Free Trade Revolution: The Economic Effects of World War II

World War II ended the practice of developed nations trying to conquer each other, as the free-trade revolution spread across the globe.

Nov 24, 2021By Owen Rust, MA Economics in progress w/ MPA
united nations
A photograph of the creation of the UN in 1945, via the United Nations

 

In Asia, Japan controlled the Korean peninsula and began waging an increasingly brutal war against China in 1937. In 1939, Germany invaded Poland, an act that would spiral into World War II. Together, these two members of the Axis Powers embarked on a war of aggression and conquest, driven partly by a desire to control natural resources. In 1941, Germany invaded the Soviet Union to get “free” oil, and Japan controlled much of Asia as part of its “Greater East Asia Co-Prosperity Sphere.” The Allied Powers managed to liberate these areas after years of total war. This war spending created an economic boom in the United States, caused the British Empire to crumble, turned the Soviet Union into a second superpower, and began the Free Trade revolution.

 

Before World War II: The Great Depression and Colonization

lebensraum germany 1930s
An image showing the lebensraum (living space) goal of German dictator Adolf Hitler, written about in his 1920s book Mein Kampf, via the United States Holocaust Memorial Museum, Washington DC

 

In the early 1930s, most of the developed world suffered intensely due to the Great Depression. Germany, forced to pay reparations from World War I, saw unemployment skyrocket. Nations felt vulnerable economically, and many had historically sought to bolster their economies through colonization, or the control of other territories. European nations, especially Britain, had controlled many colonies since the 1700s and used them to guarantee cheap natural resources and markets to buy finished goods. In Asia, Japan had colonized the Korean peninsula and parts of northeastern China.

 

In Germany, Italy, and Japan, people soon rallied around fascist politicians like Adolf Hitler, Benito Mussolini, and Hideki Tojo. These men and their respective political parties promised a restoration of wealth and national pride through conquest. In the late 1930s, these leaders helped spur economic growth through increased military and infrastructure spending. Italy invaded Ethiopia in 1935, hoping to recreate a sort of Roman Empire under Mussolini. Two years later, Japan invaded northern China and sparked the Second Sino-Japanese War. Finally, in 1939, Germany invaded Poland and began World War II in Europe. German dictator Adolf Hitler wanted to control all of eastern Europe to guarantee lebensraum – living space and resources – for Germany.

 

japanese empire ww2
A map of the Japanese Greater East Asia Co-Prosperity Sphere, also known as the Japanese Empire, in the 1930s and early 1940s, via Texas A&M University, Corpus Christi

 

Aside from national pride and, in Germany’s case, a desire for revenge from the defeat in World War I (1914-18), international trade and economics played a role in the outbreak and expansion of war in the late 1930s. Economically, the three Axis Powers were vulnerable due to a lack of domestic natural resources. The modern era required oil for internal combustion engines, and the three Axis Powers lacked access to significant amounts of oil. To get the oil cheaply, especially to fuel future wars for conquest, Germany and Japan decided to take it by force. Germany set its sights on the Soviet Union, which had massive oil reserves. Angered by a U.S. trade embargo imposed after its brutality in China, Japan targeted the Dutch East Indies.

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The Outbreak of World War II: Deficit Spending and Low Unemployment

ww2 production military boat and trucks
A train carrying U.S.-made trucks for Allied war efforts as part of Lend-Lease, via the United States Holocaust Memorial Museum, Washington DC, with; U.S. military boat production during World War II, via The National World War II Museum, Kansas City

 

World War II began in earnest in 1939 after Adolf Hitler invaded Poland on September 1 and France in May 1940. Shockingly, France was conquered in only six weeks, leaving Britain alone in Europe to stand against Germany and Italy. Afraid of a potential German invasion of the British Isles themselves, the United Kingdom embarked on a full mobilization of all defensive resources. In September 1940, the U.S. began sending military aid to Britain, and later on the USSR after it was invaded by Germany, as part of the Lend-Lease arrangement.

 

Under President Franklin D. Roosevelt, who won an unprecedented third term in 1940, the U.S. military had begun to modernize and grow as tensions in Europe and Asia mounted. Though not unusual given the recent elevated federal spending under the New Deal (1933-39), this proactive spending was unusual given that it was still technically peacetime for the United States. Historically, most nations only maintained small militaries during peacetime and then mobilized once hostilities occurred.

 

After the Japanese attack on the U.S. naval base at Pearl Harbor, Hawaii, America entered World War II on December 7, 1941, America entered World War II. Joining the Allied Powers, the U.S. added its military muscle to fight both Germany and Japan. Just as importantly, American industry joined the fight and transformed almost overnight from producing consumer goods for civilians to military goods. The Allied Powers in Europe – Britain, the Soviet Union, and the United States – engaged immediately in full mobilization at the outbreak of war, meaning transferring all capital, labor, and energy from civilian use to military use if possible. Using bonds, these nations could borrow money and spend beyond their tax revenue, a practice known as deficit spending, and drastically increase industrial production.

