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Introduction

On a July afternoon in 1945, in the spa town of Bad Homburg, at the same time that President Harry S. Truman, Marshal Joseph Stalin, and Prime Minister Winston Churchill negotiated the borders of postwar Europe—and right after delivering the news that the United States had successfully tested the world’s first atomic bomb—Secretary of War Henry Stimson found a quiet moment to lunch with two of his top generals, Dwight D. Eisenhower and Lucius Clay. The lunch gave Eisenhower a break, a chance to finally relax after Germany’s surrender (which made him military governor for the American zone of conquered Germany). By the end of the year, he would return to the States to become army chief of staff, one in a series of appointments that ultimately led to the presidency. Clay, his good friend, joined the lunch as Eisenhower’s heir apparent to govern Germany once Eisenhower returned to the States. An engineer by training, Clay helped mastermind American production during the war. Many in Washington considered him the most able administrator within the army.

Stimson, by contrast, was near the end of his public service. He had first entered government as a U.S. Attorney in 1906 and had achieved a long and storied career that included two stints as secretary of war and one as secretary of state, serving such different presidents as William Howard Taft, Herbert Hoover, and finally Franklin Roosevelt. Yet that afternoon Stimson wanted to talk about his term as the governor-general of the Philippines in the late 1920s (then an American territory). He reminisced about governing a foreign people under the American flag.¹

The afternoon was pleasant—mild temperatures and sunshine. In contrast to the unremitting strain of war, it provided a longed-for respite. The villa in Bad Homburg did not betray the horrendous destruction meted out upon the Germans just about everywhere else. Stimson compared his experience in the Philippines with the orders Washington had just delivered to Eisenhower and Clay for governing Germany—orders that instructed military government to “take no steps” that might lead to “the economic rehabilitation of Germany.”² Clay and Eisenhower worried about their orders. The orders “had to be based on the theory that there was going to be a [functioning] German government” after the war. In reality, “there wasn’t any government.” On top of that, “there was a real shortage of manpower” because “much of the manpower [was in prison] camps” or dead, and “our real big job was to get enough … agriculture going to really keep this country alive.” The Germans faced “starvation and mass deaths,” and all three men agreed that “Americans, of course, would never permit even their former enemies to starve.”³

The Philippines taught Stimson that policy should never seem “vindictive.” An occupied people already chafe under foreign authority, and if the occupiers complicate those resentments by undermining the local economy, the occupied people often revolt.⁴ This had been his observation in the Philippines, where his efforts to bring economic growth and a modicum of welfare provisions had quickly been undone by American tariffs and punitive measures enacted at the advent of the Great Depression.⁵ As a result, in regard to the orders to do nothing to help the German economy, Stimson said, “don’t put too much effort in carrying them out the way they’re written because you’ve got a job to do first which is to bring about law and order and the ability of the people in this country to live.”⁶ Stimson saw “no purpose in the deliberate destruction of the German economy,” since “its reconstruction was essential to create an atmosphere in which it might be possible to develop a true spirit of democracy.”⁷ Stimson preached to the choir. Growing up in Georgia at the end of the nineteenth century, Clay had a clear sense of how occupations could lose the support of the occupied—particularly if the occupied felt exploited. Clay made the point later to reporters: he would be “damn sure there weren’t any carpetbaggers in the military government.”⁸ Eisenhower agreed. He too had served in the Philippines where he learned the difficulties involved in governing abroad.

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This book focuses on the concerns discussed by Stimson, Eisenhower, and Clay on that warm afternoon in Germany. On the one hand, it explains how the army found itself capable of governing a foreign people, and particularly the Germans and Japanese after World War II. In this sense, the book acts as an institutional history of military government starting after the Spanish-American War—or roughly that point at which the United States began routinely using its military to govern non-Americans outside the continental United States.⁹ The country’s recent efforts in Iraq and Afghanistan highlight the fact that a history of military government is long overdue.¹⁰ As a recent army operational guide notes, “military forces have fought only eleven wars considered conventional.…” while conducting “hundreds of other military operations … where the majority of effort consisted of stability tasks.” In short, “Contrary to popular belief, the military history of the United States is one characterized by such operations, interrupted by distinct episodes of major combat.”¹¹

