Economy of the US during WWII

Overview

The emergence of the Great Depression in the United States caused a downward spiral in the U.S. economy. Banks, shops and factories were shut down, which led to the lowest business activity in the modern history of the U.S. Not only did the Depression have a profound negative affect on the stock market it also caused high unemployment. The attempts of the government in the 1930s to recover the economy from the Depression did not succeed. The milestone in bringing the U.S. economy back on track was the largest world conflict of the 20th century - World War II.

One of the main contributors to the recovery from the Depression were the World War II fiscal policies. Government management of the economy through the use of fiscal policy (spending and taxing) proved to be a permanent legacy of the war years.Labor income tax rates and, to a lesser extent, capital taxes rose during World War II. Moreover the US government issued considerable debt during the war in order to finance the high Government expenditures.

Since the estimate is that WWII fiscal policies accounted for 81.3% of the 1941 increase in real GNP, very little of the recovery is left to be explained by monetary policies. Money growth was very rapid and volatile during World War II. The high government expenditures caused by the purchasing of wartime supplies led to an increase in the money supply. These government expenditures were financed by taxes and "war bonds". Because of the massive increase in government spending, which was much higher than the collected taxes, the budget deficit rose substantially during war.

During the war, the government controlled American consumption of many items from rubber to meats and other foods through rationing. This was necessary because of all the troops, allies and newly liberated countries that America needed to supply. When the war ended, the American citizens had pent up demand for consumption, which the government exploited to keep the American economy rising.

Through high unemployment people began to save their money rather then spend frivolously, which caused aggregate demand to decrease essentially resulting in companies being forced to slow production of certain goods. Unemployment was still a large problem till Franklin D. Roosevelt was elected as President of the United States. Through his policy of the New Deal Roosevelt was able to create government jobs for the American people. Although this did not solve the problem of high unemployment it certainly helped to relieve some of the affects unemployment had on the economy. Yes, the New Deal was incredibly effective in getting the economy running again, but it still did not solve all the problems that caused the Great Depression. As the US entered the war, the unemployment rate fell due to in part the need for military goods and services and the need to fill the vacancies of the workers fighting in the war. This helped lead to more opportunities for minorities and women to be included in the labor market.

Financing the War

Fiscal Policy

Government management of the economy through the use of fiscal policy (spending and taxing) proved to be a permanent legacy of the war years. World War II fiscal policies were in fact a major contributor to the recovery from the Depression. World War II fiscal policies were the most important factor in the recovery not only during 1942, but during 1941 as well; and more than half of the recovery in output from its 1933 low point occurred during 1941 and 1942.

Government expenditures

The considerable increase in output during World War II reflected the enormous rise in military spending. At the peak of the war, government spending absorbed over 50 percent of GNP. Real GNP advanced 40 % between 1941 and 1945, which represents an average annual growth rate of 8.4%.

Taxation

Labor income tax rates and, to a lesser extent, capital taxes rose during World War II. Prior to World War II, the average marginal tax rate on capital was about 44 percent, and the average marginal labor tax rate was just 9 percent. During World War II, labor tax rates rose to about 18 percent, and capital tax rates averaged about 60 percent.

In 1939, fewer than four million Americans paid federal income tax. Before the war ended, that number had increased to over 42 million, and the dollar value of taxes paid by individuals had increased nearly twenty-fold. Payroll withholding for income tax liabilities, as well as the tremendous expansion in the number of Americans who would have to pay federal income tax, were wartime innovations that clearly outlived the war.

While these higher tax rates generated significant revenues, they were not nearly sufficient to finance war spending. The U.S. government issued considerable debt during the war at nominal interest rates ranging between 0.375 and 2.5 percent, and the debt-GNP ratio at the end of the war was at a record 1.2 percent. After the war, labor tax rates fell to 16 percent, and capital tax rates fell to 49 percent.

Taxes after the war: To achieve present-value budget balance for the baseline model, the average postwar tax rates on labor income of 23 percent and on capital income of 50 percent are increased proportionally to 27 percent and 58 percent, respectively.

