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The American Economy during World War II

Christopher J. Tassava

For the United States, World War II and the Great Depression constituted the most important economic event of the twentieth century. The war’s effects were varied and far-reaching. The war decisively ended the depression itself. The federal government emerged from the war as a potent economic actor, able to regulate economic activity and to partially control the economy through spending and consumption. American industry was revitalized by the war, and many sectors were by 1945 either sharply oriented to defense production (for example, aerospace and electronics) or completely dependent on it (atomic energy). The organized labor movement, strengthened by the war beyond even its depression-era height, became a major counterbalance to both the government and private industry. The war’s rapid scientific and technological changes continued and intensified trends begun during the Great Depression and created a permanent expectation of continued innovation on the part of many scientists, engineers, government officials and citizens. Similarly, the substantial increases in personal income and frequently, if not always, in quality of life during the war led many Americans to foresee permanent improvements to their material circumstances, even as others feared a postwar return of the depression. Finally, the war’s global scale severely damaged every major economy in the world except for the United States, which thus enjoyed unprecedented economic and political power after 1945.

The Great Depression

The global conflict which was labeled World War II emerged from the Great Depression, an upheaval which destabilized governments, economies, and entire nations around the world. In Germany, for instance, the rise of Adolph Hitler and the Nazi party occurred at least partly because Hitler claimed to be able to transform a weakened Germany into a self-sufficient military and economic power which could control its own destiny in European and world affairs, even as liberal powers like the United States and Great Britain were buffeted by the depression.

In the United States, President Franklin Roosevelt promised, less dramatically, to enact a “New Deal” which would essentially reconstruct American capitalism and governance on a new basis. As it waxed and waned between 1933 and 1940, Roosevelt’s New Deal mitigated some effects of the Great Depression, but did not end the economic crisis. In 1939, when World War II erupted in Europe with Germany’s invasion of Poland, numerous economic indicators suggested that the United States was still deeply mired in the depression. For instance, after 1929 the American gross domestic product declined for four straight years, then slowly and haltingly climbed back to its 1929 level, which was finally exceeded again in 1936. (Watkins, 2002; Johnston and Williamson, 2004)

Unemployment was another measure of the depression’s impact. Between 1929 and 1939, the American unemployment rate averaged 13.3 percent (calculated from “Corrected BLS” figures in Darby, 1976, 8). In the summer of 1940, about 5.3 million Americans were still unemployed — far fewer than the 11.5 million who had been unemployed in 1932 (about thirty percent of the American workforce) but still a significant pool of unused labor and, often, suffering citizens. (Darby, 1976, 7. For somewhat different figures, see Table 3 below.)

In spite of these dismal statistics, the United States was, in other ways, reasonably well prepared for war. The wide array of New Deal programs and agencies which existed in 1939 meant that the federal government was markedly larger and more actively engaged in social and economic activities than it had been in 1929. Moreover, the New Deal had accustomed Americans to a national government which played a prominent role in national affairs and which, at least under Roosevelt’s leadership, often chose to lead, not follow, private enterprise and to use new capacities to plan and administer large-scale endeavors.

Preparedness and Conversion

As war spread throughout Europe and Asia between 1939 and 1941, nowhere was the federal government’s leadership more important than in the realm of “preparedness” — the national project to ready for war by enlarging the military, strengthening certain allies such as Great Britain, and above all converting America’s industrial base to produce armaments and other war materiel rather than civilian goods. “Conversion” was the key issue in American economic life in 1940-1942. In many industries, company executives resisted converting to military production because they did not want to lose consumer market share to competitors who did not convert. Conversion thus became a goal pursued by public officials and labor leaders. In 1940, Walter Reuther, a high-ranking officer in the United Auto Workers labor union, provided impetus for conversion by advocating that the major automakers convert to aircraft production. Though initially rejected by car-company executives and many federal officials, the Reuther Plan effectively called the public’s attention to America’s lagging preparedness for war. Still, the auto companies only fully converted to war production in 1942 and only began substantially contributing to aircraft production in 1943.

Even for contemporary observers, not all industries seemed to be lagging as badly as autos, though. Merchant shipbuilding mobilized early and effectively. The industry was overseen by the U.S. Maritime Commission (USMC), a New Deal agency established in 1936 to revive the moribund shipbuilding industry, which had been in a depression since 1921, and to ensure that American shipyards would be capable of meeting wartime demands. With the USMC supporting and funding the establishment and expansion of shipyards around the country, including especially the Gulf and Pacific coasts, merchant shipbuilding took off. The entire industry had produced only 71 ships between 1930 and 1936, but from 1938 to 1940, commission-sponsored shipyards turned out 106 ships, and then almost that many in 1941 alone (Fischer, 41). The industry’s position in the vanguard of American preparedness grew from its strategic import — ever more ships were needed to transport American goods to Great Britain and France, among other American allies — and from the Maritime Commission’s ability to administer the industry through means as varied as construction contracts, shipyard inspectors, and raw goading of contractors by commission officials.

Many of the ships built in Maritime Commission shipyards carried American goods to the European allies as part of the “Lend-Lease” program, which was instituted in 1941 and provided another early indication that the United States could and would shoulder a heavy economic burden. By all accounts, Lend-Lease was crucial to enabling Great Britain and the Soviet Union to fight the Axis, not least before the United States formally entered the war in December 1941. (Though scholars are still assessing the impact of Lend-Lease on these two major allies, it is likely that both countries could have continued to wage war against Germany without American aid, which seems to have served largely to augment the British and Soviet armed forces and to have shortened the time necessary to retake the military offensive against Germany.) Between 1941 and 1945, the U.S. exported about $32.5 billion worth of goods through Lend-Lease, of which $13.8 billion went to Great Britain and $9.5 billion went to the Soviet Union (Milward, 71). The war dictated that aircraft, ships (and ship-repair services), military vehicles, and munitions would always rank among the quantitatively most important Lend-Lease goods, but food was also a major export to Britain (Milward, 72).

Pearl Harbor was an enormous spur to conversion. The formal declarations of war by the United States on Japan and Germany made plain, once and for all, that the American economy would now need to be transformed into what President Roosevelt had called “the Arsenal of Democracy” a full year before, in December 1940. From the perspective of federal officials in Washington, the first step toward wartime mobilization was the establishment of an effective administrative bureaucracy.

War Administration

From the beginning of preparedness in 1939 through the peak of war production in 1944, American leaders recognized that the stakes were too high to permit the war economy to grow in an unfettered, laissez-faire manner. American manufacturers, for instance, could not be trusted to stop producing consumer goods and to start producing materiel for the war effort. To organize the growing economy and to ensure that it produced the goods needed for war, the federal government spawned an array of mobilization agencies which not only often purchased goods (or arranged their purchase by the Army and Navy), but which in practice closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries.

Though both the New Deal and mobilization for World War I served as models, the World War II mobilization bureaucracy assumed its own distinctive shape as the war economy expanded. Most importantly, American mobilization was markedly less centralized than mobilization in other belligerent nations. The war economies of Britain and Germany, for instance, were overseen by war councils which comprised military and civilian officials. In the United States, the Army and Navy were not incorporated into the civilian administrative apparatus, nor was a supreme body created to subsume military and civilian organizations and to direct the vast war economy.

Instead, the military services enjoyed almost-unchecked control over their enormous appetites for equipment and personnel. With respect to the economy, the services were largely able to curtail production destined for civilians (e.g., automobiles or many non-essential foods) and even for war-related but non-military purposes (e.g., textiles and clothing). In parallel to but never commensurate with the Army and Navy, a succession of top-level civilian mobilization agencies sought to influence Army and Navy procurement of manufactured goods like tanks, planes, and ships, raw materials like steel and aluminum, and even personnel. One way of gauging the scale of the increase in federal spending and the concomitant increase in military spending is through comparison with GDP, which itself rose sharply during the war. Table 1 shows the dramatic increases in GDP, federal spending, and military spending.

Table 1: Federal Spending and Military Spending during World War II

(dollar values in billions of constant 1940 dollars)

Nominal GDP Federal Spending Defense Spending
Year total $ % increase total $ % increase % of GDP total $ % increase % of GDP % of federal spending
1940 101.4 9.47 9.34% 1.66 1.64% 17.53%
1941 120.67 19.00% 13.00 37.28% 10.77% 6.13 269.28% 5.08% 47.15%
1942 139.06 15.24% 30.18 132.15% 21.70% 22.05 259.71% 15.86% 73.06%
1943 136.44 -1.88% 63.57 110.64% 46.59% 43.98 99.46% 32.23% 69.18%
1944 174.84 28.14% 72.62 14.24% 41.54% 62.95 43.13% 36.00% 86.68%
1945 173.52 -0.75% 72.11 -0.70% 41.56% 64.53 2.51% 37.19% 89.49%

Sources: 1940 GDP figure from “Nominal GDP: Louis Johnston and Samuel H. Williamson, “The Annual Real and Nominal GDP for the United States, 1789 — Present,” Economic History Services, March 2004, available at http://www.eh.net/hmit/gdp/ (accessed 27 July 2005). 1941-1945 GDP figures calculated using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl. Federal and defense spending figures from Government Printing Office, “Budget of the United States Government: Historical Tables Fiscal Year 2005,” Table 6.1—Composition of Outlays: 1940—2009 and Table 3.1—Outlays by Superfunction and Function: 1940—2009.

Preparedness Agencies

To oversee this growth, President Roosevelt created a number of preparedness agencies beginning in 1939, including the Office for Emergency Management and its key sub-organization, the National Defense Advisory Commission; the Office of Production Management; and the Supply Priorities Allocation Board. None of these organizations was particularly successful at generating or controlling mobilization because all included two competing parties. On one hand, private-sector executives and managers had joined the federal mobilization bureaucracy but continued to emphasize corporate priorities such as profits and positioning in the marketplace. On the other hand, reform-minded civil servants, who were often holdovers from the New Deal, emphasized the state’s prerogatives with respect to mobilization and war making. As a result of this basic division in the mobilization bureaucracy, “the military largely remained free of mobilization agency control” (Koistinen, 502).

War Production Board

In January 1942, as part of another effort to mesh civilian and military needs, President Roosevelt established a new mobilization agency, the War Production Board, and placed it under the direction of Donald Nelson, a former Sears Roebuck executive. Nelson understood immediately that the staggeringly complex problem of administering the war economy could be reduced to one key issue: balancing the needs of civilians — especially the workers whose efforts sustained the economy — against the needs of the military — especially those of servicemen and women but also their military and civilian leaders.

Though neither Nelson nor other high-ranking civilians ever fully resolved this issue, Nelson did realize several key economic goals. First, in late 1942, Nelson successfully resolved the so-called “feasibility dispute,” a conflict between civilian administrators and their military counterparts over the extent to which the American economy should be devoted to military needs during 1943 (and, by implication, in subsequent war years). Arguing that “all-out” production for war would harm America’s long-term ability to continue to produce for war after 1943, Nelson convinced the military to scale back its Olympian demands. He thereby also established a precedent for planning war production so as to meet most military and some civilian needs. Second (and partially as a result of the feasibility dispute), the WPB in late 1942 created the “Controlled Materials Plan,” which effectively allocated steel, aluminum, and copper to industrial users. The CMP obtained throughout the war, and helped curtail conflict among the military services and between them and civilian agencies over the growing but still scarce supplies of those three key metals.

Office of War Mobilization

By late 1942 it was clear that Nelson and the WPB were unable to fully control the growing war economy and especially to wrangle with the Army and Navy over the necessity of continued civilian production. Accordingly, in May 1943 President Roosevelt created the Office of War Mobilization and in July put James Byrne — a trusted advisor, a former U.S. Supreme Court justice, and the so-called “assistant president” — in charge. Though the WPB was not abolished, the OWM soon became the dominant mobilization body in Washington. Unlike Nelson, Byrnes was able to establish an accommodation with the military services over war production by “acting as an arbiter among contending forces in the WPB, settling disputes between the board and the armed services, and dealing with the multiple problems” of the War Manpower Commission, the agency charged with controlling civilian labor markets and with assuring a continuous supply of draftees to the military (Koistinen, 510).

Beneath the highest-level agencies like the WPB and the OWM, a vast array of other federal organizations administered everything from labor (the War Manpower Commission) to merchant shipbuilding (the Maritime Commission) and from prices (the Office of Price Administration) to food (the War Food Administration). Given the scale and scope of these agencies’ efforts, they did sometimes fail, and especially so when they carried with them the baggage of the New Deal. By the midpoint of America’s involvement in the war, for example, the Civilian Conservation Corps, the Works Progress Administration, and the Rural Electrification Administration — all prominent New Deal organizations which tried and failed to find a purpose in the mobilization bureaucracy — had been actually or virtually abolished.

Taxation

However, these agencies were often quite successful in achieving their respective, narrower aims. The Department of the Treasury, for instance, was remarkably successful at generating money to pay for the war, including the first general income tax in American history and the famous “war bonds” sold to the public. Beginning in 1940, the government extended the income tax to virtually all Americans and began collecting the tax via the now-familiar method of continuous withholdings from paychecks (rather than lump-sum payments after the fact). The number of Americans required to pay federal taxes rose from 4 million in 1939 to 43 million in 1945. With such a large pool of taxpayers, the American government took in $45 billion in 1945, an enormous increase over the $8.7 billion collected in 1941 but still far short of the $83 billion spent on the war in 1945. Over that same period, federal tax revenue grew from about 8 percent of GDP to more than 20 percent. Americans who earned as little as $500 per year paid income tax at a 23 percent rate, while those who earned more than $1 million per year paid a 94 percent rate. The average income tax rate peaked in 1944 at 20.9 percent (“Fact Sheet: Taxes”).

