The great battles of WWII are a dramatic mix of tragedy and triumph, death and destruction, heroism and valor, costly mistakes and occasional brilliance - all combined with a lot of luck, some of it horribly bad, and some of it good.
The good fortune of the American nation was that the continent is a huge island lying between two vast oceans. With limited aviation technology of the times, American civilians and industrial plants were mercifully protected from potential Japanese and German bombing raids.
That good fortune notwithstanding, given the challenges of financing a gigantic two-front war, a lot of things were done right in managing the economy during that period. Let's briefly review the transition from peacetime to the sudden conversion to a wartime economy during 1940-42.
The decade of the 1930s is characterized by the decade-long Great Depression. Unemployment approached 25 percent. Industrial plant and equipment was idle. Small businesses were going under, farmers losing their farms, banks failing, and families struggling financially.
Even as plant and equipment was idle, and consumers wanted to buy stuff, and unemployed workers were desperate for work, businesses didn't hire because consumers didn't have the income with which to buy the goods that they wanted and needed - and which could have been produced with the unemployed resources. It was a circular downward spiral with the economy stuck in unemployed stagnation.
Economic orthodoxy of the times assumed that full employment was normal and natural except for occasional temporary cyclical downturns. After all, according to Say's Law, named after the French economist, J.B. Say, the very act of producing generated the income with which to purchase the product that was produced.
The conventional thinking was that if wages and interest rates fell far enough, businesses would be encouraged to invest and hire once again. And, the federal budget, it was argued, should be balanced.
In other words, if enough juice was wrung out of the economy, things would return to normal. Meanwhile, unemployment persisted, and the very system of capitalism was at risk - collapsing under its own weight.
The British economist, John Maynard Keynes, challenged the conventional economic orthodoxy that an economy gravitated naturally toward full employment. The problem was not the inability to produce. After all, we had unemployed workers and idle plant capacity. The problem was clearly lack of demand and a financial system that was sorely in need of reform. Keynes argued that balancing the federal budget during economic depression was not only difficult as tax collection decreased, but it would make the situation worse through restricting aggregate demand in the economy.
It was thus during the thirties that a series of banking reforms, public works projects, and major programs such as social security were instituted. Central to banking reform was the Glass-Steagall Act that instituted a system of federal deposit insurance that guaranteed safety of depositors' funds in case of bank failure. It also separated commercial banking from investment banking.
Public works programs included projects constructed under the Works Progress Administration (WPA) and the Civilian Conservation Corps. These projects provided employment for thousands of previously employed people and resulted in many large dams and public buildings that are still useful today.
Revisionists of today scoff at the public works programs of the 1930s because they didn't get the nation out of depression. Such criticism is totally unwarranted as they provided employment relief for so many people. And these programs could not have interfered with or "crowded out" private investment because we still had idle plant capacity and unemployed people with which to produce. What was needed was money in workers' pockets to create effective demand that would have stimulated production.
But the ultimate vindication of Keynes was yet to come, proving that sufficient government spending could kick start an economy and produce general prosperity. As war clouds hovered over Europe, America began sending war material to our ally, Great Britain. Employment began to pick up but remained at an anemic 14 percent.
Then - December 7, 1941 and Japanese bombs landing on Pearl Harbor that nearly destroyed America's Pacific fleet.
The economic situation changed over night. America was forced to spend heavily - planes, tanks, guns, ammunition, ships, uniforms and all the rest that it takes to fight a massive two-front war. Able-bodied men went into uniform. We went from labor surplus to labor shortage. It would be the age of "Rosie, the Riveter," as women took on jobs formerly taken by men.
As our factories started humming and workers started working, taking home paychecks, it also produced - guess what - demand with which to purchase product. But there was now a problem of a different kind. Workers now had money, but product was not available because production was oriented away from peacetime production toward necessary wartime goods.
This was the ultimate vindication of Keynes' thesis - that deficient aggregate demand could be remedied by increased government spending. Going to war is a terrible way to increase aggregate demand, but the point is that demand could have been increased by other government spending if it had been in sufficient amount - that is, on goods that weren't being blown up or sunk to the bottom of the ocean.
While government spending and wartime production solved the problem of unemployment and deficient aggregate demand, we now had other problems. The war had to be financed. And, the combination of shortage of peacetime goods and money in workers' pockets provided the ingredients for inflation.
How could the nation divert production from peacetime to war time goods, pay for the war, and keep inflation to manageable levels without taxing workers so much that it would discourage incentives to work? What kind of policy mix could achieve these objectives while keeping government debt and inflation from spinning out of control?
