Economics and The Public Welfare
76: Our War Economic Policy
Chapter 76
Our War Economic Policy
Contrasts Between Policies of Wilson and Roosevelt. The contrast between the war policy of the Wilson Administration in 1917 and the war policy of the Roosevelt Administration in World War II is in many ways extraordinary. Governmental measures in the first World War were taken for the purpose of winning the war. They were clean-cut. They were highly intelligent. They were not complicated, in general, by political considerations. They were not mixed with the desire for the aggrandizement of Governmental power. The political parties had a sort of informal truce. Ideas of social revolution or of transforming the economic life of the country were in general held down. The one “social purpose” put over was Federal Prohibition, against the opposition of President Wilson, though the war was used by President Wilson for the purpose of hastening the coming of female suffrage. But this sort of thing did not enter at all into the Government’s war economic policy. Here there was a great singleness of purpose, and Governmental wartime economic policy was directed solely toward winning the war.
In contrast, in 1940 and the years that followed, we saw the war used as a means of pushing further the New Deal programme of the redistribution of wealth. The first purpose was “no war millionaires,” a very grotesque demand indeed, since under our tax laws as they existed before we came into the War, a man living in New York who made a million dollars a year paid $807,000 to the Federal and State governments in income taxes, and in order to have a million dollars of net income after income taxes paid in a year, a man had to make $7,140,075!
Our own Government at the beginning of World War II wasted a great deal of time in giving orders for war supplies, through the closest kind of bargaining with business corporations, and subsequently forced upon these businesses complicated problems of renegotiation to squeeze out unusual profits which they might have made under the first contracts. Taxes on corporations, meanwhile, mounted to very high levels, so that if any unusual profits had been made, the Government would have taken most of them anyway, and income taxes in the upper brackets, already fantastically high, rose to such high levels that wealthy stockholders would have had very little left of any corporate profits that might have been paid out in dividends.
In the first World War we were much concerned about getting quick results and big results. The Government honored its contracts, and counted on excess profits taxes and war profits taxes to get the greater part of extraordinary windfalls growing out of Government work. The business community in World War I had far fewer distractions to contend with, and spent far less of its time and energy with the problem of whether it could produce for the Government and at the same time remain solvent.
Delay in United States War Orders, 1940. National defense expenditures ran very low in 1940 as compared with the need. The fiscal year ending June 30, 1940, shows an increase of only $450,000,000 over the fiscal year ending June 30, 1939. And 1939 shows an increase of only $280,000,000 over the fiscal year 1937. September of 1940 showed us spending only $219,000,000. This was a year after the President had declared a partial emergency and ordered an increase of army strength in September of 1939. It was several months after the Germans had invaded Denmark and Norway (April 9, 1940) and well after the invasion of Holland (May 10, 1940), the collapse of Belgium, and the collapse of France.
The Work of General Leonard P. Ayres. On September 15, 1940, Colonel Leonard P. Ayres, Vice-President of the Cleveland Trust Company, in the distinguished monthly business bulletin of that institution, sounded an emphatic warning which woke up the country. He published a chart with two curves on army expenditures, contrasting the year 1917 with the year 1940. The Government, in World War I, had moved with vigor and decision, not merely letting war contracts, but also getting war work done and paying for war work. The Colonel concluded, “Our present military machine is in many ways superior to the one we had when we entered the World War—but there is one quality which our old military machine had in superabundance and which the present one has hardly as yet exhibited, and that is acceleration.”
Colonel Ayres was recognized as probably knowing more about procurement of Army supplies in the first World War than any other one man. He had had a large part to play in organizing Army statistics, and the general problem of equipping the Army and getting the munitions and supplies it needed to France. The Army took his criticism meekly, and called him to Washington with the rank of Brigadier General, in September, 1940, and he actually began active service in the early days of October, 1940. General Ayres inaugurated a system of statistical controls for the Army. It was not a system merely of statistical records. It was a dynamic thing which forecast the needs for particular kinds of munitions and supplies at particular places, which showed the volume of existing supplies of the needed kinds, and which, therefore, indicated what kinds of supplies were most urgently needed and should have priorities in production. The General also aided the Navy in establishing a similar system under the highly competent management of Mr. D. R. Belcher of the American Telephone and Telegraph Company. The system was inaugurated and actively functioning long before General Ayres retired from the Army to return to the Cleveland Trust Company in 1942.
