Are Wars Good for the Economy?

• Mr. PRAKHAR MAHESHWARI

Are Wars Good For Economy?

INTRODUCTION

“War, n: A time-tested political tactic guaranteed to raise a president’s popularity rating by at least 30 points. It is especially useful during election years and economic downturns.” – Chaz Bufe, American Anarchist Author

Wars. Invasions. Fights. The reason for these and the final consequence of these is economy. Communities, kingdoms and countries have been fighting countless wars and invading other countries and kingdoms in search for wealth and money. The Mughals and the English came to India having knowledge that the country was full of gold and had massive wealth. Americans declared war on Iraq in search of the precious oil. Even particular individuals fight with their own kin and family for property, wealth and money. But is destruction of life and property the only thing which happens before, after even during a war?

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This project deals with precisely that. The project focuses on the economic development and/or economic destruction of USA during world wars. However, the project isn’t strictly focused on only US. Countries like Britain, France and Germany needed to be given a special mention in such kind of a topic. Wars make or break a country. And it is an integral question that we must ask ourselves: Are wars really good for economy?

ECONOMY AND WORLD WARS

There are several reasons to enter a war. Although economic reasons are the most important, patriotism, loyalty and friendship towards a nation and the belief of “helping the needy and the right out” not only decides if a nation should enter a war but also decides which side that country would join.

World War 1

The United States entered the war very late. They were participants for approximately an year and a half – from April 1917 to November 1918.[1] This little participation in terms of days was very different from the point of view of contribution. The number of Americans serving the Army was more than a staggering four million. Not only did they provide men to the fighting nations, they also equipped them with great supply of raw materials and weapons and ammunition.[2]

Before the war, the American economy was in a bad shape. However, the buying of U.S. weaponry and goods for war by the fighting Europeans and when the U.S. itself joined the conflict, the economy boomed.[3] Hugh Rockoff writes that if the United States had not converted the opportunity of making and delivering goods and weapons to the European Allies, it would have been next to impossible for the country to enter and win the war.[4] The massive production of such goods, which were added only after looking at the demands made by the European countries, ensured easy entrance of the United States.[5] Also, the goods were made in such a way that the country itself would need it if it enters the war.[6] The Americans had actually realized that the spoils of the war, if they won, would be huge and the profits were not ignorable.

Hugh Rockoff also observes that “Entry into the war in 1917 unleashed massive U.S. federal spending which shifted national production from civilian to war goods. Between 1914 and 1918, some 3 million people were added to the military and half a million to the government.”[7] Infact, the impact of such employment was that the rate of unemployment came down from 7.9 percent to 1.4 percent.[8] This was not only due to the addition of men in the armies but also because labours and workers were required in large numbers to new manufacturing jobs like manufacturing guns, war infrastructure and developing technology.[9]

U.S. exports to the European countries, due to this war in 1917, shot up to almost three times the year 1913’s exports. While U.S. exported goods worth $1.5 billion dollars in 1913, the sales were in excess of $4 billion dollars in 1917.[10] Now let us assume that the United States had got nothing to do with the war. It was a neutral country and was not supplying any goods to any European country. Also, let us assume that the raw material used to produce these exports for the European countries were only able to manufacture about half as much value when such goods were transported to other countries which were not at war.[11] Based on these assumptions, if we calculate the value in output in the year 1917, the loss would come out to be a bit more than $2 billion dollars per year.[12] In 1917, this was worth 3.7 percent the U.S GNP and about 6.3 percent of the total U.S. cost of war.[13]

Rockoff estimates “the total cost of World War I to the United States at approximately $32 billion, or 52 percent of gross national product at the time. He breaks down the financing of the U.S. war effort as follows: 22 percent in taxes, 58 percent through borrowings from the public, and 20 percent in money creation. The War Revenue Act of 1917 taxed “excess profits” — profits exceeding an amount determined by the rate of return on capital in a base period — by some 20 to 60 percent, and the tax rate on income starting at $50,000 rose from 1.5 percent in 1913-15 to more than 18 percent in 1918. Meanwhile, Treasury Secretary William Gibbs McAdoo crisscrossed the country peddling war bonds, even enlisting the help of Hollywood stars and Boy Scouts. The prevalence of patriotic themes created social pressure to purchase the “Liberty bonds” (and, after the armistice, the “Victory bonds”), but in practice the new bondholders did not make a tangible personal sacrifice in buying war bonds, since the yields on these debt instruments were comparable to those on standard municipal bonds at the time. As can be seen, patriotic motives were not sufficient to alter market prices of assets during the war.”[14]

