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WAR ECONOMIC CONVERSIONS OF THE UNITED STATES AND GREAT BRITAIN BY GISSELLE CALLEJAS Submitted to the Division of Social Science New College of Florida in partial fulfillment of the requirements for the degrees of Bachelor of Arts in Economics and History under the sponsorship of Dr. Richard Coe, Dr. Catherine Elliott, Dr. David Harvey and Dr. Robert Johnson Sarasota, Florida May, 2010
ii Table of Contents List of Graphs iii Abst ract iv Introduction 1 Chapter One: Wartime Economic Conditions 5 Chapter Two: People and Labor 24 Chapter Three: Controls and Rationing 42 Chapter Four: Finance 58 Chapter Five: Results 76 Conclusion 87 Bibliography 9 0
iii List of Graphs Figure 1(a): Anticipated Post War Labor Shift 24 Figure 1(b): British Labor Shift 38 Figure 1(c) : Women in the Labor Pool 40 Figure 2(a): Government Ideal of Price Controls 42 Figure 2(b): A ccumulation of Wealth and Consumer Demand 43 Figure 2(c): Consumer Demand and Perfectly Inelastic Supply 44 Figure 3: British Balance of Payments and Monetary Policy 59 Figure 4: British Balance of Payments and Export Policy 60 Figure 5: British Balance of Payments and the American Recession 68 Graph 1: Current Account of Great Britain 1946 49 74 Graph 2: Current Account of the United States 1946 49 74 Graph 3: Gross Capital Formation of Great Britain 1946 49 75 Graph 4: Gross Capital Formation of the United States 1946 49 75
iv WAR ECONOMIC CONVERSIONS OF THE UNITED STATES AND GREAT BRITAIN By Gisselle Callejas New College of Florida, 2010 ABSTRACT This thesis focuses on t he post World War II economic reconversion strategies of the United States and Great Britain, how they compared to each other and how successful each country was in achieving its set goals The thesis starts by looking at the economic position of the count ries as a result of the war, and then thematically compares economic performance by labor, controls/rationing and finance. It also tries to account for differences in approach as either a result of ideological or more practical concerns. By looking both a t economic data from the era as well as secondary literature thesis concludes each country was generally successful in achieving its immediate post war aims, with practical considerations usually taking pr ecedence over ideological concerns. However, the thesis notes areas of trouble (such as in labor allocation in Great Britain), as well as situations where political concerns are given p recedence over economic policy. David Harvey Richard Coe Divisio n of Social Sciences Division of Social Sciences
1 Introduction With the announcement of the victory over Japan in August, 1945, both the United States and Great Britain had the unlikeliest of leaders. The American president, Harry S. Trum an, had been thrust into the role by the sudden death of Franklin D. Roosevelt in April, following a man who had been elected president for an unprecedented four terms through depression and war. The British had just elected Clement Atlee and his Labour go vernment in July, rejecting a continuation of Winston Churchill's stewardship which proved so able in wartime. The end of World War II meant the end of the war economy, where the aim was not the largest GDP or most consumer goods, but rather to produce the largest amount of material needed to win the conflict in Europe and Asia. It meant the end of the government so explicitly directing the economy, but this also ensured continued government presence while it planned how to exit the economy. Howe ver, the all encompassing character of the conflict meant that the titular "new conditions" created by war would come with attendant "new ideas" (Kynaston 2008, 89); not only new ideas in what the state was supposed to, but also how the state was supposed to do it. Through the reconversion process, leaders of the two Allied countries would be able to set the stage for the world they felt they fought to create. Specifically, the reconversion process saw Great Britain expand the role of the state and work tha t concept into their economy, while the reconversion process in the United States saw a retreat from the way the government directed the economy in the wartime, instead promoting less involvement as an ideological statement.
2 The choices of the two nations, both government and citizenry, were informed by the experiences during and proceeding the war. The election wave that swept in Atlee was articulated by the Labour Party manifesto 'Let Us Face The Future', which outlined a peacetime Great Brita in of full employment, universal health care and other social provisions the war made standard. As demonstrated by this public choice, the ideology of the country was changing, with citizens electing a government that promised to continue the state involve ment so necessary to coordinate the war, with efforts re directed at maintaining a basic standard of living for all instead of fighting the ever present Axis threat. The depth of the state presence in day to day life during the war, as well as the damage sustained from the conflict, also made sustained state presence after the war a requirement, with the amount of reconstruction necessary far exceeding that of the US. Coupled with the pressing need to not only repay debts incurred for fighting the war, but also to find new sources of dollars to sustain the country and help rebuild the infrastructure, the condition of the British nation alone would have demanded further government involvement. In the US, the prevailing mood was one of a desire for normalcy, as suggested by the Republican congressional victories of 1946 on platforms of fewer taxes and less government. Additionally, the ideology of the era was further being formed by the changing post war relationship with the Soviet Union. As a coun terpoint to them, the US tried to emphasize its difference from the communist nation, trying to reduce government involvement in the economy from their wartime peaks. Given the comparatively limited material demands in domestic re establishment of peacetim e lifestyle, the government
3 was able to reduce its presence in the economic with a rapidity and to an extent that would have been damaging and impractical in Great Britain. Even so, in some instances, the desire for the exit of government in economic matte rs came at the expense of practical needs and the needs of the consumer. This thesis will explore different areas of the economy and each country's effort in adapting these areas from war production to the peacetime. In an effort to avoid including the effects of the Korean War, the time period studied is limited to the end of World War II to 1949. Chapter one is a summary of the American and British economies during World War II. Wartime ministries and offices established and strengthened in this time period play important roles in the reconversion of the economy. Additionally, a focus on the economic results of the war would give a better idea of where each country was starting and the resources at their disposal from in their process to retu rn to a peace economy. Chapter two focuses on the demobilization of people and labor. Here, the massive movements of millions of servicemen from theaters of war to the civilian economy caused much consternation in trying to provide employment fo r all. Also, the movement of workers within the shifting economy will be considered, with the workers brought in to fill in for those who left having to compete anew. The role of labor unions and their relationships will also play a part of this chapter. Chapter three will look at the controls and rationing structures each country had, and how far they were removed. The sequence and speed in which controls were removed had implications for the economy, and looking at those can indicate what priori ties the state had in reconverting the economy.
4 Chapter four describes the financing of the war, and other expenses associated with such an all encompassing and expensive conflict. This includes the financial constraints on what each country was able to do, as well as showing what they chose to spend their money on. Chapter five analyzes the goals the two countries had in each area and whether or not they were achieved. In addition to the short term view of the policies, it looks at an y possible long term effects the choices of the era had on the countries. Here, the idea that the British state role was enlarged while the US state ostensibly wasn't is more fully explained.
5 Chapter 1: Wartime Economic Conditions Economy During the War The declaration of war from Great Britain on September 3, 1939, soon after the German invasion of Poland, found the country in a difficult position while the experience of World War I gave economic officials an idea how to manage an economy geared for war in theory, traditional historiography contends that actual preparations were minimal, with the conversion to a command economy occurring slowly. This is attributed to a variety of reasons; for one, their foreign policy until the ear ly thirties had assumed a "ten year rule," where a major war was not predicted to happen for ten years. This foreign policy precluded large scale rearmament throughout the thirties (Kirby and Capey 1997, 555, Millward 1977, 38). Also, the aforementioned Br itish experience in World War I with "total war", with its attendant social and economic unrest, made planners skittish about pursuing a similar strategy. They instead hoped that by limiting rearmament to air and sea defense, the economy would be able to f unction without any massive changes to budget allocations or consumer spending (Millward 1977, 40). However, this view is complicated by actions the government did take, often influenced by the reasons cited as the causes of inaction. For instance, becaus e of the desire to limit impact to the economy, the Royal Air Force received the most attention in effective compared to the Royal Navy (Kirby and Capey 1997, 555). Governmen t military strategy favoring production of long range bombers, an output that required a
6 innova area of the economy that required higher levels of technology and knowledge, effectively maintaining a more advanced area of industry when the effects of the depression where st ill being felt in other areas. Also challenging the view of a slow response is the swift passage of the Emergency Powers Act in August 1939, giving a legal foundation for later curtailment of British civil liberties (Harris 1992, 21). It seems that, generally, the early war performance of the British government was mixed. The same state apparatus that implemented the massive relocation efforts that took out over one and a half million women and children from the cities before the Battle of Brit ain (Harris 1992, 22) Churchill becoming Prime Minister and the fall of France, though, the war in Great Britain bec ame total, with every aspect of society affected by war. Production Production in Great Britain was partially dependant on the Ministry of Supply, 1940). That department, with the Ministry of Aircraft Production and the Board of Trade and its newly create d departments (the Ministry of Food and the Ministry of Fuel and military needs (Pollard 1969, 300).
7 Most of the war time means of production were not owned b y the state; instead, Great Britain managed output by controlling the destination of raw materials and workers and licensing capital equipment, amongst other measures (Pollard 1969, 305). Even when the means of production were funded by the state, like wit h the expansion of aircraft factories in the mid thirties, management was still assignment to outside firms (Zeitlin 1995, 50). The relative decentralization of the production processes led to a less efficient rise in war output while Great Britain was abl e to quickly overtake Germany in aircraft production, making fifty percent more by 1940 (Zeitlin 1995, 52), this was done in a system of small orders (orders of around five hundred planes at a time), which would negate the benefits of economies of scale. This was done on purpose, since British military favored a more flexible system of manufacturing where they could continually make adjustments to aircraft designs and have them reflected in aircraft quickly (Zeitlin 1995, 55); if a factory was making only a few hundred aircraft at a time, then before fulfilling a new order, they could make the necessary adjustments to machinery without a large lag in production. Another aspect of British production was the role of imports and exports; it was not self sufficient in its island confines, relying on exports and empire to fill gaps. The advent of war, however, put shipping space at a premium, and added large limitations to what could be produced while demanding creative solutions to shortages. Iron ore essential in producing steel, was expensive to ship; local output rose to make up for decreased imports, in conjunction with reusing steel scraps (Millward 1977, 91, Pollard 1969, 314), both of which required a strengthened processing industry, leading t o expansion in that area.
