American Economic Preparations for War, 1914-1917 and 1939-1941

American Economic Preparations for War, 1914-1917 and 1939-1941Author(s): Chester W. WrightSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 8, No. 2 (May, 1942), pp. 157-175Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/136947 .

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THE CANADIAN JOURNAL OF

ECONOMICS AND POLITICAL SCIENCE

Volume VIII MAY, 1942 Number 2

AMERICAN ECONOMIC PREPARATIONS FOR WAR, 1914-1917 AND 1939-1941*

M Y purpose in this paper is to indicate the extent to which the United States seems to have learned something from history

as regards the economic problems incident to the preparation for war by comparing the preparations made during the period of neutrality in 1914-17 with those of the corresponding period of 1939-41, though I shall at points go beyond the neutrality period. The topic is a wide- ranging one and in the time available I can only hope to touch rather sketchily upon the more important aspects of the problem. I shall not attempt any analysis of the factors which explain the greater results secured during the last two years than in the earlier period of neutrality, involving such things as the attitude of the administration, of Congress, and of the public, as well as the fact that so many of the generation that faced the problems of the last war are still alive, in marked contrast to the situation in 1861 or 1914, for to do this would carry me too far afield.

*This article is a revision of a paper originally presented at a joint meeting of the American Historical Association and the Economic History Association in Chicago, December 29, 1941. For a more detailed account of the United States' economic mobilization effort during the First World War see C. W. Wright, An Economic History of the United States (New York, 1941), chaps. XLII and XLIII and further references in the bibliography. For general surveys of the current economic mobilization effort see E. Stein and J. Backman (eds.), War Economics (New York, 1942), and S. E. Harris, The Economics of American Defense (New York, 1941), and the references therein. The former, carrying the narrative to the close of 1941, is more up to date; the latter, coming down to the autumn of 1941, is more analytically critical. The most useful official publications are the annual reports of the various government departments and bureaus, the publications of the Federal Reserve banks and the Monthly Labor Review. The weekly bulletin of the Office of Production Management, Defense, the name of which was changed to Victory in December, 1941, will be found particularly useful.

Among the numerous Congressional hearings that of the House Committee on Judiciary on Delays in National Defense Preparations and that of the Senate Special Committee

Investigating the National Defense Program on Investigation of the National Defense Program, may be noted. A valuable survey stressing legal aspects is the article "American Economic Mobilization: A Study in the Mechanism of War" (Harvard Law Review, vol. LV, Jan., 1942, pp. 427-536).

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158 The Canadian Journal of Economics and Political Science

I shall treat the subject topically under the headings of the chief economic problems of war.

These chief problems are: first, getting the goods and services required for fighting; second, providing for the essential needs of the civilian population; third, devising means to enable the government to pay for these goods and services, the problem of war finance. Sometimes a fourth problem is added to this list, that of preparing to meet and to minimize the inevitable post-war readjustments. While I think this last should be classed as a peace-time problem still it is one which should properly be held in mind in shaping war-time policy, but it must be kept strictly subordinated to the problems involved in the effort to win the war.

The significance of the particular facts regarding war preparations in the account that follows will be better appreciated if I first briefly summarize the outstanding economic lessons from previous wars that the United States evidently had not learned when it entered the First World War and apparently has not thoroughly learned even today. Despite the fact that the methods of warfare have been so completely altered through mechanization since the American Revolution and each new war differs in its detailed problems from all others, it is still possible to indicate various lessons of a rather general character, but for that very reason of the most fundamental importance, which must remain in the forefront of our consideration of the economic problems of war today.

To meet the first and primary problem-that of getting the goods and services required for fighting-there must be a complete survey, first, of all the needs of every branch of the services, and second, of all the resources available, both immediately and in the long run, for meeting these needs; and then the results of these surveys must be presented in a single picture. Moreover, such surveys must cover all the countries allied or associated against a common enemy, and they should take into account all the important variations in the situation confronting the country that appear likely to arise. Next there must be developed an organization providing the greatest centralization of control in determining the broad policies to be adopted and carried into effect in view of the situation shown by the surveys. History also shows the vital necessity for speed in such action, the corollary of which is the need for the most complete advance preparation possible, not only as regards surveys and a plan of organization, but especially as regards equipment supplies, for it is there that delays will be the greatest and of the most serious conse- quences.

The importance of these lessons, which might have been learned from the experience of all American wars from the Revolution down, has



American Economic Preparations for War

of course been enormously increased by the mechanization of warfare. The man who was Secretary of War in 1917 later sadly confessed that: "To a greater extent than we or anybody else had realized, modern war is essentially an industrial art." This means that the activities of the civilian population are as vital to success as those of the fighting forces, as was clearly seen by President Wilson when he said, "It is not an army that we must shape and train for war; it is a nation." It is this mechanization of war which gives the nation that has prepared and strikes first a far greater advantage over the nation that has not prepared than existed in former times. And the Second World War is far more mechanized than the First; how much more so is crudely suggested by the cold-blooded statement (how accurate I cannot say) that while it cost $25,000 to kill a man in the First it costs $75,000 to $100,000 to do so today. It is this mechanization of warfare which makes the problem of getting the required goods and services out of the infinitely complex, interdependent, economic order of today with its specialization and round about methods of production, not only by far the most complicated and difficult, but the most vital and urgent problem of war-a point that cannot be overemphasized.

