IN 1914 WAR CAME to Europe through the measured minuet of mobilizing armies. It was a slow dance. When discretion suggested to some countries to start early to get their forces ready, prudence dictated to others that they must not be left behind. Many nations had sought safety in numbers as international tensions tightened. These alliances only multiplied the occasions for triggering hostilities. Germany and the Austro-Hungarian Empire, later joined by the Ottoman Empire, faced Great Britain, Russia, and France. The wealth that capitalism had generated in the preceding half century enabled all these prospective belligerents to build big armies and trade in their wooden naval vessels for steel-plated battleships. The military scoured industrial plants for promising improvements. Corporations like England’s Vickers poured its profits into the development of armament, as did its competitor Krupp, the German manufacturer of iron and steel. The heady feeling that came from their worldwide resources created feelings of invincibility among Europe’s leaders.
The race for industrial superiority that had fueled Germany’s impressive development in the nineteenth century entered a second lap in the competition for colonies with Great Britain at the end of the nineteenth century. Both stoked the fires of national militancy. The jingoism that had justified the imperial ambitions of each country soon justified an arms race. Propaganda, a word that got a new meaning in this period, spread aggressive messages about national superiority. The eagerness with which the combatants in World War I cultivated the means and motives for going to war still astounds. It is hard not to see its outbreak in 1914 as overdetermined, even though there weren’t really any causes for it, if you except widespread imprudence and massive miscalculations.
Contemporaries’ skill at solving international disputes did not match their demonstrated capacity to create wealth. The expectation that any war would be a short one like the Franco-Prussian War of 1870–1871 contributed to the rampant bellicosity. Few bothered to remember the bloodbath of the American Civil War in 1861–1865.
Europe had not seen a total war since the sixteenth century. Perhaps Americans’ vivid memories of their civil war explains why the United States didn’t enter the European conflict until 1917, after it had been raging for three years. By that time everyone had been disabused of the notion that the fighting wouldn’t last long. Instead grinding, stupid, indefensible trench warfare took on a kind of permanence along what came to be known as the western front. Just how bad things were going to be became apparent in the first three months of the war, when a million and a half soldiers died in battle.
Such casualties only increased the two sides’ determination to prevail. Making sense of such horrendous losses to the public meant ratcheting up descriptions of the villainy of one’s enemy. At least sixty-four million Europeans were mobilized in addition to three million outside Europe. Russia alone had an army of twelve million. Of the total sixty-four million soldiers and sailors, eight and one-half million died, twenty-one million were wounded, and another seven million were declared missing in action. Total war meant that industrial production at home went at full tilt. Many women joined the work force, especially on the assembly lines turning out munitions. (The Germans fired a million shells on the French fortress of Verdun in one day.)
Every participating country, except the United States and Japan, survived this war of attrition tired, disillusioned, and deeply in debt. These statistics pale only when they are compared with the casualties of World War II, which broke out twenty-one years later. The grimmest reaper of all remained disease. The great flu epidemic of 1918 and 1919 killed twenty million men, women, and children, worldwide. As in the Thirty Years’ War of the sixteenth century, civilians suffered even more than did the combatants.
The most spectacular event in the war came before its end when a sequence of revolutions dispatched the Russian monarchy and installed the world’s first Communist regime. The Union of Soviet Socialist Republics startled the world with its rejection of both the monarchy and its parliamentary successor. During the next seventy-two years of its existence, the USSR repeatedly affronted the Western world with its flaunting of its indifference to property rights and free enterprise. Central planners began immediately running the Soviet economy. Any domestic resistance to Soviet initiatives met severe repression. The USSR signaled its intention to break with conventional political forms when it released confidential czarist state papers that embarrassed European diplomats. Few could doubt that a new era had dawned.
Karl Marx had imagined a country with an advanced economy like Great Britain or Germany becoming Communist, not a backward one like Russia that needed to catch up even to maintain its autonomy. After withdrawing from the war, Soviet leaders devoted Russia’s resources and man and womanpower to modernizing the country, an effort that ranged from promoting women’s rights and literacy to imposing new standards in hygiene. Collective farms took over from private farming, despite tenacious resistance from the peasantry. Soviet leadership announced a five-year plan that put before the world the agenda of a command economy. It signaled its disdain for conventions like the gold standard and withdrew as much as possible from international trade. A deep suspicion of communism took root in the homelands of capitalism as the gravity of the Soviet challenge sank in.
After such a bloodbath as World War I, wisdom was in short supply. Europeans and Americans proved more adept at producing heavy artillery, chlorine gas, machine guns, submarines, tanks, war planes, and artificial limbs than at getting along with their neighbors. Wartime propaganda had depicted both sides as ravenous monsters. Victory gave the Allies the smug conviction that they had been correct. Their ally Russia, having dropped out of the war, lost any hold on the victor’s moral triumph. Revenge animated the French and English when they sat down at the various peace tables to work on the complex problems left at the end of hostilities. As textbooks frequently note, the drafters of the treaties redrew the map of Europe. Knowing that they would be creating new nations out of old empires, the Library of Congress assembled a superb collection of maps and placed them at the disposal of delegates to the peace talks in a chic Paris hotel. No one ever visited the collection. The diplomats preferred working on scraps of paper.
