Economic Problems at War's End


By EMERSON P. SCHMIDT, Economist, Chamber of Commerce of the United States of America

Substance of speech delivered extemporaneously before Research Bureau for Post-War Economics, New York City, November 24, 1943

Vital Speeches of the Day, Vol. X, pp. 233-235

WE will inherit from the war an economic system which will not be well adapted to peacetime operations. Wars, because they require enormous shifts from peacetime operations, always lead to very uneven and unequal expansion of the different parts of the economy and very uneven increases in prices and wages. This war, because of its global character, will leave us with an economy that is distorted, dislocated and maladjusted. Great patience, hard work, and much give-and-take will be necessary before the economy can be adjusted back to a self-sustaining system.

Post-War Boom?

It is widely predicted that, after a reconversion period of some months, we will experience a great replacement boom. Consumer durable goods, including motor cars and housing, have been wearing out during the war without much replacement. Meantime, most people are getting out of debt and in addition are accumulating cash, money in the bank, bonds and other liquid assets which they may want to spend at war's end.

Thus it is quite possible that we may experience a replacement boom which will probably last about one year for each year of total war. During this period the price and rationing controls will probably have to continue, perhaps in somewhat reduced intensity with gradual relaxation as the supplies of goods are increased; but we must, if we want a free society, be on our guard to prevent these necessary controls from continuing longer than is essential to avoid undue price rises.

The Post Post-War

There is great danger that this boom, if it does come, will blind our eyes to the underlying maladjustments created by the war and will lull us into a false sense of safety andsecurity, whereas we must remove the imbalances and distortions before we can have long-time prosperity.

Perhaps an illustration from the last war will make the issue more clear. During the 1914-18 war the production of sugar in Europe dropped from eight million tons to two million because of the scarcity of labor. The price of sugar went skyward. We tried to make up the deficiency and greatly expanded sugar beet production, in spite of which the price of sugar rose from five cents a pound to over thirty cents. After the war, when European agriculture recovered, the price of sugar collapsed because of the over-supply. But our farmers, now habituated to sugar production, did not want to drop this line, just as a worker hesitates to learn a new trade when his former craft becomes obsolete. The result was that the sugar industry was in a state of constant depression all through the inter-war period.

That is a clear illustration of what wars do to an economy. During this war we are urging farmers to expand many lines of production; our shipbuilding and airplane industries have expanded their capacity by several hundred per cent. The same is true of many other lines. Incomes have been lifted by the war but the increases have affected different people differently. Wages have risen enormously in many lines of work, while in others they have remained almost constant. At the end of the war all these structural changes in the economy and in prices will plague us. Again to repeat, the short-lived replacement boom is apt to lull us into a feeling that we have safely traversed the road irom war to peace production.

It is up to statesmen, the leaders of labor, industry, agricultural and all other groups to analyse these possible sources of maladjustment and urge their correction with patience, cooperation and reason. If the rabble-rouser comes alongand says, "We created prosperity for purposes of war, now we must have prosperity for peace," the people must have enough education and understanding to realize that we cannot fight a major war with our economic machine and then quickly expect to convert that machine into a peacetime production system without making some sacrifices, changes and shifts in occupations and incomes.

Already some people are saying that we should get a huge public works program ready so that all workers not quickly absorbed into private civilian jobs can be put on a public pay roll. While needed public works should be pre planned now, it would be a great mistake to try to freeze the ship and airplane workers, for example, in their present locations by means of a huge public works program. This would be unfair to the communities and to the workers who should be encouraged to shift to other areas and occupations as promptly as possible, so that they may get permanent jobs. Public works of a "make-work" character constitute a mere temporizing with the problem.

During a war the government directs production; a war economy is in many respects a regimented and a socialized economy. Nearly everyone must take orders, and liberty is substantially reduced. The government succeeds in creating "full employment" because Tittle attention is paid to costs, the demand for instruments of war is intense and all the necessary purchasing power to pay for the war is gotten by taxes or is borrowed from the people and the banks, thereby creating huge deficits. Can we do this in peacetime?

In peacetime under a free society and under which free consumer choice and the free decisions of millions of businessmen and others govern the level of business and employment, we cannot be so certain of "full employment." That is, high employment levels are more difficult to attain in a free society precisely because it is a free society. If we are unduly impatient at war's end to have a "full employment" society we may unwittingly force the hand of government to drive us into a "forced society" or a regimented society. Russia, in the past twenty years, and Hitler since 1933, have largely solved the unemployment problem. But before we adopt their methods we would better raise the question as to whether economic security and full employment can be bought at too high a price.

For this reason, we should recognize that a war of such world-shaking character as that through which we are passing, will require years of patient readjustment. If we resist the necessary readjustment we may unconsciously contribute to the formation of a dictatorship, which may arise not because any significant group wants it but because we unwittingly do those things which make dictatorship inevitable. This is our greatest danger for the post-war period.

