4. The Economics of World Wars I and II

Politics, Blood, and Money

No two wars in history have defined an entire century more than World Wars I and II; in fact, to many, those two wars have come to define modern history and the modern world itself. Both wars combined proved to be the most destructive in terms of loss of life and property that the world has ever witnessed. Empires and regimes rose and fell and the geo-political map changed several times from the start of World War I in 1914 until the end of World War II in 1945. True, politics played the central role in both of those wars and at the core of the political questions was the desire by several nation-states to acquire more land, but intertwined with the political considerations were economics.

The desire by the Central Powers to acquire more land and colonies during World War I was essentially an economic reason and economics was a major factor in how the “peace” was conducted after the war. Between the wars, hyper-inflation in Germany and the Great Depression that engulfed the entire world were economic processes that led directly to the rise of fascist and communist parties throughout Europe, which in turn led directly to World War II. Economics clearly played a major role in how and why both wars began, but economic considerations were also vital as to how both wars were conducted and ultimately won. Truly, understanding the economic factors of World Wars I and II will paint a clearer and fuller picture of these wars and their place in world history.

Colonialism and World War I

Most historians argue that three major factors led to the start of World War I: the European alliance structure, the rise of nationalism, and the prominence of colonialism among the major European powers. Among these three concepts, colonialism was clearly economic-centric in nature. When World War I began in 1914 Great Britain possessed the world’s largest empire as it was often aptly referred to as the “empire that the sun never set on.” Britain’s colonial possessions served to make the mother country wealthy and comfortable: for example, gold from South Africa helped make the British economy the strongest of the world and tea and spices from India served to keep the British people happy and content. On the other end, Britain was a booming industrial giant that from the 1870s until the start of World War I exported 35% of all its manufactured goods to its colonies. The situation was one that other European nations, especially Germany, coveted and proved to be one of the major factors that led to war.

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Before World War I began, Germany wished to emulate Britain’s economic success by expansion, but there was no land left that either was not an independent republic or a colonial possession. Germany itself possessed a number of colonies in Africa such as Togoland (Ghana), German East Africa (Tanzania), German Southwest Africa (Namibia), and Cameroon. Although Germany desired more land, it was still a relatively wealthy country compared to the rest of the world and especially among its allies in the Central Powers – Austria-Hungary and the Ottoman Empire. Germany’s wealth allowed it to mobilize and build a state of the art military fairly quickly when it became apparent that Europe was headed towards war. After the archduke of Austria-Hungary was assassinated in Sarajevo by Serbian nationalists on June 28, 1914, the alliance dominos fell and World War I began in earnest. Germany then attempted to expand its territory in continental Europe and Africa, but lost its quest for greater imperial and economic glory when it was defeated on the battlefield.

The Weakness of the Imperial Russian Economy

Among the allies that fought against the Central Powers, Imperial Russia was in the most precarious economic position. Economically speaking, Russia was quite backwards compared to the rest of Europe. Russia had only abolished serfdom in 1861 and lost a humiliating war to Japan in 1905 that exposed a plethora of social and economic problems for which the Tsar was ill-equipped to solve, or even mitigate to any extent. The immediate after-effect of Russia’s wartime loss to Japan was a failed leftist revolution and the establishment of the Duma, which is Russia’s equivalent of a parliament or congress. The creation of the Duma placated the Russian middle-classes’ angst towards the ineffective Tsar, but did little to quell the growing resentment from the legions of poor who began to increasingly turn to socialist, communist, and anarchist organizations that advocated the overthrow of the monarchy and economic equity. The social and economic situation in Russia hardly left it in an optimal position to prosecute a war, but that is exactly what the Tsar decided to do when Austria-Hungary declared war on Serbia.

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The weak Russian economy meant that the Russian troops fought with a lack of proper arms, shelter, and even food. The lack of proper equipment resulted in crushing and demoralizing battlefield losses, which further exposed Russia’s weak economy and social divisions. Ineffective use of the railways, which were often monopolized by the military, additionally hurt the civilian economy by reducing the amount of food that was transported to the cities. The situation was tailor-made for the Bolsheviks who stood on their soap boxes and proclaimed “bread and peace” as Russia’s economy collapsed. Full scale rioting in the major cities led the conservatives in the Duma to force the Tsar to abdicate his throne in February 1917. It was clear to most that Russia’s economic and social situation had reached critical mass, but for some reason its new leaders believed that staying in the war was the right thing to do. The Bolsheviks took advantage of the situation by taking the government over through a coup d’état in November 1917, thereby creating the world’s first communist state.

