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An Analysis Of Fiscal Policy During The Truman Administration (1945-1953)

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An Analysis Of Fiscal Policy During The Truman Administration (1945-1953)

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Content T h is dissertation has b se n
m icrofilm ed exactly as received 67— 5302
OLSON, J r ., John M a u r ic e C lifto n , 1919—
AN A N A L Y SIS O F F ISC A L P O L IC Y DURING THE
T R U M A N ADM INISTRATIO N (1 9 4 5 -1 9 5 3 ).
U n iv e r s ity of S ou th ern C a lifo r n ia , P h .D ., 1966
E c o n o m ic s , fin a n c e
U niversity Microfilms, Inc., A nn Arbor, Michigan
AN ANALYSIS OP FISCAL POLICY
DURING THE TRUMAN ADMINISTRATION
(19*15 - 1953)
by
John Maurice Clifton Olson, Jr.
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
June 1966
UNIVERSITY O F S O U T H E R N CA LIFORN IA
T H E G R A D U A TE SC H O O L
U N IV E R SIT Y PA RK
LO S A N G E L E S , C A L IFO R N IA 9 0 0 0 7
This dissertation, written by
J I.Qhj3 w.M.aurjlcfi„ClifJLQn..Ql5.aa,..JrJ k ......
under the direction of his.....Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by the Graduate
School, in partial fulfillment of requirements
for the degree of
D O C T O R OF P H IL O S O P H Y
Dean
Date J u i x e * . . . l .9. 6. 6.
DISSERTATION COMMITTEE
Ait
Chairman
TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION .................................... 1
The Problem............................... 2
Statement of the Problem .................. 2
Scope of Analysis...................... 3
Method of Analysis ........................ 4
Material Sources for this Analysis .... 6
Definitions of Terms ........................ 12
Fiscal Policy ............................. 12
Monetary Policy ........................... 12
Debt Management......................... 13
Organization of this Study.................13
Phases of Fiscal Policy Application . . . 14
II. ANALYSIS OF DOWNWARD ADJUSTMENT—
FEBRUARY TO OCTOBER, 1 9 4 5 .................19
Analysis of Economic Conditions ........... 19
Government Reduction Offset ............. 19
Change in Savings and Transfers ......... 21
National Economic Budget .................. 23
Characteristics of Adjustment Period . . . 31
Fiscal Policy during the Adjustment Period . 32
Federal Tax Policy....................... 34
ii
Ill
CHAPTER PAGE
Federal Expenditure Policy ................ 36
Debt Management Policy .................... 37
Monetary Policy ........................... 38
Direct Controls ........................... 40
Fiscal Policy Outcome ...................... 40
Influence on Incentives .................. 4l
Effects on Capacity, Resource Allocation,
and Stability........................... 43
Adjustment Period Interval ............... 44
Economic Growth and National Income . . . 45
Price L e v e l ............................... 46
Prelude to Inflation...................... 47
III. ANALYSIS OF ECONOMIC CONDITIONS DURING
INFLATION— 1945-1948 ........................ 48
Behavior of the Economy — 1945-1948 ......... 48
Decline of Government Sector.............. 48
Changes in Constant and Current Dollars . 50
Inflationary Characteristics . . . ......... 54
Approach of Full Employment............. 55
Rise of Aggregate Demand.................. 55
Increase In Money Wages .................. 57
Limited Productivity ...................... 58
iv
CHAPTER PAGE
The National Economic Budget ............... 60
Consumption Segment ...................... 6l
Business Segment .......................... 67
Government Sector ........................ 73
International Segment .................... 77
The National Budget...................... 82
Effect of World War I I .................... 82
Rise of Investment........................ 84
The Influence of Inflation............... 84
IV. ANALYSIS OF FISCAL POLICY DURING
INFLATION— 1945-1948 ........................ 86
Employment Act of 1946 ...................... 86
The Full Employment I d ea l............... 86
Machinery for Economic Analysis ......... 88
Nature of Governmental Planning ......... 88
Means of Achieving Results............... 89
Postwar Confidence ........................ 90
Inflationary Bias .................. 90
An Indeterminate Solution ............... 91
The Council of Economic Advisers ........... 91
Council's Role............................. 91
The Nourse Council........................ 92
Federal Fiscal Policy— 1945-1948 ........... 97
CHAPTER PAGE
Tax Policy.......................... 97
Expenditure Policy ........................ 102
The Resulting Surpluses .................... 103
Debt Management.............................105
Monetary Management ...................... 106
Federal Reserve Anti-Inflationary
Actions....................................108
V. ANALYSIS OF FISCAL POLICY EFFECTS DURING
19*15-19*18......................................Ill
Effects of Federal Expenditure Policy . . , 112
Effects of Fiscal Policy on Production . . . 115
Production Goals .......................... 116
Decline in Work Week.........................117
Decline in Output...........................118
Effects of Federal Tax Policy............ 119
The Revenue Act of 19*15 and Consumption . 119
The Revenue Act of 19*18.................121
Effects of Fiscal Policy on Liquidity . . . 123
Borrowing from Commercial B a n k s........... 12*1
Decreasing the Reservoir of
Liquid Assets .......................... 125
Treasury Action .......................... 125
Effects of Fiscal Policy on
Purchasing Power .......................... 126
vl
CHAPTER PAGE
Weakness of Moral Suasion ................... 127
Fiscal Policy Results during
1945-19^8 Period ............................ 128
VI. ANALYSIS OF FISCAL POLICY DURING
1949 RECESSION.................................130
Behavior of the Economy in 1948-1949 .... 130
Breakdown by Expenditure Classes .......... 132
Influence of Transfer Payments ............ 13^
Personal Tax Reduction ............ 135
Savings Change .............................. 135
Mildness of 1949 Recession................. 136
The National Economic Budget ................ 137
The Stability of the Consumption Segment . 139
The Significant Decline in Investment . . . l4l
The Falling Export Surplus ........ 143
Small Increase in Government Spending . . . 144
The National Budget.......................... 144
Analysis of Economic Conditions .............. 147
Role of Monetary Management................. 147
Change in Interest Rate Policy.............150
Fall in Exports...............................151
Rate of Consumption and Inventories .... 152
Fall in Effective Demand................... 153
vii
CHAPTER PAGE
Nature of the Causes of 1949
Recession................................... 155
Role of President’s Council in 1949
Recession..................................... 156
Emphasis on Inflation ....................... 158
Council Action in Recession ................ 159
Federal Fiscal Policy in the 1949
Recession ..... 160
Tax Reduction.................................l6l
Federal Expenditures ....................... 161
Administration’s Anti-Inflation Program . . 162
Congressional Action on Administration’s
Program..................................... 163
Fiscal Policy Outcome during the
1949 Recession...............................164
Expenditure Effects during Deflation . . . 164
Tax Effects during Deflation ....... 166
Effects on Budget Surpluses . . . 168
Effects of Social Security System ........... 168
Effect on Purchasing Power ............... 169
Effect on Production ...................... 170
Practicing the Gentle Act of
Disinflation .............................. 174
viii
CHAPTER , PAGE
VII. ANALYSIS OF FISCAL POLICY DURING PEACETIME
RECOVERY FROM RECESSION— OCTOBER, 19*19
TO JUNE, 1950 ................................. 176
Analysis of Economic Conditions ............. 176
Breakdown by Expenditure Classes ......... 178
The National Economic Budget ............. 180
Nature of Peacetime Recovery ................ 186
Rise In Production.......................... 188
Effect on Unemployment .................... 188
Boom In Housing...............................190
Small Increase In Price Levels ...... 191
Resumption of Investment .................. 191
Strength of Recovery ...................... 193
Fiscal Policy in the Recovery from the
19^9 Recession...............................195
Changes In the Council......................195
Expenditure Policy ......................... 196
Tax Policy................................... 197
The Budget Deficit.......................... 198
Influence of Congress ...................... 199
VIII. ANALYSIS OF FISCAL POLICY DURING KOREAN WAR—
JUNE, 1950, TO JULY, 1953 .................... 201
Nature of Economic Conditions ................ 201
ix
CHAPTER PAGE
Breakdown by Expenditure Classes .......... 204
Comparison of Inflationary Periods .... 204
National Economic Budget ................... 207
Tax Policy During the Korean W a r......... 217
Expenditure Policy During the Korean War . . 222
Budget Surpluses During the Korean War . . . 225
Inflationary Characteristics ................. 227
The Behavior of Prices.................. 228
Increasing Money Wages ..................... 233
Pull Employment Condition ................. 233
Production Increase ........................ 234
Liquidity................................236
The First and Second Postwar Inflations . 238
Monetary Management During Korean War . . . 239
End of Bond Support Program............240
Role of President's Council During
Korean War ..................................243
Outcome of Fiscal Policy During
Korean W a r ................................246
Effects of Fiscal Policy on Consumer
Income.................................. 246
Effects of Price Controls ................. 247
Effects of Federal Tax Policy......... 248
X
CHAPTER PAGE
Effects of Fiscal Policy on
Production..................................2*l8
Limited Success of Administration's
Approach ........................... 2*19
IX. SUMMARY AND CONCLUSIONS.........................251
Five Phases of Fiscal Policy
Implementation ............................. 251
Postwar Adjustment From War to Peace . . 252
The First Period of Postwar Inflation . . 252
The 19*19 Recession........................... 25*1
Peacetime Recovery from Recession .... 25*1
The Korean W a r ................................255
Fiscal Policy and the Employment Act .... 256
Maximum Employment ........................ 256
Maximum Production ........................ 257
Maximum Purchasing Power .................. 258
Special Circumstances of Postwar Period . 259
The Unique Features of the Period .... 259
Goals that Conflict with Fiscal Policy . . 260
The Federal Reserve System's Effect
on Fiscal Policy........................... 260
Economic Instability and Fiscal Policy . . 262
Fiscal Policy Record of the Truman
Administration ............................. 263
xi
CHAPTER PAGE
Minimum Unemployment ........................ 263
High Production............................. 264
Fall in the Value of Money.................. 264
Mildness of Fiscal Policy Approach .... 266
The Ends and the Means.......................267
BIBLIOGRAPHY ............................................ 269
xii
LIST OF TABLES
TABLE PAGE
I. Reference Dates for United States
Business Cycles as Designated by
the National Bureau of Economic
Research 1945-1953 ....................... 15
II. Gross National Product and Relative
Expenditures for Consumption,
Investment for First and Fourth
Quarters of 1945......................... 20
III. Gross National Product Showing Breakdown
by Classes of Expenditure Including
National Income, Personal Income and
Disposable Personal Income for First
and Fourth Quarter of 1945............. 22
IV. Consumption Segment of National Economic
Budget for First and Fourth Quarters
of 1 9 ^ 5 ................................... 25
V. Business Segment of National Economic
Budget for First and Fourth Quarter
of 1 9 4 5 .................................. 28
VI. Government Sector of National Economic
Budget for First and Fourth Quarters
of 1 9 4 5 .................................. 29
xiii
TABLE PAGE
VII. Summary of National Economic Budget
Including all Segments of the
Economy for the First and Fourth
Quarters of 1945........................ 30
VIII. Estimated Liquid Asset Holdings
For 1949 and 1 9 4 5 ...................... 39
IX. Gross National Product and Relative
Expenditures for Consumption, In
vestment, and Government For Fourth
Quarter of 1945 and Fourth Quarter
of 1 9 4 8 ................................. 149
X. Gross National Product Showing Breakdown
By Classes of Expenditure Including
National Income, Personal Income, and
Disposable Personal Income For Fourth
Quarter of 1945 and Fourth Quarter
of 1948 ................................. 51
XI. United States Gross National Product
Showing Breakdown for Consumption,
Investment, and Government for Fourth
Quarter of 1945 and Fourth Quarter
of 1948 ................................. 53
xiv
TABLE PAGE
XII. Unemployment In the United States as a
Percentage of the Total Labor Force
on a Quarterly Basis from the Fourth
Quarter of ]945 to the Fourth Quarter
of 1948................................. 56
XIII. Consumer Retail and Wholesale Price
Indexes On A quarterly Basis for the
Years 1945 Through 1948................ 59
XIV. Consumption Segment of National Economic
Budget for Fourth Quarters of 1945
and 1948 62
XV. Estimated Liquid Asset Holdings in the
United States for the Years 1945
Through 1948 65
XVI. Business Segment of National Economic
Budget for Fourth Quarters of 1945
and 1948 68
XVII. Total Consumer Credit in the United
States on a Quarterly Basis for the
Years 1946 Through 1948 ................ 70
XVIII. Government Sector of National Economic
Budget for Fourth Quarters of 1945
and 1948 78
XV
TABLE PAGE
XIX. International Segment of National Economic
Budget on a Quarterly Basis for the Years
19*15 Through 19*18........................ 79
XX. United States Exports and Imports of Goods
And Services on a Quarterly Basis for the
Years 19*16 Through 19*18.................. 80
XXI. Summary of National Economic Budget In
cluding all Segments of the Economy for
the Fourth Quarters of 19*15 and 19*18 . . 83
XXII. Expenditures of the Federal Government for
National Security and Other Purposes on
a Quarterly Basis for the Fourth Quarter
of 19*15 Through the Fourth Quarter of
19*18 104
XXIII. Composition of Holdings of Federal Debt in
the Form of Government Securities by
Banks, Individuals, and Government for
the Years 19*15 Through 19*18................107
XXIV. Expenditures of the Federal Government for
New Construction and Foreign Aid, To
gether with the Amounts of Ch tstand Con
sumer Credit for the Years 19*16 through
19*18........................................ 114
xvi
TABLE PAGE
XXV. Gross National Product and Relative
Expenditures for Consumption, Invest
ment, and Government for Nine Quarters
Beginning First Quarter of 1948 and
Ending First Quarter of 1950 ............... 131
XXVI. Gross National Product Showing Breakdown
by Classes of Expenditure Including
National Income, Personal Income, and
Disposable Personal Income for Fourth
Quarters of 1948 and 1 9 4 9 ................. 133
XXVII. Measures of the Severity of Business Cycle
Contractions in the United States with
Reference to the Great Depression and
the 1949 Recession........................ 138
XXVIII. Consumption Segment of National Economic
Budget for Fourth Quarters of 1948 and
1949..........................................140
XXIX. Business Segment of National Economic
Budget for Fourth Quarters of 1948 and
1949 ........................................ 142
XXX. Government Sector of National Economic
Budget for Fourth Quarters of 1948 and
1949 ......................................... 145
xvii
TABLE PAGE
XXXI. Summary of National Economic Budget
Including All Segments of the Economy
for the Fourth Quarters of 1948 and
194 9 ......................................146
XXXII. Personal Income in the United States and
its Disposition on a Quarterly Basis
Beginning with the First Quarter of
1948 and Ending the First Quarter of
1950 ........................................ 154
XXXIII. Expenditures of the Federal Government
for National Security and Other Purposes
on a Quarterly Basis for the Fourth
Quarter of 1948 Through the Fourth
Quarter of 1949 165
XXXIV. Unemployment, Unemployment Beneficiaries,
Unemployment Contributions and Unempooy-
ment Benefit Payments During the 1949
Recession in the United States ........... 170
XXXV. Consumer Retail and Wholesale Price Indexes
on a Monthly Basis Beginning November
of 1948 and Ending October of 1949 .... 172
XXXVI. Industrial Production Index on a Monthly
Basis Beginning November of 1948 and
Ending October of 1949 .................... 173
xviii
TABLE PAGE
XXXVII. Gross National Product and Relative Ex
penditures for Consumption, Investment,
and Government for the Fourth Quarter
of 19^9 and the First and Second Quarter
of 1950 ..................................... 177
XXXVIII. Gross National Product Showing Breakdown
by Classes of Expenditure Including
National Income, Personal Income, and
Disposable Personal Income for Fourth
Quarter of 19^9 and Second Quarter of
1950 179
XXXIX. Consumption Segment of National Economic
Budget for Fourth Quarter of 19^9 and
Second Quarter of 1950 l8l
XL. Business Segment of National Economic
Budget for Fourth Quarter of 19^9 and
Second Quarter of 1950 183
XLI. Government Sector of National Economic
Budget for Fourth Quarter of 19^9 and
Second Quarter of 1950 185
XLII. Summary of National Economic Budget In
cluding All Segments of the Economy for
the Fourth Quarter of 19^9 and the Second
Quarter of 1950 ..............................187
xix
TABLE PAGE
XLIII. Industrial Production Index on a Monthly
Basis Beginning October of 1949 and
Ending June of 1950 ...........................189
XLIV. Consumer Retail and Wholesale Price
Indexes on a Monthly Basis Beginning
October of 1949 and Ending June of
1950 192
XLV. Expenditures of Gross Private Domestic
Investment on a Quarterly Basis for the
Third Quarter of 1949 and the First and
Second Quarters of 1950 ..................... 194
XLVI. Gross National Product and Relative Expendi
tures for Consumption, Investment, and
Government for Thirteen Quarters Beginning
Second Quarter of 1950 and Ending Second
Quarter of 1953 ........................... 202
XLVTI. Gross National Product Showing Breakdown by
Classes of Expenditure Including National
Income, Personal Income, and Disposable
Personal Income for Second Quarters of
1950 and 1953 ............................. 205
XX
TABLE
LIV.
LV.
LVI.
LVII.
LVIII.
LIX.
LX.
Comparison of Rates for Individual and
Corporate Income Taxes and the Corporate
Excess Profits Tax as Enacted by the
Congress and Approved by the President
as Percentages of Taxable Income for
the Years 1948, 1950 and 1951 ...........
Expenditures of the Federal Government
for National Security on a Quarterly
Basis Beginning the Third Quarter of
1953 and Ending the Second Quarter of
1953 . . . .
Receipts, Expenditures and Debt of the
Federal Government for the Fiscal
Years of 1945 Through 1953 .............
Consumers Retail Price Index (1935—
39 - 100) ...............................
Wholesale Price Index (1935-39 = 100) . . .
United States Unemployment as a Percentage
of the Total Civilian Labor Force for
Years 1945 Through 1952 ..................
Estimated Liquid Asset Holding for Years
1945 Through 1953 ........................
PAGE
221
224
226
230
231
235
237
LIST OF FIGURES
FIGURE PAGE
1. Pattern of Economic Indicators from First
Quarter of 19^5 Through Second Quarter of
1953 Including Gross National Product,
Disposable Personal Income, Industrial
Production, Retail Prices, Wholesale
Prices and Civilian Employment . .............. 16
2. Summary of Tax and Expenditure Recommenda
tions by the Council of Economic Advisers
as Contained in Annual and Midyear Reports
of 1947-1949......................................157
xxi
CHAPTER I
INTRODUCTION
Out of the experience of the 1930’s there emerged a
determination on the part of the majority of United States
citizens that in the future the federal government would
take necessary actions in the event of deflation that would
tend to maximize employment, production, and purchasing
power. This sentiment found legal expression in the Employ
ment Act of 19^6, which established maximum employment,
purchasing power, and production as the principal ends of
the economy. The mandate declared that the federal govern
ment would use all practical means to accomplish the cited
ends or goals. Among these practical means, there were
approaches through monetary policy, debt management, and
fiscal policy. Because of the continuing evolvement of the
economy, because of the rise and fall of political parties,
and because of the differing desires of various administra
tions relative to impressing their particular economic
philosophies upon the government, the aims of the economy
tend to change. Since in the United States it is usually
the President who establishes executive policy, the consid
eration of the aims or ends of the economy can be accom
plished most conveniently by limiting the study to the
period of a particular President's term in office. For
1
2
example, the modern Republicanism of the Eisenhower Admin
istration supported actions that promoted stability through
the encouragement of the private sector by means of apply
ing doctrinaire principles of public finance; the New Fron
tier Democratic Party of the Kennedy Administration sought
to promote economic growth through larger expenditures on
the part of the public sector, thereby placing the achieve
ment of a balanced budget in a secondary position. Mone
tary policy and debt management both have significant roles
to play in guiding the economy toward its stated goals.
However, fiscal policy is the most powerful tool of public
finance available to the federal government. The changes
in taxes, transfers, and expenditures permit the government
to exert great influence over national income. In spite of
such problems as timing, incidence, and political expedi
ency, fiscal policy provides the opportunities for signifi
cant leverage action on the operations of the economy
through its effect upon real income in both the long run
and the short run.
I. THE PROBLEM
Statement of the Problem
The purpose of this study is to investigate and
analyze the use of fiscal policy during the years of the
administration of Harry S. Truman, as the principal means
i »
for the achievement of the ends or goals of the economy as
3
established in the Employment Act of 19^6. An analysis of
the application of fiscal policy during the Truman Adminis
tration is important because deflation and inflation during
both hot war and cold war were involved. Further, the
analysis is of importance because the initial period of the
Employment Act is considered when policies and procedures
were established that became influential elements of sub
sequent actions. The various aspects of the analysis
Involve the formulation of fiscal policy, the mutual inter
relationship of fiscal policy with other policies of the
federal government, and the institutional framework within
which these policies take shape.
Scope of Analysis
Overall governmental economic policy includes fiscal
policy, monetary policy, and debt management. It is neces
sary to give proper consideration to each of these because
of the interrelationship within the public finance ma
chinery of the federal government. The emphasis of this
study is upon fiscal policy and debt management: the role
of monetary policy is given secondary consideration, not
because it is of less importance, but only because this
study places fiscal policy and debt management in the more
powerful positions for carrying out the mandate of the
Employment Act of 19^6.
Method of Analysis
An analysis of fiscal policy involves consideration
of the macroeconomic variables of the economy, such as the
aggregate volume of output, the extent to which resources
are employed, the size of the national Income, and the lev
el of prices. This study may be described as an exercise
in aggregative economic analysis. The general theory of
aggregative economic behavior has not provided a simple
comprehensive model that might be used as a framework for
analysis. The theory has developed along lines that In
volve a social organism of great complexity, with many in
ternal inconsistencies, and with a multitude of variables
that are influenced by forces originating both Internally
and externally to the system.'*' The general theory may be
divided into a group of subtheories, such as: (1) the
theory of the physical growth of productive capacity; (2)
the theory of aggregate demand and the role of Investment;
(3) the theory of aggregate supply, which deals with the
problem of the interaction of demand and capacity; (4) the
theory of consumer behavior, which considers expenditure by
consumers in relation to income; (5) the theory of the eco
nomic role of public monetary policies and their effect on
the supply of money and credit; and (6) the theory of
^John P. Lewis, Business Conditions Analysis (New
York: McGraw-Hill Book Company, 1959), pp. 275-279•
5
expenditure by the major groups, such as government and
business. It is desirable that the various theories should
be reduced to numbers and algebraic expressions for pur
poses of analysis. National income accounting has served
to make the economy one of quantitative characteristics.
Concepts like consumption, taxes, defense spending, and in
vestment can be converted into numbers for past periods.
However, the aggregative economic model does not meet the
test of having its relationships capable of being expressed
as constant and absolute numbers. Although the relation
ships cannot be stated precisely, there seem to be structual
regularities. One of the assumptions of the aggregative
economic model is that there are deviations from a path of
stable, noninflationary, fully-employed growth. Whether
these deviations are regular, more or less rhythmical ups
and downs that result from certain mechanisms in or out of
the economic system is a matter to be determined by the
business-cycle analyst. Nevertheless, these are the waves
of investment, of construction, and of innovation that are
often held to be dominant over the general activity of the
economy. Aggregative economic analysis can not avoid con
sideration of past events for testing analytical hypoth
eses. Each period subjected to analysis is the result of
prior periods plus the imposition of present conditions.
There are repetitive features in almost every period that
can not be considered properly without an understanding of
prior relationships. From 1865 to 1938 there were seven
major and eleven minor cycles of economic activity in the
2
United States. The events underlying these fluctuations in
activity prior to World War II served to create the recep
tive climate for the Keynesian analysis. Deviations in
aggregative economic activity are not deducible from a the
oretical system, but are derived empirically from an anal
ysis of past events and their influence on current events.
Mitchell attempted to develop an integrated view of the
workings of the economy on the widest factual basis. This
may be described as the pragmatic approach. The statistical
investigator tries to increase knowledge through the mea
surement of aggregative economic activity, thereby determin
ing what actually takes place in the various segments of
the economy during successive time periods. He then at
tempts to establish the magnitude of influence of the vari
ous factors that produce deviation in economic activity.
Material Sources for this Analysis
The literature of fiscal policy is very large. This
analysis is not involved with fiscal policy in its broadest
form but rather with its application during the Truman Ad
ministration. This section does not constitute a review of
the literature on fiscal policy, but only a summary of the
2
A. F. Burns and W. C. Mitchell, Measuring Business
Cycles (National Bureau of Economic Research. Princeton:
Princeton University Press, 19^6), p. 19*
7
source material used for this analysis. For the most part,
these sources may be classified as dealing with the macro-
economic or aggregative economic effects of economic policy
on the operation of the economy.
Normative writings. The basic principles for the
application of fiscal policy are contained in the master
work of John Maynard Keynes, usually referred to as the
3
General Theory. Useful aides in reading Keynes are A. H.
4
Hansen’s A Guide to Keynes, S. E. Harris' The New Eco-
5 6
nomics, and L. R. Klein's The Keynesian Revolution.
Alvin H. Hansen has written several important volumes rela
tive to the extention and application of fiscal policy,
7
such as, Fiscal Policy and Business Cycles and Business
Q
Cycles and National Income. Other excellent books of this
3
John Maynard Keynes, The General Theory of Employ
ment, Interest and Money (New York: Harcourt, Brace and
Company, 1936), Chaps. o through 21.
4
Alvin H. Hansen, A Guide to Keynes (New York:
McGraw-Hill Book Company, Inc., 1953), Chaps. 2 through 11.
5
Seymour E. Harris, The New Economics (New York:
Alfred A. Knopf, 1947), Parts III and IV.
^Lawrence R. Klein, The Keynesian Revolution (New
York: Macmillan Company, 1961), Chap. VI.
7
Alvin H. Hansen, Fiscal Policy and Business Cycles
(New York: W. W. Norton and Company, Inc., 1941), Chaps.
VI-XXIII.
Q
Alvin H. Hansen, Business Cycles and National In
come (New York: W. W. Norton and Company, Inc., 1964),
Parts II, IV and V.
type that were published in the 1960's include Gardner
9
Ackley's Macroeconomic Theory, Davidson and Smolensky's
Aggregate Supply and Demand AnalysisRobert Gordon's
Business Fluctuations,11 and Day and Beza's Money and In-
12
come. The outstanding exposition of the economic theory
of fiscal policy has been prepared by the Swedish econo-
1 " 5
mist, Bent Hansen.
Analytical writings. While there appear to be no
other studies of the Truman period only, other analyses
have been made for various periods of time. The best fis
cal policy analysis of the postwar period has been prepared
l4
by B. G. Hickman for the Brookings Institution. It cov
ered the period from 19^5 to 1958. A similar book was edit
ed by Ralph E. Freeman and covered the period from 19^0 to
g
Gardner Ackley, Macroeconomic Theory (New York:
The Macmillan Company, 19^1), Parts III and IV.
■^Paul Davidson and Eugene Smolensky, Aggregate
Supply and Demand Analysis. (New York: Harper and Broth
ers, 196*0, Chaps. I-V.
"^Robert Aaron Gordon, Business Fluctuations, Second
Edition. (New York: Harper and Brothers, 1961) , Parts I
and II.
12
A. C. L. Day and Sterie T. Beza, Money and Income
(New York: Oxford University Press, I960), Parts IV and V.
13
Bent Hansen, The Economic Theory of Fiscal Policy
(London: George Allen and Unwin, Ltd., 1958), Parts I and
III.
14
Bert G. Hickman, Growth and Stability of the Post
war Economy (Washington: The Brookings Institution, I960),
Parts II and III.
15
1958. The classic description of postwar Inflation was
1 ^
written by L. V. Chandler. An English economist, J. S.
Fforde, prepared a careful study of The Federal Reserve
System from 19*15 to 19*19.^ Another English economist, A.
E. Holmans, covered United States fiscal policy from 19*15
to 1959, with particular attention to the legislative as-
18
pects of implementing fiscal policy. The Brookings Insti
tution also sponsored W. Lewis' analysis of the use of fis-
19
cal policy in the postwar recessions.
Empirical studies. A very large contribution to an
understanding of economic fluctuation has been made through
the studies prepared by the National Bureau of Economic Re
search. These empirical studies include Burns on the
15
Ralph E. Freeman (ed.), Postwar Economic Trends in
the United States (New York: Harper and Brothers, I960) ,
Parts III and V.
"^L. V. Chandler, Inflation in the United States
19*10-19*18 (New York: Harper and Brothers, 1951), Chaps .
VI, XI-XVIII.
17
J. S. Fforde, The Federal Reserve System 19*15-19*19
(London: Oxford University Press, 195*1) , 351 pp.
- j O
A. E. Holmans, United States Fiscal Policy 19*15-
1959 (London: Oxford University Press, 19~f>l) , 3*12 pp.
19
Wilfred Lewis, Jr., Federal Fiscal Policy in the
Postwar Recessions (Washington! The Brookings Institution,
1962), Chaps. II-IV.
10
20 21
business cycle, Stanback on Inventories, Creamer on per-
22 2?
sonal Income, Copeland on government financing, Fabri-
2 4
cant on productivity, Firestone on federal receipts and
expenditures, Friedmen on consumption, Goldsmith on
27 2 f t
saving, and Goode on the individual income tax. The
20
A. F. Burns and W. C. Mitchell, Measuring Business
Cycles (National Bureau of Economic Research. Princeton:
Princeton University Press, 1946), p. 78.
21
Thomas M. Stanback, Jr., Postwar Cycles in Manu
facturers1 Inventories (A Study by the National Bureau of
Economic Research. Princeton: Princeton University Press,
1962), Chap. IV.
22
Daniel Creamer, Personal Income During Business
Cycles (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1956), Chaps. 3, 4,
and 8.
23
Morris A. Copeland, Trends in Government Financing
(A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1961).
24
Solomon Fabricant, Basic Facts on Productivity
Change (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1959).
25
John M. Firestone, Federal Receipts and Expendi
tures During Business Cycles" 1879-1958 (A Study by the
National Bureau of Economic Research. Princeton: Prince
ton University Press, I960), Chaps. 2, 3, and 7.
26
Milton Friedman, A Theory of the Consumption Func
tion (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1957), Chaps. II,
III, and IX.
27
Raymond W. Goldsmith, A Study of Savings in the
United States (A Study by the National Bureau of Economic
Research. Princeton: Princeton University Press, 1956),
Chaps. I and III.
2 8
Richard Goode, The Individual Income Tax (Washing
ton: The Brookings Institution, 1964).
11
Commission on Money and Credit has also prepared some out-
29
standing studies based upon empirical analysis.
Sources of data. The principle source of raw data
for this study was the National Income Supplement to the
Survey of Current Business that was prepared by the Depart
ment of Commerce in 195*1. This particular source was
chosen because it covered all of the items of the National
Economic Budget for the years 1939 to 1953. Supplementing
this main source are the various issues of the Economic
Report of the President, the Annual Report of the Secretary
of the Treasury, the Annual Report of the Board of Governors
of the Federal Reserve System, the monthly Survey of Cur
rent Business and the monthly Federal Reserve Bulletin.
Source for policy formation. The fiscal policy
views of the administration are contained mostly in the
Economic Reports of the President. These reports were ren
dered to the Congress twice a year, in January and July,
between 19*17 and 1953. They provide in one source document
the nature of the forecast, the recommendation for fiscal
policy action, the results of prior enactments, and summa
tions as to the operation of the aggregative economy. Fur
ther interpretive comment has been provided by Edwin G.
29
The Commission on Money and Credit. Stabilization
Policies (Research Studies 1, 4, and 7. Edgewood Cliffs:
Printice-Hall, Inc., 1963).
12
Nourse,30 t^e first Council Chairman, and E. R. Canter-
bery,^1 in his doctoral thesis.
II. DEFINITIONS OF TERMS
Fiscal Policy
Fiscal Policy may be defined as the coordinated use
of the fiscal powers of government to affect consciously
the functioning of the economic system in a constructive
manner. It involves the use of taxes, expenditures, and
debt to fight inflation and unemployment and to stimulate
economic growth. The objectives of fiscal policy are usu
ally achieved through the economic effects of changes in
the level of income.
Monetary Policy
Monetary policy is determined by the Federal Reserve
System and generally carried out through the commercial
banks. By means of central bank influence over reserves
and credit, the supply of money is changed. Through open-
market purchases of government bonds, interest rates and
reserves are altered. Monetary policy works through the
banking system to expand and contract credit. While It was
3^Edwin G. Nourse, Economics in the Public Service
(.New York: Harcourt, Brace and Company, 1953~)» 511 pp.
3^E. Ray Canterbery, The Presidents Council of
Economic Advisors (New York: Exposition Press, 1961),
l65"pp.-----------
13
once believed that monetary policy alone could Insure eco
nomic stability, the experience of the 1930's tended to in
dicate that interest rates and reserves had only a limited
effect in stimulating demand. In spite of this experience
and the increased attention given to fiscal policy, mone
tary policy is often more acceptable to the public because
it does not involve government deficits and higher taxes.
It is usually concluded that monetary policy is more effec
tive against inflation, whereas fiscal policy is the
stronger force against depression.
Debt Management
Debt management means the adjustment of the struc
ture and composition of the national debt in order to
achieve certain objectives. The adjustment process Is, for
the most part, performed by the Treasury when decisions are
made relative to the Issuance of securities. The effects
of such decisions are disclosed by the levels of general
liquidity and interest cost. The function of debt manage
ment is closely tied to the operations of the Federal
Reserve System.
III. ORGANIZATION OF THIS STUDY
This investigation analyzes the application of fis
cal policy during the years of the Truman Administration in
Its effort to carry out the mandate of the Employment Act
of 19^6. It attempts to indicate the importance of the
14
major forces acting upon the aggregative economy. The
years of the Truman Administration were marked with con
siderable instability because of the factor of war— the re
adjustment after war, the necessary requirements of cold
war, and the waging of a "police action" war. The concern
of this analysis is mainly with a diagnosis of the eco
nomy’s activity within the parameter of fiscal policy. The
activity of the economy is dimensioned through the ends or
goals of maximum employment, production and purchasing
power.
Phases of Fiscal Policy Application
For purposes of analysis, the consideration of the
implementation of fiscal policy during the Truman Adminis
tration is divided into five separate periods that corre
spond with the deflationary or inflationary activities of
the economy. These economic periods begin and end with the
peaks and troughs of the business cycle as designated by
the National Bureau of Economic Research. The reference
dates are shown in Table I, and the graphical summation of
various business cycle indicators is shown in Figure 1.
Postwar readjustment. The Truman Administration be
gan in April of 1945. Chapter II of this study analyzes
the conversion period from World War II to postwar peace.
The principal fiscal policy procedures were reductions in
expenditures and taxes based upon making an orderly
15
TABLE I
REFERENCE DATES FOR UNITED STATES BUSINESS CYCLES
AS DESIGNATED BY THE NATIONAL BUREAU
OF ECONOMIC RESEARCH
19^5-1953
Period
for
this
Study
Terminal
Points of Cycle
Deflation
or
Inflation
Number
of
Months Trough Peak Trough
1 Feb. 1945 Oct. 1945
Postwar
Deflation
8
2 Oct. 1945 Nov. 1948
Peacetime
Inflation
37
3 Nov. 1948 Oct. 1949
Peacetime
Deflation
11
Oct. 1949 June 1950
Peacetime
Inflation
8
5 June 1950 July 1953
Wartime
Inflation
37
SOURCE: Geoffrey H. Moore, Business Cycle Indicators (A
Study by the National Bureau of Economic Research
Princeton: Princeton University Press, 1961),
p. 670.
16
Post
Post-War
s Prosperity
r
First
Post-
War
Reces
s i on
L! i II i / i f i 1
~ t t r
Recovery
From Recession
and
Korean Expansion
nr
■Mlt’K ttfcBB BBB BB BBB B B flB I B B B B B B B B B P 'lr fl
B^i;Tf(i:P^^BaBfliiiiBiBaiaaFL«ai»Br\«
tfaaar^Tijai
BBBT^JBBBBBB
BBBBBBBBBrrLkiBBflBflBBBBar^flfjlSra^nfllisI
B '^ w ^ B rC i.M aW B B B B B B B B B B B ^.iB laliaM M M K IM M B
■BBB.^BBBBBBBBrTl*BBBr^BBBl4l^l»I*i:i^BBa
■ B B B B B B B B B B
250
240
230
220
210
200
190
180
170
160
150
3 ;
i i * ?
1945 11946 11947119^8 194911950 1951 119 52 |»53
FIGURE 1
PATTERN OF ECONOMIC INDICATORS
FROM FIRST QUARTER OF 1945 THROUGH SECOND
QUARTER OF 1953 INCLUDING GROSS NATIONAL
PRODUCT, DISPOSABLE PERSONAL INCOME,
INDUSTRIAL PRODUCTION, RETAIL PRICES,
WHOLESALE PRICES AND CIVILIAN EMPLOYMENT
17
economic adjustment as quickly as possible from production
for defense to production of civilian goods and services.
The trough of the postwar adjustment period was reached in
only eight months.
First postwar inflation. The thirty-seven month
period from October of 1945 to November of 1948 was the
period of the first postwar inflation. Chapter III analyzes
the economic conditions with special attention to the fac
tors affecting the national economic budget. The formula
tion and implementation of fiscal policy is studied in
Chapter IV, including the enactment of the Employment Act
of 1946 and the beginnings of the Council of Economic Ad
visers. The effects of fiscal policy on the various fac
tors of the economy during the first postwar Inflation are
considered In Chapter V.
The inventory recession. The forces of deflation
gained the ascendency during the second half of 1948. What
followed was a mild recession during which an adjustment
was achieved between aggregate supply and aggregate demand.
Chapter VI studies the "gentle art of disinflation" prac
ticed by the Truman Administration during the eleven-month
period of the 1949 recession.
Peacetime recovery and the Korean War. Based upon
the business cycle, the recovery of the economy began in
October of 1949 and lasted for thirty-eight months. For
the purposes of this study, the Korean War period of infla
tion is divided into two periods. The first period studies
the recovery of the economy from the 19^9 recession to the
outbreak of the Korean War. This analysis is found in
Chapter VII. The next chapter begins at the outbreak of
the Korean War and analyzes fiscal policy during the second
period of postwar inflation. Although the term in office
of President Truman ended on January 20, 1953, the respon
sibility for fiscal policy during the first half of 1953
can be ascribed to Trueman rather than to his successor.
The ends and the means. The final chapter of this
study reviews the implementation of fiscal policy during
the five periods of analysis. The ends or goals of the
Employment Act of 19^6 are considered in the light of their
accomplishment or failure to be achieved through the means
of fiscal policy actions by the Truman Administration.
CHAPTER II
ANALYSIS OP DOWNWARD ADJUSTMENT—
FEBRUARY TO OCTOBER, 1945
The expansion phase of the business cycle that in
cluded World War II began in June of 1938. The peak of the
cycle was reached in February of 1945 when the rate of fed
eral expenditures for war material began to decline. Dur
ing the next eight months, from February to October of 1945,
there was a downturn in economic activity as the adjustment
was made from war to peace.^ Therefore, when Harry S. Tru
man became president on April 12, 1945, the contraction
phase of the business cycle had been in effect two months.
I. ANALYSIS OF ECONOMIC CONDITIONS
Government Reduction Offset
Table II shows that the annual rate of spending for
all levels of government was $98.6 billion during the first
quarter of 1945. During the next three quarters, it de
creased by $43.4 billion, for a decline of per cent.
The result of this large decrease in government spending
might have been a falling off of producers' Incomes, a
1Geoffrey H. Moore, Business Cycle Indicators (A
Study by the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1961) , p. 670.
19
20
TABLE II
GROSS NATIONAL PRODUCT AND RELATIVE EXPENDITURES
FOR CONSUMPTION, INVESTMENT, AND GOVERNMENT
FOR FIRST AND FOURTH QUARTERS OF 1945
BY SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
Quarter
Gross
National
Product
(Y)
Personal
Consump
tion Ex
penditures
(C)
Private
Domestic
Invest
ment
(V
Net
Foreign
Invest
ment
(If)
Govern
ment
Expend
itures
(G)
I 221.2 117. 4 8.0 -2.7 98.6
IV
197.1
128.4
12.9 . 6 55.2
Dollar
Change
I to IV -24.1 +11.0
+4.9 + 3.3
-43.4
Source: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954) , Selected
Statistics from Table 45. Changes computed.
Columns may not add because of rounding.
21
large Increase In unemployment, less disposable Income, a
lower consumption level, or less demand. However, such
events did not take place. Table II shows that, In spite
of the reduction In government expenditures, a decline of
similar magnatude did not occur in gross national product.
Increases In the level of spending for personal consumption
and Investment served to offset 44 per cent of the decrease
In government spending. During the adjustment period, con
sumption expenditures increased $11.0 billion, or 9•3 per
cent, and investment expenditures increased $8.2 billion,
or 155 per cent.
