World War II

The World Turned Upside Down

Of World War II and the Cold War, I once wrote:

The Third Reich and Empire of the Rising Sun failed to dominate the world only because of (a) Hitler’s fatal invasion of Russia, (b) Japan’s wrong-headed attack on Pearl Harbor, and (c) the fact that the United States of 1941 had time and space on its side…

[The subsequent Cold War was a] necessary, long, and costly “war” of deterrence through preparedness [that] enabled the U.S. to protect Americans’ legitimate economic interests around the world by limiting the expansion of the Soviet empire.

I now suspect that the Cold War was unnecessary, and therefore a vast waste of lives resources, because World War II took a wrong turn.

Bear in mind that the USSR, our Cold War enemy, survived World War II, went on to seize Eastern Europe, and became a power to be reckoned with largely because of

  • vast deliveries of American aid to the USSR during the war
  • the adoption of the policy of unconditional surrender, which probably prolonged the war in Europe, enabling the USSR to move its forces farther to the west
  • the Anglo-American invasion of Europe through northern France on D-Day, rather than through southern Europe earlier in the war, which also enabled Soviet forces to move farther to the west
  • FDR’s concessions to Stalin, late in the war at the Yalta Conference, which set the stage for the USSR’s seizure of Eastern Europe (the scope of which was ratified at the Potsdam Conference)
  • Soviet influence and espionage, exerted through and conducted by U.S. government officials, which abetted the foregoing and hastened the USSR’s acquisition of nuclear weapons.

But there is more: several foregone opportunities to end the war early and turn the tide against the USSR.

The first such opportunity is related in a recent news story:

[Rudolf] Hess’s journey to Britain by fighter aircraft to Scotland has traditionally been dismissed as the deranged solo mission of a madman.

But Peter Padfield, an historian, has uncovered evidence he says shows that, Hess, the deputy Fuhrer, brought with him from Hitler, a detailed peace treaty, under which the Nazis would withdraw from western Europe, in exchange for British neutrality over the imminent attack on Russia.

The existence of such a document was revealed to him by an informant who claims that he and other German speakers were called in by MI6 to translate the treaty for Churchill….

The informant said the first two pages of the treaty detailed Hitler’s precise aims in Russia, followed by sections detailing how Britain could keep its independence, Empire and armed services, and how the Nazis would withdraw from western Europe. The treaty proposed a state of “wohlwollende Neutralitat” – rendered as “well wishing neutrality”, between Britain and Germany, for the latter’s offensive against the USSR. The informant even said the date of the Hitler’s coming attack on the east was disclosed….

Mr Padfield, who has previously written a biography of Hess as well as ones of Karl Dönitz and Heinrich Himmler, believes the treaty was suppressed at the time, because it would have scuppered Churchill’s efforts to get the USA into the war, destroyed his coalition of exiled European governments, and weakened his position domestically, as it would have been seized on by what the author believes was a sizeable “negotiated peace” faction in Britain at that time. At the same time, since the mission had failed, it also suited Hitler to dismiss Hess as a rogue agent….

Mr Padfield added….

“This was a turning point of the war. Churchill could have accepted the offer, but he made a very moral choice. He was determined that Hitler, who could not be trusted, would not get away with it. He wanted the US in the war, and to defeat Hitler.”

Mr Padfield has also assembled other evidence to support the existence of the treaty and its contents – as well as the subsequent cover-up….

For the rest of the story, see Jasper Copping’s article, “Nazis ‘Offered to Leave Western Europe in Exchange for Free Hand to Attack USSR’,” (The Telegraph, September 26, 2013).

Hess’s aborted mission took place in 1941, and — purportedly — with Hitler’s blessing. After the failure of Hess’s mission, however, a lot happened without Hitler’s blessing. What follows are excerpts of Diana West’s American Betrayal: The Secret Assault on Our Nation’s Character (St. Martin’s Press, 2013):

… When Louis Lochner, for many years the AP bureau chief in Berlin, attempted to file a story on the activities of anti-Nazi Germans operating out of France in October 1944, U.S. military censors blocked the story. Why? “The government official in charge of censorship was forthcoming enough to confide to Lochner that there was a personal directive from the president of the United States ‘in his capacity of commander in chief forbidding all mention of the German resistance,’” writes Klaus P. Fischer in his 2011 book, Hitler and America. Drawing from Lochner’s 1956 memoir Always the Unexpected, Fischer quotes Lochner’s explanation for this seemingly inexplicable and outrageous censorship: “Stories of the existence of a resistance movement did not fit into the concept of Unconditional Surrender!” …

Turns out, Lochner knew Roosevelt personally, and both men had a mutual friend in Prince Louis Ferdinand of Prussia. Lochner had been in contact with the anti-Hitler opposition in Germany since 1939. In November 1941, German anti-Nazis asked Lochner, heading home on leave, to contact the president on their behalf, to ask Roosevelt to speak out about what form of government he would like to see take shape in post-Hitler Germany, and to provide the president with secret radio codes so that Americans and German anti-Nazis could communicate directly with each other. So writes Peter Hoffman in The History of the German Resistance, 1933– 1945, which first appeared in Germany in 1969, drawing from the 1955 German edition of Lochner’s memoir, certain details of which Hoffman says are not in the English version.

Lochner was interned by the Nazi regime at the outbreak of the war in December 1941 and didn’t reach Washington until the summer of 1942. This would have been shortly after “unconditional surrender” was affirmed and reaffirmed by the president’s postwar advisory council subcommittee, and shortly after Roosevelt had promised a “second front” to Soviet minister Molotov. Lochner immediately informed the White House that he had personal and confidential messages for the president from the prince “and secret information on resistance groups in Germany that he might not confide to anyone else.”