Global Reactions to World War I
The war spelled the end to the Austro-Hungarian and Ottoman empires as well as the German monarchy. President Woodrow Wilson, who represented the United States at the peace negotiations, thrilled suppressed people around the world with his stirring call for self-determination for all peoples. To fight a world war, the European nations had mobilized all their resources, which included their vast colonial holdings. Participation made the colonial people themselves aware of a larger world in which they might take an independent place. Though in retrospect, Wilson seems to have been thinking only of Europe, his summons to build nations around the ethnic identities of the people made him a hero to nationalists in Egypt, China, India, and French Indochina. They too read his speeches. A young Vietnamese named Ho Chi Minh actually scraped together enough money to go to Paris in the vain hope of talking to Wilson.
Having entered into secret agreements about how to split up the territory of the Middle East, the leaders of France, the Netherlands, and Britain clearly thought imperialism had a second life. Since they had won, they were not to be deterred in enjoying the full fruits of war. The colonial powers brutally suppressed any moves toward independence. They now had access to German holdings in Africa too. After the war, the countries of Asia, the Middle East, and Latin America were even more tightly integrated into the Europe-centered commercial world. The moment of independence from European domination had not arrived, but the crushing disappointment that nationalists throughout Asia and the Middle East experienced when Wilson acquiesced to the punitive terms of the peace treaties laid the foundation for enduring anti-American feelings. Remembering is selective. Those wronged hold on to their memories longer than do their suppressors.
There was one brilliant exception to this dismal pattern of squelching national self-determination. Mustafa Kemal Atatürk turned the center of the Ottoman Empire into the secular nation of Turkey. Atatürk and his “young Turks,” as his followers were known, abolished the Muslim caliphate and embarked on a crash course in modernization. Atatürk appealed to the young to participate in raising a republic. He turned out to be a brilliant nation builder with a legacy very much alive today, In Atatürk’s Turkey even women could become judges. With a toehold on the European continent, Turkey could be considered Europe’s single Muslim country.
At war’s end, Germany was a devastated country, on the verge of starvation. Kaiser Wilhelm II had fled to the Netherlands. The successor government, the Weimar Republic, was established in early 1919, if “established” is the right word. It had to struggle for stability against paramilitary socialist groups and the defeated military leaders who longed for the return of the monarchy. Perhaps what happened is best captured in the Theodor Plivier book title The King Goes, the Generals Remain. The Versailles Peace Treaty very much complicated Germany’s recovery by taking away 13 percent of its territory and assigning 10 percent of its population to other countries. The industrially rich Alsace-Lorraine was given back to France, and the Allies occupied the Rhineland for fifteen years. Behind these simple statements lies the reality of hundreds of thousands of lives turned upside down and bitter memories sown that were not likely to be forgotten.
Crushingly high reparation payments were exacted from Germany as well. This was payback from the French who had been forced to pay reparations to Germany after the Franco-Prussian War thirty-eight years earlier. The victorious leaders set up the League of Nations in hopes of settling future disputes openly with guarantees of collective security to replace the treaty system that had led to war in 1914. The U.S. Congress declined to join the League, but it did participate in a number of conferences that the League sponsored. More significant, it played a major role in the postwar financial arrangements as the principal creditor nation. It actually contributed to the financial turmoil by demanding the repayment of the large debts that France and Great Britain had run up to pay the staggering costs of waging war.
Signals in the 1920s of impending economic trouble were decidedly mixed. No one predicted the major downturn that ensued. There had been the challenge of repairing the great losses of the war, a project undertaken by people utterly exhausted by the war itself. Still, the former belligerents had recovered their agricultural and industrial capacities within five or six years. What lasted longer were the distortions that the war caused. Feeding sixty-seven million men under arms had greatly challenged the world’s farmers. They met the wartime demands, heavily cropping and bringing new land into cultivation. The cessation of hostilities left these farmers with gluts of foodstuffs and raw materials. For many countries, especially in Eastern Europe, agriculture remained their economic backbone. When an agricultural depression ensued, whole economies teetered on the edge of collapse.
The new nations of Hungary, Austria, Bulgaria, Romania, Yugoslavia, and Czechoslovakia made recovery of international trade more difficult by abandoning the free trade that those in the Danube basin had enjoyed as members of the Austro-Hungarian Empire. Seeking the impossible goal of economic self-sufficiency, these new nations raised high tariffs against one another’s imports. Even transportation from one country to another was made difficult.1 And then there were the money problems. Reparations, war debts, and paper money substitutes for gold triggered inflation almost everywhere. Germany suffered from hyperinflation. In May 1922 it took 275 marks to buy one U.S. dollar; by November it required 7,000. Those who lived off pensions and returns from bonds, rents, or savings were almost wiped out, but creditors and German companies like Thyssen and Stinnes were able to pay off their debts with cheap money.2 The costliest legacy of the war was the popular preference for revenge over help in nursing a wounded world back to normal. This made the scarcity of enlightened leadership conspicuous.