The lessons to be learned concerning the second problem-supplying the essential needs of the civilian population-can be stated very briefly. The United States has been fortunate in that, with the exception of the South during the Civil War, no large portion of the civilian population has ever been called upon to make really serious sacrifices in time of war. In the case of the First World War the sacrifices involved were insignificant as compared to those in other nations. In fact the question may well be raised whether it is not one of the lessons to be learned that the government should ask more in the way of sacrifices from the civilian population as a whole during war than has customarily been the case. This of course cannot go to the point where the psychological reaction endangers the willingness to carry on the struggle, but it should be started in the earliest stage of the war when it is most easily borne, thus making subsequent additions to the burden come more gradually should the need arise. The lessons concerning the distribution of the war burden among the civilian population in an equitable manner, a problem which in the past has caused the most suffering among considerable groups, are tied up with the third economic problem of war, that of its financing, to which I now turn.

Past experience seems to suggest that there has been exaggeration of the relative importance of the question as to whether the government can get the means for paying for the war. Before the First World War many believed that it would be impossible to carry on such a war for

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much more than a year because of the gigantic cost; yet it went on for over four years, and even then it was not a lack of governmental purchasing power that brought it to an end. A nation can issue astronomical quantities of paper money, as Germany did after the war or as the United States did on a smaller scale in the Revolution, and that money may become worthless, yet the nation can survive. A nation may be able to pile up a mountain of debt and then practically repudiate most of it by devaluation of its money, as was done in numerous cases after the First World War, and still the nation can survive. Finally, even if the possibilities of the paper money and bond issuing devices were to become exhausted, there still remains the resource of direct confiscation. While the problem of payment is pretty certain to be solved by hook or by crook it is still true that the government is far more likely to acquire the goods and services it needs if payment when made appears to afford a real quid pro quo. Thus a method of war finance which seems likely to insure a belief in governmental solvency is highly advantageous.

The second outstanding lesson of history as regards war financing is the need for a method which will tend to secure an equitable distribution of the real burden of the war. This of course includes the elimination of war profiteering by all groups as well as an equitable sharing of the inevitable losses in the post-war process of readjustment. Probably the chief, though by no means the only, cause for inequalities in the distribution of this burden is inflation. American history shows that despite all the sad experiences of the Revolution and the Civil War, the country had not learned enough to avoid this evil in the First World War. This is chiefly to be attributed to the popular fallacy that it is possible to shift some of the burden of a war, domestically financed, from the war generation as a whole to the post-war generation as a whole by resort to borrowing rather than taxation. So long as this myth prevails it constitutes the most serious obstacle to securing an adequate policy of taxation. Some government borrowing is probably necessary and even desirable; yet, with minor exceptions, it should be limited to the amount that can be secured from savings out of current income, thus reducing consumption or capital outlays, and every effort to increase such savings should be made. History shows that past war financing has never adequately stressed this type of borrowing.

Following these rather general lessons of history as to the three economic problems of war, a general lesson applicable to the attack on all three problems should be noted. This is the necessity for the closest correlation and co-ordination of all lines of action taken, since their reaction is very likely to extend over a wide field and so to affect the success attained in the attack on all three problems. To check infla-




tionary tendencies most effectively a sound fiscal and monetary policy should be vigorously supported by price controls, the labour policy, foreign trade controls, production stimuli, allocation and priorities. Similarly with other problems an infinitely more efficient programme of action can be worked out if the very varied forms of control available are so co-ordinated as to supplement one another and avoid conflicting lines of action. This was one of the outstanding lessons to be derived from many sad experiences of the First World War.

As I have been enumerating these unlearned lessons of history, what has probably impressed you more than anything else is their very obviousness. This is the most disheartening thing about it all. Why is it that a nation will constantly repeat the errors of the past? Why is a people not more successful in learning and applying the lessons of sad experience? This suggests one final general lesson. That is that one of the most important problems, if not the major problem, to which certain groups among the social scientists should address themselves is how to secure an application of the knowledge we already possess to the issues of the day. The solution lies mostly outside the domain of the economist; but the problem is perhaps the most serious that confronts democracies, and it becomes the more acute when they are engaged in war with totalitarian states.

With this background of lessons from previous wars we can better appreciate the significance of the more detailed facts concerning the preparedness measures of 1914-17 and 1939-41, to which I now turn.

