Chapter 3: The Economics of America's World War II MobilizationDonald L. Losman, Irene Kyriakopoulos, and J. Dawson Ahalt
The mobilization of the U.S. economy during World War II represented a substantial re-ordering of economic priorities. During wartime, markets are subjected to abrupt supply/demand shocks, resulting in dislocations, frictions, and bottlenecks. In order to avoid or at least minimize these problems, governments increase their intervention in the marketplace. In this chapter, we examine the manner in which the U.S. government organized and applied the instruments and mechanisms of intervention and trace their profound effects on the structure and performance of the American economy.
War demands and the preparations for war were the real force bringing the U.S. economy out of prolonged depression; the period from 1940 to 1944 witnessed the largest expansion in industrial production in U.S. history. The switch from butter to guns was clearly depicted by the enormous shift in the composition of America's income: "War production in 1939 was 2 percent of total output, in 1941 10 percent and in 1943 40 percent."1 The Depression legacy of high unemployment and low capacity utilization meant that "almost all the war output came from the increase in GNP and the drop in civilian capital formation."2 While there were many shortages of specific civilian goods, inflation-adjusted levels of consumption actually rose each year from 1942 through 1954. The incredibly impressive
increases in total output and in war material in particular resulted from the employment of previously idle labor and capital, the tremendous expansion in physical capital stock, the reallocation of labor from agriculture and elsewhere to industry, the expansion of the labor force as housewives joined in record numbers, and significant increases in labor productivity. The shift to war efforts was so substantial that by 1944 more than 50 percent of the labor force in the manufacturing, mining, and construction sectors worked on military contracts.3 Over the 1940-1945 period, these shifts and the associated increases in industrial capacity and capacity utilization resulted in the production of almost 300,000 military and special purpose aircraft (including 97,800 bombers), almost 87,000 tanks, some 72,000 naval ships, and 4,900 merchant vessels.4 Indeed, roughly "60 percent of all the combat munitions of the Allies in 1944 were produced in the United States."5
Expansion of industrial capacity was deemed absolutely essential. To this end the government embarked on an ambitious federal plant and equipment investment program. Additionally, because pre-World War II involvement of private business in defense manufacturing (except for aviation) was quite limited, the urgent need for rapid expansion of weapons production mandated increased participation of private enterprise. While the need to expand output was acute, so was the realization that in
Capacity Expansion Through Public Investment
. . . a democratic country the desired expansion in output and capacity must often be encouraged or supplemented by governmental action. Businessmen are influenced by patriotic motives, desire to win public approval, threats of commandeering, and fear of government prosecution . . . Basic to a system of private
enterprise is the profit motive. . . But the profit motive is often not a sufficient inducement to ensure the building of new plants. . . The government may, therefore, pay the cost of building the plant and then turn it over to private business to manage; in other cases, the plants may be run by the government. Similarly, when the new investment required is very large, private industry may be unable to finance it and the task is shifted to the government.6
Indeed, this is precisely what the U.S. government did. Specifically, the government assumed the cost of building defense plants, equipment, and tooling, which were then turned over to the private sector to manage and operate.7 This policy was aimed at increasing capacity and maximizing production in those industries deemed important to the war effort. Capacity, expansion was financed in large part by the government; it was then carried out by private business.
Estimates of government-financed construction of industrial plants and machine vary. Nonetheless, there is universal agreement that capacity expansion was spectacular. During the years 1940-44, U.S. industrial production grew more than in any similar period. Industrial output had increased at 7 percent annually during the First World War. By comparison, between 1940-44, output of manufactured goods increased by 300 percent; output of raw materials during the same time went up by 60 percent.8
Difficult as it may seem to comprehend such phenomenal rates of increase, it must be kept in mind that, before the onset of the war, economic activity in the United States was still extremely anemic. Throughout the 1930s, the American economy had remained in a state of economic depression. By the end of the decade, unemployment was still around 17 percent, while industrial capacity, utilization was extremely low. Accordingly, massive government orders could initially be easily accommodated and the American industrial
machine worked with incredible efficiency to meet war-generated demand.
The expansion in manufacturing output is depicted in Table 1, which shows indexes of output for several industries during the period 1939-44. As can be seen, output generally increased at impressive rates throughout the 1940-44 period; only two largely civilian goods producing industries--clothing and printing/publishing--kept operating at their pre-1940 level.9 Table 2 presents similar data for production of certain raw materials; output growth in this sector was less spectacular, compared to manufacturing, but still significantly higher than rates sustained elsewhere in European countries.10
Economic activity in other sectors also picked up speed. The volume of intercity freight traffic, registered in increases in millions of ton-miles, witnessed total traffic more than doubling during the period 1939-44. Relatively newer modes of transportation grew even faster: airline traffic grew almost six-fold between 1939-44; pipeline volume increased by 500 percent.11
Accounting for much of these increases were the U.S. government's expenditures on direct investment, which were "estimated to have increased the productive capacity" of the economy by as much as 50 percent."12 Department of Defense outlays for major physical capital investment were extraordinary, even by contemporary standards. Expressed in constant 1987 dollars, military spending on direct investment, which stood at only at $8.2 billion in 1940, rose to about $35 billion in 1941 and to almost $152 billion in 1942. Outlays on physical plant and equipment reached $394 billion in 1943 and $438 billion in 1944, a level maintained through 1945. Even during 1946, federal capital investment in military plant and equipment was running at about $157 billion.13
Table 3 relates these capital expenditures to total government
TABLE 1. Federal Reserve Indexes of Output of Certain Manufacturing Industries
in the United States, 1939-44 (1939 = 100)
1940 1941 1942 1943 1944 Aircraft 245 630 1706 1842 2805 Explosives and ammunition 140 424 2167 3803 2033 Shipbuilding 159 375 1091 1815 1710 Locomotives 155 359 641 770 828 Aluminum 126 189 318 561 474 Industrial Chemicals 127 175 238 306 337 Rubber products 109 144 152 202 206 Steel 131 171 190 202 197 Manufactured food products 105 118 124 134 141 Woolen textiles 98 148 144 143 138 Furniture 110 136 133 139 135 Clothing 97 112 104 100 95 Printing and publishing 106 120 108 105 95 Source: Alan S. Milward, War, Economy and Society, 1939-1945, Berkeley: University of California Press, 1979, p. 69.
TABLE 2. Output of Certain Raw Materials in the United States, 1939-45 Unit of Measurement 1939 1940 1941 1941 1943 1944 1945 Bituminous million short tons 394.8 460.8 514.1 582.7 590.2 619.6 577.6 Crude petroleum million 42-gallon barrels 1,265.0 1,355.2 1,402.2 1,386.6 1,505.6 1,677.9 1,713.7 Iron ore million long tons 51.7 73.7 92.4 105.5 101.2 94.1 88.4 Manganese gross weight 000 short tons 32.8 44.0 87.8 190.7 205.2 247.6 182.3 Chrome ore gross weight 000 short tons 4.0 3.0 14.3 112.9 160.1 45.6 14.0 Bauxite 000 long tons 375 439 937 2,602 6,233 2,824 981 Source: Alan S. Milward, War, Economy and Society, 1939-1945, Berkeley: University of California Press, 1979, p.69.
TABLE 3. United States Government Outlays for Major Physical Capital Investment, 1940-1990, Selected Year, in 1987 Dollars, Billion Year Total Outlays Public Physical Capital Investment
as Percent of Total Outlays
1940 $96.8 30.2 1941 135.3 44.4 1942 315.1 60.5 1943 655.2 70.4 1944 787.1 65.5 1945 812.6 61.0 1946 463.0 37.2 1947 230.6 11.9 1948 192.9 11.7 1949 245.5 8.7 1950 260.5 8.0 1960 392.1 20.7 1970 596.1 13.4 1980 832.1 6.9 1990 1,100.3 8.4 Source: Budget of the US Government, Historical Table, p. 17, 123.
outlays.14 From the beginning of the decade until the end of the war, public investment spending remained extraordinarily high. Government investment in plant and equipment absorbed over 30 percent of public spending in 1940 and increased steadily to a 1943 peak of 70.4 percent. Even in 1944 and 1945 they remained over 61 percent. By comparison, public investment spending only accounted for about 13 percent of total outlays in 1970, falling even further in subsequent years.
As a result of these expenditures, a large and diverse array of industries was created. During and immediately after World War II these included many government-owned and government-operated industrial facilities, ranging "from naval shipyards to coffee roasting
plants."15 Beginning with the Eisenhower administration, most of these facilities were closed or sold, but the tradition of government ownership and investment in defense manufacturing has remained. Today, about a third of the aircraft industry's facilities are government-owned; the U.S. government owns almost all of the final assembly operations for artillery, and tank munitions; and the Defense Industrial Reserve Act (50 U.S.C. 451) obligates the government to "maintain a minimum essential nucleus. . . of government-owned plants and equipment to be used in an emergency."16
Table 4 presents figures on real GNP for the period 1939-1949. The damage in living standards brought about by the depression decade of the 1930s is also shown. As can be seen, the American economy of 1939 had finally achieved a level comparable to 1929 standards. In 1940, it grew at just under 8 percent a year; for the next three years, war-driven growth rates increased phenomenally to over 18 percent annually. Such rates, however, were not sustainable. Indeed, after 1944, output contraction ensued, just as the federal investment spending program was significantly slowing.