War Bonds

All told, taxes provided about $136.8 billion of the war’s total cost of $304 billion (Kennedy, 625). To cover the other $167.2 billion, the Treasury Department also expanded its bond program, creating the famous “war bonds” hawked by celebrities and purchased in vast numbers and enormous values by Americans. The first war bond was purchased by President Roosevelt on May 1, 1941 (“Introduction to Savings Bonds”). Though the bonds returned only 2.9 percent annual interest after a 10-year maturity, they nonetheless served as a valuable source of revenue for the federal government and an extremely important investment for many Americans. Bonds served as a way for citizens to make an economic contribution to the war effort, but because interest on them accumulated slower than consumer prices rose, they could not completely preserve income which could not be readily spent during the war. By the time war-bond sales ended in 1946, 85 million Americans had purchased more than $185 billion worth of the securities, often through automatic deductions from their paychecks (“Brief History of World War Two Advertising Campaigns: War Loans and Bonds”). Commercial institutions like banks also bought billions of dollars of bonds and other treasury paper, holding more than $24 billion at the war’s end (Kennedy, 626).

Price Controls and the Standard of Living

Fiscal and financial matters were also addressed by other federal agencies. For instance, the Office of Price Administration used its “General Maximum Price Regulation” (also known as “General Max”) to attempt to curtail inflation by maintaining prices at their March 1942 levels. In July, the National War Labor Board (NWLB; a successor to a New Deal-era body) limited wartime wage increases to about 15 percent, the factor by which the cost of living rose from January 1941 to May 1942. Neither “General Max” nor the wage-increase limit was entirely successful, though federal efforts did curtail inflation. Between April 1942 and June 1946, the period of the most stringent federal controls on inflation, the annual rate of inflation was just 3.5 percent; the annual rate had been 10.3 percent in the six months before April 1942 and it soared to 28.0 percent in the six months after June 1946 (Rockoff, “Price and Wage Controls in Four Wartime Periods,” 382).With wages rising about 65 percent over the course of the war, this limited success in cutting the rate of inflation meant that many American civilians enjoyed a stable or even improving quality of life during the war (Kennedy, 641). Improvement in the standard of living was not ubiquitous, however. In some regions, such as rural areas in the Deep South, living standards stagnated or even declined, and according to some economists, the national living standard barely stayed level or even declined (Higgs, 1992).

Labor Unions

Labor unions and their members benefited especially. The NWLB’s “maintenance-of-membership” rule allowed unions to count all new employees as union members and to draw union dues from those new employees’ paychecks, so long as the unions themselves had already been recognized by the employer. Given that most new employment occurred in unionized workplaces, including plants funded by the federal government through defense spending, “the maintenance-of-membership ruling was a fabulous boon for organized labor,” for it required employers to accept unions and allowed unions to grow dramatically: organized labor expanded from 10.5 million members in 1941 to 14.75 million in 1945 (Blum, 140). By 1945, approximately 35.5 percent of the non-agricultural workforce was unionized, a record high.

The War Economy at High Water

Despite the almost-continual crises of the civilian war agencies, the American economy expanded at an unprecedented (and unduplicated) rate between 1941 and 1945. The gross national product of the U.S., as measured in constant dollars, grew from $88.6 billion in 1939 — while the country was still suffering from the depression — to $135 billion in 1944. War-related production skyrocketed from just two percent of GNP to 40 percent in 1943 (Milward, 63).

As Table 2 shows, output in many American manufacturing sectors increased spectacularly from 1939 to 1944, the height of war production in many industries.

Table 2: Indices of American Manufacturing Output (1939 = 100)

1940 1941 1942 1943 1944
Aircraft 245 630 1706 2842 2805
Munitions 140 423 2167 3803 2033
Shipbuilding 159 375 1091 1815 1710
Aluminum 126 189 318 561 474
Rubber 109 144 152 202 206
Steel 131 171 190 202 197

Source: Milward, 69.

Expansion of Employment

The wartime economic boom spurred and benefited from several important social trends. Foremost among these trends was the expansion of employment, which paralleled the expansion of industrial production. In 1944, unemployment dipped to 1.2 percent of the civilian labor force, a record low in American economic history and as near to “full employment” as is likely possible (Samuelson). Table 3 shows the overall employment and unemployment figures during the war period.

Table 3: Civilian Employment and Unemployment during World War II

(Numbers in thousands)

1940 1941 1942 1943 1944 1945
All Non-institutional Civilians 99,840 99,900 98,640 94,640 93,220 94,090
Civilian Labor Force Total 55,640 55,910 56,410 55,540 54,630 53,860
% of Population 55.7% 56% 57.2% 58.7% 58.6% 57.2%
Employed Total 47,520 50,350 53,750 54,470 53,960 52,820
% of Population 47.6% 50.4% 54.5% 57.6% 57.9% 56.1%
% of Labor Force 85.4% 90.1% 95.3% 98.1% 98.8% 98.1%
Unemployed Total 8,120 5,560 2,660 1,070 670 1,040
% of Population 8.1% 5.6% 2.7% 1.1% 0.7% 1.1%
% of Labor Force 14.6% 9.9% 4.7% 1.9% 1.2% 1.9%

Source: Bureau of Labor Statistics, “Employment status of the civilian noninstitutional population, 1940 to date.” Available at http://www.bls.gov/cps/cpsaat1.pdf.

Not only those who were unemployed during the depression found jobs. So, too, did about 10.5 million Americans who either could not then have had jobs (the 3.25 million youths who came of age after Pearl Harbor) or who would not have then sought employment (3.5 million women, for instance). By 1945, the percentage of blacks who held war jobs — eight percent — approximated blacks’ percentage in the American population — about ten percent (Kennedy, 775). Almost 19 million American women (including millions of black women) were working outside the home by 1945. Though most continued to hold traditional female occupations such as clerical and service jobs, two million women did labor in war industries (half in aerospace alone) (Kennedy, 778). Employment did not just increase on the industrial front. Civilian employment by the executive branch of the federal government — which included the war administration agencies — rose from about 830,000 in 1938 (already a historical peak) to 2.9 million in June 1945 (Nash, 220).

Population Shifts

Migration was another major socioeconomic trend. The 15 million Americans who joined the military — who, that is, became employees of the military — all moved to and between military bases; 11.25 million ended up overseas. Continuing the movements of the depression era, about 15 million civilian Americans made a major move (defined as changing their county of residence). African-Americans moved with particular alacrity and permanence: 700,000 left the South and 120,000 arrived in Los Angeles during 1943 alone. Migration was especially strong along rural-urban axes, especially to war-production centers around the country, and along an east-west axis (Kennedy, 747-748, 768). For instance, as Table 4 shows, the population of the three Pacific Coast states grew by a third between 1940 and 1945, permanently altering their demographics and economies.

Table 4: Population Growth in Washington, Oregon, and California, 1940-1945

(populations in millions)

1940 1941 1942 1943 1944 1945 % growth
1940-1945
Washington 1.7 1.8 1.9 2.1 2.1 2.3 35.3%
Oregon 1.1 1.1 1.1 1.2 1.3 1.3 18.2%
California 7.0 7.4 8.0 8.5 9.0 9.5 35.7%
Total 9.8 10.3 11.0 11.8 12.4 13.1 33.7%

Source: Nash, 222.

A third wartime socioeconomic trend was somewhat ironic, given the reduction in the supply of civilian goods: rapid increases in many Americans’ personal incomes. Driven by the federal government’s abilities to prevent price inflation and to subsidize high wages through war contracting and by the increase in the size and power of organized labor, incomes rose for virtually all Americans — whites and blacks, men and women, skilled and unskilled. Workers at the lower end of the spectrum gained the most: manufacturing workers enjoyed about a quarter more real income in 1945 than in 1940 (Kennedy, 641). These rising incomes were part of a wartime “great compression” of wages which equalized the distribution of incomes across the American population (Goldin and Margo, 1992). Again focusing on three war-boom states in the West, Table 5 shows that personal-income growth continued after the war, as well.

Table 5: Personal Income per Capita in Washington, Oregon, and California, 1940 and 1948

1940 1948 % growth
Washington $655 $929 42%
Oregon $648 $941 45%
California $835 $1,017 22%

Source: Nash, 221. Adjusted for inflation using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl

Despite the focus on military-related production in general and the impact of rationing in particular, spending in many civilian sectors of the economy rose even as the war consumed billions of dollars of output. Hollywood boomed as workers bought movie tickets rather than scarce clothes or unavailable cars. Americans placed more legal wagers in 1943 and 1944, and racetracks made more money than at any time before. In 1942, Americans spent $95 million on legal pharmaceuticals, $20 million more than in 1941. Department-store sales in November 1944 were greater than in any previous month in any year (Blum, 95-98). Black markets for rationed or luxury goods — from meat and chocolate to tires and gasoline — also boomed during the war.

Scientific and Technological Innovation

As observers during the war and ever since have recognized, scientific and technological innovations were a key aspect in the American war effort and an important economic factor in the Allies’ victory. While all of the major belligerents were able to tap their scientific and technological resources to develop weapons and other tools of war, the American experience was impressive in that scientific and technological change positively affected virtually every facet of the war economy.

The Manhattan Project

American techno-scientific innovations mattered most dramatically in “high-tech” sectors which were often hidden from public view by wartime secrecy. For instance, the Manhattan Project to create an atomic weapon was a direct and massive result of a stunning scientific breakthrough: the creation of a controlled nuclear chain reaction by a team of scientists at the University of Chicago in December 1942. Under the direction of the U.S. Army and several private contractors, scientists, engineers, and workers built a nationwide complex of laboratories and plants to manufacture atomic fuel and to fabricate atomic weapons. This network included laboratories at the University of Chicago and the University of California-Berkeley, uranium-processing complexes at Oak Ridge, Tennessee, and Hanford, Washington, and the weapon-design lab at Los Alamos, New Mexico. The Manhattan Project climaxed in August 1945, when the United States dropped two atomic weapons on Hiroshima and Nagasaki, Japan; these attacks likely accelerated Japanese leaders’ decision to seek peace with the United States. By that time, the Manhattan Project had become a colossal economic endeavor, costing approximately $2 billion and employing more than 100,000.

Though important and gigantic, the Manhattan Project was an anomaly in the broader war economy. Technological and scientific innovation also transformed less-sophisticated but still complex sectors such as aerospace or shipbuilding. The United States, as David Kennedy writes, “ultimately proved capable of some epochal scientific and technical breakthroughs, [but] innovated most characteristically and most tellingly in plant layout, production organization, economies of scale, and process engineering” (Kennedy, 648).

Aerospace

Aerospace provides one crucial example. American heavy bombers, like the B-29 Superfortress, were highly sophisticated weapons which could not have existed, much less contributed to the air war on Germany and Japan, without innovations such as bombsights, radar, and high-performance engines or advances in aeronautical engineering, metallurgy, and even factory organization. Encompassing hundreds of thousands of workers, four major factories, and $3 billion in government spending, the B-29 project required almost unprecedented organizational capabilities by the U.S. Army Air Forces, several major private contractors, and labor unions (Vander Meulen, 7). Overall, American aircraft production was the single largest sector of the war economy, costing $45 billion (almost a quarter of the $183 billion spent on war production), employing a staggering two million workers, and, most importantly, producing over 125,000 aircraft, which Table 6 describe in more detail.

Table 6: Production of Selected U.S. Military Aircraft (1941-1945)

Bombers 49,123
Fighters 63,933
Cargo 14,710
Total 127,766

Source: Air Force History Support Office

Shipbuilding

Shipbuilding offers a third example of innovation’s importance to the war economy. Allied strategy in World War II utterly depended on the movement of war materiel produced in the United States to the fighting fronts in Africa, Europe, and Asia. Between 1939 and 1945, the hundred merchant shipyards overseen by the U.S. Maritime Commission (USMC) produced 5,777 ships at a cost of about $13 billion (navy shipbuilding cost about $18 billion) (Lane, 8). Four key innovations facilitated this enormous wartime output. First, the commission itself allowed the federal government to direct the merchant shipbuilding industry. Second, the commission funded entrepreneurs, the industrialist Henry J. Kaiser chief among them, who had never before built ships and who were eager to use mass-production methods in the shipyards. These methods, including the substitution of welding for riveting and the addition of hundreds of thousands of women and minorities to the formerly all-white and all-male shipyard workforces, were a third crucial innovation. Last, the commission facilitated mass production by choosing to build many standardized vessels like the ugly, slow, and ubiquitous “Liberty” ship. By adapting well-known manufacturing techniques and emphasizing easily-made ships, merchant shipbuilding became a low-tech counterexample to the atomic-bomb project and the aerospace industry, yet also a sector which was spectacularly successful.

Reconversion and the War’s Long-term Effects

Reconversion from military to civilian production had been an issue as early as 1944, when WPB Chairman Nelson began pushing to scale back war production in favor of renewed civilian production. The military’s opposition to Nelson had contributed to the accession by James Byrnes and the OWM to the paramount spot in the war-production bureaucracy. Meaningful planning for reconversion was postponed until 1944 and the actual process of reconversion only began in earnest in early 1945, accelerating through V-E Day in May and V-J Day in September.

