War Economy

War Economy

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The first budget of the Second World War was introduced by the Chancellor of the Exchequer, Sir John Simon, in September, 1939. The standard rate of income tax was increased from five shillings and sixpence to seven shillings. An extra penny was added to the tax on a pint of beer. There were also extra taxes on sugar and tobacco. Simon also introduced a new Excess Profits Tax of 60 per cent on the war industries.

The country's leading economist, John Maynard Keynes, argued that this would not be enough to pay for the war and advocated a drastic increase in taxation.

In the 1930s Britain imported about 55 million tons of food a year from other countries. Understandably, the German government did what they could to disrupt this trade. One of the main methods used by the Germans was to get their battleships and submarines to hunt down and sink British merchant vessels.

With imports of food and other goods declining, prices began to rise. Food prices increased by about 15 per cent during the first six months of the war. This upset the trade unions and they began to demand wage increases for their members. The government reacted by providing £60 million a year to subsidise the price of basic foods.

The British government decided to introduce a system of rationing. This involved every householder registering with their local shops. The shopkeeper was then provided with enough food for his or her registered customers. In January, 1940, bacon, butter and sugar were rationed. This was followed by meat, fish, tea, jam, biscuits, breakfast cereals, cheese, eggs, milk and canned fruit.

There was also a shortage of workers in essential war industries such as engineering and shipbuilding. The government, against the wishes of the trade unions, passed the Control of Employment Act. This enabled them to bring in semi-skilled and unskilled workers to do jobs previously done by skilled workers.

In April 1940 Sir John Simon introduced a new budget. The standard rate of income tax was increased from seven shillings to seven shillings and sixpence. There were also extra taxes on tobacco. The most controversial measure was to increase postal charges. This especially upset members of the armed forces who were serving abroad as they feared it might reduce the number of letters they received from their families.

During the war the government decided to restrict the supplies of non-essential consumer goods to the home market. In June 1940 the government issued the Limitation of Supplies Order. This cut the production of seventeen classes of consumer goods to two-thirds of the 1939 level. This included toys, jewellery, cutlery and pottery.

From 1938 to 1944 the cost of living rose by 50 per cent, whilst weekly earnings rose by just over 80 per cent. The government tried to persuade the people of Britain to invest this extra money into National Savings schemes such as Warship Week and Wings for Victory. However, much of this money was used to buy black market goods and a dramatic increase in gambling.

The cost of the war increased throughout the war. On 4th June 1941, the new Chancellor of the Exchequer, Kingsley Wood, the cost of the war was on average £10,250,00 (£410,000,000) a day.

The first war budget. At 3.45 Simon rose (he was directly in front of me) and in unctuous tones not unlike the Archbishop of Canterbury, opened his staggering budget. He warned the House of its impending severity yet there was a gasp when he said that Income Tax would be 7/6 in the £. The crowded House was dumbfounded, yet took it good-naturedly enough. Simon went on, and with many a deft blow practically demolished the edifice of capitalism. One felt like an Aunt Sally under his attacks (the poor old Guinness trustee, Mr Bland, could stand it no more, and I saw him leave the gallery) blow after blow; increased surtax; lower allowances; raised duties on wine, cigarettes and sugar; substantially increased death duties. It is all so bad that one can only make the best of it, and re-organise one's life accordingly.

Besides manning the forces, heavier demands were now put forward on behalf of the expanding munitions factories and workshops. If the country's morale was to be sustained the civil population must also be well nourished. Mr. Bevin at the Ministry of Labour and National Service used all his knowledge and influence as an experienced trade union leader to gather the numbers required. It was already obvious that man-power was the measure alike of our military and economic resources. Bevin, as the supplier of labour, and Sir John Anderson, Lord President of the Council, together devised a system which served us in good stead up to the end of the war, and enabled us to mobilise for war work at home or in the field a larger proportion of our men and women than any other country of the world in this or any previous war. At first the task was to transfer people from the less essential occupations. As the reservoir of manpower fell all demands had to be cut. The Lord President and his Manpower Committee adjudicated, not without friction, between competing claims. The results were submitted to me and the War Cabinet.

One could certainly argue that Churchill's war cabinet had behaved on occasion no differently from a fascist regime, censoring news, controlling wages and prices, restricting travel, subordinating civil liberties to self-defined wartime necessity.

Christopher Bates, 1 Balls Green, Withyham, was sent to prison for 21 days by East Grinstead Magistrates on Monday for refusing to work down the coal mines as directed. The defendant stated that he had suffered from pains in the head, and had a fear of going underground. He stated he was a keen member of the Home Guard and had volunteered for the Royal Navy but had not been called up.

Thomas Lower, aged 18, of Grantham Cottages, Copthorne, pleaded guilty at East Grinstead Magistrates Court on Monday for not reporting for training in the coal mines. When interviewed. Lower said: "I will go into any of the Forces but not the mines. I would rather go to gaol." Mr. A. J. Burt, told Lower that coal mining was as valuable a service as entering the Forces and it was in the nation's interest that the defendant should obey the directives of the government.

