248 ChaPter^5
military, not civilian or public works projects. Even then, the economy would
remain in private hands, as FDR leaned on corporate leaders from early 1940
on, especially the head of GM, William Knudsen. From this point on—
through World War II and the Cold War and the duration of the 20th
Century—this Military Keynesian approach would be the core U.S. principle
as economic success would be always linked to expanded military spending
to stimulate business and create jobs.
In this sense the U.S. “went to war” in the second quarter of 1940 [econ-
omists divide the year statistically into 4 quarters of 3 months each, beginning
in January, April, July, and October], a full 18 months before Pearl Harbor—but
economically, not militarily. From that point on, “military–driven fiscal expan-
sion dominated the latter half [of the 1939-41 period] and thus completed the
recovery from the Great Depression.” In 1940, unemployment still remained
high, at 15 percent, but in 1941, fell below 10 percent. Government expendi-
tures as percent of potential real GDP—what the economy would produce if
operating at full capacity, or the value of all things desired and the ability to
produce them even if American workers did not make them—“started to
explode.” Potential GDP more than doubled between the 2d Quarter of 1940
and December 7th, 1941, or as noted before, in peacetime. Military spending
was $1.5 billion in 1939 and originally supposed to be $2.5 billion in 1940
but then increased to $5 billion and again to $10 billion, and went up to $15
billion in 1941. The export crisis ended as well. By early 1940, American
exports rose by 70 percent; British and French purchases of American goods
went up by over 50 percent; Soviet Union purchases soared by more than 300
percent; and even Italy, an Axis member, purchased 89 percent more American
goods [since the U.S. was not at war and thus “neutral,” it was still selling
goods to Italy and Japan]. In June 1940, the magazine Business Week wrote,
“National Defense has become the dominant economic and social force in the
United States today... [It] will reach into every phase of our Business life,
and bring increased employment, higher payrolls, widening demands for
machinery, and the construction of new factories.”
It was not coincidence that the huge increases in military spending
occurred right after the Nazis took over France, for the fall of Paris was con-
sidered catastrophic in the West. At the same time, FDR in June 1940 also
began to strip military arsenals to send weapons to Britain in anticipation of
a German attack [Sea Lion]. As used weapons went to Europe, new orders