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No Peace Without Prosperity

ISSUE:  Summer 1943

Today, all over the world, Americans are looking

forward to the end of the war. Certain we are that,

within two or three years, victory will be ours. But most of us are apprehensive about the prospects for jobs, for sales, for our business, after the war is won. We still recall the dismal pre-war decade, with its mass unemployment and widespread want, with its billion-dollar doles and million-case relief rolls. Consequently, Americans in factories and in foxholes, at the office and at sea, in shipyards and in camp, on farms and on furlough, are asking themselves, Will the armistice eliminate jobs and prosperity? Will the return of peace see the return of economic distress? Will the end of hostilities mean the beginning of a long postwar depression?

So worried are we about economic conditions after the war that a poll early this year for the National Association of Manufacturers showed 92 per cent of American workers in favor of immediate planning for the post-war era. American working men know that there can be no contentment without employment, no peace without prosperity. They realize that America’s economic future is extremely important for the maintenance of an enduring peace.


The world’s experiences during the depression of the 1980’s and the war of the 1940’s have added greatly to our economic knowledge and understanding. Surely we should now be in a position to tell whether our post-war worries are well founded and to judge which economic policies offer the best solution to the economic problems of peace.

America’s experience with a military economy during this war has taught us three important lessons that have direct bearing on our post-war problems. In the first place, we have learned that the American economy is not the frail and delicate mechanism that equilibrium economists imagined. On the contrary, it has remarkable power to adapt itself to great and sudden disturbances, such as priority orders both stopping civilian production of items like automobiles and electrical appliances and redirecting the flow of industrial materials. We need not be alarmed by the mere fact that American industry must be completely reconstructed when peace returns.

Secondly, the war has taught us the tremendous potential capacity of our economy. Even with a large number of our youth in the armed services, we are now producing at the rate of about 135 billion dollars of goods and services a year, figured at either 1929 or 1942 prices. That is a thousand dollars a year per inhabitant, five thousand dollars a year for every American family of five. It is 70 per cent greater than our national income during any year of peace.

When the war broke out in September, 1939, about ten million workers—one-fifth of the labor force—were unemployed. In the six and a half years following March, 1988, total unemployment had declined but four million. In two and a half years of war, however, total employment in American industry increased by ten million persons and total unemployment decreased by eight million. If our economy is not restrained or rendered impotent by lack of sales, it can perform economic miracles.

Finally, we have learned from our war-time experience the advantages of an economy of surplus purchasing power and the means by which such an economy can be developed and maintained. Here we have the secret of post-war prosperity, the formula for full-capacity production during peace. It is a formula that the Russians used effectively in the 1920’s and 1930’s. More money is created and paid out than the total money value of the goods available for sale at prevailing prices. Price control is, of course, absolutely essential so that the surplus purchasing power is not eaten up by price inflation.

We thought that the long queues at Russian stores simply represented a shortage of goods. But that shortage was in part created by a combination of price control and expansion in the money supply and in money incomes. During this war we also have, for the first time, combined inflationary finance with general price control, which has led to numerous shortages despite production for civilian consumption well in excess of the 1932 figure. If this policy of monetary expansion and price control is effectively pursued, the American people will, at the end of the war, have a surplus purchasing power of perhaps 100 billion dollars in the form of increased money holdings and liquid assets, including government bonds. With this tremendous reserve of purchasing power seeking products, business men would not need to worry about lack of markets and inadequate outlets for goods. Instead of the pre-war anxieties about sales, our post-war troubles would be the same as our war-time troubles—shortages of materials, of parts, and, eventually, of labor in many lines. Like the peace-time Russian economy, American industry would not be able to supply all the demand.


Because a reserve of purchasing power was not built up during previous wars, post-war decades have generally been characterized by economic difficulties and business depressions. Such post-war depressions have usually been as severe in the victorious as in the defeated countries.

Both the Civil War and World War I were followed by two distinct depressions, separated by a period of post-war prosperity. A comparatively short depression occurred in 1866 and 1921, soon after the end of hostilities. Eight or ten years later a severe depression set in, lasting from five to ten years.

The relatively short duration of the first post-war depression is partly explained by the opportunities for new investment opened up by war-time changes, including shifts in population and shifts in consumer demand, both of whicfi stimulate private investment. Also, wars have been periods of curtailment and depression in building construction. A backlog is accumulated which generally gives rise to a building boom shortly after the war-time restrictions on construction are lifted.

At the end of this war there will be a large backlog of postponed purchases. It is, of course, only possible to guess at the total volume of deferred demand that industry, governmental units, and individuals will have accumulated by the time hostilities cease—the required repairs and replacements, the needs for new machinery, houses, automobiles, and electrical appliances, the deficiencies in business inventories, the essential items for the reconversion of industry, the postponed public works and deferred maintenance of existing public property, the shortages in foreign countries that will require exports from us, et cetera. Estimates totalling from 35 to 60 billion dollars have been made for the accumulated backlog in 1942,1943, and 1944.

A housing boom right after this war, like the one that got under way in 1922, is to be expected. A genuine shortage of residential housing existed in 1939 when the war broke out. New non-farm housing in the nine years from 1931 to 1939 amounted to but 27 per cent of the total from 1921 to 1929. Even the peak year of 1941 was well below the figures of the 1920’s. Until the end of the war, new housing construction will continue at the low levels of the 1930’s.

The unusual severity and duration of our second post-war depressions (beginning in 1873 and 1929) is explained partly by the fact that they coincided with the first post-war trough in the construction cycle, whose depression phase reoccurs about every seventeen years, and partly by the fact that they occurred in the midst of the downswing of a “long wave” or long cycle of prices and production. The sharp peaks in the American price level, for example, are in 1815, 1865, and 1020, within two years after the War of 1812, the Civil War, and World War I, and the sharpest declines in our price level have taken place during the fifteen years following those wars, when the level of prices in each case dropped to less than half the peak figure.

Three long waves or cycles in economic activity have been identified approximately as follows for such countries as the United States, England, and France (for European countries the second upswing ends with the Franco-Prussian War rather than the Civil War):

Upswing Downswing

1787 to 1815  1815 to 1848

1848 to 1865  1865 to 1896

1896 to 1920  1920 to 1934(?)

The upswing phase of the long waves is characterized by relatively good times, with months of prosperity two or three times as numerous as months of depression. The downswing phase, on the other hand, contains long periods of hard times so that depression months exceed months of prosperity.

During previous major wars, the price level has increased almost in exact proportion to the expansion in our money supply (cash and checking accounts), so that no reserve or surplus of purchasing power was built up. Consequently, the price level had to drop after the war in order to offset, through an increase in the purchasing power of each dollar, the decrease in total money spending. Of course, if the money supply declined along with the price level, deflation served no economic purpose. The orthodox claim that postwar deflation restores economic balance, while true perhaps for a cash economy on a metallic standard, is not valid when the money supply consists mainly of checking accounts, which vary with the volume of bank loans and investments, and generally shrink as prices fall.

During the first three and a half years of this war the money supply increased three times as fast as the price level, money expanding over 100 per cent whereas price control kept the level of prices from rising more than 33 per cent. Although the Government has been financing one-third of the war by selling bonds to banks for newly created checking accounts—additions to the money supply which are paid out to the people—the growing excess of money and money income is being immobilized through priority certificates and rationing coupons which allow the people to spend only about 60 per cent of their total income after taxes.

The most important economic task after this war will be to prevent a recurrence of the long post-war downswing in prices and to avoid the usual pattern of post-war depressions. The best way to accomplish that task would be to maintain an economy of surplus purchasing power through price control and, when the surplus needs to be replenished, through monetary expansion. Those are the methods by which the American people and American industry are accumulating a reserve of surplus purchasing power that may amount to 100 billion dollars at the end of the war. With such a reserve, price control alone would assure us a scarcity economy of excess spending power for at least a decade.


Our after-war policies must be geared to the economic conditions that will exist when the guns cease firing and the soldiers start for home. The changes that have been occurring and will continue to occur in our economy during the war are narrowing and reducing the post-war alternatives.

If present policies and trends continue, the end of the war will find the American economy (1) with a tremendous surplus of spending power and a huge backlog of deferred or dammed-up demand; (2) with all banks, including the Federal Reserve Banks, literally stuffed full of Government bonds; (3) with a Federal debt between 250 and 300 billions of dollars; (4) with a centrally planned and directed economy subject to all sorts of Federal controls; (5) with the Government owning as much as one-third of the country’s manufacturing capacity and, in addition, 10 or 12 billion dollars worth of newly purchased land, camps, hotels, docks, warehouses, et cetera; (6) with a highly skilled labor force at least 20 per cent larger than in 1939 and much more effective, partly as a result of the large increase in machine tools during the war; and (7) with foreign trade grossly distorted and imports and exports by private firms for their own account practically non-existent.

Study of the above list indicates that our post-war problems will center around such matters as inflation and deflation of prices, widespread unemployment during a transition period, and the nature and control of American industry— the issue of market and private control versus economic planning and government control, both for domestic and foreign trade. Let us consider each of those three problems from the point of view of post-war policy.

During World War I, price inflation prevented the accumulation of a large reservoir of purchasing power, yet prices rose as much during the one and a half years following the Armistice as they had risen during the four years of war. Because of the larger backlog of deferred demand this time and because of the huge financial reserves being accumulated, the threat of post-war inflation will be much greater after this war than it was in November, 1918. The first post-war years will be characterized by a scramble for materials and certain equipment and by acute shortages of many products, at least until industrial conversion in all its phases is completed.

Consequently, it will be absolutely necessary to continue some control over prices and also over the distribution of certain materials in order to prevent inventory hoarding and, which will be much more difficult, to assure a fair distribution of materials and components amongst competitors and between industries. Control of materials has the additional advantage that it is the most effective means of controlling private investment so as to prevent excesses and abuses that are characteristic of inflationary booms.

To maintain such controls after the war will, of course, be highly unpopular and politically very difficult. The purpose will be to enforce a gradual use of the excess purchasing power so that it will all be absorbed by expansion of production and employment and not by price increases. As the end of the war is likely to see a mad scramble to return to pre-war pursuits, it will probably be necessary to “freeze” the college professors and business bureaucrats in their Federal jobs for a time in order to assure expert control of prices and of materials distribution during the first peace years.

The need for price control will be much greater after this war than after the last one, not only for the reasons already given, but also because the Federal Reserve Banks will then find themselves unable to exert their normal control over the expansion of checking accounts by banks. Government bond prices after the war will tend to decline as interest rates rise and as people and banks begin to unload their bond holdings. The Federal Reserve Banks will be forced to support the Government bond market in order to prevent a drop in bond prices, which would not have to fall very far to make many banks technically insolvent. Yet additional purchases of Government bonds by the Federal Reserve Banks at the end of the war would permit, indeed stimulate, further expansion in the money supply. Such purchases are now the main factor in checking-account expansion by banks.

From previous post-war periods we have learned that, if there is one thing worse than inflation, it is deflation, which paralyzes industry. Therefore, every effort should be made to prevent the usual downward swing of a “long wave” after this war. Following World War I, governmental authorities in Britain and this country successfully attempted to depress the price level and to induce the world to return to the gold standard. This time those deflationary policies should be shunned like the plague. General return to a fixed gold standard would be reaction with a vengeance. Also we should avoid such deflationary policies as purposeful reduction of the Federal debt, which has been a traditional post-war policy in this country.

Should the war in Europe and in Asia end at approximately the same time, the termination of hostilities would find us with some ten or eleven million in the armed services, probably twenty-five million workers producing military items, around twenty million workers in non-war or essential civilian production, and eight million in agriculture. In other words, about half of the working population may have to be provided with different jobs after the war. When the soldiers have returned, our labor force will probably be eight or ten million larger than in 1939, a third of the increase being women workers who were drawn into industry during the war and who will wish to continue such work.

The suddenness with which the war ends and the policies the Government adopts with respect to curtailment of war production will determine the length and severity of the period of reconversion to peace-time production. Integrated facilities make piecemeal or gradual reconversion very difficult. It is well to bear in mind that, for conversion to war work, the durable consumers’ goods industries, like automobiles, electrical appliances, et cetera, enjoyed a long period, ending with six to twelve months of partial curtailment under OPM-WPB orders, before civilian production was completely stopped. Even so, a considerable number of workers suffered “priority unemployment” for months while tooling up and conversion were being completed. That unemployment occurred during a period when workers were being absorbed into the armed services, whereas during the post-war transition period the armed services will be releasing workers.

For these reasons, the first post-war years will witness widespread unemployment at a time when there is a real scarcity of products, with producers unable to satisfy all of their customers’ demands. Presumably most of the “recon-version unemployment” will last less than a year. Recently, officials of General Motors have estimated that it could be in full production of 1942 models within seven or eight months after war production ceases, provided that all former peace-time production units are released for civilian production together. Assuming that price control has built up a large reserve of spending power, there should not be a difficult problem of unemployment once conversion in all its phases has been completed.

One thing should be clear if our analysis is correct. A large-scale program of public construction by the Federal Government for the purpose of absorbing “reconversion unemployment” would be a mistake. The first post-war years are likely to witness a housing boom and a considerable expansion in non-Federal public works as that backlog of deferred demand is drawn down. Most of the plants of the construction supply industries will have to be reconverted— retooled, reorganized, and supplied with working inventories of materials—before construction materials can be produced and shipped to building sites. Some of the materials will be badly needed abroad. Consequently, there will probably be post-war shortages in certain of the materials, and surely in some of the components and facilities, that a Federal construction program would require. Furthermore, most large public works projects take a long period of time to complete and are, therefore, not well suited for “reconversion unemployment” or a short “primary” post-war depression. In addition, the post-war period, with a huge Federal debt and large reserve of surplus purchasing power, would seem a particularly inopportune time for a large-scale spending program. There will be a lack of supply rather than a deficiency of demand. The only kinds of public enterprise that are appropriate for such a period are short-time projects that emphasize employment, conservation, and public service. All this does not mean, however, that a large Federal construction program should not be prepared and ready for use in case circumstances seem to warrant.

Post-war employment programs need to be developed, not so much to increase spending or investment, as to improve our health, our education, our recreational facilities, our natural resources, and the general appearance of our cities and countryside. Such programs would involve little competition for scarce materials or facilities. The same is true of programs for retraining workers and rehabilitating persons injured in combat. There is a tremendous amount that could be done in the way of further education, travel, training, and welfare activities for returning soldiers, given the proper planning and community attitude.

Certainly, the gigantic demobilization of men in the armed forces and in war industry will have to be planned and supervised so that millions of men are not thrown onto the labor market to mill and wander around in search of work. The country would not tolerate a situation in which ex-service men were forced to form breadlines or to sell apples and shoestrings on city streets.

Employment after the war is not likely to be retarded or curtailed by the level of wage rates or by the wage relationships then prevailing. There has not been the distortion of wage rates during this war that occurred in World War I, when wage rates in shipyards increased from 200 to 400 per cent. One must bear in mind that only about one-fourth of the increased wage income since August, 1939, is due to increases in wage rates. Expansion in the number of workers, longer hours, time-and-a-half for overtime, and similar factors are responsible for the remaining three-fourths. Consequently, there has been a growing gap between wage rates and average hourly earnings, which was not true during the last war, because then weekly hours of work were decreasing.

One of the most elementary errors in economics is to con* fuse wage rates, average hourly earnings, and labor costs of production. Between 1929 and 1941, increased productivity caused labor cost per unit of output to decline in manufacturing industries despite an increase of 25 per cent in average hourly earnings. Using average hourly earnings to measure changes in wage rates and labor costs, the Brookings Institution, in “Collapse or Boom at the End of the War,” comes to the conclusion that price-cost relationships will make the business outlook less favorable during the postwar transition period than in 1919. Had wage-rate and labor-cost figures been used, just the opposite conclusion would have followed. Wage rates should be brought into line with average hourly earnings before the end of the war, Because of such factors as increased productivity, excess purchasing power, and full-capacity operations, the level of wage rates after this war is likely to be too low, as was the case during the boom period of the 1920’s after the last war,

Capitalist democracies have relied upon two methods for solving economic issues and problems—the market method, which operates through money purchases by private persons or agencies, and the democratic method, which operates through votes and government agencies. The market method rests on private planning, spending, and control; the democratic method involves government planning, spending, and control.

The depression of the 1930’s and World War II have diminished people’s confidence in ordinary market methods. Before the war, the market was failing to provide the neces-sary co-ordination and direction for the myriad of economic plans of business firms and individuals. In the 1930’s, producers and consumers attempted to protect themselves through plans to restrict production, to curtail spending, and to become financially liquid. The result of such individual planning was idle money, reduced incomes, and widespread unemployment. An economic system based on self* interest proved, in the Great Depression, to be self-aggravating, self-thwarting, self-destructive.