Economic warfare

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Economic warfare, the use of, or the threat to use, economic means against a country in order to weaken its economy and thereby reduce its political and military power. Economic warfare also includes the use of economic means to compel an adversary to change its policies or behaviour or to undermine its ability to conduct normal relations with other countries. Some common means of economic warfare are trade embargoes, boycotts, sanctions, tariff discrimination, the freezing of capital assets, the suspension of aid, the prohibition of investment and other capital flows, and expropriation.

Countries engaging in economic warfare seek to weaken an adversary’s economy by denying the adversary access to necessary physical, financial, and technological resources or by otherwise inhibiting its ability to benefit from trade, financial, and technological exchanges with other countries. Economic warfare consisting of blockades and the interception of contraband among belligerents has been practiced since before the Peloponnesian War (431–404 bc ) in ancient Greece. In modern times, its uses have broadened to include putting pressure on neutral countries from which enemy countries could obtain supplies and denying potential enemies goods that might contribute to their war-making ability. One of the primary types of economic warfare employed in the 20th century was the embargo, sometimes total and sometimes restricted to strategic goods (i.e., those that are essential for military purposes). During the Cold War, for example, the United States and its allies attempted to deny the Soviet Union and its allies access to computers, telecommunications equipment, and other technologies of high economic and military value.

The effectiveness of economic warfare depends on a number of factors, including the capacity of the adversary to produce the restricted goods internally or to acquire them from other countries. For example, efforts by the United States to oust Fidel Castro from power in Cuba by maintaining a decades-long embargo were frustrated by increased trade between Cuba and Mexico, Canada, and western Europe. Although economic warfare is often considered a relatively inexpensive complement or alternative to military engagement, it imposes costs on the initiating country by denying it access to economic exchange with the targeted country. For example, consumers in the United States paid higher costs for goods that could have been imported more cheaply from Cuba or other targeted countries, such as Iran, and American businesses were denied access to their goods and markets.


The early republic was marked by frequent wars and factional struggles. Following the presidency of Yuan Shikai to 1927, famine, war and change of government was the norm in Chinese politics, with provinces periodically declaring "independence". The collapse of central authority caused the economic contraction that was in place since Qing to speed up, and was only reversed when Chiang reunified China in 1927 and proclaimed himself its leader. [5]

Chinese domestic industries developed rapidly after the downfall of the Qing dynasty, despite turmoil in Chinese politics. Development of these industries peaked during World War I, which saw a great increase in demand for Chinese goods, which benefitted China's industries. In addition, imports to China fell drastically after total war broke out in Europe. For example, China's textile industry had 482,192 needle machines in 1913, while by 1918 (the end of the war) that number had gone up to 647,570. The number increased even faster to 1,248,282 by 1921. In addition, bread factories went up from 57 to 131. [6]

The May 4th movement, in which Chinese students called China's population to boycott foreign goods, also helped spur development. Foreign imports fell drastically from 1919–1921 and from 1925 to 1927. [7]

Chinese industries continue to develop in the 1930s with the advent of the Nanking decade in the 1930s, when Chiang Kai-shek unified most of the country and brought political stability. China's industries developed and grew from 1927 to 1931. Though badly hit by the Great Depression from 1931 to 1935 and Japan's occupation of Manchuria in 1931, industrial output recovered by 1936. By 1936, industrial output had recovered and surpassed its previous peak in 1931 prior to the Great Depression's effects on China. This is best shown by the trends in Chinese GDP. In 1932, China's GDP peaked at 28.8 billion, before falling to 21.3 billion by 1934 and recovering to 23.7 billion by 1935. [8]

The rural economy retained much of the characteristics of the Late Qing. While markets had been forming since the Song and Ming dynasties, Chinese agriculture by the Republic of China was almost completely geared towards producing cash crops for foreign consumption, and was thus subject to the say of the international markets. Key exports included glue, tea, silk, sugar cane, tobacco, cotton, corn and peanuts. [9]

The rural economy was hit hard by the Great Depression of the 1930s, in which an overproduction of agricultural goods lead to massive falling prices for China as well as an increase in foreign imports (as agricultural goods produced in western countries were "dumped" in China). In 1931, imports of rice in China amounted to 21 million bushels compared with 12 million in 1928. Other goods saw even more staggering increases. In 1932, 15 million bushels of grain were imported compared with 900,000 in 1928. [10] This increased competition lead to a massive decline in Chinese agricultural prices (which were cheaper) and thus the income of rural farmers. In 1932, agricultural prices were 41 percent of 1921 levels. [11] Rural incomes had fallen to 57 percent of 1931 levels by 1934 in some areas. [11]