The End of the War

By the time the Tsar of Russia abdicated his throne his early 1917, the war had for the most part become a stalemate and it looked like the Central Powers could win through a battle of attrition. Many thought that Russia’s withdrawal from the war would force the Allies to agree to some type of terms with the Central Powers, but when the United States entered the war on the Allies’ side in 1917 it was only a matter of time until the war was over. Besides the fresh soldiers that the United States sent to the western front, the American economy was strong and its material output was so much greater than the Central Powers. After Germany and its allies surrendered, a new order was established that saw the elimination of old powers, the strengthening of a traditional one, and the emergence of a new power.

The total deaths attributed to World War I were around nine and half million, which was a staggering number for the time and largely the reason the war earned the moniker of the “Great War.” When those numbers are considered as a whole – combining both the Allied and Central Powers losses – then about 1% of the population of the belligerent nations was lost during the war. Obviously the United Kingdom, France, and Germany suffered the most in terms of battlefield casualties, but all nations involved suffered economically and morally.

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As part of the post-war peace settlement, known as the Treaty of Versailles for the location where it was signed in France, Germany lost 13% of its pre-war territory and the Austro-Hungarian and Ottoman Empires were permanently dismantled. Economically speaking, the settlement had disastrous repercussions for Germany, which will be discussed more thoroughly below, but temporarily benefited Great Britain’s empire. It acquired former Ottoman possessions in the Middle East and German colonies in Africa as League of Nations mandates, although the economic benefits they gained were minimal as they had to send troops and bureaucrats to those nations for administrative purposes. The British also lost nearly a quarter of their overseas investments as a result of the war, which they were never able to make up despite the temporary expansion of their empire through the League of Nations mandates. France also suffered economically. Despite hitting Germany hard with reparations that were approved by the other victorious nations in the Treaty of Versailles, France was unable to claim most of its debts and it lost all of its loans to Imperial Russia when that country became communist. Ultimately, the economic winner of World War I was the United States as its prestige in the world increased and the nation entered into one of its most prosperous periods, which was partly the result of military technologies that were made available to the public after the war.

Between the Wars: German Hyperinflation and the Great Depression

While the United States entered the “Roaring Twenties” after World War I, Germany found itself in the middle of economic misery and led by an inept government. The Treaty of Versailles was intended to ensure that there would never be a war like the “Great War” again, but instead it led to political and economic processes that ultimately led to World War II.

Historians often point out that the Treaty of Versailles demoralized the spirit of the German people by forcing Germany to give up 13% of its territory and although that loss of land did dishearten the spirit of many patriotic Germans, it also left lasting economic repercussions. Much of the land that Germany was forced to surrender was fertile farm land, industrial regions, and coastal areas, all of which helped produce lucrative industries that employed thousands of Germans. Another feature of the Treaty of Versailles that was both morally and economically destructive to Germany was the 132 billion marks in reparations it was ordered to pay to the Allies, primarily France and Belgium. To further compound Germany’s post-war precarious economic position, it incurred a 150 billion mark debt to fund its war effort. Germany was a nation saddled by debt and war payments that it could never possibly make.

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The post-war German government – often referred to as the Weimar government after the capital city – proceeded to pursue a fiscal policy that proved to be disastrous for Germany in the long run. After the war, Germany, like most of the Western powers, took itself off of the gold standard, which its leaders saw as limiting to its financial goals. Once Germany was off of the gold standard it was able to print as much money as it needed in order to pay off its debts and to support new social programs. The result was a cycle of hyper-inflation that began in 1921 and did not end until 1923. Although Germany was able to end the economic crisis when it introduced a new currency in 1923 that was backed by real estate, the damage had been done and the Weimar government was exposed to the German people as weak and inept. The people began to turn to what were once fringe parties on the far left and right for solutions to problems that the Weimar government could clearly not solve. The city centers and beer halls in cities such as Munich, Berlin, Dresden, and Frankfurt became the scenes of violent battles between communist and fascist organizations who vied for control of Germany’s streets in order to influence peoples’ votes on election day. Hundreds of Germans died in political violence during the 1920s that largely began with process of hyperinflation; by 1930 German was a country that was ripping itself apart from the inside.

Most of the world either ignored the economic and political situation in Germany during the 1920s or simply did not care. After all, many argued that the Germans were one of the primary aggressors during the Great War so no one should care what happens to them. In the case with most Americans, they saw the situation as too far away and not something that could really affect the lives of people in the United States. Americans and most people in the industrialized world would soon face similar economic and social problems when the Great Depression hit in 1930.

