Economic wartime regulations

Regulations including rationing, various price controls, tax increases, and formal economic planning

The outbreak of war brought new stresses to an economy still not recovered from the Great Depression, prompting extensive federal regulation of economic matters, including rationing, wage and price controls, and other forms of government intervention. The controls provided lessons in economic policy, and some aspects of the controls persisted after the end of World War II.

When the United States entered World War II on December 8, 1941, the American economy had not yet recovered from the Great Depression. The demands of a war economy quickly changed the problems facing U.S. economic policy makers from coping with unemployment and insufficient demand to a tight labor market and inflationary pressures. For example, almost 10 percent of the labor force was still unemployed in 1941 on the eve of U.S. entry into World War II, but by 1943 unemployment was below 2 percent. At the same time, output soared. Aircraft production more than quadrupled between 1941 and 1943, shipbuilding increased more than fivefold, aluminum production tripled, and munitions manufacturing increased ninefold.

To address the economic problems this transformation posed, the federal government resorted to economic regulatory measures that were unprecedented even by the standards of the New Deal. These succeeded in holding inflation to the low single digits during the war, a considerable achievement given the double-digit inflation during World War I and immediately before World War II. At the same time, the economy was mobilized to produce sufficient war material to carry on a two-front war. The government undertook three main types of regulation: wage and price controls to restrain inflation, taxation to acquire revenue and to restrain inflation, and economic planning to ensure that both civilian and military needs were met.

Wage and Price Controls

World War II brought the most extensive set of wage and price controls the United States economy had ever experienced. Fearing inflation that might result from pressures to increase production, federal economic planners moved quickly to limit increases in both wages and prices. Congress passed the Emergency Price Control Act barely two months after the United States entered the war, and the newly created Office of Price Administration quickly issued sweeping regulations covering the prices of many consumer goods and war materials, limiting rent increases in areas around war plants, and limiting wage increases. Prices generally were held to their levels of March, 1942. Wages were allowed to rise by approximately 15 percent to cover equivalent increases in the cost of living,

The wartime controls are largely viewed as a success today, although some scholars are critical of their postwar impact, arguing that the extension of government controls deep into the economy led to postwar economic regulation that was unnecessary in the absence of wartime emergencies. Restrictions such as rationing constrained economic choices and led to hardships, and shortages even of rationed goods burdened consumers with queuing in long lines hoping to receive scarce commodities. Community boards’ ability to increase individual rations sometimes led to charges of corruption and favoritism in allocations.

Perhaps the most significant failing of the wartime economic regulations was their inability to prevent a widespread black market from appearing. With price increases forbidden in legal markets and demand outstripping supply for goods from tobacco to gasoline, it is not surprising that Americans turned to unofficial markets to satisfy their needs.

Taxation

Fighting on two fronts was expensive, and federal tax revenue soared during the war from 8 percent of gross domestic product (GDP) in 1941 to 20 percent in 1945. The most significant tax policy was the expansion of federal income taxation. Prior to World War II, the federal income tax was relatively small, affecting only four million taxpayers in 1939 and yielding under $8 billion. By 1945, forty-three million Americans were paying federal income tax, and the government took in more than $45 billion. Marginal tax rates for those earning $500 per year were 23 percent, and those earning more than $1 million paid a marginal rate of 94 percent.

The government worried that taxpayers would be unable to meet their tax liabilities and so instituted income tax withholding, both to ensure that wage earners could pay their tax bills when they filed their tax returns and to dampen inflationary pressures by reducing the amount of money wage earners had to spend. Ironically, a young Milton Friedman—later an outspoken advocate of free markets and limited government intervention in the economy—was one of the architects of the withholding scheme, something for which he later reported that his wife never forgave him.

Economic Planning

Coordinating military and civilian needs, while bringing millions into the military and out of the civilian labor force, required considerable planning. The federal government established a wide range of agencies and boards to coordinate economic activity. For example, the War Production Board allocated steel, aluminum, and copper to industrial users; the War Manpower Commission controlled civilian labor markets and the flow of draftees into the military; the War Food Administration handled food supplies; and the Office of War Mobilization coordinated the other agencies. Building on the legacy of New Deal economic planning, these agencies extended government influence deep within previously private economic decision making.

Overall, the planning effort was successful in balancing civilian and military needs and allocating scarce resources between war industries and civilian needs. To accomplish this, wartime economic regulators used both price controls and quantity restrictions, primarily through rationing. Civilians were required to show ration coupons, issued by the government according to formulas reflecting relative need, for both goods critical to the war effort (such as gasoline) and luxury items (such as chocolate) whose production the government sought to restrict in an effort to shift inputs into more critical goods.

Postwar Developments

Once the war was over, the government faced the problem of how to dismantle wartime controls without causing a sudden inflation in prices and wages, caused by pent-up demand for goods and services not available during the war. More than fifty leading economists, including free market advocates such as Henry Simons and Frank Knight, issued an open letter to Congress asking for the continuation of controls for a year after the war’s end to give time for production to shift to meet peacetime demand for consumer goods. Inflation soared when controls were lifted, hitting an annual rate of 28 percent in the six months after June, 1946.

Impact

All three major forms of economic controls used during World War II—wage and price controls, tax policy, and direct economic planning—contributed to the American war effort by preventing damaging inflation at home and by coordinating war and civilian production during the conflict. Although it is impossible to know how the American war effort would have succeeded without these measures, the consensus among historians and economists is that they largely succeeded in promoting mobilization of the economy to fight a truly global war on two fronts. Furthermore, all three played a major role in transforming American society, with much greater government intervention in economic matters, many more Americans paying federal income tax, and a larger degree of national economic planning at the end of the 1940’s than at the start.

Perhaps the most long-lasting impact of wartime economic regulations was the creation of federal boards and agencies devoted to economic planning. For example, wartime cooperation between the petroleum industry and the government led to the postwar creation of the National Petroleum Council as a successor to the Petroleum Industry War Council that had coordinated oil industry efforts during the war. As industries organized to participate in such efforts, their associations and councils served as natural vehicles for lobbying the government for regulations they favored and for special consideration.

Bibliography

Engerman, Stanley L., and Robert E. Gallman, eds. The Twentieth Century. Vol. 3 in The Cambridge Economic History of the United States. New York: Cambridge University Press, 2000. Includes a definitive survey of wartime economic measures.

Harrison, Mark, ed. The Economics of World War II: Six Great Powers in International Comparison. New York: Cambridge University Press, 2000. A somewhat technical, comparative look at how the great powers handled wartime economic issues.

Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987. A critical look at the growth of government through regulatory expansion during crises such as World War II.

Hixson, Walter L. The American Experience in World War II. New York: Taylor and Francis, 2003. A comprehensive social history of the war, with discussion of economic events.

Milward, Alan S. War, Economy and Society, 1939-1945. Berkeley: University of California Press, 1980. A comprehensive, accessible one-volume review of the economics of World War II, including how economic regulation affected the U.S. economy.

Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States. New York: Cambridge University Press, 1984. The definitive history of efforts to control prices, including extensive discussion of World War II efforts.

‗‗‗‗‗‗‗. “Price and Wage Controls in Four Wartime Periods.” Journal of Economic History 41, no. 2 (1981): 381-401. A concise survey of efforts to control inflation through economic regulations.