Foreign direct investment in China soared during the Republic of China. Some 1.5 billion of investment was present in China by the beginning of the 20th century, with Russia, The United Kingdom and Germany being the largest investors. However, with the outbreak of World War I, investment from Germany and Russia stopped while England and Japan took a leading role. By 1930, foreign investment in China was more than 3.5 billion, with Japan leading (1.4 billion) and England at 1 billion. By 1948, however, the capital stock had halted with investment dropping to only 3 billion, with the US and Britain leading. [12]

The currency of China was initially silver-backed, but the nationalist government seized control of private banks in the notorious banking coup of 1935 and replaced the currency with the Fabi, a fiat currency issued by the ROC. Particular effort was made by the ROC government to instill this currency as the monopoly currency of China, stamping out earlier Silver and gold-backed notes that had made up China's currency. Unfortunately, the ROC government used this privilege to issue currency en masse a total of 1.4 billion Chinese yuan was issued in 1936, but by the end of the second Sino-Japanese war some 1.031 trillion in notes was issued. [13] This trend worsened with the outbreak of the Chinese Civil war in 1946. By 1947, some 33.2 trillion of currency was issued as a result of massive budget deficits resulting from war (taxation revenue was just 0.25 billion, compared with 2500 billion in war expenses). By 1949, the total currency in circulation was 120 billion times more than in 1936. [14]

In 1937, Japan invaded China and the resulting warfare laid waste to China. Most of the prosperous east China coast was occupied by the Japanese, who carried out atrocities such as the Rape of Nanjing in 1937 and random massacres of whole villages. The Japanese carried out systematic bombing of Chinese cities, and the Nationalist armies followed a "scorched earth" policy of destroying the productive capacity of the areas they had to abandon to the Japanese. In one Japanese anti-guerilla sweep in 1942, the Japanese killed up to 200,000 civilians in a month. 2–3 million civilians died in a famine in Henan in 1942 and 1943. Overall the war is estimated to have killed between 20 and 25 million Chinese. It severely set back the development of the preceding decade. [15] Industry was severely hampered after the war by devastating conflict as well as the inflow of cheap American goods. By 1946, Chinese industries operated at 20% capacity and had 25% of the output of pre-war China. [16]

The war brought about a massive increase in government control of industries. In 1936, government-owned industries were only 15% of GDP. However, the ROC government took control of many industries in order to fight the war. In 1938, the ROC established a commission for industries and mines to control and supervise firms, as well as instilling price controls. By 1942, 70% of the capital of Chinese industry were owned by the government. [17]

Following the war with Japan, Chiang acquired Taiwan from Japan and renewed his struggle with the communists. However, the corruption of the KMT, as well as hyperinflation as a result of trying to fight the civil war, resulted in mass unrest throughout the Republic [18] and sympathy for the communists. In addition, the communists' promise to redistribute land gained them support among the massive rural population. In 1949, the communists captured Beijing and later Nanjing as well. The People's Republic of China was proclaimed on 1 October 1949. The Republic of China relocated to Taiwan where Japan had laid an educational groundwork. [19] Taiwan continued to prosper under the Republic of China government and came to be known as one of the Four Asian Tigers due to its "economic miracle", and later became one of the largest sources of investment in mainland China after the PRC economy began its rapid growth following Deng's reforms. [20]

November 1948 to October 1949: Post-War Consumer Spending Slows

When wartime rations and restrictions were lifted after WWII, American consumers rushed to catch up on years of pent-up purchases. From 1945 to 1949, American households bought 20 million refrigerators, 21.4 million cars, and 5.5 million stoves.

When the consumer spending boom began to level off in 1948, it triggered a “mild” 11-month recession in which GDP shrunk by only 2 percent. Unemployment was up considerably, though, with all former GIs back in the job market. At its peak, unemployment reached 7.9 percent in October 1949.

War Economy - History

In the years before the Civil War, the economic interests of Americans in the North and Northwest grew increasingly further from those of Americans in the South and Southwest. Although the Civil War itself was caused by a number of different factors, the divergent paths taken in the economic development of North and South contributed to the animosity between the regions, the development of the Confederacy and, ultimately, the victory of the Union.