On the other hand, this book is an intellectual history of the political economy that military government created during the occupations of Germany and Japan. It explains why military government first seized on economic development as a key feature of successful “stability” operations, and how that initial interest grew into a distinct policy regime during the occupations of Germany and Japan. The book then shows how that policy regime came to dominate not only postwar Germany and Japan, but ultimately the United States in the 1950s. Because few of the people involved in its creation were economists or, in most cases, politicians, it never got a name in the American context. Eisenhower tried a variety of terms: “conservative dynamism” or “dynamic conservatism” and finally “modern Republicanism.” But none of these terms fit exactly.¹²

The story is held together by the careers of the men who held positions in and around the army starting at the turn of the century. These men rose through the army’s ranks and, by the 1950s, found themselves in powerful political positions. The group included most famously Generals Eisenhower, Clay, and Douglas MacArthur, along with lesser-known occupation officials such as the Detroit banker Joseph Dodge, Generals William Draper and William Marquat, and foreign leaders such as Ludwig Erhard and Hayato Ikeda. Writing in the 1950s, the sociologist and critic C. Wright Mills identified this group as part of “the power elite,” the men who dominated global politics in the years after the war.¹³

By focusing on these individuals, and in an effort to remain fair to both the institutional analysis and the intellectual history, a number of important topics get a much smaller treatment than they deserve. For example, the book barely touches upon military strategy in World Wars I and II; it does not take up every military occupation, especially Korea after the Second World War; and it does not take up the causes or course of the Cold War. Instead, the book remains true to its focus on the figures who link military government as an institution with the economic policy that came out of military government and returned to the United States in the middle decades of the twentieth century.

As Stimson first intimated to Eisenhower and Clay in 1945, economic policy worked in the service of a broader democratic vision for the Germans and Japanese. More to the point, it could prevent yet another world war. Indeed, the failure to achieve a lasting peace after the First World War weighed heavily upon military government after the Second. Prosperity might provide a tangible sign to the Germans and Japanese that the future lay in partnership with the United States, rather than in opposition. At the same time, military governors understood that a giant gap existed between wanting economic recovery and causing economic recovery. If nothing else, the barely concluded Great Depression taught this fact.

The first year of occupation saw mostly failure in military government’s effort to bridge that gap. Then, late in 1945 officials in Germany stumbled upon a critical insight that turned things around. On the advice of a number of German economists, they began to think more about public finance. Postwar planning had assumed that the centralized and hierarchical structure of firms in Germany and Japan enabled totalitarian political structures.¹⁴ The initial instructions to military government included orders to break apart large conglomerates in both countries. But as time passed, military government realized that uprooting the structure of German and Japanese firms would do little to bring about economic recovery, let alone hinder future dictators.

More to the point, occupation officials concluded that both recovery and future peace depended upon integrating Germany and Japan into the global system of trade and finance imagined during the Bretton Woods Conference of 1944. They worked for more than a decade to bring the system into full operation (many countries were not ready until 1958), using their key positions in Europe, Japan, and the United States to smooth the way for its full implementation. They felt a special commitment to it as a key to preventing a future war. Yet here, again, a gap lay between wanting integration and achieving integration.

Most immediately, military government realized that integration could not occur until economic stabilization took place within individual economies—and particularly, the stabilization of price levels and currency values. Whenever possible they enforced balanced budgets, zero-inflation monetary policy, and investment-led growth, so as to smooth the way for free trade and international capital flows as imagined at Bretton Woods. In fact, military government in Germany and later in Japan came to conclude that the Bretton Woods system ultimately worked at odds with the Keynesian approach to public finance, then taking root within the Roosevelt and Truman administrations.¹⁵ Military government in Germany had already become particularly suspicious of the Keynesian framework, because it seemed to resemble Nazi political economy in the 1930s a little too closely, and it left Germany in the throes of a debilitating inflation after the war. This fact also helps explain another surprising conclusion about the occupations. During the late 1940s, the United States followed two distinct economic policy regimes: a Keynesian framework aiming at full employment within the United States and an anti-Keynesian framework hostile to budget deficits in the occupations.

