Economics and The Public Welfare

Chapter 75

The Outbreak of World War II

At the outbreak of the war in 1914 sterling was immensely strong. It rose to $7.00 in certain transactions and remained above par until late in 1914. With the outbreak of the war in 1939 sterling broke violently from $4.68 to $3.73, rallying upon an announcement that the Bank of England would undertake to hold it between $4.02 and $4.04. But very speedily the great bulk of the sterling obligations of the British banks to the outside world were blocked. It was “official sterling” that was held at this figure. “Free sterling,” dwindling rapidly in amount because unofficial sterling was increasingly blocked, sold at a discount from these figures. Sterling had remained free through the whole of the first World War and through the postwar years. At its weakest, it was very strong. The world believed in it. The world used it. But sterling promptly ceased to be an internationally valid currency following the outbreak of the war in 1939. The reasons for this have been made abundantly clear in preceding chapters.

The Stock Market in World War II. One of the things which makes economic analysis such a fascinating study is the fact that it is a study of human behavior. Human beings think and remember, and do not always react in the same way twice under similar remembered circumstances. In 1914 the outbreak of the great war seemed to have no precedent. Business and finance, shocked, waited to see what would happen. In 1939 they remembered what had happened and they reacted promptly. The first reaction in the United States was in the stock market. The stock market had been forced to close in 1914, but in 1939 it showed great strength. There were heavy purchases, particularly of the “war babies” of the first World War. Bethlehem Steel was bought, copper stocks were bought, and the general list grew strong. The table on page 516 shows the behavior of the Dow-Jones Industrial averages from the outbreak of the war.

British and French Delay War Orders. The expectation which led to the spurt in the stock market at the beginning of the war was that we should have, as we had in 1914 and 1915, a great flood of war orders from England and France.

Such orders came, but the amount was very moderate as compared with the expectations. There was an immense inertia in both England and France. While the Germans, in the lull between the conquest of Poland in the autumn of 1939 and the invasion of Holland on May 10, 1940, were very busy preparing for the next stroke, the British and the French waited. There was a great deal of talk about war orders, but instead of giving the orders, the British and the French bargained.

The aircraft industry in the United States, especially, was bewildered, and increasingly was concerned less about the question of what business it would get and what profits it would make than it was about what was going to happen to England and France if aircraft production for their account did not speedily get under way. After the invasion of Holland had come, delays in giving orders persisted. On June 5, 1940, after the Germans were already in France, a high official of one of the West Coast aircraft companies spent five hours with a purchasing agent of the French Government discussing a minor and non-essential detail of an aircraft model not yet approved.

In December of 1939 a member of the British Embassy stated privately that the plan was to accumulate an overwhelming mass of metal, meaning artillery, and to win the war in 1942 by the destruction of the German “West Wall” with overwhelming artillery. The power of aircraft was enormously underrated.

The lethargy of the British and the French was matched by an underrating of the German military strength throughout much of Europe.1

It was not until the disaster in the Netherlands, Belgium, and France that England came to life. Then under Winston Churchill, who displaced Neville Chamberlain on May 10 (the day Holland was invaded), she performed magnificently and heroically.

Presidential Campaign of 1940. In the United States in 1940 we had, of course, the Presidential campaign and we had the unedifying spectacle of President Roosevelt and Mr. Wendell Willkie both giving the country assurances that our young men would not have to fight on foreign soil.2 Shall we never again have Presidential candidates who will tell the people the truth?

We had a sham campaign in 1940. The Republican Party had started out courageously condemning the New Deal. The Republican candidate, Mr. Willkie, wound up giving endorsement to the Wagner Act and the Wage and Hour Act. He doubtless expected to gain labor union votes thereby. He did not get them, and he disheartened his own followers.

Following the invasion of the Netherlands there was rapidly growing recognition on the part of the people in the United States that we must be drawn into the war, and the Government proceeded to make preparation. Appropriations for war purposes began 3 April 3, 1939. The raising of a drafted army began on October 16, 1940. We were not formally in the war until after the Japanese blow at Pearl Harbor, December 7, 1941, but both on the side of military and naval preparation, and war economic policy, Governmental action began long before this.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.