher and unemployment lower than at any time before or since.

What lessons can we learn from this experience?

In the immediate aftermath of the war, the lesson seemed obvious. Planning had succeeded where capitalism had failed, and more planning was needed to maintain that success. As the White Paper on Full Employment (Commonwealth of Australia 1945) put it

Despite the need for more houses, food, equipment and every other type of product, before the war not all those available for work were able to find employment or to feel a sense of security in their future. On the average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 per cent were left in unproductive idleness. By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources.

Over time, as the difficulties of planning became apparent, emphasis shifted to the idea that the war had provided a Keynesian stimulus to aggregate demand, and that, with careful management, unemployment (or inflation) due to inadequate (excessive) aggregate demand could be avoided. Thirty years of success seemed to confirm that view.

After the failure of Keynesian economic management in the 1970s, this explanation appeared less adequate, but no adequate alternative was proposed. Given the apparent success of monetary policy in stabilising output and inflation, and reducing unemployment, from 1990 onwards, the issue seemed largely academic, and given the focus of US economists on the New Deal, even academic attention to the question has been limited.

Perhaps stimulatory fiscal policy will produce a rapid and complete recovery from the current crisis, and a restoration of the postwar Keynesian orthodoxy. But given the damage that has already been done to the global financial system, and the prospect of much more to come, this is far from certain. The experience of Japan in the 1990s is not encouraging, and this crisis is far worse in important respects. Perhaps when the collapse of financial intermediation is as near-complete as it was in the Depression, a large element of central direction is needed to restore trade and ensure necessary flows of credit. In the absence of a rapid recovery, questions like this will assume increased urgency over the next year or two.

fn1. In most respects, a continuation of the Great War that began in 1914, but in economic terms a completely different kind of conflict, based on comprehensive planning and mobilisation of economic and labour resources.



Dave 12.07.08 at 8:51 am

Surely the lesson laid out very clearly by your own exposition there is that no single solution works for ever?

One immediate question to ponder might be regarding the psychology of planning versus speculation. The 1920s clearly saw an American public attuned to the benefits of speculation, many of whom ‘lost everything’ in 1929 et seq. Have western economies all shared that psychology over the last 20 years, and is it yet ‘broken’ in a way that the previous bout was by the Depression, letting in a commitment to plans? Or are the European welfare-model economies less dependent on that speculative psychology; and indeed, will the US commitment to speculation ‘break’, or will people soon be looking for the next bubble? Certainly the rhetoric in the US and UK appears to be about kick-starting the economy [in a context where that basically means restoring speculators’ confidence], without reference to anything more radical than a change in regulatory environment – or is that just because there are changes coming that nobody with a job on the line dares utter?


David Wright 12.07.08 at 11:44 am

My compliments to John for being the first leftist economics blogger I’ve read not to imply that history proves that Keynsianism and/or the New Deal cured the Great Depression. There have been some good natural experiments in economics (e.g. the Mariel boat lift as a test of the impact of immigration on wages), but the Great Deprpression was war too muddled to count as one of them.


Bob B 12.07.08 at 11:56 am

In the case of Britain, we had the Employment white paper of 1944 which started out with the statement: “The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war. . . ”

That led to decades of periodic fiscal and, later, also monetary interventions by successive governments to fine tune aggregate demand. By the early 1960s, some economists in Britain were starting to ask whether the unemployment rate was being kept at too low a rate and whether a higher GDP growth rate on trend might be achievable, and with lower inflation, if fiscal and monetary policy were applied to maintain a higher unemployment rate of around 2.5%. At the time, most commentators regarded that as unacceptably heretical.

A widely respected scholarly assessment of stabilisation policy: JCR Dow – The management of the British economy, 1945–1960 (Cambridge UP, 1964) concluded that budgetary and monetary policy, between 1945 and 1960, was positively destabilising.

The commitment of governments to maintain “full employment” was famously abandoned by Jim Callagham as PM in 1976:

“Experience led to disillusionment with initial Keynesianism on the part not only of professional economists but also of policymakers. The most dramatic evidence came from James Callaghan, when he was the Labour prime minister of the U.K.-the party and the country that had gone farthest in embracing and adopting Keynesian policies. Said Callaghan in 1976, ‘We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists; and that insofar as it ever did exist, it only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step. That is the history of the past twenty years.'”


Ciarán 12.07.08 at 12:56 pm

Excellent post and comments. I am writing a stock ‘regulatory state’ lecture that begins with the premise, crudely put, that everything we have now is a footnote to the Great Depression: that rather than seeing everything from Thatcher’s 1979 lens (or at least the narrative she created about the UK circa 1979), we should remember that post-war planning was seen as the prudent, efficient, and – in some quarters – the moral choice. I’ll incorporate the above, so thanks…


Quiddity 12.07.08 at 1:09 pm

One thing to note is that Smoot-Hawley didn’t interfere with getting out of the Depression. We sure as hell weren’t trading with Europe or Asia during World War II, a conflict that probably hindered free-trade more than any tariff schedule.


Ben Alpers 12.07.08 at 1:33 pm

It’s not true that the Depression simply continued unabated until the start of WWII. Some aspects of the New Deal worked; others didn’t. But the notion that nothing Roosevelt did had any positive effect on the economy is a right-wing myth.

For more on this, see the extensive discussions over at the Edge of the American West.


P O'Neill 12.07.08 at 2:12 pm

One possible lesson: if you’re going to have fixed exchange rates versus the dollar, you need responsible economic management in the USA for it to work. In that sense (and not only that sense) Richard M. Nixon and George W. Bush have a lot in common.


ed 12.07.08 at 2:26 pm

What lessons can we learn from this experience?

