World War II: Economics -- Financing

Figure 1.--The United States used a very different approach to finance the War than the Germans. Rather than invading other country and seizing their resources, food, and production, the United States empoloyed a combination of borrowing and voluntary saving to purchase what was needed at fair prices. Here girls are buying Defense Saving Stamps even before America entered the War. This photograph was taken in August 1941. While the United States was the only country that had the financial, industrial, and agricultural resources to fight a world war, a majority of its people wanted to stay out of the War. Hitler hoped to use this sentiment to complete his conquest of Europe. Pearl Harbor changed this attitude over night.

Short wars are resolved by the standing militaries and decisive battles. It looked like this was goinging to be the case for what we now know as World War II. The NAZIs achieved a string of military victories in the first year of the War (1939-40) until the Panzers reached the English Channel and were stopped by the valiant stand of the out-gunned Royal Air Force (1940). Once this occurred and the conflict morphed into another war of attrition funancing and just not the military became an important factor. Finncing was a serious problem for NAZI Germany. The NAZIs after 6 years of unrestrained rearmament spending, the NAZI Government was bankup but deceotive financial tricks had prevented this from becoming known. This was a factor in Hitler launching the War in 1939 so that that he could finance the War economy by pillaging the economies of occupied countries and and forcing the defeated people into slave labor. He planned to do this by seizing the East, but as the Red Army held, it would be Vichy France and the rest of the occupied West that would finance a good portion of the German war effort. Britain began the War in a far weaker financial situation than was the case of World War I. And in a little more than a year, Primeminister Churchill had to inform President Roosevelt that his country was bankrupt and might not be able to continue the War. The President' response was Lend Lease, eseentially writing Britain a blank check. And America at the time was officially neutral. The United States despite the Depression was the world's preminent financial and industrial power. American support for Britain meant that it was impossible for the Germans to defeat the British, causing Hitler to invaade the Soviet Union. The NAZI invasion of the Soviet Union after it failed created enornous stresses on the German war economy (1941). At the same time, the Japanese attack on Pearl Harbor married the enormous Soviet military with the financial and industrial strenhth pf the United States (1941). The NAZI Grossraum, was unable to mobilize the economic and finacial resorces of occupied Europe in the same way that America and the British Empire were able to mobilize its respurces.


Britain at the turn-of-the 20th century was the richest power in Europe with a vast Empire that helped feed the national treasury. Londom was the center of world finance. Loans from America helped bank role the British war effort. British finances had been weakened by the vast cost of World War I. The Great Depression further weakended the country's finncial position. While Germany lost World War I, it did not pay a substantial part of the reparations. Most of the German payments were money borrowed from America. And the Germans could finance the War by looting the occupied countries. Britain could not do this. And the costs of the War were rapidly depelting the British trasury. Britain to continue the War needed to import food and raw material in addition to armaments made in America. American Neutrality Laws placed this on a "cash and carry" basis. Britain after the fall of France (June 1940) found itself the only country still ar war with Germany. The Battle of Britain (July-Septmber 1940) had prevented invasion, but Britain now had to fight the Germans who had much of the resources of Western and Central Europe at his disposal and as aesult easily able to finance the War. At the samr time, Britain's financial capability to finance the War was rapidly declining, both reserves and the ability to borrow money. Britain facing bankruptsy turned to the United States. Prime Minister Churcvhill wrote to President Roosevelt (December 1940). President Roosevelt's answer was Lend Lease (March 1941). This in esence was the American commitment to bank role the British war effort. It was in essence a declaration of economic war against NAZI Germany. Hitler and the NAZIs recognized it as such. It mean that Britain could conduct the War indefinitely. (Hitler has his own plan to put Germany in a comprble position--Operastion Barbasrossa, the invasion of the Soviet Union. Yhe Japabese had a similar plan, seizing the Southern Resource Area.) Even with Lend Lease, World War II placed tremendous demands on the British people, Britain would finance the War throiugh donestic taxation and borrowing, both domestic and foreign. Britain borrowed 15.2 billion during the War--a staggering sum at the time. [Sayers, p. 193.] Foreign assetts were sold off in an Imperisal fire sale. The Government intoduced the National Savings Certificates. (Comparable to American War Bonds.) Normally Britain would pay for imports with the export of manufactured goods. But with the economy on a war footing, manufacturing was concereted to war production. Unlike NAZI Germany, Britain in 1940 began waging total war. Production of consumer goods for domestic consumption or export were cut back to the bare minimum. The War would leave Britain with a huge war debt. Britain would end the War as the greatest debtor nation in world history. The United States was able to finance the emense cost of not only its own war effort, but that of it allies. And it was done to a significant extent on a voluntary basis by a free people.