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Most people think that the Wall Street stock market crash of October 24, 1929 was the catalyst that started the Great Depression, but a closer examination reveals that it was only the straw that broke the camel’s back. In reality, the Great Depression was part of a larger economic process that involved many different problems in the world economy that all came together to create the perfect storm. True, the stock market played a major role in the Great Depression, but new methods in trading and the inability for novice traders to understand them also played a role. In the decade before the collapse, buying stocks on margin became a quite popular way for many investors to make money on the market. Essentially, when one buys stocks on margin a person can profit from a stock’s increase in value without the costs associated with true ownership of a company. When prices stop rising then ownership on margin becomes meaningless and people begin to sell. Since this form of trading was fairly new in the 1920s to most people, when certain stocks began to lose value it could have a “lemming” effect where people would panic and sell instead of riding out the process, which is exactly what happened in 1929. But Wall Street, the United States, and the world could have withstood the panic if a number of other economic problems had not been happening just before and after the crash.

The 1920s was a period of exceptional economic growth in the United States where unemployment was low, investment was high, and Americans could afford to enjoy new technologies like the wireless radio and the Model T Ford. The country saw incredible increases in in the number of manufacturing plants built, cars produced, and overall industrial production throughout the decade. Along with the industrial growth, an impressive real estate boom took place during the 1920s. Investors could not buy enough land. By the end of the 1920s, the real estate boom quickly became a bubble that saw many investors lose their savings and retirements to unscrupulous real estate agents and other nefarious individuals who sold get rich schemes to unsuspecting marks. Once the Great Depression became a nationwide reality in the early 1930s and Americans were scrambling to deal with massive unemployment, the plains states were hit with the natural phenomenon known as the Dust Bowl.

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The Dust Bowl was the result of erosion caused by a combination of heavy plowing of the top soil and a lack of trees that could catch the dirt when it was blown by the wind. Heavy winds created black walls of dirt and dust that could be several miles long and last for hours at a time. The economic impact of the Dust Bowl was staggering as it diminished the nation’s food supply and displaced tens of thousands of people who had to leave the region to search for work in a country where jobs were extremely difficult to find. As the Great Depression ravaged the United States it made its way across the Atlantic and began to affect Europe, which was just emerging from the chaos left by World War I.

As the Great Depression went global, leaders from the most industrialize countries experimented with different economic policies that they believed would help kick-start their struggling economies. Since the process of an economic depression involves an increase in the value of currency, although little is in circulation, many leaders took steps to devalue their currencies by printing more money, exacting tariffs on imported commodities, and perhaps the most radical measure taken by American President Franklin Delano Roosevelt to confiscate the nation’s gold. On April 5, 1933 Roosevelt ordered that all private collections of gold be confiscated by the government in an effort to further stem the tide of the Depression. Most economists and historians believe that the various national efforts to combat the Depression were met with negligible results at best and that the Depression only ended when World War II began. But the economic efforts made by some of the countries that would later be major players in World War II deserves some more careful consideration.

Joseph Stalin and Economic Communism

Joseph Stalin’s (1878-1953) meteoric rise to become the head of the Soviet Union provides, in many ways, a text book study on how to become a dictator. Born in the Republic of Georgia, Stalin, born Joseph Dzhugashvili, rose to the head of Russia’s Communist Party through a series of Machiavellian machinations that often left his enemies dead or in prison. He was able to attain total power over the Soviet Union in 1929 and although he believed in the economic visions of Marx and Lenin, he was unwilling to wait for change to happen gradually. Stalin had an economic vision for the Soviet Union and he was willing to kill millions to achieve it.

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Central to Stalin’s economic ideas were the so-called Five Year Plans. As a communist country, theoretically the economy of the Soviet Union was in the hands of the “proletariat”, but the reality was and has been with every communist dictatorship, that the economy was centrally planned by government officials down to the last details. Each Five Year Plan was set up to meet specific production goals in both the industrial and agricultural sectors. Stalin’s Five Year Plans favored the industrial production of heavy equipment over consumer goods. The Soviet dictator argued that any emphasis on consumer goods would be a sign of decadence, which the Western-capitalist nations had been suffering through for decades. The Soviet Union would show the world what a socialist utopia could do by out producing the world in terms heavy equipment, such as cranes, tractors, and trucks, which could be used to produce more things. To many, Stalin’s first Five Year Plan appeared to be a success as the Soviet Union quickly out produced most other nations in terms of heavy equipment and seemed to have avoided the worst effects of the Great Depression, but beyond the façade that Stalin allowed the world to see was a nation that had declared war on its most productive class.

