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How to maximize the economic efforts of war in real terms

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How to maximize the economic efforts of war in real terms

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Content H O W TO MAXIMIZE THE ECONOMIC EFFORTS OF
W AR IN REAL TERMS
A T h e sis
P re s e n te d to
th e F a c u lty o f th e D epartm ent o f Economics
The U n iv e rs ity o f S outhern C a lif o r n ia
In P a r t i a l F u lf illm e n t
o f th e R equirem ents f o r th e Degree o f
M aster o f A rts i n Economics
by
Edward Keng H sieh
June 1953
UMI Number: EP44718
All rights reserved
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This thesis, written by
Edward Keng H s ie h .................................
under the guidance of A is— Faculty Committee,
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fullfill-
ment of the requirements for the degree of
M aster o f A rts in Economics
Date... A une.-l.953.
Faculty Committee
Chairman
TABLE OF CONTENTS
CHAPTER
I . INTRODUCTION .......................................................................
I I . THE PROBLEMS OF W AR PRODUCTION ............................
How to a c q u ire p ro d u c tiv e a g e n ts ...................
M o b iliz a tio n ................... . . . . . . . . .
C onversion . . . ........................ ....
C re a tio n o f new p ro d u c tiv e f a c t o r s . . .
P re p a r a tio n i n th e prew ar p e r io d . . .
Postponem ent o f c a p i t a l goods p ro d u c tio n
i n n o n - e s s e n tia l f i e l d s .................................
The c u r ta ilm e n t o f new non-war i n v e s t
ment .......................................................................
D e p le tio n o f in v e n to ry o f consumer
g o o d s ................... ...................................................
Deferm ent o f renew al and r e p a i r o f
equipm ent .........................................................
Im porting ...................................................................
How to a l l o t p ro d u c tiv e a g e n ts f o r war
p ro d u c tio n p u rp o ses ................................................
C a p ita l f a c i l i t i e s c o n s tr u c tio n vs o u tp u t
expansion ............................................................
C iv ilia n p ro d u c tio n vs war p ro d u c tio n . .
i i i
CHAPTER PAGE
A pplied weapon m an u factu rin g vs new
weapon experim ent . ...................................... 1&
End goods s to c k p ile vs raw m a te r ia ls
r e s e r v a tio n ......................................................... 19
How to prom ote p ro d u c tio n e f f ic ie n c y . . . 20
Im proving th e te c h n iq u e s o f p ro d u c tio n . 21
Keeping a ste a d y su p p ly o f p ro d u c tiv e
a g e n ts in th e r e q u ir e d p ro p o rtio n s . . 22
I n te n s i f y in g th e u t i l i z a t i o n o f
p ro d u c tiv e a g e n ts ........................................... 24
I I I . THE ACQUISITION OF M ANPOW ER . ........................ 28
Q u a n tita tiv e re q u ire m e n ts ............................. 28
Q u a lita tiv e re q u ire m e n ts ............................. JO
M easures o f d ev elo p in g th e a v a i l a b i l i t y
o f manpower .......................................... 31
S ecu rin g la b o r in fo rm a tio n ........................ 31
Labor t r a i n i n g ......................................................... 32
D i s tr ib u ti o n o f la b o r .................... 35
Economy i n la b o r u t i l i z a t i o n ........................ 37
P re v e n tio n o f d is tu rb a n c e s ............................. 39
S tr i k e s ................................................... 39
In c re a s e i n th e r a t e o f la b o r tu r n o v e r . 43
O ccasio n al unemployment .................................. 43
iv
CH APTER PAGE
I n d u s t r i a l a c c id e n ts . . . . . ................... 44
IV. THE PROCUREMENT OF R A W MATERIALS ........................ 46
C l a s s i f i c a t i o n o f raw m a te r ia ls . . . . 46
Method o f a c q u irin g raw m a te r ia l s . . . 49
R e s e rv a tio n i n peacetim e ............................. 50
D eveloping new so u rc e s .................................. 50
S earch f o r s u b s t i t u t e s . . . . . . . . 50
S to c k p ilin g ............................ 51
S tim u la tio n o f p ro d u c tio n i n w artim e . 53.
Im p o rtin g .............................................................. 54
D i s tr ib u ti o n c o n tr o l . . . . 55
R eclam ation and sc ra p m a te r ia l s . . . 55
S ta n d a rd iz a tio n p ro d u c tio n ........................ 56
V. THE FLOW OF W AR INVESTMENT ...................................... 59
Sources o f funds ..................................... 59
The r i s k o f in v e stm e n t i n w artim e . . . . 61
E n trep ren eu rs* r i s k . ...................................... 61
Enemy’ s a t ta c k . . . . . . . 61
C o llap se o f demand ........................................... 62
P ric e c o n tr o l .................................................... 63
R e n tie rs* r i s k ................................................ 65
Inconvenience o f in v e stm e n t ........................... 67
Lack o f in fo rm a tio n ........................ 67
CH APTER
I n e r t i a o f sm a ll s a v e rs .............................
Inadequacy o f th e in s tru m e n ts o f
in v e stm e n t ................... .... ................................
C onclusion ..................................................................
V I. THE CONTROL OF FOREIGN TRADE . . ...................
Goals o f f o r e ig n t r a d e i n w artim e . . .
To se cu re war s u p p lie s .................................
To ac h iev e th e a b s o lu te advantage a n d /o r
com parative advantage o f p ro d u c tio n
I
To wage economic w a rfa re .............................
Problem s and p o l i c i e s re g a rd in g f o re ig n
tr a d e i n w artim e ................................................
Im port and e x p o rt c o n tr o l ........................
L ice n sin g system ...........................................
Quota system ...................................... ....
T a r i f f and s u b s id ie s ................... ....
S ta te tr a d in g ................................................
B i l a t e r a l agreem ents ..................................
F oreign exchange c o n tr o l .............................
; Causes o f th e f l u c t u a t i o n o f f o re ig n
I
| exchange r a t e s in w artim e ...................
i
j M easures o f f o r e ig n exchange c o n tro l
(
>
j Shipping c o n tr o ls ............................
PAGE
68
68
68
70
71
71
71
74
74
74
76
77
78
79
80
85
86
87
91
v i
CH APTER PAGE
S h ip b u ild in g ..................................................... 92
E ncouraging p r i v a t e sh ip p in g
e n t e r p r i s e s ................................................ 93
Government c o n tr o l and o p e r a tio n . . 94
Economic w a rfa re ................................................ 94
F o re ig n m arket c o m p e titio n .................... 95
F o re ig n funds c o n tr o l . ........................... 97
B l a c k l is ti n g o f b lo ck ed n a t io n a l s . . 93
M il ita r y a tta c k upon enemy economic
re s o u rc e s ..................................................... 99
Summary ............................ 100
¥11. CONCLUSION ...................................... 102
BIBLIOGRAPHY ................................................................................. 107
I
f
i
CHAPTER I
INTRODUCTION
In th e 2 0 th c e n tu ry a n a t i o n ’ s war-waging a b i l i t y
depends upon i t s c a p a c ity to arm i t s e l f . And t h i s , in
t u r n , i s d eterm in ed by th e m agnitude o f a v a ila b le n a t u r a l
r e s o u r c e s , manpower, and c a p i t a l c a p a c ity which i t can
o b ta in a t home o r from ab ro ad . The problem s o f a w ar-
e f f o r t c o n fro n tin g a b e l l i g e r e n t a r e , th e r e f o r e , m ainly
economic o n es. The economic power to su p p o rt a war i s
embodied i n r e a l goods and s e r v ic e s r a t h e r th a n money
w e a lth . The form er i s an end, and th e l a t t e r i s th e means
o f a r r i v i n g a t th e end.. The main ta s k i n a d e fe n se p re p a
r a t i o n c e n te r s on m axim izing war goods and s e r v ic e s o r ,
p r e c i s e l y sp e ak in g , on a c h ie v in g th e g r e a t e s t u t i l i t y o f
goods and s e r v ic e s f o r war p u rp o se s. T his i s t r u e a lth o u g h
money w e a lth i s an in d is p e n s a b le means o f a c q u irin g r e a l
r e s o u rc e s i n alm ost ev ery b e l l i g e r e n t c o u n try .
S ince a modern war i s so e x h a u stiv e t h a t th e war
consum ption i s l i k e l y to absorb a s u b s t a n t i a l p o r tio n o f
th e produce o f a w a rrin g c o u n try , th e e x e rtio n o f b o th r e a l
and money w ea lth o f th e s o c ie ty would be so trem endous as
to cause d i s l o c a t i o n s , d e v ia tio n s , o r even c o lla p s e o f i t s
2
economy, i f th e economy i s n o t p r o p e rly d ir e c te d . So,
b e s id e s th e a c q u i s i t i o n o f maximum war goods and s e r v i c e s ,
s o c i a l and economic s t a b i l i z a t i o n p r e s e n ts a n o th e r m ajor
is s u e i n d e a lin g w ith a w ar economy. In d e e d , b o th o f them
a re in ti m a t e ly i n t e r r e l a t e d : th e maximum war o u tp u t cannot
be a t t a i n e d u n le s s s o c i a l and economic s t a b i l i z a t i o n and
e q u ilib r iu m a re a c h ie v e d ; on th e o th e r hand, th e h a n d lin g
o f c r i t i c a l economic s i t u a t i o n s and problem s p r e v a i lin g i n
a b e l l i g e r e n t must be c o o rd in a te d w ith a com prehensive
p la n n in g o f p ro d u c tio n and d i s t r i b u t i o n o f r e a l goods and
s e r v ic e s sin c e a l l economic pro b lem s, alm ost w ith o u t ex
c e p tio n , have t h e i r r o o t i n th e e x i s tin g system o f p ro
d u c tio n and d i s t r i b u t i o n .
The problem o f m o b iliz in g r e s o u r c e s f o r war p u r
p o s e s , ta k in g i n to f u l l c o n s id e r a tio n s o c ia l and economic
s t a b i l i z a t i o n and e q u ilib r iu m , i s an ex tre m ely i n t r i c a t e
one. B e sid e s, a war economy i s s u b je c t to modern economic
w a rfa re imposed by th e enemy; a t th e same tim e , th e govern
ment i s r e s p o n s ib le f o r b rin g in g about th e same a g a in s t th e
enemy. The ta s k s and problem s in v o lv e d i n economic w arfa re ,
d e f e n s iv e ly o r o f f e n s iv e l y , a re complex and d i f f i c u l t to
s o lv e . And problem s a r e a ls o c r e a te d by i n t e r n a l i l l i c i t
p r o f i t e e r i n g which i s l i k e l y to p r e v a i l e s p e c i a lly i n tim es
o f d is tu r b a n c e .
3
To se cu re s o c i a l and economic s t a b i l i t y em phasis
sh o u ld be l a i d on w ar fin a n c e . In t h i s a s p e c t th e m ajor
is s u e i s th e c h o ice o f a l t e r n a t i v e te c h n iq u e s o f f in a n c in g
th e w ar— t a x a t i o n , p u b lic b o rro w in g , in c r e a s e i n money
su p p ly , and d i r e c t c o n t r o l—which would v ary from c o u n try
to c o u n try depending on n a tio n a l economic c irc u m s ta n c e s .
Thorough d is c u s s io n o f th e s e te c h n iq u e s , th e a p p l ic a tio n
o f which h as alw ays been a m a tte r o f c o n tro v e rs y , l i e s
beyond th e scope o f t h i s work. For s i m p l i f i c a t i o n o f
s u b je c t m a tte r , th e d is c u s s io n w i l l c o n fin e i t s e l f to an
in q u ir y i n to th e n a tu re o f th e problem s o f a c q u irin g r e a l
re s o u r c e s and th e a v a ila b le means to so lv e them . The
f i r s t c h a p te r o f t h i s t h e s i s d e v o te s i t s e l f to p r e s e n tin g
g e n e r a l problem s o f w ar p ro d u c tio n . The fo llo w in g c h a p te rs
d e a l w ith i t s component p a r t s in c lu d in g manpower, raw
m a t e r i a l , and c a p i t a l . F in a ll y , one c h a p te r i s employed
to t r e a t w artim e i n t e r n a t i o n a l t r a d e , w hich, to g e th e r w ith
th e above i s s u e s , i s v i t a l to am assing m a te r ia l s and
s e r v ic e s f o r war p u rp o s e s .
CHAPTER I I
THE PROBLEMS OF W AR PRODUCTION
The n a t io n a l p ro d u c tio n i n w artim e i s c h a r a c te r iz e d
by m u ltip le ex pansion i n q u a n tity and s u b s t a n t i a l change i n
c h a r a c te r a s compared w ith t h a t i n peace tim e . As men
tio n e d above, a s u b s t a n t i a l p o r tio n o f a v a ila b le re s o u r c e s
o f a b e l l i g e r e n t i s l i k e l y to be ab so rb ed by war p re p a
r a t i o n . To keep pace w ith war consum ption p ro d u c tio n must
be r a i s e d trem e n d o u sly . In tim e , a v a ila b le n a t u r a l r e
s o u rc e s , manpower, and c a p i t a l f a c i l i t i e s needed to m eet
b oth war and c i v i l consum ption would show i n s u f f i c i e n c y .
In o r d e r to chan n el more p ro d u c tio n c a p a c ity to m a n u fa ctu r
in g armament th e p ro d u c tio n o f n o n - e s s e n tia l consumer
goods m ust be reduced o r stopped e n t i r e l y . The goods
which a re e s s e n t i a l to d e fe n se and which should be i n
c re a s e d and m a in ta in e d i n p ro d u c tio n f a l l i n to th r e e
c l a s s e s : (A) m i l i t a r y goods w hich, i n t u r n , may be sub
d iv id e d u n d er th r e e g ro u p s (1) m i l i t a r y p ro d u c ts such as
p la n e s , ta n k s , g u n s, s h ip s , euqplosives, e l e c t r i c d e v ic e s ,
1 T ib o r S c ito v s k y , Edward Shaw, and L o rie T a r s h is ,
M o b iliz in g R esources f o r War {New York: McGraw-Hill Book
Company, 1951), p . 35.
5
i n d u s t r i a l a lc o h o l, a v i a t i o n , g a s o lin e , e t c . ; (2) m i l i t a r y
c o n s tr u c tio n such a s ro a d s , a i r f i e l d s , e t c . ; and (3) c a p i
t a l f a c i l i t i e s , i . e . , p l a n t , equipm ent, and t o o l s needed
f o r m i l i t a r y p ro d u c tio n and c o n s tr u c tio n ; (B) b a s ic c i v i l
ia n goods such a s f o o d s tu f f s , c l o th e s , and o th e r n e c e s s i
t i e s which a re r e q u ir e d f o r m a in ta in in g p u b lic h e a lth and
w orking p r o f ic ie n c y ; and (G) c e r t a i n e x p o rts which a re i n
te n d ed to be exchanged f o r th e form er two c l a s s e s o f goods
w ith f o r e ig n c o u n tr ie s on th e b a s is o f a b s o lu te advantage
o r co m p arativ e advantage o f p ro d u c tio n among tr a d in g
c o u n t r ie s . The l a s t c a te g o ry i s e s s e n t i a l to alm ost ev ery
b e l l i g e r e n t c o u n try , e s p e c i a l l y th o s e which la c k c a p i t a l
f a c i l i t i e s o r re s o u rc e s to produce th e n e c e s s a ry war goods,
and depend upon im p o rtin g them from o th e r c o u n t r ie s . I t i s
g e n e r a lly assumed t h a t from th e p o in t o f view o f m axim izing
th e w a r - e f f o r t im p o rtin g r a t h e r th a n e x p o rtin g i s fa v o r
a b le . B ut, o b v io u s ly , no c o u n try , b e l l i g e r e n t o r n o t, can
c o n tin u e f o r any e x te n s iv e p e r io d buying from abroad
w ith o u t e x p o rtin g .
The goods which a re deemed n o n - e s s e n tia l to d efen se
and which sh o u ld be red u ced o r o m itte d i n p ro d u c tio n
2 L e s te r V. C handler and Donald H. W a lla ce, Eco
nomic M o b iliz a tio n and S t a b i l i z a t i o n (New York: Henry
H o lt and Company, 1951), p . 7.
c o n s is t o f l u x u r i e s , s e m i- lu x u r ie s , d u ra b le consumer goods
such a s h o u se s, au to m o b ile s, e t c . , and th e c a p i t a l goods
needed to m anufacture them . These f a c t s acco u n t f o r sub
s t a n t i a l change i n th e co m p o sitio n o f w artim e p ro d u c tio n .
The b a s ic problem s in v o lv e d i n w artim e p ro d u c tio n
a r e : (a) how to a c q u ire th e re q u ir e d p ro d u c tiv e a g e n ts ;
(b) how to a l l o t th e a v a ila b le p ro d u c tiv e a g e n ts among
t h e i r a l t e r n a t i v e u s e s i n o r d e r to a c h iev e t h e i r g r e a t e s t
u t i l i z a t i o n f o r war p u rp o se s; and (c) how to prom ote p ro
d u c tio n e f f i c i e n c y to save p ro d u c tiv e a g e n ts a s w e ll as to
b rin g about prom pt war s u p p lie s to m eet u rg e n t needs i n
em ergency.
I . H O W TO ACQUIRE PRODUCTIVE AGENTS
The a c q u i s i t i o n o f th e r e q u ir e d p ro d u c tiv e a g e n ts
i s th e f i r s t ta s k o f ex p an sio n o f o u tp u t i n w artim e. I t i s
an i n v i o l a t e r u l e t h a t p ro d u c tio n can n o t be accom plished
u n le s s a l l th e r e q u ir e d p ro d u c tiv e a g e n ts a re s u p p lie d i n
th e r i g h t p r o p o r tio n . Lack o f one o f them w i l l c r e a te
b o ttl e - n e c k s i n p r o d u c tio n . In a war th e problem in v o lv e d
i n a c q u irin g th e a g e n ts o f p ro d u c tio n i s n o t o n ly one o f
q u a n tity b u t a ls o one o f q u a l i t y . For in s t a n c e , m u n itio n -
making r e q u ir e s c a r e f u l l y o rg a n iz e d i n d u s t r i e s , h ig h ly
s p e c ia liz e d equipm ent, s k i l l e d la b o r , and s t r a t e g i c raw
7
m a te r ia ls * None o f them , i f n o t p re p a re d f o r i n advance,
can be se c u re d a d e q u a te ly and p ro m p tly i n em ergency. The
3
fo llo w in g a r e th e b e s t known means to o b ta in war s u p p lie s .
M o b iliz a tio n
M o b iliz a tio n h e re r e f e r s t o b oth e x te n s iv e and i n
te n s iv e u t i l i z a t i o n o f a v a ila b le re s o u rc e s and c a p i t a l
f a c i l i t i e s f o r w ar p u rp o se s. In peace tim e th e f a c t o r s o f
p ro d u c tio n i n most c o u n tr ie s a r e u s u a lly n o t employed to
full c a p a c ity . T h is le a v e s a wide m argin f o r m o b iliz a tio n
i n w artim e. The economic w ar-w aging power o f a n a tio n
m ain ly depends upon th e p o t e n t i a l s o f m o b iliz a tio n . A part
from th e volume o f th e re s o u rc e s which must be m o b iliz e d
f o r war p u rp o s e s , th e speed o f m o b iliz a tio n i s a n o th e r
im p o rta n t f a c t o r i n w inning th e w ar. I t may even be
s a id t h a t v ic t o r y i s p re d e te rm in e d by th e speed a t which
a b e l l i g e r e n t can e f f e c t i t s economic m o b iliz a tio n . A
prom pt m o b iliz a tio n cannot be ac h iev e d u n le s s i t s p la n i s
w e ll p re p a re d i n th e prew ar p e r io d . In modern c o u n tr ie s
e v e ry a s p e c t o f t h e i r in d u s tr y i s more o r l e s s so a d ju s te d
a s to make r a p id m o b iliz a tio n p o s s ib le i n an em ergency.
3 Gf. A. 0 . P igou, The P o l i t i c a l Economy o f War
(New York: The M acm illan Company, 1941J , p . §0,
a
Under a m o b iliz a tio n program a l l th e re s e rv e d and unused
n a t u r a l r e s o u r c e s , la b o r f o r c e s , and p la n t and equipm ent
a re to be engaged i n p ro d u c tio n to f u l l c a p a c ity , i f
n e c e s s a ry . B e sid e s, th e p ro d u c tiv e a g e n ts may be u t i l i z e d
more i n t e n s i v e l y i n w artim e by (1) ex ten d in g th e w orking
h o u rs o f la b o r and m achines, (2) i n t e n s i f y i n g la n d c u l t i
v a tio n , e t c . The e x te n t to w hich p ro d u c tiv e a g e n ts can be
f u r t h e r u t i l i z e d depends upon th e s iz e o f unemployed la b o r ,
u n e x p lo ite d n a t u r a l r e s o u r c e s , and i d l e p la n t and eq u ip
m ent; w hereas t h e i r in te n s iv e u t i l i z a t i o n depends upon th e
c u r r e n t w o rk in g -h o u r system , p u b lic h e a l t h , c a p a c ity o f
c a p i t a l f a c i l i t i e s , f e r t i l i t y o f la n d , and th e te c h n iq u e s
o f p ro d u c tio n , e t c . F i n a l l y , m o b iliz a tio n i s s u b je c t to
th e l i m i t a t i o n o f f u l l employment o r b o ttle - n e c k s in p ro
d u c tio n . In th e l a t t e r case stoppage o f p ro d u c tio n may be
cau sed by s h o rta g e o f one o r more k in d s o f r e q u ir e d p ro
d u c tiv e f a c t o r s a lth o u g h o th e r f a c t o r s rem ain ab u n d an t.
B o ttle -n e c k s may be cu red by se ek in g s u b s t i t u t e s f o r sc a rc e
p ro d u c tiv e f a c t o r s . But such b o ttle n e c k s a re in c u r a b le
ex c ep t i n a c o n s id e ra b le p e r io d , once th e p o in t o f f u l l
employment i s to be deemed to have been a t t a i n e d ; th e n
f u r t h e r m o b iliz a tio n i s im p o s sib le i n th e s h o r t- r u n .
C onversion
A second so u ree from w hich war s u p p lie s can be
9
drawn i s c o n v e rs io n ; t h a t i s to reduce p e r s o n a l consum ption
to r e le a s e p ro d u c tiv e f a c t o r s f o r war p u rp o s e s . For i n
s ta n c e , i n w artim e th e m anufacture o f au to m o b iles f o r
c i v i l i a n u se may be r e s t r i c t e d to save s t e e l , r u b b e r,
g a s o lin e , la b o r , and p la n t and equipm ent f o r armament-
m aking. In an advanced co u n try where th e s ta n d a rd o f l i v
in g o f th e p u b lic i s v ery h ig h a s u b s t a n t i a l p a r t o f c i
v i l i a n o u tp u t cannot be c u t o f f w ith o u t i l l e f f e c t s on
p u b lic h e a lth and w orking e f f i c i e n c y . In a modern a l l - o u t
war i t i s alm ost in e v i t a b l e t h a t p ro d u c tio n o f c i v i l i a n
goods which compete w ith m i l i t a r y i n d u s t r i e s i n a c q u irin g
p ro d u c tiv e f a c t o r s must be s u b je c t to r e d u c tio n o r p r o h i
b i t i o n by th e governm ent. But c i v i l i a n p ro d u c tio n must be
allow ed to m a in ta in a re a s o n a b le minimum l i v i n g f o r th e
p u b lic . The scheme o f p ro d u c tio n c o n v e rsio n i n w artim e i s
u s u a lly r e a l i z e d by o f f e r in g h ig h re m u n e ra tio n to induce
th e t r a n s f e r o f p ro d u c tiv e f a c t o r s from th e f i e l d o f c i
v i l i a n u se s to th e f i e l d o f war p ro d u c tio n ; e x e r c is in g
d i r e c t c o n tr o l o v e r th e d i s t r i b u t i o n o f raw m a te r ia l s o r
la b o r f o r c e ; commandeering p la n t and equipm ent; o r im posing
p r o h i b i t i v e ta x e s upon th e i n d u s t r i e s to f o rc e c o n v e rs io n .
The ch o ice from th e s e a l t e r n a t i v e s i s d eterm in ed by th e
m e r its o f each p a r t i c u l a r c a s e , b u t i t i s a ls o g e n e r a lly
a c c e p te d t h a t to e f f e c t a prompt l a r g e - s c a l e co n v e rsio n
10
a l l th e a v a ila b le te c h n iq u e s sh o u ld be b rought to b e a r on
th e problem . A happy compromise o f them, o f c o u rs e , i s
most d e s i r a b l e .
However, p ro d u c tio n c o n v e rsio n alw ays o c c a sio n s
unemployment to th e e x te n t t h a t th e r e le a s e d f a c t o r s o f
p ro d u c tio n may f a i l to be ab so rb ed by o th e r i n d u s t r i e s
b ecause o f t h e i r in c o n v e r tib le c h a r a c t e r . In d eed , from
th e v ie w p o in t o f n a t io n a l s e c u r i t y t h i s i s o n ly a m inor
c o n s id e r a tio n , b u t i n o rd e r to av o id u p s e ttin g th e s o c ia l
economy, unemployment should be h e ld to a minimum.
C re a tio n o f Mew P ro d u c tiv e F a c to rs
The fo u n d a tio n o f war p ro d u c tio n i s b ased on
modern, o rg a n iz e d i n d u s t r i e s which cannot be c o n s tru c te d
on a s h o rt n o t i c e . However, th e c o n s tr u c tio n o r develop
ment o f c e r t a i n h ig h ly s p e c ia liz e d c a p i t a l f a c i l i t i e s which
have n o t been a d e q u a te ly p re p a re d i n norm al tim e s h as to
be u n d e rta k e n i n w artim e. E xcept th e waging o f a
" l i g h t n i n g war** which may be s u c c e s s f u lly com pleted w ith in
a s h o r t p e r io d , armament-making sh o u ld be p la n n ed i n
"d e p th " a s w e ll a s i n " w id th " .^ T hat i s , a n a tio n should
a l l o t a p a r t o f i t s re s o u rc e s to b u ild a s to c k p ile o f
4 C handler and W a lla ce, o p . c i t . , p . 5»
11
f i n i s h e d m i l i t a r y goods and a p a r t o f i t s r e s o u r c e s to
develop i t s c a p a c ity to produce more m i l i t a r y goods a t a
l a t e r date*
As to manpower, h ig h ly s k i l l e d la b o r needed f o r
m unitio n -m ak in g , s h ip b u ild in g , and a ir c r a f t- m a n u f a c tu r in g
does n o t e x i s t i n g r e a t q u a n t i t i e s i n p e a c e - t i m e ,•so a
n atio n w id e t r a i n i n g program to improve l a b o r ’ s te c h n iq u e s
must be c a r r i e d o u t. T h is w i l l be d is c u s s e d i n g r e a t e r
d e t a i l i n a coming c h a p te r .