No answer. No interest.

Lochner’s attempts at gaining an audience in June 1942 failed. Lochner followed up with a letter and received no reply. Finally, he was informed by the White House through the AP bureau in Washington, Hoffman writes, that “there was no desire to receive his information and he was requested to refrain from further efforts to transmit it.” …

… Hoffman reveals an important piece of the puzzle in a footnote. Lochner’s final attempt to reach Roosevelt on June 19, 1942, was in a letter addressed to a trusted presidential aide. That aide was [Soviet agent] Lauchlin Currie….

***

In his 1958 memoir, Wedemeyer Reports!, General [Albert C.] Wedemeyer picks up on George H. Earle’s series of secret negotiations with the German underground, which began with [Hitler's chief spy Adm. Wilhelm] Canaris….

According to Earle’s account, he sent Canaris’s initial query regarding a negotiated peace to the White House via diplomatic pouch in early 1943….

… Just before Earle departed the United States to become FDR’s special emissary in Istanbul (officially, naval attaché), he wrote the following letter on December 19, 1942, from New York City on Ritz-Carlton stationery.

Dear Harry: If you don’t mind I’m going to report to you direct my activities. I like the way your mind works and I know you will sort out what you think of importance enough for the President.

[Canaris’s query went nowhere, of course, given Hopkins’s position as a pro-Soviet agent of influence — de facto if not de jure.]

***

The next approach to Earle, also in that spring of 1943, came from Baron Kurt von Lersner, a German aristocrat of Jewish extraction who lived in virtual exile in Turkey. He, too, had a proposal for the Allies. Earle wrote, “According to Lersner— and I could not doubt him; he had placed his life in my hands— some of the highest officials in Germany, [ambassador to Turkey Franz von] Papen included, loved their country but hated Hitler. They wanted to end the war before he bled Germany of all her youth, all her strength and resources. At the same time, they were deeply concerned about Russia’s growing might and power.” …

Earle sent off another dispatch to FDR at the White House marked “Urgent.” Again, Earle received no reply. “I pressed the matter with every ounce of my persuasion and judgment,” Earle wrote, “but I sensed the old trouble. Lersner’s call for an overt stand against Communist expansion distressed Roosevelt.” …

Earle wrote that his German contacts came back to him with another more specific plan, laying out the involvement of Field Marshal Ludwig Beck; Count Wolf Heinrich von Helldorf, chief of police of Berlin; Prince Gottfried Bismarck, a Potsdam official and grandson of the “Iron Chancellor”; and a well-known cavalry officer, Freiherr von Boeselager. Again, the plan was to stage a coup, turn over Hitler and his top henchmen to the Allies, and bring about Germany’s “unconditional surrender, with one condition”: The Russians were not to be allowed into Central Europe, including Germany or territory at that time controlled by Germany.

Earle sent this dispatch off with high hopes, he wrote….

Earle doesn’t specify how much time went by, but finally an answer from the president came through. It was stiff and impersonal. “All such applications for a negotiated peace should be referred to the Supreme Allied Commander, General Eisenhower,” Roosevelt wrote…. Earle explains, “In diplomatic language, this was the final runaround. Even if we did get to Eisenhower, the matter would be referred back to Roosevelt for a decision. The President’s answer was therefore a clear indication of his complete disinterest in this plan to end the war….

As for “unconditional surrender”:

Quite notably, … the very first use of the phrase “unconditional surrender” at Casablanca was by Harry Hopkins himself. In a January 23, 1943, meeting, one day ahead of the president’s sensational announcement, Hopkins told the grand vizier of Morocco, “The war will be pursued until Germany, Italy, and Japan agree to unconditional surrender.” …

… [U]nconditional surrender may well be the policy that ensured Soviet dominion over half of Europe. It was also, as Ian Colvin noted in the preface to a 1957 edition of his Canaris biography, a “pivotal point” in the tragedy of the German underground. “Unconditional surrender” would set the strategy of “total war” (Allied) as the only appropriate response to “total guilt” (German). Such a strategy presumed, indeed, drew inspiration from, a belief in the unwavering, monolithic German support for Nazism and Hitler, which the very existence of a significant anti-Nazi German resistance movement belied. For the sake of the policy then, the significant anti-Nazi German resistance movement had to be denied, shut out. Otherwise, “total war,” and the total destruction it required, wasn’t justified. Otherwise, I say, Stalin wouldn’t win.

General Wedemeyer devotes an entire chapter of his memoir to making the devastating strategic case against unconditional surrender. The general did not mince words: “We annulled the prospect of winning a real victory by the Casablanca call for unconditional surrender,” he wrote. 39 Why? “Our demand for unconditional surrender naturally increased the enemy’s will to resist and forced even Hitler’s worst enemies to continue fighting to save their country.” …

Wedemeyer elaborated, “We failed to realize that unconditional surrender and the annihilation of German power would result in a tremendous vacuum in Central Europe into which the Communist power and ideas would flow.”

About that vacuum in Central Europe: Is it the case that “we” simply “failed” to realize that a vacuum would emerge? Or had enough of us instead bought the Moscow line that Stalin wanted “nothing more than security for his country,” as Roosevelt, invoking Harry Hopkins, told William Bullitt at this same fateful moment? What about those among us in positions of power who had already decided that Stalin in Europe would be a good thing?

Remember Hanson Baldwin’s Numero Uno “great mistake of the war”: the belief “that the Politburo had abandoned  … its policy of world Communist revolution and was honestly interested in the maintenance of friendly relations with capitalist governments.”

Where did that belief— propaganda— come from?