Change in Savings and Transfers
In order for consumption and Investment to increase
at the same time that government spending and gross national
product were decreasing, funds from other sources had to be
entering the income stream. Table III indicates the impor
tance of the role of savings and transfers during the adjusts
ment period. The decline in the annual rate of saving be
tween the first and fourth quarters of 1945 was $15*4 bil
lion, or 44 per cent. If savings had been maintained at the
first quarter rate as a percentage of disposable personal
income, during the fourth quarter of 19 45 the annual rate of
savings would have been approximately $33.8 billion. In
that event, personal consumption expenditures would have
been reduced to an annual rate of $114 billion. Such a
TABLE III 22
GROSS NATIONAL PRODUCT SHOWING BREAKDOWN BY CLASSES OP
EXPENDITURE INCLUDING NATIONAL INCOME, PERSONAL
INCOME AND DISPOSABLE PERSONAL INCOME
FOR FIRST AND FOURTH QUARTER OF 1945
BY SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
EXPENDITURE
CLASS
1ST
QTR.
1945
4TH
QTR
1945
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
3R0SS NATIONAL PRODUCT 221.2
197.1
24.1
11
Less : Capital Consumption
Allowance 12 .8
10.7
2.1
16
Indirect Business
Taxes 15.0 16 .1 1.1 7
Business Transfer
Payments
.5 .5
Statistical Discrepancy 3.5 3.0
.5 l4"
Plus : Subsidies Less Current
Surplus of Govern
ment Enterprises .6
1.5 .9 150
--
Equals:'Jational Income
189.9
168.2
21.7 11
Less: Corporate Profits
and Inventory Val
uation Adjustment 22. 4 13.2 9.2 4l
Social Insurance
Contribution 5.8
6.3 .5 9
Plus : Covernment Transfer
Payments 3.4 9.9 6.5 191
'let Interest Paid
by Government
3.3
4.1 .8 24
Dividends 4.6 4.8 .2 4
Business Transfer
Payments
.5 .5
EQUALSPersonal Income 173.6 l6a.l
5.5 3
LESS: Personal Taxes
21. 3 20.3
1.0
5
EQUALS:DISPOSABLE PERSONAL
, INCOME 152.3
147.8
4.5
LESS: Personal Savings 34.9 19.5 15.4 ^4t
EQUALSPersonal Consumption
Expenditures 117.4 128.4 11
9
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 195*0, Selected
Statistics from Tables 47 and 49. Changes and
percentages computed.
Columns may not add because of rounding
reduction would have been more in line with the declines
that took place in gross national product, national income,
and disposable personal income, but not in personal consump
tion expenditures. As for transfer payments, government
payments, especially to veterans, rose by $6.5 billion or
167 per cent between the first and fourth quarters of 19^5*
When combined with business transfer payments, the annual
rate reached $10.4 billion in the fourth quarter of 1945.
This high rate of transfer payments amounted to 5*5 per cent
of national income during 19 45-
National Economic Budget
The national economic budget is a series of financial
statements that consider the net position of receipts and
expenditures for consumers, business, foreign investment,
and government. These national income and expenditure ac
counts reflect the changes in decisions to spend or to save
that have evolved from the interaction of aggregate propen
sities and the implementation of various policies.^ These
accounts are useful in the formulation of policy, as well
as in the appraisal of past policies.
Consumption segment. Table IV is a collection of
the accounts that make up the consumption segment of the
^The Economic Report of the President to the Con
gress, January 8, 1947 (New York: Reynal and Hitchcock,
195S), Part II, p. k9.
24
national economic budget. The figures shown are the quar
terly totals converted into annual rates for the first and
fourth quarters of 1945. During this period, disposable
personal income decreased $4.5 billion or 2.9 per cent.
This was probably a reflection of the increase in unemploy
ment, which doubled from 850,000 in the first quarter to
1,756,000 in the fourth quarter. Unemployment, as a per
centage of the total labor force, rose from .017 per cent
to .033 per cent during the same period. However, the $12.6
b.illion decrease in labor income was partially offset by the
significant increase in transfer payments, which rose from
$3.9 billion in the first quarter to $10.4 billion in the
fourth quarter. Consumption expenditures increased, signi
ficantly in durables and moderately in nondurables. The
demand was large for automobiles and household equipment.
The rate of total expenditures for consumption increased
from $117-4 to $128.4 billion between the first and fourth
quarters of 1945* Table IV shows that total spending for
consumption increased in spite of the decline in disposable
personal income. This appears to have been brought about
through a reduction in the rate of savings from $34.9 in the
first quarter of 1945 to $19.5 billion in the fourth quarter
of 1945.
Business segment. The level of business profits de
creased significantly between the first quarter and the
fourth quarter of 1945* Table V shows that, during this
25
TABLE IV
CONSUMPTION SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FIRST AND FOURTH QUARTERS OF 1945 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
I
QTR.
1945
IV
QTR.
1945
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ - + -
RECEIPTS
PERSONAL INCOME 173.6 16b. 1
5-5 3-1
Labor Income
121. 7 109.1
12.6 10.0
Proprietors & Rental Income
36.7 36.7
— — — —
Dividends & Interest
11.3 11.9
. 6
5-3
Transfer Payments
3.9
10. 4
6.5 166.6
Less: Personal Tax & Non
Tax Payments
21. 3 20. 3
1.0 4.6
EQUALS: DISPOSABLE INCOME
152.3 147. 8 4.5 2.9
EXPENDITURES
DURABLE GOODS
7.5 9.6 2.1 28.0
Automobiles & Parts
• 9 1.3
.4
- -1,4.1}
Household Equipment &
Furniture 4.2 5.6 1.4
33.3
Other 2.4
2.7 • 3 12. 5
NONDURABLE GOODS 70. 6 77.1 6.5
9.2
Food 39.6 44.0 4.4 11.1
Clothing and Shoes 16. l
17.1
1.0 6.2
Other
14. 9 16.0 1.1
7.3
SERVICES
39.3 41.7
2.4 6.1
Housing 12.1 12. 8
.7 5.7
Other 27.2
28.9 1.7 6.3
TOTAL EXPENDITURES 117. 4 128. 411.0
9.3
SAVING (RECEIPTS LESS
EXPENDITURES) 34.9
19.5
15.4 44.1
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954), Selected
Statistics from Tables 47 and 49.
Changes and Percentages Computed.
Columns may not add because of rounding.
26
period, undistributed profits declined $6.0 billion or 32
per cent, and total corporate profits declined $9.0 billion
or 39 per cent. This was probably a result of the reduction
in government spending for defense. At the same time as
profits were decreasing domestic gross investment was in
creasing. Significant expenditure increases are shown in
Table V for nonresidential construction and producers' dur
able equipment, which reflect the beginning of the change
over from military production to civilian production. In
ventories, while still in a poor condition relative to de
mand, registered a small upward turn. The change in the net
position of the business segment was the sizable shift from
a $10.7 billion profits surplus in the first quarter of 19^5
to a $0.2 billion investment balance in the fourth quarter
of 19^5* These changes in the business segment suggest that
the process of conversion from military production to ci
vilian production began as soon as the high demand for war
requirements started to subside, and continued strongly dur
ing the period when the rate of government expenditures was
continuously decreasing.
International segment. During 19^5, the decrease in
net foreign investment indicated that the needs of the war
time economy for the exports of foreign nations were de
creasing. The large demand of foreign countries for imports
had not yet materialized. But the trend of the subsequent
27
behavior of foreign trade was indicated by the turn away
from an import surplus for the United States and toward the
export surplus that was to characterize the situation during
the next several years. The change in rate of net foreign
investment was only $0.5 billion between the first and
fourth quarters of 1945.
Government sector. Table VI shows the significant
reduction in the spending of the federal government. The
rate change, from $90.8 billion during the first quarter of
1945 to $46.8 billion during the fourth quarter, amounted to
$44.0 billion or 48 per cent. This decline was a reflection
of the decreased demand for defense. Even at the rate of
$46.8 billion, federal expenditures accounted for 23-7 per
cent of gross national product.
Gross national product. The four segments of the
economy are summarized in Table VII. It Is evident that
there were significant changes among the various segments
of the economy, but the decline in gross national product of
10.9 per cent is not as large as might have been expected.
The decrease in saving plus the Increase In transfer pay
ments served to sustain consumption and promote investment.
This prevented the decline In government spending from hav
ing its full effect on gross national product. From peak to
trough, the adjustment did not Involve a severe depression,
but instead turned out to be a brief turning point in eco
nomic activity as the change was made from war to peace.
28
TABLE V
BUSINESS SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FIRST AND FOURTH QUARTER OF 1945 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS
OF DOLLARS
I
QTR.
1945
IV
QTR.
1945
MOM
CHAM
IN F
IEY
[GE
lATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
RECEIPTS
Corporate Profits
22.9 13.9 9.0
39
Less: Corp. Profits Tax
Liability 12.9
7.8
5.1 39
Dividends 4.6 4.8 .2 4
Equals: Corp. Undivided
Profits 5.4
1.3
4.1 76
Plus: Corp. Consumption
Allowance 12.8
10.7 2.1 16
Less: Corp. Inventory
Valuation Adjust
ment
- .5 - .5 .2 40
EQUALS: UNDISTRIBUTED PRO
FITS AND ADDITION
TO RESERVES
18.7 12.7 6.0 32
DOMESTIC GROSS INVESTMENT
Construction 2.8
5.3 2.5 89
Residential, Nonfarm
.7
1.8 1.1
157
Non Residential 2.1
3.5
1.4 66
Producers' Durable Equipment
6.7 1.7 25
Change in Business
Inventories -1.6 - .8 .8 50
TOTAL DOMESTIC GROSS
INVESTMENT 8.0 12.2 4.2 52
EXCESS OF RECEIPTS
10.7 10.5 9%
EXCESS OF INVESTMENT .2 ,
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954), Selected
Statistics from Tables 47 and 49.
Changes and Percentages Computed.
Columns may not add because of rounding.
29
TABLE VI
GOVERNMENT SECTOR OP NATIONAL ECONOMIC BUDGET
FOR FIRST AND FOURTH QUARTERS OF 1945 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF
DOLLARS
I
QTR.
1945
IV
QTR.
1945
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
CASH RECEIPTS
Federal 44 .0
36.9
4.4 10.0
State and Local
10.9 11.5 . 6
5.5
TOTAL
54.9
51.2 3.8
CASH PAYMENTS
Federal 90.8 ^6.8 44.0 48.0
State and Local 7.8
8.5 .7 8.9
TOTAL 98.6 55.2 43.4 44.0
SURPLUS
DEFICIT
43.7 4.0 39.6 90.6
SOURCES: National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954 ,
Tables 8 and 45.
John M. Firestone. Federal Receipts and Expendi
tures During; Business Cycles, A Study by the Na
tional Bureau of Economic Research (Princeton:
Princeton University Press, I960) Table A-3S
pp. 127-131.
E. Cary Brown. "Federal Fiscal Policy in the
Postwar Period." Postwar Economic Trends in the
United States, Ralph E. Freeman, Editor (New York:
Harper & Brothers, I960), Table I, pp. 142-143.
Changes and Percentages Computed.
Columns may not add because of rounding.
30
TABLE VII
SUMMARY OF NATIONAL ECONOMIC BUDGET INCLUDING ALL
SEGMENTS OF THE ECONOMY FOR THE FIRST AND
FOURTH QUARTERS OF 1945 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS OF
DOLLARS
RECEIPTS,
'
SEGMENT EXPENDITURES I IV
OF OR QUARTER QUARTER
ECONOMY NET POSITION
1945 i945j i
Consumption Receipts
152.3
147. 8
Expenditures
117. *
128. 4
Net Position 3*1.9
19.5
Business Receipts
18. 7 12.7
Expenditures 8.0 12.9
Net Position
10. 7 - .2
Government Receipts
5*1.9
53.2
Expenditures 98.6 55-2
Net Position
-**3-7
- 2.0
International Net Position
- .7
- .2
ADJUSTED
GROSS NATIONAL
PRODUCT 221.2
197-1
SOURCE: Selected Statistics from Tables 8, 45, 47, and 49.
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Columns may not add because of rounding and
adj ustments.
31
Characteristics of Adjustment Period
Between the first and fourth quarters of 1945, cer
tain characteristics of a deflationary nature did appear In
the economy, such as a small rise In unemployment. While
the United States economy during World War II is generally
considered to have been one of full employment, there was
an average of 850,000 unemployed individuals during the
first quarter of 19 45.^ This number of unemployed repre
sented 1.7 per cent of the total civilian labor force. Dur
ing the fourth quarter of 1945, the number of unemployed
rose to 1,756,000 and the percentage increased to 3*3 per
cent. While three per cent may be considered a reasonable
percentage for frictional unemployment, the change neverthe
less was indicative of the period's deflationary trend.
Along with the rise in unemployment, there was a decline In
gross weekly earnings and in average hourly earnings. Be
tween the first and fourth quarters of 19 45, gross weekly
earnings In manufacturing decreased 13*6 per cent, and aver
age hourly earnings decreased 5*3 per cent. There were
other characteristics in the economy that seemed to be of an
^The Census Bureau concept of unemployment is the
number of persons who did no work for pay or profit or in a
family enterprise during a specified calendar week, but who
were reported as looking for work.
Gertrude Bancroft, "Current Unemployment Statistics
of the Census Bureau and Some Alternatives," The Measure and
Behavior of Unemployment CA Report of the National Bureau of
Economic Research. Princeton: Princeton University Press,
1957), p. 64.
32
inflationary nature. Both consumer retail and wholesale
price levels increased slightly during 19^5, tending to in
dicate that purchasing power might be beginning to fall.
The consumer retail price index went up 1.5 per cent and the
wholesale price index went up 0.6 per cent. During the
eight-month period of adjustment, the economy experienced a
contraction in activity that was less severe than had been
generally anticipated. From the peak of the wartime cycle
to the trough of the adjustment, some of the major macro-
economic variables did decrease by considerable amounts.
Consumption and investment expenditures rose, however, and
offset almost half of the decrease in government spending.
Unemployment rose slightly, and wages decreased slightly,
but not by large amounts. Business profits were reduced,
but dividends remained steady and investment increased.
Effective demand for both durables and nondurables was at a
high level. This contradictory set of conditions seems to
indicate that it was more of a period of economic adjustment
than a period of postwar depression. The deflationary as
pects of the period may be ascribed to a deficiency in the
aggregate supply of civilian goods as much as a deficiency
in the aggregate demand for defense production.
II. FISCAL POLICY DURING THE ADJUSTMENT PERIOD
Even before the Employment Act of 19^6, the Truman
Administration assumed the responsibility for using the
fiscal powers of the federal government to work for the
achievement of economic stabilization. Prior to the end of
World War II, some planning had been considered for the ad
justment period.^ When the war ended, the administration
had policy recommendations ready for action by the Congress.
The forecasts of economic activity for the immediate post
war period were a pessimistic mixture of depression and in
flation. Those who expected a depression based their opin
ion on the premise that (1) the labor force would be greatly
increased by demobilization, and (2) the need for workers
would be decreased by the decline in war production.5
This combination was supposed to result in an unemployment
level of eight million persons.^ Those who looked for in
flation based their opinion on the following: (1) the
limited supplies of consumers' durables, (2) the strong de
mand that had been built up during the war, (3) the large
amount of liquid assets in the hands of the public, and (4)
the uncertainty as to the length of the conversion period.
The fiscal policy objectives of the Truman Administration
2 i
Edwin G. Nourse, Economics in the Public Service
(New York: Harcourt, Brace and Company, 1953), P^ 60.
^M. Bronfenbrenner, "Postwar Political Economy: The
President's Reports," The Journal of Political Economy,
56:373, October, 1948.
^John W. Snyder, "Three Keys to Reconversion," New
York Times, October 2, 1945.
34
were to keep prices down and to promote the production of
civilian consumers goods.? The implementation of such
policy objectives was to be accomplished through limited tax
reduction, price controls, and the passage of a full employ
ment act. The administration's policy seemed to take a neu
tral position between the two forcasts of deflation and in
flation. Some tax reduction was advocated to encourage ci
vilian production, but it was to be limited in order to re
strain inflation.8
Federal Tax Policy
Shortly after the surrender of Japan, the Truman Ad
ministration outlined its limited tax reduction program and
recommended repeal of the following: (1) the excess profits
tax, to take effect on January 1, 1946; (2) the 3 per cent
normal income tax; and (3) the excise tax increases Included
in the Revenue Act of 1943, to take effect on July 1, 1946.
The estimated amount of these repealed taxes was set at $5*7
billion.9 Support for this program by the administration
was probably based on an endeavor to promote business expan
sion in the case of the excess profits tax, to foster the
?Annual Report of the Secretary of the Treasury on
the State of the Finances for the Fiscal Year Ended June 30,
19 46, pp. 326-332.
Q
Harry S. Truman, "Message on Reconversion." Con
gressional Record, 91:8505-8516, September 7, 1945*
9Annual Report of the Secretary of the Treasury, op.
clt., p. 338.
canon of equity in the case of the progressive income tax,
and to assist in the maintenance of consumer demand in the
case of excise taxes. The Congress was generally prepared
to consider the enactment of tax reduction legislation as
soon as the war appeared to be drawing to a close. Three
months after the surrender of Germany, the Tax Adjustment
Act of 19^5 was passed to increase the excess profits tax
exemption from $10,000 to $25,000, to take effect on January
1, 19 46. It was estimated that the net loss in revenue
would be only $160 million and that 12,000 small businesses
would no longer be liable for the tax.1® However, the
Japanese surrender signaled renewed consideration of tax
reduction. The Ways and Means Committee of the House of
Representatives started preparation of the first tax reduc
tion bill in thirteen years.
Revenue Act of 1945. As signed by President Truman
on November 8, the Revenue Act of 1945 provided for a larger
reduction in tax receipts than the administration had recom
mended. The act repealed the excess profits tax as of Jan
uary 1, 1946, and reduced the corporate income tax 2 to 4
per cent. The act eliminated the 3 per cent normal tax on
all income over $500, reduced rates in all brackets about 5
per cent, and relieved approximately twelve million tax
^Randolph E. Paul, Taxation in the United States
(Boston: Little, Brown and Company, 195*0 , p. 403.
36
payers of income tax liability. The tax on boats and auto
mobiles was repealed. Veterans of enlisted rank were ex
empted from tax liability on service pay and commissioned
officers were given three years to pay their tax on service
pay. The scheduled automatic increase in social security
taxes was postponed for another year. The net loss in
revenue turned out to be $9 billion annually.^
Federal Expenditure Policy
The expenditure policy of the federal government in
1945 was to reduce spending as quickly as possible to a
level compatible with the peacetime economy. However, fis
cal planners tended to agree that the total spending of the
federal government in the postwar period could not be re
duced to its prewar level. In spite of the large reduction
in expenditures for the armed forces, it appeared that it
would be necessary to maintain a military establishment of
considerable size for the defense of the United States and
the free world. In addition, the federal government had
assumed new financial obligations under the G. I. Bill for
the benefit of returning servicemen. The international
obligations of the United States had been expanded and im
mediate support was needed for the relief and rehabilitation
program of the United Nations. It seemed evident that the
overall magnitude of federal spending was to be reduced
11Ibld., p. 420.
37
because of the end of the conflict; however, the lowest re
sulting level was to be greater than prewar levels due to
new obligations that had developed during the war.
Debt Management Policy
The Truman Administration early pledged itself to a
policy of debt reduction through the creation of surpluses.
Initially the surplus was to be achieved not by a gain in
12
revenue but by a reduction in expenditures. After the
adjustment from war to peace, the administration maintained
that tax rates should not be reduced except to achieve cer
tain reforms in the tax system. The Treasury Department
continued to subscribe to a policy of low interest rates and
supported prices for government obligations. During the
adjustment period, debt management activity was dominated by
the need for refinancing as large amounts of the war debt
started to mature and as individuals started to convert
their savings bonds into cash. Treasury authorities did
not have many years of experience with the management of a
debt of the postwar size. The concern of Treasury author
ities for the interest cost of the debt and for the confi
dence of the market in government securities is understand
able. The Treasury Department was reluctant to relax its
12
John M. Firestone, Federal Receipts and Expendi
tures During Business Cycles, 187M-1958 (A Study by the
National Bureau of Economic Research. Princeton: Princeton
University Press, I960), p. 70.
38
grip on the cost of borrowing and it seemed to take this
position without sufficient consideration as to the infla
tionary consequences of such a policy.^3
Monetary Policy
There was little change in the operations of the
Federal Reserve System during 19^5. The wartime activities
of the System continued to implement a monetary policy that
involved the support of prices for Treasury obligations and
fostered low rates of interest. Of subsequent significance
was the continued practice of providing additional funds for
securities that were presented for cash at their pegged
prices. The Federal Reserve System suggested the discon
tinuance of the policy of maintaining certain supports , such
as (.1) the 1/2 of 1 per cent rate on banker's acceptances,
(2) the 3/8 of 1 per cent rate on Treasury bills, and (3)
the 7/8 of 1 per cent rate on Treasury certificates . The
Treasury refused to go along and the monetization of the
debt continued. The Federal Reserve System, however, con
tinued to warn about the inflation that was to follow and
noted the large accumulation of liquid assets In the hands
of the public. Table VIII shows the significant change in
13j. s. Fforde, The Federal Reserve System 19**5-19**9
(London: Oxford University Press, 195*0 , p. 129•
1 i j
Milton Friedman and Anna J. Schwartz, A Monetary
History of the United States 1867-1960 (Princeton: Prince-
ton University Press, 196 3), p. 577*
39
TABLE VIII
ESTIMATED LIQUID ASSET HOLDINGS
FOR 1939 AND 1945
BILLIONS OF DOLLARS
CATEGORY
OF
LIQUID ASSET
YEARS
AMOUNT
OF IN
CREASE
PERCENT
AGE
CHARGE
OF IN
CREASE
1939
Money Supply 36.2
102.3
66.1
183
Time Deposits
15.3
30.1 14.8
97
Savings and Loan Shares 4.1 7.4
3.3
80
Mutual Savings Deposits
10.5 15.3
4.8 46
Credit Union Shares .2 .4 .2 100
Postal Savings Deposits
1.3 2.9
1.6
123
Policy Reserves in Life
Insurance Companies 25.8
38.7 12.9 50
U. S. Savings Bonds 2.0
42.9 40.9 2045
TOTAL 95.4 240 .0 144 .6 152
SOURCE: John G. Gurley, "Liquidity and Financial Institu
tions in the Postwar Period," Study of Employment,
Growth, and Price Levels. Joint Economic Committee
Study Paper No. (Washington: Government Print
ing Office, I960) Table 1, p. 5.
40
liquid assets that had taken place during the war. Every
category, both in the hands of individuals and business,
increased, for an overall change of 152 per cent. The role
of these liquid assets in a market of high demand and insuf
ficient supply was pointed out by the Federal Reserve System
as the instrument of inflation.^
Direct Controls
The administration advocated the retention of con
trols. However, between August and November of 1945, the
Congress revoked controls on the use of raw material, on
food, gasoline, and wages. The legislative branch was pro
bably prompted into this early action on direct controls
because of (.1) the gloomy forecast of some economic analysts
and government officials that there might be another depres
sion, (2) the tendency to find such controls inconsistent
with the American system of free enterprise, and (3) the
demands of labor unions relative to the lifting of wage
ceilings.
III. FISCAL POLICY OUTCOME
The fiscal policy recommendations of the Truman
Administration for the adjustment period were (1) an expend
iture policy of reduced government spending, (2) a tax
policy of limited reduction, and (3) a debt management
■^Federal Reserve Bulletin, October, 1945, p. 987.
41
policy of large reductions through the creation of surpluses.
These recommendations were the core of an economic policy
that advocated price stability through the use of some di
rect controls and large increases in the production of ci
vilian goods and services. These policy recommendations
were based on the assumption of a healthy postwar economy,
free of depression, and capable of making a fast-moving
transition from war to peace.
Influence on Incentives
It was assumed by many analysts that, during the
adjustment period, war production would slow down, stop,
and then be followed by idle plants and unemployment. This
line of thinking was the cause of great concern because of
the possibility of a slow change-over to the production of
civilian goods and services. The administration and the
Congress were anxious to have businessmen undertake the
broadest possible and most expeditious transition from war
to peace in order to build up the aggregate supply of items
for the private sector of the economy. A part of the justi
fication for the Revenue Act of 1945 was to provide busi
nessmen with the incentive to get into the production of
civilian goods and services on the basis that they would be
able to retain a much larger proportion of their profits.
The most significant parts of the Revenue Act of 1945 seem
to have been the repeal of the excess profits tax in its
42
entirety, and the reduction in the corporate tax rate. The
result of these two provisions proved to be an effective
incentive for business to invest and expand. For a firm
with large profits, the excess profits tax had imposed a
marginal tax rate of 85.5 per cent; with the repeal of the
excess profits tax, the marginal rate was reduced to 40 per
cent. The effect of this change meant that if a firm had
made $10 million in profits, repeal of the excess profits
tax permitted the company to retain $6 million instead of
$1,450,000. The result was a fourfold increase in net earn
ings. In addition, the Revenue Act of 1945 provided that
losses incurred during 1946 could be carried back against
two years of wartime profits for purposes of establishing
excess profits tax liability. The effect of this provision
was to reduce a company’s 1946 risk margin to 14.5 per cent
of any possible loss.1^ The tax relief provided by the
Revenue Act of 1945 did not take effect until 1946. While
it is probable that the law had announcement effects on the
actions of business and individuals during the last two
months of 19 45, the real influence on the economy did not
take place during the adjustment period but during the in
flationary period that followed. In view of the subsequent
inflation, the question arises as to the need for tax relief
^A. E. Holmans, United States Fiscal Policy 1945-
1959 (London: Oxford University Press, 196l), p. 51.
43
in 19 45 as a means of encouraging businessmen to expedite
the changeover to civilian production. Since gross private
domestic investment doubled between the first and fourth
quarters of 1945, it seems that businessmen's expectations
for profits must have been good without the added incentive
of tax reduction.
Effects on Capacity, Resource
Allocation, and Stability
Fiscal policy during the adjustment period had little
effect on the capacity of the economy to perform the func
tions of producing, saving, investing, and consuming. Busi
ness investment and consumption expenditures increased sub
stantially during 19 45. This was in part the result of a
sizable resevoir of liquid savings and the willingness of
individuals to spend a large portion of their accumulated
savings. The large reduction in the expenditures of the
federal government resulted in a considerable shift in the
allocation of resources. In 1944, almost half of the na
tional output went to the federal government; by the fourth
quarter of 1945, it had been reduced to one quarter and the
trend was toward greater reduction. The Truman Administra
tion, during the adjustment period, was anxious to stimulate
the activities of the private sector of the economy and to
minimize as much as possible the activities of the public
sector of the economy. During the adjustment period, the
general direction of spending by the federal government was
44
down. The expenditure level was directed toward the prewar
rate of spending and was to stop short only by a sufficient
amount required to take care of the new commitments con
nected with the war and the postwar period. An expenditure
policy for the federal government that might have maintained
the wartime level of spending during the adjustment period
does not seem to have been given any consideration. Since
federal spending was to be curtailed by such a large amount,
the large effect of such a policy on gross national product
was readily apparent. However, this decline in government
spending was offset in part by the rapid growth of domestic
investment and the strength of consumption expenditures:
The result was a change in position by some economic ana
lysts who had previously maintained that the prewar stagna
tionist secular trend of the economy would be soon renewed
in the postwar period.17
Adjustment Period Interval
In the knowledge that the private sector of the eco
nomy would have to play a much larger role In the economy’s
activities, fiscal policy planners felt a considerable con
cern over the length of the adjustment period. If the pe
riod turned out to be of very long duration, the possibility
l^MIlton Friedman, A Theory of the Consumption Func
tion (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1957), p. 237-
45
of postwar depression became very real. It was evident that
shortages would develop because new production could not
possibly satisfy the backlog of consumer demand. That these
shortages would lead to price inflation was also evident.
Economic Growth and National Income
During 19 45, the growth in gross national product was
reversed for the first time since 1933*^® Between the first
to the fourth quarter of 19 45, the level of real gross na
tional product fell 11.3 per cent. During the same period,
the per capita gross national product fell 14.9 per cent.^9
There is little douht that it was not the lack of demand
that kept gross national product from growing. It would
seem that gross national product might have remained steady
or even increased if there had not been a short supply of
inventories of civilian goods. National income decreased 11
per cent between the first and fourth quarters of 19 45.
Personal income fell only 3 per cent because transfer pay
ments made up two-thirds of the loss in corporate profits.
An analysis of private payrolls during the adjustment period
shows that the loss was $2,958 billion and that total
1 f i
National Income Supplement to Survey of Current
Business (Washington: U. S. Government Printing Office,
1954), Table 40, p. 216-217.
^Ibid. , p. 25.
H6
payments to the unemployed covered only 6 per cent of the
2 0
loss. Since personal taxes remained steady during the ad
justment period, It Is possible that disposable personal In
come might not have decreased at all If government action
had chosen to make up all of the private payroll deficiency.
Since It was generally felt by the members of Congress that
taxes should be reduced in 19^5* the questions to be re
solved were (1) the amount of the reduction and (2) the dis
tribution of the reduction.The problem was to apportion
tax reduction so as to provide the best climate for consump
tion and employment. The Revenue Act of 19^5 removed 12
million'persons in the lower income group from tax rolls.
Such action on the part of the Congress seems to indicate
that consideration had been given to the economic aspects
of tax reduction.
Price Level
Of the various Congressional actions, the removal of
controls seems to have been most perverse to the admini
stration's overall economic policies. Shortages were in
evitable and those controls had been in effect for several
years. Adherence to the principle of free enterprise was
probably not the only reason for the lifting of controls.
?n
^Daniel Creamer, Personal Income During Business
Cycles (A Study by the National Bureau of Economic Re
search. Princeton: Princeton University Press, 1956),
Table 30, P* 99.
2lRandolph E. Paul, Taxation For Prosperity Indian
apolis: Bobbs-Merrill Company, 19^7)» p^ I83.
47
It appears that political expediency played its part in in
fluencing the Congress to act In response to the wish of
many individuals for tax relief and freedom from controls.
With continued controls over materials, food, gasoline and
especially wages, the economy might have maintained reason
able price stability. Without controls, there was little
to restrain the surge in consumer spending from causing
prices to rise. Especially as shoratges developed and as
the production of some consumer durables was slow in reach
ing higher rates. As a stop-gap measure to hold back infla
tion until the economy had made the adjustment from war to
peace, direct controls might have served a useful purpose.
Prelude to Inflation
The importance of fiscal policy during the adjustment
period does not lie as much In the results of action between
February and October of 1945, as in the effects of these
actions over the next several years. The adjustment period
was not a deflation in the sense of an excess of aggregate
supply over aggregate demand. The adjustment period was
really a prelude to inflation. Actually, there was an ex
cess of aggregate demand over aggregate supply. The problem
of the adjustment period was the conversion of demand and
supply from goods and services connected with war to goods
and.services connected with a peacetime economy. The defla
tionary character of the decrease in defense expenditures
was soon replaced by the expansionary period of postwar
inflation.
CHAPTER III
ANALYSIS OF ECONOMIC CONDITIONS DURING
INFLATION— 19 45-19 48
Inflation was one of the principal domestic problems
of the Truman Administration. Following the short period
of adjustment, the expansion phase of the next business
cycle began in October of 1945.^ The subsequent period of
thirty-seven months was characterized by almost full employ
ment, excess demand, great liquidity, and a high level of
investment. Of real significance in relation to Inflation
was the rise in consumer retail and wholesale prices.
While the administration resolutely set Its course to pre
vent the occurrence in the United States of the kind of In
flation that had taken place in Germany after World War I,
the end result was an Inflationary rise of considerable
magnitude.
I. BEHAVIOR OF THE ECONOMY— 1945-1948
Decline of Government Sector
Table IX indicates that all of the macroeconomic var
iables of the national income increased significantly during
"^Geoffrey H. Moore, Business Cycle Indicators (A
Study by the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1961), p. 670.
48
49
TABLE IX
GROSS NATIONAL PRODUCT AND RELATIVE EXPENDITURES
FOR CONSUMPTION, INVESTMENT, AND GOVERNMENT
FOR FOURTH QUARTER OF 1945 AND FOURTH
QUARTER OF 1948 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
QUARTER
GROSS
NATIONAL
PRODUCT
(Y)
PERSONAL
CONSUMP
TION EX
PENDITURES
(C)
PRIVATE
DOMESTIC
INVEST
MENT
(Id)
NET
FOREIGN
INVEST
MENT
(If)
GOVERN
MENT
EXPEND
ITURES
(G)
IV
1945 197.1
128. 4
12. 9
.6 55.2
IV
1948 264.0 180.1 42. 4
1.3 40.2
Dollar
Change + 66.9 + 51.7 + 29.5 + .7 -15.0
SOURCE: Selected Statistics from Table 45 National Income
Supplement to Survey of Current Business, U. S.
Department of Commerce, 1954.
Changes from Fourth Quarter of 1945 to Fourth
Quarter of 1948 Computed.
Columns may not add because of rounding
50
the 1945 to 19^8 period with the single exception of govern
ment expenditures. Gross national product rose 34 per cent,
consumption 40 per cent, and investment increased 224 per
cent. The government sector of the economy decreased, but
only by 27 per cent. While the fall in government spending
was important, of greater significance was this reduced ex
penditure level as a proportion of national income. In the
fourth quarter of 19 45, total government spending accounted
for 28 per cent of gross national product. In the fourth
quarter of 19 48, government spending was down to only 15 per
cent of gross national product. The pattern of government
spending in relation to gross national income ran hetween
12 and 15 per cent from the second quarter of 1946 through
the fourth quarter of 19 48. This steady relationship re
presented the level of government spending after its decline
from the high wartime peak of 46.6 per cent during the first
quarter of 19 43-
Changes in Constant and Current Dollars
Table X shows the breakdown of gross national product
by expenditure classes as of the fourth quarter of 1945 and
as of the fourth quarter of 1948. The percentage changes in
most of the major classifications show Increases of approxi
mately 30 per cent. It is Important to recognize that price
Inflation had a considerable Influence on these statistics.
As an aid In analyzing the effect of rising prices, the
TABLE X
51
GROSS NATIONAL PRODUCT SHOWING BREAKDOWN BY CLASSES OP
EXPENDITURE INCLUDING NATIONAL INCOME, PERSONAL
INCOME, AND DISPOSABLE PERSONAL INCOME
FOR FOURTH QUARTER OF 1945 AND FOURTH
QUARTER OF 1948 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
4th
QTR.
1945
4th
QTR.
1948
MOIS
CHAt
IN F
rEY
rGE
(ATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
GROSS NATIONAL PRODUCT
197.1
264.0
66.9 34
LESS: Capital Consumption
Allowance
10.7 17.3
6.6 62
Indirect Business
Taxes 16.1
20.9
4.8 30
Business Transfer
Payments
.5
.8
.3
60
Statistical Discrepant 3.0- 2.0
5.0
166
PLUS: Subsidies Less Current
Surplus of Govern
ment Enterprises
1.5
0
1.5 100
EQUALS: NATIONAL INCOME 168.2
227.1 5B.9 35
LESS: Corporate Profits and
Inventory Valuation
Adjustment 13.2
31.7 18.5
140
Social Insurance
Contribution
6.3 5.3
1.0 16
PLUS: Government Transfer
Payments 9.9 9.9
Net Interest Paid by
Government 4.1
4.5
.4 10
Dividends ¥.8 7.6 2.8 58
Business Transfer
Payments .5 .8
.3
60
EQUALS: PERSONAL INCOME 168.1212.8 44.7 27
LESS: Personal Taxes
20.3
20.4 .1
— —
EQUALS: DISPOSABLE PERSONAL
INCOME 147.8192.4 44.6 30
LESS: Personal Savings 19.5 12.3 7.2
37
EQUALS: PERSONAL CONSUMPTION
EXPENDITURES 128.4180.1
51.7
40
SOURCE: Selected Statistics from Tables 47 and 49 National
Income Supplement to Survey of Current Business,
U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
52
Office of Business Statistics has revised some of the data
for the period under consideration by dividing the current
dollar estimates by appropriate price indexes based on a
selected year being equal to 100.^ A comparison of the cur
rent dollar and constant 1947 dollar estimates is shown in
Table XI. The advantage of using constant dollar data is
that the influence of current prices is removed. A review
of the percentage changes in Table XI indicates that there
are considerable differences between the values computed
from current dollars and those computed from constant dol
lars. The constant dollar percentages are generally less
than those based on current dollars because the effect of
price changes on dollar valuations has been removed. The
change in consumption during the expansion phase of the
cycle was 40 per cent In current dollars and 11 per cent in
constant dollars. For investment, it was 223 per cent in
current dollars and 174 per cent in constant dollars. Gov
ernment expenditures fell 27 per cent in current dollars but
47 per cent In constant dollars. When the sum of these
national macroeconomic variables are compared, the rise of
34 per cent in gross national product in current dollars Is
reduced to only 3 per cent in constant dollars. The con
stant dollar changes serve to underscore the decline in the
2
National Income Supplement to the Survey of Current
Business (Washington: U"! ST Government Printing Office,
1954), Table 40, pp. 216-217.
53
TABLE XI
UNITED STATES GROSS NATIONAL PRODUCT SHOWING BREAKDOWN
FOR CONSUMPTION, INVESTMENT, AND GOVERNMENT FOR
FOURTH QUARTER OF 1945 AND FOURTH QUARTER OF
1948 IN BILLIONS OF CURRENT AND CONSTANT
1947 DOLLARS CHANGES AND
PERCENTAGES INDICATED
QUARTER
AND
YEAR CATEGORY
CONSUMP
TION
(C)
INVEST
MENT
(I)
GOVERN
MENT
(G)
GROSS
NATIONAL
PRODUCT
(Y)
Current Dollars 128. 4
13.5
55.2
197.1
IV Implicit Deflator 83. 8 89.2
76.9
81.2
1945 Constant 1947
Dollars 153.2
15.1
71. 8
242. 7
Current Dollars 180.1
43.7
4o. 2 264.0
IV Implicit Deflator
105.7
105.6
104.9 105.5
1948 Constant 1947
Dollars 170. 4 41.4
38.3
250. 2
Change
in
Dollars
Current Dollars + 17.2 + 26. 3
- 33.5 + 7.5
Constant Dollars + 17.2
+ 26.3 - 33.5 + 7.5
Percent
"Current Dollars + 40
+ 223 - 27
+ 34
age
Change
Constant Dollars + 11 + 174 - 47
+ 3
SOURCE: Selected Statistics from Tables 40 and 45 of Nation
al Income Supplement to the Survey of Current Busi
ness, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
54
purchasing power of the dollar during the postwar inflation.
If the constant dollar changes were considered to be real
istic appraisals of the increase or decrease in the national
Income components, it might be inferred that the consumption
change was Inflated by 263 per cent, investment by 28 per
cent, government deflated by 43 per cent, and gross national
product inflated by 1033 per cent. Such inferences would
not be correct measures of the inflation. The empirical
evidence has shown that there is an upward bias in the price
Indexes as they are prepared by governmental agencies.^ One
of the principal problems in price indexes Is the segrega
tion of the true price increase from the improvement in
quality. Therefore, while discussion of the inflation dur
ing 19 45-1948 is generally considered in terms of current
dollars, It is necessary to be aware that constant dollar
comparisons are usually of much smaller magnitude.
II. INFLATIONARY CHARACTERISTICS
The 1945-19 48 period may be described as one of pro
nounced inflationary properties. The magnitudes and
strengths of these characteristics make the period stand
out as a classical example of inflation, when prices rise
^Richard and Nancy D. Ruggles. "Prices, Costs, De
mand, and Output in the United States, 1947-57." The Rela
tionship of Prices to Economic Stability and Growth. Com
pendium of Papers Submitted by Panelists Appearing before
the Joint Economic Committee, 85th Congress, 2nd Session
(Washington: United States Printing Office, 1958), p. 299-
55
because of a high level of aggregate demand and an Insuffi
cient aggregate supply.
Approach of Full Employment
One of the reasons for Inflation was that the economy
was close to full employment during this particular period.
In Tabel XII the level of unemployment is shown as a per
centage of the total labor force beginning with the fourth
quarter of 1945 and ending with the fourth quarter of 1948.
Unemployment ranged from 2.7 per cent to 4.3 per cent during
this period. The average percentage for the period was a
little more than 3 per cent and this Is generally accepted
as a reasonable estimate of frictional unemployment.^
Therefore, it is appropriate to describe the 1945-1948 pe
riod as one of full employment.5
Rise of Aggregate Demand
Aggregate demand relates the level of money spending
by all buyers to the level of employment.^ The connecting
^John P. Lewis. Business Conditions Analysis (New
York: McGraw-Hill Book Company, 1959), p^ 110.
"The notion that public expenditures should be under
taken for no purpose other than providing maximum employment
was strongly challenged early In the postwar period.
Arthur Smithies, "Full Employment in a Free Society,"
The American Economic Review, 35:358, June, 1945.
^Paul Davidson and Eugene Smolensky, Aggregate Supply
and Demand Analysis (New York: Harper and Row,1964), p. 27.