P r e p a r a tio n i n th e Prew ar P e rio d
In a broad sense th e a b i l i t y o f a n a tio n to defend
i t s e l f i s a s s o c ia te d w ith i t s e d u c a tio n , c u l t u r e , c i v i l i
z a tio n , p o l i t i c a l i n s t i t u t i o n s , s o c i a l o r g a n iz a tio n , as
w e ll as in d u s t r y . So th e p r e p a r a tio n f o r war l o g i c a l l y
in c lu d e s alm ost ev e ry e f f o r t tow ard making p r o g r e s s in
every a s p e c t o f s o c ie ty i n peace tim e . But h e re we r e f e r
to some governm ental a c t i v i t i e s d i r e c t l y co ncerned w ith th e
b u ild in g up o f a c o u n try ’ s p o t e n t i a l to c a r r y o u t i t s de
fe n s e program such as m i l i t a r y r e s e a r c h w orks, e s t a b l i s h
ment o f s p e c i a l i z e d p la n t and equipm ent f o r war in d u s t r y ,
r e s e r v a t i o n o f n a t u r a l re s o u r c e s f o r d efen se p u rp o s e s ,
s to c k p ilin g s t r a t e g i c m a te r ia l s and p r e p a r in g such v i t a l
12
5
m u n itio n s as atom ic bombs, r e s e r v a t i o n o f g o ld , s i l v e r ,
and f o r e ig n exchange f o r fin a n c in g w ar, fu ndam ental te c h
n i c a l t r a i n i n g , and o th e r s . By a p p ly in g th e s e m easures th e
burden o f war i s s h i f t e d backward to th e prew ar p e r io d
th e re b y r e l i e v i n g p eo p le from b ein g o v er-b u rd e n ed i n war
tim e . And a s p r e v io u s ly i n d ic a t e d a long p re p a re d n e ss f o r
war w i l l s h o rte n th e p e r io d o f m o b iliz a tio n . Since tim e
i s a d e c is iv e f a c t o r i n o b ta in in g v i c t o r y i n a modern
t o t a l w ar, th e p re p a re d n e ss f o r i t i n peace tim e i s o f
grow ing im p o rta n c e .
Postponem ent o f C a p ita l Goods P ro d u c tio n i n M o n -e ss e n tia l
F ie ld s
As a r e s u l t o f th e c u r ta ilm e n t o f c i v i l i a n p ro
d u c tio n , c a p i t a l goods u se d i n such p ro d u c tio n can be r e
duced c o rre s p o n d in g ly . T h is may ta k e th r e e form s:
The c u r ta ilm e n t o f new non-w ar in v e s tm e n t. — In
i n d u s t r i a l i z e d c o u n tr ie s c o n s id e ra b le new in v e stm e n t a t
home and ab ro ad i s n o rm ally made every y e a r . By re d u cin g
non-war new in v e stm e n t such a s b u ild in g new h o u se s, f a c
t o r i e s , o r sc h o o ls war r e s o u rc e s w i l l be in c re a s e d .
5 George A rth u r L in c o ln , W illiam S. S to n e, and
Thomas H. H arvey, Economics o f N a tio n a l S e c u r ity (New York:
P r e n tic e - H a ll, I n c . , 195&J, p» 239.
13
D e p le tio n o f in v e n to ry o f consumer g o o d s. — A
c o u n try ’ s c a p i t a l i s a ls o i n form o f sto c k o f consumer
goods. A d d itio n a l r e s o u r c e s may be r e le a s e d f o r w ar p u r
pose by lo w erin g th e l e v e l o f c u r r e n t i n v e n to r i e s to a
c e r t a i n e x t e n t.
D eferm ent o f renew al and r e p a i r o f equipm ent. —
In norm al tim e s a c o n s id e r a b le volume o f goods and s e r v ic e s
must be s e t a s id e o u t o f g r o s s n a t io n a l p ro d u c t f o r th e
renew al and r e p a i r o f equipm ent to keep c a p i t a l i n t a c t .
By p o stp o n in g th e re p la c e m e n t o f o ld and w orn-out equipm ent
more r e s o u r c e s can be ta p p e d f o r m i l i t a r y u s e s .
A p p lic a tio n o f t h i s m easure would s h i f t th e burden
o f war fo rw ard to th e p o s t-w a r p e r io d , as la r g e volumes
o f re s o u rc e must be devoted to r e s t o r a t i o n o f th e n a t i o n ’ s
c a p i t a l i n th e f u tu r e th a n o th e rw ise would be th e c a s e .
However, th e scheme o f d e p le tio n o f c a p i t a l goods can n o t be
c a r r i e d to o f a r a s th e e f f i c i e n c y o f p ro d u c tio n may be im
p a i r e d , and th e n o u tp u t would te n d t o d e c lin e .^
Im p o rtin g
In th e p a s t w o rld w ars, u t i l i z i n g f o r e ig n re s o u rc e s
6 G. A. S te in e r and A s s o c ia te s , Economic Problem s
o f War (New York: John W iley and Sons, i n c . , 1942J, p p . 1 -
14
i n most b e l l i g e r e n t s pro v ed an im p o rta n t means o f b o o stin g
th e w ar e f f o r t . In some c o u n tr ie s more w ar s u p p lie s were
o b ta in e d from ab road th a n a t home. I t i s s a id t h a t no
co u n try i s s e l f - s u f f i c i e n t i n war r e s o u r c e s , and th e de
pendence upon im p o rtin g i s m erely a m a tte r o f degree to
a l l b e l l i g e r e n t s . M oreover, i n c a se t h a t war s u p p lie s
im p o rts a r e p u rch ased on long term c r e d i t , th e money burden
th e y r e p r e s e n t i s a ls o s h i f t e d to th e p o s t-w a r p e r io d . A
stu d y on f o r e ig n tr a d e i n w ar-tim e i n a g r e a t e r d e t a i l w i l l
be made i n a l a t e r c h a p te r .
In summary, th e a v a ila b le means to a c q u ire war r e
so u rc e s a r e : (1) m o b iliz a tio n , (2) c o n v e rs io n , (3) c r e
a t io n o f new p ro d u c tiv e f a c t o r s , (4) p r e p a r a tio n in th e
prew ar p e r io d , (5) d e p le tio n o f non-w ar c a p i t a l goods, and
(6) im p o rtin g . T h e ir r e l a t i v e im p o rtan ce i n m axim izing
w ar e f f o r t s v ary from c o u n try to c o u n try depending upon
t h e i r p a r t i c u l a r economic c irc u m s ta n c e s . To a h ig h ly ad
vanced c o u n try w ith abundant unused r e s o u r c e s m o b iliz a tio n
th e r e f o r e i s o f g r e a t e s t im p o rta n c e , w hereas to th o se
c o u n tr ie s where th e l e v e l o f employment i s v ery h ig h , con
v e r s io n i s th e e s s e n t i a l ap p ro ach , and to th o s e c o u n tr ie s
which la c k c a p i t a l f a c i l i t i e s o r raw m a t e r i a l s to manu-
i
f a c t u r e armaments th e m se lv e s, im p o rtin g them from fo re ig n
c o u n tr ie s assum es th e most im p o rta n t p o s i t i o n i n p r e p a r a tio n
15
f o r w ar. F i n a l l y , p re -w a r p r e p a r a tio n i s always n e c e s s a ry
as long a s th e t h r e a t o f w ar e x i s t s . However, to p r o s e c u te
an a l l - o u t war i n modern tim e s a l l th e means s t a t e d above
sh o u ld be b ro u g h t i n t o p la y i n m axim izing a w ar e f f o r t .
I I . H O W TO ALLOT PRODUCTIVE AGENTS FOR W AR
PRODUCTION PURPOSES
What we need t o s a t i s f y o u r w ants i s n o t th e goods
and s e r v ic e s a s such b u t th e u t i l i t i e s th e y re n d e r. The
achievem ent o f th e maximum u t i l i t y o f goods and s e r v ic e s
depends n o t o n ly upon th e p o s s e s s io n o f th e goods and s e r
v ic e s we need b u t a ls o upon t h e i r a p p r o p r ia te u t i l i z a t i o n .
T hat i s , we sh o u ld employ them where we need them most o r
where th e advantage i s g r e a t e s t . T his i s e s p e c i a l l y t r u e
when th e supply o f goods and s e r v ic e s i s l im ite d . Theo
r e t i c a l l y , th e p ro d u c tiv e f a c t o r s sh o u ld be so d i s t r i b u t e d
among th e p ro d u c tio n l i n e s o f th e v a rio u s a r t i c l e s t h a t th e
m a rg in a l u t i l i t i e s o f th e goods produced a re e q u a l, th e re b y
a t t a i n i n g an o v e r a l l maximum u t i l i t y . But p r a c t i c a l l y , th e
d i f f i c u l t y i n a t t a i n i n g t h i s p u rp o se l i e s i n c a lc u l a ti n g
th e m a rg in a l u t i l i t i e s o f v a rio u s goods and s e r v i c e s , as
th e r e i s no a c c e p ta b le y a r d s ti c k f o r m easuring them p r e
c i s e l y . N e v e rth e le s s , by sound re a s o n in g and good judgm ent
a f a i r ap p ro x im a tio n can be re a c h e d . One h a l f l o a f i s
16
b e t t e r th a n no b re a d . In a l l o t i n g a v a ila b le p ro d u c tiv e
a g e n ts among p ro d u c tio n o f d i v e r s i f i e d a r t i c l e s w ith a
view to m axim izing war e f f o r t , s e v e r a l m ajor i s s u e s may be
r a i s e d .
C a p ita l F a c i l i t i e s C o n s tru c tio n vs O utput E xpansion
Except i n waging a l ig h t n in g w ar, th e b e l l i g e r e n t
sh o u ld c o n c e n tr a te i t s e n t i r e economic power f o r o u tp u t
ex p a n sio n . C a p ita l f a c i l i t i e s sh o u ld be b u i l t up to b o o st
p r o d u c t i v i t y to produce more goods l a t e r on. However, i n
d e v e lo p in g c a p i t a l f a c i l i t i e s c o n s id e r a tio n m ust be g iv e n
to th e m agnitude o f raw m a t e r i a l s , manpower, and tim e r e
q u ire d to accom plish th e p r o j e c t s . I f th e c a p i t a l con
s t r u c t i o n i s so c o s t l y as to a f f e c t s e r io u s ly o u tp u t ex
p a n s io n , o r so tim e-consum ing t h a t th e p r o j e c t can n o t be
com pleted i n th e e a r l y s ta g e s o f th e w ar, th e j u s t i f i c a t i o n
o f th e scheme would be q u e s tio n a b le . I t must a ls o be
re c o g n iz e d t h a t th e o v e r c o n s tr u e tio n o f c a p i t a l goods which
e x h a u sts c o n s id e ra b le r e s o u rc e s c o u ld g r e a t l y hamper p o s t
war r e c o n s tr u c tio n .
C i v i l i a n P ro d u c tio n vs War P ro d u c tio n
I f a b e l l i g e r e n t c o u n try can h a rd ly co v er th e
needs o f b o th c i v i l i a n u s e s and war consum ption, compe
t i t i o n betw een them i n e v i t a b l y a r i s e s . S ince th e m a rg in a l
17
u t i l i t i e s ( f o r war p u rp o se s) o f l u x u r i e s , s e m i- lu x u rie s and
d u ra b le consumer goods a re low a s compared w ith th o s e o f
g u n s, a i r p l a n e s , and s h ip s e s s e n t i a l to n a tio n a l s e c u r i t y ,
i t goes w ith o u t say in g t h a t p ro d u c tio n co n v e rsio n from th e
form er to th e l a t t e r - f i e l d i s j u s t i f i e d . But th e conver
sio n i s s u b je c t to th e l i m i t o f a t o l e r a b l e minimum l i v i n g
sta n d a rd f o r th e p e o p le . O th erw ise , p u b lic h e a lth and
w orking c a p a c ity would be th r e a te n e d and th e war e f f o r t
je o p a rd iz e d . F u rth erm o re, i f th e s ta n d a rd o f l i v i n g w ere
to drop to o low, i t would damage th e p e o p le ’ s m orale and
m ight even d riv e them to r e v o l t . Such a s i t u a t i o n p erh ap s
i s more l i k e l y to develop a t th e l a t e r s ta g e s o f a w ar.
T his i s because a f t e r th e p o in t o f f u l l employment h as been
re a c h e d , th e n a t io n a l a g g re g a te p ro d u c t te n d s to d e c re a se
owing to th e sh rin k a g e i n p ro d u c tiv e c a p a c ity . As c a s u a l
t i e s mount i n th e f r o n t l i n e , more w orkers have to be
d r a f te d to r e p le n is h th e com bating f o r c e s . C e rta in raw
m a te r ia l s may be e x h a u ste d , c r e a tin g b o ttl e - n e c k s i n p ro
d u c tio n . C a p ita l f a c i l i t i e s may be d e s tro y e d by enemy a t
ta c k , o r th e e f f i c i e n c y o f f a c i l i t i e s may be im p a ired be
cause o f la c k o f r e p a i r and re p la c e m e n t. A ll th e s e f a c t s
may acco u n t f o r th e d e c re a se i n o u tp u t i n b o th c i v i l i a n and
war p ro d u c tio n . W hile th e war goes on th e demand f o r war
goods i s alw ays p e r s i s t e n t , r a r e l y rem ain in g a t a c o n s ta n t
is
l e v e l .
The a o n v e rs io n o f c i v i l i a n p ro d u c tio n f o r d efen se
i s fa c e d w ith a g g ra v a tio n . The supply o f consumer goods,
t h e r e f o r e , would be u n d er two c u r ta ilm e n ts , one by de
c r e a s in g p ro d u c tiv e c a p a c ity , and th e o th e r by in c r e a s in g
c o n v e rs io n . But a c t u a l l y , d a i ly n e c e s s i t i e s a r e by no
means l e s s im p o rta n t th a n weapons i n w artim e. L ess
" b u t t e r ” as w e ll a s l e s s "guns” can be e q u a lly e f f e c t i v e
i n i n v i t i n g d e f e a t. So, t h e r e sh o u ld be a re a s o n a b le d i s
t r i b u t i o n o f p ro d u c tiv e a g e n ts betw een " b u t t e r ” and "guns"
so t h a t th e e q u ilib riu m o f m a rg in a l u t i l i t i e s between them
i s m a in ta in e d and a g r e a t e r w a r - e f f o r t i s a c h ie v e d .
A pplied Weapon M an u factu rin g vs Mew Weapon E xperim ent
W ith s c i e n t i f i c developm ent new weapons a r e i n
v e n te d ev ery day. A r e v o lu ti o n i n m u n itio n m anufacture
may ta k e p la c e whenever th e in v e n tio n o f new weapons i s
s u c c e s s f u l. T h e re fo re , some ty p e s o f o ld - fa s h io n e d
weapons a re s u b je c t to e x c lu s io n i n p r o d u c tio n . At th e
o u tb re a k o f a war th e r e a r i s e s c o m p e titio n betw een th e
developm ent o f a p p lie d weapons such as r i f l e s , machine
g u n s, ta n k s , s h ip s , a i r c r a f t , bombs, and so on and
7 A. C. P ig o u , "War F inance and I n f l a t i o n , "
Economic J o u r n a l. 5 0 ;4 6 l-6 £ , 1940*
3.9
e x p e rim e n ta tio n f o r new p o w erfu l weapons such as th e
"H bomb** i n a c q u irin g r e s o u r c e s . How to a l l o t a v a ila b le
r e s o u rc e s betw een them i s a g rav e concern f o r th e war
p ro d u c tio n d i r e c t o r s . I f su c c e s s i n th e ex p erim en t o f a
new weapon i s u n c e r t a in , huge e x p e n d itu re s o f r e s o u rc e s
f o r th e u n c e r t a in pu rp o se would endanger n a t i o n a l d e fe n s e .
On th e o th e r hand, i f th e su c c e s s i s a t h an d , th e develop
ment o f new weapons in s t e a d o f m a n u fa ctu rin g o ld ones may
be a d v is a b le . U n fo rtu n a te ly , a c c u ra te f o r e c a s t o f th e
su c c e ss o r f a i l u r e o f a new weapon s t i l l i n e x p e rim e n ta l
s ta g e r e q u ir e s more th a n p u re economic th e o r y .
End Goods S to c k p ile vs law M a te r ia ls R e s e rv a tio n
In a p ro lo n g e d war th e s to c k p ile o f m u n itio n s
sh o u ld be w e ll above th e amount needed j u s t to meet th e
d a y -to -d a y w ar consum ption. On th e o th e r h an d , s to c k p ilin g
sh o u ld n o t be c a r r i e d so f a r as to ab so rb a l l th e a v a ila b le
r e s o u r c e s . A fte r th e c u r r e n t re q u ire m e n ts have been m et,
s u rp lu s raw m a te r ia l s sh o u ld be r e s e rv e d i n o r d e r t o p ro
v id e a m argin to p ro d u ce. O th erw ise, th e m an u factu re o f
newly in v e n te d weapons would be h andicapped by raw m a te r ia l
s h o r ta g e s . At th e d i s c r e t i o n o f m i l i t a r y e x p e rts th e mu
n i t i o n s to c k sh o u ld be m a in ta in e d i n s u f f i c i e n t q u a n tity to
su p p o rt th e f r o n t .
In s h o r t, to ch a n n el m a te r ia l s in t o th e most needed
p ro d u c tio n a c o o rd in a tin g agency sh o u ld be e s t a b l i s h e d to
d i s t r i b u t e p ro p e rly lim ite d m a t e r i a l s , manpower, and f a c i l
i t i e s among t h e i r r i v a l demands— c u r r e n t p ro d u c tio n , ex
p a n s io n o f p ro d u c tio n c a p a c ity , war and m i l i t a r y u s e s ,
a p p lie d arm am ent-m aking, and new weapon e x p e rim e n ts— and
to keep an eye on r e s e r v a t i o n o f new m a te r ia l s f o r new
armament-making p u rp o se s.
I I I . H O W TO PROMOTE PRODUCTION EFFICIENCY
In t h i s s e c tio n we a r e g o ing to d e a l w ith th e r e
l a t i o n o f p ro d u c tiv e a g e n ts to p e r - u n i t o u tp u t. A part from
th e q u a n tity o f p ro d u c tiv e a g e n ts t h a t a n a tio n p o s s e s s e s ,
th e e f f i c i e n c y o f p ro d u c tio n must be co u n ted a s a f a c t o r
i n d e te rm in in g th e s iz e o f th e n a t io n a l a g g re g a te p ro d u c t.
O ther th in g s b ein g e q u a l, th e q u a n tity o f o u tp u t v a r ie s
i n p r o p o r tio n to e f f i c i e n c y . H igher p r o d u c tiv i ty means
more p e r - u n i t p r o d u c t; low er p r o d u c t i v i t y , l e s s p ro d u e t;
i n o th e r w ords, p r o d u c tiv i ty i s th e amount o f o u tp u t r e l a
t i v e to th e u se o f a u n i t o f any ag e n t o f p r o d u c tio n .
R e la tiv e ly lo w - p r o d u c tiv ity c a u se s n o t o n ly w aste o f
p ro d u c tiv e a g e n ts b u t a ls o d e la y s p ro d u c tio n . Time, as
m entioned e a r l i e r , i s a d e c is iv e f a c t o r i n w inning a w ar.
Prom oting p ro d u c tio n e f f i c i e n c y i s o f th e u tm o st im p o rtan ce
to a s u c c e s s fu l war e f f o r t . The f a c t o r s which a f f e c t th e
e f f i c i e n c y o f p ro d u c tio n c o n s is t o f p ro d u c tiv e c a p a c ity o f
th e a g e n ts o f p r o d u c tio n , th e d i s t r i b u t i o n o f them , and th e
i n t e n s i t y o f t h e i r u t i l i z a t i o n . T h e re fo re , th e e f f ic ie n c y
o f p ro d u c tio n may be in c r e a s e d by (1) im proving th e te c h
n iq u e s o f p ro d u c tio n , (2) keeping a s te a d y su p p ly o f
p r o d u c tiv e a g e n ts i n th e p ro p e r p r o p o r tio n s r e q u ir e d f o r
p ro d u c tio n , and (3) i n t e n s i f y i n g t h e i r u t i l i z a t i o n .
Im proving th e T echniques o f P ro d u c tio n
The l e v e l o f te c h n iq u e s o f p ro d u c tio n i s based
upon th e advance o f s c ie n c e . T h is advance can n o t be ex
p e c te d o v e r n ig h t. However, a w id er a p p l ic a tio n o f th e
c u r r e n t te c h n iq u e o f p ro d u c tio n to i n d u s t r i e s i s p o s s i b le .
E s p e c ia lly i n th o s e c o u n tr ie s which f o r c e r t a i n re a s o n s
p r e f e r to adopt a p o lic y o f keep in g n a t io n a l employment a t
a c e r t a i n l e v e l , th e i n tr o d u c t io n o f new te c h n iq u e s i n t o
i n d u s t r i e s may be b lo c k e d . T h is p ro v id e s a g r e a t m argin
f o r im proving th e a r t o f p ro d u c tio n i n w artim e. Improve
ment o f p ro d u c tio n te c h n iq u e s may ta k e th r e e form s: (1)
c o n s tr u c tio n o f new and more e f f e c t i v e m achines, t o o l s ,
and equipm ent i n th e f i e l d o f war p r o d u c tio n , (2) t e c h n ic a l
t r a i n i n g to make s k i l l e d la b o r , and (3) b e tte rm e n t o f
o r g a n iz a tio n and management i n th e war i n d u s t r i e s . The
22
a p p l ic a tio n o f new e f f i c i e n t c a p i t a l f a c i l i t i e s e v id e n tly
w i l l save la b o r and c u t o v erh ead c o s t s . S im ila r ly , s k i l l e d
la b o r works more e f f i c i e n t l y th a n g re e n h an d s. The con
s t r u c t i o n o f new c a p i t a l f a c i l i t i e s and la b o r t r a i n i n g
acco u n t most h e a v ily f o r th e r i s e i n th e e f f i c i e n c y o f
p ro d u c tio n i n w artim e . B e tte r o r g a n iz a tio n and management
r e s u l t i n economy i n p ro d u c tio n by e lim in a tin g u n n e c e ssa ry
s te p s o f p ro d u c tio n and th u s c u r t a i l i n g th e w aste o f p ro
d u c tiv e f a c t o r s . T his p e rh a p s may r e s u l t from c o n c e n tra
t i o n o f p ro d u c tio n i n w a r-tim e .
K eeping a S teady Supply o f P ro d u c tiv e A gents i n th e
R equired P ro p o r tio n s
The b o ttle - n e c k s i n th e p ro d u c tio n may be caused
by th e sh o rta g e o f c e r t a i n p r o d u c tiv e a g e n ts . In such
c a s e s th e e f f i c i e n c y o f p ro d u c tio n te n d s to d e c re a se be
cause more a g e n ts a re alw ays i d l e d a s th e r e s u l t o f th e
s c a r c i t y o f one p a r t i c u l a r a g e n t. P e rh a p s , th e d e c lin e in
p ro d u c tio n e f f i c i e n c y comes l a r g e l y from th e i n t e r r u p t i o n
i n th e supply o f raw m a t e r i a l s , which may, i n t u r n , be
caused by inadequacy i n t r a n s p o r t a t i o n s e r v ic e s o r th e
m a l - d i s t r i b u t i o n o f th e raw m a t e r i a l s . In some c o u n tr ie s
l i k e E ngland which a c q u ire r e s o u rc e s m ain ly from abroad
p ro d u c tio n i s a p t to s u f f e r an e f f i c i e n c y r a t e d e c lin e
b ecau se o f la c k o f raw m a te r ia l s as i n t e r n a t i o n a l
23
t r a n s p o r t a t i o n becomes d i f f i c u l t . The s h o rta g e o f raw
m a te r ia l s a ls o a r i s e s from m a l - d i s t r i b u t i o n . I f a l a i s s e z -
f a i r e p o lic y c o n tin u e s i n w artim e and p r i c e s f l u c t u a t e ,
th e r e u s u a lly p r e v a i l s a c e r t a i n amount o f p r i v a t e h o ard
in g and s p e c u la tio n i n raw m a t e r i a l s . Then, to o , th e r e may
be se v e re c o m p e titio n i n which each c o m p e tito r t r i e s t o buy
i
j up th e sc a rc e m a te r ia l s to damp r i v a l b u s in e s s . Sometimes
c o m p e tito rs , i n a n t i c i p a t i n g th e s h o rta g e o f re s o u rc e s i n
th e f u tu r e i n r e l a t i o n to t h e i r demands, w i l l buy raw
m a te r ia l s i n ex c ess o f t h e i r re a s o n a b le n e e d s. So f a r as
th e d i s t r i b u t i o n o f raw m a te r ia l s i n n o t i n p r o p o rtio n to
th e p ro d u c tiv e c a p a c ity o f each i n d iv i d u a l e n t e r p r i s e , some
e n t e r p r i s e s must f a i l to a c q u ire them i n s u f f i c i e n t q u a n ti
t y and th u s s u f f e r a d e c lin e in p r o d u c t i v i t y . In o rd e r to
! en su re a ste a d y su p p ly o f raw m a te r ia l s f o r war e n t e r
p r i s e s , two th in g s must be done: F i r s t , t r a n s p o r t a t i o n
s e r v ic e sh o u ld be o f f e r e d w ith o u t i n t e r r u p t i o n . For t h i s
pu rp o se th e developm ent o f t r a n s p o r t a t i o n f a c i l i t i e s must
be expanded to meet th e in c r e a s in g demand i n w artim e.
S econdly, th e a l l o c a t i o n o f raw m a te r ia l s and sh ip p in g
space must be p u t u n d er governm ent c o n tr o l th ro u g h a
r a tio n i n g and p r i o r i t y system and i n accordance w ith th e
c a p i t a l f a c i l i t i e s o f in d iv id u a l e n t e r p r i s e s . T hereby,
th e flo w o f p ro d u c tiv e a g e n ts w i l l be d ir e c te d to th e p la c e
24
where th e y a re most needed i n w artim e and th e e f f i c i e n c y
o f p ro d u c tio n may be k e p t from d e c lin in g .
I n te n s i f y in g th e U t i l i z a t i o n o f P ro d u c tiv e A gents
Even though r e q u ir e d p ro d u c tiv e a g e n ts may be
p r e s e n t , th e r e i s s t i l l no a ssu ra n c e t h a t th e p ro d u c tio n
e f f i c i e n c y w i l l be h ig h because th e p ro d u c tio n p ro c e s s may
1 be c a r r i e d on too slo w ly . So, th e t h i r d f a c t o r o f con
t r i b u t i n g to h ig h p r o d u c t i v i t y i s th e in te n s iv e u t i l i
z a tio n o f th e p ro d u c tiv e a g e n ts . In t h i s f i e l d , s in c e th e
i n i t i a t i v e o f speeding up p ro d u c tio n i s i n th e hands o f
la b o r , em phasis sh o u ld be l a i d upon th e i n te n s iv e u t i l i
z a tio n o f la b o r f o r c e s . The problem i s how to maximize
w orkers* p r o d u c t i v i t y . ' In w artim e, la b o r p r o d u c tiv i ty may
be r a i s e d by a s s ig n in g th e w orkers more work, o r g iv in g
them economic in c e n tiv e rew ard s, o r a p p e a lin g to t h e i r
p a t r i o t i c s e n tim e n t. High p r e s s u r e speed-up i n la r g e
m easure ac co u n ts f o r th e in c r e a s e i n l a b o r ’ s p r o d u c t i v i t y .
Economic in c e n tiv e s tim u la tio n i s g e n e r a lly deemed an
e f f e c t i v e means o f r a i s i n g w orking e f f ic ie n c y and i s
commonly u t i l i z e d . I t ta k e s th e form o f h ig h payment f o r
e x tr a w ork, u p g ra d in g , and p ro m o tio n . However, h ig h ta x e s
on th e income o f w orking p e o p le , u s u a lly n e c e s s a ry i n w ar-
jtim e, te n d to o f f s e t th e e f f e c t s o f th e wage b o o s ts on
;p r o d u c t i v i t y . Thus economic in c e n tiv e s tim u la tio n depends
L .