- John Waelti's column is published every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The good fortune of the American nation was that the continent is a huge island lying between two vast oceans. With limited aviation technology of the times, American civilians and industrial plants were mercifully protected from potential Japanese and German bombing raids.
That good fortune notwithstanding, given the challenges of financing a gigantic two-front war, a lot of things were done right in managing the economy during that period. Let's briefly review the transition from peacetime to the sudden conversion to a wartime economy during 1940-42.
The decade of the 1930s is characterized by the decade-long Great Depression. Unemployment approached 25 percent. Industrial plant and equipment was idle. Small businesses were going under, farmers losing their farms, banks failing, and families struggling financially.
Even as plant and equipment was idle, and consumers wanted to buy stuff, and unemployed workers were desperate for work, businesses didn't hire because consumers didn't have the income with which to buy the goods that they wanted and needed - and which could have been produced with the unemployed resources. It was a circular downward spiral with the economy stuck in unemployed stagnation.
Economic orthodoxy of the times assumed that full employment was normal and natural except for occasional temporary cyclical downturns. After all, according to Say's Law, named after the French economist, J.B. Say, the very act of producing generated the income with which to purchase the product that was produced.
The conventional thinking was that if wages and interest rates fell far enough, businesses would be encouraged to invest and hire once again. And, the federal budget, it was argued, should be balanced.
In other words, if enough juice was wrung out of the economy, things would return to normal. Meanwhile, unemployment persisted, and the very system of capitalism was at risk - collapsing under its own weight.
The British economist, John Maynard Keynes, challenged the conventional economic orthodoxy that an economy gravitated naturally toward full employment. The problem was not the inability to produce. After all, we had unemployed workers and idle plant capacity. The problem was clearly lack of demand and a financial system that was sorely in need of reform. Keynes argued that balancing the federal budget during economic depression was not only difficult as tax collection decreased, but it would make the situation worse through restricting aggregate demand in the economy.
It was thus during the thirties that a series of banking reforms, public works projects, and major programs such as social security were instituted. Central to banking reform was the Glass-Steagall Act that instituted a system of federal deposit insurance that guaranteed safety of depositors' funds in case of bank failure. It also separated commercial banking from investment banking.
Public works programs included projects constructed under the Works Progress Administration (WPA) and the Civilian Conservation Corps. These projects provided employment for thousands of previously employed people and resulted in many large dams and public buildings that are still useful today.
Revisionists of today scoff at the public works programs of the 1930s because they didn't get the nation out of depression. Such criticism is totally unwarranted as they provided employment relief for so many people. And these programs could not have interfered with or "crowded out" private investment because we still had idle plant capacity and unemployed people with which to produce. What was needed was money in workers' pockets to create effective demand that would have stimulated production.
But the ultimate vindication of Keynes was yet to come, proving that sufficient government spending could kick start an economy and produce general prosperity. As war clouds hovered over Europe, America began sending war material to our ally, Great Britain. Employment began to pick up but remained at an anemic 14 percent.
Then - December 7, 1941 and Japanese bombs landing on Pearl Harbor that nearly destroyed America's Pacific fleet.
The economic situation changed over night. America was forced to spend heavily - planes, tanks, guns, ammunition, ships, uniforms and all the rest that it takes to fight a massive two-front war. Able-bodied men went into uniform. We went from labor surplus to labor shortage. It would be the age of "Rosie, the Riveter," as women took on jobs formerly taken by men.
As our factories started humming and workers started working, taking home paychecks, it also produced - guess what - demand with which to purchase product. But there was now a problem of a different kind. Workers now had money, but product was not available because production was oriented away from peacetime production toward necessary wartime goods.
This was the ultimate vindication of Keynes' thesis - that deficient aggregate demand could be remedied by increased government spending. Going to war is a terrible way to increase aggregate demand, but the point is that demand could have been increased by other government spending if it had been in sufficient amount - that is, on goods that weren't being blown up or sunk to the bottom of the ocean.
While government spending and wartime production solved the problem of unemployment and deficient aggregate demand, we now had other problems. The war had to be financed. And, the combination of shortage of peacetime goods and money in workers' pockets provided the ingredients for inflation.
How could the nation divert production from peacetime to war time goods, pay for the war, and keep inflation to manageable levels without taxing workers so much that it would discourage incentives to work? What kind of policy mix could achieve these objectives while keeping government debt and inflation from spinning out of control?
- John Waelti's column is published every Friday in the Times. He can be reached at jjwaelti1@tds.net.