By December of 1940, national defense expenditures had moved up to $473,000,000, more than double the expenditures of September, and by November of 1941, they had reached $1,437,000,000 nearly seven times the expenditures of September, 1940. Following Pearl Harbor, of course, they moved with great rapidity, reaching $5,827,000,000 in December of 1942; $7,879,000,000 in May of 1944; declining to $6,948,000,000 in February of 1945, with a great spurt in March (the result of the “Battle of the Bulge”) to $8,246,000,000—a figure nearly matched by the expenditures of May, 1945 ($8,156,000,000), the month in which V-E Day came (May 8). V-J Day came September 2, 1945, in which month war expenditures stood at $5,365,000,000. By June of 1946 the figure had dropped to $2,442,000,000, but still stood very high.
Cutting Red Tape. Army red tape and accounting red tape both were largely cut through. The most difficult problem related to the procedure of the General Accounting Office. This had been, as we have seen, a very necessary brake on the peacetime extravagances of President Roosevelt, but the procedures of the Accounting Office could not safely be applied in war. For example, it would have been entirely impossible to have carried through in secrecy the $2,000,000,000 expenditures made in producing the atom bomb, had the usual detailed accounting required by the General Accounting Office been followed. It is amazing that that secret was kept as well as it was. Apparently nobody but the President, the Secretary of War, the Secretary of the Navy, and certain other chiefs of the armed forces knew how this was being financed, except the House of Representatives Committee on Appropriations, and this committee was obliged to disguise the appropriation in such a way that it would arouse no question on the floor of the House or on the floor of the Senate. It is greatly to the credit of this distinguished committee and of its chairman, that they took the political risks involved in giving the armed forces the $2,000,000,000 they needed for what might have turned out to be a fiasco.
The red tape difficulties were largely overcome by the proclamation by the President of unlimited national emergency on May 27, 1941, supplemented by the Second War Powers Act, which became a law on March 19, 1942.
Army and Navy officers who, at the outset, had been timid about giving orders and who were constantly changing their specifications in the early period of the war—in late 1941 there were 500 stop orders in the office of one of the great aircraft companies of Southern California—came in time to trust the businessman with whom they dealt and the businessman came to trust the Army and Navy officers. It took a year to a year and a half to bring this about. It had not been adequately accomplished by the time of Pearl Harbor, but after Pearl Harbor it moved rapidly.
Another great factor, of course, in bringing about the better understanding between Government and business, was the partial pushing aside of bureaucrats and their replacement by able men drawn from the business field. Conspicuous among these were William S. Knudsen, brought in from the General Motors Corporation, and William Martin Jeffers, from the Union Pacific System. W. L. Clayton was already on the scene when the war broke out. Numerous other men of distinguished practical experience in business and production matters, gave their services, among them Lewis W. Douglas.
The $25,000 Income Limit. Even after Army and Navy were turned loose to spend what money was necessary to win the war, however, the President continued to push his policy of using the war to prevent individual men from making money. He asked the Congress in April of 1942 to adopt legislation that would provide that no citizen should have a net income, after he had paid his taxes, of more than $25,000 a year. Congress failed to do this. Later he asked for a general authority under which he could issue many orders. But in the debate which preceded the granting of this extraordinary authority, spokesmen for the President, both in House and Senate, assured the Congress that the President would not use these vast powers for the purpose of limiting income. Almost immediately, however, the President issued an order limiting salaries, after taxation, to $25,000. The Congress was in revolt at this abuse of power and bad faith, and attached a rider to the bill raising the national debt limit, which the President had to sign, repealing the President’s limitation on salaries.1
The Racial Social Equality Issue. The war was also made the occasion for pressing measures designed to bring about social, as well as political and economic, equality of Negroes and whites in the country—measures which aroused racial antagonism where it did not previously exist, and intensified it where it already existed.
WPA Continued Till June 30, 1943. The Administration resisted changes in the New Deal legislation which efficiency in winning the war demanded. A great country, conscripting 11 million of its young men, and undertaking to be the arsenal for its Allies engaged in a desperate struggle for survival, and straining itself to the utmost to provide manpower, cannot afford such luxuries as a forty-hour week or a WPA. By December of 1941, after Pearl Harbor, we had already approached full employment. The index of factory employment,2 (1923-1925 = 100) which had stood at 90.9 in 1938 and at 99.5 in August of 1939, had risen to 134.2 by December of 1941. This same index reached its peak of 177.7 1943, dropping to 172.4 in 1944 and to 149.5 in 1945. Employment was very full in December of 1941. The National Industrial Conference Board figures show, moreover, an unemployment of only 1,043,000 in August of 1941, and a negative unemployment (excess of employment over economic labor force) of 2,678,000 in August of 1942; of 7,859,000 in June of 1943, and of 8,000,000 in August 3 of 1943.
There was heavy pressure in the labor market in December of 1941. We had already taken a large number of our young men into the armed forces and we were rapidly expanding the armed forces. None the less we continued WPA, the Federal Works Progress Administration, which paid men not at work in private employment. Incidentally we were continuing CCC and NYA.4
The following table gives the wartime story of WPA.
| Works Projects Administration | |
|---|---|
| Year Month | Number Employed * |
| 1939 | |
| June | 2,438,255 |
| 1940 | |
| June | 1,583,242 |
| 1941 | |
| June | 1,369,728 |
| 1942 | |
| February | 1,028,577 |
| March | 963,496 |
| April | 866,723 |
| May | 786,007 |
| June | 697,819 |
| 1943 | |
| January | 288,652 |
| February | 202,568 |
| March | 135,934 |
| April | 81,860 |
| May | 45,981 |
| June | 42,437 |
* Statistical Abstract of the United States, 1940, p. 358; 1941, p. 390; 1942, p. 407; 1943, p. 160.
An appropriation measure was passed on June 30, 1942, appropriating $280,000,000 for the 1943 fiscal year operations of the WPA and reappropriating $56,000,000 from the preceding year’s appropriation, making a total of $336,000,000 available to permit an average monthly employment of 400,000 men on WPA projects.
It was not until December 4, 1942 that President Roosevelt ordered the liquidation of the Works Projects Administration. Finally on June 30, 1943, the Works Projects Administration turned back $130,000,000 to the Treasury and went out of existence.5
The Forty-hour Week Continued Through the War. In November of 1941, just before Pearl Harbor, the average number of hours worked in manufacturing industries in the United States was 40.3.6 Employers working on Government contracts, where the Government would pay for the overtime, could afford to work labor beyond 40 hours, but civilian industries in general could not, and the Congress was engaged in passing a price fixing measure on the theory that civilian goods were growing scarce and would grow scarcer and needed to have their prices held down.
The absurdity of the 40-hour week legislation in wartime was very widely recognized in 1941. Chairman Eccles, of the Federal Reserve Board, in testimony before the House Committee on Banking and Currency, on the price fixing bill, had proposed, purely as a temporary matter, to make the week 48 hours instead 7 of 40. Even Leon Henderson, head of the as yet unauthorized price fixing organization, made large concessions to this view, particularly for workers in the defense industries.8
But the whip was cracked. By the winter of 1941-1942, it became increasingly evident that the Administration was determined to stand its ground on this. Men in some of the Government departments devised a new theology to defend it. Forty hours was the ideal from the standpoint of productive efficiency, they maintained!
All suggestions in Administration circles for abandoning the 40-hour week were quieted. Finally, in the Congress itself, men who were tremendously concerned that we should be fighting a war with one hand tied behind us by legislation of this kind, gave up the fight as hopeless when they found shortsighted businessmen with Government contracts saying that it was really of no use to press the matter, that it would make labor disturbances if it were done, and that from their point of view it made no difference, since the Government was paying the bill anyhow. One great Senator blamed these businessmen severely. They were looking only at their own businesses. They were not concerned with the solvency of the country. “But,” he said, “of course the responsibility is here in Washington.”
The 40-hour week legislation limited production in industries producing civilian goods. The business producing to sell to the civilian population could pay the overtime only if it could raise its prices radically. It could not do this under price fixing. To remain solvent, it must, therefore, have very little, if any, overtime work.
The cost of the war, great enough in any case, was greatly increased by this 40-hour week legislation. The actual payment for overtime, great though it was, was a minor factor in the increase. The general increase in wages due to the artificial shortage of labor which the 40-hour week created was a bigger factor. The pressure on manpower would have been very much less had this legislation been abrogated for the duration of the war, and the aggregate production of the country would have been very much greater. The table on page 527 shows the average hours worked per week by all manufacturing industries of the United States for the period of the war.
Wages and Prices During the War. Partly as a consequence of the 40-hour week legislation, and partly as a consequence of other Administration policies favoring wage increases (despite the effort to retard the advance of wages under the general price and wage fixing policies), wages in the United States rose radically during the war. (See table p. 528)
A “Labor Union” Government. The war was also made the occasion for powerful Governmental pressure in the direction of unionization and “maintenance of membership” contracts.
It is an exaggeration to say that we had a government by labor union leaders in the United States during the war, but not a very great exaggeration.
Other Special Interest—Agriculture and Silver. Labor has not been the only organized special interest pushing special claims. Agricultural leaders have claimed very special privileges, notably “parity” and “parity plus 10%,” in connection with the price-fixing legislation. And we have had a very aggressive, highly successful, and utterly indefensible resistance by the legislators representing silver States to the use of the vast quantities of silver locked up in the hands of our Treasury, for vitally needed industrial purposes.
Government as Civilian Competes with Government as Warrior—Harry Byrd’s Economy Fight. We had the spectacle, too, of Executive resistance to the curtailment of civilian functions of government. We had the Government as civilian competing with the Government as warrior for needed manpower and supplies. Heavy Congressional pressure, led by Senator Harry Byrd of Virginia, was able to accomplish something in reducing the ordinary expenses of government. A Joint Congressional Committee with Senator Byrd as chairman, which included, also, the Secretary of the Treasury and the Director of the Budget, made some headway. But the results were very disappointing. The Government continued throughout the war to employ a vastly larger number of civil servants than it had any right to employ even in peacetime—all of which contributed to the pressure on manpower and to the cost of war.
| Hours of Wage Earners in Manufacturing Industries (Compiled by the Bureau of Labor Statistics) | |||||||
|---|---|---|---|---|---|---|---|
| Aug | Aug | Aug | Aug | Aug | Aug | May | |
| INDUSTRY GROUP | 1940 | 1941 | 1942 | 1943 | 1944 | 1945 | 1946 |
| Total | 38.4 | 41.0 | 43.0 | 45.1 | 45.2 | 40.7 | 39.7 |
| Durable Goods | 39.7 | 42.6 | 45.3 | 46.8 | 46.6 | 41.1 | 39.2 |
| Iron, Steel, Products | 38.8 | 41.4 | 43.7 | 46.7 | 46.7 | 41.7 | 38.3 |
| Machinery | 41.2 | 45.1 | ...... | ...... | ...... | ...... | ...... |
| Transportation Equipment | 39.9 | 41.9 | ...... | ...... | ...... | ...... | ...... |
| Nonferrous Metals, Products | 40.1 | 43.0 | 44.8 | 46.6 | 46.5 | 43.3 | 41.2 |
| Lumber, Products | 39.4 | 41.8 | 41.8 | 45.2 | 44.7 | 40.5 | 40.9 |
| Stone, Clay, Glass, Products | 37.0 | 38.5 | 40.1 | 43.5 | 44.0 | 41.6 | 40.2 |
| Electrical Machinery | ...... | ...... | 46.4 | 46.9 | 46.3 | 41.2 | 38.8 |
| Machinery Except Electrical | ...... | ...... | 49.4 | 48.8 | 48.3 | 42.7 | 40.2 |
| Transportation Equipment Except Automobiles | ...... | ...... | 47.3 | 47.0 | 47.4 | 41.9 | 39.2 |
| Automobiles | ...... | ...... | 45.1 | 47.1 | 45.1 | 33.5 | 35.8 |
| Furniture and Finished Lumber Products | ...... | ...... | 41.4 | 44.6 | 44.8 | 40.6 | 41.3 |
| Nondurable Goods | 37.2 | 39.4 | 40.2 | 42.5 | 43.0 | 40.3 | 40.1 |
| Textiles, Products | 34.9 | 38.1 | 40.3 | 41.3 | 41.8 | 38.4 | 39.8 |
| Fabrics | 35.7 | 38.9 | ...... | ...... | ...... | ...... | ...... |
| Wearing Apparel | 33.5 | 36.4 | ...... | ...... | ...... | ...... | ...... |
| Leather, Manufactures | 35.8 | 39.2 | 38.4 | 40.0 | 41.2 | 39.3 | 39.6 |
| Food, Products | 40.4 | 41.3 | 41.3 | 43.6 | 45.0 | 43.3 | 42.3 |
| Tobacco Manufactures | 36.I | 37.2 | 39.5 | 41.1 | 42.3 | 39.0 | 39.5 |
| Paper, Printing | 38.2 | 40.1 | ...... | ...... | ...... | ...... | ...... |
| Chemicals, Petroleum, and Coal Products | 38.7 | 40.0 | ...... | ...... | ...... | ...... | ...... |
| Petroleum refining | 35.8 | 38.0 | ...... | ...... | ...... | ...... | ...... |
| Other than Petroleum refining | 39.8 | 40.6 | ...... | ...... | ...... | ...... | ...... |
| Rubber Products | 36.3 | 39.4 | 42.3 | 44.2 | 45.6 | 41.8 | 39.4 |
| Apparel and other Finished Products | ...... | ...... | 36.2 | 37.8 | 37.7 | 33.1 | 36.9 |
| Paper and Allied Products | ...... | ...... | 41.2 | 45.6 | 46.2 | 44.0 | 42.8 |
| Printing, Publishing, and Allied Industries | ...... | ...... | 38.0 | 40.7 | 41.1 | 40.7 | 40.4 |
| Chemical and Allied Products | ...... | ...... | 43.1 | 45.7 | 45.6 | 43.4 | 40.8 |
| Products of Petroleum and Coal | ...... | ...... | 39.5 | 46.1 | 46.9 | 46.8 | 39.7 |
| Miscellaneous Industries | ...... | ...... | 43.7 | 45.8 | 45.1 | 41.8 | 40.9 |
| WHOLESALE PRICES | WAGES | COST OF LIVING | |||
|---|---|---|---|---|---|
| U. S. Dept. of Labor | Nat. Ind. Conf. Bd | Natl. Ind. Conf. Bd | U. S. Dept. of Labor | ||
| Weekly Hourly Earnings Earnings | |||||