25
on th e m aintenance o f m a rg in a l income a t a h ig h l e v e l .
The r e d u c tio n o f income t a x exem ptions and th e in c r e a s e
i n t a x r a t e s r e s u l t i n a low m a rg in a l income and cause a
d i s i n c l i n a t i o n t o work h a r d e r . F i n a l l y , p a t r i o t i c a p p e al
i s a ls o employed a s means to s tim u la te th e w orker to
produce more e f f e c t i v e l y , b u t i t s u s e f u ln e s s i s s u b je c t
to some u n c e r t a i n t y .
I t i s , p e rh a p s , i n e v i t a b l e t h a t prom oting p ro
d u c t i v i t y i n th e f i e l d o f war p ro d u c tio n i s a t some sa c
r i f i c e o f t h a t i n th e f i e l d o f c i v i l i a n goods p ro d u c tio n
b ecau se a s a r u l e a l l k in d s o f p ro d u c tiv e a g e n ts o f
s u p e r io r g rad e i n th e l a t t e r a re s u b je c t to c o n v e rsio n to
th e fo rm e r. S ince th e most e f f e c t i v e m achines, t o o l s , and
equipm ent a re to be u se d f o r d e fe n se p u rp o s e s , c i v i l i a n
p r o d u c tio n must u t i l i z e o ld c a p i t a l f a c i l i t i e s w ith o u t
ad e q u ate r e p a i r and re p la c e m e n t; a s s k i l l e d la b o r i s
d r a f t e d o r t r a n s f e r r e d to war p r o d u c tio n , c i v i l i a n e n t e r
p r i s e s have to employ g re e n h an d s. And th e n , to o , s in c e
w ar p ro d u c tio n h a s h ig h p r i o r i t y i n d i s t r i b u t i n g raw ma
t e r i a l s and sh ip p in g space o v er c i v i l i a n p r o d u c tio n , th e
& T. B alogh, "Money I n c e n tiv e and th e P ro d u c tio n
D r iv e ,” S tu d ie s i n War Economics (P re p a re d a t th e Oxford
U n iv e r s ity I n s t i t u t e o f S t a t i s t i c s . O xford: B a s il
B la c k w e ll, 1947}, p . 14*
26
su p p ly o f raw m a te r ia l s f o r th e l a t t e r i s alw ays i n t e r
r u p te d . A ll th e s e f a c t s e x p la in th e d e c lin e i n th e
p r o d u c t i v i t y i n c i v i l i a n p ro d u c tio n . But allo w an ce sh o u ld
be made f o r a g r i c u l t u r e b ecause most p ro d u c tiv e a g e n ts en
gaged i n a g r i c u l t u r e , ex cep t la b o r , a re n o t l i k e l y to be
c o n v e rte d .
In o rd e r to p re v e n t a d e c lin e i n p r o d u c t i v i t y in
c i v i l i a n p ro d u c tio n , e s p e c i a l l y th e m a n u fa ctu rin g in d u s
t r i e s , a scheme o f c o n c e n tr a tio n i n th e n o n - e s s e n tia l
i n d u s t r i e s was ad o p ted i n E n gland. I t p e rm itte d b e t t e r
u se o f la b o r and p l a n t i n re o r g a n iz e d la r g e f ir m s , a l
though th e e x e c u tio n o f th e scheme b ro u g h t w ith i t c e r t a i n
9
d i f f i c u l t i e s .
The above i s an a tte m p t to o u t l i n e th e g e n e ra l
problem s i n m axim izing a w a r - e f f o r t . The b a s ic is s u e i s
how to ac h iev e th e maximum u t i l i t y o f goods and s e r v ic e s
a v a ila b le f o r w ar p u rp o s e s . The a tta in m e n t o f t h i s p u r
pose depends upon n o t o n ly th e q u a n tity o f th e goods and
s e r v i c e s , b u t a ls o upon th e a p p r o p r ia te d i s t r i b u t i o n o f
them among t h e i r a l t e r n a t i v e u s e s so t h a t th e m a rg in a l
u t i l i t i e s o f them a re k e p t e q u a l d u rin g th e war p e r io d .
9 T. Balogh and F. A. B u rc h a rd t, " C o n c e n tra tio n i n
th e N o n -e s s e n tia l I n d u s t r i e s , " S tu d ie s i n War Economy.
p . 326.
27
And em phasis i s a ls o p la c e d upon th e e f f i c i e n c y o f p ro
d u c tio n s in c e "tim e u t i l i t y " i s s p e c ia lly e s s e n t i a l to a
•
war e f f o r t . A tim e la g i n m o b iliz a tio n a s compared w ith
t h a t o f th e enemy would re n d e r th e r e s o u r c e s u s e l e s s and
th u s endanger n a t i o n a l s e c u r i t y . So, c o m p e titio n i n p ro
d u c tio n e f f i c i e n c y c o n s t i t u t e s a v i t a l p a r t o f modern
economic w a rfa re i n a broad s e n s e . The m easures su g g e ste d
f o r th e s o lu t io n o f th e s e complex problem s a re s t i l l a
m a tte r o f th e o r y . The a p p l i c a t i o n o f th e s e m easures in
h a n d lin g s p e c ia l k in d s o f p ro d u c tiv e f a c t o r s u n d o u b ted ly
r e q u ir e s a v a i l a b l e te c h n iq u e s . An a tte m p t to p r e s e n t
some o f them i s made i n th e fo llo w in g c h a p te r s .
C H A P T E R III
THE ACQUISITION OF M ANPOW ER
W hile i n peace tim e a c o u n try 1s economy may o f te n
be h au n ted by th e n ightm are o f unemployment, i n tim e o f
war i t i s u s u a lly p la g u e d by la b o r s h o r ta g e . In a b e l l i g
e r e n t c o u n try th e supply o f la b o r i n r e l a t i o n to i t s de
mand i s g e n e r a lly in a d e q u a te i n b o th q u a n tity and q u a l i t y .
Q u a n tita tiv e R equirem ents
W ith r e s p e c t to th e q u a n t i t a t i v e re q u ire m e n ts th e
e x t r a demand f o r la b o r i n w artim e c o n s i s t s o f (1} manpower
to p erfo rm m i l i t a r y s e r v ic e s , and (2) p ro d u c tiv e f o r c e s to
in c r e a s e o u tp u t o f s u p p lie s f o r d e fe n se p u r p o s e s .’ * ' The
fo rm er alw ays a b so rb s m il lio n s o f y o u th , b u t, i n com
p a r is o n , th e l a t t e r may r e q u ir e many m ore. In a modern
war man cannot f i g h t w ith o u t war m a t e r i a l s . When a s o l d i e r
i s s e n t to th e f r o n t , s c o re s o f w orkers a re needed to p ro
duce w ar m a t e r i a l s , to m an u factu re a i r c r a f t , to b u ild
s h ip s , to e r e c t new f a c t o r i e s , and to b u ild up army camps,
a i r f i e l d s , and h a n g a rs , e t c . , i n th e r e a r to keep him i n
1 G. D. H. C ole, "The Manpower P roblem ," P o l i t i c a l
Economy Q u a r te r ly , 1 2 :1 5 4 -6 6 , 1941.
29
com bat. The demand f o r manpower i n w artim e th u s in c r e a s e s
trem e n d o u sly . On th e o th e r hand, th e su p p ly o f la b o r i n a
w a rrin g c o u n try r e l i e s m ain ly on th e so u rc e s o f p o t e n t i a l
w o rk e rs: th e unem ployed, th e r e t i r e d , women, and young
p e o p le . G e n e ra lly , a s u b s t a n t i a l p o r tio n o f i t comes from
th e unem ployed. T h is, how ever, v a r ie s from c o u n try to
co u n try depending on i t s p o p u la tio n and th e a d o p tio n o f
la b o r - s a v in g m achines i n p ro d u c tio n . Women, r e t i r e d p e r
so n s, and young p eo p le who i n norm al tim e s may n o t be
working m ight be in d u ced to j o i n th e p ro d u c tiv e f o r c e s as
th e war advances and a s th e la b o r sh o rta g e becomes a c u te .
A nother so u rce o f w artim e la b o r i s th e t r a n s f e r o f non-
e s s e n t i a l and a g r i c u l t u r a l w orkers to th e war i n d u s t r i e s .
I t i s alm ost im p o s sib le i n a b e l l i g e r e n t c o u n try to se c u re
th e n e c e s s a ry number o f w o rk e rs, e s p e c i a l l y th e s k i l l e d
and s e m i- s k ille d la b o r e r , from th e unem ployed o r th e r e
t i r e d p e r s o n s . Hence, i f th e d efen se program i s to be
ex e cu te d w ith o u t d e la y , a g r e a t p o r tio n o f th e la b o r fo rc e
must be r e c r u i t e d from n o n -d e fe n se p ro d u c tio n . - F i n a l l y ,
a l i e n s a re a ls o a s i g n i f i c a n t so u rce o f la b o r . B ut,
g e n e r a lly , em ployers i n war i n d u s t r i e s make c i t i z e n s h i p a
req u ire m e n t f o r v i r t u a l l y a l l jo b s . However, i t would n o t
be a b s o lu te ly n e c e s s a ry to have c i t i z e n w o rk ers i n some
common f i e l d s such as m e ta l and m achinery i n d u s t r i e s .
A lie n la b o r may be u t i l i z e d i f p r o p e r ly a rra n g e d
30
Q u a l i t a t i v e R equirem ents
The q u a l i t a t i v e re q u ire m e n ts o f la b o r f o r war
p ro d u c tio n p u rp o s e s , how ever, a re n o t so e a s i l y f u l f i l l e d .
I t i s commonly acknowledged t h a t what war in d u s t r y r e
q u ir e s i s n o t common la b o r b u t s k i l l e d la b o r . A i r c r a f t
c o n s tr u c tio n , s h ip b u ild in g , and m unition-m aking need h ig h ly
s p e c ia liz e d s k i l l s which few w o rk ers engaged i n c i v i l i a n
p ro d u c tio n have an o p p o r tu n ity t o a c q u ir e . T his i s th e
cru x o f th e problem o f la b o r sh o rta g e i n tim e o f w ar. The
o n ly obvious so u rc e o f s k i l l e d la b o r e x i s t s i n a lim ite d
number o f c i v i l i a n i n d u s t r i a l f i e l d s w herein w orkers a re
c o m p a ra tiv e ly s k i l l e d and can be s p e e d ily r e t r a i n e d f o r
war p ro d u c tio n . Tapping t h i s so u rce f o r s k i l l e d la b o r ,
how ever, would cause sh o rta g e o f s k i l l e d la b o r i n th e s e
c i v i l i a n i n d u s t r i a l f i e l d s . To f i l l th e gap th u s c r e a te d
by th e la b o r c o n v e rs io n , th e c i v i l i a n i n d u s t r i e s in
q u e s tio n have to employ s e m i- s k ill e d w o rk ers and g reen
hands who a re in c a p a b le o f w orking e f f i c i e n t l y w ith o u t
e x te n s iv e t r a i n i n g . A ll th e s e p o in t to th e t r u t h t h a t th e
la b o r problem i n tim e o f war i s one more o f q u a l i t y th a n
q u a n t ity .
31
I . MEASURES OF DEVELOPING THE AVAILABILITY OF M ANPOW ER
For a c h ie v in g prom pt m o b iliz a tio n and e f f e c t i v e
u t i l i z a t i o n o f la b o r f o r c e s th e governm ent h as to ta k e th e
r e s p o n s i b i l i t y o f r e g u la tin g th e la b o r m arket which i s
o r d i n a r i l y c o n t r o ll e d by in c o o r d in a te f o r c e s and which
more o f te n th a n n o t f a i l s to work o u t an ad eq u ate su p p ly o f
manpower i n r e l a t i o n to demand and an a p p r o p r ia te d i s t r i
b u tio n o f la b o r among a l l th e n e c e s s a ry i n d u s t r i e s p ro m p tly .
The m easures to be ad o p ted i n d ev e lo p in g la b o r f o r c e s a re
s e v e r a l . They a re d is c u s s e d i n th e fo llo w in g s e c t i o n s .
S ecu rin g Labor In fo rm a tio n
Under e x i s t i n g im p e rfe c t c o m p e titio n th e r e p r e v a i l s
a gap betw een th e demand f o r and th e su p p ly o f manpower.
How to b rin g about a b a la n c e betw een th e demand f o r and
su p p ly o f manpower i s one o f th e m ajor ta s k s i n r e g u la tin g
th e la b o r m a rk e t. The f i r s t s te p i s to a p p r a is e th e c u r
r e n t s i t u a t i o n w ith r e s p e c t to th e demand and su p p ly i n th e
labor* m arket and th e re q u ire m e n ts f o r o u tp u t ex p a n sio n to
meet th e needs o f a war economy. Im p o rtan t la b o r i n f o r
m a tio n to be c o l l e c t e d c o n s i s t s o f a budget o f manpower
needs i n a l l e s s e n t i a l i n d u s t r i e s on th e demand s id e ; and
r e c o rd s o f p o p u la tio n , s ta te m e n ts o f c u r r e n t employment i n
each in d iv i d u a l b u s in e s s , s ta te m e n ts o f a p p l ic a n ts f o r jo b s
32
i n employment a g e n c ie s , e t c . , on th e supply s id e . The
c o l l e c t i o n o f la b o r in fo rm a tio n sh o u ld be conducted by a
la b o r com m ission i n c o o p e ra tio n w ith p o lic e o f f i c e s and
employment a g e n c ie s . These m a te r ia l s a r e in d is p e n s a b le
f o r th e p r e p a r a tio n o f a n a t i o n a l la b o r b u d g e t. The
n a t io n a l d e f i c i t o f manpower in d ic a t e d i n th e budget w i l l
d eterm in e th e work o f la b o r t r a i n i n g . In o r d e r to s c r u t i
n iz e th e r e a l i t y o f th e s e re c o rd s a program o f w orker i n
te rv ie w s and f a c t o r y in s p e c tio n sh o u ld be supplem ented
s in c e th e f a c t t h a t a man r e g i s t e r s a s a s k i l l e d w orker
does n o t mean t h a t he w i l l a c t u a l l y p rove to be a compe
t e n t one, o r t h a t a s k i l l e d w orker i s employed a t s k i l l e d
jo b s . T hereby f a l s e r e p o r t s a re re d u c e d .
Labor T ra in in g
As common l a b o r e r s a r e in co m p eten t to ta k e up
s p e c ia liz e d assig n m en ts i n war i n d u s t r i e s , t r a i n i n g be
comes th e o n ly way to se c u re s u f f i c i e n t s k i l l e d la b o r .
I t i s to be p o in te d o u t t h a t th e fo u n d a tio n o f h ig h ly
s k i l l e d la b o r must be p re p a re d i n p ea ce tim e th ro u g h fo rm al
e d u c a tio n o r t e c h n ic a l t r a i n i n g . That i s to sa y , how w e ll
a c o u n try can m eet th e w artim e demand f o r s k i l l e d la b o r
depends on th e d eg ree o f i t s i n d u s t r i a l i z a t i o n . A la b o r
t r a i n i n g program i n tim e o f an emergency must be ac
com plished w ith in a lim ite d p e r io d , and does n o t a llo w an
33
a p p r e n tic e s h ip which ta k e s y e a r s . T h e re fo re , a s h o r t
p e r io d o f t r a i n i n g i n an emergency does n o t en ab le w orkers
to become m a ste rs o f th e h ig h ly s p e c i a l i z e d t r a d e s ; so
t h a t th e problem a s how to a c q u ire ad eq u ate s k i l l e d la b o r
s t i l l rem ains to be s o lv e d .
T his problem may be so lv e d i n p a r t by two m easu res:
(1) to t r a i n f o r th e h ig h ly s k i l l e d o c c u p a tio n o n ly th o s e
p e o p le who a lre a d y p erfo rm s im i l a r work so t h a t th e y may
t r a n s f e r s k i l l s from th e o ld work to th e new. For
in s t a n c e , d ra ftsm e n may become lo fts m e n , journeym an e l e c
t r i c i a n s may be t r a i n e d a s m arine e l e c t r i c i a n s . In o th e r
w ords, th e sh o rta g e o f s k i l l e d la b o r may be p a r t i a l l y
c u re d by t r a i n i n g s e m i- s k ille d la b o r ; and (2) to d iv id e
h ig h ly s k i l l e d ta s k s in t o sim ple and easy o n e s, th e p e r
form ance o f which does n o t r e q u ir e h ig h ly s k i l l f u l t e c h -
2
n iq u e s o r a h ig h degree o f i n t e l l i g e n c e . So th e c r a f t s
man can c o n fin e h im s e lf to doing o n ly th e m ost d i f f i c u l t
component p a r t s and le a v e th e easy ones t o s e m i- s k ille d
h an d s. The f i r s t p ro c e s s i s a ls o c a l l e d "U pgrading” ,
ab o u t which Sidney H illm an g iv e s th e fo llo w in g e x p la n a tio n :
The u p g ra d in g p la n c o n te m p la te s u se by each
w orker o f h i s h ig h e s t s k i l l . Under i t , a to p n o tc h
2 Etaanuel S te in and J u le s Backman, War Economics
(New York: F a r r a r and R in e h a r t, I n c . , 194277” p p . $$-56.
34
m a c h in is t w i l l be f r e e d from d e v o tin g th e u s u a l
70 o r SO p e r c e n t o f h i s tim e to o p e r a tio n s w hich
co u ld be h an d led by some one w ith l e s s e r a b i l i t y
and w i l l c o n c e n tr a te e x c lu s iv e ly on ta s k s which
u se h i s most v a lu a b le s k i l l . 3
By t h i s means a g r e a t p o r tio n o f s k i l l e d la b o r needed in
th e war e f f o r t can be s u b s t i t u t e d by an e q u iv a le n t amount
o f s e m i- s k ill e d la b o r ; t h i s may be e a s i l y s u p p lie d s in c e
th e l a t t e r may be t r a i n e d r e l a t i v e l y q u ic k ly .
In c a rr y in g o u t th e program o f la b o r t r a i n i n g two
problem s may be c o n fro n te d . F i r s t , th e c o s t o f th e ad
m i n i s t r a t i o n o f a v a s t l a b o r - t r a i n i n g program 'w ould be v e ry
h ig h . In a d d i tio n t o th e e x p e n d itu re f o r th e a d m in is tra
t i o n , r e g u la r wages a re g e n e r a lly g r a n te d to th e t r a i n e e s
i n o rd e r to in d u c e them to e n r o l l . Who w i l l ta k e th e
r e s p o n s i b i l i t y f o r f in a n c in g th e t r a i n i n g program , th e
owners o f e n t e r p r i s e s o r th e governm ent? When th e program
ta k e s th e form o f v o c a tio n a l t r a i n i n g i n r e g u la r sc h o o ls
and i s sp o n so red by th e governm ent, th e r e would be an
a p p r o p r ia tio n f o r i t . In th e ca se o f t r a i n i n g - i n - i n d u s t r y
sp o n so red by th e e n t e r p r i s e i t s e l f , governm ent f i n a n c i a l
a id i s a ls o u s u a lly g ra n te d to r e l i e v e th e e n t e r p r i s e from
o v erburden on th e ground t h a t th e o u tla y i s i n th e p u b lic
3 D efense (W ashington, D. G .: The O ffic e f o r
Emergency Management) , V ol. 2 , No. 3 , Ja n u ary 22, 1941,
p. 12.
35
i n t e r e s t .
S econdly, la b o r t r a i n i n g may be fa c e d w ith la b o r
L
u n io n o p p o s itio n . In o r d e r to p re s e rv e i t s m o n o p o lis tic
p o s i t i o n i n th e la b o r m a rk e t, la b o r u n io n s have to p re v e n t
t h e i r members from o v e r-e x p a n d in g . During th e emergency
p e r io d an in c r e a s e i n th e number o f s k i l l e d la b o r e r s w i l l
n o t a f f e c t t h e i r m arket p o s i t i o n , s in c e employment op
p o r t u n i t i e s a r e abundant b u t would im p a ir l a b o r ’ s p o s i t i o n
i n th e p o st-em erg en cy p e r io d , a s th e ta s k f o r w hich
s k i l l e d men a re w anted w i l l th e n have d e c re a s e d . An ob
s t r u c t i o n i s t a t t i t u d e o f th e u n io n s may v e ry w e ll w reck
th e e n t i r e t r a i n i n g program by d e p riv in g i t o f t r a i n i n g
p e r s o n n e l.
P i s t r i b u t i o n o f Labor
In o r d e r to a c h ie v e a p p r o p r ia te d i s t r i b u t i o n o f
la b o r among u n i t s o f d efen se p ro d u c tio n and to a t t a i n an
e q u ilib r iu m o f demand and su p p ly o f manpower, ev ery u n i t
o f p ro d u c tio n engaged i n d e fe n se in d u s tr y sh o u ld p re p a re
a manpower b u dget and p r e s e n t i t f o r a p p ro v a l to th e
a u t h o r i t i e s i n ch arg e o f la b o r d i s t r i b u t i o n . Manpower must
4 T ib o r S c ito v s k y , Edward Shaw, and L o rie T a r s h is ,
M o b iliz in g R esources f o r War (Mew York: M cGraw-Hill Book
TSompany, 1 9 ^1 )7 p . 26 T .---------
36
be d i s t r i b u t e d i n acco rd an ce w ith th e approved b u d g et. A
q u e s tio n which n a t u r a l l y a r i s e s in e x e c u tin g th e manpower
b udget i s how to b rin g w orkers and jo b s t o g e t h e r . The
a l t e r n a t i v e s a re to b rin g men t o jo b s o r jo b s to men; b o th
o f them a re s u b je c t to in c o n v en ie n ce and r e s t r i c t i o n .
W orkers a re o f te n r e l u c t a n t to move a g r e a t d is ta n c e to g e t
a jo b , i f i n so doing th e y have to b re a k e s t a b l i s h e d fa m ily
and s o c i a l t i e s , o r i f th e y have n o t th e money w ith which
to move. I f men a re to be b ro u g h t to jo b s , t r a v e l l i n g
allo w an ce s and o th e r n e c e s s a ry s u b s id ie s sh o u ld a ls o be
g ra n te d i n o rd e r to in d u ce them to come f o r t h . M oreover,
h o u sin g f u r n is h e d w ith p u b lic u t i l i t i e s and e d u c a tio n a l
f a c i l i t i e s i n th e newly e s ta b li s h e d i n d u s t r i a l c e n te r s
sh o u ld be p ro v id e d f o r th e w o rk ers. I f jo b s a re to be
b ro u g h t to th e men, th e d i f f i c u l t y would l i e i n t r a n s p o r t -
; in g th e m a te r ia l s from t h e i r so u rc e s o r th e tr a n s m is s io n
o f power from i t s o r i g i n a t i n g p l a n t s . I t i s c l e a r l y con
c e iv a b le t h a t th e form er a l t e r n a t i v e i s more f e a s i b l e th a n
th e l a t t e r b ecause la b o r h as g r e a t e r m o b ility th a n c a p i t a l
f a c i l i t i e s and n a t u r a l r e s o u r c e s . However, th e c h o ice be
tw een two a l t e r n a t i v e s sh o u ld be made by i n d u s t r i a l ex
p e r t s on th e b a s i s o f th e m e r its o f each in d iv i d u a l c a s e .
To av o id th e in c o n v e n ie n c e s o f t r a n s f e r r i n g la b o r
f o r c e s , as w e ll as p l a n t , s u b c o n tra c tin g i s to be adopted
37
a s much as p o s s i b l e . T hat i s , th e prim e c o n t r a c to r s f o r
d e fe n se jo b s co u ld be encouraged by th e governm ent to
b reak up la r g e o rd e r s i n to sm all ones and sp re a d them as
w id e ly a s p o s s ib le among sm all f irm s ac co rd in g to t h e i r
r e s p e c tiv e p ro d u c tiv e c a p a c i t i e s . S ince sm a ll e n t e r p r i s e r s
a re u n ab le to b id on la r g e c o n t r a c t s , th e y can h a r d ly g e t
th e o p p o rtu n ity to p a r t i c i p a t e i n d efen se w ork. I f th e
prim e c o n t r a c to r s th e m selv es u n d e rta k e to perform a l l th e
w ork, m ig ra tio n and c o n c e n tr a tio n o f w orkers must be i n
v o lv e d . On th e o th e r hand, many sm a ll p l a n t s which do n o t
g e t c o n t r a c t s , and u n d er a p r i o r i t i e s program a re d e p riv e d
o f m a te r ia l s w ith which to produce c i v i l i a n goods, would
be com pelled to sto p t h e i r p ro d u c tio n p a r t i a l l y o r e n t i r e l y .
The w o rk ers i n th e s e p l a n t s who do n o t m ig ra te to d e fe n se
a r e a s become unem ployed. The p u rp o se o f s u b c o n tra c tin g i s
to ab so rb th e a v a ila b le sm all p l a n t s i n t o war e f f o r t and a t
th e same tim e to m inim ize th e la b o r movement t h a t o th e rw is e
would be r e q u ir e d .
Economy i n Labor U t i l i z a t i o n
I t i s v ery d i f f i c u l t to d eterm in e i f a w o rk e r1s
a b i l i t y and energy i s b e s t and f u l l y u t i l i z e d . W aste in
manpower o c c u rs i n d i f f e r e n t ways. F i r s t , i t e x i s t s when
th e r e i s m a l - d i s t r i b u t i o n as a r e s u l t o f c u t - t h r o a t com
p e t i t i o n among r i v a l f ir m s . C o n seq u en tly , some o f th e
3B
firm s a re o v e r - s t a f f e d w hereas o th e r s a re u n d e r - s t a f f e d ,
th u s le a d in g tow ard e x tra v a g a n t w aste o f manpower. The
s o lu t io n o f t h i s problem i s governm ent c o n t r o l o f la b o r
d i s t r i b u t i o n . A r a t i o n i n g o f la b o r m ust be fo llo w e d .
Under t h i s system em ployers a re a b le to se c u re w orkers o n ly
when a u t h o r i t y makes them a v a i l a b l e . Thereby w aste o f
manpower may be e lim in a te d . In th e meantime r e g io n a l la b o r
s h o rta g e s may be c u red c o n s id e ra b ly th ro u g h a n a t io n a l
c le a ra n c e system , and a g r e a t e r e f f i c i e n c y i n n a t io n a l
la b o r u t i l i z a t i o n can be a t t a i n e d . S econdly, i t i s e v i
d e n tly uneconom ical i f a s u p e r io r man i s employed i n a
p o s i t i o n below h i s c a p a c ity o r o u ts id e h i s s p e c ia liz e d
f i e l d , o r i f a man o c c u p ie s a p o s i t i o n beyond h i s a b i l i t y .
C a re fu l i n v e s t i g a t i o n sh o u ld be made o f th e w orkers*
q u a l i f i c a t i o n s f o r th e jo b s o r o f th e f i t n e s s o f th e jo b s
f o r th e w o rk e rs. In o th e r w ords, th e r i g h t men sh o u ld be
p u t i n th e r i g h t p la c e s so t h a t each i n d i v i d u a l ’ s po
t e n t i a l a b i l i t y can be f u l l y u t i l i z e d . T h ir d ly , w aste o f
manpower a ls o f in d s fa v o ra b le c lim a te i n th e s h o r t w o rk in g -
h o u r system which keeps th e w orkers from e x e r tin g them
s e lv e s to re a c h an optimum p o in t o f la b o r e f f i c i e n c y . In
c e r t a i n c o u n tr ie s where th e governm ent o b se rv e th e p o lic y
o f re d u c in g unemployment by l i m i t i n g w orking h o u rs , say no
more th a n f o r t y h o u rs p e r week, a m argin f o r in c r e a s in g
w orking h o u rs f o r d efen se p u rp o se s i n tim e o f emergency
i s o f te n p r o v id e d .5 In d e te rm in in g w orking h o u rs s e v e r a l
c o n s id e r a tio n s sh o u ld be ta k e n i n t o a c c o u n t. F i r s t , ex
c e s s iv e work te n d s to red u ce th e w o rk e rTs p r o d u c t i v i t y .
