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No. 1, August 1945





Published August 1945





Inside Front Cover



Immediate Danger of Inflation
Nature and Magnitude of Problem of Full Employment
Farm Income
Labor Income
Business Income
Foreign Trade
Public Works
Guarantee of Employment
Minimum Standard
Social Security
Taxation of Individuals
Interest Rates
Financing Small Business
Monetary Policies
Budget and Public Debt
Formulation of Economic Policies



The Transition
VJ-Day, the Major Shock
The Final Phase of Reconversion
Prices during the Transition
After the Transition: The Period of Deferred Demand
Full Employment Level of Output
Demand in the Post-Transition Year
Government Demand
Consumer Demand
Deferred Demand
Housing, Business Inventories, and Exports
Business Investment





Relation of Potential Demand to Output at Full Employment.
Employment after Deferred Demand Has Run Its Course
How Great Is Potential Demand?
The Protective Coloration of Unemployment



Potential Higher Living Standards
Potential 60 or 70 per cent Rise in Living Standards
Corresponding Rise in Production and Living Standards
Five Goals
Background Data on Markets and Living Standards
Policies on Minimum Living Standards
Need for Special Policies on Minimum Standards
Special Policies Already in Effect
Ways to Increase Family Incomes and to Reduce Living Costs.
General Policies
Variety of Views
Policies to Increase Consumption






Economic Adviser, Board of Governors
"Full productive employment in a free
society is possible but it is not possible
without taking pains."
Sir William Beveridge.

Underlying this essay, and in fact the entire series of studies which it
introduces, is the thought that society should function for the benefit of
the individuals who compose it. Full employment at adequate pay has
been chosen as the central theme because jobs are the main channel
through which national welfare reaches the individual. If everyone able
and willing to work is employed and in a position to maintain or raise
his living standard, such global concepts as national product, national
income, and total expenditures will take care of themselves. These concepts are necessary measuring tools in estimating whether the national
output is adequate to provide for the needs of individuals, but they are
not objectives in themselves. The individual is not a mere infinitesimal
fraction of society and his welfare is not an average derived from the
national aggregate by division; on the contrary the welfare of society is
the sum of the well-being of the individuals who compose it.
This approach results in changes in emphasis in connection with appraisals of economic conditions. At numerous points practical programs
of action would be the same, whether the analysis started with the individual or with society as a whole, but the inadequacy of some of the
more extreme general proposals for action would become apparent if they
were subjected to the test of their impact on the individual.
The struggle between a philosophy imbued with the worth of the individual and the dignity of man and a philosophy based on the preeminent importance of the State, to which the individual and his interests must be subordinated, is the essence of the conflict between totalitarianism and dictatorship on the one hand and free enterprise and
democracy on the other. This series of studies is written from the viewpoint of the importance of the individual, freedom, and democracy as
against the preeminence of State, regimentation, and dictatorship. It is




believed that the proposals in this and the following studies can be
achieved without sacrificing any of the essential freedoms of the individual
—in fact, that the achievement of these objectives is the only way by
which a free society of individuals can be successfully maintained over
the years.
Government influence over the affairs of the individual has inevitably
increased as we have moved into a closer-knit society. The day of laissezfaire is over. We have gradually accepted as essential many Government
activities and regulations which in the past seemed to be infringements
on individual freedom. We do not question health and sanitation measures, child labor laws, social security programs, or regulation of the
stock exchanges, and we probably are prepared to accept some form of
universal military service. The war has expanded Government participation in economic life and some of this expansion will be permanent.
The fact that our public debt is now as large as our total wealth was a
few years ago and that the service of this debt, together with even an
irreducible minimum of other expenditures of Government, constitutes
a substantial fraction of total outlays by the nation, necessitates an increase in the role that Government must play.
What then should be the criterion of the extent to which we are prepared to accept Government participation in our economic life? The test
would seem to be that Government should do nothing that can be done
for the individual by himself or in voluntary association with others and
should leave undone nothing that needs to be done but cannot be done
adequately by individual effort. This is a broad criterion that will require
much interpretation. And yet it places the emphasis where it should be
—not on a textbook definition, but on a practical test. I t is believed
that the program sketched in this essay at no point interferes with those
phases of economic liberty which we value most. I t leaves to the individual
the choice of occupation and domicile, the choice of the nature of his expenditures on consumption goods and on other goods and services, and
the choice between saving and spending and as to timing the two processes over the span of life. I t leaves enterprisers free to follow the dictates
of the profit motive. I t impinges on the free disposal of private income
only to the extent necessary to meet public expenditures and it proposes
to meet these outlays in a manner best calculated to serve the common
Tax policy is an important part of the Government's general economic
policy. Taxation should be so fashioned as to leave as much freedom of



action and as much incentive for private enterprise as possible. A complex
and delicate problem—and controversial, but one in the understanding of
which great progress has been made under the stress of depression and
war. I t is now apparent to most students that taxation is not only a
means of raising revenue but also the most powerful instrument for influencing the country's economic life that is possessed by Government.
What is contemplated is fuller and better utilization of our resources,
human and material, for the benefit of all. This should be the central
national economic objective. I t is also the objective of the Federal Reserve Board under whose auspices these studies were prepared. At the
dedication ceremony of the Federal Reserve Building in 1937 President
Roosevelt said: " I dedicate this building to progress toward the ideal of
an America in which every worker will be able to provide his family at
all times with an ever-rising standard of comfort." I t is to the furtherance
of this ideal that these studies are devoted.
While it is apparent that the gravest long-term problem confronting
the nation is how to maintain full employment after the war, the more
immediate danger arises from inflationary pressures. So long as Government outlays continue in unprecedented amount and productive effort
and manpower are still concentrated on winning the war, there is a serious
threat of a runaway rise in prices and of speculation, which would greatly
increase the difficulty of building a prosperous economic society after the
transition period has passed. Income is increasing, liquid resources of the
people are of unheard of magnitude, and deferred demands are accumulating. Meanwhile, the supply of civilian goods is shrinking.
This situation, reinforced by the growing impatience with wartime
restraints, results in heavy pressure on the machinery of control. The
vital necessity of maintaining safeguards against inflation until the flow
of civilian goods can satisfy demand is apparent. Continuance of wage
and price controls, of rationing and allocation, as well as of licensing of
exports, is a prime condition of a successful transition from a war to a
peace economy. It is quite possible that unemployment in some sectors
of the economy will develop as war workers are laid off, at the same time
that inflationary price advances appear in other sectors. These two evils
will not cancel out; both must be prevented. Relaxation of taxes should
also be undertaken cautiously with due regard to the danger of releasing
income before goods become available. Even more important for the near



future is the orderly and expeditious reconversion of men and machines
to peacetime activity as rapidly as war demands permit. The greatest
safeguard against inflation is an ample flow of goods. In the long run the
large volume of savings held by the people can be a valuable cushion
against depression, but in the period of reconversion these savings could
be used to feed the flames of inflation—which leads to ultimate collapse
and disaster. It is essential to overcome the immediate danger of inflation
in order to have a fair chance of maintaining full employment in the postwar period.
In this paper the concept of full employment goes beyond a mere count
of persons who do or do not have jobs. It is conceived as a condition under
which every person who is able and willing to work can find enough employment in the course of a year to earn not less than enough to maintain
his habitual standard of living. It should be emphasized that this is a
conception of full employment as such and has no bearing on the question
of improvement in the distribution of wealth, the need for a rising level
of national welfare, or for a minimum standard, which are discussed elsewhere. It may be stated here, however, that the habitual standard should
in no case fall below the recognized national minimum and should advance with rising productivity. The concept allows for seasonal and socalled frictional unemployment, for its elimination in the near future
would be impossible. Steps should be taken to hold such unemployment
to a minimum, and any that remains should be covered by unemployment compensation. In the case of farmers the condition corresponding
to unemployment is inability to market enough products, or to market
them at high enough prices, to maintain their usual standard. Special
measures adapted to the needs of farmers will have to be put into effect
to protect agriculture from its equivalent of unemployment.
Full employment at adequate pay can be achieved only if our physical
and human resources are efficiently employed. What is contemplated is
an ever-rising standard of living for all people based on an ever-expanding
volume of output.
The problem of maintaining full employment in peacetime will present
a most serious and difficult hurdle even if the situation is not complicated
by a postwar inflation and deflation. The degree of economic disruption
wrought in this country by the war is roughly measurable by the fact
that its prosecution has required the expenditure by Government of



100 billion dollars a year for several years. This is a larger amount than
total national output in any year prior to 1940. Elimination of most of
this war expenditure, and of the employment it gave to those who served
in the armed forces or produced war goods, will necessitate an economic
readjustment of unprecedented magnitude. This readjustment will require all the resourcefulness, courage, and wisdom of which the nation is
capable. I t presents a supreme challenge to our economic and political
The number of persons that will need civilian jobs after the war will
be much larger than the number now employed. Some of the people who
have been drawn into the armed services or into other employment during the war will want to return to schools and homes, but others will be
seeking employment. Reduction of hours of labor to the 1939 level will
be only a partial offset to the increase in the labor force. Currently nearly
one-half of the economy's total production is purchased by the Government for war purposes. The drastic shrinkage in Government expenditures which will occur in a relatively short period after cessation of hostilities will be the greatest deflationary force our economy has ever had
to face. Furthermore, before the war in Europe began, we had 9 millions
of unemployed workers. They also must be absorbed before full employment will be achieved.
I t has been estimated that in order to have full employment in the year
1950 total national output will have to be about 200 billion dollars at 1944
prices. Should prices rise in the meantime, the money value of total output
will have to be higher. An output of 200 billions in terms of 1944 prices
represents a great rise from the 1939 level of physical production.
Immediately after the war, output will decline appreciably from the
wartime level, with considerable reduction in manufacturing. Such a decline should be expected because working hours will be reduced, some
persons will withdraw from the labor force, and in many cases workers
will be shifted to jobs where they will produce less in an hour than they
did in highly mechanized war work. On the other hand, productivity per
man-hour is likely to be greater than it was in prewar years. I t is difficult
to say how much this increase will be in a year or two years after transition to peacetime production, but it may be expected to be continuous
thereafter. As a result, we may expect an increase in what our economy
can produce with full employment.
Who will buy all these goods and services? Some will be taken by consumers, some by business enterprises, and some by the Federal, State,



and municipal governments. The total could be variously distributed
among these purchasers; the only vital requirement is that the parts add
up to the desired amount. What kind of goods and services will be produced? Broadly speaking, there will be goods and services for immediate
consumption, there will also be durable products to be used over a period
of years, and there will be capital goods. We shall have an opportunity
of living better than we ever have in the past, but only if we so manage
our economy as to provide markets for a much larger total product than
we have ever had in peacetime.
Purchases of all classes of goods and services could and should expand
greatly. A rise of 40 or 50 per cent above prewar levels in consumption
goods will be possible and necessary. This would mean that people would
buy many more cars than they did during the 1930's, many more iceboxes,
and several times the amount of some other goods and services. The increase need not all be in quantity of goods—a large part of it could well be
in quality. There would be an opportunity to replenish depleted stocks of
semi-durable things for daily use, as well as more durable articles. But,
even after war deficiencies have been made up, consumption could and
should continue on an expanded scale. There would also be a broad field
for expansion of all kinds of services. Equally important, there would be
need for a large expansion of purchases of capital goods. We could buy
as many houses, or the equivalent in better houses, as during the housing
boom in the 1920's. We could invest in new plant and equipment as much
as in 1941 and at a rate twice as high as in the 1920's. After some years
of peacetime economy, further increases in productivity would raise the
potential anew and even greater output would come off the assembly
lines and would be available for a further advance in our living standards.
Resources will be available for this rise in national well-being, but it will
require a well-planned and vigorous national public and private business
policy to realize this unequaled opportunity. We must not accept the
miserable alternative of having our products piling up as surpluses for
lack of markets and have their output shrink in consequence. We must
not suffer our wealth to be the cause of our poverty, or permit the abundance of our resources to be the basis of our want.
I n framing a comprehensive program for achieving full employment
one must venture into many fields in which he is not expert. I t is taken
for granted that the proposals here outlined will be revised, completed,



and corrected by others more familiar with each field. The only justification for attempting to put all phases of a program into one brief paper
is that it is the only way to present a broad and inclusive picture, even
though it may be blurred in many of its detailed aspects. Proposals in
this program could be grouped in a variety of ways. I t is not important
which proposal is considered first as long as it is made clear that no proposal in one field can be effective in achieving the desired result, unless
there is action on all other vital fronts as well. This is one world, economically as well as geographically.
If there is to be a market for the goods and services that will be produced if employment is maintained, the nation's income must not be
permitted to decline materially. In a sense this is circular reasoning: to
employ a given number of people we need a national output of a given
volume; to have that much production we need a domestic market for
the bulk of the output; to have this market we need employment. The
circle is complete. It, however, only reflects the essential unity of the
economic process. Regardless of the starting point, before completion the
analysis must embrace all the essential elements in the process. In this
program, income has been taken as the starting point—income of farmers,
workers, business, and professional men.
Farm Income. In order to maintain farm income the first essential is
sustained industrial employment. A strong domestic market is far more
important to prosperity for American farmers than any other single
factor. Stable exchange conditions and expanding foreign trade, however,
are important to the marketing of some of our agricultural products.
Plans for improving the dietary standards of the people and for enabling
every family to have enough nourishing food to sustain health would
help to maintain and stabilize the market for farm products.
In the long run it is apparent that there will have to be a further reduction in5 the proportion of the population that depends for a living
on agriculture. This, however, is an adjustment that will take many
years to accomplish. In the meantime, a standard of living in no
case below the national minimum should be placed within the reach of
all farmers. This will mean that specific measures to provide other sources
of income will have to be made available in some farming areas and to
some groups of farm workers.
Plans for improving rural housing should go along with plans for making better homes more generally available in towns and cities. Programs
for enlarging farm units, for rational diversification of crops, and for



better educational and hygiene services in rural districts should be developed.
The subject of agricultural prices, the desirability of subsidies, and
other controversial phases of agricultural policy are left out of this paper
because of their complexity. The guiding principle should be maintenance
of satisfactory farm income on a sustainable level.
Labor Income. It has been stated that full employment is the prime
objective of the proposed program. But employment by itself is not sufficient—it must be employment at useful pursuits and at adequate pay.
Maintenance of labor income is a necessary condition of general prosperity and of full utilization of the nation's human and physical resources.
Wages should not be permitted to decline from the existing level; on the
contrary, advances should be authorized wherever they are justified by
an increase in productivity. Increased income arising from more effective
production should be distributed among the producers, the owners of
the enterprise, and the consumers of the product. Gradual price reductions made possible by technological advances would have a favorable
rather than an adverse effect upon the economy.
Hours of labor will no doubt be reduced to the prewar level after hostilities cease, but they should not be reduced further until the country's
productivity has reached the point where relaxation of effort will be justified. Reduction of hours on a share-the-work basis is not a sound
economic device because it represents a share-the-poverty process out
of harmony with a goal of rising prosperity.
Business Income. Opportunities for business profits in the postwar
economy are closely bound up with maintenance of the volume of activity. This subject, like many of the others, cuts across a number of the
problems discussed in this paper. Suffice it to say that continued opportunity to make reasonable profits is an integral part of any program for
sustained economic activity in a system of free individual enterprise.
To encourage active enterprise the Government should pursue a policy
of preventing monopolistic practices that curtail output and sustain artificially high prices. Such a policy would have the effect of diminishing
the advantages of bigness and encouraging the adjustment of the size of
different business undertakings to that best calculated to give the most
effective and economical service to the public.
Modification in taxation of business enterprises should be undertaken. Some reduction in personal income taxes should be made as
soon as fiscal conditions permit in order to encourage risk taking. For



the same purpose better provision should be made for deductions for
losses. Since gains are and should be taxed, there should be equivalent
offsets for losses. This applies to individual as well as to corporate taxes.
Perhaps consideration should be given to the Swedish plan of reducing
taxes for enterprises that undertake construction during periods of
business recession. Such a plan might help to keep business activity
more stable.
Corporate taxes should be framed principally with a view to falling on
corporate income that has not been paid out, that is, on income that
does not reach the individual and thus escapes taxation in accordance
with the individual income tax schedule. Proper allowance should be
made for reserves and for the special needs of new and small business
enterprises. There should be some adjustment in the present system of
double taxation of corporate profits.that are paid out in the form of dividends. Perhaps consideration should be given to adjustment of the taxable
incomes of corporations on the basis of dividends paid to stockholders.
Equity financing rather than debt financing should be encouraged, both
because it diminishes financial rigidity and because it represents a partnership relationship rather than a debtor-creditor condition. Authority to
deduct interest on debt from taxable income without corresponding provisions for deducting dividends has the opposite effect.
Foreign Trade. Expansion of balanced foreign trade is a necessary part
of a comprehensive economic program for this country. It is important
not only because we have a considerable group of industries that depend
on foreign markets, but also because it is the most direct way for this
country to contribute to satisfactory world conditions, without which
lasting prosperity cannot be maintained in the United States.
In the immediate postwar period we may expect a substantial excess of
exports, since all the world will need our goods and will have little to sell
to us in return. Proper provision for financing foreign trade during this
reconstruction period must be made. Ultimately, however, our creditor
position requires the development of a commercial and trade policy that
will result in imports of foreign goods and utilization of foreign services at
least equal to and preferably in excess of the value of our exports. A flexible multilateral mechanism for avoiding unnecessary fluctuations in exchange rates and for sustaining rates of countries that are temporarily
under pressure was devised and incorporated in the Bretton Woods Agreements. Establishment of this mechanism will contribute to the effectiveness of the program of full employment and rising national income.