One is prob’ly that manufacturing competitors getting the living shit blowed out of them gave the U.S. a leg up for a couple-few years at least.


J Thomas 12.07.08 at 2:43 pm

When we try to guess how it was that WWII took us out of the depression, don’t ignore the casualties. The usual estimates are 70 million to 100 million people died, out of a population that wasn’t all that much much over 2 billion. And of course lots of places like the USA the birthrate was low.

Compare to the economic booms that came in europe after the various waves of the Black Death. It’s on a smaller scale, of course. But in general it’s a whole lot easier to get full employment after a lot of surplus workers have been killed off.

Also there was the Marshall Plan. Europe was torn up, and the USA made a whole lot of capital equipment that got “sold” to europe. Wouldn’t there be an accelerator effect from that? In the short run you get people building factories for foreigners and getting paid for it. It doesn’t produce anything that americans buy — in the short run — but it increases demand. Decades later we got the complaint that europe and japan were outcompeting us at manufacturing because their factories were new while ours were old.

Who says Keynsian policies didn’t work in the 1970’s? Johnson tried to do his Great Society and vietnam at the same time. He fudged the numbers. If an economic policy tells you what to do based on certain numbers, and you give it fake numbers, and it still works, doesn’t that say it’s working by accident?

Then under Nixon we kept ramping up the war faster than expected. But of course, as usual, it seems nobody actually tried Keynsian policies just as they have never tried communist, socialist, libertarian, or free-enterprise approaches.


richard 12.07.08 at 3:30 pm

no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources

This is a naive question: why do economists generally seem to ignore the massive destruction caused by the war as a stimulus to post-war construction? I can see that killing off a fraction of your working population doesn’t help you achieve full employment, but what about all the rebuilding? Isn’t that a classic New Deal type project?


christian h. 12.07.08 at 4:27 pm

Ahem. Permanent Arms Economy.


Zamfir 12.07.08 at 4:34 pm

Richard, I suspect a lot of JQs attnetion goes to the US and Australia, who of course did not have (a lot of) damage to their own infrastructure.

But more in general, I am not sure other wars show that kind of post-war stimulus. In general, people are reluctant to spend in uncertain times. Post-war Europe had the benefit of Marshall aid, of which perhaps the psychological side effects were even mor eimportant than the money itself. I have heard a lot of stories from my grandparents generation along the lines of “The Americans gave me a loan for a truck, and then I rebuilt my business”. There was a wide feeling that the Americans would make everything OK again, and I can easily imagine that most wars do not end that way.


HH 12.07.08 at 5:26 pm

The bottom line on WWII economic stimulus is that weapons in wartime were the only public goods to which America would commit vast resources. Thus, it follows that for large public works to be undertaken, Americans must disguise them as warlike measures (e.g., The National Defense Student Loan program, or the National Defense Highway Network).

With history as our guide, it should be simple for us to disguise train cars as rail-guided vehicular killing systems and nuclear power plants as death-ray power generators. Investments in inner-city schools can easily be relabelled as child-soldier training, and gasoline conservation measures can be represented as terrorist funding denial measures.

It is really very simple. For pathologically bellicose Americans to justify public expenditure, they must be persuaded that they are investing in killing people.


christian h. 12.07.08 at 5:39 pm

I mentioned PAE in part because I am not quite sure what John Q. asks in the post. Is it

(1) Why did the depression not kick in again after WWII as if nothing happened?


(2) Why was WWII not followed by a period of economic contraction due to demobilization, as was the case with previous wars (in particular, WWI)?


(3) What is the reason for the long post-war boom period, or more precisely, for the absence of severe recessions until the seventies?

Question (1) doesn’t seem answerable to me, but also doesn’t really require an answer – maybe the economic cycle just happened to be on the upswing even before the war started (as was, in fact, the case)? Maybe we shouldn’t even expect the economy to continue after a large war as if that war never happened?

Question (2) relies on a premise that doesn’t seem satisfied anywhere (as far as I can tell). The US suffered through a (relatively short) recession induced by demobilization after WWII, and the European economies were in shambles for about 10 years.

The PEA is a proposed (by SRG/IS/SWP (UK)) answer to question (3): namely, WWII was followed in short order by the Cold War, including Korea, Vietnam and smaller hot wars. This resulted in continued high levels of defense spending (with the exception of that short period immediately after the war), powering the economy.


bob mcmanus 12.07.08 at 5:48 pm

“Who says Keynsian policies didn’t work in the 1970’s?”

Christina Romer, previous of Berkeley, now with the CEA for one. Other New “Keynesians”.

I can’t talk about Australia, from what I understand, 50s & 60s “Keynesians” & “Keynesian policies” mean somewhat different things to Americans versus Great Britains. America didn’t have a fullbore incomes policy, save for a short period under Nixon.

We should perhaps be more clear about what exactly any given economist means by “Keynesian economic policy” I consider the automatic stabilizers of Unemployment Insurance, Social Security, Gov’t supported Health Care, and a progressive income tax to be Keynesian fiscal policies, and I would need to know if Quiggin would like those programs eliminated.

You just can’t be sure about the New Keynesians.


bob mcmanus 12.07.08 at 6:01 pm

Here os one Romer paper on 60s macro policy. She is not untypical, the narrative presented here is pretty much Neo-Classicist & New Keynesian dogma. There are other related papers o her website. DeLong has also written on the topic.