When the Bolsheviks came to power in Russia in 1918, they found the most solid base of their support among the factor workers in the largest cities. The millions of peasants on the Russians steppes and the fields of Ukraine were not particularly fond of communism. True, many of the peasants were poor, but they were vehemently independent and did not take kindly to being told how to farm or live their lives. For that reason, during the Russian Civil War (1918-1922) many of the peasants formed their own paramilitaries and fought under the green flag against the Bolsheviks. After the Bolsheviks won the Civil War, Lenin initially took a more conciliatory tone towards the peasants as his control over the vast country was too tenuous to keep fighting. The new communist government encouraged the peasants to collectivize their farms and offered monetary incentives to do so, but by the time Stalin came to power most farms were still privately owned.

Of all the numerous groups that suffered under Stalin’s rule, perhaps none did more so than the Russian and Ukrainian peasants. Stalin viewed the peasants of the Soviet Union as recalcitrant reactionaries who were holding up progress in his communist utopia. The incentives that Lenin offered to the peasants to turn over their farms to the government so that they could be collectivized quickly turned to threats and then action when Stalin came to power. Stalin used the military and secret police in tandem to round up the stubborn farmers and sent the more vocal opponents to the gulags of Siberia. The result was that by 1930, 55% of all Soviet farms were collectivized. The war against the Soviet peasants continued until 1937 when virtually all farms in the Soviet Union were owned by the government and ran as collectives. The results of Stalin’s pre-war economic programs were mixed at best.

Thousands of rebellious peasants and workers were sent to the gulags, never to be heard from again; but on the other hand, workers and peasants who met high production quotas, known as stakhanovites, were rewarded with better housing and pay. The Soviet system was supposed to replace the capitalist system of haves and have-nots, but instead Stalin created an economic system that operated through fear and produced an elite class from those individuals who cooperated. The Soviet Union was able to showcase its industrial production when it sent thousands of its men with hundreds of tanks, airplanes, and ships against Finland in the Winter War of 1939-40. Although the Soviets won the war, their industrial production was not much of a factor as many of their tanks stalled and guns jammed in the cold Finnish environment. The tough fight that the Finns put up against the Soviet juggernaut also made many around the world doubt the efficacy of Stalin’s system. Increases in agricultural production under Stalin’s Five Year plans were also negligible as on the eve of the German invasion in 1941 agricultural levels had not reached pre-Stalin levels.

Perhaps most tragically were the famines that occurred in 1932 and 1933. The famine affected the entire Soviet Union, but no country more than Ukraine where it became known by the name “the Holodomor.” Historians attribute Stalin’s desire to collectivize the farms of the Soviet Union as one of the primary factors that led to the famine, as productive land was often left fallow or rebellious farmers purposely failed to produce grain for the government. The Ukrainian people in particular suffered tremendously as up to eight million died of starvation or other related illnesses, which has led many countries to officially recognize the Holodomor as perhaps one of the worst acts of genocide in the twentieth century. While the Soviet Union was restructuring its economy in the years before World War II, the fascist and ultra-nationalist nations that would form the Axis powers were doing likewise.

Economic Fascism

Although fascism and communism are considered to be two diametrically opposed philosophies, they did share a few notable similarities. In practice, both philosophies followed totalitarian type governments and both practiced a certain level of economic socialism. The proper name of the Nazi Party, translated into English, is the National Socialist German Worker’s Party and there was a vocal and influential wing in the Nazi Party that was vehemently opposed to any collaboration with international finance. With that said, the origins of fascism are much more amorphous than that of communism. Nearly every communist party in existence before and after World War II traced their philosophical underpinnings to the writings of Karl Marx, while fascist political philosophy tended to be more localized and influenced by nationalism. Because of this, each of the major Axis powers developed its own unique economies before World War II, but those of Italy and Germany were the most developed.

In 1922, Benito Mussolini, leader of the National Fascist Party of Italy, led an army of his Blackshirts to take over the capital in Rome. Once the Fascist Party was safely ensconced in the capital, Mussolini, known by his followers as Il Duce (the leader), became the prime minister of Italy, which in turn became the first fascist nation-state in the world. But beyond the paramilitary processions and Mussolini’s colorful public appearances, few people understood the background of fascism and even fewer today understand the economic importance that fascist Italy had on the world. Yes, Italian fascism was driven primarily by ultra-nationalism: Mussolini extolled the virtues of earlier, great periods in Italian history such as imperial Rome or the Renaissance, but almost important were the economics ideas of a third position and corporatism.