France began finanzing the War much as it did in World War I and like Britain was in a far worse financial state than was the case in World War I, both because of the cost of World War I and the Depression. Financing the War became a moot condition when the Germans attacked and defeated France in the first year of the War. For most of the rest of the War France became the major support for the NAZI war economy. Hitler anticipated that thet he could prpcedute the war indefinitely with the resources of the East. It was the primary purpose of Operation to obtain those resources. But as the War progressed and the Red army held, the resources obtained barely supplied the needs of the Wehrmacht forced deployed there. It would be Vichy France that would support the German war economy. And because of the conditions of the Fraco-German Armistice and an over valued Reich Mark, there was little or no financial cost. And unlike other occupird country, France had a very sizeable econimy to exploit.


Germany was not in a good economic position when Hitler seized power and his decesion to launch a major armament program made the situation even worse. Hitler's rearament program was bankrupting NAZI Germany. The Anschluss improved the finalcial situation, but did not redress the basic problem (1938). It is questionable how long Hitler could have continued his rearament program if he had not taken Germany to war in September 1939. If the level of indebtness had become known, it would have syrely led to a greater financial crisis than that experined during the Depression. We know that NAZI government expenditures in the years just before the War began were more than twice as large as revenues. NAZI economic policies held little chnce for economic groth. NAZI focus on the military, inefficent production methods as a result of Germany's economic isolation, and the aging infrastructure, all argued against economic growth. Nor was Germany well situated to competing economocally with other major industrial countries. German corporations now acustomed to Government contracts were increasingly less capable of facing internatiinal competition. One analyst writes, "It is my conclusion that regardless of whether or not levels of deficit spending were decreased, Germany would be very poorly placed to compete in international trade, and would likely be outgrown by their major economic competitors. In the short term, they were not well placed to outgrow even the Communist economy of the USSR, which had experienced substantial levels of industrial growth while the rest of the world experienced the Great Depression." [Montgomerie] The success of the Whrmacht in the first 2 years of the War gve it possession or ontrol over most of Wesrern Europe. The NAZIs could exploit the resulting Grossraum without any financial distress on Germny itself. And to exploit it the Germans seized resources, enforced explotive trade and currencu exchange cinditions and brutal forced labor as well as slave work camps. They even began extracting the gold teeth if conentration camp imates and Holocaust vicims. Gold and foreign exchnge was needed for the ciuntries they did not occupy (Portugal, Spaain, Swede, Switzerland, and Turkey). The Royal Navy prvented Germany from importing needed material, except for these countries located on the perifery of Reich controlled territory. In contrast to the Allied countries where production expnded, production in the NAZI Grossraum declined, insome cases precipitously. (Production in the Reich increased, but not in the Grossraum.)


The British played a major role in financing the Italian war effort in World War I. This support was unavailable in World War II. And the Royal Navy blockade cut Italy off from imports. The Germans could not provide the same level of support that Nritain supplied in World War I. Mussolini calculated that the spoils of war would be a great boost to the Italian economy. It proved to be a major miscalculation. Italy was not a heaviky industrialkzed country, but there was induustry in northern Euripe. Sonn raw materual shortags adversely affected industrial production. Not only was industry unable to adequately supply the military, but the civilian population suffrd. Without imports, serious food shortages decloped.


Japan was the only industrial country in Asia. And their economy was export based. The economy struggled recovering from the World War I expansion in the 1920s and than the Depression of the 1930s. The Military that launchd the war decided that theu would do best if they conquered China to obtain resources and a captive market thant compete with america and Europe. When the war dragged on in China, finances became an increasing concern. The resources of the Southern Resource zone (SRZ) beconed, resources needed to complete the conquest of China. Japanese arms production and American economic sanctions in response to Japanese aggression has severe severe financial consequences that Japan could not permanently endure. To the militarists, onc they had the resources of the SRZ, they believed that there would be no financial constraints. Japan from the beginning inforced a strategy that their invading troops and subject people needed to be self-sufficient. The Japanese proceeded to confiscate what they wanted or purchase goods through simple currency printing. This meant military scrip was printed with no backing or the production of goods which could be purchased. There were also bilateral clearing arrangements imposed on the occupied peope. Through these mecganisms huge quantities of resources could be transferred to the Home Islands. One estimate suggests this accounted for a third of the Dutch East Indies GDP. [Huff and Majima] This strategy resulted in inflationary spirals deadly famines in the occupied countries causing declines in oroduction and reducing the what could be seized by the Japanese. But before this could affect the Japanese, the U.S. Pacific Fleet submarine force destroyed the Japanese Maru fleet making it difficult to get the resources conquered back to the Home Islands. so ultimately the whole enterprise failed. The Japanee were cut off from the resources need to run their war industries.

Soviet Union

The Sovit Union not only made a critical military contribution to the War, but also an economic contribution as well. Soviet oroduction declined as a result of the NAZI invasion (1941), but by 1943 relocated industries were back on line and matching or even exceeding Germam production. W are, hiwvr, unusure how to assess or even describe Soviet war financing.

United States

The absolute cost of the World War II to America was $321 billion durung the War years (1941-45). This does not include the cost of careing for wounded veterans after the War and GI-Bill expenditures. It was, however, greater than any other country paid. This was in part because of the high wages paid to American workers and soldiers. This was very different than the approach Germany used to finance the war--slave labor and pilaging occupied countries. The cost to America was also greater than olter countries because yhrough Lend Lease, America helped equip allied armies. It was much greater than the cost of World War I in which America only participted for a year and a half. Taxes during the war covered slightly more than 40 percent of the cost. The Federal Govrnmrnt had to borrow the reminder. Here there were several alternatives. Congress could have increased taxes to astronomical levels or it could have adopted some kind of compulsory war bond purchase scheme. Both alternatives were rejected. Congress did increase taxes. The Revenue Act of 1942 substatially changed the Federal tax system. Many more individuals were required to pay income taxes, including Americans with modest salaries. The number of taxpayers were increased from 13 million to 50 million people. The tax was highly progressive with wealthy people paying a larger percentage. Corporations were also affected by excess profits taxes. Congress chose to finance the war primarily by borrowing from financial institutins and individuals. The Federal Government launched well publicized drives to sell war bonds on a voluntary basis. The drives were supported by Hollywood celberties and decorated service men. Even children participated in these drives. They could buy Defense Saving Stamps and when they filled up their book a bond would be issued. This process began even before the Japanese Pearl Harbor attack brought America into the War (1941). There were several drives. We note a Sherman tank being used in the Third War Bond Drive (1943). The War Bond drives not only help finance the war, but took money out of the cosumer economy and thus limited both inflation and consumer demand competing with war production. President Rooselvelt had been criticized for the New Deal defecit spending during the 1930s. This oproved to be a small fraction of what the War cost. All the borrowing caused the national debt to baloon five times to $259 billion.


Huff, Gregg and Shinobu Majima. "inancing Japan's World War II Occupation of Southeast Asia, " University of Oxford Working Pper, No. 109 (October 2012).

Montgomerie, Ian. "The Nazi economy," undated internet posting.

Sayers, R.S. "Financial Policy, 1939-45" in Sir Keith Hancock, ed. History of the Second World War: United Kingdom Civil Series (London: H.M. Stationary Office, 1956).


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Created: 3:49 PM 7/29/2017
Last updated: 3:49 PM 7/29/2017