At the onset of the war, the American military was an antiquated and poorly equipped force. In order to transform this military from what it was into the world-dominating army, it would come to be known as, the government would need to find a way for its citizens to allow never before seen intrusions, nationalizations, and central planning of the economy to fuel the war effort. With the attack on Pearl Harbor driving public outrage and calls for retaliation, the government got just that.
As has been previously discussed, the American military was ill-equipped for total war, and with the Japanese surprise attack severely damaging the Pacific fleet, calls from the government to manage directly or indirectly key domestic industries to artificially divert scarce resources towards military needs. Building up the military was not an expense-free endeavor, and to fund this, the government raised taxes and issued war bonds, each carrying roughly half of the burden.
Marginal tax rates for the top tier income brackets during this time reached over 90% and stayed at that level until the sixties. Commercial institutions, at the same time as private individuals, loaned out billions worth of dollars to the government in the form of bonds. Government agencies such as the War Production Board replaced the price mechanisms for allocating scarce resources in order to divert as many materials as possible towards the war machine. This, in turn, led to the rationing of vast amounts of consumer goods and services.
By the end of 1943, the government’s management of the economy had led over two-thirds of the economy being devoted towards the war effort. At the same time, (usually government-managed) statistics were showing solid “growth” in the economy, with unemployment falling to zero percent at many times. As nice as this may have seemed on paper, however, the reality was that the living standards of daily American’s were abysmal.
During this time period specifically, there was a divergence between the lifestyle of average citizens and the on-paper data regarding the economy. So, while it may have seemed as if the Great Depression had been solved, for the most part, Austrian theory and methodology show that the means being undertaken during this period could not lead to the economic growth being supposedly calculated. Rather, what was happening was a mere redistribution of existing resources being put towards the annihilation of entire industries, economies, and societies of foreign nations, quite the opposite of actual economic growth.
In the eyes of the Keynesians however, this economic arrangement was not only driving the “growth” the United States was experiencing but essentially holding the entire economy together. Using their models and equations, Keynesians predicted that once the war would finish, unless the government continued to maintain their current levels of spending, the national economy would suffer a massive crash akin to that of the Great Depression.
By this time, Franklin Delano Roosevelt had died, being succeeded by Harry S. Truman. Truman, however, did not share the same popularity that his predecessor enjoyed. Come senate election times, control passed to the Republicans for the first time in many years. Soon after the end of the war, the Keynesian’s worst nightmares would come true, with the Right-wing Senate leading successful repeals of many New Deal programs, public spending, and government controls over the economy. Rather than see a new depression arise, however, Americans enjoyed an explosion of economic growth and increases in living standards.
While key aspects of Franklin D. Roosevelt’s legacy still lingered, these congressional Republicans, with the reluctant support of Harry S. Truman managed to steer America back towards a course of real economic growth. While not perfect, the economy during this post-war period of the late 40’s and 50’s was one where the individual was given back control over many of his economic and personal affairs, allowing him to create real wealth through entrepreneurial endeavors and market forces.