8 The same stresses affected agriculture before the war, Great Britain was largely self sufficient in eggs and milk, but imported about half of their meat, three quarters of their fruits and nearly ninety percent of their whea t and flour (Taylor 1966, 186). In order to save shipping space, the agricultural policy saw the amount of arable land rise from around twelve million to eighteen million acres, with decreases in animal herds (except for cows) providing new land. Together with a greater mechanization of farming and an did not meet the demands of civi lians (nor did production increase across the board). In order to dedicate as much of the economy as possible to the war effort, it was necessary to use various controls. Controls As a result of the World War I experience, it was known that demand fo r scarce resources and food, combined with the greater purchasing power of a more employed populace would put inflationary pressures on a war economy, threatening the social acceptance of the war (Millward 1977, 105 6). To avoid this, the British governmen t instituted a system of price and wage controls, setting changes instead of letting the market affect prices. They were able to do this in various ways. Food control alone had different approaches; with regard to food imports, the government was able to b uy it at the foreign price and then sell it to British distributors at an officially determined price (Pollard 1969, 323), or provide rebates for customs duties (Mikesell and Galbreath 1942, 525). With food made in Britain, the government was able to give subsidies directly to producers of commodities like milk and bread (Mikesell and Galbreath 1942, 525). By
9 1945, the subsidies alone cost £200 million per year (Harris 1992, 23). Government intervention with food had several social effects. The stat e instituted programs for the nutrition of children and expectant mothers, providing hard to get foodstuffs like orange juice and eggs; the infant mortality rate fell from fifty six per 1,000 live births in 1936 8 to forty five in 1944 6, even with the air raids, food shortages and other impacts of war (Pollard 1969, 346). Controls also extended to raw materials. One was setting maximum prices, to they rose too quickly ( Backman and Fishman 1942, 217). Another control was securing the supply line of certain materials; by the beginning of 1940, Britain bought the available stockpiles of copper and zinc from Australia, Burma, Canada and Rhodesia, the majority at pre war pric es (Backman and Fishman 1942, 220). Licenses were also popular, and a way to avoid having to buy materials. They had to be obtained from the Ministry of Supply, and to get one, a producer had to indicate how much of a material was needed and for what it wo uld be used for; the same licensing process was used for evaluating exports and imports of needed supplies (Backman and Fishman 1942, 222). Labor In the years before the war, Great Britain faced a serious unemployment problem. With a population of forty seven million in 1938, there had not been a year since 1921 without at least one million people out of work (Reubens 1945, 206). The pre war and workers in depress
10 taking command of where people worked ended up benefiting these people, with older workers, women and laborers able to step into places created by working men leaving for the military, and with wo rkers in depressed areas and industries getting the chance to work in industries that were producing. The state took charge of the labor force with various measures. The Essential Works Order in 1941 made it hard for workers to leave their jo b, and made it possible for the Ministry of Labour to fine them for absences (Hinton 1983, 163). Also in 1941, a registration program was inaugurated which allowed the Ministry of Labour to direct workers into industries or specific places in need of them (Hinton 1983, 163). Workers allowed this curtailing of their freedom of movement because in exchange, they got strengthened protection from being fired, improvements in workplace conditions and greater consideration regarding minimum wages (Pollard 1969, 3 41). Later actions to take care of the working people of Great Britain would form the basis of not only the welfare state, but the desire to have a welfare state. However, even though relations were generally markedly better than those in th e previous war, grievances remained in an essential industry: mining. One of the few fundamental war economy industries to decline in output during the course of the conflict (Millward 1977, 91), miners were discontent for a variety of reasons. While their wages did rise, compared to other laborers, they still made less (Pollard 1969, 319); they were also faced with rising accident rates, which could not effectively confront given the Essential Works Order. Although there was a safe workplace clause for the EWO, previous confrontations with miners made government officials wary of listening to them,
11 and they created a complicated system of controls that not only could not address problems workers had, but that could not efficiently respond to demand either ( Pollard 1969, 319, Hinton 1983, 166). Finance Great Britain, in facing the issue of paying for the war, took on what would be the largest obstacle to post war recovery. This was recognized early on, with economic advisors forecasting £150 250 million spent from reserves for just one year of war, and at least a £312 471 million deficit in the current account that could not be covered by inducing countries to accept the sterling as payment (Cairncross and Watts, 18). Given that, at the outbreak o f war, Great Britain had about £450 million in gold and dollars in reserves, they would only be able to spend £150 million per year for a three year war, a policy was reg something that could apply strategy (Millward 1977, 89), so in order to correct this perceived imbalance, economic advisors recommended an export drive in late 1939/early already experiencing shortages (Pollard 1969, 331), particularly when considering no large scale controls had been imposed on civilian consumption yet. Why was G reat Britain experiencing a hard currency shortage during this period? it augmented its output with American arms, made available to the country with the
12 November modific ation to the Neutrality Act that allowed manufacturers to sell to belligerent nations as long as they paid in dollars; this modification was met with a barrage of orders from Great Britain and France, with commissions for the second half of 1940 reaching n early $2.5 billion (Millward 1977, 49). Combined with the forced curtailing of exports the export drive was sacrificing much needed raw materials as well as getting sunk by German naval efforts money left the reserves with nothing to take its place. By D The United States modified its terms, instead instituting the Lend Lease program, which was ostensibly for all All ied Powers, but to the largest benefit of the British, both in terms of getting the largest share of American exports and in stopping the outward flow of gold and dollar reserves. It also came with stifling restrictions though, such as barring the use of a ny lend lease raw materials in British exports and promising to not have Imperial preferences in trade when the war was over (Pollard 1969, 338).The conditions associated with the Lend Lease program would have major effects in the immediate post war enviro nment. efforts it was the attempt to harness the national income of the country in the most efficient way possible that led to Keynesian theory coming to the forefront of economic practice. With John Maynard Keynes as one of the leading public intellectuals of the era, t be given back until after
13 that included estimates of national income and expenditure, and how the costs of war not covered by taxation would be addressed (through savin gs and additional taxation) (Pollard 1969, 326). Although the United States did not officially enter the war until after the att ack on Pearl Harbor, the country was involved in overseas actions, both across the Atlantic and Pacific. Its modified Neutrality Act (cash and carry) seemed tailor made to aid the then nautically superior British and French states; the following military a id policy, the Lend implementation (Vatter 1985, 3). Seemingly in spite of isolationist elements in the government, conflict measures like the Strategic Materials Act passed and the War Resources Board were created in 1939, even before the war was officially joined by Great Britain (Vatter 1985, 5). However, these prescien t early moves were often not matched by enforcement, such that the SMA proceeded to stockpile raw materials, but at a slow pace (Vatter 1985, 5), and government boards were reduced to essentially bribing industries to produce for war. Compared to the minim al physical threat the United States faced at the time, though, much was done so that when the US did enter the war in December 1941, a Selective Service Act had already been put in place a few months before (Vatter 1985, 7).
14 Production The strategies to get industrial leaders on the side of war production went to great and with ordinary, now Techniques to coax pro plus fixed from the government (Higgs 2006, 39). Another effort was with the second Revenue Act of 1940, which institute d a corporate excess profits tax of twenty five to fifty percent while allowing firms in defense industries to write off investments at twenty percent per year for five years, in an effort to promote up to date facilities (Vatter 1985, 9). As a result, emp loyment in the defense industry jumped from 1.8% of total employment to 8.5% from 1940 to 1941 (Higgs 2006, 63). New employees were given plenty of work in 1940, Roosevelt called for 50,000 planes within the next two years, and in order to achieve this, t he vice president of United Auto Workers outlined a plan to convert the excess capacity of the auto industry for the production of military aircraft (Vatter 1985, 12). The automobile industry was doing brisk business with civilians though, selling nearly f our million cars in 1941, a fact which made the opportunity cost of changing factories to military goods unattractive (Vatter 1985, 13). The experience with the Great Depression also made industry leaders wary of producing too much, since they dealt with t he trouble of excess capacity throughout the 1930s (Vatter 1985, 24).
15 However, they did not have much to fear, because in addition to breaks in taxes, larger defense companies were favored when it came to getting awarded government contracts. The army an d navy felt that buying from larger firms was preferable to buying companies; in the t Although small firms (defined as less than one hundred workers) made up twenty six percent of the market in 1939 by late 1944, they were only nineteen percent, even though total manufacturing employment went up by fifty five percent. This indicates that larger firms became bigger at the expense of smaller firms (Vatter 1985, 61). The military was able to get their producer preferences relatively easily since the jurisdiction of various war boards and administration frequently overlapped. When it was but in practice, the authority for negotiating and approving contracts stayed with the War Department and its branches, while the WPB would ultimately control raw materials; this led to inflated contracts and uncoordinated rst full year of war, where needed outputs (trucks, trains) were put off in favor of less urgent products, with raw material shortages in many sectors (Vatter 1985, 72 3). The WPB also created specialized divisions under its purview, which added to the con fusion of authority; this, added to a similar jumble of authority of civilian supply and production boards, frequently staffed by holdovers from the New Deal and at
16 odds with the WPB for its policies as much as general competition for resources (Vatter 198 5, 72 3). The leading civilian representation in the wartime government ended up not being a supply board, but the Office of Price Administration, the price control board (Bartels 1983, 7). Controls The board that would eventually become the OPA was firs t revived as the Council of National Defense, a World War I creation meant to survey the economic status of the country and then advise the government on the best course of action regarding war aims (Rockoff 1984, 87). The first formal control was issued i n February 1941 after the demand for machine tools led to substantial price increases on the open market; while later on businesses would feel alienated by the OPA for their price controls, this initial However, the Council felt prevented from issuing more controls because of their unclear legality; since there was not a war going on that America was officially involved in, it would not be able to get its power to enforce price c ontrols merely by citing way economy necessities (Rockoff 1984, 90). After Pearl Harbor, the OPA would get legal backing for their positions, but the bill giving them this power also made it so only the WPB had the power to induce consumer rationing, with the OPA in charge of recommending action and administration, a constant source of struggle between the two organizations (Rockoff 1984, 91).
17 How successful were the various boards in implementing controls and controlling inflation? It depended on the typ e of control used. Early on, across the board controls like the General Maximum Price Regulation froze prices at the highest price reached for a given period of time, which did not help keep down inflation freezing prices created inequalities, so if a sell er had the prices frozen somewhere usually high or low, this distortion would be passed down to the consumer. Enforcement also proved difficult, since it could be hard to prove if a price was merely frozen somewhere high or if the seller was charging more. Lastly, if a product came out after the price freeze, determining what the price should be would be difficult, since there would be no free market to compare it to (Rockoff 1984, 93). The controls that did end up working to keep inflation down were the more severe The standard for pricing here, instead of a price from a given period of times, was set by two criteria the first one was that an industry was allowed to earn the same profit as the average before taxes profit from 1936 9 (Rockoff 1984, 97). The other criterion was that of businessmen criticized this as too harsh, in practice p rofits still went up because many industries were operating at full capacity, with the benefits of economies of scale (Rockoff 1984, 97).
18 Labor Before the war, the US had the same chronic unemployment problem as Great Britain, with the average unemploym ent rate in 1939 still around seventeen percent, which translated to nine and a half million people who wanted to work (Vatter 1985, 3). During this time period, when the US was beginning to get involved in the war without officially getting involved, the NDAC instituted an Employment Division which trained people for defense production, as well arranging placement once the training was done (Vatter 1985, 43). As a result, when war was declared, the apparatus for training people in the vital defense industr y was already in place, easing the way for the expansion of defense industries (Vatter 1985, 42). In order to ensure the smooth transition to a war focused economy, with the minimum of disruptions, organized labor had to be worked with. Immediately after Pearl Harbor, AFL and CIO unions promised not to strike; however, giving up benefits in moving from non defense to defense jobs was not appealing, and later discrepancies between wages and rising prices led to many strikes in 1942 and after. The largest w ere government wage ceilings four separate times, prompting the government to temporarily ms, miners were condemned by some of the public as unpatriotic (Babson 1999, 122), and the experience with the strikes led to the passage of the Smith Connally Act, which made strikes or lockouts illegal, and allowed for governmental seizure of a productio n facility if war production was threatened (Vatter 1985, 125).