In connection with the first and most vital of all the three economic problems of war, that of securing the needed goods and services, the necessity for a complete survey of both the needs and the available resources was indicated as one of the lessons of history. Before we entered the First World War scarcely a beginning had been made in setting up the necessary organization for providing this. Such slight surveys as had been prepared by the army and navy proved utterly inadequate for the problem faced. In 1912 a bill had been introduced in Congress to create a Council of National Defense with the function of formulating a general war programme and co-ordinating the activities of the different branches of government for its execution; but Congress failed to act. Eventually, in August, 1916, the Army Appropriation Act did provide for such a council made up of six cabinet members and also for an advisory commission of experts, though the powers of the council itself were purely advisory. The two groups were not formally organized until October 11th and it was not until December that a really effective start was made; yet it was out of the work initiated under this council that the bodies largely controlling the mobilization of the

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economic resources of the country, among which the War Industries Board was the most conspicuous, eventually evolved. It was not until a week or so before the United States entered the war that the inde- pendent, competitive buying of munitions by different government agencies was stopped and co-ordinated under the general Munitions Board and not until August that Allied purchases were similarly co- ordinated. It was only two weeks before war that the Council was advised to raise an army of 1,000,000 men and the degree of public preparedness for what was to take place is best reflected by the reported remarks of the Chairman of the Senate Appropriations Committee who, on being told of the difficulty in estimating the cost of placing a fully equipped soldier in France, exclaimed, "My God! You don't intend to send men over there, do you?" Actually it was not until the summer of 1918, a few months before the war ended, that a comprehensive long-run survey of probable needs and available resources had been secured.

In December of 1941, fortunately, the United States found itself plunged into war with surveys and an organizational setup that were far more advanced, even if still inadequate. Evidently some lessons had been learned from sad experience. After the last war the Army Industrial College was established to supplement the planning work of the Army War College and an organization was set up to formulate an Industrial Mobilization Plan which was finally presented to the War Policies Committee, created by Congress in 1930, when its hearings began the following year. The plan then approved, though undergoing subsequent revision, still retained the basic pattern of centralized authority. In the spring of 1940 the National Defense Advisory Com- mission was established and out of its various activities there have since evolved many of the numerous alphabetically known boards and offices in much the same manner as they grew out of the Council of National Defense after 1916. Here it must suffice to note only a few of the more important steps taken. A Priorities Board was set up in October, 1940, and the Office of Production Management the following January, the latter being given charge of production, purchasing, and priorities. In March the Office for Emergency Management was created to function as a co-ordinating and liaison organization. In April came the Office of Price Administration and Civilian Supply. At the end of July the Economic Defense Board headed by the Vice President was formed to shape broad economic policies and control the flow of raw materials. A month later the Supply Priorities and Allocation Board was created within the O.E.M. to settle broad policies and general regulations for priorities and allocations, the detailed administration of which remained




with O.P.M/. to which the Division of Civilian Supply was now shifted, leaving O.P.A. in control of price operations and consumer services. This change in organization was designed to speed up defense preparations and eliminate certain conflicts which had developed. Still, this was not enough; yet it was not until over a month after the country found itself again engaged in war that the further centralization of control, which the sad experience of 1917 had clearly shown as necessary, was finally provided by the creation of the War Production Board with Mir. Nelson at its head enjoying an authority similar to that eventually granted MIr. Baruch of the War Industries Board in the spring of 1918. Naturally nothing quite like the various Allied Councils which were being belatedly set up in 1918 had been formed before we entered the war, yet there had already been close co-operation with both Great Britain and Canada and, to a less extent, with other countries on measures of common interest. Since then several boards, such as those for munitions, shipping, and war materials have been set up; but whether they will be able to exercise much more authority than the essentially advisory councils of 1918 is not yet clear. Complete international co-ordination of effort, even between allies, is extremely difficult to attain.

Turning to the army and the navy we find that it was not until the summer of 1916 that legislation was passed designed to secure a substantial increase in these branches of the service, and even this was to be spread over the course of the next three to five years. In 1914 the regular army included nearly 100,000 men and there was a slightly larger number in the national guard and state militia. The National Defense Act of June, 1916, provided for an increase in the peace-time strength of the regular army in the course of five years to 223,000 and of the national guard, into which the militia was to be merged, to 457,000, besides establishing an Officers' Reserve Corps. The disturbed conditions in Miexico in 1915 had resulted in calling the national guard into service and in Pershing's expedition into that country, which was not withdrawn until February, 1917. But the total of the regular army when war broke out, approximately 127,000, was not much above what it had been in 1914. Nearly six weeks then passed before Congress provided for its increase, and registration under the draft did not take place until June 5. In contrast with this record, in the summer of 1939 we had about 187,000 men in the regular army and about the same number in the national guard, as well as the Officers' Reserve Corps of 116,000. The army conscription act was passed in September, 1940, and registration occurred on October 16. The Secretary of War's recent report indicated that in December, 1941, we had an army in training of some 1,848,000 men, though admittedly it was not yet adequately

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equipped even for training purposes. Two months later it was announced that most of these were equipped and ready and that by the close of 1942 there would be 3,600,000 in the army, or almost the number reached at the peak in 1918.