| (1926 = 100) | (1923 = 100) | (1935-1939 = 100) | |||
| Aug.1939 | 75.0 | 27.99 | .720 | 84.5 | 98.6 (June) |
| Dec. 1939 | 79.2 | 28.49 | .729 | 84.6 | 99.6 |
| June 1940 | 77.5 | 28.23 | .740 | 85.5 | 100.5 |
| Dec. 1940 | 80.0 | 30.28 | .754 | 85.9 | 100.7 |
| June 1941 | 87.1 | 34.26 | .818 | 88.5 | 104.6 |
| Dec. 1941 | 93.6 | 36.8 | .868 | 93.2 | 110.5 |
| June 1942 | 98.6 | 39.52 | .917 | 97.4 | 116.4 |
| Dec. 1942 | 101.0 | 42.98 | .970 | 101.1 | 120.4 |
| June 1943 | 103.8 | 46.16 | 1.016 | 104.3 | 124.8 |
| Dec. 1943 | 103.2 | 47.15 | 1.045 | 103.9 | 124.4 |
| June 1944 | 104.3 | 49.30 | 1.069 | 104.4 | 125.4 |
| Dec. 1944 | 104.7 | 49.91 | 1.086 | 105.7 | 127.0 |
| June 1945 | 106.1 | 50.33 | 1.111 | 106.9 | 129.0 |
| Percentage increase | 41.5% | 79.5% | 54.3% | 26.5% | 30.8% |
Data in this table are taken from Survey of Current Business, U. S. Department of Commerce.
Functional Control of Prices in World War I—Limited Direct Control. Prices, as we have seen in an earlier chapter, had already risen very high in the United States before our wartime economic policy got under way in the summer of 1917. Then we checked the rise, and held prices down with real success while the war continued.
The controls were, primarily, functional controls, rather than direct controls. (1) We had a tremendous increase in taxes. (2) We borrowed from the people instead of borrowing from the banks, and as the Government borrowed from the people, it took up their current income and limited their competition for goods and services. (3) We had a firm money market which held down bank expansion. (4) We had price fixing of a limited number of commodities, accompanied by a very great amount of commodity control through allocations, priorities, and rationing.
Almost Exclusive Reliance on Direct Controls in World War II. The contrast between the handling of the problem of wartime “inflation” in the first World War and in the second World War is a startling one. In the first war, we relied primarily upon functional controls. In the second war, we relied almost exclusively upon direct control. In the first war we knew that we must not let the volume of bank credit get out of hand, and that the Government must not borrow from the Federal Reserve banks. In the second war we had an expansion of bank credit on an incredibly vast scale based on bank purchases of Government securities, and we had direct ownership of Government securities by the Federal Reserve banks on a scale for which the word “ominous” is none too strong.
- 1This point will be discussed at length in Chap. 34.
- 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
- 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
- 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
- 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
- 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.
- 7Mr. Herbert Hoover, in particular, did a superb job in bringing the grain and milling interests into the service of the country. I shall later find occasion to criticize his policies as President, but I wish to pay high tribute to his work in feeding the Belgians before we entered the war, to his work in food control at home during the war, to his postwar work in feeding stricken countries, and to his work under President Truman along similar lines after World War II.
- 8See my “Value and Price Theory in Relation to Price-fixing and War Finance,” an address before the American Economic Association, printed in papers and proceedings, American Economic Review Supplement, March, 1918. Reprinted in the Economic Bulletin issued by the Capital Research Company of Los Angeles, Vol. II, No. 2, Dec. 6, 1940, and reprinted in the hearings of the Senate Committee on Banking and Currency on the Price Control Bill Dec. 16, 1941. See also my testimony of Dec. 16, 1941, before this Committee.
