The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Form tf. R . ^ 3 1 BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM Office Correspondence To Chairman Eccles _ ^om Emile Despres I# pate October 2011939 Subject:: The War Boom and Some Implications f o r Policy "THE 1-m BOOM" The i n f l u e n c e o f t h e European war upon t h e .American economyw i l l be e x e r t e d through i t s e f f e c t s (1) upon our e x p o r t s t o f o r e i g n c o u n t r i e s , b o t h b e l l i g e r e n t and n e u t r a l , and (2) upon our own armament o u t l a y s , and other p u b l i c expenditures and r e c e i p t s . TJhat happens t o domestic c a p i t a l expenditures, consumer o u t l a y s , t o t a l employment, and n a t i o n a l income, depends l a r g e l y upon t h e behavior o f these two f a c t o r s . A p p r a i s a l of these two basic f a c t o r s i n d i c a t e s t h a t : 1. The stimulus o f wartime demands w i l l develop much more s l o w l y than t h e business community now expects. The premature boomlet w h i c h we are now experiencing w i l l probably be f o l l o w e d by a sharp r e a c t i o n e a r l y i n 1914-0. 2. T o t a l a c t i v i t y and employment, even when wartime demands have reached t h e i r peak, w i l l remain f a r below p r o s p e r i t y l e v e l s . Unemployment nay be reduced from 10 m i l l i o n workers t o 6 or 7 m i l l i o n , but n o t t o 2 or 3 m i l l i o n . 3. Owing t o the abnormal character o f war demands, the war w i l l leave behind some redundant c a p i t a l equipment ( e . g . , s t e e l ) and a l a r g e body o f workers f i r m l y entrenched i n communities where they w i l l have l i t t l e chance o f f i n d i n g jobs i n t h e future. The postwar problem o f unemployment w i l l be more i n t r a c t a b l e than our present unemployment problem. These p o i n t s w i l l be b r i e f l y discussed i n the subsequent paragraphs: 1. Slowness o f TiTar Boom a. Foreign buying of American goods w i l l show only a slow i n c r e a s e . Our exports o f heavy i n d u s t r i a l products w i l l increa.se, b u t f o r a considerable t i m e t h i s expansion w i l l be n e a r l y o f f s e t by a d e c l i n e i n our exports o f farm products (wheat, c o t t o n , tobacco) and l i g h t consumer goods. ( l ) Trade w i t h c o u n t r i e s a f f e c t e d b y B r i t i s h n a v a l blockade w i l l be promptly and sharply c u r t a i l e d . Our t r a d e w i t h these c o u n t r i e s produced an e x p o r t surplus o f f305 m i l l i o n s i n 1938, or over o n e - q u a r t e r o f our t o t a l e x p o r t s u r p l u s * (2) Great B r i t a i n and France are determined t o draw o n l y s p a r i n g l y on t h e i r g o l d and exchange r e s e r v e s , i n o r d e r t o conserve t h i s i m p o r t a n t element i n t h e i r economic s t a y i n g power. To avoid drawing h e a v i l y on t h e s e r e s e r v e s , t h e y vrill obtain foods t u f f s and raw m a t e r i a l s l a r g e l y from t h e i r own p o l i t i c a l and economic empire, whose p r o d u c t i v e power has g r e a t l y i n c r e a s e d since 191U-18. As a f u r t h e r means o f conserving r e s e r v e s , Great B r i t a i n and France have imposed thoroughgoing systems o f d i r e c t economic c o n t r o l ; t h r o u g h such c o n t r o l s t h e i r i m p o r t s o f many t y p e s o f goods r e l a t e d t o c i v i l i a n requirements a.re b e i n g c o n s i d e r a b l y c u r t a i l e d , w h i l e i m p o r t s o f goods r e l a t e d t o war needs w i l l be expanded o n l y s l o w l y , as a widening o f t h e scale o f h o s t i l i t i e s , consumption o f m a t e r i e l , l o s s o f l i f e , and impairment o f i n d u s t r i a l f a c i l i t i e s t h r o u g h enemy bombing make such expansion e s s e n t i a l . (3) Our e x p o r t s t o L a t i n America and t o o t h e r non-European n e u t r a l s can expand s i g n i f i c a n t l y o n l y a f t e r these c o u n t r i e s have r e p l e n i s h e d t h e i r d e p l e t e d g o l d and exchange r e s e r v e s t h r o u g h i n c r e a s e d sales o f f o o d s t u f f s and raw m a t e r i a l s t o Great B r i t a i n and France. Only t h e n w i l l t h e y be i n a f i n a n c i a l p o s i t i o n t o increase t h e i r purchases from t h e U n i t e d S t a t e s . Despite growing expenditure f o r armaments, t h e Federal Government's n e t o u t l a y s which c o n t r i b u t e t o community income w i l l • d e c l i n e somewhat d u r i n g t h e second h a l f o f t h e present f i s c a l y e a r , owing c h i e f l y t o reduced W.P.A. expenditures and i n c r e a s e d t a x r e c e i p t s . Net o u t l a y s by q u a r t e r s f o r t h e f i s c a l year ending June 30, 19k0 are e s t i m a t e d as follows: f i r s t quarter 910 m i l l i o n s , second q u a r t e r 930 m i l l i o n s , t h i r d quarter 820 m i l l i o n s , f o u r t h qxarter 7l\0 m i l l i o n s . The present sharp s p u r t i n business volumes, though i t r e f l e c t s i n c r e a s e d b u y i n g o f c e r t a i n t y p e s of c a p i t a l goods, i s based p r e d o m i n a n t l y upon i n v e n t o r y accumulation. This i n v e n t o r y accumulation i s t h e r e s u l t o f t h e f e v e r i s h r u s h t o p l a c e o r d e r s . w h i c h immediately f o l l o w e d t h e outbreak o f w a r , owing t o t h e exaggerated optimism o f American -3business men c o n c e r n i n g war demands. I t seems i n e v i t a b l e t h a t t h e r e w i l l be a sharp d e c l i n e i n business volumes e a r l y i n 19^0, when the b u l k o f these o r d e r s have been f i l l e d and i n v e n t o r y acc u m u l a t i o n has ceased. 2. Inadequacy o f War Boom Even when w a r t i m e demands are at t h e i r peak, our economy Y f i l l p r o b a b l y be o p e r a t i n g a t f a r below c a p a c i t y l e v e l s and t h e number o f uiiemployed w i l l p r o b a b l y be o n l y 3 o r b m i l l i o n s under r e c e n t l e v e l s . I t i s e s t i m a t e d t h a t w i t h our p r e s e n t w o r k i n g f o r c e , a volume o f i n d u s t r i a l p r o d u c t i o n about 60 per c e n t above immediate prewar l e v e l s w o u l d be r e q u i r e d t o reduce unemployment t o normal p r o p o r t i o n s . a. I t seems u n l i k e l y t h a t our annual e x p o r t s u r p l u s , a t i t s peak, w i l l exceed 2g or 3 b i l l i o n d o l l a r s . This i s e q u i v a l e n t t o a mon^ly average o f 250 or 300 m i l l i o n d o l l a r s as compared w i t h an average o f about 100 m i l l i o n s i n 1938 and about 55 m i l l i o n s i n t h e f i r s t e i g h t months o f t h i s y e a r . b. Our armament program w i l l d o u b t l e s s be g r e a t l y expanded, b u t t h i s w i l l be accompanied b y i m p o r t a n t , automatic o f f s e t s i n t h e f o r m o f i n c r e a s e d t a x revenues, even i f e x i s t i n g t a x r a t e s are l e f t u n a l t e r e d , and by reduced Yf.P.A. e x p e n d i t u r e s and unemployment insurance b e n e f i t s . Moreover, i t may be assumed t h a t enlargement o f armament o u t l a y s w i l l be f u r t h e r o f f s e t by r a i s i n g t a x e s , or r e d u c i n g p u b l i c works, housing, and L. A. A. e x p e n d i t u r e s , or b o t h . c. The d i r e c t impacts o f war demands w i l l be c h i e f l y conc e n t r a t e d i n a few heavy i n d u s t r i a l l i n e s , such as munitions, chemicals, petroleum products, airplanes, s h i p s , machinery, and s t e e l . I t is usually held t h a t a g i v e n volume o f p r i m a r y , s t i m u l a t i n g e x p e n d i t u r e w i l l , i f c o n c e n t r a t e d i n a few f i e l d s , have a l a r g e r cumulat i v e e f f e c t on t o t a l a c t i v i t y and employment t h a n i f t h e seme amount o f spending had been t h i n l y spread over many fields. The c o n c e n t r a t i o n o f e x p e n d i t u r e may induce e x t e n s i v e p l a n t expansion programs i n t h e i n d u s t r i e s s p e c i f i c a l l y a f f e c t e d ; d i f f u s i o n o f the i n i t i a l expendit u r e makes p l a n t expansion i n p a r t i c u l a r l i n e s l e s s necessary. The c o n c e n t r a t i o n o f the spending s t i m u l u s should induce c a p i t a l o u t l a y s n o t o n l y i n f i e l d s w h i c h would be s t i m u l a t e d b y o r d i n a r y , peacetime r e c o v e r y , such as housing, r a i l r o a d equipment, and e l e c t r i c power equipment, b u t also i n the armament, chemical, mcahinery, and i r o n and s t e e l i n d u s t r i e s , which would be much l e s s s t i m u l a t e d i n a balanced pe ace time recovery. d. I f t h i s were t h e whole s t o r y , one would be o b l i g e d t o conclude t h a t concentrated war demands w i l l hare a more p o w e r f u l s t i m u l a t i n g e f f e c t on t o t a l a c t i v i t y t h a n an e q u i v a l e n t amount o f d i f f u s e d peacetime spending. The f a c t t h a t war demands are regarded as temporary and o f abnormal character produces, however, d e t e r r e n t s t o the expansion of t o t a l a c t i v i t y and employment "which g r e a t l y outweigh the s t i m u l u s due t o t h e concentrated character of the i n i t i a l expenditure. (1) I n a number o f i n d u s t r i e s , a d a p t a t i o n t o the p r o d u c t i o n o f war goods can be r e a d i l y brought about t h r o u g h r e l a t i v e l y inexpensive conversion o f e x i s t i n g equipment. (2) Output can be expanded i n many w a r - a f f e c t e d i n d u s t r i e s through more i n t e n s i v e use o f e x i s t i n g p l a n t and equipment, f o r example by extending f u l l t i m e working hours f o r present working f o r c e s or by adding new workers and t r a n s f e r r i n g from a one s h i f t t o a two or t h r e e s h i f t b a s i s . I n d u s t r i e s i n t h i s group i n c l u d e a i r p l a n e s , armaments, machinery, and s h i p b u i l d i n g . (3) I n t h e armament, chemical, a i r p l a n e , and s h i p b u i l d i n g i n d u s t r i e s , -where new c a p i t a l o u t l a y s w i l l be r e q u i r e d d e s p i t e more i n t e n s i v e u t i l i z a t i o n o f e x i s t i n g p l a n t , products m i l be p r i c e d to i n c l u d e p r o v i s i o n f o r r a p i d w r i t i n g o f f of the new equipment and f o r abnormally h i g h p r o f i t s , owing t o the t r a n s i t o r y and d i s t o r t e d character of war demands. Thus, these c a p i t a l o u t l a y s , i n s t e a d o f p r o v i d i n g a means of i n j e c t i n g i n t o t h e income stream t h e i d l e funds of the economy as a whole, w i l l be f i n a n c e d i n l a r g e p a r t from the swollen p r o f i t s and generous d e p r e c i a t i o n allowances o f t h e war i n d u s t r i e s . For a l l these reasons, t h e cumulative stimulus t o t o t a l act i v i t y and employment p r o v i d e d by temporary and abnormal war demands m i l be much s m a l l e r than the s t i m u l u s which an e q u i v a l e n t volume o f d i f f u s e d , peacetime expenditure TOuld furnish. -5- 3. Postwar D i s l o c a t i o n s a. As mentionned above, c a p i t a l expenditure not s u b j e c t t o quick w r i t e - o f f i s l i k e l y t o be undertaken i n r a i l r o a d s , e l e c t r i c power, i r o n and s t e e l , and housing. I n t h e f i r s t two i n d u s t r i e s expansion and modernization o f c a p i t a l equipment i i h i g h l y d e s i r a b l e t o meet t h e r e quirements o f peace time p r o s p e r i t y . I n t h e i r o n and s t e e l i n d u s t r y , t h e case i s much more d o u b t f u l , and i n housing, t h e r e i s sorious danger t h a t c o n s t r u c t i o n , i n s t e a d of o c c u r r i n g i n l o c a l i t i e s where i t can be u s e f u l i n t h e f u t u r e , w i l l be undertaken i n t h e l o c a l i t i e s e x p e r i e n c i n g a temporary boom. b. The present degree o f m o b i l i t y o f t h e unemployed working f o r c e i s q u i t e h i g h , both g e o g r a p h i c a l l y and o c c u p a t i o n a l l y . About t h r e e - q u a r t e r s are under I4.5 years o f age and more t h a n h a l f are under 35* the p r o p o r t i o n o f young workers b e i n g much higher than f o r t h e working p o p u l a t i o n as a whole, w i t h a few e x c e p t i o n s , such as New England t e x t i l e w o r k e r s , most o f t h e unemployed axe so s i t u a t e d t h a t they can r e a d i l y move from t h e i r present l o c a l i t i e s t o the places where j o b s are a v a i l a b l e and are s u f f i c i e n t l y adaptable t o be q u i c k l y taught s e m i - s k i l l e d t r a d e s . As a desperate means o f making ends meet a f t e r a f asbfon, many o f t h e i n d u s t r i a l unemployed have moved t o r u r a l areas where t h e need f o r cash income i s s m a l l , or t o l o c a l i t i e s i^iere odd jobs and p a r t time j o b s are most f r e q u e n t l y a v a i l a b l e ; these workers could and would move q u i c k l y from these l o c a l i t i e s i f good jobs were open elsewhere. I t w i l l be extremely d i f f i c u l t , however, t o s h i f t workers f r o m war i n d u s t r i e s a f t e r t h e wartime demands have disappeared. Many of t h e newly-employed workers, f o l l o w i n g a b r i e f p e r i o d o f apparently s t a b l e employment and income, w i l l marry, r a i s e f a m i l i e s , and buy houses, and become f i r m l y r o o t e d i n the l o c a l i t i e s t o w h i c h t h e y have moved. From a l o n g - r u n s t a n d p o i n t , the problem o f g e t t i n g these workers i n t o peacetime jobs i s f a r more d i f f i c u l t t h a n t h a t o f drawing t h e workers i n t o the war i n d u s t r i e s . c. The l a s t war produced a marked expansion o f b o t h our a g r i c u l t u r a l and i n d u s t r i a l o u t p u t . The a g r i c u l t u r a l expansion created grave postwar d i f f i c u l t i e s . The i n d u s t r i a l expansion was welcome on t h e whole, even though the d e s i r e t o keep some o f our w a r - s t i m u l a t e d i n d u s t r i e s a c t i v e l y employed may have been p a r t l y r e s p o n s i b l e f o r our u n f o r t u n a t e p o l i c y o f h i g h t a r i f f s and -6- encouragement t o f o r e i g n l e n d i n g . Under present cond i t i o n s the character o f war demands w i l l s c a r c e l y be such as t o c r e a t e a new, postwar a g r i c u l t u r a l problem, b u t t h e war expansion o f t h e heavy i n d u s t r i e s i s l i k e l y t o become a major source o f postwar d i s l o c a t i o n . In t h i s r e s p e c t , our postwar economic problem may be comparable t o t h a t of England 1 s d i s t r e s s e d area problem a f t e r t h e l a s t war* II. POLICIES TO IIITIGATS THE E^fiRLY 19bP DECLIKE 1. Discourage increases i n administered p r i c e s . 2. Check any renewed tendency towards higher i n t e r e s t r a t e s . Urge upon r a i l r o a d s and e l e c t r i c power companies, by whatever means a v a i l a b l e , the need f o r a n t i c i p a t i n g t h e i r requirements f o r new equipment and avoiding congestion and delays l a t e r on. III. i^. Defer t o the s p r i n g months the scheduled w i n t e r increase Tf.P.A. a c t i v i t i e s . in 5» Postpone t o t h e s p r i n g a l l postponable Government procurement. 6. Try t o a c t i v a t e l o f t cost housing p r o j e c t s under F.H.A. f i n a n c i n g . THE BUDGET FOS FISCAL YEAR 19kl 1. Don't cut p u b l i c works o u t l a y s or A.A.A. b e n e f i t s , and d o n ' t c u r t a i l T7.P#A. s h a r p l y . 2. Cover increased arms o u t l a y s by a d d i t i o n a l t a x e s on p r o f i t s , such as: 3. a. more adequate c a p i t a l gains t a x e s . b. t a x i n d i v i d u a l stockholder on basis o f h i s share i n t o t a l accrued earnings i n s t e a d o f cash d i v i d e n d s r e c e i v e d . (The present Supreme Court probably would not declare such t a x a t i o n u n c o n s t i t u t i o n a l ) c. excess p r o f i t t a x The p o l i c y o f m a i n t a i n i n g n o n - m i l i t a r y o u t l a y s and t a x i n g p r o f i t s w i l l d i v e r t t o other s e c t o r s of t h e economy the s t e r i l e p r o f i t s accruing f r o m war i n d u s t r i e s . I t w i l l both mitigate -7- t h e worst f e a t u r e s o f t h e l o c a l i z e d boom i n war i n d u s t r i e s , and a l l o w a p a r t o f t h e p r o f i t s o f these i n d u s t r i e s t o s t i m u l a t e t h e r e s t o f the economy. i opposite f i s c a l p o l i c y would r e t a r d g e n e r a l recovery w h i l e a l l o w i n g the war p r o f i t s boom t o become accentuated.
@FedFRASER