In the case of the navy considerably more was accomplished during the period of neutrality after 1914 than in the case of the army, doubtless owing to the feeling that it provided the first line of defence. In 1914 there were 56,000 men in the navy and 10,000 in the marine corps. In 1916 an increase in the navy personnel to 68,700 and of the marine corps to 15,000 was authorized and the Naval Appropriations Act of August was notable for the adoption of a building plan, originally intended to be spread over five years but finally speeded up to three years, which would add 156 vessels of all types at a cost of $502 million. Yet it was admitted even this would barely keep the navy in the third place among the great powers. Though specifications had already been prepared so that bids could be asked for as soon as the Act was signed we had entered the war before any of these ships were in service. Except for a substantial increase in battleships and torpedo boats and a few submarines there had been little change in the fighting fleet in service in the preceding two years, while the number of men in the navy in April, 1917, was 69,000. In contrast, in the summer of 1939 there were 121,000 men in the navy and 19,000 in the marine corps, besides reserves of 72,000. Following the lapse of the naval limitation treaty at the close of 1936 the country had embarked upon a policy of more rapid expansion of the fleet, which was given a tremendous impetus following the fall of France in the spring of 1940. Within a few months Congress had authorized a programme of naval construction designed to provide a two-ocean navy by 1947 at least, and possibly by 1945, and in September, 1941, it was announced that all contracts for this navy had been let covering 2,831 ships at a cost of $7,234,000,000. How rapidly this programme can be carried to completion is another question, but on November 1, 1941, the navy had in commission 17 battleships, 7 aircraft carriers, 38 cruisers, 170 destroyers, and 113 submarines, and there were then reported as on shipbuilding ways 7 battleships, 11 aircraft carriers, 54 cruisers, 192 destroyers, and 73 submarines. By this time the number of men in the navy had risen to 311,500.

One measure by which we can roughly judge the extent of defence preparations in general is provided by the sum total of Congresssional appropriations or authorizations to incur expenditures for this purpose. Up to our entrance into the war in December these amounted to about $62 billion, including therein some $13 billion of lease-lend funds. For comparative purposes it may be noted that this sum is nearly twice




the $32 billion actual outlay, including the loans to the Allies, of this government for the First World War, from our entrance in 1917 to the return of the last troops in 1919. Within eleven weeks after Pearl Harbour some $82 billion more had been added to this figure.

But securing Congressional authorizations and appropriations or getting men into the army and navy are after all rather simple problems that can be solved relatively easily and quickly. The really critical problem is how to get the equipment without which the fighting forces are impotent. Not long ago it was estimated that it took six months to provide the camps for an army, a year to train that army, and two years to equip it. There is no time, even if adequate facts were available, to present in detail what has been accomplished in increasing the output of war munitions during the last two years, but progress in two or three vital lines can be noted.

Evidence of one lesson learned from the past as to the need for advance preparations for production, though applied on a very small scale, is to be found in an act of 1938, appropriating funds, added to in 1939, for so-called educational orders for war equipment. By enabling a manufacturer to acquire at least a small supply of machine tools and to become familiar with the production problems involved, it is claimed that often several months of time may be saved when the necessity for stepping up output arrives.

There is much reason to believe that one of the most critical factors determining the effectiveness of our own participation in an offensive warfare will be the supply of shipping available for the overseas transport of men and supplies. In the First World War there was nothing of which we were in greater need. In this second war, fought on two oceans and with Japan nearly twice the distance of France, this need is far greater. What has been done? In 1937 when it was realized that about seven-eighths of our registered shipping would be obsolete by 1942 a programme for adding 50 ships a year was initiated. In January of 1941 the President ordered the construction of 200 more; soon after- wards an additional 227 were ordered for lend-lease purposes, and then in July he doubled this whole programme. These plans involved the turning out of over 1,150 ships before the end of 1943 and on December 1, 1941, 1,135 merchant ships of 6,780,000 gross tons were under construction or contracted for. This would double the tonnage of seagoing merchant ships available on July 1st. This programme involved an outlay of over $3 billion, substantially the same as the total outlay for the enormous construction initiated during the First World War, but started so late that scarcely any of it was finished before the war ended. The capacity of private shipyards in December, 1941, was five times

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greater than in 1937 and the number of workmen employed was as large as it was a year after we entered the First World War. After Pearl Harbour the programme was further enlarged and by February 1st some 1,566 seagoing vessels of over 11,000,000 gross tons were under construction, all to be completed before the end of 1943, while contracts for over 600 more ships were placed in January. An output of two a day was predicted by May and three a day before the close of the year. The Shipping Administration, set up in February, 1942, and granted almost complete control of the country's cargo vessels, should insure the most effective use of the available supply. Shipbuilding is a slow process, though it is claimed the new Victory cargo boats can be turned out in three and one-half months as compared with ten months to a year in 1917, and the use of welding in place of riveting has greatly facilitated the speeding-up process. In time we are well over a year ahead of where we were in April, 1917, and in quantity even further advanced.