Wedemeyer explains, “We poisoned ourselves with our own propaganda and let the Communist serpent we took to our bosom envenom our minds and distort our ideals.” Baldwin is more matter-of-fact. “We became victims of our own propaganda,” he wrote. “Russian aims were good and noble. Communism had changed its spots.”

We were victims, all right, but not of “our own” propaganda; it was their propaganda. It was propaganda conceived in Moscow and disseminated by bona fide Kremlin agents, mouthpieces and organizers of Communist parties, fellow travelers, and many, many dupes (“ liberals,” “all the best people,” opinion makers, etc.). …

This puts a cap on it:

Now, the question: What if Lochner’s query had been received with natural interest and acted on in mid-1942? What if the U.S. government had initiated contact with the anti-Hitler opposition at that point and supported a successful coup against Hitler in Germany? Or, what if six months later, Canaris, Hitler’s secret opponent, had been encouraged to produce the defection of the German army and negotiate its surrender to the Allies? What if one of the subsequent, serious attempts that other opponents of Hitler made through various Anglo-American emissaries in 1942, 1943, and 1944 had been able to overthrow the Führer, close down the concentration camps, abort the Final Solution, thwart Soviet conquests in Europe and Asia, call off every battle from Monte Cassino to D-day to the Warsaw Uprising to the Battle of the Bulge, avoid the destruction of city centers from Hamburg to Dresden, and save the lives of millions and millions and millions of people in between? …

… [B]ut there it is: World War II could have ended years earlier had Communists working for Moscow not dominated Washington, quashing every anti-Nazi, anti-Communist attempt, beginning in late 1942, throughout 1943 and 1944, to make common cause with Anglo-American representatives….

It’s not as if the true nature and intentions of the Soviet regime were unknown. As West points out, the peace feelers from Canaris et al.

began … at about the same time former U.S. ambassador to the USSR William C. Bullitt presented FDR with his prophetic blueprint of what the postwar world would look like if Anglo-American appeasement of Stalin didn’t stop….

Specifically:

Bullitt’s first memo to FDR was written on January 29, 1943. It was, Bullitt told the president, “as serious a document as any I have ever sent you.” He began by acknowledging that many observers in the United States believed that Stalin shared the president’s post-war vision expressed in the Atlantic Charter and the Four Freedoms. Bullitt countered that no “factual evidence” existed to support the view that Stalin was a changed man. “We find no evidence,” he wrote, “but we find in all democratic countries an intense wish to believe that Stalin has changed….” This view of a changed Stalin, therefore, was “a product of the fatal vice in foreign affairs—the vice of wishful thinking.” U.S. and British admiration for the valor demonstrated by the Russian people in the defense of their homeland was causing policymakers to overlook “both basic Russian Nationalist policy and Soviet Communist policy.”

“The reality,” Bullitt explained,

is that the Soviet Union, up to the present time, has been a totalitarian dictatorship in which there has been no freedom of speech, no freedom of the press, and a travesty of freedom of religion; in which there has been universal fear of the O.G.P.U. [secret police] and Freedom from Want has been subordinated always to the policy of guns instead of butter.

Stalin controls “in each country of the world,” Bullit further explained, “a 5th column” composed of “public or underground Communist Parties.” Stalin uses this Fifth Column for “espionage, propaganda, character assassination of opponents, and political influence….”

“[T]here is no evidence,” Bullitt emphasized, “that [Stalin] has abandoned either the policy of extending communism or the policy of controlling all foreign communist parties.” The Soviet Union “moves where opposition is weak, [but] stops where opposition is strong.” The United States must, advised Bullitt,

demonstrate to Stalin—and mean it—that while we genuinely want to cooperate with the Soviet Union, we will not permit our war to prevent Nazi domination of Europe to be turned into a war to establish Soviet domination of Europe. We have to back democracy in Europe to the limit, and prove to Stalin that, while we have intense admiration for the Russian people and will collaborate fully with a pacific Soviet State, we will resist a predatory Soviet State just as fiercely as we are now resisting a predatory Nazi State.

Bullitt provided FDR with a brief history lesson to show that Russia had always been an expansionist power…. Therefore, Bullitt opined, “[e]ven if Stalin had become a mere Russian nationalist—which he has not—that would be no guarantee of pacific behavior; indeed, it would be a guarantee of aggressive imperialism.”

Bullitt then listed Stalin’s “avowed” aims, which included the annexation of Bukovina, eastern Poland, Besserabia, Lithuania, Estonia, Latvia, and parts of Finland, and his secret goals, which included establishing communist governments in Romania, Bulgaria, Yugoslavia, Poland and northern Iran, and expanding the influence communist parties in France and Germany. Bullit feared that a Soviet Union victorious in Europe would try to take geopolitical advantage of the fact that the United States and Great Britain still had to contend with Japan in the Far East. In such circumstances, Bullit wrote, “[t]here will be no single power or coalition in Europe to counterbalance the Soviet Union. The Soviet Union will be in a position to devote all its strength to overrunning Europe….” He sketched the following scenario:

While the United States and Great Britain are engaged in defeating Japan, the Red Army … will sweep through Europe from east to west, being welcomed by the Soviet 5th columns already organized in every European country. Then will follow the familiar comedy. There will be no talk of “annexation by the Soviet Union.” There will be a “freely chosen form of government” (Soviet); “free expression of the people’s will” (under occupation by the Red Army); and out will be trotted again all the obscene lies that accompanied the “freely expressed desire of the Baltic Republics, to be received into the Soviet Union.”

