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«Last revised April 23, 2006 The Second World War as an Economic Disaster Niall Ferguson Laurence A. Tisch Professor of History Harvard University ...»

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DRAFT – Not to be circulated or quoted without permission

Last revised April 23, 2006

The Second World War as an Economic Disaster

Niall Ferguson

Laurence A. Tisch Professor of History

Harvard University

nfergus@fas.harvard.edu

The Second World War as an Economic Disaster ∗

Niall Ferguson

I

On April 20, 1949, the New York Times carried three items about Japan. The most

arresting headline was: ‘Japan’s War Cost Is Put at $31 Billion; 2,252,000 Buildings

Razed, 1,850,000 Dead.’ Similar figures were produced in the post-war period for nearly all the combatant countries. In four countries – China, Germany, Poland and the Soviet Union – the death toll was even higher, or five if the mortality of the 1943 Bengal famine is attributed to the war. Altogether, the best available estimates suggest, somewhere in the region of 60 million people lost their lives as a result of the Second World War. In some countries the mortality rate was higher than one in ten. In Poland it approached one in five. 1 No other previous war had been so catastrophic in relative, much less in absolute, terms. Nor was Japan unique in the scale of destruction its capital stock had suffered.

Although the bombing of Hiroshima and Nagasaki represented the logical culmination of Anglo-American strategy – two entire cities laid waste by just two atomic bombs – comparable devastation had already been wreaked in other cities by conventional weaponry. In the aggregate, according to the U.S. Strategic Bombing Survey, 40 percent of the built-up areas of 66 Japanese cities had been destroyed; nearly a third of urban population had lost their homes. In Germany a similar proportion of the housing in 49 cities had been destroyed or seriously damaged. Of course, although they lacked the Allies’ bombing capability, the Germans and Japanese had meted out their share of destruction before suffering this explosive ‘payback’. Around 30 per cent of Polish buildings had been destroyed, and comparable proportions of the country’s agricultural property, mines and industry. More than a fifth of Yugoslavian housing had been wrecked. The story was much the same in Ukraine and Byelorussia, which had borne ∗ This paper draws heavily on my forthcoming book, The War of the World: History’s Age of Hatred, to be published by Penguin in 2006. Full acknowledgements for assistance will be provided in the book.

The total death toll is based on the figures in Overy, Times Atlas of the Twentieth Century, pp. 102–5;

Harrison, ‘Overview’, pp. 3f., 7f.. On the Soviet figures, see Harrison, ‘Soviet Union’, p. 291; Overy, Russia’s War, pp. xvi, 287; Erickson, ‘Red Army Battlefield Performance’, pp. 235f. For German mortality, see Overmans, Deutsche militärische Verluste. For China, see Ho, Studies on the Population of China, pp. 250−3.

brunt of the Nazi occupation. Eastern China was in a state of unquantifiable chaos thanks in large measure to the depredations of Japanese rule. Nor had Western Europe escaped unscathed. In Great Britain about 30 per cent of the homes were destroyed or damaged; in France, Belgium, and The Netherlands about 20 per cent. The exactions of German occupation had reduced gross domestic product in France and the Netherlands to below 60 per cent of the 1938 level; Italy had fared little better. According to the Encyclopedia Britannica, the cost of the war ‘to governments’ – meaning, presumably, its aggregate fiscal costs – amounted to $1 trillion. Given the unquantifiable human suffering that lies behind all such statistics, it seems almost bathetic to call the Second World War an economic disaster. It was, quite simply, the greatest man-made disaster of any kind in modern history.

Yet the two other items about Japan in that same day’s paper told a contrasting story: one of rapid economic recovery. Not only were Japanese farmers achieving a record post-war harvest. More significantly, the Times published a remarkable photograph under the headline: ‘Japanese Items Ready for Export’. The caption below the picture read: ‘Samples of paper umbrellas, table tennis balls, textiles and fish nets which will be flown to the United States to encourage American firms to place orders with Japanese manufacturers.’ 2 This was just the beginning of an explosive growth of Japanese exports, the composition of which would soon change from such low-value products to sophisticated industrial manufactures. Herein lay one of the great ironies of the Second World War. Out of the ashes it left in its wake grew, phoenix-like, the economies of the defeated powers.

