Economists at Armistice

1946 brought the Armistice and a new economic task: the focus of the economists had to move from the problems of wartime rationing and finance to a new world of economic reconstruction, post-war stabilization, economic growth, and debt reduction. In addition the Cold War brought a new tactic: strategic deterrence. In this year Japan commemorated the anniversary of the death of Takashi Korekiyo, H. H. Kung gathered his wealth and prepared to flee the Chinese Communist forces, Maynard Keynes helped establish the International Monetary Fund, only to die exhausted, and Hjalmar Schacht defended himself from accusations of Nazism and regained his freedom.

‘If They Say Bomb at One O’clock …’

In Japan conventional bombing had not proved sufficient: it was the atom bomb that ultimately brought surrender. The brilliant Hungarian mathematician John von Neumann had worked on the Manhattan Project and identified Hiroshima as a bombing target. He went on to design computers that helped build bigger bombs. In addition he developed an original mathematical approach to modelling a dynamic economy that helped economists advance their modelling. With the Cold War looming, he and colleague Oskar Morgenstern pioneered the new subject of game theory which the big powers used to model their post-war defence tactics, and led to the classic 1950s strategy of ‘mutually-assured destruction’.

‘No One in Our Age was Cleverer …’

As troops massed on the border, John Maynard Keynes had to hastily cut short a holiday in France. A government advisor, academic, journalist, and polymath, he spent the next few years working on pioneering and highly innovative economic ideas: how to pay for the war, how to apply his ground-breaking ‘General Theory’ to policy, how to avoid repeating the mistakes of Versailles, and how to set up an international clearing exchange at Bretton Woods that would eventually become the IMF. As Germany turned on the Soviet Union, Keynes became very worried about his Russian in-laws caught up in the terrible siege of Leningrad.

Annex

The Annex draws out learnings on the impact of World War II on the major warring economies, draws general conclusions on the burdens that war places on economies, and summarizes wartime policy approaches.

The Calculating Iceman

The only way through the wartime Leningrad siege was a winter ice road across a lake, monitored by a brilliant young Soviet mathematician. Leonid Kantorovich had been brought up in the chaos of post-Czarist Russia, and during his pioneering career invented linear programming to help Soviet industry become more efficient, then worked out mathematical ways to improve the planning of the whole Soviet economy. But this was dangerous work, as Stalin disapproved of economists and cybernetics, had sent many to the gulags, and was trying to run the economy himself, despite all the practical problems of wartime central planning without prices.

The Self-Proclaimed Economic Wizard

Seeking an arms deal, Kung flew to Germany to meet Adolf Hitler. There he also met Hjalmar Schacht, the austere German Reichsbank head. Schacht was a clever banker who became famous for helping stem Germany’s hyper-inflation in the 1920s. As Head of the Reichsbank, he was very influential helping the Nazis fund rearmament in Germany, finding innovative ways to finance purchases, and working out a system of trade barter to avoid economic sanctions. He was a very opinionated man, and following disagreements with Hitler, he was eventually sacked by the Nazis. He soon found himself imprisoned in concentration camps. After the war he was indicted in the Nuremberg Trials for helping the Nazis, but was eventually released.

Fall Down Seven Times Get Up Eight?

The chapter opens in 1936 with rebel soldiers of the Japanese Army creeping through the snow to assassinate the elderly Japanese Minister of Finance, Takahashi Korekiyo. He was a remarkable self-taught Japanese, many times Minister of Finance, who learned his economic and financial skills raising funding in European markets to finance the Japanese-Russian War. He managed bank crises and saved his country from the Great Depression with an innovative range of pre-Keynesian macroeconomic policies. However his attempts to cut military spending ran into intense opposition from the Japanese military who were intent on invading Manchuria, and a group of fanatic soldiers ultimately assassinated him.

Economists in the Cold War

The last chapter covers the transition from World War II to the decade of the Cold War. The new divide was between East and West, and new tasks for economists included civilian reconstruction, a return to consumer economies, military expenditure, strategic deterrence, and the economic possibilities for peace. Von Neumann’s game theory provided an influential way of viewing the Communist threat, while in the USSR Kantorovich emerged from Stalin’s dark shadow to help develop Soviet computing and teach the new subject of management science. Both these Cold War geniuses died early of cancer. In the meantime Leontief was using his input-output analysis to build scenarios for world peace.

The Peacenik who Helped Bombing Tactics

The Allies were worried whether the economy of the Soviet Union could survive the war, and in Washington the OSS (Office of Strategic Services) directed a young Russian émigré economist to study the problem: Wassily Leontief’s reports predicted the Soviet economy was stronger than thought, and ultimately he was proved right. Leontief’s big contribution was to invent the input-output methodology, and this was used in economic planning for the US economy. In the war the Americans went further, adapting this technique to map the Axis economy, and identify weak points for targeting their bombing raids in Europe. Ultimately this helped destroy the German economy.

Richest Man in the World?

The assassination sent shockwaves through China, and soon led to the 1937 invasion by Japan. H. H. Kung was an American-educated Minister of Finance in the turbulent China of the 1930s. He was a member of the famous Soong family—both Sun Yat-sen and Chiang Kai-shek were brothers-in-law, and his wife was the richest woman in China. As the Japanese invaded, the economy in China progressively worsened. With little regard for the law, Kung proved adept at raising revenue by forcing Chinese to pay taxes, by bank fraud, by manipulating the currency, always with something on the side for him and his family. As the war worsened, he extracted aid dollars from the American taxpayer. When the Communists took power Kung reinvented himself as a wealthy Wall Street banker.