To prevent Soviet domination of Europe after the war, Bullitt counseled, the United States must establish in “occupied or liberated countries in Europe democratic administrations which, working together, will be strong enough to provide the requisite defense against invasion by the Soviet Union.” … ” The United States, he advised Roosevelt, must “lay the ground work for a combination of democratic governments in Europe strong enough to preserve democracy in Europe and keep the Bolsheviks from replacing the Nazis as masters of Europe.”

The United States, argued Bullitt, should not rely on agreements with the Soviet Union to preserve peace and the balance of power in Europe and the world. “The onward flow of the Soviet Union,” he explained, “has never been impeded by any written agreement…. Soviet invasion finds barriers in armed strength, not in Soviet promises.” That armed strength, according to Bullitt, should consist of an integrated, democratic and armed Europe backed by Great Britain and the United States….

Four months later, on May 12, 1943, Bullitt wrote a short follow-up memo to the president. He urged FDR to get commitments from the Soviet Union and Britain to help us in our war against Japan, and repeated his call for a military invasion of the Balkans to liberate Eastern and Central Europe before Soviet forces occupied the region. U.S. power was at its zenith, according to Bullitt, so it was essential that we translate that power to achieve our political goals.

On August 10, 1943, Bullitt wrote a final letter to the president on this subject. Echoing the great theorist of war, Karl von Clausewitz, Bullitt emphasized to Roosevelt that “[w]ar is an attempt to achieve political objectives by fighting; and political objectives must be kept in mind in planning operations.” The political objectives of the United States, he explained, “require the establishment of British and American forces in the Balkans and eastern and central Europe. Their first objective should be the defeat of Germany, their second, the barring to the Red Army of the way into Europe….”

A Soviet dominated Europe would be as great a threat to the United States and Britain as a German dominated Europe, wrote Bullitt. The dilemma of U.S. policy was to find a way to “prevent the domination of Europe by the Moscow dictatorship without losing the participation of the Red Army in the war against the Nazi dictatorship.” The most important elements of such a policy were, he wrote, the “creation of a British-American line in Eastern Europe,” and the establishment of “democratic governments behind” that line. (From the entry for William Bullitt at the University of North Carolina’s site, American Diplomacy: Foreign Service Dispatches and Periodic Reports on U.S. Foreign Policy)

Roosevelt ignored Bullitt, and the rest is history. The war in Europe was prolonged, unnecessarily and at great cost in lives and treasure. (Bear in mind that if the war in Europe had ended sooner, the Allies could then have focused their efforts on the war in the Pacific — with the resultant saving of many more lives and much more treasure.)

Perhaps the failure to seize an early victory can be chalked up to stubbornness and near-sightedness. I would believe that if there had been only one failure, or even two of them. But several failures look like a pattern to me: a pattern of preference for the survival of the Communist regime in Russia, and a willingness to abide Communist expansion in Europe. The best that can be said is that FDR’s outlook was blinkered by his commitment to Germany’s unconditional surrender, and that his views about the long run were (a) unduly optimistic, (b) insouciant, or (c) actively pro-Soviet. Given the degree of influence wielded by Harry Hopkins with respect to unconditional surrender and Soviet success, I opt for (c). Dupe or not, FDR sat in the Oval Office and made the decisions that turned the world upside down.

The prolongation of World War II is perhaps the biggest government failure in the history of the United States. There is one other that might rival it, though its proximate cause was inadvertent.

Does “Pent Up” Demand Explain the Post-War Recovery?

Russ Roberts wonders about the meaning of “pent up” demand:

The usual way that Keynesians explain the post-[World War II] expansion despite the huge cut in government spending is to say, well of course the economy boomed, there was a lot of pent-up demand. What does that mean? There is always pent-up demand in the sense there is a stuff I wish I could have but can’t. But the standard story is that people couldn’t buy washing machines or cars during the war–they were rationed or simply unavailable or unaffordable. So when the war ended, and rationing and price controls ended, people were eager to buy these things. But the reason these consumer goods were rationed or unavailable is because all the steel went into the tanks and planes during the war. So when the war ended, there was steel available to the private sector. That’s why cutting government activity can stimulate the private sector. Fewer resources are being commandeered by the public sector.

Roberts refers to an earlier post of his, in which he rightly ridicules Keynesians for believing in the magical multiplier:

One of the most mindless aspects of the multiplier is to treat is as a constant, such as 1.52. It can’t be a constant, not in any meaningful way. If the government conscripted half of the US population to dig holes all day and conscripted the other half to fill them back in, and paid each of us a billion dollars a day for the task, and valued holes that were dug and holes that were filled in at a trillion dollars a hole, then GDP would be very very large, unemployment would be zero and there would be no stimulating effect and we would soon be dead from starvation.

Priceless.

I share Roberts’s disdain for the multiplier. (See this and this.)

Nevertheless, the availability of resources for private use after the war ended is only half the story. Consumers and businesses had to demand things — not just want them, but demand them with money in hand. That is where pent-up demand comes into play, as I explain here:

Conventional wisdom has it that the entry of the United States into World War II caused the end of the Great Depression in this country. My variant is that World War II led to a “glut” of private saving because (1) government spending caused full employment, but (2) workers and businesses were forced to save much of their income because the massive shift of output toward the war effort forestalled spending on private consumption and investment goods. The resulting cash “glut” fueled post-war consumption and investment spending.

Robert Higgs, research director of the Independent Institute, has a different theory, which he spells out in “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War” (available here), the first chapter his new book, Depression, War, and Cold War. (Thanks to Don Boudreaux of Cafe Hayek for the pointer.) Here, from “Regime Change . . . ” is Higgs’s summary of his thesis:

I shall argue here that the economy remained in the depression as late as 1940 because private investment had never recovered sufficiently after its collapse during the Great Contraction. During the war, private investment fell to much lower levels, and the federal government itself became the chief investor, directing investment into building up the nation’s capacity to produce munitions. After the war ended, private investment, for the first time since the 1920s, rose to and remained at levels sufficient to create a prosperous and normally growing economy.