The most obvious effect of reconversion was the shift away from military production and back to civilian production. As Table 7 shows, this shift — as measured by declines in overall federal spending and in military spending — was dramatic, but did not cause the postwar depression which many Americans dreaded. Rather, American GDP continued to grow after the war (albeit not as rapidly as it had during the war; compare Table 1). The high level of defense spending, in turn, contributed to the creation of the “military-industrial complex,” the network of private companies, non-governmental organizations, universities, and federal agencies which collectively shaped American national defense policy and activity during the Cold War.

Table 7: Federal Spending, and Military Spending after World War II

(dollar values in billions of constant 1945 dollars)

Nominal GDP Federal Spending Defense Spending
Year Total % increase total % increase % of GDP Total % increase % of GDP % of federal
spending
1945 223.10 92.71 1.50% 41.90% 82.97 4.80% 37.50% 89.50%
1946 222.30 -0.36% 55.23 -40.40% 24.80% 42.68 -48.60% 19.20% 77.30%
1947 244.20 8.97% 34.5 -37.50% 14.80% 12.81 -70.00% 5.50% 37.10%
1948 269.20 9.29% 29.76 -13.70% 11.60% 9.11 -28.90% 3.50% 30.60%
1949 267.30 -0.71% 38.84 30.50% 14.30% 13.15 44.40% 4.80% 33.90%
1950 293.80 9.02% 42.56 9.60% 15.60% 13.72 4.40% 5.00% 32.20%

1945 GDP figure from “Nominal GDP: Louis Johnston and Samuel H. Williamson, “The Annual Real and Nominal GDP for the United States, 1789 — Present,” Economic History Services, March 2004, available at http://www.eh.net/hmit/gdp/ (accessed 27 July 2005). 1946-1950 GDP figures calculated using Bureau of Labor Statistics, “CPI Inflation Calculator,” available at http://data.bls.gov/cgi-bin/cpicalc.pl. Federal and defense spending figures from Government Printing Office, “Budget of the United States Government: Historical Tables Fiscal Year 2005,” Table 6.1—Composition of Outlays: 1940—2009 and Table 3.1—Outlays by Superfunction and Function: 1940—2009.

Reconversion spurred the second major restructuring of the American workplace in five years, as returning servicemen flooded back into the workforce and many war workers left, either voluntarily or involuntarily. For instance, many women left the labor force beginning in 1944 — sometimes voluntarily and sometimes involuntarily. In 1947, about a quarter of all American women worked outside the home, roughly the same number who had held such jobs in 1940 and far off the wartime peak of 36 percent in 1944 (Kennedy, 779).

G.I. Bill

Servicemen obtained numerous other economic benefits beyond their jobs, including educational assistance from the federal government and guaranteed mortgages and small-business loans via the Serviceman’s Readjustment Act of 1944 or “G.I. Bill.” Former servicemen thus became a vast and advantaged class of citizens which demanded, among other goods, inexpensive, often suburban housing; vocational training and college educations; and private cars which had been unobtainable during the war (Kennedy, 786-787).

The U.S.’s Position at the End of the War

At a macroeconomic scale, the war not only decisively ended the Great Depression, but created the conditions for productive postwar collaboration between the federal government, private enterprise, and organized labor, the parties whose tripartite collaboration helped engender continued economic growth after the war. The U.S. emerged from the war not physically unscathed, but economically strengthened by wartime industrial expansion, which placed the United States at absolute and relative advantage over both its allies and its enemies.

Possessed of an economy which was larger and richer than any other in the world, American leaders determined to make the United States the center of the postwar world economy. American aid to Europe ($13 billion via the Economic Recovery Program (ERP) or “Marshall Plan,” 1947-1951) and Japan ($1.8 billion, 1946-1952) furthered this goal by tying the economic reconstruction of West Germany, France, Great Britain, and Japan to American import and export needs, among other factors. Even before the war ended, the Bretton Woods Conference in 1944 determined key aspects of international economic affairs by establishing standards for currency convertibility and creating institutions such as the International Monetary Fund and the precursor of the World Bank.

In brief, as economic historian Alan Milward writes, “the United States emerged in 1945 in an incomparably stronger position economically than in 1941″… By 1945 the foundations of the United States’ economic domination over the next quarter of a century had been secured”… [This] may have been the most influential consequence of the Second World War for the post-war world” (Milward, 63).

Selected References

Adams, Michael C.C. The Best War Ever: America and World War II. Baltimore: Johns Hopkins University Press, 1994.

Anderson, Karen. Wartime Women: Sex Roles, Family Relations, and the Status of Women during World War II. Westport, CT: Greenwood Press, 1981.

Air Force History Support Office. “Army Air Forces Aircraft: A Definitive Moment.” U.S. Air Force, 1993. Available at http://www.airforcehistory.hq.af.mil/PopTopics/AAFaircraft.htm.

Blum, John Morton. V Was for Victory: Politics and American Culture during World War II. New York: Harcourt Brace, 1976.

Bordo, Michael. “The Gold Standard, Bretton Woods, and Other Monetary Regimes: An Historical Appraisal.” NBER Working Paper No. 4310. April 1993.

“Brief History of World War Two Advertising Campaigns.” Duke University Rare Book, Manuscript, and Special Collections, 1999. Available at http://scriptorium.lib.duke.edu/adaccess/wwad-history.html

Brody, David. “The New Deal and World War II.” In The New Deal, vol. 1, The National Level, edited by John Braeman, Robert Bremmer, and David Brody, 267-309. Columbus: Ohio State University Press, 1975.

Connery, Robert. The Navy and Industrial Mobilization in World War II. Princeton: Princeton University Press, 1951.

Darby, Michael R. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941.” Journal of Political Economy 84, no. 1 (February 1976): 1-16.

Field, Alexander J. “The Most Technologically Progressive Decade of the Century.” American Economic Review 93, no 4 (September 2003): 1399-1414.

Field, Alexander J. “U.S. Productivity Growth in the Interwar Period and the 1990s.” (Paper presented at “Understanding the 1990s: the Long Run Perspective” conference, Duke University and the University of North Carolina, March 26-27, 2004) Available at www.unc.edu/depts/econ/seminars/Field.pdf.

Fischer, Gerald J. A Statistical Summary of Shipbuilding under the U.S. Maritime Commission during World War II. Washington, DC: Historical Reports of War Administration; United States Maritime Commission, no. 2, 1949.

Friedberg, Aaron. In the Shadow of the Garrison State. Princeton: Princeton University Press, 2000.

Gluck, Sherna Berger. Rosie the Riveter Revisited: Women, the War, and Social Change. Boston: Twayne Publishers, 1987.

Goldin, Claudia. “The Role of World War II in the Rise of Women’s Employment.” American Economic Review 81, no. 4 (September 1991): 741-56.

Goldin, Claudia and Robert A. Margo. “The Great Compression: Wage Structure in the United States at Mid-Century.” Quarterly Journal of Economics 107, no. 2 (February 1992): 1-34.

Harrison, Mark, editor. The Economics of World War II: Six Great Powers in International Comparison. Cambridge: Cambridge University Press, 1998.

Higgs, Robert. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” Journal of Economic History 52, no. 1 (March 1992): 41-60.

Holley, I.B. Buying Aircraft: Materiel Procurement for the Army Air Forces. Washington, DC: U.S. Government Printing Office, 1964.

Hooks, Gregory. Forging the Military-Industrial Complex: World War II’s Battle of the Potomac. Urbana: University of Illinois Press, 1991.

Janeway, Eliot. The Struggle for Survival: A Chronicle of Economic Mobilization in World War II. New Haven: Yale University Press, 1951.

Jeffries, John W. Wartime America: The World War II Home Front. Chicago: Ivan R. Dee, 1996.

Johnston, Louis and Samuel H. Williamson. “The Annual Real and Nominal GDP for the United States, 1789 – Present.” Available at Economic History Services, March 2004, URL: http://www.eh.net/hmit/gdp/; accessed 3 June 2005.

Kennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999.

Kryder, Daniel. Divided Arsenal: Race and the American State during World War II. New York: Cambridge University Press, 2000.

Lane, Frederic, with Blanche D. Coll, Gerald J. Fischer, and David B. Tyler. Ships for Victory: A History of Shipbuilding under the U.S. Maritime Commission in World War II. Baltimore: Johns Hopkins University Press, 1951; republished, 2001.

Koistinen, Paul A.C. Arsenal of World War II: The Political Economy of American Warfare, 1940-1945. Lawrence, KS: University Press of Kansas, 2004.

Lichtenstein, Nelson. Labor’s War at Home: The CIO in World War II. New York: Cambridge University Press, 1982.

Lingeman, Richard P. Don’t You Know There’s a War On? The American Home Front, 1941-1945. New York: G.P. Putnam’s Sons, 1970.

Milkman, Ruth. Gender at Work: The Dynamics of Job Segregation by Sex during World War II. Urbana: University of Illinois Press, 1987.

Milward, Alan S. War, Economy, and Society, 1939-1945. Berkeley: University of California Press, 1979.

Nash, Gerald D. The American West Transformed: The Impact of the Second World War. Lincoln: University of Nebraska Press, 1985.

Nelson, Donald M. Arsenal of Democracy: The Story of American War Production. New York: Harcourt Brace, 1946.

O’Neill, William L. A Democracy at War: America’s Fight at Home and Abroad in World War II. New York: Free Press, 1993.

Overy, Richard. How the Allies Won. New York: W.W. Norton, 1995.

Rockoff, Hugh. “The Response of the Giant Corporations to Wage and Price Control in World War II.” Journal of Economic History 41, no. 1 (March 1981): 123-28.

Rockoff, Hugh. “Price and Wage Controls in Four Wartime Periods.” Journal of Economic History 41, no. 2 (June 1981): 381-401.

Samuelson, Robert J., “Great Depression.” The Concise Encyclopedia of Economics. Indianapolis: Liberty Fund, Inc., ed. David R. Henderson, 2002. Available at http://www.econlib.org/library/Enc/GreatDepression.html

U.S. Department of the Treasury, “Fact Sheet: Taxes,” n. d. Available at http://www.treas.gov/education/fact-sheets/taxes/ustax.shtml

U.S. Department of the Treasury, “Introduction to Savings Bonds,” n.d. Available at http://www.treas.gov/offices/treasurer/savings-bonds.shtml

Vander Meulen, Jacob. Building the B-29. Washington, DC: Smithsonian Institution Press, 1995.

Watkins, Thayer. “The Recovery from the Depression of the 1930s.” 2002. Available at http://www2.sjsu.edu/faculty/watkins/recovery.htm

Citation: Tassava, Christopher. “The American Economy during World War II”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/the-american-economy-during-world-war-ii/

Arsenal of World War II: The Political Economy of American Warfare, 1940-1945

Author(s):Koistinen, Paul A.C.
Reviewer(s):Tassava, Christopher

Published by EH.NET (January 2005)

Paul A.C. Koistinen, Arsenal of World War II: The Political Economy of American Warfare, 1940-1945. Lawrence, KS: University Press of Kansas, 2004. xiii + 657 pp. $49.95 (cloth), ISBN: 0-7006-1308-0.

Reviewed for EH.NET by Christopher Tassava, Metropolitan State University.

In this monumental and magisterial work, Paul A.C. Koistinen, professor emeritus at California State University-Northridge, addresses World War II, the key moment in the history of the subject he has spent a lifetime studying: “the political economy of American war — the means that the nation has employed to mobilize its economic resources for defense and hostilities” (p. 1). Over the course of Arsenal of World War II, Koistinen demonstrates, more deeply and broadly than any other scholar, how the federal government directed the American war effort.

Arsenal of World War II is not a general history of American mobilization for World War II, but rather an authoritative examination of five key organizations: the National Defense Advisory Commission, the Office of Production Management, the Supply Priorities and Allocations Board, the War Production Board, and finally, the Office of War Mobilization. The NDAC is the subject of the book’s first and briefest part, OPM/SPAB feature in the second part, and WPB/OWM are the focus of the third and longest part. (Two additional chapters address labor supply and labor relations from 1940 to 1945.)

These major organizations and the scores of others that composed the “alphabet soup” of the wartime federal government were tied together in constituting but also opposing “the growing mobilization alliance between the corporate community, whose members predominated in the WPB and its forerunners, and the armed services, which were responsible for most wartime demand” (p. 8). The nearly two hundred-page section on the War Production Board and Office of War Mobilization is particularly useful as an insightful study of how these two agencies balanced the competing demands of the military services, industrial contractors, and civilians.

As Koistinen explicitly points out in numerous places and implicitly demonstrates with the book’s overall argument, the WPB/OWM achieved only limited success in directing the war economy because both organizations had to work against the strong alliance of the armed forces and industry. “The military remained acutely aware that its long-run interests rested with the corporate structure. … Industry reciprocated since the army and navy negotiated and let contracts. Consequently, more often than not, the armed services and corporate America stood together on mobilization policy even though, at times, their immediate interest differed” (p. 503). As a result, “the World War II American military assumed levels of power that were unusual, and unwise, in a democratic country” (p. 505). Koistinen does not here explore the implications of this bold assertion, which seems to point back to the book’s scholarly genesis in the charged academic climate of the 1960s. Rather, Koistinen uses the book to show how the military and industry cooperated to block the ambitions of the civilian mobilization agencies from NDAC to OWM. Koistinen’s analytic skill knits together the numerous battles between the military and its would-be overseers, orienting them to his overarching argument and preventing Arsenal of World War II from devolving into an unreflective chronicle of that war-within-the-war.