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Many fascists were sympathetic to various socialist ideas, such as social safety nets and government investment in public works, but were strongly opposed to communism/Marxism as it was anti-nationalist. Mussolini and the National Fascist Party of Italy sought to address these economic issues by pursuing what they termed a “third economic position” that was neither capitalist nor communist. The Italian fascists believed that private property rights should be protected, but that international financiers’ influence on their country should be severely restricted. They also believed that the workers and peasants should be given a voice, although all other political parties were outlawed and known communists were persecuted. Mussolini envisioned a new economic system in order to make the third way a reality in Italy. The system that the Italian fascists devised became known as corporatism and although some of the core ideas were borrowed from earlier periods in history, it was essentially a new economic idea in the modern world. Under corporatism, the state holds supreme power and all economic activity is done for the benefit of the state. In order to make things move smoothly, the fascists divided all sectors of the economy into groups with representatives. In theory, the representatives all meet with each other to resolve any disputes and to plot the economy’s direction. No one sector would be able to exercise hegemony over another: for example, the miner’s union would not be able to continually shut down production, while conversely the mine owners would not be able to take advantage of the workers. Mussolini’s economic ideas were revolutionary at the time and viewed as a threat to many in international finance, especially after the National Socialists took power in Germany in 1932 and adopted many of the Italian dictator’s financial policies.

When Adolf Hitler and the National Socialist German Worker’s Party took the mantle of power in Germany, much of their inspiration was taken from Mussolini and the Italian fascists. Hitler heaped ample praise on Mussolini in his autobiography Mein Kampf and since the National Fascist Party already held power in Italy for ten years, the National Socialists were provided with an economic template by their southern cousins. The National Socialists followed a much more racial strain of fascism than the Italians, which was manifested most clearly in their militant anti-Semitism and disregard of all Slavic peoples, but Hitler took Germany on a third position economic path much like Mussolini did in Italy.

The economic remodeling of Germany began in earnest not long after the National Socialists came to power. As a student of architecture, Hitler desired to see new government buildings, offices, and sports stadiums built that would reflect his fascist vision of the future. The costly architectural program was headed by Albert Speer, who was as much a fanatical National Socialist as he was a brilliant architect. Radial roads were to be built to the capital city of Berlin and in 1934 the groundwork for the well-known German freeway system, known as the Autobahnen, was first laid. To populate Germany’s new freeways the government invested millions of Reichsmarks into building the essentially new industrial city of Wolfsburg in Lower Saxony. The goal was for the primary company in Wolfsburg, Volkswagen, to produce 1.5 million cars per year, which National Socialist economists argued would help to reduce unemployment and raise Germany’s Gross Domestic Product.

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In 1936, as saber rattling by the Axis powers of Germany, Italy, and Japan, as well as the Soviet Union became more pronounced, National Socialist economists, led by the head of the Luftwaffe, Hermann Göring, pressured Hitler to continue with the Third Position, but also to turn inwards and pursue an autarkic economic policy. Autarkic, or self-sufficient economic systems, have been fairly common throughout world history, but much less so in modern times. Hitler and Göring argued that since Nazi Germany could end up going to war at any time, then it had to create a system whereby it would not be vulnerable to supply-line problems or a lack of important resources. Hitler then initiated his own “Four Year Plan”, which was intended to create a blockade-free German economy where the National Socialist government would invest in much needed resources such as chemicals, fuel oil, rubber, aluminum, and iron-ore. The first step towards Nazi German economic autarky came on March 7, 1936 when German troops reoccupied the Rhine Valley, which it had lost in the Treaty of Versailles. Occupation of the Rhine gave the Germans access to iron-ore, which they would need to build their war machine and also it allowed them to trade iron to their fascist allies in Italy, Japan, Romania, Hungary, and Bulgaria. The results of Hitler’s Four Year Plan, like Stalin’s Five Year Plans, was mixed. Military output increased by 300%, which no doubt helped Germany take the lead in the early stages of World War II, but the national debt increased tremendously. Also, like Stalin’s Soviet Union, Hitler’s Germany paid special interest to the peasants and farmers.

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Where Stalin saw the peasants and farmers of the Soviet Union as a political threat, Hitler and the National Socialists viewed the peasant class as the backbone of their movement. Small, independent farmers made up one of the most loyal blocs of National Socialist supporters and in turn National Socialist propaganda often promoted the virtues of peasant culture and agrarian life. On the election trail the National Socialists campaigned for tariffs to promote German farm commodities and low internal taxes on farms. Once in power, the National Socialists followed through with their promises as very little food was imported into Germany from the outside and market and price controls were introduced to further protect the German peasants. The result was that although Germany suffered many material shortages during the war, it never suffered from any significant food shortages. But World War II was obviously not won as the result of who had the most food, many other important economic factors played significant roles concerning how the war was conducted and ultimately won by the Allies.