Contrasting Economies
As a nation, the United States was still primarily agricultural in the years before, during and immediately after the Civil War. About three-quarters of the population lived in rural areas, including farms and small towns. Nevertheless, the Industrial Revolution that had hit England decades before gradually established itself in the "former colonies."
While factories were built all over the North and South, the vast majority of industrial manufacturing was taking place in the North. The South had almost 25% of the country's free population, but only 10% of the country's capital in 1860. The North had five times the number of factories as the South, and over ten times the number of factory workers. In addition, 90% of the nation's skilled workers were in the North.
The labor forces in the South and North were fundamentally different, as well. In the North, labor was expensive, and workers were mobile and active. The influx of immigrants from Europe and Asia provided competition in the labor market, however, keeping wages from growing very quickly. The Southern economy, however, was built on the labor of African American slaves, who were oppressed into providing cheap labor. Most Southern white families did not own slaves: only about 384,000 out of 1.6 million did. Of those who did own slaves, most (88%) owned fewer than 20 slaves, and were considered farmers rather than planters. Slaves were concentrated on the large plantations of about 10,000 big planters, on which 50-100 or more slaves worked. About 3,000 of these planters owned more than 100 slaves, and 14 of them owned over 1,000 slaves. Of the four million slaves working in the South in 1860, about one million worked in homes or in industry, construction, mining, lumbering or transportation. The remaining three million worked in agriculture, two million of whom worked in cotton.
Since Eli Whitney's 1793 invention of the cotton 'gin, the cotton industry became a lucrative field for Southern planters and farmers. Utilizing slave labor, cotton planters and farmers could cut costs as they produced cotton for sale to other regions and for export to England. In exchange, Southern farmers and planters purchased manufactured goods from the North, food items from the West and imported luxuries like European designer clothes and furniture from England. The growth of the Southern cotton industry served as an engine of growth for the entire nation's economy in the antebellum (pre-war) years.
The other critical economic issue that divided the North from the South was that of tariffs. Tariffs were taxes placed on imported goods, the money from which would go to the government. Throughout the antebellum period, whenever the federal government wanted to raise tariffs, Southern Congressmen generally opposed it and Northern Congressmen generally supported it. Southerners generally favored low tariffs because this kept the cost of imported goods low, which was important in the South's import-oriented economy. Southern planters and farmers were concerned that high tariffs might make their European trading partners, primarily the British, raise prices on manufactured goods imported by the South in order to maintain a profit on trade.
In the North, however, high tariffs were viewed favorably because such tariffs would make imported goods more expensive. That way, goods produced in the North would seem relatively cheap, and Americans would want to buy American goods instead of European items. Since tariffs would protect domestic industry from foreign competition, business interests and others influenced politicians to support high tariffs.
Americans in the West were divided on the issue. In the Southwest, where cotton was a primary commodity, people generally promoted low tariffs. In the Northwest and parts of Kentucky, where hemp (used for baling cotton) was a big crop, people supported high tariffs.

Economic Factors in Secession
As the 1850s proceeded, the divide between the North and Northwest and the South and Southwest widened. The bitter debates over the slave status of newly-admitted states, which had been going on since at least the Missouri Compromise of 1820, were signs of the very real fear Southerners had of having their voice in Congress drowned out by "Yankee industrialists." Incidents such as the Southern protests against the "Tariff of Abominations" in the 1820s and the Nullification Crisis of the 1830s demonstrated how deep a rift the tariff controversy was creating between North and South.
In Congress, Southern Representatives and Senators were concerned that their interests would not be suitably addressed. As immigrants flocked to the Northern areas, swelling the ranks, Southerners were afraid the Northern states would increase their representation in the House of Representatives, blocking "Southern-friendly" legislation. The interests of Southern Americans who were African Americans, however, did not seem to concern a large number of Southern Congressmen. By the late 1850s, the fear of Northern domination in national economic policy, combined with the desire to maintain Southern institutions (including slavery), became a major influence on the people who eventually chose to secede from the Union.
What did the Confederacy hope to accomplish by seceding from the Union? The clearest goal was to defend and preserve the right of Southern Whites, including the right to own slaves. While the concept of owning another human being would obviously be a moral and criminal issue today many slaveowners either ignored or tried to justify their way out of that dimension, focusing on the economic aspects of slavery. They held that the right to own people was a property right, just like owning land or buildings. Thus, when Northern politicians tried to ensure that new states admitted to the Union were "free-soil" (i.e., that no slavery was allowed), slaveowners felt that their right to settle in the West with their "property," including slaves, was being infringed. In addition, in the minds of secessionists, the threat of national abolition not only had the potential of reducing the wealth of many prominent Southerners, but also interfered with the "property" rights of Southern Whites. Thus, secession seemed to be the only way of preserving those rights.
In addition, some secessionists were interested in preserving the "Southern way of life." While the image of the large plantations and elegant Scarlet O'Hara-esque Southern belles sipping mint juleps was applicable to only a small minority of southern farms, the gentility and clearly-defined class system was something of a comfort, even for those Southerners who did not live in that world. In addition, some accepted the myth of the happy, subservient slave, who was not quite a human being and would benefit from the civilizing influence of Southern gentility. At the foundation of the "Southern way of life," however, was its oppressive economic system. In addition to reducing millions of Americans to the status of chattel, it made it very difficult for non-landed, unskilled Whites to succeeded in the face of labor competition from slaves.
Part of the "Southern way of life" was the European flavor and aspirations of the planter class. This cultural influence grew out of and was fed by the long-standing mutual economic relationship between England and the South. In order to ensure that the British market for Southern cotton remained open, Southern planters and others had to maintain relatively sizable importation of goods from Britain. At the same time, the European influence on Southern gentile society in education, fashion, arts, and other fields created a large demand for European imports. An imbalance in this relationship, such as would be caused by the abolition of slavery or increases in tariffs, would have cultural implications for the South.