Any interpretation of the Second World War as an economic disaster has to take account of both sides of this strange coin. On one side, the quintessence of disaster: six years of systematic destruction of people and capital. On the obverse, the prelude to economic miracles unprecedented in human history.

Economic historians have done less than might have been expected to resolve this seeming paradox. For example, the two pre-eminent English-language journals of economic history have published surprisingly little on the subject of the Second World War since 1949. There have been seventeen articles about the war in the Journal of New York Times, April 20, 1949.

Economic History and just four articles in the Economic History Review. By comparison, the JEcH published no fewer than thirty articles about the Great Depression in the same period. Yet the Depression, though it left millions idle, killed few people. Though it certainly emptied many buildings and left them to decay, it destroyed no cities. It is not as if the war had nothing to do with economics. Those who began it, both in Europe and in Asia, explicitly averred their economic motivations. Behind the rhetoric about ‘living space’ and ‘Asian co-prosperity’ were cold calculations about Germany’s and Japan’s need to acquire by force strategic raw materials which they could not acquire by trade. At the same time, economics played a central role in the debates about how far to ‘appease’ rather than confront the dictators. And, needless to say, once the war began it was economics as much as grand strategy that decided its outcome. The economic spin-offs of the war are also well known, not least in accelerating technological innovations that lay the foundations of post-war growth.





There are, it is true, distinguished exceptions to the rule of relative neglect.

Building on their earlier researches on the Nazi economy, Alan Milward 3 and Richard Overy 4 have both addressed the central economic questions about the war’s origins and course. Mark Harrison, too, has done much to illuminate the economic foundations of the Soviet war effort. 5 Thanks to Hugh Rockoff and others, we now know much more than we did about the workings of American war economy. 6 J. R. Vernon demonstrated more than a decade ago that ‘half or more’ of the U.S. recovery from the Depression occurred in 1941 and 1942, and that most of the increase in real GNP in those years was attributable to the war-induced fiscal stimulus. 7 More recently, Robert Higgs has cast doubt on the enduring economic value, in terms of capital formation, of wartime government investment. 8 There is also an important literature on the institutional consequences of the war, which allowed ‘fresh starts’ for Germany and Japan, but reinforced institutional deficiencies in Britain. 9 Yet it was striking that, when a group of historians recently co-authored a new economic history of the war, their contributions Milward, War, Economy and Society.

Overy, Why the Allies Won.

See e.g. Harrison, ‘Soviet Union’.

See for an overview Rockoff, ‘United States’.

Vernon, ‘World War II Fiscal Policies’.

Higgs, ‘Wartime Socialization’.

Olson, Rise and Decline; Barnett, Audit of War.

were quite different in terms of approach and methodology, making any kind of comparative reading distinctly difficult. 10 The most alluring avenue of inquiry at present is to use financial market data to draw inferences about contemporary investors’ views of the war. Here, more or less standard methods of identifying structural breaks in bond price series are used to illuminate the attitudes of investors in various markets, notably Zurich, Stockholm, Paris and London. 11 It is nevertheless symptomatic that these papers essentially concern themselves with the reactions of financial markets to war, treating military and political events, once again, as exogenous shocks which investors could anticipate and discount, or be (pleasantly or unpleasantly) surprised by.

In this paper I will argue that the economics of the Second World War can be understood under four headings: the economic motivations of its instigators; the economic arguments that prevented their being deterred from going to war; the economic reasons for their ultimate but very costly and hard-fought defeat; and the economic consequences of the Allied victory. I hope to show that the war was an economic disaster in more than one sense; not only in terms of the death and destruction that it caused, but also because from an economic point of view it was unnecessary. Conquest was not the solution to the economic problems of Germany, Japan and Italy that the leaders of those countries claimed it would be. Equally spurious were the economic arguments that led the Western powers to appease rather to deter Germany and Japan. Because both sides erred, a war ended up being fought that the Axis powers stood no realistic chance of winning, but which the Allied powers nevertheless found extremely expensive to win. Post-war economic growth, which saw the vanquished transformed into victors, in large measure vindicated Winston Churchill’s famous assertion that the Second World War ought to be known as ‘the unnecessary war’.