I t w i l l cause f a t i g u e , slow down th e pace o f w ork, c r e a te
a c c id e n ts , and w i l l r e s u l t i n tu r n in g o u t i n f e r i o r
p ro d u c ts . Thus th e e x te n t to which w orking h o u rs can be
p ro lo n g ed w ith o u t im p a irin g th e e f f i c i e n c y o f p ro d u c tio n ,
depends upon th e a v a ila b le w orking h o u rs , h a rd s h ip o f th e
w ork, and w orking c o n d itio n s , e t c . , on th e one hand, and
th e h e a lth o f th e w orkers on th e o th e r . The maximum
w orking h o u rs sh o u ld be lim ite d to th e p o in t beyond which
th e e f f i c i e n c y o f p ro d u c tio n and th e w o rk e rs 1 h e a lth would
n o t be s e r io u s ly im p a ire d .
I
[P revention o f D istu rb a n c e s
W hile la b o r i s a c q u ire d a d e q u a te ly and u t i l i z e d
e f f e c t i v e l y , a t t e n t i o n sh o u ld be p a id to th e p re v e n tio n o f
d is tu r b a n c e s i n p ro d u c tio n a r i s i n g u s u a lly from a number
o f s i t u a t i o n s to be d is c u s s e d l a t e r .
S t r i k e s . — Defense p ro d u c tio n cannot be w ith o u t
i n t e r r u p t i o n u n le s s la b o r s t r i k e s can be p re v e n te d .
S tr i k e s cause th e g r e a t e s t d is tu rb a n c e i n p ro d u c tio n and
S te in and Backman, op. c i t . , p . SB.
40
a r e , t h e r e f o r e , a f e a r f u l t h r e a t to n a t i o n a l s e c u r i t y .
Most d e fe n se s t r i k e s in v o lv e w ages. When p r i c e s
go u p , th e c o s t o f l i v i n g r i s e s , and th e r e a l income o f
th e w orking c l a s s d e c re a s e s , s t r i k e r s a r e o f te n u se d by
la b o r u n io n s as a weapon to demand h ig h e r wages to keep
pace w ith commodity p r i c e s . I n c r e a s e s i n wage r a t e s may
c o n tr ib u te to r i s i n g p r i c e s because wages c o n s t i t u t e a
c o s t f a c t o r i n th e p ro d u c tio n o f a l l ty p e s o f goods. T h is ,
i n t u r n , may le a d to new demands f o r wage in c r e a s e s , and a
v ic io u s s p i r a l o f i n f l a t i o n may r e s u l t . A nother s i g n i f i
c a n t f a c t o r b e a rin g upon th e problem o f wage d is p u te s i n a
war economy i s th e r i s e o f p r o f i t s . An in c r e a s e o f p r o f i t s
i s th e accompaniment o f r i s i n g i n d u s t r i a l a c t i v i t y . Labor
te n d s to demand a sh a re o f th e la r g e p r o f i t s i n th e form
o f wage in c r e a s e s . S t r i k e s a r i s e a ls o when in c r e a s e s i n
wage r a t e s a re n o t u n i v e r s a l .
S econdly, s t r i k e s may in v o lv e u n io n r e l a t i o n s w ith
em ployer. A u n io n may c a l l a s t r i k e to f o r c e th e em ployer
to ded u ct u n io n dues and t u r n th e money o v er to th e u n io n .
J u r i s d i c t i o n a l d is p u te s betw een u n io n s may a ls o r e s u l t i n
s t r i k e s .
T h ir d ly , th e pace o f war p ro d u c tio n i s l i k e l y
som etim es to produce g rie v a n c e s and i r r i t a t i o n i n la b o r
r e l a t i o n s w hich may c u lm in a te i n s t r i k e s . I n c r e a s in g th e
speed o f p ro d u c tio n , r e o r g a n iz in g th e f a c to r y f o r new
p ro d u c ts , and le n g th e n in g h o u rs o f work a l l may encroach
upon u n io n r u l e s and in c r e a s e s t r a i n and f a t i g u e . Such
developm ent may le a d to work sto p p a g e s.
How to b rin g about a prom pt i n d u s t r i a l peace i s o f
c o u rse o f u tm o st im p o rta n ce to war economy. To t h i s p ro b
lem th e r e a re s e v e r a l a l t e r n a t i v e ap p ro ac h es, in c lu d in g
i
I re g im e n ta tio n o f la b o r , p r o h i b i t i o n th ro u g h l e g i s l a t i o n ,
and v o lu n ta ry c o o p e ra tio n . The p o lic y o f com plete r e g i
m e n ta tio n o f la b o r i s d em o n strated by c o l l e c t i v i s t coun-
i
t r i e s . T h is i s n o t a c c e p ta b le to d em o cratic c o u n tr ie s on
ac co u n t o f i t s repugnancy to th e i d e a l s o f dem ocracy. In
a d em o cratic c o u n try i t i s a ls o im p o s s ib le to e lim in a te
s t r i k e s th ro u g h l e g i s l a t i o n . F i n a l l y , a program o f v o lu n
t a r y c o o p e ra tio n betw een o rg a n iz e d la b o r and in d u s tr y i s
u se d a s th e main means to le s s e n th e number and s e v e r i t y
o f s t r i k e s f o r th e d u r a tio n o f em ergency. C o lle c tiv e
b a r g a in in g and tr a d e agreem ent n e g o t ia t io n s a re c o n t r ib u -
t i v e to th e avoidance o f p ro d u c tio n sto p p a g e s. For t h i s
! to be t r u e , th e r e must be a gen u in e ac ce p tan c e o f c o l l e c -
I I
> t i v e b a rg a in in g i n good f a i t h and a genuine d e s ir e on th e j
! p a r t o f b o th la b o r and management to p re v e n t s t r i k e s . A l-
I though th e b a s ic problem i s to e lim in a te th e cause o f i n -
d u s t r i a l d is p u t e s , governm ent in t e r v e n t i o n i s q u ite o f te n
42
in d is p e n s a b le f o r a c h ie v in g a prom pt s e ttle m e n t o f la b o r
d is p u t e s . F or t h i s p u rp o se an i n t e g r a t e d s e t o f p r i n c i p l e s
and a d m in is tr a tiv e a g e n c ie s must be d e v is e d . In th e l a s t
W orld War th e U n ite d S ta te s ad o p ted th r e e b a s ic p r i n c i p l e s
w ith r e s p e c t to th e s e ttle m e n t o f la b o r c o n t r o v e r s i e s .
They a r e : ^
1. W o s t r i k e s o r lo c k o u ts f o r th e d u r a tio n o f
th e w ar.
2 . S e ttle m e n t o f a l l d is p u te s th ro u g h s te p -b y -
s te p c o n c i l i a t i o n , m e d ia tio n , and a r b i t r a t i o n .
3 . C re a tio n o f a war Labor Board to h a n d le th e
d is p u t e s .
And s e v e r a l s te p s w ere fo llo w e d . F i r s t , th e p a r t i e s con
c e rn e d n e g o tia te d i r e c t l y f o r s e c u rin g an a d ju stm e n t by
c o l l e c t i v e b a r g a in in g . S econdly, i f a r e c o n c i l i a t i o n f a i l s
to be e f f e c t e d , th e governm ent would o f f e r i t s m e d ia tio n
c o n c i l i a t i o n and a r b i t r a t i o n s e r v i c e s . F i n a l l y , i n a
c r i t i c a l s i t u a t i o n , i f a l l o th e r means f a i l e d to b rin g
ab o u t a q u ick r e s t o r a t i o n o f i n d u s t r i a l p e a c e , th e govern
ment sh o u ld be empowered to s e iz e th e p a ra ly z e d p l a n t and
ru n i t as a governm ent p r o j e c t . G reat B r i t a i n a ls o
fo llo w e d a s i m i l a r v o lu n ta ry c o o p e ra tio n p o lic y . T his i s
d i f f i c u l t to program and to m a in ta in , b u t i t o f f e r s rew ards
i n e f f i c i e n c y and m o ra le , i f s u c c e s s f u l.
6 S te in e r and A s s o c ia te s , o p . c i t . . p p . 14-27.
43
In c r e a s e i n th e R ate o f Labor Turnover
When more jo b s a r e o f f e r e d i n w artim e , w orkers
hoping f o r b e t t e r o p p o r tu n ity elsew h ere te n d t o s h i f t from
one jo b to a n o th e r . T his i s p e rh a p s i n e v i t a b l e i n r e
c r u i t i n g manpower from n o n - e s s e n t i a l f i e l d s o f p ro d u c tio n
to e s s e n t i a l o n e s. However, f re q u e n t w orker tu rn o v e r
o c c a s io n s u n n e c e ss a ry w aste o f la b o r and i n t e r r u p t i o n i n
p r o d u c tio n . I n a c r i t i c a l s i t u a t i o n i t i s n e c e s s a ry t h a t
w o rk ers sh o u ld n o t be allo w ed to le a v e t h e i r p o s i t i o n s
w ith o u t th e p e rm is s io n o f p u b lic a u t h o r i t y .
O c c a sio n a l Unemployment
As p ro d u c tio n r e tr e n c h e s due to some u n ex p e cte d
c a u s e s , unemployment may a p p e a r a s a problem . In w artim e
s e r io u s d e s t r u c t i o n o f p l a n t and equipm ent may be oc
c a s io n e d by th e enemy a t t a c k s ; o r th e i n t e r r u p t i o n in
su p p ly o f raw m a te r ia l s may a ls o be cau sed by th e enemy
i n t e r f e r e n c e w ith v i t a l t r a n s p o r t a t i o n l i n e s th ro u g h a i r
r a i d s o r navy b lo c k a d e . C o n seq u en tly , unemployment w i l l
o c c u r as p r o d u c tio n s h r in k s o r s to p s e n t i r e l y . M oreover,
unemployment may be m u lt ip lie d th ro u g h " p ro c e s s e f f e c t s "
u n d e r modern ro u n d -a b o u t p r o d u c tio n system . To e lim in a te
th e w aste o f la b o r th e unem ployed sh o u ld be p ro m p tly ab
so rb ed by o th e r i n d u s t r i e s w henever s u i t a b l e and p o s s i b l e .
44
I n d u s t r i a l A ccid en ts
D eath and d i s a b i l i t y o f w orkers cau sed by a c c id e n ts
i n in d u s t r y a re i n c l i n e d to go upward i n w artim e as a r e
s u l t o f a speed-up i n p ro d u c tio n and th e lo n g -w o rk in g -h o u r
system . E s p e c ia lly , i n th e i n d u s t r i e s o f m achine t o o l s ,
a i r c r a f t , and s h ip b u ild in g th e r a t e o f d e a th and d i s a b i l i t y
from i n d u s t r i a l a c c id e n ts i s u s u a lly double o r more th a n
7
th e a c c id e n ts o f norm al tim e s . Most o f th e in c r e a s e d
a c c id e n ts a re p e rh a p s n o t n e c e s s a r i l y u n a v o id a b le . As a
rem edy, a s h o r te r w orking h o u r system , accom panied by a
m a n y -s h ift system as w e ll as o th e r s a f e t y p r e c a u tio n s ,
sh o u ld be adopted to l i m i t th e a c c id e n ts to a minimum.
In c o n c lu s io n , i t may be s a id t h a t th e problem o f
a c q u ir in g manpower f o r d e fe n se p u rp o se s i s m ainly one o f
d ev e lo p in g h ig h ly s k i l l e d la b o r e s s e n t i a l to d e fe n se p r o
d u c tio n . T h is i s b ecau se th e q u a n t i t a t i v e re q u ire m e n ts o f
la b o r i n most b e l l i g e r e n t c o u n t r ie s i s l e s s u r g e n t th a n
q u a l i t a t i v e re q u ire m e n ts , and th e in c r e a s e i n th e number o f
w o rk ers i s lim ite d by p o p u la tio n w hich cannot be ex p e cte d
to in c r e a s e d u rin g a w ar. B ut, on th e o th e r h an d , te c h n i
c a l s k i l l can be dev elo p ed c o n s id e ra b ly th ro u g h t r a i n i n g
7 M. D. K o s s o ris and S. K ja e r, " I n d u s t r i a l I n j u r i e s
i n th e U n ite d S ta te s D uring 1940," M onthly Labor Review .
V ol. 53, No. 2 , pp. 327, 342, A ugust, 1941*
45
and r e t r a i n i n g . F u rth e rm o re , manpower can be saved a s th e
w aste o f l a b o r , cau sed by m a l - d i s t r i b u t i o n o f la b o r , m is
p lacem en t o f w o rk e rs , s t r i k e s , r a p id tu r n o v e r , o r in d u s
t r i a l a c c id e n ts , e t c . , i s red u ced o r e lim in a te d . In s h o r t ,
th e t a s k o f a c q u ir in g manpower i s to be accom plished by
a c t i v e l y f o s t e r i n g l a b o r 's o c c u p a tio n a l s k i l l and e lim i
n a tin g la b o r w aste w herever i t o c c u rs .
C H A P T E R IV
THE PROCUREMENT OF R A W MATERIALS
In modern tim e s m unition-m aking h as come to need
e e r t a i n s p e c i a l raw m a t e r i a l s . Some o f them a re w o rld ly
sc a rc e and cannot be found i n e v e ry c o u n try . I t i s s a id
t h a t no c o u n try i n th e w o rld i s s e l f - s u f f i c i e n t i n r e -
1
l a t i o n to a l l m a te r ia l s needed f o r d e fe n se p u rp o s e s .
T h e re fo re , th e a c q u i s i t i o n o f sc a rc e raw m a t e r i a l s con
s t i t u t e s a n o th e r i n t e g r a l p a r t o f w ar-m aking e f f o r t .
C l a s s i f i c a t i o n o f Raw M a te r ia ls
A ccording to t h e i r r e l a t i v e s ig n i f ic a n c e to de
fe n s e and t h e i r s c a r c i t y , raw m a t e r i a l s a r e d iv id e d in t o
th r e e c a t e g o r i e s : s t r a t e g i c m a t e r i a l s , c r i t i c a l m a t e r i a l s ,
and common m a t e r i a l s . Such a c l a s s i f i c a t i o n i s m erely a
p ro d u c t o f l e g i s l a t i o n b ased upon th e m i l i t a r y u s e s o f th e
raw m a te r ia l s and t h e i r su p p ly i n a p a r t i c u l a r c o u n try .
I t a ls o v a r i e s from tim e to tim e . For exam ple, i n th e
U n ite d S ta te s th e Army and Navy M u n itio n s Board made a
d e c l a r a t i o n o f s t r a t e g i c m a te r ia l s and c r i t i c a l m a te r ia l s
1 George A rth u r L in c o ln , W illiam S. S to n e , and
Thomas H. H arvey, Economics o f N a tio n a l S e c u r ity (New York:
P r e n t i c e - H a l l , Inc'. "," 1950}, p7 T W .— ------------------
47
w hich in c lu d e d 14 and 15 ite m s r e s p e c t i v e l y .
1. S t r a t e g i c m a te r ia l s a re th o s e e s s e n t i a l to
a n a t i o n a l d e fe n s e , f o r th e supply o f which
i n war dependence must be p la c e d i n w hole,
o r i n s u b s t a n t i a l p a r t , on th e so u rc e s
o u ts id e th e c o n t in e n t a l l i m i t s o f th e U n ited
S t a t e s ; and f o r which s t r i c t c o n s e r v a tio n
and d i s t r i b u t i o n c o n t r o l m easures w i l l be
n e c e s s a ry .
The com m odities a s c l a s s i f i e d i n Jan u ary
1942 in c lu d e d ;
Antimony, chromium, cocoanut s h e l l c h a r,
m anganese, M anila f i b e r , m ercury, m ica, n ic k e l,
q u a r tz c r y s t a l s , q u in in e , ru b b e r, s i l k , t i n ,
and tu n g s te n .
2 . C r i t i c a l m a te r ia l s a re th o s e e s s e n t i a l to
n a t i o n a l d efen se th e procurem ent problem o f
which i n war would be l e s s d i f f i c u l t th a n
th o s e s t r a t e g i c m a t e r i a l s e i t h e r b ecause
th e y have l e s s e r d eg ree o f e s s e n t i a l i t y o r
a re o b ta in a b le i n more ad eq u ate q u a n t i t i e s
from dom estic s o u rc e s , and f o r which some
deg ree o f c o n s e rv a tio n and d i s t r i b u t i o n con
t r o l w i l l be n e c e s s a ry .
The com m odities in c lu d e d ;
Aluminum, a s b e s to s , c o rk , g r a p h i t e , h id e s ,
io d in e , kapok, opium, o p t i c a l g l a s s , p h e n o l,
p la tin u m , ta n n in g m a t e r i a l s , t o l u o l , vanadium ,
and woo1 .2
For an in c r e a s in g number o f com m odities i t was
found t h a t s u p p lie s fo rm e rly th o u g h t ad e q u ate were r e a l l y
i n s u f f i c i e n t f o r new demand, and th e l i s t was r a p id ly
expanded. Of th e new l i s t 17 were s t r a t e g i c , 20 c r i t i c a l ,
i — ................................................. in.....
2 The S tr a te g i c and C r i t i c a l M a te r ia ls (W ashington,
D. C .; Army and Navy M unition Board, March, 1940), p . 3-
4S
and 35 im p o rta n t. So th e c l a s s i f i c a t i o n o f raw m a te r ia l s
i s s u b je c t to r e v i s i o n depending on many f a c t o r s which a re
d is c u s s e d i n th e fo llo w in g s e c tio n s .
(A) The le n g th o f w ar. — A war may l a s t many y e a rs .
The m a te r ia l s which w ere ad eq u ate a t th e b eg in n in g o f th e
war may be soon e x h a u ste d . I f th e d e p le tio n o f c e r t a i n
m a te r ia l s cannot be r e p le n is h e d , th e y a re u s u a lly p u t on
th e s t r a t e g i c m a te r ia l s l i s t .
(B) Change i n armament p r o d u c tio n . — I f a new
weapon i s in v e n te d , i t s o ld e r ty p e i s bound to j o i n th e
o b s o le te . The p r o d u c tio n mechanism g e a re d to making th e
o ld weapon h as to be c o n v e rte d . As t h i s ta k e s p la c e th e
m a te r ia l s r e q u ir e d to produce th e new weapon w i l l e n te r
th e l i s t o f s t r a t e g i c m a te r ia l s to r e p la c e th o s e u se d in
m a n u fa c tu rin g th e o ld o b s o le te ty p e .
(C) I n t e r r u p t i o n i n p ro d u c tio n o r t r a n s p o r t a t i o n . —
I f th e su p p ly o f c e r t a i n m a te r ia l s d e c re a s e s due to
sto p p ag e i n p ro d u c tio n o r i n t e r r u p t i o n in t h e i r tr a n s p o r
t a t i o n from ab ro ad , w ith o u t a c o rre sp o n d in g d e c re a se in
demand, th e y a ls o a re e n t i t l e d to be c l a s s i f i e d as s t r a t e -
3
g ic m a t e r i a l s .
3 Henry W illia m S p ie g e l, The Economics o f T o ta l
War (Hew York: D. A p p leto n -C en tu ry Company, 1 9 ^ ) ,
p7” 219.
49
Common m a t e r i a l s , i n t u r n , may be su b d iv id e d i n to
m a n u fa c tu rin g m a te r ia l s such as ir o n o r e , co p p e r, wood,
e t c . ; power re s o u rc e s such as c o a l, l i g n i t e , p e tro le u m ,
and w a te r pow er, e t c . ; and f o o d s t u f f s . I t i s to be p o in te d
o u t t h a t common m a t e r i a l s , a lth o u g h c o m p a ra tiv e ly abundant
in q u a n t ity , may be o f e q u a l im p o rtan ce as s t r a t e g i c ma
t e r i a l s to d e fe n s e . M oreover, any common raw m a te r ia ls ',
ex c e p t f o o d s t u f f s , may be l i s t e d as s t r a t e g i c m a te r ia l s o r
c r i t i c a l m a te r ia l s a t th e moment th e y become sc a rc e i n r e -
✓
l a t i o n . t o demand. N eed less to sa y , f o o d s tu f f s a re by no
means l e s s s i g n i f i c a n t th a n o th e r k in d s o f m a t e r i a l s . So,
i n o r d e r to keep war e f f o r t going w ith o u t i n t e r r u p t i o n ,
raw m a t e r i a l s o f many k in d s must be s u p p lie d s u f f i c i e n t l y
i n r e l a t i o n to demand.
Method o f A cq u irin g Raw M a te r ia ls
How to a c q u ire th e n e c e s s a ry raw m a te r ia l s i s one
o f th e m ajor ta s k s o f a w ar e f f o r t . In th e m eantim e, we
have to p re v e n t th e enemy from g e t t i n g s t r a t e g i c m a t e r i a l s .
T h is c h a p te r , how ever, w i l l c o n fin e i t s e l f to th e answer
o f th e f i r s t q u e s tio n , le a v in g th e o th e r to be t r e a t e d in
a n o th e r c h a p te r . There a re v a rio u s m ethods o f a c q u ir in g
raw m a t e r i a l s , th e m ajor ones o f w hich a re b r i e f l y o b se rv e d
a s fo llo w s ;
50
R e s e rv a tio n i n p e a c e tim e . — In a n t i c i p a t i o n o f w ar
tim e needs dom estic re s o u rc e s w ith r e s p e c t to d e fe n se
sh o u ld be r e s e rv e d i n p e a c e tim e . As a r u l e , c i v i l i a n u se
and e x p o rt o f th e s e v a lu a b le m a te r ia l s sh o u ld be p r o h ib ite d
o r s t r i c t l y c o n t r o l l e d because e x h a u s tio n o f such m a te r ia l s
u n d o u b te d ly en d an g ers n a t io n a l s e c u r i t y .
D eveloping new s o u r c e s . — T his r e f e r s to th e s u r
vey o f m in e ra l d e p o s its i n o r d e r to f in d new so u rc e s o f
s t r a t e g i c m a t e r i a l s . In c e r t a i n i n d u s t r i a l l y undeveloped
c o u n tr ie s r i c h r e s o u r c e s rem ain to be e x p lo ite d . S cien
t i f i c su rv ey and i n v e s t i g a t i o n h e re sh o u ld be b ro u g h t in to
e f f e c t i v e u s e . The d isc o v e ry and developm ent o f r i c h
p o ta s h d e p o s its in th e Andes, o f m ercury i n M exico, and o f
co p p er i n R hodesia w ere l a r g e l y th e outcome o f n e c e s s i t y .
S earch f o r s u b s t i t u t e s . — R e so u rces, no m a tte r how
r i c h , a r e li m i t e d by n a tu r e . In v e n tio n o r d is c o v e ry o f
s u b s t i t u t e s f o r s c a rc e goods i s th e o n ly way to b re a k t h e i r
n a t u r a l q u a n t i t a t i v e bounds. The p ro d u c tio n o f sy n th e
s iz e d p e tro le u m , s y n th e s iz e d ru b b e r, and o th e r s y n th e s iz e d
s u b s t i t u t e s f u r n i s h exam ples. The p ro d u c tio n o f s y n th e
s iz e d s u b s t i t u t e s i n th e i n i t i a l s ta g e o f developm ent
te n d s to be q u ite c o s t l y , b u t t h i s does n o t n e c e s s a r i l y
mean l e s s s a t i s f a c t o r y . M oreover, economic c o s t may be a
m inor c o n s id e r a tio n i n a c q u irin g e s s e n t i a l goods f o r de
fe n s e p u rp o s e s . The p ro d u c tio n o f s u b s t i t u t e s f o r
51
s t r a t e g i c m a t e r i a l s i s J u s t i f i e d , so long a s th e need f o r
them rem ains u r g e n t. Though newly developed s u b s t i t u t e s
a re o f te n i n f e r i o r to o r i g i n a l goods i n q u a l i t y and b e a r
h ig h e r c o s t o f p ro d u c tio n , i n tim e th e y can be p e r f e c t e d .
R esearch to develop s u b s t i t u t e s f o r sc a rc e goo d s, how ever,
i s n e i t h e r prom pt n o r i n f a l l i b l e . A c o n s ta n t e f f o r t in
t h i s d i r e c t i o n sh o u ld be made i n p e a c e tim e .
S to c k p ilin g . — S carce m a te r ia l s a r e d i f f i c u l t to
o b ta in and can n o t be am assed w ith in a s h o r t p e r io d . In th e
tim e o f war th e o u tp u t o f m a t e r i a l s may be h an d icap p ed by
s h o rta g e o f p ro d u c tiv e a g e n ts and in s tru m e n ts o f t r a n s
p o r t a t i o n , and im p o r ta tio n from ab road o f goods may be
h in d e re d by o th e r b e l l i g e r e n t s . The g r e a t e s t p o r tio n o f
needed s t r a t e g i c m a t e r i a l s m ust be s to c k p ile d i n p e a c e
tim e ac c o rd in g to th e sound Judgment o f m i l i t a r y e x p e r ts .
P r i o r to th e o u tb re a k o f th e w ar i n E urope, th e U n ited
S ta te s C ongress had p a s se d th e S tr a t e g i c M a te r ia ls Act
on June 7, 1939, a u th o r iz in g th e Procurem ent D iv is io n o f
th e T re asu ry to p ro c u re and s to c k p ile s t r a t e g i c and c r i t i
c a l m a te r ia ls .* 1 ' In 1940, th e R e c o n s tru c tio n F inance
C o rp o ra tio n was a u th o riz e d to make lo a n s to any c o r p o r a tio n
4 F e d e ra l R ecords o f W orld War I I , V ol. I , C i v ilia n
A gencies N a tio n a l A r c h iv e s T u b i ic a tio n No. 5 1 -7 , 1951-
52
f o r th e purpose o f p ro d u c in g , a c q u ir in g , and c a rr y in g
s t r a t e g i c and c r i t i c a l m a te r ia l s and f o r p l a n t c o n s tr u c tio n
and ex p a n sio n , a s w e ll a s f o r th e p r o v is io n o f w orking
c a p i t a l r e q u ir e d by th e borrow er to m an u factu re m a te r ia l s
f o r d e fe n s e , and to c r e a te s u b s i d i a r i e s to a c q u ir e , p r o
duce, and c a r r y s t r a t e g i c and c r i t i c a l m a t e r i a l s . The RFC
im m ed iately e s ta b li s h e d th e M etal R eserve Company and
Rubber R eserve Company on June 2&, 1940 to in c r e a s e th e
dom estic and f o r e ig n p ro d u c tio n , a s w e ll a s im p o rt, o f
s t r a t e g i c m e ta ls and m in e ra ls and r u b b e r , r e s p e c t i v e l y . 5
In f a c t , s to c k p ili n g o p e r a tio n s i n raw m a te r ia l s
were a ls o c a r r i e d on th ro u g h Navy R eserve S to ck , Army
O rdnance, Commodity C r e d it C o rp o ra tio n , and D efense Sup
p l i e s C o rp o ra tio n . In a d d i tio n , some were s to c k p ile d by
th e S u rp lu s Commodities C o rp o ra tio n .
