Coming out of the depression filled years of the 1930’s, America was facing the possibility of war. The U.S. wanted to remain isolated from the conflict but after the Pearl Harbor Attack, there was no choice but to enter into World War II. The economy of the 1940’s can generally be divided into two periods: the economy during the war and the economy after it.
World War II did not merely revitalize the U.S. economy; it altered it in a drastic way. America’s involvement in WWII quickly boosted the economy during the war years of 1941-1945. It also laid the foundation for the U.S. to become an economic superpower (Vatter 169).
To begin with, one of the more outstanding economic performance achievements by the U.S. during WWII was the virtual elimination of unemployment (Vatter 21). Between 1940-1944 industrial production rose by 88%, this was attained by employing more labor and by using more energy and raw materials inputs with moderate additions to preexisting capital stock (Williams 230). During this period, employment went up from 47.52 million to 53.96 million, an increase of 13.5%. Unemployment rates had fallen from 4.7% in 1942 and could decline only to 1.2% in 1944 (Williams 230). This accomplishment was even more significant because of the diminished labor force caused by the 11 million men and women entering the armed forces during this period. This drainage of manpower created opportunity for categories of workers who had previously never had a chance to work; such as young people, minorities, older workers and especially women. The labor force was one of the main reasons U.S. industry was able to meet the great demand in productivity created by the war.
The year of 1942 saw America’s conversion to a “total war” economy. In January of that year, President Roosevelt established the War Production Board to redirect the nations production to the war effort. The automobile industry stopped production of automobiles and redirected its labor to the production of tanks, planes, guns and other weapons. Residential construction nearly stopped and business investment was channeled into increasing the capacity of essential munitions plants, pipelines, and railroads (Williams 229). “Within a few months the great consumer durable industries had been shutdown for the duration of the war” (Williams 229).
Along with the abundance of employment opportunities and partly because U.S. industry shifted into war production, civilians were faced with shortages of goods. There were shortages of meat, shoes, gasoline, and sugar. “If left to the free market, prices would have soared and distribution would have been determined solely by the ability to pay these prices” (Finkelstein 40). To handle these problems the Roosevelt administration created the Office of Price Administration.
The OPA was first ordered to “hold the line” against rising prices and they did this successfully, “from April 1943 to February 1946, the OPA managed to hold the annual rate of inflation to only 1.6 percent” (Williams 235). However, because prices were being held below their real market value or “market clearing levels” the demand for those products exceeded supply. To prevent shortages, the OPA began its rationing program. The process of rationing was kept simple. Books of coupons were issued to each individual. For gasoline, individual consumers received modest weekly allocations of 4 gallons, while businesses got more. Sugar, coffee, meat, shoes, and canned goods were all assigned points and purchased with ration books of stamps and coupons. For the most part, the system, “…worked equitably and well. Overall, prices rose only 33% over the entire period, a rather remarkable outcome” (Finkelstein 235).
Price controls did more than simply suppress inflation in the short run. Controls allowed the government to acquire resources at a lower cost than would have been possible had the distribution of vital war material been left to the free market. If the government had not pursued a policy of price controls or rationing, the war industries would have had to bid resources away from civilian uses by paying higher prices. The budget deficit would have been even larger, and because the Federal Reserve had pledged to keep interest rates constant, the additional financing needs of the government would have led to greater money creation and ultimately higher prices (Williams, 238).
Another result of WWII was the expansion of the federal government. As Bailey states, “By 1945 the government had instituted itself into virtually every phase of the nations life” (181). The federal government grew from 1 million employees to 3.8 million in 4 years. In addition, the federal budget soared to a staggering $98.4 billion, more than 10 times the $9 billion budget of 1939 (Bailey 181).
With an expanding bureaucracy and a costly war, the government needed to raise revenue. In 1945, the annual deficit was about $95.2 billion (Finkelstein 32). “Perhaps the best index of the economic gains was the increase in the number of Americans who had to pay income taxes. In 1940, 7.8 million…in 1945, 48 million” (Bailey 145). To pay for the war, taxes and borrowing were both raised to new highs. Between 1940-1945, the Congress passed a large number of revenue bills, and each one raised more money for the costs of war by increasing the tax rates and broadening the tax base (Finkelstein 32). One of the most important innovative features that resulted from these revenue bills was the withholding feature of the Revenue Act of 1943. Passed to raise an additional $16 billion, the act adopted a 20% withholding tax on personal income.
The year 1945 saw the end of World War II. “In the summer of 1945 Americans stood at the dawn of a new era with their wallets bulging” (Williams 247). Because of rationing and the shortage of automobiles and other consumer durables not produced during the war, consumers had few outlets for spending. As a result, the public, with their rising incomes, had been forced to accumulate money balances and government securities. “Nearly 25% of disposable income earned by Americans since Pearl Harbor had been saved. Money balances alone equaled half of the annual GNP” (Williams 247). The impending removal of rationing restrictions would unleash this purchasing power. Added to domestic demanded were the needs of a war-torn world for American goods and foodstuffs. With no rationing, the OPA would be able to do little to hold prices down (Vatter 150).
Another positive outcome of WWII was the creation of the GI Bill of Rights in 1944. For all veterans, the legislation provided educational benefits among other things. This act made it possible for millions to go to college, many of whom under other circumstances would not have gone beyond high school level. According to Finkelstein, “The macroeconomic benefit for social welfare and national wealth were immeasurable, for the country’s net worth was increased by billions of dollars owing to the contribution of a more competent and highly educated people” (Finkelstein 527).
The years after WWII also saw the rise of a new economic order. The economy began evolving into a “mixed economy” in which, “…government would assume responsibility for continued growth and for fairness in distribution of wealth” (Goodwin 625).
The mood of the country was very optimistic following the war. “A poll showed that 7 out of every 10 citizens questioned felt that they now had a better chance of getting ahead of their parents” (Bailey 145). For the most part, the latter years of the 1940’s saw a growing economy, although there were some major problems such as a long nightmare of work stoppages in key industries, in the winter years of 45-46. Furthermore, during the second half of 1948 the forces of deflation surged and the economy entered its first postwar recession, albeit a mild one that was quickly reversed (Williams 247).
There is no doubt that the U.S. involvement in WWII raised the economy to new heights. “More than 17 million new jobs had been created, industrial production had gone up 100%, corporate profits doubled, and GNP jumped from $100 billion to $215 billion” (Goodwin 625). The economic landscape had been changed almost immediately upon U.S. involvement in WWII. Furthermore, because of policies enacted by the government as a result of WWII, Americans were able to reap the rewards in the years following it. The U.S. grew from the conflict into an economic giant, with a new economic environment, in which the government played a more vital role in the economy from then on.
Bailey, Ronald H. The Home Front: U.S.A. New Jersey: Time-Life Books, 1981
Finkelstein, Joseph The American Economy: From the Great Crash to the Third Industrial Revolution. Arlington Heights: Harlan Davidson, 1992.
Goodwin, Doris K. No Ordinary Time. New York: Simon and Schuster, 1994.
Vatter, Harold G. The U.S. Economy in World War II. New York: Columbia University Press, 1985.
Williams, Raburn M. The Politics of Boom and Bust in Twentieth-Century America. St. Paul: West Publishing, 1994.