Fiscal and monetary policy during World War II

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.


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