In particular, military government also worried that the Keynesian framework undermined the welfare state because of its propensity for inflation. At midcentury, most welfare states focused primarily on pensions for retirees and defined benefits for the poor. Inflation tended to reduce the real value of government benefits. As Eisenhower explained to a friend in 1953, “Every one of these [beneficiaries] will be ruined if we do not stop the deflation in the value of the dollar.”¹⁶

* * *

There is a tendency among scholars to picture American governance at midcentury as a kind of three-legged stool, where one leg represents the state’s commitment to the economic goals of full employment and mass consumption through Keynesian spending, the second leg represents expanded state capacities in the interest of welfare and national security, and the last, a preference for the corporate institutional form (including experts and professionals from the public and private sector).¹⁷ Occupation officials embraced two legs of the stool (the commitment to welfare and the organizational form) while rejecting the commitment to full employment and mass consumption through Keynesian spending. More to the point, they felt that both a welfare and warfare state would prove more effective and lasting without the commitment to Keynesian spending. At the time this seemed like “conservative” or “laissez-faire” economics, and subsequently could seem like the “supply-side” approach of Reaganomics; however, it differed from both because occupation officials never opposed what today we call “big government.” They did not favor tax cuts (indeed, the Eisenhower years saw some of the highest marginal rates in American history), and in some cases they favored tax increases (for example, in financing the Interstate Highway System).

Put simply, occupation officials did not see a contradiction between a muscular central state—for welfare or for warfare—and balanced budgets. Their approach has never fit comfortably within the story of American liberalism because it resists the basic “big” versus “small” government debate that has animated so much political discourse in the twentieth century. Unfortunately, the “big government–small government” debate can trap historians in categories that often obscure the many ways the American state has evolved both domestically and internationally.¹⁸ Occupation officials asked a different question: should a vastly empowered government function (roughly speaking) on a pay-as-you-go basis? Or should it accomplish its goals on credit? From the perspective of military government, the answer to this question had enormous consequences. The occupations suggested that a pay-as-you-go approach tended to keep a balance between the interests of the state and citizenry. It also tended to preserve the state by avoiding the over-commitments and broken promises that could lead to political upheaval later.¹⁹

More recently, political scholars have focused their research on specific state institutions and how those institutions have evolved in order to accomplish an assigned task. Often an institution lacks the capacities to accomplish its task: sometimes it lacks the necessary experts; sometimes it faces legal or constitutional prohibitions; and sometimes the preexisting bureaucracy resists doing the task. This research approach, often called American Political Development, fits this story because it suggests a focus on the growing capacity of military government through the first half of the twentieth century. Occupation officials found themselves forced to expand the governing capacities of the army in response to the tasks that increasingly fell to them.²⁰

At the same time, American Political Development’s institutional focus sometimes misses the fact that occasionally leaders have not employed the capacities they possessed—whether in combination, alone, or not at all. In other words, policy also matters.²¹ In simple terms, the distinction lies between what a state can do and what its leaders choose to do. The phrase “policy regime” helps get at this distinction. The term has taken on a life of its own among scholars in recent years: it has been used to describe local, federal, and even international orders where “constellations of rules, practices, institutions, and ideas [have held] together over time.”²² To better explain the occupiers’ story, though, consider “policy regime” in the minimal sense often employed by economists—and specifically, Thomas Sargent—who see a policy regime as a government “strategy” that fundamentally shapes the decisions and expectations of most private economic actors. In short, to be a “regime” a policy cannot be perceived as temporary or a trick or a one-time effort; it must be credible and enduring.²³

This distinction between capacities and policy matters because it helps clarify the overall arc of the narrative to follow. In general terms, the first half of the book explains how and why the army became a powerhouse of economic policy in the years after World War II—how it developed capacities as a governing institution. The last chapters of the book explain how army officials then developed a coherent policy regime that employed some capacities while ignoring others. In Germany, Japan, and finally the United States, occupation officials inherited state capacities they chose not to use, implementing a policy regime focused on economic restraint instead.