A question may be raised whether it will be possible for this country
to maintain higher standards of living than exist in other countries and
yet to compete with these countries in world markets. Perhaps one should
be reminded that our main interest as a nation is not in having higher
standards than other countries; our interest is to have our own standards
as high as our resources and our skills permit. If others can match it—so
much the better. If standards among our people are based on our ability
to produce more efficiently than other countries, there is nothing in
foreign competition that needs to put a downward pressure on our
economy. On the contrary, our purchases and expenditures abroad, which
will be on a large scale if we are prosperous, should exert an upward
pressure on living standards throughout the world. Problems arising out
of unfair commercial practices by foreign countries and out of other unfavorable competitive conditions must be handled by the authorities
t h a t determine our commercial policy.
Public Works. Some public works are a routine part of public housekeeping. Others can be timed so as to support the economy when private
activity is declining. Plans can be made to build schools, libraries, hospitals, roads, recreational facilities, and other public utilities in larger
volume during business recessions than during periods of expansion.
Rehabilitation of blighted urban areas, undertaken largely by private
enterprise under the auspices of Federal and local governments, should
be included in this group of projects. A shelf of such enterprises with
detailed blueprints should be maintained in order to enable the Government to step in promptly if business activity shows signs of slowing down.
Distinction should be made between projects that for social or other
reasons could not be delayed without damage to the community, and
projects which could well be postponed until additional employment is
needed. All public works should be on a business basis and wages, hours,
and working conditions in such operations should be at standard levels.
Guarantee of Employment. An essential plank in the proposed platform is that the Government should stand ready to give employment to
any worker who is unable to find a job elsewhere. A guarantee of employment should be the first clause in a bill of economic rights.
A policy of guaranteeing employment would have great social and
psychological value. By sustaining consumption it would also offer resistance to a downward swing of the business cycle. This type of Government employment is not as attractive in many ways, such, for example,
as chances for advancement, as work in other fields and there is little



reason to believe that those who are so employed will not continue to
look for jobs elsewhere. Such employment should not be on a charity
basis, should have no relation to a means test, and should not impinge
on the worker's self-respect. This proposal is not a substitute for public
works or for unemployment compensation, which should be available to
cover periods without work between jobs. Among proposals that the
Government take up the slack this suggestion for dealing with marginal
employment appears to have the most promise because it is simple,
flexible, and aimed directly at the objective of maintaining full employment. I t is also a part, perhaps the most essential part, of the concept of
a national minimum standard proposed in the next section.
Guaranteed employment would not remove the incentive for effort or
hinder the growth of productivity and of national income. It is not necessary to argue here about the possible effects on human endeavor of
economic security granted to everyone regardless of his individual efforts.
I t is obvious that assurance of minimum standards and minimum returns
for labor, which is what is proposed, would deter relatively few persons
from seeking higher than minimum standards and earnings. The person
who will work only long enough and hard enough to fill his belly is surely
the exception rather than the rule. What he needs is a process of education that will broaden his wants. Far from diminishing economic incentives, the sustained opportunity and assurance of stability which
should flow from the success of the proposed program would result in
greater vigor of individual and corporate enterprise and in more concerted and continuous effort alike by employers, wage earners, and independent workers.
Operation of the guarantee program should be flexible. Policies should
be adapted to different circumstances, with due regard to local conditions,
the capacities of applicants, and the reasons for their lack of employment.
The guarantee should be viewed as a last resort which would take care
of the residual number of workers who were not able to find jobs even
though all the other available methods of providing employment had
been put into effect. I t should be the policy to reduce to a minimum and
ultimately eliminate altogether the need of employing workers under the
guarantee. The less it will be necessary to do under the guarantee, the
more successful will have been the general economic program.
Minimum Standard. Responsibility of Government for social and
economic conditions should include the promotion of measures that
would assure to everyone a defined minimum standard of living. While



a country's spirtual civilization is reflected in the highest level to which
the genius of its people rises in the arts and sciences, a rock-bottom
measure of its economic civilization is the level of comfort and decency
below which no one of its people needs to fall.
There exists even now a sort of a minimum in that no one is supposed
to starve, or freeze, or be entirely without shelter. But this minimum is
far too low in view of our resources. Also, it is a disorganized standard;
it varies in accordance with local conditions and depends too much on
the attitudes and actions of different individuals and groups of individuals.
There should be established a national standard below which no person
in this country needs to fall, a minimum of food, of clothing, of shelter,
of education, of medical care, and of other elements in real income. This
should be the floor of our economic organization. It has been estimated
that the resources of the United States in men, machines, and materials
are great enough to permit the average standard of living to rise in the
next decade to a level 60 or 70 per cent above that prevailing before the
war. The minimum standard, which is considerably below the average,
should and could be raised considerably more.
It is not possible to enumerate here all that can and should be done to
establish a national minimum. We already have a well organized, though
not uniformly applied, minimum standard of education, and free library
facilities are available to many people. There are much less well-defined
standards of hygiene and health. These standards need to be raised and
their application made universal.
A recent pamphlet by a group of forward looking Indians presents a
plan of economic development for India, in which provision of a minimum
for all is taken as a starting point. While the minimum they envisage
may seem pitifully low to us, it nevertheless represents a doubling of
India's per capita income within a period of 15 years. A 60 or 70 per cent
advance for this country is surely not beyond our powers—and it would
bring us within reach of the goal of adequate minimum standards for all.
One field in which the establishment of a minimum standard as a
national policy could exert a great influence is housing. A program of
demolition of slums and of building reasonably adequate housing in their
place would not only improve living conditions for a considerable proportion of the people but would also offer large-scale opportunities of
employment in the building industry. Such a program should be planned
and sponsored by the Federal Government but should be carried out
largely by private enterprise in collaboration with local authorities.



Plans have been worked out and a bill introduced in Congress which
would make it possible for every family to obtain the food necessary for
a healthy life at a price representing not more than a stated reasonable
proportion, say 40 per cent, of its income. The plan would automatically
leave out families whose earnings were large enough to meet their food
requirements by use of less than the stated proportion of their income.
Such families would have no occasion to use the plan. The plan would
help to stabilize markets for agricultural products and thus have a definite
anti-cyclical influence. It would also have the merit of not interfering
with habits of consumption or with established channels of distribution.
In Canada an approach to the minimum standard has been made by
providing a subsidy to every family for every child in the household.
The application of the subsidy is universal but the well-to-do lose in
income tax deductions what they receive in subsidy. It may be that
this expansion of provisions for taking care of children is a step in the
right direction.
An important means of assuring a minimum standard to underpaid
groups is better organization. Effective organization results in increased
bargaining power, and in a free society bargaining power is the most
effective leverage for obtaining fair treatment. Responsible leadership
and management of labor organizations, however, is a prerequisite of
their effective operation in the common interest. Training programs to
develop needed skills in workers who for one reason or another have become stranded would also be a step in the right direction. It is to be hoped
that fewer and fewer people will remain in the minimum fringe and that
the minimum itself will gradually rise to higher levels.
Other special devices may have to be developed from time to time to
meet other requirements of the people. What is clear is that this country
cannot afford poverty and its consequences in social, economic, and political conditions.
Social Security. Expansion of social security should be included in any
comprehensive economic program. Our social security provisions are only
a beginning, though a good beginning, in this field. Important risks such
as loss of health are not included. We need much wider coverage and
more adequate benefits both in unemployment compensation and in old
age and survivors insurance. The goal should be universal coverage, and
benefits sufficient to assure the recipients somewhat more than the
established minimum standard of living. Eventually financing should
be largely out of revenues raised by general taxation, although many



psychological and practical political factors need to be considered.
There are many technical problems involved in this question and
different parts of the problem require special consideration, but there
can be no substantial argument against the importance of broad-gauge
social security as an element in stable prosperity. It is not a question
whether we can afford it. We cannot afford the consequences of not
having it. It is a social as well as an economic obligation upon the community, and a social and economic right of its members.
Taxation of Individuals. Tax policy is the greatest single instrument
through which Government can influence the distribution of income and
to some extent the channels of its utilization. This instrument should be
used consciously as a part of economic policy and the extent of its use
should not be judged entirely by fiscal needs or administrative considerations. The public interest will be served best by a flexible tax policy
that supplements other parts of general economic policy.
Taxation of private enterprise has been discussed elsewhere. With
respect to personal taxation, taxes on consumption should be held to a
minimum because they are regressive and are an obstacle to consumption. Income taxes on the lower income groups should generally be as
low as the raising of necessary revenues will permit. The income tax,
however, should continue to be the mainstay of the tax structure.
Interest Rates. Financial problems after the war are likely to be much
less complex and intractable than non-monetary problems. It is clear
that the immediate responsibility of monetary authorities will be to
maintain stability in the market for long-term United States Government
bonds. In view of the size of the public debt and the widespread character
of its ownership, we cannot permit wide fluctuations in the value of
Government securities. Not only would they seriously disturb the economy but they would be a breach of faith with the individuals and institutions that have helped the war effort by lending a large part of their
cash resources to the Government. Long-term interest rates, therefore,
should not be permitted to rise substantially. Short-term rates, however,
which are the more immediate concern of credit authorities, may well fluctuate in response to changing conditions. The abnormal spread between
rates on long- and short-term money had its origin in the vast gold inflow
and the lack of active demand for credit during the depression. The fact
that the spread was later crystallized into a pattern of rates which was
sustained during the period of war financing does not mean that it will
persist after the war. In fact it is not likely to persist.



Banking. The country's banking system is in a strong position and
it need not be concerned about a shrinkage of deposits. Its problems
can be solved under constructive leadership by the bankers themselves
and by the monetary authorities. The liquid position of most individual
banks will enable them to meet shifts in deposits without strain. The
major task of banks will be to develop energetic programs for making
business loans and of rendering additional services so that their cost to
the community will be fully justified by their contribution to its economic life.
Financing Small Business. Financing needs of small business enterprises require the adoption of constructive measures. Large enterprises
are in a position to meet their needs for external funds by the use of existing credit and capital facilities. Small businesses need access to credit
and capital at reasonable cost. Increased reliance on equity financing,
which is desirable, will depend primarily on factors which encourage
entrepreneurs to put additional funds into small business ventures.
Among these are favorable taxation, Government aid and advice along
technological and managerial lines, and the development of local investment organizations. Plans for providing the necessary facilities have been
developed and should receive consideration.
Monetary Policies. Monetary authorities can play an important constructive role in the postwar economy by contributing to economic stability. To do that they must be prepared to view economic problems in
a broad way and to fit their policies not only to changing conditions but
also to other economic and fiscal policies of the Government.
Federal Reserve authorities will need in the postwar period all the
powers over the general volume and cost of money that they have had
in the past, and they should have additional authority over member
bank reserves. They should perfect and expand the instruments of selective credit regulation acquired in recent years and develop an effective
technique for using them in conjunction with the broader powers that
influence general credit conditions. They must continue to utilize openmarket operations, rate policies, and changes in reserve requirements, as
well as the new devices such as margin requirements on security loans
and regulations of terms for instalment purchases. Possibilities of further
expansion of selective credit instruments, such for example, as regulation
of real estate loans, are being explored.
Budget and Public Debt. In outlining this program of economic policies
it is believed that there is nothing in the proposals that would interfere



with rational budgetary management. There is nothing sacred in the
budget in and of itself. In periods of depression it cannot be balanced;
the choice then is between unbalancing it deliberately by doing what
needs to be done to bring back prosperity and having it become unbalanced by a decline in revenue and by emergency outlays reluctantly
made but unavoidable. In periods of prosperity, with a reasonable tax
system, the budget would be in balance. In fact, a surplus of revenue for
reduction of the public debt would be likely.
If a rational economic policy is pursued successfully the budget would
take care of itself; if it is not, the budget would not be the major difficulty
with which the economy would have to contend. There is just as little
excuse for expecting a balanced budget to be a major method of improving
conditions as for considering a budget deficit—regardless of how incurred
—to be a remedy for depression. How the Government raises taxes and
spends funds is more important to the economy than the balance struck
on the Treasury's books. No one looks to the budget as a major factor in
military warfare and no one should look to it as a determining factor in
waging war against destructive conditions in the domestic economy.
The corollary of this view on the budget is that expansion and contraction of the public debt will depend on the phase of the general economic program. The public's attitude toward the size of the debt will
present important psychological and political problems that cannot be
ignored. The debt also has a bearing on the proportion of national income
that is frozen into fixed charges, which must go on year-in and year-out,
regardless of the phase of the cycle. As the result of war, the public has
no choice but to accept a public debt of a magnitude beyond the dreams
of the wildest spender of a decade ago. There should be general acceptance
by the public of the rational view that there is nothing alarming in the
present size of the debt—provided an active condition of business is
maintained. The long-term part of the debt can be viewed as a preferred
medium of conservative investment, such as consols were in prewar
England, and the short-term debt can fluctuate in volume in response to
changes in the demands made on the budget by different phases of the
economic program.
Formulation of Economic Policies. An agency should be established in
Washington with the specific duty of formulating over-all economic
policies. It should be headed by a person, probably connected with the
Executive Offices, whose function would be to study, analyze, and coordinate economic policies in all fields of Government, both Federal and



local. He should have advisory committees drawn from Government departments and offices, from Congress, and from the different economic
groups of the people. He should have access to all available information
and sufficient staff to make it possible for him to prepare reports on
economic policy and present them to the President, the Cabinet, the
Congress, and the public. His function should be advisory, but he should
help to crystallize opinion in the Government and in the country on
programs of concerted action by the Government and the people for the
achievement of the common goal—full employment and a rising level of
general well-being.
This program, which is necessarily both generalized and incomplete, is
presented solely as a basis of discussion of a wide range of highly controversial subjects. It is encouraging to reflect that there is fairly general
agreement on the proposition that a high level of production and employment must be maintained in the United States and that periodic
wholesale purges of the unsuccessful or the unlucky are neither feasible
nor tolerable in modern society. It may not, therefore, be too much to
hope that a way may be found to carry out the common will.

Formerly of Division of Research and Statistics, Board of Governors
Full employment of the labor force at productive work will be the
major economic goal of the United States after the war. I t must be
achieved and sustained. On this the nation's leaders, in and out of government, are agreed. This does not necessarily mean that new policies,
aimed at raising the level of demand and employment, must be adopted
by the Federal Government. I t is conceivable that full employment will
appear, and endure, without public action directed toward it. The purpose of this paper is to analyze the prospects.
Many of the forces which determine the level of production, income,
and employment in a dynamic economy are too intangible and subjective
to yield readily to statistical measurement, and our understanding of the
forces which are subject to statistical treatment, though rapidly improving, is far from perfect. Notwithstanding these obstacles to complete
statistical analysis, the effort must be made to evaluate the power of
income-sustaining forces after the war and the changes in them to be
anticipated during early postwar years. Otherwise there is danger that in
preparing for the future we may reason too extensively by analogy with
past events.
One current belief, that reconversion is certain to be followed by an
inflationary boom and collapse, is probably founded jointly upon the
memory of 1918-20 and upon the apparent logic of economic development
at the end of any war. After the First World War the depressing shock of
cutbacks in war production temporarily outweighed the expansionary
effect of pent-up demand for non-war products and a few months of
somewhat reduced output and employment began in November 1918.
Later, civilian demand—domestic and foreign—became sufficiently strong
to drive prices upward. Speculation added fuel to the inflation and the
boom of 1919-20 developed. Some sources of demand were only temporary, however, and other expenditures were choked off by the rise in
prices. The result was the collapse of 1920.
But the sequence of events in 1918-20 may offer misleading clues to the
reconversion period which began with victory in Europe in 1945. In a




number of ways, conditions are unique in 1945 and developments following victory in the Pacific may also be unique. The chief relevant
contrasts between this and all previous wars are four: the comprehensive
controls over production and prices during this war; the sheer magnitude
of the reconversion problem; the volume of accumulated deferred demand
and of liquid assets to finance; its satisfaction; and the productive capacity
which will be available when reconversion has been completed.
During this war, as in no previous conflict, we have developed a comprehensive system of direct controls over production and prices, including
wages, and have used them to channel resources into war production and
to restrain inflationary pressures. We are relaxing or abandoning some
individual controls now, as it proves feasible; but if we are wise we will
retain others during the reconversion period to eliminate bottlenecks, to
check dangerous price pressures on products in short supply, and to
prevent the diversion of materials and resources from the uses in which
they will most speed reconversion. If we avoid inflationary distortions of
relationships between supply and demand until reconversion has made
it possible to meet a high level of civilian demand, we will materially
lessen the probability of inflation and collapse.
The deflationary effect of a reduction in war expenditures will be far
greater this time than in 1918. War expenditures then absorbed about
25 per cent of the nation's output; during 1944 and the first half of 1945,
they absorbed almost 45 per cent. If Japanese resistance should collapse
this autujnn while reconversion is in its initial stages, the direct and
immediate effect of sharp cutbacks in war demand would be highly deflationary. The shock to the economy might be so great as to dampen
expectations and cause a significant reduction in later demand.
As in the case of previous major wars, we shall have an accumulation
of deferred demand—this time foreign demand, demand for inventories,
for plant and equipment, for housing, and for consumer durable goods.
And now, more than in 1919-20, accumulated liquid assets will be a
buoyant force. These liquid assets are held by both consumers and business enterprises. Their possession is apt to increase both consumer expenditures and business investment during the reconversion period, whether
it be depressed or prosperous, and to intensify speculative activity
should it develop.
But the spending which results will not necessarily be sufficient to
cause inflation. When the war in Europe began in 1939, the United States
economy was depressed. Much of the nation's productive capacity lay



idle. Hours of work were abnormally low, and between 8 and 9 million
persons were unemployed. Since then all these idle resources and an
unprecedented amount of additional manpower and equipment have
been put to work, mainly at war production. Termination of the war
will release so much productive capacity that the same percentage increase above prewar demand which brought inflation in 1919 might not
provide work for our entire labor force. Until postwar demand is sufficient
to activate economic capacity, there can be neither full employment
nor a general pressure of demand upon productive resources. In particular industries, of course, where monopoly practices influence prices
and output or where the limits of capacity to produce a given product
are reached, upward price pressures may develop while unemployment
is still considerable.
The circumstances which set the end of this war in economic contrast
with earlier wars are in part expansionary, in part deflationary. Without
analysis of the relative importance of the divergent tendencies, it is not
possible to form a judgment regarding the course of events after the
present war. The sections which follow attempt such an analysis. I t is
assumed that victory in the Pacific may occur by September 1945 and
will occur not later than mid-1946. This assumption of course involves
no prediction; it is made because some fairly definite assumption concerning the war's end is necessary as a basis for discussion.*

The employment problem in the transition from war to peace may be
symbolized by a single statistic: within a fairly short period, annual war
expenditures of the Federal Government will fall by some 80 billion
dollars. In April 1945, just before victory in Europe, they were at an
annual rate of almost 90 billion. By twelve months after victory in the
Pacific, they will be down to a few billions. A source of demand which
has been absorbing almost 45 per cent of the nation's output will shrink
by say nine-tenths.
Until this reduction in war expenditures has become substantial, the
primary barrier to full employment will obviously be the time required
*NOTE: Hostilities ended in August 1945, while this manuscript was
in process of publication. The analysis which assumed that VJ-Day
would be in September 1945 is thus the relevant one. Termination of
hostilities in August will not seriously affect estimates for the transition
period. Discussion of the first post-transition year, referred to as 1948,
will apply to a somewhat earlier 12-month period.



for technical reconversion, not the lack of markets. The most extreme
pessimist would not deny that during this period demand will temporarily
be great enough to employ all who wish to work, if production for non-war
purposes can be organized fast enough to take up the slack in output
and employment as rapidly as munitions cutbacks and demobilization
pay it out.
The first goal of reconversion policy must be to speed the revival of
non-war output. Release of materials from war production in sufficient
quantities to permit reconversion to get under way did not occur until
mid-1945, some two months after VE-Day. In the third quarter of the
year, decline in war production is proceeding gradually, and non-war
output is rising slowly. This means that the first responsibility of the
Federal Government with respect to reconversion is to reduce war production as rapidly as the prudently calculated needs of the armed forces
permit, for except as resources are released from war use, reconversion
cannot gain speed. The second responsibility is to guide the released
materials and equipment into uses which will facilitate most the revival
of non-war production.
Even if reconversion is handled with maximum effectiveness, however,
non-war output of types now greatly curtailed or non-existent cannot
rise rapidly overnight. It will take time to re-equip a plant for a changed
type of production, to reorganize the flow of materials to that plant, to
train or retrain workers, and to create a going production process. These
problems will be acute in the production of consumer durable goods
requiring metal. In the construction industry, problems caused by shortages will be complicated by the necessity of replacing thousands of small
firms which have disappeared during the war. In 1940, there were 500,000
construction firms in the United States; at the end of 1944, the number
was less than one-third as great. If large-scale unemployment develops
while these problems are being solved, the resulting fall in income may
cause a deflationary shrinkage of demand for nondurable goods other
than food and clothing, and later for food and clothing as well. This
would intensify transitional unemployment.
VJ-Day, the Major Shock. Because of these reconversion problems, if
VJ-Day should occur this fall the ensuing reductions in war expenditures
would bring a deflationary shock far greater than the short-lived one
immediately following the armistice of November 1918. At the risk of
considerable error, an estimate of output and employment may be



Third quarter purchases of goods and services for war use will probably
total between 18 and 19 billion dollars—an annual rate of about 75 billion.
Unemployment during the quarter will probably average between 1 and
2 million. If VJ-Day should occur at the end of the third quarter, war
expenditures would probably fall 50 billion dollars by mid-1946, and
some 6-7 million members of the armed forces would be demobilized.
How fast could non-war production rise?
Construction—both residential and nonresidental—and the production of consumer durable goods may be expected to expand as rapidly
as output can be increased. The demand for machinery and equipment
will be high. Foreign demand for American goods will be limited only by
the availability of shipping and of funds with which to make payment.
Businessmen will be eager to increase their inventories of goods which
have been scarce during the war. Notwithstanding a reduction in income,
consumers will be eager to buy not only automobiles, radios, washing
machines, and other durable goods as they appear, but also shoes, textiles,
and other semi-durable items of which consumer supplies are short. And
purchases of non-war goods and services by Federal, State and local
governments will rise somewhat.
The pages which follow estimate the effect of these increases in nonwar output upon total production and employment through 1947.
The table on page 28 summarizes the estimates. Without going into
detailed estimates here, we may note that non-war production could
hardly rise fast enough during the nine months following September 1945
to take up more than a third of the slack caused by demobilization and
the fall in war expenditures. In spite of decline in overtime and some
withdrawals from the labor force, unemployment would probably reach
a peak of 7-9 million at some time during the first half of 1946.
If the Pacific war continues until the middle of 1946, and if war production continues the decline which is now occurring, the longer period will
permit the completion of reconversion in many industries, and non-war
output in reconverted industries will get under way. The economic shock
of subsequent sharp cutbacks would be less severe, and peak unemployment during the remainder of 1946 might be between 4 and 7 million.
I t should be noted that the demand which will stimulate rapid increase
in non-war output will also bring inflationary pressure upon the prices of
goods in scarce supply. This problem is discussed later on pages 29-31.
I t is one of the dangers of the reconversion period which must be guarded
against vigilantly.