56
TABLE XII
UNEMPLOYMENT IN THE UNITED STATES AS A PERCENTAGE
OF THE TOTAL LABOR FORCE ON A QUARTERLY
BASIS FROM THE FOURTH QUARTER OF 1945
TO THE FOURTH QUARTER OF 1948
-
YEARS
QUARTERS
1945 1946 1947 1948
I 4.2
3-9 3.9
II
3.9 3.6
2.7
III 3.4 3.4
3.1
IV 2.8
3.3
2.6
2.7
SOURCE: Survey of Current Business » Department of Commerce.
57
link in this relationship is the price level, which is a
function of the money-wage rate and the marginal product of
labor. Changes in the price level are directly proportional
to the marginal product of labor. When there is a rise in
aggregate demand and the economy is close to full employ
ment, the effective demand for labor will tend to bring
about a small change in employment and a large increase in
money wages.
Increase in Money Wages
As the economy approaches or arrives at full employ
ment, there is a tendency for trade unions to grow stronger,
for employers to become less resistant to wage increases,
and for the wage level to rise faster. In November 19^5,
180,000 workers in General Motors Corporation plants went
on strike, asking for a 30 per cent increase in wages. The
113 day strike set the pattern of 18 1/2 cents per hour for
the first round of postwar wage increases. When price con
trols were lifted as of June 30, 19^6, the rise in prices
Q
generally cancelled the wage increases. The result was a
second round of wage increases during the latter part of
19^6. As prices continued to rise, a third round was fought
7
Gardner Ackley, Macroeconomic Theory (New York:
The Macmillan Company, 1961), p. 381.
O
Joseph G. Raybach, A History of American Labor (New
York: The MacMillan Company^ 1959), p. 393•
58
during the winter and spring of 1947-1948. From January,
1945, to June, 19*18, wages increased 1*1 per cent while
9
prices rose more than twice that amount.
Ascent of Price Levels
As money wages increase, the tendency is for prices
to follow because the additional cost in production is usu
ally in the short run passed on to the consumer. The rise
in the Department of Labor's price indexes for consumer re
tail and wholesale prices is shown by the data in Table
XIII. Between the fourth quarter of 19*15 and the fourth
quarter of 19*18, the consumer price index rose 36 per cent,
and the wholesale price index rose 55 per cent.
Limited Productivity
Basically, the 19*15-19*18 inflation was a continua
tion of the situation brought about by World War II. The
aggregate demand for consumption, investment, exports, and
for use by the government exceeded the total output. The
inflation was slowed down during the adjustment at the end
of the war, but for only a short period of eight months.
Beginning in the fourth quarter of 19*15, each segment of
the economy tried to buy more goods and services than the
g
By combining the cost of living and productivity in
to one formula, the General Motors-United Automobile Workers
wage agreement of May, 19*18, seemed to provide the basis
for a pattern of continued inflation.
Calvin B. Hoover, "Keynes and the Economic System,"
The Journal of Political Economy, 56:402, October, 1948.
59
TABLE XIII
CONSUMER RETAIL AND WHOLESALE PRICE INDEXES
ON A QUARTERLY BASIS FOR THE YEARS
19^5 THROUGH 19^8
1< 345 1946
1947 1948
RETAIL
WHOLE
SALE RETAIL
WHOLE
SALE RETAIL
WHOLE
SALE RETAIL
WHOLE
SALE
1st
QUARTER
126.9 105.2
129.9 107.9 154.3 145.7 167.7 162. 7
2nd
QUARTER 128.1 106.0 132.0 110.9
156. 4 147. 6
170. 5
164. 3
3rd
QUARTER 129. 2
105.7 143.7 125.9 160. 8
153.9 174. 2
168.9
4th
QUARTER 129.4 106.6 151. 4 138. 3 165.2 160. 4
172.9 163. 8
SOURCE: United States Department of Labor
Consumer Retail (1935-1939 = 100)
Wholesale (1926 - 100)
60
full-employment level of the economy could provide. This
effective demand was so great that requests for higher
money wages could be met by inclusion in the price of the
additional cost of labor in its entirety. Such action was
taken without jeopardizing sales. Output of real gross pro
duct decreased 1.5 per cent from 1944 to 1945 and an addi
tional 4.3 per cent from 1945 to 1946. During 1947, the
level of output turned up again and in 1948 it reached the
same level as in 1944.10 In spite of the increase in the
money value of gross national product beginning in 1946,
the physical volume of goods did not rise in a correspond
ing fashion. The strength of effective demand for the
limited output of goods and services provided the surge in
spending by the private sector of the economy that gave
rise to the period's inflationary characteristics.
III. THE NATIONAL ECONOMIC BUDGET
The expansion phase of the first postwar cycle began
In October of 1945 and continued until November of 1948.
In considering the changes in the economy during this
thirty-seven month period, a comparison Is made of the na
tional income and expenditure accounts for the fourth quar
ter of 1945 and the fourth quarter of 1948.
10
John W. Kendrick, Productivity Trends in the
United States (A Study by the National Bureau of Economic
Research. Princeton: Princeton University Press, 1961) ,
Table A-XXII, pp. 333-335.
Consumption Segment
The status of the economy's consumption segment dur
ing selected periods is shown in Table XIV.
Demand for durables. After the war demand was high
for consumers' durable goods, particularly automobiles,
which had not been available for several years. Sales of
consumers' durables rose as rapidly as expanding production
permitted. Table XIV Indicates that the rise in the rate
of such expenditures was $12.7 billion, or 132 per cent.
In spite of this more than doubled expenditure for consum
ers' durables, It was not until 1948 that the level approxi
mated the 1939 relationship of 10 per cent of disposable
income."'"^ The backlog of deferred demand for some goods,
particularly automobiles, rose steadily: in 1939, spending
for automobiles was 3 per cent of disposable Income; in the
fourth quarter of 1945, it was less than 1 per cent; in the
fourth quarter of 1948, It had reached 4 per cent. Demand
was also high for electrical appliances. The percentage of
wired homes having refrigerators increased 10 per cent dur
ing the inflationary period, vacuum cleaners 4 per cent,
12
and electric washers 8 per cent. This increased buying
seemed to be a reflection of the higher levels of disposable
11Robert Aaron Gordon, Business Fluctuations (second
edition; New York: Harper and Row, 1961), p• 435•
12
Annual Report of the President to the Congress,
January 1957, Appendix D.
62
TABLE XIV
CONSUMPTION SEGMENT OP NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTERS OF 1945 AND 1948 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
IV
QTR.
1945
IV
QTR.
1948
MO]
CHA1
IN
NTEY
STGE
RATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
RECEIPTS
PERSONAL INCOME 168.1 212.8
44.7
26.6
Labor Income
109.1 139.4
30.3
27.8
Proprietors & Rental
Income
36.7
45.8
9.1
OO
•
CM
Dividends & Interest
11.9 16 .9 5.0 42.0
Transfer Payments 10.4
10.7 .3 2.9
Less: Personal Tax & Non
Tax Payments
20.3
20.4 .1 .5
EQUALS: DISPOSABLE INCOME 147.8 192.4 44.6 30.2
EXPENDITURES
DURABLE GOODS 9.6
22.3 12.7 132.3
Automobiles & Parts
1.3
7.8
6.5
500.0
Household Equipment &
Furniture 5.6 11.2 5.6 100.0
Other
2.7 3-3
. 6 22.2
NONDURABLE GOODS
77.1 99.4
22.3 28.9
Food 44.0
57.5 13.5 30.7
Clothing and Shoes 17.1
20.0
2.9 16 .9
Other 16 .0
21.9 5.9 36.9
SERVICES
41.7
58.4
16.7
40.0
Housing 12 .8
18.3 5.5
43.0
Other
28.9
To.i 11.2 38.8
TOTAL EXPENDITURES 128. 4 180 .1
51.7 40.3
SAVING (RECEIPTS LESS
EXPENDITURES)
19.4
12.3 7.1 36.9
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954), Selected
Statistics from Tables 47 and 49.
Changes and Percentages Computed.
Columns may not add because of rounding.
63
personal Income Inasmuch as there was a stable relationship
between these two variables during the 1945-1948 period.^
Demand for nondurables. The rapid rise In expendi
tures for durable goods was not as surprising as was the
similar rise in the demand for nondurable goods. Table XIV
points out that, beginning in the fourth quarter of 1945,
consumption of nondurables rose $22.3 billion by the fourth
quarter of 1948, a rise of 28.9 per cent. During the
fourth quarter of 1945, spending for nondurable consumption
was 52 per cent of the disposable income level of $147.8
billion: during the fourth quarter of 1948, consumption
was 52 per cent of the disposable income of $192.4 billion.
This Increased consumption of nondurable goods was the
result of several factors present in the economy. First,
there was the large amount of accumulated liquid assets.
Not only was the stock of liquid assets more than twice as
large as it had been before the war, but it continued to
grow during the inflationary period. Table XV shows that
it increased 8 per cent from 1945 to 1946, 5 per cent from
1946 to 1947, and 2 per cent from 1947 to 1948. While the
growth pattern was tapering off, liquid assets nevertheless
grew 15 per cent during the 1945-1948 period. Second,
there was a change in the distribution of income in favor
13
Lewis, op. cit. , p. 457.
of the lower Income groups, thereby tending to raise the
overall propensity to consume the Investigation of income
distribution shows that. The lowest fifth of the population
gained 21 per cent in its share of family personal income
between 1941 and 1947.^ Several different studies have
indicated that the average propensity to consume ranges be
tween 89 and 92 per cent of income.^ Third, there was a
higher standard of living as reflected by the greater con
sumption of food in the postwar period. In 1939, food con
sumption amounted to $19.2 billion; in 1945, it was $41.6
billion, or an increase of 117 per cent; in 1946, it was
$48.8 billion; in 1947, it was $54.2 billion; and in 1948,
it was $57.3 billion.1^ Based on per capita food consump
tion, the percentage increase was 103 per cent between 1939
and 1945, 12 per cent between 1945 and 1946, 9 per cent be
tween 1946 and 1947, and 4 per cent between 1947 and 1948.
14
Selma Goldsmith, "Size Distribution of Income
The Mid-Thirties," Review of Economics and Statistics,
Tables 4 and 9, 36:1-32, February, 1954.
Selma Goldsmith. "Size Distribution of Personal
Income," Survey of Current Business, April, 1958, Table 3.
15
Raymond W. Goldsmith, A Study of Saving in the
United States (A Study by the National Bureau of Economic
Research. Princeton: Princeton University Press, 1956),
Part III, pp. 182-183.
^ National Income Supplement to the Survey of Cur
rent Business, op. clt., Table 51, pp. 236-237.
65
TABLE XV
ESTIMATED LIQUID ASSET HOLDING IN THE
UNITED STATES FOR THE YEARS 1945
THROUGH 1948 IN BILLIONS
OF DOLLARS
CATEGORY
OF
LIQUID ASSET
YEARS
1945
1946
1947
1948
Money Supply
102. 3
110.0 113-6 111. 6
Time Deposits 30.1 33.8 35.2 35- 8
Savings and Loan Shares 7.4
8.5 9.8 11. 0
Mutual Savings Deposits
15.3 16.9 17- 8
18.4
Credit Union Shares . 4 . 4
.5
.6
Postal Savings Deposits
2.9 3.3
3-4
3.3
Policy Reserves in Life
Insurance Companies
38.7
41. 7 44.9
48.2
U. S. Savings Bonds
42. 9
44.2 46.2 47.8
TOTAL 240.0 258. 8 271. 4
276. 7
SOURCE: John G. Gurley, "Liquidity and Financial Institu
tions in the Postwar Periods," Study of Employment,
Growth, and Price Levels. Joint Economic Com
mittee Study Paper No. 14 (Washington: Government
Printing Office, I960) Table I, p. 5.
Columns may not add because of rounding.
66
Rising propensity to spend. Table XIV indicates
that, between the fourth quarter of 1945 and the fourth
quarter of 1948, personal spending for consumption goods
and services rose from an annual rate of $128.4 billion to
$180.1 billion, an increase of $51.7 billion, or 40 per
cent. This was nearly as much as the change in gross na
tional product, which increased $66.9 billion, or 34 per
cent. Part of the reason for the rise in consumption spend
ing lay in the large increase in current disposable personal
income plus accumulated liquid assets that had been saved
during the war. The annual rate of disposable personal in
come rose 109 per cent from prewar 1939 to midwar 1944.
The postwar rise from the fourth quarter of 1945 to the
fourth quarter of 1948 was an additional 30 per cent.
Declining propensity to save. As war production di
minished and more consumption goods became available, the
propensity to save decreased. Table XIV points out that,
as of the fourth quarter of 1945, the annual rate of saving
was 14 per cent of disposable personal income. By the
fourth quarter of 1948, the rate of saving was 7 per cent.
This decrease in the rate of saving contributed to the
forces of inflation because consumers demanded more of the
economy's output of goods and services In competition with
the other sectors of the economy.
67
Business Segment
The condition of the business segment of the economy
has been summarized in Table XVI.
Residential building. In his first economic report,
President Truman cited the need for one million housing
starts during 19^7.^ Table XVI points out the large in
crease in the construction of residential buildings. From
the fourth quarter of 19**5 to the fourth quarter of 19^8,
this activity increased from a $1.8 billion rate to a $8.3
billion rate, an increase of 361 per cent. This signifi
cant change was the result of several factors. First, the
rate of housing construction during the depression and the
war had been relatively low. From 1929 through 1938, the
average annual rate of expenditures in residential, nonfarm
construction was $1.5^ billion; from 1939 through 19^5, the
average was $1.93 billion. But for the years 19^5 through
19^8, the average rate of expenditures jumped to $6.3 bil-
18
lion. The low rates of residential construction from
1929 to 19*15 had helped to bring about the large housing re
quirement In the postwar period when demand was intensified
17
Economic Report of the President to the Congress,
January 87 19^7 (New York: Reynal and Hitchcock, 19^8),
Part II, p. 33.
18
National Income Supplement to the Survey of Current
Business, op. cit., Table 2, pp. 162-163.
68
TABLE XVI
BUSINESS SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTERS OF 1945 AND 1948 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
IV
QTR.
1945
IV
QTR
1948
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ - + -
RECEIPTS
Corporate Profits
13-9
31.6
17. 7
127. 3
Less: Corp. Profits Tax
Liability 7.8
12. 0
12.0 4.2
Dividends 4.8 7.6 2.8
58.3
Equals: Corp. Undivided
Profits
1.3
12. 0
10. 7 823.1
Plus: Corp. Consumption
Allowance 10. 7
17.3
6.6
61. 7
Less: Corp. Inventory Val
uation Adjustment
- .7
.2
.9 128. 6
EQUALS:UNDISTRIBUTED PROFITS
AND ADDITION TO
RESERVES
12. 7 29. 1 16. 4
129.1
DOMESTIC GROSS INVESTMENT
Construction
5.3
18. 0
12. 7 239. 6
Residential, Nonfarm 1.8 8.3 6.5
361.1
Non Residential
3-5 9.7
6.2
177.1
Producers' Durable Equipment 8.4 19. 6 11.1 132.1
Change In Business Inven
tories - .8
4.9
5*7
712.5
TOTAL DOMESTIC GROSS
INVESTMENT
12. 9
42. 4
29.5
228.6
EXCESS OF INVESTMENT .2 13.1 6550.0
SOURCE: Selected Statistics from Tables 47 and 49 National
Income Supplement to Survey of Current Business,
U. S. Department of Commerce , 1954\
Changes and Percentages Computed.
Columns may not add because of rounding.
69
by demobilization of millions of home-seeking veterans and
expansion of the private sector of the economy. Second,
the high degree of correlation between the business cycle
and personal income was evidenced by the fact that the level
of income had risen during the war years and continued to
19
rise in the postwar period. Personal income had amounted
to $72.9 billion in 1939 and by 19^5, it had more than dou
bled to $171-2 billion. This rising trend continued to
$178.0 billion in 19^6, $190.5 billion in 19^7, and $208.7
billion in 19^8. Since tax rates did not increase in the
postwar period, a similar increase took place in disposable
personal income, thereby providing considerable funds for
the pruchase of new homes. Third, the increase in the rate
of housing starts was in part a reflection of the avail
ability of an ample supply of consumer credit. Table XVII
shows that total consumer credit moved steadily upward and
more than doubled during the inflationary period. As of
the fourth quarter of 19^8, total consumer credit reached
$15.5 billion, representing the largest expansion of con-
20
sumer credit that the United States had ever experienced.
19
Daniel Creamer, Personal Income During Business
Cycles (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1956), p. 110.
20
Paul Studenski and Herman E. Krooss, Financial
History of the United States (New York: McGraw-Hill Book
Company, 19&3), p. 4fc)l.
70
TABLE XVII
TOTAL CONSUMER CREDIT IN THE UNITED STATES
ON A QUARTERLY BASIS FOR THE YEARS
19^6 THROUGH 194 8 IN
BILLIONS OF DOLLARS
QUARTERS YEARS
1946
1947
1948
I 6.6 10.0 13-2
II 7.6
10. 9 13*9
III
8.3 11.5 14. 5
IV 9.5 12. 7 15.5
SOURCE: Federal Reserve Bulletin
71
Producers' durables. Entrepreneurs, In search of
profits, committed large sums for Investment In producers'
durables. Table XVI indicates that investments of this
category climbed from the $8.4 billion rate in the fourth
quarter of 1945 to the $19.5 billion rate in the fourth
quarter of 1948, an increase of 132 per cent. The first
reason for the increase in the investment of producers' dur
ables was the postwar backlog of needs for the replacement
21
and modernization of equipment. In terms of constant
1947 dollars, investments in producers' durables during
P P
1947 were 170 per cent greater than during 1939* After
fifteen years of depression and wartime restriction, a high
rate of investment in new equipment was needed to recon
struct the consumer goods productive facilities of the eco
nomy that had become highly unbalanced as a result of war
production. Another reason for the increased investment in
producers' durables was the availability of funds. Prom
1941 through 1945, undistributed corporate income averaged
2 ^
$5.0 billion per annum. 0 This accumulation of liquid
21
The Midyear Economic Report of the President to the
Congress, July 21, 1947 (New York: Harcourt, Brace and
Company, 1949), Part II, p. 79-
22
The Economic Report of the President to the Con
gress, January 14, 19^48 (New York: Harcourt, Brace and
Company, 1949), Part II, p. 194.
2 3
National Income Supplement to the Survey of Cur
rent Business, op. cit. , Table 22, pp. 192-193.
72
assets, plus the availability of loans from commercial
banks, provided a large amount of readily available funds
for support of the postwar investment programs.
Business inventories. The postwar inflation was sup
ported also by the desire to build up business inventories,
an investment designed to fill the pipe lines between pro-
24
ducer and consumer. Inadequate supplies of durable goods
was common during most of the 1945-1948 period. Although
the restocking of nondurables was substantially completed
early in 1947, throughout the period the overall ratios of
2S
inventories to sales remained below the prewar levels.
Domestic private Investment. The 1945-1948 period
was characterized by a willingness and a capacity to commit
large sums for purposes of Investment. Table XVI shows that
from the fourth quarter of 1945 to the fourth quarter of
1948, domestic private investment rose from an annual rate
of $12.2 billion to $42.4 billion, an Increase of 229 per
cent. During this same period, the rate of new orders for
2 4
Thomas M. Stanback, Jr., Postwar Cycles in Manu
facturers* Inventories (A Study by the National Bureau of
Economic Research. Princeton: Princeton University Press,
1962) , p. 12.
25
The Midyear Economic Report of the President to
the Congress, July 21, 19^7, op. cit., p. 139".
73
2 6
durable goods Increased 141 per cent, and housing starts
27
rose 217 per cent. The number of new corporations In
creased 31 per cent from the fourth quarter of 1945 to the
P f t
fourth quarter of 1946. During the years 1945 through
1948, the average annual number of new corporations was
29
94,642. 7 These investment rates Indicate the measure of
confidence held by businessmen that profits would be good
in the postwar inflationary period.
Government Sector
The changes that took place within the government
sector of the economy between the fourth quarter of 1945
and the fourth quarter of 1948 are shown in Table XVIII.
Federal spending. Between the fourth quarter of
1945 and the fourth quarter of 1948, the rate of spending
by the federal government decreased 50 per cent. The level
of expenditures, on an annual basis, decreased 51 per cent
from 1945 to 1946, which may be considered to be the dif
ference between spending for war and for the postwar eco
nomy. Between 1946 and 1947 the rate of spending decreased
2 6
Geoffrey H. Moore, Basic Data on Cyclical Indica
tors (Vol. II of Business Cycle Indicators. A Study by the
National Bureau of Economic Research. Princeton: Prince
ton University Press, 1961), p. 80.
27Ibid., p. 82. 28Ibld. . p. 92. 29Ibid.
74
only 6 per cent, tending to indicate that a stable level
had been reached. Then between 1947 and 1948, the rate of
spending decreased 11 per cent. The wartime spending of
the federal government could not be reduced overnight. It
took months, and in some cases years, to cancel the con
tracts, reduce the armed forces, and achieve a peacetime
30
level of governmental operations. The postwar level,
even in 1948, was still more than twice what it had been
in 1939-
Federal revenue. Federal receipts had grown 144 per
cent between 1940 and 1944.^ About one-half of the 1944
receipts came from the individual income tax and about one-
quarter from the corporate income tax. From October of
1945 to November of 1948, personal income rose 23.6 per
32
cent. During the same period, corporate income before
taxes, rose 72.6 per cent. In spite of tax reductions in
1945 and 1948, the postwar tax base was broad enough to
^John M. Firestone, Federal Receipts and Expendi
tures During Business Cycles, 1879-1958 (A Study by the
National Bureau of Economic Research Princeton: Princeton
University Press, i960), p. 70.
31
Morris A. Copeland, Trends in Government Financing
(A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1961), Table 45,
p. 148.
32
Creamer, op. cit., Table 15, p. 56.
33
National Income Supplement to the Survey of Cur
rent Business, op. cit., Table 18. pp. 184-185.
75
maintain steady revenues at a relatively high level, when
compared with the prewar period. Table XVIII shows that
from the fourth quarter of 1945 to the fourth quarter of
1948, federal receipts actually increased in rate. On an
annual basis, federal revenues did not deviate from the
average more than five per cent during the four year per
iod beginning in 19 45.
Federal surpluses. The federal gross debt stood
at $279.2 billion in February, 1946. By use of the gen
eral fund cash balance, which had been built up by the
Eighth War Loan, the debt was reduced to $258. * 1 billion
In June, 1946; during the first half of 1947, the surplus
from receipts over expenditures amounted to $754 million;
during the second half of 1947, it was $1.75 billion; In
the first four months of 1948, an additional surplus of
$6 million was accumulated and the debt was reduced $4.7
billion.34 This record underscores the early success of
the Truman AdministratIon1s debt-management program that
called for reduction of the debt, while maintaining
government credit, and paying low interest rates. By
first using the $20 billion from the last war loan, and
then the excess of receipts over expenditures, the Truman
Administration was able to effect a reduction In the
federal debt in the amount of $26.3 billion between its
3^Charles C. Abbott, The Federal Debt (New York:
The Twentieth Century Fund, 1953) » PP • 46-*l8.
76
TABLE XVIII
GOVERNMENT SECTOR OP NATIONAL ECONOMIC BUDGET
FOR FOURTH QUARTERS OF 1945 AND 1948 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF
DOLLARS
IV
QTR.
1945
IV
QTR.
1948
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+
— + —
CASH RECEIPTS
Federal 39.6 42.2 2.6 6.5
State and Local
11.5 17.1 5.6
48.7
TOTAL 51.2
59.3
8.1 15. 8
CASH PAYMENTS
Federal 46.8 23.4 23.4 50.0
State and Local
8.5
16..8
8.3 97-6
TOTAL 55.2 40.2 15.0
27.1
SURPLUS
19.1 23.2 565.8
DEFICIT '4.1
SOURCES: National Income Supplement to Survey of Current
Bu slness, U. S. Department of Commerce, 1954,
Tables and 45.
John M. Firestone. Federal Receipts and Expendi
tures During Business Cycles, a Study by the
National Bureau of Economic Research (Princeton:
Princeton University Press, I960) Table A-3,
pp. 127-131.
E. Cary Brown. "Federal Fiscal Policy in the
Postwar Period." Postwar Economic Trends in the
United States , Ralph E. Freeman, Editor (New
York: Harper & Brothers, I960), Table 1, pp.
142-143.
Columns may not add because of rounding.
postwar high point and December of 1948.^5
Government sector. It is evident that the govern
ment sector, which had grown so fast after 1939, did not
return to its prewar levels after World War II was over.
Federal spending was $36 billion in 1946, $30 billion in
1947, and $35 billion in 1948. The three year average dur
ing 1946-1948 was $34 billion, which was 100 per cent high
er than the 19 39 level. In terms of influence, the govern
ment sector was firmly established in a position that would
profoundly affect the whole economy.3^
International Segment
The position of the United States in relation to the
international segment of the economy during the 1945-1948
period is shown in Table XIX. In considering that portion
of gross national product that is derived from abroad, it
is necessary to take into account not only exports and im
ports, but also the net production abroad that is credited
to the United States, and the net amount of gifts and con
tributions received from abroad. The net change in Inter
national assets and liabilities arising out of the flow of
goods and services, factor Incomes, and cash gifts and
^Charles C. Abbott, The Federal Debt (New York:
The Twentieth Century Fund, 1953), PP. 46-48.
^ Federal Reserve Bulletin, June, 1950, p. 716.
3^The Economic Report of the President to the Con
gress, January 8, 1947* op. cit.. p. 2%~.
78
contributions is summarized as net foreign investment.
Table XIX shows the behavior of this segment of gross na
tional product for the years 19*15 through 1948. While the
change in annual rate, as measured from the first quarter
of 1945 to the fourth quarter of 1948, is only $4.0 billion,
the change in annual rate from the first quarter of 1945 to
the third quarter of 1947 is $12.5 billion. The pattern of
demand shows beginning in the second half of 1945, a rising
level through 1946 and to the third quarter of 1947, fol
lowed by a sharp decline so that the annual rate in the
third quarter of 1948 was the same as that of the fourth
quarter of 1945.
Demand for exports. Shortly after the end of World
War II, an intense demand developed for goods that were
available only, or chiefly, ir the United States. The
value of exports reached the annual rate of $15.3 billion
in 1946, an increase of 275 per cent over the prewar
37
level. Table XX shows that the value of exports reached
an annual rate of $19.8 billion in 1947, and that the ex
port surplus rose to the rate of $12.5 billion during the
second quarter of that year. This high demand for United
States exports was a reflection of (1) the need for recon
struction of war-devastated areas, especially in Europe;
(2) the fact that the industrial plants of many foreign
37Ibid., p. 27.
79
TABLE XIX
INTERNATIONAL SEGMENT OF NATIONAL ECONOMIC BUDGET
ON A QUARTERLY BASIS FOR THE YEARS 1945 THROUGH
19 48 AS EVIDENCED BY NET FOREIGN INVESTMENT
BY MEANS OF SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
NET
FOREIGN
INVESTMENT YEAR QUARTER
II
III - 1.0
IV
II
III
IV
II
III
IV
II
III
IV
SOURCE: Survey of Current Business, U. S. Department of
Commerce, 1954.
80
TABLE XX
UNITED STATES EXPORTS AND IMPORTS OF GOODS AND SERVICES
ON A QUARTERLY BASIS FOR THE YEARS 1946 THROUGH 1948
AS EVIDENCED BY SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
YEAR QUARTER EXPORTS IMPORTS
EXPORT
SURPLUS
1946 I 14. 3 7.2
7.1
1946 II 16. 4 6.5 9.9
1946 III 15.0
7.1 7.9
1946 IV 15.3
7.6
7.7
1947 I
19.3
8.1 11.2
1947 II 21.1 8.6
12.5
19^7
III 19. 2
8.3 10. 9
1947 IV 19. 4
8.9 10.5
1948 I 17. 8 10.0 7.8
1948 II
16.9
10.4
6.5
1948 III
15.9 10.7
5.2
1948 IV 16.6 10. 0 6. 6
SOURCE: U. S. Department of Commerce
Columns may not add because of rounding.
nations were at very low capacity; and (3) the inflation
abroad that made prices in the United States appear to be
favorable.
Financing foreign purchases. Not only were foreign
countries anxious to buy our exports, but the United States
also was willing to finance these urgently-needed purchases.
More than half of the exports was financed by aid and loans
extended by the United States government. Foreign gold
stocks had been quickly exhausted and dollar credits had
been considerably reduced. During 1946, the annual rate of
financing reached $8.2 billion;^ and during 1947, the an-
OQ
nual rate of financing rose to $11.4 billion.
Accentuating scarcity. The foreign demand for United
States exports was concentrated in food, steel, and some
other items that were also in the greatest demand domesti
cally. However, by 1948 the productive capacity of many
foreign countries had improved enough so that the annual
rate of United States export surplus was reduced by $3.0
billion.^ From 1947 to 1948, merchandise exports fell 18
o Q
The Midyear Economic Report of the President to
the Congress, July 21, 1947, op. cit., Table VI, p. 104.
39
The Economic Report of the President to the Con
gress, January 14, 1948, op. cit., Table 5« p. 2W.
40
The Economic Report of the President to the Con
gress, January 7. 19^~9 (New York: Harcourt, Brace and Com
pany, 1949), Part I, p. 23.
82
per cent in dollar volume, and, by the fourth quarter of
19^8, the export surplus of the United States was at the
same level as It had been during the first quarter of 19^6.
Since at no time during the 19^5-19^8 period did exports
exceed 5 per cent of gross national product, the export sur
plus served to accentuate the scarcity of some Items, to
improve conditions in certain kinds of manufacturing, but
did not fundamentally effect the total economy.
The National Budget
The income and expenditures for consumers, busi
nesses, government, and net foreign investment are combined
in Table XXI.
Effect of World War II
The National Economic Budget for the 19^5-19^8 period
is a reflection of the significant effect of World War II
on the economy of the United States. The economy was
transformed from one of substantial unemployment and moder
ate production to one of almost full employment and high
production. In 19^6 the level of gross national produce
was almost equal to the highest war year of 19^4, and It
was twice as great as the last prewar year of 1939. Even
when consideration Is given to the rising level of prices,
the economy had been Influenced to a considerable degree
by the requirements of World War II.
83
TABLE XXI
SUMMARY OF NATIONAL ECONOMIC BUDGET INCLUDING ALL
SEGMENTS OF THE ECONOMY FOR THE FOURTH QUARTERS
OF 1945 AND 1948 AS EVIDENCED BY SEASONALLY
ADJUSTED QUARTERLY TOTALS AT ANNUAL RATES
IN BILLIONS OF DOLLARS
SEGMENT
OF
ECONOMY
RECEIPTS
EXPENDITURES
OR
NET POSITION
IV
QUARTER
1945
IV
QUARTER
1948
MO
CHA
IN
NEY
NGE
PATE
PERCENTAGE
CHANGE
IN RATE.
+ + -
Consumption Receipts 147.8 192.4 44.6 30.1
Expenditures 12^.4 l80.1
51.7
40.2
Net Position
19.5
12.3 l.'c
36.9
Business Receipts 12.7 29.1 16.4
129.1
Expenditures 12.9
42.4
29.5
228.6
Net Position - .2
-13.3 13.1
6650.0
Government Receipts 51.2
59.3
8". 1 15.8
Expenditures 55.2 40.2 15.c 27.1
Net Position - 4.1
19.1
23.2 565.8
Interna
tional Net Foreign
Investment .6
1.3 .7
116.6
ADJUSTED
GROSS
NATIONAL
PRODUCT 197.1
264 .0
66.9 33.9
SOURCE: Selected statistics from Tables 8, 45, 47, and 49.
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Columns may not add because of rounding.
84
Rise of Investment
While the 1945-1948 period saw a large increase in
consumption expenditures, the rise in investment was rela
tively about twice as large. The great surges in invest
ment did not all occur simultaneously: the demand for pro
ducers' durables increased very rapidly during the first
half of 1947; the rate of increase in inventories rose
strongly in the second half of 1947. During the 1945-1948
period gross private domestic investment showed the largest
percentage increase of all the macroeconomic variables.
The Influence of Inflation
An analysis of fiscal policy during the administra
tion of Harry S. Truman turns around the effects of the
postwar inflation. The administration was committed by the
Employment Act of 1946 to direct itself toward the maximi
zation of employment, production, purchasing power, and a
stable value of money. The postwar situation of almost full
employment all but eliminated the need for action directed
toward increasing the proportion of employed workers within
the total civilian labor force. Production was being car
ried out at a maximum rate to meet the high demand with the
largest possible supply. Therefore, maximum purchasing
power and the stable value of money became the foremost
problems for the administration to resolve. The degree to
which the inflationary surge was contained largely deter
mined the success or failure of the Truman Administration
85
in economic affairs. The responsibility involved the re
cognition of the inflationary force, the forecast of the
results upon the economy through lack of action, the recom
mendations for remedial action, the successful passage of
the proper legislation through the Congress, and the effec
tive implementation of fiscal policy actions designed to
thwart the inflationary force.
CHAPTER IV
ANALYSIS OF FISCAL POLICY DURING
INFLATION— 1945-19^8
The Truman Administration declared that Inflation
was Its most important short-run economic problem. During
the 1945-1948 period the administration in general main
tained an anti-inflationary position and gave almost con
tinuous support to the maintenance of existing tax rates,
the reduction of federal spending, and the accumulation of
surpluses for debt reduction. The conflict of the admini
stration's position with the aims of the 80th Congress re
sulted in a fiscal policy that fell short of effective eco
nomic stabilization, especially in the matter of a stable
value of money.
I. EMPLOYMENT ACT OF 1946
The Full Employment Ideal
A bill that would commit the federal government to
the maintenance of a high level of employment was Intro
duced In the United States Senate on January 22, 1945.
After the end of World War II, the passage of such a law
became a matter of primary consideration, especially among
those members of Congress who expected a postwar depression.
President Truman called for the passage of such an act when
86
87
he sent his first message to the Congress on postwar legis
lative recommendations on September 6, 1945.^ The Congress
considered the bill with mixed feelings: in general, there
was conservative opposition to underwriting full employment
with deficit spending on the one hand, and liberal support
for federal responsibility to insure against another Great
Depression on the other hand. The result was compromise of
a type that failed to satisfy either side completely. The
final wording of the act is an attempt to satisfy some leg
islators who did not want the federal government to support
those who were willing and able to work, and to assure
other legislators that the federal government would not
fail to take some action in those periods when the activity
of the private sector of the economy was failing to main
tain adequate employment and income. The most significant
statement in the act is the following policy declaration:
The Congress hereby declares that it is the continu
ing policy and responsibility of the federal government
to use all practicable means consistent with its needs
and obligations and other essential considerations of
national policy, with the assistance and cooperation of
industry, agriculture, labor, and State and local gov
ernments, to coordinate and utilize all its plans, func
tions, and resources for the purpose of creating and
maintaining, in a manner calculated to foster and pro
mote free competitive enterprise and the general wel
fare, conditions under which there will be afforded use
ful employment opportunities, including self employment,
for those able, willing, and seeking to work, and to
^Congressional Record, 79th Congress, 1st Session,
December 1^7 1945, p. 12267.
88
promote maximum employment, production, and purchasing
power.^
Machinery for Economic Analysis
The Employment Act was passed with the expectation
that (1) national economic goals could be defined, and (2)
a system could be put together that would facilitate the
accomplishment of such goals. The definition of goals was
supposed to be contained in the Economic Reports of the
President, which were to be transmitted to the Congress at
the beginning of each regular session. The reports were
expected to be economic road maps, showing the present po
sition of the economy, and laying out a route for the eco
nomy to follow. The Congress was required to have a Joint
Committee, made up of seven members from each House, whose
function was to be the continuous study and periodic report
ing on the matters contained in the President’s Economic
Reports. The work of the Joint Committee was to serve as a
guide for the Congress in its subsequent actions relative
to fiscal and economic policies.
Nature of Governmental Planning
The importance of the Employment Act as an economic
document lies in the foundation it seemed to establish for
coordinated economic planning on the part of the federal
^Public Law 304, 79th Congress, 2nd Session. Section
2.
89
government. Its basic approach seemed to subscribe to the
Keynesian premise that (1) if consumption and investment
are reduced, national income will fall; (2) if national in
come falls, it can be raised again through increases in
consumption and investment; and (3) if the private sector
cannot accomplish such increases, the government can be the
means of achieving such changes. The program of the Em
ployment Act called for the maintenance of full employment
through governmental spending and Investment.
Means of Achieving Results
The Employment Act made the federal government res
ponsible for avoiding depressions and maintaining prosper
ity. However, such goals were not to be achieved automati
cally through the enactment of the law. The President
pointed out that the well-being of the economy continued to
depend on the adoption of needed policies that were tai-
Z j
lored to the changing conditions of the economy. The
principal means of achieving the goals established in the
Employment Act continued to be the Congressional enactments
of discretionary policy instruments. By itself, the act
did not provide any specific measures for achieving full
employment.
3
Stephen K. Bailey, Congress Makes a Law (New York:
Columbia University Press, 1950), p. IW.
H
Economic Report of the President to the Congress,
January 7, 1949 (New York: Harcourt, Brace and Company,
1949) , p. xvii.
90
Postwar Confidence
As a tangible expression of the federal government's
commitment to stabilization, the Employment Act proved to be
one of the major factors that promoted confidence during the
postwar period. A common belief developed that another de
pression was not very probable because the federal govern
ment would somehow prevent its occurrence.5 However, many
who were interested in the avoidance of depression lost
sight of the fact that price stability might be a goal of
equal importance. The postwar confidence that there would
not be another period like the 1930's seemed to obscure the
fact that inflation could erase the gains that might result
if the economy were operating at close to full employment.
Inflationary Bias
It has been pointed out that the Employment Act may
have injected a secular inflationary bias into the govern
ment's approach to cyclical stabilization affairs.^ This
contention has been based on the rationale that there would
be a tendency for fiscal planners to overstate the need for
greater aggregate demand in periods of deflation, and to
understate the need to absorb purchasing power in periods
^Ralph E. Freeman, "Postwar Monetary Policy," Post
war Economic Trends in the United States. Ralph E. Freeman,
editor (New York: Harper & Brothers, 19^60), p. 59.
6
Wilfred Lewis, Jr., Federal Fiscal Policy In the
Postwar Recessions (Washington: The Brookings Institution,
195277 p. 312.----
91
of Inflation. The members of Congress also seem to prefer
to consider antirecession programs, rather than anti-in
flation programs. The Employment Act, while not constitut
ing an endorsement of inflation, nevertheless was more of
an antirecession measure than an anti-inflation measure.
In its advocacy of maximum employment, the act seemed to
assume that fiscal policy might call for Increases in
spending, which would possibly be financed by deficits and
which might tend to encourage the economy to take an in
flationary course.
An Indeterminate Solution
The Employment Act was an Important step in a long
series of actions taken to make the federal government an
agency for the control of cyclical fluctuations. While the
act did not mention fiscal policy specifically, the under
standing was that the federal government would direct its
fiscal policy toward the achievement of stabilization.
However, in spite of the fact that the problem was legis
latively recognized, the act did not provide the kind of
objectives that could be easily defined or sought, and it
did not provide machinery for the implementation of fiscal
policy that did not depend on Congressional discretion.
II. THE COUNCIL OF ECONOMIC ADVISERS
Council1s Role
The Council was established as an agency to aid the
President in the analysis of economic conditions, the inter-
pretation of trends or movements in the macroeconomic vari
ables, and in the formulation of national economic policy.
As it has turned out, the Council is but one of a large
group of governmental agencies that sometimes work indepen
dently and sometimes together on various aspects of eco
nomic analysis and policy formation. The Council’s chang
ing role has been largely determined by its various chair-
7
men. In general, two alternative roles have been deve
loped: one has been to present data and to offer economic
policies; the other has been to use value judgments and to
prepare recommendations for economic policy. In one case,
the Council is only analytical; in the other case, it is
advisory. The analytical approach has been associated with
the first chairman, Edwin G. Nourse; the advisory approach
has been associated with Leon H. Keyserling, the second
chairman.
The Nourse Council
During the 19^6-19^8 period, the chairman of the
Council was Edwin G. Nourse. By means of a literal inter
pretation of the Employment Act, Chairman Nourse considered
Q
the Council to be an analytical staff, with its function
7
E. Ray Canterbery, The President's Council of Eco
nomic Advisers (New York: Exposition Press, 1961), p. 23
8Ibid., p. 18.
centered in the research necessary for presenting to the
President a detailed description of the condition of the
economy. The Nourse attitude may be described as one of
academic objectivity. During this period, the Council was
beset with internal disagreement over the attitudes of the
members concerning agreement with the President on matters
of economic policy, the issuance of reports to the public,
and testimony before Congressional committees. President
Truman did not resolve these matters and Nourse resigned as
of November 1, 19^9. The Truman Administration chose to
regard the Employment Act as an instrument that committed
the federal government to such actions as were deemed neces-
Q
sary to maintain a healthy economy. This broad approach
served to make the ambiguous objectives of the Employment
Act even broader when they were taken up in the early
Economic Reports of the President.
The broad approach. In accordance with the require
ments of the Employment Act, the Council prepared economic
reports for the President, beginning in January of 19^7.
The early reports were not limited to matters of employment,
production, and purchasing' power alone. In the January,
19^7 report, the administration presented long-range recom
mendations that might be described as components of a
a
The Economic Report of the President to the Con
gress, January 8, 1947 (New York: Reyna1 and Hltchock,
19^8), Part II, p. 8.