1 9 Workers often had a case for grievances the average manufacturing job work accompanied by a rise in the rate of di sabling injuries per hour work, thirty percent between 1940 and 1943. Workers were working for longer hours in increasingly dangerous surroundings as the war progressed (Higgs 2006, 71). Even with all of these problems, though, organized workers saw thei r social status workers in a union by 1945 (Vatter 1985, 120) and many seeing a growth in earnings in spite of a wage control, since the extra earnings came from overtime (Babson 1999, 120). Finance It is difficult to overstate the impact of the war on national finances while New Deal measures left the country with a debt of that was about forty three percent of the GNP in 1940, that figure multiplied to 129 percent of th e GNP in 1946. Why did the debt multiply? During the wartime period, federal fiscal policies were geared towards a capacity, 90 per cent in magnesium metal, 71 per cent in the manufacture of air craft and ultimately, such spending meant that the government owned forty perce nt of the capital assents in the country by the end of the war (Hooks 1995, 37). This ownership would have large
20 implications for the post war reconversion process and government relations with business. This growth in government expenditures was paid for by a rise in taxes and more issued debt (Ohanian 1997, 25). The changes in taxes were immense, with rates both increasing and getting applied to a larger swath of people (Higgs 2007, 445) In 1945, forty three million people filed a tax return, while that figure in 1939 was only four million (US Treasury). There was also a change in how taxes were collected halfway the US tax system which has outlasted its initial beginn ing (Higgs 2007, 444). However, taxes only covered forty one to forty cost, with the rest made up by borrowing, leading to major growth in the national debt (Higgs 2007, 445, Vatter 1985, 106). This was owned by several sour ces; a major one was the public. The constraints on consumer spending imposed by rations and converted production meant that people were saving at higher levels than before (Vatter 1985, 108). t a fifth of the debt with savings bonds (Vatter 1985, 106). The Federal Reserve also bought savings bonds, twenty billion dollars worth, and helped promote more bond purchases by adopting policies which increased credit and money availability, which in tu rn increased demand for bonds (Higgs 2007, 445).
21 Post War Preparations and Anticipated Issues Planning for the end of the war happened even before people knew when it would actually end forecasts in 1941 had to be based on assumed end dates (Cairncross and Watts 1989, 70). By late 1944, though, a victorious end to the war was foreseen by both Great Britain and the United States, and both had plans and problems that victory would bring. In Great Britain, the economic advisors hired by the government ma de an outline of four broad areas that the post war environment would make urgent: 1) unemployment, distribution of income, 3) post war industry and what it would look like an d 4) re establishing trading and international finance (Cairncross and Watts 1989, 70). The future of the first two areas was heavily colored by the Beveridge Report, released in 1942, which planned for the post war with an eye on societal benefit the foun dations for the ive health and 1969, 349). Clearly, these would be measures that would require a substantial amount of money; however, with eighty six percent of the public supporting the plan at the time it came out, British citizens were less worried about the costs than Treasury officials and the ruling Conservative politicians (Hoover 2003, 124), setting the stage for the Labour government victory in 1945.
22 The other major British concern for the immediate post war period was the state of their balance of payments. Given the cessation of consumer exports and military face an intractable balance of p ayments problem involving a need for tight control of state with an overhanging imports/exports crisis thus implied a British post war economy that would still be contro lled; to what extent, it remained to be seen, but continued government presence was taken for granted. The United States had a general consensus in the state of certain areas after the war, with many leaders promoting policies which included: 1) maintain ing prosperity in a less government controlled economy, 2) maintaining high employment levels, and 3) extending the social security system (Brownlow 1944, 310 1). The manner in which people wanted to achieve these aims often differed due to ideology though The New Deal successors in the OPA felt that the combination of major savings on the part of consumers combined with demand for restricted goods (which would no longer be restricted with the end of the war) would lead to inflationary pressures on the eco nomy if prices were suddenly left up to the market; as a result, they suggested maintenance of controls through peacetime, with their eventual removal coming gradually (Bartels 1983, 24). The more business oriented WPB, however, was looking towards rapid removal of controls, ostensibly to prevent a post war recession (Bartels 1983, 24); since they were
23 enforced at the whims of the WPB, and the struggle between the two resp ective policies would largely impact the demobilizing US consumer economy. The future aims of Great Britain and the US also included large roles for each other. Many of the future policies of Britain would be dependant on US action, since the US was thei r largest creditor and the imbalance of American dollars was a major source of trouble. However, the two countries also worked together in creating a vision for the rest of the post war world. The largest example of this was the conference at Bretton Woods held in July 1944; a multinational conference, representatives from the US and Great Britain took the lead in creating the framework for a new worldwide economic system, establishing both the International Monetary Fund and the International Bank for Rec private i With the future planned for as well as it could be, both countries anticipated the end of the war and the dawn of a new era.
24 Chapter 2: The Demobilization of People and Labor The General Economic Issue Each country anticipated similar labor problems with the end of the war. The movement of millions of men in the military back into the civilian labor force meant that the labor supply would increase without anyone being able to anticipate how the labor demand would re act to this increase. One situation could be like the one illustrated by figure 1(a), where the civilian workforce expands to accommodate the new labor, but at the expense of higher wages. Another feared situation was that because of the sticky wage theory unemployed; given both countries experiences with unemployment during the depression, this was an outcome they were keen to avoid. Additionally, members of the military going back into private employment would only be part of a larger drop in government expenditure. Not only would these
25 individuals stop getting paid by the government, but the military focused industrial output that employed eleven million (Higgs 2006, 111) would cea se production, putting those people out of work and lowering government expenditure even further. There was a possibility that this would reduce demand for labor, exacerbating the potential for large unemployment. The British Experience The end of the wa r left workers in a strong position, with a newly elected government that ran on a platform which included the continuation of worker protections as well as the creation of a stronger social safety net. The manifesto of the anticipated strengthened welfare state, the Beveridge Report, included full employment as one of the goals of post war Great Britain. However, how the state would execute this was still unclear the Labour party, prior to their landslide victory, ideologically favored so called market capitalism so abundant throughout the 1920s and 30s (Brooke 1991, 687). The Labour government found this hard to apply in practice, with the strengthened union s unwilling to concede on their ability to collectively bargain (Brooke 1991, 692). This meant that for labor management, the government increasingly favored the 701). Socialis t planning and Keynesian labor policies had to co exist during reconversion, with mixed results. Further complicating the situation was a changing conception of nationality, with new additions to the labor pool not only evaluated on the skills they possess
26 The Changing Labor Pool The promises of the newly elected Labour government made full employment one of the top priorities for the reconverting society, a difficult problem to solve in peacetime, but one that they had to address with about five million men in military service and around three and a half million workers in war industries (Pollard 391, 1969). The British proved remarkably successful in this aspect, with worker sh ortages in certain industries becoming a more pressing problem than unemployment, which hovered near two percent. With a total labor force of about twenty one and a half million men and women in June 1945, this meant that nearly forty percent of manpower of the country was employed by war (Miller 1946, 183). In releasing people from military service, providing a labor source suitable for controlled economic recon struction, and satisfying tiered system was developed before D Day where armed service members would be divided up into two groups, the larger one released through a combination of age and length of service, and the other through their previous employment (and presumed return) in labor scarce industries like construction and coal mining (Pope 1995, 69). This strategy was mostly successful, with a large number of people released in an orderly fashion, b ut also with directed second smaller group releases largely ineffectual. The disincentives to prevent abuse, such as shorter paid leave and the easier terms on which they could be recalled to service (Pope 1995, 69), did not encourage servicemen to apply f or the accelerated discharge, and many of the men who were discharged as miners and agricultural workers went to other industries (Pope 1995, 77). However, the much
27 larger group was released with fewer problems, and by December 1946, 4.25 million men were out of the armed forces (Pope 1995, 75). The civilian labor market that the newly released faced was vastly different from the one they left; where before the British worker faced unemployment of at least ten percent from 1921 on until the start of the war (Reubens 1945, 206), the average unemployment for 1945 was 135,000, increasing with the end of the war but nowhere near the constant group of a jobless one million (Cole 1957, 53). There were also different people employed new people had to ent er the market as workers to replace those leaving as soldiers, and the bulk of the new workers were women previously not in the labor pool. While there was already high labor participation from single women prior to the war (Joshi, Layard and Owen 1985, S1 51), much of the growth in female employment during the war came from increased participation from married women, (Summerfield 1983, 249). Many of these married wom en had children, and the state responded accordingly by 1943 there were 1,450 public nurseries providing care for newborns to five year olds (Smith 1984, 940). However, while the Ministry of Labour authorized the measure as a way to get more people working the Ministry of Health was responsible for creating and end to the state nurseries 941), with their number declining to 879. In addition to fewer child care services, women were also discouraged from
28 staying in the workforce because of wages the lucrative munitions industry effectively engineering sector, where nearly half a million women were fired between the end of the war and 1946 (Pollard 352, 1969). The same issue repeated itself in situations where women did work comparable to men (and received according higher wages); many were rk for about one shortages in particular industries would continue, and the state faced a challenge in trying to retain and attract female workers to critically underemployed industries. It seemed that the government labor needs were at odds with the aims of private industry and trade unions, who both feared the competition women posed to returning male workers a nd encouraged their leaving. Sometimes, government policy in other areas conflicted with labor aims. At odds with the labor shortage in Great Britain, the government in this time allowed many of their most economically productive citizens to resettle thro ughout the empire in the interests of strengthening the bonds of the colonies to the home country (Paul 1997, 26). This would not only ensure the importance of the metropole in the increasingly self h prestige in the face of the more powerful and populous US and USSR (Paul 1997, 29). This cause was sometimes served at the cost of practical domestic needs for 1948, for instance, nearly half the men who
29 illed mining, building, or engineering The state's responses to labor shortages were varied. While during the war the government was able to rely on the Essential Work Order to direct wo rkers to areas where they were most needed, the end of the war was supposed to bring back choice and freedom for civilians, and the continuation of such controls did not seem tenable in peacetime. Instead, the government, by encouraging the export sectors of manufacturing and the consequent job availability in those areas, had a hand in directing employment, but not totally controlling it. Industries that reaped the benefits of the export drive were the automotive industry, responsible for more than half of (Kynaston 2008, 485) and the engineering and electrical goods sector (Cole 1957, 48). However, in an area such as housing, with many people unable to return to damaged homes, the government took a more direct hand, being respon sible for the construction of over six hundred thousand new houses by 1950, and the attendant employment of people in the construction industry (Cole 1957, 360). Another response was to import labor from the Continent. The Foreign Labour Committee, formed in February 1946, was put in charge of the effort and began by tapping the pool of Poles supported by Britain during the war (Paul 1997, 68). By the end of 1949, between 120,000 and 125,000 Polish veterans and their families were living in Britain, and the se immigrants were aided by the government in settling down through measures like the Polish Resettlement Corps and the Polish Resettlement Act (Paul 1997, 68). These government actions meant that the state not only matched them with civilian jobs (ideally in the industries experiencing labor shortages) (Paul 1997, 68), but also tried
30 to the national insurance program and unemployment benefits even as non citizens and by convincing labor unions to not view them as a threat (Paul 1997, 81). In these efforts, the state was intervening to protect a new group of people of its own introduction, where the people were selected for both labor skill and for their perceived suit ability as future programs put in place to bring them in from Eastern Europe, Italy and the Baltic area, as well as accepting some already present former prisoners of wa r from Germany and Italy for permanent residency (Paul 1997, 78). In total, around 345,000 were recruited by the Atlee government (Paul 1997, 78). This meant that hundreds of thousands of people were available to fill in for labor shortages. When it came to the non Polish recruits, the government felt that they would be able to more readily control their movements. This started with their selection to enter the country in the first place, with applicants who were disabled, older or with dependants dismisse d (Paul 1997, 80), but also when they were in the country, since one of the conditions for admission was to register with the Ministry of Labour to get assigned a job, and to only change it with their approval (Paul 1997, 80). The intention was to direct t he new arrivals into the understaffed industries, and in this the government generally succeed, with over fifty thousand of the newcomers put into the undermanned agriculture sector between June 1947 and June 1948 (Paul 1997, 80). However, one area in wh ich the government continued to experience long term problems was the coal industry. Continuously plagued by unrest since the early twentieth
31 century, the previous world war saw a rapid decline in output per head and labor disputes following the quick remo val of government control. While the 1920s and 30s saw measures that indicated larger state oversight of the industry, with quotas and eventual government ownership of the unmined minerals, which pit owners would then be contracted to mine, the end of the Second World War and the election of the pro nationalization Labour party fast tracked the state ownership of the capital equipment and the management of the workers. While workers welcomed the change in owners, it was unfortunate that the offic ial changeover to government control on January 1, 1947, coincided with the coal shortage in the following weeks that effectively put the country at a standstill, illustrating the rgy coming from coal (Kynaston 2008, 188), the harsh winter and subsequent rise in need for heating competing with expanding industrial needs led to electricity being shut off for long periods of time and a reduction in transportation by the end of the mon th (Kynaston 2008, 190). The inability of industry to operate (from both lack of fuel and weather conditions) meant that the unemployment rate went from about 400,000 in January to more than 1.75 million in February (Kynaston 2008, 194). The com bination of extra shifts in the mines and government restrictions on electrical and gas use saw the population through to March, when the harsh conditions abated (Kynaston 2008, 194), but the event was a harsh reminder that the continued maintenance of the country was dependent on a money losing industry that needed to be funded by the government.