A Volume Economy vs. A Price Economy

Probably the greatest single lesson which we still have to learn is that our welfare does not depend upon our money incomes but on our production of goods and services. Just because a wage increase or a higher price received for what a man sells gives him a greater command over goods and services, the average person is apt to reason from the particular to the general. The foregoing reasoning is correct, providing not too many other people also get higher wages and charge higher prices. But if we all organize ourselves into numerous pressure groups to get higher prices, higher wages, shorter hours and, in general, become price-minded, obviously we are not going to have a high standard of living. Monopoly is always restrictive; it is price minded—this applies to business monopolies and to labor monopolies. For this reason, in die post-war world instead of everyone or every group trying to get more money, the economy must be allowed a high degree of flexibility under which more competition and volume of output should be the goals rather than mere dollars—we cannot eat dollars!

Unless we are willing to allow more flexible prices and wages to make constant adjustments with changing supplies and demands, we cannot expect to have full employment. Stated in another way—if we continue to have our major economic decisions made by force, by pressure groups, and by power, we cannot have a high volume economy. Pressure groups do not merely neutralize each other—rather, they tend to paralyze the economy and freeze many people out of jobs, out of incomes—and then those who seemingly benefit by the pressure groups merely have to support those who are frozen out of useful employment. This is the greatest single lesson we have yet to learn. If we fail to learn it, we will be forced into a totalitarian society just because we have failed to be wise enough to let a free society operate in the only way in which it can operate.

New Investment—The Key to Post-War Prosperity Another reason why patience is absolutely indispensable for an effective transition to a post-war prosperity relates to the problem of inducing new investment. Without a steady rate of new investment in productive facilities, we cannot have prosperity; without a fair return on existing investment we do not have adequate incentive to make new investment. In our economy we require an investment of about $5,000 in equipment and building, on the average, to put one man to work. Man works with capital—machines, tools, raw materials, etc.,—and this is why we call ours a capitalistic society.

New investment is necessary for two fundamental reasons: (1) Unless the current savings of people are promptly invested, not in existing stocks and bonds, but in new securities or for new productive facilities, these savings tend to remain idle purchasing power; (2) we have a net increase in our labor supply (young people) estimated at nearly 700,000 persons annually. Thus unless many, many units of $5,000 are converted regularly into new, job-creating facilities we cannot absorb our young people into the effective work force. This is the most important post-war problem.

Return on Existing Investment

Unsettled social and political issues, taxes which impinge unduly on profits, labor turmoil, etc., all may cause businessmen to lose confidence and the economy will bog down. By "confidence" we mean the conviction on the part of businessmen that people generally will spend their incomes promptly in either the form of personal consumption or investment. When conditions are uncertain, people will hesitate and the businessman "loses confidence." In short, the businessman who, in effect, is a trustee of the assets in his charge, must avoid losses and he tries to make a profit. If conditions for profits on existing investments are not favorable, obviously we cannot expect anyone to make new investments. Therefore, in terms of jobs and production for the post-war, we must create the political and social environment which will lead to profit expectations—first, in order to put to use our existing resources, and second, to create new investment in jobcreating facilities.

It should be noted that high profits are not necessary, but what is absolutely necessary is that profit expectations be maintained. It is the expectation of profits which makes the economy click at high levels. Furthermore, the more we reduce the risks of business by building a favorable climate for business, the lower is the necessary profit which will induce high rates of industrial activity. If we make the life of the businessman tougher, more uncertain, and constantly threaten investments with all sorts of pressure group and olitical action, we will find that we cannot have high levels of production and employment.

Thus a plentiful supply of jobs is absolutely dependent OU an adequate return on investments. Instead of "capital" and "labor" being in opposite classes and having different interests, the fact is that their interests are mutually interdependent and we must allow no foreign "ism" to lead us believe otherwise.

Action Needed

Nearly every group and every substantial business organization is engaging in post-war planning. Possibly the new products, new raw materials, new techniques, deferred and foreign demand will break through the crust of obstacles facing high levels of production and exchange in the postwar. Beyond promotion of products and markets, insufficient attention is being devoted, however, to the inevitable readjustments which will face us in post-war. Business groups and a few economists are cautiously drawing attention to thedistortions but are not speaking out boldly and effectively for a more flexible and mobile economy which is the only type of economy compatible with freedom. Socially and politically, we are inclined to allow problems to reach the crisis stage before acting. Had we the foresight to act in advance, the solution to the problems would be greatly facilitated.

In the pre-war period we never collected as much as $5 billion in federal taxes. The interest on our federal debt alone in the post-war will require 50 per cent more than that sum—in addition, we will have the ordinary expenses of government, a huge standing army, a two-ocean navy and many other commitments to fulfill. Unless we have extraordinarily high levels of industrial activity we will not be able to carry our burdens or absorb our labor supply. This is deadly serious business and, unless people in positions of leadership and responsibility can be awakened in time to the problems which we face, our way of life can be destroyed. It has happened in many European countries, but it can be avoided here if we act in time.