Many m ethods may be u sed to b u ild up sto c k p i l e s :
F i r s t , s t r a t e g i c m a te r ia l s may be o b ta in e d by tr a d in g
s u r p lu s com m odities w ith f o r e ig n c o u n t r i e s . S econdly, th e
s u p p lie s may be a c q u ire d by th e v a r io u s governm ent agen
c i e s . T h ird ly , s to c k s may a ls o be o b ta in e d by d ip lo m a tic
n e g o t ia t io n w ith f o r e ig n c o n tr o l a g e n c ie s , s c o u tin g o u t
5 U n ited S ta te s D epartm ent o f Commerce, War A c tiv i-
!t i e s o f th e R e c o n s tru c tio n F inance C o rp o ra tio n and I t s
1 d u b sic IT a rle s. T 945.
53
6
sm a ll l o t s o f a v a i l a b l e s u p p lie s th ro u g h o u t th e w o rld .
S to c k p ilin g a c t i v i t i e s g e n e r a lly ta k e f o u r ty p e s :
F i r s t , s u p p lie s a re tu rn e d i n t o th e sto c k p i l e on th e same
b a s i s t h a t a lo n g -te rm in v e stm e n t i s s e t a s id e f o r s a f e
k e e p in g ; th e u n d e rs ta n d in g i s t h a t w ith d ra w a ls a re to be
made a s a l a s t r e s o r t i n c a se o f d ir e m i l i t a r y em ergency.
S econdly, a sto c k p i l e i n t o which s u p p lie s a re p la c e d can
be ta p p ed o n ly to su p p ly m i l i t a r y n e e d s, beyond th e c u r
r e n t l y a v a ila b le s u p p li e s , f o r a s p e c ia l p e r io d o f emer
gency. T h ir d ly , a t th e same tim e s te p s a re ta k e n to i n
c re a s e p ro d u c tio n o r c u r t a i l consum ption so a s to en a b le
e v e n tu a l re p la c e m e n t o f th e s u p p lie s w ithdraw n. F o u rth ly ,
one ty p e o f sto c k p i l e in v o lv e s th e m ain ten an ce o f a r e
se rv e from w hich sm a ll q u a n t i t i e s can be q u ic k ly a l l o c a t e d
when u n ex p e cte d s h o rta g e i n p a r t i c u l a r i n d u s t r i e s o r p l a n t
7
a p p e a r.
S tim u la tio n o f p r o d u c tio n i n w a rtim e . — For some
raw m a te r ia l s w hich f o r c e r t a i n re a s o n s can n o t be s to c k
p i l e d , th e su p p ly depends s o l e l y upon p ro d u c tio n i n w ar
tim e . T h e ir p ro d u c tio n must be r a p id ly expanded a t th e
6 R o b ert F. M a rtin , S tr a t e g i c M a te r ia ls (New York:
N a tio n a l A s s o c ia tio n o f M a n u fa c tu re rs, 1 9 4 1 ), p . 9.
7 S te in and Backman, o£ . c i t . , pp. 57-59.
54
f i r s t s ig n o f an open w ar. U s u a lly , t h i s i s h a n d le d by th e
governm ent b u t, o f c o u rs e , p r i v a t e e n t e r p r i s e s p o s s e s s in g
th e needed n a t u r a l re s o u r c e s o r c a p i t a l f a c i l i t i e s a re to
be encouraged to expand p ro d u c tio n th ro u g h economic i n
c e n tiv e s ti m u la tio n , p a t r i o t i c a p p e a l, and, i f n e c e s s a r y ,
by th e t h r e a t o f commandeering o r p e n a lty . Among th e
m easures d e sig n e d t o a p p e a l to economic i n c e n ti v e s a re
s u b s i d i e s , g u a ra n te e d p r i c e s , p r o f i t s , and s p e c ia l a rra n g e
m ents f o r r a p id a m o rtiz a tio n o f new p l a n t s . These w i l l be
d is c u s s e d i n d e t a i l l a t e r .
Im p o rtin g . — Raw m a te r ia l s o r i g i n a t i n g i n f o r e ig n
c o u n tr ie s can be o b ta in e d o n ly by t r a d e . G e n e ra lly , a low
t a r i f f p o lic y i s u se d a s a means to s tim u la te im p o rts .
For exam ple, th e C anadian Government low ered d u tie s f o r
im p o rts o f s u g a r, w ool, and o th e r p ro d u c ts i n o r d e r to
s tim u la te an in c r e a s e d flo w o f s u p p lie s i n W orld War I I .
But to develop f o r e ig n tr a d e i n w artim e in v o lv e s sh ip p in g
f a c i l i t i e s s h o r ta g e s , f o r e ig n exchange d e f i c i e n c i e s , and
w inning th e economic w a rfa re waged by b e l l i g e r e n t s . To
overcome th e s e d i f f i c u l t i e s i t becomes n e c e s s a ry to
s tr e n g th e n t r a n s p o r t a t i o n r e g u l a t i o n , f o r e ig n exchange
c o n t r o l s , and o th e r m easures p e r t i n e n t to th e developm ent
o f f o r e ig n tr a d e i n w artim e . These w i l l a ls o be d is c u s s e d
i n a n o th e r c h a p te r .
55
D i s t r i b u t i o n c o n t r o l * — I t h a s been o b se rv e d in
th e fo re g o in g pages t h a t manpower can be made more a v a i l
a b le by a p p r o p r ia te la b o r d i s t r i b u t i o n among v a r io u s i n
d u s t r i a l f i e l d s . The same i s a p p lic a b le to raw m a t e r i a l s .
Raw m a te r ia l s sh o u ld be d i s t r i b u t e d among a l l u s e s a c
c o rd in g to t h e i r r e l a t i v e im p o rta n ce to d e fe n s e . C i v ilia n
p ro d u c tio n o r consum ption which compete w ith d e fe n se u s e s
i n a c q u ir in g e s s e n t i a l raw m a t e r i a l s must be cu rb ed o r
sto p p e d . The in s tru m e n t to e f f e c t raw m a te r ia l s d i s t r i
b u tio n c o n tr o l c o n s i s t s o f h ig h p r i c e p o lic y , t a x a t i o n , and
d i r e c t c o n t r o l. C i v i l i a n u s e s o f raw m a te r ia l s may be d i s
couraged by r a i s i n g t h e i r p r i c e s o r im posing heavy ta x e s ,
th e e f f e c t i v e n e s s o f w hich, how ever, h as been h e ld a s un
c e r t a i n . D ir e c t c o n tr o l on th e o th e r hand i s deemed th e
most e f f e c t i v e method o f d i s t r i b u t i o n c o n t r o l . B esid es
d is c o u ra g in g c i v i l i a n u s e s , e x p o rt c o n t r o l c o n s t i t u t e s an
im p o rta n t p a r t o f th e d i s t r i b u t i o n c o n t r o l . As a r u l e ,
raw m a te r ia l s sh o u ld be r e t a i n e d a t home f o r dom estic p ro
d u c tio n p u rp o s e s .
R eclam atio n and sc ra p m a t e r i a l s . — Most d u ra b le
goods, a f t e r t h e i r u s e f u l l i f e h a s ended, have c o n s id e r a b le
sc ra p v a lu e w hich can be b ro u g h t back i n t o p ro d u c tio n . I f
n e c e s s a r y , th o s e which a re s t i l l i n u se by th e consum ers
can be p u rc h a se d by th e governm ent f o r d e fe n se p u rp o s e s .
56
F or exam ple, cam paigns to c o l l e c t aluminum p o ts and pans
to o k p la c e i n G re at B r i t a i n , Canada, and th e U n ite d S ta te s
i n 1940-41 i n o r d e r to supplem ent th e lim ite d su p p ly o f
v i r g i n aluminum a v a i l a b l e f o r th e p ro d u c tio n o f a i r c r a f t .
However, as th e p ro d u c tio n o f d u ra b le goods w hich com petes
w ith war i n d u s t r i e s f o r v i t a l m a t e r i a l s i s re d u c e d , th e
s c ra p p in g o f p ro d u c ts w i l l s h r in k a u to m a tic a lly .
S ta n d a r d iz a tio n o f p r o d u c tio n . Raw m a t e r i a l s , as
w e ll a s la b o r and c a p i t a l f a c i l i t i e s , can be saved w ith o u t
c u r t a i l i n g th e q u a l i t y o f p ro d u c ts by s ta n d a r d iz a tio n and
s i m p l i f i c a t i o n o f p ro d u c ts i n r e s p e c t to s t y l e s , v a r i e t i e s ,
s i z e s , c o l o r s , e t c . D uring W orld War I I i n th e U n ite d
S ta te s a Bureau o f I n d u s t r i a l C o n se rv a tio n was e s t a b li s h e d
in th e O ffic e o f P ro d u c tio n Management to in a u g u ra te a
c o n c e rte d and c a r e f u l l y p la n n ed a t t a c k on a l l a s p e c ts o f
i n d u s t r i a l , consum er, and g overnm ental w a s te . The
Consumers* D iv is io n o f th e O ffie e o f P r ic e A d m in is tra tio n
was a ls o engaged i n v a rio u s a c t i v i t i e s d e sig n e d to i n
c r e a s e th e s ta n d a r d iz a tio n o f consumers* goods. Under
v a r io u s s i m p l i f i c a t i o n program s th e number o f v a r i e t i e s o f
ran g e b o i l e r s and ex p an sio n ta n k s was red u ced from 130 to
1 3 ; o f m ilk and cream b o t t l e s and b o t t l e c a p s, from 40 to
4 ; o f ic e -c re a m mold s i z e s , from 30 t o 1; and o f s t e e l
57
a
drums and b a r r e l s , from 66 to 26.
Among a l l th e m ethods o f s e c u rin g raw m a te r ia l s
s t a t e d above, r e s e r v a tio n o f n a t u r a l r e s o u r c e s and s to c k
p i l i n g a re t o be em phasized on th e ground t h a t th e form er
makes p o s s i b le o u tp u t ex p an sio n o f raw m a t e r i a l s , and 'th e
l a t t e r in s u r e s th e su p p ly o f r e q u ir e d m a t e r i a l s . However,
once a n a tio n e n te r s i n t o a war a l l th e a v a ila b le m ethods
sh o u ld be b ro u g h t to p la y t h e i r b e s t r o l e s i n se c u rin g th e
r e q u ir e d m a te r ia l s so f a r a s p o s s i b l e .
6 D efen se, op. c i t . , O ctober 21, 1941* p . 12
and November 12, 19^1, p . 9.
CHAPTER V
THE FLOW OF W AR INVESTMENT
The money r e q u ir e d to f in a n e e th e c a p i t a l con
s t r u c t i o n to produce th e v a r io u s ty p e s o f war goods i s
trem endous and th e need i s u s u a lly v ery u r g e n t. In most
b e l l i g e r e n t c o u n t r ie s a g r e a t p o r tio n o f th e w artim e ex
p a n s io n o f c a p a c ity i s fin a n c e d by th e governm ent because
p r i v a t e i n d u s t r y i s e i t h e r u n a b le o r u n w illin g to ta k e th e
r i s k s in v o lv e d . D uring W orld War I I more th a n 75 p e r c e n t
o f th e p la n t ex p a n sio n i n th e U n ite d S ta te s r e q u ir e d f o r
th e d efen se e f f o r t was fin a n c e d by th e governm ent. In so
f a r as p r i v a t e in d u s t r y f a i l s to u n d e rta k e th e e x p a n sio n ,
th e governm ent must ta k e th e r e s p o n s i b i l i t y . Beyond t h i s ,
governm ent ow nership o f p l a n t s , how ever, i s s u b je c t to
o b je c ti o n s , which Theodore 0 . Yntema summarized a s fo llo w s :
(1) p ro d u c tio n can u s u a l l y be a c h ie v e d more
sp e ed ly and more ec o n o m ic ally by c o n v e rs io n o f
p r i v a t e p l a n t s o r by c o n s tr u c tio n o f p l a n t s i n
c o n ju n c tio n w ith o th e r s u n d er p r i v a t e management.
(2) Government ow nership o f such f a c i l i t i e s . . .
w i l l cause s e r io u s i n t e r n a l d is s e n s io n . . .
B usinessm en have re a s o n to f e a r t h a t governm ent
p l a n t s w i l l n o t compete w ith them on f a i r te rm s ,
and t h a t th e y w i l l se rv e a s p o l i t i c a l c lu b ,
r a t h e r th a n economic y a r d s t i c k s . (3) E n try o f
governm ent i n t o many f i e l d s o f p r i v a t e b u s in e s s
w i l l te n d tow ard s t a t e s o c ia lis m — a developm ent
w hich i s l i k e l y to be i n c o n s i s t e n t i n th e long
59
1
ru n w ith o u r d em o cratic way o f l i f e .
M oreover, s in c e t a x re v e n u e s i n w artim e u s u a lly
la g b eh in d p u b lic e x p e n d itu re , th e governm ent may be u n a b le
to r a i s e money s u f f i c i e n t l y and p ro m p tly th ro u g h t a x a ti o n
and borrow ing from th e i n d iv i d u a ls f o r th e in v e stm e n t
p u rp o se . A l t e r n a t i v e l y , th e governm ent h a s to r e s o r t to
m a n u fa c tu rin g new money th ro u g h borrow ing from th e banks
o r is s u in g p a p e r money to m eet th e re q u ire m e n ts , and th u s
in c r e a s e th e p o t e n t i a l o f p r i c e i n f l a t i o n . So, p r i v a t e
in v e stm e n t i f i t i s fo rth c o m in g i n war p ro d u c tio n may
e i t h e r se rv e t o r e l i e v e th e p e o p le from heavy t a x a t i o n o r
to c o u n te r a c t th e p r e s s u r e o f p r ic e i n f l a t i o n and th u s
assume im p o rta n ce i n f in a n c in g war e f f o r t . However, th e
m agnitude o f p r i v a t e in v e s tm e n ts i n war p ro d u c tio n depends
upon th e a v a i l a b i l i t y o f fu n d s , th e ex p e cte d r i s k s , and th e
convenience o f th e i n v e s t o r s . O b se rv a tio n on th e s e t o p i c s
a re g iv e n below .
I . SOURCES OF FUNDS
The so u rc e s o f a v a ila b le p r i v a t e fu n d s g e n e r a lly
c o n s is t o f (a) c u r r e n t money s a v in g s , (b) in v e stm e n t i n
1 Theodore 0. Yntema, "Some Economic Problem s i n th e
E xpansion o f C a p a c ity to Produce M i l i t a r y G oods," American
Economic R eview , p . 376, F e b ru a ry , 1941*
60
some n o n - e s s e n tia l c i v i l i a n p ro d u c tio n which can be w ith
drawn and r e in v e s te d i n war p r o d u c tio n , and (c) fu n d s which
a r e p r im a r il y in te n d e d to be sp e n t on consum ption can be
saved th ro u g h lo w erin g th e s ta n d a rd o f l i v i n g to some ex
t e n t . The l e v e l o f a g g re g a te p r i v a t e sa v in g s depends upon
th e s iz e and th e d i s t r i b u t i o n o f w e a lth and th e income o f
a n a t io n . In an advanced c o u n try where th e l e v e l o f p ro
d u c tio n i s h ig h i n r e l a t i o n to i t s consum ption, th e r e a r e ,
u s u a l l y , accum ulated la r g e sa v in g s i n th e form o f b o th
money and r e a l goods. And th e in v e stm e n t i n th e p ro d u c tio n
o f l u x u r ie s and g e n e r a l com m odities which can be w ithdraw n
and r e in v e s te d would be a ls o o f c o n s id e r a b le volum e. The
h ig h s ta n d a rd o f l i v i n g i n such a c o u n try p ro v id e s a m argin
t h a t may be c u t down w ith o u t a f f e c t i n g p u b lic h e a l t h and
w orking e f f i c i e n c y , and th u s makes more fu n d s a v a i l a b l e f o r
in v e s tm e n t. In a backward c o u n try , on th e o th e r hand,
where sa v in g s o f th e p u b lic a re s m a ll, and th e s ta n d a rd o f
l i v i n g i s low, th e in v e stm e n t i n d e fe n se i n d u s t r i e s would
be q u ite l i m i t e d . A c o u n try where th e d i s t r i b u t i o n o f i n
come and w e a lth i s c e n t r a l i z e d would have l a r g e r a g g re g a te
p r i v a t e sa v in g s th a n one where th e d i s t r i b u t i o n o f ineome
and w e a lth i s s c a t t e r e d because th e p r o p e n s ity to consume
o f th e riG h i s low er th a n t h a t o f th e p o o r. F i n a l l y , in
d is c u s s in g in v e stm e n t i n w artim e c a p i t a l movements must be
6 1
ta k e n in t o a c c o u n t. A c o u n try which a b so rb s a g r e a t d e a l
o f c a p i t a l from f o r e ig n c o u n tr ie s i n p eacetim e would s u f f e r
a sh o rta g e o f i t d u rin g a war as f o r e ig n i n t e r e s t s a re i n
c l in e d to w ithdraw i t . The war e f f o r t o f such a c o u n try
th u s would be g r e a t l y im p a ire d .
'I I . THE RISK OF INVESTMENT IN WARTIME
In v estm en t by th e p u b l i c , i n my o p in io n , i s o f two
t y p e s . One c o v e rs th o s e w hich in v o lv e e n tre p re n e u rs * r i s k
o r r e n t i e r s * r i s k , such as in v e stm e n t i n p r o d u c tiv e goods
o r com m ercial s e c u r i t i e s . The o th e r in c lu d e s th o s e which
assume l e a s t d anger i n norm al tim e s , such as in v e stm e n t in
governm ent bonds, b ecause governm ent has an in d e te r m in a te
l i f e . N eed less t o say i t i s n e c e s s a ry to p r o t e c t th e i n
v e s to r s a g a in s t a l l th e r i s k s o f in v e stm e n t i f th e p u b lic
i s t o be encouraged to in v e s t t h e i r money d i r e c t l y on war
i n d u s t r i e s .
E n tr e p r e n e u r s * R isk
I n s t a b i l i t y and u n c e r t a i n t y o f a war economy i n
c r e a s e th e r i s k s o f in v e s tm e n t, e s p e c i a l l y o f in v e stm e n t i n
th e f i e l d s o f d e fe n se p r o d u c tio n . The r i s k s a re s e v e r a l i n
number:
Enemy* s a t t a c k . — In modern w a rfa re i n d u s t r i a l
p l a n t s and equipm ent a re th e p rim ary t a r g e t s o f enemy*s_____
62
a t t a c k . D uring a war v a s t f a c t o r i e s , m in es, and tr a n s p o r
t a t i o n f a c i l i t i e s may be r u in e d by a i r r a i d s . So, th e
p r i v a t e e n tre p re n e u r w i l l h e s i t a t e to v e n tu re i n t o b u s in e s s ,
e s p e c i a l l y m i l i t a r y i n d u s t r i e s , u n le s s th e governm ent
s ta n d s b eh in d th e i n d u s t r i e s and i s re a d y to com pensate f o r
w ar damages t h a t m ight be in c u r r e d .
C o lla p se o f demand. — The demand f o r war p ro d u c ts
h a s i t s o r i g i n i n th e w ar. The sto c k o f war goods and th e
p l a n t and equipm ent w hich a re h ig h ly s p e c ia liz e d i n manu
f a c t u r i n g armaments and cannot be c o n v e rte d i n t o c i v i l i a n
u s e s would become w o rth le s s i n th e p o stw a r p e r io d when th e
m arket o f th e p ro d u c t h a s d is a p p e a re d . Or, when a new
ty p e o f weapon a p p e a rs to r e p la c e th e o ld one, th e lo s s on
th e p a r t o f th e p ro d u c e r th ro u g h th e d e c re a se i n th e v alu e
o f a lre a d y -m a n u fa c tu re d s to c k , and th ro u g h th e n e c e s s a ry
c o n v e rs io n o f m achinery and equipm ent, co u ld e a s i l y c ru sh
th e p ro d u c e r. Under th e s e c irc u m s ta n c e s th e r e i s l i t t l e
in c e n ti v e to u n d e rta k e such c o n s tr u c tio n o f c a p i t a l f o r war
p ro d u c tio n and to f in a n c e i t p r i v a t e l y . As a remedy
s p e c i a l arran g em en ts m ust be made to e n a b le th e e n t r e
p re n e u r to g e t back h i s in v e stm e n t b e fo r e a c o lla p s e o f
demand f o r war p ro d u c ts o c c u rs .
To s tim u la te th e p r i v a t e in v e stm e n t o f fu n d s i n
f a c i l i t i e s to be u se d f o r th e p r o d u c tio n o f war goods in
63
th e U n ited S t a t e s p r o v is io n was made i n th e ex c ess p r o f i t s
t a x a c t approved on O ctober &, 1940, f o r a more r a p id
a m o rtiz a tio n o f d e fe n se f a c i l i t i e s t h a t was n o t allow ed
u n d e r u s u a l t a x law r e g u l a t i o n s .
I t was p ro v id e d t h a t a c o n t r a c to r who s u p p lie d
h i s own fu n d s and who d id n o t r e c e iv e any cash r e
im bursem ent from th e governm ent f o r th e c o s t o f
th e f a c i l i t i e s o v er a 60-month p e r io d , by b ein g
e n t i t l e d to deduct i n any ta x a b le y e a r f o r a l l
income t a x p u rp o se s (b o th norm al and e x c e ss p r o f i t s )
up t o o n e - f i f t h o f th e t o t a l c o s t o f th e emergency
f a c i l i t i e s . T h is h a s th e e f f e c t o f re d u c in g th e
n e t ta x a b le income o f th e c o n t r a c to r u n t i l th e 7
e n t i r e c o s t o f th e f a c i l i t i e s h a s been a m o rtiz e d .
An a l t e r n a t i v e method i s t h a t th e governm ent r e
im burses th e m a n u fa c tu re r d i r e c t l y f o r th e c o s t o f p l a n t
and equipm ent c r e a te d f o r d e fe n se p u rp o s e s . The t i t l e to
th e s e f a c i l i t i e s i s r e t a i n e d by th e m a n u fa c tu re r u n t i l he
i s f u l l y re im b u rse d . At t h a t tim e th e t i t l e i s to be
t r a n s f e r r e d to th e governm ent. But i t i s g e n e r a lly g r a n te d
t h a t th e m a n u fa c tu re r may e x e r c is e an o p tio n to p u rch ase
th e f a c i l i t i e s a t c o s t l e s s norm al d e p r e c ia t io n . S ince th e
governm ent h as p a id d i r e c t l y f o r th e new f a c i l i t i e s , no de
p r e c i a t i o n o r a m o rtiz a tio n ch arg e can be in c lu d e d i n th e
p r i c e o f goods produced w ith them .
P r ic e c o n t r o l . — In a war economy th e c o s t o f
2 G. A. S te in e r and A s s o c ia te s , Economic Problem s
o f War (New York: John W iley and Sons, I n c . , 1942), p . 12.
64
p ro d u c tio n i s l i k e l y to f l u c t u a t e . The p r i c e s o f raw
m a te r ia l s and wages i n w artim e te n d t o r i s e . But th e
p r i c e s o f p r o d u c ts , on th e o th e r hand, a re u s u a lly s u b je c t
to governm ent c o n t r o l o r a re f ix e d by c o n t r a c t . T h e re fo re ,
th e i n v e s t o r ’ s lo s s a p p e a rs t o be more th a n l i k e l y .
A g ain st th e r i s k in v o lv e d i n t h i s ca se th e governm ent h as
to make s p e c ia l paym ents such as s u b s id ie s to th e p ro
d u c e rs to com pensate them f o r th e lo s s cau sed by th e i n
c re a s e d c o s t o f p ro d u c tio n and th u s to in s u r e a c e r t a i n
p e rc e n ta g e o f p r o f i t f o r them . O th erw ise , th e p r i c e o f
p ro d u c ts must be d e c o n tr o lle d by th e governm ent i f th e i n
c e n tiv e f o r th e i n v e s t o r s i s to be s u s ta in e d . The l a t t e r
a c t i o n , how ever, i s more c o s t l y to th e economy s in c e th e
p r i c e in c r e a s e w ould ap p ly to th e e n t i r e o u tp u t, w hereas
th e su b sid y a p p lie s to o n ly a sm a ll p a r t o f i t . The sub
s id y makes i t p o s s i b le to g iv e h ig h - c o s t p ro d u c e rs th e i n
c e n tiv e to in c r e a s e o u tp u t w ith o u t th e n e c e s s ity o f a
p r i c e r i s e a t a low er c o s t to th e governm ent th a n th e p r i c e
r i s e would e n t a i l . M oreover, th e paym ent o f s u b s id ie s
c e n te r s a t t e n t i o n upon p a r t i c u l a r needs more e f f e c t i v e l y
th a n a p r ic e in c r e a s e and th e r e f o r e may p rove to be th e
more v a lu a b le in s tru m e n t to u se when a s ti m u la tio n o f war
p r o d u c tio n i s d e s ir e d . S u b s id ie s may a ls o be n e c e s s a ry to
o b ta in th e o u tp u t o f m a rg in a l p ro d u c e rs who ca n n o t o p e ra te
65
t h e i r p l a n t s o r m ines a t th e p r i c e le v e l which i s p r o f i t
a b le f o r o th e r p ro d u c e rs whose c o s ts a re r e l a t i v e l y low.
However, th e u se o f s u b s id ie s i s s u b je c t to a d m in is tr a tiv e
d i f f i c u l t i e s which can n o t be d is c u s s e d h e r e .
R e n t i e r s * R isk
Based on e x p e rie n c e i n p a s t w a rs, p e o p le , a n t i c i
p a tin g th e r i s e i n th e p r i c e l e v e l , te n d t o i n v e s t t h e i r
fu n d s i n r e a l goods o r p ro d u c tio n r a t h e r th a n to make
lo a n s t o o th e r s f o r i n t e r e s t so t h a t th e y can p r o t e c t
th e m se lv e s a g a in s t l o s s ca u sed by th e d e p r e c ia tio n o f th e
v a lu e o f money. F u rth e rm o re , b ecau se o f th e u n c e r t a i n
t i e s o f a war s i t u a t i o n and th e upward tr e n d o f p r i c e s ,
th e p eo p les* ca sh p r e f e r e n c e w i l l go even h ig h e r as th e y
a re th e n p rone to r e s e rv e more money f o r em ergency a s w e ll
as f o r tr a d e p u rp o s e s . T h e re fo re , th e m easures to e lim i
n a te t h i s ty p e o f r i s k sh o u ld be d ir e c t e d tow ard p r ic e
s t a b i l i z a t i o n . An a l t e r n a t i v e i s to g u a ra n te e com pensation
f o r th e r e n t i e r s * l o s s due to d e p r e c ia tio n o f money v a lu e
th ro u g h e n a c tin g s p e c ia l law s f o r th e w ar p e r io d . And when
a p o t e n t i a l p ro d u c e r i s u n a b le to borrow fu n d s from b an k s,
becau se h i s c r e d i t s ta n d in g i s n o t h ig h enough to borrow
th e la r g e sums r e q u ir e d to f in a n c e huge w ar p r o d u c tio n , i t
may be n e c e s s a ry f o r th e governm ent to g u a ra n te e th e r e
paym ent o f th e p r i n c i p a l p lu s a c c ru e d i n t e r e s t to th e b an k s.