I shall argue further that the insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administration during the so-called Second New Deal from 1935 to 1940. Starting in 1940 the makeup of FDR’s administration changed substantially as probusiness men began to replace dedicated New Dealers in many positions, including most of the offices of high authority in the war-command economy. Congressional changes in the elections from 1938 onward reinforced the movement away from the New Deal, strengthening the so-called Conservative Coalition.

From 1941 through 1945, however, the less hostile character of the administration expressed itself in decisions about how to manage the warcommand economy; therefore, with private investment replaced by direct government investment, the diminished fears of investors could not give rise to a revival of private investment spending. In 1945 the death of Roosevelt and the succession of Harry S Truman and his administration completed the shift from a political regime investors perceived as full of uncertainty to one in which they felt much more confident about the security of their private property rights. Sufficiently sanguine for the first time since 1929, and finally freed from government restraints on private investment for civilian purposes, investors set in motion the postwar investment boom that powered the economy’s return to sustained prosperity notwithstanding the drastic reduction of federal government spending from its extraordinarily elevated wartime levels.

Higgs’s explanation isn’t inconsistent with mine, but it’s incomplete. Higgs overlooks the powerful influence of the large cash balances that individuals and corporations had accumulated during the war years. It’s true that because the war was a massive resource “sink” those cash balances didn’t represent real assets. But the cash was there, nevertheless, waiting to be spent on consumption goods and to be made available for capital investments through purchases of equities and debt.

It helped that the war dampened FDR’s hostility to business, and that FDR’s death ushered in a somewhat less radical regime. Those developments certainly fostered capital investment. But the capital investment couldn’t have taken place (or not nearly as much of it) without the “glut” of private saving during World War II. The relative size of that “glut” can be seen here:

Derived from Bureau of Economic Analysis, National Income and Product Accounts Tables: 5.1, Saving and Investment. Gross private saving is analagous to cash flow; net private saving is analagous to cash flow less an allowance for depreciation. The bulge in gross private saving represents pent-up demand for consumption and investment spending, which was released after the war.

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

The post continues with an exchange between Higgs and me. The bottom line is the same.

What is the answer to the title question, then? It is that a period of forced, nominal saving can create pent-up demand, which can result in the employment of resources that had theretofore been unavailable. The pent-up demand at the end of World War II was, in great measure, responsible for the post-war recovery.

This rare phenomenon has nothing to do with the multiplier, and probably has nothing to do with the current economic situation. Government has commandeered a large chunk of the American economy, but so gradually that Americans have not acquire a “glut” of nominal savings, as they did in World War II.

Does World War II “Prove” Keynesianism?

In “How the Great Depression Ended,” I say that

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

That analysis is by no means an endorsement of simple-minded Keynesianism (as propounded by Paul Krugman, for example), which holds that the government can spend the economy out of a recession or depression, if only it spends “enough” (which is always more than it actually spends). But there is no point in pumping additional money into an economy unless the money elicits productive endeavors: business creation and expansion, leading to net capital formation and job creation.

Pumping additional money into government programs results in the misdirection of resources, at best, and in the discouragement of productive private activity, at worst. Discouragement takes two forms: crowding-out and active interference (usually through regulatory inhibitions).

The answer to the question of this post’s title is that World War II has nothing to do with Keynes or Keynesianism, as it is widely understood. Employment and output (measured in dollars) rose sharply during World War II, but most of the additional output was devoted to the war effort. Huge increases in government spending did not lead to huge increases in the material well-being of Americans, most of whom were working harder while being deprived of the fruits of their labors, through rationing.

If anything, the post-war recovery “proves” the folly and wastefulness of efforts to stimulate an economy through government spending. It was not government spending that re-started the U.S. economy after World War II, it was private spending on capital investments and consumer goods. Some of that private spending was encouraged by the end of regime uncertainty. That end was brought about by the curtailment of New Deal initiatives (until the 1960s) because of the war and FDR’s death. Private spending — which was boosted by wartime saving — would have been purely inflationary had businesses not been willing and able to create jobs and expand output.

Rating America’s Wars

In “Why We Should (and Should Not) Fight” I say that

American armed forces should be used only to preserve, protect, and defend the interests of Americans.

I ended that post with an assessment of the engagements in Iraq, Afghanistan, and Libya. But what about earlier American wars? Here are my thumbnail assessments of them (the dates indicate years in which U.S. forces were involved in combat):

Indian Wars (1637-1918). This long, episodic battle with Native Americans was justified when the purpose was to defend Americans and justly condemned when the purposes were genocide and theft  of Indian lands by force or fraud. There is probably much more to be ashamed of than to be proud of in the history of the Indian Wars.

Revolutionary War (1775-1783). The struggle for self-government deserves praise whether the motivation was liberty in general or the economic interests of colonial planters, merchants, and manufacturers. The latter is a subset of the former, and the outcome of the war served both ends. In that regard, many of the leaders of the armed struggle also became prominent figures in the establishment of the Articles of Confederation and Constitution. Both documents were aimed at preserving and extending the liberty for which the revolution was waged.

War of 1812 (1812-1815). A leading cause of this war was the imposition by Britain of restrictions intended to impede American commerce with France. That, alone, would have justified the war if Britain could not be dissuaded by peaceful means, which it could not be. The U.S. had other legitimate grievances: impressment of American sailors into the British navy and British support of Indian raids in the Northwest Territory. The War of 1812 was, in effect, a belated and creditable resumption of the Revolutionary War.

