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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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Under the Treaty of Versailles, however, Germany had been deprived of her relatively few colonies, whereas Britain had added to her already vast imperium, as had France. If, as Hitler had learned from Haushofer, ‘living space’ was essential for a densely populated country with limited domestic sources of food and raw materials, then Germany, Japan and Italy all needed it. Another way of looking at the problem was to relate available arable land to the population employed in agriculture. By this measure, Canada was ten times better endowed than Germany and the United States six times better. Even Germany’s European neighbors had more ‘farming space’: the average Danish farmer had 229 per cent more land than the average German; the average British farmer 182 per cent more and the average French farmer 34 per cent more. To be sure, farmers in Poland, Italy, Romania and Bulgaria were worse off; but further east, in the Soviet Union, there was 50 per cent more arable land per agricultural worker. 12 Figure 1

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Living space had a secondary meeting, however, which was less frequently articulated but in practice much more important. This was the need that any serious military power had for access to strategic raw materials. Here changes in military technology had radically altered the global balance of power – arguably even more so than post-1918 border changes. Military power was no longer a matter of ‘blood and iron’, or even coal and iron, as it had been in Bismarck’s day. Just as important were oil and rubber. The production of these commodities was dominated by the United States, the British Empire and the Soviet Union or countries under their direct or indirect influence. American oilfields alone accounted for just under 70 per cent of global crude petroleum production; the world’s next largest producer was Venezuela (12 per cent).

Tooze, Wages of Destruction, table 4.

The Middle Eastern oilfields did not yet occupy the dominant position they enjoy today:

between them, Iran, Iraq, Saudi Arabia and the smaller gulf states accounted for less than 7 per cent of total world production in 1940. The critical point was that oil production in all these countries was in the hands of British or American firms, principally AngloPersian, Royal Dutch/Shell and the successors to Standard Oil. 13 Nor was modern warfare solely a matter of internal combustion engines and the rubber tires. Modern planes, tanks and ships – to say nothing of guns, shells, bullets and the machinery needed to make all these things – required a host of sophisticated forms of steel, which could be manufactured only with the admixture of more or less rare metals like antimony, chromium, cobalt, manganese, mercury, molybdenum, nickel, titanium, tungsten and vanadium. Here too the situation of the Western powers and the Soviet Union was dominant, if not monopolistic. Taken together, the British Empire, the French Empire, the United States and the Soviet Union accounted for virtually all the world’s output of cobalt, manganese, molybdenum, nickel and vanadium, around three-quarters of all chromium and titanium, and half of all tungsten. The former German colony of SouthWest Africa, now securely in British hands, was practically the only source of vanadium.

The Soviet Union, followed distantly by India, accounted for nearly all manganese production. Nickel was virtually a Canadian monopoly; molybdenum an American one. 14 The case that Germany, Italy and Japan lacked ‘living space’ was therefore far from weak. Germany had abundant domestic supplies of coal and the biggest iron and steel industry in Europe, but before the 1930s needed to import all its rubber and oil. 15 Rearmament necessarily increased Germany’s appetite for both these commodities; at the same time, however, diverting resources into armaments reduced the amount that Germany could export – and, in the absence of ample hard currency reserves and foreign credit lines, it was only through exporting that Germany could earn the money to pay for imports. There was thus a clear and recurrent conflict between Hitler’s military ambitions and the economic resources at his disposal. There had already been one foreign exchange crisis in 1934, which had forced a sharp reduction in imports. Hitler’s Four Year Plan memorandum of August−September 1936 was intended to overcome this constraint on See Yergin, The Prize.

Economist, October 1, 1938, pp. 25ff.

Tooze, Wages of Destruction, appendix 2.

his military ambitions. As Hitler made clear, his priority remained the confrontation and defeat of ‘Bolshevism’, meaning Soviet Communism. The paramount objective of the German government must therefore be ‘developing the German Army, within the shortest period, to be the first army in the world in respect to training, mobilization of units [and] equipment’. Yet Hitler proceeded to enumerate the difficulties of achieving this within Germany’s existing borders. First, an ‘overpopulated’ Germany could not feed itself because ‘the yield of our agricultural production can no longer be substantially increased’. Secondly, it was ‘impossible for us to produce artificially certain raw materials which we do not have in Germany, or to find other substitutes for them’. Hence, Hitler reasoned, ‘the final solution’ could be found only ‘in an extension of our living space, and/or the sources of the raw materials and food supplies of our nation.’ Yet Germany was not yet in a military position to win ‘living space’ through conquest.

Rearmament would therefore only be possible through a combination of increased production of domestically available materials (e.g. low-grade German iron ore), further restriction of non-essential imports (e.g. coffee and tea) and substitution of essential imports with synthetic alternatives (e.g. ersatz fuel, rubber and fats). The core of the Four Year Plan was therefore a huge investment in new technologies capable of producing synthetic raw materials using domestically available commodities such as coal, as well as the creation at Salzgitter of a vast new state-owned factory designed to manufacture steel from low-quality German iron ore.

Hitler’s memorandum should be understood primarily as a repudiation of the earlier ‘New Plan’ favored by the Reichsbank President and Economics Minister Hjalmar Schacht, which had aimed at replenishing Germany’s depleted hard currency reserves through a complex system of export subsidies, import restrictions and bilateral trade agreements. Hitler dismissed brusquely Schacht’s arguments for a slower pace of rearmament and a strategy of stockpiling raw materials and hard currency. The memorandum was also an explicit threat to German industry that state control would be stepped up if the private sector failed to meet the targets set by the government. However, the most important point in the entire report was the timetable for war that it established.