32 fewer miners entering or returning to the pits than needed and their ability to demand that while reassuring the miners and making them feel better about their work, cost more compared to the money coming in. One labor pool left untapped in this time period was that of the Commonwealth citizen. With an imperial population of 650 million (Paul 1997, 24), the shared British subject status entitled any of the m to freely go to Great Britain to live and work (Paul 1997, 16). However, the arrival of nearly five hundred Jamaican men to London in 1948 was enough to disturb the government greatly, even though the migrants had every right to free imperial movement (P aul 1997, 112). The euphemism applied to them was indicative of how the state wanted to portray them recruits (Paul 1997, 85). Afterwards, con fronting the idea of bringing in more colonial citizens, the Ministry of Labour went so far as to downplay their labor shortages; they also denied the would be migrants suitability for the work along racial lines, claiming n the colder weather (Paul 1997, 123). In short, the state tried to deny many of their own citizens the opportunity to come to what they saw as their motherland, spending millions of dollars instead to bring in more acceptable white labor whatever the bure aucratic cost. As a result, from 1948 to 1952, only about one thousand to two thousand people annually came from the colonies (Paul 1997, 132).
33 The American Experience Discharging American soldiers from the military had massive implications for the (Patterson 13, 1997). The desire for soldiers and civilians for a rapid demobilization had to be measured against the need to retain more than one million men fo r peacekeeping in Europe and Asia (Flynn 1993, 91). Including those working in military dependent industries, the number of people working in and for the armed forces goes to over twenty five million people in 1945, a figure reduced to little over three mi llion (or five percent of the labor force) in 1947 (Higgs 2006, 111). Some space for returning men was found in the exit of women from the labor force, which did not affect all women equally. Like in Great Britain, the federal government funded a child care program for women with children in order to hire them in undermanned war industries (Riley 1994, 663), and cut off funding at the end of the war, making it extremely difficult for these women to continue working in these jobs and instead makin g leaving the labor pool the more desirable choice. However, this would not be a barrier for women who were already working prior to the war; nearly half the married women 35 64 working in 1940 (before the US officially joined the war effort) worked throug h 1944 to 1950, indicating that while the growth in female employment rates did introduce new populations to work outside the home, the women that ended up staying after the war were largely not new to being wage earners (Goldin 1991, 746). Additionally, w omen already present in the labor pool before the war tended to have more education and fewer children than the women joining later, making them more desirable employees from the point of view of the employer (Goldin 1991, 750).
34 Demobilization i n America had effects beyond just introducing millions more to the labor pool. In regard to race, disproportionately more black people served than were in the population, with one million in the military between 1942 and 1945 (Patterson 22, 1997). The expe rience, while mixed since they were mostly still segregated and barred from officer positions, still sharpened the desire for returning servicemen for more equitable treatment in America. The experience of white women was, to a lesser extent, mirrored by b lack women, who were able to shift to higher paying industrial jobs in metals, chemicals and rubber industries to a peak of 150,000 in 1945 (Patterson 33, 1997). Government measures also had the effect of removing men from the labor pool. Largel y through the GI Bill, which funded part if not all of further education costs, in addition to a living stipend, enrollment in college in 1946 was at two million, up fifty r about seventy percent of all male enrollment in the years after V Turner 2002, 785). Not only did this take a significant amount of people out of the labor force while they were in school, it also changed their long term empl oyment prospects, where they and technical education, with men who served in the military having higher graduation rates than those who did not (Bound and Turner 2002, 786). Ultimately, 7.8 million World War II veterans took advantage of this legislation (JBHE 2003, 36), which amounted to about twelve percent of the working population in 1950. These benefits did not extend to all groups equally. With over a mi llion black men
35 serving in World War II, it was notable that the bill itself had no race barriers included in it (Turner and Bound 2003, 148). In practice though, existing racial exclusions made it difficult for them to use, with the smaller historically b lack colleges in the segregated South having less space to admit all the veterans who wanted to enroll, and with very few offering postbaccalaureate programs (Turner and Bound 2003, 153). Not only was it harder to enroll in college, those still in the Sout h "also had a particularly difficult time gaining access to vocational and on the job training programs" (Turner and Bound 2003, 171). The systemic denial of not only the educational opportunities promised by the bill but also the more favorable loan rates their veteran status accorded them meant that while the white middle class was able to expand and get new members, "the black middle class failed to keep pace" (JBHE 1994, 106). This kept them from being able to change their human capital as easily as whi te veterans were able to. Union Demands By the end of the war, nearly twenty two percent of workers in the U.S. were represented by unions; union members also made up nearly a third of non agricultural employment (Patterson 1997, 40). However, their experience was harder than organized labor in Great Britain, which had their party leading the government. In the U.S., the immediate post lt keenly (Patterson 41, 1997). The area especially troubling them were wages, with the working class getting paid seventy percent of the salary full time employees received. Unionized workers responded by striking, which involved nearly two mill ion people in 1946 (Patterson 43, 1997).
36 Against the advice of the Office of Price Administration, which wanted to avoid an inflationary spiral, wages were increased to keep up with inflation (Patterson 44, 1997). One area the unions did not make gains in was management and input to the corporations where they worked; while a listened to voice during the war, the post war period saw the reversion to company dominance in company union relations, with unions accepting automatic inflationary wage adjustments i strikes (Patterson 45, 1997). This also had the effect of exacerbating existing inequalities amongst industrial workers, with the non unionized worker (often female, non skilled and/or non white) unable to gain a ccess to the clauses in these contracts (Patterson 45, 1997). Additionally, the social welfare programs being established in Great Britain by the government were increasingly being provided by private companies in the United States, with labor c ontracts adding benefits like health insurance, paid vacations and pensions (Patterson 45, 1997). The responsibility for social welfare, while still augmented by Social Security and the coming GI Bill, was largely being shifted to private industry as well. The worsening relationship with labor was also an issue with the government. Truman was unsupportive of the strikes in 1946; in May, he threatened the striking railroad workers with a proposed law to force them to work as military draftees, sig naling his intentions to not capitulate, and, if anything, make conditions worse (Patterson 48, still sent a disturbing message to organized labor. Later that year when the coal miners went on strike against a court order, and with the government effectively acting as their
37 employer, the union was fined over three million dollars. The judge described the strikes as evil and demonic, and predicted that future govern ment capitulations would lead to it sabotaged by racial prejudice. When both the AFL and CIO tried to enter the traditionally anti union South, not only did anti unionists link them to desegregation efforts, but existing white steel unions often rejected black efforts to join (Patterson 53, 1997). The disintegrating relationship became codified through the Taft Hartley Act, a bill passed into law in mid 1947, where it legally li mited the types of strikes unions were allowed to instigate, as well as allowing non union workers to join union shops, undermining the strength a strike could have had with everyone participating. Although Truman expressed some interest in repealing it, t he act was eventually left alone, a bane to the American labor movement (Taft 1964, 590). Even though it still, to some extent, preserved a status quo when it came to the reach of the unions (instead seemingly slowing their growth more), it did also illust rate the beginnings of the Cold War, where they required union officers sign affidavits pledging they were never a Communist Party member (Babson 1999, 130). Comparing the Experiences In both countries, the fears of mass unemployment were left unmet; with Great Britain remembering that the post World War I unemployment rate stayed around 20% throughout the 1920s, and both still so close to the depression, finding men jobs in a rapidly shifting labor market was a state priority. Both countries we re in a fortunate position for employment growth; while Great Britain suffered much more wartime damage than the US, and though both countries suffered a loss of capital (by wearing out
38 equipment), the pent up demand of choice strapped civilians would prov ide consumers for the manufacturing sectors. Even the process of rebuilding itself would allow Great Britain to provide jobs, hiring men to construct homes and repair infrastructure. Given the destruction in Continental Europe, their ability to export g oods also provided another outlet for produc tion. As shown in figure 1(b), t he shift in demand for civilian goods managed to increase the demand for labor and made up for the drop in government spending. The target of full employment plus the pre eminence of Keynes in Great Britain meant that his strategy of deficit spending, where government money pumped into the economy would increase the aggregate demand of the consumer through the multiplier effect, which would then encourage production to sat isfy the consumer (Barnett 1987, 259). This shows a clear shift where full employment is seen as more desirable than a balanced budget, where before a balanced budget was the aim (Barnett 1987, 258). The US also had low levels of unemployment, g oing from 1.9% of the civilian
39 labor force in 1945 to 3.9% in 1947. In both the US and Great Britain, the ability to provide many men with jobs came at the expense of newly introduced women into the labor pool, who promptly left or were forced out, leavin g their labor participation rates largely unchanged from before the war. With married women with husbands as one of the largest groups to be targeted in the labor efforts, the return of their husbands meant that women who worked were again largely represen ted by either young, single woman or lower income households who needed to add to the income (Higgs 2006, 111). Sharing the same unemployment goal and achieving it in this short time frame, how did the two countries need to go about it differentl y? For one, workers would have to want to work somewhere, given the general scarcity of labor. Their upper hand in choosing employment meant that employers had to acquiesce to worker demands more often, to a further extent in Great Britain than the U.S. In some industries, this had effects beyond the monetary. In the mining industries, for instance, the government funded installations of baths in the pits led to what the miners felt was a destigmatization of themselves since they weren't as easily identif ied as miners now that they could wash themselves off, leading to higher self confidence (Jencks 1967, 305). Much of the change in workers' benefits came as a result of organized labor agitation, but this was received in the two countries differently. In the US, the declining relationship between unions and the New Deal Democrats after the war coincided with a Congress in 1946. In Great Britain, on the other hand, the par ty in power was the one that represented unions, and one that long before the war envisioned a Britain of more worker representation in industry and that dreamt of nationalizing certain industries, already
40 assuming more government involvement in day to day life even before the war made that a normal response. Unfortunately, in both countries, the aspiration to fuller benefits and a larger voice on the job often only applied to a certain type of worker. The US and Great Britain each saw women pushed out of the workforce, to the extent that the gains they made from the war did not last and did not lead either to a change in how many were hired nor a change in what kind of jobs they would be considered for. As shown in figure 1(c), much of the In the US, the promise of opportunity symbolized by the GI Bill could only be pushed so far by black veterans; while the bill itself did not exclude them from using it, the practices of the day made it much harder for them to gain from educational or
41 been easier to invite the black and Asian British subjects who already had British citizenship and who al ready knew English and knowledge of British culture into the country to work, their perceived unsuitability based around their race kept them from taking advantage of an open job market.
