Economy, World War II

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On December 8, 1941, a day after the devastating Japanese attack on Pearl Harbor, the United States declared war on Japan. On December 12, one day after Japan's Axis partners declared war on the United States, Congress reciprocated. Having embarked on its second world war in a generation, the federal government stumbled forward in an attempt to mobilize the nation for its greatest challenge since the Civil War. Despite the experience it had gained from World War I and even though it had begun mobilization prior to December 1941, the government, for myriad reasons, was unprepared for war and never managed to fully organize the nation for the twentieth century's final global conflict.

World War II cost the United States over $130 billion, and wartime finance soon proved to be an issue where the federal government excelled. For the most part, Washington financed this war, as it had World War I, through massive borrowing. In all, seven war bond campaigns raised some $135 billion. It also financed the war by transforming the tax code with the Revenue Act of 1942. Reflecting the progressive tax laws of World War I, this act raised the corporate, estate, excess profits, and gift taxes. It simultaneously revolutionized the tax code by tripling the number of wage earners paying federal income tax. By extending the income tax to millions of low to moderate wage earners, the 1942 legislation added 37 million Americans to the federal tax roles. War bonds and taxation also worked—in conjunction with the Anti-Inflation Act of 1942, which allowed the president to freeze wages and prices—to hold down the rate of inflation. From 1940 to 1945 the consumer price index rose a modest 28 percent.

Whereas the federal government quickly met the challenge of financing the war, the same cannot be said for its mobilization of the nation's economy, which before December 1941 proved haphazard at best. Much of the blame for this rests with President Franklin Delano Roosevelt and his isolationist opponents. The president, on the one hand, was reluctant to vest the authority needed to control the wartime economy with any single person or agency. Isolationists, on the other hand, harangued the administration when it attempted to better prepare the nation for conflict. Not until May 1940, as France faced certain defeat, could President Roosevelt create the Office of Emergency Management (OEM), an agency with the power to effectively direct the transition from a peacetime to a wartime economy. The OEM successfully oversaw the transition from civilian to wartime production during the first six months of 1941, when shortages of energy and raw materials and a growing chorus of complaints led the president to transfer its mandate to the newly created Supplies Priorities and Allocations Board

on August 28, 1941. This new board, however, proved to be neither more capable than the OEM nor more resistant to criticism, and in January 1942 the president abolished it in favor of the new War Production Board (WPB).

Largely the brainchild of Bernard Baruch, the leader of the World War I War Industries Board, the WPB soon proved a disappointment. Lacking control over war production and the allocation of resources, it failed to bring coordination and control to industry. Far more important, though often overlooked, was the Office of Economic Stabilization (OES), created in October 1942 to combat rising inflation. Its director, South Carolina Senator James Byrnes, used this mandate to gain control over the allocation of scarce raw materials and in the process gained control over wartime industrial production. Success at OES brought Byrnes even greater authority when in May 1943 the president named him head of the newly created Office of War Mobilization (OWM), a kind of super agency with complete power to direct wartime mobilization through control of raw materials, civilian and military production, and transportation.

Despite early problems in coordinating the wartime economy, the United States soon proved capable of supplying both American and Allied needs. Industrial production jumped from $8 billion in 1941 to over $30 billion the next year, and by 1944 American factories produced twice as much war material as the entire Axis. From December 1941 to August 1945, the United States produced over 274,000 aircraft, almost 5,600 merchant ships, 90,000 combat vessels, and 100,000 tanks. American industry supported a military of some 15 million and allowed the United States to provide $50 billion in Lend Lease aid to Axis opponents.

United States war production altered the course of the global conflict and in the process reshaped the lives of countless Americans. War mobilization ended the Great Depression even before the first bombs fell on Pearl Harbor as the gross national product rose from $91 billion in 1939 to $126 billion in 1941 to over $166 billion in 1945. Unemployment fell from 8 percent in 1940 to 5 percent in 1942 to 1 percent by 1944. Building on the experience of World War I, the federal government weighed in on the side of labor in order to avert strikes. The War Labor Board (WLB), created in January 1942, settled some 20,000 disputes involving 20,000,000 workers. With WLB help, union membership increased from 10 million to 15 million. Steady work and shortages of certain consumer goods contributed to a phenomenal rise in personal savings, from $3 billion in 1939 to $37 billion in 1944. For industrial workers, income rose some 70 percent during the war and farm income rose a staggering 300 percent. The war, in short, gave birth to the modern American middle class.

Just as war production reshaped the course of millions of individual lives, it also reshaped the contours of American business and industry. Prior to the 1939, 87 percent of Americans worked for firms with fewer than 10,000 employees. During the war years, however, large employers received the lion's share of defense orders and, therefore, the bulk of wartime profits. By 1944, 30 percent of Americans worked for these large employers. A similar process occurred in agriculture, where the number of family farms continued to decline while large farms, which relied on greater mechanization and freed labor for war work, increased in both number and acreage.

Although World War II officially ended with Japan's formal surrender on September 2, 1945, the war's effect on the American economy continues into the twenty-first century. The war ended the Great Depression, strengthened the union movement, made the income tax a shared burden, narrowed the gap between rich and poor, and increasingly made the typical employer a large, often anonymous, entity. At the same time, the war years showed both the limitations of government's power to organize the economy and the immense productive capacity that a union of capital and labor could achieve in time of national emergency.

Financing, World War II; Labor, World War II; Profiteering; Rationing.

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Sidney L. Pash

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