Wikipedia Deep Dive

War economy

12 min read

When Nations Bet Everything on Victory

In the summer of 1943, two-thirds of the entire American economy was devoted to a single purpose: winning the war. Automobile factories that once churned out Chevrolets and Fords now produced tanks and aircraft. Rubber, copper, and oil—materials that had flowed freely through civilian life—became precious commodities, carefully rationed and allocated by government boards. The United States had transformed itself into something it had never been before: a war economy.

This transformation represents one of the most dramatic shifts any society can undergo. A war economy is exactly what it sounds like—an entire nation's productive capacity redirected toward the machinery of conflict. But the reality is far more complex and fascinating than that simple definition suggests.

What Actually Changes

Think of a peacetime economy as a river flowing in many directions—some water goes to farms, some to factories, some to entertainment, some to luxury goods. A war economy is what happens when you build dams and channels to force nearly all that water in one direction.

The changes are sweeping. Interest rates climb as governments compete for capital. Resource allocation programs spring up, telling businesses what they can and cannot produce. In extreme cases, governments introduce rationing—those famous ration books that limited how much butter, sugar, or gasoline a family could purchase. Sometimes they go further still, conscripting civilians for war-related work.

During World War Two, Britain created something called the Women's Land Army, recruiting urban women to work on farms while men fought overseas. They also established the Bevin Boys program, which drafted young men into coal mining rather than military service. Coal powered the factories. Factories built the weapons. The weapons won the war. Every link in the chain mattered.

The Economics of Destruction

Here's a paradox that economists have puzzled over for decades: wars are enormously destructive, yet some nations emerge from them economically stronger than before.

The United States is the classic example. The country came out of both World War One and World War Two with its industrial capacity not just intact but dramatically enhanced. While European factories were reduced to rubble, American manufacturing hummed along at unprecedented levels. The war forced technological innovations that would have taken decades to develop in peacetime. Radar, jet engines, nuclear power, early computers—all received massive investment and development during the conflict.

This phenomenon has a name: military Keynesianism. The economist John Maynard Keynes argued that government spending could stabilize economies during recessions. Military spending, whatever its other effects, certainly qualifies as government spending. Defense contracts create jobs. Soldiers receive paychecks. Research and development funding flows into universities and laboratories.

But not everyone agrees this is actually beneficial. The economist Seymour Melman spent his career arguing that military spending represents a kind of economic drain. Money poured into weapons is money not spent on civilian infrastructure, education, or consumer goods. A tank cannot plow a field. A bomb cannot house a family. In the long run, Melman argued, the wasteful nature of military production undermines the very technological progress it sometimes accelerates.

Desperation's Economic Logic

There's a darker side to war economics that historians don't always emphasize. Throughout history, some leaders have viewed war as an economic escape valve.

When currencies collapse, when unemployment soars, when social unrest threatens to tear a nation apart—war offers a grim solution. Military service absorbs the unemployed. Wartime production creates jobs. The shared external threat can unite a fractured society. And, in the most cynical calculation, casualties reduce the number of people competing for scarce resources.

Franklin D. Roosevelt understood these dynamics deeply. During World War Two, he warned Americans about what defeat would mean. If the Axis powers won, he said, the United States would have to convert itself permanently into a militaristic power, living under a perpetual war economy. Victory, paradoxically, was the only path back to peace.

America's Century of Wartime Economics

The twentieth century forced the United States to learn war economics four times over: World War One, World War Two, Korea, and Vietnam. Each time, the government improvised new institutions and approaches.

For the first World War, America created the War Industries Board, usually called the WIB. This agency coordinated military production across the entire economy—telling manufacturers what to build, allocating raw materials, setting priorities. A separate Fuel Administration introduced daylight saving time, not as a convenience for golfers, but to reduce coal and oil consumption. The Food Administration encouraged farmers to grow more grain while asking families to practice voluntary rationing.

Propaganda became an essential tool. The government recruited thousands of volunteers called Four Minute Men—speakers who would appear at movie theaters, town halls, and public gatherings to deliver brief, rousing speeches about the war effort. They promoted everything from war bond purchases to food conservation. The journalist George Creel, who helped organize the program, marveled at how popular it became. Americans wanted to contribute, and the government gave them ways to do so.

World War Two required even more dramatic mobilization. The fall of France in 1940 shocked Americans into action. As Nazi tanks rolled through Paris, the United States Congress passed the Two-Ocean Navy Act, authorizing the construction of a fleet large enough to fight in both the Atlantic and Pacific simultaneously. After Pearl Harbor, the mobilization accelerated further.

Washington created an alphabet soup of new agencies. The War Production Board—the WPB—became the nerve center of the war economy. It awarded defense contracts, allocated scarce materials, and pressured businesses to convert civilian factories to military production. The government raised taxes dramatically, covering half the war's cost. The other half came from war bonds—essentially loans from American citizens to their own government.

Banks bought bonds too. By the war's end, commercial banks held more than twenty-four billion dollars in government debt. It was perhaps the largest cooperative effort in American history, with private enterprise and government working in tandem toward a single goal.

The results were staggering. American factories mass-produced Liberty ships—cargo vessels essential for supplying overseas forces. They built the North American P-51 Mustang, a fighter plane that could escort bombers deep into enemy territory. They manufactured the Willys MB—the original Jeep—and the M4 Sherman tank that formed the backbone of Allied armored forces.

Germany's Double Disaster

Germany offers a contrasting and cautionary tale. The nation was economically devastated by both World Wars, though not because of poor economic planning.

During World War One, the German agricultural sector collapsed under the war's demands. Farmers were conscripted to fight. Food was requisitioned for the troops. The civilian population faced desperate shortages. German authorities tried to manage the crisis through rationing and price controls, hoping to prevent speculation and hoarding. The measures failed. People went hungry anyway.