The Causes and Consequences of a Mistaken Revolution

The American perspective is more focused on monetary policy than the British, IIRC.


bob mcmanus 12.07.08 at 6:21 pm

I think part of the game since the mid-seventies is an attempt to define “Keynesian economic policy” as

a) persistant fiscal deficits and inflationary monetary policy, or

b) emergency measures to be applied in severe contractions, instead of

c) Minsky’s broad safety net and automatic stabilizers

I hesitate to speculate on motives, but note that many New Keynesians, after compromising with the Neo-Classicists in the 80s, have recently been appointed to powerful positions in the Obama gov’t.


Bob B 12.07.08 at 6:47 pm

Arguably, the sanest comment on this issue was made several decades back:

“The cover of Time magazine in December 1965 quoted Milton Friedman saying: ‘We are all Keynesians now.’ Friedman later said he had been misrepresented by selective quotation, but the point held good. Charles L. Schultze, then US budget director, felt able to tell Time: ‘We can’t prevent every little wiggle in the economic cycle, but we now can prevent a major slide.’”

For all our sakes, I only hope that George Schultze is right.

As for the origins of our present predicament, try this for a precursor:

“The savings and loan crisis of the 1980s and 1990s was the failure of 747 savings and loan associations (S&Ls) in the United States. The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government—that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts — which contributed to the large budget deficits of the early.” 1990s.

I first learnt about the connection between the moral hazards in banking and the Saving & Loan Association crisis from reading the first edition of Donald E Campbell: Incentives (Cambridge UP, 1995).

Sadly, Campbell seems to have been ignored. I’m not one who thinks much of Hegel but in this he seems to have been absolutely right:

“What experience and history teach is this – that people and governments never have learned anything from history, or acted on principles deduced from it.” [Philosophy of History]


Walt 12.07.08 at 7:41 pm

I just read that Romer paper, and I have to say that I am not pleased she’s in the administration. The macroeconomic performance in the 60s until the escalation of the Vietnam War is clearly superior to that of the 50s.


fred lapides 12.07.08 at 7:41 pm

1. We learn that Keynes was partially right and helpful.
2. That deregulation should not have taken place
3. That perhaps we need a major war now instead of the rather smallish warfare taking place in Afghanistan and Iraq.
4. That those on the Right will forever belittle FDR and govt inteference but offer not one thing in its place except the “free market”, by which they mean price supports for selected industries, and govt bailouts when their approach fails.


Donald A. Coffin 12.07.08 at 7:44 pm

While it’s true that the world did not return to a state of depression, it certainly was not clear that the time that would be the case. In fact, there were reasons to be concerned.

Without looking at other countries, in the US, real GDP fell 1.1% in 1945 (compared to 1944), fell 11.0% in 1946, and fell an additional 0.9% in 1947. The total decline from 1944 to 1947 was 12.8%. After a 4.4% increase 1947-48, there was yet another decline. So in the final year of the war and in three of the first four post-wat years, real GDP fell in the US, by a total (by 1949, compared with 1944) of 9.5%.

Clearly not as bad as the 1929 – 1933 collapse (a cumulative 26.5% decline in real GDP), but a decline that led a lot of people to wonder whether we had actually shaken off the sickness of the 1930s.


J Thomas 12.07.08 at 8:31 pm

I almost remember a couple of anecdotes from the postwar period. I probably have some of the details wrong.

Bill Maulden was a millionaire when WWII ended. But he had to carefully watch his expenses until he found out whether his income tax would be 94% or 95%. He drove around the country looking for something to do. When his Packard broke down he could have fixed it himself if only he could get parts. But he couldn’t. He paid high prices to mechanics who for example replaced his transmission with somebody else’s busted transmission they fixed up themselves. Once when his battery went bad the garage put a layer of black paint on it and tried to charge it up enough to get him out of the building. He got after them about it but there wasn’t much they could do — they didn’t have parts either.

Guy Friddell went to journalism school after the war. He and his wife lived in a basement with seven other couples. They put sheets up between the cots. He was desperate to find an apartment particularly since his wife was pregnant, but there weren’t any. He found somebody who almost had apartments for rent, but the guy couldn’t get any commodes and couldn’t rent without them. The owner said if Guy could get enough commodes then he could rent one of the apartments. Guy used his semi-black-market contacts and found a way to buy the commodes. He drove behind the truck that would deliver them, and there was a minor accident. One of the commodes fell off the truck. If it was broken the deal was off. Guy jumped out of his car and checked the commode and made sure nobody stole it. All of a sudden he noticed that he was kneeling on an icy slushy city street hugging a commode, and thanking God for his luck.


It seems to me that it wasn’t depression times. After the depression we went another 4+ years with nothing getting repaired or replaced, and we had a whole lot of people who’d put their pay into War Bonds. There was a whole lot of pent up demand. It took some reorganization, but there was no doubt that there was lots of work to be done, lots of jobs waiting, lots of stuff people would buy if they could only get it.


Bob B 12.07.08 at 9:24 pm

#20: “We learn that Keynes was partially right and helpful”

Yes – Keynes’s primary motivation was to construct a new economic theory to explain how a market economy could get stuck at a “sub-normal” level of activity:

“In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [General Theory p.249]

The prevailing conventional wisdom at the time was that such situations were temporary anomalies and the standard prescriptions were reducing public spending, because tax revenues had fallen, and general cuts in money wages to promote employment.

In contrast, keynesians said that reducing public spending made matters worse and general wage cuts were likely to promote deflationary spirals of prices where the rational course for consumers and business investors was to postpone spending whenever possible because prices would likely be lower next year than this.

I think problems of interpreting Keynes arose because he was apt to endorse sympathetic but conflicting interpretations.