Deficit

Before the war, a small but important group of New Dealers influenced by the ideas of John Maynard Keynes had advocated the conscious use of budget deficits to bring the nation out of the Depression. Yet, the limited size of the federal budget and the persistence of the conventional wisdom about the dangers of deficit spending severely restricted actual experimentation with Keynesian measures for stimulating the economy. Not until the advent of World War II were the president and congress willing to accept budget deficits of sufficient size to demonstrate the full potential of government fiscal policy. Whereas New Deal recovery programs had clearly failed to bring about an end to the Depression, the spectacular growth of the economy between 1939 and 1945 seemed to demonstrate the efficacy of Keynesian policies.

Monetary Policy

An American War Bonds poster from 1942

War Bonds

War bonds were savings bond sold to individuals by the government during World War II. These types of bonds were known as Series E bonds (later replaced by Series EE bonds in 1980) and were first made available for purchase on May 14, 1941 in denominations of $25 up to $10,000. The main function of these bonds was to give funding to the government, however they also served other purposes.

Lowering Inflation

Generally during times of War, the inflation rate rises because many goods are not produced for domestic benefit. More money is spent, but less goods are available on the market. The monetary policy for fighting inflation is to decrease the money supply. In a normal economy, the Federal Reserve will sell treasury bonds (to banks) to lower the monetary base.

However, the Federal Reserve does not have power over the sale and purchase of savings bonds purchased by individuals. When Americans purchased war bonds, they were effectively removing money from circulation, therefore lowering the Money Supply. This helped control inflation throughout the war.

Selling Bonds

People selling war bonds

With the boost in available jobs and higher wages during World War II, the average disposable income was rising. A massive advertising campaign encouraged workers to purchase War bonds to support the War effort. The fact that so many people were willing to forgo their disposable income for a cause showed that people had a positive attitude toward the war and felt their investments were safe. Many companies offered payroll deduction plans in exchange for War bonds. Since consumers were not spending their disposable income on goods, the money spent on war bonds became savings.

Numbers

During World War II, the US government sold more than $185 Billion worth of War bonds to finance the war. This accounted for over half of the war's $304 billion cost.

Unemployment

Overview

Description

The emergence of the Great Depression in the United States caused a downward spiral in the U.S. economy. Not only did the Depression have a profound negative affect on the stock market it also caused high unemployment. Through high unemployment people began to save their money rather then spend frivolously, which caused aggregate demand to decrease essentially resulting in companies being forced to slow production of certain goods. Unemployment was still a large problem till Franklin D. Roosevelt was elected as President of the United States. Through his policy of the New Deal Roosevelt was able to create government jobs for the American people. Although this did not solve the problem of high unemployment it certainly helped to relieve some of the affects unemployment had on the economy. Yes, the New Deal was incredibly effective in getting the economy running again it still did not solve all the problems that caused the Great Depression.

World War II although horrible was a blessing in disguise for the United States economy.With the war hitting the United States on the home front it led to a decrease in unemployment because there was a demand for military products especially oversees. This resulted in more jobs being created to fill the factories that would begin the production of this military equipment. Also since many Americans were either enlisting or being drafted in the army specifically men to fight oversees there were still a demand for people to fill the jobs that these men had left to go fight in Europe.

This is the point when women begin to fill these positions. Due to the large amount of men off to war the people left to feel those vacancies were women. This is one of the main reasons why production continued to increase throughout and after the war. Without women filling these positions it would have been incredibly difficult for the U.S. economy to continue increasing its production. This also is arguably the turning point in U.S. history for women becoming increasingly more active participants in the labor force.

Employment During WWII

Description

The wartime economic boom benefited from the increase in employment, with help from the gender and racial employment barriers that were broken. Calculating the labor force during WWII we look at the all employed and unemployed civilians, population who are not a part of the armed forces. In the table below there are calculations for the employment rate of all non-institutional civilians 14 years old and up

Description

There is an increase in the population of civilians from 1940 to 1941, but the decrease thereafter is in result of more of the American population going to war. With the attack of Pearl Harbor in 1941 and the declaration of war on Japan, there is a demand for more Americans to fight. The absence of workers, especially white men, due to the war, allowed space for others to work.

