LECTURE 22: WORLD WAR II - Causes, conduct and consequences

1. INTRODUCTION

1.1. Legacy of the interwar years (Overview 1)

The Interwar period was associated with some years of economic fluctuations. Most firms
had to face some structural changes and a great reorganization regarding both services
and manufacturing, so as to resurface from WWI. The main goal was to increase
productivity by reducing unemployment and optimizing the use of resources.

There was a growing importance of the international climate. It was feared that another
war could start again and, therefore, many countries started to focus on military spending
and technological change, which lead to an economic expansion.

1.2. The immediate consequences of WWII (Overview 2)

The World War II brought with it economic expansion, full employment (labour devoted to
the war), adoption of new technologies. However, it disrupted the world's economy:

• Huge investment in "war related" industries; changes in the destination of trade flows;
and changes in labour migration (mainly forced migration associated with the war
economies of Germany and Japan).

• In belligerent countries, the state intervention in some affairs increased. Most resources
were devoted to increasing the military capacity of the country. It was accompanied by an
increase in social welfare spending. The State becomes a very large spender.

1.3. Mobilisation for Victory (Overview 3)

The ALLIES: The USA, UK, and USSR; and their respective leaders Roosevelt, Churchill and
Stalin; foresaw the World War II as a “Total War” and so they tried to prepare well.

The AXIS: Germany, Italy and Japan; by contrary, they had an inadequate planning and in
the case of Japan there wasn't a concrete plan.

The ultimate deciding factor for mobilisation was mainly related to having an enormous
military capability. This can be seen in the re-direction of the US economy to a war
“footing” that started by delivering goods (guns, tanks, fighters, bombers, aircraft,
submarines, ships...) so as to secure the victory for the Allies.

Once the USA entered the war, the Allies were able to produce a combined industrial
output that surpassed the one of the Axis in three times. The battles of the World War II
were won or lost by armies and air forces; but the sure and certain victory depended on
the effectiveness of "war related" factories. Therefore, the war was won in the factories
and especially in those from the UK and US.
2. FOCUSING ON THE CASES OF JAPAN & UNITED KINGDOM

2.1. Similarities between Japan and the UK:

a) Both countries were Imperial Powers and both had colonies in the “Far East”.
b) They both had a great presence in China, by controlling Hong Kong and Taiwan.
c) Both Japan and the UK formed part of the Allies in World War I.
d) Both experience inflation and then deflation immediately after WWI.
e) They were important textile producers (especially cotton products).
f) Their main economic policy was to return to the Gold Standard. However, this
failed for both and resulted in economic austerity programmes, protectionism and
currency depreciation.
g) “Keynesian” policies were not seriously considered until 1936.
"In Keynes’ General Theory of Employment, Interest and Money, the author
exposes that the level of employment is not determined by the price of
labour but by the market aggregate demand (which had to increase with
government expenditure) ; and he also argues that it is wrong to assume
that competitive markets will, in the long run, deliver full employment."

h) Both states increased military spending in the 1930s (mainly in defence systems).

2.2. Differences between Japan and the UK

2.2.1. JAPAN

2.2.1.1. Japan during the interwar period

The Japanese economy faced chronic crises during the interwar period. Among the crises,
the Showa Financial Crisis of 1927 and the Showa Depression of 1930-31 marked turning
points. The Showa Financial Crisis of 1927 was the consequence of persistent financial
instability because of incomplete restructuring in the business sector and postponements
in the disposal of bad loans by financial institutions. The Showa Depression of 1930-31
was caused by the Great Depression, a worldwide economic collapse which had been
intensified in Japan by the return to the Gold Standard in January 1930.

a) Japan had created an important Empire and it had the stimulus to enter another war.
b) In the 1920s, the country had to face problems associated with deflation.
c) Japan suffered from a huge Financial Panic in 1922:
"Ishii Corporation, a company engaged in speculative activities, went bankrupt at
the end of February 1922, triggering bank runs in Kochi Prefecture and Kansai
region. Then, from October through December 1922, bank runs spread far across
the country. In 1922, operations were suspended at 15 banks."
 d) Japanese “Special Loans” after the Great Kanto Earthquake of 1923:

"The Great Kanto Earthquake in September 1923 hurt the financial system in Japan,
damaging the financial assets of banks, as well as their bank buildings. Depositors
feared bank losses and delays in the repayment of bank loans. On September 7, the
government promulgated an emergency ordinance to impose a moratorium, which
allowed for the postponement of payments."

e) During 1930-1931, Japan flirted and returned with Gold Standard (just for a year)
before the Showa Depression.

f) In 1931, Japan implements the Takahashi economic policy, which consisted in the
depreciation of the Yen with the aim of stimulating the industrial sector.

g) In 1936, Takahashi was assassinated by Right Wing and some military plotters since
his economic measures hadn't succeed as expected.

h) Japan had the goal of expanding into China. The first Japanese expedition consisted in
occupying the Manchuria (1931) and by 1937 a total war began between both countries.
This conflict between China and Japan started to bring them both to the WWII.

2.2.1.2. Imperial Ambitions of Japan in 1930s

The 1930s marked the high point of Japan’s pre-World War II empire, when Imperial
Japan’s territory stretched from mainland China to Micronesia. Japan’s empire would grow
even larger during World War II, extending almost as far south as Australia, which Japan
directly attacked in 1942 and 1943.

Japanese military leaders believed that seizing control of areas like Korea was vital to
securing Japan’s security in the East Asia region. Moreover, the Japanese Navy aimed for
expansion in Indo-China and the Pacific. The main goal was to dominate zones in which
there were abundant strategic resources, such as oil, tin, rubber, foodstuffs, rice...

However, the US prohibited supplying Japan with oil and other strategic items. Why?
Because Americans perceived threat of war and opposition to Japanese occupation of
Chinese coastal areas.
 2.2.1.3. Imperial aggression and defeat (1941-1945)

The Japanese expansionism began on 7th December 1941, when they attacked the island
of Pearl Harbour (Hawaii), in which the American had they military base located, without
any prior declaration.

Consequentially, Roosevelt decided that the United States had to enter the war, by joining
the allies, and he declared the war to Japan, Germany and Italy. The globalization of the
war started in that moment.

Japan was unstoppable until 1942. It conquered Asian colonies of Great Britain, France
and the Netherlands (Singapore, Hong Kong, Malaysia, Burma Indonesia, Philippines...).
However, the failure and decline of the Japanese began after the campaigns in Burma and
in the Pacific Islands.

The American advance was slow due to the hard resistance of Japan. Many islands such as
The Marianas or The Philippines were liberated in the late 1944. Nonetheless, the
Japanese didn't give up. Roosevelt died in April 1945 and Truman succeeded him. It was
Truman who finally ordered to launch two atomic bombs on Hiroshima and Nagasaki on
August 6 and 9, 1945. This event caused the surrender of Japan and the end of the war.

2.2.1.3. Japan’s business organisations.

After the Meiji restoration (1868), long-history of companies, long-established merchants,

rice dealers and also financial speculators provided capital for corporations such as banks,
insurance companies or industrial firms (mainly textiles and engineering).

Consolidation of Zaibatsu: It refers to industrial and financial conglomerates that were

typically controlled by a singular holding company structure and owned by families or
clans of wealthy Japanese. This kind of clustering used vertically integration, so they may
have a controlled subsidiary bank and other service providing companies. The largest ones
were Mitsubishi, Mitsui, Sumitomo and Yasuda (closely associated with the expansionist
sections of the Japanese military).

It also started to become very popular the creation and development of cartels. The
Ministry of International Trade and Industry (MITI) played a major role in the coordination.
MITI located steel mills and organized a domestic market. For example, it sponsored
Yawata Steel Company, which was a state company by 1901. However, once the
competition started to enter its market during 1920s, the company decided to join a cartel.

There was a structural change regarding the “heavy” industry (metals, engineering,
chemicals). By 1935, this sector had replaced the once most important industries
(especially textiles) as the dominant industry of the economy.

In this period, there was a development of internal labour markets. Moreover, there was a
reform in the Anti-trade union (anti-communist) legislation, whereby there was a lot of
labour arrest in this period.

Some factor such as new wage structures, seniority and career path jobs boosted long
term employment and an increase in loyalty to the employing firm (for example with
guaranteeing promotions to workers).
 2.2.2. The UNITED KINGDOM

2.2.2.1. Great Britain’s business organisations.

After WWI there was a movement of Demobilization. During the war, 4 million men had
been taken from civilian life and the domestic economy. Now, suddenly, they were back
home. Not all the returning soldiers could find job positions, but many who did took
employment from the women and immigrants. Some women were encouraged to leave the
labour market (even from jobs that they had held before the war).

