The Economy During Wartime

The Economy During Wartime

During the Second World War, the United States had a centrally planned economy—and the most rapid economic growth in U.S. history. What lessons can we take from the war economy today?

Destructive Creation: American Business and the Winning of World War II
by Mark R. Wilson
University of Pennsylvania Press, 2016, 392 pp.

During the Second World War, the United States had a centrally planned economy. Strategic resources were produced in quantities set in Washington, and allocated among end users by the public officials sitting on the War Production Board. Key prices and wages were administered, not left to markets. The large majority of investment was directed, financed, and, in most cases, owned by the federal government. Thousands of private businesses that failed to comply with the planners’ instructions were simply taken over by the government—including some of the country’s largest corporations, like Montgomery Ward. For millions of Americans, the photograph of Ward’s adamantly anti-Roosevelt chairman Sewell Avery being carried from his headquarters by a squad of soldiers crystallized the new relationship between government and capital.

What are we to make of the fact that economic life was “quite completely regimented” (in the approving words of Admiral Harold Bowen) during the war? For novelists of the front lines, it could appear as part of a vast impersonal machine, consuming human lives as means to an inscrutable end. Think of Corporal Fife in The Thin Red Line, watching his transport ship coming under attack by Japanese planes: “A regular business venture, no war at all. It was weird and wacky and somehow insane. . . . It was as though a clerical, mathematical equation had been worked out, as a calculated risk.” For historian Mark Wilson, whose attention is fixed on the home front, there’s no such ambivalence. His new book Destructive Creation is a defense of the management of the war economy by “clerical, mathematical equation,” against those on the right, who attribute wartime production to the genius of private business, and those on the left, who see the wartime state as an engine of profiteering and monopoly. The book is animated by the idea that wartime planning represents a lost model for effective public direction of the economy: “If American policymakers had applied the lessons of World War II mobilization to the toughest challenges of the later twentieth century, people around the world would be better off today.”

The Second World War was certainly an economic success story, in that it coincided with the most rapid economic growth in U.S. history. Much of this growth came not in the recovery from the Depression, but in the post-1940 period, when the country was already more or less at full employment. Between 1938 and 1944, unemployment fell by about 10 million. (This includes people leaving the Works Progress Administration and similar jobs programs.) Over the same period, private employment and military employment each rose by 10 million, implying 10 million new entrants to the labor force—mostly women. At the same time, workers shifted from less productive activities (especially agriculture) to more productive jobs in industry. Industrial productivity—output per hour—also rose rapidly.

Wilson is certainly right that the federal government played a central role in this vast expansion of productive capacity. Even before Pearl Harbor, it was clear to the leaders of the mobilization effort that the peacetime system of allocating industrial inputs by markets was breaking down in the face of a rapid expansion of military production. Materials like steel, copper, aluminum, and rubber were in short supply, exacerbated by hoarding by contractors who wanted to ensure that their own orders were filled. Even more critically, investment in new industrial capacity—after 1940, almost all directed and financed by Washington—could only be decided if future supplies of critical raw materials were known. (There was no point in building a new bomber factory if there wouldn’t be enough aluminum for it to make planes from.) Ad hoc price controls and the crude “priority” system reserving key materials for military use were not enough—an explicit planning process was needed.

Economic planning during the war also led to a broader rationalization of economic life. Much macroeconomic data begins around 1945—it was first collected to aid in wartime planning. The estimates of actual versus potential output that guide so much macroeconomic policy today emerged out of the “feasibility debates” between civilian economists and military planners—a fascinating story barely touched on by Wilson but told in detail in Paul Koistinen’s Arsenal of World War II (2004), which remains the definitive history of wartime economic planning. The same goes for other belligerents. Richard Werner (in Princes of the Yen, 2003) convincingly argues that the planning apparatus that guided Japan’s postwar economic miracle was the product of the war—early twentieth-century Japanese capitalism more closely resembled the freewheeling liberal, market-centered American system than what we have come to think of as the “East Asian model.” Turning back to the United States, it’s clear that much of what the businesses objected to as “red tape” was simply that in order to win government contracts, they had to adopt explicit cost accounting, wage schedules, and other hallmarks of the modern managerial firm.

