WW2 bombers in sky

Bust to Boom: How the American economy thrived during WWII

The USS Gerald R Ford, the USA’s latest aircraft carrier, took more than eight years to build. In contrast, by 1945, the US Navy finished the production of an aircraft carrier every week.

The US was the only allied country to emerge from the war with its economy not only intact but thriving, and the only economy which saw an expansion of consumer goods despite rationing. GDP grew at an average of 14% per year, and the war marked an end to the long-term economic hardship caused by the Great Depression.

How did the USA manage to leverage a war into the period of greatest economic growth in its history?

By 1936, the US had only just returned to its pre-1929 levels of economic output, and the unemployment rate remained high at 16.9%. The Smoot-Hawley Tariff Act of 1930 was intended to offer the American economy a degree of protectionism and mitigate the effects of the Great Depression, yet the act made imported goods mostly unaffordable to the vast majority of Americans. Other nations retaliated against the US, resulting in a fall in international trade by 65% and the collapse of several banks in both the US and Europe. When Franklin D Roosevelt (FDR) took office in 1933, he introduced the infamous “New Deal” programs, which proved to be relatively successful in revitalising the country’s economy. American bank accounts became insured through the Federal Deposit Insurance Corporation (FDIC), restoring some consumer confidence in the markets, public works projects brought millions into the federal payroll, and social security programs were established to provide income to the disabled and elderly.

Despite this, by 1938 FDR was being constrained by Congress and could not intervene to such an extent to stimulate a full economic recovery. By such time, FDR had also cut back on government spending in an attempt to balance the budget, which contributed in part to the recession in 1938. War would come to change that.

Pre-1939 efforts to stimulate economic growth pale in comparison to the effects of WWII on the American economy. During the war, over 17 million new civilian jobs were created (including the introduction of women into the workforce), both post-tax corporate profits and industrial productivity almost doubled, and by 1944 real weekly wages were 50% higher than in 1939.  Through the Reconstruction Finance Corporation, the federal government distributed the necessary capital to expand America’s industry, and businesses were allowed to make significant profits during the war (although there was a wartime tax on ‘excess profits’). This economic growth was not a common phenomenon and occurred in the US in part due to the government’s approach to mobilization.

American mobilization was less centralized than in the other belligerent nations: from 1939 onwards, American leaders recognised that winning the war was too important to allow the war economy to grow in a laissez-faire manner. Yet despite this, the American economy was never overseen by war councils comprised of both military and civilian officials like had occurred in Germany and Britain.

Yet companies still operated with the ‘profit motive’ in mind, and the war presented itself as an excellent opportunity for these companies to capitalise on the billions of dollars spent on the defence industry. Different sectors responded to mobilisation at different times and in various ways: the auto companies only fully converted to war production in 1942 and began substantially contributing to aircraft production in 1943, whereas merchant shipbuilding mobilised early and effectively by 1940. The profit motive combined with the vast amount of government expenditure incentivized higher efficiency and output from the industrial sector. Henry Kaiser, known as the ‘father of modern American shipbuilding’, was able to reduce the production time for Liberty Ships down from 365 days in 1940, to 62 days by 1942, and finally one day by the end of the war.

The War Production Board, set up by FDR in early 1942, was one of several agencies established to preside over the ‘war economy’ and was directed by Donald Nelson. Nelson recognised what he called the “feasibility dispute”, which was the key issue of how to administer a war economy effectively: to balance the needs of civilians and private companies against those of the military. Nelson resolved this dispute in 1942 by arguing that ‘all out’ production for war would have negative implications on America’s future productive capacity (as indeed occurred in Britain for example), and thus convinced the military to restrain its demands. Under Nelson, the WPB also created the ‘Controlled Materials Plan’, which allocated steel, aluminium, and copper to industrial users, helping to effectively distribute these scarce supplies.

Through the lend-lease program, the US economy also witnessed a substantial injection of money by the federal government for the production of industrial goods for Britain. Between 1941-1945, over $32.5 billion worth of goods were exported through Lend-lease and represented a significant portion of federal defence expenditure (which in 1945 alone totalled $64.53 billion). Lend-lease was one of the first indicators of the growth of American industry throughout the war, and how the US would have to support its allies’ industrial efforts through being what FDR coined the “Arsenal of Democracy”. After 1945, lend-lease generated a consistent revenue stream for the US through the repayment of low-interest loans; Britain finally stopped repaying its lend-lease debts to the US in 2006.

Another element of the US economy that proved to be crucial for the country’s rapid economic growth during the war was that of taxation and war bonds. The war saw the introduction of the first-ever general income tax in American history, with the number of Americans paying such tax rising from 4 million to over 43 million during the war. The top tax bracket, for those earning over $1 million a year, rose to 94%, and this new taxation increased the government’s tax revenue from $8.7 billion in 1939 to $45 billion in 1945. Yet taxes only covered roughly half of the war’s cost, and thus the remaining sum was raised through war bonds which only returned 2.9% p.a. after its 10-year maturity, yet which were sold to over 85 million Americans and commercial institutions such as Banks. Thus these bonds did not only generate the money which the federal government needed to fund the war, but also provided many Americans with a relatively stable and safe investment that would contribute to the war effort.

One final important aspect of the US economy to note is how America’s geographical isolation from the theatre of war favoured industrial output. While the War devastated most of the industrialised world, from the Blitz raids in London to the persistent aerial bombing assaults in German and Japanese industrial centres, no such devastation hit the US mainland except for Pearl Harbour in 1941. The US capitalised on the fact that its industry back home was, for the most part, safe from the threats of war, whilst foreign industrial output was under the constant threat of destruction.

The growth of the American economy throughout, and as a consequence of, the Second World War seems to disprove Sun Tzu’s claim that ‘there is no instance of a nation benefitting from prolonged warfare.’ The War revitalised the American economy from the long-term recession it continued to face after 1929 and positioned it as a global superpower by 1945. US growth was unlike anything seen anywhere else in the world and, perhaps, will be unlike anything the US will ever see again.

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