42 Chapter 3: Controls and Rationing The General Ec onomic Issue During the war, both countries had experience with government management in output and consumption, with both countries prioritizing raw materials and factory space for war equipment, at the expense of consumer goods. The need to manage produ ction, prices and wages led to extensive government involvement in issuing controls in many areas, in the attempt to provide for personnel in the war theaters as well as civilians in the home front without anyone getting priced out of the market. The end o f the war presumably brought the end of practical restrictions on civilian goods; however, the process of reconverting factories and production to non war consumption necessitated continued government involvement in allocating raw materials and setting pri ces in order to ease the transition.
43 In figure 2(a), the price set by the price control is under the equilibrium that would have been reached without it. While it does keep the price down, it also changes the quantity traded, with Q1 sold instead of t he equilibrium Q2, causing shortages. However, government planners found shortages and the extra bureaucracy involved in maintaining controls and rations a more favorable situation than certain people not getting a share of needed goods, or materials that the war industry needed instead going to civilian production. Undoing price controls would cause prices to move up to their equilibrium level, P2 in figure 2(a). Removing price controls in both countries would be affected by the accumulation in wea lth by consumers, limited in what they were able to spend during the war. This increase in wealth would be expressed as a rightward shift in the demand curve, shown in figure 2(b). Keeping the supply curve the same, this would cause both a rise in
44 prices a nd a rise in the quantity sold, inflationary pressures both countries would want to contain. Depending on the magnitude of the shift, prices for goods could quickly escalate. However, figure 2(b) assumes the supply curve is upward sloping. This situa tion was not entirely true for Great Britain much of their capital stock was either destroyed in bombing raids or run down, leaving certain sellers unable to meet consumer demand. In figure 2(c), this is exaggerated with a perfectly inelastic supply curve, where even in the face of increased consumer demand, supply is unable to increase, leading to only higher prices without an increase in quantity sold. The inflationary pressure, while present in both countries, would be larger Great Britain in this situat ion. The US Experience The end of the war put the big business sympathetic War Production Board and the consumer protective Office of Price Administration in stark opposition while during the war the two had to work together, the end of the war made clear the different ways
45 they wanted to proceed. The WPB, instead of continued government planning, favored a quick removal of price controls (Bernstein 1965, 244) while the OPA, headed by a New Deal holdover, favored maintaining controls and government involve ment as long as was felt necessary (Bernstein 1965, 245). The two approaches reflected the aims of the organizations; the OPA wanted to continue the anti inflation program it was charged with during the war, while the WPB aimed to encourage high employment with the impact on inflation as a secondary worry (Bernstein 1965, 248). Initially, the OPA had the popular support, with nearly three fourths of Americans agreeing in March 1946 that controls should continue (Jacobs 1997, 934). It also had the president ial support, with Truman going so far as to request a specific policy from the WPB that included limiting the quantity of manufactured goods that used scarce materials and requiring an allocated amount of materials to go to low value goods (Bernstein 1965, 250). This policy was willfully re interpreted by the head of the WPB as supporting their position and left unenforced by a preoccupied president, such that on August 20th, 1946, not even a week after Japan's surrender to the Allies, 210 control orders we re canceled by the WPB on durable goods like refrigerators, washing machines and vacuum cleaners (Bernstein 1965, 252). The controls at stake were varied. There were the straight forward price controls, where a maximum price was set for a commodity that s ellers could charge in order to ensure it could be affordable for everyone, instead of following the rules of a free market, where prices would rise in the face of higher demand or lower supply. There was also rationing, thought to reinforce the effect of price controls by controlling the amount
46 people could demand at any given time (Rockoff 1984, 131). One version of rationing, used mainly for food purchases, was the points system, where consumers were issued a certain number of points and then could use t hem to purchase any combination of price controlled foods that fell under that system. The other rationing method was the unit system, in which the issued ration ticket was specific to a good and could only be used for that item (Rockoff 1984, 132). Fallin g under the system of controls were those for wages as well, which were set in coordination between the OPA and National War Labor Board. The controls were ended at a time when civilians were ready to spend their hard saved dollars. The war saw the person al savings rate reach "extraordinary levels" (Higgs 2006, 108), getting as high as twenty five percent in 1944; by dropping the savings rate to 9.5% in 1946 and 4.3% in 1947, as well as receiving increases in income (Higgs 2006, 108), the American consumer was able to continue saving while still consuming billions of dollars worth of goods and services. The desire and ability to spend in conjunction with the removal of controls led to a situation that encouraged upward pressure on prices (Jacobs 1997, 936) ; for instance, removing quotas guaranteeing fabrics for cheaper clothing led to fabrics getting sold for higher end products, leading to a jump in clothing prices for the consumer (Bernstein 1965, 253). It wasn't only the consumer who suffered. While big ger businesses favored quicker removal of controls, smaller firms felt that taking them off suddenly would put them at a disadvantage when it came to competing for scarce resources. They felt this
47 could be nullified if they received special aid in obtainin g materials (Bernstein 1964, 249). No such aid was forthcoming, however, and the situation was typified by the state of steel suppliers, accused in June 1946 of "routing limited supplies only to their biggest customers" and ignoring the smaller firms that had operated during the war time (Bernstein 1965, 259). Changes in price setting were also politically influenced. Wanting to wait a few months after VJ day to readjust prices, the president of the OPA advised not to raise the prices on steel in order to accommodate labor demands for higher wages. The leader of the steelworkers union called for a strike, notably ending the wartime truce between labor unions and management. Changes in price setting were also politically influenced. Wanting to wait a few mon ths after VJ day to readjust prices, the president of the OPA advised not to raise the prices on steel in order to accommodate labor demands for higher wages. The leader of the steelworkers union called for a strike, notably ending the wartime truce betwee n labor unions and management. This came at the heels of other strikes in the oil and meat industries, but rather than seize steel mills (like the government did with packing plants and refineries), Truman chose to mediate between the unions and executives authorizing an 18.5 cent rise in wages and making that the new wage limit, an attempt to both mollify the union while ostensibly maintaining controls. The latter objective was a reflection of the OPA's eagerness to "exercise government power" (796), at odds with Truman's inclination to leave the industry alone. The strategy, although averting a strike in the vital steel industry, also angered some groups -the continued government involvement in wage setting threatened the labor
48 unions and their larger p ost war influence, while the capitulation to their demands angered farmers and others in agriculture, still constrained at the time by controls on what they could charge. The issue of agricultural controls proved especially complicated with the worldwide f ood supply situation. The American wheat yield at the end of the war was near the record high, and the country had "the greatest agricultural abundance" it had ever known (Bentley 1998, 142), but the man made devastation in Europe and Asia compounded with drought in agricultural areas of South America and no wet season in India (Bernstein 1964, 235) meant world wide crop failures. Before the end of the war, it was predicted there would be enough of an agricultural surplus to feed the hungry of the war torn regions, so government officials were looking forward to announcing the end of food rations, particularly those of meat, by the end of 1945 while still being able to send food abroad. The rationing of meat, fat and oil was ended by late November in the fac e of increasingly grim reports from Europe and Asia about the need for food (Bernstein 1964, 237), which grew worse into 1946 (Bentley 1998, 143). The end of rationing, however, meant that any increase in food sent overseas would have to be supplemented by voluntary restriction schemes such as meatless days of the week, which wound up having limited impact as American adherence to voluntary rationing proved tenuous at best; while polls indicated that nearly three fourths supported sending aid to Europe at t he cost of stateside shortages (Bentley 1998, 146), they also showed that less than a quarter of people asked actually followed the measures, with
49 nearly thirty percent admitting the difficulty of not eating meat for a day a week (Bentley 1998, 163). In a ddition to civilian reluctance to return to food restrictions, the government controls that were still present had a perverse incentive for farmers. Corn, subject to a price ceiling, proved to be more valuable as a way to feed American pigs than as a produ ct on the open market, and the shortage of corn meant that the other farmers dependent on corn for their animals had to turn to the more easily available wheat as feed (Bernstein 1964, 238). As with the steel industry, the OPA was hesitant to raise prices for fear of inflation pressures, but in this case, the idea of animals eating food that could go overseas to starving people instead compelled officials to raise prices regardless of the inflationary pressures. The price ceiling of corn was increased, mak ing it worth selling from the farmer's standpoint, and it could replace wheat as food for animals (Bernstein 1964, 240). There was a subsequent rise in prices for dairy products (the effect of the feed for cows getting more expensive); altogether, raising prices of corn had the effect of helping people overseas and "pushing the BLS index of retail foods from 139.6 in February to 145.6 in June" of 1946 (Bernstein 1964, 240), serving as another example of the loosening grip price control had on the country. The jump in the CPI of retail foods was part of the larger rise of the cost of living, up six percent, a result of the legislative efforts against controls. The act which would have extended the lifetime of the OPA came to President Truman as one that wo uld've weakened the board extensively; trying to express his displeasure and get a stronger one,
50 he vetoed the act, expecting a stronger one to come to him before the controls expired. None came, and the jump in prices on previously rationed items like mea t sent a shock to consumers, who protested those they saw as profiteers (Jacobs 1997, 938). These spurred Congress into reinstating controls, which provoked meat packers in particular into withholding their product from the market. The unavailability of meat for the consumer proved too much, and the previous support the OPA enjoyed (and, by extension, their vision for government involvement) declined as the meat drought wore on (Jacobs 1997, 939) With mid term elections coming up, Truman announced the end of meat controls in October, although unable to prevent a new Republican controlled Congress from getting elected, Republicans who used the continued shortages as part of their larger, anti government intervention platforms (Jacobs 1997, 940). While contr ols over rents, sugar and rice were maintained, the rest were officially ended on November 10, 1946 (Rockoff 1984, 108), fifteen months after the end of the war. In the retreat from direct government involvement, arguably positive state intervention was bu llied out by politics and business interests. The Bri tish Experience The more sustained and penetrating British government involvement during and after the war required a different magnitude of controls compared to the US, meaning that, while the instru ments were the same, they were applied at a different volume. For instance, price controls were held over all the items purchased and then re sold by the government, only in Britain's case, this meant that it affected fifty to sixty percent of consumer spe nding (Cairncross 1992, 68). Furthermore, they started to be de controlled
51 en masse in 1948 (as opposed to August 1945 in the US), and a few lasted until the early 50s (Cairncross 1992, 68). Price controls were particularly important because the campaign p romise of full employment after the war was "associated with varying degress of inflation" (Rogow 1955, 37), so they were part of a program to try and reduce overall consumption. Another prominent control was consumer rationing, which was implemented in Gr eat Britain in several ways: the rationing of specific items, the issuance of points and spending those (both like in the US, only with more items affected) and limits on the amount of money that could be spent (Cairncross 1992, 68). The last method was pa rticularly important to the British government, who were trying to find a way to keep track of the dollars and pounds in the country, and trying to find ways to make sure the former didn't leave the country. Consumer rationing was also at the service of a policy of trying to reestablish the export sector of the country, so in the case of things like pottery and fine carpets, goods made in Great Britain would have been accessable to foreign consumers while being "totally prohibited" from home consumption (Ro gow 1955, 31). One method of control more used in Great Britain than in the US was that of controls on investment. A far cry from the, at best, unbothered post war industries of America, industry and entrepreneurs in Great Britain were subject to the state 's allocation of steel and timber, as well as having to apply for building licenses for work that would cost more than £1,000 (Rogow 1955, 27).. This gave the government not only control over what got made, but where and for who; the welfare state had the opportunity to have input on the physical surroundings of the people it was supposed to serve. The controls
52 for aluminum, wool and rubber were abolished in 1947, while the ones for tin and cotton were gone by 1949. The control over investment wasn't all en compassing -the buying and selling of "plant, machinery, stocks and vehicles were practically unrestricted" (Rogow 1955, 27). As previously mentioned, another way to control the economy was through raw material allocation. With the exception of coal and s teel, other raw materials had to be imported to the island nation, and since the government was controlling the ships that did the importation, it essentially was the gatekeeper between new supplies and buyers; not only that, in 1946 "four fifths both of f ood and of raw material imports were on government account" (Cairncross 1992, 70). Where previously the government intervened in managing imports as a result of needing to most efficiently allocate limited shipping space between civilian and military needs the most pressing impetus for continued involvement in import management was the British balance of payments crisis. Imports not managed directly by government purchase were still subject to licensing by the state, with those involving dollars specifiyi ng the maximum amount allowed to be brought in within a certain time period, while non dollar imports were still expected to report to the Board of Trade (Rogow 1955, 30). The controls allowed for more imports from areas within the British sterling area an d were later expanded to include areas outside of it that still didn't use dollars; meanwhile, imports that needed to be paid in dollars were subject to varying levels of restriction, depending on the state of the balance of payments (Cairncross 1992, 71).
53 Wage controls, like in the US, proved to be a point of argument between government and labor, only the state of British industry complicated the discussions. The victory of the Labour Party allowed them to pursue their long term objective of nationalizati on of certain sectors: the Bank of England was taken over in 1946, the coal, gas and electricity generating industries following afterward, and rail, canal and long distance truck transport in 1948 (Cairncross 1992, 77). Unions still expressed their disapp roval of wage ceilings, but recognizing that the entity with the power to control the wages was also, in the case of nationalized industries, their employer, they generally complied with government requests to not strike and to allow for the formation of b oards of arbitrators (Flexner 1948, 425). These arbitrators were instructed in early 1948 to be stricter in considering wage claims, only allowing higher wages in order to attract people to understaffed industries or in order to raise the worker out of po verty (Flexner 1948, 426). However, the strict controls did not extend to every personal income in the country, and the pressure of rising prices made the public demand more substantial wage increases, with the retail prices growing at a rate of nine perce nt versus the 8.7% of the weekly wage rate from 1945 1948. The gap grew again from 1948 50, with the weekly wage growing 4.5% against the the government control im plementation was stronger in Great Britain than in the US and unions more accommodating of government needs, they were still as reluctant as their American counterparts to give up the ability to negotiate for wages, even if a national wages policy meant a stronger government tool in trying to fight inflation (Rogow 1955, 40).
54 Business influence over government policy wasn't just limited to America, either; a contributing reason why workers demanded higher wages was because they needed to cope with already high prices, established by government boards, but government boards advised by trade associations, who had their members' interests at heart (Rogow 1955, 68). Again, economic considerations were sometimes subordinate to political ones. The political cons iderations weren't always domestic, either -the eventual first "bonfire" of controls occurred in November 1948, ending or lessening restrictions on many commodities and manufactured goods, and reducing the need to issue an annual 200,000 licenses and perm its (Rogow 1955, 41). This mass government withdrawl from the market came as a result of a growing American influence in British government, one that "strongly emphasized the need for more competition and less regulation" (Brett, Gilliatt and Pople 1982, 1 38). contributed to the eventual exit from extensive planning, doubts stoked by events like the coal crisis of 1946 1947 (Rogow 1955, 43). The wage policy which emphasized not rapidly increasing wages had a large exception: coal mining. The industry had only 626,000 workers employed, down from the 700,000 of the war and the million plus of the late 1920s (Stamp 1948, 181). The experience of long term unemployment and mass pover ty the Labour government had promised to avoid stuck in the collective memory of miners, who discouraged sons from taking up the job (Stamp 1948, 181). Increases in wages which outstripped the increases in other occupations still weren't enough to tempt me n underground (Stamp 1948, 181), so that by the time the unusually cold winter of
55 1946 47 came, Britain, with immense coal reserves, found itself importing the fuel for want of workers (Stamp 1948, 192). Not only did this cost dollars, but Britain missed o ut on goods it could have received in exchange for coal if it were able to export (Cole 1957, 133). An indirect government control that still had income impact was in the agricultural sector. While civilians were subject to rationing in their food choices, with controls lasting until 1954 in the case of butter, cheese and meat (Cairncross 1992, 68), they were also affected by the food subsidies continued from their wartime introduction. Worth £400 million in 1948, they played a major part in keeping the inf lationary wage increases down by keeping the prices of some foods down (Cairncross 1992, 62). But even then, they still "could be attacked as contributing to the high taxation" which hit high income earners the most, reducing their incentives (Pollard 1969 371). Differences in their Experiences Although both countries had unprecedented government involvement with the market and economy that exceeded anything they had ever implemented, they each still drew from previous experiences in both World War I and m anaging the depression and referred to those when determining what the priorities would be in addressing the post war economy. In Great Britain's case, the First World War experience of immediately removing controls led to inflation that increased rapidly and, more importantly to the government in power, years of high unemployment and depressed wages for the working class (Pollard 1969, 365). This made them publicly emphasize their commitment to ensuring "a high and stable level of employment," even though in practice, the
56 employment problem turned out to be having too small a labor pool (Cairncross 1992, 59), with many jobs going unfilled. The excess demand in several areas (workers, commodities, etc) led to inflationary pressures in Great Britain, seeing a three percent rise from 1945 to 1946, and then a rise of 11.6% in 1947. In addition to these economic expectations, the Labour government was also elected by presenting an idea of a revolutionized Great Britain, one faithful to the 'Welfare State' vision outlined by the wartime Beveridge Report. British citizens, living with the reality of war at their doorstop, and the government presence necessary to combat it, essentially approved of an expansion of the government role in day to day peacetime life, end orsing the unification and enlargement of social services that had been available before but unorganized (Cairncross 1992, 79). The centerpiece of the new plan was the "compulsory and universal" national insurance program, which provided for unemployment benefits, sickness benefits and pensions for retirees and dependents of deceased workers (Pollard 1969, 400). Benefits associated with the program but not paid out of the national insurance were family allowances and work injury compensation (Pollard 1969, 400). While not directly a control, the high taxes necessary to pay for the new services also acted as a disinflation measure by reducing the money people had, and consequently, lessening the demand pressures on the economy (Pollard 1969, 367). In this si tuation, the government was trying to avoid a balanced budget multiplier, where the combined effects of the tax ated. Instead, the high taxes
57 (avoiding rapid inflation). In the US, continued controls were starting to take on ideological overtones. Expecting the war to be over later, the abrupt end left policy planners scrambling (Jacobs 1997, 935), with somewhat of a free for all in who could get their vision implemented. The New Deal inspired OPA stood in contrast to the more hands off WPB, and despite initial wide support, the forme r lost the PR battle with the latter's supporters (manufacturers and processors) withholding pork and chicken from the market and implying it was a cause of OPA meddling (Rockoff 1984, 106). This tactic largely worked, and consumers felt let down by the g overnment board's inability to do what it said it would do, protect prices for the common person (Jacobs 1997, 939). The perceived failure of controls in providing goods to the market combined with the cooling relations with the former war ally, the USSR; in this new era, "the word planning acquired ideological overtones" (Galbraith 1967, 22). Even before the end of the war, there was a trend towards conservatism that FDR recognized by choosing Truman as his running mate in 1944 instead of a more liberal c andidate (Adams 1994, 143), a trend enhanced by the growing post war tensions between the US and the Soviet Union. In this atmosphere, a rejection of a New Deal holdover office directly involved in the market read not only as the public choosing a "control free prosperity" (Jacobs 1997, 940), but less overt government involvement in the market.
58 Chapter 4: Financing in the Post war Period The General Economic Issue The end of the war also saw the end of government spending for the war, spending that saw th e U.S. and Great Britain go into unprecedented government debt. While both owed vast sums of money, each were in a different position to pay it back damage inflicted on their capacity to produce. Great Britain entered the post war with a serious balance of payments deficit, since the need to produce for their war effort overtook their export industries which previously maintained their current account (the sum of expor t minus imports, investment income and transfer payments) at healthy levels. According to macroeconomic theory, one way to correct this would be by using monetary policy to raise interest rates, as shown in figure 3(c) with the shift from r1 to r0, which w ould have attracted foreign capital to the country. The increased demand for pounds resulting from the increased demand for British assets by foreigners would help alleviate the BOP deficit. However, it would also be a reduction in the output of the coun try, which would imply a reduction in British employment, something the government wanted to avoid.
59 Another way to correct this deficit would be by promoting exports. An increase in exports, like in figure 4(b), would both increase the IS curve from IS1 to IS2 by promoting growth in income for the people hired to produce the exports, and cause a rise in the BP curve from BP1 to BP2, since the export rise would be reflected in the current accounts.
60 As it turned out, the British government woul d pursue a policy encouraging exports (the second scenario) while not pursuing a policy of higher interest rates in the immediate post thorities in home building efforts, as well as in industries that had become newly nationalized (Pollard 1969, 368).
61 The British Experience With the war over, Great Britain saw the current account deficit on the balance of payments equal almost £10 billio n (Cairncross 1992, 47); while £6.7 billion was covered by lend lease arrangements with the US, the suspension of fighting also saw the suspension of lend lease aid, an unpleasant development for the British government, which did not expect such a sudden e nd to the program. Since the war effort redirected production to armaments, the export dependent country saw its ability to manufacture and ship commodities to other nations drop, while still needing to maintain a certain level of imports to provide for th e population (Pollard 1969, 357); this production decline, combined with the need to sell one fourth of overseas investments during the war (which totaled £1.2 billion and a loss of £100 million in revenue) meant that the British balance of payments had a large current account deficit that would only get larger in the short term as armament production stopped and reconverted to consumer production, meaning the British would in an import only position. Great Britain was indebted to several different areas. M oney not owed to the US was overwhelmingly owed to areas like India and Egypt, countries part of the Commonwealth and which used the pound sterling as currency. The fluidity of borrowing within the Commonwealth went the other way as well -the Bank of Engl and also held reserves for the other members of the sterling area, allowing them to deposit and withdraw not only pound sterling, but also dollars and gold (Cairncross 1992, 56). However, with the US, and to an extent, Canada, as the only industrialized co untries in a
62 position to provide mass exports, the required currency was dollars, precipitating a world wide dollar shortage that Great Britain was not spared from. The combination of the need for imports and dwindling dollar reserves motivated the British to ask the US for a loan (£1.25 billion), calculated to tide them over three to five years until they were capable of increasing exports by 75% over the pre war level, the estimated target where they thought they could meet the balance of payments deficit and build up the gold and dollar reserves (Pollard 1969, 357). The US gave them credit for up to $3.75 billion with an additional $650 million to pay for lend lease debts, with the important provision they adopt the Bretton Woods agreement stipulations a year after getting the loan, instead of the five years originally agreed to (Pollard 1969, 357). The provisions meant a shift in exchange rate regimes for Great Britain. In 1931, when the pressures of the gold outflow from the Great Depression spurred the government into abandoning the internationally used gold standard (Pollard 1969, 228), the British state had followed a floating exchange rate, where the could change without government or central bank intervention. This proved to be somewhat stable throu gh the 1930s, with the pound exchanging at nearly five dollars, but the building European conflict and the need to fund the war effort meant that the pound again followed a fixed exchange rate from 1940, with the official rate being $4.03 for every pound. However, this official rate was undermined by an exchange rate black market (Cole 1957, 173), which suggests that government pegged the pound at too high a value. While the provisions meant that Great Britain would go from one fixed rate regime to another it still proved to be a major problem for the nation. The Bretton Woods
63 agreements, negotiated between the U.S. and Great Britain and agreed to by more than forty other countries in July 1944, established a post war financial regime that would include fr eer trade and fixed exchange rates centered on the US dollar and gold reserves. This essentially made the dollar the "world's reserve currency", with the US as "the lender of last resort" (Schroter 2005, 46). With many countries needing to rebuild after wa rtime destruction and sustain their populaces, and with the US as the main source of exports for raw materials and food (although Canada exported as well), there was an international scramble for scarce dollars to pay for needed goods (Cairncross 1992, 50) This shortage was not felt deeply initially due to programs such as the United Nations Relief and Reconstruction Administration, which distributed around $1.5 billion to war damaged Europe, and an additional $500 million worth of supplies to civilians i n 1946 alone, the former representing dollars that could be left in reserves and the latter goods that would not have to be bought. However, with the loan granted in July 1946, the adoption of Bretton Woods standards meant that July 15, 1947, was when the new conversion standards had to be applied. This meant that the pound sterling, established at the exchange of one pound to $4.03 in 1940, would be able to be traded into dollars without restriction by civilians and industry, with the Bretton Woods standa rds in turn pegging the American dollar to thirty two dollars per ounce of gold. With the Bank of England holding reserves accessible to not only Great Britain but all of the sterling using area, the world wide dollar shortage spurred the other areas into converting their sterling into the more useful dollars when the switch to Bretton Woods standards made that possible. The situation was also
64 exacerbated by the provision of non discriminatory importation, a direct hit on the British practice of favoring im ports from the sterling area (and paying in sterling) as opposed to other areas, particularly ones that needed to be paid in dollars (Cairncross 1992, 53). The rapid loss in reserves was so worrisome that restrictions were put back in place on August 20th, a rapid refutation of the financial liberalization policies the conference set out to establish. Even with this effort to stem the outward flow of dollars, the gold and dollar reserves of Great Britain fell from nearly $2.7 billion at the end of 1946 to l ittle more than two billion dollars at the end of 1947, with a further plunge that saw the reserves hit 1.68 billion in 1949 (Cole 1957, 209). The outflow of dollars decreased the purchasing ability of Great Britain, and exemplified a new world where dolla rs and the American goods they purchased where more valued than the pound sterling and more easily available than British goods. The need to try to not only maintain the dollar and gold reserves but grow them meant that there was an export drive, and this was in turn encouraged by a growth in capital formation; this capital formation was meant to both increase the export capacity of Great Britain and replace the capital destroyed and worn down during the war. As a result, there was a steady growth in fixed capital formation in the immediate post war period, going from £905 million in 1946 to £1.17 billion in 1947, and increasing further in 1948, to £1.58 billion; it reached £1.67 billion in 1949 (Cole 1957, 118). This increase in capital investment initial ly coincided with a drop in government expenditure, but this should not suggest less government presence in the economy. For one, capital investment was often restricted by government controls in the form of
65 licenses and permits, which usually needed spons orship from government departments (Pollard 1969, 371); these restrictions were a result of the need to maintain control over the outflow of dollars, since heavy machinery and other capital investments were going to come from dollar areas. The restrictions also meant the government could direct investment in certain directions without it being public expenditure, by either granting a small amount of licenses for one use or a larger amount for another. For instance, they limited the amount of building licens es for shops and hotels while increasing the licenses for industrial buildings to the extent that industrial expansion occurred at a faster rate than it had in 1938 while the growth of shops and hotels stagnated compared to the same period of time (Rozen 1 963, 188). Not only did the state get involved with approving the ability to build, it also became involved in the ability of a firm or individual to access capital in the first place. Anyone applying for more than fifty thousand pounds worth of loans ove r a twelve month period would have to go before the Capital Issues Committee, which followed earning, import 1963, 189). Additionally, the vast government spending during the war m eant that its end would bring a large fall in government expenditure, but a fall centered around munitions production and other areas that the civilian population would not see; as a percentage of GDP, government expenditure fell from 58.8% in 1945 to 45.5 % in 1946, and down even further to 38.8% in 1947, declining more in 1948 and 1949. The growth the economy experienced obscured the changes in public expenditure though; while it did fall from
66 £2.29 billion in 1946 to £1.74 billion the following year, it s tarted going back up, reaching £1.97 billion in 1948 and £2.06 billion in 1949 (Cole 1957, 118). Obviously, with so much spending, the British government would need to look at its tax system to make sure they could generate appropriate revenue to try to of fset outlays. While the first budget of the new government included a cut from the high war time rates (Pollard 1969, 367), the need to deliver on the promise of an expanded welfare state soon overtook the tax cutting impulse to the extent that by 1949, 41 % of private income was taxed, compared to 24% in 1938 (Weaver 1950, 202). Of this money, half was used for "redistributive" expenditures, where the tax payer would be benefited with services such as food subsides and pensions (Weaver 1950, 202); little l ess than half was used for non redistributive expenditures such as paying down the public debt's interest and maintaining the national defense (Weaver 1950, 202), with the small leftover kept as a surplus. The taxes were collected on individuals and corpor ations, with the former paying through income and consumption taxes, and the latter paying through taxes on profits and capital (Weaver 1950, 202). The taxes on individuals had different impacts. The income and property taxes were progressive, while the i ndirect taxes (which fell on consumption) were regressive and largely fell on the lower classes (Weaver 1950, 203). There was seemingly a balancing act between two aims of taxation: one was to pay for the increase in expenditures that would be redistribute d, like health care, while trying to clamp down on the inflationary pressures the depressed wartime consumption and subsequent pent up civilian demand caused (Weaver 1950, 206). While the lower classes felt the burden of
67 sales and item specific taxes more than the wealthy, they also were the biggest gainers from the beginning of an expanded welfare state and the increased access to education and health care (Weaver 1950, 206). The taxes on corporations spurred controversy between businessmen and government; during the war, the tax on both profits and excess profits had been large, with the latter reaching 100% in 1940 and lasting at that level until 1946 (Cole 1957, 292). When the excess profits tax was readjusted in 1947, it was to ten percent for undistrib uted profits and twenty five percent for distributed profits, which was later raised to thirty percent in 1949 in an effort to discourage dividends and encourage new investment from savings (Rogow 1955, 120). Combined with the need to go before a committee for large loans, private investments would have needed to be largely self financed if the firm wanted to minimize government involvement, or if the investment government was trying to direct the private sector towards a certain path of development. However, the Labour government's vision for Great Britain was often at odds with reality. One such situation was during the harsh winter of 1946 47, which stressed already low coal supplies to the extent that in February 1947, even after rationing for civilians and industry had been put in place, electricity was shut off for many industries fo r nearly the whole month. This caused an estimated loss of at least £100 million in needed exports (Cairncross 1992, 54), to say nothing of the people left idle and domestic consumption curtailed.
68 The country was also sensitive to changes in the American economy. The US recession in 1949, for instance, precipitated another balance of payments crisis; it coincided with the fall repayment of dollar purchases, which already weakened the value of the pound. The combination of the recession and the reduced doll ar exports as a result of the recession forced a devaluation of the pound in September, moving from $4.03 to $2.80 in another refutation of the Bretton Woods agreement (Pollard 1969, 361). The recession had the effect of exacerbating the balance of payment s situation, with the fall in exports leading not only to a reduction in income, but a reduction in the current account within the BP curve. The two combined, as shown in figure 5, would cause a deficit to get bigger. The movement of the later British economy is shown in figure 5. The US recession caused a drop in export demand, causing a shift from NX1 to NX2, which led
69 to the return of larger deficit in the balance of payments, shown in the movement from BP1 to BP2, with a corresponding drop in nation al income, with the movement from Y1 to Y2. The devaluation that followed made the British exports more attractive, causing the second shift from NX2 to NX1, with not only the balance of payments going from BP2 to BP1, but also the IS going from IS1 to IS2 with the national income rising to Y3. The American Experience The United States helped other countries financing their war effort, or at least the consequences of the war, with a series of programs that put dollars into other countries. In 1943, the countries who would later agree to adhere to the Bretton Woods standards established the United Nations Relief and Rehabilitation Administration (UNRRA) in order to help with rebuilding war ravaged countries when the war ended (Weintraub 1945, 1 ). An effort to avoid the aftermath of World War I, when peace had no prospect of future relief, this program meant a transfer of money and goods from countries that were not invaded into countries that were; this transfer was in the form of relief suppli es and services as well as help rebuilding public utilities (Weintraub 1945, 10). While there were contributions from multiple countries, that the contributions were pegged to one percent of the country's national income meant that the United States made t he biggest contribution, reporting little over $1.5 billion in UNRRA expenses in 1946, and $761 billion in 1947, when the program ended in June. Other unilateral international payments included the cost of supplies distributed to civilians through the military, which totaled little over three billion dollars by the middle of 1949. By this time though, the biggest program for giving Europe aid was the
70 European Recovery Plan, which would later be better known as the Marshall Plan. Also conceiv ed as a counter to the disorder that affected Europe after World War II, its approval by Congress was prompted by the severe winter of 1946 1947 (the same that disrupted Great Britain) and ensuing agricultural shortages combined with the anticipated end of UNRRA; the worry in the United States was that continued economic distress would lead the affected into the arms of communism (Schroter 2005, 47). Indeed, the grant was given on conditions that the recipients take steps to opening up their economies, enfo rced by the aid being sent in installments as the countries financially liberalized (Schroter 2005, 49). One fourth of the aid was set aside for Great Britain and one fifth was meant for France, with the rest going to fourteen countries (Schroter 2005, 48) Even with the dollar crisis affecting the world, a small amount of the aid sent was in dollars; however, what was sent was still effective, with food supplies maintaining the citizenry (and the labor pool) and raw materials allowing industries to start p roducing in order to get dollars and provide work (Schroter 2005, 48). In its first year, the Marshall Plan put $1.38 billion in Europe, and in 1949, this figure reached $3.7 billion. The issue of the scarcity of dollars was unique in the US in the sense t hat dollars were scarce for everyone else, while the US was in the position of being an export centered nation out of necessity to countries that had limited dollars with which to buy American goods. This was dealt with by the aforementioned grants and loa ns, which put what the US saw as more protectionist policies, with government subsidies to producers
71 who made goods that could be bought for dollars that would enter the country; there were also limits to what exports British manufacturers and civilians could buy with dollars, without there being any such limits to goods and services purchased in the pound sterling (Cairncross 1992, 70). However, the United States was exporter to make sure the future still had room for it to grow more, which accounts for the provisions in the Bretton Woods agreement guaranteeing loosening trade restrictions from countries participating. T he Marshall aid that came with restrictions was still accepted by desperate European countries, who complied with the stricter views of leftists, leading to the ban of the Communist party from running for election in France and the purge of Communists from the English civil service. The change in approach was not limited to proscribing behavior overseas. e British used to encourage specific decisions with their companies was repealed entirely in the US by the Revenue Act of 1945, which also lowered the corporate tax rate (Higgs 2006, 108) from 11.2% in 1945 to 9.5% in 1946. Contrary to the nationalizations and high taxes of Great Britain, the government not only tried to divest itself quickly of many assets, but it also wanted to return to more favorable conditions for business taxes. The decline in government income was coupled with a decline in spending t hat looked like the reverse of the crowding out effect. In the crowding out effect, an increase in government expenditure causes a decline in private investment, usually through things
72 like higher interest rates. However, in this situation, government expe nditure dropped from 84 billion dollars in 1945 to 28.8 billion in 1946, then to 22.6 billion in 1947, before inching up again in 1948 at 24 billion, and getting to 27.6 billion in 1949 (Bureau of Economic Analysis). This same time period saw the gross fix ed investment go from 10.8 billion dollars in 1945 to nearly forty billion in 1949 (BEA). While some of the increase in government expenditure was for defense purposes, with the start of the Cold War and the build up to the Korean War, some of it w as also for year for tuition, with the years determined by the length of service. It also provided for a stipend and on the job training in trades. The redistributive effect of this bill did not reach all populations, however the reality of segregation and discrimination meant that while the bill itself was race neutral, its implementation (in terms of admitting new students and giving mortgages, for instance) still dep ended on geography for many black veterans, who were unable to enroll in many colleges (Bound and Turner, 151) and have access to government subsidized work improvement programs. Comparing the experiences To start with, the British current acc ount starts in a negative position, before declining further. This decline, as shown in graph 1, indicating an excess of imports compared to exports, matches up with the peak of the surplus of the United States; while the British trough corresponds to the world wide dollar crisis that did not only affect them, the nearly nine billion dollar peak in the current account of the US should suggest while being one of the less devastated of the European belligerents.
