How the Economy Fights Our Wars

Yesterday, while celebrating the military, we could have also applauded the economic might that made it possible.

When the Second Continental Congress established an army on June 14, 1775, they surely knew they would need the economy to fight a war.

And yes, soon after, the new American nation had to supply an army of (plus or minus) 22,000 men with gargantuan amounts of food, bayonets, candles, and all we might imagine. They needed to give the French troops that assisted them a 35,000 barrel five-month supply of flour. 

Responding local manufacturers mobilized. To preserve food, saltworks proliferated. So too did gunpowder makers, gunsmiths, paper mills, and textile producers. The army (and its horses) devoured blankets, wood, rum, hay, and oats.

How to pay for it all? The Continental Congress simply printed money—close to $200 million Continental dollars between 1775 and 1779. In addition, bond sales generated cash as did states with their own currency. Maryland reported using 60 percent of its budget on military supplies. 

We had to wait for the 1930s when war funding radically changed.

Wartime Economics

During the 1930s, a group of government economists led by Nobel laureate Simon Kuznets invented what became the GDP. Because of them, we could figure out how much we produced. Only then did we know the depths to which we had sunk during the Great Depression. And, only then, could we calculate our potential mobilization for World War II.

Saying we had to become the “arsenal of democracy,” President Roosevelt initiated the wartime economics that would divert civilian production to the military. His economic planners needed to know, for example, how much steel and aluminum to produce for fighter planes, tanks, and ammunition.

As President Roosevelt explained, “…Our war program for the coming fiscal year will cost $56 billion, or, in other words, more than half of the estimated annual national income. We shall produce 60,000 planes…We shall produce 25,000 tanks…We shall produce 55,000 anti-aircraft guns…We must convert every available plant and tool to war production.”

Only by knowing the actual size of what we would call the GDP, could they calculate what could be produced.

Our Bottom Line: The Circular Flow Model

As economists, we can use a circular flow model to see how the economy changes during wartime.

In a circular flow model of the market system, goods and services move between Businesses and Households in the upper loop. At the same time, in the lower loop, you can see that Households sell their land, labor, and capital to Businesses. Then, in return, they are paid with the national income (rent, wages, salaries, interest, and profits).

During wartime, Businesses send less to the Households in the upper loop. Instead, shown by my green arrow, government receives the goods and services it needs to fight the war:

Rarely cited, the economy is the weapon that helps us win wars.

My sources and more: Inspired by Episode 15 from Economics USA, I’ve always wanted to share the military role of the GDP. Then, Radical Hamilton had the Revolutionary War facts.