The so-called Roaring Twenties typically roared for people coming of age in the 1920s. Their older brothers and sisters were more likely to be dispirited, if not cynical and wounded. People in the United States suffered many fewer casualties from the country’s brief twenty months in the conflict. It soon became evident that the war had killed more than people; it had finished off many traditional values, especially those affecting the relations of men and women. Women’s bobbed hair and short skirts announced a freer social spirit. Fertility had been declining throughout the Western world since the 1870s, with families in the United States half the size—fewer than four children—at the end of the nineteenth century as at its beginning.3 Such a shift affected women more than men. If one thinks of women’s liberation as having a long gestation period, this decrease in fertility can stand as a beginning. More timesaving appliances, the proliferation of white-collar jobs, and the experience of wartime employment outside the home also need to be included as liberating forces. By 1925 most economies were moving into prosperous times. And with them came a social style in full revolt against the straitlaced mores of the Victorian age.
The famous logo for the phonograph, a popular component of the new cultural style, featured a dog listening to “his master’s voice.” More likely the phonographs blared out the jazz music coming from the American black community. That community too was on the move, sending its young people up north. Movies with sound tracks replaced the silent films. The United States got its first commercial radio station in 1920. Within a decade more than half the American homes boasted a radio.4 Even in Germany and Great Britain, almost three million families had radios by 1929. Rural isolation was vanishing. In the midst of this rather raucous public space of the 1920s, the New York Stock Exchange began its “great bull market.” As stock prices rose, moneyed people began to pull out of their European investments and buy American securities. In typical bubble fashion, prices went up, up, up, drawing in more eager investors with every record set.
The First World War jumbled things up in the Pacific as well as in the rest of the world. Japan had won inclusion in the group of leading European imperialist powers that divvied up Africa in the Berlin Conference of 1885.5 Its decision to go to war for dominance in East Asia fitted in well with the spirit of the times. Although aligned with the Allied powers, Japan did little fighting and a lot of producing. Its economy benefited from Allied orders for munitions and other war materials. The removal of Western competition in both its domestic and mainland Asian markets could also be considered another dividend from the war.
The inevitable slump after World War I extended through the 1920s in Japan. Early in its push for modernization, the government had favored large firms that could be depended upon for capital and conformity to national goals. During the 1920s every Japanese industry formed cartels to ward off undue competition in difficult times. More giant firms emerged like Nissan in the 1930s with its ambitious plans to turn out fifteen thousand automobiles a year. Various holding companies moved into mining, chemicals, fisheries, marine transport, and civil engineering. When Nissan produced its first passenger cars, the company’s motto was “The Rising Sun as the flag and the Datsun as the car of choice.”6
In Europe, the aftereffects of the war were as much emotional and intellectual as material. Being on the winning side didn’t save Italy from a parlous postwar situation that opened up Italians to radical political ideas. A socialist journalist named Benito Mussolini built a career and a new party by advertising the defects in the West’s liberal system of electoral politics and self-correcting markets. The Fascist movement Mussolini launched carried him to power in 1922. Having moved sharply to the right, he worked quickly to silence opposition, steamroller Parliament, and suppress workers’ unions along with any other kind of independent political activity. Mussolini organized employers and workers into confederations whose relations the government mediated. He used tariffs, quotas, and subsidies to shield the Italian economy as much as possible from world trade. What fascism offered was a lively nationalism to take the place of personal satisfactions. It knitted the country into a giant corporation in which individuals yielded to the good of the whole, as defined by Il Duce.
By 1935 Mussolini was ready to show what his Italy could do outside its borders. He invaded Ethiopia, which had successfully repelled the Italians forty years earlier. For this act of sheer aggression, the League of Nations imposed sanctions, but its member countries proved unwilling to sustain any sacrifice, especially a loss of oil sales to Italy. Mussolini called the League’s bluff, and it fell along with Ethiopia. A virile masculinity, suggestive of violence, came to represent strength in contrast with the weakness of the rest of Europe with its faith in civil liberties and individual decision making. Mussolini’s corporatism and economic self-sufficiency, laced by investments in a military buildup, brought Italy out of the depression looming on the American and European horizon.
A Spreading World Depression
Two slow, inexorable movements help explain the increasing severity of economic downturns, exemplified by the depression that began in the early 1930s. Men and women—usually young—moved from rural jobs in farming and services to the urban industrial centers, and national firms became more and more connected to a world market. Both developments signaled progress, but they also exposed more and more people and firms to disruptions from faraway places. Nations had less and less control over their economies. Another feature of capitalism kicked in to make these downturns painful in their suddenness. This can be traced directly to the optimism that is integral to free enterprise. Participants have to imagine attractive earnings to keep investing their time and resources in future outcomes. One way to keep hope alive is to ignore distant clouds and focus on the sun that is still shining. It’s hard to balance optimism with caution. Underneath the many particularities of the stalled years of the 1930s were the general trends of greater global integration and an insistent go-ahead spirit.