94
program concerned with economic welfare in a very broad
sense. Some of the aspects dealt with were the techno
logical revolution in farming, the development of chroni
cally depressed areas, federal participation in research
and development, the promotion of public health nutrition
and education, the extension of social security, housing
and foreign aid, the problems of transportation, and urban
redevelopment. Because of this broad approach, the Council
did not do the kind of planning for the mitigation of busi-
ness-cycle fluctuations that had seemed to be the intent of
the Employment Act. Specific recommendations about maximum
employment, production, and purchasing power were lost in a
larger program involving the national economic policy.11
Tax policy stand. The early reports of the Council
under Nourse advocated the maintenance of current tax rates
based upon the premise that a surplus of revenues over ex
penditures would be the best way to meet inflation. This
stand was firmly expressed in the first economic report,
and with somewhat less emphasis in the other reports of the
1945-1948 period.12
11
Robert A. Gordon, Business Fluctuations (New York:
Harper and Brothers, 1952), p. 601.
12
Economic Report, January 8, 1947 , op. cit. , Part
II, p. 34; Midyear Economic Report, July 21, 1947» op. cit. ,
Part II, p.Tlj and Economic Report, January l4, 19^o, op.
cit., Part II, p. 122.
95
Position on Inflation. The early reports were not
entirely consistent in their treatment of inflation. The
dangers of inflation were mentioned generally in the first
report, and in the mid-year report of July 21, 1947 , the
11
Council noted that prices were leveling off. J However, in
1948 the Council stated that inflationary pressures were a
14
major threat to economic stability. While the timing of
economic prognosis may be in error, the early reports have
been criticized for changing their position on the infla
tionary dangers: the favorable consideration of such fac
tors as consumer demand, exports, and easy credit in the
1947 report was changed to concern eighteen months later
ic
because of the contribution of these factors to inflation.
The reports prepared by the Council of Economic Advisers
during 1947 and 1948 reflected a genuine concern about in
flation. However, they indicated that it was difficult for
the Council to determine the strength and direction of the
inflationary force. The first report seemed to register
11
Economic Report, January 8, 1947, op. cit. , Part
II, p. 10: Midyear Economic Report, July 21, 1947 , op. cit.,
Part II, p.“S9l--------------- ------------ ------ -----
14
Economic Report, January 14, 1948, op. cit. , Part
II, p. 163.
15
Frank W. Fetter, "The Economic Reports of the
President and the Problem of Inflation," Readings in Fiscal
Policy, Arthur Smithies and J. Keith Butters, editors
(Homewood: Richard D. Irwin, Inc., 1955)* p. 172.
96
some concern for postwar deflation by citing the need for
public works as a favorable factor in the economic situa
tion.'1 '^ In spite of the fact that prices stopped rising in
the spring of 19^7, the midyear report of that year seemed
to overlook the lull in inflation and instead pointed to
17
its continuing strength. The resumption of the price
rise in the second half of 19^7 was recognized in the re-
port of January, 19^8. Then, with prices declining just
before the 19^9 recession, the Council declared that the
situation in July of 19^8 was dominated by new strength in
19
the inflationary spiral. On an overall basis, the Coun
cil's determination of the economy's inflationary character
was correct: its estimate of the strength, and its fore
cast as to the course of inflation fell short of the most
desirable prognosis upon which to base fiscal policy legis
lation.
16
The Economic Report, January 8, 19^7, op. cit.,
Part II, p. 30.
17
The Midyear Economic Report, July 21, 19^7, op.
cit. , Part II, p. 85.
18
The Economic Report, January 14, 19^8, op. cit.,
Part II, p^ 158.
19
The Midyear Economic Report of the President to
the Congress, July 30« 19^8 (New York: Harcourt, Brace and
Company7 1949), Part II, p. 29^.
III. FEDERAL FISCAL POLICY— 1945-19^8
97
While the Council of Economic Advisers made recom
mendations to the President and assisted in the preparation
of the Economic Report, it did not formulate national fis
cal policy, nor did the President. In the areas of expen
diture and taxation, it is the Congress that actually
established what the fiscal policy will be. Only in the
area of debt management does the President exercise some
measure of personal control through his Secretary of the
Treasury. But even here, the control is somewhat limited
by Congressional enactments relative to debt ceilings and
interest rates. Federal fiscal policy is the result of the
interactions of administration recommendations, congres
sional expenditure and tax enactments, Treasury management
of the debt, and the concomitant influences of monetary
policy as carried out by the Federal Reserve System.
Tax Policy
The tax policy evoked a wide divergence of opinion
between the Truman Administration and the 80th Congress.
The Truman Administration opposed any tax cuts after its
approval of the Revenue Act of 19^5, which had been passed
to help offset the deflationary effect of the end of the
war. From the beginning of 19^6, inflation became the im
mediate problem and the administration’s method of attack
was the maintenance of existing tax rates, the decrease of
98
expenditures, and debt reduction. The Congress, on the
contrary, favored significant reductions in the level of
federal expenditures and, consequently, lower taxes. The
Republican campaign during the elections of November, 19*16,
promised a reduction of 20 per cent in the personal income
tax liability and the Republicans won majorities in both
Houses of Congress.
Continuation of excise tax rates. The Revenue Act
of 19*13 had been set up on the basis that the higher rates
of excise taxes were to expire six months after the end of
the war. Since the war officially ended on January 1, 19*17,
the automatic expiration date was July 1, 19*17. The Truman
Administration recommended chat the higher rates be con
tinued for another year in order to (1) prevent a $1.5
billion tax reduction in an inflationary period, and (2)
refrain from piecemeal reduction until all excise tax rates
could be reviewed and revised. The Republican majority was
more desirous of reducing the direct income tax than the
indirect excise tax. Because it was apparent that both
taxes could not be reduced without incurring a deficit, the
Congress passed a bill to continue the excise tax rates at
20
their current levels without any time limit. The bill
was signed by President Truman on March 11, 19*17.
20A. E. Holmans, United States Fiscal Policy 19*15-
1959 (London: Oxford University Press, 19^1), p. 62.
99
Congressional moves for tax reduction. As soon as
the 80th Congress convened in January, 1947, the Republican
majority started to take action to fulfill its campaign
promises for tax reduction. Without considering the politi
cal reasons, the economic support for such action was based
mostly on the need (1) to increase the supply of venture
capital, and (2) to increase incentives for managerial ef-
21
fort and investment. The Knutsen Tax Bill, referred to as
H. R. 1, was vetoed by President Truman on June 16, 1947
and the Congress failed to override the veto. A second tax
reduction bill, referred to as H. R. 3950, was quickly in
troduced and was likewise vetoed by the President on July
18, 1947.
The administration’s proposal. As soon as the second
session of the 80th Congress convened, the Republican ma
jority started its third attempt at reduction of individual
income taxes. The administration’s counter proposal was
contained in the State of the Union message delivered on
2 2
January 7, 1948. As further explained in the Economic
Report delivered one week later, the administration's re
commendation was designed to foster stability in a period
21Ibid., p. 63-69.
2 2
Congressional Record, 80th Congress, 2nd Session,
Vol. XCIV, pp. 34-38.
100
23
of inflation. To help low-income receivers, the Presi
dent proposed a tax reduction of $40 for each taxpayer and
each dependent, but, in order to maintain the current level
of receipts, sought to regain the revenue lost from the per
sonal income tax through increased taxes on corporate ex
cess profits. The rationale behind this proposal was to
help the low-income group that had suffered most by the
inflationary rise in prices, and to maintain total revenue
collections by taxing the extraordinarily high profits of
corporations. It was, in short, to be a redistribution of
24
the tax burden.
Congressional reasoning. The Congress, meeting in
early 1948, felt confident that the expansionary phase of
the postwar business cycle would continue its upward climb
inasmuch as the macroeconomic variables were continuing to
rise on a quarterly basis. Inflation was the recognized
national economic problem and the Congressional endorsement
of tax reduction was supported on the basis that it was
part of the anti-inflationary policy. The Ways and Means
Committee of the House of Representatives maintained that
tax reduction would lead to increases in investment and
2 3
Economic Report, January 14 , 1948, op. cit., Part
II, p. 16TI
2 4
Holmans, op. cit. , p. 88.
101
25
production. The greater incentive resulting from lower
taxes was supposed to lead to greater aggregate supply and
thereby close the inflationary gap. The success of such an
approach was dependent upon aggregate supply increasing
more than enough to offset the additional disposable per
sonal income to be derived from (1) greater production and
(2) the reduction in taxes.
Revenue Act of 1948. The third attempt by the Repub
lican majority to reduce the personal income tax was con
tained in H. R. 4790. The bill was introduced on December
18, 1947. Its major provisions were as follows: (1) to
increase the individual exemption from $500 to $600, (2)
to reduce tax liability 30 per cent on taxable income less
than $1000, (3) to reduce tax liability 20-30 per cent on
taxable income between $1000 and $1400, (A) to reduce tax
liability 20 per cent on taxable income between $1400 and
$4000, (5) to reduce tax liability 20 per cent on the first
$4000 of taxable income greater than $4000, (6) to reduce
tax liability 10 per cent on all income over $4000 where
the taxable income was greater than $1000, (7) to permit
married persons to split their incomes for computation of
tax liability, (8) to provide an additional exemption of
25
United States House of Representatives, Committee
on Ways and Means, Report to Accompany the Revenue Act of
1948, Report No. 1274, January 27, 1948.
102
$600 for persons more than 65 years of age, (9) to permit
Income splitting for computation of the liability under
estate and gift taxes, and (10) to increase the existing
deduction for the blind from $500 to $600. The administra
tion’s disapproval of tax reduction was in vain. During
the hearings, the administration pointed out that 6,300,000
taxpayers would be freed of income tax liability; that
revenue would be decreased $2.0 billion just through the
changes in exemptions; that the splitting of incomes for
tax purposes would decrease revenue by $0.8 billion; that
the total revenue loss from both the income and estate
taxes would be $6.3 billion; and that 37 per cent of the
tax relief would go the wealthiest 4 per cent of the tax-
2 6
payers. The Knutsen bill, H. R. 4790, was passed by
overwhelming majorities in both Houses of the Congress.
Again President Truman vetoed a tax reduction bill, but
this time the Congress overrode the veto. On April 2, H.
R. 4790 became the Revenue Act of 1948.
Expenditure Policy
The decline in the expenditures of the federal gov
ernment was a reflection of two different alms: the first
was to decrease spending for war purposes; the second was
to reverse the upward trend in federal budgets. By far
P 6
Randolph E. Paul, Taxation in the United States
(Boston: Little, Brown and Company, 1954), pp. 482-492.
103
the largest part of total expenditures had been connected
with national security and Its related activities. Table
XXII shows that the percentage of total federal expendi
tures for national security decreased from 98.2 per cent
during the fourth quarter of 19 45, to 70.1 per cent during
the third quarter of 1947. This was a decrease of 28.8
per cent for defense and a similar increase in spending for
other purposes. Between the third quarter of 1947 and the
fourth quarter of 1948, the amount of spending for national
security increased slightly and averaged 74.1 per cent of
total federal spending during the last six quarters of the
1945-1948 period.
The Resulting Surpluses
Deficit spending ended in July of 1946 for the first
time in 16 years. ^ From mid-1946 on, surplus conditions
prevailed until 19 49 . This was the result of maintaining
the tax rates as established in 1945, and reducing federal
expenditures. The cash surplus for the fiscal year ending
June 30, 1947, was $6.8 billion, and for the following year
it was $8.8 billion. The federal budget, after exceeding
$100 billion in fiscal 1945, fell to $63-7 billion in fis
cal '19^6, declined to $42.5 billion in fiscal 1947, and
reached the lowest postwar level of $36.3 billion in fiscal
2 7
'Morris A. Copeland, Trends in Government Financing
(Princeton: Princeton University Press, 196lT, p^ J8T
10 4
TABLE XXII
EXPENDITURES OF THE FEDERAL GOVERNMENT FOR NATIONAL
SECURITY AND OTHER PURPOSES ON A QUARTERLY BASIS
FOR THE FOURTH QUARTER OF 1945 THROUGH THE
FOURTH QUARTER OF 1948 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS OF
DOLLARS
YEAR QUARTER
SPENDING FOR
national SECURITY
---: --"-------------
SPENDING FOR
OTHER PURPOSES
AMOUNT
PERCENTAGE
OF TOTAL AMOUNT
PERCENTAGE
OF TOTAL
1945
IV 49.2 98.2
.9
1.8
1946 I
27.7
95.8 1.2 4.2
19^6 II 22.1 92.1
1.9 7.9
1946 III
18. 3 85.1
3.2 14.9
1946 IV
16. 7 82.3
3.6
17.7
1947 I 14.4 80.4
3.5
19.6
1947 II 14.1 83.4 2.8 16.6
1947
III
11. 7
70.1 5.0
29.9
1947 IV 13.2 77.6 3.8 22.4
1948 I 14.5 80.6
3.5
19.4
1948 II
15.5 74.2 5.4 25.8
1948 III 16.8
71.5 6.7 28.5
1948 IV
17.1 72.2 6.6 27.8
SOURCE: National Income Supplement to Survey of Current
Business t 1954.
1948.28
105
Debt Management
The disposition of the surpluses resulting from the
maintenance of existing tax rates and the reduction of ex
penditures was a part of the Treasury’s debt management
program. The Treasury's action on surpluses was to retire
the securities held by the commercial banks. This method,
in general, permitted bank reserves to remain at their
previous levels. In addition, the Treasury had other mone
tary powers at its disposal. First, in February, 1946, the
Treasury held a balance of $26 billion in its general fund,
most of which was in the form of deposits with commercial
banks. The Treasury’s balance was reduced by cancelling a
certain amount of its debt due to commercial banks, and
banks cancelled an equivalent amount of Treasury-owned de
posits. The banks' reserve positions remained the same,
because no reserves were required against war loan accounts.
Second, in 1945, agencies of the federal government held a
little more than $30 billion worth of government securities.
The procurement of these securities by the various trust
funds is a procedure that is similar to the open-market
operations of the Federal Reserve System. On occasion,
bonds have been bought and sold to exercise some desired
2 8
Annual Report of the Secretary of Treasury for
the Year ended June 30, 1948, pp~ 428-429.
106
effect on bond prices. In 19^7, the Treasury sold $1.8
billion In securities to stop an unwanted price rise in
bonds. Later that same year the Treasury purchased $1 bil
lion in securities to cushion the decline in bond prices.
This buying and selling, while not extensive, had an in
fluence on the composition of the holdings of federal secu
rities. Third, another Treasury program sought to increase
the holdings of government securities by the nonbank group
of investors. The underlying purpose of this program was
to decrease the amount of holdings in the hands of commer
cial and Federal Reserve System banks. The instruments in
volved in this program were savings bonds of the types
known as Series E, F and G. Table XXIII serves to indicate
the results of this Treasury program. Over the period from
19^5 to 19^8, bank holdings decreased 25 per cent and non
bank holdings increased 15 per cent.
Monetary Management
During the war the Treasury had been the dominating
influence in monetary policy. The Federal Reserve System
had agreed at the beginning of the war to support the gov
ernment's financial plans. When the war was over the Trea
sury decided to continue the wartime level and pattern of
interest rates. While the Federal Reserve System may have
been able to cut down the reserves of member banks and
thereby reduce the inflationary movement, it was obligated
107
TABLE XXIII
COMPOSITION OP HOLDING OF FEDERAL DEBT IN THE FORM OF
GOVERNMENT SECURITIES BY BANKS, INDIVIDUALS, AND
GOVERNMENT FOR THE YEARS 1945 THROUGH 1948
AS EVIDENCED BY ACTUAL AMOUNTS
IN BILLIONS OF DOLLARS
BANK
HOLDINGS
PRIVATE
HOLDINGS
GOVERNMENT
HOLDINGS
TOTAL
HOLDINGS
YEAR AMT
PER
CENT
AGE AMT
PER
CENT
AGE AMT
PER
CENT
AGE AMOUNT
1945 115.1 44.5 105. 8
40.9 37.8 14.6
258.7
1946
97-9 36.3 134. 3 49.9
37.2
13. 8
269. 4
1947 91. 3 35. 3 125. 3 48. 5
41. 7 16.2 258. 3
1948 85. 8 34. 0 121.3 48.1 45. 2
17.9 252.3
108
by prior agreement with the Treasury not to take such
action. The result was that the Federal Reserve System's
bond support program helped to provide funds for the Infla
tionary expansion by permitting the lending Institutions to
turn in their government securities for cash.
Federal Reserve Anti-
Inflationary Actions
During the 1945-1948 period, the Federal Reserve
System did take certain policy actions that may be described
as restrictive in their intent. These actions were: (1)
the raising of margin requirements to 100 per cent in Jan
uary of 1946 to slow down the upward trend of stock prices,
the volume of trading, and the extension of credit for such
purposes; (2) the removal of the preferential rate of 1/2
per cent in April of 1946, so that member banks might find
it more difficult to obtain Federal Reserve credit with
which to expand consumer credit; (3) the net reduction of
$2.0 billion in the holdings of government securities be
tween January of 1946 and October of 1947 to restrain the
growth in member bank reserves; (4) the discontinuation of
the 3/8 per cent buying rate on Treasury bills and the 7/8
per cent buying rate on certificates in July and October of
19^7, in order to raise the low wartime interest rates and
to discourage further monetary expansion; (5) the sale or
redemption of over $6.0 billion worth of government short
term securities from November of 1947 to March of 1948, to
109
offset the effect on bank reserves of bond purchases and
the Inflow of gold, thereby restraining the growth of bank
credit; (6) the attempt through moral suasion in November
of 1947 to persuade bank supervisory authorities to avoid
making nonessential loans during the period of Inflation;
(7) the raising from 1 to 1.5 per cent of the buying rate
on bankers' acceptances in August of 1948 , to maintain
pressure on member bank reserves and as part of the anti-
inflationary program; (8) the raising of reserve require
ments from February to September of 1948, to help absorb
additional reserves held by member banks; and (9) the
tightening of installment credit in September of 1948, to
29
decrease the growth of consumer installment credit. ^ The
1945-1948 period was an interval during which the rate of
interest was weakened as an instrument for the cyclical con
trol of business activity. The reason for this was that
the public debt had grown so large during the war that the
rate of interest became an important factor influencing the
distribution of national income and the value of capital
30
assets. At a time when monetary policy might have been
29
J. W. Hanks and R. Stuck!, Money, Banking, and
National Income (New York: Alfred A~ Knopf, 1956)* pp. 339-
3 ^
30
Henry C. Wallich, "The Changing Significance of
the Interest Rate," The American Economic Review, 36:762,
December, 1946.
110
used to play an Important part In the administration’s anti-
inflationary efforts, it was relegated to a secondary role.
CHAPTER V
ANALYSIS OF FISCAL POLICY EFFECTS
DURING 1945-1948
Based upon the experience of the 1930's and during
World War II, the United States entered the postwar period
with the knowledge necessary to guide fiscal policy toward
the stabilization goal. For the most part, the forecast of
inflation, after some initial hesitation, was accepted as
the problem to be faced by the economy. The stabilization
goal, however, was lost in the Congress, which was unwill
ing to take the advice of the administration, or to adopt
policies that would tend to deflate the high level of ef
fective demand. The fiscal policy actions of the 1945-1948
period were not of a countercyclical character, and at
times even contributed to the rise of inflation whereas the
period required an anti-inflationary fiscal policy. The
goals of such a policy should have included (1) the curtail
ment of expenditures; (2) the encouragement of maximum pro
duction; (3) the maintenance of satisfactory tax revenues;
(4) the reduction of liquidity through debt management; and
(5) the maintenance of the currency's purchasing power.
The degree to which fiscal policy was successful in achiev
ing such goals tends to indicate the economic effectiveness
of the fiscal policy enactments of the Congress and the
111
administration.
112
I. EFFECTS OF FEDERAL EXPENDITURE POLICY
In the 1945-19^8 period, both political parties were
supporting a policy of reduced expenditure on the part of
the federal government. However, the goal of the Republi
can majority in the Congress was an expenditure level such
as had been in effect during the years just before the
build-up for World War II. The Democratic Administration,
on the other hand, seemed more understanding of the nation
al commitments to veterans and to foreign allies, and
therefore, did not subscribe to such a goal. The level of
federal expenditures was significantly reduced during the
19^5-19^8 period but the lowest level reached, in the second
quarter of 19^7* was $15*3 billion: this was about twice
the prewar level. It was shown in Table XXII that during
the 19^5-19^8 period, the percentage of federal expendi
tures that were directed into national security decreased
steadily while federal expenditures for other purposes
steadily increased. Certain groups drew attention to what
was considered to be an excess over a minimum level of
expenditures. The majority view of the Congressional Joint
Committee on the Economic Report recommended that expendi
tures of the federal government, both for defense and
nondefense, be reduced.'1 ' Special attention was directed to
certain duplications in national defense programs, to pro
jects of a questionable nature that were Included under the
Marshall Plan, to the continued extension of credit for
housing, and to the annual Increases in public works. In
testimony before the Joint Committee on the Economic Report
In November of 1947s the Federal Reserve System's Chairman
Eccles, likewise; advodated greater restraint in government
spending for new construction, the large volume of expendi
tures in foreign aid, and the significant climb of consumer
credit. Even the administration recognized that the fed
eral government was making some contribution to the infla
tion through some of its spending policies. The increase-
in credit was openly acknowledged as an important factor
in the growth of inflation.^ Bank credit was pointed out
as nullifying the effect of a budget surplus.3 Since the
federal government fostered the growth of mortgage debt
through its housing programs, since It did permit new fed
erally-supported construction to Increase, and since it
proposed and supported the very large expenditures for
The 19 48 Report of the Congressional Joint Commit
tee on the Economic Report (New York: Harcourt, Brace and
Company, 1949), Part II, p. 210.
^The Economic Report of the President to the Con
gress, January 7. 1949 (New York: Harcourt, Brace and
Company, 19 49;, Part I, p. 11.
^The 1948 Report of the Congressional Joint Commit
tee on the Economic Report, op. clt.. Part II, p^ 213.
114
TABLE XXIV
EXPENDITURES OF THE FEDERAL GOVERNMENT FOR NEW
CONSTRUCTION AND FOREIGN AID, TOGETHER WITH
THE AMOUNTS OF OUTSTANDING CONSUMER CREDIT
FOR THE YEARS 1946 THROUGH 1948 AS
EVIDENCED BY ACTUAL AMOUNTS
IN BILLIONS OF DOLLARS
YEAR
NEW
CONSTRUCTION
CONSUMER
CREDIT
OUTSTANDING
AID TO
FOREIGN
COUNTRIES
1946 1.074 10.101
5.053
1947 1.175
13.426 5.712
1948
1.339
16.100 4.566
SOURCE: The Economic Report of the President to the Con
gress, January 7, 1949, Tables C-14, C-23 and
C-36.
foreign aid, the administration's expenditure policy fell
short of the goal of achieving the greatest possible re
strictive effect during an inflationary period. However,
before maintaining that federal expenditures should have
been decreased more than they were, it is appropriate to
note that empirical study has indicated that the drastic
curtailment of expenditures after World War I contributed
to the severity of the 1920-1921 recession. While this
World War I experience was probably not a controlling fac
tor in post-World War II fiscal policy, it does serve to
indicate that alternative policies might have resulted in
less desirable circumstances. The proposition may be con
sidered that a prompt return to prewar federal expenditure
levels might have helped to bring about the postwar depres
sion that many were expecting. Because of the commitments
resulting from World War II, it appears that only relatively
small changes could have been made in expenditure policy,
and that further small reductions in expenditures would not
have materially affected the forces of inflation.
II. EFFECTS OF FISCAL POLICY
ON PRODUCTION
The 19^6-19^8 period was one of increasing production
John M. Firestone, Federal Receipts and Expenditures
During Business Cycles, 1879-1958 (A Study by the National
Bureau of Economic Research. Princeton: Princeton Univer
sity Press, I960), p. 72.
Il6
not only in terms of current dollars, but also in constant
dollars. Using 1947 dollars, gross national product in
creased from $233.8 billion in 1946 to $243.9 billion in
1948, or an increase of 4.3 per cent. When compared with
the prewar year of 1939, national output in real terms in
1946 had increased about 50 per cent.^ In terms of the
Federal Reserve Board’s Industrial Production Index, using
1947-1949 as equal to 100, production rose from 85 in Octo
ber of 1945 to 103 in November of 1948, an increase of 21
per cent.
Production Goals
At the beginning of 1947, the administration set up
a goal of an overall increase of 5 per cent in total na
tional production during the year.^ By midyear, it became
evident that production for the year might not reach that
7
high level, and in fact the goal of 5 per cent was not
0
accomplished in 1947. In 1948, the goal was reduced to 3
5
The Economic Report of the President to the Con
gress, January 8, 1947 (New York: Reynal and Hitchcock,
194b), Part II, p. 98.
^Ibid. , Part II, pp. 18-19.
7
The Midyear Economic Report of the President to the
Congress, July 21, 1947 (New York: Reynal and Hitchcock,
1948), Part II, pp. b9-90.
8
The Economic Report of the President to the Congress
J anuary 14, l'9"48 (New York: Reynal and Hitchcock, 1948),
Part I, p. 2.
117
Q
per cent, and the economy produced between 3 and 4 per
cent more goods and services than In 1947.10 This lack
luster record In the rate of production growth seemed to
reflect a less-than-desired level of efficiency with which
national resources were converted into the demanded goods
and services.11
Decline in Work Week
An increase in national output per man-hour can re
sult from heavy investment, public improvements, and high
volume of tangible capital per capita. Empirical studies
have indicated that a growing fraction of the potential
product resulting from higher national output per man-hour
12
has been sacrificed for greater leisure. The average
weekly hours in manufacturing decreased from 43.4 hours in
1945 to 39.9 hours in the second half of 1948.1^ The re
tardation in the growth of population, combined with the
decline in the length of the work week, has brought about
a decrease in the rate of increase in the total number of
^Ibld. , Part I, p. 46.
10The Economic Report, January 7, 1949 , op. cit. ,
Part I, p. 1.
11
John W. Kendrick, Productivity Trends in the
United States (A Study by the National Bureau of Economic
Research. Princeton: Princeton University Press, 1961),
p. xlvi.
1^Ibid. , p. xxviil.
13
The Economic Report, January 7, 1949, op. cit.,
Part I, Table C-ll, p. 109.
118
14
hours worked per year by the American population.
Decline in Output
The record of postwar inflation tends to indicate
that real output expanded quite moderately between June of
1946 and the fourth quarter of 1948, although the rate of
increase in output per man-hour actually declined during
the postwar inflationary period. This condition of short
supply was recognized by the administration which recom-
17
mended that studies of productive capacity should be made.
Since the 1946-1948 period was characterized by a lack of
balance between effective demand and aggregate supply, it
appears that greater emphasis might have been placed on
increasing industrial productivity. Without sacrificing
the basic objective of tax policy, various measures, such
as accelerated depreciation, might have been used to in
crease productive capacity and efficiency at a faster rate.
Since increased aggregate supply was the real problem of
the period, a stimulating, short run, tax policy might have
1 i 4
R. A. Gordon, Business Fluctuations (second edi
tion: New York: Harper and Brothers, 19&1, pp. 229-230.
^L. V. Chandler, Inflation in the United States
19*10-1948 (New York: Harper and Brothers, 1951), p. ?22.
"^Solomon Fabrlcant, Basic Facts on Productivity
Change (A Study by the National Bureau of Economic Research.
Princeton: Princeton University Press, 1959), p. 13.
17
The Economic Report, January 7, 1949, op. cit.,
Part I, p. xxvi.
119
devised taxes on Idle capacity In an effort to enforce the
greater production of civilian goods.
III. EFFECTS OF FEDERAL TAX POLICY
In appraising the economic effects of federal tax
policy during the 19*45-19^8 period, consideration must be
given to both the Revenue Act of 19*45 and the Revenue Act
of 1948.
The Revenue Act of 19*45
and Consumption
Although passed in the last Quarter of 19*45, the
real effect of tax reduction through the Revenue Act of
19*45 took place during the 19*46-19*48 period. The effect of
the Revenue Act of 19*45 was to reduce annual tax collections
by $5.7 billion.Empirical studies have Indicated that
disposable income Is promptly altered by changes In with
holding rates for the personal Income tax.It has also
been concluded on the basis of empirical study that when
there is a reduction of the personal income tax at a time
when Income is falling, or at least not rising as fast as
the trend in the recent past, consumers tend to spend the
additional Income Immediately and to raise the level of
1 R
Annual Report of the Secretary of the Treasury for
the year ended June 30, 19*46, p. 338.
■^Albert Ando, E. Cary Brown, Robert M. Solow and
John Kareken, "Lags in Fiscal and Monetary Policy," Stabil
ization Policies (A Series of Research Studies Prepared for
the Commission on Money and Credit. Edgewood Cliffs:■
prentice-Hall, Inc., 1963), p. 9*
20
consumption. Further, it has been shown that consumers
respond to tax reductions by spending 60 per cent of the
money difference in the same quarter, 76 per cent by the
end of the second quarter, and 86 per cent by the end of
21
the third quarter. Disposable personal income was prompt
ly altered by tax reduction and increased steadily through
out the 1945-19^8 period except for a brief hesitation in
the second quarter of 19^7. The behavior of consumers in
the 19^5-1948 period tends to substantiate the findings of
the empirical studies. Spending for consumption increased
steadily, and at a faster rate than personal income. The
tax policy adopted in 19^5 did not provide the kind of ac
tion that was needed. The administration permitted the
fear of a postwar recession to neutralize its correctly
judged prognosis of inflation. The Congress succumbed to
political pressure for tax reduction although tax reduction
at the outset of a strongly inflationary period was des
tined to be an unwise fiscal policy. During the fourth
quarter of 19^5, personal taxes amounted to 12 per cent of
personal income. Assuming that taxes had not been reduced,
and that consumption corresponded to the actual quarterly
rates of the period, the difference between actual revenue
20
Albert Ando and E. Cary Brown, "Lags in Fiscal
Policy," Part II of "Lags in Fiscal and Monetary Policy."
Stabilization Policies (A Series of Research Studies Pre
pared for the Commission on Money and Credit. Edgewood
Cliffs: Prentice-Hall, Inc., 1963), p. 136.
21Ibid,
121
collections and hypothetical collections would have been
only 7-9 billions. Not only does it appear that tax re
duction was an inappropriate fiscal policy, but there is
evidence that tax increases might have been a reasonable
fiscal policy. Prom the standpoint of using fiscal policy
to reduce inflationary pressure, increases in the personal
income tax would have reduced the purchasing power in the
hands of the private sector. Administratively, the increase
could have been quickly handled through changes in with
holding rates. Further, such an increase would probably
have had a minimum effect on the incentive and capacity of
business to carry out the program of conversion from war
production. The 19^5-1948 period demonstrates the role of
political obstruction in the successful application of
countercyclical fiscal"p‘ ollcy. It has been generally quite
difficult to sell the Congress on the proposition that addi
tional taxes over expenditures are needed in periods of
inflation.
The Revenue Act of 1948
The economic effects of the Revenue Act of 19^8 were
more influential in the recession of 19^9, than in the in
flationary period of 19^5-19^8. Nevertheless, there were
effects of real significance between May 1, the effective
date for the change in withholding rates under the Revenue
Act of 19^8, and the end of the first postwar inflationary
period in November of 1948.22 In the second quarter of
1948, tax revenue declined $2.4 billion, or 10.3 per cent,
from the first quarter rate. Personal income continued its
upward trend at the quarterly rate of about 3 per cent from
the first to the second quarter of 1948. Disposable perso
nal income made a larger change: from the first to the se
cond quarter, disposable personal income increased from
$178.3 to $187.3 or 5 per cent. But while disposable per
sonal income was increasing 5 per cent, expenditures for
personal consumption did not keep pace. Prom the first to
the second quarter of 1948, the increase was only from
174.1 to 176.8 or 1.5 per cent. At the same time, savings
increased from $4.2 billion to $10.6 billion, or 152.3 per
cent. The conclusion reached through empirical studies of
the 19 48 period is that tax reductions, in a period of gen
erally full employment and rising income, do not lead to an
immediate expenditure of the extra income resulting from
the smaller tax liability. There appears to be some time
lag before consumption expenditures are affected. 23 in
19 48, consumption did not continue to climb, as had been
expected, for several reasons: (1) there was an increasing
supply of goods both in the United States and abroad, (2)
2 2
G. H. Moore, Business Cycle Indicators (A Study by
The National Bureau or Economic Research. Princeton:
Princeton University Press, 1961), p. 670.
23richard Goode, The Individual Income Tax (Washlngto
The Brooking Institution^ 1964), p. 303.
123
there was a trend for the large expansion of consumer de
mand to diminish since most of the urgent needs had been
satisfied, (3) there was a tendency for private investment
to decline in view of the past two years of expansion in
housing, new businesses, and exports. Prom the standpoint
of fiscal policy, the timing of the Revenue Act of 19^8 was
excellent, even though the Congress had not considered tax
reduction in 19^8 as part of an antirecessionary program.
The passage of the Revenue Act of 19^8, just at the time
that the forces of inflation were beginning to diminish,
served to delay the beginning of the 19^9 recession and to
minimize its severity.
IV. EFFECTS OF FISCAL POLICY
ON LIQUIDITY
With government spending at Its wartime levels, anti
Inflation policy might have called for a tax policy of in
creased collections. The wartime policy of voluntary bor
rowing created a large deficit, permitted the Increase of
disposable income, and established a high level of liquid
assets. While it is generally agreed that wartime collec
tions could not have paid for all federal expenditures with
out adverse effects, it is also held by many that a much
larger proportion of expenditures could have been collected
in taxes.
Borrowing from Commercial Banks
During the 19^5-19^8 period, the Treasury was in a
124
position to influence the liquidity of privately held as
sets. This could have been accomplished by borrowing from
individuals and nonfinancial sources instead of banks. In
this way, the private sector would have held government se
curities instead of a large supply of money. As it actually
happened, the Treasury made its securities completely liquid
and cashable on demand. The commercial banks held large
amounts of government bonds and were able to increase their
reserves at any time through the sale of such securities.
Even in this situation, individuals and nonfinancial sources
chose to keep more than half of their assets in currency,
checking accounts, and time and savings accounts. The
Treasury was forced to borrow large amounts from the Federal
Reserve and the commercial banks.
Easy money. The policy of low interest rates and
easy money was probably an inflationary influence in view
of the large demands for credit in the postwar period. The
rise in interest rates could probably have been started
prior to mid-1947 without any serious deflationary effects.
It appears that monetary curbs tended to be on the side of
too little restraint for a stable price level because the
goal of a stable price level was combined with the goals of
2 4
full employment and economic growth.
2 4
Bert G. Hickman, Growth and Stability of the Post
war Economy (Washington: The Brookings Institution, I960),
p. 413.
125
Decreasing the Reservoir
of Liquid Assets
What was needed at the end of World War II was a
tight credit policy to cope with the excess liquidity. How
ever, the Treasury was faced with a public debt of consider
able size and the need to refund maturing obligations on a
continuous basis. Therefore, the Federal Reserve System
agreed to maintain an easy money policy that would support
the price of government securities. All of this situation
resulted from the method adopted during World War II of
financing deficits through voluntary lending. Liquid as
sets grew faster than income and injected an inflationary
bias into the United States economy that was to last into
the 1950’s.
Treasury Action
Further, the Treasury's action in regard to the sur
pluses had a great effect relative to inflation. The Trea
sury chose to retire securities held by commercial banks
rather than taking other action that might have reduced
reserves, such as increasing its cash balance. When re
tiring government securities held by commercial banks, the
Treasury reduced the money supply, but left the volume of
bank reserves unaffected. The more anti-inflationary ap
proach would have been to use the current Treasury surplus
not only to retire the securities that were held by commer
cial banks but also to use the surplus to drain off re
serves by building up a cash surplus, by increasing the
126
deposits In Federal Reserve banks, or to retire securities
25
held by Reserve banks. The debt management policy during
1945-1948 may be held to be partly responsible for the In
flation that took place because of (1) the controlled Inter
est structure, (2) the bond support program, (3) the em
phasis on short-term obligations, (4) Treasury limitation
of Federal Reserve System functions, and (5) the uncoordi
nated extension of credit by a group of federal agencies,
such as the Federal National Mortgage Association and the
Reconstruction Finance Corporation.
V. EFFECTS OF FISCAL POLICY ON
PURCHASING POWER
The Employment Act set maximum purchasing power as
one of the objectives of fiscal policy. The administration
acknowledged that purchasing power would be reduced through
p /T
increases in the price level in its first economic report.
The remedy offered was full employment and maximum produc
tion.^^ Nearly full employment was a characteristic of the
period, though not because of fiscal policy, but production
did not achieve the levels necessary to meet the demands of
additional income in the hands of wage earners, plus the
25
Chandler, op. cit. , p. 264.
26
The Economic Report, January 8, 1947* op. cit.,
Part II, p. 10,
27
The Economic Report, January 14, 1948, op. cit.,
Part II, p"! 162.
127
pent up demands of the war economy supported by large
amounts of liquid assets.
Weakness of Moral Suasion
The Council expressed concern about the ability of
the economy to consume in 19^7 5 per cent more product than
2 8
had been produced in 19^6. This concern was grounded in
the declining purchasing power of the dollar. The Council
tried to convince the business community by moral suasion
to lower prices so that real purchasing power would be in
creased from current income rather than through the use of
savings and credit. ^ However, from the first quarter of
19^6 to the fourth quarter of 19^7, real purchasing power
decreased nearly 8 per cent. The action of excess demand
started the inflation of 19^6-19^8. The nature of the
price rise was not one of steady ascent: there were per
iods of rapid rise followed by periods of slow increase or
temporary decline., It was a period of both cost-push and
demand-pull inflation, with wage earners and consumers com
peting for larger, shares of the national product. The In
flation ran Its course without vigorous fiscal policy ac
tions being taken to curb the price rise. Even though in
come continued to rise, the inflation came to an end when
demand became less strong because many priority requirements
i
2^The Economic Report, January 8, I9**7» op. cit. ,
Part II, p. 20.
2^The Midyear Economic Report, July 21, 19^7. op.
cit., Part II, p. 92.
128
had been satisfied. It may be said that tax policy even pro
longed the Inflation. In weighing the risks of alternative
policies, the choice of the Congress was for fiscal policy
with an inflationary bias. It appears that neither the ad
ministration nor the Congress brought the inflation to a
close. It was the consumers who chose not to increase the
level of expenditure in proportion to the rise of income.
Fiscal policy failed to use higher income taxes or minimum
expenditures as anti-inflationary measures. Debt management
policy did not retard the monetization of the debt. The
gestation period for new plant and equipment took so long
that aggregate supply could not satisfy the vigorous demand
for goods and services.
VI. FISCAL POLICY RESULTS DURING
1945_ig48 PERIOD
Fiscal policy did not bring about economic stabiliza
tion during the 19^5-19^8 period, nor did it control aggre
gate demand. It did not bring about an aggregate supply of
goods in sufficient quantity or as soon as the situation re
quired: it did not absorb excessive amounts of liquid assets
and it did not restrain rising prices. The result is that
It did not carry out the mandate of the Employment Act of
19^6. What fiscal policy did accomplish was a return to a
peacetime economy of reduced expenditures and taxes at a
time of close to full employment. A large national debt was
managed in a manner that kept Interest costs low and reduced
the principb.1, The conclusion that the Inflation could have
129
curbed through fiscal policy is based on assumption and con
jecture, The conclusion that fiscal policy could have been
more effective than it was, is based on the application of
subsequent experience in an ex post manner. Expenditure
policy might have been able to reduce spending 10 per cent
more than the level achieved, but such action could have had
recessionary results. Tax policy might have maintained a
higher level of revenue, but the beneficial effects of tax
reduction could have outweighed the monetary effects of
Treasury surpluses. Debt management policy might have
abandoned its support for low interest rates but the advan
tages for Investment could have been minimal in the light
of the additional cost of financing the debt. Positive
results of a more satisfactory nature seem possible only
when fiscal policy is part of an overall economic policy
that involves direct controls and a vigorous monetary policy.
The public's reluctance to accept such measures except duri
ing war precludes the desired degree of fiscal policy suc
cess in combatting the inflationary trend. The reluctance
of the Congress to make consumer credit regulation a per
manent part of the equipment of Federal Reserve System
authorities confirmed this lack of confidence in a strong
economic policy and in monetary policy in particular.
3°E. A. Goldenweiser, "Federal Reserve Objectives
and Policies," The American Economic Review, 37:333. June,
19 47.
CHAPTER VI
ANALYSIS OP FISCAL POLICY
DURING 19^9 RECESSION
The major upswing in business activity that began in
October of 1945 reached its peak in October of 1948. Dur
ing the next eleven months, the economy experienced a down
swing in activity. The analysis of fiscal policy during
this deflation is important because it represents the ef
fectiveness with which the administration and the Congress
carried out the mandate of the 1946 Employment Act. A de
pression with high levels of unemployment had been commonly
forecast for the postwar period. Instead, there had been
three postwar years of Inflation. The deflation In 1949
presented problems requiring solutions of a short-run char
acter from an administration and a Congress generally con
cerned with the long-run inflationary tendency.