With the outbreak of war, the democracies soon discovered that the exigencies of total warfare demanded a concentration of economic effort much more stringent than the market mechanism could achieve. Central planning and direction are based upon the assumption that market forces alone cannot bring conflicting economic interests into a working harmony and that the area of conflict is so significant that economic interests must be harmonized by state action and guided toward a set of social goals.

The great centralizing forces in the past three decades have been war and unemployment. The solution of those two problems might well permit more decentralization and more reliance upon the market method of settling economic matters. But so long as there are real threats of war, of widespread unemployment, or of sharp inflation and deflation, it will be almost impossible to avoid central planning and control in our economy.

This conclusion applies to foreign as well as domestic trade. When markets and employment contract, nations become shortsighted and narrow-minded. Depression, unemployment, and deflation lead to restrictive tariffs, beggar-my-neighbor policies, and economic warfare. In prosecuting the war under a military economy, the democracies have merged economics and politics, with foreign trade simply a means of achieving a political goal—defeat of our enemies.

It will be difficult to separate state and industry in America if, after the war, a number of important nations continue political control over their economies, or even over the war plants they now own. Douglas Miller has well pointed out, in “You Can’t Do Business with Hitler,” how independent business firms in our pre-war economy often found themselves handicapped in competing in foreign trade with totalitarian or collectivist states that enjoyed tremendous monopolistic powers by serving as sole buyer or seller for a whole nation. Through arbitrary purchases, subsidized exports, and barter arrangements, such a state is in a position to exert enormous pressure in international affairs for its own political or strategic purposes.

American isolationists and reactionaries are faced with a dilemma. Without some strong international organization to minimize political control of industry abroad and without machinery to prevent wars and widespread unemployment which lead to national centralization, America will be practically forced to continue various government controls over our economy, especially those relating to foreign trade.


After the war an effort will be made to increase the scope of market control of domestic and international trade. That effort will, however, fail unless steps are taken to improve the functioning of the market mechanism. No longer will we endure an economy running at half, or even three-quarters, of capacity. People will not be satisfied unless the market mechanism supplies a national income and a volume of employment comparable with that achieved under economic planning and superabundant purchasing power in war-time. The maintenance of an economy of surplus spending power is one way of improving the market so that it will provide full-capacity production. Sooner or later we will be forced to choose between a planned economy with central control and an economy that will assure markets for American industry by such means as the maintenance of excess spending power.

The war has taught us the trick of creating an economy of surplus purchasing power. It can be accomplished, however, without a war or even an elaborate public-works program. The only requirement is that the government control prices while expanding the money supply and paying out that expansion for salaries, bonuses„ pensions, or what not. One proposed method of expanding the money supply and money incomes is simply to grant each American citizen 50 or 100 dollars every three months until a sufficient reserve of purchasing power is built up. Administratively, that device would be relatively simple. It relies upon private spending in the market and involves no threat of government competition with, or control of, private business. Like war expenditures, such a per-capita grant could be financed by borrowing from the banks, preferably the Federal Reserve Banks. The Government would need to pay little, if any, interest on such borrowings. As has frequently been pointed out, it costs ‘the banks practically nothing to write up the checking accounts that they have been lending to the Government. The result is that they are making tremendous profits on their Government bond purchases, which have totaled about 35 billion dollars in the past one and a half years. By the end of the war, the Federal Government will be paying the banks 2 or 3 billion dollars a year in interest, and bank profits will be twice their pre-war peak.

After the war, however, we shall not need to worry about accumulating a surplus of purchasing power. If war-time price control has been reasonably successful, we shall enter the post-war period with a huge reservoir of dammed-up spending power in the form of new money, bond holdings, tax-refund credits, and other liquid assets, which people will wish to use to liquidate the large backlog of pent-up demand. All that will be necessary is to take advantage of that unique opportunity and prevent a rapid dissipation of our purchasing-power reserves through price inflation.

Successful price control can provide high-capacity production in the post-war years and can postpone, perhaps for a decade, any need for monetary expansion or for a spending program to supply markets for American products. Through stabilization of the price level and maintenance of an economy of surplus spending power we can avoid the customary pattern of post-war depressions and prevent the severe slump in prices that has followed other major wars. In wise monetary management lies the hope for a prosperous post-war era.


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