Mexican-American War (1846-1848). The proximate cause of the war was the attempt by Mexico to retake Texas, which had won independence from Mexico in 1836 and annexed itself to the United States in 1845. The resulting war enabled the U.S. to acquire from Mexico — for $18,250,000 — land that is now California, Nevada, Utah, New Mexico, most of Arizona and Colorado, and parts of Texas, Oklahoma, Kansas, and Wyoming. The U.S. was right to prosecute the war and entirely reasonable about the terms and conditions for resolving it.

Civil War (1861-1865). The war that is still being fought (with words) by many Americans pitted the morally reprehensible Southern defenders of slavery against Northerners, led by Abraham Lincoln, who hewed to the dubious proposition that secession is impermissible under the Constitution. The Civil War can be justified only in that it ended slavery in the United States, which was not Mr. Lincoln’s original aim in prosecuting it.

Spanish-American War (1898). This unnecessary war was fought on the excuse of Spanish atrocities in Cuba and the still-mysterious sinking of the USS Maine in Havana Harbor. It was in fact an exercise in imperialism through which the U.S. acquired the dubious honor of controlling Cuba, Puerto Rico, Guam, and the Philippines — altogether more trouble than they were worth. It is especially galling that Theodore Roosevelt rode the Spanish-American War to fame, and eventually to the imperial presidency.

World War I (1917-1918). The immediate cause of the entry of the United States into this war was German acts of belligerence — sabotage and the sinking of U.S. merchant ships. Those acts were aimed at preventing the U.S. from selling war supplies to Britain. Germany, in other words, was sorely provoked, and the U.S. government could not realistically claim to be a neutral party in what was really a European war, with Asian and African sideshows involving opportunistic attacks on German interests in those regions. Had the U.S. stayed neutral and avoided war, Germany might have won, though a stalemate was more likely. In either event, an exhausted Germany would hardly have been a threat to the U.S., and might even have welcomed trade with the U.S. as it rebuilt in the post-war years. All of this was last in the anti-German hysteria of the time, which played well to the super-majority of Americans whose roots were in the British Isles. It is pure hindsight to say that a victorious or stalemated Germany probably would not have produced the Third Reich, but true nevertheless. America’s entry into World War I was a mistake, in any event, but it turned out to be a horrendously costly one.

World War II (1941-1945). While Anglo-American and French politicians pursued the illusion that peace could be maintained through diplomacy and treaties, Adolf Hitler and Japan’s military caste pursued dominion through conquest. The Third Reich and Empire of the Rising Sun failed to dominate the world only because of (a) Hitler’s fatal invasion of Russia, (b) Japan’s wrong-headed attack on Pearl Harbor, and (c) the fact that the United States of 1941 had time and space on its side. Had the latter not been true, Americans could well have found themselves cut off from the world — and much the poorer for it — if not enslaved. World War II clearly ranks just behind the War of 1812 as the most necessary war in America’s post-Revolutionary history.

Cold War (1947-1991). This necessary, long, and costly “war” of deterrence through preparedness enabled the U.S. to protect Americans’ legitimate economic interests around the world by limiting the expansion of the Soviet empire. The Cold War had some “hot” moments and points of high drama. Perhaps the most notable of them was the so-called Cuban Missile Crisis of 1962, which was not the great victory proclaimed by the Kennedy administration and its political and academic sycophants. (For more on this point, go here and scroll down to the section on Kennedy.) That the U.S. won the Cold War because the USSR’s essential bankruptcy was exposed by Ronald Reagan’s defense buildup is a fact that only left-wingers and dupes will deny. They continue to betray their doomed love of communism by praising the hapless Mikhail Gorbachev for doing the only thing he could do in the face of U.S. superiority: surrender and sunder the Soviet empire. America’s Cold War victory owes nothing to LBJ (who wasted blood and treasure in Vietnam), Richard Nixon (who would have sold his mother for 30 pieces of silver), or Jimmy Carter (whose love for anti-American regimes and rebels knows no bounds).

Korean War (1950-1953). The Korean War was unnecessary, in that it was invited by the Truman administration’s policies: exclusion of Korea from the Asian defense perimeter and massive cuts in the U.S. defense budget. But it was essential to defend South Korea so that the powers behind North Korea (Communist China and, by extension, the USSR) would grasp the willingness of the U.S. to maintain a forward defensive posture against aggression. That signal was blunted by Truman’s decision to sack MacArthur when the general persisted in his advocacy of attacking Chinese bases following the entry of the Chinese into the war. The end result was a stalemate, where a decisive victory might have broken the back of communistic adventurism around the globe. The Korean War, as it was fought by the U.S., became “a war to foment war.”

Vietnam War (1965-1973). Whereas the Korean War was a necessary war against communist expansionism, the Vietnam War was an unnecessary entanglement in a civil war in which one side happened to be communist. Nevertheless, the U.S., having made a costly commitment to the prosecution of the war, should have fought it to victory. Instead, unlike the case of Korea, U.S. forces were withdrawn and it took little time for North Vietnam to swallow South Vietnam. American resolve suffered a body blow, from which it rebounded only partially by winning the Cold War, thanks to Reagan’s defense buildup in the 1980s. When it came to actual warfare, however, Vietnam repeated and reinforced the pattern of compromise and retreat that had begun with the Korean War, and which eventuated in the 9/11 attacks.

Gulf War (1990-1991). This war began with Saddam Hussein’s invasion of oil-rich Kuwait. U.S. action to repel the invasion was fully justified by the potential economic effects of Saddam’s capture of Kuwait’s petroleum reserves and oil production. The proper response to Saddam’s aggression would have been not only to defeat the Iraqi army but also to depose Saddam. The failure to do so further reinforced the pattern of compromise and retreat that had begun in Korea, and necessitated the long, contentious Iraq War of the 2000s.