By so ably summarizing and analyzing particular episodes of war mobilization, Koistinen also provides invaluable thumbnail sketches of key episodes in the history of American mobilization. In this sense, the book can serve as a kind of analytic reference work on American mobilization. Two entries in this ostensible encyclopedia are especially impressive. First, Koistinen provides an excellent account of the 1942 feasibility dispute, the War Production Board’s greatest trial by fire (pp. 303-314). The military services predictably argued that American victory depended on all-out production for their needs in 1943, while the WPB held that such a push would irreversibly destabilize the economy, harming the long-term war effort. After bitter in-fighting, the WPB prevailed; more-or-less rational planning of military and civilian requirements obtained throughout the rest of the war — but at great cost, for losing the feasibility debate permanently hardened the military against the WPB. In a second beautifully succinct look at a key moment in mobilization, Koistinen contextualizes the long debate over national service legislation, which would have mandated the conscription of civilian workers for industrial jobs that the military felt were underserved (pp. 390-401). Strongly advocated by the armed forces but few others, the “labor draft” dispute clearly demonstrated the military’s interest in maximizing its control over the civilian economy (and its distrust of organized labor). The debate only withered in 1945 when the Allies’ imminent victory showed that civilian administration of the labor-supply system had worked. In this pair of case studies and numerous others — such as his running castigation of General Brehon Somervell, the blowhard nemesis of civilian administrators throughout the war — Koistinen shows his mastery of the minutiae of American mobilization.

As is unfortunately common in contemporary publishing, the book suffers from numerous relative minor typographical flaws (including an orphaned parenthesis on page 1!) and, more troublingly, a binding error which resulted in the omission of pages 211-242 in the review copy. More substantively, Koistinen does not — and, truthfully, could not — adequately address every major mobilization agency. Despite his claim that “no significant … administration involved in economic mobilization … is neglected” (p. 8), for instance, Koistinen does not substantially examine the U.S. Maritime Commission. Shipbuilding ranked second only to aircraft manufacturing as a sector of the mobilized economy, and the Maritime Commission was responsible for forty percent of all shipbuilding, yet this sibling of the Army and Navy appears only briefly in Arsenal of World War II. (These statistics come from Frederic Lane, Ships for Victory: A History of Shipbuilding under the U.S. Maritime Commission in World War II [Baltimore: Johns Hopkins University Press, 1951], 10).

Overall, however, these issues are more than offset by the density and clarity of the content of Arsenal of World War II and by other features of the book, from its lucid organization and prose to Koistinen’s substantial endnotes and his useful bibliographic essay. Even dedicated students of World War II’s political economy will profit from the essay, which charts Koistinen’s use of sources such as the government’s official postwar histories and key primary records like those in the U.S. National Archives, among others.

Arsenal of World War II is the fourth in a projected five-volume series; the previous three works covered the periods from 1606-1865 (Beating Plowshares into Swords, 1996), 1865-1919 (Mobilizing for Modern War, 1997), and 1920-1939 (Planning War, Pursuing Peace, 1998). The fifth will deal with the Cold War. Judging by the scale and scope of Koistinen’s accomplishment here, students of the institutional and political-economic underpinnings of American warfare should eagerly anticipate the final volume in Koistinen’s series.

A word of caution, however: readers interested in the social or cultural aspects of America’s engagement in World War II will here find little of direct interest. They should look first to other overviews of American culture and society during the war (David Kennedy’s recent Freedom from Fear [1999], John Morton Blum’s classic V Was for Victory [1976], or even Richard Lingeman’s dated but useful Don’t You Know There’s a War On? [1970]). With that grounding, they can then come back to Koistinen for a masterful account of the war’s domestic political-economic backdrop, a chronicle which has no peer in the current literature.

Christopher Tassava, Ph.D., is a member of the community faculty at Metropolitan State University (St. Paul, MN). He is currently revising his dissertation, a study of World War II merchant shipbuilding on San Francisco Bay, for publication.

Subject(s):Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

Author(s):Edwards, Sebastian
Reviewer(s):Richardson, Gary

Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold. Princeton: Princeton University Press, 2018. xxxiii + 252 pp. $30 (cloth), ISBN: 978-0-691-16188-4.

Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California at Irvine.

 
The risk-free rate of return on investments is often considered to be the yield on United States government debt. “The risk-free rate is hypothetical,” Investopedia indicates, “as every investment has some type of risk associated with it. However, T-bills [United States Treasury debt obligations with a maturity of 52 weeks or less] are the closest investment possible to being risk-free for a couple of reasons.” The first is “the U.S. government has never defaulted on its debt obligations, even in times of severe economic stress.” Similar statements appear in Wikipedia’s entry on the risk-free interest rate as well as in scores of economics and finance textbooks used around the world. Sebastian Edwards’ new book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold, questions this concept underlying modern financial markets by asserting that the United States defaulted on federal debt during the 1930s, when it withdrew monetary gold from circulation and abrogated the gold clause in contracts, both public and private.

Before I delve into the details of Edwards’ insightful study, I want to give you an overall assessment of the book It is fascinating, well-written, and thoroughly researched. It provides new perspective on an important era of American history. It discusses the ideas, personalities, politics, economics, and finance underlying the principal policies by which the Roosevelt administration resuscitated the United States economy after the catastrophic contraction of the early 1930s. An academic press published the book, but the clarity of its prose and vividness of the narrative make it accessible to a general audience. The book should and will be widely read. It’s worth pondering and debating, and I will debate some aspects of it later in this review.

Edwards’ book asks provocative questions about fundamental features of the U.S. and international financial systems. The author lists these questions at two points in the book: the end of the introduction and beginning of the conclusion. The lists contain fifteen total queries. A short summary is:
• Did the United States default on federal government debt in 1934 when it abrogated the gold clause for government bonds (particularly the fourth Liberty Bond)?
• Why did the federal government abrogate the gold clause? Was this action necessary?
• Who made the key decisions during this episode and how did they justify their actions?
• What were the consequences for investors and for the economy as a whole, both in the United States and abroad?
• Could this happen again?

Edwards answers these questions over the course of 17 chapters plus an introduction, an appendix, a timeline, and a list describing the men around whom the story revolves. The introduction lays out the issues of interest. Chapters 1 through 15 narrate the story. The narrative revolves around policymakers, such as President Franklin Roosevelt, Senator Carter Glass, and members of the Supreme Court, and the men who advised them, including Roosevelt’s Brain Trust, whose initial members included Raymond Moley and Adolf Berle, law professors from Columbia University and Rexford Tugwell, an economics professor at Columbia. The narrative describes the decisions that these men made (or had to make), their rationales for making these decisions, and the state of knowledge and state of the world at the times the men made these decisions.

The narrative starts in March 1932, during the economic downturn now known as the Great Depression. A few pages describe the poverty and desperation imposed upon people from all walks of life. Nearly a quarter of the labor force experienced unemployment. Commodity prices declined more than half. These declines proved particularly hard on men and women running small businesses, such as family farmers who made up a quarter of the United States population. Declining farm prices accentuated farmers’ debt burden, since the nominal value of debts remained fixed. This forced farmers who wanted to pay their mortgages and crop loans to double production (which was often impossible) or cut consumption (particularly of durable goods like cars, radios, and clothing) — and forced other farmers (and eventually almost all farmers) to stop paying their debts, default on their loans, and face bankruptcy, which often resulted in the loss of lands and livelihoods.

Chapters 1 through 4 cover Roosevelt’s campaign platform and policies and the economic turmoil from November 1932 through February 1933. During these last five months of the Hoover administration, a nationwide panic drained funds from the banking system and gold from the vaults of the Federal Reserve. The public feared for the safety of deposits, and rushed to convert their claims against banks into coins and cash. The public (particularly foreign investors) also feared for the value of the dollar, since they anticipated that the Roosevelt administration might lower the gold content of U.S. currency or leave the gold standard all together, as had Britain and numerous other nations. In March, gold outflows forced the Federal Reserve Bank of New York below its gold reserve requirement. To prevent the New York Fed from shutting its doors, the newly inaugurated President Roosevelt declared a national banking holiday. This segment of the story ends by describing the policies that the Roosevelt administration implemented as it resuscitated the financial system and sparked economic recovery.

This review will not go into details about decisions and the logic underlying them. For that information, you should read the book, which presents the materials cogently and clearly. You may also peruse other recent readable treatments on the topic, including The Defining Moment (Alter, 2006), FDR: The First Hundred Days (Badger, 2008), Nothing to Fear (Cohen, 2009), and Freedom from Fear (Kennedy, 1999). All of these cover similar material and reach similar conclusions. I also recommend the memoirs of Herbert Hoover and Roosevelt’s principal advisors. A list appears in Edwards’ bibliography. To it, I recommend adding the memoir of Jesse Jones, who was head of the Reconstruction Finance Corporation, Fifty Billion Dollars: My Thirteen Years with the RFC (1951).

Chapters 5 through 10 describe the Roosevelt administration’s efforts to help the economy recover from the spring of 1933 through the winter of 1934. The administration believed a key cause of the catastrophic contraction was the devaluation of the dollar and decline in prices — particularly of farm commodities — that occurred during the 1920s and early 1930s. Prices of wholesale goods fell an average of 25% between 1926 and 1933. Consumer prices fell by the same amount. The average price of farm crops fell more than 66%. Declining prices made it difficult for farmers and other producers to earn sufficient profits to pay their debts, which were fixed in nominal terms, forcing families and firms to cut consumption and investment, in order to avoid bankruptcy, or forcing families and firms to default on their debts, which was often worse for them and which also put banks out of business, restricting the availability of credit, triggering banking panics, and leading to further economic contraction. The administration sought to alleviate this cycle of debt-deflation by convincing (or forcing) individuals and firms to redeposit funds in banks, encouraging banks to lend, and refilling the Federal Reserve’s vaults with gold. All of these actions would expand the money supply and eventually raise prices.

The administration also sought to speed the process by directly influencing commodity prices, particularly those traded on international markets, which had fallen substantially due to foreign governments’ decisions to devalue their own currencies, usually by abandoning the gold standard and allowing the price of their currencies to be determined by market forces. The quickest way to raise commodity prices and alter the exchange rate was to change the dollar price of gold. The federal government had lowered and raised gold’s dollar price in the past. The constitution provided Congress with the power to do so. Congress authorized the president to act, by raising the dollar price of gold up to 100% (or synonymously by cutting the gold content of dollar coins up to 50%), with the Thomas Amendment to the Agricultural Adjustment Act in May 1933. The Roosevelt administration used these powers to the utmost, periodically and persistently raising gold’s dollar price from the spring of 1933 through the winter of 1934. Roosevelt’s gold program concluded in January 1934, with the passage of the Gold Reserve Act, which set gold’s official price at $35 per troy ounce.

Gold clauses in contracts impeded this policy. An example was printed on Liberty Bonds: “The principal and interest hereof are payable in United States gold coin of the present standard of value.” Clauses like this were common in public and private contracts. Their intent was to protect creditors from declines in the value of currency or inflation, which is the same phenomenon but stated as an increase in the average price of goods. Gold clauses ensured lenders that they would be repaid with currency or gold coins with the same real value, in terms of the goods and services that they could purchase, as the funds that they had lent.

Gold clauses had a pernicious effect, however, when deflations and devaluation decisions of foreign governments reduced prices and economic activity. Then, gold clauses prevented governments from quickly and effectively remedying the situation by altering the money supply, interest rates, exchange rates, and prices to push the economy back toward equilibrium. In Chapter 16, Edwards admits monetary expansion was the optimal policy to pursue. He “strongly” believes it was the “main force behind the recovery” (p. 188). He indicates, correctly, that this is the consensus of scholars who have studied the issue. He offers no alternative. The Roosevelt administration understood this problem, and on May 29, convinced Congress to void gold clauses in all contracts retroactively and in the future.

Chapters 5 through 10 do a good job of conveying this material and describing the thought-process of the Roosevelt administration as it struggled to make difficult decisions in real time with limited information. The chapters reflect the conventional wisdom found in canonical accounts of this period including Milton Friedman and Anna Schwartz’s (1960) Monetary History of the United States, Peter Temin’s (1989) Lessons from the Great Depression, and Barry Eichengreen’s Golden Fetters (1992). The chapters also do a good job of describing concerns and criticisms of Roosevelt’s recovery plans. Perhaps as a narrative device, the chapters do not tell you who was right. That material appears one hundred pages later in Chapter 16.

Chapters 11 to 15 contain the novel part of the narrative. They describe investors’ reactions to Roosevelt’s gold policies and the abrogation of the gold clause. Investors quickly sued in state and federal courts, demanding that borrowers repay debts with gold coin, as required by gold clauses, rather than currency, as determined by Congress. Courts consistently ruled against plaintiffs, usually indicating that the Constitution gave Congress the power “to coin money and regulate the value thereof” and to determine what was legal tender for the discharge of public and private debts. Plaintiffs appealed these decisions, and the cases quickly reached the Supreme Court.