I. BEHAVIOR OF THE ECONOMY IN 1948-1949
In order to analyze fiscal policy during the 1949 re
cession, consideration must be given to economic activity
beginning In 1948. Table XXV shows the relative expendi
tures of the segments of national Income for nine succes
sive quarters beginning the first quarter of 1948. During
19^8, gross national product increased steadily but at
130
131
TABLE XXV
GROSS NATIONAL PRODUCT AND RELATIVE EXPENDITURES
FOR CONSUMPTION, INVESTMENT, AND GOVERNMENT
FOR NINE QUARTERS BEGINNING FIRST QUARTER
OF 1948 AND ENDING FIRST QUARTER OF 1950
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
QUARTER
AND YEAR
GROSS
NATIONAL
PRODUCT
(Y)
PERSONAL
CONSUMP
TION EX
PENDITURES
(C)
PRIVATE
DOMESTIC
INVEST
MENT
NET
FOREIGN
INVEST
MENT
(If)
GOVERNMENT
EXPEND
ITURES
(G)
1948-1
247 .9
174.1 38.6
3.9
31.2
1948-11
255.5
176.8 41.2
1.9
35.6
1948-111
261.9 179.5 42.5
.6 39.2
1948-IV 264.0 180.1 42.4
1.3
40.2
1949-1 259.9
178.4 37.0 1.4
43.1
1949-11 257.2 180. 4 32.1 .4 44.4
1949-in 256.5 180.1 32.0 .9 43.5
1949-IV
255.5 183.5 29.1 - .5
43.4
1950-1
264.9 185.2
39.9 - 1.5 41.3
SOURCE: Selected Statistics from Table 45 National Income
Supplement to Survey of Current Business, U. S.
Department of Commerce , 1954'.
Changes from 1st to 4th Quarter Computed.
Columns may not add because of rounding.
132
relatively low and progressively lower rates from quarter
to quarter. During 19^9, gross national product decreased
each quarter but again at very small decrements. The dol
lar change in annual rate from the fourth quarter of 19^8
to the fourth quarter of 19^9 was only $8.5 billion, and
the percentage change was only 3.2 per cent. During this
same period, consumption expenditures increased in annual
rate by 1.9 per cent, and government expenditures rose by
8 per cent. These changes were all relatively small in mag
nitude. The most significant change between the fourth
quarter of 19^8 and the fourth quarter of 19^9 was in total
investment, which experienced a decrease in annual rate of
$15.1 billion, and a percentage decrease of 31.^ per cent.
The decrease in business fixed investment might have been
much greater if there had been a greater expansion of pro
ductive capacity during the 19^5-19^8 inflationary period.
During 19^8 the ratio of national output to fixed capital
was estimated to be 120, and this represented a more inten
sive capacity utilization by industry than in any previous
peacetime year.1
Breakdown by Expenditure Classes
The breakdown of national income by expenditure
classes is shown in Table XXVI. Between the fourth quarter
1Raymond W. Goldsmith, A Study of Saving in the
United States, Volume III (Princeton: Princeton University
Press, 195&), Table W-3.
TABLE XXVI
133
GROSS NATIONAL PRODUCT SHOWING BREAKDOWN BY CLASSES OF
EXPENDITURE INCLUDING NATIONAL INCOME, PERSONAL
INCOME, AND DISPOSABLE PERSONAL INCOME FOR
FOURTH QUARTERS OF 1948 AND 1949
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
EXPENDITURE
CLASS
4TH
QTR.
1948
4TH
QTR
1949
MO
CH
IN
NEY
ANGE
RATE
PERCENT
CHANGE
IN RATE
+
—
+ —
3ROSS NATIONAL PRODUCT 264.0
255.5 8.5
3.2
LESS: Capital Consumption
Allowance
17.3 19.1
1.8 10.4
Indirect Business
Taxes
20.9 22.01.1 5.2
Business Transfer
Payments .8 .8
_ _
Statistical Dis
crepancy - 2.0 2.04.0 200.0
PLUS: Subsidies Less Current
Surplus of Govern
ment Enterprises .0
. - *_3
• j
EQUALS: NATIONAL INCOME
227.1 211.3 15.8 6.9
LESS: Corporate Profits and
Inventory Valuation
Adjustment
31.7 25.3
6.4 20.1
Social Insurance
Contribution
5.3 5.7
.4
PLUS: Government Transfer
Payments
9.9 11. 81.9
Net Interest Paid
by Government
4.5
4.6 .1
Dividends 7.6 7.8 .2
Business Transfer
Payments .8 .8
mm
EQUALS: PERSONAL INCOME 212.8 205.3 17.5 3.5
LESS: Personal Taxes 20.4 18 .6 *1.8 8.8
EQUALS: DISPOSABLE PERSONAL
INCOME 192.4
186.7 5.7 2.9
LESS: Personal Savings
12.3 . . . . 3.2 9.1 73.9
EQUALS: PERSONAL CONSUMPTION
EXPENDITURES 180.1
183.5
3.4
. . . JL. 8,
SOURCE: Selected Statistics from Tables 47 and 49 National
Income Supplement to Survey of Current Business,
U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
134
of 1948 and the fourth quarter of 1949, gross national pro
duct, national income, personal Income and disposable per
sonal Income all decreased between 2.9 and 6.9 per cent.
During the same period, Indirect business taxes, social In
surance taxes, net interest paid by government, and divi
dends paid by business all increased between 2.2 and 7.5
per cent. These changes, along with the 1.8 per cent in
crease In personal consumption, were all minor changes.
The expenditure classes that experienced significant changes
were government transfer payments, personal taxes, and per
sonal savings.
Influence of Transfer Payments
Between the fourth quarter of 1948 and the fourth
quarter of 1949, government transfer payments Increased in
annual rate from $9.9 billion to $11.8 billion. This dol
lar change of $1.9 billion represented a percentage increase
of 19.1 per cent. The benefits for the unemployed turned
2
out to be the most important built-in fiscal stabilizer.
During the fourth quarter of 1949, 6.8 per cent of the ci
vilian labor force was unemployed: this represented
4,276,000 Individuals, and of this number, 55.1 per cent
were Insured for unemployment compensation. Transfer
2
Wilfred Lewis, Jr. Federal Fiscal Policy in the
Postwar Recessions (Washington: The Brookings Institution,
1962), p. 57.
135
payments were part of the reason for the small decline in
disposable personal income.
Personal Tax Reduction
As a result of the Revenue Act of 1948, collections
from personal taxes decreased 8.8 per cent in annual rate
between the fourth quarter of 1948 and the fourth quarter
of 1949. The dollar change in annual rate was $1.8 billion.
Because of the retroactive features of the 1948 Revenue Act,
cash refunds were large in the spring of 1949. About half
of the decrease in personal income between the fourth quar
ter of 19^8 and the fourth quarter of 1949 was offset by
the fiscal influence of unemployment compensation benefits
and other government transfer payments, plus the reduction
of personal income taxes as a result of the Revenue Act of
1948.3
Savings Change
A very Important change took place in the rate of
personal savings. Between the fourth quarter of 1948 and
the fourth quarter of 1949, the annual rate of saving de
creased from $12.3 billion to $3.2 billion. This was a
money change of $9*1 billion and represented a decrease of
74 per cent. The decline in the annual rate of savings
3
Morris A. Copeland, Trends in Government Financing
(Princeton: Princeton University Press, 1961), p. 125.
136
began during the third quarter of 19^8, and the decline con
tlnued during the balance of 19^8 and all of 19^9- This
seems to indicate that even though disposable personal in
come was reduced, consumers continued to maintain an in
creasing level of personal consumption expenditures, even
at the expense of curtailing personal savings. This action
on the part of consumers has been explained on the basis
that there seems to be a "ratchet effect" that makes it
easier for individuals to increase consumption than to re-
duce it.
Mildness of 19^9 Recession
The degree of severity of the 19^9 recession may be
characterized as mild. By reviewing the changes that took
place in the national income and its component parts, it
appears that most of the declines were small and that such
items as transfers, tax refunds, and savings tended to off
set the large reduction in investment. Most of the moder
ate fall in gross national product was due to changes in
5
inventories. Demand by the public sector tended to remain
steady and this seemed to moderate the decline and to work
i f
James S. Duesenberry, Income, Saving, and the
Theory of Consumer Behavior (Cambridge: Harvard University
Press” 1949), p. 115.
S
Bert G. Hickman, Growth and Stability of the Post-
War Economy (Washington: The Brookings Inst it u ti on, 1960),
pp. 71-72.
137
for an early upturn. Easy credit facilitated the growth of
residential construction and the backlog of demand for auto
mobiles remained strong. The combination of small declines
in some parts of aggregate demand, coupled with continued
strength in other parts, worked to moderate the recession.
Its mildness is quite obvious when compared with the Great
Depression in every category. Table XXVII shows a compari
son of various measures of the severity of business cycle
contractions for the Great Depression and the 19*19 reces
sion. For the period from 1920 to 195*1, the Great Depres
sion is classified as the most severe and the 19*19 recession
as fifth in order of severity.8 The contraction classified
as most modest was the period of adjustment between Febru
ary and October of 19*15. 7
II. THE NATIONAL ECONOMIC BUDGET
The 19*19 recession began in November of 19*18 and
O
ended in October of 19*19. The changes in the macroeconomic
variables during this eleven month period are studied by
means of a comparison of the national income and expendi
ture accounts for the fourth quarter of 19*18 and the fourth
^Geoffrey H. Moore, Business Cycles Indicators (A
Study by the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1961), p.12*1.
7Ibid.
8Ibld., p. 670.
138
TABLE XXVII
MEASURES OP THE SEVERITY OP BUSINESS CYCLE CONTRACTIONS
IN THE UNITED STATES WITH REFERENCE TO THE
GREAT DEPRESSION AND THE 1949 RECESSION
Business Cycle Contraction GREAT DEPRESSION 1949 RECESSION
Peak AUGUST 1929 NOVEMBER 1948
Trough MARCH 1933 OCTOBER 1949
Months from Peak to Trough
43
11
Unemployment Rate at Peak 3.2 3.4
Unemployment Rate at Trough 23.6
5.5
Change In Unemployment Rate 20.4 2 .1
Change In Industrial
Production
i
o
•
H
- 7.7
Change in Gross National
Production -49.6 - 3.2
Change in Personal Income -49.8
- 3.7
Change in Corporate Profits -136 .0
0
•
OJ
OJ
l
SOURCE: Geoffrey H. Moore. Business Cycle Indicators. A
Study by the National Bureau of Economic Research
(Princeton: Princeton University Press, 1961)
Table 5.2, p. 122.
139
quarter of 1949.
The Stability of the
Consumption Segment
The status of the economy’s consumption segment dur
ing the selected periods is shown in Table XXVIII. The per
centage change in the annual rate of expenditures during the
three year period beginning with the fourth quarter of 1945
and ending in the fourth quarter of 1948, was 40.3 per cent.
The average annual Increase over this three-year period was
approximately 13 per cent. When the 13 per cent Is com
pared with the 1.8 per cent for the period of the recession,
the decrease in demand is apparent. After three years of
high-level spending, consumers seemed to have satisfied
o
most of their most urgent requirements. The decrease In
the rate of growth of consumption was from 10.0 per cent In
1945 to .008 per cent in 1949.^ There was still some de
mand for such durables as automobiles and for housing, but
the first great postwar surge In buying seemed temporarily
to have lost its strength. Table XXVII shows that even
though disposable income decreased 2.9 per cent, consump
tion expenditures, nevertheless, increased 1.8 per cent.
q
Earl C. Hald. Business Cycles (Boston: Houghton
Mifflin Company, 1954), p. 101.
10Daniel Hamberg. "The Recession of 1948-49 in the
United States," The Economic Journal, No. 245, 62:7, March,
1952.
140
TABLE XXVIII
CONSUMPTION SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTERS OF 1948 AND 1949 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
IV
QTR.
1948
IV
QTR.
1949
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ -
+
—
RECEIPTS
PERSONAL INCOME 212.8 205.3 7.5 3.5
Labor Income 139.4 134.6 4.8 3.4
Proprietors & Rental Income 45.8 40.2 5.6 12.2
Dividends & Interest l6.9 17.9
1.0
5.9
Transfer Payments
10.7
12.6
1.9 17. B
Less: Personal Tax & Non
Tax Payments 20. 4 18.6 1.8 8.8
EQUALS: DISPOSABLE INCOME 192.4
186.7 5.7 2.9
EXPENDITURES
DURABLE GOODS
22. 3 25.1
2.8
12.5
Automobiles & Parts 7.8 10.1 2.3 29.5
Household Equipment &
Furniture 11.2 11.9 .7
6.2
Other 1-4 3.2 .2 5.8
NONDURABLE GOODS 99.4 9 6.6 2.8 2.8
Food
57.5 56.5
1.0
1.7
Clothing and Shoes 20.0 18.0 2.0 10.0
Other
21.9
22.1 .2
.9
SERVICE'S’ 58.4
61.7 3.3
5.6
Housing
18.3
20.2
1.9 10.3
Other 40.1 41.5
1.4
3.5
TOTAL EXPENDITURES 180.1
183.5
3.4 1.8
SAVING (RECEIPTS LESS
EXPENDITURES)
12.3
3.2
9.1 73.9
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954), Selected
Statistics from Tables 47 and 49.
Changes and Percentages Computed.
Columns may not add because of rounding.
141
the changes In the various components of the consumption
segment during the recessionary period were relatively
small, with positive changes generally being offset by nega
tive changes. For Instance, while income decreased, divi
dends and transfer payments increased, though not enough to
prevent a decrease in disposable income; while nondurables
registered decreased expenditures, durables and housing
were able to maintain an overall increase of 2 per cent in
consumption spending.
The Significant Decline
in Investment'
Table XXIX shows the changes that took place in the
business segment of the economy between the fourth quarter
of 1948 and the fourth quarter of 1949. During this period,
corporate profits declined in annual rate from $31.6 bil
lion to $24.8 billion, a decrease of 21.5 per cent. The
annual rate decrease in investment during this period was
$10.0 billion, a fall of 75.1 per cent. However, the most
spectacular decline was in business inventories, which
changed from $4.9 billion to $-6.3 billion. This decrease
in annual rate of more than 200 per cent was the change
that tended to characterize the recession as a period of
Inventory adjustment. The basis for calling the 1949 per
iod an inventory recession was that the moderate fall In
gross national product was accounted for In large measure
142
TABLE XXIX
BUSINESS SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTERS OF 1948 AND 1949 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
IV
QTR.
1948
IV
QTR.
1949
MON
CHA
IN R
EY
NGE
ATE
PERCE1
CHAl
IN Rj
TTAGE
'IGE
&TE
+ — + —
RECEIPTS
Corporate Profits 31.6 24. . £
21.5
Less: Corp. Profits Tax
Liability 12.0 9.9
2.1]
17.5
Dividends 7.6 7.8 .2 2.6
Equals:Corp. Undivided
Profits 12.0
7.1 4.9 40.8
Plus: Corp. Consumption
Allowance
17.3 19.1
1.8 10.4
Less: Corp. Inventory Valu
ation Adjustment .2 .4 .2 100.0
EQUALS:UNDISTRIBUTED PROFITS
AND ADDITION TO
RESERVES
29.1
25.8
3.3 11.3
DOMESTIC GROSS INVESTMENT
Construction lB.0 lB. 6 . 6
3.3
Residential, Nonfarm
a.3
9.6
1.3
15.6
Non Residential
9.7 9.0 .7 7.2
Producers* Durable Equipment
19.5 16.9
2.6
13.3
Change in Business Inven
tories
4.9 -6.3
11.2
228.5
TOTAL DOMESTIC GROSS
INVESTMENT 42.4
29.1 13.3 31.3
EXCESS OF INVESTMENT
13.3 3.3
10.0
75.1
SOURCE: Selected Statistics from Tables 47 and 49 National
Income Supplement to Survey of Current Business,
U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
143
by the inventory change.11 The fall in private fixed in
vestment seemed to coincide with a downswing in the inven
tory investment cycle of many durable and most nondurable
12
goods. The larger part of the inventory decline, especi
ally in durable goods, was in the earlier stages of produc
tion, such as purchased raw materials and goods in pro-
13
cess.
The Falling Export Surplus
The position of the United States in relation to the
international segment of the economy during the 1949 reces
sion may be characterized as one of a continuing decline.
Net foreign investment was $1.3 billion in the fourth quar
ter of 1948, $1.4 billion in the first quarter of 1949,
$0.4 billion in the second quarter, $0.9 billion in the
third quarter, and $-0.5 billion in the fourth quarter of
1949. This was a reflection of the further decline in the
volume of merchandise exports which had started to decrease
after the third quarter of 1947. On an annual basis, the
value of exports was reduced by $2.0 billion between 1948
11Hickman, loc. cit.
12Conrad A. Blyth. "The 1948-1949 American Reces
sion," The Economic Journal, No. 255, 64:487-489, Septem
ber, 1951T
■^Benjamin Caplan. "A Case Study: The 1948-1949
Recession," Policies to Combat Depression, A Conference of
The Universities - National Bureau Committee for Economic
Research (Princeton: Princeton University Press, 1956),
p. 47.
and 19*19.14
Small Increase In
Government Spending;
The changes that took place within the government
sector of the economy between the fourth quarter of 1948
and the fourth quarter of 1949 are shown in Table XXX.
Federal receipts declined 5.2 per cent, due in large mea
sure to the tax reduction brought about by the Revenue Act
of 1948. Federal expenditures increased 4.6 per cent,
mostly because of increased military spending, an expansion
of foreign aid, and supports for agricultural prices.
State and local governmental spending continued to increase,
just as they had in every postwar year in response to the
needs of population growth and for community services.
The National Budget
The income and expenditures for consumers, businesses
government, and net foreign investment, are combined in
Table XXXI. The gross national product decreased only $8.5
billion in annual rate, or 3.2 per cent. This relatively
small decline was the result of firmness in the consumption
segment and an increase in the government sector, coupled
with a significant decrease in domestic gross investment.
14
Walter S. Salant, et al., The United States Bal
ance of Payments in 1968 (Washington: The Brookings In
stitution, 1963), Table 1, pp. 278-281.
145
TABLE XXX
GOVERNMENT SECTOR OF NATIONAL ECONOMIC BUDGET
FOR FOURTH QUARTERS OF 1948 AND 1949 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF
DOLLARS
1948
MO
CH
IN
NEY
ANGE
RATE
PERCE
CHA
IN F
.NTAGE
lNGE
iATE
1949
+ - + —
CASH RECEIPTS
Federal 42. 2 40.0 2. 2 5.2
State and Local
17-1 16.5 . 6
3.5
TOTAL
59.3 56.5 2.8
4.7
CASH PAYMENTS
Federal 23- 4 24.5 1.1 4.6
State and Local 16. 8
18.9
2.1
12.5
TOTAL 40. 2 43. 4 3.2
7.9
SURPLUS
19.1 13.1 6.0
31. 4
SOURCES: National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954,
Tables & and 45.
John M. Firestone. Federal Receipts and Expendi
tures During Business Cycles, A Study by the
National Bureau of Economic Research (Princeton:
Princeton University Press, I960) Table A-3,
pp. 127-131.
E. Cary Brown. "Federal Fiscal Policy In the
Postwar Period." Postwar Economic Trends In the
United States, Ralph E. Freeman, Editor (New
York: Harper & Brothers, I960), Table 1, pp. 142-
143.
Columns may not add because of rounding.
146
TABLE XXXI
SUMMARY OP NATIONAL ECONOMIC BUDGET INCLUDING ALL
SEGMENTS OP THE ECONOMY FOR THE FOURTH QUARTERS
OP 19^8 AND 1949 AS EVIDENCED BY SEASONALLY
ADJUSTED QUARTERLY TOTALS AT ANNUAL RATES
IN BILLIONS OP DOLLARS
SEGMENT
OF
ECONOMY
RECEIPTS
EXPENDITURES
OR
NET POSITION
IV
QTR.
1948
IV
QTR.
1949
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ —
+
—
Consumption Receipts 192.4
186.7 5.7 5.7 2.9
Expenditures 180.I
183.5
3.4 1.8
Net Position
12.3
3.2
9.1 73.9
Business Receipts 29 .1 25.8
3.3 11.3
Expenditures 42.4
29.1 13.3 31.3
Net Position
-13.3 - 3.3 10.0
75.1
Government Receipts
59.3 56.5
2 .3
4.7
Expenditures 40.2 43.4 3.2
7.9
Net Position
19.1 13.1 6.0 31.4
Interna
tional
Net Foreign
Investment 1.3 - .5 1.8 138.4
ADJUSTED
GROSS
NATIONAL
PRODUCT 264.0
255.5 8.5 3.2
SOURCE: Selected Statistics from Tables 8, 45, 47, and 49.
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Columns may not add because of rounding.
147
III. ANALYSIS OP ECONOMIC CONDITIONS
A variety of factors served to Influence the economy
so as to effect a breathing spell In the Inflationary surge
that had followed the postwar adjustment. The majority
opinion among American economists is that it was an inven-
15
tory recession. Other economists have ascribed the cause
to underconsumption in the form of the reductions in exports
and military spending.1^ In analyzing the economic condi
tions, the inclination is to subscribe to an eclectic
rationale that includes some of the aspects of both schools
of thought.
Role of Monetary Management
Whether or not it was just a coincidence, the begin
ning of the recession occurred at about the same time that
the Federal Reserve System and the Treasury took action -to
combat inflation through a tightening of credit.
Action on reserves. In February and June of 1948,
the Federal Reserve System raised the reserve requirements
15
Martin Bronfenbrenner, "Comment on A Case Study:
The 1948-1949 Recession: by Benjamin Caplan, in Policies to
Combat Depression (A Report of the National Bureau of
Economic Research. Princeton: Princeton University Press,
1956), p. 53.
^Hamberg, loc. clt.
148
of the New York and Chicago banks about $1 billion.^
These member banks in turn sold government securities in
order to acquire additional reserves. In September of 1948,
reserve requirements were raised again. The net effect of
raising the reserve requirements was to reduce the liquid
assets of the banking system in the amount of $6.5 billion.
Since liquid reserves were reduced, the effect might have
been that banks became less willing to continue the process
of selling bonds and making loans. However, since the sys
tem was not forced to borrow, it appears that raising the
reserve requirements in 1948 simply meant a transfer of
Treasury obligations from commercial banks to the Federal
18
Reserve banks. The reason that it meant a transfer was
that the government securities were sold in a pegged market
and the commercial banks easily acquired sufficient reserves
to support their outstanding loans.
Action on credit. Consumer credit controls had ex
pired in November of 1947. The Congress reinstated these
controls as Regulation W in September of 1948. This regula
tion of down payments and maturities on installment credit
was passed by the Congress as an anti-inflationary measure.
17
Daniel Hamberg, Business Cycles (New York: The
MacMillan Company, 1951), p. 493•
T 8
Charles C. Abbott, The Federal Debt (New York:
The Twentieth Century Fund, 1953), p. 57•
1^9
After the recession was recognized, the Federal Reserve Sys
tem relaxed the regulation In March of 19^9, and brought
about Its termination in June of 19^9- The economic effect
of these credit controls was probably to keep some marginal
buyers out of the market until the controls were lifted in
mid-19^9.19
Action on cash surplus. From June 30, 19^7, to June
30, 19^8, the Treasury used its $8 billion cash surplus to
retire $8 billion worth of marketable debt. The bulk of
this reduction was in the first quarter of 19^8, and 56 per
cent, or $5 billion, was held by the Federal Reserve Sys-
20
tern. This action on the part of the Truman Administra
tion was intended to have a maximum anti-inflationary ef
fect through a reduction in the total amount of the federal
debt held by banks. The purpose in concentrating on the
debt held by Federal Reserve banks was to put pressure on
commercial banks to replenish their reserves by selling
21
government securities to the Federal Reserve System.
19
Hickman, op. cit. , p. 73.
20
Annual Report of the Secretary of the Treasury for
the Year Ended June 30* 19^7, p. ^ .
Annual Report of the Secretary of the Treasury for
the Year Ended June 30» 19^8» p. 38.
21
Henry C. Murphy, The National Debt In War and
Transition (New York: McGraw-Hill Book Company, 1950) ,
p. 233.
150
However, since only 33 per cent, or $2.9 billion, of the
total amount retired by the Treasury came from nonbank hold-
22
ers, the deflationary effect was not very great.
Change In Interest Rate Policy
The Treasury's postwar debt management program had
sought to maintain government credit by means of exercising
23
control over interest rates. On the basis that any other
course of action might run the risk of a collapse in the
government securities market, the Treasury enjoyed the com
plete cooperation of the Federal Reserve System. However,
there was a trend toward higher interest rates, which the
Federal Reserve System had identified as early as mid-1945.
The Treasury was gradually forced to permit slight increases
in interst rates: (1) between July and December of 19^7,
the rate on bills was raised from 3/8 of 1 perccent to 1 per
cent; (2) between August of 19^7 and August of 19^8, the
rate on certificates was raised from 7/8 of 1 per cent to
11/k per cent; (3) between October of 19^7 and December of
19^8, the rate on long-term bonds was raised from 2.26 per
22
Lester V. Chandler, Inflation in the United States
1940-1948 (New York: Harper and Brothers, 1951), p. 271.
2 3
Annual Report of Secretary of the Treasury for the
Year Ended June 30 * 19^9» P^ 16.
151
2 4
cent to 2.45 per cent. But the most Important event In
debt management policy took place on June 28, 1949 , when
the Open Market Committee of the Federal Reserve System
announced its commitment to an easy-money policy in place of
25
adherence to low interest rates. This was an important
step in a series of events that were to culminate in the
Accord of 1951.
Fall in Exports
During 1948, there was a decline of $2.5 billion in
United States export trade. The high level demand for
American products had reached its peak in 1947, when there
had been a $4.2 billion increase in such trade. The reasons
for the lower level of exports in 1948 were (1) the rapid
recovery of Europe, in part due to the effective assistance
rendered under the Marshall Plan; (2) the increasing diffi
culty of foreign countries in securing foreign exchange due
to the dollar shortage; and (3) the depreciation of the dol
lar as a result of American price inflation. Even though
foreign trade constituted only 4 per cent of gross national
product in 1947, the sharp turn in the volume of exports in
2 4
Milton Friedman and Anna Jacobson Schwartz. A
Monetary History of the United States 1867-1960 (Princeton:
Princeton University Press, 1963), p. 579.
25
Paul Studenski and Herman E. Krooss, Financial
History of the United States (New York: McGraw-Hill Book
Company, Inc., 1952), p. 478.
152
19*18 probably exerted a small measure of Influence on busi
nessmen's expectations.
Rate of Consumption and Inventories
As early as January, 19*19, the Department of Commerce
pointed out the change that was taking place in the rate of
2 6
consumer spending. In spite of only minor changes in
national income, retail trade dropped off and inventory in
vestment rose In 19*18. This Increase In inventories was
not planned, and therefore, It had a considerable effect on
the outlook of businessmen. Relative to nondurables, the
ratio of total retail inventories to total retail sales in
creased 17 per cent during the year following October of
19*18. It appears that by the Fourth Quarter of 19*18, the
ratio of inventories to sales In soft goods had reached its
prewar or normal level. When sales volume declined in 19*19,
the result was Inventory accumulation. However, inventories
were not generally excessive before the recession began. At
the end of 19*18, the ratio of inventories in manufacturing
and distributing to sales were below the prewar levels.
During 19*15-19*18, restocking had been mostly an effort to
regain the prewar relationship between stocks and sales.
There was, consequently, little need during 19*19 to liqui
date large inventories that might have been accumulated for
2 6
Survey of Current Business, January 19*19.
27
Hamberg, op. clt., p. 500.
153
speculation. This tended to keep production and prices
from making any large declines and the deflationary force of
2 8
inventory disinvestment had run its course by mid-1949.
Fall in Effective Demand
The reasons behind the change in the rate of growth
in consumption are based on the decline in effective de
mand. In the first place, the backlog of pressing needs had
mostly been filled by the fourth quarter of 1948. There
were a few exceptions, such as automobiles and electrical
motors, but by and large consumer demand had leveled off.
Table XXXII indicates that effective demand had decreased
in 1948 as evidenced by the fact that the rate of savings
went up during the second half of the year. During the
third and fourth quarters of 1948 and the first quarter of
1949, the average annual rate of savings was $12.2 billion
and this was an average of 6.3 per cent of disposable per
sonal income. Secondly, there had been a 43 per cent rise
in the cost of living index. This had served to reduce the
large volume of accumulated liquid assets in the hands of
the public. Thirdly, consumers began to gear their con
sumption expenditures to their current Incomes. When much
of the accumulated liquid assets had been spent, consumers
were forced to omit past savings as a source of funds to be
combined with Income for consumption expenditures.
2 8
Hickman, op. cit. , p. 76.
TABLE XXXII
PERSONAL INCOME IN THE UNITED STATES AND ITS DISPOSITION
ON A QUARTERLY BASIS BEGINNING WITH THE FIRST QUARTER
OF 19*18 AND ENDING THE FIRST QUARTER OF 1950 AS
EVIDENCED BY SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
QUARTER
AND YEAR
PERSONAL
INCOME
PERSONAL TAXES
DISPOSABLE
INCOME CONSUMPTION SAVINGS
SAVINGS
AS A
PERCENTAGE
OF DIS
POSABLE
INCOME
FEDERAL
STATE
& LOCAL
19*18-1 201.5
21.1 2.1
178.3 17**.1
4.2
2.3
19*18-11 208.1
18.7
2.1
187.3
176.8 10.6 5.6
1948-111 212.3 18.0 2.2 192.1 179.5
12.6
6.5
1948-IV 212.8 18.2 2.2 192.4 180.1
12.3 6.3
19*19-1 208.9 16.3
2.4 190.2 178.4 11.8 6.2
19*19-11
207.6 16.2 2.4
188.9
180.4 8.6
4.5
19*19-111 205.5
16.2
2.5 l86.9 l80.1 6.7 3.5
19*!9-IV
205.3
l6.1
2.5 186.7 183.5 3-2 1.7
1950-1 218.5 16.7 2.7 199.1 185.2
13.9 6.9
SOURCE: Table *17, National Income Supplement to Survey of Current Business, U. S.
Department of Commerce, 195*1.
Percentages Computed.
Columns may not add because of rounding.
155
Nature of the Causes
of 19*19 Recession
The actions of the Treasury and the Federal Reserve
System In 1948 were of only minor influence as causes of the
igijg recession; their influence could be described as con
tributory. Investment in inventories had not been specula
tive but had followed an almost conservative pattern, so
that an adjustment was necessary mostly in final goods. The
rate of consumption did not fall off significantly during
1949. Savings had decreased. However, during the eleven
month recession, industrial production fell only 10 per
cent. The federal government's expenditures went up $3-2
billion, housing expenditures rose $2.1 billion, and the
demand for automobiles was firm. This pattern gives a pic
ture of conflicting forces that caused only a minor hesita
tion in the economy's postwar expansion. Rising prices
were temporarily restrained by an increase in aggregate sup
ply. Consumption slowed its rate slightly after three
years of high aggregate demand. Investment tended to pause
in the great surge of postwar development. A more severe
decline in economic activity did not take place because
there were certain elements of strength at this period.
These elements were: (1) an expansion of government spend
ing for defense, (2) a rise in construction of residential
housing, (3) a strong demand for automobiles, (4) an ex
pansion of government spending for public construction, and
(5) a release of $3.8 billion through the purchase of
156
government securities by banks when the Federal Reserve
System eased reserve requirements between May and September
of 1949.
IV. ROLE OF PRESIDENT'S COUNCIL
IN 19^9 RECESSION
The first test of the role of the Council of Economic
Advisers in a deflation took place during 1948 and 1949.
The Employment Act had made the Council and the President
responsible for the formulation of policy to stabilize eco
nomic activity. While the 1949 recession may be considered
to be a limited test, the characteristics and actions of
such a mild deflation were possibly more demanding to ana
lyze and combat than those which might accompany a reces
sion of more serious intensity. A summary of the tax and
expenditure policy recommendations of the Council of Eco
nomic Advisers, as presented through the Economic Reports
of 1947-1949, is shown in Figure 2. The first economic re
port pointed out the danger of inflation and recommended
high revenues in order to achieve surpluses for debt reduc-
29
tion. In January of 1948, when inflation was still strong,
the report recommended a $40 per capita tax reduction for
29
Economic Report of the President to the Congress,
January 8, 1947 (New York: Reynal and Hitchcock, 1948),
Part II, p"! 34 •
ECONOMIC
REPORT
JANUARY
1947
JULY
1947
JANUARY
1948
JULY
1948
JANUARY
1949
JULY
1949
ECONOMIC
CONDITION
Inflationary Inflationary Inflationary
Inflationary
With Signs
Of Recession
Recession
Deflationary
With Signs
Of Recovery t
COUNCIL
TAX
RECOMMENDATION
OR
PROGRAM
Hold
Rates
Constant
Hold
Rates
Constant
$40 Credit
For Every
Taxpayer &
Dependent
Increase
Income
Taxes-
Personal
And
Corporate
Hold
Rates
Constant $4 Billion
Increase In
Corporate
Taxes
Excess
Profits
Tax $4 Billion
COUNCIL
EXPENDITURE
RECOMMENDATION
OR
PROGRAM
Achieve
Surplus,
Expenditures
Less Than
Revenue
Achieve
Surplus y
Keep
Expenditures
Less Than
Revenue
Achieve
Surplus
Keep
Expenditures
Less Than
Revenue
Loss Of
Surplus Due
To Tax Cut
Need For
Prudence
In
Expenditures
Maintain
Level
Of
Expenditures
Recognition
Of
Higher
Defense
Expenditures
Need For
Surplus
Deficit
If Necessary
CHARACTERISTIC
OF
RECOMMENDED
PROGRAM
Anti-
Inflationary
Anti-
Inflationary
Anti-
Inflationary
Anti-
Inflationary
Anti-
Inflationary
Neutral
Figure 2
Summary of Tax and Expenditure Recommendations
By The Council of Economic Advisers
As Contained in Annual and Midyear Reports of 1947-49
158
all taxpayers and their dependents. This recommendation
was made on the basis of tax Justice, that is, to help the
lower-income groups in their problem of diminishing purchas
ing power. But when tax reduction was coupled with the
revival of the excess profits tax, the Januray, 1948 , re
port did not advocate an anti-inflationary program even
though the diagnosis of inflation was correct.
Emphasis on Inflation
It must be recognized that the President's Economic
Report of July, 1948, did point out that the continuing
postponement of an anticipated postwar recession might be
31
creating a false sense of security. But the same report
32
saw inflation as the greatest danger to the economy.
Even in the January, 1949 report, the Council recommended
a $4 billion surplus to be obtained from taxation on cor
porations, estates and gifts, the upper and middle brackets
of the individual income tax, and excises. The 1949 Eco
nomic Report further advocated an increase in social
30
Economic Report of the President to the Congress,
January 14, 194b (New York: Reynal and Hitchcock, 194b),
Fart I, p. a1.
31
Midyear Economic Report of the President to the
Congress, July 30, 194b (New York: Harcourt, Brace and
Company,1949), Part II, p. 251.
32Ibid., p. 255.
33
^ Economic Report of the President to the Congress,
January 7, 1949 (New York: Harcourt, Brace and Conroanv.
1PT9T7 Fart I, p. 38-40.
159
•3/j
security taxes and careful limitation of federal spending.
This program appears to have been designed to combat infla
tion at a time when the economy was experiencing a reces
sion.
Council Action in Recession
Even though the Council's recognition of the reces
sion was rather late, its reaction to the deflation seems
to have been appropriate. It might appear from Figure 2
that the Council's recommendation in recession was the same
as in inflation. Actually, the Council was optimistic about
the capacity of the economy to work its way out of the re
cession based upon the following indicators: (1) consump
tion which was running ahead of production, (2) the upturn
in housing starts, (3) the recovery of investment expendi
tures, (4) the effect of rising government spending, and
(5) the influence of transfer payments on disposable in-
35
come. Reliance by the Council upon the behavior of mar
ket forces to readjust the economy appears to have been the
correct stabilization policy as of July, 1949. The Coun-
sll's consideration of the deflation as a short-run problem
within the framework of the larger and characteristically
long-run inflationary trend was sound economic reasoning.
The 1949 period was recognized as one of transition, having
34
Ibid., p. xxiv.
35
Caplan, op. cit. , p. 50.
160
within its total composition factors of underlying strength
Of.
and also elements of uncertainty. The position that the
Council seemed to take was that some deflation was not only
inevitable but desirable after the three years of postwar
17
inflation. In meeting recession with what would be a
firm stabilization policy, the Council’s proposals seemed
to be modest and cautious. One of the most significant de
cisions of the Council during 19^9 was to accept deficit
financing as the federal course for the next fiscal year,
OQ
even though Chairman Nourse was not free of apprehension.
V. FEDERAL FISCAL POLICY IN
THE 19^9 RECESSION
The fiscal policy actions of the federal government
relative to the 19^9 recession were not the result of a
consciously-planned and carefully executed discretionary
fiscal policy. Some of the enactments that turned out to
be appropriate were passed for other than fiscal policy
purposes; some of the proposals that were not enacted might
have made a mild recession more severe.
O £
Edwin G. Nourse, Economics in the Public Service
(New York: Harcourt, Brace and Company, (1953), p. 239.
37
J'Lewis, op. clt. , p. 107.
O Q
Nourse, op. cit. , p. 282.
l6l
Tax Reduction
The Revenue Act of April 2, 1948, was passed in a
period when inflation was still considered to be the most
important economic problem. The possibility of deflation
hardly entered into the considerations prior to enactment.
However, the effect of the act was to reduce annual collec
tions of personal income taxes by $4.7 billion during 1949?^
In spite of the fact that social security taxes increased
along with indirect business taxes, total tax revenue in
1949 decreased. The fortunate result was that the Revenue
Act of 1948 turned out to be a well-timed instrument of
fiscal policy to minimize the effect of the 1949 recession.
The act was passed by a Republican Congress over the objec
tions of the administration, for the political considera
tions of tax reduction and not for purposes of fiscal
14 40
policy.
Federal Expenditures
Because of international tensions and the agriculture
support program, federal spending rose $10 billion in annual
rate between the first quarter of 1948 and the first quarter
of 1950. Again, it is evident that increased government
spending for fiscal policy purposes was not the reason be
hind the additional expenditures. The international
39
Lewis, op. clt., p. 93.
40
A. E. Holmans. United States Fiscal Policy 1945-
1999 (London: Oxford University Press, 196l5, pp. 99-100.
162
situation was the reason for additional defense spending
plus the commitments of the Marshall Plan. The result was
that expenditures increased just as revenues were reduced,
the net effect being that the federal cash surplus was re
moved as the administration’s most effective anti-infla
tionary instrument.
Administration’s Anti-
Inflation Program
As early as November 17, 1947, President Truman re
commended to the Congress a ten point anti-inflationary
program. The program was divided into three parts, consist
ing of (1) credit restraints, (2) material allocation
authority, and (3) direct controls. These proposals were
reviewed in the 19 48 Economic Report.^ When they were not
enacted, the President called a special session of the Con
gress in July of 1948 to consider his anti-inflationary pro
gram, which was then reduced to eight points: (1) reestab
lish the excess profits tax, (2) restore consumer credit
controls, (3) grant bank credit control to the Federal
Reserve Board, (A) establish control over commodity ex
changes, (5) set up controls over scarce commodities, (6)
strengthen rent controls, (7) provide for rationing of
special products, and (8) establish rationing were needed.
^ Economic Report January 14, 19 48, op. cit., Part
II, p. 121.
Congressional Action on
Administration's Program
The Eightieth Congress, in regular and special ses
sion, did not favorably receive the President's anti-infla
tionary program. During the special session, the Federal
Reserve System was authorized to reimpose consumer credit
controls and to increase reserve requirements. Beyond that
the Congress felt that the proposals were more applicable
i i p
to a wartime economy. ^ The President recommended much the
same program in his 19^9 Economic Report.^3 From the view
point of contracyclical policy, it was fortunate that the
Congress passed the Housing Act on August 10, 19^8. This
act liberalized the program of federal housing administra
tion insurance for lower priced housing and rental units,
thereby stimulating new mortgage insurance programs, making
capital easier to borrow, and shifting construction to the
broader markets of lower priced housing and rental units.
Since disposable personal income changed little during the
recession, the economic effect of the Housing Act of 19^8
opened up an additional segment of housing demand for ex
penditure in 19^9.
t p
H£:Lewis, op. cit. , p. 97.
^ The Economic Report, January 7. 19^9» op. cit.,
pp. xxiv-xxviii.
VI. FISCAL POLICY OUTCOME DURING
THE 1949 RECESSION
164
Federal fiscal policy, in the form of discretionary
actions on taxes, expenditures, and debt management, did not
exert strong counter-cyclical influences during the 1949 re
cession. Fiscal policy actions were limited to mild stimu
lants for investment, minimum programs of public works,
limited expansion of credit by the Federal Reserve System,
and some promotion of housing starts. These measures were
cautious because they were undertaken in an atmosphere of
mixed opinion as to the possible length and severity of the
recession. If 1949 had been the beginning of a strong de
flationary movement, or a real depression, the anti-reces
sionary policy recommended by the administration would have
been inadequate. As it turned out, the 1949 recession was
moderate in its effects: this was fortunate because fiscal
policy was not prepared to stabilize the economy in the
event of a strong deflation.
Expenditure Effects
During Deflation
The downward course of federal spending was reversed
during the summer of 1947 and the level of spending rose
during 1948 and most of 1949- The upward trend was again
in response to the requirements of national defense.
Table XXXIII shows how spending for national security in
creased from 72.2 per cent of federal expenditures for
165
TABLE XXXIII
EXPENDITURES OF THE FEDERAL GOVERNMENT FOR NATIONAL
SECURITY AND OTHER PURPOSES ON A QUARTERLY BASIS
FOR THE FOURTH QUARTERS OF 19 48 THROUGH THE
FOURTH QUARTER OF 19 49 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS OF
DOLLARS
SPENDING FOR
NATIONAL SECURITY
SPENDING FOR
OTHER PURPOSES
YEAR QUARTER AMOUNT
PERCENTAGE
OF TOTAL AMOUNT
PERCENTAGE
OR TOTAL
1948
IY
17.1
72. 2 6.6
27. 8
19 49
I 19. 4
o
•
in
i - —
6.6 25.0
19 49 II
in
o
CM
77.0
6.3 23.0
1949
III
m
•
CT\
i —1
77-6 6.4 22. 4
1949 IV
OO
•
C"-
1 —1
72. 6 7.0 27.4
SOURCE : National Income Supplement to Survey of Current
Business, 1954.
166
gooda and services during the fourth quarter of 1948, to
77.6 per cent during the third quarter of 1949. The eco=
nomic effect of this Increase In defense spending served In
some measure to offset the decrease In the rate of growth
of consumption during the same period. This counterbalanc
ing of the private and public sectors of the economy tended
to prevent any large decrease in gross national product.^
Tax Effects During Deflation
The total annual revenue reduction in 1949, resulting
from the passage of the Revenue Act of 1948, was about $5.25
billion. The effect of this reduction was reflected in the
maintenance of high levels of consumption. Refunds were
very large in the early part of 1949, which was most oppor
tune from the standpoint of antirecessionary policy. The
Revenue Act of 1948 proved to be a well-timed tax cut that
helped to cushion the 1949 recession. In addition to the
tax cut, the federal income taxes, both corporate and per
sonal, demonstrated their automatic, built-in, responses to
the cyclical movements of the economy. The corporation in
come tax has been the largest built-in stabilizer, and tax
accruals, as a percentage of the change in gross national
product, decreased 25-3 per cent during the peak-to-trough
movement in 1949.^
2i ii
Caplan, op. cit., p. 49.
45
Lewis, op. cit. , p. 37-
167
Automatic change In Individual Income tax. Based up
on postwar experience, the built-in flexibility of the Indi
vidual Income tax base has been computed to be about 65 per
cent: that is, a $10 billion change in total adjusted gross
h c
income produced a $6.5 billion change in the tax base.
The marginal rate applying to additions to the tax base has
been set at about 27 per cent during the same period.
Since both the built-in flexibility of the base and the mar
ginal rate seem to have been generally constant, the built-
in flexibility of the individual income tax in respect to
adjusted gross income was roughly constant at between 17.0
! * o
to 18.0 per cent. Another measure of the automatic ad
justment of the Individual income tax is the ratio of ad
justed gross income to gross national product. It has been
found that adjusted gross Income tends to change from year
to year by 56 per cent of the change in gross national pro
duct. ^ on this basis, the built-in flexibility of the in
dividual income tax with respect to gross national product
has been between 8 and 10 per cent. The 1949 recession
^Joseph a . Pechman, "Yield of the Individual Income
Tax During a Recession," Policies to Combat Depression (A
Report of the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1956), p. 125.
^7Ibld. 48Ibid., p. 125-126.
^Richard Goode. The Individual Income Tax (Washing
ton: The Brookings Institution, 1964), p. 349.
5°Ibid.
16 8
probably would have been more severe if the Revenue Act of
19 48 had not reduced federal revenue by approximately 14 per
cent and thereby sustained the level of consumption expendl-
tures.J
Effect on Budget Surpluses
During 19 49, the surplus condition of the federal
government was replaced by a deficit. Prom the fourth quar
ter of 1948 to the second quarter of 1949, the gross nation
al product decreased $9.5 billion and the federal budget net
position of a $3.8 billion surplus decreased $7.7 billion
to a deficit of $3*9 billion. This large change in such
a short period of time was a demonstration of the automatic
stabilizing effect of the federal income taxes. Without
any discretionary action, the federal government changed
over to deficit financing. The need to increase federal
expenditures at a time when taxes had been reduced was
perverse to the fiscal requirements of the period but,
nevertheless, politically necessary.
Effects of Social Security System
Not only did tax reduction play a large role in min
imizing the severity of the 1949 recession, but other auto
matic stabilizers contributed to the mildness of the defla
tion by moderating the cumulative contraction in disposable
5^-Lewis, op. cit. , p. 127.
^Lewis, op. cit. , Table 20, p. 128.
169
income and consumption expenditures. The established social
security system made an important contribution toward mini
mizing the deflationary effects of the 1949 recession.
Table XXXIV shows that the level of unemployment rose to
6.4 per cent of the total civilian labor force during July
of 1949. During this same month, 60.2 per cent of these
unemployed persons were receiving benefit payments. During
March of 1949, 83.7 per cent of the unemployed received
benefit payments. Wage and salary receipts reached their
peak in October of 1948. During 1949, the aggregate loss
in wages and salaries was $6.3 billion: the benefits ac
cruing to unemployed persons amounted to 28 per cent of the
loss.53 a measure of the impact of such benefit payments
is that the ratio of benefit payments to consumption ex
penditures doubled after the fourth quarter of 1948, and
maintained the new relationship during all of 1949.
Effect on Purchasing Power
The Council of Economic Advisers set up as an annual
goal, at the beginning of 1949, the achievement of a bal
anced purchasing power to be achieved through a better
53ida C. Merriam, "Social Security Programs and
Economic Stability," Policies to Combat Depression (A Re
port of the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1956), p. 215.
54Ibid., p. 217.
TABLE XXXIV
UNEMPLOYMENT, UNEMPLOYMENT BENEFICIARIES, UNEMPLOYMENT
CONTRIBUTIONS AND UNEMPLOYMENT BENEFIT PAYMENTS
DURING THE 1949 RECESSION IN THE UNITED STATES
AS EVIDENCED BY UNEMPLOYED IN THOUSANDS, AND
CONTRIBUTIONS AND PAYMENTS IN
BILLIONS OF DOLLARS
YEAR QUARTER MONTH
NUMBER
UN
EMPLOYED
UN
EMPLOYED
AS A
PER CENT
OF C.L.F.
BENEFIC
IARIES
AS A
PER CENT
TOTAL UNEM.
UNEMPLOYMENT
CONTRIBUTIONS
UNEMPLOYMENT
BENEFIT
PAYMENTS
19^8 IV
Oct. 1,642
2.7 59.3
297.9 282. 3
Nov.
1,831
3.0 57.2
Dec. 1,941 3.2 69 • 6
1949
I
Jan. ~ 2,66'4 4.4
67.9
362.8 547.6 Feb. -3,221
5-3
69. 4
Mar.
__ 3,167
5.2 83.7
1949
II
Apr. 3,016 5.0 80.4
270. 8 617.4 May
3,289 5.3 73.5
June 3,778 6. d 66.3
1949
III
July
4,095
6.4 60.2
301.8 590.2 Aug.
3,689 5.8 63.6
Sept.
3,351 5-3
58.8
1949
IV
Oct. 3,576
5.7 49.7
292.1 519.0 Nov.
3,409
5.4
57-9
Dec.
3,489 5.6 60.8
SOURCE: Ida C. Merriam, "Social Security Programs and Economic Stability." Policies to
Combat Depression (A Report of the National Bureau of Economic Research Princeton:
Princeton University Press, 1956), pp. 212 and 219* M
171
(515
alignment of the pattern of production and consumption.
Table XXXV shows that prices fell very little during the
1949 recession. From November of 1948 to October of 19*19,
the consumers' price index decreased only 2.2 per cent, and
the wholesale price index declined only 7.2 per cent. In
comes appear to have been geared to current prices and lit
tle effort was made during the recession to reduce wages
56
and thereby achieve some lower price level. The resis
tance of the federal government to wage decreases, coupled
with steady prices, served to effect some measure of sta-
C7
bility in purchasing power during 19* 19.
Effect on Production
The administration's annual objective for an in
crease in production in 19*19 was set at 3 to * 1 per cent, or
$8 to $10 billion in 19*18 prices. Table XXXVI shows that
instead of increasing 3 to * 1 per cent, the industrial pro
duction index fell 14.9 per cent between November of 1948
and October of 1949- The fall in this Index was a reflec
tion of the reaction of businessmen to the unplanned
55
The Economic Report, January 7, 1949, op. cit.,
Part I, p~ 38" !
56
Hickman, op. cit., p. 403.
57
The Midyear Economic Report of the President to
the Congress, July 11, 1949 (Washington: Government Print-
lng Office, 1949), p. 8.
58
The Economic Report, Januray 7, 19*19, op. cit. ,
Part I, p~ 36.
172
TABLE XXXV
CONSUMER RETAIL AND WHOLESALE PRICE INDEXES
ON A MONTHLY BASIS BEGINNING NOVEMBER
OF 19 48 AND ENDING OCTOBER OF 19 49
YEAR MONTH
CONSUMERS'
PRICE
INDEX
WHOLESALE
PRICE
INDEX
19 48 NOVEMBER 172.2
163.9
1948 DECEMBER
171.3
162. 3
1949
JANUARY
170.9 160. 7
1949
FEBRUARY 169.0 158. 4
1949
MARCH
169.5
158. 6
19 49
APRIL
169.7 157.1
1949
MAY 169.2 155. 8
1949 JUNE 169.6
154.5
1949 JULY 168. 5 153.6
1949 AUGUST 168. 8
152.9
1949
SEPTEMBER 169 .6
153.5
1949
OCTOBER
168. 5
152.2
SOURCE: U. S. Department of Labor
173
TABLE XXXVI
INDUSTRIAL PRODUCTION INDEX ON A MONTHLY BASIS
BEGINNING NOVEMBER OP 1948 AND ENDING
OCTOBER OF 1949
YEAR MONTH
INDUSTRIAL
PRODUCTION
INDEX
1948 NOVEMBER
195
1948 DECEMBER 192
1949
JANUARY
191
1949 FEBRUARY
189
1949
MARCH 184
1949 APRIL
179
1949
MAY 174
1949
JUNE
169
1949 JULY 161
1949
AUGUST 170
1949
SEPTEMBER 174
1949 OCTOBER 166
SOURCE: Federal Reserve Bulletin.
(1935 - 1939 = 100)
174
59
accumulation of inventories. The levels of production
were reduced in a significant manner. Table XXVI reveals
a five point decline in the Industrial production index
each successive month from March to June of 1949, and in
July, the reduction was eight points. The industrial pro
duction index, in July of 1949, returned to the same level
it had occupied in April of 1946.
Practicing the Gentle Art
of Disinflation
In his Economic Report of January, 1949, President
Truman entitled one of his sections on legislative recom
mendations, "Policies to Combat Inflation and to Promote
Production in Certain Industries. Prom the standpoint
of the long run this approach to fiscal policy was not de
signed to achieve stability in the event of a recession of
short duration.^1 The Administration considered inflation
59
The Midyear Economic Report of the President to
the Congress, July 26, 1950 (Washington: Government Print
ing Office, 1950), p. 32.
^°The Economic Report of the President to the Con
gress January 7, 1949 (New York: Harcourt, Brace and Com
pany, 1949) , p. xxiv.
^The Council of Economic Advisers was criticized
for not having offered an arsenal of monetary and fiscal
weapons to meet the recession in its January 1949 report.
The criticism centered around the tendency to avoid actions
for economic stabilization in favor of actions that would
support the market for government securities.
Howard S. Ellis, "The January 1949 Economic Report
of the President," Review of Economics and Statistics,
31:174-176, August, 1949.
175
to be the major danger and the legislative recommendations
were directed against inflation. Higher corporate taxes,
lower levels of spending and the creation of surpluses,
were proper proposals for an anti-inflationary fiscal pol
icy. Even when the administration noted the slowing down
of inflation, the recommended tax policy was still to in-
P
cur no large loss in revenue. The Council of Economic
Advisers felt that strong measures to combat inflation were
not needed. In a mood of optimism, the Council depended
upon business confidence to maintain a reasonable level of
investment in spite of the decline in production levels and
a fall in price levels. Consumer strength was maintained
by income that was buoyed up by social security payments
and special payments to veterans. By relying on the reduc
tion in taxes resulting from the Revenue Act of 1948, plus
the automatic, built-in stabilizing features of the income
tax systems, the administration practiced the gentle art of
disinflation for the short-run, and continued its anti-in
flationary position for the long-run. By relying on a fis
cal policy that called for additional expenditures on the
part of the federal government, expecially for defense, the
effects of the recession might have been minimized.^
C p
The Midyear Economic Report of the President to
the Congress, July 11, 1949 (Washington: Government Print
ing Office, 1949), p. 10.
^G. l. Bach, "Monetary-Fiscal Policy Reconsidered,"
The Journal of Political Economy, 57:384, October, 1949.
CHAPTER VII
ANALYSIS OF FISCAL POLICY DURING PEACETIME
RECOVERY FROM RECESSION— OCTOBER, 19^9,
TO JUNE, 1950
While the trough of the 19^9 recession has been set
by the National Bureau of Economic Research as October of
19^9, there were signs of recovery in the early part of the
third quarter of 1949.^ Sometime between mid-19^9 and the
beginning of the Korean War in June of 1950, the economy
made Its recovery from the 19^9 recession. The importance
of an analysis of fiscal policy from October of 19^9 to
June of 1950 is to try to demonstrate that there was a
peacetime recovery of the economy prior to the Korean War,
and to indicate the role that fiscal policy played in that
recovery.
I. ANALYSIS OF ECONOMIC CONDITIONS
A review of Table XXXVII, showing the changes in the
annual rate of expenditures for the fourth quarter of 19^9
and the first half of 1950, indicates that gains were regis
tered in gross national product, personal consumption, and
Geoffrey H. Moore, Business Cycle Indicators (A
Study by the National Bureau of Economic Research. Prince
ton: Princeton University Press, 1961), p. 670.
176
177
TABLE XXXVII
GROSS NATIONAL PRODUCT AND RELATIVE EXPENDITURES
FOR CONSUMPTION, INVESTMENT, AND GOVERNMENT
FOR THE FOURTH QUARTER OF 1949 AND THE
FIRST AND SECOND QUARTERS OF 1950
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
QUARTER
AND YEAR
GROSS
NATIONAL
PRODUCT
(Y)
PERSONAL
CONSUMP
TION EX
PENDITURES
(C)
PRIVATE
DOMESTIC
INVEST
MENT
< V
NET
FOREIGN
INVEST
MENT
(If)
GOVERN
MENT EX
PENDITURES
(G)
1949-IV 255.5 183.5 29.1 - .5
43.4
1950-1 264. 9
185.2
39.9 -1.5 41.3
1950-11 275.9 189.1 49.0
-2.3
40.1
Change
49-IV
50-11
+20. 4 + 5.6
+19.9
-1.8
-3.3
SOURCE: Selected Statistics from Table 45, National Income
Supplement to Survey of Current Business, U. S.
Department of Commerce, 1954.
Columns May no add because of rounding.
178
Private domestic investment. During these three quarters,
gross national product increased $20.4 billion in annual
rate, or 7.9 per cent. Personal consumption expenditures
rose by $5.6 billion, or 3.0 per cent. The largest gain
was made by private domestic investment, which increased 68
per cent in changing its annual rate from $29.1 billion to
$49.0 billion. During the three quarters under considera
tion, net foreign investment decreased $1.8 billion in
annual rate and government expenditures decreased $3.3 bil
lion In annual rate, or 7.6 per cent. However, the general
level of government spending did remain firm, and this,
coupled with a large increase in investment, seemed to per
mit consumption expenditures to rise slightly and to allow
gross national product to reach a level 7.5 per cent high
er than that registered for the third quarter of 1949.
Breakdown by Expenditure Classes
The breakdown of national income by expenditure
classes for the fourth quarter of 1949 and the second quar
ter of 1950 is shown in Table XXXVIII. All of the classes
of expenditure register an Increase between the two desig
nated periods. National income, personal income, and dis
posable income show gains of from 7.4 to 9.8 per cent.
Indirect business taxes and personal taxes increased 5.9
and 7.5 per cent respectively. As an indication that the
recession had passed, corporate profits plus the inventory
TABLE XXXVIII
179
GROSS NATIONAL PRODUCT SHOWING BREAKDOWN BY CLASSES OF
EXPENDITURE INCLUDING NATIONAL INCOME, PERSONAL
INCOME, AND DISPOSABLE PERSONAL INCOME FOR
FOURTH QUARTER OF 1949 AND SECOND QUARTER
OF 1950 AS EVIDENCED BY SEASONALLY
ADJUSTED QUARTERLY TOTALS AT
ANNUAL RATED IN BILLIONS
OF DOLLARS
4th
QTR.
1949
2nd
QTR.
1950
'M0NE7
CHANGE
IN RATE
CHA
IN F
ENT”"
NGE
ATE
+ — + w
GROSS NATIONAL PRODUCT 255.5 275.9
20.4
7.9
LESS: Capital Consumption
Allowance
19.1
20.2 1.1 5.8
Indirect Business Taxes 22.0
23.3 1.3 5.9
Business Transfer
Payments .8 .8
Statistical Discrepancy 2.0 .0 2.0 100 .0
PLUS: Subsidies Less Current
Surplus of Government
Enterprises
- .3
.6 .9 200.0
EQUALS:NATIONAL INCOME
211.3
232.2
20.9 9.8
LESS: Corporate Profits and
Inventory Valuation
Adj ustment
25.3
32.8
7.5 29.6
Social Insurance
Contribution
5.7 6.7
1.0
11.7
PLUS: Government Transfer
Payments 11. 8 14.2 2.4
20.3
Net Interest Paid by
Government 4.6
4.7
.1 2.2
Dividends 7.8
8.3 .5
6.4
Business Transfer
Payments .8 .£
_
EQUALS:PERSONAL INCOME
205.3 220.7
15. 4
7.5
LESS: Personal Taxes 18.6 20.0 1.4
7.5
EQUALS:DISPOSABLE PERSONAL
INCOME
186.7 200. 7
14.0 7.4
LESS: Personal Savings 3.2 11.6 8.4
262.5
EQUALS:PERSONAL CONSUMPTION
EXPENDITURES
183.5 189.1
5.6 3.0
SOURCE: Selected Statistics from Tables 47 and 49
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 195'4.
Changes and Percentages Computed.
Columns may not add because of rounding.
180
valuation adjustment increased a healthy 29.6 per cent, and
dividends rose 6.4 per cent. Another significant increase
was the 20.3 per cent rise in government transfer payments.
The most significant change was in savings, which registered
an $8.4 billion increase in annual rate; this was an in
crease of two and one-half times the annual rate of the
fourth quarter of 1949.
The National Economic Budget
The detailed changes in the economy between the
fourth quarter of 1949 and the second quarter of 1950 may
be considered by means of the national economic budget.
Consumption segment. The status of the economy*s
consumption segment during the selected periods is shown in
Table XXXIX. Income, transfer payments, dividends and In
terest, combined to raise personal Income $15.4 billion in
annual rate, or 7*5 per cent. Personal taxes Increased
$1.4 billion, and this change represented the same percent
age increase as in personal income, or 7.5 per cent. The
same relationship was reflected in the increase In dispos
able income, which reflected an increase in annual rate of
$14.0 billion, or 7.5 per cent. Spending Increased in all
categories: durables rose In annual rate by 5.1 per cent;
non-durables by 1.7 per cent, and services by 4.5 per cent.
The overall annual rate increase in expenditures during the
period of three quarters was $5-6 billion, or 3.1 per cent.
l8l
TABLE XXIX
CONSUMPTION SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTER OF 1949 AND SECOND QUARTER OF 1950
AS EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL RATES
IN BILLIONS OF DOLLARS
IV
QTR.Q
1949
II
QTR.
1950
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ — + -
RECEIPTS
PERSONAL INCOME
205.3 220.7
15.4
7.5
Labor Income 134.6 143.1 8.5 6.3
Proprietors & Rental Income 40.2 43.8 3.6
8.9
Dividends & Interest 17.9
l8.8
.9
5.0
Transfer Payments 12.6 15.0 2.4
19.0
Less: Personal Tax & Non
Tax Payments 18.6 20.0 1.4
7.5
EQUALS: DISPOSABLE INCOME
186.7 200.7
14.0
7.5
EXPENDITURES
DURABLE GOODS
25.1
26.4
1.3 5.1
Automobiles & Parts 10.1 11.6
1.5
14.8
Household Equipment &
Furniture 11.9 11.5
h
• • »
3.3
Other 3-2
3.3
,1
3-1
NONDURABLE GOODS 96.6
98.3 1.7 1.7
Food
56.5 57.7
1.2 2.1
Clothing and Shoes 18.0 18.0 — - - -
Other 22.1 22.6"
.5 2.3
SERVICES
61.7 64.5
2.8
4.5
Housing 20.2 21.1
.9
4.4
Other
41.5
T3.4
1.9
4TT
TOTAL EXPENDITURES 183.5 189.1
5.6
3*1
SAVING (RECEIPTS LESS
EXPENDITURES) 3.2 11.6 8.4
162.5
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Washing
ton: Government Printing Office, 1954), Selected
Statistics from Tables 47 and 49.
Changes and Percentages Computed
Columns may not add because of rounding.
182
Since spending did not keep pace with Income, the savings
Increase of $8.4 billion in annual rate represented an in
crease of 162.5 per cent.
Business segment. The condition of the business seg
ment of the economy between the fourth quarter of 19 49 and
the second quarter of 1950 has been summarized in Table XL.
Corporate profits increased in annual rate the significant
amount of $9.9 billion, or 39*9 per cent. Undistributed
profits rose $7.2 billion, or 27-9 per cent. These signi
ficant increases were reflected automatically in corporate
taxes,which increased $5.6 billion in annual rate, or
56.5 per cent. Not only was business income significantly
increased during this period, but investment expenditures
also rose in an important fashion. Table XL shows that
spending for construction rose 18.2 per cent, and expendi
tures for producers' durables rose 15-9 per cent. The
change in business inventories was $13.6 billion, or 115.8
per cent, tending to indicate that businessmen had renewed
their confidence in effective demand after the 1949 reces
sion. Total domestic gross investment rose $19.9 billion
in annual rate, or 68.3 per cent. The excess of investment
over income amounted to an increase in annual rate of $12.7
billion, or 384.8 per cent; this was a very large increase
to have taken place in the short period of three quarters.
183
TABLE XL
BUSINESS SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
FOURTH QUARTER OF 19 49 AND SECOND QUARTER
OF 1950 AS EVIDENCED BY SEASONALLY
ADJUSTED QUARTERLY TOTALS AT
ANNUAL RATES IN BILLIONS
OF DOLLARS
IV
QTR.
1949
II
QTR.
1950
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
RECEIPTS
Corporate Profits 24. 8 34.7
9.9 39.9
Less: Corp. Profits Tax
Libility 9.9 15.5 5.6 56.5
Dividends 7.8 8.3
•5
6. 4
Equals:Corp. Undivided
Profits
7-1 10.9 3.8
53.5
Plus: Corp. Consumption
Allowance 19.1 20.2 1.1
5.7
Less: Corp. Inventory Valu
ation Adjustment .4
-1.9 2.3 475.0
EQUALS:UNDISTRIBUTED PROFITS
AND ADDITION TO
RESERVES 25. 8 33.0 7.2
27.9
DOMESTIC GROSS INVESTMENT
Construction 18.6 22. 0
3-5
18. 2
Residential, Nonfarm 9.6 12. 4 2.8
29.1
Non Residential
9-§
. 6 6.6
Producers' Durable Equipment
16. 9 19. 6 2.7
15.9
Change in Business Inven
tories
-6.3
7-3
13.6 115. 8
TOTAL DOMESTIC GROSS
INVESTMENT
29.1 49.0 19.9
68.3
EXCESS OF INVESTMENT
3-3
16.0 12. 7 384. 8
SOURCE: Selected Statistics from Tables 47 and 49
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
184
Government sector. The changes that took place with
in the government sector of the economy between the fourth
quarter of 1949 and the second quarter of 1950, are shown
In Table XLI. During this period, federal spending remained
at the same general level of 1948. Due to the additional
requirements of national defense and foreign aid, federal
spending had been increased 33 per cent in 1948 over the
1947 level. In 1949, the level increased another 16 per
cent. However, in the first half of 1950, federal expendi
tures were declining due to a slowdown in the requirements
of the defense build-up for the cold war and of the Marshall
Plan. The surplus condition shown in Table XLI indicates
that federal expenditures for goods and services had been
reduced: on a cash basis, the deficit was $3.0 billion,
the result principally of the veterans' insurance dividend
distribution in early 1950.^
International segment. In the second quarter of
1950, net foreign investment declined to $-2.3 billion,
reaching its lowest level since the second quarter of 1945.
This was a reflection of the continuing decline of the
United States export surplus. During the fourth quarter
of 1949, the surplus stood at $4.4 billion; during the
first quarter of 1950, it declined to $2.6 billion; and
2
The Midyear Economic Report of the President to the
Congress, July 26, 1950 (Washington: Government Printing
Office, 1950), p. 18.
185
TABLE XLI
GOVERNMENT SECTOR OF NATIONAL ECONOMIC BUDGET
FOR FOURTH QUARTER OF 1949 AND SECOND
QUARTER OF 1950 AS EVIDENCED BY
SEASONALLY ADJUSTED QUARTERLY
TOTALS AT ANNUAL RATES IN
BILLIONS OF DOLLARS
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
1949 1950 + — + -
RECEIPTS OF TAXATION
Federal 40. 0
37.9
2.1 5.2
State and Local
3.6.5 17.8
1-3
7.8
TOTAL 56.5 55.7
. 8 1.4
PAYMENTS FOR GOODS
AND SERVICES
Federal 24. 5
20. 7 3.8 15.5
State and Local
18. 9
19. 4
• 5
2.6
TOTAL 43. 4
40.1
3-3
7.6
SURPLUS
13.1
15. 6
2.5
19.0
SOURCES: National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954,
Tables 5 and 45.
John M. Firestone. Federal Receipts and Expendi
tures During Business Cycles, A Study by the
National Bureau of Economic Research (Princeton:
Princeton University Press, I960) Table A-3,
pp. 127-131.
E. Cary Brown. "Federal Fiscal Policy in the
Postwar Pei’iod." Postwar Economic Trends in the
United States, Ralph E. Freeman, Editor (New
York: Harper & Brothers, I960), Table I, pp.
142-143.
Columns may not add because of rounding.
186
during the second quarter of 1950, it remained at the $2.8
billion level. This situation resulted from a decreased
demand for United States exports, and an Increased value of
foreign imports as a result of the devaluation of foreign
currencies.
The national budget. The Income and expenditures
for consumers, businesses, government, and net foreign in
vestment, are combined in Table XLII. Significant increases
are shown for all of the component parts of gross national
product except the international segment. The most impor
tant change took place in the very large increase in invest
ment. During the three quarters under consideration, gross
national product increased $20.4 billion, or 7.9 per cent.
II. NATURE OF PEACETIME RECOVERY
Shortly after mid-1949, various signs appeared to
indicate that the forces of deflation had lost their
strength. Inventory disinvestment was beginning to change
to Inventory investment once again. Government spending
was being maintained at a relatively high level, so much so
that expenditures were exceeding revenue. Residential
housing was in high demand, as were durables, and expecially
automobiles. As national Income rose, so did consumer de
mand, and after a brief interval, Investment by business In
plant and equipment also Increased. These factors seemed
to interact In such a way that a cumulative expansion was
TABLE XLII
187
SUMMARY OP NATIONAL ECONOMIC BUDGET INCLUDING ALL
SEGMENTS OP THE ECONOMY FOR THE FOURTH QUARTER
OF 19^9 AND THE SECOND QUARTER OF 1950 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF
DOLLARS
SEGMENT
OF
ECONOMY
RECEIPTS
EXPENDITURES
OR
NET POSITION
IV
QUARTER
1949
II
QUARTER
1950
MONEY
CHANGE
IN RATE
PERCE
CHA
IN R
NTAGE
NGE
ATE
+ +
_
Consumption Receipts 187.6
200.7
14.0
7.5
Expenditures
183.5 189.1 5.6 3.1
Net Position 3.2 11.6 8.4
162.5
Business Receipts 25.8 33.0 7.2 27.9
Expenditures
29.1 49.0
19.9 68.3
Net Position
- 3-3
-l6.0
12.7
384.8
Government Receipts
56.5 55.7
. 8 1.4
Expenditures 43.4 40.1
3.3
7.6
Net Position
13.1
15.6
2.5
19.0
InternationalNet Foreign
Investment
- .5 - 2.3
1.8 360.0
ADJUSTED
gross
NATIONAL
PRODUCT 255.5 275.9
20. 4
7.9
SOURCE: Selected Statistics from Tables 8, 45, 47 and 49.
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
188
In process prior to the beginning of the Korean War.3
Rise In Production
By mid-19^9 the liquidation of Inventories had gone
far enough so that the relation of inventories to current
sales permitted retailers to order new merchandise.^ These
new orders gave rise to Increased industrial production, as
is shown in Table XLIII. From October of 19^9 to June of
1950, The Federal Reserve Industrial Production Index in
creased 33 points, or 20 per cent. This was a significant
change to have taken place in the relatively short period
of nine months. Further, in May of 1950, the index equaled
the previous high that had been registered in October of
19^8; in June of 1950, the index exceeded the previous high
by 2 per cent.
Effect on Unemployment
While it is apparent that industrial production in
creased significantly, unemployment remained at about 5-2
per cent of the total civilian labor force as of June,
1950. This represented an improvement over the situation
existing in February of 1950, when unemployment reached its
^Bert G. Hickman, Growth and Stability of the Post
war Economy (Washington: The Brookings Institution, I960),
p'. 76. -
^Wilfred Lewis, Jr., Federal Fiscal Policy in the
Postwar Recessions (Washington: The Brookings Institution,
1962), p. 120.
^The Midyear Economic Report, July 26, 1950a op. cit».
Table B-9, p. 12 3-
189
TABLE XLIII
INDUSTRIAL PRODUCTION INDEX ON A MONTHLY BASIS
BEGINNING OCTOBER OP 19 49 AND ENDING
JUNE OF 1950
YEAR MONTH INDEX
)
1949 October 166
1949 November
173
1949 December
179
1950 January
183
1950 February 180
1950 March
187
1950 April 190
1950 May 195
1950 June
199
SOURCE: Federal Reserve Bulletin
(1935 - 1939 = 100)
190
postwar peak of 4.7 million, or 7.6 per cent of the total
civilian labor force. According to the administration, this
32 per cent reduction in unemployment was an improvement,
but was far short of the 1.5 to 2.5 million that the admini
stration felt to be a realistic goal. The increase in em
ployment was reflected in the level of wage and salary pay
ments, which rose to a seasonally adjusted annual rate of
$139.8 billion during the second quarter of 1950.
Boom in Housing
Part of the recovery was carried forward by the large
increase in the demand for housing and the consequent signi-
g
ficant increase in the investment of residential housing.
This boom in housing had its beginning with the passage of
the Housing Act of 1948. Housing starts increased from
931,600 in 1948 to 1,025,100 in 1949, an increase of 10 per
cent. Expenditures for housing amounted to $20.2 billion,
$20.7 billion, and $21.1 billion in annual rate for the
third quarter of 1949 and the first and second quarters of
7
1950, respectively. This represented an increase over the
three quarters of 18 per cent. During 1950, the annual
volume of government-backed mortgages reached $20.0 billion
^Robert A. Gordon, Business Fluctuations (second
edition; New York: Harper and Brothers, 1952), p. 480.
7
National Income Supplement to Survey of Current
Business (Washington: Government Printing Office, 1954)
Table 51, p. 236-237*
191
and constituted about 40 per cent of the total outstanding
mortgage loans.^
Small Increase In Price Levels
During the nine month period under consideration,
both the Wholesale Price Index and the Consumer's Retail
Price Index increased slightly, as is shown in Table XLIV.
The change in the Consumer's Retail Price Index between
October of 1949 and June of 1950 was only 1.7 points, or an
Increase of only 1 per cent. The change in the Wholesale
Price Index during the same period was only 5.1 points, or
an increase of only 3.3 per cent. These small changes tend
to indicate that prices were steady rather than buoyant, as
they had been during the 1945-1948 period of inflation.
Further, the levels reached by the price indexes In June of
1950 were both less than the levels that they had reached
during the 1945-1948 period of Inflation.
Resumption of Investment
Another of the basic strengths of the peacetime re
covery was the increase in private domestic Investment. In
the second quarter of 1950, gross private domestic invest
ment reached a seasonally adjusted annual rate of$49 bil
lion: this level was less than $6.6 billion below the
0
Ralph E. Freeman, "Postwar Monetary Policy," Post
war Economic Trends in the United States, Ralph E. Freeman,
Editor (New York: Harper and Brothers, I960), p. 62.
192
TABLE XLIV
CONSUMER RETAIL AND WHOLESALE PRICE INDEXES
ON A MONTHLY BASIS BEGINNING OCTOBER
OF 1949 AND ENDING JUNE OF 1950
YEAR MONTH
CONSUMERS
RETAIL
PRICE
INDEX
(1935-39 = 100)
WHOLESALE
PRICE
INDEX
(1926 = 100)
1949 October
168. 5
152. 2
1949 November 168.6 151.6
1949
December
167.5 151.2
1950 January
166. 9 151.5
1950 February 166.5 152. 7
1950 March 167.0
152.7
1950 April
167.3 152.9
1950 May 168.6
155.9
1950 June 170.2
157.3
SOURCE: United States Department of Labor.
Consumer Retail (1935-1939 =100)
Wholesale (1926 = 100)
193
postwar peak reached in the fourth quarter of 1948 and $19.9
billion above the recession trough reached in the fourth
quarter of 1949. Table XLV indicates that all segments of
gross private domestic investment increased significantly
in their annual rates during the period under consideration.
New construction increased by 18 per cent, producers' dur
ables by l6 per cent, and the change in business inventories
by 116 per cent. The postwar record rate of business in
vestment reached $42 billion in the second quarter of 1950,
and was a reflection of the revitalization of businessmens'
expectations relative to the recovery from the 1949 reces
sion and the expansion of consumer demand.
Strength of Recovery
If the second half of 1949 may be described as a
period during which the economy turned up from the recession
trough, the first half of 1950 may be described as a period
of cyclical upswing. The progress of this recovery seemed
to be steady, especially when the fourth quarter of 1949
is used as the starting point. Because of the significant
change in investment, it is likely that a recovery that was
based upon such strength would probably have carried for-
Q
ward into the second half of 1950.
^A. E. Holmans, United States Fiscal Policy 1945-
1959 (London: Oxford University Press, 1961), p. 128.
191 *
TABLE XLV
EXPENDITURES OF GROSS PRIVATE DOMESTIC INVESTMENT ON A
QUARTERLY BASIS FOR THE THIRD QUARTER OF 1949 AND THE
FIRST AND SECOND QUARTERS OF 1950 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
YEAR
1949 1950 1950
QUARTER IV I II
New Construction 18.6
20.7
2 2.0
Producers' Durables
16.9 16.6 19*6
Change in Business Inventories
- 6.3 2.5 7-3
GROSS PRIVATE DOMESTIC INVESTMENT
29.1 39.9
49.0
SOURCE: Selected Statistics from Table 45, National In
come Supplement to Survey of Current Business,
1954.
Columns may not add because of rounding.
III. FISCAL POLICY IN THE RECOVERY
FROM THE 19*49 RECESSION
195
The effect of fiscal policy upon the change of the
economy from moderate recession to cyclical upswing may be
described as indirect rather than direct. Even though the
federal government did pass several measures of fiscal sig
nificance, the resurgence of business confidence and in
vestment seemed to stem from the judgment of the Congress
in turning down some of the administration’s recommendations
rather than in acting favorably on all of the administra
tion's fiscal policy proposals.
Changes in the Council
In October of 19*49, Leon Keyserling replaced Edwin
G. Nourse as Chairman of the Council of Economic Advisers.
In a direct refutation of the position taken by the former
chairman, Keyserling believed that the Council should be a
policy-making body, not an analytical and advisory body.
Further, the new chairman interpreted the Employment Act of
19*46 as committing the federal government to "full employ
ment economics, rather than countercyclical economics."'*’^
The result was a transformation of the Council from an ana
lytical staff into an agency for the formulation and imple
mentation of economic policy. The Council became another
10E. Ray Canterbery, The President's Council of
Economic Advisers (New York: Exposition Press, 1961) , p.
196
source of new policies affecting business. The Council
under Keyserling became a spokesman for presidential eco
nomic policy, both before the Congress and the public.
Expenditure Policy
The administration noted in the 1950 Economic Report
that federal expenditures might decline due to the reduced
requirements of national defense and the Marshall Plan.
Taking the position that the public sector should maintain
investment wherever it could do so most efficiently, the
administration recommended increased government expendi
tures for the St. Lawrence Seaway, federal aid to education,
liberalization of Social Security, and expansion of grants-
in-aid to the states. These recommendations were made at a
time when the economy was recovering from the 19^9 reces
sion and, probably, were not intended to offset declines in
consumption and investment.'1 ' ' * ' The Congress did not sub
scribe to the administration's recommendations and this lack
of action turned out to be fortunate. When the Korean War
started in June, the administration's anti-recession recom
mendations were set aside. In the Economic Report of July,
1950, the administration took note of the necessity of a
sharp increase in expenditures for defense, and the need to
examine all federal programs in order to reduce demand for
11Canterbery, op. clt. , p. 9^.
scarce resources.^
197
Tax Policy
On January 23, 1950, the President sent his message
to the Congress on a tax program that called for (1) re
peal of the excise tax on the transportation of goods; (2)
reduction of the excise taxes on passenger fares, long dis
tance telephone calls, furs, luggage, toilet goods, and
jewelry; (3) extension of the existing tax on radios to
television sets; (4) increase in the corporation profits
tax to 22 per cent on profits up to $50,000, and 42 per cent
on the balance of the taxable profits; (5) elimination of
the 53 per cent tax on taxable profits between $25,000 and
$50,000; (6) extension of the period for the carry-back of
losses from two years to five years; (7) increase of estate
and gift taxes; (8) reduction of depletion allowances; (9)
higher taxation of life insurance companies; and (10)
tighter provisions against tax avoidance. This program
seemed to be more a reflection of social policy than fiscal
policy because it was designed for a redistribution of in
come in favor of consumers rather than an instrument for
short-run economic stability. It might appear that the pro
gram would have been a depressant to domestic investment
even though the Administration’s proposals were supposed to
12
The Midyear Economic Report, July 26, 1950, op.
clt., p. 11.
198
1*5
protect and expand private Investment. Again the Congress
did not favorably act on the administration's tax program.
By not taking any action on taxes, the Congress and the
federal government were not faced with reduced revenues
when the Korean War began. The administration soon recog
nized that there was no longer any need to reduce taxes in
order to provide stimulation for recovery from the 19^9
recession. It was also understood that defense spending
would soon provide large demands on the economy.
The Budget Deficit
President Truman and his administration believed
strongly in the principle of the balanced budget. The
Secretary of the Treasury, as an administration spokesman,
subscribed to the doctrine of reducing the public debt dur
ing years of prosperity, and seemed to feel that the doc-
i 2j
trine might be applicable even In fiscal 19^9. But In
the President's message to the Congress on January 23, 1950,
he pointed out that even with his recommendations for de
creased expenditures and increased taxes, there would still
be a budget deficit. It is significant that President
Truman defended the deficit as the correct policy for that
15
particular period. ^ As soon as the Korean War started,
13
Holmans, op. clt. , p. 130.
14
Report of the Secretary of the Treasury for the
Year Ended June 30, 1950, pp^ 159, 179, 181.
15
"Tewis, op. clt., p. 123.
199
the President advised against deficit spending and again
called for increased revenues to remove the deficit and to
counteract the inflationary trend.This would tend to
indicate that the administration was willing to endorse de
ficit spending as an anti-recessionary measure, but not as
a suitable policy for periods when defense spending experi
enced a sharp increase.
Influence of Congress
The Congress did not accept and implement the fiscal
policy recommendationas as presented by the President and the
the Council of Economic Advisers. The Congress particularly
did not raise taxes during the first half of 1950. The
Congress did not subscribe to a program of high federal ex
penditures in order to buoy up the levels of consumption
and investment. What it did do for the recovery period by
previous enactments was (1) to underwrite the housing pro
gram of purchasing mortgages on the part of the Federal
National Mortgage Association under the Housing Act of 19*19,
(2) to increase disposable personal income through tax re
duction under the Revenue Act of 19*18, and (3) to stimulate
consumption by payment of the National Service Life Insur-
andce dividend during the fourth quarter of 19*19 and the
first quarter of 1950. These enactments, plus the effect
~*~^The Midyear Economic Report, July 26, 1950» op.
cit., p. 10.
of high defense spending, served to provide the basic
stability upon which the confidence was built for the re
covery of the economy from the 19^9 recession. The admini
stration continued to support the goals of maximum pro
duction, employment, and purchasing power. In implementing
fiscal policy toward the achievement of such goals, the
administration's recommendations appear to have been better
suited for long-run application than for short-run utiliza
tion .
CHAPTER VIII
ANALYSIS OP FISCAL POLICY DURING
KOREAN WAR— JUNE, 1950, TO
JULY, 1953
The Korean War began on June 25, 1950. This was the
signal for the beginning of a new period of Inflationary ex
pansion similar to the 19^5-19^8 period. A large Increase
In federal expenditures for armament put increased demands
on the economy. However, it was soon evident that the in
flation did not result as much from the military spending
as from the rush of consumers to accumulate inventories as
a hedge against possible shortages in such items as sugar,
nylon stockings, household linen, automobile tires, and
meat, all of which had been in short supply during World
War II. For 37 months the economy experienced on a reduced
scale the wartime conditions of high demand and increased
expenditures.
I. NATURE OF ECONOMIC CONDITIONS
The Korean War period was characterized by large In
creases in expenditures for two segments of national Income
and steady performance by the third. Table XLVI shows the
increases in these macroeconomic variables and serves to
Indicate the magnitude of the expansionary thrust that the
201
202
TABLE XLVI
GROSS NATIONAL PRODUCT AND RELATIVE EXPENDITURES FOR
CONSUMPTION, INVESTMENT, AND GOVERNMENT FOR THIRTEEN
QUARTERS BEGINNING SECOND QUARTER OF 1950 AND
ENDING SECOND QUARTER OF 1953 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
QUARTER
AND YEAR
GROSS
NATIONAL
PRODUCT
(Y)
PERSONAL
CONSUMP
TION EX
PENDITURES
(C)
PRIVATE
DOMESTIC
INVEST
MENT
(Id)
NET
FOREIGN
INVEST
MENT
(If)
GOVERN
MENT EX
PEND
ITURES
(G)
1950-11
275.9 189.1 49.0
-2.3 40.1
1950-III 294. 4
202.9
53.4
-2.5 40.7
1§50-tV 305.0 198. 8 62.6 -2.4 46.0
1951-1 319.3
210.0 59.6
-2.5 52. 2
1951-H 326.1 204. 4 62. 2 -1.1
60. 5
1951-IH 331.3 207. 3
55.4
1.7 66.9
1951-IV
336.3 211.6
50.3
22. 8 71.6
1952-1
340. 3 213.5 50.7 2.3 73.7
1952-11 341. 4
216. 7
47.2
- .7
78.1
1952-III 344. 2 218.2 50.2
-1.5 77.3
1952-IV
35b.5 225.3
5^.4 - .8 79.6
1953-1 361. B 228.6
51.9 -1.8 83.0
1953-H 369.9 230.8
55-9 -3.3
8676
SOURCE: Selected Statistics from Tables 47 and 49, Na
tional Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
economy experienced. Between the second quarter of 1950
and the second quarter of 1953, the gross national product
increased $9^ billion In annual rate. This represented an
increase of 34 per cent. For twelve successive quarters,
the average annual rate of increase was $7-8 billion or 2.4
per cent. Expenditures for personal consumption likewise
Increased steadily during the Korean War. Between the se
cond quarter of 1950 and the second quarter of 1953, con
sumption spending rose $41.7 billion in annual rate. For
the whole period, this represented an increase of 22 per
cent. For twelve successive quarters the average annual
rate of increase was $3-5 billion, or 1.7 per cent. During
the Korean War, expenditures for investment In general re
mained steady. For the thirteen quarters beginning with
the second quarter of 1950 and ending with the second quar
ter of 1953, Investment spending averaged $53.1 billion In
annual rate. During this thirteen quarter period, Invest
ment expenditures did not increase or decrease more than
15 per cent during any quarter. Like consumption and gross
national product, government expenditures increased signifi'
cantly during the Korean War period. Between the second
quarter of 1950 and the second quarter of 1953, government
spending more than doubled from an annual rate of $40.1
billion to $86.6 billion. This was an increase of $46.5
billion, or 116 per cent. For twelve successive quarters,
the average increase was $3*8 billion or 6.5 per cent.
204
Breakdown by Expenditure Classes
Table XLVII shows the breakdown of gross national
Income by expenditure classes for the second quarter of
1950 and the second quarter of 1953- Gross national pro
duct, national Income, and personal Income all Increased
about 30 per cent. Disposable personal income rose 25 per
cent. These increases were indicative of a significant
rise in aggregate demand that took place during a period
when business tax collections were increasing 30 per cent
and personal income taxes 80 per cent. During this expan
sionary period It is important to note that government
transfer payments decreased only 11.3 per cent. It is also
significant that the rate of personal savings increased al
most 70 per cent. The changes in these annual rates are
Indicative of an expansion of such magnitude that it be
comes almost a repetition of the 1945-1948 inflationary
period.
Comparison of Inflationary Periods
In considering the second postwar period of Infla
tion, it is appropriate to compare the changes that took
place during the two periods. Table XLVIII shows the com
parisons between the two inflationary periods relative to
the changes in annual rates In terms of dollars and in
terms of percentages. Viewed on the basis of the change in
terms of dollars, It is noted that gross national product,
national Income, and personal income were all about a third
TABLE XLVII
205
GROSS NATIONAL PRODUCT SHOWING BREAKDOWN BY CLASSES OF
EXPENDITURE INCLUDING NATIONAL INCOME, PERSONAL
INCOME, AND DISPOSABLE PERSONAL INCOME FOR
SECOND QUARTERS OF 1950 AND 1953 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS
OF DOLLARS
EXPENDITURE
CLASS
2nd
QTR.
1950
2nd
QTR.
1950
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ - + —
GROSS NATIONAL PRODUCT
275.9 369.9
94.0 34.0
LESS: Capital Consumption
Allowance 20.2 27. 4 7.2 35.6
Indirect Business
Taxes
23-3
30.2
6.9
29.6
Business Transfer
Payments .8 1.0 .2 25.0
Statistical Discrepancy .0 2.6 2.6
— —
PLUS: Subsidies Less Current
Surplus of Governmen
Enterprises b .6 - .6 1.2 200
EQUALS: NATIONAL INCOME 232. 2 308.276.0
32.7
LESS: Corporate Profits and
Inventory Valua
tion Adjustment 32. 8 4l. 0 7.2 25.0
Social Insurance
Contribution
6.7 8.9
2.2 32. 8
PLUS: Government Transfer
Payments 14. 2 12. 6 1.6
11.3
Net Interest Paid by
Government
4.7
5.0
.3
6.3
Dividends
8.3 9.3 1.0 12.0
Business Transfer
Payments .8 1.0 . 2 25.0
EQUALS: PERSONAL INCOME
220. 7
286 . 4
65.7 29.7
LESS: Personal Taxes 20.0
35*915.9 79.5
EQUALS:DISPOSABLE PERSONAL
INCOME
200. 7
250. 4
49.7 24.7
LESS: Personal Savings 11.6 19 - 6 8.0
58.9
EQUALS:PERSONAL CONSUMPTION
EXPENDITURES
189-1
230. 8
41.7
22.0
SOURCE: Selected Statistics from Tables 47 and 49, Na
tional Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 195^•
Changes and Percentages Computed.
Columns may not add because of rounding.
TABLE XLVIII
206
UNITED STATES GROSS NATIONAL PRODUCT SHOWING BREAKDOWN
BY EXPENDITURE CLASSES MONEY CHANGE IN RATE FOR FIRST
POSTWAR PERIOD OF INFLATION (1945-IV TO 1948-IV)
AND SECOND POSTWAR PERIOD OF INFLATION
(1950-11 TO 1953-11) SEASONALLY
ADJUSTED QUARTERLY TOTALS
AT ANNUAL.RATES 1945-53
BILLIONS OF DOLLARS
EXPENDITURE
CLASS
FIRST POSTWAR
INFLATION
MONEY CHANGE
+ IN RATE
SECOND POSTWAR
INFLATION
MONEY CHANGE
IN RATE
+ - + —
GROSS NATIONAL PRODUCT 66.9 94
LESS:
PLUS :
Capital Consumption
Allowance 6.6 7.2.
Indirect Business Taxes 4.8
6.9
Business Transfer Pmts.
_ -3
.2
Statistical Discrepancy
5.0
2.6
Subsidies Less Current
S Surplus of Govern
ment Enterprises
1.5 1.2
EQUALS:NATIONAL INCOME
58.9
76.0
LESS: Corporate Profits
and Inventory Valu
ation Adjustment
18. 5
8.2
Social Insurance
Contribution 1.0 2.0
PLUS : Government Transfer
Pmts. 1.6
Net Interest Paid
by Government .4
•3
Dividends 2.8 1.0
Business Trans. Pmts.
• 3
. 2
EQUALS:PERSONAL INCOME
44. 7 65.7
LESS: Personal Taxes . 1 15.9
EQUALS: DISPOSABLE PERSONAL
INCOME 44.6
..49,7
LESS:
Personal Savings 7.2 8.0
EQUALS:PERSONAL CONSUMPTION
EXPENDITURES
51-7
41.7
SOURCE: Selected Statistics from Tables 47 and 49, Na
tional Income Supplement to Survey of Current
Business» U. S. Department of Commerce, 1954.
larger in the second period of inflation than in the first
period of inflation. Personal taxes increased by almost
$16 billion during the second inflation, while during the
first inflation the change was only $100 million. This dif
ference in personal taxes served to bring disposable per
sonal income in the two periods to within 10 per cent of
one another. The big difference in the two periods came in
savings: during the earlier period, there was a decline in
rate in the amount of $7*2 billion; during the latter period
there was an increase in rate in the amount of $8 billion.
In comparing personal consumption expenditures during the
two inflationary periods, it Is apparent that the increase
during the second period of inflation was $10 billion less
than during the first period. From a percentage standpoint,
personal consumption went up 40 per cent In the first period
and 22 per cent in the second period. This tends to Indi
cate that the second period of Inflation was of less in
tensity than the first.
National Economic Budget
The changes that evolved between the second quarter
of 1950 and second quarter of 1953 can be analyzed by con
sideration of the national income and expenditure accounts
of the various segments of the economy. These financial
statements show the receipts and expenditures for consumers,
business, foreign Investment, and government.
208
Consumption segment. Table XLIX is a collection of
accounts that make up the consumption segment of the na
tional economic budget. The figures shown are the quarterly
totals converted into annual rates for the second quarters
of 1950 and 1953- During this period, personal income in
creased $65.7 billion in annual rate, or 29-8 per cent.
The automatic increase in revenue that was derived from the
federal income taxes is reflected in the increase of $15-9
billion, or 79.5 per cent. The large increase in tax col
lections did serve to decrease the relative change in dis
posable income, but only slightly: disposable income rose
$49.7 billion, or 24.7 per cent. As for expenditures,
spending for durables rose 14.8 per cent, for nondurables
21.7 per cent, and for services 25.4 per cent. Over the
three year period, total consumption rose $4l.7 billion in
annual rate, or 22 per cent. This significant increase in
spending did not dampen the level of saving, which in
creased in annual rate by $8.0 billion, or 69.0 per cent.
Business segments. Important changes in the busi
ness segment of the economy occurred between the second
quarter of 1950 and the second quarter of 1953- Table L
shows that corporate profits increased in annual rate by
$7.2 billion, or 20.7 per cent. However, corporate tax
liabilities advanced by 45.1 per cent, and dividend pay
ments increased by 12 per cent. These two increases served
209
TABLE XLIX
CONSUMPTION SEGMENT OF NATIONAL ECONOMIC BUDGET FOR
SECOND QUARTERS OF 1950 AND 1953 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OF DOLLARS
II
QTR.
1950
II
QTR.
1953
MONEY
CHANGE
IN RATE
PERCI
CHJ
IN
SNTAGE
\NGE
3ATE
+ — + —
RECEIPTS
Personal Income 220.7
286. 4
65.7 29. 8
Labor Income 143.1201. 3 59.2 4l.4
Propeeetors & Rental In
come 43- 8 48. 9 5.1
11.6
Dividends & Interest 17. 8 22. 6 3.8 20.2
Transfer Payments 15-0 13.6 1. * J
9.3
Less: Personal Tax & Non
Tax Payments 20.0
35.9 15.9 79.5
EQUALS: DISPOSABLE INCOME
200. 7
250. 4
49.7 24.7
EXPENTITURES
DURABLE GOODS 26. 4
30.3 3-9
14.8
Automobiles & Parts 11.6
13.7
2.1 18.1
Household Equipment &
Furniture
11.5 12.7
1.2 10.4
Other
3-3 3.9
. 6 18.2
NONDURABLE GOODS
98.3
119.6
21.3 21.*7
Food
47.7
72.0
14.3
2l\lT
Clothing and Shoes 18. o 20. 2 2.2 12.2
Other
22. 5 27. 4
4.8 21.2
SERVICES
6 4.5 80.9
16.4 25. 4
Housing 21.1
27.3
6.2 29.4
Other 43- 4 53.6 10.2
23.5
TOTAL EXPENDITURES 189.1s ?30,8 41.7 2^.0
SAVIND CRECEIPTS LESS
EXPENDITURES) 11.6 19.6 8.0 69.0
SOURCE: U. S. Department of Commerce, National Income
Supplement to Survey of Current Business (Wash
ington: Government Printing Office, 195*0,
Selected Statistics from Tables *17 and 49.
Changes and Percentages Computed.
Columns may not add because of rounding.
TABLE L
210
BUSINESS SEGMENT OP NATIONAL ECONOMIC BUDGET FOR
SECOND QUARTERS OP 1950 AND 1953 AS EVIDENCED
BY SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES IN BILLIONS
OP DOLLARS
II
QTR.
1950
II
QTR,
1953
MONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ —
+ —
RECEIPTS
CORPORATE PROFITS
34.7 41.9 7.2
20.7
Less: Corpo Profits Tax
Liability 15.5 22. 5
7-0
45.1
Dividends
8.3 9.3
1.0 12.0
Equals:Corp. Undivided
Profits 10.9
10 .1 . £
7.3
Plus: Corp. Consumption
Allowance 20.2 27.4 7.2 35.6
Less: Corp. Inventory Valu
ation Adjustment
-1.9 - .9
1.0 52. 6
EQUALS:UNDISTRIBUTED PROFITS
AND ADDITION TO
RESERVES 33.0 38.4 5.4
16.3
DOMESTIC GROSS INVESTMENT
Construction 22.0
25.9 3.9 17-7
Residential, Nonfarm 12. 4 12.2 . 2 1.6
Non Residential 9.6 4.1
42. 7
Producers' Durable Equipmen19.6 24.6 5.0
25.5
Change in Business Inven
tories
7.3
5.4
1.9
26.0
TOTAL DOMESTIC GROSS
INVESTMENT 49.0
55.9 5-9
14 .0
EXCESS OP INVESTMENT 16 .0
17.5 1.5
9.3
SOURCE: Selected Statistics from Tables 47 and 49,
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
211
to keep corporate undivided profits from increasing and
actually brought about a 7-3 per cent decrease in annual
level. Business spending increased for construction and
for producers' durable equipment. Inventories declined, as
consumer demand increased and production in many lines
declined. Total domestic gross investment increased in
annual rate by $6.9 billion, or 14.0 per cent. The excess
of Investment over business receipts amounted to an annual
rate of $17.5 billion In the second quarter of 1953, which
exceeded the level in the second quarter of 1950 by $1.5
billion, or 9-3 per cent.
International segment. The Korean War exerted a
large Influence on net foreign investment. Exports declin
ed significantly in 1950: during the first half of 1950,
the export surplus fell from the 19^9 annual rate of $6.2
billion to $3.0 billion. At the same time as United States
exports were decreasing, United States imports were in
creasing. This demand for imports was a direct result of
the war as the United States purchased many items abroad in
order to satisfy quickly Its requirements until the time
when domestic production levels had Increased.^ This was
especially true in raw materials that were necessary for
^The Midyear Economic Report of the President to the
Congress, July 23, 1951 (Washington: Government Printing
Office, 1951), p. 198.
212
war material and stockpiling programs. United States ex
ports were declining because European and Japanese produc
tions were rapidly increasing, thereby reducing their need
for United States exports. Table LI shows the rise of ex
ports of goods and services but the decline of net foreign
investment due to the high level of net unilateral transfers
by the federal government for purposes of defense and mutual
security.
Government sector. The cost of the Korean War to
the United States was approximately $50 billion.2 Expendi
tures of the federal government increased rapidly as the
armament program proceeded to exert great influence on the
economy. The level of spending for national security in
creased 101.6 per cent from 1950 to 1951, 30.0 per cent
from 1951 to 1952, and 7.2 per cent from 1952 to 1953- As
a proportion of total spending by the federal government,
national security constituted roughly one-third in 1950,
and two-thirds in 1953- These high levels of federal spend
ing turned out to be less than the administration had esti
mate^. At the same time, tax receipts turned out to be
higher than had been anticipated. The result of these two
fortunate events was that large deficits did not materia
lize. In 1951, there was a surplus of $3.5 billion; in
p
Paul Studenski and Herman E. Krooss, Financial
History of the United States (second edition; New York:
McGraw-Hill Book Company, 1963), p. 489.
213
TABLE LI
INTERNATIONAL SEGMENT OP NATIONAL ECONOMIC BUDGET
FOR THE YEARS 1949 THROUGH 1953 AS EVIDENCED BY
NET FOREIGN INVESTMENT BY MEANS OF SEASONALLY
ADJUSTED QUARTERLY TOTALS AT ANNUAL RATES
IN BILLIONS OF DOLLARS
19^9
1950
1951
1952 1953
Exports
15.9 14.4 20.2 20.4 21. 4
Imports 9.7 12.1
15.1
15.4 16.8
Surplus 6.2
2.3 5-1
5.0 4.6
Unilateral
Transfers:
Government 5.2 4.0
4.5
4.8 5.8
Unilateral
Transfers:
Private
.5 .5
.4 .4
.7
Net Foreign
Investment
.5 -2.2 .2 -.2
-1.9
SOURCE: Survey of Current Business, U. S. Department of
Commerce.
214
1952, there was a deficit of $4.0 billion; and in 1953, the
deficit increased to $9-4 billion.3 The debt rose only 3
per cent between 1950 and 1953. Table LII shows the changes
in receipts and expenditures for the government sector of
the economy between the second quarter of 1950 and the
second quarter of 1953* While federal receipts increased
70.9 per cent, federal spending increased 200.4 per cent.
State and local spending and revenues also increased in an
outstanding manner.
Gross national product. The four segments of the
economy are summarized in Table LIII. Between the second
quarter of 1950 and the second quarter of 1953, gross na
tional product increased in annual rate by $94.0 billion,
or 34.0 per cent. Receipts and expenditures increased in
every segment of the economy except net foreign investment.
In constant 19 47 dollars, the increase during the period
under consideration was $41.9 billion, or 13.6 per cent.
The important difference between the levels, as expressed
In current dollars and in constant dollars, serves to em
phasize the Inflationary character of the economy during
the Korean War.
^Annual Report of the Secretary of the Treasury on
the State of the Finances for the year Ended June 30. 1955
(Washington: Government Printing Office, 1956), pp. 350-
351.
215
TABLE LII
GOVERNMENT SECTOR OP NATIONAL ECONOMIC BUDGET
FOR SECOND QUARTERS OF 1950 AND 1953 AS
EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF
DOLLARS
II
QTR.
1952
II
QTR.
1953
MONEY
CHANGE
IN RATE
PERCE
CHA
IN R
NTAGE
NGE
(ATE
+ — + —
RECEIPTS OF TAXATION
Federal 37.9
'STTB-
26.9 70.9
State and Local 17.8
27.4 9.6 53.9
TOTAL 55.7 92.2
36.5 65.5
PAYMENTS FOR GOODS
AND SERVICES
Federal 20.7
62.2
41.5
200. 4
State and Local 19.4 24.4 5.0 26.7
TOTAL 40.1 S6.6 46.5 115.1
SURPLUS 15. 6 5.6 10.0 64.1
SOURCES: National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954,
Tables S and 45.
John M. Firestone, Federal Receipts and Expendi
tures During; Business Cycles, A Study by the
National Bureau of Economic Research (Princeton:
Princeton University Press, I960) Table A-3, pp.
127-131.
E. Cary Brown. "Federal Fiscal Policy in the
Postwar Period." Postwar Economic Trends in the
United States, Ralph E. Freeman, Editor (New
York: Harper & Brothers, i960), Table I, pp. 142-
143.
Columns may not add because of rounding.
216
TABLE LIII
SUMMARY OF NATIONAL ECONOMIC BUDGET INCLUDING ALL
SEGMENTS OF THE ECONOMY FOR THE SECOND QUARTERS
OF 1950 AND 1953 AS EVIDENCED BY SEASONALLY
ADJUSTED QUARTERLY TOTALS AT ANNUAL
RATES IN BILLIONS OF DOLLARS
SEGMENT
OF
ECONOMY
RECEIPTS
EXPENDITURES
OR
NET POSITION
II
QUARTEI
1950
II
QUARTER
1953
viONEY
CHANGE
IN RATE
PERCENTAGE
CHANGE
IN RATE
+ — + —
Consumption Receipts 200.7
250.4
49.7 24.7'
Expenditures
189-1
230.8
41.7
22.0
Net Position 11.6 19.6 8.0 69.O
Business Receipts 33.0 38.4 5.4
16.3
Expenditures 49.0
55.9 6.9
14.0
Net Position -16.0
-17.5 1.5 9.3
Government Receipts 55.7
92.2
36.5 65.5
Expenditures 40.1 86.6
46.5 115.1
Net Position 15-6 10.0 64.1
InternationalNet Foreign
Investment - 2.3 - 3.3 1.0 43.4
ADJUSTED
GROSS
NATIONAL
PRODUCT
275.9 369.9 94.0 34.0
SOURCE: Selected Statistics from Tables 8, 45, 47, and 49.
National Income Supplement to Survey of Current
Business, U. S. Department of Commerce, 1954.
Changes and Percentages Computed.
Columns may not add because of rounding.
II. TAX POLICY DURING THE KOREAN WAR
217
On January 23, 1950, the administration had recom
mended certain tax law revisions that were designed (1) to
reduce excise taxes to the extent that the loss in revenue
could be replaced by closing loopholes in existing tax laws,
and (2) to add revenue in the amount of $1 billion by re-
h
vision of the corporate income tax and the gift tax. This
tax revision program turned out to be quite controversial
and was debated in the House of Representatives for six
months. Such a bill, HR8920, was passed by the House of
Representatives on June 29, 1950. But after the Korean
War began, it was necessary to change the tax policy ap
proach from one of tax reform to one of increasing revenue
in order to meet the additional expenditures for defense.
The administration changed its recommendation on July 25,
1950 to the following: (1) elimination of any contemplated
reductions in excise taxes, (2) enactment of measures to
close loopholes in the existing laws and to withhold the
tax on dividends, (3) increase the individual income tax
to rates that were in effect in 19^5 by removal of the per
centage reductions brought about by the Revenue Acts of
19^5 and 19^8, (4) increase of the corporate income tax to
^Annual Report of the Secretary of the Treasury on
the State of the Finances for the Fiscal Year Ended June
30. 1950 (Washington: Government Printing Office, 1951),
p. 3*t.
218
25 per cent on the first $25,000 of income, and 45 per cent
on the balance, and (5) make the increased rates effective
as of January 1, 1950.
The Revenue Act of 1950. Based upon the recommenda
tions of the President for interim tax legislation to meet
the immediate needs for increased revenues, the House of
Representatives revised HR8920. The first revenue measure
to finance the Korean War revised the individual income tax
by eliminating the rate decreases of the Revenue Act of
1948. For the lowest bracket, the combined normal rate and
surtax increased from 16.6 to 20 per cent; for the top
bracket the combined rate rose from 82.1 to 91 per cent.
The maximum effective rate increased from 77 to 87 per cent.
The corporation income tax was also changed. The notch
rate of 53 per cent for income between $25,000 and $50,000
was eliminated. Effective June 30, 1950, the normal rate
was set at 25 per cent on all profits up to $25,000, and
45 per cent on all profits in excess of $25,000. The carry
back and carry-forward provisions were changed to allow
seyen years for averaging income instead of five. The esti
mated increase in tax liability as a result of the Revenue
Act of 1950 was initially estimated to be $4.5 billion.^
5lhid., p. 10. 6Ibjd., p. 37.
219
The Excess Profits Act of 1950. On November 14,
1950, President Truman wrote a letter to the Chairman of
the House Ways and Means Committee recommending the enact
ment of an excess profits tax. Through prompt action, the
President was able to approve HR9827 on January 3, 1951.
This bill called for a 30 per cent surtax on excess profits
beginning on July 1, 1950, and running for three years: In
addition, the surtax rate on corporate income was increased
from 20 to 22 per cent. The result of these two changes
was that the total corporate tax rate rose from 45 to 77
per cent.
The need for additional revenue. In spite of the
two important tax measures passed in 1950, additional
revenues were needed to pay for the increased spending for
defense without resorting to extensive borrowing. On
February 2, 1951, President Truman sent a message to Con
gress, calling for $10 billion in additional revenues.7
The administration went on record as being firmly convinced
that the expenditures for the Korean War should be paid for
on a "pay-as-we-go" basis. It was felt by the administra
tion that taxes had not been high enough during World War
II, that the government had been forced to borrow too much,
?Annual Report of the Secretary of the Treasury on
the State of the Finances for the Fiscal Year Ended June
30» 1951. (Washington:Government Printing Office,1952),
p. 439.
220
and that the failure to tax had resulted in the postwar
inflation from 1945 to 1948.8 The administration endorsed
the principle that the cost of the war should not be put
off on future generations.9
The Revenue Act of 1951. The President recommended
that revenues be increased by $10 billion, of which $4
billion would be gained through the individual income tax,
and $3 billion each would be obtained from the corporate
income tax and excise taxes. The bill passed by the Con
gress, HR4473, increased revenue by only half the amount
that had been recommended. For the individual income tax,
surtax rates were raised so that the total tax in the low
est bracket increased from 20 to 22.2 per cent, and in the
highest bracket from 91 to 92 per cent. For the corporate
income tax, the normal rate was raised from 25 to 30 per
cent. For excise taxes, rates were increased on many
items, such as alcoholic beverages, cigarettes, gasoline,
and automobiles. Although he was not satisfied with the
amount of increase in revenues, President Truman reluctant
ly approved the Revenue Act on October 20, 1951- A summary
of the three tax measures of the Korean "War is shown in
Table LIV.
8Ibid., p. 440.
9
The Economic Report of the President to the Con-
§
ress, January 12, 1951 (Washington: Government Printing
IT ice, p. 17-
221
TABLE LIV
COMPARISON OF RATES FOR INDIVIDUAL AND CORPORATE INCOME
TAXES AND THE CORPORATE EXCESS PROFITS TAX AS ENACTED
BY THE CONGRESS AND APPROVED BY THE PRESIDENT
AS PERCENTAGES OF TAXABLE INCOME FOR
THE YEARS 1948, 1950 AND 1951
PERIOD
PRE
KOREAN
KOREAN
YEARS 1948 1950
1951
CONGRESS-SESSION 80th-2nd 8lst-2nd 8lst-2nd 82nd-lst
H.R. NUMBER H.R.4790 H.R.8920
H.R.9827 H.R.4473
REVENUE ACTS Revenue Revenue Excess Revenue
Act Act Profits Act Act
Of 1948 Of 1950 Of 1950 Of 1951
Individual Tax
Lowest Normal
2. 49 3
—
3
Bracket Surtax 14.11
17
-
19.2
Total 16.60 20
—
29.2
Highest Normal
2.7075 3
—
3
Bracket Surtax 79.4200 88
—
89
Total 82.1275 91 1
—
92
Max.Effective Rate
77 87
-
88
Corporation Taxes
Normal 24 24
25 30
Income Surtax 14 20 22 22
Total 38
45 47 52
Excess Profits
— — 30 30
Total Tax
38 ' 45 77
82
Max.Effective Rate 62 70
SOURCE: Annual Report of the Secretary of the Treasury on
the State of the Finances for the Fiscal Year
Ended June 30, 1951 (Washington: Government Print-
lng Office, 1952), p. 45.
222
Increase in federal receipts. The changes in tax
rates resulted in large increases in federal tax receipts.
Federal receipts increased after 1950 by $14.3 billion in
1951, by $3.8 billion in 1952, and $3.0 billion in 1953-
In spite of this large amount of increase, the budget defi
cit was $3.^ billion in 1951 and $5.8 billion in 1952. The
expenditures for the Korean War had risen faster than
revenues.
III. EXPENDITURE POLICY DURING
THE KOREAN WAR
The expenditure policy of the administration as the
economy was emerging from the 19^9 recession, was to keep
federal spending at low levels. Based upon 19^8 experience,
the level that might have been considered reasonable was
about $20 billion. There was some feeling that national
security spending might be reduced in the latter part of
1950.10 It was also felt that the economy had recovered
from the recession, and that the federal government's re-
cession-connected obligations would soon be reduced. The
outlook was bright for an economy that would be operating
at a high level, though short of the goal of maximum em
ployment .
~^The Economic Report of the President to the Con
gress, January 6, 1950 (Washington: Government Printing
Office, 1950), p. 105.
223
Impact of Korean War. In order to pay for a national
security program that included doubling the strength of the
Army and the Air Force, and increasing the Navy by one-half,
there was an estimated need for $150 billion during 1951
and 1952 combined.11 This requirement was of major signifi
cance because of the moderate increase in spending during
the second half of 1950; spending for the military services
had increased only $3.5 billion, or 30 per cent, more than
during the first half of 1950.12 As of January, 1951,
military spending was running at an annual rate of $20
billion; as of December, 1951, it was anticipated that the
rate of annual spending would have more than doubled to
$^5 or $55 billion. The change in the money rate of spend
ing meant that the proportion of total national output de
voted to spending would increase from 7 per cent to 18 per
cent. Table LV shows that total government expenditures
more than doubled during the period beginning with the
third quarter of 1950 and ending the second quarter of
1953. However, when the expenditures of the federal govern
ment are extracted from total government spending, it is
apparent that such spending tripled during the same period.
Table LV also Indicates that the climb of spending for na
tional defense was even more rapid, going from $14.0
11The Economic Report. January 12, 1951, op. clt.,
p. 67.
12Ibld., p. 162.
224
TABLE LV
EXPENDITURES OP THE FEDERAL GOVERNMENT FOR NATIONAL
SECURITY ON A QUARTERLY BASIS BEGINNING THE THIRD
QUARTER OF 1950 AND ENDING THE SECOND QUARTER
OF 1953 AS EVIDENCED BY SEASONALLY ADJUSTED
QUARTERLY TOTALS AT ANNUAL RATES
IN BILLIONS OF DOLLARS
YEAR QUARTER
TOTAL
GOVERN
MENT EX
PENDITURES
FEDERAL
GOVERN
MENT EX
PENDITURES
NATIONAL
SECURITY
EXPEND
ITURES
NATIONAL
DEFENSE
EXPEND
ITURES
1950 III
40.7 20.7
17.8 14.0
1950 IV 46.0 25.1 22.1 18.2
1951 I 52.2 30.6 27.4 24.1
1951
II
60.5
38.8 35.2
31.5
1951
III
66.9
45.2 41.4
38.3
1951 IV 71.6 49.4 45.0
41.5
1952 I
73.7 50.9 46.2 44.0
1952 II 78.1 55.1 50.0
47.3
1952 III
77.3
54.1 47.8 45.0
1952 IV 79.6
55.7
50.0 48.1
1953
I 83.0 58.1 51. 0
48.7
1953
II 86.6 62.2
54.3 52.0
SOURCE: Table 45, p. 224-225
National Income Supplement to Survey of Current
Business 1954.
225
billion during the third quarter of 1950 to $52.0 billion
during the second quarter of 1953* This represented an
increase in annual rate of 270 per cent. Further, Table LV
indicates that national defense spending, as a percentage
of federal government expenditures, climbed from 67 per
cent during the third quarter of 1950 to 83 per cent during
the second quarter of 1953* This Indicates that the fed
eral government's spending for other than defense, while
increasing in dollars by $3.5 billion, actually decreased
16 per cent in its share of federal government expenditures
during the period under consideration.
IV. BUDGET SURPLUSES DURING
THE KOREAN WAR
When the Truman Administration looked back upon its
accomplishments over the seven year period from 19 45 to
1952, It had feelings of pride and regret relative to bud
get surpluses. The gross debt had stood at $279.2 billion
on February 28, 19 46. As of January, 1953, it stood at
$267.A billion, a difference of about $11 billion. In add
ition to reducing the debt, the administration had also
achieved a series of annual surpluses. Table LVI shows the
annual summary of receipts and expenditures for the fiscal
years of 1946 through 1953* The year 1946 may be eliminat
ed from an appraisal on the grounds that it was an extra
ordinary situation during which it was probably politically
impossible to achieve a balance between revenues and
226
TABLE LVI
RECEIPTS, EXPENDITURES AND DEBT OP THE FEDERAL
GOVERNMENT FOR THE FISCAL YEARS OF 1945
THROUGH 1953 IN BILLIONS OF DOLLARS
YEAR RECEIPTS EXPENDITURES SURPLUS DEFICIT GROSS DEBT
1946 40.0 60.7 20.7
269.4
1947
40.0
39.3
.8
258.3
1948 42.2 33.8 8.4
252.3
1949
38.2 40.1 1.8 252.8
1950 37.0 40.2
3.1
257.4
1951 47.5
44.0
3.5 255.2
1952
61.3 65.3 4.0
259.1
1953 64.7 74.1 9.4 266.1
SOURCES: Annual Report of the Secretary of the Treasury on
the State of the Finances for the year Ended
June 30i 1950 (Washington: Government Printing
Office, 1951), pp. 480-481, 491.
Annual Report of the Secretary of the Treasury on
the State of the Finances for the year Ended
June 30, 1955, (Washington: Government Printing
Office, 1956), pp. 350-351.
Columns may not add because of rounding.
227
impossible to achieve a balance between revenues and ex
penditures. During the next six years, the administration
pointed with pride to the fact that receipts exceeded ex
penditures by $3-7 billion.^
Lack of revenue during Korean War. The administra
tion was disappointed that its relatively good record of
having receipts exceed expenditures was lost to deficits
during the Korean War. Having proposed that the Congress
should Implement the policy of paying for the Korean War
out of current taxation, the administration felt that the
Congress had failed to meet the challenge. The deficit
in fiscal 1952 was $4.0 billion, and in 1953s It increased
135 per cent to $9.4 billion. By adopting in the Revenue
Act of 1951 only about half of what the administration had
recommended, the Congress had prevented the administration
from achieving its overall fiscal policy goal of paying
for the Korean War out of current tax collections.
V. INFLATIONARY CHARACTERISTICS
The Korean War period was the second time for the
economy to experience a serious postwar inflation. The
first postwar Inflation from 1945 to 1948 was related to
-^Annual Report of the Secretary of the Treasury on
the State of the Finances for the Year Ended June 30, 1952.
(Washington: Government Printing Office, 1953), p~ 8.
228
the second period in many ways. Both periods experienced
surges In consumer demand for both durables and nondurables.
In each period, there was an abundance of liquid assets.
The two periods are associated with increased output, high
Income, and the growth of disposable personal income. How
ever, the important difference between the two periods was
that the first was generally free of controls while, during
the second, an effort was made to institute governmental
anti-inflationary action. Money Income was somewhat re
duced through an anti-inflationary program of the Federal
Reserve System, taxes were increased significantly, and
direct controls were set up over wages, prices, and mater
ial allocations. The effect of these governmental measures
served to temper the second inflationary period: between
the fourth quarter of 19^5 and the fourth quarter of 19^8,
the consumer price index rose 36 per cent, and the whole
sale price index rose 55 per cent; between the second quar
ter of 1950 and the second quarter of 1953, the consumer
price index rose 11 per cent, and the wholesale price in
dex rose 10 per cent. The intensity of the second postwar
period of inflation seemed to be about one third of the
first postwar period.
The Behavior of Prices
The behavior of wholesale and consumer prices dur
ing the Korean War did not follow an expected pattern.
229
The peculiar circumstances of the 1950-1953 period seemed
to bring about an initial rise of the price levels and then
a subsequent stable course during the balance of the period.
Just as the economy was emerging from the 1949 recession
and going through a peacetime recovery that was character
ized by a general balance of supply and demand,the outbreak
of the Korean War instigated a new buying surge as con
sumers and business tried to hedge against future short-
14
ages. When the shortages did not develop, the infla
tionary pressure seemed to subside.1^
Consumer price level rise. The rise of the consumer
price index was slower and more moderate than the movement
of the wholesale price index, as is shown in Tables LVII
and LVIII. Between June of 1950 and March of 1951, the
consumer price index rose from 187-3 to 205.8. This was a
change of 18.5 points in the index and represented a rise
of 9.8 per cent. During this same period, the wholesale
price level had increased 16.9 per cent. The consumer
price index continued its gradual climb and did not reach
its peak until July of 1952. This was sixteen months after
14
Bert G. Hickman, The Korean War and United States
Economic Activity, 1950-1952. Occasional Paper 49 TNew
York: National Bureau of Economic Research, Inc., 1955),
p. 203-
•^John p. Lewis, Business Conditions Analysis
(New York: McGraw-Hill Book Company, 1959), p• 329.
230
TABLE LVII
CONSUMERS RETAIL PRICE INDEX (1935-39 = 100)
MONTH 1950 1951 1952 1953
J anuary 202.4
210.9 209.0
February
204.9 208.9
207.8
March 205. 8
208.7
208.2
April 184.1 205.6
209.7 207.9
May 185.7 206 .5 210. 3
208.2
June
187.3
206.4 210.6
209.7
July 190.0 206.6 211.8
August 191.8 206.1 211.8
September 192.6 207.4 211.1
October
193.9 209.0 210.7
November
194.9 210. 3
210.4
December 198. 4 210.8 209.6
SOURCE: Department of Labor
231
TABLE LVIII
WHOLESALE PRICE INDEX (1935-39 - 100)
MONTH 1950
1951
1952
1953
January
114. 7 113.0 109.9
February
116.9 112.5
109.6
March 117.2
112.3
110.0
April
97.3 116.9
111.8 109.4
May 99.3 116.5
111.6 109.8
June 100.2 115.8 111.2 109.4
July 103.8
114.3
111.8
August 106.0 113. 4 112.2
September
107.9 113.2 112.8
October
107.7 113.7
111.1
November
109.4 113.6 110.7
December
111.7 113-5 109 .6
SOURCE: Department of Labor
232
the wholesale price Index had reached Its peak. Between
June of 1950 and July of 1952, the consumer price Index
rose 21.8 points, or 11.4 per cent.
Wholesale price level changes. Table LVIII Indicates
that the wholesale price index rose from 100.2 to 117*2 be
tween June of 1950 and March of 1951. During this ten
month period, the 17 point increase in the index represent
ed a change of 16.9 per cent. For the balance of the
Korean War, the level of wholesale prices decreased grad
ually and by a small amount. Between April of 1951 and
June of 1953, the price level went from 116.9 to 109.4.
This decline represented an average monthly reduction of
0.27 points or 0.24 per cent. Such small increments could
be considered to be insignificant and the behavior of the
wholesale price level may be described as stable between
March 1951 and June of 1953.
Price stability after March of 1951* Several fac
tors seemed to have been responsible for the reasonable
leveling off of prices during the latter part of the Korean
War inflationary period: (1) the fear of shortages was
dispelled because businessmen and consumers found that the
economy was able to maintain satisfactory inventory levels,
(2) businessmen began to taper off the inventory build-up
after it reached the rate of $15*5 billion during the
second quarter of 1951, (3) prices tended to settle at
233
realistic levels after the initial demand of consumers had
been satisfied for most items, and (4) price controls were
put Into effect in early 1951.^ The behavior of prices
during the early part of the Korean inflationary period
seemed to be a reflection of consumer buying as a hedge
against shortages or future price Increases, rather than
the result of public expenditures for defense which in
creased aggregate demand at a given level of income.
Increasing Money Wages
Average gross hourly earnings in total manufacturing
industries rose from $1,465 in 1950 to $1,687 in the second
half of 1952.-*-7 This was an Increase of 15 per cent at the
same time as the consumer price index was increasing 12 per
cent. Despite the general ceiling on wages established on
January 26, 1951, In the latter half of 1952 and early
1953, wages Increased 5 per cent when controls were relaxed
in a limited manner. It appears that the administration
did not choose to try to equate supply and demand by hold
ing wages at fixed levels.
Full Employment Condition
As of the second half of 1952, unemployment was
l6Ibid., pp. 326-329.
^ The Economic Report of the President to the Con
gress. January 14. 1953 (Washington: Government Printing
Office, 1953), Table B-15, p. 180.
234
down to 2.2 per cent of the total civilian labor force.