The big question about the Great Depression is not why it occurred—such downward slides in economic activity had become regular features of the market economy—but rather why the normal rebound didn’t take place. Why, as one contemporary commented, did the world economy pass from a cycle to a crisis to a chute as businesses went bust and some national unemployment rates rose as high as 30 percent. Unsold inventories stacked up in warehouses and barns; the price of cotton, wheat, sugar, wool, coffee, silk, rubber, butter, rice, tobacco, and corn stagnated from one harvest to the next. The consequent discouragement, fear, and pessimism encouraged saving instead of spending, one of the perversities that make bad times worse. Despite all the efforts to remedy these adverse conditions, the recoveries that did occur didn’t last. One day people would agree with relief that things had bottomed out only to watch sales and prices plunge downward anew. To explain all this, there was a stunning variety of opinions from monetarists, market stabilizers, interventionists, planners, corporatists, and advocates of laissez-faire, the philosophy of letting things alone.7
Today, almost eighty years after the Great Depression, there is still no consensus among experts about its causes. Most people agree on the relevant factors: gluts of farm commodities and raw materials, insufficient purchasing power for the amount of factory goods being produced, an unstable financial system, high tariffs, the one, two punch of a speculative stock mania followed by near-zero investments, and, of course, the powerful aftershocks from the First World War. And yet with all these dangers, few foresaw that their economies were going to swoon. In fact international trade and industrial production rose almost 20 percent higher in 1929 than they had been in 1925.
One thing that the experts do agree upon is that the precipitous drop in American stock prices on Black Tuesday, October 24, 1929, didn’t trigger the Depression, largely because the causes had kicked in earlier and been ignored in the general euphoria of a rising stock market. The crash led to a lot of financial distress and heartbreak as the index of stock market prices skittered from a high of 381 to 199 in three weeks on its way down to 79 two years later. Of more immediate influence on the Depression was the loss of confidence in banks—big-city banks, country town banks, central banks. Banks had proved very convenient in serving the needs of savers and borrowers. They held people’s money safely, paid interest, and gave them instant access to it. They lent money for new ventures, usually more money than they had on hand at any given time. This made banks peculiarly vulnerable to a run of depositors wanting their money at the same time that they feared for the safety of their savings. Such runs were exactly what happened throughout the capitalist world, especially in the United States when nine thousand banks closed their doors between 1930 and 1933. In Germany the entire banking system collapsed.
Progress had seemed unstoppable until the Great Depression. It was particularly hard on the United States because its economy depended more upon consumers, whose reactions were harder to read, than it had earlier. The stock market crash of 1929 produced headlines about investors jumping to their deaths from the tops of high buildings, but the people who really hurt from the ensuing depression were already at the bottom—or near there. Layoffs that had been seasonable now became permanent, as people lost confidence and stopped buying. Savings and retirement plans disappeared into foreclosures, evictions, and bankruptcies. Whole families found themselves unemployed. The charitable network of ethnic mutual aid societies and church welfare was strained to the breaking point. Unlike European countries, the United States had relied upon private relief when the economy turned sour. The Great Depression revealed its inadequacy.
Single men tramped the country, looking for work, often “riding the rails” from city to city where “hobo towns” formed on their fringes.8 These were often called Hoovervilles in reference to President Herbert Hoover, who was blamed for letting the good times slip away on his watch. Manufacturers were thrust into a catch-22. As they lowered prices to compete for new customers, they suppressed the wages of their workers. With little to spend outside of bare necessities, these men and women became a drag on the consumer side of the economic equation. The ignored plight of workers during these years fostered the formation of brigades of capitalist critics who marched under the banners of socialism, unionism, regulation, economic justice, or nostalgic calls to return to the farm.
The world economy was very much a ship adrift without a captain. Great Britain, the capitalist trailblazer since the eighteenth century, had long exerted leadership, especially in monetary exchanges and international bank loans. Other national currencies were measured against the British pound sterling, in part because the Bank of England gave a fixed amount of gold for the pound. By 1931 Britain could no longer sustain this commitment and went off the gold standard, as did the United States. Twenty-six other countries joined them a year later, meaning that they no longer backed their currencies by gold. A crazy quilt of currencies now appeared, the free-floating British pound and the American dollar among all the wildly fluctuating others. The gold standard, which most capitalist countries had adopted in the 1880s, no longer existed to facilitate the settling of international accounts. All this might not have hurt so much had most economies not depended upon international trade to keep their economies humming. A depression of epic proportions had arrived.
The United States had the most powerful economy; its industrial production represented more than 40 percent of the world’s output and twice as much as that of Germany and Great Britain combined.9 It could have stepped in as the new guardian of stability but didn’t, preferring to act as the Lone Ranger. It protected its domestic markets by raising tariffs to an all-time high and refused to use its wealth to steady currency fluctuations. High American tariffs made it hard for France, Britain, and Germany to pay their war debts because they couldn’t sell their goods. At the same time, American banks wouldn’t lend more to these countries either.