The quick victory in Iraq, coupled with the coincidental end of the Cold War, helped to foster a belief that the peace had been won. (That belief was given an academic imprimatur in Francis Fukuyama’s The End of History and the Last Man.) The stage was set for Clinton’s much-ballyhooed fiscal restraint, which was achieved by cutting the defense budget. Clinton’s lack of resolve in the face of terrorism underscored the evident unwillingness of American “leaders” to defend Americans’ interests, thus inviting 9/11.  (For more about Clinton’s foreign and defense policy, go here and scroll down to the section on Clinton.)

Which leads us back to the wars and skirmishes of the 21st century.

How the Great Depression Ended

Don Boudreaux writes:

No modern myth dies harder than the familiar claim – today repeated in the Los Angeles Times by one Joan Mortenson – that “It was the massive spending of World War II that finally ended the Depression.”

Between 1941 and 1945 Uncle Sam drew into his military 16 million persons – that was 22 percent of the pre-war labor force.  With so many workers then militarized, mostly through conscription, there’s no evidence that wartime spending restored the labor market to health.  And while real GDP did rise during those years because of military spending, the private economy shrank.  As Robert Higgs notes, “Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946.  The privately owned capital stock actually shrank during the war.

It is true that the private economy shrank during World War II. But the important thing is what happened after that, and why. Here is a more complete picture, which I have lifted from an old post of mine:

Conventional wisdom has it that the entry of the United States into World War II caused the end of the Great Depression in this country. My variant is that World War II led to a “glut” of private saving because (1) government spending caused full employment, but (2) workers and businesses were forced to save much of their income because the massive shift of output toward the war effort forestalled spending on private consumption and investment goods. The resulting cash “glut” fueled post-war consumption and investment spending.

Robert Higgs, research director of the Independent Institute, has a different theory, which he spells out in “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War” (available here), the first chapter his new book, Depression, War, and Cold War. (Thanks to Don Boudreaux of Cafe Hayek for the pointer.) Here, from “Regime Change . . . ” is Higgs’s summary of his thesis:

I shall argue here that the economy remained in the depression as late as 1940 because private investment had never recovered sufficiently after its collapse during the Great Contraction. During the war, private investment fell to much lower levels, and the federal government itself became the chief investor, directing investment into building up the nation’s capacity to produce munitions. After the war ended, private investment, for the first time since the 1920s, rose to and remained at levels sufficient to create a prosperous and normally growing economy.

I shall argue further that the insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns. This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administration during the so-called Second New Deal from 1935 to 1940. Starting in 1940 the makeup of FDR’s administration changed substantially as probusiness men began to replace dedicated New Dealers in many positions, including most of the offices of high authority in the war-command economy. Congressional changes in the elections from 1938 onward reinforced the movement away from the New Deal, strengthening the so-called Conservative Coalition.

From 1941 through 1945, however, the less hostile character of the administration expressed itself in decisions about how to manage the warcommand economy; therefore, with private investment replaced by direct government investment, the diminished fears of investors could not give rise to a revival of private investment spending. In 1945 the death of Roosevelt and the succession of Harry S Truman and his administration completed the shift from a political regime investors perceived as full of uncertainty to one in which they felt much more confident about the security of their private property rights. Sufficiently sanguine for the first time since 1929, and finally freed from government restraints on private investment for civilian purposes, investors set in motion the postwar investment boom that powered the economy’s return to sustained prosperity notwithstanding the drastic reduction of federal government spending from its extraordinarily elevated wartime levels.

Higgs’s explanation isn’t inconsistent with mine, but it’s incomplete. Higgs overlooks the powerful influence of the large cash balances that individuals and corporations had accumulated during the war years. It’s true that because the war was a massive resource “sink” those cash balances didn’t represent real assets. But the cash was there, nevertheless, waiting to be spent on consumption goods and to be made available for capital investments through purchases of equities and debt.

It helped that the war dampened FDR’s hostility to business, and that FDR’s death ushered in a somewhat less radical regime. Those developments certainly fostered capital investment. But the capital investment couldn’t have taken place (or not nearly as much of it) without the “glut” of private saving during World War II. The relative size of that “glut” can be seen here:

Derived from Bureau of Economic Analysis, National Income and Product Accounts Tables: 5.1, Saving and Investment. Gross private saving is analagous to cash flow; net private saving is analagous to cash flow less an allowance for depreciation. The bulge in gross private saving represents pent-up demand for consumption and investment spending, which was released after the war.

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

UPDATE: Robert Higgs, in an e-mail to me dated 06/24/06, submitted the following comment:

I happened upon your blog post that deals with my ideas about why the depression lasted so long and about the way in which the war related to the genuine prosperity that returned in 1946 for the first time since 1929. I appreciate the publicity, of course. I suggest, however, that you read my entire book, especially, with regard to the points you make on your blog, its chapter 5, “From Central Planning to the Market: The American Transition, 1945-47″ (originally published in the Journal of Economic History, September 1999. I show there that the “glut of savings” idea, which is an old one, indeed perhaps even the standard theory of the successful postwar reconversion, does not fit the facts of what happened in 1945-47.

Here is my reply of 10/12/06:

I apologize for the delay in replying to your e-mail about my post… Your book, Depression, War, and Cold War, has not yet made it to the top of my Amazon.com wish list, but I have found “From Central Planning to the Market: The American Transition, 1945-47″ on the Independent Institute’s website (here). If the evidence and arguments you adduce there are essentially the same as in chapter 5 of your book, I see no reason to reject the “glut of savings” idea, which is an old one, as I knew when I wrote the post. But, because it is not necessarily an old one to everyone who might read my blog, it is worth repeating — to the extent that it has merit.

At the end of the blog post I summarized the causes of the end of the Great Depression, as I see them:

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

In the web version of chapter 5 of your book you attribute increased capital spending to an improved business outlook (owing to FDR’s demise) and (in the section on the Recovery of the Postwar Economy, under Why the Postwar Investment Boom?) to “a combination of the proceeds of sales of previously acquired government bonds, increased current retained earnings (attributable in part to reduced corporate-tax liabilities), and the proceeds of corporate securities offerings” to the public. It seems that those “previously acquired government bonds” must have arisen from the “glut” of corporate saving during World War II.

What about the “glut” of personal saving, which you reject as the main source of increased consumer demand after World War II? In the online version of chapter 5 (in the section on the Recovery of the Postwar Economy, under Why the Postwar Consumption Boom?) you say:

The potential for a reduction of the personal saving rate (personal saving relative to disposable personal income) was huge after V-J Day. During the war the personal saving rate had risen to extraordinary levels: 23.6 percent in 1942, 25.0 percent in 1943, 25.5 percent in 1944, and 19.7 percent in 1945. Those rates contrasted with prewar rates that had hovered around 5 percent during the more prosperous years (for example, 5.0 percent in 1929, 5.3 percent in 1937, 5.1 percent in 1940). After the war, the personal saving rate fell to 9.5 percent in 1946 and 4.3 percent in 1947 before rebounding to the 5 to 7 percent range characteristic of the next two decades. After having saved at far higher rates than they would have chosen in the absence of the wartime restrictions, households quickly reduced their rate of saving when the war ended.

That statement seems entirely consistent with the proposition that consumers spent more after the war because they had the money to spend — money that they had acquired during the war when their opportunities for spending it were severely restricted. Not so fast, you would say: What about the fact that “individuals did not reduce their holdings of liquid assets after the war” (your statement)? They didn’t need to. Money is fungible. If consumers had more money coming in (as they did), they could spend more while maintaining the same level of liquid assets — because they had a “backlog” of saving. Here’s my take:

  • Higher post-war incomes didn’t just happen, they were the result of higher rates of investment and consumption spending.
  • The higher rate of investment spending was due, in part, to corporate saving during the war and, in part, to individuals’ purchases of corporate securities and equities.
  • At bottom, the wartime “glut” of personal saving enabled the postwar saving rate to decline to a more normal level, thus allowing consumers to buy equities and securities — and to spend more — without drawing down on their liquid assets.

Granted, business and personal saving during World War II was not nearly as large in real terms as it was on paper — given the very high real cost of the war effort. But it was the availability of paper savings that strongly influenced the behavior of businesses and consumers after the war….

The Decision to Drop the Bomb

The final words with respect to the bombing of Hiroshima and Nagasaki — as far as I am concerned — were written five years ago by Richard B. Frank in The Weekly Standard (“Why Truman Dropped the Bomb“) and Victor Davis Hanson at National Review Online (“Considering Hiroshima“). Here’s an excerpt of Frank’s piece:

The sixtieth anniversary of Hiroshima seems to be shaping up as a subdued affair–though not for any lack of significance. A survey of news editors in 1999 ranked the dropping of the atomic bomb on August 6, 1945, first among the top one hundred stories of the twentieth century. And any thoughtful list of controversies in American history would place it near the top again. It was not always so. In 1945, an overwhelming majority of Americans regarded as a matter of course that the United States had used atomic bombs to end the Pacific war. They further believed that those bombs had actually ended the war and saved countless lives. This set of beliefs is now sometimes labeled by academic historians the “traditionalist” view. One unkindly dubbed it the “patriotic orthodoxy.”

But in the 1960s, what were previously modest and scattered challenges of the decision to use the bombs began to crystallize into a rival canon. The challengers were branded “revisionists,” but this is inapt. Any historian who gains possession of significant new evidence has a duty to revise his appreciation of the relevant events. These challengers are better termed critics.

The critics share three fundamental premises. The first is that Japan’s situation in 1945 was catastrophically hopeless. The second is that Japan’s leaders recognized that fact and were seeking to surrender in the summer of 1945. The third is that thanks to decoded Japanese diplomatic messages, American leaders knew that Japan was about to surrender when they unleashed needless nuclear devastation. The critics divide over what prompted the decision to drop the bombs in spite of the impending surrender, with the most provocative arguments focusing on Washington’s desire to intimidate the Kremlin. Among an important stratum of American society–and still more perhaps abroad–the critics’ interpretation displaced the traditionalist view….

[I]t is clear [from a review of the evidence now available] that all three of the critics’ central premises are wrong. The Japanese did not see their situation as catastrophically hopeless. They were not seeking to surrender, but pursuing a negotiated end to the war that preserved the old order in Japan, not just a figurehead emperor. Finally, thanks to radio intelligence, American leaders, far from knowing that peace was at hand, understood–as one analytical piece in the “Magic” Far East Summary stated in July 1945, after a review of both the military and diplomatic intercepts–that “until the Japanese leaders realize that an invasion can not be repelled, there is little likelihood that they will accept any peace terms satisfactory to the Allies.” This cannot be improved upon as a succinct and accurate summary of the military and diplomatic realities of the summer of 1945.

The final words go to Hanson:

The truth . . is that usually in war there are no good alternatives, and leaders must select between a very bad and even worse choice. Hiroshima was the most awful option imaginable, but the other scenarios would have probably turned out even worse.