II The Depression caused radical changes in economic policy in most countries, but radical changes in political and legal arrangements in only some countries and the adoption of expansionist foreign policies in fewer still. Most countries in fact responded to the crisis Harrison (ed.), Economics of World War II.

Frey and Kucher, ‘History as Reflected in Capital Markets’ and ‘Wars and Markets’; Brown and Burdekin, ‘German Debt’; Oosterlinck, ‘Bond Market’; Waldenström and Frey, ‘Government Bond Prices’.

as Britain and the United States did; by seeking as far as possible to avoid external conflicts. This was as much out of parsimony as altruism; the assumption was that the cost of fighting unemployment at home ruled out further expenditures on small wars abroad. Even the majority of authoritarian regimes were quite content to persecute internal enemies and bicker with their neighbors over borders. Only three countries aspired to territorial expansion and war as a means to achieve it. They were Japan, Italy and Germany. Their dreams of empire were the proximate cause of the multiple conflicts we know as the Second World War.

Why did only these three authoritarian regimes adopt and act upon aggressive foreign policies aimed at the acquisition of empires? A conventional answer might be that they were in thrall to anachronistic notions of imperial glory. Yet there was nothing anachronistic about the idea of empire in the 1930s. In a world without free trade, empires offered all kinds of advantages to those who had them. It was undoubtedly beneficial to the United Kingdom to be at the centre of a vast sterling bloc with a common currency and common tariff. And what would Stalin’s Soviet Union have been if it had been confined within the historic frontiers of Muscovy, without the vast territories and resources of the Caucasus, Siberia and Central Asia? The importance of empire became especially obvious to the self-styled ‘have not’ powers when they adopted rearmament as a tool of economic recovery. For rearmament in the 1930s – if one wished to possess the most up-to-date weaponry – demanded copious supplies of a variety of crucial raw materials. Neither Italy, Germany not Japan had these commodities within their own borders other than in trivial quantities. By contrast, the lion’s share of the world’s accessible supplies lay within the borders of one of four rival powers: the British Empire, the French Empire, the Soviet Union and the United States. Thus, no country could aspire to military parity with these powers without substantial imports of commodities whose supply they all but monopolized. For three reasons, it was not possible for the ‘have nots’ to rely on free trade to acquire them. First, free trade had been significantly reduced by the mid-1930s, thanks to the imposition of protectionist tariffs.

Second, Italy, Germany and Japan lacked adequate international reserves to pay for the imports they required. Third, even if their central banks’ reserves had been overflowing with gold, there was a risk that imports might be interdicted by rival powers before rearmament was complete. There was therefore an attractive logic to territorial expansion.

The concept of Lebensraum had been originated in the late 1890s by Friedrich Ratzel, Professor of Geography at Leipzig, and developed by the Orientalist and geopolitical theorist Karl Haushofer, whose pupil Rudolf Hess may have introduced the term to Hitler in the early 1920s. We can now see that the argument was based on an excessively pessimistic view of economic development. Since 1945 gains in both agricultural and industrial productivity have allowed ‘haves’ and ‘have nots’ alike to sustain even larger populations than they had in 1939. By the end of the twentieth century, Italy’s population density was 17 per cent higher than sixty years before, Britain’s 28 per cent higher, France’s 42 per cent higher, Germany’s 64 per cent higher and Japan’s 84 per cent higher. As a result of decolonization, all these countries had been ‘have nots’ (in the interwar sense) for most of the intervening years, yet their economies had grown significantly faster than in the periods when some or all of them had been ‘haves’. Clearly, ‘living space’ was not as indispensable for prosperity as Haushofer and his disciples believed. Yet in the inter-war context the argument had a powerful appeal – and particularly in Germany, Italy and Japan. In the late 1930s, as figure 1 shows, Germany had the fourth-highest population density of the world’s major economies (363 inhabitants per square mile), after the United Kingdom (487), Japan (469) and Italy (418).



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