Swords into plowshares: why the Truman economy was surprisingly successful
It is commonly believed among certain schools of economics that war is good for the economy and therefore peace is bad. This has been proven wrong over and over again, but it nevertheless persists, because it is the poisoned fruit of a bad economic root, the idea that economic growth depends on policies which stimulate spending. If one starts with the idea that spending leads to growth, it’s hard to avoid the myth that war is good for the economy, because it’s hard to deny that wars are one of the most expensive things which government does.
This idea got a major test after the end of WWII and the succession of power from FDR to Truman.
While investors, industry and businessmen, and entrepreneurs all shared a common disdain and fear of Roosevelt, after WWII he was now gone and so was his business-destructive administration. Harry Truman was neither investor nor business favorite. Yet, this was a breath of fresh air after the Roosevelt administration. “Investors might not like the Truman administration, but they could live with it.” Truman’s succession of the presidency
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“completed the shift from a political regime investors perceived as full of uncertainty to one in which they felt much more confident about the security of their property rights …. business and professional people felt much less threatened by Truman than they had by Roosevelt.”
As the dismal economy of the 1930s lingered painfully on, public support for Roosevelt began to weaken. Even some of the radicals of Roosevelt’s Brain Trust became disenfranchised about the New Deal. Brain Trust member
“Raymond Moley … who had become estrange from the New Deal, described [one of the New Deal programs] in 1940 as a 'time bomb.'"
In fact, by November 1941 a Fortune magazine poll revealed 92.8 percent of business executives grimly predicted a post-war economic structure in the United States would be somewhere between a quasi-socialist state and an outright dictatorship.
By the mid-1940s, unemployment was at a paltry 3.9 percent. In fact, unemployment maintained a very low rate; 3.9 percent in 1946, 3.6 percent in 1947, and 3.4 in 1948. It wasn’t until 1949 that it rose to 5.5 percent which is a healthy and strong figure; in fact, between 1950 and 1957 unemployment range from a low of 2.5 percent to a high of 5.0 percent – stunning figures of economic health by any standard. From an employment standpoint, the Shining City certainly did shine.
Even with the exceedingly low levels of unemployment, “substantial price controls were in effect in 1944, but were essentially abandoned by 1947.” Although there were price controls in place during the period between 1941 and 1945 prices rose by 46 percent – so much for the government’s ability to manage prices, although the government did marginally control the pricing on war materials. And during the post-war period between 1945 and 1948 prices rose about 13 percent.
Economists Richard Vedder and Lowell Gallaway’s joint review of the economic data suggests that the strong economic increases cited during the war years are seriously overstated. Therefore concluding that WWII brought America out of the Great Depression, a common misconception, is not correct. In fact, the war prosperity was superficially due to the government’s massive demand and consumption on wartime materials. Not to paint this as unnecessary to shift to such an economy during times of significant wars – this change is often crucial to secure a military victory via massive munitions development and production. But the falsehood of this substitute prosperity is the very reason so many economists at the end of the war predicted a return to a depression and exacerbated by the return of soldiers needing employment. It also drove the greatly inflated, and fundamentally flawed, economic statistics.
Looking at it from the demand side, many consumers of governmental services are forced to “purchase” those services at a cost above what the consumer would be willing to pay if permitted to buy the services on a non-coercive basis. From the supply perspective, monopolistic governmental bureaucrats lack the incentive to minimize resource use, and thus services are provided less efficiently than if sold competitively in the private market economy.
With the government’s exit from industry the GNP in 1946 declined by only 1.1 percent – a tiny number in contrast to the dire predictions of economists of the time. Output in 1947 was less the 2 percent below the output of 1944, and 1948 exceeds the wartime peak by nearly 6 percent. The result of the economy at the end of the war and post-war is the exact opposite of what the Keynesian economists of the time predicted. They believed that
“[I]t reflected a more short-term Keynesian concern with falling aggregate demand in the face of decreased government expenditures. The thought of a rapid reduction in government military spending [would be a] nightmare.”
But as Vedder and Gallaway report, “Yet that is precisely what the government did.”
Federal spending dropped by more than 50 percent, essentially a spending cut of 53.4 percent (seemingly unimaginable by today’s perception). In 1945 government spending was $118 billion and fell to $58 billion by 1947, and to $55 billion in 1948.
Between Congress and President Truman little was done – with the exception of a few small efforts were – to invoke any new public works spending or stimulate aggregate demand through tax relief. Congress completely rebuked a majority of Truman’s efforts to push any reinstituted programs from the New Deal. The citizens of the Shining City did as they did during the war – they soldiered on. With a report from the New York Times only three days after V-J Day stating,
“[R]eports indicate that industry is reconverting its plants from war to peace much more quickly and early, and that reconversion unemployment is much smaller than anticipated.”
Despite the evaporation of government contracts for the war effort, reports Burt and Anita Folsom, entrepreneurs, who were the success behind the supplying of war materials, proved after the war, they were not dependent on government war contracts for success, as they quickly shifted to peacetime production underpinned a successful economy.
Business also ignored the dire predictions of the economists, as stocks rose more than 30 percent between the autumn 1945 and the autumn of 1946. Articles from Business Week revised their originally bleak projections of unemployment by a 30 percent improvement stating “that the transition from war to peace production isn’t proving too rough.” However, they were still off by 60 percent in 1946 with unemployment even improving further in 1947 and 1948.
“The doomsayers’ 'minimum estimate' turned out overly pessimistic by nearly a factor of three.”
Since they were relying on a Centrally Planned economy, which was about to depart, the Keynesians saw this departure as the impetus to their depressing future for the country. Fortunately, the citizens of the United States proved them incorrect.
