The Bear’s Lair: The lost Arcadia of 1938

What if the Munich Agreement of 1938 had worked? I was led to this speculation by watching a wonderful British movie “Q Planes” made in that year in which British technology reigned supreme and there was no sign of any Great Depression. (With Laurence Olivier and Ralph Richardson, it’s well worth catching up with!) But would a world without World War II really have been better for all of us, or only for Britain?

We must begin by defining what we mean by the Munich Agreement “working.” It must have (i) avoided the outbreak of a general war, either then or later, (ii) avoided further depredations by the Third Reich in Eastern Europe, either in the remainder of Czechoslovakia or Poland, for example, and (iii) avoided the full moral horror of the Reich’s later genocide, though it would have remained a brutal and racist regime, as evil as Stalin’s Soviet Union to the East. That triplet of requirements is a heavy lift, which is why, other than through delaying war for a year, the Munich Agreement was probably mistaken. However, it is not wholly improbable, so let us take it as a given. What would the world of today look like?

Large parts of it would be worse off than they are in real life. The Soviet Union would not have had an empire in Eastern Europe, so would not have faced the collapse of that empire in 1989-90, so might not itself have collapsed. One can imagine a regime over the whole 1939 Soviet Union (i.e. excluding the Baltic States) that is brutal like Vladimir Putin’s Russia, but nowhere near as economically efficient. Communism would still nominally be in place, with capitalism allowed only on a small scale and the vast majority of industries remaining state-owned and controlled by Gosplan – only military expenditure would be gigantic. On average, the ordinary inhabitant of the Soviet Union would be significantly worse off than here, whether in part of today’s Russia or in one of our successor states.

The successor Third Reich, frozen in place at its December 1938 boundaries to include Austria and the Sudeten Germans, would also be impoverished. After Hitler’s death, probably before 1950, the regime would have evolved, in conjunction with the remnants of the pre-1914 German ruling class, most likely to a kind of Juncker Socialism. Democracy would have been discredited, so the regime would be an oligarchic dictatorship, probably cemented in power by occasional referenda, which would be duly stolen if they threatened to “go wrong.” The rich, relatively free-market West Germany of Konrad Adenauer would never have been created, so state control, high military spending, autarky and racism against minorities would mark the Oligarchic Reich that remained.

The picture in the remainder of Europe would be more mixed. Eastern Europe, squeezed between the Reich and the Soviets, would be a set of undemocratic dictatorships as it was between the wars, perhaps intermixed with some nominally communist states, with little economic progress. However, Western Europe would do rather better, because it would not be hampered by the European Union bureaucracy. France and Belgium would be socialist, poorer than today but richer than in 1938, while Scandinavia would have evolved much as it has today. Spain, Portugal and Italy would be more prosperous than today, as their dictatorships would have evolved into democracies without being discredited and they would have avoided socialism.

Outside Europe, one other area that would be markedly poorer than today is East Asia. In 1938, Japan controlled Korea and Manchuria and was at war in China. Without World War II, the Japanese regime would presumably not have reformed, although it might have abandoned the attempt to take over China. Japan and Korea would thus be autarkic and generally hostile to the United States and Britain; thus (except for North Korea) considerably worse off than in our era. China would probably be ruled by a warlord; thus probably about as rich per capita as today, though having followed a more gradual trajectory to get there. It would be growing more slowly than here and would have a population of under 1 billion so a GDP far below that of the United States.

The British Empire would have been wound down, but rather more slowly than in our timeline. India would have been given independence in stages, and most of Africa would have been given independence after 2000 rather than around 1960. Since population control would not have fallen into the intellectual disfavor it did in our timeline due to the Third Reich’s version of eugenics, excessively rapid population growth in India and the African continent would have been tapered. Consequently Egypt, for example, would have a population of 40 million rather than 100 million as it does in our timeline, and would be roughly three times as rich, per capita. Africa also would have transitioned smoothly from British rule with fewer population pressures and be considerably wealthier and happier.

Latin America would have the immense advantage of not having suffered the appalling example of Juan Domingo Peron. Argentina would have remained semi-democratic but controlled by the more conservative elements in its society and would thus be as rich as much of Europe. The rest of the continent, as well as the Caribbean, would have benefited from a slower rate of population growth and less socialism.

Without World War II, and with Britain having clearly enjoyed a happier 1930s than itself, the United States would have rejected FDR’s attempt at a third term in 1940 and would have gone Republican-isolationist, electing Robert A Taft. The 1940s and 1950s would then have seen a shrinkage of government and a partial reversal of the New Deal, with top tax rates coming down to 1980s levels. On the other hand, with the Republicans controlling Congress and the Southern Democrats unable to block legislation, civil rights would have been pushed forward under Taft, with the Voting Rights Act passed some 20 years earlier than in our timeline. Southern politics would then have been reformed significantly earlier and less divisively, and the United States would be a little richer than in our timeline, with a retained commitment to balanced budgets and sound money and a much smaller government. Although communications satellites would be common, as in our world, there would have been no manned public sector Space Program and no Moon Landing, although entrepreneurs in both the U.S. and Britain would be experimenting actively, perhaps with a view to Moon or asteroid mining.

As for Britain itself, with a successful Munich and no World War II there would have been no Winston Churchill and probably no Clement Attlee and no Anthony Eden. Neville Chamberlain would have succumbed in late 1940 as he actually did and would have been succeeded by Lord Halifax. With the British economy purring, there would have been no occasion for a Labour government, so with luck the feeble Halifax would have been succeeded quickly by Oliver Stanley or Oliver Lyttleton, both much better than the Tory ministers of the 1950s. Eventually a Labour government would have returned, but probably not before 1951, a full 20 years after the departure of the unhappy 1929-31 edition, and in a far more moderate form, perhaps under Hugh Gaitskell or even Harold Macmillan (who was not naturally a Tory).

Economically, there would have been no post-war British decline. The supreme capabilities of British research in the 1930s, epitomized by radar, the jet engine, penicillin and rayon, would have carried on through the 1940s and 1950s, which such ventures as the De Havilland Comet being properly funded and therefore successful. The Concord (no e because no France) supersonic jet would also have led to supersonic luxury air travel, with a high level of comfort. There would also have been no “brain drain” of British scientists and academics, as British academia would have remained properly remunerated, at least at the top level, producing more Nobel-winning research at home rather than in U.S. universities.

By today, Britain would have only a few straggling colonies, but it would have preferential trade agreements with its ex-colonies, especially those supplying useful raw materials and food that Britain did not produce domestically. It would be considerably richer than today, with a vibrant scientific sector and a much smaller government – health care would be funded by a subsidized insurance scheme but carried out in the private sector as in Germany today, which appears to be the most efficient system globally. Stylistically, much of the old Britain would have survived – no World War II to undermine it – so we would purr to the Drones Club in our electric Lagondas, while the Beatles would be a long-forgotten pub band.

On average, it is a better world than we have today – so it should be, with a major war removed. Probably its most important advantage over our world is that there would be no sign of decadence and decay. The societies like the Oligarchic Reich and the Soviet Union that had chosen the wrong road would be clearly worse off than Britain, the United States and the more successful countries of southern Europe and Latin America, so there would be no incentive to stray into socialism or worse. That perhaps, is the main lesson to be learned: a major external event, like a World War (I or II) or a serious global epidemic can throw off even the most stable and best designed of civilizations.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)