World War II was the seminal event defining the last half of the 20th Century. It changed the world map, shifted international power alliances, set in motion the Cold War that shaped American foreign policy and domestic politics, and permanently changed the American economy.
The American economy had limped through the Great Depression of the 1930s with high unemployment and idle production capacity, even as people needed goods that were not being produced. Japanese bombs on Pearl Harbor, December 7, 1941, changed that situation overnight.
As America declared war on the axis powers, the federal government needed planes, tanks, ships, guns, ammunition, uniforms and all the rest of the materiel for a two-front all-out war. As men filled the ranks of the armed forces, the nation went from unemployment to labor shortages.
As the nation's factories churned out goods, previously unemployed workers now had money in their pockets - cash with which to buy the goods they had been unable to afford during the Great Depression.
Instead of unemployment and stagnation, we now had full employment and factories straining to produce more. Instead of lacking cash with which to buy goods, people now had cash, but the goods weren't available. Production was oriented toward wartime needs.
On a personal note, my dad had bought a W-C model Allis Chalmers tractor right before the war. It was a good thing, because farm tractors weren't made during the war. That tractor was the "work horse," along with four real horses that enabled production of milk, hogs, chickens and eggs on those 220 acres of hills north of Monroe during the war.
The problem of unemployment was solved. But economic issues of one kind or another are forever with us. There remained the perennial basic economic questions of what to produce, how to produce, and for whom.
Clearly, wartime goods had priority. As employment and incomes increased, issues facing policy makers were how to divert production to wartime goods, and how to pay for the war, while keeping price levels and government debt from spinning out of control.
Here are the dilemmas: The combination of shortages of civilian goods along with rising personal incomes creates the ingredients for classic "demand-pull" inflation. Civilian spending power can be reduced by taxing it away and by selling government bonds to the public. There were limits to how much taxes could be increased. And borrowing from the public, that is, selling government bonds, increases the public debt. Nevertheless, the war had to be financed.
In other words, taxes and government borrowing could serve the dual objectives of reducing private spending and raising revenue to pay for the war - partly anyway. To augment taxes and government borrowing, a system of price and wage controls and rationing was put in place. Rationing was necessary because if prices are held below free market levels, demand for goods exceeds supply at that below-market price. Therefore, goods have to be allocated, or rationed among consumers.
It was thus that a combination of taxes, government borrowing, wage and price controls, and rationing was used to achieve economic objectives of high production and financing the war, while keeping prices and the public debt from spinning out of control.
It is probably difficult - even impossible - for anyone under the age of 50, or even 60, to comprehend why people would put up with rapidly rising public debt, rising taxes, rationing, and price controls that are anathema to free market principles.
The short answer is that with the Empire of Japan expanding its control of Asia and the Pacific Rim, Nazi Germany closing in on total control of the European Continent, and nearly every American family having at least one, but mostly many more, of its members in uniform, in harm's way, being shot at, many already dead, there is a totally different mindset toward national unity, collective effort, sense of civilian responsibility, and willingness to endure some discomfort.
To depress consumer spending to achieve the complementary objectives of holding down prices, diverting goods to wartime production,and raising government revenue to finance the war, taxes had to be raised. President Roosevelt had hoped to pay for at least half the cost of the war from current income. Some congressional leaders favored a national sales tax. The Treasury Department flirted with a complex tax on individual spending.
Tax experts agreed that the fairest, most effective way to draw upon spending power was through the income tax. Thus, the income tax, formerly the domain of the wealthy, was broadened to include the rising incomes of some 40 million Americans who paid income taxes for the first time during the war. Congress instituted progressive marginal rates ranging from 13 percent on the first $2,000 to 82 percent on incomes above $200,000. Gift and estate taxes were broadened, and a graduated tax on excess corporate incomes put in place. Gasoline, tobacco, and alcoholic beverages were subject to excise taxes.
Treasury Secretary Morgenthau feared mass tax evasion. But most Americans made a good-faith effort to pay their taxes. In 1943 the practice of withholding began. Since wartime spending was producing huge deficits, the partial answer was to withhold taxes from every paycheck instead of requiring the previous quarterly payments.
Even with higher taxes, rationing, and price controls, thanks to protection afforded by two vast oceans and a functioning economy, on strictly economic criteria the vast majority of American civilians were living better during the war than during the decade of the 1930s.
The higher taxes diverted spending power away from civilian goods and contributed to the complementary objectives of reducing pressure on prices and raising government revenue. However, it was not feasible to raise enough revenue through taxes to pay for the war.