Rapid reallocations of resources and redirection of output efforts inevitably entailed frictions and impediments which slowed the reallocation process. Direction and assistance were rendered by a variety of control agencies whose prime function was to ensure that war industries were able to obtain the necessary production inputs in a timely fashion. The government could and did utilize the market mechanism by offering enticing contracts at profitable prices, thereby inducing sellers to enter or expand military production. There was, however, no guarantee that these producers would have been able to obtain the necessary resources in the required time
Resource Reallocations: The Emerging Visible Hand
TABLE 4. United States Gross National Product,
1929-1949, Selected Years
(in Constant 1982 Dollars; Billions)
Year GNP Percent Change from
1929 $709.6 1933 498.5 1939 716.6 1940 772.9 7.8 1941 909.4 17.7 1942 1,080.3 18.8 1943 1,276.2 18.1 1944 1,380.6 8.2 1945 1,345.8 -1.9 1946 1,096.9 -19.0 1947 1,066.7 -2.8 1948 1,108.7 3.9 1949 1,109.0 0.0 Source: Economic Report of the President, Feb 1990, Table C-2, p. 296.
frame. Accordingly, both to keep costs down and to speed the production process, the government prioritized the most important military (and essential civilian) needs, estimated the human and material inputs required, and then directed and coordinated resources to the appropriate producers. Bernard Baruch called this "The Synchronizing Force,"17 but the system was not implemented either as early or as systematically as he had recommended.
The process was rather straight forward. The military services would define their requirements, which were then translated into input matrices and work schedules. The input matrices delineated the required resources, all of which were (or were becoming) relatively scarce, with the goal of ensuring that they would not be diverted to nonessential purposes, while the work schedules were to coordinate the timing of input deliveries. A rating system was devised to indicate the relative importance of "various products (for example, airplanes might he deemed more important than tanks) by utilizing
a "complex multiple band system . . . in which letters and numbers were used to differentiate between degrees of urgency. As first set up, the system had A, B and C priorities and ten numbers were assigned to each letter."18 Accordingly, a rating of A-la [A one a] was higher priority than A-lb. Suppliers besieged with orders were mandated to fulfill those orders according to the preference rating certificates which came with the orders.
Such certificates were either automatically issued or requested by buyers; they contained about three hundred classes of items in 194119 In addition to the priorities system, there were also prohibitions: Inventory Orders, Limitation Orders, and Material Orders. Inventory Orders were for the purposes of preventing the hoarding of scarce materials; Limitation Orders prohibited production of specific items except for military contracts. For example, an April 1942 order limited nonessential construction. And Material Orders prohibited the use of essential defense materials in non-defense products, such as the use of chrome in automobiles or tin for ornaments. Other controlled items included magnesium, ferro-tungsten, manila fiber, rayon yarn, zinc, chlorine, cobalt, pig iron, toluene, and lead.
Although Bernard Baruch and the War Resources Board had recommended as early as 1939 that there should be central control of economic resources, the body politic was not ready for such moves. The legacy of the Great Depression coupled with laissez-faire notions popular in the business community made the government reluctant to supersede the marketplace. So the government worked through the market via relatively attractive contracts, financial incentives such as subsidies, and the priorities system. The process only "inched" toward more centralized control.
However, a priorities system still did not guarantee deliveries when supplies were short. And scarcities were exacerbated by another Depression legacy. "Even after U.S. entry into the war, the fear of flooded postwar markets was very common in business circles"20 and acted to limit increases in capacity. The priorities system
later became even more complex in its attempts to deal with supply tightness, but such actions seemed only to yield greater confusion. Unfortunately, the "outbreak of World War II found American government unprepared for the job of industrial administration because it did not know the production possibilities and capacities of particular firms."21 The Production Requirements Plan (PRP) was introduced in the first half of 1942 to gather relevant information, but it "had scarcely begun to operate on a large scale when it revealed serious defects."22 In November, 1942, the War Production Board announced the Controlled Materials Plan (CMP). Superseding the Production Requirements Plan, it was introduced in 1943 to simplify and augment the failing priorities mechanism. This was the beginning of the allocation system. Under a complete allocation system, the entire supply of a good would be under the government's control, the latter directing supplies to specific users. The CMP combined requirements planning and allocation, and was applied in 1943 only partially, to copper, aluminum, and special steels. Other scarce commodities were later added, with the CMP being deemed a very workable system, one which resolved most materials problems by the end of 1943.
In addition to the capacity expansion undertaken via government stimulus, private manufacturers massively switched from butter to guns, even within existing plants. For example, "Large silverware manufacturers produced surgical instruments; an electrical refrigerator manufacturer made machine guns; a company that had formerly turned out burial vaults manufactured 100-pound bombs. . . ."23
Finally, as desirable as long-term production planning was (from a materials, manpower, and cost perspective), both shortages and constantly changing demands restricted production scheduling to a month-to-month basis. This in turn mandated innumerable contract
terminations and renegotiations.24 In short, the resource reallocation process was both rapid and pervasive.
Also, there were a host of financial inducements utilized to evoke increased production. For example, government subsidies can be a less expensive means of obtaining greater output by providing price premiums on incremental production. In the copper industry, as a case in point, companies were given quotas and rewarded with a premium of 17 cents per pound for all output in excess of their quotas. In free markets, price tends to reflect the marginal cost of production, which means that all units of output tend to sell for the relatively high cost of the marginal outputs. In 1943, about 21 percent of the copper supply was subsidized in this fashion, costing the government almost $25 million. If all copper had been supplied at 20 cents (instead of the marginal copper at 29 cents), "the additional cost would have been $137.6 million, or more than five times the subsidy."25 The World War II subsidies for copper, lead, and zinc are estimated to have saved the government roughly $1 billion, an amount triple the cost of subsidies.26 Subsidies were also used on occasions to assist in controlling inflation, often associated with price roll-back activities. The subsidies enabled firms either to roll-back prices or absorb cost increases without raising prices. Transportation was a sector for which this tool was often applied.
Major mobilizations invariably bring substantial inflationary pressures which translate into rising price levels. An examination of U.S. history, for example, reveals that, during the War of 1812,
the level of wholesale prices . . . rose by about 70 per cent, during the Civil War period (1860-1865), by slightly less than 120 per cent, and during the period of World War I (1914-1920), by 125 per cent.27
The goal of avoiding or minimizing inflation is another reason why government intervention occurs. It is, of course, fair to ask: What is the real problem with inflation? After all, the real job is to win the war as speedily as possible. So what if prices increase? Surely economic stabilization is a far secondary consideration! But it turns out that serious inflationary problems, by distorting prices, weakening incentives, and generating uncertainties, may indeed harm a war effort.
Price Controls"The serious inflation which accompanied World War I enriched some persons while impoverishing others, and increased the cost of that war by about 150 per cent."28 To avoid a similar experience, the government took steps even prior to Pearl Harbor to contain the inflation monster. On April 1, 1941, President Roosevelt established the Office of Price Administration and Civilian Supply (OPACS), which was mandated to prevent price spiraling, rising costs of living, profiteering, speculative accumulation, and hoarding. In August, 1941, the functions of the OPACS in connection with civilian supply were transferred to the Office of Production Management and the OPACS became the Office of Price Administration (OPA). By the time the United States entered the war in December 1941, support for federal price controls was quite strong. Congress passed the Emergency Price Control Act, signed by the President on January 30, 1942. This Act continued the power of price control with the OPA and made possible the control of prices in general. Although plans for general price regulation had been constructed even before the Act was passed, it was not until late April 1942, that the so-called General Maximum Price Regulation (later popularly known as General Max) was officially announced. John Kenneth Galbraith, Deputy Administrator of OPA, noted that
prices were rising steadily and neither the Treasury nor Congress were contemplating taxation or other fiscal controls on a scale that seemed sufficient to check the advance. Partly to gain time, partly as a tactical move to force action by the Treasury and Congress, and partly because it was the only available answer to an insistent demand for action, the General Maximum Price Regulation was issued.29
The President's message to Congress on April 27, 1942, coupled with the sweeping price control order issued the next day by the OPA, consisted of a seven point program and one specific action--a monumental price-freezing order covering an enormous range of consumer goods. The seven points were as follows:
- personal and corporate earnings must be taxed heavily;
- ceilings must be set on the prices which consumers, retailers, wholesalers, and manufacturers pay for the items they buy; and there would be ceilings on rents for dwellings in all areas affected by war industries;
- remuneration [pay] for work must be stabilized;
- prices received by farmers must be stabilized;
- all citizens should buy war bonds;
- scarce commodities must be rationed;
- buying on credit must be discouraged, while repayment of debt and mortgages should be encouraged.
While each of the seven points was considered indispensable in an integrated program, the first, third and fourth were of principal importance, for these addressed the areas where the efforts to prevent inflation had previously proved weakest.
The General Maximum Price Regulation (General Max) provided that (1) beginning May 18, 1942, retail prices of commodities and services, with some exceptions, could not exceed the highest levels which each individual seller charged during March, 1942; (2) beginning May 11, 1942, manufacturing and wholesale prices and
the prices for wholesale and industrial services could not exceed the highest March levels for each seller; (3) beginning July 1, 1942, no one could legally charge more for services sold at retail in connection with a commodity than was charged during March when the ceiling went into effect. The regulation also provided for the immediate licensing of all retailers and wholesalers, effective as of the date on which the ceiling applied to their particular commodities or services; that is, retailers were directed to regard themselves licensed as of May 18, and wholesalers as of May 11. Official registration and licensing on a national scale were to come later.30
Despite the fact that inflationary pressures were much greater in 1942 than in 1941, the control effort seemed to work, the rate of wholesale price increases (from May to October 1942) being less than one-seventh the rate which prevailed during the corresponding period a year earlier. After General Max, industrial prices declined, while those of farm products and foods rose less than one-third as much as in the corresponding 1941 period. While the most significant action was the inauguration of comprehensive direct control at the retail level, General Max also brought 34 percent of wholesale foods under control and exercised some measure of indirect control over the prices of wholesale farm products. Yet in 1942 both inflation and living costs continued to rise, fueled by the inability to effectively stabilize food prices. Accordingly, the Stabilization Act of October 1942 was passed, broadening control over farm prices and giving statutory authority to the President to control wages.