The Economic Factors of World War II

Clearly there were several economic factors that combined to influence events before World War II, which are directly attributed to the war’s root causes. The grim economic situation in Germany during the 1920s and throughout the world in the 1930s led to renewed forms of nationalism, economic isolationism, and ultimately the ascendancy of fascist and communist political parties throughout Europe. Fascism and communism appealed to many in the lower and middle classes who had the most to lose during the lean years after World War I and also the most to gain with the switch to a new political paradigm. The political, social, and economic militancy of fascism and communism meant that any government that followed either of those two ideologies was inherently opposed to any that did not, which eventually set Europe and the world on the road to World War II. Once World War II began, it quickly became apparent to anyone with even a rudimentary background in economics that the side with the greatest output and wealth would be the victor.

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When one considers some of the economic logistics before the war began, it would have been difficult to predict the winner. The Allied countries had much more territory and population within their borders than the Axis countries, which certainly were advantages: the territorial expanse per head was about three times more. On the other hand, the average income level of a European Allied citizen was less than $1500 per head, which was almost half of the Axis level of $2900. The same imbalance was also present in Asia between the Axis power of Japan and the Allied nation of China. Although China had much more territory and a larger population than Japan, its average income per person was only about half of that in Japan, which meant that in the early stages of the war the Japanese had a distinct economic and material advantage over the Chinese. In fact, one of the major reasons why the Axis powers had the early upper hand in World War II was because of their pre-war mobilization programs and industrial planning.

As stated above, Germany’s pre-war economy was stimulated by its pre-war military mobilization program. All facets of the economy were directed in some form toward remolding the Germany military into the most advanced fighting force on the face of the earth. Discoveries in rocket and jet technology were used to build devastating planes and missiles and new tanks and cannons were developed that helped thrust the Wehrmacht to some early easy victories. The other Axis powers of Italy, Japan, and the smaller central European countries followed suit to a certain extent, but none totally retooled their economy to war the way Germany did. On the other side, one would think that the Five Year Plans that Stalin imposed on the Soviet Union would have helped that country prepare better for the early stages of World War II, but in fact the opposite seems to have been true.

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When Germany invaded the Soviet Union in June 1941 as part of “Operation Barbarossa,” not only were the Soviet forces caught off guard tactically, but the attack also contributed to the near collapse of the Soviet economy that year. The Soviet Union and its economy held on for dear life and recovered by 1943, benefiting from its totalitarian government it was able to mobilize quickly. Between 1940 and 1942, the Soviet Union shifted 44% of its GNP from the civilian to the military sector, which combined with their numerical superiority and the immense vastness of Russia, contributed to the U.S.S.R’s ultimate victory over Germany and its Axis allies on the eastern front. The war on the eastern front truly became a war of production and industrial output, but as the war began in the west the scramble for gold played a central role.

Operation Fish and Lend-Lease

As war in Europe appeared imminent in the 1930s, the majority of Americans were more concerned with finding work and trying to survive the Great Depression. The ideas of neutrality, isolationism, and protectionism began to take hold in the United States, as many saw that the country’s problems would only increase if it were dragged into another European war. The sentiment created a number of politically odd bedfellows with noted left-wing pacifists joining together with fascist sympathizers to form the America First Committee, which was led by American hero and aviation pioneer Charles A. Lindbergh among others. Despite President Roosevelt’s opposition to isolationism, Congress reflected public opinion and passed a series of “Neutrality Acts” in 1935, 1936, and 1937 that restricted the American sales of weapons and munitions to belligerent nations. The acts allowed for one major provision: that the United States would be allowed to sell weapons and munitions to belligerent nations as long as they purchased them with cash, gold, or securities, not credit. This payment system became known as “cash-carry” and played an integral economic role in the first couple of years in the European theater of World War II. The Neutrality Act of 1939 affirmed the cash-carry system, while adding more regulations concerning who was allowed to sell weapons and what countries were allowed to buy American made products. Essentially, the 1939 act gave preference to Great Britain and France, which moved the United States slowly into the Allied camp against the Axis powers. Although the cash-carry system allowed Great Britain and the other remaining Allied nations to buy weapons, munitions, and other raw materials from the mineral rich United States, it did not provide the method by which the financial transactions would be made.