For many nations, including Chile, Mexico, Spain, India, Brazil, and Japan, the collapse of their export markets proved to be the proverbial “blessing in disguise.” But not before their purchasing power had fallen more than 50 percent below the levels of 1929. With no foreign exchange reserves to pay for manufactured goods, these countries began making the things that they had earlier imported. In this widespread “import substitution,” dozens of small industrial enterprises sprang up. India expanded its output of cement and other processed goods. The Brazilian government bought and destroyed coffee to relieve the glut it was suffering. More important, the government poured money into industry. By the end of the decade Brazilian manufacturers were making 90 percent of the country’s cloth, clothing, leather goods, and furniture. Japan became nearly self-sufficient in textiles, railroad equipment, and electrical machinery, all of which it had previously paid for with profits from silk exports.10
On top of all these structural and transient problems, most political leaders, including socialists, held to their belief in balanced budgets with a tenacity that matched their conviction that the earth circled the sun. Extending unemployment benefits might actually have stimulated the economy and certainly would have helped those out of work, but instead governments cut benefits to balance their budgets. Jobs were so scarce that many families moved back to the country, even though farmers were laden down with redundant wheat, corn, and cotton harvests. In statements that bring knowing smiles to our lips, lots of experts expressed the fear that the age of invention and expansion had come to an end. Some critics hailed the Depression as a reproof to a materialistic age. It posed, they said, an opportunity to return to the simple way of life that had prevailed before the invention of the steam engine.
The severity, universality, and duration of the Great Depression disproved the contention that the economy had its own means for righting itself. The unwillingness of the United States to demonstrate the enlightened self-interest of a leader willing to take a few hits for the benefit of long-term recovery disappointed. The Depression also exposed the need for mechanisms to stabilize currencies, credit, and the flow of goods. The major players—Great Britain, France, Belgium, the Netherlands, Sweden, the United States, and for a while Germany and Italy—began to recognize the importance of political action to improve the market mechanisms in which their economies were now tightly entangled. They signaled this new awareness with studies, commissions, and conferences, many of them, like the World Economic Congress, ending without concrete results. The wish to cooperate existed, but it wasn’t strong enough to overcome the dominance of national priorities.
Theories about the workings of the economy enter the history of capitalism by way of policy makers. They offer analyses that can be used to predict outcomes, which then become critical in deciding how to achieve desired effects. Policy makers are very much like stage managers. They don’t write the plays, make the props, or act the parts, but like stage managers, they can determine how smoothly the show goes on. Waiting in the wings as the Depression reached tragic dimensions was a novel economic script. Reexamining the fundamentals of economic reasoning, Britain’s John Maynard Keynes recommended that the governments stop balancing budgets and begin spending money, going into debt, if necessary, to “prime the pump” of their economies.
Not only did Keynes challenge the assumption that national budgets needed to be balanced, but he also took aim at the postulate of economics that said that buying and spending in the market would maintain a positive equilibrium with optimal employment. Not so, Keynes explained. A new equilibrium had not taken place as predicted when unemployment drove down wages. Manufacturers had not been lured to start producing again. Nor would they invest, Keynes insisted, because if times were sufficiently bad, people had a “liquidity preference.” That is, they preferred to save, so money wasn’t invested, goods and services weren’t produced, and laborers were thrown out of work. This of course is exactly what was happening in the 1930s when he was writing his grand theoretical tome.11 To counter this development, Keynes recommended that government provide jobs through new programs. This would make good the deficit in private employment and help restore confidence in the economy, the most precious commodity of all.
The New Deal in the United States started to follow this prescription. Welfare legislation had been much more common in Europe than in the United States with its traditional partiality to individual liberty and self-help. In his famous “first hundred days,” President Franklin Delano Roosevelt shepherded through Congress laws giving direct relief to the jobless. Next came funding for work projects, later incorporated into the Works Progress Administration and the Public Works Administration, which built everything from aircraft carriers to schools, bridges, and roads. Millions entered the government’s payroll, constructing post offices, public art, and conservation projects.
The major effort to coordinate industrial policies, the National Recovery Act, ran afoul of one of the strongest and most distinctive American values, the commitment to freedom over social planning, to individual rights over the general welfare. Two kosher butchers had been fined and jailed for so-called destructive price cutting. Fighting this verdict all the way to the Supreme Court, the Schechter brothers won a unanimous decision that the industrial code embedded in the NRA legislation was unconstitutional. Blocked by this decision, Roosevelt tried to increase the size of the Supreme Court, enabling him to make congenial appointments. Americans didn’t like tampering with their Supreme Court either, and he backed down. After the Court declared parts of the National Recovery Act unconstitutional, Congress extracted the sections dealing with labor and put them in the Wagner Labor Act of 1937, which greatly enhanced opportunities for successful union negotiations with employers. Quickly unionized nonagricultural labor accounted for 36 percent of the work force, its highest level ever.
Probably the most successful New Deal program was the Civilian Conservation Corps, which gave jobs for six months to two years to young men between the ages of eighteen and twenty-three who promised to give most of their pay to their families. Working principally on federal land, the CCC helped the Bureau of Reclamation fight soil erosion with seeding and terracing, the National Park Service build campgrounds and picnic sites, and the U.S. Forest Service protect timber from fire, disease, and insects. The government had to borrow to fund these programs, thus upsetting the goal of balancing the federal budget, but the classical economists’ conviction that the market would balance itself no longer convinced the public, which rewarded Roosevelt with four elected terms as president. Still, as is frequently the case with new ideas, leaders hedged their bets. The old budget-balancing orthodoxy reasserted itself. After his landslide victory in 1936, Roosevelt raised taxes and cut spending, and as Keynes had predicted, unemployment went up again. An international crisis then took over. When war broke out in Europe, the United States girded its loins to help Great Britain. Government spending reached levels high enough to bring the nation out of the Depression.12
If the causes of the Great Depression elude experts, it’s because there are too many of them interacting in hidden ways. This underlines the point that in a free market economy, though some people have much more power than others, no one is in charge. All the material aspects of the economy—available capital, plant capacity, fiscal instruments, transportation, and communication systems—rely on personal and institutional choices. More perplexing, not only do the individuals making decisions have different cultural values, but their attitudes will vary according to whether they were old enough to have lived through the last depression at the end of the nineteenth century or have just entered the world of commerce. The economy is not so impenetrable that governments can’t pass measures to prevent a rerun of the latest downturn, but an unforeseen development is usually in the offing.
Lingering Grievances from World War I
As it sadly turned out, the worst consequence of the First World War was not economic but political. The day after the inauguration of Roosevelt in March 1933, Adolf Hitler received full power to govern Germany by decree. The experiences of the 1930s tarnished the reputation of liberal democracies with their representative legislatures and civil rights, free markets and personal political freedoms. Hitler’s success, as did Mussolini’s, fed on the discontent that accompanied the tanking economies of the postwar period. Ambitious in his plans for Germany, which after all had been the second-largest economy before World War I, Hitler spent massively to provide jobs as he rearmed Germany in defiance of the Versailles Peace Treaty. Like Mussolini, whom he admired, he used the minions in his Nazi Party to suppress unions and all independent political institutions like newspapers. Hitler too had uniformed followers whose enthusiasm he sustained with military parades and giant convocations, where he harangued them for hours on end. He stoked his countrymen’s rage at their treatment after the First World War and played on their anti-Semitic prejudices with a horrendous campaign to rid the world of Jews and their culture.
Hitler had unilaterally abrogated many of the terms of the treaty that ended World War I. He seized Austria and Czechoslovakia, but it was not until he invaded Poland in September 1939 that Britain and France woke up to the threat that he posed and declared war. They now faced Hitler’s strategy of lightning war, which exploited all of the technologies of mobility—airplanes, tanks, and motorized infantry. He succeeded famously in the first year, polishing off Poland in concert with his new ally the Soviet Union, and then invaded Denmark, Norway, Belgium, the Netherlands, and France. By the end of 1940 Britain was confronting Germany alone, saved from invasion by the Royal Air Force working with the new radar and antiaircraft defenses. After Germany forced the evacuation of all English forces from the Continent in June 1940, most of Europe was his. The British turned to defending the Suez Canal and India while the United States began tooling up to send them material support. This decision gave Britain something of a breather.
Fresh from victory over France, Germany invaded Russia a year later. Hitler’s expectation of another quick victory got ground down by the unexpected ferocity of the Russian defenders of their homeland. They successfully blunted the German offensive and threw the invaders on the defensive. Both Russia and Germany suffered horrific losses. While Russia didn’t definitively defeat Germany, it delivered the crippling blow that tilted the war in the Allies’ favor. Britain and the United States pounded German factories and the civilian population from the air, cutting their productivity and diverting precious German resources to defending against these attacks. With improved navigational aids the Royal Air Force could switch to bombing at night. After a steady stream of aviation improvements, the United States turned out the first intercontinental bomber, the Boeing B-29, nicknamed the Superfortress. By the summer of 1944, when the Allies were ready to take the war back to France, the Americans had mobilized all the D-day units for a fully mechanized invasion, the largest in world history.13
When Japan entered World War II, as an ally of Hitler’s Germany and Mussolini’s Italy, it had already been pursuing for almost a decade an aggressive campaign under the rubric of the Greater East Asia Co-Prosperity Sphere. The “Co” in the title was illusory; this was a program to bring its neighbors under the control of imperial Japan. One wag turned Rudyard Kipling’s famous line about the white man’s burden upside down when he said that Japan would now relieve the white man of his burden. Japanese opinion makers cultivated the idea that as descendants of the sun goddess the Japanese had the moral purity and cultural superiority to lead Asia out of the quagmire Western powers had made. While some Japanese intellectuals responded to the promise of replacing Western imperialists with a pan-Asian community of nations, the government’s goals were more concrete and exploitative, focusing upon garnering the raw materials that Japan lacked and monopolizing Asian markets.
The brutality of the Japanese Army squelched any possibility for genuine cooperation. After achieving a protectorate of Manchuria in 1933, Japan moved into Inner Mongolia and China proper. There Japanese forces met those of Chiang Kai-shek, who, despite cooperation from the country’s Communists and help from the United States, failed to halt their advance. While pacifying China, Japan moved into Indochina and points west and south. American opposition to these acts took the form of an embargo of scrap steel and oil, providing a motive for Japan’s attack on Pearl Harbor four years later. Western snubs, like its unwillingness to include a racial equality clause in the League of Nations Covenant and the immigration exclusions in the United States and Australia, kept alive the anger that fueled much of Japan’s expansion. The outbreak of full-scale war had the effect of stifling a nascent domestic opposition movement against the Japanese military’s dominance in foreign policy.14
The attack on America’s Pacific fleet at Pearl Harbor at the end of 1941 was enormously successful, destroying eight battleships and damaging seven others. The Japanese followed up this feat with devastating strikes on the Philippines and Hong Kong. At Singapore, they surprised British naval officers by invading overland. They immobilized America’s military presence in the Pacific for more than a year. The United States now faced enemies in both the Atlantic and the Pacific, but enjoyed the advantage of being the world’s greatest industrial power. In battles depending upon mobility on the sea, in the skies above Europe, and on the ground everywhere, this proved decisive. Once Japan’s military campaigns were folded into World War II, the “Co-prosperity Sphere” became a front behind which the Japanese manipulated local puppet governments with slogans like “Asia for Asians.” The unintended consequence of this rhetoric was to promote fierce national identities in Japan’s occupied territory.15
A successful Japanese offensive in 1944 linked Japan to its empire, stretching from Korea to Malaya. Now the way to the Indies was opened just in time for prosecuting an all-out war, made more urgent by Japan’s need for oil, bauxite (for aluminum), and rubber from the islands of the Dutch East Indies and Burma, all of which it eventually occupied. At last Japan had the raw materials required for prolonged hostilities, but alas, the new possessions were far away, leaving its merchant and naval fleets vulnerable to attack.
Japan executed its air strikes brilliantly, but it had already made a fatal mistake in not developing a full antisubmarine program. The German U-boat successes of World War I had convinced American and British strategists that both submarines and defenses against these new underwater vessels would play a crucial role in future wars. The United States had several companies producing the electric diesel motors used in submarines, so it was well positioned to speed up production of submarines when war broke out. It also had in place a well-thought-out antisubmarine doctrine, which included training its naval crews to fight fires ignited by enemy submarines. After the United States broke the Japanese code used to track its ship movements, the American submarine fleet wreaked havoc on the Japanese merchant marine plying the waters between Japan and the East Indies. It destroyed a third of Japan’s naval vessels and, by the summer of 1945, three-quarters of its commercial fleet.16
Impressive Wartime Production
The critical need for producing war material put maximum pressure on the economies of all the belligerents. Great Britain, Germany, the United States, and the Soviet Union mobilized in ways congruent with their differing industrial strengths and war goals. They initially met wartime demands by providing employment to those left unemployed by the Depression rather than having to preempt domestic production. This government spending brought the Great Depression to a close. A year into the conflict, one-half to two-thirds of the industrial work force had been drawn into war production. War aims interacted with the character of the political system of each belligerent to fine-tune its conversion to a wartime economy.
As the aggressor Germany devised the strategy of lightning war, which, as its title suggests, emphasized speed and mobility. German production was geared to replacing the weaponry its blitzkrieg forces would need for the next campaign, whereas England and the United States did not know where or how Germany would attack, so they had to plan for diverse scenarios in a more protracted struggle.17 Air and sea power became integral to their strategy, in large part because they didn’t have the manpower or material available to return to France. The Russians copied the superior features of the German tank divisions entering their country. The Soviets showed an impressive capacity to improve its models throughout the war. Up-to-date weaponry was scarce in the Far East, so most belligerents there fought with rifles and light artillery when not actually using knives and swords.18
The Germans clung to their tradition of fine craftsmanship and performance-enhancing detail while the Americans relied on their mass production expertise.19 Karl Benz met Henry Ford. The Germans also pursued many designs for tanks while the Americans churned out nothing but Sherman tanks until the Pershing tank replaced them. Most large American firms became defense contractors, but none got the publicity of Ford Motors, which built the world’s largest factory at Willow Run, Michigan. By late 1943 three hundred B-24 bombers were rolling off the Willow Run assembly line each month though General Motors actually surpassed Ford in its war production. In another example of productive wizardry, in Richmond, California, Henry Kaiser built more ships than any other manufacturer and even managed to pioneer a company health plan at the same time. When the war in the Pacific drained the Japanese and American navies in 1942–1943, Japan built seven new aircraft carriers. American shipyards turned out ninety.20
In wartime, all economies become command economies, so in this sense war production in Communist Russia did not differ so much from that of its free market Allies. Confronted with a fight for national existence and with a considerable part of its land occupied by Germany, Russia carried out the most intense war effort. More important and surprisingly, Soviet mobilization was far more effective than that of Nazi Germany. Even the United States, with the least experience in state planning, did a much better job of prioritizing war production. By 1944 American factories were sending a mighty stream of tanks, trucks, armored cars, even canned food for the defense of Russia. With an industrial plant much larger than any of the other combatants, the United States still outdid itself, supplying through lend-lease agreements up to a third of Great Britain’s material needs and a quarter of those of the Soviet Union.