 

us defense spending
A graph showing the high level of U.S. defense spending during World War II, via the Federal Reserve Bank of St. Louis

 

The importance of full mobilization in warfare is seen in Germany, the aggressor, who failed to do so quickly. Japan, contrary to the popular stereotype of fanatical loyalty to the emperor and country, struggled with ramping up domestic support for the war effort. Economically, therefore, it does not pay to be the aggressor and try to insulate one’s civilians from the harsh necessities of total war, such as rationing. When you are attacked, your people are willing to ration out of patriotism, but this is much less likely when there is no need to defend oneself.

 

Unemployment in the United States virtually disappeared during World War II, falling from over 14 percent in 1939 to just over 1 percent in 1944. Ultimately, this elevated defense spending definitively ended the Great Depression by guaranteeing a job for just about every willing worker. For the first time, women joined the labor force in large numbers in order to keep factories running as men were drafted or volunteered for the war. However, this was only popular among the Allies – the Axis Powers were slower to allow women to take on industrial work.

 

The sudden addition of women to the workforce allowed for unprecedented levels of production and spending. The Allied Powers swiftly overtook the Axis Powers in terms of industrial production, and this is largely credited to their victory. Very quickly, it was apparent that Germany, Italy, and Japan could not as easily replace ships, planes, and tanks that were being destroyed in battle. Britain, the Soviet Union, and the United States, by contrast, were able to churn out equipment rapidly, shifting the balance of power by the end of 1942.

 

Industrial Might Wins World War II

world war ii japanese surrender 1945
The Japanese delegation arrives on the USS Missouri on September 2, 1945, to formally surrender, via the United States Navy

 

It should be no surprise that the victors in World War II were the nations that could produce the most capital goods. Although Germany was known for its technological innovations such as the jet fighter, heavy tank, and assault rifle, these had little effect on the industrial might that the U.S. and Soviet Union unleashed on either side. Similarly, despite the feared fanaticism of its soldiers, Japan rapidly lost industrial capacity as the U.S. drew within bombing range in the Pacific Ocean and could destroy factories. By late in the war, neither Germany nor Japan could maintain industrial production, especially of fuel.

 

Germany and Italy were defeated, slowly and painfully, on land as the Allies ground from town to town. On May 8, 1945, Germany surrendered unconditionally, and VE Day – Victory in Europe Day – was declared. On September 2 of that year, Japan surrendered unconditionally, and V-J Day – Victory of Japan Day – was declared. On this historic date, World War II was officially over. Japan surrendered before any Allied troops landed on the shores of the “home islands,” and historians have debated whether it was the U.S. dropping the atomic bombs on Hiroshima and Nagasaki, the invasion of Japanese territory in China by the Soviet Union, or other factors that convinced the Japanese to surrender.

 

Free Trade Wins After World War II

free trade
An image showing the international flows of trade, via The Library of Economics and Liberty

 

Tariffs were popular in the early 1930s as nations attempted to raise revenue from other nation’s exports to their citizens during the Great Depression. Unfortunately, they quickly discovered that almost all tariffs were reciprocal, meaning that nations whose companies had to pay tariffs retaliated in kind. The United States, which passed the Smoot-Hawley Tariff Act in 1930, swiftly faced retaliatory tariffs from other countries. This resulted in a death spiral for international trade and contributed to the economic woes that influenced the beginning of World War II.

 

Additionally, Germany and Japan discovered that it was not cheaper to conquer foreign territory to gain its natural resources. The land-grab and use of forced labor by Germany and Japan were simply not competitive with free workers in the Allied countries. Forced laborers were treated poorly and would attempt to escape or even sabotage the efforts of their captors. Hundreds of thousands of soldiers were needed to control this labor, and there were plenty of casualties from freedom fighters and civilian resistance.

 

ww2 european assembly british india colonial painting
A European assembly to handle questions about trade after World War II, via European Centre for International Political Economy (ECIPE), with; A painting of the British in India during the colonial era, via Gresham College, London

 

To promote economic growth and ensure that nations no longer felt the need to procure resources by force, the General Agreement on Tariffs and Trade (GATT) was created in 1947. In the 1990s, this evolved into the World Trade Organization (WTO). GATT helped promote free trade by creating uniform rules for international trade and reducing trade barriers like tariffs, quotas, and embargoes. Free trade economists believe that all consumers and most producers benefit from reduced transaction costs enjoyed by no tariffs or quotas on imports. After World War II, international trade increased dramatically.

