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