After enactment of the legislation, it became possible to extend price control to 90 per cent of the foods sold at retail as compared with a prior coverage of only 60 per cent and in this way to close one of the serious gaps in the price control structure.31
Nonetheless, living costs continued to increase. "Not only was the rise proceeding unchecked despite extensive price controls, but organized labor began to demand further increases in basic wage
rates to offset this rise."32 The Hold-The-Line order of April 1943 was found necessary to stop a nascent wage-price spiral from gathering momentum. Its main actions consisted of a rollback of specific food prices, subsidy payments, specific dollars/cents ceilings, and a far more comprehensive price control monitoring system (volunteer administration). It was cost of living increases and widespread breaches of General Max that eventually prompted OPA to finally embrace a grassroots price volunteers program by which local panels would monitor price controls and rationing activities as well as maintain liaison with the business community. "When the volunteer administration of price control was finally instituted in 1943, there can be little doubt of its success. The system was absolutely decisive for the maintenance of stable prices from 1943 to early 1946."33
RationingWith short supplies and large effective demand, unlettered markets yield high prices. Price controls then create shortages. Rationing is one mode of allocating these short supplies. Rationing must be designed so as to permit everyone to obtain their quotas. If rations are set too high, distribution will become chaotic; rationing will lose any semblance of "fairness" and quickly inspire black markets. Hence, a well-administered rationing program must fix rations to match the amount of available supplies. Rations were usually fixed in terms of physical quantities. For example, when sugar rationing was instituted, the original ration was half a pound per week per person. Of course, the amount of sugar, or of any other good that a ration coupon commands, can always be increased or decreased as supplies change, if the authorities choose to do so. Although quantitative physical rationing is satisfactory for a uniform product like sugar, a different technique is required for goods which appear in many forms and varieties. The problems of rationing clothing, for instance, were addressed by a point system of rationing in both England and Germany. Each ration consisted of a quantity of points, a certain number of which had to be surrendered with each clothing purchase. The specific amount that had to be given up was set for
each type of clothing, a suit being worth so many points, shoes a lesser number, and so on. The point system effectively limited the total amount an individual could buy, but also enabled the distribution of purchases to be tailored to individual desires.34
Point system rationing in the U.S. became effective March 1, 1943, for certain foods. War Ration Book 2 allowed each person, including infants, 48 points a month for most canned goods, processed soups, vegetables, and fruits. More points were counted for purchases of scarce food than the buying of more plentiful items. Rationing of meats and fats went into effect March 29, 1943. Book 2 was also used for meats.35 Despite all these efforts, shortages were pervasive because prices were held down. Rationing was merely a means of managing, not ending, shortage situations.
Wage PolicyIt is infeasible to simultaneously "clamp a ceiling" on prices, yet allow wages to rise. Accordingly, wage controls usually accompany price controls.36 Britain as well as the United States, price stabilization preceded wage stabilization. Well before President Roosevelt proclaimed a general wage ceiling, the American government prohibited price increases of many consumer goods, which included 60 percent of the average family's food budget. In July 1942, two months after General Max had been issued, the War Labor Board established its "Little Steel" formula, ordering the Bethlehem, Republic, Youngstown, and Inland Steel corporations to raise wages so as to match the 15 percent increase in living costs that had taken place between January 1941 and May 1942. In basing this ruling (and various subsequent ones) on the rise of living costs, the Board clearly recognized price stabilization as the prerequisite for wage stabilization and adopted a constant real wage as its goal. The expansion of price control to 90 percent of the average food budget, which followed the enactment of the Anti-Inflation Law in October 1942, reduced the probability of an upward revision of the Little Steel
formula. Nonetheless, the War Labor Board was forced to go beyond the Little Steel criterion in certain instances and some exceptions were allowed. In the case of the nonferrous metal miners, wage increases above the Little Steel formula were allowed in an effort to reduce disturbing wage inequalities. For the same reason, the War Labor Board refused to give highly paid groups of workers the full benefit of the formula. Perceptions of "fairness" were very important, with significant underlying concerns that if "fairness" was not generally perceived, strikes and labor disputes harmful to the war effort might ensue.
Therefore, in October 1942, additional steps were taken to combat inflation by further extending government controls. The President's executive order of October 3 brought all salaries under regulation, with intent to freeze them except under certain specified conditions.37 The President's order (1) abolished the right of employers and workers to raise--and to lower--wage rates without the approval of the War Labor Board; (2) instructed the Board not to approve increases beyond the rates prevailing on September 15, 1942, "unless such increase is necessary to correct maladjustments or inequalities, to eliminate substandard living, to correct gross inequities, or to aid in the effective prosecution of the war"; and (3) determined that any wage increase likely to necessitate adjustments of price ceilings should not become effective unless approved by the Economic Stabilization Director.38
Tax PolicyWar finance has four objectives: stabilizing the economy at high levels of capacity utilization without inflation; expansion of war outputs and increases in capacity; equitably distributing the costs of war; and assisting in the achievement of a smooth and rapid return to normalcy in a postwar situation. Tax policy has a role in each of these functions. Certainly taxes raised critical revenues which were utilized to procure labor and war materiel. And taxes, by removing excess purchasing power, were an indispensable weapon in the fight against inflation.
STRAIGHT-TIME WAGE RATES PAID IN MANUFACTURING INDUSTRIES
Source: Bureau of the Budget, p. 197.
"During the six fiscal years from July 1, 1940, to June 30, 1946, the federal government spent $387 billion, of which about $330 billion was for national defense. . . ."39 The Treasury raised some $397 billion, of which taxation garnered $176.3 billion, or 44.4 percent.40 Receipts from individual income taxes were increased by lowering personal exemptions, by sharp increases in effective rates for all income brackets, by initiating a victory tax in 1942, and by instituting a wage/salary withholding system in June 1943. Rates became more progressive, in part as a revenue raising effort and in part for perceptions of equity.
Corporate income collections were very significant, annually exceeding
individual income taxes from 1940-1943, falling to a 36+ percentage share of collections in 1944 and 1945, and then beginning a secular decline. Ordinary, corporate profits tax rates were raised several times, tax surcharges were added in 1941 and increased in 1942, and the prewar rates on excess profits were continually increased until their repeal in 1945. The 1940 version used progressive rates rising from 25 to 50 percent. Excess profits tax collections exceeded those from the normal corporate income tax in every calendar year from 1942 through 1945. The tax, however, was contentious and was repealed after 1945.
Commodity excises, like alcohol and tobacco taxes, can play some role in reducing consumption outlays, but on the negative side they also tend to add to the cost of living. Although in 1940 and 1941 they accounted for 23.1 percent and 20.6 percent, respectively, of federal tax collections, there were clear limits on their revenue-raising capabilities. As other sources of federal revenue increased, their share diminished significantly.
Although borrowing overwhelmingly dominated taxes as a revenue source after 1941, tax receipts did jump sharply in the war's last two years, ultimately financing about 45 percent of all war expenditures. While this was historically high for the United States--a much
TABLE 5. Percentage Share of Four Major Taxes in Total Internal Revenue Collections and Total Internal Revenue Collections as Percent of National Income, World War II and Selected Comparative Fiscal Years Fiscal year Individual income taxes Corporation income taxes Employment taxes Alcohol and tobacco Four taxes as percent of total collections All collections as percent of national income* 1929 37.3% 42.1% 15.2% 94.6% 3.5% 1940 18.4% 21.5% 15.6% 23.1% 78.6% 7.1% 1941 19.2% 27.9% 12.6% 20.6% 80.3% 8.1% 1942 25.0% 36.4% 9.1% 14.0% 84.5% 10.9% 1943 29.6% 43.2% 6.7% 10.5% 90.0% 14.7% 1944 45.5% 36.8% 4.3% 6.5% 93.1% 22.9% 1945 43.5% 36.6% 4.1% 7.4% 91.6% 24.2% 1946 46.0% 30.9% 4.2% 9.1% 90.2% 22.7% 1950 44.0% 27.9% 6.8% 9.1% 87.8% 17.4% 1977 52.2% 16.8% 24.0% 2.2% 95.2% 24.9% 1982 55.8% 10.4% 26.7% 1.3% 94.2% 25.8% * National income year is average of two calendar years, the last of which is the fiscal year shown in the table; eg., the income year related to fiscal 1940 is the average national income from 1939 and 1940.
Sources: Federal tax collections are from Historical Statistics, pt 2, p 1107, ser. Y-358-365; Statistical Abstract, 1978, p. 268, no 434, and 1984, p. 326, no 521. National income is from the Economic Report of the President, February 1984, p. 242, table B-19.