It’s easy to see the attraction of making the fight against Hitler exhibit A in a broader argument for the public sector. If government planning was essential for developing and mobilizing real resources for the war, why not for its moral equivalents today, such as climate change? Wilson doesn’t explicitly make this argument—his story stops in the 1950s—but it’s safe to say he’d be on board.

There’s plenty of useful material in this book, but its case would be stronger if it were not so narrowly focused on the business-government interface. Wilson offers a comprehensive account of the ways in which public officials interacted with business: as customers, as financiers, as regulators, as rivals for the favors of public opinion. But he has nothing to say about two critical questions that lie, so to speak, on each side of this interface: how the planning apparatus actually functioned, and how American industry was able to generate such big increases in output and productivity. Wartime productivity gains get, literally, one aside (“economies of scale, improving production techniques, or other factors”) tucked into a discussion of how prices were set for military procurement. Similarly, the operations of the planning apparatus—the War Planning Board and its predecessors—gets less than two pages. By contrast, a dozen pages are devoted to how payments were handled on prematurely canceled contracts. Wilson is very interested in how much the government paid for tanks and ships, not so much in how so many of them were produced.

Wilson does not ask, for example, why war production required central planning. It is not an easy question, but one natural place to look for an answer might be the history of industrialization, which in some ways involves similar problems—the more or less rapid redirection of resources from one set of activities to a very different one, in the face of various bottlenecks and coordination problems. As famously argued by the economic historian Alexander Gerschenkron, modern industrialization would have been impossible without a high degree of conscious direction. The simultaneous expansion of many interdependent sectors and industries—along with the public infrastructure they require—is exactly the wrong sort of problem for widely dispersed private decision makers. The large-scale investment in plants and equipment required by both military mobilization and industrialization is often unattractive to private wealth-holders, who put a steep discount on returns far off in an uncertain future. Even the routine coordination of production through the price mechanism can break down in the high-pressure environment of a major redirection of production. In an economy running at full throttle, scarce resources will experience large and disruptive price rises, while private actors will be tempted to hoard key resources and exploit their market power. Giant corporations, starting with the railroads in the nineteenth century, organized themselves internally through central planning, not markets, with salaried managers performing the essential tasks of coordination. It’s no surprise that a government seeking to maximize military production would seek to organize the whole economy the same way.

The fundamental political problem raised by wartime planning is not the extent to which it did or did not affect private profits or competition, but the way it replaced dispersed private authority exercised through markets with centralized (and in principle at least, democratically accountable) authority exercised by the state. If urgent production needs and rapid reallocation of resources require a central plan—if even private businesses recognize this internally—then what claim do private capitalists have to their power and profits? In his opening chapter, on precursors to Second World War planning, Wilson quotes an amusing exchange between U.S. Steel chairman Elbert Gary and Bernard Baruch, head of the First World War–era War Industries Board. Unhappy with what the military was paying for steel, Baruch informed Gary that if prices didn’t come down, the government would simply take the industry over. When an incredulous Gary asked how U.S. Steel could be managed without its top executives, Baruch replied, “Oh, we’ll get a second lieutenant or somebody to run it.” More threatening than taxes, red tape, or even militant unions was the implication of wartime planning that owners were unnecessary to production. During the Second World War, business owners angrily—and correctly—complained that government control of investment, allocation of scarce materials, and prices and wages meant that “the businessman is just a middleman” for the planners in Washington.