Probably alongside of shipping, airplanes constitute the equipment where the need is most critical, very likely at the moment even more critical. The airplane output for 1941 was 18,000 to 20,000 and it is claimed will be 60,000 in 1942, while 125,000 is the goal set for 1943, reaching a level which in 1940 it was expected would not be attained until 1945. The chief difficulty here is engine shortage. To prevent a threatened shortage of aluminum, measures designed to more than triple the 1941 output of 615,000,000 pounds are well along, while the 1941 production of magnesium is to be increased twenty-two times. There is also the most urgent need for tanks. By the end of November, 1941, they were being turned out at the rate of 600 a month and the programme contemplated 2,800 a month by the close of 1942; but this is now revised

upward and the 1943 goal is set at a total of 75,000. These activities may be contrasted with some of the results obtained by the United States

during the First World War, when hardly any heavy guns or airplanes and not a single tank got to the front before the war ended, leaving the American forces in France dependent upon England and France for such equipment. Of the additional measures already taken to increase electric power and the output of steel, or to accumulate large stocks of essential imported raw materials such as wool, rubber, tungsten, and tin, or to provide more pipe line transportation for oil, not to mention in- numerable other things, activities which for the most part had not even been commenced in April, 1917, there is no time to speak.

When we turn to the war-time labour problems, unfortunately, the measures adopted up to the time of our entering the war show far less evidence of our having learned the lessons of our First World War




experience than is found in most other fields. The outstanding lessons of that earlier experience were the necessity for the most effective mobilization and conservation of the labour supply and for a clearly- defined labour policy which would seek to standardize relative wages, hours and conditions of work, thus helping to minimize labour contro- versies and the constant shifting about of workers with the resulting wastes attending a high turnover of labour. From one point of view we were fortunate in having available an unusually large number of unem- ployed when the present war defence programme began to gather momentum. In November, 1940, there were probably between seven and eight million such, but within a year this had been cut to less than four million, including one million C.C.C. and W.P.A. workers, and how many among this total are fitted for normal forms of employment is uncertain. The most difficult problem has been to find men fitted for the skilled types of work where the shortage of workers was most acute. To meet this particular labour problem substantial action was promptly undertaken. Starting in June, 1940, with a small appropriation, which was greatly increased in October and again in July, 1941, bringing the total to $175,500,000, provision was made for various types of vocational training for defence industries, and somewhat over 1,500,000 persons had benefited from this up to the end of June, 1941. There is another source of unused labour power now available, though not available to any such extent in 1917, of which relatively little use seems to have been made before we entered the war. This is an increase in the hours of work per week. In manufacturing industries in June, 1939, the prevailing hours were 37.3 per week; in the autumn of 1941 the prevailing hours were between 41 and 42 a week, which can be compared with something over 55 hours in 1914 and a decrease to 51.3 hours by 1919. How great an increase could be made now without impairing efficiency would require careful study; but this is a resource which, up to the attack upon Pearl Harbour at least, the administration was very loath to tap. While work has since been speeded up in war industries, this has usually taken the form of adding more shifts, when suitable workmen could be found, rather than lengthening the hours, though in the most urgent cases overtime has been'resorted to. Much the longest weekly working hours reported in any industry in December was the 54 hours of machine and machine-tool workers. The continuance of the basic forty-hour week with time and one-half or double-time pay for overtime of course puts a heavy penalty on overtime, except where provision is made for passing on the added cost to the government. The need for channelling all recruiting of scarce types of labour through one central organization to make sure it will be diverted to the most essential purposes and check

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competitive enticements has not yet been adequately met, though the placing of state employment.bureaus under the federal organization in January, 1942, was a step in this direction.

The failure to adopt a clearly defined general labour policy is largely responsible for serious loss of vital labour time through strikes. Why such jurisdictional disputes as arose because of C.I.O. and A.F. of L. rivalries or those between A.F. of L. unions should be tolerated at such a time is hard to comprehend. With a few exceptions, such as the rather circumscribed arrangement of the A.F. of L. building trades in connection with army camp construction, no general agreement to abandon strikes in favour of mediation or arbitration had been made before war was upon us. The Labor Conference of December helped somewhat and staved off impending action by Congress, yet it did not attain the desired goal. Whether the new War Labor Board will prove any better able to establish standards than its predecessor of 1918, which finally had to be supplemented by a War Labor Policies Board, remains to be seen. While it is true that in the case of the First World War it was more than a year before the United States had effectively worked out many of these problems, it must be admitted the country has already lost critical time in applying the lessons of that experience.