During the 1920s and 1930s there is a slight increase in the productivity pattern regarding
both services (mainly finance) and manufacturing. Productivity remained higher in the
services (and in agriculture) than in manufacturing industries. Despite the high level of
unemployment there started a sectorial change.

Slowly, during the interwar years there was an expansion in the number of people
employed, despite:
a) the affected people of the war
b) the structural changes in the economy (technological change was thought by
to replace labour with capital

During this period, the government wanted to apply a labour measure which was based on
wage cuts and increasing hours. Clearly, the labour force opposed to these policies and
they decided to do a General Strike (1926). The response of the Conservative government
was to put some constraints for Trade Unions. However, many employers were reluctant
to use the new law against workers.

Regarding the distribution of businesses, it started to be popular to consolidate chain-

stores on the “High Street” of many cities. The first ones to do so were: Marks and Spencer,
Ltd.; British Homes Stores, Ltd; and Woolworths, Ltd.
It also began a very strong co-operative movement between companies, especially in
manufactured consumption goods.

It must be highlighted the Finance Expansion of the “Big Five” banks, which hold 90% of
the assets in the banking system. They were Barclays, Lloyds, Midland, National Provincial
and Westminster. The expansion was based on London-based banks distributed
throughout the United Kingdom (e.g. subsidiary banks in Scotland and Northern Ireland).

By 1927 managers of the “Big Five” recognised the benefits of using machines. There was a
rapid diffusion of new managerial techniques and new technology was introduced in
banks between 1929 and 1934. The managerial structures and record systems developed
in the interwar years were adapted when computers were introduced until the late 1950s.
Some authors say there was an entrepreneurial and managerial failure. But no! There is no
evidence of British banks failing.

The engineering and automobile sectors suffered a huge transformation and many
innovative products were launched in the market.
There was an expansion in the manufacture and private ownership of cars; and new
household electrical products emerged:

a) Labour saving devices (largely female): irons, vacuum cleaners, cookers, refrigerators...
b) Leisure products – radio and also televisions (new and few).
The British market had to face an increasing competition from Japan and India. It was
handicapped by small scale of most of the enterprises in the industry, because they had a
limited scope for technical progress.

In order to face this situation, the Government and the Bank of England took actions which
attempted to encourage rationalisation (change the organization of a business according to
scientific principles of management in order to increase efficiency). However, many
company owners were reluctant to incur the costs of such changes.

“Rationalisation” was also problematic as a concept because it could be understood in

many different ways to people:

a) Re-organisation of companies (divisionalization, diversification, firm's size...)

b) Introduction of new machinery
c) Development and launch of new products
d) Closure of less efficient factories

2.2.2.2. Recruiting managers

During the war, there was still that pre-1914 reliance on “in-house” training of supervisors
and white-collar workers. Only the largest companies needed managerial structures and
few needed complex and developed organisations. British companies had a history of
training managers in technical colleges and universities, but it was limited to some of them.
They were taught about law, accountancy, book-keeping, marketing and work place
organisation among others.

2.2.2.3. Wartime economic policy

By 1941 the demands of the war and the development of inflationary pressure ensured the
consideration of a new economic policy. This new policy was inspired by J.M. Keynes and it
was outlined by his How to Pay for the War. Keynes used his macroeconomic framework to
inform about an economic policy that was based in an efficient use of resources.

In 1939 the British economy still had lots of doubts. Companies responded in different
ways to technological and structural changes. Unemployment was still high, although they
were generating job positions. Moreover, inflation destroyed profits.

What proposed Keynes to do with the problem of inflation? He explains how the country
could plan spending and taxation in order to remove, or at least reduce, inflation. Even if
Keynes was really aware of inflation, some people criticized him of being an inflationist.

3. SUMMARY AND CONCLUSION

War contributed to economic recovery in all the major economies. The state played an
increased crucial role for stabilizing economy and protect society. Moreover, the share of
national expenditure taken by the state in each country expanded.

In the UK and the USA a state-directed private sector delivered the resources required to
win the war. In the end, the enormous productive capacity of the US economy ensured that
the Allies would defeat the Axis powers.