Money and Waging War: the Myth of WW II

Napoleon famously said "An Army marches on its stomach." In the same sense, wars are won with money. Of course, brave warriors, capable leadership, advanced technologies, and many other factors are essential. But without the funds to pay for them, victory is impossible.

In the months preceding the election, both the left and the moderates in Congress pounded the American people with the idea that the campaign in Iraq has become too costly and that we cannot possibly continue to fund operations at the current tempo.  Hollywood jumped on the bandwagon to propagandize the electorate into believing that the US was also financially on its last legs in WW II and struggling to muster the resources to continue our march to victory.  Of course, it is implied, that such is the case with Iraq.

This is patently false for both WW II and today's war.  If we are to understand how nation-states have conducted wars in the context of global and regional geo-strategy, including this war, and how certain powerbrokers manipulate perceptions of our national wealth, then the myth of an America on the brink of a financial disaster in WW II must be debunked once and for all.

What was spent

Despite the odd views of post-modern national security theorists on the economic and industrial divergence of fighting wars, the financial well-being of nations at war has real implications on the battlefield.  A state's ability to finance a war directly relates to generating combat power in the form of men, ships, tanks, planes, etc.  In other words, the more materiel, technology, and men a country can produce and field over time, the better the chances of success.

A few references still exist that provide a simple tally* of the money aspects of WW II without prejudice or the burdens of post-modernism.  Simply put, the figures show that the US was a war-making and industrial powerhouse unsurpassed by any of her allies or enemies, and despite huge tax increases and deficit spending, it was far from being driven into poverty in 1945.

Total spending by the allies and neutrals amounted $398 billion.  The major spender was the US, which spent almost 50 percent of the total Allied war budget at $197 billion (this is a little over two trillion USD adjusted for 2005 dollars).  Russia was next at $112 billion (28%), then Great Britain at $65 billion or 16 percent of the total.  Total spending by Axis powers was about $245 billion.  The biggest spender was Germany at $158 billion or 65 percent of Axis expenditures, Italy spent $55 billion (23%), while Japan spent only $33 billion**; only 14 percent of the Axis total.

Tax revenue

There is a simplistic notion on the part of critics who compare our current funding levels to those of WW II that by simply raising taxes, we can devote more revenue to support our military.  What they overlook is that FDR started a military buildup funded by increased tax revenues almost two years prior to the attack on Pearl Harbor.

For example, Congress passed pre-WW II revisions to the tax code to support mobilization of National Guard Divisions for "extended active duty for training," paying for the Selective Service Act, production of war armaments, and pre-war support to allies.  The three revenue acts in 1940 and 1941 increased individual and corporate income tax rates, raised most excise tax rates to 50% to 60%, and reduced personal exemption amounts all the way down to $1,500 for married couples.
 
Yet, as taxes were further increased during the war and deficits climbed - the military buildup caused the deficit in 1941 to nearly double - a positive effect actually occurred:
"... tax changes increased federal receipts from $8.7 billion in 1941 to $45.2 billion in 1945.  Beyond the rates and revenues, however, another aspect about the income tax that changed was the increase in the number of income taxpayers from 4 million in 1939 to 43 million in 1945.
In other words, by the end of the war, the labor market had not only increased ten-fold, but millions of Americans had good paying jobs with defense contractors such as Ford, GM and Lockheed.

Total Treasury receipts in the war years (1942-1945) amounted to about $138 billion, but outlays were huge, amounting to $303 billion, sometimes resulting in yearly deficits of up to $50 billion.  If we expended almost $200 billion on the war, this meant that we not only had a shortfall of $62 billion just on defense spending, but "routine" government functions and those all-important New Deal programs were soaking up more than their fair share in a time of war.

So, are Hollywood and the left correct about the Greatest Generation's dire economic strats?  The answer is no.  Because they forgot that the exponential increase in personal income enabled Americans to make huge contributions buying war bonds.  Thankfully for the New Dealer politicians, the American public (again) bailed them out of their undisciplined fiscal shenanigans.