Due to this war, various infrastructural projects were taken up and developed like Railroad, fuel and granaries. Since men had to go to war, the women took up the initiative of working in companies, etc. This ensured the economic freedom of women and more and more women started working.

It is often said that the one’s gain is another’s loss. Wars are no different. Where one country’s, the United States’, economy was going through a positive transformation, the economies of the European powers were humbled. Even though the Allies won the war, the major participants, the British and the French, suffered massive losses. Saints have said that “Everything that shines is not gold.” They may have “won” the war, but economically, they had been fooled by this shine.

However, the losses were restricted mainly to the battle fields. Overall, even the British economy (in terms of GDP) grew by around 14-15% during the four to five years of the world war. However, the country lost its men fighting for the country.[15] As discussed earlier, war also involves patriotism and many civilians hence started saving and investing in wars rather than the normal consumption. These investments were used majorly for ammunitions. The Government’s share of Gross Domestic Product (GDP) rose from 8% to 38% in these five years.[16]

The story of the Germans, the losers of the war, was however very different. Not only they had to give huge taxes and compensation, there economy was brought to the knees. Germany, just like any other country, had to borrow money from various banks, the axis powers and even its citizens. When the Germans lost, they had to pay back even these creditors. The Germans were left in huge debts and their economy was destroyed. And the main cause of their destruction was the Treaty of Versailles. Supposed to be a peace treaty, many people claim it to be an important reason of the Second World War. This treaty literally forced the Germans to pay huge compensations – a total sum of £6.6 billion.[17] This amount was way beyond the financial capacities of the Germans. Economy doesn’t only mean the money or financial capacity. It also means the territorial extend of the country. After all, even territories are the properties of a country. After the First World War, Germany had to give up large chunks of its territories to the Allied Forces.

“The Versailles treaty deprived Germany of around 13.5% of its 1914 territory (some seven million people) and all of its overseas possessions. Alsace-Lorraine was returned to France, and Belgium was enlarged in the east with the addition of the formerly German border areas of Eupen and Malmedy. Among other territorial re-arrangements, an area of East Prussia was handed over to Lithuania, and the Sudetenland to Czechoslovakia. The German army was limited to a maximum of 100,000 men, and a ban placed upon the use of heavy artillery, gas, tanks and aircraft. The German navy was similarly restricted to shipping under 10,000 tons, with a ban on submarines.”[18]

The other financial and economical clauses of the treaty are dealt with in Article 248 to 312 with certain Annexes.

Hence where some countries were enjoying the spoils of war, the other countries had to pay heavy compensations and reparations.

World War 2

World War 2 was no different when the reasons for the war are given a thought. The world had seen one of the greatest economic tragedies ever in the form of the Great Depression of 1929, just 6 years before the start of the Second World War. There was chaos on the streets as people lost on jobs and the unemployment rate was on an all time high, crossing the 25% mark. The companies were going bankrupt, economy was in a disaster and depression, as the name phenomenon suggests, was spread across the world. It was evident that another war was on its way.

With the rise of Adolf Hitler and economic woes of Germany after accepting the Treaty of Versailles, Germans had to wage wars, once again with the Allied Powers.

