Economic Consequences of the Vietnam War

In his book Mr. Campagna performed a comprehensive examination of the economic consequences of the Vietnam War. He examined the immediate and direct costs as well as the future and indirect costs. One of the most interesting aspects of his analysis was his attempt to discern the non-monetary economic costs of the war. As Mr. Campagna said, “there may still be strands remaining from the period that continue to influence the present.”

According to Campagna, in the early years of the Second Indochina War the economic impact was minimal. The impact of aid sent by President Eisenhower was negligible. Under President Kennedy the costs of resolving the supposed missile gap far exceeded the costs of assistance to the Republic of Vietnam, even though the number of military advisors practically doubled every year of his administration.

As the conflict escalated under President Johnson the direct costs of the war obviously also escalated, but it was also during this period in which unintended, long-term consequences began to appear. The costs of the war began to shoot up drastically after congress passed the Tonkin Gulf Resolution in late 1964. In 1965 the budget for activities in Vietnam was $100 million. When McNamara prepared the budget for 1967 he estimated the costs to be $10 billion, unfortunately he had only planned for activities until June 30 of 1967 and his estimate was half of what it should have been. McNamara was optimistic that the war would be concluded by then, and he also did not want to end up with a large surplus of war goods as happened after the Korean war. That extra $10 billion of costs also represents unplanned orders sent out into an economy that was already running near full capacity.

Prior to the escalation the American economy was running well, there was full employment (4% unemployment) and low inflation (1.2%). As the increased demand for military goods made it’s way through the economy inflation began to creep higher. According to Campagna the most appropriate action under the circumstances would have been to increase taxes in order to curb consumer demand and free industrial capacity for war production, but it was shunned for fear of being seen as a war tax and a reversal of the huge tax cuts enacted just after Kennedy's death. Political inaction began to lead to inflation. As the demand outstripped supply factory owners were able to increase prices. The workers were not willing to let the owners keep an increasing portion of the profits and demanded wages increases, and a cycle of inflation began.

By 1966 inflation was over 3 percent and the federal reserve decided that since there was no political will to employ fiscal policy it would have to change monetary policy. The Fed increase interest rates and slowed the growth of money. This caused a credit crunch. The demand was still high and with the money supply restricted banks had little to lend, so they began implementing creative measures to get money to lend. They offered higher rates on savings accounts in order to steal deposits from thrifts. They also developed schemes to use savings from foreign subsidiaries to fund consumption in the United States. As banks began to worry about how inflation would hurt their bottom lines they resorted to writing more variable interest rate loans.

This started a trend of large banks seeking ways to subvert or take advantage of differing sovereign monetary policies. The federal governments unwillingness to tackle the issue with fiscal policy and its inability to prevent banks from subverting monetary policy began to undermine the publics confidence in the governments ability to regulate the economy. This would be the beginning of a decline in economic liberalism.

When President Nixon came to power in 1969 unemployment was still low, but inflation had toped 4.5 percent. With the tight labor market and high inflation women were induced into joining the labor force more rapidly. On the heels of the Cambodian incursion and the shootings at Kent State there was a significant economic development. The Penn Central Railroad collapsed when it was unable to rollover its lines of credit. During the credit crunch companies scrounged for money to expand their capacity, and since banks were less able to lend they turned to issuing their own debt and got into the habit of just continuing to roll it over instead of paying it off. This caused fears that other major corporations, such as Chrysler, would also default.

President Nixon decided that he needed to take action and instituted a decidedly anti-capitalistic thing, price and wage controls. This only masked the symptoms in the short-run and made things decidedly worse in the long run. This policy was coupled with increased government spending leading to an economic ramp-up before the 1972 election. After the election he dropped the price controls and prices skyrocketed. The value of the dollar sank, and since it was used as the medium for settling oil contracts the oil producing countries began to fear dollar devaluations. This combined with American policies in the middle east led to the oil embargo. All of these factors combined to form stagflation. The situation was later corrected, but the fear of inflation had already been instilled in the public.

Mr. Campagna published his book in 1991 and could not have foreseen the economic crises that would befall the United States in 2008, but many of the structural changes that he described in his book have also been referenced concerning this current economic downturn. America currently has high unemployment, an arguably broken international banking system, and a population that does not trusts its government to assist with its problems; it would seem reasonable to suspect that based upon Campagna’s analysis the Vietnam war to this day affecting our economy and in turn our citizenry.

Originally written August 12, 2010
Published: 2010-09-08