Fiscal and monetary policy during World War II

by on March 9, 2009 at 7:29 am in History | Permalink

Returning now to our pretax inflationary gap, summing to $290 billion, we may estimate how that excess income was "absorbed."  We can roughly account for about $269 billion of it:

inflation took $84 billion, or 29 percent;
personal taxes took $67 billion, or 23 percent;
net increase in individual's holdings of government securities took $49 billion, or only 17 percent;
the increase in individuals' nominal money stocks, M2…took $69 billion, or 24 percent.

In other words, monetary policy had a great deal to do with the wartime expansion.  I have yet to see a good study of wartime price controls, but if you have rising M and fixed P and market power, some of the Q's will go up (with quality going down also).

That is from Harold G. Vatter's The U.S. Economy in World War II, one of the better treatments of that era.

Note also that the wartime expansion was built upon several years of preceding economic growth, not contraction.  This point is overlooked in many current discussions of fiscal policy.

1 liberalarts March 9, 2009 at 8:54 am

On the quality going down under price control issue: I have my father’s childhood Hardy Boys book collection, spanning the late 30s to the mid 1940s. The wartime books were printed on much lower quality paper; the pages can barely be turned without breaking.

2 Scott Sumner March 9, 2009 at 9:09 am

I recall hearing that the federal government offered to buy essentially unlimited quantities of many manufactured goods (for the war effort) at a fixed price. And the price was set above the full employment MC of production. If I am right, then this essentially turned oligopolies into competitive industries facing a perfectly elastic demand curve–and this led to explosive growth in production. Works well for a while, although eventually you’ll end up like the old Soviet Union.
I agree that the WWII experience has little relevance for today, for all sorts or reasons.

3 erichwwk March 9, 2009 at 12:45 pm

I too have always found it silly to allege that WWII got the US out of the great depression. Military expenditures, an input, are counted as output, whereas labor utilized in WPA projects, real output, were not counted. Nothing like cooking the books to support an ideological result.

4 WS Grizzard, MD March 9, 2009 at 6:16 pm

If you regress output on government spending since 1951 there is no positivie correlation. Six quarters after the spending there is actually a negative correlation. Why does anyone think that government spending helps?

5 Steve Roth March 9, 2009 at 8:35 pm

On that topic, I think you’ll be pleased to see Christy Romer agreeing with you on the overall Great Depression story in her just-released Brookings paper:

“Had the U.S. not had the terrible policy-induced setback in 1937, we, like most other countries in the world, would probably have been fully recovered before the outbreak of World War II.”

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