Keynes endorsed JR Hicks on: Keynes and the Classics (Econometrica 1937) at the time and that eventually became hugely influential in textbook presentations of Keynes’s General Theory but Hicks’s interpretation is essentially a comparative static model which determines aggregate demand. Whatever is happening on the supply-side is taken as implicit and expectations are treated exogenously.

Little wonder then that the policy emphasis post-WW2 became fiscal adjustments to fine tune aggregate demand.


Barry 12.07.08 at 10:55 pm

J Thomas 12.07.08 at 8:31 pm

” Bill Maulden was a millionaire when WWII ended. But he had to carefully watch his expenses until he found out whether his income tax would be 94% or 95%.”

Note – nobody’s tax rate was this high; the *marginal* tax rate on income above a certain level was that high.


PersonFromPorlock 12.08.08 at 12:08 am

I’m not sure what lessons can be learned, but I’m dead certain the major political players will refuse to learn any lessons that call their established positions into question. The world’s economies may crumble, but the political establishment will continue to treat self-promotion as its summum bonum.


minneapolitan 12.08.08 at 1:39 am

So how do we theorize the re-globalization of the Western economies after WWII? I’m thinking particularly about Africa, but South and Southeast Asia and South America also went from being real backwaters in an economic sense to being, if not full participants, then at least a significant chunk of the market for gasoline & Coca-Cola & .223 and 7.62 mm bullets. The Jet Age opened up a lot of places that were formerly only suppliers of raw materials as real markets for industrial goods. Not least because brushfire wars conveniently kept bursting out due to the effects of decolonization and Cold War jockeying for position.
And of course there were the concurrent trends like rural electrification in the West’s own backwaters (and in the USSR too of course) — you couldn’t have sold a washing machine to my grandparents right after WWII, ’cause their farm (about 140 miles from Boston) wasn’t electrified until the early 1950s.


Bob B 12.08.08 at 1:23 pm

The keynesian model of the General Theory – whatever it was intended to be ! – only purported to be a theory of the short run where business investment contributes to aggregate demand but doesn’t add to the capital stock or productive capacity of the economy. For that, we must have recourse to growth theory of which the prevailing paradigm for capitalist market economies is Solow’s neoclassical growth model:

However, I don’t believe that model helps to illuminate a narrative about how the western economies reglobalised after the war. Probably this book of essays: Stephen Marglin + Juliet Schor (eds): The Golden Age of Capitalism (OUP, 1992) makes the best effort for the period post-WW2 through to c. 1973 when the Bretton Wood framework created in 1944 collapsed and the western economies succumbed to an extended period of “stagflation”:

On the course of reglobalisation, we must have regard to: (a) the Marshall Plan (1947), and (b) reduced trade barriers resulting from regional trade blocs – eg the Rome Treaty (1957) in Europe – and seven successive GATT trade rounds which brought phased multilateral reductions in trade barriers.


Tracy W 12.08.08 at 1:24 pm

I am not a military historian, but I get the impression that the demobilisation after WWII was unusually delayed, in part because of the ongoing military problems (eg the de-Nazification of Germany), in part because of the sheer level of devastation in central Europe, and in part because of the vast numbers of troops and how scattered around the world they were, so it just took a long time to get the ships to bring them all home. Then the Cold War started. So there was no massive dumping of demobilised men into the labour market all at once and therefore no massive dislocation costs. How long did it take people to get home after WWI?

As for Keynesian economics – macroeconomics is one of the numerous things I am not expert in, but my understanding from the courses I took in it was that part of the problem with Keynesian economics as formulated in the 1950s and 1960s (after Keynes’ death in 1946) assumed that the nominal interest rate was the same as the real interest rate. Increased long-term inflation as a result of an expansionary monetary policy eventually drove investors to demand higher nominal interest rates in order to maintain their rate of return, thus reducing the effect of Keynesian spending. In other words, Keynesian spending (as formulated in that time period) works great as long as people in the private sector are surprised by it. However eventually people learn.
The Neo-Keynesians have sought to reconcil Keynes’ work with long-run rational expectations of inflation (by which I mean that business people do not make systematic mistakes in their expectations of inflation over the long-run, as opposed to meaning that people are perfectly rational). I’ve lost track of where they are with that. One of the problem with macroeconomics is that you have to wait a few decades for experimental results.
Note, I have been formulating this as interpretations of Keynes’ work, rather than Keynesian economics, because Keynes didn’t use mathematics enough to allow us to be sure that what the policymakers were doing was what Keynes recommended before his death.


aaron 12.08.08 at 3:04 pm

I think one thing that is often missed is that the war also caused a shift from building small roads to places no one really wanted to go to large roads connecting active places. It was that infrastructure was built that actually lowered the cost of performing economic activity. Things that induce demand.


aaron 12.08.08 at 3:20 pm

The war effort also provided useful skills and traing, and instilled a strong work ethic.


wj 12.08.08 at 4:25 pm

I share the questions posed by several earlier commentators:
(1) Why should the war effort be understood as qualitatively different from FDR’s stimulant packages instead of constituting a hyperbolic application of them?
(2) Is it reasonable to accept as a working hypothesis that the economies of modern nation-states are, in fact, economies of “Permanent Arms” (christian h.)?
(3) How soon should we begin a major war against Pakistan?
(4) Are we up shit-creek without a paddle?


Eli Rabett 12.08.08 at 6:48 pm

Donald Coffin has it right. 1946 sucked economically except for wine and there was not much of that. Europe was devastated, the UK was broke, and worse, thus the Marshall plan which came in mid-47. Among other things Churchill and the Conservatives were tossed in 1945, Truman barely held on in 48.


J Thomas 12.08.08 at 7:01 pm

How soon should we begin a major war against Pakistan?