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As an island nation, Great Britain has enjoyed relative stability throughout its history as its navy has been able to stop any potential amphibious invasions by foreign invaders. The drawback to Britain’s prime defensive location is that it lacks the resources to support a large, growing population. Britain’s answer to this problem in the early modern period was to use its state of the art navy to rule the waves and create an empire that the sun never set on. Through its imperial possessions, the British were able to import food and precious commodities such as spices and gold to the mother country, which in turn helped Britain grow in terms of its raw population and overall wealth. When war broke out in Europe in 1939, the British had the will and manpower to match the Germans, but they lacked the weaponry and raw materials. For that they would turn to the United States under the cash-carry system.

When France was conquered by Germany in 1940, Prime Minister Winston Churchill and the British War Cabinet decided to transfer nearly all of their gold and securities to Canada and the United States so that they could more easily buy raw materials and munitions from the Americans under the cash-carry program. The proposal became known as “Operation Fish”, which proved to be the largest physical transfer of wealth the world has ever seen. The operation was a secret for most of the war and even today has not been studied very thoroughly by historians, but those who do know about it claim that it was integral in keeping the Allied war effort afloat in the early stages of World War II when Germany was winning battle after battle. Although Operation Fish was declared an official operation in 1940, it technically began in October 1939, when the British cruisers Emerald and Enterprise each carried about two million pounds in gold bullion from Britain to Halifax, Nova Scotia. The two cruisers were accompanied by two battleships, which established a template that was used throughout the war during Operation Fish: small convoys that quickly separate and later regroup if attacked by German U-boats in the north Atlantic. The British were the main functionaries of Operation Fish, other governments that had been conquered by the Axis powers also sent their gold across the Atlantic on British cruisers, which in one case resulted in a separate sub-mission known as “Operation Menace.”

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When the Axis armies moved into a conquered country one of the first things they did was to confiscate the gold and securities. Usually, the commodities were sent back to Berlin, Rome, or Tokyo, but the gold stores of Belgium and Poland were instead sent to the former French colony of French West Africa (current day Senegal). The Germans thought that since French West Africa was in the hands of the Axis collaborating regime of Vichy France, far from the frontlines in Europe or North Africa, the gold would be safe there; but the British believed that it was a potential weak spot that they could exploit. Members of the British high command, along with important officers in the exiled Free French army, contrived “Operation Menace” to invade French West Africa by sea thereby liberating the colony and the Belgian and Polish gold. The British and Free French believed that their superior sea power, combined with a lack of will to fight by the Vichy French soldiers, would mean a quick and easy victory. They also believed that the colonials would quickly come to their side. Once the plan was developed the attack on the colonial capital of Dakar took place in September 1940, but the resistance was much tougher than they expected and the Vichy French were able to move the gold further inland. Although the British were unable to retake the Belgian and Polish gold, Operation Fish continued giving the Allies much needed material support from North America. As the war progressed though, public opinion in the United States began to slowly move towards support of the Allies, although not to outright involvement.

Lend-Lease

The move in public opinion allowed the Congress and President Roosevelt to scrap the cash-carry program in favor of one that was much more flexible – Lend-Lease. When it was passed on March 11, 1941, the Lend-Lease Act gave great power to the president to decide the terms of what was considered allowable payment for American resources and munitions. The result was that instead of having to pay at the point of exchange, the British were leased the materials on credit. The inception of the Lend-Lease Act was much more than just a long-term economic deal between Great Britain and the United States, it also represented the beginning America’s mobilization process.

11 Mar 1941, Washington, DC, USA --- Washington, DC.: President Franklin D. Roosevelt is shown signing the historic Lend-Lease Bill at the White House in Washington, DC. He put it into immediate effect by ordering prompt release of a large quantity of Army and Navy materials of war to Britain and Greece from supplies already on hand. To supplement these, he announced he will ask Congress for $7,000,000,000 more to carry on the "Aid To Democracies" program. --- Image by © Bettmann/CORBIS

The cash-carry system was one where private companies dealt directly with the British government to sell their goods, but under Lend-Lease the government played the primary role. Purchasing was done directly by the military and competition for contracts by civilian companies was severely limited. Britain, the Soviet Union, and other Allied nations made requests and payments directly to the U.S. military: civilian contractors were kept out of the most important decision making processes within the program. Essentially, the program was intended to equally disburse the economics of the war burden among the Allied nations.