Along with the increase of unemployed workers finding jobs, there is an increase in the labor force as well. This is the increase of women and African American workers. By 1945, 8% of the workforce were African American approximating the population of African American, 10% of American population. There is also an increase in women workers. By 1945, about 19 million American women were working outside the home. About 2 million of those women were laborers in war industries.

Fair Employment

Description

A strong effort from The Roosevelt administration to enforce a nondiscrimination policy in war-related employment played a significant role in the economy, by offering black workers new opportunities. The government’s first initiative to enforce an antidiscrimination policy amongst defense contractors was through the Fair Employment Practice Committee (FEPC). The committee was started in order to receive, investigate, and resolve complaints of discrimination in the workplace. This independent committee received very little media attention, so every hearing was not just meant to put pressure on the industries, but it was also a chance for them to promote their antidiscrimination policy.

This first committee was organized in August 1941, but fell apart in June 1942. A year later Roosevelt reorganized the FEPC, expanding it to 16 regional offices. The FEPC still covered cases to resolve complaints on discrimination, but ended up settling most cases through persuasion and bargaining. The committee would act as an intermediary to offer suggestions on how to bring in more black workers without disrupting the workplace. Many employers found that integrating black workers hurt their work force. Trying to fight strikes, the employers referred their problem to the FEPC. Because the committee has direct influence from the president, the Army becomes involved and the defiant white workers returned to work immediately after hearing they could lose their jobs and be reconsidered in the draft. This intrusion of governmental power into labor markets made the FEPC “the most controversial federal agency in the nation during the war and perhaps in modern American history” (Merl E. Reed, 1991, p. 1). The success of the government’s efforts was skeptical. The committee had very low credibility, it was not able to directly penalize firms. Without the backing from the government, the committee would’ve held no power.

There is much evidence that there was an increase in black employment during the war, but many question whether it is in direct relation to the FEPC. William J. Collins states, “if FEPC intervention was effective, then it should have caused a larger-than-average increase in the black employment” (The American Economic Review, p. 278).

Although there is much doubt that the FEPC actually helped blacks enter the workforce, Collins proves it was surprisingly effective in Table 2. He takes the nonwhite/white employment ratio in column one and sets the caseload variables all to zero, to imply an absence of the FEPC. The results suggest that the nonwhite/whit ratio would have only been .056 rather than .092 in 1944 in the given cities.

Overall, FEPC intervention was important in breaking racial barriers in the workforce. By giving advice for integrating in the workplace, the companies lowered the expected cost of integration associated with strikes. Also the evidence suggests FEPC interventions at one firm may have affected other industries’ hiring practices by changing the local norms of segregating in the workplace.

Women and the Job Market

Description

Some historians and economist would argue that World War II not only helped the United States get out of the Great Depression but also provide many job opportunities that they may not have had in the past. Marc Miller in his article Working Women and World War II stated, “the war led to a dramatic rise in the number of women working in the United States; from 10.8 million in March, 1941, to more than 18 million in August, 1944, reversing a downward trend attributed to the depression” (Miller, p.42). So in 3 years from 1941-1943 there was 7.2 million jump in the amount of women in the job market. This jump was large in itself; however, what makes it more amazing is that this increase occurred not to long after the Great Depression. Marc Miller goes on to say “although many women entered the labor force for the first time, 29 percent of American women workers in 1944-1945 had over ten years of experience; another 19 percent had worked for over five years” (Miller, p.42). In looking at these figures, 48 percent of women had at least five years of experience; however that meant that over 50 percent of women had only five years or less work experience, which shows many women began working during World War II. This suggests that World War II did have a positive affect on women entering the job market.

Description

It is also important to note the reasons why women decided to enter the labor force in the first place. In the article, The of World War II in the Rise of Women’s Employment, the author Claudia Goldin discusses a couple reasons why women entered the labor force. One reason she states, “A husband’s absence often meant that his wife had less to do in the home and that the family’s labor income dropped considerably; for others, patriotic duty was reason enough to join the war effort” (Goldin, p. 741). So with many men off at war many women decided to enter the labor force in order to continue supporting their families. Another reason women entered the job market was the easing of norms held by society or by a husband against a wife’s working” (Goldin, p. 741). Also Claudia states,

The War may also have eroded various policies that had constrained the employment of married women. ‘Marriage bars’- the stated policies of firms, school districts, government, and other organizations not to hire married women and to fire single women upon marriage- were greatly expanded during the Depression. The bars vanished sometime after the early 1940’s and by the 1950’s were rarely encountered. (Goldin, p. 743)

Basically this relates to the theory that World War II was what helped break down the barriers between women joining the labor force.