This radical content of wartime planning was more clearly recognized by its business and conservative opponents than by the planners themselves, who—a few ardent New Dealers aside—seem to have moved toward more centralized planning as a pragmatic response to the difficulties of ramping up war production. Initially, planners hoped to achieve the vast expansion of industrial capacity required to meet military needs through private investment. They turned to public ownership only when private banks proved uninterested in financing war plants. For business, on the other hand, planning and public ownership was clearly seen as a mortal threat to their prestige and power—a feared and hated rival, or even, Wilson suggests, an enemy on par with the official enemies abroad. Already by 1941, government enterprise was, according to a Chamber of Commerce publication, “the ghost that stalks at every business conference.” J. Howard Pew of Sun Oil declared that if the United States abandoned private ownership and “supinely reli[es] on government control and operation, then Hitlerism wins even though Hitler himself be defeated.” Even the largest recipients of military contracts regarded the wartime state with hostility. GM chairman Alfred Sloan—referring to the danger of government enterprises operating after war—wondered if it is “not as essential to win the peace, in an economic sense, as it is to win the war, in a military sense,” while GE’s Philip Reed vowed to “oppose any project or program that will weaken” free enterprise.

Nonetheless, at the war’s end, about a quarter of the country’s industrial plants, representing the large majority of wartime investment, were owned by the federal government. The disposition of this vast system of public and semi-public enterprises was one of the central questions of postwar conversion; while almost all of it eventually passed into private hands, this was by no means a foregone conclusion in 1945. For the remaining New Dealers and their newly empowered allies in labor, these publicly owned factories offered the basis for a permanent expansion of public enterprise, on the model of the Tennessee Valley Authority. (The TVA’s place in the liberal imagination as part of a project of broader social renovation is memorably expressed in Elia Kazan’s 1960 film Wild River.) As the war wound down, Harold Ickes floated the idea that new semi-public corporations should be created to refit the war plants to produce civilian goods and their shares to be distributed to returning veterans.

This was not to be. The success of business owners and their allies in rolling back wartime economic management is the most interesting part of Wilson’s book. By the 1960s the military was more dependent on private contractors not only than during the war, but, arguably, than at any previous point in its history. From the nineteenth century through the 1940s, half of Navy ships were built in government-owned shipyards by government employees. But less than two decades after the end of the Second World War, this capacity was entirely gone and all new warships were built by private contractors. Large public investments in other areas of military production that long predated the war similarly passed into the hands of private owners.

Wilson shows that this enormous rolling back of public production was not inevitable or driven by concerns of efficiency. It was an ideological project pushed by business leaders. Even in the days after Pearl Harbor, as dozens of government-financed and -owned plants were being authorized, conservatives like Senator Robert Taft were determined to ensure that these taxpayer-funded factories would eventually be “returned” to private business—an outcome that would require Congress to be “constantly on guard, and determined to restore a system of privately owned and operated enterprise.” By the end of the war, the conservatives had largely displaced New Deal economists like Eveline Burns and Alvin Hansen, whose National Resources Planning Board had been developing plans for turning the publicly owned war facilities into TVA-style public corporations. Instead, the discussion was dominated by the likes of the Baruch-Hancock report, which took as its starting point that the top priority should be “taking the government out of business.” The 1946 Employment Act, among the crown jewels of postwar Keynesianism, formalized a public commitment to avoid a return to the mass unemployment of the 1930s, but stipulated that full employment was to be achieved only through policies that “foster and promote free private enterprise.”

Perhaps the biggest contribution of Wilson’s book is the case it makes that the dismantling of the wartime planning apparatus was an ideological project aggressively pushed for its own sake. In this sense, the book serves as a kind of prequel to Kim Phillips-Fein’s Invisible Hands (2010), on business efforts to reverse the New Deal. Today, when the role of private owners in production is simply taken for granted, it’s useful to be reminded that at that decisive moment, private ownership was tenaciously pursued as an end in itself.

J.W. Mason is assistant professor of economics at John Jay College-CUNY and a fellow at the Roosevelt Institute.