The U.S., like the previous war, joined this one later, approximately by 2 years. The country, however, like before, started producing and manufacturing wartime goods for the “worst case scenario”. When the United States got involved in the Second World War, the demand for labor shot up. To fight a war, country needs weapons and for that the country needs manufacturing facilities and labor in huge numbers. The national employment suddenly fell to a minimal 10% in just a few months of the declaration of war by the country from its 1940 level.[19] The country was at war and weapons and infrastructure need to be built up with a rapid speed. Even fortification of borders and military bases abroad was equally important.[20] All these factors coupled with the fact that weapons and military equipments, vehicles and other wartime instruments needed to be transported and mobilized ensured vast labor requirement.[21] The Employers wanted to fill the vacancies as fast as possible so as to meet the production demand. This however, brought in vacancies in other non-war areas. These positions were then filled by women and non white people. They had been excluded from a long time from such industries which payed highly and involved high skills. Hence war meant employment for the whole country.[22]

War doesn’t only bring profits. It brings massive destruction to life and property. Britain gave us the Industrial Revolution, and the very same industries, which were the pride of the Great Britain, were left nothing more to rumble. The damage that these facilities incurred, not only in Britain but also in other European countries, was much more than what they had incurred in the previous wars.[23] Where the damages incurred by France were approximately thrice of their total annual income, Britain suffered heavy losses in the form of damages to residential houses.[24] About 30% of the homes in Britain were destroyed by Germans in the Second World War, first by the aerial blitz and then by bombs and rockets.[25] The Germans, losing the war again, had their country divided into West and East Germany. While West was influenced by the capitalist USA, the East was the communist USSR.

The economic woes for Britain and France were not limited to their own countries. They had to let go many important colonies as they had exhausted their money and resources and had none left for their militaries in these areas. India gained its independence as the growing revolts and violence in the country left Britain shocked. Britain had no more resources to deal with these violent outbursts and had to leave the country, just like they had to leave many other territories. USSR and US strengthened their economies during cold war, but USSR, after the recession of 1970, could not recover like the US and had to surrender in the cold war. It has been seen by historians that whenever countries have not gone to war or had no threat of being attacked, their economy have not grown or grown but with a very low percentage.

But the wars, apart from developing or destroying economies, affect common man too. Inflation and rise in taxes are the two main effects. These are however short term.

“Increasing taxes reduces consumer spending, which does not help the economy improve at all. Suppose we decrease government spending on social programs. Firstly we’ve lost the benefits those social programs provide. The recipients of those programs will now have less money to spend on other items, so the economy will decline as a whole. Increasing the debt means that we’ll either have to decrease spending or increase taxes in the future; it’s a way to delay the inevitable. Plus there’s all those interest payments in the meantime.”[26]

Lack of wars

The European countries in the western side of the continent have very little or no threat of being overtaken by another country in the present times. The politicians and ministers are therefore not criticized for not developing the economy faster. Infact, when these ministers lose their office, they are “garlanded” with income boosts from counseling and consultation as well as speaking fees. If not these, then they retire to an amazing and dreamy holiday spot.[27] This however is not true for the countries that face constant danger from their neighbors or other countries. An example would be that of China and Japan. The Japanese face great pressure, both territorial and geographical from the Chinese.[28] This is true for India and Pakistan. India today is the largest importer of ammunitions as she faces constant and grave danger from its parted neighbors, Pakistan.

Hence where countries like India face constant danger from almost all its neighboring countries, they are the highest importers of ammunitions and weapons and countries like Switzerland, which are considered to be one of the most peaceful countries, hardly import any weapons.[29] US spend approximately $650 billion dollars in ammunitions.[30] This is what wars can do. They can make a country develop its resources and infrastructure.

CONCLUSION

As we can see, wars have the ability to develop an economy. In this project we dealt with three types of outcomes of a war. And each type had its representative. In the first type of outcome, the country wins. They win and enjoy a good deal of compensation. There economy grows by leaps and bounds, the rate of unemployment declines, infrastructure develops and the spoils of war compensate the losses they suffer. An example of this is the United States. While they joined late in the world wars, they had a great say and impact on the war. They had already developed their weapons and ammunitions and had gone to war with preparation. The second type of outcome is one in which although the country wins the war, they are badly hurt as far as economy is concerned. Their industries are destroyed, territories left damaged and even the spoils of war are not enough for their recovery. Britain and France are good examples of these. They “won” the Second World War but ended up losing more than what they won. They exhausted all their resources and their colonies gained independence. The third type of outcome is one in which the country loses; Germany being the example. Germany lost both its wars and had to pay damages which the obviously couldn’t. Infact, they had to ask for loans from the same countries they had to pay the damages.