Source: Vatter, US Economy in World War II, p. 111.
greater effort than in either the Civil War or World War l--most economists generally agree that the tax tool was utilized too sparingly. Personal taxes, for example, absorbed only 23 percent of the inflationary gap;41 U.S. tax efforts were significantly below the corresponding British tax effort.42 Why? From the perspective of absorbing purchasing power to contain wartime price levels and avoid post-war inflation, greater taxation efforts appeared to be most appropriate. Even John Maynard Keynes advised his American disciples, who held key positions in the Roosevelt administration, to raise taxes before inflation gained ascendancy.
Because government spending rose at twice the rate of tax receipts during the war years,43 the gap had to be closed by significant deficit spending. Thus, while the ratio of gross federal debt to GDP was about 53 percent at the end of 1940, it reached 100 percent at the end of 1944, and exceeded 127 percent at the end of 1948. Only by the end of 1963 had this ratio fallen back to its 1940 level; at the end of 1994, gross federal debt was estimated to be just about 70 percent of U.S. GDP.44
There were, in fact, several reasons of considerable importance which served to restrain greater use of the taxation tool. First is the normal political resistance to tax hikes. Second is the impact on incentives. Americans were continually exhorted to increase work efforts for the war and to bear growing sacrifices. At what point might appeals to patriotism grow too thin and the tax burden too heavy to continue strong economic efforts in support of the war? With Rosie the Riveter laboring in industry, with money incomes sharply upward but with minimal consumer goods available, and with taxes continually being raised, how much more would the civilian work- force be willing to bear without diminishing its efforts? No one knew for sure how large a burden the workforce would bear, but many believed more taxation was too much to ask. Further, there was some evidence that heavy tax burdens on the British people were "acting in some cases as a disincentive."45 Third, there was the continuing
and pervasive specter of the Great Depression. All aspects of society seemed to recognize that it was the war economy, both in terms of war preparations and actual participation, which had pulled the nation out of depression; the almost universal economic fear centered on its possible return in the postwar era. Further tax hikes, it was feared, would increase this likelihood.
Perhaps the most influential individuals who deemed further use of the taxation tool inappropriate were the early American Keynesian economists who constituted the intellectual and statistical backbone of Roosevelt's economic team (and vision). They were far less worried about inflation and far more concerned with secular stagnation, with a return to the unacceptable conditions of the 1930s. In June, 1940, Gerhard Colm of the Bureau of the Budget urged that most additional expenditures should be financed by borrowing. Richard V. Gilbert, at a September 1940 financial conference, urged the postponement of higher taxes until full utilization of resources, describing the effort to finance defense via increased taxes as "taking two steps forward and then one step back."46 Keynesian economists such as Alvin Hansen and John Kenneth Galbraith maintained that the fear of inflation was exaggerated, while any inflationary fires could be extinguished or limited via price controls. In addition to supporting the war, the Keynesians' prime goals were to maintain full employment and avoid a postwar depression. Given these targets, it is not surprising that they stressed the expansionary impacts of federal deficits rather than the inflationary impacts.
By the end of 1943 the War Production Board began to consider postwar reconversion challenges, with the Keynesians fearing widespread unemployment as military, production declined. Although they recognized that there would be inflationary pent-up postwar demand, they worried about the problems of reconversion and massive unemployment. Paul Samuelson, who later received the first Nobel Prize in economics, predicted "a boom and a depression at the same time."47 In short, the dampening effects of higher taxes,
both in the earlier stages of the war economy and in the postwar period, appeared somewhat menacing to these Keynesian advisors. Given this orientation, they were naturally hesitant to endorse further tax increases.
Voluntary SavingBesides diverting current incomes by the tax route, the economic managers sought ways to turn the burgeoning stream of purchasing power away from current consumption through encouragement of voluntary savings. The government issued a special type of security, war savings bonds, designed for small investors. The 2.9 percent interest which they paid, if held until maturity ten years from date of issue, compared very favorably with what could be obtained elsewhere for equally safe investments. The bonds were not marketable and therefore not subject to price fluctuations. As early as sixty day's after purchase, they were redeemable at the purchase price plus accrued interest, as stated on the bonds. To stimulate the sale of these securities, appeals to patriotism were made through newspapers, magazines, radio, movies, billboards, house-to-house canvassing, and business firms. Workers were urged to invest 10 percent of their wages in these bonds every pay day. The bonds were extremely popular,
so popular, in fact, that with one exception every,"war bond drive during World War II oversubscribed its goal for sales to individuals. All told, about 85 million people bought over $59 billion worth of savings bonds during the war.48
Other savings instruments were sold to corporations and commercial banks, each of which desired safe, liquid outlets for the large amounts of funds they possessed.
Monetary PolicyBy the end of 1940 the excess reserves of the U.S. banking system had achieved an all-time high of $6.5 billion, reflecting the increased
SOURCES OF FEDERAL FUNDS: TAX RECEIPTS AND BORROWINGS
 Total held by non-banks includes .1 billion dollars which represents the net change in individual holdings.
Source: Bureau of the Budget, p. 252.
reserves emanating from federal deficit spending coupled with a Depression-inspired hesitance on the part of the commercial banks to make loans. However, as defense outlays continued to grow, rising bank reserves and an eventually expanding volume of lending significantly increased the money supply, igniting Federal Reserve fears of inflation. As a consequence, the Federal Reserve acted to tighten
the money supply. "By December 1941, the change in reserve requirements combined with expansion of commercial bank credit had lowered excess reserves to about 4 billion dollars."49 However, after war was declared, the Federal Reserve reversed its contractionary policy and pursued an "easy money" course throughout the war years, so as to facilitate a maximum of defense production. Easy money basically meant that the increases in the money supply resulting from federal deficits would not be neutralized by contractionary Federal Reserve policies. Instead, the deficits were accommodated.50
While the Federal Reserve pursued easy money as a general policy, it also utilized selective (qualitative) controls to help allocate funds (and productive efforts) away from low priority areas. In order to discourage production of consumer goods, in August 1941, it issued Regulation W, which limited installment credit; later this was applied to charge accounts and some financial transactions. "From August 1941, until the end of the war, total installment credit declined from $6.4 billion to less than $2 billion."51 While such a sharp decline is extremely impressive, it cannot all be attributed to this policy directive. Because the bulk of installment debt derived from the purchase of automobiles and consumer durables, the virtual cessation of the production of these items as the economy shifted to war materiel ensured that use of installment credit had to decline. The Treasury was very much interested in keeping interest rates as low as possible, both because it wanted to encourage defense firms to borrow and expand capacity and because it wanted to minimize the interest cost of the national debt. Accordingly, after Pearl Harbor the Federal Reserve announced that it would provide the economy "an ample supply of funds" and "exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government's requirements."52 In practice, this meant that the Federal Reserve stood
ready to buy sufficient amounts of Treasury bond issues to ensure that the price of the bonds did not fall. By this "pegging" process, the Federal Reserve was able to keep interest rates from rising. As a consequence, Federal Reserve holdings of government debt increased almost tenfold from the beginning of 1940 to the end of 1945. From the perspective of the interest rate goal, the policy was an incredible success. Indeed, Federal Reserve purchases "resulted in a moderate decline in interest rates on government bonds despite an increase of more than $200 billion in the volume of government securities."53 This decline was a far cry from the rising interest rates of World War I, which were associated with a volume of debt increase only one-fourth of the World War II increases.
WORLD WAR I VERSUS WORLD WAR II
Source: Raising the Funds for Victory, p. 13.
There was a tradeoff, however. The effort to keep interest rates low and provide funding for the war essentially forced the Federal Reserve to abandon its major weapon against inflation, namely, limiting increases in the money supply. During World War II liquid assets increased more than $200 billion, making it difficult to hold the line against wartime inflation and serving as the basis for major price level increases in the postwar period.
Inflation Containment: The ResultsOf the cumulative pre-tax inflationary gap over the 1941-1945 period, swollen money stocks held at financial institutions as demand and time deposits absorbed some 24 percent; individual holdings of government securities absorbed 17 percent, while inflation itself took only 29 percent.54 The combined effects of all the controls must be deemed remarkably successful. The wholesale price index rose only 29 points from 1939-1945, compared to an 86-point rise during World War I. "Even more impressive was the showing made after 1942, the year that price control was adopted seriously; for the wholesale commodity index rose only 7 percent from 1942 to 1945,"55 despite the enormous volume of available purchasing power. Another indicator, the cost-of-living index, displayed greater price advances, the measure rising "from 116 in May, 1942 . . . to 133 in June, 1946, and it is probable . . . that an accurate comparison of both quality and price would indicate a much larger increase."56
The ways and methods of getting around price controls are virtually unlimited. When consumers are loaded with purchasing power and sellers possess scarce supplies, human ingenuity tends to devise legal, albeit "shady," means of avoiding controls as well as illegal activities. The more popular a war effort, the less common such evasion efforts are. The longer the controls are in place, the more likely they will be circumvented. An effective measure of black market transactions would no doubt raise the cost-of-living estimates still further, but would probably in no way vitiate the conclusion that inflation containment during World War II was quite successful.
TABLE 6. Price Record on an Annual Basis 1940-1945 Wholesale,
1940 59.4 37.8 59.9 1941 63.7 46.0 62.9 1942 68.3 59.2 69.7 1943 69.3 68.5 74.0 1944 70.4 68.9 75.2 1945 71.3 71.6 76.9 Source: Vatter, US Economy in World War II, p. 91.