Economics and the Union Victory
Despite the advantages the Confederacy had in well-trained officers and dedication to a cause, it was inevitable that the Union would win the war. The only hope for the Confederacy would have been that the Union would not resist secession, or that foreign nations would assist the Confederate cause. Once the Union decided to fight for unity and European nations chose to remain largely neutral, there was little long-term hope for the Confederacy. The Union's resources, although far from unlimited, were much greater than the Confederacy's resources, and would eventually last longer.
The Union had more than double the population of the Confederacy (including slaves), and almost four times the number of men of combat age. Even with only 50% of eligible men enlisted, relative to the Confederacy's 75%, the Union still had more than twice the number of people in the armed forces.
In addition to being more industrialized than the South (see "Contrasting Economies" Section), the North had better infrastructure. By the time of the Civil War, an extensive railroad system had been built, with new lines through the Northwest being added. In the South, disputes between states prevented the construction of interstate railroad systems. In all, the North had 20,000 miles of railroad compared to the South's 9,000 miles. In addition to possessing 70% of the total miles of railroad in the United States, the North had 96% of the United States' railroad equipment. The long-standing shipbuilding industry in New England ensured that the North would have a large merchant marine, as well as easy access to naval resources. Because of interstate conflicts, there were few continuous interstate railroad systems through the South. In addition, although there was a small Southern industry producing naval stores, there were few merchant ships or naval vessels in the South.
In the North, the US government was able to fund the war effort with the nation's treasury. The Union had strong banking institutions, and controlled at least 70% of the nation's wealth. To raise more funds, the US government raised taxes on goods and services and set high imports tariffs. In addition, the Treasury issued paper money ("greenbacks") which was not backed by gold, but by government credit, thus reducing the amount of specie necessary for a given amount of money. The US government also raised money by selling bonds to individuals and banks.
The Southern economy, with its agricultural emphasis and relative lack of industrialization, did not have the money or capacity to support a war effort. The Confederacy had less than $1 million in specie in its treasury. Because of the Union blockade, Southern imports fell drastically, reducing the amount of import customs duties the Confederate government could collect. The blockade also prevented Southern farmers to export their goods Southern cotton exports, for example, fell to 2% of their prewar volume. Thus, farmers and planters had little income with which to pay taxes. Because of issues of states rights, central Confederate taxation was too controversial to be effective, and the states were not contributing enough to the Confederate coffers to support its needs. The existence of slavery in the South and the unlikeness of Confederate victory made foreign governments generally reluctant to loan money to the Confederacy. The Confederacy tried to raise money by borrowing from its citizens, in exchange for Confederate bonds. The Confederate government issued over $150 million in bonds, none of which was ever repaid.
In order to raise money, the Confederacy printed more currency, about $1 billion, causing drastic inflation. By 1864, Confederate dollars were worth about $.05 in gold. Prices shot up, and many basic foods were out of the price range of most Southerners. In the spring of 1862, bread riots began in many Southern cities, the worst being the Richmond Bread Riot of April 2, 1862. More than a thousand women marched and rioted in downtown Richmond, shouting "bread or blood." Jefferson Davis himself ended the riot by appearing in person and threatening to order the militia to open fire.
By the end of the war, the South was economically devastated, having experienced extensive loss of human life and destruction of property. Poverty was widespread, and many resented the many Northerners and Southerners who took advantage of the needy in the South as the war came to an end. These conditions made it more difficult for the nation to heal the wounds which its union had suffered.

It is clear that economics was only one factor in the Civil War. Nevertheless, the economic tension between North and South contributed greatly to political tensions. In addition, economic realities were largely responsible for the Union's victory. While regional tensions and conflicts remained, the end of the Civil War signaled the beginning of the United States' development, economically and otherwise, as one nation.

A post-war history of U.S. economic growth

Five years removed from the end of the Great Recession, economists, policymakers, investors, business leaders, and everyday Americans from all walks of life remain concerned about the future of economic growth in the United States. The severity of that two-year recession and the lackluster recovery ever since sparks fear among economists and policymakers that the U.S. economy is in for a perhaps new and long period of slow growth. Economist Tyler Cowen of George Mason University raised this concern in his book “The Great Stagnation.” And Harvard University economist and former Treasury Secretary Larry Summers recently warned about secular stagnation where the economy suffers from a prolonged period of inadequate demand.

While these fears are surfacing today, the anemic economic conditions that prevail at present and from which these concerns spring may be the result of structural changes in the U.S. economy over the past 40 years. Since the mid-1970s, the U.S. economy has undergone a variety of changes that may help or hinder economic growth over the long-term, among them:

  • An employment shift from manufacturing to services
  • The advent of the Internet
  • The entrance of women into the paid labor force
  • The greater participation of people of color in all sectors of the economy
  • The greater openness of the economy to international trade
  • The ever-evolving role of government
  • A rapid increase in income inequality

The mission of the Washington Center for Equitable Growth is to understand whether and how these structural changes, particularly the rise in inequality, affect economic growth and stability. But before we can understand how these forces may affect economic growth, we need a baseline understanding of how the U.S. economy grew in the past.

This report helps in that endeavor by looking at the past 65 years of economic growth in the United States—measured by examining our country’s Gross Domestic Product, both its rate of growth and sources of growth, from 1948 to 2014. The starting point, of course, is what this oft-cited statistic GDP actually measures. GDP is comprised of aggregate statistics based upon four major components: consumption, investment, government expenditures, and net exports.

The report then looks at the overall growth of real (inflation adjusted) per capita GDP as well as the contributions of each component to growth over time, specifically over business cycles, or patterns of economic recessions and expansions. (See graph.)

Based on the overall trends, we divide the post-World War II into three eras of growth—the booming post-war period to the early 1970s (the fourth quarter of 1948 to the fourth quarter of 1973), the transition period to the early-1980s characterized by a series of economic shocks and high inflation (the fourth quarter of 1973 to the third quarter of 1981), and the ensuing period of low economic volatility and heightened growth known as the Great Moderation up until the start of the Great Recession in 2007 (the third quarter of 1981 to the fourth quarter of 2007).(See graph.)

Specifically, economic growth in the third period, leading up to the Great Recession, was:

  • Not as brisk as it once was
  • More dependent upon consumption
  • Held back by net exports
  • Less driven by government expenditures and investment

The current business cycle, starting with the beginning of the Great Recession, appears to be the beginning of a new era—one tentatively defined by tepid consumer demand, stagnant real-wage gains, and growing economic inequality.

This report will have achieved its purpose if it spurs new thinking about how exactly we can and should promote economic growth in the United States.

Additional Themes in the Indonesian Historiography

Indonesia is such a large and multi-faceted country that many different aspects have been the focus of research (for example, ethnic groups, trade networks, shipping, colonialism and imperialism). One can focus on smaller regions (provinces, islands), as well as on larger regions (the western archipelago, the eastern archipelago, the Outer Islands as a whole, or Indonesia within Southeast Asia). Without trying to be exhaustive, eleven themes which have been subject of debate in Indonesian economic history are examined here (on other debates see also Houben 2002: 53-55 Lindblad 2002b: 145-152 Dick 2002: 191-193 Thee 2002: 242-243).

The indigenous economy and the dualist economy

Although western entrepreneurs had an advantage in technological know-how and supply of investment capital during the late-colonial period, there has been a traditionally strong and dynamic class of entrepreneurs (traders and peasants) in many regions of Indonesia. Resilient in times of economic malaise, cunning in symbiosis with traders of other Asian nationalities (particularly Chinese), the Indonesian entrepreneur has been rehabilitated after the relatively disparaging manner in which he was often pictured in the pre-1945 literature. One of these early writers, J.H. Boeke, initiated a school of thought centering on the idea of ‘economic dualism’ (referring to a modern western and a stagnant eastern sector). As a consequence, the term ‘dualism’ was often used to indicate western superiority. From the 1960s onward such ideas have been replaced by a more objective analysis of the dualist economy that is not so judgmental about the characteristics of economic development in the Asian sector. Some focused on technological dualism (such as B. Higgins) others on ethnic specialization in different branches of production (see also Lindblad 2002b: 148, Touwen 2001: 316-317).

The characteristics of Dutch imperialism

Another vigorous debate concerns the character of and the motives for Dutch colonial expansion. Dutch imperialism can be viewed as having a rather complex mix of political, economic and military motives which influenced decisions about colonial borders, establishing political control in order to exploit oil and other natural resources, and preventing local uprisings. Three imperialist phases can be distinguished (Lindblad 2002a: 95-99). The first phase of imperialist expansion was from 1825-1870. During this phase interference with economic matters outside Java increased slowly but military intervention was occasional. The second phase started with the outbreak of the Aceh War in 1873 and lasted until 1896. During this phase initiatives in trade and foreign investment taken by the colonial government and by private businessmen were accompanied by extension of colonial (military) control in the regions concerned. The third and final phase was characterized by full-scale aggressive imperialism (often known as ‘pacification’) and lasted from 1896 until 1907.

The impact of the cultivation system on the indigenous economy

The thesis of ‘agricultural involution’ was advocated by Clifford Geertz (1963) and states that a process of stagnation characterized the rural economy of Java in the nineteenth century. After extensive research, this view has generally been discarded. Colonial economic growth was stimulated first by the Cultivation System, later by the promotion of private enterprise. Non-farm employment and purchasing power increased in the indigenous economy, although there was much regional inequality (Lindblad 2002a: 80 2002b:149-150).

Regional diversity in export-led economic expansion

The contrast between densely populated Java, which had been dominant in economic and political regard for a long time, and the Outer Islands, which were a large, sparsely populated area, is obvious. Among the Outer Islands we can distinguish between areas which were propelled forward by export trade, either from Indonesian or European origin (examples are Palembang, East Sumatra, Southeast Kalimantan) and areas which stayed behind and only slowly picked the fruits of the modernization that took place elsewhere (as for example Benkulu, Timor, Maluku) (Touwen 2001).

The development of the colonial state and the role of Ethical Policy

Well into the second half of the nineteenth century, the official Dutch policy was to abstain from interference with local affairs. The scarce resources of the Dutch colonial administrators should be reserved for Java. When the Aceh War initiated a period of imperialist expansion and consolidation of colonial power, a call for more concern with indigenous affairs was heard in Dutch politics, which resulted in the official Ethical Policy which was launched in 1901 and had the threefold aim of improving indigenous welfare, expanding the educational system, and allowing for some indigenous participation in the government (resulting in the People’s Council (Volksraad) that was installed in 1918 but only had an advisory role). The results of the Ethical Policy, as for example measured in improvements in agricultural technology, education, or welfare services, are still subject to debate (Lindblad 2002b: 149).

Living conditions of coolies at the agricultural estates

The plantation economy, which developed in the sparsely populated Outer Islands (predominantly in Sumatra) between 1870 and 1942, was in bad need of labor. The labor shortage was solved by recruiting contract laborers (coolies) in China, and later in Java. The Coolie Ordinance was a government regulation that included the penal clause (which allowed for punishment by plantation owners). In response to reported abuse, the colonial government established the Labor Inspectorate (1908), which aimed at preventing abuse of coolies on the estates. The living circumstances and treatment of the coolies has been subject of debate, particularly regarding the question whether the government put enough effort in protecting the interests of the workers or allowed abuse to persist (Lindblad 2002b: 150).

How large of a proportion of economic profits was drained away from the colony to the mother country? The detrimental effects of the drain of capital, in return for which European entrepreneurial initiatives were received, have been debated, as well as the exact methods of its measurement. There was also a second drain to the home countries of other immigrant ethnic groups, mainly to China (Van der Eng 1998 Lindblad 2002b: 151).

The position of the Chinese in the Indonesian economy

In the colonial economy, the Chinese intermediary trader or middleman played a vital role in supplying credit and stimulating the cultivation of export crops such as rattan, rubber and copra. The colonial legal system made an explicit distinction between Europeans, Chinese and Indonesians. This formed the roots of later ethnic problems, since the Chinese minority population in Indonesia has gained an important (and sometimes envied) position as capital owners and entrepreneurs. When threatened by political and social turmoil, Chinese business networks may have sometimes channel capital funds to overseas deposits.

Economic chaos during the ‘Old Order’

The ‘Old Order’-period, 1945-1965, was characterized by economic (and political) chaos although some economic growth undeniably did take place during these years. However, macroeconomic instability, lack of foreign investment and structural rigidity formed economic problems that were closely connected with the political power struggle. Sukarno, the first president of the Indonesian republic, had an outspoken dislike of colonialism. His efforts to eliminate foreign economic control were not always supportive of the struggling economy of the new sovereign state. The ‘Old Order’ has for long been a ‘lost area’ in Indonesian economic history, but the establishment of the unitary state and the settlement of major political issues, including some degree of territorial consolidation (as well as the consolidation of the role of the army) were essential for the development of a national economy (Dick 2002: 190 Mackie 1967).

Development policy and economic planning during the ‘New Order’ period

The ‘New Order’ (Orde Baru) of Soeharto rejected political mobilization and socialist ideology, and established a tightly controlled regime that discouraged intellectual enquiry, but did put Indonesia’s economy back on the rails. New flows of foreign investment and foreign aid programs were attracted, the unbridled population growth was reduced due to family planning programs, and a transformation took place from a predominantly agricultural economy to an industrializing economy. Thee Kian Wie distinguishes three phases within this period, each of which deserve further study:

(a) 1966-1973: stabilization, rehabilitation, partial liberalization and economic recovery

(b) 1974-1982: oil booms, rapid economic growth, and increasing government intervention

(c) 1983-1996: post-oil boom, deregulation, renewed liberalization (in reaction to falling oil-prices), and rapid export-led growth. During this last phase, commentators (including academic economists) were increasingly concerned about the thriving corruption at all levels of the government bureaucracy: KKN (korupsi, kolusi, nepotisme) practices, as they later became known (Thee 2002: 203-215).

Financial, economic and political crisis: KRISMON, KRISTAL

The financial crisis of 1997 started with a crisis of confidence following the depreciation of the Thai baht in July 1997. Core factors causing the ensuing economic crisis in Indonesia were the quasi-fixed exchange rate of the rupiah, quickly rising short-term foreign debt and the weak financial system. Its severity had to be attributed to political factors as well: the monetary crisis (KRISMON) led to a total crisis (KRISTAL) because of the failing policy response of the Soeharto regime. Soeharto had been in power for 32 years and his government had become heavily centralized and corrupt and was not able to cope with the crisis in a credible manner. The origins, economic consequences, and socio-economic impact of the crisis are still under discussion. (Thee 2003: 231-237 Arndt and Hill 1999).

(Note: I want to thank Dr. F. Colombijn and Dr. J.Th Lindblad at Leiden University for their useful comments on the draft version of this article.)

America Joins the Fight

Neutrality came to an end when Congress declared war on Germany on April 4, 1917, and the United States began a rapid expansion and mobilization of more than 3 million men.

Economic historian Hugh Rockoff writes:

By the end of 1918, American factories had produced 3.5 million rifles, 20 million artillery rounds, 633 million pounds of smokeless gunpowder, 376 million pounds of high explosives, 21,000 airplane engines, and large amounts of poison gas.

The flood of money into the manufacturing sector from both home and abroad led to a welcome rise in employment for American workers. The U.S. unemployment rate dropped from 16.4% in 1914 to 6.3% in 1916.

This fall in unemployment reflected not only an increase in available jobs but a shrinking labor pool. Immigration dropped from 1.2 million in 1914 to 300,000 in 1916 and bottomed out at 140,000 in 1919. Once America entered the war, around 3 million working-age men joined the military. About 1 million women ended up joining the workforce to compensate for the loss of so many men.

Manufacturing wages increased dramatically, doubling from an average $11 a week in 1914 up to $22 a week in 1919. This increased consumer buying power helped stimulate the national economy in the later stages of the war.

War Economy - History

Photograph taken by Heather Dougherty

Detroit is a city with a rich history. For many years, people migrated to the area in search of jobs and in hopes of achieving the American dream. &ldquoBy 1880, Detroit was an immigrant city with over 116,000 people. More than 40 different nationalities were represented&hellipLatinos were a growing population, with many coming north to work in the railroad industry.&rdquo1

As Detroit entered the 20th century its population grew immensely and in 1910 was the 9th largest city in the United States. Detroit was not only home to the auto industry but also produced metal crafts, railcars, stove works, paints, iron, brass, and copper. By 1910, an African-American middle class was established. The late 1910&rsquos saw World War I and Detroiters fought valiantly as did other Americans. After the war, Detroit &ldquogrew geographically to 77.9 square miles.&rdquo2 The city developed culturally with the opening of the Detroit Institute of Arts, the Masonic temple, the Fox Theater and many other movie houses.

In 1922, the Ford Motor Company introduced the 40-hour work week which made Detroit a very appealing city to new Americans and migrating Americans alike. The Great Depression had a devastating effect on Detroit. However, with the election of Franklin Roosevelt and his initiation of the New Deal, Detroit was able to bounce back. Many construction projects were started. The Detroit Zoo was built and the famous Woodward Avenue was expanded. Housing projects were also built in the city. In 1932, a New Deal interior design project was funded and allowed famous muralist Diego Rivera to complete his fresco entitled, Detroit Industry. 3

After World War II, Detroit was leading the country&rsquos economy and accounted for &ldquo1/6 of the country&rsquos employment at mid-century.&rdquo4 The post war abundance allowed for many improvements in the city, however, Detroit was racially segregated and conditions were beginning to worsen. The period after World War II in Detroit is often times discussed through a racial discourse of black and white. This is partly because these two groups were the major residents of the city. However, there were other ethnic groups present, like Latinos. Not a lot of scholarship exists on these groups though. Nonetheless, African Americans fought against racial segregation in housing and employment. As author Thomas Sugrue notes, &ldquoIn 1953, Detroit boasted the largest number of independently owned black businesses of any city in the United States.&rdquo 5

Detroiters witnessed two major riots in the 20th century, one in 1943 and one in 1967. Many argue that Detroit has not bounced back from the riot in 1967. Whether this is true or not, it is important to view the riot as a turning point in the history of Detroit. Social and economic unrest was prevalent and still is in Detroit. Also, the effects of deindustrialization were hard-hitting to residents of the Motor City in 1967 and throughout the rest of the century.

Detroit is still struggling with many of these problems today. Companies continue to move out of the city, as do residents. However, there is still hope for the city of Detroit. This is being illustrated by the many Latinos that reside on Detroit&rsquos Southwest side. Latinos are proud of their Detroit, and are making history with all they are doing.


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