Turning now to what, at least in the past experience of the United States, has proved a relatively easy problem, that of providing for essential civilian needs, we can be very brief. As regards the great domestically produced agricultural staples, foodstuffs and raw materials, we enter the war with supplies that, generally speaking, are very abun- dant; and this despite a governmental policy of restricting the output of many staples. In marked contrast to the pre-1917 neutrality period the government promptly adopted a policy of accumulating a large stock of imported raw materials which, though chiefly designed for defence use, were also in some cases needed for civilian consumption, such as

rubber, tin, and wool. In September, 1940, a fund of $1 billion was set aside for this purpose, while a system of export controls, such as had not been provided until August, 1917, was promptly set up in July of that

year, partly to conserve needed supplies and prevent them from falling into hostile hands, and partly to exert pressure for concessions desired from other countries. But even before we entered the war the desira-

bility of reducing civilian consumption of certain goods employing resources required for defence had been at least partially recognized and to a limited extent acted upon, as in the slashing of automobile production. The main activity having to do with the protection of civilian

consumption, however, is in the field of price control; but this can best




be dealt with in the discussion of the third economic problem of war, that of finance, to which I now turn.

During the period of neutrality preceding the First World War the increase in the actual outlay of the government for definite defence purposes, to say nothing of the authorizations, was insignificant as compared with that of 1939-41. However, several laws to raise more revenue were passed during this period so that the gross national debt which stood at about $1 billion in 1914 had increased to only $14 billion by April 5, 1917. For the fiscal year 1916 the government's outlay was covered by its receipts, and even for the fiscal year 1917, which included nearly three months of war, receipts were more than half expenditures. In 1939, in contrast, we unfortunately entered the period of neutrality under a bad start. We then had a debt of around $40 billion on which the interest charges alone about equalled the total debt in 1914. As defence expenditures rapidly rose new tax laws were slowly enacted. The Act of June, 1940, increasing income and various excise taxes, was expected to yield eventually about $1 billion more revenue a year, and the excess profits tax law of October, 1940, was designed to produce an equal amount. Finally, the tax law of September, 1941, greatly broaden- ing the base of the income tax and imposing much heavier rates on the middle range of incomes, as well as many new or higher excise taxes (unfortunately rather indiscriminately chosen from the point of view of conserving scarce resources), was expected to produce $3.5 billion. Yet for the fiscal year ending June 30, 1941, government receipts fell over 40 per cent below expenditures and the national debt rose to $49 billion. Even the first budget estimate for the current fiscal year ending June 30, 1942, did not figure upon receipts quite equal to half the estimated expenditures, while thus far the result has been a revenue equal to only about one-third of the outlay, with a consequent increase in the national debt to $57 billion in December and over $60 billion in February. Finally, the budget submitted in January, 1942, for the fiscal year 1942-3 estimated total expenditures at $59 billion but only pro- posed taxes which would raise total revenue to $23.5 billion, leaving a deficit of $35.5 billion to be met by borrowing. This means a ratio of receipts to expenditures of about 40 per cent, or only slightly better than the one-third ratio for the First World War. In that war this led to an inflation which, despite price controls, nearly doubled the cost of living. One wonders if the United States has learned nothing from that experience, or that of the Civil War which was very similar, or even that of Revolutionary times.

It is true this does not mean that a serious inflation is inevitable, but it certainly does little to avoid that danger. It should be pointed

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out that the receipts from the last and heaviest tax law have only just begun to flow into the treasury and will rise rapidly when the first income tax payments fall due this March; but it must also be added that since the law was passed we have become involved in war and expenditures have been skyrocketing. All history teaches us that the lag of tax legislation and the resulting receipts behind rapidly increasing expenditures in such times as these creates a serious danger. The lag is likely to become greater; the total accumulates at an astounding rate to a gigantic sum; there is no catching up on arrears until the war is over and the damage has probably been done. This lag will raise the national debt of the United States by the middle of 1943 to an estimated $110 billion-a third of the total national wealth as valued in 1937. Inability to produce war equipment as fast as is hoped for may result in reducing the actual expenditure considerably below estimates, as was the case in 1917-18 when it was cut nearly one-third; but this would be a worse evil.

While we are slipping behind in our tax programme we are also

slipping behind in diverting savings out of current income to government loans, which is one of the important alternative means for checking inflationary tendencies. It is true we finally made a start in May, 1941, by launching a weak campaign to sell defence bonds, which was more than was done before the spring of 1917. Yet the sales up to December, 1941, approximately $2 billion, fell far below what was essential consider- ing the prospective deficit of the government. In December sales jumped and in January reached $1 billion, only to fall to $703 million in February. But just how much of this borrowing actually came out of savings from current consumer income is by no means clear; the sales of Series E bonds, which are most likely to represent such savings, rose from about 40 per cent of the total before December, 1941, to two- thirds of the total in January, 1942. The rise of the national income from around $70 billion in 1940 to $92 billion in 1941 provided the ideal time, psychologically, to divert to the government through taxation a much larger portion of this increase than was taken. To allow people who were emerging from a long period of depression to enjoy such a

rapid increase in their standard of living when there was in prospect the necessity for enforcing a drastic reduction-some claim it must go back to the low level of 1932-3-was certainly a shortsighted policy.