- John Waelti's column is published every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The American economy had limped through the Great Depression of the 1930s with high unemployment and idle production capacity, even as people needed goods that were not being produced. Japanese bombs on Pearl Harbor, December 7, 1941, changed that situation overnight.
As America declared war on the axis powers, the federal government needed planes, tanks, ships, guns, ammunition, uniforms and all the rest of the materiel for a two-front all-out war. As men filled the ranks of the armed forces, the nation went from unemployment to labor shortages.
As the nation's factories churned out goods, previously unemployed workers now had money in their pockets - cash with which to buy the goods they had been unable to afford during the Great Depression.
Instead of unemployment and stagnation, we now had full employment and factories straining to produce more. Instead of lacking cash with which to buy goods, people now had cash, but the goods weren't available. Production was oriented toward wartime needs.
On a personal note, my dad had bought a W-C model Allis Chalmers tractor right before the war. It was a good thing, because farm tractors weren't made during the war. That tractor was the "work horse," along with four real horses that enabled production of milk, hogs, chickens and eggs on those 220 acres of hills north of Monroe during the war.
The problem of unemployment was solved. But economic issues of one kind or another are forever with us. There remained the perennial basic economic questions of what to produce, how to produce, and for whom.
Clearly, wartime goods had priority. As employment and incomes increased, issues facing policy makers were how to divert production to wartime goods, and how to pay for the war, while keeping price levels and government debt from spinning out of control.
Here are the dilemmas: The combination of shortages of civilian goods along with rising personal incomes creates the ingredients for classic "demand-pull" inflation. Civilian spending power can be reduced by taxing it away and by selling government bonds to the public. There were limits to how much taxes could be increased. And borrowing from the public, that is, selling government bonds, increases the public debt. Nevertheless, the war had to be financed.
In other words, taxes and government borrowing could serve the dual objectives of reducing private spending and raising revenue to pay for the war - partly anyway. To augment taxes and government borrowing, a system of price and wage controls and rationing was put in place. Rationing was necessary because if prices are held below free market levels, demand for goods exceeds supply at that below-market price. Therefore, goods have to be allocated, or rationed among consumers.
It was thus that a combination of taxes, government borrowing, wage and price controls, and rationing was used to achieve economic objectives of high production and financing the war, while keeping prices and the public debt from spinning out of control.
It is probably difficult - even impossible - for anyone under the age of 50, or even 60, to comprehend why people would put up with rapidly rising public debt, rising taxes, rationing, and price controls that are anathema to free market principles.
The short answer is that with the Empire of Japan expanding its control of Asia and the Pacific Rim, Nazi Germany closing in on total control of the European Continent, and nearly every American family having at least one, but mostly many more, of its members in uniform, in harm's way, being shot at, many already dead, there is a totally different mindset toward national unity, collective effort, sense of civilian responsibility, and willingness to endure some discomfort.
To depress consumer spending to achieve the complementary objectives of holding down prices, diverting goods to wartime production,and raising government revenue to finance the war, taxes had to be raised. President Roosevelt had hoped to pay for at least half the cost of the war from current income. Some congressional leaders favored a national sales tax. The Treasury Department flirted with a complex tax on individual spending.
Tax experts agreed that the fairest, most effective way to draw upon spending power was through the income tax. Thus, the income tax, formerly the domain of the wealthy, was broadened to include the rising incomes of some 40 million Americans who paid income taxes for the first time during the war. Congress instituted progressive marginal rates ranging from 13 percent on the first $2,000 to 82 percent on incomes above $200,000. Gift and estate taxes were broadened, and a graduated tax on excess corporate incomes put in place. Gasoline, tobacco, and alcoholic beverages were subject to excise taxes.
Treasury Secretary Morgenthau feared mass tax evasion. But most Americans made a good-faith effort to pay their taxes. In 1943 the practice of withholding began. Since wartime spending was producing huge deficits, the partial answer was to withhold taxes from every paycheck instead of requiring the previous quarterly payments.
Even with higher taxes, rationing, and price controls, thanks to protection afforded by two vast oceans and a functioning economy, on strictly economic criteria the vast majority of American civilians were living better during the war than during the decade of the 1930s.
The higher taxes diverted spending power away from civilian goods and contributed to the complementary objectives of reducing pressure on prices and raising government revenue. However, it was not feasible to raise enough revenue through taxes to pay for the war.
- John Waelti's column is published every Friday in the Times. He can be reached at jjwaelti1@tds.net.