After the war, Germany faced economic catastrophe—hyperinflation, unemployment, social chaos. When the Nazis came to power in the 1930s, they implemented policies that brought unemployment down dramatically. They did this partly by rearming, in clear violation of the Treaty of Versailles, which had forbidden Germany from building a large military. The Third Reich instituted a draft and built weapons factories. Both actions created jobs for millions of desperate Germans.

But there was a catch. By 1939, government debt had reached over forty billion Reichsmarks. Adjusted for inflation, that's equivalent to roughly one hundred seventy-eight billion euros today. The Nazi economy was built on borrowed money and borrowed time.

When war came, Germany found an alternative source of revenue: conquest. The Nazis systematically exploited the economies of every country they occupied. France proved the most valuable prize.

Historians Marcel Boldorf and Jonas Scherner have documented just how thoroughly Germany extracted wealth from occupied France. French economic output provided eleven percent of Germany's national income during the occupation—enough to fund five months of Germany's total wartime expenses. The extraction took many forms. In the early months, Vichy France—the puppet government the Nazis installed—was forced to pay a "quartering fee" of twenty million Reichsmarks per day, supposedly to cover the costs of German occupation forces. In reality, the money fueled the German war machine.

The Nazis also used extortion and forced labor. French workers were conscripted to work in German factories. French factories produced goods for German use. It was economic exploitation on a continental scale.

Of course, Germany lost the war. We'll never know whether the Nazi economic model could have sustained itself even in victory. The whole system depended on continuous conquest, continuous exploitation, continuous expansion. It was less an economy than a machine for plunder.

A Modern Example: Armenia's War Economy

War economies aren't just historical curiosities. They continue to emerge whenever nations face existential military threats.

Armenia, a small country in the Caucasus region between Europe and Asia, provides a recent example. In 2020, Armenia fought a brief but intense war with Azerbaijan over the disputed territory of Nagorno-Karabakh. Despite being blockaded by hostile neighbors—Turkey to the west, Azerbaijan to the east—Armenia had been building its military capacity for years.

After 2018, Armenia's military budget grew to six hundred forty million dollars. By 2019, defense spending consumed nearly nineteen percent of the entire national budget—an extraordinary share for a small country at peace. When war came, Armenia declared full mobilization. The country concentrated its human capital—not just soldiers, but volunteers and doctors—toward the war effort.

Armenia ultimately lost that war, ceding territory it had held for decades. But the episode demonstrates how war economy principles remain relevant in the modern world. Small nations facing larger adversaries must mobilize every available resource. The alternative is defeat.

The Permanent War Economy

Since the September 2001 attacks on New York and Washington, the United States has been in a continuous state of war. American forces have operated in Afghanistan, Iraq, Syria, Somalia, Yemen, and numerous other countries. The "War on Terror" has no clear endpoint and no defined enemy nation that could surrender and bring the conflict to a close.

This raises an uncomfortable question: Has the United States become a permanent war economy?

The numbers are striking. The American military budget exceeds the combined defense spending of India, China, Russia, the United Kingdom, Germany, Saudi Arabia, and France. That's not a typo. One country spends more than those seven nations put together.

Some economists and political scientists argue this represents a kind of "military-industrial complex"—a term coined by President Dwight Eisenhower in his 1961 farewell address. Eisenhower, himself a five-star general who had commanded Allied forces in World War Two, warned that the combination of a large military establishment and a powerful defense industry could acquire undue influence over national policy. The interests of weapons manufacturers might shape foreign policy. The desire to justify military spending might encourage unnecessary interventions.

Others counter that military spending is simply the price of maintaining global peace. American military power, in this view, prevents larger conflicts by deterring aggression. The spending is expensive, yes, but cheaper than the alternative.

The Deeper Questions

Studying war economies forces us to confront uncomfortable truths about the relationship between violence and prosperity.

War accelerates technological innovation. The internet traces its origins to a military research project. So does GPS. Medical advances from treating battlefield injuries save civilian lives for decades afterward. Wartime manufacturing techniques transform peacetime industries.

But war also destroys. Cities reduced to rubble. Populations displaced. Young lives ended. Resources consumed that could have built hospitals, schools, and homes. The opportunity cost of military spending is everything that money could have purchased instead.

Perhaps the most troubling implication is that some economies become dependent on war. When military contracts employ millions of workers, when defense industries dominate certain regions, when political careers depend on military bases remaining open—peace itself can become economically threatening. The transition from wartime to peacetime production is painful. Workers lose jobs. Factories close. Communities built around military installations wither.

This creates perverse incentives. A permanent state of tension, a permanent enemy, a permanent need for weapons—these serve certain economic interests even as they drain resources and risk catastrophe.

What War Economics Teaches Us

The study of war economies reveals something profound about human societies: we are capable of extraordinary collective effort when we believe our survival is at stake.

In World War Two, Americans accepted rationing, worked in factories around the clock, and loaned their savings to the government. Germans, facing defeat, extracted wealth from half a continent to continue fighting. Armenians devoted nearly a fifth of their national budget to defense while surrounded by hostile powers.

This capacity for mobilization is neither good nor evil in itself. It can serve genocidal conquest or it can defeat genocidal conquest. It can build weapons of mass destruction or it can develop technologies that improve civilian life for generations.

The question every society must answer is: What do we want to mobilize for? And at what cost are we willing to do it?

War economies demonstrate that the constraints we normally accept—limited budgets, competing interests, political gridlock—can be overcome when the stakes are high enough. The challenge is applying that same capacity for collective action to the problems we face in peacetime: climate change, poverty, disease, infrastructure decay.

Perhaps the most important lesson of war economics is simply this: when societies choose to, they can accomplish almost anything. The question is what we choose—and who pays the price.