At the same time, American Political Development’s focus on specific institutions does a better job of understanding military government than another recent development among scholars: the turn to the idea of “empire” to explain the way the United States functions in the global context.²⁴ While “empire” as a theoretical construct has advantages, it holds a number of disadvantages for understanding military government. The better rubric comes from the political theorist Robert Latham, who has suggested scholars focus on America’s “external state”—those institutions functioning outside the formal boundaries of the United States, while still tied to it. The external state sometimes fills the space between “flag and Constitution”—what the Supreme Court (in the Insular Cases) identified as American possessions not incorporated into the United States proper.²⁵

For Latham, the external state expresses more than “an external face to the state”; it refers to “the organs that are literally situated and deployed in the external realm” and distinct not only from “the internal state,” but also from “those institutions which command authority over the deployment process itself, the state center.”²⁶ Latham’s terminology fits here because the military did more than simply express the desires of the American metropole. “I had too much flexibility,” Clay complained later of his time in the occupation. “I had—there were many times when I would have loved to have had instructions.… What the hell do you do when you don’t get any?”²⁷ Oftentimes, the external state made policy directly, for example, when Clay unilaterally stopped reparations to the Soviet Union from the American zone.²⁸ In that case, the external state bound the metropole, which found itself compelled to support Clay. Particularly in the aftermath of World War II, when “administrative disarray and domestic constraints” inhibited clear instructions from flowing to Germany and Japan, decisionmaking lodged “itself in the field,”²⁹ where military governments functioned as distinct institutions, developing their own policy pathways and capacities.³⁰

Thinking of military government as an external state also allows for a fresh take on the vast literature already written on this topic. In general (and with exceptions), scholars have taken three broad approaches in explaining the occupations. The first approach argues that a group of American elites in government or business (or some combination of the two) pursued policies to reshape the globe in their interests. Whether in response to Soviet provocations, or “to restructure the world so that American business could trade, operate, and profit without restrictions everywhere,” or to provide national security, or to impose a “corporate” reconstruction of the international economy, or to provide a New Deal for the world, or to Americanize the world (culturally or otherwise), these scholars see the United States as the hub around which the wheel of the rest of the world revolved.³¹ While scholars in this group have disagreed (sometimes vehemently) over the motivations of American political and business elites, and have similarly argued over which group, ultimately, had the most influence in policymaking, they nevertheless privilege the “metropole” in telling the story of the occupations. The occupations simply expressed the broad geopolitical aims that began in Washington (or sometimes New York).

The second approach usually comes from German and Japanese scholars who have raised the possibility that Washington did not have as much power as once thought. One version of this story argues that a brief window of opportunity existed to genuinely remake the German and Japanese political economy along progressive lines; tragically, however, the advent of the Cold War shut that window as Washington essentially relinquished the reform agenda, allowing conservative German and Japanese elites to reassert their authority.³² A different version of this story argues that the Germans and Japanese managed to cleverly undermine, thwart, or work around the occupation. Using cultural misunderstanding to their advantage, they limited the occupations’ overall influence, often to their ultimate benefit.³³

Finally, a new set of scholars has taken both a more global and a less state-centric approach. Sometimes called “transnational,” “America in the world,” or “New International,” this group exhibits skepticism toward the idea of “the unitary state, nation, or nation-state as an ontological given,” noting that states are often comprised of competing institutions with different agendas.³⁴ They have also looked at institutions functioning outside of official state lines (such as nongovernment organizations or the United Nations) as well as culture and cultural transmissions across borders.³⁵ These scholars see in the early Cold War “complex circuits of exchange” rather than a wheel revolving around Washington, D.C.³⁶ The idea of an “external state” fits best within this final approach because it speaks to the odd configuration of institutional power, neither national nor hegemonic, true of military government.

With the recent experience of Iraq and Afghanistan in mind, it is much easier to appreciate how precarious the entire project of rehabilitating Germany and Japan was. Both countries lay in ruins, their economies devastated by war and their people moribund from defeat. Both populations lived on the edge of starvation. Each seemed susceptible to growing resentments and (particularly in Germany) the call of communism. Moreover, each country faced rampant inflation, nonexistent financial markets, and little economic activity. For the generals who took power at the end of World War II in Germany and Japan, success seemed uncertain and failure likely. Yet they largely succeeded in bringing both countries back from the brink of chaos, a testament to the governing abilities of these soldier sovereigns.