American Default’s coverage of these court cases is seminal and stimulating. I know the literature on this topic well. As the official Historian of the Federal Reserve System, I wrote essays on “Roosevelt’s Gold Program” and the “Gold Reserve Act of 1934” which appear on the Federal Reserve’s historical web site. I have read much of what scholars have published on this topic. I know of no comparable source for information on these court cases, the arguments presented by the plaintiffs and defendants, and the rationale underlying the Supreme Court’s confusing decision that Congress’s abrogation of the gold in private contracts was constitutional while Congress’s abrogation of the gold clause for government bonds, particularly the Liberty Bonds, was constitutional in some ways but unconstitutional in others, did not harm the plaintiffs, and therefore would not be overturned by the courts.

Now, we get to one point on which I disagree with the author. Edwards clearly believes the United States federal government defaulted on its debts. The Supreme Court equivocated, but generally seemed to think that the United States did not default, and I agree with the Supreme Court. Let me explain.

Merriam-Webster’s dictionary defines a default as either a (1) failure to do something required by duty or law or (2) a failure to pay financial debts. The United States Supreme Court decision in the gold cases indicated that the federal government defaulted in the first sense. It did not fulfill a promise printed on the bonds, which was to literally repay bondholders with United States gold coins at the standard of value that prevailed when the bonds were issued in 1918. At that time, the basic gold coin was the Eagle. It was worth $10 and contained 0.48375 troy ounces of gold and 0.05375 troy ounces of copper. So, a Liberty Bond with a face value of $100 promised upon maturity payment of 10 gold Eagles containing a total of 4.8375 troy ounces of gold and 0.5375 troy ounces of copper. When Liberty Bonds matured in 1938, however, the government gave bondholders neither the Eagles nor the metals that they contained.

The Supreme Court ruled that the federal government did not default in the second sense. The government fully paid its financial debts. The latter conclusion requires explanation, particularly because the book emphasizes the “American Default” aspect of the Supreme Court’s decision. The Supreme Court justified this conclusion based upon two arguments originally advanced by the federal government. The first argument began with the fact that in 1933, the federal government had withdrawn all monetary gold from circulation and paid in return paper currency at the standard of value which had prevailed since 1900. This meant that an individual holding 10 Eagle coins had to give them to the government and accept $100 in paper currency in return. The government argued that Liberty bond holders could and should be treated the same way as everyone else in the United States. In a hypothetical scenario, when the bonds matured, the government would pay bondholders the gold coins as promised, but then the government would also immediately confiscate those coins and compensate the former bondholders with currency at the same rate as everyone else had been compensated a few years before. This hypothetical sequence of transactions was legal. The U.S. Constitution enumerated Congress’s power to determine the standards of coinage and legal tender. These enumerated powers enabled Congress to convert gold coins to paper currency and/or redefine the standards of value and objects accepted as payment for public and private debts. If the government executed this hypothetical sequence of transactions when the bonds matured in 1938, an individual who had purchased a $100 Liberty Bond in 1918 would in the end receive $100 in currency. The Supreme Court ruled that it was acceptable for the government to give that currency directly to the bondholders upon maturity, rather than go to the hassle of giving them gold coins, taking them back, and then paying the currency to them.

To understand the second argument that abrogating the gold clause did not involve a financial default, it may help to step back from the legal technicalities and think of the repayment in an economic sense. The purpose of the gold clause was the protect bond holders from a fall in the value of American currency, a phenomenon known as inflation. The clause promised that individuals who invested in the United States would be repaid with dollars whose real value in terms of goods and services was equivalent to the real value of the dollars with which they purchased the bonds. Did the United States government do this? The answer is yes. The purchasing power of the dollar rose four percent between 1918, when the fourth Liberty Bond was issued, and 1938, when the fourth Liberty Bond matured. So, an American citizen who in 1918 purchased a $100 Liberty Bond received in 1938 funds sufficient to purchase goods and services that would have cost $104 in 1918. The government also paid 4.5% interest each year along the way. So, the government did honor its pledge to maintain the purchasing power of the funds entrusted to it by purchasers of Liberty Bonds and return that to them plus interest.

What about foreigners? They owned many U.S. bonds. The largest group of foreign investors were English. Their position is worth considering. In October 1918, when the Liberty Bonds were issued, the dollar-pound exchange rate was 4.77. An English investor could exchange ₤1 for $4.77 and purchase a $100 Liberty Bond for ₤20.96. In October 1938, when the Liberty Bonds matured, the dollar-pound exchange rate was 4.77. So, an English investor who redeemed his bond for $100 in U.S. currency could convert that into ₤20.96, exactly what they had paid for it, and with those funds, they could buy goods which would have been valued at ₤46.69 in 1918, since the purchasing power of the pound had risen substantially since that time. So, English investors, like many others overseas, made large profits from investing in Liberty Bonds.

Plaintiffs in the gold clause cases before the Supreme Court hoped that their suit would allow them to reap even higher returns. They argued that the government should be required to pay them with old gold coins, like the Eagle, at the 1918 standard of value, and then they should be able to convert the Eagles to dollars at the price established by the Gold Reserve Act of 1934 ($35 per troy ounce of gold). The government countered that this plan was infeasible. There was not enough gold in the U.S. to pay gold to all Liberty Bond holders. That plan was also illegal. The law no longer allowed the public to own, save, or spend monetary gold. In that case, the plaintiffs argued, they should receive the amount which would result from a hypothetical sequence of transactions where the government gave them gold coins at the 1918 standard of value (as stated on the bonds) and then immediately converted that gold to currency at the 1934 standard of value. This sequence would pay $166.67 on a $100 Liberty Bond upon maturity in 1938, a sum sufficient to purchase goods and services which would have cost $174.19 in 1918. The majority of the Supreme Court rejected this claim and referred to it as unjust enrichment.

Chapter 16 discusses the consequences of the abrogation of the gold clause. At the time, opponents of the policy contended that its effects could be catastrophic. Contracts would not be trusted. Creditors would no longer want to extend loans. Interest rates would rise. Investment would fall. The economy would stagnate. Edwards looks for evidence of these ailments in data on investment, borrowing, bonds, stocks, prices, interest rates, and output and finds none. After abrogation, the government actually found it easier to borrow, rather than harder. Edwards concludes that there is “no evidence of distress or dislocation in the period immediately following the abrogation, or the Court ruling. … it is possible that if the gold clause had not been abrogated, output and investment would have recovered faster than they did, and that the costs of borrowing would have declined even more. Those outcomes are possible, but in my view, highly unlikely” (p. 195).

The reason abrogation had no detectable impact, Edwards concludes, was that it was an excusable default. Excusable defaults occur under circumstances “when the market understands that a debt restructuring is, indeed, warranted, and beneficial for (almost) everyone involved in the marketplace” (p. 197), when the restructuring is done according to existing legal rules, and when the default is largely a domestic matter, with few foreigners involved. Excusable defaults do not stigmatize sovereigns, since they do not change borrowers’ expectations of sovereigns’ probability of repaying future debts. I agree with Edwards that the abrogation of the gold clause fit these circumstances, and I argued, in the preceding paragraphs, that the abrogation fit another classic characteristic of an excusable default. Bondholders received payment equal to (or better than) what they expected when the debt was issued. Since past holders of Liberty Bonds received the repayments that they expected when they purchased the bonds on origination in 1918, despite the tremendous shocks to the United States and world economies between then and maturity in 1938, future bondholders had no reason to doubt that their expectations would not be met.

Could it happen again? The author asks that question at the beginning and end of the book (and in the title to Chapter 17), because he says “among all questions, [it was] the one that kept coming back again and again” (p. 201). In emerging economies, Edwards indicates, “situations that mirror what happened in the United States during 1933-1935 have occurred recently in a number of … countries, and it is almost certain that they will continue to arise in the future” (p 203). Examples from the recent past include Argentina, Mexico, Turkey, Russia, Indonesia, and Chile. Advanced economies are not immune from these economic forces. In 2008, Iceland faced “a gigantic external crisis with a massive devaluation and a complete collapse of the banking sector. It took almost ten years for Iceland to recover” (p. 205). Greece continues to struggle with a similar situation. So do other European nations, such as Portugal, Italy, and Spain. These nations may be tempted to leave the Eurozone, reintroduce independent currencies, and devalue their exchange rate in order to speed economic recovery. But, any nation that tries (or is forced) to do this will struggle with contracts, all of which are written requiring payment in Euros. If these are rewritten to permit repayment in new currencies of lesser value, the issue is sure to end up in domestic and foreign courts as well as the World Bank’s tribunal for international investment disputes.

While the rest of the world may be in danger of experiencing events similar to the U.S. abrogation crisis of the 1930s, Edwards argues that “it is almost impossible that something similar will happen again in the United States” (p. 201). The main reasons are the change in the monetary system and the exchange rate regime. The United States’ exchange rates are now determined by market forces. Gold no longer underlies the monetary system. Most contracts are denominated in lawful currency, not gold, commodities, or foreign currency. Even if a repeat is extremely unlikely, the chance of the United States restructuring its debt, Edwards argues, is not zero. The federal debt outstanding is now nearly equal to gross domestic product. A tenth of the debt is fixed in real terms, because upon maturity, bondholders receive a premium payment linked to increases in the Consumer Price Index. The implicit debt for future entitlement, particularly Medicare, Medicaid, and Society Security, exceeds 400 percent of gross domestic product. There is little agreement on how to pay for these promises, Edwards notes, and at some point in the not-too-distant future, the U.S. government may be forced to restructure these payments. This potential crisis, Edwards argues, differs from the crisis of the 1930s, because the abrogation crisis stemmed from deflation, exchange rates, and the structure of the monetary system. The modern problem arises from promises made in the present for the future delivery of services.

On all of these points, I agree with Edwards. I am, however, less hopeful for the future. The unsustainable federal debt is not an accident. It was consciously created by Republican politicians to justify reducing (or eliminating) future federal entitlements. With Republicans in control of all three branches [When the review was published by Cato, this was true. However, Republicans now control only half of Congress] of the federal government, taxes cut, deficits up, and a recession on the horizon, the day of reckoning may be upon us in the near future. I anticipate a massive abrogation of federal medical and retirement entitlements within the next decade and sooner if Republicans retain control of Congress and the Presidency through 2020.

The roots of the past and current crises may have more in common than Edwards indicates. Most payments for federal entitlement programs are indexed for inflation. Federal entitlement obligations are, in other words, guaranteed in real terms, just like payments for Liberty Bonds one hundred years ago. They cannot be adjusted on aggregate by monetary policies that generate inflation. The can only be adjusted through the legislature and the courts. On this point, Edwards’ American Default ends on a high note. The ability of the United States to deal with the crisis of the 1930s and the abrogation of the gold clause demonstrates the strength of our legislative and judicial institutions. Given these, it is likely that our nation will be able to overcome future federal financial restructurings. Memories of those events will fade. The will be forgotten just like the events that Edwards masterfully recounts in his book, and America’s federal debt will remain the risk-free standard for the rest of the world.

References:
Alter, Jonathan. The Defining Moment: FDR’s Hundred Days and the Triumph of Hope. Simon & Schuster, 2006.

Badger, Anthony J. FDR: The First Hundred Days. Hill and Wang, 2008.

Cohen, Adam. Nothing to Fear: FDR’s Inner Circle and the Hundred Days That Created Modern America. Penguin Press, 2009.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

Friedman, Milton and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Kennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. Oxford University Press, 1999.

Investopedia. “Risk-Free Rate of Return”. Retrieved June 21, 2018.

Investopedia. “How is the risk-free rate determined when calculating market risk premium?” https://www.investopedia.com/ask/answers/040915/how-riskfree-rate-determined-when-calculating-market-risk-premium.asp. Retrieved June 21, 2018

Richardson, Gary, Michael Gou, and Alejandro Komai. “Gold Reserve Act of 1934.” Federal Reserve History Web Site. Retrieved June 26, 2018. https://www.federalreservehistory.org/essays/roosevelts_gold_program.

Richardson, Gary, Michael Gou, and Alejandro Komai. “Roosevelt’s Gold Program.” Federal Reserve History Web Site. Retrieved June 26, 2018. https://www.federalreservehistory.org/essays/roosevelts_gold_program.

Temin, Peter. Lessons from the Great Depression. MIT Press, 1989.

Wikipedia. “Risk-Free Interest Rate.” https://en.wikipedia.org/wiki/Risk-free_interest_rate. Retrieved June 21, 2018

This review was originally published in Regulation, Fall 2018.
Gary Richardson was the editor of the Federal Reserve’s historical web site, https://www.federalreservehistory.org/, on which he wrote a series of articles about the Roosevelt Administration’s gold policies. He is the author of numerous academic articles on the history of money, banking, and the Federal Reserve.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Oxford Handbook of American Economic History

Editor(s):Cain, Louis P.
Fishback, Price V.
Rhode, Paul W.
Reviewer(s):Rosenbloom, Joshua L.

Published by EH.Net (December 2018)

Louis P. Cain, Price V. Fishback and Paul W. Rhode, editors, The Oxford Handbook of American Economic History. New York: Oxford University Press, 2018. xiii + 961 pp. $300 (hardcover, 2 volumes), ISBN: 978-0-19-994797-3.