With the war's termination came a substantial clamor for ending price controls. The first portion of 1946 was characterized by an unprecedented shortage of a wide variety of goods combined with an unprecedented volume (about $226 billion) of liquid assets. The advocates of continued price controls maintained that their instant cessation would be accompanied by huge price increases which might
lead to the prompt conversion of war bonds into cash. . . . Union workers, seeing their real incomes whittled down . . . would stage strike after strike . . . and this feverish prosperity might give way to the greatest depression in our history.57
They argued for a phased reduction of controls over a one-year period. But "as political opposition to controls mounted, arguing that supply would 'soon' catch up with admittedly excess demand, illegal price raising and relaxation of the law and its enforcement gathered momentum."58 Pressed by the National Association of Manufacturers and a body politic eager for more goods and freedom from controls, Congress "modified the price control legislation so greatly
that the President decided that it was unworkable, and in late 1946 removed all controls except those relating to rents"59 and a few other items.
A deluge of pent-up purchasing power hit the market and was predictably absorbed via higher prices, led by agricultural products. By November 1947, the cost of living had reached an all-time high, with even the leader of the National Association of Manufacturers concerned that if "the constant upward winding of the spiral continues you'll see one of the most terrible busts this country has ever had."60 "In the 26 months between June 1946 and the peak, the whole sale price index had risen 45 percent!"61 Afterwards, prices fell modestly and it took two more years for them to again approach the August 1948 level. What this record clearly indicates is that the inflationary aspects of wartime finance cannot be measured solely during the duration of the conflict, but must also include some extended postwar period as the economy seeks a return to normalcy.
It should be stressed that it is far easier to describe the price control system than it was to either administer it or transact under it, a point made abundantly clear in the various complications which controls created for defense procurement. General Max, issued toward the end of April 1942, retroactively froze all relevant prices at the highest figure charged by individual sellers during the previous month. The effective dates of the price regulation were May 11, 1942 for manufacturers and wholesales and May 18 for retailers; goods purchased by the federal government were to be exempted by forth-coming regulations. This "meant that all kinds of accidental and often bizarre cost-price relationships would be perpetuated indefinitely."62 If an item happened to be on sale or serving as a "loss leader," or if input prices for some reason were particularly favorable, thus allowing a lower than normal sales price, or if competitive conditions forced low prices, these became the price ceilings under which sellers had to operate. Further, producers might be able to offer a particular quantity of goods over a specified normal period
at one particular price, but if the military required double or triple the normal production runs (or required delivery in half the time), sales at the earlier price became impossible. Clearly, thousands (if not more) of exemptions would have to be promulgated by a relatively small government agency.
Only eleven days after General Max was issued, OPA announced a postponement in its implementation to July 1, 1942 regarding contracts of the War and Navy departments. This action provided time for extensive negotiations between OPA and the military. In early May, a long list of military items as the main category of goods remaining under price controls which the services procured. Not surprisingly, the Quartermaster General vehemently objected. His procurement efforts were already hampered by lower materials priorities. If subjected to price ceilings, many suppliers would "shift even further to the production of non-controlled items and production of Quartermaster items would be more difficult than ever."63 Requests were made for broader exemptions and for providing the War Department authority to negotiate prices above the ceilings without prior OPA approval.
In the initial bureaucratic negotiations, proposals coming from the Quartermaster General came too late to be included in the earliest agreements; virtually no Quartermaster items were exempted from the 112 OPA price schedules. The regulations thus prohibited Quartermaster contracting officers from providing compensation for expeditious deliveries, changes in design and specifications, or the costs of multiple shifts. On June 3 an important agreement was reached which did allow price rises to compensate for a variety of cost increases. On June 9 exemptions from price control were granted to field stoves and ranges, ski troop equipment, helmet liners, identification tags, paratroop knives, specified field rations, canteens, and other items. A crippling limitation--a $1000 maximum exemption for emergency purchases--was removed on June 23. Importantly, on July 11
contracting and finance officers of procuring agencies were relieved of all criminal and civil penalties imposed by the Emergency Price Control Act. This action freed contracting officers from the necessity of ascertaining that all prices in their procurement contracts conformed to OPA ceiling limitations.64
However, even as these negotiations and subsequent ones were being held, OPA was proposing to retract important exemptions. Thus, an amended regulation, effective on July 22, imposed price controls on a number of critical items in military procurement, to include gas-, steam-, and diesel-engines; compressors; pumps; construction equipment; radios; and radar! Even more serious, OPA was planning to place two key Army combat items--aircraft and tanks--under controls, the rationale being that rising prices on these items had inflationary impacts upon wage rates, uncontrolled materials, and other inputs. These efforts at policy reversal alarmed both the military departments and the affected industries. They launched a major campaign leading to what became known as the Henderson-Patterson-Forrestal agreement, announced on November 12, 1942. This resolution established a line of demarcation between military and commercial goods, with both OPA and the services agreeing that they would not seek further modifications of the existing regulations. The agreement remained intact for the duration of the war, yet still left roughly 35-38 percent by dollar value of military procurement under price controls.65 The bulk of these were in Quartermaster items, but also included lumber for construction projects, Medical Department purchases, and machinery, and metals for Ordnance items.
Price controls and the priorities system were clearly serious challenges which often imposed significant costs in terms of delays, quality reductions, administrative expenses, market distortions, and reduced procurements.
Importantly, "World War II produced an economic controls bureaucracy of a magnitude never known before or since in the
Administrative Confusions and Challenges
history of the country."66 Excluding military organizations, there were roughly 165 economic and non-economic war agencies. The most effective agencies were probably the armed services themselves, the Maritime Commission and War Shipping Administration, the Foreign Economic Administration, the Office of Price Administration, the War Food Administration, the Industry and Commodity Divisions of the War Production Board, and a grouping of labor agencies, to include the Selective Service System, U.S. Employment Service, the War Manpower Commission, and War Labor Board. But with so many agencies with overlapping functions, blurred lines of authority, and a general American aversion to economic controls, confusion and disarray seemed destined to dominate much of the war planning and implementation process. It was undoubtedly this concern which, in 1939, spurred both Bernard Baruch, guru of the World War I industrial mobilization, and the War Resources Board (constituted two months before the outbreak of war in Europe in 1939) to recommend central control of economic resources. But this was not to happen for several years.
When France fell in June 1940, war preparations became the nation's most pressing goal. This was associated with a "remarkable proliferation of defense planning agencies, however weak and fumbling in power and procedures."67 Lack of coordination and confusion are the best descriptors applicable to the mobilization effort of the first several years. The establishment of more agencies and increased degrees of mobilization clearly correlated with deteriorating conditions in Europe and Asia, but the process was an ad hoc one, perhaps best described by Eliot Janeway as "control by no one."68 Control over production was separated from control over prices, the services constantly feuded with OPM, and interagency conflict was widespread. Nonetheless, it should be stressed that despite the administrative chaos which accompanied the mobilizations of 1939-1941, U.S. official entry into the war was greatly bolstered by these enormous preparedness efforts, however inefficient they might have been.
After Pearl Harbor the War Production Board (WPB) supplanted both OPM and the Supply Priorities and Allocations Board (SPAB). In the first seven months of 1942 its staff grew from 6,600 to 18,000. The WPB clearly became the top agency. Yet it was merely advisory to its head, Donald Nelson, who held all decision making power. Such organization enabled quicker and more effective decisions. While in theory the WPB could have supplanted the procurement activities of the services, it never did so. "The renouncement . . . was, of course, just what the services wanted . . ." and "the services proceeded to freely trespass upon the territory the President had assigned to the WPB."69 Clearly, the WPB had its hands filled with pressing coordination problems. "But now the struggle for administrative efficiency was blessed with a foreboding sense of national unity for [its] very survival. Administrators could hence-forth count on the full support of the public."70
Military production orders for 1942 far exceeded the economy's capabilities, and the doubled requirements for 1943--so ambitious that they would have consumed 75 percent of the gross national product--had to be scaled back substantially, with actual production still not achieving the reduced goal. With such massive demands on an economy already tight, coordination and direction at the highest levels were imperative. The WPB, however, concentrated on production activities and controlling the flow of materials, leaving a void in terms of overall war effort leadership. Accordingly, in early 1943 the Office of War Mobilization (OWM), headed by James Byrnes, was created.
Mr. Byrnes' great personal prestige and his ability to speak for the President in dealing with conflicts, combined with his knack for achieving compromises, made OWM operate as a high level policy coordinating agency with considerable success.71
Only by late 1943 could it be said that reasonable organizational and procedural smoothness characterized the war production process.
In examining the performance of the food and agricultural sector in supporting the WW II effort, it is important to keep in mind that the size and structure of the industry then was far different from today. At the beginning of the war there were nearly 31 million people,or 23 percent of the U.S. population, living on about 6.5 million farms. Agriculture then was a relatively labor-intensive industry. Today the farm population is only about 4.7 million. There are less than 2 million farms in total, with less than 900 thousand considered commercial operations (these account for most of the gross income).72 Today's highly capital-intensive agriculture generates about 170 percent more output than when WW II began.73 Exports of U.S. agricultural products in 1940 were only $3.5 billion compared with over $42 billion today.74 A measure of the relative growth in productivity of the food and agriculture industry is the declining share of income spent for food. U.S. consumers spent 21 percent of their after-tax income on food before WW II, compared with a little over 11 percent today.75
Agriculture--A Case Study
Early Agricultural Problems In Supporting The War EffortAgriculture suffered sorely during the Great Depression. Further, in the late 1930s agriculture was rather isolated from international events and much of urban America. Rural America voiced its concerns about low farm commodity prices and depressed incomes. The impending world crisis was not high on the farm agenda. It was in this context that policy makers in the late 1930s worked on the design and operation of farm commodity programs under the Agricultural Adjustment Act (AAA). This landmark legislation, passed in 1933 and amended in 1936, established Government-wide authority
to support farm commodity prices by removing excess supplies from the market and by restricting farm output.76
Farm policy in the 1930s focused on the excess capacity problem. As problems in Europe deepened, the task for farm policy makers shifted to addressing the emerging issue of supplying the massive war needs.77 Retrospectively, this "problem" today seems simple. However, the agricultural community in the prewar period had no idea that Government spending (in real terms) would surge to close to 60 percent of GDP by 1944.78 Nor was it perceived that farm exports would quadruple and farm income would more than double because of the war effort. Clairvoyance obviously would have produced an alternate policy response and the performance of the agricultural sector would have been much different. Reviewing how events unfolded sheds some light on why the policy process moved as slowly as it did.
