There are at least two principal views of the economic impact of wars, especially regarding the relationship between war and the Great Depression of the 1930s. Various economists (you know, the guys who know all about money but usually are not wealthy) have asserted what we will term “View One” -- that the federal programs designed to pull the U.S. out of the Great Depression were tremendously helpful and necessary. Another group of economists suggest a “View Two” – that these programs were ineffective bandaids, it actually took a war to get the economy going again, and wars generally stimulate economic growth. The first view is most often defended by those aligned with the Democrat Party (perhaps since FDR was of that party), and, not surprisingly, the second view is most often defended by Republicans (isn't it curious how economic questions become political ones?).
The idea that federal spending drove recovery is appealing as it tends to confirm the idea that purposely action by the government really can stimulate economic recovery. On the other hand (recall Harry Truman's quote about a one-handed economist), the result of massive government spending under the New Deal programs of the 1930s was a GNP in 1939 of just $91 billion, whereas the ensuing years of WWII resulted in a GNP of $212B by 1945. Doubling the GNP is a handful of years is no minor improvement, and these numbers can easily be used to support the argument that war is good for the economy.
That sounds depressing. Can it be that war is a major engine of economic growth, achieved at a horrible human cost? Is the health of the economy, with its resultant affect on hundreds of millions of people, dependent at least to a substantial degree on the machinations of war? Is this normal? Or is this view faulty? Is there usually a direct connection between wars and depressions, or not?
Just for fun (ha! recovering from a minor illness and too lazy to do anything but type on my computer), I researched the relationship between the economy and wars by examining what are known as the "Top 13" depressions in the history of the United States. Here is what I found:
1807-1810 -- Caused primarily by the Embargo Act of 1807, which decimated the shipping business and coastal economy by limiting foreign trade in an attempt to preserve neutrality amidst increasing rivalry between France and England (it didn't work, as the U.S. got drawn into the War of 1812 anyway). Bottom line: the depression was caused by a response to the threat of war, but ended prior to U.S. entry into war; the war cannot be credited with the recovery.
1815-1821 -- Federal spending to support the War of 1812 stimulated the economy, and spurred a period of speculative high prices for land and farm commodities. But heavy U.S. debt incurred to finance the war led to a decrease in available capital, falling land and commodity prices, loan calls, bank failures, and a depression. Bottom line: the war stimulated the economy, but also inflation, speculation, and collapse; the war first helped, then harmed the economy.
1837 Panic -- This will sound similar to very recent history. As the U.S. expanded west, investors saw an opportunity to profit from land development. President Andrew Jackson had obliged them by repealing substantial banking restrictions, and the banks financed a broad array of speculative land deals. Pity Martin Van Buren, who was president when the land boom went bust, and of course was blamed for the Panic of 1837. When the bubble burst, over 40% of banks in the U.S. failed. Bottom line: No direct war connection for this one, but perhaps a cautionary tale about the outcome of making a war hero president.
1857 Panic -- Discovery of gold in California in the late 1840s led to several years of very high consumer optimism, and a period of inflation. The failure of a single company (a branch of the Ohio Life Insurance Co) triggered a panic, resulting in over 5,000 bank failures in a single year. Bottom line: no apparent direct connection to war.
1873 Panic -- This is one of the more interesting depressions in U.S. history. For several years, the economy had been growing, industries churning out goods at full steam, and bank-financed railroads expanding at a frenetic pace. But, beginning in late summer of 1872, an epidemic of Equine flu spread across the U.S. and Canada. Though not generally fatal, in just three months the flu incapacitated virtually the entire North American horse population. Without horses to transport coal or goods, trains and ships stalled, and ports filled with backed up freight. A drop in railroad bond values led to bank failure and the ensuing panic and depression. Bottom line: No direct war connection, though one might postulate that the U.S. and Canada were temporarily immune from attack, as no foreign army would bring its horses to either country until the flu passed.
1893 Panic -- This caused the second worst depression in U.S. history. The cause was overheated railroad expansion at a time when the general economy was slowing. The bankruptcy of a significant railroad (the Philadelphia and Reading ... care for a game of Monopoly?) triggered a run on banks and the failure of over 500 banks and 15,000 other businesses. Bottom line: No war connection for this one.
1907 Panic -- Another sad era reminiscent of recent history. Still operating under the laissez faire policies initiated under President Jackson, railroads, oil, steel, and banking trusts fueled a period of rapid growth. But when copper speculation led to the failure of one of the largest trusts in the country, the stock market crashed, eventually wiping out nearly half of its total value. Bottom line: No war connection; just another reminder of what non-regulated financial institutions can accomplish.
1920-1921 Depression –- This was a very short, very severe depression. As WWI ended, over 1.5 million U.S. troops returned home, swamping the labor market. The results were high unemployment, serious deflation, and an almost instantaneous entry into depression. Bottom line: In a sense, caused by war. Probably better stated as the result of conducting a war without an economic plan for its end.
1930s Depression –- Beginning in October, 1929, with the worst stock market crash in U.S. history, the “Great Depression” lasted nearly twelve years. Banks failed, unemployment was rampant, and the GNP fell by one-half. The cause was unchecked market speculation, largely financed by under-regulated banks. Bottom line: No direct war causation, but (as noted above) arguable war stimulus as key to the eventual recovery.
1973-1975 -– Economists still argue over whether this was a recession or a depression (remember, recession = your neighbor is out of work; depression = you are out of work), and whether it really ended in 1975 , since its effects were felt for many years afterward. Either way, this one is a little complicated. In 1971, the U.S. abandoned the gold standard, which led to an unsettling situation as numerous world currencies moved from fixed to free floating exchange rates (ending an agreement hammered out at the close of WWII). However, the more direct causes of this recession/depression were a “perfect storm” of inflation driven by Vietnam War spending and an OPEC oil embargo, coupled with a stock market crash and resultant unemployment generally attributed to the switch to floating currencies. Bottom line: War spending was at least partly to blame for one of the root causes, and certainly did not aid recovery.
1980s Recession –- Again, arguable in terms of recession/depression, but several years (early 80s) of high unemployment and a stagnant economy. The primary cause was a tightening of the Federal Reserve’s monetary policy, designed to control inflation. The retraction by the Fed eventually caused inflation to subside, but at a cost to GNP and employment. Bottom line: No direct war connection.
2008-2014 –-Another example of what can happen when Washington removes restrictions on banking, this recession/depression was caused by the collapse of an economic segment dependent on loose consumer credit and high risk mortgages. A real estate bubble burst, leading to the failure and/or bailout of banks and insurance companies. Bottom line: No direct war connection, though one could say it’s a bit surprising homeowners didn’t raise an army to attack those responsible for the bubble. Incidentally, Canada, which chooses to more closely regulate its banks, to a large degree escaped the housing meltdown experienced in the U.S.
Summary: A cursory examination of the 13 worst depressions in U.S. history (thus far!) does not actually settle the argument regarding WWII impact on the country’s recovery from the Great Depression of the 1930s. What it does suggest is that when Washington opts to weaken oversight of the banking industry and/or allow speculative lending practices **, economic disaster almost certainly follows.
** With apologies to those opposed to regulation of Wall Street!
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