Reviewed for EH.Net by Joshua L. Rosenbloom, Department of Economics, Iowa State University.

 
Over the past several decades economic historians have substantially broadened and deepened our understanding of the development of the American economy. Students or scholars seeking an overview of the state of the field have, however, had few options when looking for a convenient and comprehensive overview. Jeremy Atack and Peter Passell’s New Economic View of American History (second edition) is now more than two decades old, and more up-to-date textbooks are pitched at too low a level to be of much help. The Oxford Handbook of American Economic History thus fills an important gap, providing a one-stop reference that distills and summarizes much of the recent scholarship.

The editors, Louis Cain (Loyola University Chicago and Northwestern University), Price Fishback (University of Arizona) and Paul Rhode (University of Michigan) have all made important contributions to our understanding of American economic history; and they have assembled an all-star cast of contributors. After an introductory chapter, the two volumes contain 37 chapters divided into five topical sections covering population and health; production and structural change; factors of production; technology and urbanization; and government and economic policy. Each of the first four sections contains six chapters, while the final section includes a total of thirteen. The chapters in this final section make something of an odd mix, and it might have been helpful to split this section between the chapters exploring longer-run trends and themes and those focused on specific episodes such as the New Deal or the Civil War.

With the exception of a few of the chapters in the final section, which address chronologically specific events — such as the Constitution, the New Deal, the Civil War and the two World Wars — the great majority of chapters focus on particular topic across the full-span of U.S. economic history. The content is consistently detailed and each chapter includes extensive references. As such, these accounts will be extremely useful for readers seeking to dip into this work to get a quick sense of the state of scholarship on a particular topic. I suspect, however, that few readers will want to make their way through these two volumes cover to cover.

Readers wanting to get an understanding of a particular period or those seeking to understanding the larger narrative of U.S. economic development will find the Oxford Handbook less helpful. Someone seeking to understand the Great Depression, for example, would need to integrate information from chapters on the New Deal, welfare policy, banking and monetary policy and the record of economic growth and business cycles among others.

Despite the breadth and depth of coverage, some topics appear to have fallen between the cracks. Among these the most glaring for this reader was the limited attention devoted to the economics and politics of slavery and race. In a similar vein, while there is a chapter devoted to the topic of executive compensation contributed by Carola Frydman, recent work on the broader topic of income and wealth inequality receives little attention. Finally, while the chronological scope of the essays in this collection varies, the nearly two centuries of American economic history preceding American independence is hardly discussed.

These caveats aside, there is a great deal of useful information to be found in these volumes. The essays collected here are consistently engaging, well-written and provide extensive references for readers wishing to dig deeper. It would be impossible within the scope of this review to touch on each chapter, and by singling out a small number of chapters for specific mention I risk offending authors of the remaining chapters. Yet several of the essays do stand out for going beyond a review of the state of the literature and suggesting fresh perspectives or reframing a topic. Price Fishback’s chapter on the New Deal is one. Fishback has been at the center of efforts to digitize and make available geographically disaggregated data on New Deal policies and economic outcomes, and has authored or co-authored an overwhelming volume of scholarship related to this topic. His chapter offers a concise and accessible summation of the results of this research program. It also provides a clear and accessible illustration of the econometric challenges of identifying causal effects from such data that would be useful in many other contexts beyond economic history courses. Paul Rhode’s chapter on the role of capital is another stand-out, focusing attention on the tensions between macro-growth theorists’ stylized facts and the historical record of growth and capital accumulation.

There has been something of a proliferation of handbooks and edited volumes of economic history in the last few years, but this collection of essays stands out for the quality and depth of its chapters as well as the breadth of its coverage. The individual chapters will be a useful reference for many readers seeking to catch up on scholarship on a particular topic.

 
Joshua L. Rosenbloom is Chairperson of the Department of Economics at Iowa State University and a Research Associate of the National Bureau of Economic Research. He is the author (with Brandon S. Dupont) of “The Economic Origins of the Postwar Southern Elite,” Explorations in Economic History (April 2018).

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (December 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Business History
Economic Development, Growth, and Aggregate Productivity
Economic Planning and Policy
Economywide Country Studies and Comparative History
Education and Human Resource Development
Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Historical Demography, including Migration
History of Technology, including Technological Change
Servitude and Slavery
Military and War
Industry: Manufacturing and Construction
International and Domestic Trade and Relations
Labor and Employment History
Living Standards, Anthropometric History, Economic Anthropology
Macroeconomics and Fluctuations
Transport and Distribution, Energy, and Other Services
Urban and Regional History
Geographic Area(s):North America
Time Period(s):17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Sovereign Soldiers: How the U.S. Military Transformed the Global Economy after World War II

Author(s):Madsen, Grant
Reviewer(s):Taylor, Jason E.

Published by EH.Net (September 2018)

Grant Madsen, Sovereign Soldiers: How the U.S. Military Transformed the Global Economy after World War II. Philadelphia: University of Pennsylvania Press, 2018. xi +328 pp. $45 (hardcover), ISBN: 978-0-8122-5036-7.

Reviewed for EH.Net by Jason E. Taylor, Department of Economics, Central Michigan University.

 
Histories of war generally focus on the details of key battles, turning points, and heroes. Less examined is the economic aftermath of war. During the twentieth century, the United States employed its military to govern many defeated or troubled areas beyond its borders and these actions continued during the early twenty-first century as the U.S. military become involved in governing Iraq and Afghanistan. This is the motivation behind Brigham Young University historian Grant Madsen’s Sovereign Soldiers, as he documents the American military as an external state in the years just after World War II. These soldiers were not charged with defeating the enemy, but rather, getting civilian populations back on their feet. The book traces the steps of heavyweights such as Dwight D. Eisenhower, Lucius Clay, and Douglas MacArthur — important American generals who subsequently became military governors of postwar Germany and Japan. It also examines the roles of lesser known occupation officials such as General William Marquat, Joseph Dodge, and General William Draper, among others.

The failure to achieve a lasting peace after the First World War generally motivated American military governors to try to create a postwar environment in defeated nations that would not again lead to the rise of dictators. In fact, U.S. State Department planners who began to envision the postwar order in 1943 were determined to bring a healthy and prosperous Germany into the fold of the international community. Still, many back home objected to the notion of American help for defeated nations. When President Franklin Roosevelt was shown a draft of these plans he threw it on his desk saying, “Feed the Germans! I’ll give them three bowls of soup a day, with nothing in them…. Control industry … There’s not going to be any industry in Germany to control” (p. 69). Such attitudes were not unique to FDR.

Madsen shows that the military governors generally understood that they were effectively in no-win situations. If they tried too hard to help the populations of the defeated nations, they would likely be blamed for providing too much sympathy to the enemy. But if they left these populations to starve, history may blame them for creating the vacuum that lead to the next war. In the end, the idea of a “soft” peace in which the U.S. would wholeheartedly attempt to help the defeated economies recover won the day. Madsen does an excellent job of thoroughly documenting the many challenges that these “sovereign soldiers” faced in achieving their recovery objectives in postwar era Germany, as well as in postwar Japan where General MacArthur played a major role. Madsen has an impressive grasp of the key economic issues and the pros and cons of the economic models that were debated and tried at the time.

The final section of Madsen’s book focuses heavily on the creation of the postwar economic environment — and the “military-industrial complex” — in the United States, and specifically Eisenhower’s role in creating it during his own presidency. The background events that shaped Eisenhower’s views prior to taking the highest office, which are gleaned in the earlier chapters, give the reader important insights into Ike’s policies.

The archival research behind Madsen’s research is very impressive. This book will be of high interest to Eisenhower historians, in particular, and to those keenly interested in the postwar transitions in Germany and Japan. For the more casual reader, the book’s 325 pages may be a bit much. There were times when I wished for less detail and name dropping — keeping all the players straight became confusing at times — and for the author to offer more insight as to what important lessons or ideas we should take away from studying these events. I was searching for a major theme, finding, or conclusion from the book and was largely left wanting in that respect. The book ends very abruptly — honestly I did not see the end coming. I simply turned the page from the end of Chapter 13 and the book was over (there is a three-page epilogue). A concluding chapter that summarized the key events, lessons, and themes of the book would have been a welcome addition for this reader. In fairness, however, these critiques may be because of the differences in the ways that economists, of which I am one, and historians approach research. Overall, this is an impressive work of scholarship.

 
Jason E. Taylor is Professor of Economics at Central Michigan University. His book, Deconstructing the Monolith: The Microeconomics of the National Industrial Recovery Act, will be published by the University of Chicago Press in December 2018.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economic Planning and Policy
Military and War
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Political History of American Food Aid: An Uneasy Benevolence

Author(s):Riley, Barry
Reviewer(s):Barrett, Christopher B.

Published by EH.Net (June 2018)

Barry Riley, The Political History of American Food Aid: An Uneasy Benevolence. New York: Oxford University Press, 2017. xxvii + 562 pp. $50 (hardcover), ISBN: 978-019-02-2887-3.

Reviewed for EH.Net by Christopher B. Barrett, School of Applied Economics and Management, Cornell University.

 
International food aid has long attracted attention from policymakers and scholars far out of proportion to its scale in the global economy. Concessional food shipments have always comprised a small share of international flows of food and a negligible increment of global food production and consumption. Yet a Google Scholar search on “food aid” and “economics” returns more than one million results. Since at least T.W. Schultz more than half a century ago, economists have written about food aid’s direct effects on the economic and nutritional well-being of recipients and, even more, on its indirect effects on outcomes as diverse as food markets and prices, agricultural producer incentives in donor and recipient countries, international trade flows, and conflict in recipient countries. In recent years, special attention has been paid to the political economy of food aid and to the distributional and efficiency effects of statutory restrictions placed on food aid donations by legislatures, especially by the United States Congress since the U.S. has long been, by far, the world’s largest food aid donor. The complex political processes behind those restrictions, however, indeed the motivations and machinations behind the very existence and scale of international food aid donations, has remained a bit of a black box.

Barry Riley has done a remarkable job filling that void. This new volume offers the definitive political history of U.S. food aid. Riley brings impeccable credentials to the task. Now retired after a long and distinguished career with various food aid agencies of the U.S. government and the World Bank, he wrote the volume while a Visiting Scholar at Stanford University. At a time when economists too commonly grab a secondary data set and quickly write about a complex topic without taking time to master essential policy details, Riley’s work stands out as firmly rooted in an immersive understanding of the topic’s finest details. And this comprehensive historical account is meticulously sourced with primary documents from government records, media accounts of the day, and even personal letters.

Riley lucidly explains how and why the U.S. became the world’s primary food aid donor. He tells the story of the constant tension between the humanitarian impulse to assist those imperiled by natural disasters or war and the conservative instinct to resist foreign entanglements and fiscal commitments beyond the nation’s borders. He skillfully explains the time-varying electoral pressures faced by elected officials confronted by agricultural and maritime interests seeking assistance in lean times and reaching for profits opportunistically. He documents both the cynical and the idealistic geopolitical aims various nineteenth and twentieth century U.S. politicians had in deploying American farm surpluses around the world. The central role of key leaders — especially Herbert Hoover, Lyndon Johnson, and Henry Kissinger — in bending others to their will comes through clearly. The case-specific drivers and outcomes of food aid donations are especially nicely illustrated in two chapters that go into particular depth on a single country: Chapter 13’s explanation of the Johnson administration’s management of food aid to India in the 1960s and Chapter 19’s analysis of the Reagan administration’s handling of the mid-1980s famine in Ethiopia.

Riley begins with late eighteenth-century Congressional debates when the framers of the Constitution and their colleagues were struggling to interpret what limits, if any, the new nation’s founding charter imposed on the federal government using scarce tax revenues to shower largesse on foreign populations. Those debates resumed periodically in response to a variety of foreign disasters of various sorts. Into the early years of the twentieth century, American food aid was episodic and modest in volume and impacts.

Riley then focuses attention on the first half of the twentieth century, when the ravages of two World Wars and the Great Depression, combined with rapid technological change in American agriculture, created a perfect storm of U.S. commodity surpluses, extended periods of depressed global demand, and acute humanitarian need. This period put the existential questions surrounding U.S. food aid to rest. Programs became permanent and expansive. That period begat the Agricultural Adjustment Acts of 1933 and 1938, which launched large-scale farm support programs that insinuated the federal government into commodity markets. This laid the foundation for 1954’s passage of the Agricultural Trade Development and Assistance Act, Public Law 480, which created the main U.S. food aid programs ever since. The program’s renaming in the Food for Peace Act of 1966 signaled the growing use of food aid as a foreign policy tool under the Kennedy, Johnson, Nixon, Ford, Carter, and Reagan administrations. The aims varied with the political leanings of the U.S. government of the day: to foster economic development and relieve world hunger, to reward foreign allies and punish those regimes that strayed too near the Soviet orbit, to advance human rights, or to promote American exports. Both Democratic and Republican administrations, however, proved overconfident in food aid’s ability to bend the world to American will.