After France surrendered in 1940, the United States declared a "defense planning" period. The Administration built public support for the Lend Lease program and started gearing up industrial activity to supply the war.79 However, agriculture was not directed to participate in this initial effort and, as a result, continued trying to deal with the excess supply problem. Some argue that the President explicitly excluded agriculture from the "planning" process at that stage because he did not want to prematurely elevate public concern over preparing for war.80
Even before the Lend Lease program began to take shape during 1941, demand for food was expanding, especially for animal protein. In response, the Secretary of Agriculture urged farmers to
step up pork production. Once the Lend Lease program became law in early 1941, the U.K. asked for large quantities of meat, dairy products, eggs, and vegetables. The Secretary responded by calling for increased output of these products. He directed the U.S. Department of Agriculture (USDA) to purchase certain commodities at prices above market-clearing levels to stimulate output.81
Looking ahead during mid-1941, USDA expected that imported items likely to be cut off in a protracted conflict included vegetable oils, hemp, flax, and vegetable seeds. Accordingly, USDA gave various incentives and assistance to farmers to expand domestic production of these and substitute commodities. For the most part, this program met with early success. Other supply-enhancing actions by USDA before Pearl Harbor included announcing annual production goals. It is noteworthy, however, that the original wheat production "goal" called for a 16 percent cutback from the large 1941 crop. Clearly, the Depression mentality was alive and well in the agriculture community. At the prompting of Congress, USDA raised support prices for the major crops.82
Even after the bombing of Pearl Harbor and the surging patriotic emotions of most Americans to defeat the Axis, USDA did not eliminate Government acreage limitations. Why did it take so long to shift agriculture into high gear and operate at full speed in the midst of a major global war? There are five significant reasons, reflecting the Depression-inspired fears of excess capacity and continuing low prices.
- Vivid recollection of the disastrous problems in the post WW I era and the conviction that agriculture was inherently plagued with excess productive capacity and natural instability, ultimately leading to severely depressed commodity prices.
- Large carryover stocks of grains from unusually favorable weather patterns in the late 1930s, coupled with the fear that
the wartime demand would be insufficient to return stocks to more manageable levels.83
- The sharp drop in U.S. agricultural exports in 1938-40 caused by the Axis powers interrupting shipping on the high seas.
- The difficulties in comprehending the ultimate size of the war effort and how it would affect the farm sector. The same was true for the size of the Lend Lease program and commercial foreign demand for food and fiber.84
- Concern that if the trend of tractors replacing horses and mules continued as the main source of power on farms, the demand for feedstuffs for draft animals would fall sharply.85
WW II was not the final time policy officials found it difficult to convince the farm community that changing forces were at work. A similar encounter occurred in the early 1970s when wage and price controls were imposed in peacetime. In this later case, Government policy makers soon faced trade-offs between the stabilization goals and the objectives of the traditional agricultural programs.86
Farm Opposition To Price ControlsAdjusting supplies to meet growing WW II needs was not the only area where the agricultural community clashed with other economic policy makers. Demand pressures associated with the war began to show in 1941. By December food prices at retail were up 15.7 percent, a rate nearly 60 percent above overall retail prices.87
Anticipating rising demand pressures, the administration requested legislative authority to impose price controls. Spurred by the attack on Pearl Harbor, the legislation was signed before the end of January 1942.
In September 1941, Bernard Baruch recommended comprehensive controls across the board, including wages, farm products, prices, and rents.88 However, the farm lobby and farm belt members of Congress strongly opposed price controls on farm products. The Administration, in sympathy with labor at the outset, did not initially pursue wage controls. The legislation that passed contained significant loopholes to accommodate increases in farm product prices, but did not include provisions to control wages.
As demand heated up during 1942, both price and wage advances accelerated. By October, the Administration requested and got new legislation from the Congress that allowed for partially lowering price ceilings on farm products in return for wage controls. Additionally, the Administration granted farmers guarantees that farm prices would receive Government support at the end of the hostilities. This legislative change coupled with modest tax increases provided the basic stabilization framework for the duration of the war.89
In response to continued price acceleration in 1943, the President's "Hold the Line" order further tightened price controls. Price ceilings were lowered on meats, butter, and coffee, and the Office of Price Administration (OPA) imposed price ceilings on "dry" groceries. The Government recognized that the huge procurement of U.S. foodstuffs for military, and Lend Lease (about 25 percent of the 1943 domestic output) tightened supplies sharply.90 This tightness, coupled with growing consumer buying power and lack of consumer durables such as automobiles and household appliances, were forces behind the big surge in demand for food. Accordingly, an agricultural subsidy program was set up to cushion consumers' costs while encouraging added production of foodstuffs. But this initiative was not supported by the agricultural interest groups, who favored higher prices to stimulate output. The initial Federal action in this
regard was the sale of USDA wheat stocks for animal feed to stimulate output of meat, milk, and eggs.91 The Farm Bureau and the farm bloc in Congress bitterly fought this action. Ultimately the Congress put upper limits on the size and conditions of these sales.92
Massive Consumer Demand GrowthReal per capita disposable incomes rose 35 percent during the 1939-46 period. This advance greatly overshadowed the increase in supply of foodstuffs (combined output of meat, milk and eggs rose only 19 percent from 1939 to 1946).93 Annual advances in retail food prices exceeded overall retail price increases every year throughout the war except for 1944.94 Thus food, and especially meat, became a major problem for price control, rationing, and procurement officials.95 Despite higher prices and sporadic shortages, consumers upgraded the quality and quantity of food in their diets during the war years. The number of pounds of food consumed per capita by the civilian population during the war rose from 1,548 pounds in 1939 to 1,646 pounds in 1946, a record that remains.96
Lend Lease StimulusU.S. agricultural exports fell sharply during the early war years. However, the Lend Lease program, U.S. troop food needs abroad, and commercial export demand more than made up for the initial drop. By 1946 the real value (1993 dollars) of U.S. agricultural exports exceeded $8 billion, more than 25 percent above the 1938 level.97 The major surge came from increased shipments of processed meats, dairy products and powdered eggs under the Lend Lease program. Most of the Lend Lease shipments went to help feed British and Russian citizens. The move toward exporting processed
Source: Bureau of the Budget, p. 238.
food products reflected limited shipping space available due to the heavy movement of war materials.98
Distribution and Interagency ProblemsBurgeoning military procurement, surging export needs, and growing domestic consumer demand put strains on the U.S. agricultural marketing and food distribution system. Farm interests were unhappy with price controls and rationing. Consumers complained about inconveniences and temporary shortages.
By mid-1942, black markets were popping up periodically and meat shortages broke out in several major U.S. cities. To deal with distribution and procurement matters here and abroad, an interagency group, called the Food Requirements Committee, was set up under the War Production Board. The Secretary of Agriculture chaired the Committee, which included eight other agencies and
the military services. Later the group was renamed the Combined Food Board. It expanded to include the United Kingdom as a member (to address Lend Lease needs) along with other U.S. Government procurement officials. Canada also became a member, and this group lasted throughout the war.99
One supply dilemma was the canned meat problem that plagued the military procurement process. Canned meat prices were subject to controls, but live animal prices were not. This resulted in a "squeeze" on meat packer margins during periods of excess demand. Price ceilings were temporarily lifted on canned meat to encourage meat packers to supply the military; later canned meat was imported from South America.100 Even with increased military and Lend Lease procurement, total output growth was so large that the only major foods that consumers were forced to significantly cut back on during the war were butter, cheese, and canned fruit.101
A number of interagency squabbles developed over allocating supplies. For example, Wilcox notes the difficulties in getting the military to provide the War Food Administration with information regarding food stocks on hand. Wilcox further cites a dispute which arose only days after the President created a special committee to allocate foods in short supply. In this case the War Department appeared reluctant to alter existing procurement practices despite the President's new special committee. There were also disagreements in timing procurements. Despite recommendations from the War Food Administration, the military did not want to step up meat purchases during months when supplies were seasonally heavy. These issues led to Congressional hearings which Wilcox credits as "the most effective means of getting changes in army practices.102
Even so, the food distribution system seems to have performed reasonably well in supplying military needs within the context of the overall mobilization effort. Indeed, a report by the War Department
Procurement Review Board (WDPRB) in mid-1943 concluded that the Quartermasters Corps' policy of maintaining ninety days of reserve stocks of nonperishable foods in the United States was "too high." It reached this conclusion based on the ability of the U.S, food system to produce and deliver in a timely manner.103
U.S. Farm Output ExpansionFollowing the disastrous 1930s, farm commodity prices rose sharply during the war. By 1946 farm commodity prices stood 139 percent above the 1939 levels.104 At the same time, the agricultural production increase was only about one-third as large as that of industrial output.105 The smaller rise in farm output reflects the highly inelastic supply response that is inherent in the basic agricultural production process. Unlike much of the non-farm economy, farmers call do little in the short run to expand output by working more hours. In contrast, farmers mainly make decisions on what annual crops to plant, or what to do to adjust production of meat, milk, and eggs on farmland that is limited. Additionally, in the early 1940s capital equipment and production inputs were limited in availability due to industrial war needs. Furthermore, the supply of farm labor tightened considerably as over a million workers left farming for higher paying industrial jobs or to serve in the military.
Bureaucratic inertia played a role as well. The USDA did not completely lift acreage controls until 1944, convinced by then that demand for food here and abroad would outstrip anything ever witnessed before in the modern history.
Weather was generally favorable to crop production during the 1940s. Therefore larger output per acre helped offset the lags in plantings. Responding to wartime needs, food grain output rose over 50 percent during the period.106 Moreover, production of soybeans, a relatively "new" U.S. crop, expanded more than threefold during the war years and helped offset the curtailment of vegetable oil imports from Asia.107 On the other hand, production of cotton
dropped more than a fourth as land shifted from fiber to food crops.108 Acreage planted to potatoes also fell in response to rising yields and changing civilian diets.109
Labor OutmigrationCapital had been substituted for labor in agriculture since the Civil War. Farmers, their families and farm workers had been leaving the countryside to seek higher paying jobs and increased services in urban areas. This trend accelerated during WW II and added significantly to the nation's productivity as farm labor moved into higher productivity industrial jobs utilizing larger stocks of capital equipment. From 1939 to 1946 the farm population declined by over 5 million, or about 18 percent; farm workers decreased by about 6 percent.110 As families and workers left agriculture, this further strained the remaining farm labor supply and stimulated the demand for more farm machinery and other labor-saving technology.
Better paying jobs were not the only reason young people left farming during the war years. Some were drafted and others volunteered to serve. To help offset this outflow, farm interest groups lobbied hard to get deferments for farmers and farm workers. They were successful in 1942 with the "Tydings Amendment," which gave statutory deferments to farm workers.110 The Administration took other actions during the war to temporarily augment the supply of farm workers during harvest time. These included giving special 1-3 day passes to servicemen to help with the harvest; bringing workers in from Mexico, the Bahamas, and Jamaica; and near the end of the war, using POWs held in the U.S.112
Agricultural CapitalBefore the United States entered the war, the Administration was already taking steps to divert industrial output away from the civilian market to meet wartime needs. In 1941 the farm equipment
industry's farm machinery, output was limited to 80 percent of the 1940 level. Limits were also placed on the production of parts and export activities in the farm machinery, industry.113 These mandated restraints adversely affected agriculture, which for two decades had been mechanizing to replace draft animal power and manual labor in order to boost farm productivity.
Farmers, farm interest groups, and USDA officials complained loudly about the wartime cutbacks in farm machinery production. Simultaneously, the War Food Administration exhorted farmers to expand production! This situation was exacerbated by sharper cutbacks imposed on the machinery industry, in 1942 and 1943 just as war needs mounted. In late 1942, the Government pursued an unusual policy. It turned to the two major farm machinery manufacturers for war production needs and allowed the smaller companies to concentrate primarily on farmer needs. This action "tilted" the commercial business in favor of the smaller companies. As signs of the war winding down began to appear in 1944, the Administration relaxed restrictions on producing for the civilian market. By the end of the year constraints were virtually eliminated.114
Despite mandated farm machinery cutbacks, other factors such as rising commodity prices, tight labor markets, and the need to boost productivity spurred farmers toward increased farm machinery outlays during the war.115 By 1946, farmers were using 44 percent more mechanical power and machinery than they had in 1939.116 This increase would have been substantially larger if farm machinery and equipment had been more readily available.
Use of fertilizer, lime, and agricultural chemicals expanded rapidly and played a major role in helping boost farm output during the war. With the sharp rise in agricultural commodity prices, there was strong farm demand for fertilizer and chemicals. Use of these materials (some first introduced during the period) doubled during
the 1939-46 war years, despite disputes over limits on allocations for agriculture.117 Thus spurred by the war effort, a new age was underway in agriculture. One writer described this era as "entering the period of chemical marvels."118
Agricultural ProductivityDespite WW II constraints on the availability of farm workers, machinery, and other key inputs, total factor productivity increased 22 percent during the 1939-46 period.119 This expansion reflected new technology and increased capital. Favorable weather patterns also contributed to higher output (corn and wheat yields improved every year but two during the war120). The move to a highly capitalized farm sector helped set the stage for the rapid productivity gains that characterized U.S. agriculture in the postwar years.
Legacy of the War YearsIn focusing on what was learned from America's agricultural experience, several broad categories of lessons emerge:
- The U.S. food and agricultural industry responded reasonably well in the 1940s to massive increases in domestic and foreign demands. However, the supply response for food and agriculture could have been more timely with earlier adjustments in policies and programs to fully support the war effort. A more transparent interagency policy process would have been particularly useful.
- WW II seriously disrupted food supplies in many countries of the world. The aftermath of this massive damage stimulated the European countries and Japan for decades to pursue inefficient self-sufficiency policies to protect their food and agricultural sectors. These inward looking strategies significantly
raised barriers against reforming agricultural trade in the postwar period.
- The war devastated many nations' agriculture. This, along with bad weather in 1947/48, caused global food supplies to drop sharply. These developments, on top of the inherent instability associated with agricultural markets and the lack of effective demand facing many nations, drove home the notion that the United States needed to look at matters far beyond its own borders. As the end of the war approached, support grew for the idea that many world food-related problems ultimately needed addressing through multilateral forums. In this regard, the United States was an architect in a 44-nation meeting in 1943. That session ultimately helped create the Food and Agricultural Organization (FAO) and other food-related agencies under the United Nations framework.121
- Improvements that occurred in agriculture because of the war include formation of a highly capital intensive U.S. food and agriculture industry. This industry remains the envy of the world. The development of some crops received a massive stimulus from the war. One example is the rise of the U.S soybean industry, which today is by far the world's largest oilseed producer. The postwar conversion of ammonium nitrate plants to civilian use provided a major expansion in nitrogen fertilizer production capacity.122 Major breakthroughs in chemicals also occurred during the war. However, some products, such as DDT and 2,4-D, that helped augment agricultural productivity after the war have since
fallen by the wayside, especially as their toxic effects became better understood.123
The accomplishments of the American economy in support of our World War II mobilization efforts were nothing less than spectacular, going beyond what even the wildest of imaginations in the early 1940s could have possibly conceived. The production of war materiel over the 1940-1945 period was and remains unprecedented. Military production increased its share of total output twenty-fold over the 1939-1943 period. Not only did the United States arm the allies, it helped feed them as well. While military, genius and heroism were critical ingredients in winning the war, without the accomplishments of the economy's industrial and economic mobilization, they would have been for naught (or victory would have been attained at a far higher price).
Driven by military, production, America's economy for the first time exceeded the one trillion dollar level in 1942. By the war's end, America's GNP was roughly half of the global GNP. Note should be made of a key fact, however: unlike the other major belligerents, the United States did not fight on its own soil and did not experience destruction of its capital stock due to the war. To the contrary, led by the public sector, an enormous capital expansion occurred. The American industrial landscape also changed dramatically. There were major transformations in the agricultural sector, which emerged from the war with far fewer human resource inputs and a much greater orientation toward global agricultural markets. New products and industries were spurred by military production and needs, including an emerging soybean industry, synthetic rubber, commercial aviation, computers, and an emerging modern electronics industry.
In the United States, as in other belligerent countries, the scope of the marketplace continually narrowed as the economy became more centrally directed and micromanaged. Further, equity concerns over the fair apportionment of the costs of war pervaded policy decisions--the application of wage controls, measures against profiteering, income and excess profits taxes, and virtually all other such decisions. Similarly, the Great Depression and its legacy served as a double-edged sword, its imprint also touching most policy discussions. This was most evident in the reluctance to fight inflation with still higher taxes and in the reluctance to encourage capacity, expansion in both industry and agriculture (and thus impeding the mobilization effort). On the other hand, the Depression provided enormous excess capacity which allowed for rapid production increases. Although inflationary, pressures were pervasive, inflation containment was nonetheless very successful, particularly when compared to the World War I experience. Clearly, however, the most appropriate perspective on the inflationary aspects of war is the broader one which encompasses at least several years of the immediate postwar period.
Prewar mobilization and economic stabilization arrangements were distinctly beneficial, even though the organizational arrangements were far from optimal. Finally, more focused and centralized control earlier in the mobilization process and a more transparent interagency process would have been helpful. In the end, despite numerous inefficiencies and frictions, the arsenal of democracy's economic and industrial performance was incredibly impressive and stands as a major asset in our World War II victory.
Table of Contents ** Previous Chapter (2) * Next Chapter (4)
1. Alan S. Milward. War, Economy and Society, 1939-1945 (Berkeley: University of California Press,1979), 63.
2. Harold G. Vatter. The U.S. Economy in World War II (New York: Columbia University Press), 10.
3. Milward, 67.
4. CPA, Industrial Mobilization for War, 1:962.
5. Milward, 70.
6. Jules Backman, et.al. War and Defense Economies (New York: Rinehart & Co., 1952), 84-85.
7. Congress of the United States, Office of Technology Assessment, Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base, OTA-ISC-500 (Washington, D.C.: U.S. Government Printing Office, July 1991 ), 44-45.
8. Milward, 64-65.
9. Ibid., 69.
11. James L. Abrahamson. The American Home Front (Washington, D.C.: National Defense University Press, 1983), 144.
12. Milward, 65.
13. Budget of the United States Government, Historical Tables, Fiscal Year 1995 (Washington, D.C.: U.S. Government Printing Office, 1994), 133.
14. Public investment was almost exclusively defense-related during the 1940-45 period, although these figures do include some non-defense capital spending as well.
15. U. S. Congress, Office of Technology Assessment, Redesigning Defense to the Future of U.S. Defense Industrial Base, OTA-ISC-500 (Washington, D.C.: U.S. Government Printing Office, July 1991), 45.
16. Ibid., 64.
17. See Bernard Baruch, "Priorities, The Synchronizing Force," Harvard Business Review (Spring, 1941), 261-270.
18. George A. Lincoln and associates. Economics of National Security (New York: Prentice-Hall, Inc., 1954), 349.
19. Backman, 103.
20. Vatter, 24.
21. Horst Mendershausen. The Economics of War (New York: Prentice-Hall Publishers, 1943), 141.
22. Ibid., 142.
23. Army Service Forces. Logistics in World War II: Final Report of the Army Service Forces (Washington, D.C.: U.S.G.P.O., 1948), U.S. Army Center of Military History, Facsimile Reprint, 1993, 66.
24. In addition to changing product needs, varying order quantities, and related production rearrangements, a pervasive concern for equity and the fair apportionment of war burdens was evident. Indeed, the "Renegotiation Act of 1943 grew out of the recognition that neither close pricing policies nor excess profits taxes would be successful in preventing war profiteering." Ibid., 70.
25. Backman, 86. In contemporary microeconomic jargon, this is a form of price discrimination in which the subsidy applies only to incremental, higher cost output rather than to total production.
27. Mendershausen, 147.
28. Paul F. Gemmill and Ralph H. Blodgett Economics, third edition, volume 2 (New York: Harper & Brothers Publishers, 1948), 118.
29. J.K. Galbraith, "'The Disequilibrium System," American Economic Review (June 1947), 290.
30. Paul F. Gemmill and Ralph H. Boldgett, American Economy in Wartime (New York: Harper Brothers, 1942), 24-26.
31. Backman, 309.
33. Vatter, 95.
34. Raymond T. Bye and Irving B. Kravis, Economic Problems of War (New York: F.S. Crofts & Company, 1942), 38-39.
35. "Rationing at a Glance," Chattanooga Times, 21 February 1943.
36. Mendershausen, 199-200.
37. The National City Bank of New York, Monthly Letter; November 1942, 122.
38. Mendershausen, 200.
39. Backman, 250.
40. Ibid., 253.
41. Vatter, 107.
42. Lincoln, 449.
43. Budget of the United States Government, Fiscal Year 1995, 89.
45. Milward, 107.
46. Washington, D.C. conference on September 17, 1940, reported in "Exploring the Financing of National Defense and its Economic Consequences," Savings Bank Journal (November, 1940), 13.
47. Samuelson to Thomas Blaisdell on March 12, 1943. See National Resources Planning Board, National Archives. See also Paul Samuelson, "Full Employment After the War," in Seymour Harris, editor, Postwar Economic Problems (New York: McGraw-Hill, 1943).
48. Lincoln, 466.
49. Ibid., 468.
50. Easy money was implemented not only through Fed purchases of government bonds, but also via reduced bank reserve requirements and the exemption of Treasury deposits from those requirements.
51. Backman, 293.
52. Board of Governors of the Federal Reserve System, Annual Report for 1941 (Washington, D.C.: Federal Reserve, 1942), 1.
53. Bachman, 279.
54. Vatter, 107.
55. Gemmil and Blodgett, Economics, Volume 2, 120.
58. Vatter, 99.
59. Gemmil and Blodgett, Economics, Vol 2, 122.
60. Quoted in Time [magazine], 7 April 1947, 85.
61. Vatter, 100.
62. Galbraith, 295.
63. R. Elberton Smith, The Army and Economic Mobilization (Washington DC; Department of the Army, Office of the Chief of Military History, 1959), 399.
64. Ibid., 401.
65. Ibid., 405.
66. Vatter, 87.
67. Ibid., 32.
68. Eliot Janeway, The Struggle for Survival (New Haven: Yale University Press, 1951), 201.
69. Vatter, 72.
70. Ibid., 68.
71. Lincoln, 68.
72. Department of Agriculture, Agricultural Statistics (Washington, D.C.: Government Printing Office. 1972), 521 & 566. See also the 1985 edition, 550.
73. Ibid. The 1972 edition, 537. Also Council of Economic Advisers, Economic Report of the President (Washington, D.C.: Government Printing Office, 1994), 380.
74. Economic Report of the President, 1994. 383.
75. Table prepared by Judith Putman, Economic Research Service, U.S. Department of Agriculture.
76. The terms "excess supplies" and "excess capacity" in this context describe the tendency for agricultural output over time to expand more rapidly than demand. This process, which pushes prices downward, is the classical problem of too many resources in agriculture.
77. See for example. Walter Wilcox, The Farmer In The Second World War (Ames Iowa: Iowa State College Press, 1947), Chapter 4. See also Murray R. Benedict, Farm Policies of the United States, 1790-1950 (New York: Twentieth Century Fund, 1953), Chapter 16.
78. Economic Report of the President, 1994, 398.
79. Benedict, 403.
80. Wilcox, 36-37.
81. Ibid., 38.
82. Ibid., 40. See also Albert B. Genung, Food Policies During World War II (Ithaca, New York, Northeast Farm Foundation 1951), 6-7.
83. Benedict, 402-405.
84. See earlier discussion on this problem.
85. Ronald L. Mighell, American Agriculture: Its Structure and Place in the Economy (New York: John Wiley and Sons, Inc., 1955), 3-6. Mighell reports that between 1918 and 1953 some 70 million acres of feed grains, (roughly 133 million acres were used to produce feed grains in 1943) were no longer needed as tractors replaced draft animals on farms. This land could be shifted to producing feedstuffs for cattle, hogs and poultry or to other crops. However, some farmers feared it could depress prices.
86. Marvin H. Kosters, Controls and Inflation (Washington, D.C.: American Enterprise Institute, 1975), 65. See also Arnold R. Weber, In Pursuit of Price Stability (Washington, D.C.: The Brookings Institution,1973) 77-80.
87. Economic Report of the President, 1994, 340.
88. Wilcox, 117-119.
89. Benedict, 409-416.
90. Genung, 50-51.
91. Benedict, 420-424.
92. Genung, 14-15.
93. Agricultural Statistics, 1972, 688-690, and Economic Report of the President, 1994, 198.
94. Economic Report of the President, 1994, 340.
95. John Kenneth Galbraith, A Theory of Price Control (Cambridge, Massachusetts: Harvard University Press, 1952), 26 and 73. See also R. Elberton Smith.
96. Agricultural Statistics, 1972, 688-690.
97. Ibid., 698.
98. Milward, 247.
99. Genung, 13-14.
100. Smith, 405-408.
101. Mordecai Ezekiel, "Agricultural and Industrial Problems" in Economic Reconstruction, edited by Seymour E. Harris (New York. N.Y: McGraw Hill Book Company, 1946). 27.
102. Wilcox, 270-271.
103. Smith, 158-159.
104. Economic Report of the President, 1978, 365.
105. Agricultural Statistics, 1972, 537 and 542.
106. Ibid., 537.
107. Ibid., 162.
108. Ibid., 537.
109. Ibid., 219.
110. Agricultural Statistics, 1972, 521 and 523 and Wilcox, 98-100.
111. Wilcox, 85-89.
112. Ibid., 93-95.
113. Wayne Broehl Jr., John Deere's Company (New York, N.Y.: Doubleday & Co. Inc., 1984), 546.
114. Ibid., 547-548.
115. Theodore W. Schultz, Agriculture In An Unstable Economy (New York, N.Y: McGraw Hill Company, Inc. 1945), 25-26.
116. Department of Agriculture 1990 Fact Book of Agriculture (Washington, D.C.: Government Printing Office, 1990, Misc. Publication No. 1063), 15-16.
117. Ibid., 15-16.
118. Mighell, p. 2. Mighell writing in 1955 described the predominate forms of capital equipment farmers used over the centuries. He depicted the first half of the 20th Century' as, "the period of mechanical power." Looking ahead, he speculated that agriculture was "now entering the period of chemical marvels."
119. Agriculture Statistics, 536.
120. Ibid., 1-2 & 34-35.
121. Department of Agriculture, International Organizations and Agricultural Development, by Martin Kriesburg (Government Printing Office, Foreign Agricultural Economic Report no.131, 1984), 47-63 and Wilcox, 331-333.
122. Mirko Lamer, The World Fertilizer Economy (Stanford, California: Stanford University Press, 1957), 215-217, 647. Production of synthetic nitrogen tripled during the war with the establishment of 10 Government synthetic ammonia plants. These plants were originally built by the Government to supply military needs during the war and sold or leased (on favorable terms to the industry) at the end of the war for commercial nitrogen fertilizer production.
123. Thomas R. Dunlap, DDT, Scientists, Citizens, and Public Policy (Princeton, New Jersey: Princeton University Press, 1981). 63-75, and Arthur H. Westing, Herbicides in War--The Long-Term Ecological And Human Consequences (Stockholm, Sweden: Stockholm International Peace Research Institute, 1984), 4.