Wars have always acted as a catalyst for technology, but in World War II science made spectacular contributions with the development of radar, computers for charting ballistics, rocketry, jet-propelled aircraft, and a slew of synthetic products developed to substitute for the natural resources no longer available to the belligerents through trade. Small advances sometimes had large impacts. America’s two-way radios enabled the Russians to improve their tank tactics. Another technological breakthrough, the atomic bomb, brought the Pacific war to an end two months after Germany surrendered in May 1945.
With millions of lives hanging in the balance, the warring nations made exertions of heroic proportions, a tragic reminder that human beings perform at their highest pitch when threatened with annihilation. World War II exacted a terrible cost from its belligerents, civilians suffering even more than combatants. As might be expected with the perfecting of new weaponry, the casualties of World War II topped those of World War I. A total of seventeen million combatants died, with civilian deaths reaching thirty-three million, the preponderance of them Russian and German, with six million Jews of many nationalities eliminated in Nazi concentration camps. Millions more were displaced by the war, wounded, or left to die from starvation. Heavy aerial bombardments leveled houses, ships, bridges, railway lines, factories, airfields, docks, and sometimes whole cities. Only the Western Hemisphere escaped war’s awful fury.
World War II put the far-flung empires of Great Britain, France, Belgium, Italy, Portugal, and the Netherlands on life support if not actually writing finis to them. During the war Japan had seized the American Philippines, the Dutch East Indies, French Indochina, and British Burma and Malaysia. In defeat, the Japanese played the spoiler and encouraged agitators for independence as they were departing from what was to become Indonesia. A new federation of Malaysia emerged from which Singapore became a separate republic in 1965. Great Britain accepted the creation of two nation-states, India and Pakistan, in 1947. Bangladesh broke away from Pakistan, and the island of Ceylon formed Sri Lanka. The United States granted independence to the Philippines in 1946, almost fifty years after promising it.
France waged protracted war with Algeria until 1962, but the other North African Arab states escaped European domination more easily. The French fought in Indochina as well. Laos and Cambodia gained independence, but the United States took over France’s war against Vietnam as part of its Cold War effort to halt the spread of communism. It suffered defeat there in 1973. Portugal fought off national liberation movements in Angola and Mozambique. Only with the toppling of the Portuguese dictatorship did its colonies gain freedom in 1975. The British, after a decade of brutal fighting, finally yielded in 1963 to the Mau Mau to make Kenya the thirty-fourth independent African nation. The British Empire came to an official end when in 1997 the Union Jack was lowered over Hong Kong, a city it had leased from China for a century. The wars of national liberation came to an end just as thirty-five nations gathered in Helsinki to sign accords on the right to self-determination in 1978.
People sometimes refer to a great power as a juggernaut. They perhaps are not aware that a juggernaut, according to Hindu myth, is one of the eight avatars of Vishnu, whose devotees throw themselves under the wheels of the vehicle carrying a statue of the god in annual processions. By the end of World War II capitalism could be compared to a juggernaut. Its direction was uncertain, its power was conspicuous, and its devotees were capable of great self-destruction. In 1945 the capitalist juggernaut faced a radical challenge coming from its wartime ally the Soviet Union. They had truly been strange bedfellows, the one with an economy run on venture capital eager to get other countries to adopt its ways, the other a command economy with the mission of spreading its Communist institutions globally. Of the fifty million military and civilian deaths, Russia sustained twenty million. Despite these truly horrific losses, the Soviet Union came out of the war stronger than ever once it established control over the countries of Eastern Europe, including a third of Germany. Now capitalism with its prejudice against the centralization of power confronted a block of countries determined to expose, intensify, and exploit its flaws.
Those persons born in 1880 who watched the construction of roads for the automobile, the proliferation of electrical tools and appliances, and the refashioning of city centers with skyscraping office buildings and opulent department stores would have lived long enough to suffer from a world war, a decade of depression, and the resumption of hostilities in an even more catastrophic world war. In old age they could have contemplated an utterly new kind of rivalry between the United States and the Soviet Union in what seemed at the time to be a gigantic struggle about fundamental truths rising above opposing economic systems. And while the United States and Western Europe confronted the Soviet Union and the countries of Eastern Europe, the peoples colonized by Europeans demanded the self-determination that was denied them in 1918. No longer could places on world maps be designated with a few European imperial colors. Two world wars and a worldwide depression had demonstrated capitalism’s capacity for destruction. The time had arrived to prove its beneficent qualities.