66
Such an arrangem ent was developed i n th e U n ite d S ta te s
d u rin g W orld War I I . I t i s summarized a s fo llo w s :
By c o o p e ra tio n o f th e War D epartm ent, th e Wavy
D epartm ent, and th e M aritim e Commission w ith th e
War P ro d u c tio n Board and th e F e d e r a l R eserve
a u t h o r i t i e s , an arrangem ent was d ev e lo p ed , and
a u th o riz e d by th e e x e c u tiv e o r d e r o f th e P r e s id e n t ,
f o r in s u r in g o r g u a ra n te e in g lo a n s t h a t w ere needed
to fin a n c e e s s e n t i a l war p r o d u c tio n . The lo a n s
w ere made by com m ercial banks o r o th e r le n d in g i n
s t i t u t i o n s which to p r o t e c t th e m selv es from ex
c e s s iv e r i s k , o f te n o b ta in e d g u a ra n te e s c o v e rin g
p o r tio n s o f lo a n s . The g u a ra n te e was g iv e n by th e
War D epartm ent, th e Navy D epartm ent, o r th e M aritim e
Commission depending on which was p r im a r il y i n t e r - ~
e s te d i n th e c o n tr a c t which th e lo a n was to f in a n c e .
Such a method may be a p p lie d w id ely to th e lo a n s
made by p r i v a t e in d i v i d u a l s o th e r th a n banks to draw more
g en u in e sa v in g s from th e p u b lic f o r w ar fin a n c e p u rp o s e s .
F or m a t e r i a l i z i n g such a scheme, a d ev ice s i m i l a r to th e
d e p o s it in s u ra n c e d e v ic e ad o p ted by th e U n ited S ta te s i s
p e rh a p s f e a s i b l e . T his may in v o lv e th e o r g a n iz a tio n o f a
war bonds in s u ra n c e c o r p o r a tio n to g u a ra n te e th e repaym ent
o f th e p r i n c i p a l and ac cru ed i n t e r e s t on th e bonds is s u e d
by a l l d efen se i n d u s t r i e s f o r r a i s i n g money to fin a n c e th e
p r o d u c tio n , a c q u i s i t i o n , o r t r a n s p o r t a t i o n o f war s u p p li e s ,
i
Ith e re b y enco u rag in g i n d iv i d u a ls to le n d and th u s a v o id in g
3 Board o f G overnors o f th e F e d e ra l R eserve System,
F e d e ra l R eserve System— I t s P u rp o ses and F u n c tio n s
(W ashington, D. C .: The N a tio n a l P r i n t i n g Company, 1947),
p . 10S.
67
bank c r e d i t ex p a n sio n t o some e x t e n t.
I I I . INCONVENIENCE OF INVESTMENT
Under th e e x i s t i n g im p e rfe c t c o m p e titio n th e r e
p r e v a i l s a d is c re p a n c y betw een sa v in g s and o p p o r tu n iti e s
o f in v e s tm e n t. A b r i e f a n a ly s is o f th e f a c t o r s which a re
r e s p o n s ib le f o r th e im p e rf e e t c o m p e titio n w ith r e s p e c t to
in v e stm e n t i s now i n o r d e r .
Lack o f In fo rm a tio n
L acking in fo rm a tio n o f in v e s tm e n t, p o t e n t i a l
e n t e r p r i s e r s a r e u n a b le to b r in g c a p i t a l and in v e stm e n t
o p p o r tu n iti e s to g e t h e r . S av in g s, e s p e c i a l l y sm all o n e s,
te n d to rem ain i d l e i n th e hands o f ow ners, and, on th e
o th e r hand, in v e stm e n t o p p o r t u n i t i e s would p a s s unheeded.
T his s i t u a t i o n h a s been im proved by th e developm ent o f
money m a rk e ts and banking sy stem s. These i n s t i t u t i o n s
p erfo rm a f u n c tio n o f b r in g in g to g e th e r th e o p p o r tu n iti e s
o f in v e stm e n t and lo a n a b le fu n d s . However, th e r e i s no
a s s u ra n c e t h a t p eo p le w i l l i n v e s t o r borrow th ro u g h th e s e
i n s t i t u t i o n s . In an i n d u s t r i a l l y u n d erd ev e lo p ed c o u n try
n o t equipped w ith a modern banking system and a s e c u r i t y
exchange, p r i v a t e sa v in g s o f any consequence can h a r d ly
g e t i n t o th e c h a n n e ls o f in v e s tm e n t.
6 8
I n e r t i a o f Sm all S av ers
P e o p le , e s p e c i a l l y sm a ll s a v in g - h o ld e r s , b ein g
o cc u p ied by d a i ly work o r r e l u c t a n t to ta k e th e tr o u b le to
i n v e s t t h e i r fu n d s , r a r e l y seek in v e stm e n t o p p o r tu n iti e s
th ro u g h th e money m a rk e t. They would r a t h e r h o a rd th e
money as i d l e sa v in g s i n s t e a d .
Inadequacy o f th e In s tru m e n ts o f In v estm en t
The s e c u r i t i e s a v a i l a b l e i n th e modern m arket a re
n o t alw ays a t t r a c t i v e to a l l p o t e n t i a l i n v e s to r s i n t h e i r
am ount, te rm s , l i q u i d i t y , o r m a tu r ity ; th u s th e s e s e c u r i
t i e s f a i l to ab so rb a v a ila b le p r i v a t e s a v in g s .
IV . CONCLUSION
In a war d i r e c t p r i v a t e in v e stm e n t i n d e fe n se
p ro d u c tio n a id s governm ent f in a n c e f o r th e same p u rp o se .
S in ce i t a v o id s th e p ro c e d u re o f t a x a t i o n and th e in c u r
re n c e o f p u b lic e x p e n d itu r e , p r i v a t e in v e stm e n t d i r e c t l y
on war p ro d u c tio n p ro v id e s a s h o r t c u t f o r f in a n c in g war
to a c o n s id e ra b le d e g re e . M oreover, i n o r d e r to av o id
e x tre m e ly heavy ta x e s and trem endous money e x p a n sio n ,
p ro p e r governm ent d i r e c t i o n o r even c o n t r o l o f th e flo w o f
p r i v a t e in v e s tm e n ts i n t o d e fe n se i n d u s t r i e s i s , u n d o u b te d ly ,
d e s ir a b le and n e c e s s a ry . To e x e c u te such a program th e
69
governm ent must assume a la r g e sh a re o f th e r i s k s i n which
i n norm al tim e s would f a l l on p r i v a t e e n t e r p r i s e s . I t
must c o n t r o l th e money m arket and im prove th e in s tru m e n ts
o f in v e stm e n t w herever p o s s ib le *
CHAPTER VI
THE CONTROL OF FOREIGN TRADE;
As a r e s u l t o f s c i e n t i f i c and te c h n o lo g ic a l ev o lu
t i o n i n th e m a n u fa c tu rin g o f arm am ents, th e economic r e
q u ire m e n ts o f modern w a rfa re a re g r e a t and can h a r d ly be
met by a s in g le c o u n try . War p ro d u c tio n as d is c u s s e d in
fo re g o in g c h a p te r s needs v a rio u s sc a rc e raw m a t e r i a l s ,
s k i l l e d la b o r , and w e ll-o r g a n iz e d i n d u s t r i e s ; a b e l l i g e r e n t
can n o t be ex p e cte d to p o s s e s s a l l o f them . War s u p p lie s
which can n o t be prod u ced by dom estic i n d u s t r i e s have to be
se c u re d from f o r e ig n s o u rc e s ; h e n c e , th e need f o r f o r e ig n
t r a d e . The r o l e p la y e d by f o r e ig n tr a d e i n a war e f f o r t i s
to exchange raw m a t e r i a l s o r f i n i s h e d p ro d u c ts which a re
n o n - e s s e n tia l to d e fe n se f o r war s u p p lie s from o th e r coun
t r i e s . For in s t a n c e , c o f f e e , b an a n as, c o c o a n u ts , which can
be u se d f o r w ar p u rp o s e s , can be exchanged i n f o r e ig n mar
k e t s f o r g uns, ta n k s , s h ip s , a i r c r a f t , and o th e r w eapons.
I t i s f o r e ig n tr a d e t h a t e n a b le s a backward c o u n try to wage
a modern war on a l a r g e r s c a le th a n would o th e rw is e be pos
s i b l e . However, u n lik e dom estic commerce f o r e ig n tr a d e i s
s u b je c t to i n t e r f e r e n c e and blo ck ag e by enemy c o u n t r ie s .
E s p e c ia lly i n modern economic w a rfa re problem s c o n fro n te d
by f o r e ig n tr a d e a re in d e ed m u ltip le and d i f f i c u l t . I t i s
71
now common knowledge t h a t even enem ies may tr a d e w ith each
o th e r i n tim e o f w ar. Thus i n W orld War I I th e U n ited
S ta te s s e n t a i r p la n e g a s o lin e t o Japan i n exchange f o r
n a t u r a l r u b b e r . An e x te n s iv e change o f p a t e n t s and o th e r
tr a d e to o k p la c e betw een Germany and th e U n ite d S t a t e s .
Each c o u n try sought th e com m odities o r /a n d knowledge i t
needed m ost.
I . GOALS OF FOREIGN TRADE IN WARTIME
To S ecure War S u p p lie s
I t i s g e n e r a lly a g re e d t h a t no c o u n try i n th e
w o rld h a s a l l th e r e s o u r c e s needed to c a r r y on a modern
w ar. Each c o u n try m ust depend, more o r l e s s , upon f o r e ig n
so u rc e s f o r raw m a t e r i a l s o r war goods. For in s t a n c e , th e
U n ite d S ta te s h as to im p o rt 100 p e r c e n t o f f i f t e e n s t r a
t e g i c m a t e r i a l s and more th a n 50 p e r c e n t o f te n o th e r
such com m odities from v a r io u s f o r e ig n c o u n t r ie s ; G reat
B r i t a i n h a s to g e t most o f h e r raw m a t e r i a l s , food s t u f f s ,
and f u e l s from a b ro a d ; China h as to im p o rt armaments and
o th e r war s u p p li e s . N ee d less to sa y , th e main g o a l o f
; d e v e lo p in g f o r e ig n tr a d e i n w artim e i s to se c u re th e
(
jn e c e s s a ry war s u p p lie s n o t produced a t home.
To Ac'hieve th e A b so lu te Advantage a n d /o r C om parative
Advantage o f P ro d u c tio n
72
A n a tio n im p o rts n o t o n ly th e goods which i t can n o t
produce b u t a ls o th e goods which i t p ro d u c e s l e s s e f f i
c i e n t l y th a n f o r e ig n c o u n t r i e s . I t w i l l a ls o im p o rt th e
ite m s w hich i t p ro d u ces l e a s t e f f i c i e n t l y from w herever
th e y can be b o u g h t. In t h i s r e s p e c t c o u n tr ie s a re v ery
much l i k e in d iv i d u a l p e rs o n s . An in d i v i d u a l employs
somebody to do some work f o r him b ecau se he cannot p erfo rm
i t h im s e lf ; o r b ecause he i s l e s s s k i l l e d th a n h i s em
p lo y e e ; o r b ecau se he ch o o ses to do a n o th e r jo b i n which
h i s a b i l i t y i s most p r o d u c tiv e and th e rew ards a r e th e
g r e a t e s t , even though he can s t i l l do th e h ir e d work
more e f f i c i e n t l y th a n h i s em ployee. N a tio n s v ary i n t h e i r
s p e c ia liz e d f i e l d s o f p ro d u c tio n b ecause t h e i r c l im a tic
c o n d itio n , n a t u r a l r e s o u r c e s , q u a n tity and c h a r a c te r o f
la b o r, a v a i l a b i l i t y o f c a p i t a l equipm ent, p o l i t i c a l s t a b i l -
1
i t y and s e c u r i t y , and a c c e s s i b i l i t y to m arket a re d i f f e r
e n t. F a c to rs such as th e s e cause them to have an a b s o lu te
advantage o r a co m p arativ e advantage i n c e r t a i n f i e l d s o f
p ro d u c tio n o v er one a n o th e r.
I f c o u n try "A” p o s s e s s e s abundant n a t u r a l r e
so u rc e s and adequate c a p i t a l f a c i l i t i e s , and i s th u s b e t t e r
1 John Parke Young, The I n t e r n a t i o n a l Economy (New
York: Ronald P re s s Company, 1 P*
73
equipped to m an u factu re armaments th a n th e o th e r c o u n t r i e s ,
w here a s c o u n try ”Btf, endowed w ith v a s t f e r t i l e la n d , cheap
la b o r , and f a v o r a b le c lim a tic c o n d itio n s h a s advan tag e i n
r a i s i n g farm p r o d u c ts , th e r e l a t i v e c o s t o f p ro d u c tio n o f
armaments i n c o u n try "A" would be low er th a n i n c o u n try
M BM ; and c o n v e rs e ly , th e r e l a t i v e c o s t o f p ro d u c tio n o f
a g r i c u l t u r a l goods i n c o u n try "B” would be low er th a n i n
c o u n try "A” . C ountry "A" w i l l s p e c i a l i z e i n p ro d u cin g
arm am ents, and c o u n try ” B" i n a g r i c u l t u r a l goods; and th e
two c o u n t r ie s w i l l exchange t h e i r s u r p lu s p ro d u c ts th e re b y
a c h ie v in g r e c i p r o c a l a d v a n ta g e s. Or c o u n try ” An may f in d
i t s t i l l more ad v an tag eo u s to c o n c e n tr a te h e r r e s o u r c e s on
m a n u fa c tu rin g atom ic bombs and le a v e th e p ro d u c tio n o f
g u n s, ta n k s , a i r p l a n e s , and s h ip s to c o u n try ”Bn a lth o u g h
th e r e l a t i v e c o s t o f p ro d u c in g them i n c o u n try * * A M i s
s t i l l low er th a n i n c o u n try "B ". Then c o u n try nAn would
produce o n ly atom ic bombs, w h ile c o u n try "B” p ro d u ces b o th
a g r i c u l t u r a l goods and c o n v e n tia l arm am ents. They would
1 tr a d e w ith each o th e r f o r what th e y need, th e re b y r e a l i z i n g
th e co m p arativ e advan tag e o f p ro d u c tio n i n th e s e two coun-
I
i
! t r i e s . The optimum u t i l i z a t i o n o f r e s o u r c e s can n o t be a t -
! ta in e d w ith o u t i n t e r n a t i o n a l d iv is io n o f tr a d e and economic
c o o p e ra tio n . In th e modern age f o r e ig n tr a d e i s a m ajor
means o f m axim izing war e f f o r t s as w e ll a s f o r a c h ie v in g
74
o th e r p u rp o s e s .
To Wage Economic W arfare
Economic w a rfa re i s d esig n ed to hamper th e enemy*s
economic p o t e n t i a l o f w ar by a tta c k in g i t s war i n d u s t r i e s
and t r a n s p o r t a t i o n f a c i l i t i e s and by denying i t a c c e s s to
f o r e ig n r e s o u r c e s . Hence, to acco m p lish th e t a s k , i n t e r
n a t i o n a l tr a d e i s u s u a lly d e s tin e d to p la y an im p o rta n t
r o l e i n tim e o f w ar.
I I . PROBLEMS AND POLICIES REGARDING FOREIGN
TRADE IN WARTIME
The problem s c o n fro n te d i n w artim e i n t e r n a t i o n a l
tr a d e c e n te r around th e q u e s tio n s : ( l ) “Where” and "how”
war s u p p lie s can be o b ta in e d from ab ro a d , (2) how to pay
f o r them , and (3) how economic w a rfa re can be c a r r i e d on.
The q u e s tio n "w here" in v o lv e s an o v e r - a l l i n v e s t i g a t i o n o f
w o r l d - d i s t r i b u t i o n o f r e s o u r c e s . Hence, i t i s beyond th e
scope o f t h i s d is c u s s io n . The o th e r q u e s tio n s , how ever,
can and w i l l be exam ined i n t h i s d is c u s s io n .
Im port and E xport C o n tro l
As developed i n p a s t w orld w ars the* im p o rt- e x p o rt
c o n t r o ls ta k e two fo rm s: p e rm is s iv e c o n t r o l and a c tiv e
c o n t r o l . The fo rm er aims a t r e g u la tin g th e k in d , q u a n t ity ,
75
d e s t i n a t i o n , and p r i c e o f im p o rts and e x p o rts by p e r m ittin g
c e r t a i n t r a n s a c t i o n s and f o rb id d in g o t h e r s ; th e l a t t e r
aim s to ch an n el im p o rts and e x p o rts i n ways t h a t ex cep t
♦
f o r th e m easures ta k e n by th e governm ent would n o t be
v o l u n t a r i l y ad o p ted by th e c o u n try ’ s tr a d in g p a r t n e r s . In
o r d e r to maximize a w ar e f f o r t im p o rts sh o u ld be h an d led
u n d er a d e f i n i t e p o l i c y . I t i s w e ll re c o g n iz e d t h a t th e
goods to be p u rc h a se d sh o u ld be lim ite d to th o se
( l ) t h a t a re v i t a l to th e war e f f o r t o r e s
s e n t i a l c i v i l i a n needs and have no s u i t a b l e sub
s t i t u t e s ; (2) t h a t would o th e rw is e f a l l i n t o
enemy’ s hands and be v a lu a b le to him ; and (3)
t h a t a r e so im p o rta n t to n e u t r a l s ’ economic l i f e
t h a t f a i l u r e t o f in d a m arket f o r them would i n
duce th e n e u t r a l s to d e a l w ith th e enem y.2
O ther commodity im p o rts o u ts id e th e above c a te
g o r i e s , e s p e c i a l l y lu x u r ie s and s e m i- lu x u r ie s , sh o u ld be
p r o h ib ite d o r h e ld to a minimum to save f o r e ig n exchange
and sh ip p in g space f o r war p u rp o s e s .
E x p o rts , on th e o th e r hand, sh o u ld be sc re e n e d w ith
a view to p r o t e c t i n g d e fe n se i n t e r e s t s . The fo llo w in g
goods sh o u ld be ex c lu d ed from e x p o r ta tio n i n w artim e.
(1) T hat a r e c r i t i c a l l y needed a t home; (2)
t h a t ta k e to o much sh ip p in g sp a c e ; (3) t h a t m ight
be e x tre m e ly u s e f u l to th e enemy i f o b ta in e d by
2 Y u a n -li Wu, Economic W arfare (New York:
P r e n tic e - H a ll, I n c . , 1952), p . 58.
76
him from n e u t r a l s ; and (4) t h a t would r e q u ir e to o
much im p o rted m a te r ia l to m a n u fa c tu re .3
I f w artim e re q u ire m e n ts a re to be f u l f i l l e d
s a t i s f a c t o r i l y , f o r e ig n tr a d e sh o u ld n o t be l e f t to p r i
v a te i n i t i a t i v e as i n norm al tim e s b ec au se p r i v a t e t r a d e r s
a re u n a b le to d eterm in e th e d eg ree o f im p o rtan ce o f
v a r io u s goods i n r e l a t i o n to d e fe n s e , and th e y p r im a r il y
fo llo w t h e i r own i n t e r e s t s . P r o f i t e e r s may emerge among
th e le g i t i m a t e im p o rte rs and e x p o r te rs to m a n ip u la te
f o r e ig n t r a d e a t th e expense o f th e n a t i o n a l s e c u r i t y .
They m ight im p o rt war s u p p lie s i n c o m p e titio n w ith a l l i e d
c o u n t r ie s and e x p o rt a t r a t e g i c r e s o u r c e s to a n e u t r a l
c o u n try which t r a d e s w ith th e enemy. For e n s u rin g th e
im p o r ta tio n o f e s s e n t i a l ite m s g o v ern m en tal c o n t r o l o v e r
f o r e ig n tr a d e i s in d is p e n s a b le . For t h i s p u rp o se d i r e c t
c o n t r o l o v e r im p o rts and e x p o rts i s more e f f e c t i v e th a n
such i n d i r e c t m easures a s t a r i f f s , s u b s i d i e s , and p r i c e
c o n t r o l .
L ic e n sin g sy stem . — L ic e n sin g i s a v e ry u s e f u l
in s tru m e n t f o r p e rm is s iv e im p o rt-e x p o r t r e g u la tio n i n
w a rtim e . Under t h i s system a governm ent b u reau i s s e t up
to s i f t o u t n o n - e s s e n t i a l im p o rts and e x p o r ts . In
3 I b id ., p. 58.
77
c o n s id e r in g th e a p p l i c a t i o n s b e fo re i s s u in g l i c e n s e s ,
c o n t r o l a u t h o r i t i e s have th e o p p o r tu n ity to exam ine: (1)
th e im p o rtan ce o f th e commodity to th e im p o rtin g o r ex
p o r tin g c o u n try and to th e enemy; (2) th e term s o f paym ent;
(3) th e volume o f p re v io u s im p o rts o r e x p o rts to th e con
sig n e e and th e same f o r e ig n c o u n try ; (4) th e volume o f
p re v io u s im p o rts o r e x p o r ts by th e same a p p l i c a n t , e t c .
In g e n e r a l p r a c t i c e th e c e n t r a l a u t h o r i t i e s would c l a s s i f y
th e e x p o rta b le o r im p o rta b le a r t i c l e s and check each i n
d iv id u a l a p p l i c a t i o n a c c o rd in g ly . Im port o r e x p o rt
l i c e n s e s a r e r e q u ir e d i n a p p ly in g f o r f o r e ig n exchange and
sh ip p in g space a t th e governm ent c o n t r o l agency.
Quota sy stem . — L ic e n sin g schemes a r e employed
p r im a r ily to in s u r e t h a t im p o rts o r e x p o rts meet t h e i r
c e r t a i n q u a l i t a t i v e s ta n d a rd s d e s ig n a te d by th e p u b lic
a u t h o r i t y . The q u a n t i t a t i v e c o n t r o ls o v e r im p o rts o r ex
p o r t s can n o t be com pleted by ad o p tin g a l i c e n s i n g system
a lo n e ; i t must be accom panied by a q u o ta sy stem . The
q u o ta system in v o lv e s a l i m i t a t i o n on e i t h e r th e v a lu e o r
th e volume o f s p e c i f i e d im p o rts o r e x p o r ts . F re q u e n tly ,
b o th lic e n s i n g schemes and th e q u o ta system s a r e j o i n t l y
u se d to r e s t r i c t th e q u a n t ity o f im p o rts o r e x p o rts to an
amount s p e c i f i e d by th e governm ent.
In w artim e im p o rt and e x p o rt q u o ta s a r e u se d as a
7$
weapon to e x e r t p r e s s u r e on f o r e ig n c o u n t r ie s i n f o r e ig n
t r a d e . The e f f e c t i v e n e s s o f t h i s weapon, how ever, depends
upon th e c o u n tr y ’ s m o n o p o litic p o s i t i o n i n i n t e r n a t i o n a l
t r a d e . I f th e c o u n try i s an im p o rt b u y er o f com m odities
from s e v e r a l com peting c o u n tr ie s o r an im p o rta n t s e l l e r o f
c e r t a i n com m odities t o s e v e r a l r i v a l f o r e ig n b u y e rs , i t
co u ld in f lu e n c e i t s f o r e ig n tr a d e p a r t n e r s by a d ju s tin g
i t s im p o rts o r e x p o rts a l l o c a t e d to them .
T a r i f f and s u b s i d i e s . — T a r i f f s and s u b s id ie s a re
deemed th e c l a s s i c a l means o f s e l e c t i v e c o n t r o l. S u b si
d ie s a re e f f e c t i v e i n en co u rag in g t r a d e r s to m a in ta in
t h e i r b u s in e s s e s , e s p e c i a l l y when th e p r o f i t in c e n tiv e i s
i n j u r e d . For i n s t a n c e , u n d er w artim e dom estic p r i c e
r e g u l a t i o n im p o rte rs a re p r o h ib ite d from p a s s in g on to
t
p u rc h a s e rs th e h ig h p r i c e s charged by f o r e ig n s u p p l i e r s .
F e a rin g th e r i s e i n th e c o s t o f a c q u i s i t i o n above dom estic
c o n t r o l l e d s e l l i n g p r i c e s , th e im p o r te rs would h e s i t a t e to
ta k e th e r i s k in v o lv e d i n fo r e ig n t r a d e . A com pensatory
su b sid y o r t a r i f f d u ty d e d u c tio n o r r e t u r n may be employed
to e lim in a te th e r i s k and th u s keep th e im p o rte rs i n b u s i
n e s s . However, i t i s a ls o b e lie v e d t h a t i t i s l e s s e f f e c
t i v e i n d is c o u ra g in g im p o rts o r e x p o r ts . Due to th e
ch an g eab le demand s i t u a t i o n , th e e f f e c t o f t a r i f f a d j u s t
m ents a re e x tre m e ly u n c e r t a i n . M oreover, t a r i f f s ,
79
s u b s i d i e s , and e x p o rt t a x a t i o n a r e s u b je c t to th e c o n t r o l
o f th e l e g i s l a t u r e and, t h e r e f o r e , a r e n o t f l e x i b l e enough
to cope w ith th e changing c irc u m s ta n c e s . The p o s i t i o n o f
s u b s id ie s and t a r i f f s i n im p o rt-e x p o rt c o n tr o l i s re g a rd e d
as b e in g l e s s im p o rta n t th a n d i r e c t c o n t r o l s — lic e n s i n g
and q u o ta sy stem s.
S ta te t r a d i n g . — The p e rm is s iv e im p o rt-e x p o rt
c o n t r o l i s e f f e c t i v e i n b lo c k in g w hat sh o u ld n o t be im
p o r te d o r e x p o rte d b u t h a s no p o s i t i v e e f f ic a c y i n s e c u rin g
optimum tr a d e volume needed to b o l s t e r th e war e f f o r t s .
To in s u r e an optimum tr a d e volume a c tiv e c o n tr o l becomes
n e c e s s a r y . A ctive c o n t r o l c o n s i s t s u s u a lly o f a compre
h e n s iv e im p o rt-e x p o rt p la n n in g and n e g o t ia t io n f o r tr a d e
agreem ents w ith f o r e ig n c o u n t r ie s . T his f u n c tio n , o f
c o u r s e , c a n n o t be l e f t t o th e p r i v a t e t r a d e r s . A t r a d e
agreem ent may s t i p u l a t e t h a t c e r t a i n im p o rts sh o u ld be
m atched w ith c e r t a i n e x p o r ts , o r sh o u ld be t i e d i n w ith
4
o th e r im p o rts . In t h i s f u l f i l l m e n t o f b i l a t e r a l tr a d e
ag re e m e n ts, governm ent a l l o c a t i o n and p ro d u c tio n c o n t r o ls
a re u s u a l l y invoked o u t o f n e c e s s i t y . P r iv a te im p o rts and
e x p o r ts , a lth o u g h s t i l l p e r m is s ib le u n d e r a lic e n s i n g
system o r a q u o ta sy stem , would be q u ite c irc u m s c rib e d .
4 I b id . , p. 71.
BO
I n s te a d o f checking p r i v a t e im p o rts and e x p o rts a c c o rd in g
to w artim e n e e d s, th e governm ent would i t s e l f u n d e rta k e
f o r e ig n t r a d e . The ad v an tag e o f t h i s approach l i e s i n
t h a t i t p e rm its a h ig h d eg ree o f f l e x i b i l i t y i n im p o rt and
e x p o rt p o l i c i e s . I t can e x e c u te s t r a t e g i c p la n s w ith m in i
mum d e la y . And i n c a se p r i v a t e t r a d e r s u n d er c r i t i c a l war
c o n d itio n s a r e u n a b le to surm ount th e d i f f i c u l t i e s o r a re
u n w illin g to ta k e th e r i s k , th e governm ent can e a s i l y ta k e
o v er th e whole o f f o r e ig n t r a d e . I t can a ls o p ro b a b ly
p u rc h a se th e n e c e s s a ry com m odities a t l e s s c o s t .
B i l a t e r a l a g re e m e n ts. — B i l a t e r a l tr a d e agreem ents
were in tro d u c e d by Germany as a d e v ic e to u t i l i z e i t s
f o r e ig n c r e d i t b a la n c e w ith th e B alkan c o u n t r ie s w hich were
e x e r c is in g s t r i c t exchange c o n t r o l . By t h i s d e v ic e two
c o u n t r ie s ag ree to e x p o rt to each o th e r goods o f an e q u i
v a le n t v a lu e o v er a p e r io d o f tim e . I t i s p o s s ib le a ls o
t h a t o ld o u ts ta n d in g d e b ts can be p a id o f f i n th e form o f
e x p o rts to th e c r e d i t o r s . A c o u n try t h a t i s u n a b le to u se
i t s c r e d i t b a la n c e i n a n o th e r c o u n try f o r p u rc h a s in g from
a t h i r d c d u n try may be com pelled to e n t e r a c l e a r in g
arrangem ent w ith a d e b it c o u n try o r a t h i r d c o u n try s in c e
i t w i l l have no u se f o r a c r e d i t b a la n c e t h a t ca n n o t be
t r a n s f e r r e d i n t o o th e r U’ s e s . In th e Second W orld War b i
l a t e r a l t r a d e agreem ents w ere u sed by Germany to p ro c u re
31
war s u p p li e s . T his p o lic y can maximize war s u p p lie s
th ro u g h f o r e ig n t r a d e c h a n n e ls i n s e v e r a l ways: (1) Under
such an arran g em en t, t r a d e term s may be im proved by a
" t y i n g ” and "m atch in g ” p r a c t i c e . T h is p r a c t i c e makes i t
n e c e s s a ry to t i e some e x p o rts w hich th e f o r e ig n buyer i s
n o t e s p e c i a l l y an x io u s to a c q u ire to a n o th e r e x p o rt i n
w hich th e s e l l i n g c o u n try e n jo y s a m onopoly, so t h a t th e
f o r e ig n b uyer i s com pelled to a c c e p t b o th o r none; o r to
t i e one o r more im p o rts w ith which th e f o r e ig n s e l l e r may
be r e l u c t a n t to p a r t , b u t which a re v a lu a b le to n a t i o n a l
d e fe n s e , w ith some o th e r im p o rts , w hich th e f o r e ig n s e l l e r
i s e a g e r to s e l l . O th erw ise , th o s e com m odities t h a t th e y
o r d i n a r i l y would n o t be l i k e l y to p a r t w ith c o u ld n o t be
a c q u ire d w ith o u t o f f e r i n g h ig h p r i c e s ; o r th o s e com m odities
t h a t th e y o r d i n a r i l y a re n o t w i l l i n g to a c c e p t c o u ld n o t be
s o ld to them w ith o u t lo w erin g p r i c e s . O b v io u sly , th e
f a v o r a b le p o s i t i o n i n n e g o tia tin g such agreem ents depends
upon th e number o f com m odities w hich a c o u n try can monopo
l i z e . B i l a t e r a l tr a d e agreem ents may be a ls o a r r i v e d a t
by an a g g r e s s iv e c o u n try w ith i n t e n t to e x p l o it o th e r
c o u n t r ie s th ro u g h t h r e a t o f m i l i t a r y in v a s io n . The con
t r a c t s made by Germany w ith South E a s te r n European coun
t r i e s i n th e Second W orld War f u r n is h a good exam ple. (2)
Under b i l a t e r a l agreem ents f o r e ig n exchange i s no lo n g e r
82
th e a c t u a l medium o f exchange, so th e flow o f im p o rts and
e x p o rts w i l l n o t be h an d icap p ed by f i n a n c i a l d i f f i c u l t i e s .
The exchange r a t e w i l l be s t a b i l i z e d b ecau se th e exchange
o f com m odities betw een two p a r t n e r c o u n t r ie s d u rin g a
c e r t a i n p e r io d i s lim ite d to a c e r t a i n t o t a l v a lu e , so t h a t
e x p o rts and im p o rts w i l l alw ays b a la n c e . Even i f th e r e
e x i s t s a d is c re p a n c y betw een th e im p o rts and e x p o rts and
a c e r t a i n amount o f in d e b te d n e s s h a s been in c u r r e d , th e
exchange r a t e b ein g f ix e d i n th e agreem ent can n o t f l u c t u a t e
d u rin g th e p e r io d c o n tr a c te d . T hereby, th e p o t e n t i a l lo s s ,
which o th e rw is e w ould be cau sed by a drop i n th e f o r e ig n
exchange r a t e i s av o id e d . (3) S ince a b e l l i g e r e n t c o u n try
u s u a l l y la c k s ad e q u ate raw m a t e r i a l s , s k i l l e d la b o r , o r
t r a n s p o r t a t i o n f a c i l i t i e s , i t u s u a l l y f a i l s t o d e l i v e r
e x p o r ts p ro m p tly . Hence a c o u n try w ith which i t i s t r a d
in g , o f t e n u n d er com pulsion, i s com pelled to m a in ta in
c r e d i t b a la n c e w ith th e fo rm e r. T h is c o n t r ib u t e s t o th e
b e l l i g e r e n t c o u n tr y ’ s war e f f o r t g r e a t l y . For in s t a n c e ,
i n th e Second W orld War la r g e p u rc h a s e s were made by
Germany from s o u th e a s t E uropean c o u n tr ie s u n d e r b i l a t e r a l
a g ree m en ts, b u t Germany was n o t prom pt i n d e l iv e r in g goods
i n r e t u r n a f t e r r e c e iv in g im p o r ts . Due to Germany’ s
m i l i t a r y pow er, th e s e c o u n tr ie s were u n ab le to f o rc e
Germany to l i v e up to h e r b i l a t e r a l ag ree m en ts. Germany
S3
even fo rc e d th e s e c o u n tr ie s to a c c e p t w o rth le s s commodi
t i e s , such a s Kodaks w ith o u t l e n s e s , i n exchange f o r com
m o d itie s needed by Germany— t r a n s a c t i o n s e q u iv a le n t to
f ra u d b u t e n fo rc e d by m i l i t a r y c o n q u e st. (4) B i l a t e r a l
agreem ents may a ls o be u se d as an economic weapon to d i v e r t
a n e u t r a l* s tr a d e w ith an enemy to in c r e a s in g tr a d e w ith
o n e ’ s own c o u n try i n d i r e c t i o n s t h a t a re c o n s id e re d most
d e s i r a b l e . The aim o f t r a d e agreem ents a s an economic
weapon i s to i n j u r e th e enemy’ s economy, and as such th e y
a p p e ar i n th r e e d i f f e r e n t fo rm s.
(a) C le a rin g ag reem en ts. — Under th e arrangem ent
im p o rte rs and e x p o r te r s a l l o p e r a te w ith t h e i r n a t io n a l
c u r r e n c ie s th ro u g h t h e i r own dom estic c l e a r in g h o u se s. The
c l e a r in g o f f i c e s o f th e p a r t n e r c o u n tr ie s o f f s e t t h e i r ob
l i g a t i o n s . For exam ple, i n th e Second W orld War Germany
e n te r e d i n to a b i l a t e r a l agreem ent w ith th e B alkan coun
t r i e s . German im p o r te rs handed R eichsm arks to a c le a r in g
acco u n t w ith a R eichsbank m a in ta in e d by a r e s p o n s ib le agen
cy o f a p a r t n e r B alkan c o u n try , and German e x p o r te r s were
p a id o u t o f t h a t a c c o u n t. L ik ew ise, B alkan im p o rte rs would
d e p o s it t h e i r r e s p e c tiv e c u r r e n c ie s i n c l e a r in g ac co u n ts
f o r th e R eichsbank w ith t h e i r r e s p e c tiv e c e n t r a l banks, and
t h e i r e x p o r te rs would be p a id o u t o f th o s e a c c o u n ts . The
two-way t r a d e sh o u ld g e n e r a lly have been b a la n c e d ; t h i s was
th e o r i g i n a l i n t e n t i o n o f th e c l e a r in g ag reem en t.
84
(b) Payment ag ree m en ts. — T h is i s a form o f
c l e a r i n g agreem ent w hich in c lu d e s n o t o n ly com m odities b u t
a ls o some o th e r ite m s i n a c o u n tr y ’ s f o r e ig n paym ents
such a s repaym ent o f d e b t, payment f o r t o u r i s t ex p en d i
t u r e s , and s e r v ic e s o f v a r io u s k in d s . Such a system was
u se d by Germany i n th e Second W orld War to g u a ra n te e to th e
o th e r c o n tr a c tin g p a r ty payment in f r e e exchange o u t o f
German e x p o rt p ro c e e d s f o r German im p o rts and o th e r o b l i
g a t i o n s . The c h i e f pu rp o se o f payment was to p ro v id e th e
f o r e ig n c o u n t r ie s t h a t were r e l u c t a n t to s e t up th e
n e c e s s a ry c l e a r in g c o n t r o ls w ith a s u b s t i t u t e method to
p r o t e c t th e i n t e r e s t o f t h e i r n a t i o n a l s w ith c la im s on
Germany.
(c) C om pensation ag ree m en ts. — Under t h i s system
e v e ry e x p o rt d e a l i s m atched by an im p o rt d e a l o f e q u a l
v a lu e . I t c o n s t i t u t e s a b a r t e r e i t h e r d i r e c t l y betw een
i n d iv i d u a l im p o rte rs and e x p o r te r s o r betw een th e g o v ern
m ents o f th e p a r t n e r c o u n t r i e s . O r ig in a lly com pensation
agreem ents were a p p lie d o n ly to p r i v a t e t r a n s a c t i o n s , b u t
b ecau se t h i s d e v ic e may be u se d to evade f o r e ig n exchange
c o n t r o l , p u b lic s u p e rv is io n became n e c e s s a ry .
What a re d is c u s s e d above a re th e m ethods o f con
t r o l o v e r th e flo w o f com m odities i n f o r e ig n t r a d e . T his
u n d o u b te d ly c o n s t i t u t e s th e i n t e g r a l p a r t o f f o r e ig n tr a d e
35
c o n t r o l . L o g ic a lly , th e in s tru m e n ts to f a c i l i t a t e th e
commodity flo w — f o r e ig n exchange and sh ip p in g sp ace—
sh o u ld n o t be l e f t to th e o p e r a tio n o f f r e e m arket b u t
sh o u ld be p u t u n d er th e c o n t r o l o f governm ent, i f th e
netw ork on f o r e ig n tr a d e c o n t r o l i s to be co m p leted . The
two a u x i l i a r y c o n t r o l s — f o r e ig n exchange c o n t r o l and
sh ip p in g c o n t r o l —w i l l be t r e a t e d i n fo llo w in g p a ra g ra p h s
s e p a r a t e l y .
F o re ig n Exchange C o n tro l
The main o b je c ti v e s o f f o r e ig n exchange c o n t r o l i n
w artim e a re p r im a r il y to se c u re ad eq u ate f o r e ig n exchange
needed to fin a n c e war s u p p lie s p u rc h a se and, s e c o n d a r ily ,
to s t a b i l i z e th e r a t e o f f o r e ig n exchange. The two ob
j e c t i v e s , how ever, a re c l o s e ly i n t e r r e l a t e d . The d ep re
c i a t i o n o f f o r e ig n exchange r a t e i n w artim e due to c r i t i c a l
s i t u a t i o n s does n o t n e c e s s a r i l y s tim u la te e x p o rtin g tr a d e
b u t w i l l c u r t a i l th e p r i c e s o f e x p o rts i n te rm s o f f o r e ig n
goods and s e r v i c e s . And, w hat i s w o rse, c r e a t e money
p a n ic , p r i v a t e h o a rd in g , s p e c u la tio n on f o r e ig n exchange,
and c a p i t a l e x p o r t, e t c . A c tu a lly , i n w artim e th e c e n t r a l
bank h as to r e s e r v e a g r e a t b u lk o f f o r e ig n exchange to
p u rc h a se war s u p p lie s from a b ro ad . The s t a b i l i z a t i o n o f
f o r e ig n r a t e s i s l e f t to r e s t r i c t i v e f o r e ig n exchange
c o n t r o l w hich i s d e sig n e d to curb th e p r i v a t e demand f o r
36
f o r e ig n exchange and th u s to p re v e n t f o r e ig n exchange
r a t e s from d e c lin in g w ith o u t expending much o f th e g o v ern
ment s t a b i l i z a t i o n fu n d .
Causes o f th e f l u c t u a t i o n o f f o r e ig n exchange r a t e s
i n w a rtim e, — The f a c t o r s w hich ca u se th e f l u c t u a t i o n o f
f o r e ig n exchange r a t e a r e :
(A) Growing d e b it b a la n c e o f f o r e ig n t r a d e . In
w artim e a d i s p a r i t y betw een im p o rts and e x p o r ts i s o f te n
c r e a te d by huge im p o rts o f war s u p p lie s and th e d e c re a se
i n e x p o r ts . As th e war consum ption i s p e r s i s t e n t , th e
needs f o r im p o r ta tio n o f w ar s u p p lie s become g r e a t and
u r g e n t. But e x p o rtin g t r a d e , on th e o th e r hand, te n d s to
d e c lin e due to s h o rta g e o f p r o d u c tiv e a g e n ts to produce
e x p o r ta b le goods. C o n seq u en tly th e demand f o r f o r e ig n
exchange would be i n e x c e ss o f i t s su p p ly . T his a c c o u n ts ,
to a g r e a t e x t e n t , f o r th e d e p r e c ia t io n o f th e f o r e ig n ex
change r a t e i n a b e l l i g e r e n t c o u n try .
(B) S p e c u la tio n and p r i v a t e h o a rd in g . S p e c u la tio n
i n f o r e ig n exchange by m ark et m a n ip u la to rs te n d s to a g g ra
v a te th e d e p r e c ia t io n o f th e f o r e ig n exchange r a t e . In
a d d i tio n , c i t i z e n s w ith l e g i t i m a t e n e e d s, a n t i c i p a t i n g a
d e c lin e i n n a t i o n a l c u rre n c y v a lu e s , a re i n c l i n e d to h o ard
m e t a l l i c c o in s and to i n v e s t i n f o r e ig n s e c u r i t i e s ,
f o r e ig n c u rre n c y , g o ld and s i l v e r , e t c . , and th u s in c r e a s e
37
th e demand f o r f o r e ig n exchange and s h o rte n i t s su p p ly .
(C) C a p ita l e x p o r ts . Owing t o d e p r e c ia tio n o f th e
n a t i o n a l c u rre n c y , u n c e r t a i n t y o f th e economic s i t u a t i o n ,
heavy ta x e s , p r i c e c o n t r o l , and th e f e a r o f f r e e z in g
f o r e ig n a s s e t s i n a w a rrin g c o u n try , th e w ith d ra w a l o f
f o r e ig n c a p i t a l and th e escap e of. n a t i o n a l c a p i t a l abroad
a re l i k e l y to o c c u r. T his i s a n o th e r im p o rta n t f a c t o r
w hich c a u se s a d r a s t i c in c r e a s e i n th e demand f o r f o r e ig n
exchange and sh a rp d e c lin e i n i t s r a t e , e s p e c i a l l y i n
th o s e c o u n t r ie s to which th e flo w o f f o r e ig n c a p i t a l i s an
im p o rta n t ite m i n i t s f o r e ig n r e c e i p t s and paym ents.
(D) Postponem ent i n money c o l l e c t i o n from f o re ig n
c o u n t r i e s . For th e same re a s o n s o f c a p i t a l e x p o rt s t a t e d
above, im p o rte rs a r e l i k e l y t o s e l l on a lo n g -te rm b a s is
to w ell-know n f o r e ig n c o r p o r a tio n s , o r d e p o s it i t w ith
f o r e ig n banks r a t h e r th a n c o l l e c t th e money from them.
S to c k h o ld e rs and b o n d h o ld e rs a r e a ls o d i s i n c l i n e d to
c o l l e c t t h e i r a c c ru e d d iv id e n d s and i n t e r e s t from f o r e ig n
d e b to rs b u t a re r a t h e r w i l l i n g to r e i n v e s t o r d e p o s it i t
i n th e f o r e ig n c o u n try .
M easures o f f o r e ig n exchange c o n t r o l . — In i t s
b ro a d e s t se n se exchange c o n t r o l c o n s t i t u t e s p a r t o f th e
norm al f u n c tio n s o f a c e n t r a l bank aim in g , d i r e c t l y o r
i n d i r e c t l y , a t c o n t r o l l i n g th e exchange r a t e s . The c o n tr o l
33
m easures in c lu d e g e n e ra l m onetary p o l i c y , bank r a t e p o lic y ,
5
open m arket p o l i c y , and f o r e ig n exchange p o lic y . B ut,
i n t h i s work we a re n o t co n cern ed w ith th e s e norm al
m easures f o r f o r e ig n exchange c o n t r o l . We a re g o in g to
d e a l w ith o n ly th e main d i r e c t m e asu res, nam ely, i n t e r
v e n tio n , exchange r e s t r i c t i o n , and b lo c k ed a c c o u n t, w ith
em phasis on exchange r e s t r i c t i o n . These m easures were
ad o p ted by w a rrin g c o u n t r ie s i n th e p a s t and a r e s t i l l
deemed e f f e c t i v e to d a y , a lth o u g h w ith some m o d if ic a tio n s .
(A) I n t e r v e n t i o n . L i t e r a l l y , i t means f o r e ig n
exchange o p e r a tio n s u n d e rta k e n by, o r on b e h a lf o f , mone
t a r y a u t h o r i t y to keep th e f o r e ig n exchange r a t e on a
d e s ir e d l e v e l . F or t h i s p u rp o se a s t a b i l i z a t i o n fu n d i s
g e n e r a lly s e t a s id e c o n s is tin g o f f o r e ig n s e c u r i t i e s ,
g o ld o r s i l v e r , w ith which m onetary a u t h o r i t i e s may buy o r
s e l l f o r e ig n exchange, a c t i v e l y o r p a s s iv e l y aim ing a t
b a la n c in g th e demand f o r and su p p ly o f f o r e ig n exchange,
o r en co u rag in g o r d is c o u ra g in g c e r t a i n ty p e s o f f o r e ig n
exchange t r a n s a c t i o n s . T h is m easure i s e f f e c t i v e i n
c o u n te r a c tin g s p e c u la tio n i n f o r e ig n exchange. However,
due to th e g r e a t and p e r s i s t e n t r i s e o f th e demand f o r
5 P a u l E in z iz , Exchange C o n tro l (London: M acm illan
and Company, L t d ., 1934), p p . 1 0 -1 1 .
S9
f o r e ig n exchange o v er i t s su p p ly i n w artim e , th e fund i s
l i k e l y to be d ra in e d a t a r a p id r a t e and sh o u ld be sup
p lem en ted by r i g i d r e s t r i c t i v e m easures to p re v e n t th e
s h rin k a g e o f th e fu n d .
(B) Exchange r e s t r i c t i o n . T h is m easure means
g o v ern m en tal monopoly i n d e a lin g w ith f o r e ig n exchange
t r a n s a c t i o n s and en fo rcem en t o f th e ban o f th e b la c k
m arket i n f o r e ig n exchange. The d i s t r i b u t i o n o f f o r e ig n
exchange among a p p l ic a n ts by th e governm ent i s li m i t e d to
s p e c i f i e d p u rp o s e s , such a s f o r f in a n c in g im p o r ta tio n o f
war goo d s, i n d u s t r i a l equipm ent, and raw m a t e r i a l s , n e c e s
s i t i e s , and c e r t a i n k in d s o f d eb t rep ay m en ts. S e v e ra l
o f f i c i a l r a t e s a re e s t a b l i s h e d f o r d i f f e r e n t ty p e s o f
t r a n s a c t i o n s i n o r d e r to d isc o u ra g e u n d e s ir a b le p u rc h a s e s .
There would be one r a t e f o r w ar s u p p lie s im p o rts , a n o th e r
f o r c i v i l i a n g o o d s, a t h i r d f o r d e b t rep ay m en ts, and a
6
f o u r th f o r l e s s e s s e n t i a l a r t i c l e s . M oreover, to c o u n te r
a c t p r i v a t e h o a rd in g , s p e c u la tio n , and c a p i t a l e sc a p e ,
f o r e ig n c u r r e n c i e s , o ld b a la n c e s o r s e c u r i t i e s h e ld abroad
sh o u ld be c a l l e d i n by th e governm ent. F u rth e rm o re , no
im p o rt o r e x p o rt o f s e c u r i t i e s , b a n k n o te s, o r g o ld should
6 John P arke Young, The I n t e r n a t i o n a l Economy (New
York: Ronald P r e s s Company, 1946), p . $10.
90
be a llo w e d . E x p o rte rs a r e r e q u ir e d to make a d e c l a r a t i o n
o f th e v a ln e o f ev ery shipm ent and a re fo rb id d e n to e x te n d
c r e d i t to f o r e ig n e r s w ith o u t th e p e rm is s io n o f th e a u t h o r i
t y . A part from u s in g th e p o lic e pow er, some f i n a n c i a l
in s tru m e n ts a re a ls o employed f o r f o r e ig n exchange re g u
l a t i o n p u rp o s e s : S u b s t a n t i a l premiums a re g e n e r a lly
g ra n te d by th e m onetary a u t h o r i t y to th e p eo p le o f f o r e ig n
exchange handed o v e r t o th e governm ent, w h ile a su p e rc h a rg e
i s le v i e d on a p p l ic a n ts f o r f o r e ig n exchange p u rc h a s e s ,
i f f o r l e s s d e s ir a b le p u rp o s e s .
(G) B locked a c c o u n ts . I t h a s been found t h a t even
th e most e f f i c i e n t exchange r e s t r i c t i o n s alo n e a re n o t
s u f f i c i e n t to c o m p le te ly c u t o f f t r a n s f e r s ab ro a d . Under
t h i s system th e dom estic d e b to rs a r e com pelled by t h e i r
m onetary a u t h o r i t i e s to re p a y t h e i r d e b ts owed to f o r e ig n
e r s by tu r n in g th e sum o v e r to a “ b lo c k ed acco u n t" i n
n a t io n a l c u rre n c y . The fu n d s o f th e b lo c k ed ac co u n t a re
k e p t by th e c e n t r a l bank o f th e d e b to r c o u n try as a
fro z e n d e p o s it to th e f o r e ig n c r e d i t o r s . In some c a s e s
th e b lo c k ed fu n d s a re a v a i l a b l e to th e f o r e ig n owners f o r
th e p u rp o se s s p e c i f i e d by th e dom estic a u t h o r i t y in c lu d in g
p u rc h a s in g d e s ig n a te d g o o d s, in v e s tin g i n th e d e b to r
c o u n try , and such o th e r p u rp o se s a s th e a u t h o r i t y deems
d e s i r a b l e . T h e re fo re , th e f o r e ig n c r e d i t o r s a re com pelled
91
e i t h e r to d e p o s it t h e i r money w ith th e banks o f th e d e b to r
c o u n try , o r to buy th e d e s ig n a te d goods th e re fro m , o r to
r e i n v e s t i t t h e r e . Under t h i s a rran g em en t, t h e r e f o r e , th e
demand f o r f o r e ig n exchange always c r e a t e s an e q u a l amount
o f th e su p p ly o f i t , th e re b y p r e v e n tin g th e exchange r a t e
from d e c lin in g .
S h ipping C o n tro ls
A part from f o r e ig n exchange, t r a n s p o r t a t i o n f a c i l i
t i e s a re a n o th e r in d is p e n s a b le means to c a r r y o u t f o r e ig n
t r a d e . The demands f o r sh ip p in g space i n w artim e a re
m u lt ip le : tr o o p s a re to be t r a n s p o r te d to b a t t l e f i e l d s ;
th e navy needs a u x i l i a r y c r u i s e r s and su p p ly v e s s e l s ; war
i n d u s t r i e s demand raw m a t e r i a l s im p o rts ; and th e m i l i t a r y
a u t h o r i t y w ants to im p o rt f i g h t i n g equipm ent from a b ro ad .
On th e o th e r hand, th e r e w i l l be l e s s o v e rs e a p a s s e n g e r
t r a f f i c and no tr a d e w ith th e enemy. T hese, how ever,
p ro v id e l i t t l e r e l i e f . At th e same tim e th e su p p ly o f
t r a n s p o r t a t i o n s e r v ic e i s l i k e l y to d e c re a s e r a t h e r th a n
i n c r e a s e . The enemy*s s h ip s no lo n g e r a r e a v a i l a b l e ; th e
v e s s e ls o f n e u t r a l c o u n t r ie s shy away from th e r i s k s ; th e
b e l l i g e r e n t ’ s own s h ip s a re s u b je c t to l o s s e s by enemy
a t t a c k ; and w aste i n s h ip p in g c a p a c ity u s u a lly r e s u l t s
from w a itin g f o r convoy o r f o r p i e r s b ecau se o f c o n g e s tio n .
For th e s e re a s o n s th e demand f o r s h ip p in g s e r v ic e s o f te n
92
exceeds th e su p p ly . To c lo s e th e gap th e fo llo w in g
m easures a re g e n e r a lly ad o p te d .
S h ip b u ild in g . — Mew s h ip c o n s tr u c tio n i s alw ays
r e q u ir e d to meet th e in c r e a s e d demand f o r t r a n s p o r t a t i o n
i n a p e r io d o f w ar. However, s h ip y a rd s a re alw ays r e q u i
s i t i o n e d f o r th e navy and a re th u s u n a v a ila b le f o r b u ild
in g m erchant v e s s e l s . A s tro n g n a t io n a l m erchant m arine
h as been ad v o cated w ith a view to s tre n g th e n in g th e n a tio n
a l d e fe n s e . The f u n c tio n s m erchant m arine can p erfo rm i n
w artim e fo llo w :
(1) They a re e s s e n t i a l b o th a s t r a n s p o r t s and
as c a r r i e r s o f m i l i t a r y s u p p lie s i n any im p o rta n t
m i l i t a r y o p e r a tio n r e q u ir in g ocean t r a n s p o r t a t i o n .
(2 ) A n a t i o n ’ s m erchant m arin e may be th e o n ly
v e h ic le f o r m a in ta in in g i n tim e o f war th e o v e r
se a s t r a n s p o r t a t i o n s e r v ic e s n e c e s s a ry f o r b r in g in g
war m a t e r i a l s and f o r c a rr y in g o u t goods whose
s a l e ab road w i l l p ro v id e m uch-needed f o r e ig n ex
change and g u a rd a g a in s t g l u t i n c e r t a i n m a rk e ts.
The w ith d ra w a l o f enemy, a l l i e d , o r n e u t r a l s h ip p in g
to such a tim e , when th e demand f o r sh ip p in g space
i s m u l t i p l i e d , c o u ld cause a s e r io u s breakdown o f
th e w ar economy i f th e r e were no n a t io n a l m erchant
m a rin e . (3) S h ip s may supplem ent th e i n t e r n a l
t r a n s p o r t a t i o n f a c i l i t i e s i f th e l a t t e r became o v e r
lo a d e d o r b re a k down. (4) The sh ip p in g in d u s t r y can
e a rn c o n s id e r a b le f o r e ig n exchange i n w artim e , i f i t
i s g iv e n ad e q u ate navy p r o t e c t i o n , s in c e a t such a
tim e f r e i g h t r a t e s a r e alm o st su re to be h ig h . But
b e l l i g e r e n t v e s s e ls g e n e r a lly work u n d er g r e a t e r
h a n d ic a p s th a n do n e u t r a l v e s s e l s . (5) M erchant
s h ip s may c o n t r ib u t e d i r e c t l y to n a v a l pow er, e i t h e r
a s combat v e s s e l s o r as su p p ly and s p e c i a l - s e r v i c e
93
7
v e s s e l s .
