Once again I have seen an old, silly argument, that somehow war stimulates the economy. Since I occasionally get taken to task for beating up on liberals, let me state up front that this is a bipartisan foolishness, the right falling for it as often as the left. In fact, the right has even turned it into part of the effort to discredit FDR, claiming that he did not end the depression, World War II did. (Well, it did, but not in the way most mean, more on that later.)

Today I saw this foolishness in its conservative variant, with comments about a column arguing that World Wars I and II led tot he subsequent properity of the 1920's and 1950's.

Now, this argument is a bit hard to debunk because the wording gets vague sometimes. Some argue clearly enough, saying that wars bring prosperity. Others use weasel words, saying that war "stimulate the economy". Now, since there is no real definition of "stimulation", I can't really debate this, but, as they seem to take this "stimulation" to mean something good, I can argue that wars do not help the economy. They may make everyone appear to be busier, which may be what is meant by "stimulation", but that appearance of activity does not mean we are any better off.

The fact of the matter is that wars destroy things, requiring us to rebuild them. That is why wars appear to make everyone busy and employ a lot of people. But that is not the same as creating wealth. If destroying things created wealth, then we could become very rich by simply nuking San Francisco. In fact, if we were truly greedy, we could nuke all our major cities. That should keep us busy for at least a decade or two, as we rebuilt all our infrastructure. It would not make us richer, but it would make us busier.

Let me make a simple analogy. If your car breaks down at the same time your house catches fire, you will probably find yourself a bit short of cash. You will probably put in overtime, earn more money, just so you can pay to repair your car and rebuild your house. Your personal economy will be "stimulated", you will be doing more work, but, once you have everything back to where it was, would you call yourself richer? No, you just worked a lot harder to replace losses. Breaking your car and burning down your own house is not the path to riches.

Nor is war, which just amounts to burning down a lot of houses and breaking lots of cars.

There are some who recognize this fact, yet argue that war spurs innovation. These are often the same people who think the government sponsored space program spurred innovation.

Yes, both war and the exploration of space resulted in new technologies. So did the private sector era of wild cat oil prospecting or the early days of the automobile. So what? Any activity which employs a huge number of people will produce innovations. Some will be applicable to other fields, some will not. The problem is, these people tout the innovations they can see, and do not recognize all the innovations that never were. When war or the space program diverted money to their respective projects, they took that money and that manpower from civilian applications that could have produced other innovations. We will never know what was lost.

Unfortunately this makes it hard to argue with these people. They can point to velcro and say "look what the space program gave us", while I can't point to the life saving surgical innovation that never was. Doubtless we did lose innovation, but there is no way to tell what was lost. So, their concrete innovation looks much more impressive. Sadly, pointing out that people generally get less satisfaction form military or space technology than consumer technology, that state enterprises are much less efficient, and that government bureaucracy tends to stifle innovation rather than encourage it, does nothing to convince them that their innovations cost them much more than they were worth. They simply continue to point to what they can see and assume that is the best possible outcome.

So, since it is fruitless to argue that the supposed innovations of war are obtained at the cost of other innovations, let us move on to a topic I raised at the beginning of the essay, but put off until now. If war does not improve the economy, how did the Great Depression end then?

And, here I have to say that the conservatives who say the war ended the Depression are right, but for the wrong reasons. The war did not end the depression by stimulating the economy, or putting men to work, it ended the depression by solving the underlying economic problems.

The Depression was, at its root, a monetary crisis. Following the break with monetary gold, banks worldwide had begun an unprecedented inflation, the outcome of which were first the boom of the 1920's and then the crash and depression of the 1930's. As FDR came into office in the US and continued to meddle with the economy, he simply prolonged this monetary crisis, as did semi-socialist leaders in the rest of the civilized world. Nor did the protectionist policies of these nations help, as their push for autarchy kept them even more impoverished, cutting them off from the benefits of trade. With the value of money steadily declining, the government dabbling in confiscatory taxation and stifling regulation, and anyone with money trying to find a concrete store of value to preserve it against future inflation, there was simply no investment and the economy stagnated.

The war managed to resolve many of these issues.

First, unlike peace time, war gave the government free reign to use honest financing. Rather than hiding deficits through monetizing the debt, the government explicitly sold war bonds and raised taxes. This change more than anything else helped stabilize the dollar. By using honest financing, inflation was held in check and the value of the dollar was kept relatively consistent. Even without the war, had the government used bond issues and tax increases rather than monetary inflation the depression would have eventually come to a close.

Second, FDR died. Truman and Eisenhower had little taste for FDR's more explicitly socialist schemes. As the economy shifted from a war footing to civilian production, FDR's successors did little to restore FDR's more socialist measures. The return to a more business friendly economy did a lot to convince investors to return money to business investments.

Third, war conditions forced savings. Yes, a lot of money was taken by the government in war bonds and taxes, but what was left had little use. With rationing and little in the way of consumer production, individuals had little enough to do with their surplus income. This spurred a major increase in consumer savings.

Fourth, thanks to both the stabilized dollar and the guaranteed income from war contracts, many manufacturing firms started to look more promising to investors. Both banks, newly infused with deposits, and private investors who had hidden assets in real estate and other concrete stores of wealth, were attracted to the steady returns from industry, and began investing again.

Fifth, unemployment was largely resolved by the not-so-pleasant expedient of killing off a lot of the labor force. Thanks to the number of deaths in the war, labor was in short supply by 1950, and unemployment was a thing of the past. This could not last forever, as the reduced labor force would normally mean reduced demand, and the economy would adjust to an equilibrium state at the smaller population. However, immediately after the war, all those accumulated savings from the war years kept spending artificially  high for a time, though it could not, and did not, last forever.

So, yes, in some ways the war did end the depression, but not for the reasons usually given. It ended the war by forcing the government into a more responsible economic policy, not through any economic stimulation.

The sad part is that this myth has convinced some that there is no way out of a depression. Just as the FDR myth convinced liberals that government intervention is the only way out of a depression, this myth has convinced some conservatives that war is. Neither is true.

Almost all depressions are monetary events. Certainly all the boom-bust cycle depressions are. They are the result of inflation having gone too far, of the money supply either having been inflated too far or having been inflated too often. It is a transitory event. It may seem horrible at the time, and bad policies such as the 1920's and 1930's love for protectionist policies can extend it, but it will end on its own. Ironically, the government intervention usually proposed to fix it, only serve to make such depressions longer and more severe. Despite the political pressures, the best solution is often to do nothing.

Of course, the real solution is to end both fiat currency and central banking. Fiat currency because once currency is no longer redeemable in gold or silver there is little reason for the state to limit inflation. And central banking because no private bank would risk their investment with the sort of irresponsible inflation that the government often undertakes.

But I have drifted too far from my original topic. So, to close, let me just reiterate my original point. War may give the appearance of creating an economic boom, as it spurs so much activity, but in reality the destruction of war does nothing but impoverish. Sometimes war may be necessary, but it should be fought with the understanding that war is always a net loss to the economy, not a benefit.
 

POSTSCRIPT

I am sure I forgot some of the other reasons the depression ended thanks to the war. My list is probably far from comprehensive. However, my point still stands, yes the war ended the depression, but not because it of any supposed economic benefit of war.