If each country devotes roughly the same fraction of its national production to the war, then the financial burden of war is distributed equally among the United Nations in accordance with their ability to pay. And although the nations richest in resources are able to make larger contributions, the claim of war against each is relatively the same. Such a distribution of the financial costs of war means that no nation will grow rich from the war effort of its allies. The money costs of the war will fall according to the rule of equality in sacrifice, as in effort. (Fifth Report to the Congress on Lend-Lease Operations, June 11, 1942)

When the Lend-Lease program finally came to an end on August 21, 1945, it was responsible to sending $50.6 billion in aid to Great Britain and the Soviet Union. The Lend-Lease program was one of the major economic factors that helped the Allies overcome the early advances of the Axis, but it was the United States entry into the war the ultimately sealed the coffin of Germany and its allies.

The End of the War

Once the United States officially entered the war on the Allies’ side after the December 7, 1941 bombing of Pearl Harbor, it quickly became a losing proposition for the Axis powers. After the initial victories by the Axis powers stalled and the war became one of attrition, the superior GDP and population numbers of the Allies became the major factor. The Allies were able to better absorb the costs of their mistakes, replace battlefield losses, and ultimately use their quantitative superiority against the Axis. The British learned to effectively ration their food and fuel, while the United States simply out produced the enemy. For instance, after the United States entered the war, it produced nearly eleven million carbine rifles compared to just eight and half for all of the Axis powers combined and production of those American rifles was never threatened by air raids the way they were in Germany and Japan. Like the Lend-Lease program, the Allies shared their economic strengths in order to overcome their weaknesses. The Americans shared their capital-intensive, high-technology resources with Britain and the Soviet Union, while the latter countries used their territory as forward bases and bore the brunt of the battlefield losses. In that way the Allied war effort can be characterized as an economically integrated system that proved to be more effective than that of the Axis powers.

The Economic Aftermath of World War II

Once the smoke of World War II cleared, the world was a completely different place. It is estimated that fifteen million soldiers and thirty five million civilians died on both sides of the war. The Axis countries were devastated economically and politically and were placed under Allied military control for a number of years. Despite being on the winning side, Great Britain suffered economic losses as high as any of the Axis powers. It incurred a $20 billion debt, which led directly to its relinquishing of its long held empire. India was given independence and partitioned between Muslim (Pakistan) and Hindu communities in 1947. Britain continued to play an important role in NATO throughout the Cold War, but its days as an imperial power were over. A new world economic and political order emerged after World War II.

The United States emerged from World War II better off economically and politically. The war helped propel the country through the Great Depression and the United States quickly became the head of the Western-anti-communist bloc of nations, led by NATO, but also various other alliances in Asia and Latin America. The United States helped rebuild western Europe through the Marshal Plan, which distributed $13.5 billion between 1948-51 to the countries hardest hit by the war. The Bretton Woods monetary system, which was a modified gold-standard, also began in the United States and it was the Americans that both led and ultimately dismantled that system.

Europe after WWII

On the other side, the Soviet Union gained political and economic ascendancy in eastern Europe as a result of World War II. Puppet communist regimes were installed in Poland, Czechoslovakia, Hungary, Romania, and East Germany, which combined to form the Warsaw Pact, the counterpoint of the NATO alliance. The satellite communist regimes of eastern Europe followed Stalinist communism faithfully by abolishing property rights and instilling a climate of fear through intricate networks of secret police. Stalin tried to answer the American’s Marshall Plan by creating a communist bloc economic community known as the Council for Mutual Economic Assistance (COMECON), but the organization proved to be little more than another tool by which the Soviets exploited their weaker neighbors and spread the influence of the their growing communist empire.

Among some of the more interesting aspects of post-World War II economics was the role that the two primary Axis powers – Germany and Japan – took in world finance. After the war, Germany was partitioned by the Allies into communist East Germany and democratic-capitalist West Germany. East Germany became known for its repressive political policies and its near autarkic economy, while West Germany became a beacon for progressive thought and capitalist endeavors. Within two decades after the war, West Germany was not only one of the leading NATO powers, but it was became one of the premier banking and finance centers of the world and its people enjoyed one of the highest standards of living in Europe. Japan also experienced phenomenal economic growth after the war and continues to be one of the most important economic players in the world. World War II truly changed the economics of the world in the first couple of decades after the war, but more recently a final economic footnote to World War II was added to many history books.

Most people approach the history of World Wars I and II from a political perspective, which is important, but one can learn even more when an economic methodology is used to understand the wars. Economics played vital roles concerning how both wars began and also how they were prosecuted and won. No battlefield strategy, by any army, would be applicable if the resources were not available to carry it out and most battles were fought for the acquisition of more land, which is just another economic consideration. Truly, if one wants to more clearly understand World Wars I and II then a thorough economic history of the period from 1914-1950 is required.