Depression, War, and Cold War This page intentionally left blank Depression, War, and Cold War Studies in Political Economy Robert Higgs Senior Fellow in Political Economy The Independent Institute 1 2006 1 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education. Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam © Copyright 2006, The Independent Institute 100 Swan Way, Oakland, CA 94621–1428 510–632–1366 • 510–568–6040 fax • [email protected] • www.independent.org Published by Oxford University Press, Inc. 198 Madison Avenue, New York, New York 10016 www.oup.com Oxford is a registered trademark of Oxford University Press. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Higgs, Robert. Depression, war, and cold war : studies in political economy / by Robert Higgs. p. cm. Includes bibliographical references and index. ISBN 13: 978-0-19-518292-7 ISBN 0-19-518292-8 1. United States—Economic conditions—20th century. 2. War—Economic aspects—United States. 3. Depressions—1929—United States. I. Title. HC106.H535 2006 330.973’091—dc22 2005022028 9 8 7 6 5 4 3 2 1 Printed in the United States of America on acid-free paper For Elizabeth who wouldn’t let me give up on it Love is patient, love is kind. This page intentionally left blank Contents Introduction, ix 1 Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War, 3 2 Private Profit, Public Risk: Institutional Antecedents of the Modern Military Procurement System in the Rearmament Program of 1940–41, 30 3 Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s, 61 4 Wartime Socialization of Investment: A Reassessment of U.S. Capital Formation in the 1940s, 81 5 From Central Planning to the Market: The American Transition, 1945–47, 101 6 The Cold War Economy: Opportunity Costs, Ideology, and the Politics of Crisis, 124 7 Hard Coals Make Bad Law: Congressional Parochialism versus National Defense, 152 8 Airplanes the Pentagon Didn’t Want, but Congress Did, 176 9 Profits of U.S. Defense Contractors, 186 10 Public Opinion: A Powerful Predictor of U.S. Defense Spending, 195 Index, 209 This page intentionally left blank Introduction Warfare is the quintessential government activity. As a rule, a national government that is unprepared to defend itself against armed attackers cannot expect to retain control of its territory, resident population, and other resources. Hence, nearly all governments devote substantial efforts to maintaining effective armed forces. Military preparedness requires that resources be diverted from civilian uses. The organizing and financing of that reallocation, normally effected by some combination of market and nonmarket means, have important consequences for the performance of the entire economy, especially when the reallocation takes place on a large scale. With huge costs and benefits at stake, the nation’s political and gov- ernmental systems invariably become actively and pervasively engaged in the process. The political economy of actual warfare or “defense” (preparation for warfare) in modern times calls to mind the so-called military-industrial complex. In the United States, since World War II, a more illuminating concept is the “military-industrial-congressional complex” (MICC) [Higgs, 1990]. A closely related idea is that of the “iron triangle,” which when ap- plied to defense issues, denotes an arrangement composed of at least a military purchasing agency, a private supplier, and the congressional committees with oversight and appropriations authority (Adams, 1982). Around this institutional triad, other actors often congregate: consulting firms, trade and veterans’ associations, scientific organizations, univer- sities, think tanks, labor unions, “public interest” groups, and represen- tatives of local governments, among others. From the pulling and hauling of all of these interest groups emerges the policies and actions that consti- tute the operation of the MICC. The general public’s role is to bear the costs of the vast operation and to enjoy, so to speak, the benefits of “national security” in the event that the MICC succeeds in producing any of that hard- to-define output. The workings of the MICC may be viewed usefully as a process in which the various actors, each relying on his own knowledge, opinions, and ide- ology, create the policies and take the actions that establish, maintain, and modify the military establishment. Conceptually, the analyst can under- stand better the connection between the actors and their ideas, on the one hand, and their actions, on the other hand, by analyzing the institutional context within which the actors take their actions. The prevailing ix x Introduction institutions establish the actors’ incentives and constraints, and they con- dition the expectations on which the actors rely as they make their deci- sions. Once established, institutional arrangements tend to persist; in the now familiar terminology, institutional “path dependency” prevails. Scholars have devoted much effort to understanding the operation of the MICC and its consequences for the economy, polity, and society in which it is embedded. My own work along these lines began in the early 1980s and found substantial expression first in my book Crisis and Levia- than: Critical Episodes in the Growth of Government (1987, pp. 123–58, 196– 236, 238, 241, 244–6, 250–1), which contains two long chapters on the political economy of the world wars, as well as some discussion of the Cold War. In that work, I was concerned with relating the nation’s mili- tary experience to the long-term growth of the federal government’s size, scope, and power and, in particular, with showing how various wartime actions and events had significant long-term consequences, ideological as well as institutional. In the years since the publication of Crisis and Leviathan, I have contin- ued to study and to write about a variety of related research topics. Ten of my more substantial recent essays are included in the present collection. Together, they extend and refine the ideas expressed in the 1987 book. These essays present new interpretations of familiar data, new evidence, and new statistical analyses. Most of them appeared originally in peer-reviewed journals. One (chapter 8) is published here for the first time in its present form (that is, with documentation). In this introduction, I place the essays into a wider scholarly context by calling attention to the approaches, findings, and interpretations that oth- ers have presented. In some cases, my own views have changed somewhat as I have continued to study certain issues, such as the relation between World War II and the prosperity that resumed in 1946 after a decade and a half of depression and war. I also take this occasion to indicate how other research, which I either disregarded or did not know about when I made my own studies, bears on the reports gathered in the present volume. The Great Depression and the New Deal continue to receive much at- tention from economists, economic and political historians, and other schol- ars.1 In my own research, I focused first on the initial New Deal response to the Depression and on the enduring consequences of the New Deal policies for the growth of government (Higgs, 1987, pp. 159–95). Later, in the 1997 article reproduced as chapter 1 of this volume, I considered how the New Deal policies prolonged the Depression by creating “regime un- certainty” and how a number of related political changes brought about or hastened by the war diminished that uncertainty enough to permit a resumption of genuine prosperity (as opposed to the spurious “wartime prosperity”) after the war ended. Since writing the 1997 essay, I have become aware of a major body of evidence bearing on my “regime uncertainty” hypothesis: Gary Dean Best’s Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933–1938 (1991). The Introduction xi evidence that Best has compiled and organized adds significant weight to the views that I previously documented with regard to how business people and investors perceived the New Deal and the seriousness of its threat to the security of private property rights during the latter 1930s. How does my interpretation relate to other interpretations of the dura- tion of the Depression, especially to those that characterize the recovery as, like the preceding Great Contraction, little more than a macro-monetary phenomenon?2 In brief, my interpretation complements, rather than sub- stitutes for, those that focus on macro-monetary relations. I do not claim that the latter are wrong, only that, even if they are correct as far as they go, they are insufficient. If property rights are seriously up for grabs, no amount of pumping money into a depressed economy can bring about genuine complete economic recovery. From 1935 to 1940, such “up for grabs” conditions were precisely the ones that prevailed in the United States; hence, the unevenness and incompleteness of the recovery, even as late as 1940, more than ten years after the onset of the Great Contraction. Moreover, my interpretation proves its value decisively when one ap- proaches the task, not merely as one of explaining the slow recovery be- tween 1933 and 1941, but as one of explaining several related aspects of a longer span of economic events (e.g., private output, long-term civilian in- vestment, and unemployment) between 1935 and 1948.