The danger of inflation is further increased by the present setup in the monetary and banking situation. The tremendous stock of gold which has been accumulated, the unprecedentedly high volume of money in circulation, the large surplus reserves and the high federal reserve ratio, the low interest rates, to say nothing of the inflationary possibilities




to be found in our present laws, provide an ideal situation for nurturing a great inflation. Except for defence bond sales, a limitation on instal- ment purchases, and the increase in bank reserve requirements in 1941, which, with other changes, reduced the excess reserves of member banks during the year from $6.4 billion to $3.1 billion, almost nothing has been done in the monetary and banking field to lessen this danger. The proposal now before Congress to repeal the prohibition against direct sale of government bonds to the Federal Reserve banks, originally enacted to prevent just such an inflationary use of this device as was employed in the last war, is ominous. Despite governmental assurances that it will not be so used one cannot forget the complete domination of monetary and banking policies during that war by the fiscal needs of the government. When the existence of all these conditions is combined with the fact that inflation has always been the easy and popular policy, the outlook appears anything but assuring so far as fiscal, monetary, and banking policies are concerned.

The next question to be asked is what has been done about the control of prices? Previous to April, 1917, nothing had been done to control prices. For more than a year after the war started in Europe in 1914, there was practically no change in the wholesale price level in the United States. The rapid rise began in October, 1915, and by March 1917, the general level was 56 per cent above the 1913-14 base. More- over, it was not until mid-summer that price control measures became effective and by that time prices were 89 per cent above the pre-war level. These measures only gave a direct grant of power to fix prices to the separate food and fuel administrations while the War Industries Board had to depend on agreements made with producers, nominally volun- tarily, but practically under the threat of the government's use of its powers to ration, to fix priorities, or to commandeer. It may be added that thereafter the group of controlled prices was kept below the level then reached, though the average for all prices had doubled when the war ended, and, following the too sudden abandonment of controls, rose to a point 171 per cent above the pre-war level in May, 1920.

Fortunately, this time we have made an earlier start. The Division of Price Stabilization was set up under the Council of National Defense in May, 1940, and has since evolved through O.P.A.C.S., organized last April, to the present O.P.A. Since the middle of 1940 pressure has been brought to bear on essential industries where increasing prices were believed unjustifiable, and during 1941 about one hundred price schedules were drawn up for various groups of products and strong pressure exerted to secure their observance. However, it was not until January, 1942, that power to fix prices directly was granted to O.P.A. The power was

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centralized and comprehensive, but wages were excluded, control of rents was limited to "defense areas," and the powerful agricultural interests succeeded in setting rather high minima below which control could not be employed and in requiring the Secretary of Agriculture's approval for any maxima established. Moreover, this price control effort has been vigorously supported by the prompt adoption of a system of priorities and rationing such as was only slowly worked out after we had entered the last war. Despite all this, however, when we turn to price movements we find that during the first twenty-five months following the outbreak of war in 1939, that is through September of 1941, the rise in wholesale prices was 22 per cent or almost as much as in the similar period after July, 1914, when it was 26.4 per cent, while the rise in the cost of living, almost 10 per cent, was substantially the same for both periods. By the middle of February, 1942, wholesale prices had risen to a point about 27 per cent above the August, 1939, level. This looks ominous. Does it suggest that we may expect the subsequent rise to correspond with that which occurred in the First World War?

Obviously so much depends upon what the government may yet do that no answer is possible, but there are some differences in conditions between the two periods which should be noted. In the first place prices were more depressed in 1939 than in 1914, and hence a somewhat greater rise in a recovery movement might be expected. This was particularly true of agricultural products. Much the biggest factor in the recent increased cost of living is the higher prices for food and clothing, and at least some of this increase can be attributed to the artificial support given farm prices by the 85 per cent of parity loan basis adopted in the autumn of 1941, as well as by other devices. Also the agricultural interests' success in securing high minima before price control can be

applied has stimulated the more recent rise, despite some sales of government owned supplies. On the other hand, in the case of the important metals, where prices would often have skyrocketed, the price controls have generally kept the advances allowed within reasonable bounds. Stopping this at an early stage was of the greatest importance since a rise here would exercise endlessly ramifying effects. One notable im- provement in price control policy over the 1917-18 practice is illustrated in the case of copper where, in the effort to increase output, instead of maintaining a high price to enable high cost mines to operate, these mines are given a bonus and the price of copper is kept at a lower level. The application of a similar policy to farm products where a greater output is required certainly deserves the most serious consideration, for it would greatly help the solution of several difficult problems. Its administration would present many difficulties but it would be well




worth a great effort. A large addition to the output of most important farm products will be very difficult to secure, short of the most favourable weather conditions, and present policies appear likely to yield meagre results compared to the enormous cost to the general public. In fact, as compared with the last war, it is this early start at price control in general and its prompt co-ordination with the essential complementary action for priorities and rationing that afford the most hope, despite the weak fiscal policy, that the rise that has already taken place can be checked before it attains the heights reached during the First World War.