 

The post-World War II collapse of the British Empire, and later collapse of French colonialism, were direct results of the war and helped expand free trade further. Like India and Algeria, newly independent countries were now free to make trade agreements with nations other than their colonial masters. The end of the colonial era in the 1950s and 1960s helped cement the importance of free trade – anyone could import and export from anyone.

 

Military-Industrial Complex Spending

eisenhower military industrial complex
Then-general Dwight D. Eisenhower praises American industry for its help in World War II, via the Hoover Institution at Stanford University

 

The need for full mobilization as part of total war during World War II created the military-industrial complex, which would be cemented in place by the following Cold War. As a result of World War II’s size and scope, close links would be forever forged between the military and industry. Defense contractors expanded tremendously during the war and became highly profitable. Naturally, the leaders and investors of these companies would lobby for their continued preferential status after the war. Today, defense spending remains exorbitant worldwide despite the absence of any armed conflicts rivaling World War II in size or scope or any true Cold War rivalry between superpowers.

 

It is debatable whether elevated defense spending after World War II is attributable more to the growth of the military-industrial complex during the war or the Cold War. Although the Cold War undoubtedly had a considerable effect on such spending, with NATO and Warsaw Pact nations spending much more on defense per capita than before World War II, it is possible that defense spending would have been elevated post-war even without tensions between the U.S. and Britain and the USSR. After years of fiscal stimulus during the Great Depression, governments would have faced pressure to not cut defense spending sharply and potentially trigger a recession.

 

northrop grumman defense support
An exhibit of a Northrop Grumman satellite, via the National Museum of the U.S. Air Force, Dayton

 

The ability of defense contractors to switch back and forth between products for the military and for the civilian market has helped lock in higher defense spending, as it can be argued that such spending can benefit society as a whole through technological innovations. Defense contractors with civilian applications, such as most aerospace companies, became popular as a way to boost defense capabilities “off the books” without having to create additional government agencies. However, these private companies demand profit, thereby likely elevating expenses compared to having all military work done by government employees. This has established a permanent post-World War II trend of higher spending.

 

Higher Education 

world war ii gi bill
An image showing a college graduate beneath the emblems of the U.S. military branches, via the Georgia Department of Veterans Service

 

The passage of the GI Bill in 1944 allocated billions of dollars toward veterans’ college tuition. With millions of young men and women serving in the armed forces, the federal government wanted to ensure that they could successfully transition back to civilian life. Within seven years, some eight million World War II veterans helped fund their education with the GI Bill. This led to a massive expansion of America’s universities. With higher education predominantly catering to the wealthy prior to the war, a major sociocultural shift occurred and schools began marketing themselves to the middle class.

 

Now that higher education was affordable for the middle class, a tremendous increase in formal education expectations commenced. Prior to World War II, only a quarter of U.S. adults had a high school diploma. Now that military service would effectively pay for one’s college education, a high school diploma became the expectation for most Americans. Within two decades after the end of the war, more than three-quarters of young people were graduating from high school. During this time, college tuition costs were much lower than today, adjusting for inflation, and higher education was affordable even for Baby Boomers (children born between 1946 and 1964) who were not military veterans with GI Bill benefits. Thus, World War II and the resulting GI Bill made higher education a middle class expectation in America.

 

Post-World War II Baby Boom And Consumer Spending

post ww2 spending cars
A showroom of new automobiles during the Baby Boom era (1946-64), via WGBH Educational Foundation

 

Coming immediately on the heels of the Great Depression, World War II and its necessitated rationing meant Americans had spent many years without generous consumer spending. With the economy stimulated by wartime spending, including post-war GI Bill benefits, citizens were ready to celebrate the new peacetime by opening their pocketbooks. An age of consumerism began in the late 1940s, with families purchasing new cars, refrigerators, and other expensive appliances.

 

This elevated consumer spending continued by necessity as the result of a baby boom. The “Baby Boomers” were the generation born between 1946 and 1964. More babies were born in 1946 than any previous year in U.S. history, resulting in millions of young men returning from the war. Simultaneously, millions of women left their wartime factory jobs and returned to the domestic sphere. Millions of new nuclear families resulted, and they spent lots of money on their children. These “Boomers” carried these spending habits into adulthood and lavished on their own kids, the Millennials (1981-1996). World War II, therefore, can be credited with creating the modern, consumer-centric incarnation of the classic American childhood.



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By Owen RustMA Economics in progress w/ MPAOwen is a high school teacher and college adjunct in West Texas. He has an MPA degree from the University of Wyoming and is close to completing a Master’s in Finance and Economics from West Texas A&M. He has taught World History, U.S. History, and freshman and sophomore English at the high school level, and Economics, Government, and Sociology at the college level as a dual-credit instructor and adjunct. His interests include Government and Politics, Economics, and Sociology.