War Bond Revenue

The war bond program was instrumental in funding the war, but unlike the manner in which it was painted in Flags of Our Fathers, previous drives had already put over $109 billion into the US war chest.  It was not necessary to lay a guilt trip on the survivors of Iwo Jima, since the seventh bond drive was not critical for keeping the US war machine humming right along.

The drive depicted in Flags really went like this:
Beginning on May 14, 1945, just a few days after V-E Day, some officials feared the goal of $14 billion would not be reached if Americans believed the surrender of Germany made full subscription unnecessary.  These fears proved unfounded, as the individual sales goal of $7 billion - the highest of any war bond drive - was surpassed by $1.6 billion.  The final tally recorded sales of over $26 billion dollars during the six weeks of the Seventh War Loan drive.

Overall, the WW II war bond drives were masterfully executed thanks to the $180 million worth of donated advertising, which included appearances by Hollywood stars.  Maybe not so amazingly given the greatest generation's seriousness about the war, over $156 billion total was raised in eight war bond drives.  If the government was strict in its accounting, then theoretically, we had a $97 billion credit to the War and Navy Departments!

The real war reserves

The US had an ace in the hole in financing the war.  At the time, the USD was not the international currency it is today; that role was filled by gold.  In 1933, FDR issued Executive Order No. 610, which ordered all U.S. citizens to turn in their gold to the government, which was eventually collected and stored at the United States Bullion Depository at Fort Knox, Kentucky.

Today, holdings amount to about 147 million ounces, but on 31 December of 1941, the depository had over 649 million ounces with a "book value" of $35.00 per ounce.  So, a little more than three weeks after the attack on Pearl Harbor, the US had over $22.7 billion in gold for global transactions and for emergency war use.

Changes in world-wide gold reserves by war's end showed that some nations did in fact, profit from industrial demands of the war, especially countries rich in raw materials.  Argentina gained $535 million, South Africa $404 million, Brazil $187 million, and for the Axis, oil-rich Rumania gained over $205 million.

Among the losers: Great Britain -$12 million, and Japan -$145 million.  Meanwhile, France lost a whopping $779 million.  Given that Germany, the top spender for the Axis, actually showed a zero net for gold, we can see the effect of the Nazis plundering the gold reserves of conquered countries so it could fuel its war industries.
 
So where did the US end up in the gold trade?  We gained over $3.3 billion in gold* during the war years.  Let's put that in perspective. It cost the US $2.3 billion dollars (a little over one percent of our direct war spending) to produce enough Highly Enriched Uranium (HEU) and Plutonium to fuel the Trinity test device and two operational A-bombs.  Even if all of the Manhattan Project infrastructure and research had to be redone from scratch, our gold profits would have done the job, and then some.  In a very real sense, the US was the arsenal of democracy and was never in danger of going broke.

Our current war

Two days after the 9-11 attacks, the Congressional Research Service published a report saying
...the President made specific requests for funds, which Congress dealt with through the usual annual appropriations process.  Supplemental defense appropriations for FY1942, as well as regular and supplemental appropriations for FY1943 and later years, were provided in the regular form - that is, as specified dollar amounts for specified accounts.

Clearly, President Bush has been following the same appropriations model that FDR and his Congress used in WW II, one that I have been critical of in the past because it slows the building and deploying of a larger permanent force to fight the long war.  But just the opposite is happening.  The President's policies have been critical in maintaining America's position as the world's only economic hyper-power, putting us in a position to build a global warfighting capability.

Remember, this President didn't have the luxury or a compliant Congress to fund a two year military build up prior to 9-11 as FDR did before Pearl Harbor; and second, the forces on hand in 2001 were suffering from one of the most severe draw downs in US history, both in real warfighting capabilities and in morale.  Glossed over is the sobering fact that the US taxpayer had to spend over $46 billion just to bring deployable manpower up to what it should have been on 9-11.

The President's steadfast resistance to calls for tax increases despite repeated calls to do so in order to cover up military and political malfeasance goes largely unnoticed.  The tax cuts have already worked at fueling a hugely successful economy, have increased revenue to the Treasury, and are actually bringing down the deficits in a time of war.  More to the point, we have been fighting a global war for five years and have spent $437 billion, which is only 21 percent in 2005 dollars of what we spent for all of WW II.  We are not going broke, nor are we unable to sustain the war.