Yet the rise that has already started can hardly be stopped at once and the resulting increase in the cost of living has been the chief justification offered for the numerous demands for higher wage rates which have been so generally conceded. In fact, new demands are now being presented on the ground that previous increases in wages have already been more than offset by the rising cost of living. Average weekly earnings in manufacturing industries increased 15.1 per cent in the two years following June, 1914, and they increased 31.8 per cent in the two years following June, 1939. The increase in real wages of this group for the two periods was 5.7 per cent and 24.2 per cent, respectively, that is, over four times as great for the recent period. The increase in weekly wages in this recent period was partly due to a 10.7 per cent rise in the hours of work, partly due to overtime rate of pay beginning at 40 hours in June, 1941, as compared to 44 hours in 1939, and partly due to an advance in hourly wage rates giving an increase of 15 per cent in average hourly earnings. In the earlier period average hourly earnings rose more rapidly but, unlike the recent period, there was a decline in the weekly hours of work. While the labour cost per unit of product is not likely to increase in the same ratio as hourly earnings-it was 6.9 per cent as against 15 per cent June, 1939, to June, 1941-still, when we bear in mind that this will be less and less true as the stage of full employment is reached and may in time be reversed, together with the fact that labour cost is by far the most important item in total costs, generally speaking, it will be obvious that a rise in average hourly wage rates must exercise the most widely ramifying effects and is apt to become one of the most potent immediate causes of a general rise in prices. Hence the importance of reducing to a minimum the rise in living costs which is the chief justification offered for advancing wage rates. Without such a check we start a trend toward an endless upward spiral of prices. This leads to my final point concerning the measures needed to secure an equitable distribution of the burden of war costs.

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In the first place we must frankly face the enormous size of this burden. Current estimates are running in terms of $30 to $60 billion a year, or roughly from one-third to over one-half of the national income at present price levels. A portion of this, but a relatively small one, will go to provide food; clothing, shelter, etc., to those drawn into government service, military or civil, and their dependents, reducing to that extent the number that have to be supported by non-governmental sources of income, except in such cases as dollar-a-year men. The sum needed is so great that it could not possibly be obtained from the rich, even if you took away every cent of their incomes. In 1935-6 with a national income around $60 billion, to get half of it you would have had to take every cent from those families and individuals getting over $2,000 a year; to get one-third you would have had to take everything away from those getting around $3,000 and more. At the present higher level of the national income these figures might be raised a half and minor corrections would probably raise all of them somewhat. Obviously it is inevitable that no small share of the burden will have to be borne by the masses. Obviously no group except the lowest can reasonably claim that they should be allowed to maintain their existing standard of living. For better paid wage earners to make such a claim, for the farmers to insist, now that they have secured the long-sought parity purchasing power (which, incidentally, in itself had no sound justification), that that is not good enough for them today, is to ask complete exemption from the burden of war at the expense of everybody else.

What steps have been taken thus far to secure a more equitable distribution of this burden than was obtained in the last war? One of the chief objectives of the War Policies Committee in response to the popular demand was to take the profit out of war, and several laws relating to government contracts, in addition to the tax legislation, were passed with this in view. These certainly represent an advance along this line over the previous wars, though there will doubtless be many cases where they fall short of attaining the desired end, and the need for speed in letting contracts has led to the repeal of certain safe- guarding measures. Corporation profits in general have risen very substantially since 1939, as was to be expected in a period of rapid shift from depression to boom time conditions, and while the earnings per share (which, of course, may be no measure of the rate of return on the investment) appear very high in some cases there are many instances of concerns having big government contracts where this is not so. Certainly the marked downward trend in the prices of industrial stocks since 1939, in such great contrast with the spectacular rise of war baby securities previous to 1917, is very significant, though other factors also enter into




this outcome. The more prompt and vigorous effort to keep the cost of living from rising is so much to the good, despite the steps that still need to be taken both in price control and fiscal policy. Among the larger groups those that have enjoyed the greatest gains absolutely are the farmers and the industrial wage earners, and within both groups it has been the upper economic class that has benefited most. It should be recognized, however, that a decrease in leisure time among industrial wage earners is properly to be considered as a sacrifice, somewhat offsetting their very substantial gain in the purchasing power of weekly wages. Yet harder and longer hours of work is one of the sacrifices being made by many other groups as well.

As a summary of this rapid survey it may be said that the course of action preceding our entrance into this war indicates that we have learned and, though much too slowly, tried to apply more of the lessons of history than in the case of any serious preceding war. With the exception of the lag in fiscal policy and to a less extent in labour policy, we may claim that as the United States entered this war it was from a year to a year and a half ahead of where it was in April, 1917. In trying to meet the economic problems of mechanized warfare a year's start is of tremendous importance for the results cumulate rapidly. But the gains in economic mobilization for war over those made in 1914-17 which have been outlined above have been stated in absolute terms, not in terms relative to the present need; and we must clearly realize that the war which the country faces today is certain to require an infinitely greater effort to ensure success than was the case in 1917.

CHESTER W. WRIGHT The University of Chicago.

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Documents

American Economic Preparations for War, 1914-1917 and 1939-1941