The Economy During Wartime

During the Second World War, the United States had a centrally planned economy. Strategic resources were produced in quantities set in Washington, and allocated among end users by the public officials sitting on the War Production Board. Key prices and wages were administered, not left to markets. The large majority of investment was directed, financed, and, in most cases, owned by the federal government. Thousands of private businesses that failed to comply with the planners’ instructions were simply taken over by the government—including some of the country’s largest corporations, like Montgomery Ward. For millions of Americans, the photograph of Ward’s adamantly anti-Roosevelt chairman Sewell Avery being carried from his headquarters by a squad of soldiers crystallized the new relationship between government and capital.

What are we to make of the fact that economic life was “quite completely regimented” (in the approving words of Admiral Harold Bowen) during the war? For novelists of the front lines, it could appear as part of a vast impersonal machine, consuming human lives as means to an inscrutable end. Think of Corporal Fife in The Thin Red Line, watching his transport ship coming under attack by Japanese planes: “A regular business venture, no war at all. It was weird and wacky and somehow insane. . . . It was as though a clerical, mathematical equation had been worked out, as a calculated risk.” For historian Mark Wilson, whose attention is fixed on the home front, there’s no such ambivalence. His new book Destructive Creation is a defense of the management of the war economy by “clerical, mathematical equation,” against those on the right, who attribute wartime production to the genius of private business, and those on the left, who see the wartime state as an engine of profiteering and monopoly. The book is animated by the idea that wartime planning represents a lost model for effective public direction of the economy: “If American policymakers had applied the lessons of World War II mobilization to the toughest challenges of the later twentieth century, people around the world would be better off today.”

The Second World War was certainly an economic success story, in that it coincided with the most rapid economic growth in U.S. history. Much of this growth came not in the recovery from the Depression, but in the post-1940 period, when the country was already more or less at full employment. Between 1938 and 1944, unemployment fell by about 10 million. (This includes people leaving the Works Progress Administration and similar jobs programs.) Over the same period, private employment and military employment each rose by 10 million, implying 10 million new entrants to the labor force—mostly women. At the same time, workers shifted from less productive activities (especially agriculture) to more productive jobs in industry. Industrial productivity—output per hour—also rose rapidly.

Wilson is certainly right that the federal government played a central role in this vast expansion of productive capacity. Even before Pearl Harbor, it was clear to the leaders of the mobilization effort that the peacetime system of allocating industrial inputs by markets was breaking down in the face of a rapid expansion of military production. Materials like steel, copper, aluminum, and rubber were in short supply, exacerbated by hoarding by contractors who wanted to ensure that their own orders were filled. Even more critically, investment in new industrial capacity—after 1940, almost all directed and financed by Washington—could only be decided if future supplies of critical raw materials were known. (There was no point in building a new bomber factory if there wouldn’t be enough aluminum for it to make planes from.) Ad hoc price controls and the crude “priority” system reserving key materials for military use were not enough—an explicit planning process was needed.

Economic planning during the war also led to a broader rationalization of economic life. Much macroeconomic data begins around 1945—it was first collected to aid in wartime planning. The estimates of actual versus potential output that guide so much macroeconomic policy today emerged out of the “feasibility debates” between civilian economists and military planners—a fascinating story barely touched on by Wilson but told in detail in Paul Koistinen’s Arsenal of World War II (2004), which remains the definitive history of wartime economic planning. The same goes for other belligerents. Richard Werner (in Princes of the Yen, 2003) convincingly argues that the planning apparatus that guided Japan’s postwar economic miracle was the product of the war—early twentieth-century Japanese capitalism more closely resembled the freewheeling liberal, market-centered American system than what we have come to think of as the “East Asian model.” Turning back to the United States, it’s clear that much of what the businesses objected to as “red tape” was simply that in order to win government contracts, they had to adopt explicit cost accounting, wage schedules, and other hallmarks of the modern managerial firm.

It’s easy to see the attraction of making the fight against Hitler exhibit A in a broader argument for the public sector. If government planning was essential for developing and mobilizing real resources for the war, why not for its moral equivalents today, such as climate change? Wilson doesn’t explicitly make this argument—his story stops in the 1950s—but it’s safe to say he’d be on board.

There’s plenty of useful material in this book, but its case would be stronger if it were not so narrowly focused on the business-government interface. Wilson offers a comprehensive account of the ways in which public officials interacted with business: as customers, as financiers, as regulators, as rivals for the favors of public opinion. But he has nothing to say about two critical questions that lie, so to speak, on each side of this interface: how the planning apparatus actually functioned, and how American industry was able to generate such big increases in output and productivity. Wartime productivity gains get, literally, one aside (“economies of scale, improving production techniques, or other factors”) tucked into a discussion of how prices were set for military procurement. Similarly, the operations of the planning apparatus—the War Planning Board and its predecessors—gets less than two pages. By contrast, a dozen pages are devoted to how payments were handled on prematurely canceled contracts. Wilson is very interested in how much the government paid for tanks and ships, not so much in how so many of them were produced.

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