This was an important change from the situation as of June,
1950, when unemployment was up to 5.2 per cent. This 58
per cent decrease in the rate of unemployment was a re
flection of the demand that was put upon the labor force to
meet the needs of the private and public sectors of the
economy. Table LIX shows that, except for the Recession
of 1949, the years of the Truman Administration were gen
erally characterized by conditions of close to full employ
ment .
Production Increase
For 1951, the Council of Economic Advisers set up a
goal of output valued at $310 billion at 1950 prices. This
- 1 Q
was to be a $20 billion or 7 per cent increase. In
current 1950 dollars, the economy exceeded the goal by in
creasing the annual rate from $305 billion in the fourth
quarter of 1950 to $336.3 billion in the fourth quarter of
1951: this was an increase of 31.3 billion or 10.2 per
cent. In constant 1947 dollars, the increase was $18.2
billion, or 6.8 per cent. The 1952 increase was 6.6 per
cent in current dollars and only 3.9 per cent in constant
1947 dollars. During the 1951-1952 period, total output
increased faster than the security program, tending to
18
Economic Report, January 12, 1951, op. cit. , p. 76.
235
TABLE LIX
UNITED STATES UNEMPLOYMENT
AS A PERCENTAGE OP THE TOTAL CIVILIAN LABOR FORCE
FOR YEARS 1945 THROUGH 1952
YEAR
TOTAL
CIVILIAN
LABOR
FORCE
(MILLIONS)
UNEMPLOYMENT
(MILLIONS)
UNEMPLOYMENT
AS PER CENT OF
TOTAL CIVILIAN
LABOR FORCE
1945 53,860 1,040
1.9
19 46 57,520 2,270
3.9
1947 60,168 2,142 3.6
1948 6l,442 2,064 3.4
1949 62,105 3,395 5.5
1950 63,099
3,142 5.0
1951
62,884
1,879 3.0
1952 62,962 1,672
2.7
SOURCE: Department of Commerce
236
indicate that the economy was emerging from the Korean War
in a position that made it capable of producing more civ
ilian goods than prior to June of 1950. The industrial
production index, as formulated by the Federal Reserve
System, increased from 199 in June of 1950 to 23*+ in Decem
ber of 1952, an increase of 35 points, or 17-5 per cent.
Liquidity
The money supply increased 183 per cent between 1939
and 19*15. During the same period, total liquid assets in
creased 152 per cent. At the end of 19*15, total liquid
assets amounted to 112 per cent of gross national product,
and the money supply stood at *18 per cent of gross national
product. Table LX shows that during the 19*15 to 19*18
period of inflation, some of this supply of liquid assets
was reduced: in relation to gross national product, total
liquid assets declined 13*1 per cent, and the money supply
decreased 17.6 per cent. The same sort of reductions took
place during the Korean War: in relation to gross national
product, total liquid assets declined 10.1 per cent, and
the money supply decreased 13-7 per cent. Since the levels
of total liquid assets and the money supply, as percentages
of gross national product, both declined during the first
and second periods of postwar inflation, the financing of
the inflations appears to have been largely dependent
upon a definite rise in velocity. In spite of this limited
237
TABLE LX
ESTIMATED LIQUID ASSET HOLDINGS
FOR YEARS 1945 THROUGH 1953
BILLIONS OF DOLLARS
YEAR
MONEY
SUPPLY
TIME
DEPOSITS
POLICY
RESERVES
IN LIFE
INSURANCE
COMPANIES
U. S.
SAVINGS
BONDS OTHER* TOTAL
19*5 102.3
30.1 38.7 42.9
26.0 240.0
1946 110.0 33.8 41.7 44.2 29.1
258.8
1947 113.6 35.2
44.9 46.2
31.5
271.4
1948 111.6 35.8 48.2 47.8
33.3 276.7
1949 111.2 36.1 51.5 49.3 35.7
283. 8
1950
117.7 36.3 54.9 49.6
37.7
296.2
1951 124.5 37.9 58.5 49.1
40.8 310.8
1952 129.0
40.7
62.6 49.2 45.7
327.2
1953 130.5 43.7 66.7
49.4
51.3
341.6
#Goher Categories Are:
Savings and Loan Shares
Mutual Savings Deposits
Credit Union Shares
Postal Savings Deposits
SOURCE: John G. Gurley, "Liquidity and Financial Institu
tions in the Postwar Period," Study of Employment,
Growth, and Price Levels. Joint Economic Commit-
tee Study Paper No. {"i960) , p. 5, Table 1.
238
reduction, the important feature of both the first and
second periods of postwar inflation was that consumers had
access to large holdings of liquid assets. These liquid
assets had been originally accumulated during World War II
when disposable income had increased faster than the supply
of consumer goods, when controls and rationing had mini
mized inflation, and when savings had been encouraged. The
growth of liquid assets during the Truman Administration
is shown in Table LX as $101.6 billion, or 42.3 per cent.
The First and Second
Postwar Inflations
There were several common characteristics between
the two periods of postwar inflation. The periods were
both strongly influenced by consumer demand that was effects
ively supported by large amounts of liquid assets. In the
first postwar period, the demand seemed to stem from war
time restrictions on consumer goods; in the second, the
demand seemed to arise from the fear of shortages and
price increases. Regardless of the motivation, the surges
in demand reflected the strong desires of consumers to
acquire goods and services over and beyond the normal
levels of expenditures. The periods were both character
ized by a large amount of liquid assets which consumers
were willing to spend, often in addition to their in
creased disposable income. The resultant surges in effec
tive demand were evidenced in all parts of the economy
239
through the advance of both retail and wholesale prices.
Concurrent with the advances in prices were the demands of
the labor unions for increased wages and in both periods
employment was at record highs as unions pressed for higher
wages. Finally, conditions of high demand, employment and
investment led to marked increases in production as
measured in terms of gross national product. Although
these two inflationary periods had common characteristics,
they were also to be distinguished by the attributes of
peace on the one hand, and war on the other. This funda
mental difference made the application of fiscal policy
dissimilar in its concept and effect.
VI. MONETARY MANAGEMENT DURING KOREAN WAR
The condition of the economy was strong In the third
quarter of 1950. Production and employment were at high
levels. The expansion of credit had accelerated. Defense
spending by the federal government was about to rise
sharply. The Federal Reserve System announced in August
that it intended to restrain the expansion of credit and
the discount rate was raised from 1-1/2 to 1-3/4 per cent
iq
for all banks. ^ In September, the down payments on con
sumer durable goods were raised to 33-1/3 per cent, and the
, Whitney Hanks and Roland Stucki, Money, Banking,
and National Income (New York: Alfred A. Knopf, 1956),
p~! 346.
maximum time on installment loans was limited to 15 months;
the minimum down payments on real estate were Increased and
the maximum time period was limited to 20 years. In spite
of these actions, bank loans expanded at an unprecedented
rate from the outbreak of the war to mid-November. This
continued expansion of credit was being reflected in rising
prices, decreasing purchasing power, and causing the de
fense program to be more costly. In November, 1950, the
Federal Reserve System again requested banks to curb the
expansion of credit. This effort, through moral suasion,
was not successful and in February, 1951, reserve require
ments were raised slightly on both demand deposits and time
deposits. To check the continued upward trend of stock
prices, margin requirements were raised from 50 to 75 per
cent of market value. Another effort was made in February
of 1951 to institute a program through moral suasion to
restrain the expansion of credit.
End of Bond Support Program
During World War II and the postwar period, the Fed
eral Reserve System had supported the market for government
securities at fixed prices. This policy permitted banks
and other financial organization to obtain funds easily for
the expansion of credit by turning in the securities for
cash. It became apparent to many, including some leading
Senators, that the inflation was partially supported
24l
through this source of ready liquid capital.2® The re
luctance of the Federal Reserve System to continue to sup
port the market for government securities at fixed prices,
led the President to call a conference of Treasury and
Federal Reserve officials to discuss credit policy on
February 26, 1951- This conference led to one of the most
significant developments in monetary management during the
Truman Administration. On March 3, 1951, the Treasury and
the Federal Reserve System announced that they had reached
full accord on debt management and monetary policies. The
agreement covered four main points: (1) a plan to clear
the market of 2-3/4 per cent, twenty-nine-year bonds; (2)
a new procedure by the Federal Reserve System to support
bonds at scaled down prices; (3) a new procedure allowing
short-term government securities to fluctuate above and
below the discount rate; and (4) a continuation of the
1-3/4 per cent Federal Reserve System discount rate during
P 1
the balance of 1951. The agreement meant that the sup
port at fixed prices of the market in government securities
was being withdrawn. It also meant that the Federal
^ Congressional Record. 82nd Congress, 1st Session,
Vol. 97, No. 33, P. 1516.
21
Subcommittee on General Credit Control and Debt
Management, Joint Committee on the Economic Report, Re
plies , Congressman Wright Patman, Chairman, 82nd Congress
2nd Session, 1952, Part 1, pp. 79-80.
242
Reserve System had regained its power to use monetary
policy for the stabilization of economic fluctuation.
Gradual transition to flexibility. The Federal Re
serve System adopted a policy of gradual transition from a
rigid rate structure to one of greater flexibility. Bill
rates moved upward slightly from the 1.4 to the 1.6 per
cent range; medium term securities increased slightly from
the 1.9 to the 2.0 per cent range; and long term securities
changed from the 2.5 to the 2.7 per cent range.^ During
the year following the accord, the level of free reserves
was kept relatively high at about $500 million, bank borrow
ings ran about the $300 million level, and nonborrowed re
serves increased at the rate of about $75 million per month
The discount rate was not increased again until January 15,
1953, when it was raised from 1-3/4 to 2 per cent.^3
Whether the change in administration from Truman to Eisen
hower had anything to do with delaying the further use of
monetary policy is not known. What is apparent is that the
Truman Administration did draw attention to the fact that
higher interest rates were tending to increase the cost of
22j
ames L. Knipe, The Federal Reserve and the Ameri
can Dollar (Chapel Hill: The University of North Carolina
PressT 19^5), pp. 82-83.
23
Annual Report of the Secretary of the Treasury on
the State of the Finances for the Fiscal Year Ended June
30. j-953 (Washington: Government Printing Office, 1954),
pp. 82-83.
2^3
capital, and that the higher cost of capital would tend to
increase the costs of production, and that the high produc-
p
tion costs would tend to inflate prices.
VII. ROLE OP PRESIDENT'S COUNCIL
DURING KOREAN WAR
After the resignation of Edwin G. Nourse on November
1, 19^9, the Council of Economic Advisers was led during
the balance of the Truman Administration by Leon H Keyser-
ling, first as Acting Chairman, and after May 10, 1950, as
Chairman. The other members were John D. Clark, Roy Blough,
and Roy Blough's successor, Robert C. Turner. This Council
started out by declaring the increased military build-up
for the Korean War would not cause strong inflationary pres
sures. It was maintained that the level of production
could be raised 7 to 8.5 per cent above the 1950 level and
still meeet the additional demands put on It without result-
2 S
ing in a significant rise of inflation. The reason why
this approach did not turn out to be a serious error was
that the heavy buying of the early period was succeeded by
a falling-off of civilian demand. The significant develop
ment was the Increase in the propensity to save, which
p U
^ The Economic Report of the President to the Con-
gress, January 17, 1952 (Washington: Government Printing
Office, 1952), p. ii»0.
2^The Economic Report« January 14, 1951» op. clt.,
p. 76.
2 44
reflected the reduced rate of purchasing over a wide range
of consumer durable goods.
Special factors In consumption. The Korean War In
flation was a reflection of what consumers can do to the
economy when (1) they hold large amounts of liquid assets,
(2) they can obtain easy credit, and (3) they are motivated
to make large scale advance purchases. The events of the
second half of 1950 tended to refute the hypothesis that
consumer spending was a function only of real income.
Other factors and variables seemed to exert considerable
influence over consumption and saving during the Korean
War, such as expectations relative to shortages in durables,
and the influence of military operations on the forecasts
of consumers in regard to subsequent price rises. And so
while the Council concerned itself with the fact that pur
chasing power per capita was rising, the importance of the
consumer's decision to spend or save was not emphasized.
Influence on economic stability. While the Council
recognized that there had been marked inflationary pres
sures during the Korean War, it concluded in January of
1953 that there had been a remarkable degree of economic
27
stability. The rise in consumer prices in 1952 over 1951
26
The Economic Report, January 14, 1953, op. clt. ,
p. 48.
27Ibid., p. 39.
245
was only 1.3 per cent, whereas In 1951 It had been 6 per
cent. The Council felt that the price distortions of the
early Korean Inflation had been properly readjusted during
1952. The Council admired the work of the Wage Stabiliza
tion Board which limited the advance of wages to .4 per
cent per month during 1951 and 1952, whereas In 1950 It had
been .9 per cent per month. It was the Council's conclu
sion that it had correctly forecast the high-level economic
stability of the latter part of the Korean period.
The Council's reorganization. The Council under
Keyserling was intended to be more than an economic re
search agency. Its purpose was broadened to assist the
President in the determination of needs, and the prepara
tion of policies and programs to meet these needs. The
changing character of the Council became the target of po
litical attack by the Republican minority of the Joint
Committee on the Economic Report. This criticism was espe
cially directed toward the Council's recommendations on
such matters as pensions, unemployment insurance, and other
Social Security matters that the Congress felt were its
particular prerogatives. In 1953, the Council was reor
ganized by the Eisenhower Administration, with Mr. Arthur
F. Burns as the new chairman.
246
VIII. OUTCOME OF FISCAL POLICY
DURING KOREAN WAR
Although the period of the Korean War may be describ
ed as characteristically Inflationary, there were factors
of strength in the economy that acted as safeguards against
the kind of Inflation that took place in Germany after
World War I. The first of these was the capacity of the
economy to expand its output for both the private and pub
lic sectors in a manner that demonstrated competence and
flexibility; the second factor was the tendency toward a
high rate of savings at a time when the economy was operat
ing at close to full employment. The Truman Administration
recommended that taxes be increased during this period of
accelerated government spending and full employment so as
to balance the budget and even create a surplus. This fis
cal policy recommendation was only partially accepted by
the Congress and there were, subsequently, deficits and un
balanced budgets. However, the fiscal policy achievement
of the period was the utilization of tax policy to minimize
the deficits and the Increases to the national debt, and to
act as a stabilizing influence during a period of strong
inflationary tendencies.
Effects of Fiscal Policy on
Consumer Income
The federal government attempted to curb the expan
sion of money income during the Korean War through (1)
247
various restrictions on private fixed investment, (2) high
er taxes, and (3) direct controls over wages and prices.
These actions tended to slow down the increase of disposable
personal income, influencing consumers to reduce spending
and to save. Between the second quarter of 1950 and the
second quarter of 1953, personal income rose at an annual
rate of 29.8 per cent, while disposable personal income
increased only 24.7 per cent. That this outcome might have
been more effective is evident; however, the difference be
tween greater effectiveness and actual result was a matter
of implementation of policy, and not of policy recommenda
tion .
Effects of Price Controls
The experience of the latter half of 1950 was a de
monstration of what a special demand on the part of con
sumers can do to the price level. The rapid rise of prices
during the second half of 1950 was also a stimulant to
further demand as consumers considered the possibilities of
more shortages and greater increases in the price level.
These expectations were checked in part by price controls.
Consumers seemed to react to price controls by reducing
their accelerated rate of purchases to one that was more
normal for the period. As personal income continued to
rise, the rate of savings also increased. This increase in
savings seemed to be a reflection of the heavy buying dur
ing 1950 and the decrease in the value of liquid assets as
248
prices increased. The effectiveness of price controls
might have been much greater if they had been imposed ear
lier in the Korean War period* and if they had been enforc
ed more effectively in the latter part of the period.
Effects of Federal Tax Policy
Federal tax policy during the Korean War was properly
conceived, was enacted by the Congress in a timely manner,
but fell short of the administration's goal of paying for
the Korean War out of current revenues. The policy of in
creasing tax rates promptly was a demonstration of effective
discretionary fiscal policy. The sharp increase in revenue
was a demonstration of the effect of the built-in flexi
bility of the income tax systems. However, the Korean con
flict did serve to increase the national debt by $9 billion
because taxes were not increased enough to cover expendi
tures. While this increase of 3 per cent in the national
debt was moderate, it is also evident that the increase
might have been avoided. The most important effect of the
Revenue Acts of 1950 and 1951 was their contribution to
economic stability that prevented an inflation of World War
II proportions from taking place.
Effects of Fiscal Policy
on Production
The flow of goods and services increased significant
ly during the Korean War. Between the second quarter of
1950 and the second quarter of 1953, gross national product
249
rose at an annual rate of $94.0 billion, or 34 per cent.
In terms of constant 1947 dollars, the increase In gross
national product between 1950 and 1953 was $41.9 billion,
or 15.8 per cent. When allowance is made for price changes,
the expansion of physical output was not as large as the
current dollar valuations seemed to indicate. Nevertheless,
production did appear to be stimulated for both the public
and the private sectors. The value of goods and services
for national defense increased 226 per cent at the same
time as consumption expenditures were increasing 22 per
cent. Although the heaviest demand was for items of na
tional defense, it is evident that the economy also respond
ed to the requirements of consumers.
Limited Success of
Administration *s Approach
The approach of the Truman Administration to the
Korean War period was different from that employed during
World War II. The decision of the Truman Administration
was to curb excessive civilian demand through an increase
in income tax rates rather than through rigid price con
trols. The Congress seemed to agree with this approach in
principle because of its enactment of the Revenue Acts of
1950 and 1951. It is reasonable to conclude that there was
general agreement that tax revenue should be increased to
meet the additional defense expenditures, and only the de
termination of how high tax rates should be set, limited
250
the overall success of the policy.
CHAPTER IX
SUMMARY AND CONCLUSIONS
Harry S. Truman was President from April 12, 19^5 to
January 20, 1953, a period of seven years, nine months, and
seven days. During this period, fiscal policy was called
upon to counteract the fluctuations in business activity.
The Employment Act, as passed in 19^6, included the mandate
to the federal government to use all practical means to
promote maximum employment, production, and purchasing
power. The recommendations of the President and the Coun
cil of Economic Advisers were generally anti-inflationary
in a period that can be characterized as inflationary.
While some of the President's fiscal policy actions may
have been politically inspired, the actions of the Congress
appear to have been more partisan and politically expedient.
The result is a fiscal policy record that failed to contain
the postwar inflation, and which permitted the purchasing
power of the United States dollar to decrease 33 per cent.
I. FIVE PHASES OF FISCAL
POLICY IMPLEMENTATION
The role of fiscal policy during the various per
iods of inflation and deflation that occurred during the
Truman Administration may be summarized as follows.
251
252
Postwar Adjustment From
War to Peace
The eight month period from February to October of
1945 was a period of deflation. Knowledge of the economic
situation was beset by fears of the insufficient aggregate
supply and the presence of a great abundance of liquid
assets; however, these items of correct diagnosis were un
dermined by fears of a postwar depression and the return to
an economy similar to that of the 1930's. The policy para
meters called for a large reduction of expenditures by the
federal government and the maintenance of high levels of
revenue. The policy procedures did decrease spending 44
per cent but it was not possible to return to the prewar
level; taxes were also reduced $5.7 billion on the basis
that such action would promote the expansion of business
production. The implication of these spending and taxing
policies was that a budget surplus would soon be achieved
by reducing spending more than taxes. Such fiscal actions
did serve as the means of achieving the ends of the eco
nomy; unemployment did not exceed 1.6 per cent of the total
civilian labor force, the price Indexes did not change more
than 2 per cent. However, the most important goal that was
achieved in a manner beyond expectations was the reasonably
smooth adjustment of the economy from war to peace.
The First Period of
Postwar Inflation
The thirty-seven month period from November of 1945
253
to October of 19^8 was a period of inflation. The economic
situation was correctly appraised, resulting in an advocacy
of the maintenance of tax rates, the reduction of spending,
and the accumulation of surpluses. The fear of a postwar
depression lost much of its appeal. The policy parameters
called for further reductions in expenditures, and over the
three-year period they were reduced 50 per cent. However,
this reduction was accomplished by the end of the second
quarter of 19*16, and afterwards spending remained steady
when it was found that the spending level could not be re
duced to the prewar level. The policy procedure of the
Congress was to reduce taxes, which the President success
fully resisted until 19*18. In that year, taxes were re
duced $5.7 billion. The implication of these fiscal poli
cies was a debt reduction of $26.3 billion. There were
strong influences exerting pressure on the implementation
of these fiscal policies, namely, the strong measure of
effective demand together with the weight of liquid assets,
the decline of the propensity to save, the rise in demand
for United States exports, the lack of strength in the
President’s Council of Economic Advisers, the failure to
gage the true strength of the inflationary impulse, and the
influence of federal credit in the growth of mortgage debt.
The full employment goal was accomplished; but the value of
money decreased 33 per cent. Although the inflation was
costly in terms of the purchasing power of the dollar, the
254
administration considered the avoidance of hyper-inflation
as an achievement of great worth.
The 1949 Recession
The eleven month period from November of 1948 to
October of 1949 was a period of deflation. Evaluation of
the economic situation was correct in maintaining that in
flation was still the greatest danger and that deflation
was a short run problem. However, the diagnosis of the
deflation was generally slow. The policy parameter called
for increased spending, but the increase in spending was
for defense and not for countercyclical fiscal policy. The
tax rates, that had been inappropriately lowered during the
preceeding inflationary period, now appropriately brought
about a $4.8 billion reduction in revenue. The additional
spending and the lower revenue resulted in a budget deficit.
However, for the first time, deficit spending was generally
accepted as a proper course of fiscal action. Unemployment
rose to 6.8 per cent of the total civilian labor force and
the price indexes decreased slightly.
Peacetime Recovery from Recession
The seven month period from November of 1949 to May
of 1950 was reflationary, as the economy emerged from the
1949 recession. Diagnosis of the economy was mixed: some
advocated increased spending to buoy up demand while the
administration proposed tax changes for social purposes.
255
Unemployment fell from 7.6 per cent to 5.2 per cent and the
price indexes turned up again. The most significant fiscal
policy action of the period was the payment of $3.0 billion
for the veterans’ insurance dividend.
The Korean War
The thirty-seven month period from June of 1950 to
July of 1953, was a period of wartime inflation during the
Korean War. Knowledge of the economic situation was clearly
to be cognizant of the requirements of another military
build-up. The policy parameters were designated as increas
es in both expenditures and revenues. Federal spending rose
sharply, especially in 1951. The Congress responded with
tax legislation that brought about significant increases in
tax revenues. The implications of such an expenditure and
tax policy were that the deficits were small, and material
ized mainly because the Congress did not increase tax rates
quite as much as the administration had recommended. The
recommendation of the administration that the expenses of
the Korean War should be paid out of current revenues, was
not implemented by the Congress. The economy’s demand for
production again caused unemployment to fall to less than
3 per cent of the total civilian labor force. While the
full employment goal was being satisfied, prices again rose
in an inflationary manner, registering increases in both
consumer and wholesale price indexes of around 10 per cent.
Most of the surge of inflation took place in the early
256
months of the war; when shortages did not develop, prices
seemed to remain generally steady during the balance of the
period. The fall in the value of money indicated that one
of the two principal goals of fiscal policy had been
achieved with only limited success.
II. FISCAL POLICY AND THE EMPLOYMENT ACT
The mandate of the Employment Act was clearly In
tended to prevent the recurrence of another Great Depres
sion. The three areas of maximization were stated to be
employment, production, and purchasing power. The Truman
Administration recommended passage of the measure and in
dicated Its support of the enactment at almost every op
portunity. While fiscal policy was not Intended or declar
ed to be the only approach toward the realization of the
mandate, It was, nevertheless, the principal fiscal means
for the accomplishment of these proclaimed ends of the
economy.
Maximum Employment
The Employment Act expressed the goal that govern
ment should not permit the unemployment of the labor re
source to reach a significant level. In the five periods
that have been considered, the unemployment level remained
in the range that is usually considered to be associated
with frictional causes during four periods: only during
the 19^9 recession did unemployment temporarily exceed five
257
per cent of the total civilian labor force. This accom
plishment cannot be credited to fiscal policy because fed
eral expenditure policy was not responsible for the high
levels of employment. The concern of the Truman Adminis
tration was generally with inflation and fiscal policy was
usually framed in terms of minimum expenditures and steady
tax revenues. Federal spending did increase slightly dur
ing the 19^9 recession, but for reasons of national security
and foreign aid, rather than to meet the threat of high
level unemployment. Although President Truman was prone to
credit the Employment Act with contributing to the economy’s
progress through coordination of economic policy, such an
achievement does not seem to have contributed directly to
maximum employment.
Maximum Production
Economic planning, especially at the beginning of
the postwar period, was concerned with the need for a large
increase in the production of goods and services for the
private sector of the economy. In terms of constant 19^7
dollars, expenditures of the private sector increased $51.3
billion or 23.5 per cent between 19^5 and 1952. During the
eight year period, this represented an annual increase of
slightly less than 3 per cent at a time when aggregate de
mand was very strong and the economy was operating at close
to full employment most of the time. Therefore, it was not
a problem of achieving a level of aggregate demand that
258
would fully utilize the economy's productive capacity and
employ its labor force. The problem confronting the eco
nomy was to provide a level of aggregate supply that could
satisfy the level of aggregate demand. This was achieved
only during the 19^9 recession.
Maximum Purchasing Power
Throughout the postwar period, the persistent upward
pressure on the price level was the commanding character
istic. Inflation became the dominant problem of the eco
nomy when World War II started: the unemployed and others
not ordinarily so engaged, were put into the armed forces,
the demand of the federal government for goods and services
increased significantly, the supply of goods and services
was limited, high tax rates reduced personal disposable in
come, and the federal deficit soon ran at $50 billion per
year. Wartime Inflation was met by suppression. Not only
were goods and services unavailable, but controls and ra
tioning placed part of the loss on consumers for the high
demands of the military. The result was a postponement of
demand and a higher than usual rate of saving. After the
war, price controls were abandoned and with high demand
both at home and abroad, the natural result was for each
group to try to get the most for Itself. Monetary policy
proved to be ineffective in the manner in which it was used.
Fiscal policy, too proved to be ineffective because taxes
were not raised or spending reduced enough to stop
259
inflation. The reason that fiscal policy was not effective
was due partly to the fear of starting a long awaited post
war depression, and partly to a lack of knowledge of how
far to go.
Special Circumstances of
Postwar Period
The postwar period was not a period of balance for
the economy. The levels of activity that were attained by
consumption and investment could not be maintained. What
was surprising was that after catching up with demand tem
porarily in 19^9, the economy was able to recover during
peacetime conditions prior to the beginning of the Korean
war. Fiscal policy did contribute to the stabilization of
the economy: public expenditures were maintained and taxes
had been reduced in 19^8. Prosperity was not left to
change; transfer payments cushioned the postwar adjustment
and the 19^9 recession. The postwar period was a demon
stration of the special circumstance in which the forces of
inflation were of a temporary but powerful variety that did
not respond to formula-type solutions.
The Unique Features of the Period
The transformation of the economy after World War II
was not from war to peace. It was actually a change from
a hot war to a cold war.1 The Immediate period was
IWilliam Fellner, "Postwar Economic Tendencies In the
United States," The Business Cycle in the Postwar World,Erik
Lundberg, editor (London: Macmillan 8 t Co., Ltd., 1955) * p. 11.
260
one of building up the economies of Europe, which was
followed by confrontation with Russia in Berlin, and this
was followed by another hot war in Korea. All of this tend
ed to foster a defense type of economy with almost full em
ployment, high investment and consumption, and rising
prices. The whole period was influenced by the great re
serve of liquidity that was built up during World War II,
plus the subsequent deficencies in aggregate supply.
Goals that Conflict with
Fiscal Policy
The Truman Administration did not establish a stable
value of money as the only goal, and fiscal policy as the
means for achieving such an end. The eight years of the
Truman Administration were first of all beset by other re
quirements of a primary importance, such as national de
fense for both hot and cold wars: these needs necessarily
made the ends of fiscal policy take lower positions in the
order of fiscal importance. Further, the Truman Adminis
tration was dedicated to the pursuance of social goals,
such as providing for the needs of veterans and tax equity
for those in the lower tax brackets. These social goals
sometimes modified the administration's actions relative to
the goal of a stable value of money.
The Federal Reserve System's
Effect on Fiscal Policy
The lack of coordination between the Treasury and
261
the Federal Reserve System constituted another problem
area relative to the goal of a stable value of money. The
decision to continue the wartime policy of the Federal
Reserve System to support the market for government securi
ties permitted the supply of private credit to make effec
tive demand exceed aggregate supply. While the purpose of
the Treasury was being served by the functioning of a
steady bond market, the administration's fiscal policy was
being thwarted in its effort to achieve a steady value for
money. It became clear in 1951 that higher interest rates
for the Treasury's bond management program were a lesser
evil than the continued increase of private credit through
the bond support program of the Federal Reserve System.
While the Accord of 1951 could not be described as an anti-
inflationary action, it did involve a reduction in the
forces of inflation that were working against the achieve
ment of the stable value of money.
The role of cheap credit. During the years 19^5 to
1951, the Treasury-Federal Reserve System arrangement arti
ficially held interest rates at low levels. This made
credit cheap not only for the federal government, but also
for all borrowers. Private individuals were able to liq
uidate their government securities at any time on the
basis of par value or better. This policy provided the
basis for a continuation of the wartime expansion of credit
into the postwar period. The availability of credit,
262
coupled with liquid assets and a large resevoir of demand
for consumer goods and services, caused prices to rise and
was instrumental in the fall of the value of money.
Economic Instability and
Fiscal Policy
The Employment Act of 19^6 did not mention business
cycles or economic fluctuations. However, the passage of
the Act was to insure governmental intervention in the
event of another depression. The maximization of employ
ment, production, and purchasing power, was intended as a
group of goals that would result in programs designed to
avoid another period like the 1930's. The Employment Act
also did not mention fiscal policy but in using all practi
cal means to achieve the cited goals, it necessarily fol
lows that fiscal policy is one of the principal means,
along with monetary policy and debt management. One of
the more limited ways of interpreting the Employment Act
would be to declare that it was passed in order to insure
the utilization of fiscal policy as an agency for the re
duction of wide fluctuations in economic activity. The
business cycle is a complex phenomenon that embraces the
entire economic system, is caused and conditioned by a
large number of factors and circumstances, and for which
2
there is no single theoretical explanation. What does
?
Gottfried Haberler, Prosperity and Depression
(third edition; Lake Success! United Nations, 19^6), pp.5-7.
263
seem to be inferred is that there is an inherent instabil
ity in the economic system that tends to move the economy
through successive periods of inflation and deflation.
This institutional condition was acknowledged by the Truman
Administration and the challenge of taking remedial action
accepted.3
III. FISCAL POLICY RECORD OF
THE TRUMAN ADMINISTRATION
Fiscal policy was used by the Truman administration
as a means of maximizing employment, production, and pur
chasing power. The Economic Reports of the President re
flect the recommendations of the Chief Executive and his
Council of Economic Advisers relative to overall economic
policy and fiscal policy in particular.
Minimum Unemployment
The first economic goal is usually full employment
and it is usually achieved when the economy is operating at
a high and rising level. Although the low level of unem
ployment was not the result of fiscal policy action, the
record of the Truman Administration, nevertheless, is as
sociated with a period of generally full employment. The
^The Economic Report of the President to the Con
gress, July 26, 1950 (Washington: Government Printing
Office, 1950) p. 37.
264
only test for fiscal policy action relative to unemployment
came during the 1949 recession and the Truman Administration
chose to practice "the gentle art of disinflation" rather
than engage in large deficit-spending programs designed to
increase employment levels.
High Production
Output and employment rose together during the eight
years of the Truman Administration. The only lull in the
whole period was the decumulation of inventory during the
1949 recession. As investment and consumption rose, output
and employment kept pace. In terms of gross national pro
duct, the period was one of almost constant growth. How
ever, greater production would have served to decrease the
inflationary trend. If automobiles, refrigerators, washers,
and other consumer durables could have been produced in
greater quantity, if aggregate supply could have matched
aggregate demand more evenly, the inflation might have been
replaced by a period of growth without the resultant de
crease in the value of money.
Fall in the Value of Money
It develops that It may not be possible to achieve
4
all economic goals simultaneously. There appears to be a
4
Myron H. Ross, Income: Analysis and Policy (New
York: McGraw-Hill Book Company, 1964), p. 307.
265
conflict between the goals of full employment and the steady
value of money. If the employment level Is to be maintained
at 95 to 97 per cent of the total labor force, it may be
necessary to accept an increase in the price level. The
two goals appear to be competitive, and not complimentary.
The postwar inflationary process. When the economy
emerged from World War II, the production of consumer goods
and services started to expand. Prices started to rise
when bottlenecks developed in some industries and full ca
pacity was attained in others. Overtime pay, resulting
from longer work weeks, also added to costs and was passed
on in prices because of the high level of effective demand.
Costs for technological Improvements and additional ca
pacity came to be contributory to the price rise. Resource
costs increased because of higher labor costs. Rounds of
wage Increases increased aggregate demand through higher
incomes. By this accumulative process, aggregate demand
kept rising enough to sustain the Increases in prices even
though the level of output sometimes remained constant.
Anti-inflationary program. The program of the
Truman Administration to keep prices from continuing to
rise was generally Ineffective. In 19^8, the needs of the
foreign aid program under the Marshall Plan, and the
stepped-up defense spending, were not offset by higher
rates for the income taxes, but by lower rates. In 1950,
266
the expectation that shortages would develop in the inven
tories of civilian goods and services touched off a hyper
inflation that was contained mostly by a reduction in de
mand. In both situations, the stable value of money was
placed in a secondary position relative to other goals.
When corrective action was taken, it was either insuffi
cient for the requirement or too late.
Inflationary tendency. The two inflationary periods
during the Truman Administration were of the vigorous type
and they influenced the entire economy. Price increases
did not discourage a consuming public which held a large
amount of liquid assets and whose demand had been deferred
for a considerable period of time. The Truman Administra
tion and the Congress seemed more concerned with the pos
sibility of a postwar depression than with the reality of
a falling value of money. Unemployment and lost production
were considered to be worse evils than inflation. Legis
lation was directed for the most part toward actions that
might be considered inflationary, such as easy money,
greater spending, tax reduction, automatic stabilizers,
agricultural supports, and administered prices.
Mildness of Fiscal Policy Approach
In spite of the limited fiscal policy experience of
the federal government in 19^5, the general approach to
fiscal policy may be described as mild rather than
267
aggressive. The determination to act with fortitude in
fiscal matters was assured In the event of a depression.
But to reduce inflation, knowledge of the appropriate
action— and determination to gain support, passage, and Im
plementation of this action— seemed to be lacking. While
the Truman Administration was pro’ 1 of its record of accum
ulating surpluses and reducing debt, the record might have
been more significant. During the eight years of the
Truman Administration, more tax revenue collections might
have served to reduce disposable personal income, consump
tion, and demand; less easy credit might have reduced in
stallment buying of consumer durables so that demand would
have been closer to the level of supply; higher Interest
rates might have curbed the expansion of private credit and
slowed down the great surges of inflationary buying and
investing. In almost every area of fiscal action, the Ad
ministration took positions that precluded any dramatic
results. The tendency seemed to be to take moderate posi
tions from which alternative courses of action could be
undertaken easily.
The Ends and the Means
Pull employment high levels of production, and a
stable value of money are set up as the ends of the economy.
The means for achieving these ends Include fiscal policy.
In an economy in which our knowledge of its functioning Is
limited, and which is subjected to many disturbances both
268
Internal and external, the main problems seem to be formu
lating policy for an imperfect model and accepting results
that are minimum deviations from the established ends. The
Truman Administration is associated with full employment,
mostly because the nature of the period generally served to
assure that particular goal without any particular effort.
The Truman Administration is also associated with the fall
in the value of money. Here the deficiencies included
knowledge of the economy, the policy to be recommended, and
the accomplishment of policy objectives with uncertain in
sight as to external conditions. The stability of the
value of money was lost In the postwar period because eco
nomic policy failed to come to grips In an aggressive man
ner with the inflationary impulse of the economy.
B I B L I O G R A P H Y
269
270
BIBLIOGRAPHY
A. BOOKS
Abbott, Charles Cortez. The Federal Debt. New York: The
Twentieth Century Fund, 1953*
Ackley, Gardner. Macroeconomic Theory. New York: The
Macmillan Company, 19&1.
Bailey, Stephen K. Congress Makes a Law. New York:
Columbia University Press, 1950.
Bancroft, Gertrude. The Measure and Behavior of Unemploy
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Burns, A. F., and W. C. Mitchell. Measuring Business
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Canterbery, E. Ray. The President's Council of Economic
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Chandler, L. V. Inflation in the United States 19^0-19^8.
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Copeland, Morris A. Trends in Government Financing. A
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Creamer, Daniel. Personal Income During Business Cycles.
A Study by the National Bureau of Economic Research.
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Davidson, Paul, and Eugene Smolensky. Aggregate Supply and
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Day, A. C. L., and Sterie T. Beza. Money and Income. New
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Fabricant, Solomon. Basic Facts on Productivity Change. A
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Fforde, J. S. The Federal Reserve System 19^5-19^9•
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Firestone, John M. Federal Receipts and Expenditures Dur
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Freeman, Ralph E. (ed.). Postwar Economic Trends in the
United States. New York: Harper and Brothers , 196>0 .
Friedman, Milton. A Theory of the Consumption Function. A
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Friedman, Milton, and Anna Jacobson Schwartz. A Monetary
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Goldsmith, Raymond W., Robert E. Lipsey, and Morris
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Goode, Richard. - The Individual Income Tax. Washington,
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Gordon, Robert Aaron. Business Fluctuations. Second
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Haberler, Gottfried. Prosperity and Depression. Third
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Hanks, J. W., and R. Stucki. Money, Banking, and National
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Kendrick, John W. Productivity Trends in the United States.
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Knipe, James L. The Federal Reserve and the American
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The Economic Report of the President to the Congress ,
January m, 1953. Washington: Government Printing
Office, 1953.
C. REPORTS OF THE SECRETARY
OF THE TREASURY
The Annual Report of the Secretary of the Treasury on the
State of the Finances for the Fiscal Year Ended June
30\ 1945. Washington: Government Printing Office,
1946.
The Annual Report of the Secretary of the Treasury of the
State of the Finances for the Fiscal Year Ended June
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T94T
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275
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1 W T
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19 p r .
D. PUBLICATIONS OP THE
U. S. CONGRESS
The Congressional Record
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Joint Economic Committee, Study of Employment Growth and
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_. The Relationship of Prices to Economic Stability
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_. Federal Tax Policy for Economic Growth and
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276
E. OTHER GOVERNMENT PUBLICATIONS
The Federal Reserve Bulletin, published monthly by the
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The Survey of Current Business, published monthly by the
Office of Business Economics, U. S. Department of
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F. PUBLICATIONS OF PROFESSIONAL
ECONOMIC GROUPS
The Commission on Money and Credit. Stabilization Policies.
Edgewood Cliffs: Prentice-Hall, Inc., 1963.
_______ . Inflation, Growth, and Employment. Edgewood
Cliffsi PrentIce-Ha11, Inc., 19641
Conference of the Universities, National Bureau Committee
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Conference Report of the National Bureau of Economic
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National Bureau of Economic Research, Inc. The Behavior of
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_______ . Long-Range Economic Projection. Princeton:
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Bach, G. L. "Monetary-Fiscal Policy Reconsidered," The
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277
Blyth, Conrad A. "The 1948-1949 American Recession," The
Economic Journal, September, 1954.
Bronfenbrenner, M. "Postwar Political Economy: The Presi
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October, 1948.
Creamer, Daniel. "Behavior of Wage Rates during Business
Cycles," National Bureau of Economic Research, 1950.
Ellis, Howard S. "The January 1949 Economic Report of the
President," Review of Economics and Statistics, August
1949.
Goldenweiser, E. A. "Federal Reserve Objectives and
Policies," The American Economic Review, June, 1947.
Goldsmith, Selma. "Size Distribution of Income Since the
Mid-Thirties," Review of Economics and Statistics,
February, 1954.
Hamberg, Daniel. "The Recession of 1948-49 in the United
States." The Economic Journal, March, 1952.
Hoover, Calvin B. "Keynes and the Economic System," The
Journal of Political Economy, October, 19^8.
Miller, Donald C. "The Revenue Act of 1951: A General
Survey," National Tax Journal. March, 1952.
Mintz, Use. "Trade Balances during Business Cycles:
U. S. and Britain since 1880," National Bureau of
Economic Research, 1959-
Oakes, Eugene E. "The Revenue Act of 1951: Excess Profits
Tax Amendments," National Tax Journal, March, 1952.
Smithies, Arthur. "Full Employment in a Free Society,"
The American Economic Review, June, 1945.
Wallich, Henry C. "The Changing Significance of the
Interest Rate," The American Economic Review, December.
1946.

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Creator Olson, John Maurice Clifton, Jr. (author)

Core Title An Analysis Of Fiscal Policy During The Truman Administration (1945-1953)

Degree Doctor of Philosophy

Degree Program Economics

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

Tag Economics, Finance,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Anderson, William H. (committee chair), Guild, Lawrence R. (committee member), Phillips, E. Bryant (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-116599

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