Appendices - Hirohito's War
APPENDIX C
ECONOMICS OF THE PACIFIC WAR – THE NEW DEAL MOBILIZED
Inflation and General Max: That America’s wartime expansion occurred without it causing significant inflation was made possible by the fact that the US economy prior to the start of World War II was operating at less than 70 per cent of capacity. For example the aggregate level of demand in the construction industry that had peaked at an annual US$11.0bn in 1926 fell to 25 percent of that in 1933 and had only recovered to US$7.0bn in 1942. At its peak of US$13bn in 1943, demand for construction was just 15.3 percent higher than almost two decades earlier.
Thus, according to the US Bureau of Labor Statistics, although prices in the US rose by 11.35 percent in 1942, annual inflation dropped to 7.64 percent in 1943 and to just 2.3 percent in 1945. As Losman, Kyriakopoulos and Ahalt noted in The Economics of America’s World War II Mobilization [1997] “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.”21
On 28 April 1942 Roosevelt explained in one of his legendary ‘fireside chats’ that the government was “now spending, solely for war purposes, the sum of about US$100m every day in the week. But, before this year is over that almost unbelievable rate of expenditure will be doubled.”22 Price controls would be needed. The President had already sent Congress a seven point plan calling for higher taxes, rationing, limitation of consumer credit, sale of war bonds and price controls. However he declined to go the ‘whole hog’ with Bernard Baruch’s call for forced savings and wage controls. Eventually Congress was forced to pass tax-raising bills to help damp down inflation. However in December 1943 the House watered down Morgenthau’s plan to raise US$10.5bn to just US$2.14bn.
Price controls issued in 1942 under the name General Maximum Price Regulation quickly became known as ‘General Max’. Newsweek noted that US citizens were “about to find totalitarian economic control has entered their democratic way of life.”23 Price control was a struggle however. James Byrnes, who was responsible for the control of wages and prices at the Office of Economic Stabilization, later averred, “the fight to hold wages… and prices was a bitter struggle… Senators, Representatives, labor leaders, businessmen, farmers, and spokesmen for groups of all kinds would present their special cases.”24 When thwarted, special pleaders tried to outflank him by going direct to the President. Byrnes however successfully held the line on inflation. Bruce Caton called him “the super-umpire.”25
For the remainder of the war the US press would rail against the hardships of war. Newsweek predicted that Americans “will have to sacrifice for the duration the traditional way of life.”26 In reality, for the vast majority of Americans who had been forced to suffer the depredations of the recession, the arrival of war and full employment brought benefits to their standard of living. Above all the psychological uncertainties about job security were removed. Millions were saved from the dead-end lives that the extended depression had threatened. Inflation did not ravage incomes and with a few exceptions consumer products were plentiful. As John Kenneth Galbraith concluded, “never in the long history of human combat have so many talked so much about sacrifice with so little deprivation as in the United States in World War II.”27
Although prices rose sharply for a few years after the war the US economy made the readjustment to peacetime demands with relative ease. It was an outcome that would not be repeated following the Vietnam War when ‘crowding out’ by military expenditure ushered in a long period of high US inflation from 1967 to 1997.
“Powerful enemies must be out-fought and out-produced,” President Franklin Roosevelt had told Congress after Pearl Harbor. “It is not enough to turn out just a few more planes, a few more tanks, a few more guns, a few more ships than can be turned out by our enemies. We must out-produce them overwhelmingly, so that there can be no question of our ability to provide a crushing superiority of equipment in any theater of the world war.”28 It was a promise that was fulfilled during World War II with both extraordinary energy and efficiency.