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But leaving aside these so called boosters of economy, can any war, battle or fight justify the loss of human life? How can we as humans put a value to a person’s life? Economy may get boosted but for a short while. The damage to life, however, is a very very long one. In conclusion, I would like to say that war, like alcohol, is an addiction. Initially it tastes good, you think that all the worries are now away. But it’s not long before the person indulging himself in such addiction realizes that the pleasure was momentary, what he faces now is scars for life, which no money or economy can remove.

[1] Price Fishback, ‘U.S. Economy in World War I’ (eh.net 2010) <http://eh.net/encyclopedia/u-s-economy-in-world-war-i/> accessed 28 June 2014.

[2] Price Fishback, ‘U.S. Economy in World War I’ (eh.net 2010) <http://eh.net/encyclopedia/u-s-economy-in-world-war-i/> accessed 28 June 2014.

[3] Carlos Lozada, ‘The Economics of World War I’ (nber.org 2014) <http://www.nber.org/digest/jan05/w10580.html> accessed 29 June 2014.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Carlos Lozada, ‘The Economics of World War I’ (nber.org 2014) <http://www.nber.org/digest/jan05/w10580.html> accessed 29 June 2014.

[10] Price Fishback, ‘U.S. Economy in World War I’ (eh.net 2010) <http://eh.net/encyclopedia/u-s-economy-in-world-war-i/> accessed 28 June 2014.

[11] Ibid.

[12] Price Fishback, ‘U.S. Economy in World War I’ (eh.net 2010) <http://eh.net/encyclopedia/u-s-economy-in-world-war-i/> accessed 28 June 2014.

[13] Ibid.

[14] Carlos Lozada, ‘The Economics of World War I’ (nber.org 2014) <http://www.nber.org/digest/jan05/w10580.html> accessed 29 June 2014.

[15] Niall Ferguson, The Pity of War: Explaining World War I (1st, Basic Books, 1988) 249.

[16] Ibid.

[17] London Jewish Cultural Centre, ‘Economic effects of the Treaty of Versailles’ (theholocaustexplained.org 2009) <http://www.theholocaustexplained.org/ks4/the-nazi-rise-to-power/the-german-economy-c-1919-29/economic-effects-of-the-treaty-of-versailles/> accessed 29 June 2014.

[18] Michael Duffy, ‘Treaty of Versailles, 28 June 1919’ (firstworldwar.com 2009) <http://www.firstworldwar.com/source/versailles.htm> accessed 29 June 2014.

[19] David Siminoff and Deb Tennen, ‘World War II: Home Front’ (shmoop.com 2009) <http://www.shmoop.com/wwii-home-front/economy.html> accessed 29 June 2014

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Dr. Susmit Kumar, ‘Consequences of World Wars I and II’ (susmitkumar.net 2010) <http://www.susmitkumar.net/index.php?option=com_content&view=article&id=66:consequenses-of-world-wars-i-and-ii&Itemid=38> accessed 29 June 2014.

[24] Ibid.

[25] Dr. Susmit Kumar, ‘Consequences of World Wars I and II’ (susmitkumar.net 2010) <http://www.susmitkumar.net/index.php?option=com_content&view=article&id=66:consequenses-of-world-wars-i-and-ii&Itemid=38> accessed 29 June 2014.

[26] Jodi Beggs, ‘Are Wars Good for the Economy?’ (about.com 2014) <http://economics.about.com/cs/issues/l/aa032003c.htm> accessed 29 June 2014.

[27] Tyler Cowen, ‘The Lack of Major Wars May Be Hurting Economic Growth’ (nytimes.com 2014) <http://www.nytimes.com/2014/06/14/upshot/the-lack-of-major-wars-may-be-hurting-economic-growth.html?_r=0> accessed 29 June 2014.

[28] Ibid.

[29] “The 15 countries with the highest military expenditure in 2013 (table)”. Stockholm International Peace Research Institute (2011).

[30] Ibid.