The 1940s Business and the Economy: Topics in the News

WAR ENDS THE GREAT DEPRESSION

In 1939, the American economy was struggling. Unemployment was high, while prices and wages were low. By 1940, with Europe at war, everything had changed. European countries were desperate for goods to use in the war effort. They spent millions of dollars on American steel, ammunition, weapons, and food. Yet private businesses were slow to react to the demands of war. Many manufacturers continued to make consumer goods when military hardware was most needed. Shortages of raw materials also held up the recovery. Rather than issuing government orders or taking control of industries, the Roosevelt administration chose to guide private industry into producing what was required. It struck deals with private businesses to boost wartime production. This mixture of private money and federal incentives became the model for the American economy for the next thirty years.

In the 1930s, President Franklin D. Roosevelt (1882–1945) set up so many new government agencies, each known by a set of initials, that they collectively were known as "alphabet soup." Some of these agencies were converted to war work in the 1940s. But several new agencies were set up specifically to deal with the war. Headed by William S. Knudsen (1879–1948), the Office of Production Management (OPM) set production targets for raw materials such as steel. In 1941, the Supply Priorities and Allocations Board (SPAB) took on some of the OPM's duties. The National Defense Mediation Board (NDMB) tried to make sure essential industries were not disrupted by strikes. Early in 1942, the War Production Board (WPB) and the National War Labor Board (NWLB) became the two main agencies monitoring the supply of goods and raw materials. Donald Nelson (1888–1959), a former Sears Roebuck executive, was appointed head of the WPB, becoming the most powerful man in the economy.

Yet despite all these efforts to keep supplies steady, the war did create shortages. In order to make sure essential supplies were shared fairly, many items, including meat, sugar, butter, and canned goods, were rationed. Every U.S. citizen was given a book of stamps. These stamps had to be handed over by the customer when he or she bought rationed goods. Many suppliers made extra money by illegally selling rationed goods to customers who did not have enough stamps, charging them extra. Gasoline was also rationed, but in a different way. Every vehicle was rated A to E, and carried a sticker in the window with a letter on it. Those rated "A" were private automobiles, and were entitled to very little gas. Emergency vehicles were rated "E," and could take as much as they needed. Others fell in between. Before long, there was a thriving black, or illegal, market in gasoline and other rationed goods.

Although there were still shortages at home, by 1943 the American economy was more productive than it had ever been. Between 1940 and 1945, American industry produced eighty-six thousand tanks, thirty thousand aircraft, and sixty-five hundred ships. U.S. Steel made twenty-one million helmets for the army. Quality improved as well. Aircraft could fly farther and faster than ever. The General-Purpose vehicle, known in soldier slang as the GP, or Jeep, grew tougher. Advances made during wartime helped American industry reach its dominant postwar position. By 1946, corporate America was desperate to separate Americans from the $140 billion they had saved in times of shortage and rationing. Keeping that spending under control was one of the biggest challenges faced by President Harry S Truman in the late 1940s.

Americans Do Without, Collect Scrap

Despite the rationing system, supplies of certain consumer goods ran out during the war. Production of nylon stockings all but stopped when factories converted their operations to produce parachutes and medical supplies. Women took to drawing a line up the backs of their legs so that people would think they were wearing seamed stockings. Eyeglasses, usually imported from Germany, became very scarce. The federal government ran "scrap drives" to help save on raw materials. Children collected bacon fat (used in making ammunition), old newspapers (for recycling), old tin cans, tin foil, and other scrap metal. Scrap drives brought the nation together in the fight against fascism. But they had very limited effect on the shortages of consumer goods.

GOVERNMENT FINDS NEW WAYS TO FINANCE THE WAR

The American economy surged ahead in the early 1940s. This dramatic recovery resulted from massive federal spending on defense. The cost of U.S. involvement in the war, between 1941 and 1945, came in at a staggering $360 billion. Less than half of that was paid for by taxation. Instead, the federal government borrowed money to cover its wartime expense. In

1940, government debt stood at $43 billion. By 1945, the U.S. government owed $260 billion.

Taxation was the most reliable way of raising money. But increasing income taxes was politically risky. The Roosevelt administration had to be careful not to take too much money from ordinary Americans. This policy made sense not only because it kept voters supporting the Democratic president. The federal government also might have damaged the economy by reducing the amount of money American consumers had to spend if it had raised taxes too much. Instead, the administration opted for a "progressive" taxation system, in which people with higher incomes paid a progressively larger tax as a percentage of their income. Wartime tax policies were so successful that they continued until 1964.

The 1942 Revenue Act imposed the highest income taxation rates in American history. The highest earners paid a 91-percent tax on some of their income. Companies paid up to 40 percent of their gross profits in corporation taxes. Most significantly, however, more Americans were paying taxes than ever before. The number of taxpayers rose from 39 million in 1939 to 42.6 million in 1945. A new system for collecting taxes was put in place. Though it was meant as a temporary wartime arrangement, payroll deduction became routine after the war.

But even increased taxation still did not provide enough money to pay for the war. Sixty percent of the war's cost was met by borrowing. The main form of government borrowing was a system of war bonds. Americans could buy these bonds from the U.S. government in denominations from $25 up to $10,000. Bond holders could sell the investments back to the government at a later date. In total, $135 billion was raised by the sale of government war bonds. Most of the bonds were sold to banks and insurance companies looking for secure investments at a time of great uncertainty. But for ordinary Americans, buying war bonds became a patriotic act. Private citizens lent $36 billion to the nation through the war-bond system. Bond drives, some featuring publicity stunts, encouraged people to buy bonds. The horseshoes of Kentucky Derby winner Man o'War were auctioned off at a war-bond drive, while movie actress Hedy Lamarr (1913–2000) gave out kisses in exchange for buying bonds.

It was not just the war effort that benefited from this combination of progressive taxation and investment in bonds. The difference between rich and poor in America began to level out. In 1939, the top five percent of earners had 25 percent of the nation's disposable income. In 1945, they had only 17 percent. For the first time in American history, the rich had stopped getting richer. When the war ended, people cashed in their bonds and began spending the money on consumer goods. High wages, and America's domination of world trade, insured the emergence of a new American middle class after World War II.

The performance of the economy after the war soon helped reduce the federal deficit. In 1945, the federal government spent $53 billion more than it received in taxation. By 1950, federal spending outstripped income by only $3 billion. Government debt, however, did not go away. The amount owed by the federal government dipped from $260 billion in 1945 to $256 billion in 1950, but it continued to climb for most of the next fifty years.

COLD WAR TENSIONS CREATE THE "MILITARY-INDUSTRIAL COMPLEX"

Ever since the Russian revolution in 1917, political tension had existed between the United States and the Soviet Union. The two nations had come together to fight the Nazis during World War II, but after 1945 the Soviet Union hoped to expand its borders. This expansion threatened to close off many of the markets where American companies did business. After the war, President Harry S Truman decided that the spread of the Soviet Union had to be stopped. His adviser was George F. Kennan (1904–), an official at the American embassy in Moscow. Kennan's advice led to a foreign policy that would stay in place for the next forty-five years. It was known as the policy of "containment." The U.S. government wanted to "contain" the spread of Soviet power and influence.

The Spruce Goose

Aviation enthusiast and movie tycoon Howard Hughes (1905–1976) made a fortune during World War II. His company built planes for the military. One of the planes that Hughes's company built was a huge aircraft which was half boat and half plane. The so-called "Spruce Goose," which was built mostly of birch, was so large that observers joked that a small plane could take off from its horizontal tail fins. The vertical tail fin towered 113 feet above the ground, equal to the length of a B-17 Flying Fortress bomber. The plane's 320-foot wingspan was the largest in aviation history. Hughes made a vow that either the Spruce Goose would fly or he would leave the country. On November 2, 1947, the eight three-thousand horsepower engines were fired up and, by some miracle, the Spruce Goose took to the air. It managed to fly one mile and landed in Long Beach harbor, never to fly again. Hughes did not have to leave the country. Although the whole affair was a great embarrassment for the government, the project proved the confidence and energy of American industry.

Truman's containment policy was matched by aggressive talk from Moscow. In the late 1940s, the United States and the Soviet Union each began spending billions of dollars on defense and entered what was known as the cold war. The nonmilitary standoff earned the nickname because neither country wanted nor could afford a "hot" war with one another. Still, the Soviet Union and its Communist ideology seemed so threatening to world governments that one of the first things Truman did as president was to give $400 million to help Greece and Turkey fight Communist rebels. The United States did not want those two nations to become part of the Soviet Union.

The Bretton Woods Agreement

One of the reasons to stop the expansion of the Soviet Union was the effect such a development might have on trade. As World War II came to an end, American diplomats and business leaders tried to make sure there would be free markets around the world. In 1944, with the end of the war in sight, the Bretton Woods Agreement was signed. It set up two institutions, the International Monetary Fund (IMF) and the World Bank (International Bank of Reconstruction and Development), and established the General Agreement on Tariffs and Trade (GATT), a multilateral agreement that set rules for trade between countries. Because America had come out of the war without suffering damage at home, representatives from the United States dominated the IMF and the World Bank. Free trade was encouraged through GATT, and measures were put in place to regulate currency markets. The IMF lent money to governments to help them rebuild after the war. It charged interest on its loans.

In 1948, the Truman administration submitted a budget of $39.6 billion to Congress for approval. Around $18 billion, almost half of the total government spending, was earmarked for the military. For the first time in history, the United States began to build a large standing army. Just as it had between 1939 and 1945, such massive spending boosted American industry. The difference was that this time there was no sense that the war would ever end. A whole new kind of industry emerged, with the sole purpose of providing armaments, equipment, and ammunition for the Pentagon. Because it linked together the military and industry, this new part of the economy was known as the "military-industrial complex." By the end of the 1940s, it was one of the most powerful sectors of the American economy. During the 1940s, it seemed important that the military had a good supply of hardware. Very few people recognized the risk that such a powerful industry might want to keep the cold war going for its own benefit.

AMERICAN BUSINESS MOVES INTO FOREIGN MARKETS

One of the causes of the Great Depression was the loss of access to foreign markets by American companies. During World War II American businesses expanded rapidly. They supplied billions of dollars' worth of goods to war-ravaged countries such as France and Great Britain. By the time the war ended, American businesses had built up huge reserves of money. In the late 1940s they used this money to invest abroad.

In 1947, the United States invested a total of $26.7 billion abroad. Sixteen billion dollars of that capital came from private companies. The rest came from the federal government in the form of loans and investments

through such agencies as the World Bank, the International Monetary Fund (IMF), and the Reconstruction Finance Corporation (RFC). Part of the reason for this overseas investment was to stop the spread of communism. But the main aim of American spending overseas was to prevent another economic disaster like the Great Depression.

The Balance of Trade

The 1940s saw the United States recover from the economic problems of the 1930s. In particular, it began to export more goods than it imported. This had not happened for almost a decade. The table shows the value of exported and imported goods in the 1940s.

American business expansion in the 1940s often happened through joint ventures by U.S. companies with the federal government and with foreign governments. Some business leaders managed to expand into overseas markets and to be patriotic at the same time. Robert W. Woodruff (1889–1985), president of Coca-Cola, faced a serious problem during the war. With the supply of sugar rationed, his product was under threat. Woodruff solved the problem by convincing the government that soldiers and industrial workers would be better off if they drank Coca-Cola. Before long, wherever American troops went, they took Coca-Cola with them. In this way, Coca-Cola was introduced to a worldwide market and has stayed there ever since.

The search for natural resources such as oil, coal, and metal ores also drove international expansion. By the end of the war, American continental reserves of high-grade iron ore were running out. Bethlehem Steel Corporation spent $37.5 million developing iron ore deposits in Latin America. In Brazil, the M. A. Hanna Company opened up an iron ore supply of around 160 million tons. The Anaconda Copper Mining Company invested $150 million in Chilean copper mines. Manufacturers also expanded onto foreign soil. Ford invested $3 million to begin building cars in Australia, as did General Motors.

But it was oil that offered the biggest opportunity for expansion over-seas. Every American oil company looked abroad for new reserves and new business in the 1940s. U.S. Secretary of the Interior Harold Ickes (1874–1952) helped American companies gain access to Middle Eastern oil reserves. This was often achieved through joint agreements with foreign companies and governments. Standard Oil, the most aggressive of the oil companies, spent $100 million building refineries, pipelines, and even new towns in Venezuela and elsewhere. It spent another $140 million on refineries in England. In all cases, the oil companies worked closely with the federal government. During the 1940s there was unprecedented cooperation between government and business. Nowhere was this more important than in overseas expansion.

AMERICAN AID HELPS REBUILD EUROPE

In the aftermath of World War II, the nations of Europe faced terrible hardships. Major cities such as Berlin, Dresden, and Cologne in Germany and Coventry, Hull, and Liverpool in Great Britain had been flattened by bombs. To make matters worse, factories, railroads, ports, and major industries were severely damaged. In June 1947, U.S. Secretary of State George Marshall (1880–1959) proposed a program of aid to help rebuild several European nations. The program became known as the Marshall Plan.

Marshall and his supporters in Washington, D.C., believed that World War II had two causes. First, they believed that the United States had been mistaken in trying to keep out of international affairs after World War I. The United States had refused to join the League of Nations (a body set up to promote dialogue among countries), and it also had withdrawn from European affairs in the 1930s. The second cause of World War II, according to Marshall's supporters, was the failure of the United States to deal with war debts after World War I. Heavy debts brought economic crisis to Germany in the 1920s and led to Adolf Hitler (1889–1945) and the Nazis taking power in 1933. The Marshall Plan aimed to prevent the same thing from happening again.

At first the Soviet Union, as well as other European nations, were keen to benefit from the Marshall Plan. But after the first meeting, the Soviets and their allies pulled out, claiming that the conditions attached to any aid would be unfair. Sixteen European nations stayed at the table. They eventually agreed to receive an aid package of $17 billion over four years. Five billion dollars would be paid in the first year. In return for providing aid, Marshall's supporters wanted to regulate the European economy just as the Roosevelt administration had regulated the American economy during the 1930s.

The federal government was eager to use the Marshall Plan to create a market free from trade barriers within Europe. There were several reasons this seemed important. Many European countries, including France and Italy, had developed powerful Communist parties, and many Americans worried that Soviet power would spread across Western Europe, just as fascism had done twenty years earlier. American businesses wanted Europe restored so that its citizens could buy more American goods. But whatever the motives, the Marshall Plan speeded the recovery of European nations and helped to avoid another economic crisis. It also laid the foundations for the European Common Market and the single currency called the Euro, which is now used in several western European countries.

LABOR UNIONS EXERCISE POWER AND INFLUENCE

At no other time in American history have labor unions been as powerful as they were in the 1940s. During World War II, union membership grew rapidly. In 1941, 10.1 million workers belonged to labor unions. Four years later, 14.7 million men and women were union members. Labor unions had close ties with the Democratic Party and were supported in the president's cabinet by Secretary of Labor Frances Perkins (1882–1965). Their influence on federal government went far beyond their ability to organize strikes and protests.

Two large organizations dominated the labor movement: the American Federation of Labor (AFL) and the Congress of Industrial Organizations (CIO). Both unions agreed not to press for strikes while the war continued. But labor leaders soon became unhappy with the National War Labor Board (NWLB), the federal agency set up to control wages. They were also concerned that the NWLB and other wartime agencies were run by big business.

By 1942, trouble was brewing between big business and the labor unions. The cost of everyday household items was rising fast, and the unions demanded higher wages for their members. Eventually the NWLB agreed to a 15-percent pay increase. But by 1943, strikes were also on the increase. Over three million workers walked out on strike that year. The United Mine Workers' (UMW) leader John L. Lewis led four hundred thousand coal miners out on strike, breaking the no-strike deal. The strike was very unpopular with the general public, because coal was the main form of heating fuel. Lewis quickly became the most hated man in America.

Labor unions in general, and Lewis in particular, had enjoyed a close relationship with the Roosevelt administration. By 1943, everything had changed. There was talk of mines being seized by the federal government. Congress passed the War Labor Disputes Act, trying to make it illegal to encourage strikes in government-run plants. President Franklin D. Roosevelt stopped the bill, but ordered Secretary of the Interior Harold Ickes to take over the mines. Eventually a new way of calculating wages ended the dispute without breaking the NWLB rules regarding wage increases.

As worker shortages grew worse, Roosevelt looked for creative ways to solve the problem. In January 1944, he proposed making it possible for the federal government to order citizens to work anywhere it saw fit. The labor unions were angered by this plan. They saw it as a form of slave labor. And they had an unlikely friend in big business. Business leaders did not want to be told whom they should hire.

In 1946, not long after the end of the war, strikes broke out in the automobile, steel, communications, and electrical industries. This was a record year for walkouts in America, with 4.6 million workers setting down their tools. President Harry S Truman struggled with powerful unions that refused to accept wage settlements. In the end, the Truman administration took over mines and railroads. Still, the strikes went on, with Truman denouncing strikers as traitors. The UMW was heavily fined for violating a federal injunction. Yet, despite these conflicts, by the end of the decade growing prosperity had closed the rift between the Democratic administration and organized labor.