War against pakistan is useless. Look at a map, we have no reliable allies near them we can base our REMFs in. None. Well, maybe we can park the supplies and REMFs and all in eastern afghanistan. Run the supplies through turkmenistan or uzbekistan into afghanistan and then pakistan. Maybe we can do it that way.

Or maybe we can have the Marines do amphibious landings in the south. Float the supplies in through the mediterranean and the suez canal and then south past somalia, or down around the horn of africa. Once the Marines take karachi we’ll have a port and we can really pile in the men and supplies and head north, take it city by city.

Better yet, we can do both plans at once. Come in through southeastern afghanistan and the amphibious operation at the same time. The paks won’t use their nukes, they’ll know better. If they nuke our troops in pakistan, we nuke their cities. It worked in iraq, we threatened if they used any kind of WMD against us we’d nuke them, and they didn’t use any WMDs at all. There’s something to be said for a strategy of total reprisal. “Do what we want or we will kill every one of you, man woman and child.” And they’ll know we’d do it. “No, you can’t surrender, you have to fight a conventional war and let us kill your soldiers because we need a long war to restore our economy.” Something a bit off about that, we need a better way to phrase it.

Pakistan is just plain the wrong war for us. They’re in the wrong place and they don’t have anything we want except they have nukes. We’d do far better to win a war against china. Look at the benefits! We stop importing from them, we repudiate our debt to them, and the better we do at destroying their economy the less they can hurt us. Except they have a few nukes. Not so many, only around 250, and maybe our pinpoint nuclear strikes could knock those out in the first 15 minutes.

That will pretty much do it. Knock out the chinese nukes, declare war, repudiate the debt, destroy their economy, and Bob’s your uncle. If you want a war to revive the US economy then china’s your victim, not pakistan.


HH 12.08.08 at 7:11 pm

WWI was entered with great enthusiasm by the major powers, and their populations viewed it, at first, as an exciting adventure. Germany entered WWII, their continuation of WWI, with great zeal, hoping to restore their lost national honor and dreams of dominance. American’s look back at WWII affectionately as the “good war,” and we consume endless quantities of WWII-praising popular culture.

War is not the only means of providing economic stimulus, but it is by far the most popular method.


Danny Yee 12.08.08 at 11:29 pm

For anyone interested in the macroeconomics of WWII, I recommend The Economics of World War II: Six Great Powers in International Comparison (link is to my review).


Bob B 12.09.08 at 12:08 pm

#35: “Werner Abelshauser’s chapter on Germany goes back to 1933, arguing that the ‘economic miracle’ preceded Keynesianism and exploring the financing of rearmament.”

Not so – but many thanks for the citation. Keynes had visited Hamburg to give a lecture in January 1932 – DE Moggridge: Maynard Keynes (1992) p.539. On his return, he wrote in the New Statesman: “Germany today is in the grips of the most powerful deflation any nation has experienced . . ”

Previously, Schacht had been giving impeccably convential advice to the Nazis: belt tightening in public spending to match reduced tax revenues – see Avraham Barkai: Nazi Economics (Berg Publisher Ltd, 1990). Mr Barkai is a research fellow at the Institute of German History, Tel Aviv, and also:

“The Nazi Party leaders were savvy enough to realise that pure racial anti-semitism would not set the party apart from the pack of racist, anti-semitic, and ultranationalist groups that abounded in post-1918 Germany. Instead, I would suggest, the Nazi success can be attributed largely to the economic proposals found in the party’s programs, which in an uncanny fashion integrated elements of 18th and 19th century nationalist-etatist philosophy with Keynesian economics. Nationalist etatism is an ideology that rejects economic liberalism and promotes the right of the state to intervene in all spheres of life including the economy.”
[W Brustein: The Logic of Evil – The Social Origins of the Nazi Party 1925-33 (Yale UP, 1996), p.51]

The populist interpretation of keynesianism as boosting public works spending to reduce unemployment in times of recession/depression goes back at least to a pamphlet that Keynes co-wrote for the Liberal Party in the 1929 general election in Britain: Can Lloyd George Do It?

Btw significant rearmament spending in Nazi Germany didn’t start until 1936 – previous public works programmes had been in building autobahns, stadiums (for the 1936 Olympics) and government buildings – in Britain, a white paper of March 1935 announced the commitment of the government to begin a rearmament programme.

“The fact is that the rearmament programme was seriously begun under Baldwin, pushed along more slowly than Churchill wanted, but more quickly than the opposition advocated. Defence spending, pegged at about 2.5 per cent of GNP until 1935, increased to 3.8 per cent by 1937.”
Peter Clarke: Hope and Glory: Britain 1900-2000 (Penguin Books, 2004) p.186.

CP Kindleberger notes that once in power, the Nazis were hugely successful in reducing unemployment:

” . . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.” [CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]


aaron 12.09.08 at 1:33 pm

HH, that’s because it is the about the only one known that can be stopped once it’s started.


HH 12.09.08 at 1:52 pm


It can be argued that industrial mobilization for war in most advanced nations began with WWI and has never ended. Messiah Obama plans to increase the bloated US defense budget and build ever more exotic weapons to defeat invisible adversaries.

The best engineering talent in the United States is devoted to war. Much of US popular culture is devoted to depiction of high-technology violence. US foreign policy is centered on the cultivation of threats that justify preparations for war. When one threat subsides, another is generated or amplified.

As crises accumulate, Americans are likely to turn to the universal remedy they love and trust: war. What is to stop them?


Barry 12.09.08 at 2:20 pm

aaron 12.09.08 at 1:33 pm

“HH, that’s because it is the about the only one known that can be stopped once it’s started.”

And because we in the USA tend to think of rather short, successful wars, fought on somebody else’s territory.


Grand Moff Texan 12.09.08 at 4:05 pm

I am not a military historian, but I get the impression that the demobilisation after WWII was unusually delayed

That’s interesting, because after looking at accounts of the outbreak of the Korean War, the consensus seems to be that US demobilization was pell-mell and short-sighted.


Mario Sanchez 12.09.08 at 5:11 pm

WW2 provided 2 things that the 1930’s sorely lacked:

1. During the period of 1938-1941, it provided a hungry consumer who was not killing our capacity. Europe was the consumer, hungry for heavy equipment, guns and machinery, and at that point we were not yet reducing our work force by having them slaughtered by the thounsands on far away beaches.

2. During the period of 1942-1945, it provided certainty. Instead of the constant terror of changing laws in the 1930’s – will my gold be confiscated? will I be prosecuted for what I charge for products or pay my employees? will my business be destroyed by competition form the government? will tax rates lax after I’ve already executed my annual plan? will I go to jail for legally avoiding taxes? – it was pretty clear that by 1942 government was the partner of business, creating an environment of profits and massive production.


sg 12.09.08 at 5:46 pm

j thomas, just a minor quibble with your nuke theory – it wasn’t US nukes that dissuaded Iraq from using WMDs. It was that they didn’t have any. Which fact a lot of non-Iraqis were quite aware of at the time.


Davis X. Machina 12.09.08 at 8:05 pm

, the consensus seems to be that US demobilization was pell-mell and short-sighted.

This was certainly my impression


J Thomas 12.09.08 at 8:59 pm

SG, of course you’re right that the iraqis not having any WMDs influenced their decision not to use any after we threatened to nuke them. But the fact is, nevertheless, after we threatened to genocide them if they used their WMDs against our invading troops on iraqi soil, they did not do so.

The theory that we can keep other nations from nuking us by threatening to genocide them has still not gotten a fair test, but as Captain Roadstrom pointed out, “No need to try it until the big money is down.”


Tracy W 12.09.08 at 10:48 pm

That’s interesting, because after looking at accounts of the outbreak of the Korean War, the consensus seems to be that US demobilization was pell-mell and short-sighted.

The American intervention in the Korean war started in 1950, did it not? That means over 4 years between the end of WWII and the start of the Korean war. That may not be much in terms of remaking the political map of Asia by military occupation, but it’s a decent chunk of a normal economic cycle.


Todd Bandrowsky 12.10.08 at 1:58 am

That’s interesting, because after looking at accounts of the outbreak of the Korean War, the consensus seems to be that US demobilization was pell-mell and short-sighted

I would rethink that, as, that political argument doesn’t really jive with the reality that all of the military stock produced by the USA during World War II was obsolete or nearly so by the time it had ended. I mean, how many surplus B-17s did you really want to have shot down over North Korea?

Everything the USA had produced during World War II was practically junk by the time it ended, and keeping an army of that size going would have made little sense. Even the Russians demobilized their army to a large degree following the war. Nobody could afford to keep those massive armies going perpetually and everything in them would have had to have been replaced. The advent of the jet made all of those propeller planes obsolete, the newly constructed Iowa class battleships never really fufilled their intended role, the aircraft carriers were too small to operate jet aircraft, the Russians were busily studying the captured sturmgewer and thus creating an assault rifle that would make the M1 obsolete. Sherman tanks were no match for the T-34 they would have had to go against. GATO class submarines were obsoleted by the XXI U-Boat and would wind up being replaced with the first nukes barely a decade later… and then, you had the pretty good argument that the atomic bomb would make conventional forces obsolete anyway.


virgil xenophon 12.10.08 at 7:04 am


WHICH “non-Iraqis” were “quite aware” that Iraq didn’t have any WMDs? AFAIK, although they were all wrong in the event, the British, French, German, Polish, Czech, Italian and Israeli intelligence services–both military and diplomatic as well as their respective political leaders–all were on record both in public and in private in the belief that Iraq did indeed possess such weapons (to one degree or another, and with varying degrees of confidence.) And both the Russians and the PRC made public noise to the same effect (no matter what their private knowledge) So are you talking about pvt analysts, or what? And what do you mean by “a lot?”


John Quiggin 12.10.08 at 11:34 am

Oh dear. Lots of people thought, in 2002 and earlier that Iraq had WMDs, and that the appropriate response was to demand inspections. The US and UK governments made numerous claims, until about December 2002, that they had accurate intelligence about WMDs. Then, Saddam agreed to inspections, the US and UK governments suddenly started hedging and the inspection teams found nothing.

At that point, lots of people and lots of governments became aware that, in all probability, there were no WMDs. The governments of several countries you mentioned, which had supported UN 1441 on the basis of the assumed likelihood of WMDs, opposed the invasion on the basis that the inspections should be allowed to proceed – had they done so, of course, they would have found nothing.

It is perhaps not surprising that support for wars is correlated, almost perfectly, with incapacity to recall basic facts about those wars.


Bob B 12.10.08 at 1:49 pm

Of interest and arguable relevance to the thread topic, Lloyd George – PM of Britain 1916-1922 and therefore a leading participant in the Paris Peace Conference of 1919 – went on a visit to Germany in August 1936 to meet with Herr Hitler. Here is a video clip of that meeting:

On his return to Britain, Lloyd George wrote an article for the Daily Express on 17 November 1936:

“I have just returned from a visit to Germany. In so short time one can only form impressions or at least check impressions which years of distant observation through the telescope of the Press and constant inquiry from those who have seen things at a closer range had already made on one’s mind. I have now seen the famous German Leader and also something of the great change he has effected. Whatever one may think of his methods – and they are certainly not those of a parliamentary country – there can be no doubt that he has achieved a marvellous transformation in the spirit of the people, in their attitude towards each other, and in their social and economic outlook. . .

“What Hitler said at Nuremberg is true. The Germans will resist to the death every invader at their own country, but they have no longer the desire themselves to invade any other land. . .

“The establishment of a German hegemony in Europe which was the aim and dream of the old pre-war militarism, is not even on the horizon of Nazism. …”

It was explained at the time that Lloyd George didn’t really know about “the camps”, which is curious as the entry on 16 March 1936 in George Orwell’s research diary for his book for the Left Book Club that was to become: The Road to Wigan Pier (1937) reads:

“Last night to hear Mosley [founder of the British Union of Fascists in 1932] speak at the Public Hall [in Barnsley], which is in structure a theatre. It was quite full – about 700 people I should say. About 100 Blackshirts on duty, with two or three exceptions weedy looking specimens, and girls selling Action etc. Mosley spoke for an hour and a half and to my dismay seemed to have the meeting mainly with him. He was booed at the start but loudly clapped at the end. Several men who tried to interject with questions were thrown out . . . one with quite unnecessary violence. . . . M. is a very good speaker. His speech was the usual clap-trap – Empire free trade, down with the Jew and the foreigner, higher wages and shorter hours all round etc. After the preliminary booing the (mainly) working class audience was easily bamboozled by M speaking as it were from a Socialist angle, condemning the treachery of successive governments towards the workers. The blame for everything was put upon mysterious international gangs of Jews who were said to be financing, among other things the British Labour Party and the Soviet. . . . M. kept extolling Italy and Germany but when questioned about concentration camps etc always replied ‘We have no foreign models; what happens in Germany need not happen here.’ . . . ”
George Orwell: The Collected Essays, Journalism and Letters, Vol. 1 An Age Like This 1920-1940 (Penguin Books) p.230.

Note the references in that entry to “a Socialist angle” as well as “concentration camps”.

As for Nazi economics in Germany:

“We must not reckon profit and loss according to the book, but only according to political needs. There must be no calculation of cost. I require that you do all that you can and to prove that part of the national fortune is in your hands. Whether new investment can be written off in every case is a matter of indifference.”
From a speech of Goering in 1936 quoted in John Hiden: Republican and Fascist Germany (Longman 1996), p.128.


sg 12.10.08 at 1:55 pm

j thomas, are you taking the piss? Because that last comment is a priceless piece of wingnuttery.


Barry 12.10.08 at 2:33 pm

And it’s a piece of wingnuttery which never gets stale; our grandchildren will probably be taught that in schools.


b9n10t 12.10.08 at 5:17 pm

Virgil, John

& there’s a world of difference between “Iraq has WMD”, and “Iraq is a growing/eminent threat with its WMD”. Even if there was consensus that Saddam probably had WMD, only a small faction of the US policy elite came up with the latter gem (which then was eagerly adopted as a self-evident truth by foreign policy “experts” and other “very serious people” and amplified through the media).



J Thomas 12.10.08 at 5:42 pm

SG, yes, I am. I would have thought it would be completely obvious from the first. It’s a sad reality that these days absurdio ad reductio no longer works, that a surprising number of people accept absurd conclusions simply because those conclusions follow from their initial assumptions.

Yes, I am taking the piss. I will repeat it in new words.

If somehow a war can get us out of our economic troubles when other methods won’t, the fault is not in our economy but in ourselves. It is simply that we are unwilling to do what is neede because it is needed, but will only do it for a war.

And in that context a war with pakistan is useless. It isn’t a big enough war for us to sacrifice our economic ideals to win it. If we could solve our problems with a little war, then why not instead invade paraguay? It’s closer to us, the logistics are easier, it has natural resources we could develop, its neighbors are far more likely to approve the idea of letting us invade through them, etc. The name even begins with the same two letters.

No, if we want a war that will scare us into doing the right things for our economy, we need to fight china. China is bigger and scarier. China is a real competitor. We owe china lots of money, debts which we would cancel as soon as a state of war existed — or sooner if we declared sanctions against them in the leadup to war. China is a better enemy in every possible way.

And suppose that china did manage to nuke twenty or fifty US cities. We could have our own internal Marshall Plan, we could do much better for our economy than we could from some puny little war with pakistan. Pakistan probably couldn’t nuke us at all, and if we destroyed their cities we wouldn’t spend all that much building them back again, either.

Starting a war to improve our economy is an utterly stupid idea, but if we’re going to even consider it, we need to look at how to do it right.


wj 12.10.08 at 9:44 pm

J Thomas is correct that a war with China would be far more beneficial to the economy that a war with Pakistan, which was my own, more modest, proposal. Part of my initial preference for Pakistan was based upon how easily it would be to scape-goat them within the international community, and, because of this, to ensure that our invasion of their country doesn’t escalate into a global conflict (apart from riling up the usual criticism of certain Muslim states and communities). It may even be waged under the auspices of the War on Terror! A kind of surprising sequel to America’s initially modest take-overs of Afghanistan and Iraq–especially because Pakistan wasn’t initially a member of the Axis of Evil.

But I now see that my reasons for preferring war with Pakistan to war with China can equally be used to argue for war with China. One man’s modus ponens is another modus tollens and all that. As I see it, there remains only one problem with J Thomas’ excellent analysis: it is not at all certain that, in a war with China (which, surely, would escalate into a global conflict, since the greatness of the powers would de facto not allow for the neutrality of other nations), the U.S. would emerge victorious. By victorious I mean not only that we would kill more Chinese and destroy more Chinese infrastructure than vice versa, but that we would do so with enough of our population and infrastructure intact so as to allow for “our own internal Marshall Plan,” in J Thomas’s words. I prefer engaging in wars in which I can fairly accurately predict my chosen side’s ability to withstand the economic and social fallout, and I worry that a war with China might do more economic harm than good. One needs a functioning market, after all, if one hopes to help the S&P 500!

So, we need a big conflict, but not one so big that it would destroy the very social conditions for the possibility of the corporations we are trying to help. Perhaps if we waged simultaneous conflicts against Pakistan and, say, Russia, we could meet J Thomas’s criteria while ensuring for our own survival.


J Thomas 12.10.08 at 10:15 pm

WJ, I’m concerned about the numbers. China is widely believed to have about 250 nuclear warheads; they decided that was a big enough deterrent and they didn’t spend the resources to build and maintain more. Russia is likely to have on the order of 6000 nukes, a bit fewer than we do. Nobody knows how well maintained they are unless some of the russians do. For that matter nobody knows how well maintained ours are. Every now and then we test an ICBM but it would be such a big deal if it didn’t work right that each time we completely rebuild the thing before it gets tested. Then it works.

So looking at the unreliable numbers, if we’re going to be undeterred by somebody’s nuclear arsenal, it would probably be better to be undeterred by china’s nukes than russia’s. But I don’t really know since the closest we have to actual data is secret, and it probably isn’t very good data anyway.

I repeat, if we’re going to start a nuclear war to give ourselves sufficient incentive to end a depression when we wouldn’t be willing to do so otherwise, it really needs to be a nuclear power because there aren’t any nonnuclear powers that are scary enough to get excited about. Indonesia? Hardly.

And starting a war with a nuclear power would provide various advantages for various people. Like, for around 50 years we’ve based our security on MAD, on the idea that nobody would attack us because we have nukes that would hit them back. There’ve been a lot of americans who say that this is crazy, that we can’t depend on this to protect us from people who don’t care whether their nations get genocided, and so whenever we suspect some other nation of wanting to nuke us anyway we need to nuke them first just in case. But the USA has not been willing to actually wage a first strike on this reasoning, and for 50+ years we haven’t actually gotten attacked. This provides the illusion that MAD actually works, when it’s quite possible that the reason we haven’t been nuked is sheer coincidence.

If we were to nuke china or russia, we would decisively disprove MAD and it would open the way to an entirely new nuclear strategy. “We know there’s a nation that’s crazy enough to nuke a nation that has 250 nukes aimed at them. Namely, us. So it follows we need to take pre-emptive action against anybody we suspect might be as crazy as we are.”

The more I look at this, the crazier it gets. Here’s an alternative plan. Let’s get somebody to give nukes to lebanon. Maybe 200 or so of them. And then israel and lebanon can have a nuclear war. Afterward we start a Marshall plan for both countries, and as the whole world looks at the consequences of that little war everybody agrees that there aren’t going to be any nukes. Sanctions on any nation that refuses inspections to prove they don’t have them. Make the world safe for conventional warfare.

And then if we need another WWII to rescue our economy we can have one.


c.l. ball 12.10.08 at 11:49 pm

Unlike the post-war period, global capital movements are much greater, and, as yet, there is no push to regulate those. This, of course, complicates demand stimulus policies.


Maynard Handley 12.11.08 at 3:17 am

“What lessons can we learn from this experience?”

Surely the obvious lesson is that money spent on science, technology, and engineering provide truly stunning benefits?
And yet the US population is resolutely against spending more money in this way, and can only be conned into spending what it does through games like DARPA which disguise lots of fundamental research as military expenses.


J Thomas 12.11.08 at 8:36 am

Money spent on science etc can have large results if it isallowed to.

But one of the big lessons of the 70’s was that technology must be carefully regulated to keep it from changing the power structure.

If we were to have a crisis that required us to use new technologies regardless of their social status effects, we might get some big changes. We might reduce health costs by declaring tobacco an illegal narcotic and nicotine a rarely-prescribed drug. We couldn’t keep it from being grown illegally but the volume would surely be much less than now. Similarly our balance of payments would be improved if coffee and gaurana were declared illegal narcotics and caffeine became a rarely-prescribed drug. Modern building techniques are potentially much cheaper — for example spray concrete with spray foam insulation, not necessarily greener to construct but far better insulation, better hurricane and earthquake resistance, etc. Whyever would we keep building cars with internal combustion engines? If we ignored the dislocations resulting from technological change — which we would ignore if the first priority was to win a war, and which loom large under every other circumstance — then we might do great things.


burritoboy 12.12.08 at 3:12 am

“Note the references in that entry to “a Socialist angle” as well as “concentration camps”.”

Everybody knew there were prison-like camps, which were called “protective custody camps”, starting with Dachau in March 1933. The camps were covered widely (and positively) by the German press and weren’t extermination camps -“regular” criminals could be and were semi-regularly released from the “protective custody camps” and some people survived in Dachau for a decade. Extermination camps only began (depending on how you want to define the terms) with Belzec in March 1942. The extermination camps are what we today visualize as the archetype of the concentration camp. What precisely was going on in the camp system from 1933-1941 wasn’t really clearly known to the public, and the camps were portrayed by the regime as a reformatory prison.

Obviously, eventually you had to either be gullible as hell or intentionally ignoring the evidence that the KZ were killing off a lot of people, but it wasn’t as clear-cut as the camp system later evolved to become. You can’t argue that Lloyd George was supporting Auschwitz, because that wasn’t what the camp system was in 1936.

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