Managing the Nation's Finances

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Managing the Nation's Finances

U.S. president Franklin D. Roosevelt (1882–1945; served 1933–45) had two major home front financial concerns during World War II (1939–45): how to finance the very expensive war effort and how to control the greatly altered home front economy. Solutions for both problems were intertwined. During World War I (1914–18) prices of goods and services in the United States had risen 62 percent, causing much economic hardship on the U.S. home front. Roosevelt was determined to avoid such dramatic inflation (prices of goods rising faster than wages) during World War II. This meant making major changes to the U.S. economy during the war years. Under Roosevelt's direction, the economy changed from a peacetime free market economy—an economic system with very limited government control over business activities, whereby the price of goods is primarily determined by the public demand and availability—driven by consumer spending to what is called a "command" economy. A command economy is driven largely by government funding and controls, under command of various temporary agencies that are directed by private business leaders. In fact, many of the wealthy and prestigious business leaders who greatly influenced the market economy prior to the war continued to strongly influence the wartime command economy and prospered greatly from it.

The "Good War"

The wartime economy led to a new period of national prosperity, ending the economic crisis called the Great Depression. The Depression began in the United States in late 1929 and spread throughout the world during the 1930s. During the Depression, U.S. unemployment hit 25 percent, and those who kept their jobs had to accept, on average, a 40 percent decrease in their salaries. During World War II the unemployment rate dipped below 2 percent; almost everyone who wanted a job could easily find one. The nation's gross national product (GNP)—the total value of goods and services produced by a nation in a particular time period—more than doubled, going from $88.6 billion in 1939 to $211.9 billion in 1945. Worker productivity, a general measure of economic health based on how many hours a typical worker produces a certain good or performs a certain manufacturing task, increased 25 percent. Farm output increased more than 30 percent.

The strong wartime economy inspired good spirits among the general public on the home front. As they contributed to the war effort, Americans felt a sense of pride in their work, and the entire population was unified by a desire to help win the war. These sentiments caused people to label World War II as "the Good War." However, the prosperity World War II brought was different from good economic times such as the 1920s, when business activity boomed. During the 1940s civilian consumer goods were scarce, the quality of available goods declined, shoppers wrestled with a complex system of rationing (a government program of making certain foods or materials available to the general public and businesses in limited amounts), housing was inadequate in many areas, workers spent long hours on the job, and families or family members were dislocated to far reaches of the country or overseas. It was not prosperity in a normal sense. Nonetheless, it was a definite economic improvement from the 1930s. Wartime jobs provided Americans with much better incomes. As a result, U.S. consumer spending rose 12 percent between 1939 and 1943. Savings accounts grew, and people were able to pay off their Depression-era debts.

Financing the war

Fighting World War II was very expensive. The U.S. government spent well over $300 billion for battlefield expenses and home front mobilization. That amount was almost twice as much as the United States had spent in its entire history up until the war. The annual federal budget grew from about $9 billion in 1939 to over $98 billion in 1945. The government spent an average of $75 billion a year during the war. This unprecedented spending called for a new approach to raising public funds. Two key avenues for fund-raising included raising taxes and selling war bonds.

A New Tax System

President Roosevelt strongly preferred paying for the war primarily through increased taxes. He wanted the highest tax increases to be paid by the wealthy, by corporations, and by the war industries, whose large profits came directly from the war effort. Taxing would serve two important purposes: The money raised by taxes would pay for the war, and paying higher taxes would reduce the disposable income (money left after paying for basic necessities, such as food and rent) of American consumers. Taking this money out of circulation would guard against another wartime inflation spiral. Economic inflation means the prices of goods and services rise faster than peoples' incomes, and the supply of money being printed by the U.S. Treasury increases, causing the value of money to decline and thus the price of goods to rise.

The public, business, and Congress opposed relying so heavily on taxes to pay the war costs. Congress did not want to lay the full burden of higher taxes on the wealthy and corporations, who were the main taxpayers under the existing system. In 1942 Congress passed the Revenue Act, which was formulated using the ideas of private financier Beardsley Ruml (1894–1960). Ruml was head of the Committee for Economic Development, a group of businessmen appointed to revise the federal tax structure. A key goal of Ruml and the rest of the committee was to increase the number of people who had to pay personal income tax in the United States. Ruml's committee recommended increasing the amount of personal income subject to taxes by taxing a person's income over $624 a year, a substantially lower figure than before. This new system lowered the minimum income threshold, so that even lower-income people had to pay some tax. As a result, this change would dramatically increase the number of taxpayers in America. Signed into law, the Revenue Act brought major change to the nation's tax system. For the first time, more taxes would be paid by individuals than by corporations. Only 4 million workers paid income tax in 1939. In 1942, 28 million Americans would pay taxes, and by 1945, 43 million were paying taxes. The amount of national income paid to income taxes rose from 7 percent in 1940 to 24 percent in 1945. Despite the increase, taxes paid for less than half of the war costs.

In the past all personal income taxes were paid at the end of a year. Because the new tax system created more taxpayers, it required a more effective collection process. To answer this need, the federal government introduced payroll tax deductions for the first time; taxes would be taken directly out of workers' paychecks on a regular basis. (This was another of Ruml's ideas.) Withholding taxes through the payroll system helped guard against inflation by reducing the disposable income consumers had each month. Under the old collection system citizens would have paid their 1942 taxes in early 1943. To avoid having workers pay income taxes twice in one year, Congress chose to not collect most personal income taxes for the year 1942 and begin payroll withholding at the beginning of 1943 for 1943 taxes.

Even though more people had to pay taxes and all citizens paid a higher tax rate, the revised tax system received very little opposition. Wartime patriotism brought a quiet acceptance of the new system, and regular payroll deductions turned out to be more popular than the old, end-of-the-year tax collection. A public poll in January 1943 showed a 90 percent approval rating for the new system. The importance of the personal income tax in the U.S. economy significantly increased during World War II and remained the key source of government operating funds afterward.

Other Tax Proposals

The 1942 Revenue Act raised much less money than President Roosevelt needed, so he introduced another tax bill in 1943. His chief economic adviser, Leon Henderson (1895–1986) of the Office of Price Administration (OPA), pressed for higher tax rates to slow inflation. Roosevelt sought a $10.5 billion tax bill. Congress responded with only a $2 billion bill. Roosevelt angrily vetoed the tax bill in February 1944, but Congress overrode his veto.

A national sales tax was also considered for raising money. Under this proposal, citizens would have paid a tax whenever they bought certain consumer goods at the store. However, Secretary of the Treasury Henry Morgenthau Jr. (1891–1967) opposed the idea because it would burden the poor. The Victory tax was another means of raising funds and fighting inflation. Passed as part of the tax legislation in 1942, the Victory tax took another 5 percent from workers' income in addition to the regular income tax. However, the Victory tax proved so unpopular that Congress repealed it in 1944.

War Bonds

Even with the new tax increases, the government did not raise nearly enough money to finance the war. Other means of fund-raising had to be found. One way was to sell government war bonds. Selling war bonds was a form of borrowing: The government asked citizens to buy war bonds and promised to buy back the bonds later, with interest. War bonds were available in denominations (values) ranging from $25 to $10,000. War bonds had the potential to take money out of circulation; that is, if individuals bought war bonds, they would have less disposable income to spend elsewhere. So, like taxes, war bonds helped fight inflation. However, unlike taxes, war bonds were a form of personal investment for Americans. The government had to eventually pay them back the original value of the bonds plus interest. This arrangement increased the national debt and raised the possibility of postwar inflation (money might flood back into circulation when the bonds were

redeemed). By selling bonds and pursuing other forms of borrowing, the federal government increased the national debt from $49 billion in 1941 to $259 billion in 1945.

The U.S. Treasury Department conducted seven major bond drives during the war. Morgenthau and Roosevelt hoped war bond sales would spur greater home front participation in the war and maintain patriotic unity. Therefore, the drives were aimed at the general public rather than the wealthy and corporations.

To attract public interest in bonds Hollywood stars pitched in. Seven tours were conducted in some three hundred communities. Actress Dorothy Lamour (1914–1996) was credited with selling $350 million in bonds. Singer Kate Smith (1909–1986) raised $39 million during a one-day radio drive. Another star, actress Carole Lombard (1908–1942), was killed in an airplane crash while returning from a bond drive. Bonds were available in relatively low denominations, and most Americans who were financially able purchased bonds. Despite the focus on general public sales, the overall highest dollar amounts of bonds were purchased by banks, large corporations, and insurance companies, who recognized war bonds as safe investments. In all, the United States raised $135 billion from the bond drives, including $39 billion raised from individuals.

Defense Stamps were another item that raised money for the war. The stamps, available at schools, sold for only pennies but provided a way for children to contribute directly to the war. However, unlike war bonds, the stamps were not meant to be redeemed at the end of the war.

Economic controls

The disposable income of Americans rose through 1941 as wages in the war industries increased. Economists and government leaders were concerned that this excess of spending money could cause high rates of inflation and cripple the nation's economy. Furthermore, with manufacturers concentrating on war materials, shortages of certain consumer goods could cause the prices of those goods to skyrocket. It would take time to introduce the new tax system to help guard against inflation. In the meantime, a system was needed to balance the increasing supply of spending money with the decreasing availability of goods. The government also needed to manage the shortages of various goods in a way that was fair to all citizens. To address all these needs the government established a system of controls on how much money workers could make, what they could spend it on, what would be available to purchase, and how much it would cost (wage and price controls and rationing).

Controlling Prices

Efforts to control the economy began in April 1941. President Roosevelt established the Office of Price Administration and Civilian Supply (OPACS).

Leon Henderson, Roosevelt's chief economic adviser at the time, was appointed head of the small agency. OPACS was charged with ensuring that prices of goods did not rise too sharply and that retailers did not make excessive profits. However, like the small temporary agencies created to mobilize industry (see Chapter 1: Mobilization), OPACS lacked any real power to force companies to comply with its recommendations.

Responding to the wartime industry boom and workers' rising wages, companies began to raise the prices of consumer goods in 1941. Between March and September, prices rose at the high rate of 13 percent. Alarmed by the growing inflation rate, President Roosevelt revamped OPACS into the Office of Price Administration (OPA), still headed by Henderson. Roosevelt also went to Congress and asked that OPA be given greater authority than OPACS had wielded. In response, Congress passed the Emergency Price Control Act in late January 1942. It gave OPA the authority to set maximum prices for a wide range of consumer goods and to freeze rents in war industry areas where housing shortages were occurring.

Using its newly granted authority, OPA issued the General Maximum Price Regulation, known popularly as General Max, in April 1942. Affecting about 60 percent of consumer goods, General Max froze prices at the highest levels they had reached during March. General Max was not very effective in keeping prices down. To get around the price freeze on their regular products, businesses found creative ways of altering or repackaging the goods and then charged higher prices for these "new" products. As a result, prices on consumer goods rose 18 percent between 1941 and 1943.

Controlling Wages

On April 27, 1942, as General Max was going into effect, President Roosevelt gave a public address on managing the nation's economy. He spelled out a seven-point program that called for higher taxes, price controls, and wage controls. In July 1942 the National War Labor Board (NWLB) established a limit on further wage increases by ruling that wages could increase no more than 15 percent above their level back in January 1941. This rule became known as the "Little Steel formula" when the NWLB applied it in a labor dispute involving small steel producers. The wage control was designed to stop the surge in prices of consumer goods. However, workers could still earn more income by working overtime (working more than their prescribed weekly hours) or obtaining promotions.

The wage controls proved more effective than price controls in curbing inflation because companies were clever to avoid price controls by producing new items not covered by the limitations. The average industrial wage rose from 66 cents an hour in January 1941 to 85 cents an hour by January 1943, an increase of about 29 percent. (The 15 percent wage control measure was not totally successful but helped slow down increases.) Consumer prices rose

18 percent during that period. To maintain an effective control on any further inflation, Roosevelt issued an order in April 1943 to hold wages and prices where they were.

Controlling Purchases

In addition to controlling prices and wages, the government had to deal with growing shortages of consumer goods and critically needed resources for war industries. Common foods such as sugar, coffee, and meat were diverted for military use, causing home front shortages. To ensure a fair distribution of limited goods, especially essential items, the government established a rationing program. Rationing means limiting how much of a product a person can buy within a certain period of time.

Working together with the War Production Board (WPB), created in January 1942 to control the production of consumer goods, OPA established a civilian rationing program. Locally established ration boards were set up in every county to operate the program. Some thirty thousand local citizens staffed the boards as volunteers. The system for rationing included a series of

Sugar and Coffee

Sugar was the first table food rationed during World War II; sugar rationing began in the spring of 1942. Sugar shortages had occurred in World War I (1914–18). Remembering this, Americans rushed to stockpile sugar when the United States entered World War II in December 1941. So many shoppers were purchasing hundred-pound bags that stores soon set a limit of ten pounds for each purchaser. The U.S. government issued War Ration Book One in early May 1942 to ration sugar and coffee. This first book contained coupons to present at each purchase. The sugar ration was eight ounces for each person per week. The amount was later increased to twelve ounces. Office of Price Administration (OPA) inspectors enforced the rationing restrictions as best they could. Later in 1942, the sugar shortage worsened when sugar shipments from the Philippines and Latin America declined. Sugar would be rationed throughout the war—and even afterward through 1946—before the supply was once again sufficient to meet the demand.

The sugar shortage meant putting less sugar in drinks and foods and finding substitutes such as saccharin and corn syrup. Honey was another popular sugar substitute; beehives were reportedly stolen in California for their honey. Coconut kisses sweetened with honey and molasses replaced chocolate kisses. Restaurants put less sugar in their sugar bowls and asked customers to limit their use. People bought more goods from bakeries to avoid depleting their own sugar supplies at home.

The rationing of coffee started in November 1942. The threat of looming coffee shortages and rationing led to much hoarding, which only caused shortages to occur sooner than expected. To combat hoarding, the government froze all sales of coffee in late October 1942. Citizens were allowed one pound of coffee per adult every five weeks. Coffee drinkers who wanted more than their rationed amount had to resort to the black market or rebrew their used coffee grounds. Many who were not coffee drinkers began drinking coffee to make use of their coupons; others gave coffee ration coupons as wedding presents. Rationing of coffee stopped in July 1943.

ration books containing coupons and colored stamps. The books were issued to every man, woman, and child. For convenience, rationing books were made available at local schools. The rationing system grew to include 90 percent of the items found in six hundred thousand retail stores. Important items that were rationed included sugar, coffee, meat, fish, dairy products such as butter, canned goods, tires, and gasoline. Fresh fruits and vegetables were never rationed. To purchase the rationed items shoppers had to present cash and the proper coupon or number of stamps. Americans became accustomed to standing in lines with their ration books of coupons and stamps. Over fifteen million housewives signed pledges promising to follow the ration system and price controls without breaking the guidelines implementing them.

Although Americans grumbled about rationing, it was generally accepted as necessary for the war effort. Nevertheless, a black market (an illegal system of trade that violates government regulations) sprang up for certain restricted items as well as counterfeit ration coupons. For example, restaurants had their own ration allotments, including a ration of meat; this made it difficult for them to obtain as much meat as they wanted to sell. To get around this problem, restaurants began purchasing meat in a different, nonrationed form: cattle. Cattle, which were then butchered for their beef, became a popular item on the black market. However, black market prices were quite steep. Those who chose to sell their cattle on the black market profited greatly.

Rationing Point Systems

The OPA issued War Ration Book Two in February 1943. Beginning in March newly rationed items included canned goods, dried beans, and peas. Sales of canned meats and fish had been frozen the first of February to save existing supplies for rationing. Book Two had a different look than Book One. The first book contained coupons for specific items, for example sugar, or for a certain quantity of something. The new ration books contained rows of tiny blue and red stamps marked A, B, C, and so forth. Blue stamps were for processed goods, and red stamps were for meats, cheeses, and fats. Each stamp and each rationed item was worth a certain number of points. To purchase rationed goods, shoppers had to turn in the corresponding colored stamps with the correct point total. For example, every man, woman, and child had forty-eight blue points to spend each month. In 1943 a one-pound can of beans cost eight points, and a pound can of fish was seven points. Baby foods cost few points and, as a result, were regularly eaten by adults.

The number of points required to purchase certain items changed frequently. When an item became scarce, OPA would increase its point value to restrict sales. Similarly it would lower point values for goods that had become more plentiful. The flexible but confusing point system required families to recalculate their ration points every week or even daily. Shoppers had to budget both money and points and keep track of when particular stamps were valid. In addition, decisions made by local ration boards often led to different points being assigned to specific items in one city than they were in another. Local newspapers published the ever-changing point values of rationed food items. Point values were also posted in small red numbers on the shelves below rationed items.

To help guide the complex rationing program Congress passed the Economic Stabilization Act in October 1942. The act created the Office of Economic Stabilization (OES). Roosevelt appointed U.S. Supreme Court justice James F. Byrnes (1879–1972) to head OES. Byrnes left the Court to take the new post. Two more ration books containing more stamps would be issued by the fall of 1943.

Meat shortages began occurring during the winter of 1942–43. First steak and then hamburger meat ran out. The lucrative black market, as well as the legitimate shipment of meat overseas to feed the troops, was draining the beef supply away from the U.S. retail market. Meat rationing began on March 29, 1943. Each person was allowed twenty-eight ounces of meat a week and four ounces of cheese. To ensure fairness among the shoppers, OPA issued detailed instructions to butchers, describing how to make certain cuts of meat so there would be minimum variation in the common cuts of meat available.

By early 1944 OPA ended rationing of canned goods and some meats, while maintaining rationing of other goods. However, as fighting overseas increased through 1944, shortages developed again. Rationing was restarted at the beginning of 1945. Congress reluctantly extended the life of OPA to June 1946.

Rubber and Gasoline

Aside from foods, rubber was the first material to be restricted in public availability. Japan's military expansion into Southeast Asia through 1941 cut off 90 percent of the rubber used by the United States. Japan wanted the rubber for its own use; that was the purpose of its military expansion, to gain control of much-needed raw materials for their growing industries. Rubber quickly became scarce when the U.S. went to war. To conserve the remaining rubber supply, President Roosevelt froze the sale of tires and then banned recapping (adding a new strip of molded rubber to a worn tire). Car owners could possess no more than five tires. Any extra tires had to be turned in at gas stations for industrial reuse. Other little-used rubber items were gathered in scrap drives. To further conserve rubber, Roosevelt reduced the national maximum speed limit to 35 miles per hour (rubber is worn from a tire more quickly when a car travels at a higher rate of speed over time).

To limit the use of rubber by civilians, the government decided to ration gasoline. Rationing gas would reduce the use of automobiles and thus reduce wear on rubber tires. Gas itself was not especially scarce except in the eastern part of the United States. Gas

Gas Rationing

The Office of Price Administration (OPA) developed a nationwide gas rationing system that went into effect on December 1, 1942. The oil industry and its assigned wartime government coordinator, Secretary of the Interior Harold Ickes (1874–1952), immediately protested the rationing of gas, because it was not in short supply anywhere except on the East Coast. Nevertheless, gas rationing proceeded. Five windshield stickers identified priority levels: A, B, and C stickers for automobiles, E stickers for emergency vehicles, and T stickers for trucks. Category A stickers entitled drivers to the smallest amount of gas, only 4 gallons a week. (For the average car at that time, 4 gallons would last approximately 60 miles.) Later the allotment was reduced to 3 gallons a week. Category B stickers were for drivers who had more-essential driving to do, such as war industry workers who drove car pools to the factory and back. They received the A-sticker allowance (3 or 4 gallons) plus a certain supplementary amount. Category C stickers provided even greater allowances for people who used their cars for work, such as doctors making house calls and driving to hospitals. E stickers were reserved for emergency use by police, doctors, and clergy and provided essentially all the gas these workers needed. T stickers

ensured truckers whatever amount of gas they needed to complete their routes. The local OPA ration boards issued the stickers and determined the allowances. Hoping to get as much gasoline as possible, many drivers argued that they needed a B or C sticker. More than half the driving population, or about fifteen million drivers, received the B or C classification.

shortages in the Northeast first appeared in May 1942. They were primarily the result of German U-boats (submarines) sinking oil tankers in the Atlantic Ocean. The East Coast received 95 percent of its oil, which could be refined into gasoline, from the tanker shipments. Leon Henderson of OPA began gas

rationing on the East Coast that same month. Henderson announced that each driver would receive 2.5 gallons of gas for each week. Still, by summer the East Coast was largely out of gas. When drivers spotted a gasoline tank truck going through town, they would follow the truck to the service station. Lines of cars, sometimes several blocks long, would form at the service station as drivers anxiously waited to fill their tanks (see sidebar on page 49).

Those who chose to walk faced shoe rationing. The military demand for leather led to a hide shortage, and shoe rationing began in February 1943. Each person was limited to three new pair of shoes a year. In 1944 the limit was reduced to two pair, still not very demanding compared to Great Britain's limit of one pair per year.

Gas rationing and the reduced availability of tires forced department stores to cut back on home deliveries, and residential milk delivery was also cut back. America's streets became much less congested, and the incidence of automobile fatalities dropped. Unfortunately for state budgets, state revenues from gas taxes also dropped, because less gas was being sold.

By January 1943 OPA further tightened driving restrictions by banning all pleasure driving. This meant that even if a person had plenty of gas in his or her tank, driving was limited to work, church services, funerals, medical needs, and emergencies. These restrictions were difficult to consistently enforce, but many citizens tried to help by writing down license plate numbers of cars parked in front of nightclubs, restaurants, or ball games. Violators of the pleasure driving ban could lose their gasoline ration sticker.

Because of its "watchdog" role in controlling the economy, OPA was not very popular. By the end of 1942 Henderson, who was not skilled at public relations, left his post. Chester Bowles (1901–1986) replaced him. Bowles was a millionaire advertising man who managed to improve OPA's public relations while implementing the unpopular measures. After 1942 any anger over rationing gradually diminished. Rationing helped wage and price controls work more effectively. Under the rationing system, scarce goods were generally distributed fairly, and inflation was largely held in check. From mid-1943 to the end of the war in August 1945, consumer prices rose only 2 percent.

A changed economy

Americans were not accustomed to government so closely controlling day-to-day economic matters. They believed that they should be able to spend as much as they wanted on whatever they chose. During the war years they could no longer spend so freely. As a result the new economic measures were sometimes not well received. Nonetheless, taxes, wage and price controls, and rationing largely accomplished their purpose: maintaining a stable economy on the home front. These economic measures distributed the sacrifice of war among all citizens. In general, the actual financial demands on American civilians were relatively small compared to the economic hardships suffered on the home fronts of other nations involved in the war.

A public poll taken in February 1945 indicated only 36 percent of the American public felt that they had made serious sacrifices for the war. (The people who stated that they had made real sacrifices were people who had a loved one in the armed forces.) The home front was relatively comfortable for most Americans, much more so than during the Great Depression of the 1930s. Unlike other Allied nations, the United States lost no major comforts during the war.