The Final Phase of Reconversion. Following the first abrupt decline
after victory in the Pacific, war expenditures will continue to fall, but
more slowly. Will the rise in non-war output be great enough and fast
enough to outweigh the decline in production for war, or will transitional
unemployment continue undiminished so long as the fall in war production continues? What is in question is not the post-transition level of
demand, but the transitional balance between the speed with which war
output falls and the speed with which other output rises.
The determining factors will be the rate of rise in exports, housing
construction, production of plant and equipment for business use, and
production of consumer durable goods. Restocking of inventories will
also be important.
For a year or more after VJ-Day, the rise in output in several fields
will be limited, not by demand, but by technical problems of reconversion.
This will be true of private residential construction, for which the annual
rate at mid-1945 was perhaps 500 million dollars. Construction activity
is increasing gradually now. Experts estimate that during the first two
years after VJ-Day, private residential construction will rise to an annual
rate of about 4 billion dollars, and to higher levels thereafter. The estimates assume that business demand for construction will also be high.
If business demand were low, residential construction could rise at a
somewhat more rapid rate.
Technical problems will also retard full production of consumer durable
goods. If present forecasts are correct, supply of some main types of consumer durables will run behind demand until at least the early part of
1947. This assumes only a moderate volume of deferred demand, in addition to the consumer demand for durable goods which would normally
be associated with the income forecast below for 1947.
Business inventories, aside from manufacturers' inventories of war
goods that will not be useful in peacetime, will be depleted after the war.
They will probably be some 10 billion dollars less than the amount appropriate even for a level of business activity somewhat lower than we
have at present. Goods declared surplus by the Army and Navy will
probably meet somewhat less than one-half of this deficiency. The remainder will be met by new production as soon as materials can be
obtained and processed, probably within 18 months following VJ-Day.
Demand for American goods for relief and rehabilitation in Europe
and in Asia will temporarily be extremely large. For two or three years
after shipping becomes available, exports for these purposes will be



determined largely by funds available to foreign countries to pay for
them; by our generosity in contributing to the relief of distress; and by
the amount of credit we are willing to extend. For fats, oils, and perhaps
some meats, and for industrial products not now produced, American
supply will be a limiting factor in 1946. Our imports will also be large.
Experts differ concerning the probable level to which our net export
balance will rise, but a minimum of 3 billion dollars and maximum of
4 billion seems a reasonable estimate. This level will probably be reached
some time in 1947. Since our present balance, excluding goods purchased
and exported by the Federal Government for war purposes, is an import
balance of 1 billion or more, the shift will mean an increase in demand
for the output of this country of 4 or 5 billion dollars annually.
The demand for business plant and equipment cannot be judged without evaluation of business needs at the war's end. The category "plant
and equipment" includes all private construction other than housing,
and all equipment used in business. Many persons think of manufacturers
as being the chief purchasers of plant and equipment, but in prewar years
only one-fourth of all investment in plant and equipment was by manufacturing industries; three-fourths was by other businesses—wholesalers
and retailers, service trades, railroads, public utilities, farmers, etc.
During the war, billions of dollars have been expended for plant and
equipment in war industries, but such expenditures by other industries
have been severely limited by the War Production Board. Analysts
disagree concerning the extent of the deficiencies which have developed.
No conclusive evidence frcm which to form a final quantitative judgment
is available, but existing information justifies the belief that demand
for plant and equipment during the transition years will be substantially
above prewar levels. The following analyses and surveys point in this
(1) An analysis by the United States Department of Commerce of purchases of plant
and equipment before and during the war indicates that in some manufacturing industries, and in many other fields, construction during the war was much less than
in the several prewar years.1 This is true of these manufacturing industries: food
products; textiles; apparel; leather products; pulp, paper, and printing; stone, clay,
and glass; and lumber products. (These industries accounted for 44 per cent of all
manufacturing construction before the war.) It is also true of commercial construction
and of miscellaneous private community facilities. Wartime farm construction just
equaled in value that before the war.
D. Stevens Wilson, "Wartime Construction and Plant Expansion," Survey of Current
Business, October 1944. The periods compared are January 1937-June 1940 and July 1940December 1943.



The analysis also indicates that purchases during the war of business vehicles
(automobiles, trucks, and buses), of many types of manufacturing machinery, and of
miscellaneous subsidiary machinery and equipment were much smaller than before
the war.2
Since these industries whose purchases have been curtailed during the war will
have a postwar volume of business far above that of 1940, an unusual burst of demand
for plant and equipment seems certain.
(2) Scattered evidence indicates that farmers will be in the market for plant and
equipment in amounts considerably exceeding their prewar purchases, unless farm
income is seriously depressed.
(3) A survey of the investment plans of railroads for "the year following VE-Day"
indicated plans for investment of 800 million dollars, twice the average for 1937-40.3
(4) Before VE-Day, the Department of Commerce requested a selected sample of
manufacturers to report the amount of new plant and equipment they expected to
purchase during the year following victory in Europe, and the anticipated volume of
their sales.4 Sales expectations were well below the present level of sales—in fact were
those to be expected at a level of gross national product of only 150 billion dollars,
25 per cent below the 1944 level. Yet in spite of these reduced expectations, manufacturers expected to invest 4.5 billion dollars in plant and equipment, an amount 2}4
times the dollar value of their average annual investment in 1939-40. In all probability, manufacturers did not indicate the entire amount of investment they plan in
preparation for postwar business, for some must have planned to postpone investment
beyond the year following VE-Day until materials are more readily available. It is
also true that manufacturers will probably find the volume of their sales during early
postwar years greater than they anticipated at the time of the survey, for the gross
national product (stated in 1944 prices) will probably be above 150 billion dollars.
This will tend to increase investment above the anticipated amount.

From these bits of evidence an estimate of total investment in plant
and equipment during the transition years may be built. The expectations of manufacturers may be roughly typical of those for the entire
economic system, since like the economy as a whole manufacturing contains both industries which have accumulated a surplus of plant and
equipment during the war, and industries which have been unable to
make good deficiencies. Total investment in plant and equipment in
1929 and again in 1937-40 was about four times that in manufacturing
Since manufacturers plan to invest 4.5 billion dollars, the 4 to 1 ratio
suggests that total investment may reach 18 billion. It is noted above
that plans of manufacturers expressed in the survey probably under2
Manufacturing machinery and "other machinery and equipment" are not broken down
in the published data. The statement in the text is based on unpublished estimates.
D. Stevens Wilson, "Planned Capital Outlays and Financing," Survey of Current Bustness, July 1945. A parallel survey indicated investment by electric and gas utilities only
slightly above the average amount during 1937-40.



state the total they will actually make in preparation for postwar business. If so, and if other investment is proportionately high, the total will
be well above 18 billion. Not all will occur in any one year, however, and
several billion dollars of needs may be satisfied by the purchase of war
surpluses. After allowance for these factors, 15 or 16 billion dollars is not
an unduly optimistic estimate of total investment in newly produced
plant and equipment in the first postwar year during which materials
are freely available. If VJ-Day occurs in late 1945 or mid-1946, this total
may be regarded as an optimistic forecast for 1947. During 1946 the
level, though rising, would be much smaller. Rough guesses concerning
the investment by non-manufacturing industries in which investment
has been restricted during the war yield a range of estimates whose
upper limit is consistent with this total.
Consumer expenditures for nondurable goods other than rationed
foods, textiles, and leather goods, will probably be the only main category
of non-war expenditures to decline during the transition period. The increase in these expenditures during the war has been as great as would
normally be associated with the increase in consumer income after taxes.
As income falls, these expenditures also will probably fall.
By combining estimates of the trend in output in all of these fields, it
is possible to forecast total output, and hence also the level of income
and employment. In making the forecast—especially for consumer income and expenditures—it is necessary to make an assumption concerning
Federal tax rates. For if wartime rates are continued, consumer income
and demand will" obviously be less than if taxes are reduced. Continuation
of wartime corporation taxes would also affect business investment.
In making the forecast, the writer has assumed the following changes
in Federal taxes (in addition to certain other minor changes): that the
corporate excess profits tax will be repealed effective in 1947, and if
VJ-Day occurs in September 1945 will be reduced to 65 per cent effective in 1946; that wartime excise rates will revert to 1942 levels six months
after VJ-Day, and will be further cut so as to reduce their yield by approximately 1 billion dollars, effective in 1947; that the normal individual
income tax of 3 per cent will be repealed, effective in 1946 if VJ-Day
occurs in September 1945, and in 1947 if VJ-Day occurs by mid-1946;
and that surtaxes in the individual income tax will be lowered moderately in 1947. These assumptions concerning tax changes are not forecasts of Congressional action, but are believed consistent with the general
nature of tax revisions to be expected. With war expenditures reduced as



indicated in the tabulation on page 28, the resulting tax schedules will
balance the Federal budget, or yield a slight surplus, in 1947. If tax
reductions are greater than is assumed here, consumer income after taxes
will be increased, and consumer expenditures for some types of goods
will also be greater.
The volume of unemployment during the period of transition will
depend not only on the net change in employment opportunities in the
civilian economy, but also on the size of the civilian labor force. This in
turn will depend on the rate of demobilization of the armed forces, and
on how many of the 7 million workers who entered the labor force because of the war will withdraw, and when they will do so.
Estimates of the size of the labor force and of the probable number of
employed and unemployed workers at different stages in the transition
period are given in the table on page 28, together with forecasts of the
different types of expenditures that will motivate economic activity.
Judgments expressed above as to the general course of economic activity
are reflected in the estimates. Alternative sets of figures are given, one
based on the assumption that victory in the Pacific will be in September
1945 and one on the assumption that the war will not end until June 1946.
The estimates are based on three assumptions concerning events after
VJ-Day: (1) that cutbacks in the procurement of munitions not needed
after VJ-Day will be as rapid as is administratively possible; (2) that
price controls will be maintained on products under upward price pressure; and (3) that no emergency public employment program will be
undertaken. The third assumption seems unrealistic; it is used, not
because it seems apt to be fulfilled, but in order to distinguish clearly
between the situation created by the war's ending and the improved
conditions brought about by remedial or palliative action. If public works
projects are undertaken which do not merely bid scarce materials away
from private construction projects, they will diminish unemployment
both directly and by augmenting consumer income and expenditures.
The tabulation is intended to present a general pattern of the probable
course of events, not a firm conviction of the accuracy of specific figures.
Subjective factors that defy statistical measurement may alter the course
of one or all of the factors that determine the level of output and employment. It is believed, however, that the estimates present an optimmistic view of the transition period—that non-war output is more apt to
rise less rapidly than indicated, and unemployment to be greater, than
the reverse.



Two striking features of the estimates may be noted. One is the very
rapid rise in non-war output, after a short period of plant reconversion.
(Dollar items in billions, at 1944 prices—seasonally adjusted annual rates)
VJ-Day, Sept. 1945
Type of

Government expenditures for
goods and services 13
Federal war expenditures....
Federal non-war expenditures
State and local expenditures.
Private capital formation
Producers' durable g o o d s . . . .
Net change in inventories 0 ...
Net exports
Consumer expenditures
Durable goods
Nondurable goods
Services other than r e n t . . . .
Total gross national p r o d u c t . . .
Consumer income after t a x e s . .

VJ-Day, June 1946















(In millions of persons)
Total labor force
Armed forces
Civilian employment.





* All output estimates are rounded to the nearest billion or half billion, except for construction and rent, where
comparison between time periods would be distorted. Labor force estimates are rounded to the nearest half million
Exclusive of "transfer payments," that is, subsidies, social insurance benefits, relief payments, etc.
Peak rate of 4 billion dollars not shown in the table.

In the case of an early VJ-Day, the rise is from an annual rate of 134
billion dollars in the second quarter of 1946 to 158 billion a year later.
The other feature is the indication that in spite of this very rapid rise in
non-war output, material unemployment will continue even into 1947.



The reason is that the decline in war production and demobilization of
the armed forces will pour such a large continuing stream of persons into
the non-war civilian labor market that even the rapid upswing in nonwar production cannot immediately absorb them. The estimates indicate
a gradual reduction in the number of unemployed. Whether this decrease
will culminate in full employment following reconversion will depend on
whether there will be demand for the output of full employment. This
question is discussed in a later section of this paper.
Prices during the Transition. In order that the quantities indicated
in the tabulation may clearly represent changes in the physical volume
of output, price changes are ignored. All dollar figures are presented
in 1944 prices. This introduces an element of artificiality; for whether
prices on the average rise, fall, or remain unchanged, there will almost
certainly be substantial changes in some prices relative to others.
The influences affecting prices during the transition are so complex that
no attempt is made here to forecast their net effect either on the price
level in general or on the prices of particular products. Some of the forces
which will be at work have been indicated in the preceding discussion.
Demand will be stimulated by accumulated needs; by the large quantities of liquid assets in the hands of consumers and business enterprises;
by the reduced level of instalment and book account debt; and by the
increase in business investment, which creates income for consumers, and
the increase in housing construction and in the output of consumer durables, both of which (because the products are sold on credit) create far
more consumer income than final sales absorb. The preceding table
indicates that the stimulating effect of all these factors on demand will
be far less than the depressing effect of the reduction in Federal expenditures and the Federal deficit; the net result will be a reduction in the
present strong pressure of demand upon the nation's productive resources. The sooner VJ-Day arrives, the greater the net fall in income
will be in the months following, hence the greater the reduction in the
pressure of demand.
This does not mean that we are sure to have deflation. Some analysts
feel that demand will still be inflationary, even when reduced below its
present level. In some fields this will clearly be true, because of shortages
of supply. Housing and other construction will certainly increase far too
slowly in many areas to meet the demand, as will the supply of automobiles, radios, washing machines, and other consumer durables. Whatever
the general price situation may be, and with any probable reduction m



income, upward price pressures will certainly exist in these important
fields. If price controls were to be removed at VJ-Day, within wide limits
market prices of these goods would be almost entirely dictated by sellers.
No matter how soon victory in the Pacific occurs, food will be in rather
scarce supply well into 1946, according to specialists of the United States
Department of Agriculture. Specific shortages of fats and oils will continue longer at any probable level of income and demand. The supply
of textile and leather products will presumably increase sharply during
the half-year following VJ-Day, if not sooner. Nondurable goods other
than food and clothing will probably be in plentiful supply, relative to
demand, soon after victory. In the event of an early VJ-Day, their prices
will probably sag during the months following, whatever their later
course may be. When food and clothing have become more plentiful,
prices of all nondurable goods may weaken, even while some other prices
are under upward pressure. The sooner VJ-Day occurs, the greater the
chance that this will happen.
Certain influences will operate directly upon costs and prices, rather
than in the market for final products. Organized labor will press for increases in basic wage rates. If VJ-Day occurs in 1945, and unemployment is high thereafter, the pressure may not be generally successful in
1946. The main factor which might preclude success in 1947, if unemployment decreases as estimated above, is the possible effect of "superseniority" for returned veterans upon union strength during the transition.
But increased wage rates may not mean increased prices. Corporate
profits in 1944 totaled some 25 billion dollars before taxes and 10 billion
after taxes. Contemplated reduction in corporation taxes will increase
profit margins, and elimination of premium overtime wage payments
will reduce labor costs per hour. Reduction of weekly hours, elimination
of marginal workers, and the return to civilian employment of the
physically most fit segment of the labor force will all tend to increase
The net effect in a typical plant will probably be a material increase in
profit margins after taxes at present prices and wage rates, although in the
case of reconverted plants this may not be true until the flow of goods has
reached full volume. Thus increased wage rates may be paid without
either raising prices or reducing wartime profit margins after taxes. But
present profit margins seem abnormally low to many executives. Whether
wage increases, if they occur, will in fact result in increased prices—and
whether if wages are not increased, prices will fall—depends upon mana-



gerial decisions concerning the most advantageous relation between unit
costs and unit prices in view of the demand situation at the time.
This discussion leads to no firm conclusion concerning the course of
prices during the transition. It should be noted that the presence of strong
expansionary forces will not necessarily bring inflation; their strength
may be spent in holding deflationary forces. Either a moderate decline
in the average of all prices, or a rise, or first the one then the other, may
occur. We should be prepared to combat either tendency. In specific
areas, upward pressures will clearly exist; the distortion in price relationships which they may cause, even if they do not start an inflationary
spiral, is a strong argument for price control during reconversion.

A year or so after VJ-Day, the rate of decline in war expenditures will
have been greatly reduced. Further decline in buying for war purposes
may be largely offset by a rise in Government expenditures for non-war
purposes. Reconversion of war plants to peacetime production will be
substantially completed. A few months later output for civilian use will
reach its full flow. The transition will have come to an end.
Let us assume that 1948 will be the first calendar year after transition.
Whether the nation will then be in good economic health depends primarily upon the volume of output which it can produce at full employment, and upon the level to which deferred demand and other expansionary forces resulting from the war raise the demand for that output.
How much will the nation be able to produce in 1948 if it makes full use
of its manpower, and will there be markets for the goods and services
it can produce? It is impossible to measure precisely the many interacting
forces which determine the level of production and consumption, and the
results of any quantitative analysis are subject to wide error. The estimates offered in the following sections should be considered with these
qualifications in mind.
Full Employment Level of Output. The writer has estimated elsewhere
that the nation's output at full employment' in the first post-transition
year will be more than 40 per cent above the 1940 output of 97 billion
dollars.5 In 1944 prices, this would mean an output worth 180 billion.6

With E. A. Goldenweiser, in "Jobs After the War," Federal Reserve Bulletin, May 1944.
In the previous article, this was estimated as 170 billion dollars, in 1943 prices. Further
research has convinced the writer that the price rise since 1940 has been greater than was
then estimated. See "Postwar Output in the United States at Full Employment," Review of
Economic Statistics, May 1945.



(Both the figure for 1940 and that for postwar include interest payments
on the public debt.) Should prices be above or below the 1944 level, the
value of the nation's output would be correspondingly changed.
This may be taken as a conservative estimate of full-employment
output in 1948. I t assumes that productivity is temporarily somewhat
Demand in the Post-Transition Year. If the goal of full employment
is attained in 1948, there will be 180 billion dollars of goods and services
to be marketed. The comparable figure for 1940, the peacetime year of
greatest output in the past, is less than 130 billion dollars in 1944 prices.
Full employment in 1948 calls for an increase in peacetime demand of
more than 40 per cent. What are the probable sources of demand?
Government Demand. Governments—Federal, State, and local—will
purchase part of the 180 billion dollars of output. Federal expenditures
will obviously be far higher than before the war. The consensus of published opinion is that Government pay rolls plus interest payments plus
purchases of goods and services from private business enterprise will total
about 30 billion dollars. Of this amount perhaps 20-21 billion will be
expended by the Federal Government and 9-10 billion by State and local
governments. 8 Private expenditures for goods and services will have to
total 150 billion if we are to have markets for the output of the economy
at full employment.
Consumer Demand. In peacetime, by far the largest proportion of
demand is for goods and services used by consumers. The share of total
output purchased by consumers varies with changes in the level of income, but for decades before the war remained above two-thirds of total
Reduction in the size of the armed forces by 8-9 million would reduce the gross national
product, 199 billion dollars in 1944, by some 10 billion dollars. The transfer of these men
(except for casualties) to civilian employment and the normal annual growth in the labor
force would counteract in part the reduction in hours of work from their wartime level and
the withdrawal from the labor force of some two-thirds of the workers drawn in by the war.
The net decline from the 1944 total in man-hours worked, assuming frictional unemployment
of 3 million, would be some 5 per cent. This would reduce output by an added 10 billion
dollars, to 180 billion dollars, and the shift of workers from munitions industries to others
where the value of their output per hour will be less will tend to decrease it further. On the
other hand, several influences will tend to increase output; namely, the increase in output
per man-hour between 1944 and 1948 because of normal technological progress, increased
efficiency due to reduction in the length of the work week, and the increased efficiency due
to elimination of marginal workers and the return to civilian work of the armed forces. The
estimate assumes that the favorable factors will no more than offset the unfavorable ones.
I t seems a conservatively low estimate.
For brief reference to the likely level of Federal expenditures, see the paper by Richard
A. Musgrave, "Federal Tax Reform," in Public Finance and Full Employment, another pamphlet in this series.



output. An attempt will first be made to estimate "normal" consumer
demand in 1948 exclusive of deferred demand for goods that have not
been available during the war.
To estimate how great consumer normal purchases will be if we have
full employment in 1948, it is necessary first to estimate the income
which would remain in the possession of individuals after they have paid
their taxes, and then to estimate what proportion of this disposable income they would spend. In calculations of disposable income of individuals, it is customary to include the profits of farm operators and other
unincorporated businessmen, since it is impossible to separate the profits
which the owner of a business holds as a businessman from those which
he turns over to himself as a consumer.
The level of individual income depends upon the value of the nation's
output. It is possible to estimate total income of individuals from the
value of the nation's output, by subtracting those parts of business
revenues which are not paid out to individuals, and adding income of
individuals not derived from production (for example, veterans' benefits).
Deduction of taxes paid by individuals then yields disposal income.
Such an estimate is presented in the table below.

Value of gross national product
Less: Depreciation, depletion, and other charges to
business reserves
Less: Business taxes, other than social security
Equals: National income
Less: Corporate profits not distributed
Less: Excess of social security trust fund receipts
over expenditures
Plus: "Transfer payments" from Treasury funds
and by States
Equals: Incomes received by individuals
Less: Personal taxes a
Equals: Disposable income of individuals

Billions of dollars
— 6
— 1
-f- 5


The division of taxes between business and personal taxes in the tabulation is arbitrary. It does not affect
the estimate of disposable income. Total taxes other than social security taxes are shown as 33 billion dollars.
Government interest payments plus pay rolls plus purchases of goods and services from private business enterprises
were estimated in the text above at 30 billion dollars. In addition, special payments to individuals—e.g., to veterans,
to farmers, to needy persons, etc.—are estimated at 5 billion dollars. The 2 billion dollar excess of public expenditures over taxes is explained in the text below.

It has been assumed that taxes will be levied sufficient to balance the



Federal budget and to balance State and local budgets except for 2
billion dollars of public works financed by funds accumulated during the
war or by borrowing. The tabulation indicates that with output of
180 billion dollars, disposable income will be about 135 billion.
This disposable income is so far above any prewar level that no precise
estimate of consumer expenditures at this level of income is possible.
Disposable income in 1940 was 73 billion dollars. Even with allowance
for the rise in prices, it is equivalent to less than 100 billion dollars at
the 1944 price level. Three alternative estimates of consumer expenditures at disposible income of 135 billion dollars are all defensible.
(1) During the prosperous years 1923-29, expenditures by American consumers
(excluding purchases of homes) averaged more than 90 per cent of disposable income.
If an equal percentage of disposable income is spent in 1948, expenditures will total
almost 123 billion dollars.
(2) But the average experience of 1923-29 may not be a good guide to consumer
spending in 1948. Per capita income at full employment in 1948, after allowance for
the difference in prices, will be more than 50 per cent greater than that of 1923-29.
As income increases, the percentage spent may decrease. The data for the years from
1923 to 1940 show that as income increased, less than 90 per cent—in fact, only about
82 per cent—of the added income was spent.9 This was true during the prosperous
1920's as well as during the depressed 1930's. If consumers spend only 82 per cent of
the increase from prewar levels of disposable income to the 135 billion dollars estimated
at full employment in 1948, their expenditures will total only 119 billion dollars in 1948.
(3) Finally, some analysts believe that a tendency exists for savings to increase
more and more sharply as income rises further and further. They argue that as disposable income rises to the unprecedentedly high level of 135 billion dollars, less than
82 per cent of the increase from prewar levels will be spent and expenditures will
total less than 119 billion dollars—perhaps about 115 billion.

One important reason exists for rejecting the lowest estimate of expenditures: it is the great increase in the liquid assets of individuals which
has occurred during the war. Between December 1939 and June 1945,
the cash, bank deposits, and Government securities held by individuals,
plus the cash value of their life insurance policies, increased from 74.5
billion dollars to about 199 billion. In 1939 these liquid assets represented less than 110 per cent of the year's disposable income of individuals; in 1948, even if they do not increase from the mid-1945 level,
they will be more than 145 per cent of a disposable income of 135 billion.
While no good data concerning the distribution of liquid assets exists,
Some analysts separate the increase in expenditures into two parts, that due to development of new desires, movement of individuals from rural areas to urban areas, etc., and that
due to increase in income. These analysts claim that the data prove that in any given year
an increase in disposable income of $1.00 increases expenditures bv only 76 cents.



it seems probable that the proportion held by lower income groups is
larger now than it was before the war.
Without this increase in the holdings of liquid assets by individuals,
it might well be that less than 82 per cent of the increase in disposable
income would be spent; families might put much of their added income
into liquid assets in order to have that comfortable feeling of security
which comes with "cash in the bank" or its equivalent in other liquid
assets. But very large amounts of liquid assets have been acquired during
the war, when goods were not available. Possession of liquid savings
certainly increases a family's tendency to spend its current income—
even though the savings themselves are not spent. A guess may therefore be
hazarded that at a disposable income of 135 billion dollars, consumer
expenditures, aside from purchases to satisfy deferred demand, will total
at least the middle estimate cited above, 119 billion dollars. Perhaps the
influence of liquid asset holdings will be enough to raise the average
percentage spent to the level of 1923-29. Tentatively, a range of 119-123
billion dollars may be taken as the estimate of "normal" consumer expenditures at 135 billion dollars of disposable income in 1948.
Deferred Demand. Deferred demand will cause additional consumer expenditures. Consumers have been accumulating a backlog of demand for a
variety of durable goods—automobiles, refrigerators, radios, washing machines, and many smaller items. Some of the foregone wartime purchases
will never be made good. A man who before the war purchased a new automobile each year, will not purchase five because five years have elapsed
since his last purchase. But even after deduction of such purchases, accumulated demand will probably total between 15 and 20 billion dollars. *
The demand would obviously not be made good in one year, even if
the^necessary volume of the wanted goods could be produced. Instead,
the deferred demand will probably exercise some effect upon total consumer purchases of durables over a considerable number of years. The
first post-transition year will be the first full year in which a full flow of
these goods has become available. It seems probable that in that year,
because of deferred demand, consumer purchases will be several billion
dollars above the high total estimated—that is, will be between 122 and
126 billion dollars.10
This implies total expenditures for consumer durable goods of between 19 and 20 billion
dollars. While 16-17 billion of this may be termed "normal" purchases, and 3 billion "deferred" purchases, the distinction is not meaningful. The total compares with an all-time
peak of 10.3 billion in 1941 (at a lower price level), and less than 7 billion in 1944. Purchases
in 1944 were composed of furniture and house furnishings, jewelry, and a large variety of
small items.



I t is important to remember that these estimates of expenditures are
based on the assumption that disposable income will be 135 billion dollars.
But this will be true only if total output equals 180 billion in value.
Therefore, if the estimates of other expenditures indicate that total demand will not be sufficient to create a market for 180 billion dollars of
output, it will be necessary to re-estimate disposable income and consumer expenditures. The estimates are only provisional, and are to be
adjusted when the rest of the picture has been filled in.
Housing, Busines Inventories, and Exports. Three other sources of demand for newly produced goods and services will be housing construction,
business inventories, and net exports.
Most housing experts anticipate a postwar boom, and estimate that
private expenditures for housing will average 6-7 billion dollars a year
for a few years, if income is at the full-employment level. For residential
housing construction to reach a 6 billion dollar level by the first posttransition year, it would have to rise by 5.5 billion, or more than 1,000
per cent, from the level attained in the first half of 1945. This would be
an astoundingly rapid increase, especially in view of a potentially high
level of business construction. The construction industry can probably
accomplish the expansion if bottlenecks are broken, if shortages are
relieved, and if the upswing is well under way before victory over Japan.
An estimate of 5 to 6 billion dollars will be used here for the year 1948.
All or almost all of the wartime deficiencies in inventories of retailers,
wholesalers, and manufacturers will probably be made good in 1946 and
1947. Hence inventory accumulation out of new production in 1948 will
•probably not exceed 2 billion dollars, and there may be none whatever.
The probable excess of United States exports over imports during the
period of relief and rehabilitation has been estimated in the preceding
section as between 3 and 4 billion dollars. That estimate is applicable to
1948 also.
Business Investment. No other large component of expenditures is so
difficult to estimate as business investment in plant and equipment.
Specific influences which are important in determining the volume of
housing construction, or of inventory accumulation, or of exports, can be
estimated with some degree of accuracy, so that at least a rough judgment
may be hazarded. Business investment in plant and equipment, however, depends partly on the level of total national output, partly on
whether that level is rising or falling, and partly on influences too intangible to forecast readily.



By assuming a large and rising national output, one may estimate a
high volume of business investment in plant and equipment. But one
may find that the assumed level of national output is justified only if the
estimate of business investment is correct. Hence the conclusion may
be merely a reflection of an assumption. This difficulty, which applies to
some extent to the various estimates made above, is especially acute for
an estimate of investment in plant and equipment. Furthermore, if an
increase in business activity causes a high volume of business investment
in plant and equipment, the effect may be only temporary. Once the
nation's productive plant has been enlarged sufficiently to meet the high
demand, investment may fall to a low level. In spite of these difficulties,
an estimate of expenditures for plant and equipment must be made if
any judgment concerning the future course of output is to be hazarded. 11
Business investment is made with one of three main purposes: to
replace worn or obsolete plant and equipment, to meet enlarged demand
for present output, or to provide capacity to produce a new (or changed)
type of product.
To judge the amount of investment needed to replace worn and obsolete
* plant and equipment after the war, it is necessary to estimate how much
has been needed in the past. The amount has typically been less than
current charges to depreciation and depletion, both because of the conservatism of accountants in setting up depreciation and depletion charges,
and because technical advance often makes it possible to replace the
capacity of a worn-out machine or plant at less than the original cost,
even though the purchase price of a given machine has not changed.
During the 1930's, costs declined for the added reason that prices fell.
Between 1930 and 1939, inclusive, according to Department of Commerce estimates, total investment in plant and equipment was 63 billion
dollars, approximately the same as total charges to depreciation and
depletion. But productive capacity was not merely maintained; it was
expanded considerably during that period. A smaller amount of investment would have served to make good depreciation and obsolescence.
As a rough rule of thumb, this experience suggests that investment equal
to three-fourths of depreciation and depletion charges is sufficient to
maintain productive capacity. If so, the necessary amount of investment
The Department of Commerce has begun a series of quarterly surveys of the investment plans of manufacturers and perhaps of other business groups. In time these surveys
should further understanding of the influences which affect investment plans and their fulfillment and should become invaluable aids in forecasting.



averaged 4.8 billion during 1938-40. In view of the rise in prices since
then, and of the expansion of capacity and the relative newness of a large
portion of the plant and equipment which will exist in 1948, it is estimated that the amount of investment needed annually in early postwar
years to replace worn or obsolete plant and equipment may be about
7 billion dollars. If the year 1948 is moderately prosperous, this much
replacement investment may be counted on.
There remains the question how much net new investment will go into
expansion of productive capacity in 1948. Any estimate of this item at
this time can be little better than sheer guess. Evidence presented in the
preceding section suggests that business activity will be high in relation
to prewar levels, and rising, at the end of 1947. This would be favorable
to a continued good volume of investment in plant and equipment. Two
special influences will work in the direction of fairly high business investment after the war if market prospects are bright. One is the backlog of
ideas for new products and new productive methods that will emerge
from the war experience. Many of these will not have been applied to
production of civilian goods by 1948. The other is that many business
enterprises, like many individuals, will hold unprecedentedly large
amounts of liquid assets with which to finance new investment.
In previous peacetime years of high or rising output net new investment
has been between 3.5 and 6.5 per cent of the nation's output. During the
prosperous period 1923-29, when gross national product averaged 90 billion dollars a year, total investment in plant and equipment averaged
9 billion. Of this amount probably 4 billion, or 4.5 per cent of the gross
national product, was net new investment.12 In 1929 the percentage
reached a high of more than 6.5. Net new investment in 1940, calculated
as a residual by using the rule of thumb referred to above to isolate investment caused by depreciation and obsolescence, was 5 per cent of
gross national product. This was a rise from a level of 3.5 per cent in 1939.
It should not be taken for granted that any one of these percentages
will apply to 1948. To assume that a potential national output of 180 billion dollars will automatically provide markets that will stimulate large
investment in new plant and equipment is to ignore the fact that depressions have occurred and that business investment has been low when
potential output was high. But if other circumstances stimulate invest11

Depredation and depletion charges averaged between 6.0 and 6.5 billion dollars: it is
assumed here that 5.0 billion of investment was sufficient to make good depreciation and



ment, the size of the market bears some relation to the volume of investment which may be expected. The low and high percentages of gross
national product cited—3.5 per cent in 1939 and 6.5 per cent in 1929—
are therefore taken as limiting estimates of the business investment which
may be induced by early postwar conditions—without any clear assurance
that in fact they are the proper limits. By this yardstick, net new investment in 1948 would be estimated in round numbers at between 6 and 12
billion dollars. With outlays required by depreciation and obsolescence,
the total of business investment in plant and equipment would be between
13 and 19 billion. If investment in 1946 and 1947 has substantially
satisfied deferred needs and increased capacity sufficiently to take care
of 180 billion dollars of output, the lower limit is the more probable
estimate even if other forces bring a high level of business activity. To
the extent that capacity is not fully geared to new high levels, investment
may be higher than the lower estimate.
Relation of Potential Demand to Output at Full Employment. In the
accompanying table the high and the low estimates for the components
of potential demand at full employment in 1948 are brought together so
that their total may be compared with the estimated total of output
which would provide full employment. The low estimate of potential
(In billions of dollars)


Government expenditures for goods and services...
Consumer expenditures, including deferred demand
Housing construction
Inventory accumulation
Net exports
Plant and equipment



Total potential demand
Demand needed for full employment




demand (173 billion dollars) is only slightly below the estimate of output
at full employment (180 billion) and the high estimate (187 billion) only
slightly in excess of that amount. The conclusion may be incorrectly
drawn that demand in 1948 will at worst be only slightly deficient or
slightly excessive. This would be seriously in error. For most of the com-



ponents of demand were estimated on the assumption that total output
would be 180 billion dollars. This is true of consumer expenditures, housing
construction, inventory accumulation, and business investment in plant
and equipment. If demand and therefore business activity is somewhat
less than assumed, inventory accumulation and investment in plant and
equipment may be somewhat less than estimated. With lower consumer
income, housing construction and other consumer expenditures will be
less than estimated. These changes will cause further reduction in estimates of income, expenditure, and output.
Consider the estimate of consumer expenditures. I t was made on the
assumption that individuals will have disposable income of 135 billion
dollars, an amount in excess of what they would have if total output was
only 173 billion. With output at 173 billion, disposable income would be
reduced by over 4 billion and consumer expenditures by over 3 billion.
This reduction in turn would cause a further reduction in consumer
income and thus in consumer expenditures. Without the intervention of
forces to stimulate output, this deflationary process would be repeated
until output and demand came into balance at a greatly reduced level
of employment and production.
I t can be shown that if a given decline in output reduced consumer
disposable income by an equal amount, a deficiency of 7 billion dollars
in demand would lead to a reduction in consumer expenditures of at least
30 billion before a level was reached at which demand balanced output.
But it can also be shown that a given decline in output will not reduce
disposable income by an equal amount, for several reasons. For instance,
as output declines, corporate retained profits will decline. T h a t is, a
larger share of corporate gross revenues will be paid out and become
individual incomes. Further, social security payments to individuals will
tend to rise above the contributions collected from them. Most important,
however, public budgets would not remain in balance with a sharp
decline in income. Tax revenues would decline, and public expenditures,
at least for relief, would rise. These changes would check the decline in
individual incomes after taxes and hence in consumer expenditures. If
only a very moderate Federal program to meet the distress of unemployment is assumed, the increase in Federal expenditures and the reduction
in taxes, together with the changes in corporate retained profits and
social security payments, would prevent consumer expenditures from
declining by more than twice the original 7 billion dollar deficiency of



As has been noted, the deflationary effect of the lower level of consumer
income and expenditures on other expenditures would further reduce
the levels of output and employment. Housing construction might fail
to reach 5 billion dollars; business investment in plant and equipment
would probably total less than the 13 billion estimated; some inventories
might be liquidated. Thus the cumulative effect of a deficiency of demand
of only 7 billion dollars would probably be to hold the gross national
product down to a total of less than 160 billion.
At that level of output, unemployment (unless spread among all
workers by shortening the work week below that of 1940, or disguised
by migration to farms and in other ways discussed below) would total
between 8 and 10 million. Thus the deficiency of demand indicated by
the low estimate, though it seems slight, would have grave social repercussions.
On the other hand, if total demand were 187 billion dollars, 7 billion
more than the estimated full employment output at 1944 prices, the
additional demand would raise income, the added income would again
increase demand, income would again respond, and an upward spiral of
prices would be under way. In this case, the large accumulation of liquid
assets might spur both "ordinary" and speculative expenditures, thus
increasing the upward pressure and bringing serious inflation.
Among the assumptions made in deriving estimates for 1948 was that
the Federal budget would be balanced. If tax rates are cut sharply from
the wartime level while Federal expenditures are held at the estimated
level of 20-21 billion for pay rolls, interest, and purchases from private
enterprises, and 5 billion more for other Treasury expenditures, the
budget may be unbalanced. If so, the direct effect would be to reduce
unemployment if the lower estimate of potential demand is correct, and
to increase inflationary pressure if the higher one is correct.
Thus the forecast indicates a range of possibilities from serious unemployment to serious inflation during the post-transition period of deferred demand. In the writer's opinion, no data at present available make
possible an assured judgment as to which will eventuate. To him, demand
not in excess of output seems most probable, even during this period of
deferred demand. Neither deflation nor inflation need occur if vigorous
preventive measures are taken.
I t is possible that price rises and unemployment will occur together.
They are not mutually exclusive. I t is true that in a situation of perfect
competition, including the ability of laborers and enterprisers to shift



easily from the production of one commodity or service to that of another,
prices would not rise until full employment was reached. But where is
there this type of competition? Certainly not in the highly mechanized
and specialized economy of the United States. Even in the absence of any
labor organization, and with keen price competition among enterprisers,
some prices would rise before full employment- was reached, because of
the failure of productive capacity to match perfectly the demands of
buyers, and the technical impossibility of quickly shifting idle human
and mechanical resources in response to demand changes.
Among existing tendencies which cause prices to rise before full employment is reached are not only this technical situation, but also the
presence of noncompetitive practices, including collective bargaining.
But to the writer, management practices seem more Important as a cause
than the actions of labor unions. These practices include not merely
collusion or monopolization of production of a given commodity, in the
usual sense of that term—though such monopolization undoubtedly
exists, even in cases where the courts rule that the anti-trust laws have
not been violated. Perhaps more important, they include the practices
referred to in the economic literature of the last decade as imperfect or
monopolistic competition. Prominent among them is the recognized and
ethical practice of building such pronounced consumer preference for a
product that a price and profit margin may be established which would be
impossible under keen price competition. Specifically, a price can be and
often is maintained sufficiently high so that would-be competitors could
and would readily produce, at a lower price, a commodity which physical
analysis would demonstrate to be superior—except that the consumer
preference established for the existing brand bars others from the market.
Because of this situation, it is sometimes possible to raise prices as
demand increases, and may be more profitable to do so—notwithstanding
the existence of unemployment and idle resources—than to expand production at existing prices.
Such administration of prices explains in part why labor unions strike
for higher wages at a time when unemployed men would gladly work for
the prevailing wage. Many such strikes are strikes to share large profits,
which it seems reasonable to workers and to their leaders that they
should share. Because he is not bound down by price competition, the
executive who is forced to grant such a wage demand may then consider
whether his profits, though they may be satisfactory, will not be augmented by widening his profit margin through a price increase.



This situation may exist after the war. It may result in a rising price
level in 1948, even though demand lies somewhere in the lower half of
the range indicated by the estimates above, with unemployment of say
3 to 8 million. With greater unemployment, the tendency would hardly
operate. It is entirely possible that it will not operate at levels of unemployment considerably below 8 million, for at this time productivity may
be rising rapidly. If so, employers may find that their ratio of costs to
selling prices has not risen, even though they grant significant wage

As purchases to satisfy deferred demand taper off, an increase in other
expenditures must take their place or total expenditures will decline.
More than this, since output per worker increases year by year even
though hours of work decline, total expenditures and output must
steadily rise or employment will steadily decline. Unemployment will
increase not only by the amount of the decline in employment but also
by the year-by-year increase in the labor force as the population of
working age grows. During recent decades, the rate of increase in output
necessary to maintain full employment of a growing and increasingly
productive labor force has been more than 3 per cent per year. If output increases, but less than enough to offset gains in productivity and
growth in the labor force, it is paradoxical but true that output and unemployment may both rise, side by side.
It was assumed in the preceding section that for a year or two after
the war the disturbances of the transition would retard the normal increase in productivity. During the years 1948-50, however, productivity
will probably rise with abnormal rapidity as wartime technical advances
are shifted to peacetime uses. By 1950 productivity will probably be
back to its normal trend, and at full employment the nation will be
able to produce output worth 200 billion dollars in 1944 prices.13 For
purposes of exposition, this figure will be considered the full employment
level of annual output during the first year after deferred demand has
run its course. The true level (at 1944 prices) for such a year may be
higher, since that year may be later than 1950; but 200 billion dollars
is a conveniently rounded figure to use as the focal point for discussion.
This assumes that the labor force in 1950 will be no larger than in 1948, the normal
growth over a two-year period having been balanced by the gradual withdrawal of an additional million war entrants.



For convenience, the year in question will be referred to as 195Q. The
reader must keep in mind that whatever the level of output may be in
this year, it must increase moderately year by year; that it is a typical
stage in an expanding process rather than a goal to be achieved once
and for all. And, of course, the reader must understand that there will
be no year in which deferred demand will stop suddenly. Some types will
end soon; others will continue longer. The housing boom may last the
longest of all. But by thinking of various types of deferred demand as
coming to an end together, we can visualize the situation we shall approach, if we take no preventive measures, as deferred expenditures
taper off one after another.
How Great Is Potential Demand? Two hundred billion dollars of output will create 200 billion dollars of income for business plus Government
plus consumers. The question put at this stage is: If we enter the period
when deferred demand has run its course without having paid much
attention to the problem of stimulating demand, and wTith a balanced
Federal budget, will demand be great enough to provide a market for
this output? Because the general analysis upon which estimates must
be based has been presented in the preceding section, only brief discussion is necessary here.
I t is probably realistic to assume that in any prosperous peacetime year,
public expenditures will at least be at the levels indicated above for 1948.
Federal payments for interest, wages, salaries, and purchases from
private businesses will probably total at least 20 billion dollars (rising
non-war expenditures having replaced tapering war expenses), and in
addition Treasury payments to veterans and to the needy and the handicapped will total 3 billion (or more). State and local governments may
be spending about 10 billion dollars annually for interest, wages, salaries,
and purchases, and an added billion for social security purposes. One of
the 10 billion, not covered by taxes, may be for public works. Expenditures from Federal social security trust funds will probably be broadened; but it seems desirable here to estimate them without assuming a
major change from prewar policy. Consequently, expenditures out of
social security funds at full employment are assumed to be down slightly
from those of 1948 when frictional unemployment was greater, and
receipts to be up because of higher wage payments, so that the excess of
receipts is 2 billion. Granted an unprecedented level of output and a
large flow of business investment (which induces corporations to retain
and reinvest profits), it is reasonable to assume that undistributed cor-



porate profits will be 8 billion dollars. Charges to business reserves are
estimated at 10 billion.
If these conditions hold, and if total output is 200 billion, disposable
incomes of individuals will be 151 billion dollars. The computation is
presented in the table below.

Value of gross national product
Less: Depreciation, depletion, and other charges to
business reserves
Less: Business taxes, other than social security
taxes a
Equals: National income
Less: Corporate profits not distributed
Less: Excess of social security trust fund receipts
over expenditures
Plus: "Transfer payments" from Treasury funds
and by States
Equals: Incomes received by individuals
Less: Personal taxes a
Equals: Disposable income of individuals

Billions of dollars
— 8
— 2
-f- 4


The distribution of taxes between business and personal taxes is arbitrary. It does not affect the estimate of
disposable income.

Following the reasoning of the previous section, and with allowance
for the effect of accumulated liquid savings, we may estimate consumer
expenditures out of this disposable income at between 132 and 137 billion
dollars. This estimate makes no allowance for the possible tendency of
consumer expenditures to decline below "normal," as consumers become
stocked up with durable commodities.
Other possible types of expenditures are housing construction, accumulation of inventories, an export surplus derived from American investment abroad, and expenditures for construction and equipment by every
conceivable type of business. Once a housing boom has cared for pressing
accumulated demand, continued annual private expenditures of 5 billion
for housing construction, even at high levels of income, are the most
that can reasonably be hoped for.14 Without strong public stimulus, the
amount may well be no more than 4 billion. If income falls, housing
expenditures will certainly be below this figure.
The National Housing
families during the postwar
of 5 billion dollars will build
900,000 units, at an average

Agency estimates that the increase in the number of nonfarm
decade will average 410,000. Annual construction expenditures
800,000 units, if average construction cost per unit is $6,250, or
construction cost of $5,550.



Even after inventories have been brought up to the desired size, continued increase year by year is to be expected if full employment is maintained and the nation's volume of business steadily expands. Perhaps
inventory expansion averaging 1 billion dollars per year may be expected.
If the United States has participated in world arrangements and if
mutual international confidence exists, possibly 2 billion dollars of American funds may flow into new investments abroad annually, even without
Government lending. If these investments occur, there will be an annual
export surplus of 2 billion dollars. Elementary facts concerning foreign
trade are perhaps worth repeating. No employment will be created in
the United States, except very temporarily, by curtailing imports.
Foreigners must obtain dollars in order to buy our goods; a temporary
export surplus obtained by blocking imports can continue only while
foreign funds convertible into dollars are drained to the United States.
That drain must bring about currency devaluations, trade restrictions
(which would curtail our exports), and a worsening of the whole structure
of peace. Only by making investments abroad in geographic areas which
either do not have sufficient savings with which to finance their own
investments, or do not have the industrial equipment to produce the
capital equipment they desire, can we create an export surplus without
harming other nations and forcing them to economic defense measures.
Finally, there will be business investment in all types of plant and
equipment for domestic use. It is estimated that by 195Q the amount
needed to make good depreciation and obsolescence will total perhaps
8 billion dollars. Once the postwar plant has been built up, the hope of
continued high net new investment must rest largely upon the introduction of new equipment embodying technical improvements and upon the
development of new consumer goods and new industries—though if
income increases steadily, some investment would be needed simply to
enlarge capacity to meet increasing purchases. During 1923-29, business
investment was stimulated by the technological revolution which brought
the expansion of the automobile industry with all of its auxiliaries, the
electrical goods industries, the public utilities which served them, and a
number of minor industries. Let us assume that a similar spectacular
development of new consumer goods occurs after this war, and that it
causes net new investment proportional in importance to that of 1923-29.
I t should be noted that this is a remarkably optimistic assumption.
Annual net new investment in plant and equipment will then be 9 billion
dollars, and total investment in plant and equipment, 17 billion.



High and low estimates of potential demand in 195Q for an estimated
potential output of 200 billion dollars are summarized in the accompanying table. Whether the high or low estimate is used, it appears that demand will be inadequate to sustain full employment. Even the low
estimate is optimistic, inasmuch as it includes a boom level of business
investment in plant and equipment. If such a boom fails to materialize,
or if, having occurred, it tapers off, the lower demand estimate should be
correspondingly reduced.
(In billions of dollars)
Government expenditures for goods and services .
Consumer expenditures
Housing construction
Inventory accumulation
Net exports
Plant and equipment
Total potential demand
Demand needed for full employment.


I t is illuminating to compare the high estimate with expenditures in
1923-29. Consumer expenditures are estimated at the same percentage
of disposable income as in 1923-29, and business investment in plant and
equipment at the same percentage of potential total output as the ratio
between business investment and total output during the great investment boom of 1923-29. Yet total demand is deficient by 8 billion dollars.15
* I t is, of course, conceivable that demand will spontaneously exceed
even the high estimate and reach a full-employment level. But that it
should do so, and especially that it should continue to do so year by
year after deferred demands have been satiated, seems to the writer so
improbable as to be wishful thinking. Altogether, not to plan against the
contingency of seriously inadequate demand in the absence of wise and
vigorous policy measures seems foolhardy.
As in the forecast for 1948, it must be noted that the apparent deficiency of demand indicated in the table is not the total deficiency. For
consumer expenditures, housing construction, inventory accumulation,
and business investment in plant and equipment were calculated pro15

For footnote, please turn to p. 48.



visionally, on the assumption that national output would be 200 billion
dollars. Since demand is inadequate to purchase that output, output will
be below 200 billion, consumer income will not be great enough to bring
about consumer expenditures of the amount estimated, and sales of business enterprises will not be great enough to induce the amount of investment indicated. Cumulative downward revision of the estimates is necessary, as has been described above in discussing estimates for 1948. This
revision indicates that even if the high estimates of demand should prove
correct, expenditures and output would come into balance at a gross national
product some 20 per cent below full employment. If the low estimates
of demand are correct, the decline in output would be much greater.
The Protective Coloration of Unemployment. If this fall in income
and output is permitted, and if workers remaining at work continue to
work full time and those thrown out of employment stand up to be
counted, some 12 to 16 million persons will be found to be unemployed.
But unemployment has a way of disguising itself by blending its color
with that of the nearest emergency refuge. Unemployment becomes a
shift to the farm, makeshift jobs, a movement out of the labor force,
part-time work, so that the statistics catch only part of the facts. One
million of the dismissed workers might drift to farms, there to contribute
little to total output—since the farm labor force would be adequate
without them—and to share the income of a depressed agriculture. A
number would find refuge in struggling retail and service shops and in
odd jobs. Perhaps a million or more, too proud to think of themselves as
unemployed, would disappear from the labor force to be supported by
the reduced incomes of relatives. Finally, the work week would be
With these important components comparable to those of a prosperous past period,
the reader may wonder why the deficiency exists. The main reasons are three:
(a) A smaller proportion of gross national product than in 1923-29 will be needed
for investment to make good depreciation and obsolescence. This is true because (apparently)
the course of technical advance results in a gradual reduction of the amount of investment
needed to maintain a given amount of productive capacity.
(b) Social security funds are estimated to absorb 2 billion dollars a year in excess of
expenditures from them. No such deflationary drag existed in 1923-29.
(c) Housing construction is estimated at no more than 20 per cent above that of
1923-29 in dollar terms, and as a much smaller percentage of gross national product (2.5 per
cent or less, compared to 4.5 per cent). This is true partly because in the postwar year selected
for analysis deferred demand for housing is assumed to have been satisfied, whereas in 1923-29
there occurred the greatest housing boom in the country's history. But even at the height
of the postwar housing boom—assuming that one occurs—the volume of housing construction
will not have increased as much above that of 1923-29 as has potential gross national product.
To a large extent, the demand for housing depends upon the rate of increase in the number
of families. ]n the postwar decade that rate of increase will be less than it was between 1920
and 1930.



shortened by several hours, even though nine workers of ten would
prefer the income of the longer hours of work to the added "leisure." 16
This spreading of unemployment would shrink the number totally unemployed by 2 or 3 million. Altogether the equivalent of 5 or 6 million
man-years of forced idleness or under-employment would escape the
unemployment statistics, which would record say 8 million unemployed.
The statistical puzzles of 1933-40 would reappear. Some statisticians would probably add the output of 6 million workers to the level
existing in 195Q, arrive at potential output of 170 billion dollars (at 1944
prices), and assure us that higher output was impossible. If conditions
improved, workers who had withdrawn from the labor force would
reappear, industrial employment would increase faster than statistical
unemployment decreased, and the same statisticians would assure us
that with output at record peacetime levels the unemployment figures
were fallacious. But the unemployment, the deep distress, and the economic unrest which it generates would be there nevertheless.
Summary. These forecasts indicate the probability of unemployment
of 6-8 millions during the reconversion period.
They further suggest the possibility that following reconversion the
country may be faced with inadequacy of demand even while war-caused
shortages are made good. If so, the inadequacy will become greater as
deferred demands become satiated. In this case, there is danger that,
resigning ourselves to reduced output, we shall permanently fail to attain
the potential well-being within our grasp. This would be tragic.
On the other hand, transitional unemployment may give way to a boom
of inflationary violence following which collapse is probable or, we may
pass from a period of transitional unemployment through a prosperity
period, and then experience either a sudden collapse as at the end of the
1920's, or a gradual sagging of demand below the country's growing
potential. The country must be prepared for alternative developments
during the short-run, and must be prepared to act with vigor to prevent
either deflation or inflation following the transition.
Whichever may occur, to the writer it seems highly probable that the
longer run problem will be one of inadequacy of demand. We may or
may not have a 1923. If we do, we are also apt to have a 1929.
That workers will for a time prefer a 40-hour week to more leisure and less income is
indicated by the increase in hours of work during the late 1930's, as demand for labor increased;
by the alacrity with which workers accepted overtime work when war came; and by the privately expressed opinions of labor leaders.

F R A N K R.


Division of Research and Statistics, Board of Governors
Living standards in the United States by the middle 1950's may be as
much as 60 or 70 per cent higher than they were in 1939—will be, in fact,
if our resources in manpower, machinery, and materials are fully utilized.
With a rise in population, total consumption would show more increase
from the 1939 level and so also would total production.
Sharp expansion in output and consumption per capita seems possible,
from the resource point of view, partly because the 1939 level was so low
in relation to productive capacity, with 9 million workers unemployed
and much equipment unused. By the middle 1950's, moreover, output
per man-hour—and per worker—may be expected to be much higher
than in 1939. This rise in productivity would reflect wider use of efficient
procedures already known, introduction of new equipment and techniques, shifts in the composition of total output, and, it is to be hoped,
a considerably higher level of activity. If the average number of hours
actually worked were to be reduced from those prevailing in 1939, the
increase in output per worker, estimated here at about 40 or 45 per cent
for the decade and a half, would be less marked. Even so, the indicated
rise in production and consumption from 1939, and more especially from
1945, would be large in comparison with increases in earlier periods of
similar length.
During the war period production per capita reached a level nearly
two-thirds above that of 1939 but practically all of the increase consisted
of equipment and supplies for our armed forces and our allies. Civilian
consumption showed little increase, as supplies of numerous goods were
restricted, and the excess of total production over civilian consumption
was very great.
Now that the war is over production is declining from the wartime
level but may be expected to continue for some time considerably above
consumption. In this country producers and distributors generally will
be building up inventories and making repairs and replacements on a
scale much greater than would be necessary on a continuing basis. Also,




in some lines, such as the telephone industry, expansion of facilities will
be uncommonly large. For several years consumers will presumably be
buying more automobiles, furniture, and other durable goods than they
are using up and for a while they will be replenishing their supplies of
clothing and many other semi-durable products. People in other countries
will be in great need of supplies for relief, rehabilitation, and reconstruction, and if the goods are made available and adequate financing is arranged, exports from this country will be very large. At the same time
production abroad will be limited, owing to the devastation of war, and
other countries will not be able to send us a corresponding amount of
their products. Surplus supplies of the armed forces will meet part but
by no means all of the special demands of producers and consumers
both here and abroad.
In this fashion production will probably be maintained at a fairly high
level—for a time. Over the longer term, however, high production levels
can be sustained only if consumption—consumption in this country—
rises about as much from the 1939 level as production.
The sort of reasonable balance between production and consumption
which will permit maintenance of activity and income at high levels will
be difficult to achieve. The start is unavoidably from a situation adapted
to wartime objectives but extremely unbalanced from a peacetime point
of view. The levels to be sought are far above anything known in the
prewar period. Maintenance of activity without wide fluctuations would
represent a real departure from the record of the quarter century between
the two world wars—and further back than that. Considering the intricacy
of the longer term problems and the many differences of view as to their
solution it is clear that a good deal of intensive thinking will be in order
during the period ahead.
One approach is to consider first what the goals for our economy are
or should be. They may be summarized as high living standards, with
minimum standards much higher than heretofore; sustained full employment; a large degree of freedom of choice and equality of opportunity;
and decent economic relationships with other peoples, contributing to
enduring peace. These goals need not be inconsistent with each other.
It is a good omen that many who prize freedom are facing and seeking
to meet the very real problems of unemployment and inadequate living
standards; and that many who seek full employment are quite aware of
the difficulties which may arise out of bureaucratic controls.
In this paper the emphasis is on the goal of high living standards.



Good diets, housing, medical service, and education are important in
themselves, even as the opportunity to work has a value all its own.
Moreover, consideration of the whole economic process from the point
of view of end products and their uses may at least supplement analyses
centering on business operations or employment. Over the longer term,
markets, wages, and profits in all lines depend on living standards to an
extent seldom recognized. Some of the people, moreover, who would agree
in general terms on the need for higher living standards may not have
considered fully what these higher standards would mean in terms of
new relationships between prices and wage rates and of new ways of life
for their neighbors of high or low degree.
On the basis of available figures it appears that we can have sharp
increases in consumption by the lowest income groups and at the same
time have considerable advance among other groups. With a 65 per cent
increase over-all, expenditures, in terms of 1939 prices, by the fourth of
our families and individual consumers having the lowest incomes could
be considerably more than doubled, while outlays by other groups were
rising over one-half, on the average; or, if all those below the prewar
average were brought up to that amount, a rise of two-thirds would still
be possible for those above the prewar average. In view of the needs of
people in the lowest income groups and the great production potentials,
a good argument could be made for increasing outlays by these groups
considerably more than is implied in the doubling of a small figure; the
same dollar increase in expenditures by all families would mean an increase in consumption of about 160 per cent for the lowest fourth and
nearly 35 per cent for the top fourth, with little increase, in percentage
terms, for the top tenth.
Considering the potential rise along commodity lines, an increase of
65 per cent in total consumption would probably reflect increases of
about that amount for housing and household operation, more than
that for automobile transportation and medical service, less than that
for things such as food and tobacco. Increases even for food, however,
might be very substantial, judging by the much larger outlays made for
food by the higher income groups than by the lower income groups.
With regard to minimum standards, numerous Government measures
have already been adopted because standards developed through regular
market processes and through private action in the way of neighborly
sharing, organized charity, and informal price reductions, as on medical
service, have proved insufficient. Government measures, however, have



often been of an emergency nature and in many instances have been
inadequate, covering only part of the field and providing aid only in
small amounts and for fairly short periods. Clearly, prevailing minimum
standards relating to diet, medical care, housing, and education are altogether too low, considering our production potentials.
Much could be done to raise minimum standards through measures
designed to increase incomes for the lowest income groups and to make
essentials available to these groups at lower cost. On the income side, a
variety of measures may be taken, including expansion of social security
benefits. The primary source of income, however, should be wages; and
there are strong arguments in favor of a commitment by the Federal
Government that jobs will always be available. This proposal has many
implications and may best be considered in relation to the operation of
the economy as a whole. On the cost of living side, legislation which
restricts consumption of low-priced products, such as margarine, should
be repealed, and new measures should be adopted to make essentials
available to the lowest income groups on terms which they can afford.
Administrative problems will need careful consideration in working out
a real program for minimum standards but techniques of administration
have been greatly improved and it should be possible to cope with such
The broader problem of achieving generally high living standards and
sustained full employment may be regarded as the central problem of
our economy and should be considered from many angles, even though
things look complicated when more than one interest or one doctrine is
taken into account. The challenge to economists and citizens generally
to explore the situation is particularly sharp now because the shortcomings of the two decades following the First World War have been
highlighted by the production record of the war period.
One fact to be noted early in such exploration is how closely economic
developments in the United States are related to those in other parts of
the world and how necessary it will be for us to take account of this in
shaping our policies on a wide range of matters. Continued operation of
synthetic rubber plants, for example, is no more to be regarded as a
local issue than is the tariff. Increases in costs and prices which might
put our markets out of line with those in other countries are to be scrutinized with great care; they may lead to reductions in trade, granting of
export bounties and imposition of import restrictions—and also to retaliatory measures. However, increases in particular cost elements, say



wage rates, are not necessarily to be regarded as disturbing to international trade; it may be that higher rates reflect economies being
achieved through further technical progress or through a sustained high
level of activity, and that prices are declining rather than increasing as
compared with those abroad. In any exploration of the international side
of such problems, moreover, considerations beyond the economic sphere,
even broadly interpreted, require special attention. The degree to which
the possible mutual advantages of greatly expanded trade and investment can be realized will depend to a considerable extent on the nature
of the whole foundation for world peace as well as on price relationships
and levels of business activity.
Exploring domestic phases of economic affairs, everyone agrees that
output should be much greater than it was in the years before the war.
Generally, also, appeal is made to the record of the past, and especially
the years since 1919, to develop particular views as to how such an increase can be brought about. The inferences drawn from the record, how.
ever, are varied. Some observers emphasize the importance of stimulating
investment, others the importance of increasing consumption. Some are
impressed with what private enterprise has done and can do while others
stress what the Government will need to do to regulate or supplement
private activity. These important differences of view persist although the
quantity of facts available is much greater than at the end of the first
world war and the number of people accustomed to deal with economic
problems is greatly increased. Much work still needs to be done to obtain more agreement on major points of analysis and on a practical
program. The extent of the rise required above prewar levels is not yet
fully recognized, particularly with respect to consumption. Understanding of relationships among consumption, income, and prices is not yet
adequate. There is on the part of many people a reluctance to see competition really enforced, and on the part of some others a tendency to
underestimate enforcement difficulties and also the problems which in
any event would remain to be handled through other means. Policy
making, on the part of both private and public organizations, is still too
much within the framework of a low-consumption business-cycle economy rather than of a high-consumption full-employment economy. In particular, prices in many fields are set by sellers—competitors as well as
monopolists—at levels which are higher than they would need to be if
producers did not feel obliged to assume that lean years were just around
the corner. The circle is a vicious one and the argument for some sort of



action to provide assurance of reasonable stability at a high level of business activity is very strong. Efforts in this direction should be made in
full recognition of the forces operating to perpetuate cyclical fluctuations
but should be conceived in more comprehensive terms than heretofore
and pressed more vigorously.
Arrangements to influence interest rates and the availability of credit,
while useful, are not adequate of themselves to assure sustained activity.
Appeals to businessmen and consumers to act as though they expected
large volume, when many of them really do not, are likely to be insufficient. The growing impression that the Federal Government will intervene at some stage to prevent any sharp decline may have some effect
in assuring markets, but this, again, is likely to be insufficient. If fairly
general agreement on the matter could be achieved, perhaps the most
effective single measure to provide assurance of sustained markets and
sustained activity would be a commitment by the Federal Government,
with reasonable exceptions and on reasonable terms, to provide jobs to
those who cannot find them elsewhere. The cost to the Federal Government and the taxpayer would not necessarily be prohibitive; in fact, the
fiscal and employment problems of the Government might easily be
much less serious than if no such action were taken. Assurance of a sustained high level of activity would need to be accompanied by an expression of determination to prevent inflationary developments. The
means for this are fairly well known, and if a iob guarantee were to be
made effective, restrictive action would not be as hazardous to the
economy or as difficult to initiate as in the past.
As there is no single goal which we should seek to the exclusion of all
others, there is no single method by which the set of goals we seek may
be achieved. Perhaps one of the measures most essential in a democracy
—in a way more basic than those already mentioned—is to broaden the
participation of citizens generally in the development of economic policy.
To this end more facilities could be provided to promote understanding
of economic problems. Meanwhile, in a world where short-run interests
and the interests of small groups find ready and determined expression,
it is essential to have some broad notions as to the sort of methods which
may help to achieve our main goals over the longer term. The suggestion
here is that we should utilize market forces wherever they serve reasonably well but that we should shape affairs through Government action
wherever the limitations of the market appear important, and the burdens of Government action seem not too great. One point at which our



system has failed thus far is in providing minimum standards of living
which seem reasonable in terms of our goals and our production—and
more especially in terms of our production potentials. The difference between actual production and potential production itself represents a
failure which in the decade of the 1930's was great. These are major
points at which the responsibilities of Government agencies will be and
should be recognized to an increasing degree. In the international field
too responsibilities of governments will be greater in the postwar years.
The job of thoughtful participants in affairs will be to see that longterm and community interests are recognized and that action taken is
consistent with all our goals as to living standards and employment,
freedom and equality of opportunity, international trade relationships,
and enduring peace.

The future has always held a certain fascination for practically everyone concerned with economic affairs and particularly for those who hoped
to turn a quick penny by forecasting shifts in values. Now many economists are engaged in guessing what may happen and suggesting programs
for improving conditions. They use numbers rather freely in presenting
their views, sometimes warning their readers that the numbers are only
crude approximations.
Potential 60 or 70 per cent Rise in Living Standards. The statement
made here that our resources are sufficient to permit a rise of 60 or 70
per cent in living standards by the middle 1950's, while believed to be
reasonably reliable, is to be considered with due reservations. It is based
on the assumptions (1) that total production may be as much as 85 to
100 per cent above the 1939 level; (2) that output of equipment and supplies for the armed forces, though larger proportionately than in 1939, is
likely to be a very small part of total production; (3) that the portion of
output for civilians going into current consumption will be about the
same as in 1939; and (4) that the civilian population sharing in the goods
produced—and in the use of existing goods—will be about 13 per cent
larger than in 1939. The first estimate—as to potential total output—is
based in turn on a whole series of assumptions. If there are about 15 per
cent more workers in the civilian labor force than in 1939, and all except
2 or 3 out of every 100 of these workers are employed; and if those employed work on the average about 40 hours a week, the same as in 1939;
and if output per man-hour rises 40 or 45 per cent over the intervening



period; then the 85 to 100 per cent expansion in total output will prove
a reality. The figure for the change in labor force allows for continuation
of the prewar trends toward more schooling and earlier retirement. I t
allows also for withdrawal from the labor force of those who have been
added to meet the war emergency and for an increase over the prewar
level in the number in the armed forces.
The two main factors which account for the potential rise of 60 or 70
per cent in per capita consumption from the prewar level are: (1) the
low level of production and consumption in 1939, when one-sixth of our
labor force and a considerable amount of equipment were idle; and (2)
the 40 or 45 per cent rise in output per man-hour which may be expected
on the basis of peacetime and wartime developments.
The war has temporarily slowed technical progress in some lines but
has stimulated a great many innovations in other lines. A large share of
these innovations can be adapted to peacetime purposes, especially if
peacetime operations are on the scale indicated as possible. The estimate
used assumes that over the period covering the war years and the first
decade after the war, output per man-hour can show a rise, for all lines
taken together, of a little over 2 per cent per year, compounded. This is
fairly arbitrary and cannot be otherwise, partly because of the lack of
really good historical information, except for certain time periods and
certain parts of the economy. But even with large gaps in our information,
the evidence of sustained increases in output per man-hour over long
periods is very impressive and the probability that increases will continue
is based not simply on the assumption of major new inventions but also
on the expectation of continued minor improvements in a great number
of materials, techniques, and products, and extension of the use of efficient practices already known. In manufacturing, the average increase
in output per man-hour from 1899 to 1939 was 2.8 per cent per year,
compounded, according to the National Bureau of Economic Research,
and for the period from 1919 to 1929 the annual rate was 5.6 per cent.
Peacetime improvements have been general in other parts of the economy,
including mining, agriculture, transportation, and many other types of
activity—but on the whole appear not to have been as large as in manufacturing.
Some readers may wish to raise the figure of 40 or 45 per cent considerably, perhaps on the ground that the necessities of war have taught
us quickly much about manufacturing, transportation, and distribution
at high levels of activity which otherwise would not have been learned



for a long time. If, for any reason, some other readers want to reduce
the 40 or 45 per cent to 30 or 35 per cent they will find that the potential
rise in production and consumption above prewar levels will still be
very great. This is all that is basic to the further discussion.
Corresponding Rise in Production and Living Standards. Tacitly it has
been assumed that a given rise in production would mean nearly the
same rise in domestic consumption over the long term. I t has also been
assumed that production and consumption were roughly in balance in
1939, at a low level, and should be in balance, but at a high level, in the
future period selected for comparison. The year 1939 was one in which
the share of production going into capital equipment, inventory accumulation, and other "capital formation" was larger than in depression years,
not so large as in the 1920's, and perhaps not quite so large as might be
sustained over a long period.
In the years immediately ahead, production is likely to exceed consumption by an unusual margin as producers, distributors, and consumers all build up stocks depleted during the war. The financial position
of buyers in this country will permit and encourage replenishment and
also expansion of inventories and of capital equipment unless the troubles
inevitable in the conversion period, such as unemployment and reduced incomes in war boom areas, should prove cumulative and come to dominate
economic developments. Replenishment and expansion of stocks will include for consumers a wide range of durable goods—mainly automobiles
and household equipment—and many semi-durable items like clothing.
Additions to the housing supply will be made in substantial volume. For
producers and distributors buying to replenish supplies will include many
types of industrial and commercial equipment and of raw and semifinished materials. Government agencies will need to undertake special
work on highways and other projects set aside during the war. Exports
are likely to be large relative to imports. Temporarily all this is likely to
mean production greatly in excess of current domestic consumption.
This, however, cannot proceed for many years; and estimates of full
employment conditions which depend very heavily on "deferred demand"
all along the line relate primarily to short-term developments. Over the
longer term there should be adequate replacements and also some rise
in the community's stocks of goods—capital equipment and inventories
at all points—as production and consumption increase. But the great
bulk of any increase in production over the 1939 level must be matched
by increased current consumption—or production will not be sustained.



Private capital formation, including residential building, amounted in
1939 to only about one-eighth of our total production. Total capital formation plus output of consumer durable goods has in no decade amounted
to more than 30 per cent of total output. And capital formation itself is
dependent in large degree, over any extended period, on final consumption.
Those who have studied cycles in residential building will have at hand
a ready example of what happens when consumption in a particular line
does not rise as rapidly as supplies are increased. Between 1925 and 1929,
before the stock market crash or any general reduction in incomes, residential building in urban areas declined by nearly half. In one view too
many houses had been built; in another view, prices and rents had been
established at such high levels that people could not afford to move into
better houses even though the general income situation was favorable.
Certain it is that residential building declined sharply while large numbers
of people were still poorly housed, according to their own standards or
those of the experts.
I t seems evident that the potential rise in domestic production should
be reflected almost entirely in increased domestic consumption, either of
domestically produced goods or of imported goods received in exchange
for exports. For a time production for export will exceed imports from
other countries by a substantial amount, largely because of shipments
for relief, reconstruction, and development. 1 Over a longer period exports
of goods and services can exceed imports to the extent that payment is
taken in gold or a creditor position is developed; and in view of the advanced stage of industrial development in this country there is good
reason for us to assist in the development of other economies. But a
growing creditor position is likely to involve large interest payments to
us and greater pressure to increase imports into this country. Thus if our
exports are to be large our imports will need to be large also, assuming
we wish to collect in goods or services for most of what we send abroad.
The argument that we need to promote exports, and the implied argument that we should restrict imports, in order to increase investment,
suggests that those concerned, here and abroad, should be willing to see
our creditor position greatly and continuously expanded. It also suggests
In view of the desperate conditions faced by many people abroad this winter we should
clearly share our relatively abundant supplies of food, fuel, and other essentials at this time,
even if that involves continued rationing and additional effort to avoid further price advances. Analysis here of long-term problems is in no way intended to minimize the importance
of short-term problems, either in foreign or domestic fields.



that our arrangements for disposing in this country of domestically produced goods and of imported goods equivalent in the aggregate to what
we can produce here will not be adequate. That possibility is one which
needs to be considered—but mainly in terms of the domestic situation.
The student of economic history may object that talk of a nice balance
between domestic production and domestic consumption at a high and
rising level is nonsense because business cycles have been getting more
rather than less severe, and to such an extent that some observers now
talk about "secular stagnation." I t is true that many of the underlying
factors which have contributed to business fluctuations before will still
be present. The products of the economy will be similar and so will many
of our ways of doing things. The historians may also note that we start
with the whole economy exceptionally unbalanced, in terms of peacetime
production and price relationships. Output for war purposes for a long
time was over 40 per cent of total output as compared with a peak of
one-fourth reached for a brief period toward the end of 1918. "Reconversion" will require more than mechanical changes in industries producing finished goods; markets will be needed on a large scale for finished
goods and materials alike. Deferred demands from all quarters will be a
sustaining factor for a time but in meeting these demands large supplies
of new durable goods will be accumulated. A practical program for
sustained high consumption and employment in the following period
will not be easy to develop, in view of all the considerations cited.
But that is precisely the challenge presented to us. If we recognize in
advance the real difficulties ahead we may be able to do something about
them; the effort might well be made before it is handicapped by emergency conditions.
Five Goals. With regard to the goals themselves, it has already been
indicated that high standards of living and full employment of resources
are important. Few people, even among those who enjoy reading "Walden," would argue that we are likely to have too many goods, in the
aggregate, for a while yet. Some people may already have more than is
conducive to their own good or that of their children but for every one
such there are hundreds at the other end of the income scale who lack
even adequate food and shelter. In between is the great mass of people
who are not as "badly off" as they might be but are hardly "well off."
That living conditions in the community generally are not what might
be desired has been amply demonstrated, in respect to health at least, by
the records of Selective Service examinations. Even in the field of edu-



cation, where our record in some respects is better than in other fields,
conditions are still far from satisfactory. Standards vary widely both
among States and within States and the best is no better than is needed
for successful operation of a democracy under modern conditions.
Full employment is another broad goal which hardly seems debatable.
It is important because only through full use of our manpower and other
resources can potential living standards be realized. It is important because only if the demand for labor is great will jobs be readily available
for all those able and willing to work. With jobs readily available workers
generally would gain not only more regular income but also more of a
feeling of security. Unemployment insurance and relief payments, while
necessary at times, are poor substitutes for wages paid for useful work.
At the same time the idea of full employment needs definition. How
many hours, for example, should be a week's work? And how many weeks
should be a year's work? Jobs need to be defined also in terms of occupations, working conditions, and wage rates, not simply hours. And the
size of the labor force needs to be considered—in very active or very dull
times the number of job-seekers may actually be greater than in other
periods. Questions could be raised too about the utilization of resources
other than labor. Idle equipment implies a waste and so also does uneconomical exploitation of mineral, forest, and other resources.
Before unemployment problems became so important and discussion
of full employment came to be the starting point of so much economic
analysis, the goals of the economy were frequently stated primarily in
terms of freedom of choice and equality of opportunity for the individual.
These are still first-rate goals, and they are generally recognized as such.
The questions now raised about freedom in economic affairs usually
relate to freedom of business enterprise. The right of consumers to choose
their own diet, perhaps with a certain amount of advice from health
authorities as well as advertisers, is generally not questioned; nor is the
freedom to choose a job to one's liking, although as a matter of practice
the range of choice is affected by geographic considerations, the general
economic situation, and various customs or rules enforced by employers,
fellow employees, or Government agencies.
Issues concerning freedom of business enterprise relate in good part
to circumstances in which the results of freedom—exercised within the
framework of basic law with respect to property, association, contract,
trademarks, patents, and the like—fall short of textbook promises of
advantage to the community. Antitrust action is interference on behalf



of equality of opportunity for competitors and reasonable prices for consumers. Public utility regulation is aimed to provide fair prices where
production under monopolistic conditions seems most economical. Pure
food laws restrict a minority who would take advantage of flaws in the
working of a system which assumes a greater degree of consumer knowledge than exists. Graduated income taxes were initiated to limit in some
degree the inequalities in economic power developed in the market and
in the secondary process of distribution, chiefly through the inheritance
of property. Labor laws have been passed to cover a wide range of problems relating to working and bargaining conditions not readily handled
through negotiations between individual workers or trade unions and
employers. Collective bargaining has been recognized as essential in a
world of large-scale enterprise. In the financial field a degree of Government participation has long been recognized as necessary and during the
depression of the early 1930's rescue measures were undertaken on a
large scale. And to be realistic any account of Government action bearing on freedom of enterprise should include an impressive array of laws
passed to meet the problems of one small group or another without much
reference to freedom of enterprise for other groups, as in the case of restrictions on imports from abroad or shipments across State lines.
Altogether the list of Government activities and the size of the tax bill
have grown until many believe the goal of freedom is being sacrificed and
along with it the benefits that might be expected from freedom in terms
of large production and high living standards. Each reader will have his
own views on the extent to which freedom and equality of opportunity
have been made real—or impaired—by regulation, taxation, and, in a
few fields, by Government ownership and operation. All will probably
agree, however, on the great desirability of a high degree of freedom in
the economy. Fortunately many who believe in this goal are willing to
face problems relating directly to living standards and employment, recognizing the importance of "freedom from want" as well as "freedom from
Government interference" and the necessity for selective Government
action when existing conditions are unsatisfactory.
If we were actually to make great progress toward the goals of high
living standards and sustained full employment, of freedom of choice and
equality of opportunity, conditions should be favorable for concurrent
progress toward another primary goal—the maintenance of decent
economic relationships and peace among the peoples of the world.
The drift of all this is that any program for the entire economy should be




fashioned in terms of several goals, each of great importance. Consumption is not quite "the sole end and purpose of production" which Adam
Smith asserted, but it does warrant more attention than is commonly
given it in descriptions of what goes on or in programs for the future.
Perhaps the American Economic Association was asserting this in highlighting consumption problems at the phantom annual meeting of 1945.
Background Data on Markets and Living Standards. Quite a little
patience is required to understand what goes to make up living standards
and the variety of living conditions actually prevailing in different parts
of the country, in different types of communities, and in different income
groups. Only since the middle 1930's have attempts been made to organize
comprehensive information on these points and even now current changes
can only be estimated very roughly.
The accompanying table shows how much, in the aggregate, consumers
spent in 1939 for various classes of goods and services, including the estiCONSUMPTION EXPENDITURES, 1939
Total consumption expenditures.
Total commodities
Total services




Clothing and accessories.
Household operation..
Household furnishings.
Medical care
Personal business
Personal care
Religious and welfare activities.
Reading matter
Private education and research.
Foreign travel and remittances.


of dollars

of total











NOTE.—The total shown here for all consumption expenditures in 1939 is about 15 billion dollars greater than
the total shown for 1935-36 in Consumer Expenditures in the United States, from which the estimates in three later
tables are taken. This difference reflects mainly higher consumption in 1939 and the inclusion here of some items
classified as "savings" or as "gifts" in that study. "Household operation" has been adjusted here to exclude household furnishings. "Recreation" has been adjusted to exclude reading matter.
SOURCE.—William H. Shaw, Consumption Expenditures, 1929-43, Survey of Current Business, June 1944, p. 9.



mated value of home-grown food and the estimated rental equivalent of
owner-occupied houses. The dollar figures need to be read with special
care because in the years since 1939 prices have risen considerably. The
66.5 billion dollar total, if expressed in 1945 prices, would be at least 90
billion dollars. Moreover, prices for some things, notably food and clothing, have gone up much more than the average while rents have shown
little advance, affecting the proportions of expenditures for various goods
and services. In the whole discussion it seems better to talk about what
was consumed in 1939 rather than what is being consumed in 1945 because many wartime changes in consumption, caused by reductions in
imports or diversion of materials to war production, are temporary.
The figures show that in 1939 about two-thirds of consumer expenditures were for goods and one-third for services, including housing. About
28 per cent of the total went for food; 13 per cent for housing; 12 per cent
for clothing; 10 per cent for transportation; 8 per cent for household
operation, mostly fuels and utilities; 7 per cent for household furnishings;
and 22 per cent for all other consumption items.
In view of the great emphasis often placed on the growing importance
of automobiles, furniture, refrigerators, and other consumer durable goods
in our economy, it seems desirable to note that consumer expenditures
for such goods have amounted, on the average, to only about 10 or 12
per cent of total consumer outlays. By far the greater part of consumer
outlays is for nondurable goods such as food, for semi-durable goods such
as clothing, and for various types of services. Purchases of new automobiles and parts in 1939 made up only about 3 per cent of consumer expenditures and were no larger than consumer outlays for gasoline and
oil. The value of new houses built in 1939, which, incidentally, is regarded as capital formation and is not included in these figures, was only
about 2 billion dollars as compared with about 9 billion for housing as a
current service. Purchases of consumer durable goods have increased
somewhat more rapidly than other outlays; but in thinking about possible increases in consumption over the longer term, it is necessary to
keep in mind the importance of nondurable goods and of services and to
see purchases of durable consumer goods in proper perspective as only a
small, though growing, part of total consumer outlays. At the same time,
for analysis of cyclical developments, it is important to emphasize the
wide fluctuations which do occur in the purchase and production of consumer durable goods and also in production of certain other durable
goods, notably houses, which render services directly to consumers. One



cause of such wide fluctuations is that in periods of uncertainty consumers can retrench somewhat without much sacrifice to themselves,
merely by postponing the purchase of new automobiles or houses, meanwhile continuing to use what they have.
The table below indicates roughly what portions of the outlays for
various products were made by the 10 million families and single conPORTIONS OP CONSUMPTION EXPENDITURES MADE BY


(In per cent)


(Incomes (Incomes of (Incomes of (Incomes of
$635 to
under $635)
$1,070 to $1,715 and

All consumption items.






Household operation.






Medical care
Household furnishings.






Personal care
Education (private).
Other items








NOTE.—Each of the four groups includes 10 million "consumer units"—families and single individuals. The
average number of persons in each "consumer unit" is largest in the first group, smallest in the fourth group.
The figures include allowances for food produced and consumed on farms and for rental value of owned homes.
SOURCE.—National Resources Committee, Consumer Expenditures in the United States, 1939, p. 90.

sumers in each of four income groups. These figures relate to 1935-36
and consequently the income levels shown for the various groups are
much lower than they would be in 1945, and somewhat lower than they
were in 1939. However, the proportions shown are probably not far from
right for 1939, which is the starting point for our observations. The
lowest quarter of families, ranked according to income, consumed about
10 per cent of the total; the second quarter 17 per cent; the third quarter
25 per cent; and the highest quarter 48 per cent. Of the total outlay for



food, 13 per cent was made by the lowest fourth, 40 per cent by the top
fourth. Of total outlays for automobile transportation, 3 per cent was
made by the lowest fourth, 65 per cent by the highest. It is evident that
very great increases in total consumption would result if families in the
lower groups were able to raise their standards a substantial part of the
way toward levels already customary in other parts of the community.
This point would appear in more striking fashion if the division were into
tenths rather than quarters, because a large share of those in the top
fourth had rather moderate incomes.
It is also evident that increases by the lower groups toward levels already prevailing in the upper groups would be greater for some products
than for others but that even for food the increase might be very great.
The increase in nutrition would not correspond to the increase in outlays—but nevertheless would be extremely important in making up the
dietary deficiencies existing among large numbers of people in all sections
of the country.
Increased consumption by the lower income groups would be of special
importance in improving living standards—economists have long recognized differences in the meaning of a dollar to different income groups
when talking about taxation and may as well extend this to discussions of
consumption. But as long as there is little change in income distribution,
markets will be found in large part among the people having the larger
incomes; and a considerable part of any increase in consumption will no
doubt come in the top half or even the top quarter of the income scale.
It is here, for example, that most of the new products developed as a
result of wartime discoveries will find their first markets. If consumption
by the lowest fourth were to be more than doubled by the middle 1950's
while consumption on the whole rose 65 per cent, there would still be a
55 per cent rise for the other groups, on the average. An equal dollar
increase in expenditures for all four groups would mean an increase of
nearly 35 per cent for the top fourth, a 160 per cent rise for the lowest
fourth. Full employment itself would provide large increases in income
for those previously unemployed and increase their expenditures. The
extent to which full employment would bring about a corresponding increase in expenditures by the top fourth or the top tenth would depend
on many factors, including selected pay scales, the level of profits after
taxes, the level of interest rates, the degree of graduation of personal
income taxes, and the amount of savings by this group.
The table on page 67 shows how people in the four income groups



divided their outlays for goods and services in 1935-36; it suggests that
with generally higher incomes the proportions of family outlays for different purposes would change considerably. Items other than food, housPORTIONS OF CONSUMPTION EXPENDITURES OF FOUR

(In per cent)


$635 to
under $635) $1,070)

(Incomes of (Incomes of
$1,070 to $1,715 and

All consumption items






Household operation. ,






Medical care
Household furnishings






Personal care
Other items






NOTE.—Each of the four groups includes 10 million" consumer units"—families and single individuals. The
average number of persons in each "consumer unit" is largest in the first group, smallest in the fourth group.
The figures include allowances for food produced and consumed on farms and for rental value of owned homes
The figures in the first column here differ quite a little from those in the second column of the table on page 63
because of differences in items included, classification, period covered, and basic estimates. These differences
however, do not greatly affect the differences in distribution of outlays by the four income groups.
SOURCE.—National Resources Committee, Consumer Expenditures in the United States, 1939, p. 85.

ing, and household operation account for about 25 per cent of the outlays
by the lowest fourth and about 45 per cent for the highest fourth. In
dollar amounts, as shown in the table on page 68, average outlays by
the lowest fourth for items other than food, housing, and household
operation amounted to about $125 in 1935-36 while the corresponding
figure for the top fourth was $1,050. These tables also show that outlays
for food and housing by the higher income groups were much larger in
dollar amount than similar outlays by the lower income groups, although



for the higher income groups these expenditures were not as large a patt
of total outlays.
These data indicate that there is plenty of room for expansion in consumption without relying on the introduction of new products. As to
new products, wartime developments in electronics, industrial chemicals,
metallurgy, and the like have been very great and will provide the techAVERAGE CONSUMPTION EXPENDITURES MADE BY

(In dollars)


All consumption items



under $635)

(Incomes of
$1,070 to

(Incomes of
$1,715 and





Household operation.






Medical care
Household furnishings






Personal care
Other items






NOTE.—Each of the four groups includes 10 million "consumer units"—families and single individuals. The
verage number of persons in each "consumer unit" is largest in the first group, smallest in the fourth group.
The figures include allowances for food produced and consumed on farms and for rental value of owned homes.
SOURCE.—National Resources Committee, Consumer Expenditures in the United States, 1939, p. 85.

nical basis for an unusual improvement in the range and quality of
consumer goods.
A further analytical step would be to estimate in detail what expansion
in consumption might occur under assumed conditions and to translate
the estimates into terms of employment opportunities. Such a task is
beyond the scope of this paper. I t may be observed, however, that increases in employment would not necessarily correspond in amount to



increases in consumption; in any particular instance the rise might be
smaller or larger.
It may also be noted that some changes in consumption would require
little time, merely from a technical production point of view, while others
would take considerable time. Supplies of most foods can be increased
fairly rapidly. Housing would take much longer to bring up to advanced
standards, because additions to the supply of houses in any one year are
only a very small part of the total—and would be even if as many as a
million and a quarter or a million and a half units were built in a year.
Extension of medical service depends partly on the training of more
doctors and the process of medical education is a long one.
As people approach all these problems they will be wondering about
the probable size of the markets for food, housing, medical service, and
the like. If expansion is to be adequate in amount and, broadly, in the
most useful directions, it appears essential that people should be making
their plans now in terms of markets which will exist if we have full employment and substantially higher living standards generally, with a
more than proportionate rise in minimum living standards.

As already indicated, our resources in men, machinery, and materials
will be so great by the middle 1950's that we could afford a standard of
living 60 or 70 per cent above the 1939 level. Such an increase might conceivably be developed "across the board/' with those in cities and on
farms, in high income groups and low, in small families and large, sharing
the increase in the same way that they shared the previous total. More
likely, with full employment the proportions of income going to various
groups would shift somewhat; and so also would the proportions of expenditures by these groups. Certainly a job for everyone able and willing
to work would go a long way toward raising minimum conditions to a
reasonable level. Even in that situation, however, special attention would
probably be necessary to assure adequate consumption by the very
lowest income groups; and if full employment is not achieved, the need
for action on problems of this sort will be greater.
Need for Special Policies on Minimum Standards. The view that
special attention to minimum standards will be required arises partly
from comparison of actual living conditions with standards of adequacy
which appear reasonable in terms of what the community can afford.
Basic to this view is the idea that the consumption patterns developed



through the ordinary processes of income distribution are not necessarily
the best possible. Even if it could be shown that each family gets back
from the economy and consumes as much as it contributes or stands
ready to contribute—and for a variety of reasons this cannot be shown
—it wTould still appear desirable to raise minimum standards more than
consumption generally. Only if minimum standards are far above what
they have been can a reasonable degree of equality of opportunity be
achieved. Only thus can the community at large avoid the many difficulties which arise when a considerable number of people live under substandard conditions.
Any very persistent questioning concerning the meaning of "substandard conditions" at different times and places would take the inquirer
into a philosophical discussion of great breadth. On a common sense basis,
however, it seems clear that one thing desirable and important would be
for all people to have at least a good opportunity to enjoy the best of
health obtainable within the limits set by individual heredity, the state
of the medical arts, both preventive and healing, and the amount of economic resources available. This would represent a considerable extension
of the widely accepted view that no one should be permitted to starve
and would definitely contribute to the equality of opportunity which we
have long been seeking through public education and other means.
The poor showing made in the Selective Service examinations by men
of military age is evidence enough that health conditions in this country
now fall far short of what might be desired. The record shows that 40
per cent of 22 million men of military age were unfit for general military
duty because of various ailments, many of which were avoidable or remediable. The Selective Service System has estimated that one-sixth of the
defects for which men were rejected could be remedied relatively easily.
The Army, moreover, has inducted \}4 million men with "major" defects
and rendered these men fit for duty. How many of the 9 million rejections
would have been inevitable under the most favorable possible conditions
is an unanswered question. There seems to be plenty of independent evidence, however, that poor diets, lack of good medical facilities, and bad
housing conditions—generally associated with low incomes—contribute
in an important way to unsatisfactory health conditions. Infant mortality,
for example, is much greater among the lower income groups than among
the higher income groups.
Health conditions depend on so many different interrelated factors
that no simple quantitative statements can be made about the effects on



health of substandard living conditions. Where, as in some lands, millions
of people die of starvation, there is no question that dietary deficiencies
are important. In this country, the deficiencies are much less marked and
are important chiefly as they contribute to diseases which may result from
a variety of causes. The unfavorable effects of poor diets, although obscured, do appear to be widespread, especially among the lower income
groups. This is no place for a technical discussion of thiamin and riboflavin, or calcium and phosphorus. Those who have studied such things,
however, seem agreed that a large number of people should eat more leafy,
green, and yellow vegetables, more citrus fruits and tomatoes, and more
dairy products. In general, people on farms fare rather better in these
matters than those in cities. But pretty generally actual diets fall short
of recommended standards and in the lowest income groups the deficiencies are marked. This much seems clear from considerable research work in
recent years on the proper standards and from numerous surveys on
actual diets. For the benefit of those who are accustomed to attach importance only to those things referred to in numbers, perhaps it would be
safe to add that data from the Consumer Purchase study of 1935-36
indicate that the diets of about 25-30 per cent of nonfarm families were
"very poor/' according to the standards of the National Research Council, and that 10-25 per cent of the diets of farm families fell in this class.
Actual proposals to improve minimum conditions will be developed
chiefly to meet specific needs for better diets, better housing, better
medical care, and better education rather than to make effective any
broad design for a more equitable division of goods produced. In seeking
perspective on these matters, however, it may be recalled that only 10 per
cent of all goods and services consumed in 1935-36 went to the 10 million
families or single individuals having the lowest incomes, while 48 per cent
went to the 10 million families or single individuals having the highest
incomes; and that the shares of the two intermediate groups were 17 and
25 per cent. With this sort of division of consumption—the differences
are great, although considerably less marked than those in income—the
share of any increase going to the lowest fourth might be very large without raising any questions about the merits of equal and unequal consumption.
To increase consumption by the lowest fourth considerably more than
100 per cent and consumption by other groups somewhat over 50 per cent
would raise the share of the lowest groups from 10 per cent to 13 per cent
of the total. At the same time it would mean an increase in absolute



amount for this group only half as large as that for the top fourth. This
might easily be regarded as too little, especially since many would still
have inadequate diets, health services, housing, and education. The
average amount spent by the lowest fourth of "consumer units" (families
and individuals) was about $500 in 1935-36, somewhat more in 1939.
The corresponding wartime figure would be considerably more than this,
reflecting on the one hand much higher family incomes and on the other
hand higher prices and some increase in the volume of goods obtained.
Special Policies Already in Effect. The idea of establishing some minimum is already widely accepted. Neighbors have always helped each
other out, and organized charity has provided a certain amount of assistance. So also have informal price reductions such as those made by
doctors. But this sort of thing has not proved adequate and various types
of Government action have been developed. From time immemorial the
poor-house has represented an offer of a general minimum of a sort, with
the minimum set low enough to constitute a threat as well as an offer.
Relief payments in kind represent another approach, one which leaves
the individual little freedom of choice. Relief payments in cash are aimed
to provide a minimum with more freedom of selection. In work projects
the importance of employment to the individual is recognized. As a
matter of tax policy, the smallest incomes customarily are exempt from
income taxation. Under a Canadian law recently adopted the incomes of
families with children are supplemented by regular allowances which,
subject to some limitations, vary with the number of children; and in
effect this is of direct advantage only to families which have small
incomes, because income taxes have been increased.
In an attempt to put a floor under incomes for those who work, minimum wage laws have been enacted and are generally accepted as desirable,
within limits, after much discussion among economists about possible
effects on employment and much controversy in the courts over constitutional issues. To provide benefits which will lessen the impact of temporary involuntary unemployment, employers, and in a few States employees, in many types of establishments are now required to contribute to
unemployment insurance funds set up by the States. Old age and survivors insurance is provided in a Federal system originally set up to be
financed by pay-roll taxes. Wartime wage controls were designed to permit larger percentage increases in sub-standard rates than in other rates.
Another approach used by Government agencies is to make a limited
amount of goods or services available to some groups at prices lower than



those prevailing in the market. The stamp plan for disposal of surplus
food products and the school lunch program were partly moves toward
meeting minimum requirements. Public housing offered for rent below
the market comes under this heading too. Free medical treatment at
public clinics is a service rendered to low-income groups, chiefly in urban
areas. Public education, a major item, is furnished free to all groups.
During the war period general price controls and subsidies on meats,
dairy products, flour, and various other items have been used to restrain
increases in the cost of living.
This brief listing, although incomplete, suggests that more is being
done to establish minimum standards than is actually the case. Most of
these measures cover only limited groups and some apply only in emergency periods. The amounts paid or the services provided as supplements
to other income are generally inadequate in terms of decent living standards. Nevertheless, action along so many lines does represent some effort
to cope with this problem and provides experience to use in judging more
comprehensive proposals.
Ways to Increase Family Incomes and to Reduce Living Costs. Looking ahead, on the income side, there is need for expanding social security
benefits and extending them to important groups which are not now
covered. Questions about the share of the cost to be met through pay roll
taxes should be reviewed. Minimum wage legislation should be continued
in effect with increases in rates at least large enough to allow for higher
living costs; but what can be done in this way is limited. More important
are provisions relating to job security. Proposals for a guaranteed period
of work each year will be considered in some union contract negotiations but the possibilities along this line, without broader measures,
appear limited because of basic economic uncertainties, especially in the
durable goods industries. From the point of view of minimum standards
a Federal job guarantee would be very desirable and this should be taken
into account in any appraisal of the effect of such a guarantee on the
whole economy.
In general it appears that a large share of any sustained increase in
income received by the lowest income group will be used in buying the
more essential items although there are plenty of individual instances in
which sudden large increases in incomes lead to extravagant purchases
of luxury goods. Undoubtedly education in domestic economics, nutrition,
and the like will be required to make most effective any increase in income which families are free to use wholly as they choose—and this ap-



plies far up the income scale. Provision of more adequate information
about the quality of goods offered for sale would assist buyers in making
their dollars go as far as possible.
There are many things Government agencies can do to reduce the cost
of the most essential things to people who cannot afford them at the
regular price. Further improvement in our system of free education is in
order and free or low-cost health services for the lowest income groups
can be extended. Public housing to rent below the market has reached
few families to date, and until housing standards for higher income
groups improve, tax payers are not likely to approve extension of the
low-rent program to meet more than a small part of the housing problem
for the lowest income group. The aim, however, should be to improve
housing conditions generally rather than to slow down attempts to meet
the housing needs of the lowest income groups. In the matter of minimum
food requirements, serious consideration should be given to the proposed
National Food Allotment plan. That program is designed to offer tangible
encouragement to people in the lowest income groups to raise their food
standards all the way to those provided by the "low-cost adequate diet"
—as well as to provide larger markets for farmers and food processors.
The administration of such a plan, as of any other in which large numbers
of small transactions are involved, presents real problems; but certainly
there is much to be said for the general approach of trying to meet consumer needs and to maintain producer incomes with a high level of output rather than simply to maintain producer incomes by restricting
output and raising prices.
Finally, in considering means to reduce the cost of living for those in
the lowest income groups, a special analysis might be made of prices
charged for essentials to see where private and Government practices
contribute to unreasonably high prices. The benefit of any program developed on the basis of such study would be shared by buyers above the
lowest income group. Producers, however, might then find other fields
of production or distribution more attractive; and so, even from the
point of view of developing reasonable prices for essentials, it would
appear necessary to develop proper pricing policies throughout the economy. This is part of the story about general policies.
Interest in the broad problem of achieving sustained full employment
and high living standards for the whole community has been widespread



in recent years, partly because so much went wrong in the two decades
from 1919 to 1939. The sharp advance in prices in 1919 and early 1920
and the following collapse provide a special warning for the early postwar
period, when supplies of many goods will still be short. The great decline
in activity, prices, employment, and income during the early 1930's, with
attendant acute financial difficulties, is still fresh in memory and provides
a background for much current thinking about longer range problems.
So also does the 1933 to 1939 experience of incomplete recovery from
extreme depression. In the entire interval between the two wars, the
period from 1923 to 1929 was the only one of any considerable length in
which the share of our productive resources in use was reasonable. This
period, moreover, showed less rise in consumption than in production
and, with unfavorable developments in real estate markets, in security
markets, and in the international situation, the drastic decline of 19291933 developed.
There were good features in the interwar period, including a rapid
growth in productivity during the 1920's, a reduction in working hours
from previous high levels, the introduction of many new products, and
the extension of the use of many products to larger groups in the population. But on balance the economic record of these two decades fell far
short of what might have been desired.
The shortcomings of these years were highlighted by the tremendous
increase in production during wartime. This increase, it is true, did not
prevent declines in civilian purchases of some services; of certain nondurable goods, such as meats, sugar, and gasoline; and of important durable goods, such as automobiles and household electrical equipment. Purchases of many other goods increased, however, and in the aggregate
civilian consumption was maintained at about the 1939 level, or increased
somewhat, even though 12 million of the physically most fit were inducted
into the armed forces, huge quantities of munitions and supplies were
furnished to our armed forces and our Allies, and imports were restricted.
The wartime production record was achieved partly by special additions
to the labor force, longer hours, and the like, which no one would wish
to see continued; but aside from these factors it was an extremely impressive record. Manufacturing schedules which seemed impossible were
met, and more than one forecaster learned in the hard way that the capacity of the railroads was much greater than he had supposed.
Variety of Views. The conclusions drawn from all this are varied, although everyone is agreed that production after the war should be much



larger than before the war. There is some difference of opinion concerning
the amount of production required for full employment and high consumption, because judgments differ on the probable size of the labor
force and more especially on the possible extent of increases in output
per man-hour and the desirability of further substantial reductions in
hours of work. Concerning policies to bring about any desired level of
production, there is more difference of view, as the imagination roams
far afield, less Restrained by considerations of fact.
A great many people emphasize the importance of encouraging private
enterprise and especially private investment in new industrial and commercial facilities, residential building, and the like. They point out that
fluctuations in outlays for such things are very wide and urge that current consumption will take care of itself if investment is sufficiently encouraged. They cite the incompleteness of the 1933 to 1939 recovery as
evidence that Government action cannot be relied on to bring full activity
and suggest that the Government will do well if it can stabilize its own
activities in roadbuilding, school construction, and the like. Many of
these people hope to see private investment stimulated primarily by the
adoption of a "hands off" policy on the part of the Government and the
lowering of taxes on corporations and on individuals, especially those in
the higher income brackets. Now, as in the past, they generally oppose or
do little to support Government efforts to enforce competition, although
some regard action along this line as basic to maintenance of the whole
system. Their opinions concerning collective bargaining also continue to
differ, but the issues now considered relate chiefly to the scope of organized labor activity rather than, as at the end of the last war, to the continuation of such activity.
In the view of another group, private investment is not likely to be
sufficient over the longer term to absoib the savings people will make;
and therefore the Government must be prepared to prevent unemployment, chiefly through fiscal action. This conclusion is reached through
analysis of production potentials and prospective income flows. Thus an
attempt is made to see how much income consumers, producers, and
Government agencies would have under various conditions, how much
they would spend in the ordinary course of events, and what special fiscal
action the Government should take to bring prospective expenditures in
the economy into line with production potentials and thus to prevent unemployment. Those who approach the problem in this way often assume
that consumer expenditures will continue in about the same relationship



as before the war to the income which consumers have available after
paying their income taxes. They find that if this is so, private investment
will need to be very large indeed, as compared with that of the past, or
else the Government must spend more than it receives. Until recently
the emphasis of this group has been rather generally on the need for the
Government to spend whatever extra amount is required to provide full
employment, taking account of indirect as well as direct effects of such
expenditures. Currently, with taxes at advanced levels and with the
general income analysis being used more widely, there is more discussion
about the desirability of reducing taxes to counteract any deflationary
tendencies which may appear. Either way, great emphasis is placed on
the ultimate responsibility of the Government for full employment and
on fiscal action as an instrument of economic policy. Either way, the
Government must survey developments continuously and be ready to
act promptly. One question about these two alternatives would be how
well action could be timed in each case; and another would be how the
action taken would affect income distribution, consumption, savings, and
investment. In general, fiscal policy occupies a central position in current
economic discussions, similar to that held by credit control policy after
the last war.
Another view is that considerable unemployment is likely to develop
unless the Government takes action to facilitate the proper functioning
of our economy through measures chiefly not of a fiscal sort. Those who
take this position, as well as those interested primarily in what can be
done through fiscal policy, often cite the record of the interwar period
as evidence that Government action of one sort or another is essential if
we are to avoid wide swings in activity and income. Many different proposals are made to deal with situations in which existing markets cannot
be relied on to guide economic affairs, because of monopolistic influences,
the nature of the product, or some other consideration.
Various proposals are made to expand Government efforts to do away
with monopolistic practices and to establish competitive conditions. It is
hoped that this would result in prices for many products more closely in
line with costs over the long term and more responsive to changes in
demand over the short term; and thereby would encourage full utilization of resources. Such proposals might require considerable revision of
patent and other laws as well as increased efforts to enforce existing
legislation. Another proposal, based on the theory that monopolistic
elements are so pervasive in modern industry that they cannot possibly



be eliminated by Government order, is simply to appeal to those responsible for price policy in industry to set prices at levels which would
prevail if there were competition, thereby promoting the long-term
interest of business and the community generally.
One recent specific suggestion, made as part of a general program for
stabilizing activity at a high level, is to have the Government survey the
economic situation continuously and offer buyers special incentive payments to make purchases during periods in which sales and activity
would otherwise probably decline. It is hoped that this would help to
prevent cumulative declines in production, employment, and income, with
relatively little Government expenditure. The incentives offered would
apply only to commitments involving outlays of some minimum amount
such as $500 but would be applicable whether the purchases were to be
made by producers or consumers, by private or Government agencies.
Extra incentive payments would be made when buyers agreed to have
projects undertaken not in an immediate period ahead but at such time
as the projects might be needed most to provide orders and employment.
This proposal involves considerably more Government participation in
economic affairs than we have been accustomed to, but is advanced by
its author, along with other recommendations, as a way of meeting the
problem of unemployment within the general framework of the private
enterprise system.
In all these approaches sustained high levels of employment and consumption are advanced or accepted as important goals. There is also a
general desire that workers should have as much freedom as possible in
choosing jobs and consumers as much freedom as possible in choosing
goods and services. Differences relate to the emphasis appropriate for
various goals and the effectiveness of various measures proposed. In the
writer's view not enough attention has been given to high consumption
as a goal and to measures directed specifically to this end. Activity can
be developed along the most useful lines only if appropriate attention is
given to consumption problems and the general level of activity can be
raised permanently only through increased consumption. Deferred domestic demands and emergency foreign demands provide only an insecure foundation for economic activity and employment.
Policies to Increase Consumption. Direct emphasis on consumption
leads immediately to analysis of the substandard conditions under which
large numbers of people live and to some understanding of the need for
action to raise minimum standards very sharply. Special policies which




might be adopted to help achieve this objective have already been mentioned earlier in this paper. Policies to raise minimum standards, however,
constitute only part of a general program to bring about sustained high
consumption. Here again direct emphasis on consumption affects the
description of the way in which the economy operates and the selection
of policies to improve conditions. While study of private investment
focuses attention on the importance of fluctuations in output of producers'
durable goods from one period to another, study of consumption directs
attention to the large share of total production which consists of goods
or services sold to consumers and to the necessity for growth in this part
of the economy. Considering possible growth, there is clearly room for
great expansion in the output of consumer nondurable and semi-durable
goods, which comprise 85 per cent of all consumer goods and 60 per cent
of all consumer goods and services. More expansion, in percentage terms,
is possible for output of consumer durable goods. Services, including
housing, education, medical care, and the like, can also be greatly increased. All of this, in turn, will require new investment; additional
housing services, for example, depend directly on new construction.
Tractors are required for producing food, looms for weaving cloth, and
railroad coaches for providing travel service. Consumption is by no means
the sole determinant of investment, particularly over short periods, but
it is an important determinant, and one whose significance is often underestimated.
Policies designed to raise consumption may be thought of in three
groups: policies to lower prices charged to consumers in regular markets;
policies to increase consumer incomes; and policies to stimulate consumption directly through Government aid. The direct measures relate chiefly
to minimum standards of education, diet, housing, and medical care,
and need not be considered further. Tax policies, which affect prices,
incomes, and the scope of Government activity, fit in this grouping only
on a selective basis.
For a long time the principal emphasis in efforts to increase consumption throughout the community was on lower prices. The chief means
advocated for establishing reasonable prices were competition, enforced
where necessary by the Government, and Government regulation.of
prices of goods or services which could be produced most efficiently under
monopoly conditions. In recent years the emphasis has shifted to higher
incomes as the chief means of increasing consumption. In the writer's
view, reasonable price relationships are considerably more important to



the successful operation of the economy and to high consumption than
some students of the income flow suggest. The problem of obtaining such
relationships through market processes, however, is by no means simple.
Heretofore Government action affecting prices has been aimed to accomplish many diverse purposes, often to protect producers against competition from abroad or from other producers in this country. The attempts
which have been made to establish competitive conditions have been
impeded by many strong forces. It has been difficult, moreover, for legislators and administrators to determine what really fair competitive practices would be in different industries and to make their decisions hold in
court. Clearly the search for more effective means to improve pricing
practices needs to be intensified and Government support to particular
prices should be continued or granted only under exceptional circumstances and for limited periods.
The increasing emphasis of recent years on higher income has been
reflected in proposals designed to bring about full employment and sustained high production; to assure equitable bargaining conditions; to
establish minimum wage rates and support prices; and to provide unemployment insurance or other payments to supplement the incomes of
those in an especially unfavorable position. This approach has been reflected also in discussions of tax and other fiscal policies in terms of their
effects on the level and distribution of income and also on expenditures.
In the writer's opinion, with economic activity organized as it is, a considerable share of the large increase in living standards which is possible,
from a resource point of view, can best be brought about through increasing incomes.
How much of their incomes consumers might spend rather than save
under conditions of sustained full employment is something yet to be
determined. As people moved into higher income groups expenditures
would probably increase considerably. The amount saved each year
would probably also increase, affording protection to an increasing number of families against risks not covered adequately in any social security
arrangement now in effect or likely to be set up. Whether the proportion
of income saved would increase or decrease under the changed conditions
assumed is not so certain, as there would be strong forces working in
both directions. Study of problems in this field, developed only in recent
years, should be intensified; and, as a basis for such study, information
about savings by various income groups should be greatly improved.
Concerning the probable or proper division of gains in productivity



between consumers, through price reductions, and producers, through
increases in wages, salaries, interest, and profits, no simple answer is
possible. I t is evident th^t price reductions often provide a method for
expanding output of a particular product and for spreading the gains in
productivity in particular industries throughout the economy. I t is also
evident that absorption by employers or employees of all of the gains
from a sharp increase in productivity in a particular industry would
change the relationship between returns in that industry and in other
industries where similar improvements had not occurred. But unless it is
assumed that all present relationships are satisfactory it is not possible
to know off-hand whether in a particular case such a change would be
desirable. Those people engaged in any activity, moreover, may properly
ask why all the gains of productivity should be passed along to consumers,
or to some other group in their own industry, when many of the losses
incidental to the change accrue to their group. Further, it is difficult for
people to appreciate the importance of lower prices as readily as that of
higher income. Expenditures are made a little at a time while receipts
come in larger amounts, and outlays for many items can be avoided if
prices get too high. Considering all this and the greater control people
often exercise over the prices of goods or service they sell as compared
with what they buy, it is probable that only part of the gains of increased
productivity will be passed along to consumers in the form of lower prices.
Remaining gains will continue to be shared by employers, employees,
and the tax collector.
In the end, the greatly increased productivity in prospect will be reflected in incomes which are higher in relation to prices than in the past.
One specific conclusion from this is that relationships between wage rates
and prices should not be expected to resemble closely those prevailing
before the war—wage rates should be relatively much higher. To set up
a prewar standard on this would be to imply that the whole broad program of full employment and of high consumption, based on high productivity, would not succeed.
When we consider what policies might help most to bring about desired adjustments in prices and incomes, and to maintain employment
and consumption at high levels, we quickly encounter many problems
associated with cyclical fluctuations. Blocking a complete recovery in
both production and consumption in the 1930's was a fear of inactivity
and unemployment. Right now some estimates of future markets are influenced by expectations that there will be considerable unemployment.



And a large amount of unemployment is implied in customary ideas as
to probable living standards. Even those who see the need for sustained
full employment and urge measures to obtain it are careful to point out
that they are not predicting it. The tendency to accept cycles as a starting point in shaping policies is understandable; the effects of this procedure are often serious, however, and need to be examined.
Prices are all too frequently determined on a "prince and pauper"
basis—high enough in good times to make up for losses in bad times to
come. These high prices, found especially in building and many other
industries whose output varies most widely, discourage buying and often
lead to restriction of output and to inefficiency even during good times.
This applies to numerous consumer goods as well as to many producer
goods. It applies in some degree to distribution, which accounts for a
large share of the cost of many articles to the consumer, as well as to production. War experience, for example, suggests that the cost of hauling
freight on the railroads could be reduced, if continuous operations at a
high level were to be assured. In general the cycle feature of price determination is not primarily a matter of competition or monopoly; competitors as well as monopolists look ahead and take precautions that
should not be necessary. It seems essential, if we are to have prices suitable for high consumption and high production levels, that we have
reasonable assurance that those levels will prevail.
The effects of cyclical fluctuations are also evident in policies which
restrict the flow of income in periods of relatively high activity. Wages
and other income payments are considerably lower than they could be
if high production levels were to be maintained and, if, therefore, costs
were to be calculated on a somewhat different basis. Corporate profits
are often retained rather than distributed, partly as a measure of protection against impairment of financial position in depression and possible loss of control by those in charge. Such preparations for depression,
necessar}/- as they seem, have unfortunate effects in limiting the flow of
income as well as in holding prices at too high a level. The advantages
of sustained full production and advance assurance thereof might be reflected partly in lower prices and partly in larger income payment to
wage-earners and other income receivers. Profits could be larger with
lower profit margins, if volume were to be maintained.
To provide the assurance of general stability which is essential if
business and individual decisions are to fit conditions of full employment
and high consumption is a task of the first magnitude. Heretofore most



Government efforts to cope with business cycle problems have been
made after depression conditions developed. It has been recognized for
a long time that action should be taken in advance, if possible, but the
scope of preventive action actually taken has been limited. The experience of the 1930's has shown how extremely depressed conditions may
become with an unusual combination of adverse circumstances, and it
has led to adoption of numerous measures to provide some cushion
against the sharpest declines in income and to prevent excesses of the
sort which developed in the 1920's.
In the writer's view, the responsibility of the Government for assuring
general stability should be recognized much more clearly than in the
past and the most thoughtful attention should be given by the people of
this country to measures which might provide the necessary assurance.
In his opinion the proposal which offers the most prospect of being effective, if generally supported, is a Government guarantee that jobs will
always be available to those who are able to work and willing to work.
There would need to be reasonable limitations as to age and the like, and
the terms of employment offered would need to be most carefully planned
in relation to the terms of employment on other jobs. Such a guarantee
would involve a commitment to spend large sums under certain circumstances, and naturally a crucial question to be considered would be
whether it would really help to prevent the development of depression
conditions and thereby avoid costs which would otherwise be incurred.
Clearly, such a measure should not be expected to be a cure-all. In some
periods it might even contribute to excessive optimism and inflationary
developments; but the techniques for preventing inflation are fairly well
known and it should be possible to meet any such contingency. Meanwhile, plans could be made by business, individuals, and Government
agencies within the framework of the assumption that depression conditions would not again be permitted to develop, certainly not on any
such scale as in the 1930's.
In this discussion of policies to increase consumption as productivity
rises and to prevent wide cyclical swings in activity, little has been said
about differences among broad classes of products and markets. Perhaps
the difference between durable and non-durable goods, emphasized so
much since the early 1930's, should have a primary place in any such
analysis; certainly wide fluctuations in output of durable goods, both for
producers and consumers, warrant special attention. The writer believes,
however, that in many current studies too much attention is focused on



durable goods—and on producers' goods—and that solutions are sought
too much in terms of measures which are immediately related to investment, and investment over short rather than long periods. The need fcr
increasing consumption appears to be basic for many reasons, including
the fact that over the long term the level of investment is determined in
considerable part by the level of consumption. It is recognized that the
amount of plant and equipment which producers buy does depend partly
on other factors, such as the advantage to be gained by installing modern
cost-saving equipment. In the past, with a high degree of freedom of
enterprise, technological progress has been rapid and certainly any program for the future should include adequate incentives to encourage
experimentation with new methods and introduction of new equipment
and new products. But concern about the need for encouraging private
investment often leads to misplaced emphasis in policy formation. Undue
attention may be focused, for example, on the need for reducing corporate taxes rather than for lowering taxes which bear more directly on the
consumer and restrict consumption. Again, this approach often leads to
too much emphasis on profit margins and not enough on volume operations. This need not be so but it often is. Further, and this is a key point
in the whole argument, emphasis on investment may mean too much
reliance on devices to stimulate activity temporarily and not enough on
plans to raise levels of activity permanently through growth in consumption. It is true that the problem of increasing consumption itself may
look least difficult for the short term when approached indirectly through
expansion of output of durable goods or of producers' goods; but, unless
meanwhile many more goods and services are made available to consumers at prices which they can afford to pay, the rise in consumption
will not be adequate and the expansion in activity will prove temporary.
Houses need to be occupied as well as built and machinery needs to be
operated as well as installed.
Another day it may be possible to carry this discussion forward to
take account of the many special problems which would be encountered in
applying general observations to particular situations. Meanwhile, the
problem of improving housing conditions is dealt with at some length in
another paper in this series, and consumption problems are considered
either directly or indirectly in various other papers, including those on
competition, employment and wages, social security, agriculture, and
international economic affairs.
Anyone who pauses more than a moment to view the economic scene



must be impressed with the complexity as well as the importance of postwar problems, and with the difficulties in the way of understanding and
dealing with these problems. With a modicum of good sense and good
will all around, however, it should be possible to increase our understanding and to make further substantial progress toward common goals of
high living standards and sustained full employment, freedom and equality of opportunity, decent international trade relationships, and enduring peace.