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Rationing and Postwar Consumption

Rationing Overview

Prior to the attack on Pearl Harbor, the United States had no intention or plan for rationing, yet within sixteen months after the historic event, the government installed thirteen major rationing programs. The programs, in order of their installation, are tires, automobiles, typewriters, sugar, bikes, gas, protective rubber footwear, fuel oil, coffee, shoes, stoves, processed foods and meats, fats, oils and cheese. All of the programs except for the last two were implemented during 1942. At first the government tried price controlling, but the price levels were at a point where demand exceeded supply, which created the need for rationing. Supplies were low because the government needed to supply the troops, our allies and newly liberated places.

During the United State’s involvement in the war, industrial factories stopped making consumer items and began to produce war materials. Ration coupons took over as currency. People could clearly see the effect that the war was having on their own soil. Yet, in 1943 two thirds of people surveyed said that their meals were not different since rationing started and three quarters said that they size of their meals had not changed. Then in 1944, ninety percent of women surveyed said they had enough meat and seventy five percent said they had enough sugar. More than a third claimed they could not use all there canned goods before they expired. Even the quality and quantity of the wartime diet increased, especially in low income households. The American rationing system was so effective because of the “native good sense of the American people and because, on the whole, the amateurs who organized and administered it rose to the situation and discharged their responsibilities with vigor, imagination, and courage.”

"Plant to Conserve- Can to Preserve"

The government launched big campaigns to urge American citizens to conserve on everything. Shown to the right are some of the images they used. The government encouraged people to make “victory gardens,” which were gardens an individual household could use to get vegetables. They also encouraged home canning, to help preserve food longer. There were community canning centers set up to help people. The government put so much emphasis on food production that they referred to it as America’s “first line of defense.” In 1943, twenty million households (three fifths of the population) produced more than forty percent of he vegetables that Americans consumed. The government marketed conservation as highly patriotic, as seen on the rightand left. It was the way American citizens not in Europe can help fight the war and defeat the Axis. A pamphlet for the Office of Price Administration in 1943 stated:

“American meat is a fighting food. It’s an important part of a military man’s diet, giving him the energy to outfight the enemy. It helped the Americans drive the Japs from Guadalcanal. It’s feeding our troops on world battlefronts. It helped sustain the heroic British 8th Army in its blistering drive from Egypt to Tunisia. It aided the Red Army in breaking the German lines at Stalingrad and Leningrad. It’s helping soviet troopers roll the Axis forces back. Meat from our farms and packing houses is playing a part almost on par with tanks, planes, and bullets.”

Postwar Consumption

There are many theoretical reasons why economies prosper after a war. First, greater government control over the economy is a good thing, which lingers even after the war has stopped. The government can ration and control prices, keeping them fair. Another argument is that there is a technology race between the two states at war, thus speeding up innovation. Also, because foreign resources that were once available are not anymore, there becomes a nee to produce within the country, boosting the job market.

After the war ended, Americans had a lot of pent up consumption. Rationing was like a dam for consumption, so after the war when the dam broke, peoples’ spending rushed out. The government had propaganda for mass consumerism, as they saw it as the way to have a successful postwar economy. In their advertising, they said that consumption was not selfish but doing your duty to keep America in prosperity. A bridal magazine stated, “the dozens of things you never bought or even thought of before … you are helping to build greater security for industries of this country … What you buy and how you buy it is very vital in your new life- and to our whole American way of living.” The housing market was huge after the war. In 1960, a quarter of the homes in America were built in the fifties. In 1940 forty four percent of the citizens in America owned a home, but in 1960 that number had increased to sixty two percent.

Economy of the US during WWII