As food aid’s ineffectiveness as a foreign policy tool and as the fiscal imperative of extracting the U.S. government from the business of propping up grain prices as a buyer of last resort both became clear, the scale of U.S. food aid relative to commercial exports and the domestic food economy has steadily declined since the 1970s. The dominant voices in recent food aid debates have thus been the international development and humanitarian organizations, as well as the agribusinesses — mainly processors, not farmers — and maritime interests that profit from Congressionally-imposed statutory restrictions on commodity and ocean freight procurement. In the twenty-first century, both Democratic and Republican administrations have consistently advocated for reforms to enhance the efficiency and timeliness of increasingly scarce humanitarian food aid. But the complex political economy that begat a permanent and briefly-generous U.S. food aid program now complicates the Congressional politics of reform. Without understanding the political history of U.S. food aid, it’s hard to make sense of the current policy debate.

In twenty-five years of studying food aid, I have probably read the vast majority of published studies on the topic. Rarely have I learned so much as from Riley’s impressive and beautifully written history. This volume is an indispensable reference for anyone studying or writing about U.S. food aid programs. U.S. food aid policy has always reflected a shifting balance among a range of objectives. Thus it has always been deeply political. The complexities of U.S. Congressional authorization and appropriations processes often make it difficult to identify the drivers of policy decisions. Thanks to Barry Riley’s lucid historical account, it is far easier for contemporary policy analysts to appreciate the history dependence of current economic policy.

 
Christopher B. Barrett is the Stephen B. and Janice G. Ashley Professor of Applied Economics at Cornell University. He has written extensively on the economics of food aid and food assistance programs and is co-author (with Daniel G. Maxwell) of Food Aid after Fifty Years: Recasting Its Role and co-editor (with Julia Steets and Andrea Binder) of Uniting on Food Assistance: The Case for Transatlantic Cooperation.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

The New Worlds of Thomas Robert Malthus: Rereading the Principle of Population

Author(s):Bashford, Alison
Chaplin, Joyce E.
Reviewer(s):Hammond, J. Daniel

Published by EH.Net (July 2017)

Alison Bashford and Joyce E. Chaplin, The New Worlds of Thomas Robert Malthus: Rereading the Principle of Population. Princeton: Princeton University Press, 2016. vii + 353 pp. $45 (cloth), ISBN: 978-0-691-16419-9.

Reviewed for EH.Net by J. Daniel Hammond, Department of Economics, Wake Forest University.

Alison Bashford and Joyce E. Chaplin have written a richly sourced and finely detailed account of the writing, reading, and interpretation of Thomas Robert Malthus’s Essay on the Principle of Population. Their focus is on the 1798 first edition of the Essay and the enlarged 1803 second edition. Bashford (University of Cambridge) and Chaplin (Harvard University) have distinguished records of scholarship in areas related to this project, including history of science, humans’ encounters with nature in early American history, demographic and environmental history, and history of eugenics. Their aim is to expand and reorient the context for reading Malthus’s Essay beyond the conventional. Thus the element in their title, “Rereading the Principle of Population.” This is important work, not the least because Malthus is so widely known, cited, and used as the basis for an intellectual category (Malthusianism), but little read or understood.

The most historically accurate readings of the Essay have set it within the political and economic discourse of England and France in the late eighteenth and early nineteenth centuries, the period from just prior to its first edition to the sixth and last (1826). The French Revolution is the event of prime significance for the first edition of the Essay. Malthus wrote in response to ideas of two Englishmen, his father Daniel Malthus and William Godwin, and a Frenchman, Nicolas de Condorcet. Malthus’s father was a political radical and friend of Jean-Jacques Rousseau. Malthus himself said that he began the essay from a conversation with his father. The primary subjects of his critique in the text itself are Godwin’s and Condorcet’s Revolution-inspired utopian writings. Bashford and Chaplin have no objection to this orientation for reading the Essay as an argument against utopian political ideas. Rather, they invite us to look beyond the issues that Malthus engaged in 1798 to the sources of data from which he derived his principle of population in the first and second editions. The sources were the new worlds of North America and the South Pacific. Malthus used accounts of European explorers to these new worlds and colonial censuses for evidence of unchecked population growth and the operation of checks on population. Bashford and Chaplin read the Essay in the context of the origins of the principle of population in these new worlds and its implications for them.

The book is in three parts. “Population and the New World” comprises two chapters on “Population, Empire, and America” and “Writing the Essay.” Malthus was a synthesizer of four strands of population analysis, each of which has long historical roots: (1) Judeo-Christian theology, (2) statecraft, (3) political arithmetic, and (4) political economy. Chapter one provides a condensed but fulsome account of these analytical strands as they were available to Malthus. Chapter two includes biographical information on Malthus and his publisher, Joseph Johnson. Their juxtaposition is interesting on several counts. Malthus was an Anglican clergyman and Johnson was a religious dissenter. Malthus was conservative, while Johnson moved in radical circles.  Johnson published a critique of war finance by Malthus’s tutor, Gilbert Wakefield. This led to libel charges against both Wakefield and Johnson. Johnson was fined and sentenced to six months imprisonment. He also published a volume of Benjamin Franklin’s political writings that included “Observations Concerning the Increase of Mankind.” This contained an anticipation (or source) of Malthus’s principle of population. Johnson became a force in the publishing trade with a stable of prominent authors including William Wordsworth, Samuel Taylor Coleridge, Mary Wollstonecraft and her husband and Malthus’s primary intellectual adversary, William Godwin.

The three chapters of part two are on three new worlds that figure prominently in Malthus’s second edition: New Holland (New South Wales), the Americas, and the South Sea. Where the first edition was largely a response to the utopian political theory, the second edition became a universal history of mankind built around the theme of the means by which population is checked. These chapters give richly textured accounts of the sources available to Malthus for incorporating information on the Americas, Australia, and the South Sea into the second edition and the use he made of them.

Part three, “Malthus and the New World, 1803-1834,” has a chapter each on the public issues of slavery and abolition and colonization and emigration as they related to the principle of population. In both cases Malthus’s principle of population was used to form arguments on either side of the issue. Malthus had become a recognized authority on population. The authors depict Malthus as timid about taking a stand on slavery, perhaps because of personal entanglements through income derived from sugar plantations. The West Indies and British slave trade are conspicuously absent from the otherwise worldwide scope of evidence surveyed in the 1806 edition. On the issue of emigration as an outlet for population Malthus opposed clearance and removal of excess population but not voluntary emigration. The final chapter in this section covers the reception of the 1803 essay in the new worlds up to Malthus’s death in 1834.

The book concludes with a coda. The coda opens with accounts of critical commentary after Malthus’s death regarding his purported indifference to the plight of the poor.  The authors conclude that this was far from the truth. Malthus was concerned to understand population dynamics in order to protect the poor from misery and vice. The coda proceeds to draw material and moral implications from Malthus’s analysis of the European settlement of new worlds in the Americas and South Pacific in the 1803 edition for contemporary and future economic development of “new worlds.” The material implications are that today as before, the poor bear the brunt of material “expansion” by the wealthy. The moral implications, referred to as “moral hazards” in the coda, are that the distribution of benefits and costs of economic development between the rich and poor is unjust.

The New Worlds of Thomas Robert Malthus gives considerably more attention to the 1803 edition of the Essay on the Principle of Population than to the 1798 edition, for it was in the enlarged second edition that Malthus dealt extensively with new world demographics. Further, the coda suggests that it is to the 1803 rather than the 1798 edition that we should turn today for insight into contemporary issues. The suggestion is that 1803-edition population principles have more relevance today and will in the future than the 1798-edition population principles. This suggests that Malthus made changes in substance rather than just in coverage between the first and second editions. This is an enduring question in historical interpretation of texts that underwent numerous or large revisions. In responding to reactions and suggestions of readers and to changing circumstances between one edition and the next, has an author more fully developed a thesis common to all editions or has the author changed the subject matter or thesis? The coda suggests the latter for Malthus.

If we accept the interpretation that the first edition was about British and European internal political issues and the second about English and European relations with lands and native peoples of the Americas and South Pacific, it is not clear to this reviewer that the second edition is more germane than the first to our time. The social and political revolutions of 1968 bear a resemblance to the French Revolution of 1789. The ancien régime remains under assault today as it was in the eighteenth century. Utopian visions of humans, their relations with each other, and with nature, are so embedded in modern culture that they go unrecognized. The objects of assault are no longer Monarchy, Aristocracy, and Church. They are the Constitution, Family, and Christianity. Conservatives, such as Malthus was, fight a rear-guard battle against what has become the Western revolutionary establishment of the early twenty-first century. Against this background it is instructive to reread the 1798 edition of An Essay on the Principle of Population.

J. Daniel Hammond is Hultquist Family Professor in the Department of Economics, Wake Forest University. He is the author of “Malthus, Utopians, and Economists,” Research in the History of Economic Thought and Methodology 33 (2015): 179-207.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Europe
Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):18th Century
19th Century

The Long Space Age: The Economic Origins of Space Exploration from Colonial America to the Cold War

Author(s):MacDonald, Alexander
Reviewer(s):Salter, Alexander

Published by EH.Net (June 2017)

Alexander MacDonald, The Long Space Age: The Economic Origins of Space Exploration from Colonial America to the Cold War.  New Haven: Yale University Press, 2017. xi + 258 pp. $35 (hardcover), ISBN: 978-0-300-21932-6.

Reviewed for EH.Net by Alexander Salter, Rawls College of Business, Texas Tech University.

Alexander MacDonald, an economic historian trained at Oxford currently working as an economist for the Jet Propulsion Laboratory and as Senior Economic Advisor with NASA, has written an exciting account of the development of space capability in the United States.  MacDonald’s scholarship is both readable and precise, and this thesis — that private initiative in space has historically been much greater than recognized — certainly challenges conventional interpretations in the literature on the economics of space policy.

In the Introduction, MacDonald makes clear he is undertaking an ambitious project.  The conventional wisdom holds that space exploration was primarily driven by governments, and in particular by competition between the United States and the Soviet Union during the Cold War.  The U.S.’s victory with the Apollo 11 landing, and eventual triumph with the waning and collapse of the Soviet Union, saw public activity in space shrink during the latter decades of the twentieth century, with private activity (privately funded commercial and exploratory ventures) just picking up in the first decades of the twenty-first.  MacDonald seeks to turn this narrative on its head.  Instead of government being the senior partner in space exploration and private initiative the junior, MacDonald shows how “if we look at the history of America space exploration on a longer timescale, a very different history emerges — one in which personal initiative and private funding is the dominant trend and government funding a recent one” (p. 3).  This justifies the author’s chosen title: the Space Age is “Long” because it cannot be fully understood without reference to private initiative in funding observatories, the major space exploration technology to precede spacecraft, dating back to the late eighteenth century.

MacDonald begins by surveying the history of celestial observation in America, from colonial days until the mid-nineteenth century.  He does an excellent job of detailing the rise of civic (community-funded) observatories, as well as the subtle shifts in public motives behind celestial exploration.  Most surprising, however, is the statistical information presented in the beginning of the chapter (pp. 15-19).  By adjusting the expenditures on observatories to capture changes in purchasing power (using an index more relevant to large capital outlays, rather than consumer expenditures), and then showing what the equivalent expenditure today would have to be in order for observatory expenditures to remain a constant share of GDP, MacDonald shows that private initiative was capable of mobilizing vast resources.  For example, expenditures on the Lick Observatory, finished in 1876, totaled $188 million in adjusted dollars.  The equivalent expenditure in 2015, as a percentage of GDP, would be over $1.5 billion, making this expenditure larger than many major NASA missions (pp. 14-16).  Altogether, MacDonald shows that expenditure on space-related observational activities from 1820 to 1940 was overwhelmingly private: 96.6% of funds were supplied by the private sector.  The picture that emerges from these statistics, and the narrative to follow, portrays the dominance of private (individual and community-led) initiative in celestial observation.

The second chapter continues the narrative of the development of American observatories, going up until the 1940’s.  One theme of this chapter is the changing means by which observatories were financed, beginning with community-based, and widely-purchased, subscription options, and later moving predominantly to large grants from wealthy philanthropists.  Others include the tensions between community members and professional astronomers in how observatories were used, and the public motives of politicians, astronomers, and the ordinary public in seeing these projects to fruition.

Chapter 3 focuses on the fundraising strategies of aerospace and rocketing pioneer Robert Goddard.  This is the narrowest of the chapters in terms of focus, and perhaps the one least easy to square with MacDonald’s thesis of private initiative in space exploration.  This is because a good deal of Goddard’s funding came from military contracts during and after the First World War.  However, it’s important to note — as MacDonald does — that most funding for Goddard’s projects did come from private sources, most notably the personal fortune of mining magnate Daniel Guggenheim, and later the Guggenheim Foundation (p. 155).

The final chapter brings us to the popular conception of the Space Age: 1957 (Sputnik) and beyond.  MacDonald analyzes national space programs, focusing on that of the United States, as driven by signaling, rather than national prestige per se (pp. 161-163).  MacDonald presents a simple model of two nations competing for allies.  Potential allies want to ally with the stronger of the two nations, but this information is incomplete and asymmetrically distributed.  The two courter nations can signal power by investing in a successful space program.  A successful space program is a good signal because, as the saying goes, such a program is “costly to make and costly to fake.”  MacDonald also analyzes late- and post-Cold War space activities in terms of signaling, although for obvious reasons the precise information to be signaled, and the goals for signaling in the first place, differed from the periods of fiercest competition with the U.S.S.R.

The Conclusion summarizes the arguments and reasserts MacDonald’s chief contribution: showing that private initiative was massively more important, relative to politically-led signaling efforts during the Space Race, to developing space capability than previously thought.  MacDonald also comments on the implications of his arguments for twenty-first century space policy.  Examples include resisting the temptation to rebuild existing organizations, such as NASA, on lines identical to those that existed in these organizations’ heyday, and instead embrace organizational novelty in the development of space capability, as well as recognizing that the private sector can play a much larger role than previously appreciated.

Overall, MacDonald succeeds in his arguments.  He convincingly shows that early astronomical observation was not a separate phenomenon from the later Space Age, but a necessary precursor that should be seen as contiguous with it.  I have only two quibbles with the book.  The first has to do with the discontinuity, for lack of a better word, between the first two chapters and the remaining chapters.  Chapters one and two form a single coherent narrative, whereas the transition to Goddard’s work and the Space Race can sometimes feel like add-ons.  However, this is probably an unavoidable result of a work that has the courage to be eclectic and wide-ranging in scope, and it does not distract from the thesis.  The second quibble has to do with MacDonald’s analysis of signaling and intrinsic motivation, especially in chapter four.  MacDonald introduces these concepts in the Introduction, seemingly indicating that they will be doing substantial work throughout.  But the heaviest lifting has to wait until his analysis of the Space Race.  I agree with MacDonald that these economic tools can shed vital light on the episodes in question; I only wish they had been as extensively applied in chapters one through three as in chapter four.

In conclusion, I strongly recommend MacDonald’s work to any scholars who are interested in issues at the intersection of political economy, economic history, and space issues.  In conjunction with the literature on the feasibility of private legal orders in space (e.g., Buxton 2004; Coffey 2009; Cooper 2003; Hertzfeld and von der Dunk 2005; Hudgins 2002; Salter, 2016, 2017; Salter and Leeson 2014; Simberg 2012a, 2012b; White 2003), MacDonald’s work can and should be used to make the case that private initiative will continue to be an invaluable component of space policy and engagement in the twenty-first century.

References:

Buxton, Carol R.  2004.  Property in Outer Space: The Common Heritage of Mankind Principle vs. the First in Time, First in Right, Rule of Property. Journal of Air Law and Commerce 69: 689-708.

Coffey, Sarah. 2009. Establishing a Legal Framework for Property Rights to Natural Resources in Outer Space. Case Western Reserve Journal of International Law 41(1): 119-147.

Cooper, Lawrence A. 2003. Encouraging Space Exploration through a New Application of Space Property Rights. Space Policy 19(2): 111-118.

Hertzfeld, Henry R., and Frans G. von der Dunk.  2005.  Bringing Space Law into the Commercial World: Property Rights without Sovereignty. Chicago Journal of  International Law 6: 81-100.

Hudgins, Edward L., eds.  2002.  Space: The Free Market Frontier.  Washington, D.C.: Cato Institute.

Salter, Alexander W.  2016.  Space Debris: A Law and Economics Analysis of the Orbital Commons. Stanford Technology Law Review 19(2): 221-238.

Salter, Alexander W.  2017.  Ordering the Cosmos: Private Law and Celestial Property Rights.  Journal of Air Law and Commerce, forthcoming.

Salter, Alexander W. and Leeson, Peter T. 2014. Celestial Anarchy: A Threat to Outer Space Commerce? Cato Journal 34(3): 581-596.

Simberg, Rand. 2012a. Homesteading the Final Frontier: A Practical Proposal for Securing Property Rights in Space. Competitive Enterprise Institute, Issue Analysis No. 3.

Simberg, Rand.  2012b. Property Rights in Space. The New Atlantis: 20-31.

White, W. N. Jr. 2003.  Interpreting Article II of the Outer Space Treaty.  Paper presented at the 54th International Astronautical Conference.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):History of Technology, including Technological Change
Geographic Area(s):North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

A History of American State and Local Economic Development: As Two Ships Pass in the Night

Author(s):Coan, Ronald W.
Reviewer(s):Stabile, Donald R.

Published by EH.Net (June 2017)

Ronald W. Coan, A History of American State and Local Economic Development: As Two Ships Pass in the Night. Cheltenham, UK: Edward Elgar Publishing, 2017. xii + 735 pp. $210 (hardback), ISBN: 978-1-78536-635-2.

Reviewed for EH.Net by Donald R. Stabile, Department of Economics, St. Mary’s College of Maryland.

In this very lengthy book, Ronald W. Coan offers a history of the economic development programs, plans and agencies used by states and local communities to nurture the economic development of their geographic regions. He holds the rich details of that history together through his use of a policy-making model that he elaborates in the first chapter and makes use of throughout the book. The model is complex, because economic development policies at the local level have many goals. They also vary greatly from one locality to another.

The book is organized into three parts for a total of twenty chapters. Coan explains his model in the first chapter of Part I. He starts with three characteristics of the profession of local economic development: “onionization” through the increase of layers of policy as new agencies are added to implement another program without elimination of older agencies, “siloization” from each agency focusing on one aspect of economic development, and “bifurcation” with the profession split into practitioners in the field and policy formulators in academia and think tanks. These policy formulators and implementers work in a context of the economic pressures that define their work. The most important is the cycle of industry profitability as industries start from the early days of innovation, grow to become mature and then potentially decline. Economic development professionals must cope with a world where the economic base of their locality is changing. Another pressure economic development professionals must deal with is shifts in population, from immigration and internal migration as happened in the U.S. in a process of city building. When cities developed, moreover, they produced hierarchies where established cities competed with emerging cities and all cities functioned at the lower end of a legal system headed by state and county governments. These hierarchies also generated economic and political elites with vested interests in economic development that differed. States, counties and cities are also divided into different legal jurisdictions with different policy goals. The main split in policy goals Coan finds is between Privatism, the belief that in a capitalist economic system development depends on using private sector values and agencies, and Progressivism, the principle that economic development generates inequalities that the government should remedy. The former represents a push for jobs while the latter embodies the nurturing of a community comprised of humans with social needs and ambitions. Coan thus divides his history into economic development versus community development — the two ships that pass in the night of his subtitle. Given that the professionals who favor one approach or the other have a variety of programs, strategies, tools and skills to use in developing policies, at the local level Coan finds a large variation in the way his policy-making model has been applied during U.S. history.

The rest of Part I gives the history of the early days of economic and community development, from the colonial period through the 1920s. The period was marked by a focus on Privatism, with business organizations such as a chamber of commerce taking the lead and cooperating with government through private-public hybrid agencies with a focus on economic development. Community development also existed through the work of churches and later from the settlement house movement. Part II describes a period of transition where the federal government became involved with economic and community development as Roosevelt’s New Deal began intervening in the economy during the Great Depression. The New Deal and World War II changed the economic landscape of the U.S. due to the parts of the country, particularly the South and West, where the federal government located its programs (such as the TVA) and its investment in defense production (such as aircraft manufacture). New cities arose in those regions and by competing for industries to locate in the region ended a century-long hegemony of the urban centers of the Northeast and Midwest, creating several waves of internal migration from south to north, east to west and eventually north to south. Part III brings the history into the present, an era where the federal government has reduced its economic and community development efforts and the states have moved in to take up the slack.

This brief summary does not do justice to the richness of detail that Coan provides. It is also a great deal of information to absorb in a single reading—each of the three Parts could have been a separate book. Still, I found it worth making the effort, as Coan weaves in the familiar material of the big picture of U.S. economic history with many case studies of local jurisdictions formulating policies for economic development and community development. My one quibble is that Coan overdoes it with his split between economic development and community development; my research indicates that Progressives believed that their focus on the development of human capabilities would add to economic development, although I would agree with Coan that the two sides did not always recognize it. Coan aims the book at economic development professionals to teach them the history of their expertise but economic historians can also benefit from reading it.

Donald R. Stabile is professor of the college at St. Mary’s College of Maryland. His most recent book is The Political Economy of a Living Wage: Progressives, the New Deal and Social Justice, New York: Palgrave Macmillan, 2016.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (June 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Planning and Policy
Urban and Regional History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Destructive Creation: American Business and the Winning of World War II

Author(s):Wilson, Mark R.
Reviewer(s):Duncan, Thomas K.

Published by EH.Net (May 2017)

Mark R. Wilson, Destructive Creation: American Business and the Winning of World War II. Philadelphia: University of Pennsylvania Press, 2016. v + 379 pp. $45 (cloth), ISBN: 978-0-8122-4833-3.

Reviewed for EH.Net by Thomas K. Duncan, Department of Economics, Radford University.

In Destructive Creation: American Business and the Winning of World War II, Mark R. Wilson (UNC-Charlotte) provides a very detailed account of the U.S. industrial war machine. The information contained within makes this book well worth the read for anyone who is seriously studying the war economy of World War II. Wilson’s stated purpose is to redefine the narrative of the war, positing that “business and government were reluctant, contentious, and even bitter partners” (p. 286) rather than the stated alternative narrative where the war is won by unbridled capitalism. Wilson also attempts to dismiss the argument that the war led only to the confluence of interests that became the military-industrial complex. The evidence provided does not definitively resolve the issue. Interestingly, the case falls short not due to lack of research but perhaps due to an overabundance. The research that went into Destructive Creation is detailed enough to allow for a far more nuanced view of the war and its economic effects.

Chapter 1 establishes the anti-war view that U.S. enterprises held after World War I. During the Great War, the U.S. had seen an increase in regulation, government seizures, the rise of state capitalism, and the excess profits tax. After the war, industrial leaders were labeled “merchants of death,” investigated by the Nye Committee, and saw the New Deal expand the role of government through the TVA and other public ventures. The interwar period was a time of industrial mistrust of war policies and a hesitancy to engage in the pre-war buildup.

While most chapters of the book have a wealth of information, Chapter 2 is the strongest in this regard. The U.S. began its armaments buildup of 1938-1940 despite industry misgivings. Though Wilson states that the war economy should not be interpreted as creating a “military-corporate alliance,” he notes the rise of government organizations headed by business leaders, increasing industrial dependence on government investment, and the growing importance of the government-owned, contractor-operated plants, where government financed construction and leased the plants to private contractors. The buildup was also the period where cost-plus fixed-fee contracts and subsidized construction allowed for massive industrial expansion. Wilson attempts to downplay the role of large corporations by highlighting the increases in subcontractors, but this argument is weakened with the discussion of the high costs of conversion for mid-sized firms and the prominence of prime contracting where large firms dominated.

Shifting focus, the “War Stories” chapter describes how U.S. industrial leaders attempted to win the war at home – as well as abroad. To highlight the narrative of free enterprise, Wilson offers detailed accounts of the public relations efforts of the National Association of Manufacturers with its 1942 “Production for Victory” tour and corporate radio ads. Yet he far too quickly dismisses the influence of the counter narratives of labor’s “soldiers of production” and the reemergence of the “merchants of death” label. While the Republicans’ Congressional gains in 1942 may suggest the dominance of the pro-business narrative, Wilson’s next two chapters provide evidence of concern over excess profits and of seizures to enforce union contracts. Such evidence suggests that the alternative narratives found traction in some corners of government and public opinion.

In fact, the next two chapters clearly illustrate the nuance needed in reading this book and the tension in the simple narratives. In Chapter 4, Wilson argues that business did not enjoy working with government, particularly when faced with regulations, contract cancellations, changing specifications, and the excessive paperwork associated with bureaucratic red tape. Variability in contracts, such as the Army’s tank and small arms reductions, caused painful reallocations for industrial manufacturers. The new excess profits tax, established to prevent war profiteering, created additional uncertainty in the profitability of the war effort. Yet even as contracts were cancelled and profits reduced in some areas, other projects, such as Boeing’s B-29, saw expansions in orders to offset losses. Larger industrial leaders like General Motors and Du Pont were also able to access significant tax loopholes to lower their burden. The fifth chapter exhibits many of these same tensions, with government willing to seize companies to break union wage strikes in a pro-business manner, but also to seize companies for underperformance and for failing to adhere to the union’s maintenance of membership rules in decidedly not pro-business actions.

Chapter 6 is perhaps the weakest of the chapters. Though it provides the history of the reconversion era after the war’s end, there is far less detail given than in previous chapters. This lack of depth is likely due to the span of history Wilson is attempting to cover, as the reconversion period discussed covers the years up to and partially during the Vietnam era. The chapter argues that the shift to privatization, ramped up by Robert McNamara, has led to a less regulated and more expansive military industry. Wilson again offers mixed evidence for business favoritism across the economy, yet very clearly lays out the foundations of the military-industrial complex in the specific areas of aviation and missile programs.

In summation, there are a few times the author presses an argument that does not appear to be supported by the evidence surrounding it, yet overall Wilson offers a well-researched and largely well-written historical account that, despite the title, spans from the end of World War I to the beginning of the Vietnam War. Wilson ultimately concludes that the lessons of World War II may provide guidance for resolving current issues such as climate change and healthcare. However, this conclusion misses the singular focus that all-out war mobilization brings, namely producing military ordnance in great abundance. This singular focus may not be true of the disparate and conflicting wants and needs of a peacetime economy.

Thomas K. Duncan is an Assistant Professor of Economics in the College of Business and Economics at Radford University. He has published research on the U.S. war economy in journals such as The Independent Review, the Review of Austrian Economics, and Peace Economics, Peace Science and Public Policy, and has been a contributor to the Oxford Handbook of Austrian Economics in the area of U.S. foreign intervention. Email: tduncan13@radford.edu

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (May 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII