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since 1775



^^—^—^—•-^——SINCE 1 7 7 5 — — — ^ • — — ^ — i — • •

A study of the reaction of business activity immediately following previous wars can, in a
measure, act as a partial guide to the future—at least avoid a hasty step into the unknown. The
general pattern of these reactions is outlined in this chart by the Red
and Green
squares which block out and high light the trends that have followed our previous major wars.
These diagrams indicate a more or less definite pattern of reaction that points up as follows:
first, a brief period of uncertainty; then a year or move of business recovery followed by a short
period of depression; then a period of prosperity extending over several years.
Summing up a comparison of these postwar years we find that they cover a space of from eight
to ten years each, showing less than three years of business recessions and an average of seven
years of prosperity.
By taking these reactions as outlined in this chart we may sketch a picture of the probable
structure of the postwar economy. We may apply these findings to industry as a whole or to
individual concerns and we will experience the following stages:
First, the switch-back period—(Period of Uncertainty). This will involve some turmoil and
confusion caused by reconversion and demobilization; stopping production for war and preparing
to produce and sell for peace.
The second phase, or go-ahead period—(Postwar Recovery). Here we begin to produce for
peace-time—producing perhaps a 1942 model or a stop-gap product; building up the new selling

and distributing organizations; preparing, producing, and introducing new products; meeting the
urgent postwar demands.
Third, the perioc of relapse—(Primary Postwar Depression). The immediate postwar buying
slackens. A slight period of unemployment and depression may follow (as in 1921). This will
be emphasized if speculative and inflationary forces lead to business excesses (as in 1919-20).
Fourth, the covalescent period—(Prosperity). Smooth sailing and strong business activity
period. This period begins when a majority of businesses have completed reconversion and are
headed for their typical peace-time activities. The possibilities of this period, its duration and
quality will be determined by business management policies, labor management policies, and the
wisdom of Government action in the preceding periods.
Whether history will again repeat itself at the end of this war and throughout the ensuing years
remains to be seen Many factors involved in the present situation did not exist at the end of
former wars. This var is conducted on a much broader scale with more intense and concentrated
utilization of econonric resources. The cost involved is much greater.
General fear of an immediate postwar depression has no sound basis. The principal thing to
fear as the possible) cause of such a depression is that fear itself. This war has shown men how
to accomplish the impossible, by the release of powerful new reserves in the human spirit and
imagination, and if properly directed and intelligently applied, could lead this nation on to greater
heights of progress and accomplishment than ever achieved before, placing American products
and standards of living on a world-wide basis.
Source: Excerpts from "Business Planning Now for V Day" by The Committee for Economic Development,
Washington, D. C.



We can, in a measure, visualize the magnitude of this war by comparing our National Income
during World War I in the years of '17, '18 and '19 with that of our 1942 income and our anticipated
income for 1943 (See Green line on the chart
In 1919 our National Income totaled 70 billion dollars. In 1942, it was approximately 120 billion
dollars, and the estimated income for 1943 is 146 billion dollars.
The impact of these vast amounts of money staggers the imagination. Our National Income rose
from 77 billion in 1940 to 120 billion in 1942, an increase of 43 billion. The 1943 estimate of 146
billion will show an increase of 69 billion dollars over 1940.
Of the 120 billion National Income for 1942, the total compensation or share to employees represented 83 billion dollars. Of this sum 13 billion dollars was paid in salaries and wages to Government
agencies, which included our Armed Forces.
The 1942 income was derived from the following t principle sources and in the order named:
Manufacturing, Trade, Government, and Agriculture.
The spectacular rise in individual savings in 1942 is in keeping with our National Income. They
rose from 13.7 billion dollars in 1941 to 35.2 billion dollars in the fourth quarter of 1942.
Source: Survey of Current Business.

The buying power of the cost-of-living dollar has been brought up
to June 30, 1943 (See the White pillars in the green shaded Commodity Price area
bounded by the dashed line from 19391943).
The past year has seen the buying power of the dollar shrink from
85c to 73c as compared to the 100-cent dollar of 1939. The slow
steady rise in living costs will continue to clip its value. The rise in
food prices is especially sharp. The ever-growing scope of scarcity,
rationing, and black markets are manifestations of the widening rift
between diminishing supplies and growing demand.
The demand for food has been increased by several factors: 1—Peak
production work requires more food energy; 2—The needs of our
Armed Forces have increased from 4% in 1941 to over 25% in 1943;
3—A surplus of money to spend for food.
One of the weakest links in our stabilization program is that of price
control and its principal problems are: First, to keep prices down in
the face of supply and demand which would ordinarily result in sharp
increases without control. Second, to distribute scarce food equally
through rationing. Third, to keep prices at levels sufficient to maintain

or increase production. The conflict between the first and third problems
has thus far constituted one of the toughest, knottiest tasks of the
whole price control program.
The cost of food is the biggest item in the working man's budget.
When prices rise he notices it at once and it hurts. This follows with
demands for higher wages which in turn automatically increase the
basic cost of food. These increased costs spur the farmer to ask still
higher prices and another full, upward turn takes place in the inflationary spiral.
This problem is aggravated by the greatest accumulation of excess
buying power in history (a surplus of money to spend) estimated at
between 40 and 50 billion dollars. The situation as a whole is one of
deep concern and must be held in check if we are to prevent a runaway inflation after this war and a subsequent deflation or sudden drop
in prices and the long years of deflated prices that follow (See Commodity Price peak, 1920).
The most encouraging report thus far in the price inflation fight is
that of the Bureau of Labor Statistics ndicating the cost of living
for city workers has dropped 0.8% on a nation-wide average between
mid-June and mid-July. This is the first substantial decline in the past
Source of Data: See above chart—Bureau of Labor Statistics—U. S. Dept. Labor.



The Federal Debt (see red line on the chart
) is now around the
150 billion dollar mark and will continue to increase each day, with a possible
prospect of its reaching 300 billion dollars when the war is over. Congress has
so far appropriated 338 billion dollars for war purposes.
The all-time record in the increase of the Federal Debt occurred when it
jumped from 50 billion dollars in 1941 to 150 billion in 1943. Such fabulous
amounts in dollars have in a measure become meaningless. We can best realize
how vast these amounts of money are by the following comparison:
The total assessed value of all the property in this country, all the homes,
factories, farms, lands, and personal belongings against which taxes are levied,
amount to approximately 150 billion dollars. This sum is equal to our present
debt, or in other words, the debt has reached, and in some areas passed, the
first mortgage value of the property of the nation. If the debt reaches the 300
billion figure it is twice the assessed value of our nation's property.
The necessary cost of this war is not important. Victory is worth the price.
Whatever the cost to the future citizens is, they will get their money's worth
in benefits derived. This does not and cannot mean, however, that the peace and
the future be jeopardized by excessive costs and unnecessary spending now.

Industrial Production continues at near capacity with increases in war
production that offset declining civilian manufacture. This high rate is
being accomplished in the face of the accumulated strain of three years
of intensive effort. Airplane and ship construction continue to expand.
Steel production has been temporarily hampered by coal strikes. Electric
output continues to increase.
Vast consumer buying and higher prices hold the dollar volume of retail
sales at a high level.
The business volume scale still points up. When this peak will be
reached, will be determined by the over-all future developments of the war.
Stocks: Stock market prices reached their best levels since 1940. Future
war news and the inflation outlook will have an important bearing on the
stock market. (See CHAIN L I N E I - I - I - ) .
Bonds: Low interest rates continue to prevail. Average corporate bond
yields at 3.2%, Municipals 2.2% and Governments around 2%. War
Bonds dominate the consumer saving market. (See DOTTED LINE

Source of Data: U. S. Treasury Reports. Estimates National Property Values by Representative
Albert J. Engel of Michigan.

C E N T U R y T I O N , B O X
Federal Reserve Bank of St. Louis


• • •

T O L E D O ,



Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102