Bottom line: Given no opportunity for a two-year military buildup and a Congress religiously devoted to home district pork, that we are still capable of fighting globally and that we have a robust economy to support the fight is nothing short of masterful fiscal leadership.

Also, the reality of the larger regional war underway is an aspect that only a few have understood.  Rumsfeld understood it; and I think the President and Rumsfeld were taking advantage of the culminating point in Iraq by carefully building the economic and military foundation for a gradual increase of forces to handle the long war.  The lack of action so far may, and I stress may, be an indication of a plan to husband troops to mass elsewhere, while simultaneously resourcing a conflict that could potentially involve a more economically powerful adversary.

Is there an advantage to this approach to the war?  Yes, if we are steady in the face of the inevitable setbacks.  Unfortunately, the election and the Baker Commission report seemingly show that our own selfishness and impatience may be our undoing.  The Democrat-controlled Congress is on the verge of abandoning Iraq to the enemy all because they seem disengaged enough from the war to cling to those sacred domestic, big government programs.

But this is more than what we normally think of the left's forte at prioritizing home district pork over funding the war.  Oddly enough, there are some unexpected allies in the mission to leave Iraq; and they are working feverishly to make it happen sooner rather than later. 

Next week: Part II: The Investor Class, the Realists, and the Saudis

* Budget figures and estimates of world-wide movement of gold are obtained from History of WW II,  Editor-in-Chief A.J.P. Taylor, compiled by S.L. Mayer, printed in London, England in 1974.  Money amounts were in British Pounds, so the Pacific Exchange Rate Service was used to convert Pounds to US Dollars (USD) at the 1974 rate.

** Purely from an economic perspective, FDR's Germany First Policy was vindicated by Japan's relatively small war output.  Germany alone nearly equaled both Britain and Russia in war spending combined, and was by far the most dangerous threat.

 

Douglas Hanson is the national security correspondent of American Thinker.

Napoleon famously said "An Army marches on its stomach." In the same sense, wars are won with money. Of course, brave warriors, capable leadership, advanced technologies, and many other factors are essential. But without the funds to pay for them, victory is impossible.

In the months preceding the election, both the left and the moderates in Congress pounded the American people with the idea that the campaign in Iraq has become too costly and that we cannot possibly continue to fund operations at the current tempo.  Hollywood jumped on the bandwagon to propagandize the electorate into believing that the US was also financially on its last legs in WW II and struggling to muster the resources to continue our march to victory.  Of course, it is implied, that such is the case with Iraq.

This is patently false for both WW II and today's war.  If we are to understand how nation-states have conducted wars in the context of global and regional geo-strategy, including this war, and how certain powerbrokers manipulate perceptions of our national wealth, then the myth of an America on the brink of a financial disaster in WW II must be debunked once and for all.

What was spent

Despite the odd views of post-modern national security theorists on the economic and industrial divergence of fighting wars, the financial well-being of nations at war has real implications on the battlefield.  A state's ability to finance a war directly relates to generating combat power in the form of men, ships, tanks, planes, etc.  In other words, the more materiel, technology, and men a country can produce and field over time, the better the chances of success.

A few references still exist that provide a simple tally* of the money aspects of WW II without prejudice or the burdens of post-modernism.  Simply put, the figures show that the US was a war-making and industrial powerhouse unsurpassed by any of her allies or enemies, and despite huge tax increases and deficit spending, it was far from being driven into poverty in 1945.

Total spending by the allies and neutrals amounted $398 billion.  The major spender was the US, which spent almost 50 percent of the total Allied war budget at $197 billion (this is a little over two trillion USD adjusted for 2005 dollars).  Russia was next at $112 billion (28%), then Great Britain at $65 billion or 16 percent of the total.  Total spending by Axis powers was about $245 billion.  The biggest spender was Germany at $158 billion or 65 percent of Axis expenditures, Italy spent $55 billion (23%), while Japan spent only $33 billion**; only 14 percent of the Axis total.

Tax revenue

There is a simplistic notion on the part of critics who compare our current funding levels to those of WW II that by simply raising taxes, we can devote more revenue to support our military.  What they overlook is that FDR started a military buildup funded by increased tax revenues almost two years prior to the attack on Pearl Harbor.

For example, Congress passed pre-WW II revisions to the tax code to support mobilization of National Guard Divisions for "extended active duty for training," paying for the Selective Service Act, production of war armaments, and pre-war support to allies.  The three revenue acts in 1940 and 1941 increased individual and corporate income tax rates, raised most excise tax rates to 50% to 60%, and reduced personal exemption amounts all the way down to $1,500 for married couples.
 
Yet, as taxes were further increased during the war and deficits climbed - the military buildup caused the deficit in 1941 to nearly double - a positive effect actually occurred:
"... tax changes increased federal receipts from $8.7 billion in 1941 to $45.2 billion in 1945.  Beyond the rates and revenues, however, another aspect about the income tax that changed was the increase in the number of income taxpayers from 4 million in 1939 to 43 million in 1945.
In other words, by the end of the war, the labor market had not only increased ten-fold, but millions of Americans had good paying jobs with defense contractors such as Ford, GM and Lockheed.

Total Treasury receipts in the war years (1942-1945) amounted to about $138 billion, but outlays were huge, amounting to $303 billion, sometimes resulting in yearly deficits of up to $50 billion.  If we expended almost $200 billion on the war, this meant that we not only had a shortfall of $62 billion just on defense spending, but "routine" government functions and those all-important New Deal programs were soaking up more than their fair share in a time of war.

So, are Hollywood and the left correct about the Greatest Generation's dire economic strats?  The answer is no.  Because they forgot that the exponential increase in personal income enabled Americans to make huge contributions buying war bonds.  Thankfully for the New Dealer politicians, the American public (again) bailed them out of their undisciplined fiscal shenanigans.

War Bond Revenue

The war bond program was instrumental in funding the war, but unlike the manner in which it was painted in Flags of Our Fathers, previous drives had already put over $109 billion into the US war chest.  It was not necessary to lay a guilt trip on the survivors of Iwo Jima, since the seventh bond drive was not critical for keeping the US war machine humming right along.

The drive depicted in Flags really went like this:
Beginning on May 14, 1945, just a few days after V-E Day, some officials feared the goal of $14 billion would not be reached if Americans believed the surrender of Germany made full subscription unnecessary.  These fears proved unfounded, as the individual sales goal of $7 billion - the highest of any war bond drive - was surpassed by $1.6 billion.  The final tally recorded sales of over $26 billion dollars during the six weeks of the Seventh War Loan drive.

Overall, the WW II war bond drives were masterfully executed thanks to the $180 million worth of donated advertising, which included appearances by Hollywood stars.  Maybe not so amazingly given the greatest generation's seriousness about the war, over $156 billion total was raised in eight war bond drives.  If the government was strict in its accounting, then theoretically, we had a $97 billion credit to the War and Navy Departments!

The real war reserves

The US had an ace in the hole in financing the war.  At the time, the USD was not the international currency it is today; that role was filled by gold.  In 1933, FDR issued Executive Order No. 610, which ordered all U.S. citizens to turn in their gold to the government, which was eventually collected and stored at the United States Bullion Depository at Fort Knox, Kentucky.

Today, holdings amount to about 147 million ounces, but on 31 December of 1941, the depository had over 649 million ounces with a "book value" of $35.00 per ounce.  So, a little more than three weeks after the attack on Pearl Harbor, the US had over $22.7 billion in gold for global transactions and for emergency war use.

Changes in world-wide gold reserves by war's end showed that some nations did in fact, profit from industrial demands of the war, especially countries rich in raw materials.  Argentina gained $535 million, South Africa $404 million, Brazil $187 million, and for the Axis, oil-rich Rumania gained over $205 million.

Among the losers: Great Britain -$12 million, and Japan -$145 million.  Meanwhile, France lost a whopping $779 million.  Given that Germany, the top spender for the Axis, actually showed a zero net for gold, we can see the effect of the Nazis plundering the gold reserves of conquered countries so it could fuel its war industries.
 