The a d o p tio n o f such a scheme demands com prehensive
c o n s id e r a tio n s re g a rd in g th e p o l i t i c a l , econom ic, a s w e ll
as th e m i l i t a r y a s p e c ts which ca n n o t be d is c u s s e d h e r e .
S in ce s h ip b u ild in g u s u a lly can n o t be expanded q u ic k ly ,
a s tro n g m erchant m arin e sh o u ld be c o n s id e re d as a lo n g
term economic w a rfa re m easure.
E ncouraging p r i v a t e sh ip p in g e n t e r p r i s e s . — Ship
p in g s u b s id ie s have been employed as a m ajor d e v ic e f o r
en co u rag in g p r i v a t e s h ip p in g s in c e e a r l y tim e s . In peace
tim e th e su b sid y i s d esig n ed to make i t p o s s i b le f o r sh ip
o p e r a to r s to s e t r a t e s below t h e i r f u l l c o s t o f p ro d u c tio n
so t h a t th e y may compete on even term s w ith f o r e ig n o p e r
a t o r s . In tim e o f w ar th e governm ent su b sid y m e re ly com
p e n s a te s f o r th e a d d i t i o n a l expenses in c u r r e d by th e p ro
v i s i o n o f e x t r a sp e ed , r e g u l a r i t y o f s e r v i c e s , e x t r a b u lk
h e a d , and o th e r m i l i t a r y f e a t u r e s o f th e s h ip s and by th e
s p e c i a l l i a b i l i t y f o r m i l i t a r y s e r v i c e . B ut, extrem e
voyage danger and o th e r d i f f i c u l t i e s i n w artim e make th e
f i n a n c i a l inducem ent in a d e q u a te . The owners o f s h ip s a re
r e l u c t a n t to ta k e th e voyage r i s k s f o r any a p p lic a b le
7 Lawrence W. Towle, I n t e r n a t i o n a l Trade and
Commercial P o lic y (New York and London: H arper anoT
B r o th e rs , P u b lis h e r s , 1 9 4 7 ), p p . 573-574.
94
f i n a n c i a l g r a n t s . Convoy m ust be c a r r i e d o u t to p r o t e c t
m erchantm en, and th e g r a n t o f f i n a n c i a l com pensation to
them f o r any lo s s e s in c u r r e d i n sh ip p in g i s a ls o i n d i s
p e n s a b le .
Government c o n tr o l and o p e r a t io n . — P erh ap s th e
most e f f e c t i v e means o f a c q u irin g maximum sh ip p in g space
f o r d e fe n se u se i s to p o o l s h ip p in g c a p a c i t i e s . Under
t h i s scheme a l l s h ip s a re b ro u g h t u n d er governm ent c o n tr o l
by c h a r t e r i n g , r e q u i s i t i o n , te m p o ra ry l e a s e , o r governm ent
p u rc h a s e . ' What ro u te a sh ip h as t o g o , and what cargo i t
h a s to c a r r y a re d eterm in ed by th e governm ent. T hereby,
th e a v a ila b le c a r r y in g c a p a c ity can be u se d s t r i c t l y i n
acco rd an ce w ith th e urgency o f th e needs f o r goods o r
s e r v ic e s i n r e l a t i o n to d e fe n s e .
Economic W arfare
In a b ro ad sen se economic w a rfa re means th e
m easures to s tr e n g th e n a b e l l i g e r e n t 1s economic d e fe n se
as w e ll a s to weaken th e d e fe n se o f th e enemy. The form er
i s d e fe n s iv e and th e l a t t e r , o f f e n s iv e . Here we s h a l l con
f i n e th e d is c u s s io n to th e o f f e n s iv e one. The o b je c ti v e s
o f o f f e n s iv e economic w a rfa re a re th e d e s t r u c t i o n o f th e
8 P au l E in z ig , Economic W arfare (London: M acm illan
and Company, L t d ., 1940), p p . 1-3TI
95
enemy’ s s u p p lie s a t home and th e p re v e n tio n o f t h e i r r e
p le n ish m e n t from ab ro a d . The l a t t e r o b je c tiv e i s a t t a i n e d
by com peting w ith th e enemy i n a c q u irin g f o r e ig n r e s o u r c e s ,
e x h a u s tio n o f th e enemy’ s p u rc h a s in g power f o r f o r e ig n
g o o d s, and i n t e r f e r i n g w ith i t s i n t e r n a t i o n a l t r a n s p o r t a
t i o n . For th e s e p u rp o s e s , th e best-know n m ethods o f
o f f e n s iv e economic w a rfa re a re s e v e r a l.
F o re ig n m arket c o m p e titio n . — A lthough f o r e ig n
m a rk e ts a re beyond th e c o n t r o l o f a n a t i o n ’ s governm ent,
v a r io u s m easures may be ta k e n to d e p riv e th e enemy o f a
n e u t r a l ’ s m arket and d i v e r t th e tr a d e betw een them to i t s
own d e a lin g s f o r th e sake o f n a t i o n a l d e fe n s e . The a v a i l
a b le in s tru m e n ts f o r t h i s p u rp o se a re many. Of them th e
m ajor ones in c lu d e :
(A) P r e c lu s iv e b u y in g . In o rd e r t o b u i l d up a
n a t i o n ’ s own s u p p lie s o f s t r a t e g i c m a t e r i a l s as w e ll as
to p re v e n t th e enemy from g e t t i n g v i t a l war m a t e r i a l s , a
b e l l i g e r e n t h as to buy n o t o n ly what i s e s s e n t i a l to i t s
d e fe n s e , b u t a ls o w hat i s v a lu a b le to th e enemy even though
such com m odities may n o t be needed. In th e Second W orld
War th e U n ited S ta te s made an agreem ent w ith th e Mexican
governm ent on J u ly 14, 1941, t h a t f o r th e fo llo w in g
e ig h te e n months Mexico would make a v a ila b le to th e U n ite d
S ta te s and to th e o th e r W estern Hem isphere c o u n t r ie s i t s
96
e n t i r e e x p o rta b le s u r p lu s o f antim ony, co p p e r, g r a p h ite ,
le a d , m ercury, tu n g s te n , t i n , z in c , and henequen. O ther
agreem ents in c lu d e th e c o n tr a c t o f th e U n ite d S ta te s
governm ent w ith th e f o u r l a r g e s t copper m ining com panies
o f C h ile and P eru t o buy v i r t u a l l y t h e i r e n t i r e o u tp u t o f
c o p p e r, and a t h r e e - y e a r c o n t r a c t w ith th e A rg e n tin e
governm ent f o r i t s e n t i r e o u tp u t o f tu n g s te n . C o n tra c ts
have been made by th e U n ite d S ta te s w ith B o liv ia f o r
tu n g s te n and t i n , w ith P eru and A u s tr a li a f o r le a d , w ith
B r a z il f o r m anganese, and w ith o th e r c o u n tr ie s f o r o th e r
raw m a t e r i a l s .
(B) P e rsu a d in g n e u t r a l governm ents to p a s s embargoes
a g a in s t th e enemy. I n s te a d o f p r e c l u s iv e p u rc h a s in g , th e
n e u t r a l governm ent may be p e rsu a d e d th ro u g h d ip lo m a tic
p r e s s u r e o r economic c o n c e s s io n , to embargo o r to d iscourage
e x p o rts to th e enemy c o u n t r i e s . For exam ple, th e U n ited
S ta te s governm ent h as had some su c c e s s i n p e rsu a d in g th e
Mexican governm ent to f o r b id th e e x p o r ta tio n o f c e r t a i n
l i s t e d p ro d u c ts to any non-A m erican c o u n try and to any
o th e r c o u n try t h a t h as n o t e s t a b li s h e d e x p o rt r e s t r i c t i o n s
w ith th e same e f f e c t as th o s e e s ta b li s h e d by th e Mexican
governm ent. The l i s t e d p ro d u c ts a re henequen, antim ony,
t
a r s e n i c , b ism u th , cadmium, z in c , c o b o lt, co p p e r, f l u p r s p a r , j
t i n , g r a p h i t e , m anganese, m ercury, m ica, molybdenum, le a d ,
97
and vanadium . B r a z il a ls o a g ree d to s to p s e l l i n g to th e
Axis pow ers any s t r a t e g i c m a t e r i a l s . And s im ila r e x p o r t-
c o n tr o l system s were i n s t i t u t e d by P e ru and Columbia.
(C) Dumping. As a weapon o f economic w a rfa re
dumping may be d esig n ed to d e s tro y c o m p e tito rs i n a
n e u t r a l m a rk e t. T hat i s , to compete w ith th e enemy i n
lo w erin g s e l l i n g p r i c e s i n o r d e r to d e p riv e th e enemy*s
e x p o rts o f th e f o r e ig n m arket and th u s t o p re v e n t th e
enemy from g e t t i n g f o r e ig n exchange to p u rc h a se war sup
p l i e s from ab ro a d . S ince th e f o r e ig n s a l e u n d er such
c o m p e titio n i s made a t a p r i c e below m a rg in a l c o s t, such
a m easure ca n n o t be c a r r i e d o u t u n le s s th e governm ent
g r a n ts a bou n ty on th e e x p o r ts . A lthough u n eco n o m ical, i t
can be j u s t i f i e d on th e ground t h a t i t c o n s t i t u t e s a p a r t
o f economic w a rfa re and th e n c o n t r i b u t e s to n a t io n a l s e
c u r i t y i n w a rtim e .
F o re ig n fu n d s c o n t r o l . — In a d d i tio n to th e con
t r o l o f th e i n t e r n a t i o n a l flo w o f goods f o r e ig n funds con
t r o l may be a ls o b ro u g h t to p la y i t s r o l e i n underm ining
th e e f f o r t s to a c q u ire war s u p p lie s from ab ro a d . The
te c h n iq u e o f f o r e ig n fu n d s c o n t r o l in v o lv e s th e r e g i s
t r a t i o n o f a l l a s s e t s h e ld by f o r e i g n e r s . A ll t r a n s a c t i o n s
a f f e c t i n g th e ow nership o f th e b lo c k e d a s s e t s a re p ro
h i b i t e d e x c e p t th o s e w hich a re s p e c i f i c a l l y p e rm itte d by
93
th e governm ent. F o re ig n fu n d s c o n t r o l was f i r s t im posed
by th e U n ite d S ta te s i n th e Second W orld War on th e t r a n s
f e r o f ow nership o f th e d o l l a r a s s e t s h e ld by th e
N orwegians and Danes im m ed iately a f t e r t h e i r c o u n tr ie s had
been in v a d ed by th e A x is. The p u rp o se was to f r e e z e th e s e
a s s e t s i n o r d e r to p re v e n t t h e i r f a l l i n g i n to th e hands o f
th e Germans. S im ila r a c tio n s were ta k e n by th e U n ite d
S ta te s w ith r e s p e c t to th e a s s e t s o f th e N e th e rla n d s ,
B elgium , Luxembourg, F ra n c e , and o th e r c o u n tr ie s a s th e y
f e l l i n t o th e hands o f th e A xis. The c o n tr o l was n o t o n ly
a p a s s iv e m easure to p r o t e c t th e i n t e r e s t o f th e g o v ern
ment and i n d iv i d u a ls i n th e in v a d e d c o u n tr ie s b u t a ls o an
a g g re s s iv e m easure to d is r u p t th e economic p la n s o f th e
Axis c o u n t r i e s .
B l a c k l i s t i n g o f b lo c k ed n a t i o n a l s . — A nother
in s tru m e n t o f economic w a rfa re c l o s e ly r e l a t e d to e x p o rt
and f o r e ig n fu n d s c o n t r o l i s th e b l a c k l i s t i n g o f b lo ck ed
n a t i o n a l s i n f o r e ig n c o u n t r ie s . A ll th e f o re ig n firm s and
p e rs o n s w hich i n s i s t on tr a d in g w ith th e enemy o r have
t
c lo s e com m ercial r e l a t i o n s w ith them may be b l a c k l i s t e d .
!
I Not o n ly a re e x p o rts to th e b l a c k l i s t e d firm s o r n a t i o n a l s
|p r o h i b i t e d , b u t t h e i r a s s e t s i n t h i s c o u n try may be f ro z e n .
F u rth e rm o re , p e rso n s i n th e n a tiv e c o u n try a re fo rb id d e n
to do any b u s in e s s w ith them u n t i l th e y can d e m o n strate a
99
com plete se v e ra n c e o f tr a d e and f i n a n c i a l r e l a t i o n s w ith
th e enemy c o u n try . A f te r th e N azis eame i n t o power in
Germany, th e y u se d some L a tin American n a t i o n a l s a s a g e n ts
to c a r r y on b o th economic and p o l i t i c a l w a rfa re a g a in s t
th e L a tin American c o u n t r ie s and th e U n ite d S t a t e s .
In o r d e r to s to p th e s e p r a c t i c e s , th e U n ited
S ta te s D epartm ent o f Commerce is s u e d a ’’P ro claim ed L i s t o f
C e rta in Blocked N a tio n a ls ” on J u ly 17, 1941. B l a c k l i s t i n g
h as been a p p lie d a ls o to European firm s i n c o u n tr ie s o th e r
th a n th o s e c o n t r o l l e d by th e A x is, such a s Sweden, T urkey,
S w itz e rla n d , S p ain , and P o r tu g a l. Thus th e e f f e c t o f t h i s
a c tio n sh o u ld have in c r e a s e d th e amount o f t r a d e betw een
th e U n ited S ta te s and th e n e u t r a l c o u n t r ie s and, a t th e
same tim e , d e p riv e d th e A xis powers o f an e f f e c t i v e
te c h n iq u e o f economic and p o l i t i c a l w a r fa re .
M i l i t a r y a t t a c k upon enemy economic r e s o u r c e s . —
Naval b lo ck ad e i s one o f th e p r i n c i p a l weapons o f economic
w a r fa re . The c o n d itio n f o r ad o p tin g t h i s m easure i s th e
suprem acy o f th e b e l l i g e r e n t ’ s se a pow er. A ir f o rc e as
w e ll a s ground tr o o p s may a ls o be u se d to weaken eco
n o m ic a lly th e oponent by a t ta c k in g th e enemy’ s supply
d e p o ts , p l a n t and equipm ent f o r war p r o d u c tio n , r e s e r v e s
o f raw m a t e r i a l s , and im p o rta n t i n t e r n a l and e x te r n a l
t r a n s p o r t a t i o n l i n e s . In a modern war a good f r a c t i o n o f
m i l i t a r y a t t a c k s a re made f o r economic w a rfa re p u rp o se s.
I I I . SU M M A RY
Due t o th e advance i n m i l i t a r y te c h n iq u e and th e
e x h a u s tiv e n e s s o f modern w a r fa re , th e in te rd e p e n d e n c e
among n a tio n s i n m eeting war re q u ire m e n ts h a s been s t e a d i l y
in c r e a s e d . The c o n t r ib u t io n o f i n t e r n a t i o n a l economic co
o p e r a tio n and tr a d e d iv is io n i s b ased upon th e "c o m p arativ e
a d v a n ta g e " , w hich i s a p p lie d to f o r e ig n tr a d e p o lic y in
w artim e a s w e ll a s i n p e a c e tim e . But owing to th e ex
p a n s io n i n tr a d e volume i n w a rtim e , m isb e h a v io r o f s e l f i s h
n a t i o n a l s and economic a t t a c k s by th e enemy, a b e l l i g e r e n t
u s u a lly s u f f e r s from la c k o f f o r e ig n exchange and sh o rta g e
in t r a n s p o r t a t i o n f a c i l i t i e s to c o n tin u e f o r e ig n t r a d e .
To se c u re a maximum amount o f war s u p p lie s th ro u g h f o r e ig n
tr a d e c h a n n e ls and to a s s u re g r e a t f l e x i b i l i t y o f s t a t e
c r a f t i n f o r e ig n tr a d e p o lic y , e x p o rt and im p o rt to g e th e r
w ith th e in s tru m e n ts to c a r r y them on, such as f o r e ig n
exchange and t r a n s p o r t a t i o n f a c i l i t i e s , m ust be p la c e d
u n d er governm ent c o n t r o l . In a d m in is te rin g th e s e c o n tr o l
schemes v a r io u s te c h n iq u e s a r e r e q u ir e d to a t t a c k s p e c ia l
problem s a r i s i n g i n th e s e f i e l d s . At th e same tim e f o r e ig n
tr a d e i s a ls o d e sig n e d to wage an o f f e n s iv e economic w ar
f a r e to weaken th e enemy’ s d e fe n se economy, w hich i s o f
101
grow ing im p o rtan ce i n an a l l - o u t war i n th e modern age.
CHAPTER ¥11
CONCLUSION
I t i s w e ll re c o g n iz e d t h a t an a ll-o m t war i n th e
modern age em braces th r e e m ajor weapons— m i l i t a r y a c tio n s ,
p s y c h o lo g ic a l w a r fa re , and economic w a r f a r e . The ta s k s o f
a w ar economy ta k e b o th c o n s tr u c tiv e and d e s t r u c t i v e form s.
Such a war e f f o r t in v o lv e s on th e c o n s tr u c tiv e s id e su p p ly
in g th e f i g h t i n g f o r c e s w ith a maximum o f goods and s e r
v ic e s i n th e s h o r t e s t p o s s i b le tim e . On th e d e s t r u c t i v e
s id e , i t e n t a i l s w eakening and damaging th e enemy*s po
t e n t i a l and a c t i v e economic s t r e n g t h . Because o f th e
trem endous and p e r s i s t e n t m i l i t a r y and c i v i l i a n demands
f o r goods and s e r v ic e s alm o st e v e ry b e l l i g e r e n t i s h a r d -
p r e s s e d t o meet th e t o t a l demands. T h e re fo re a w ar economy
i s c h a r a c te r i z e d by s c a r c i t y , n o t abundance, i n r e s o u r c e s .
M axim izing th e war e f f o r t n e c e s s i t a t e s an in c r e a s e
in p ro d u c tio n and d e c re a se i n c i v i l i a n consum ption sim u l
ta n e o u s ly . I n t h i s e f f o r t a t t e n t i o n must be g iv e n to th e
p r e s e r v a tio n o f j u s t i c e i n th e d i s t r i b u t i o n o f s a c r i f i c e s
and avoidance o f economic d i s l o c a t i o n and d i s r u p t i o n . The
problem c o n fro n te d by a b e l l i g e r e n t , i n s h o r t , i s how to
m o b iliz e re s o u r c e s f o r war p u rp o se s and how to s t a b i l i z e
tJniversity ot Southern CaliSu
103
th e s o c i a l economy u n d er th e g r e a t s t r a i n on b o th money
and r e a l w e a lth . These two problem s a re r a t h e r i n t e r
r e l a t e d and in s e p a r a b le i n a w ar e f f o r t . I t i s re c o g n iz e d
t h a t w ith o u t s t a b i l i z a t i o n c o n t r o l s th e i n e v i t a b l e i n
f l a t i o n o f p r i c e s , c o s t o f l i v i n g , w ages, and o th e r c o s ts
o f p ro d u c tio n w ould p la y havoc w ith war p ro d u c tio n and
th u s d is r u p t th e war e f f o r t .
In m axim izing war s u p p lie s th e f i r s t th in g we have
to do i s p ro c u re th e n e c e s s a ry p ro d u c tiv e a g e n ts and f a c
t o r s a d e q u a te ly and p ro m p tly . For t h i s pu rp o se th e schemes
which a r e g e n e r a lly employed by c o u n tr ie s i n th e p e r io d o f
war o r rearm am ent a re many; m o b iliz in g th e unused r e
s o u rc e s — manpower, raw m a t e r i a l s , and p l a n t and equipm ent
to t h e i r l i m i t s ; c o n v e rtin g c i v i l i a n p ro d u c tio n and c u r
t a i l i n g c i v i l i a n consum ption i n o r d e r to r e l e a s e p ro d u c tiv e
a g e n ts f o r d e fe n se p u rp o s e s ; c o n s tr u c tin g new c a p i t a l
f a c i l i t i e s needed by w ar o u tp u t ex p a n sio n ; b rin g in g about
la b o r t r a i n i n g ; s to c k p ili n g s t r a t e g i c m a t e r i a l s ; u s in g
s u b s t i t u t e s f o r s c a rc e m a t e r i a l s ; s im p lif y in g and s ta n d a r
d iz in g p r o d u c ts ; p o stp o n in g th e r e p a i r and re p la c e m e n t o f
c a p i t a l f a c i l i t i e s i n some n o n - e s s e n tia l f i e l d s ; and de
v e lo p in g f o r e ig n t r a d e .
S econdly, we sh o u ld a l l o c a t e th e a v a ila b le r e
so u rc e s i n such a manner t h a t th e y a re dev o ted to t h e i r
104
b e s t u s e s from th e s ta n d p o in t o f m axim izing th e war
e f f o r t — t h a t i s , a l l o c a t e i n such a manner t h a t th e m argi
n a l u t i l i t y o f a l l p ro d u c ts c o n tr ib u te d to war a r e e q u a l.
T his r e q u ir e s p ro d u c tio n program m ing, i . e . , f o rm u la tio n o f
needed and f e a s i b l e p ro d u c tio n o b je c ti v e s f o r th e t o t a l
n a t i o n a l o u tp u t and i t s com ponents, sc h ed u le d o v e r s p e c ia l
tim e p e r io d s . D ir e c t c o n t r o ls on th e u se o f manpower,
m a t e r i a l s , and c a p i t a l f a c i l i t i e s a re in d is p e n s a b le to
im plem ent th e program s.
T h ird ly , to o b ta in more p ro d u c t p e r u n i t o f p ro
d u c tiv e a g e n ts we have to make a tte m p ts to prom ote p ro
d u c tio n e f f i c i e n c y th ro u g h a p p ly in g and e x te n d in g th e u se
o f new e f f e c t i v e m achines and t o o l s to i n d u s t r i e s ; a f
f e c t i n g re a s o n a b le d i s t r i b u t i o n o f raw m a te r ia l s and la b o r
f o r c e by d e v ic e s o f d i r e c t c o n t r o l among a l l p ro d u c tio n
u n i t s a c c o rd in g to t h e i r c a p a c ity ; c a rr y in g o u t th e con
c e n t r a t i o n o f i n d u s t r i e s ; im proving th e management and
s u p e rv is o ry system ; u t i l i z i n g economic in c e n ti v e o r a p p e a l
in g t o th e p a t r i o t i s m o f th e w o rk e rs; and in c r e a s in g
a ssig n m e n ts o f w ork.
In any w ar-m aking e f f o r t , o b s ta c le s and d i f f i c u l
t i e s may be cau sed by th e enemy*s economic o f f e n s iv e as
w e ll as by do m estic p r o f i t e e r s . A g ain st th e enemy i t i s
n e c e s s a ry to wage d e fe n s iv e and o f f e n s iv e economic w a rfa re
105
to c o u n te r a c t h i s a c tio n s o r p o s i t i v e l y im p a ir h i s c a p a c ity
w ith d e s t r u c t i v e a t t a c k s . D uring th e war th e p r o f i t
m o tiv e , c o m p e titio n , th e m ark et p r ic e mechanism, and
p r i v a t e economic s o v e re ig n ty must be s u b o rd in a te d to th e
n a t i o n a l d e fe n se aim. For t h i s p u rp o se , th e m easures o f
d i r e c t c o n t r o l , economic in c e n tiv e s t i m u la tio n , and p a
t r i o t i c a p p e a l a re to be b ro u g h t i n to a t t a c k from d i f f e r
e n t a n g le s .
However, s in c e th e c o s t o f a modern war u s u a lly
o v erb u rd en s th e p e o p le , t h e r e f o r e , i n o r d e r to r e l i e v e
them from extrem e s t r a i n , s tr e n g th e n in g n a t i o n a l d e fe n se
i n p ea ce tim e and se ek in g f o r e ig n c o o p e ra tio n and a s s i s t a n c e
sh o u ld be em phasized. In o th e r w ords, war e f f o r t s sh o u ld
be ex ten d ed i n b o th " tim e ” and " s p a c e ” . I t i s t r u e t h a t
t o t a l war e r a s e s th e l i n e o f d em arcatio n s e p a r a tin g war
from peace and c a l l s f o r t h th e economy o f th e perm anent
m i l i t a r y s t a t e , u n le s s th e t h r e a t o f war i s a b s o lu te ly
e r a d i c a t e d i n th e w o rld .
As to u t i l i z i n g f o r e ig n r e s o u r c e s th e war e f f o r t
may be g r e a t l y enhanced th ro u g h i n t e r - a l l i e d economic
c o o p e ra tio n i n a l l o c a t i o n o f c r i t i c a l m a t e r i a l s o r i n t e
g r a t i o n o f p r o d u c tio n . A llie d c o u n t r ie s may be asked to
t r e a t a l l e x p o rt demands o f a b e l l i g e r e n t on th e same
b a s is o f p r i o r i t y r a t i n g as a l l t h e i r own dom estic demands
106
by n e g o t ia t in g r e c i p r o c a l a id program s. F u rth e rm o re ,
a l l i e s may be p u t u n d er a scheme o f p o o lin g r e s o u r c e s and
c o o r d in a tin g war p ro d u c tio n p la n s a s w e ll as o f c o o p e ra tio n
i n o th e r a s p e c ts . N e u tra l c o u n tr ie s may a ls o be p e rsu a d e d
to s id e w ith a b e l l i g e r e n t a g a in s t th e enemy i n tr a d e as
w e ll a s i n o th e r m a tte r s . The a v a ila b le m easures f o r t h i s
p u rp o se c o n s is t o f u s in g d is c r im in a to r y tr a d e and f i n a n c i a l
d e v ic e s la r g e ly b ased upon m o n o p o lis tic p o s i t i o n s a g a in s t
th e s e c o u n tr ie s to in f lu e n c e t h e i r conduct to w ard th e
b e l l i g e r e n t ’ s i n t e r e s t ; th r e a te n in g m i l i t a r y in v a s io n as
co n d u cted by Nazi Germany upon E uropean c o u n tr ie s i n th e
Second "World War; o f f e r i n g a id to n e u t r a l c o u n t r ie s i n
t h e i r economic advancem ent to in d u c e them to c o o p e ra te
w ith a b e l l i g e r e n t v o l u n t a r i l y i n waging economic w a rfa re
a g a in s t th e enemy.
What i s d is c u s s e d above i s th e s k e le to n o f th e
g e n e ra l th e o ry re g a rd in g m axim izing a war e f f o r t . The
v a r i e t y o f te c h n iq u e s needed i n a p p ly in g th e th e o ry to
p a r t i c u l a r c o u n t r ie s i s grow ing day by day, as many de
f e n s e r e s e a r c h i n s t i t u t i o n s i n v a r io u s c o u n tr ie s a r e en
gaged i n d ev e lo p in g new and a p p r o p r ia te p o l i c i e s to meet
a f u t u r e w ar.
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| 103
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University of Southern Caliiw,

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Asset Metadata

Creator Hsieh, Edward Keng (author)

Core Title How to maximize the economic efforts of war in real terms

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Anderson, William H. (committee chair), Garis, Roy L. (committee member), Phillips, E. Bryant (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-442951

Unique identifier UC11263921

Identifier EP44718.pdf (filename),usctheses-c20-442951 (legacy record id)

Legacy Identifier EP44718.pdf

Dmrecord 442951

Document Type Thesis

Rights Hsieh, Edward Keng

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA