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Cost of Victory: Converting a Wartime Economy to Peace

Strained supply chains, inflationary pressures in the pipeline and worries about the health of the labor market. Sound familiar? This is the US in 1945 as President Harry S. Truman tried to engineer an end to World War II and minimize disruptions that would accompany peace. 

The  role of the atomic attacks on Japan, fears of Russian encroachment and the collapse of Japanese industry are well charted in discussions surrounding Tokyo’s capitulation on Aug. 15, 1945. Less well known is the impact of financial and commercial tensions developing on the home front. I spoke to Marc Gallicchio, professor of history at Villanova University and author of “Unconditional: The Japanese surrender in World War II,” which dives into the debates within Truman’s team about ending the war, including fears of an impending economic calamity.  

These concerns didn’t stop at America’s shores. What did planners envisage for Japan’s economy and did they drop the ball by not thinking more about the prospect that China — a wartime ally — would one day challenge the US? The conversation has been edited for clarity and length.  DANIEL MOSS: Describe domestic economic conditions and how were they shaping Washington’s decisions in 1945? 

MARC GALLICCHIO: From early that year, with the impending defeat of Germany, people were beginning to look past the war. Not only the general public, but also business leaders, who were concerned that not enough emphasis had been placed on reconversion to a peacetime economy. If peace burst upon the US suddenly, the economy would be unprepared. Manufacturers were still in wartime mode, primarily producing goods for the military. There were restrictions on consumer activity, there was food rationing, price limits imposed. There was anxiety that if the war ended suddenly, all these soldiers and sailors would come home and the domestic economy would be in no shape to absorb them into the workforce.  

There was this rising chorus of complaints among executives and legislators — you begin to see it in the newspapers — that the army is absorbing too much manpower and material. Now that they have a one front war to fight, the questions were increasingly about why so much was needed to fight just Japan when they had been fighting both Japan and Germany? The worry was all these wartime jobs and contracts would end and business would not be ready make the transition to domestic production.  

There was great fear of unemployment. That turned out to be less of a problem than expected, but access to consumer goods and worries about inflation were real issues. By the early summer of 1945, the coal industry was warning that unless it could get more miners, there would be shortages. For that they needed personnel released from the army, which was reluctant. Moving people and goods across the US was becoming more difficult after four years. There was a lot of track maintenance that needed to be done. So there were petitions for the early release of people from various professions and the military just didn’t want to do that.     

DM: What priority did Truman give these economic pressures, given the development of the atomic bomb and worries about the implications of Russia’s entry into the war against Japan?

MG: Before Truman went to the final summit of the war at Potsdam in July, he sided with the army. But Treasury Secretary Fred Vinson, in whom Truman had great confidence, opposed the army’s position. It’s not clear what Truman would have done if he didn’t have the bomb.

Truman receives these extraordinary cables from Vinson at Potsdam telling him there will be a serious crisis if the US doesn’t move more forcefully toward reconversion. Vinson starts to suggest that surely the army doesn’t need all these resources. We need unconditional surrender, but maybe we can get there through blockade and bombardment, which would allow for fewer men. The military was against that view because they believed it would lead to a protracted war, the American public would lose interest and the Japanese would use that to their advantage. What Vinson was proposing in order to avoid disaster was a modification of unconditional surrender. He didn’t outright say that, but that would probably have been the result.

Truman learns in Potsdam that the bomb can be deployed months before the scheduled invasion of Japan and probably before Russia came in. I don’t think he thought the bomb would keep Russia out, necessarily. His first reason for using it was to bring about the defeat of Japan, though he may have viewed the possibility that the war could be over before Russia got too far into Northeast Asia as a bonus. 

The bomb made invasion unnecessary. It also meant this slow-moving crisis in the US economy could be addressed. 

DM: There was intense debate over whether to modify the demand for unconditional surrender in hopes of coaxing Japan to lay down its arms. What kind of compromise, if any, was made?

MG: The idea that an imperial institution would remain never made it to the statement issued at Potsdam. But there was this idea of a liberal peace that would allow the return of soldiers to Japan, allow the country to re-enter the world community, have access to raw materials abroad — as opposed to control of them. Japan would be incorporated into a liberal postwar international economy. They could have a government of their choice once they have convinced the peace-loving nations of the world that they would no longer be a threat. You could read between the lines and say that if the emperor shut things down quickly, he would be someone who could lead Japan toward that state described in Potsdam.

DM: The struggle against Covid has often been framed in martial terms. Did the US have what amounted to a wartime economy during the peak of the pandemic? 

MG: We didn’t get extensive regulation of the overall economy. There were big restrictions on bars, restaurants, airlines. State support was there, but it wasn’t as omnipresent during people’s lives as during WWII. What didn’t surprise me one bit was the enormous demand to lift restrictions on social lives and the economy.

We have this collective memory of WWII as being a time when there was unity, where everyone was willing to sacrifice and that’s contrasted with later wars like Vietnam, where there was a lot of controversy. But by 1945, that just wasn’t the case. There was growing dissent, a great deal of anger, directed particularly at the army. 

DM: Did US officials give much thought to what Japan’s economy might look like after the war?

MG: There was clash between New Dealers and business-friendly planners and advisers to Truman. People like Henry Stimson, Secretary of War, and Joseph Grew, Undersecretary of State, saw Japan as having done a remarkable job of industrialization since the late 19th century. They didn’t see the monarchy as an inherently dangerous institution, as far as the US was concerned. All you had to do was sweep away the militarists. Their fear was that if you did away with the emperor and undertook deep, extensive reforms, that would sow the seeds for revolution and communism. 

Then there were New Dealers who saw the problems as much deeper. They felt that in the process of modernization, Japan never moved beyond a feudal structure. They thought the emperor’s status enhanced the power of the military and the big industrial conglomerates. In order to get a really democratic Japan, you have to do away with the emperor, do away with big trusts and democratize Japan socially and economically. Liberate women, allow unions to properly organize and so on.

A lot of critics of unconditional surrender said after the war that Truman should have told Japan it could keep the emperor, since that is what ended up happening anyway. But it’s important to note that after unconditional surrender, the emperor did not have the same authority that he would have had if Truman had committed to keeping Hirohito on the throne. In the end, the US was able to implement a host of significant reforms because Truman insisted on unconditional surrender and occupation. One of the biggest reforms was a new constitution that reduced the emperor to the figurehead that Grew and Stimson mistakenly claimed he had always been.

DM: In 1945, what would they have thought if told that China would emerge as the key rival to the US? 

MG: There was not much anticipation of China playing a leading role in the Far East for quite some time. That was in part the reason why people like Stimson and Grew thought it necessary to build Japan back quickly so it could be a force for stability. None of them foresaw a juggernaut emerging in China.

DM: Was it a mistake to pay insufficient attention to what China might become?

MG: China kind of gets pushed off the page. American military thinking was sequential in that the goal was defeat Japan first and then look over the horizon and see what is out there. It might seem like short-sighted policy, but the view was “look, if we have Japan, we can keep the rest of the world out of the Pacific and we will be able to defend the US come what may in China.”

People just wanted to be done with it, to bring the boys home. Even though American power was at high tide, that tide was also starting to run out. The staying power wasn’t there.

More From Bloomberg Opinion:

• 1947, 1970s, 2008. Take Your Pick, Inflationistas: Daniel Moss

• What the World Got Wrong About Shinzo Abe: Gearoid Reidy

• WWI History Is Wrong, and Skewing Our View of China: Hal Brands

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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