So where did the US end up in the gold trade?  We gained over $3.3 billion in gold* during the war years.  Let's put that in perspective. It cost the US $2.3 billion dollars (a little over one percent of our direct war spending) to produce enough Highly Enriched Uranium (HEU) and Plutonium to fuel the Trinity test device and two operational A-bombs.  Even if all of the Manhattan Project infrastructure and research had to be redone from scratch, our gold profits would have done the job, and then some.  In a very real sense, the US was the arsenal of democracy and was never in danger of going broke.

Our current war

Two days after the 9-11 attacks, the Congressional Research Service published a report saying
...the President made specific requests for funds, which Congress dealt with through the usual annual appropriations process.  Supplemental defense appropriations for FY1942, as well as regular and supplemental appropriations for FY1943 and later years, were provided in the regular form - that is, as specified dollar amounts for specified accounts.

Clearly, President Bush has been following the same appropriations model that FDR and his Congress used in WW II, one that I have been critical of in the past because it slows the building and deploying of a larger permanent force to fight the long war.  But just the opposite is happening.  The President's policies have been critical in maintaining America's position as the world's only economic hyper-power, putting us in a position to build a global warfighting capability.

Remember, this President didn't have the luxury or a compliant Congress to fund a two year military build up prior to 9-11 as FDR did before Pearl Harbor; and second, the forces on hand in 2001 were suffering from one of the most severe draw downs in US history, both in real warfighting capabilities and in morale.  Glossed over is the sobering fact that the US taxpayer had to spend over $46 billion just to bring deployable manpower up to what it should have been on 9-11.

The President's steadfast resistance to calls for tax increases despite repeated calls to do so in order to cover up military and political malfeasance goes largely unnoticed.  The tax cuts have already worked at fueling a hugely successful economy, have increased revenue to the Treasury, and are actually bringing down the deficits in a time of war.  More to the point, we have been fighting a global war for five years and have spent $437 billion, which is only 21 percent in 2005 dollars of what we spent for all of WW II.  We are not going broke, nor are we unable to sustain the war.

Bottom line: Given no opportunity for a two-year military buildup and a Congress religiously devoted to home district pork, that we are still capable of fighting globally and that we have a robust economy to support the fight is nothing short of masterful fiscal leadership.

Also, the reality of the larger regional war underway is an aspect that only a few have understood.  Rumsfeld understood it; and I think the President and Rumsfeld were taking advantage of the culminating point in Iraq by carefully building the economic and military foundation for a gradual increase of forces to handle the long war.  The lack of action so far may, and I stress may, be an indication of a plan to husband troops to mass elsewhere, while simultaneously resourcing a conflict that could potentially involve a more economically powerful adversary.

Is there an advantage to this approach to the war?  Yes, if we are steady in the face of the inevitable setbacks.  Unfortunately, the election and the Baker Commission report seemingly show that our own selfishness and impatience may be our undoing.  The Democrat-controlled Congress is on the verge of abandoning Iraq to the enemy all because they seem disengaged enough from the war to cling to those sacred domestic, big government programs.

But this is more than what we normally think of the left's forte at prioritizing home district pork over funding the war.  Oddly enough, there are some unexpected allies in the mission to leave Iraq; and they are working feverishly to make it happen sooner rather than later. 

Next week: Part II: The Investor Class, the Realists, and the Saudis

* Budget figures and estimates of world-wide movement of gold are obtained from History of WW II,  Editor-in-Chief A.J.P. Taylor, compiled by S.L. Mayer, printed in London, England in 1974.  Money amounts were in British Pounds, so the Pacific Exchange Rate Service was used to convert Pounds to US Dollars (USD) at the 1974 rate.

** Purely from an economic perspective, FDR's Germany First Policy was vindicated by Japan's relatively small war output.  Germany alone nearly equaled both Britain and Russia in war spending combined, and was by far the most dangerous threat.

 

Douglas Hanson is the national security correspondent of American Thinker.