Hitler’s two conclusions could not have been more explicit:

I. The German armed forces must be ready for combat within four years.

II. The German economy must be fit for war within four years. 16 By decisively sanctioning an acceleration in the pace of rearmament and overriding Schacht’s warnings of another balance of payments crisis, Hitler’s Four Year Plan memorandum significantly increased the likelihood that Germany would be at war by

1940. In the words of Major General Friedrich Fromm of the Army’s Central Administrative Office: ‘Shortly after completion of the rearmament phase, the Wehrmacht must be employed, otherwise there must be a reduction in demands or in the level of war readiness’. 17 Indeed, the Four Year Plan made it quite likely that war would come even sooner than that. By the time Hitler addressed his senior military leaders on November 5, 1937 – a meeting famously summarized by Colonel Friedrich Hossbach – it had become apparent that the enormously expensive mobilization of internal resources envisaged in the Four Year Plan could not possibly deliver the level of rearmament the service chiefs regarded as necessary until, at the earliest, 1943. It was for this reason that Hitler turned his attention to the possibility that ‘living space’ – and the resources that came with it – might be acquired sooner rather than later, beginning with Austria and Czechoslovakia. From early 1938 onwards Hitler embarked on a policy of territorial expansion and accelerated rearmament which made war in Europe increasingly probable.

Such was the circular quality of the ideology of Lebensraum: a country needed a large and well-equipped military in order to acquire additional space; but such a military could be acquired only by conquering additional space.

The Japanese need for ‘living space’ seemed even more acute. The collapse of global trade after 1928 had dealt Japan’s economy a severe blow – a blow only made more painful by the ill-timed decision to return to the gold standard in 1929 (the very moment it would have made sense to float the yen) and Finance Minister Inoue Junnosuke’s tight budgets. The terms of trade turned dramatically against Japan as export prices collapsed relative to import prices. In volume terms, exports fell by 6 per cent between 1929 and 1931. At the same time, Japan’s deficits in raw materials soared to record heights (see figure 2). Unemployment rose to around one million. Agricultural incomes slumped.

Treue, ‘Hitlers Denkschrift’.

Tooze, Wages of Destruction, ch. 7.

Figure 2

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1897-1906 1907-1916 1917-1926 1927-1936

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There were, it is true, alternatives to territorial expansion as a response to this crisis. As Finance Minister from December 1931, Takahashi Korekiyo cut Japan’s economy loose from the deadweight of orthodox economics, floating the yen, boosting government spending and monetizing debt by selling bonds to the Bank of Japan. These proto-Keynesian policies worked as well as any tried elsewhere during the Depression.

Between 1929 and 1940 gross national product rose at a real rate of 4.7 per cent per annum, significantly faster than the Western economies in the same period. Export volumes doubled. In theory, Japan might have carried on in this vein, reining in the budget deficit as the recovery gathered pace, exploiting her comparative advantage as a textile manufacturer at the heart of an Asian trading bloc. As a percentage of total world trade, intra-Asian trade doubled between 1913 and 1938. 18 By 1936 Japan accounted for 16 per cent of total Chinese imports, a share second only to that of the United States. 19 Yet the proponents of military expansion forcefully argued against the option of peaceful commercial recovery. Japan’s principal export markets were neighbouring Asian countries; could those markets be relied upon to remain open in an increasingly protectionist world? There was, in any case, good reason to suspect the Western powers of preparing to abandon the so-called ‘unequal treaties’ with China in response to Chinese nationalist pressure. In 1929 the British had restored tariff autonomy to China and ended their embargo on arms shipments. The following year, they restored the North China naval base of Weihaiwei to Chinese control. This boded ill for Japan, which saw the subjugation of China as indispensable to her trade policy. At the same time, Japan was heavily reliant on imports of Western machinery and raw materials. 20 In 1935 she depended on the British Empire for half her imports of jute, lead, tin, zinc, and manganese, nearly half her imports of rubber, aluminium, iron ore and cotton, and onethird of her imports of pig iron. 21 Around a third of Japan’s imports came from the United States, including copious quantities of cotton, scrap iron and oil. 22 Around 80 per cent of Japanese oil was imported from the United States in the 1930s and 10 per cent from the Dutch East Indies; the nearest other source was on the Soviet-controlled island of Sakhalin. 23 Her dependence on American heavy machinery and machine tools was greater still. Japan also needed the English-speaking economies as markets for her exports, around a fifth of which went to British imperial markets. In the words of Freda Utley, the left-wing English journalist and author of Japan’s Feet of Clay (1936), a liberal Japan seemed doomed to ‘oscillate between the Scylla of dependence on the USA and the Charybdis of dependence on British empire markets’.24 Territorial expansion was the alternative to such insecurity. In the short term, the militarists reasoned, the increased military expenditure caused by a shift to formal imperialism would stimulate Japan’s domestic economy, filling the order books of Sugihara, ‘Economic Motivations’, p. 260.

Endicott, Diplomacy and Enterprise, p. 186.

Boyd, ‘Japanese Military Effectiveness’, p. 143.

Neidpath, Singapore Naval Base, p. 136.

Jansen, Japan and China, p. 397.

Coox, ‘Effectiveness of the Japanese Military Establishment’, p. 19.

Sugihara, ‘Economic Motivations’, p. 267. See also ibid., tables 2, 3.

companies like Mitsubishi, Kawasaki and Nissan, while in the long term, it was argued, the appropriation of resource-rich territory would ease the country’s balance of payments problems – for what use is an empire if it does not guarantee cut-price raw materials? At the same time, Japan would acquire desperately needed ‘living space’ to which her surplus population could emigrate. In the words of Lieutenant General Ishiwara Kanji, one of the most influential proponents – and practitioners – of a policy of territorial


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