73 The rapid upward movement illustrated on the graph on the part of the British in the next year is also impressive. It suggests the efficacy of the British strategies in both promoting exports for dollars and contro lling the outflow of dollars. Meanwhile, the American current account was steadily declining, a combination of both getting more imports and a decline in exports as countries were able to replenish their capital stock without needing to constantly get more from the US. The chain of events following the Bretton Woods conference not only affected the US and Great Britain, but the economic development for much of the world, both developed and developing. By being the early enshrinement of more economically li beral policies and their bastions like the IMF and World Bank, the future ascendancy of neo liberal financial rules was made easier. Additionally, making the dollar the center of the system that pegged other major currencies to an exchange rate based on it s stability showed not only a confidence in the future of the American dollar and economy, but effectively made it the basis of international finance. That scores of other countries agreed to conditions of the conference as well, some from Latin America a nd not as affected by war conditions speaks to the power the United States wielded. Also, there were some indications of future disagreements with the Soviet Union (to put it very lightly) when they refused to peg the ruble to the dollar, share economic da (Cesarano 2006, 168).
76 Chapter 5: Results, Successes and Failures The Outcome in Great Britain The Keynes influenced post war employment policy formulated by the wartime government in 1944 stated that they "accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment." Taken as the chief employment goal of the immediate post war period, the British were remarkab ly successful in achieving this. In contrast to the reconverted economy of the 1920s, with a core of one million unemployed or the economy of the 1930s, with an unemployment that peaked at around 3.5 million in 1932 but that still was near two million in 1 939 (Pollard 1969, 243), the number of unemployed stayed between 300,000 and 500,000 from the second half of 1948 to 1950 (Cairncross 1992, 60). Another remarkable aspect of this policy is the shift in thought; here, the government announces tha t full employment isn't just something that would be nice to have, but something that they, as the government, assume responsibility to create the conditions for and promote. The tools necessary for this ability would come from a Keynesian understanding of the economy, where the national expenditure is maintained so that employment could be stable, both in aggregate number and in specific areas of work (Barnett 1987, 261). In trying to ensure full employment, however, the state made it clear that it would not be totally their responsibility; frictional unemployment was to be expected, and every person still would need to "exercise to the full his own initiative in adapting himself to changing circumstances" (Employment Policy). Additionally, w hile the total unemployment was kept extremely low in the reconversion period, the experience with
77 coal mining showed how quickly that could change. For one, industry and civilian life were almost totally dependent on a steady stream of coal for energy nee ds that, when cut off, could make unemployment shoot up. Another aspect was that the industry itself was undermanned, with workers choosing to leave it throughout the war, and which "continued to lose labour when demobilization was at its height" (Cairncro ss 1992, 64). The aggregate unemployment was low, but this could obscure that a vital industry did not have all the people it needed to fuel everything else. In this sense, the quest for full employment came short, with some jobs available without the labo r to fill it. Tied to the aim of 'full employment' was the use of controls. In the post World War I experience, Great Britain's rapid decontrol found it dealing with inflation rates in the double digits, at twenty two percent in 1918, ten percent in 1919 and fifteen percent in 1920. Coupled with the scarcity of goods because of the destruction of capital and lack of dollars, then keeping inflation at manageable levels through controls was a major aim for the British. They were moderately successful in the ir approach to inflation, with the rate in 1946 and 1949 both at around three percent. However, it did reach over eleven percent in 1947, lessening to just under ten percent in 1948. While nowhere near the rates seen after World War I, it would still be en ough for the consumer to notice. Another job for the controls was to allocate scarce goods and materials not just fairly amongst civilians, but also towards industries the government thought needed them more, not only in immediately needed industries lik e building construction, but also ones involved in export. In this, the government was fulfilling its expanded state role; everyone got a "fair share" of rations, instead of letting the pent up demand in the market
78 run rampant. Not only that, but by taking a more active role in granting things like building permits and distributing raw materials, the government could affect patterns of urban and industrial development more directly, while still not having official administrative control. This was part of th e plan to try and rectify the balance of trade, severely unbalanced by all the outgoing money and lack of exports during the war. Restrictions on imports were part of this plan too, which affected raw material availability and the goods sold in the country This ran into trouble with the United States, keen on getting the trade liberalization clauses from Bretton Woods established. The different controls had varying levels of success. It seems that as far as price controls went, the government yielded to su stained pressure in the business field to dismantle them; however, this pressure came after a few years and after it seemed as if supplies were sufficient to satisfy demand (Pollard 1969, 371). The aforementioned labor controls had less success, with the w artime controls looked at as infringement on freedom of movement, while getting rid of them lost people from undermanned fields. Although there was a push for incentives to stay at those jobs, they weren't attractive enough for everyone to stay. The contr ols over investment seemed to be moderately successful, since the government was able to influence the direction over where capital went and with whom it was created. The value of capital formed did rise, but not largely. The import control scheme worked v ery well, as far as it went to promote exports and decrease imports, with the 1947 value of imports decreased by thirty percent from 1938 versus the one percent decline in exports in the same time period (Cole 1956, 176). This was important in
79 stemming the outward flow of dollars in the largest problem Great Britain had to address during the demobilization of the economy. In this area, the British efforts can be regarded generally as mediocre, with the anticipated balance of payments problem sparking into a full fledged crisis at several points. Before the end of the war, the government had already anticipated issues with the balance of payments, recognizing the combined effects of borrowing so much money from abroad and the switch from producing export goo ds to items for the war effort as promoting disequilibrium in this era (Pollard 1969, 356). To rectify this, the government had limits on what could be imported, using a direct hand in controlling what could be made available for the average British consu mer, drive further limited choices for consumers, with certain British made goods more easily available for purchase overseas than domestically. This attempt to ste adily build up dollar reserves and correct the current account imbalance was jeopardized by the terms of the American loan stating the need to change the convertibility terms between dollars and few more cuts in goods before the government suspended the change and reverted to the pre loan standard (Kynaston 2008, 226). In 1949, the problems came to a head, precipitated by a downturn in the US. As a result of the US b uying less, exports from Great Britain went down, and the trend of importing more than what was exported exacerbated a high cost of living in Britain, especially since it was combined with what was considered to be the overvalued pound
80 sterling, pegged at $4.03 per pound. As a result, in September, the currency was devalued to $2.80, a thirty percent reduction. This action has been evaluated in several ways; one the c ountry (Pollard 1969, 362), while an economist, writing more closely to the era, saw it as a painful yet necessary step that had the effect of helping close the dollar gap (Hall 1950, 868). Both saw that it was politically unpopular domestically, with the former also considering it a further repudiation of the Bretton Woods agreements (Pollard 1969, 362). In the radio broadcast announcing the decision to the public, the Chancellor of the Exchequer said the decision was made because it was it would allow the m to manage the Here, it seems that while the economic wisdom of the decision was debated, the way it was pitched to the public rested on the way they considered their state, and their role within it; there was the Chancellor, explaining that the government was trying to uphold its pro mise to maintain jobs for all and the welfare state, but that it would take continued sacrifice from the citizenry. The state would keep its heightened presence in public life, and people would still get something from it, even if they had to give up a lit tle more. Another interesting aspect of this crisis was that, following the British devaluation, the currencies of other countries followed the lead and were devalued as well, with the sterling area and Scandinavian countries matching the thirty percent d rop,
81 West Germany by twenty percent, and France and Belgium devaluing their currencies. While Great Britain suffered not only economically but prestige wise by having its economy rest so closely on how the US was doing, it still had the power to influence dollar exchange value of the currencies of some one (Leffingwell 1950, 203). With the US economy as the leader, the British economy still had a large part to play in the post war regime, The Outcome in the United States Unl ike Great Britain, the post war employment intent of the United States purchasing power; this has been interpreted by one economist as the state not only distancing itself fr om an absolute pursuit of full employment, but that it would also be (Santoni 1986, 12). With less precise aims than Great Britain, it is harder to judge whether the y succeeded in fulfilling them. However, even considering some aspects of the American reconversion without specific goals in mind, it is possible to make a judgment when it comes to how America approached it. For one, it seems as if the employment polic y worked, with the unemployment rate hovering between three and four percent from 1946 to 1948, going to over five percent in 1949 because of an economic downturn. The shift mirrored the one in Britain in the sense that in addition to new jobs being create d, many of the new women workers added during the war exited the labor pool, cutting down on job competition. There was also the GI Bill, which not only took men out of the labor pool and paid for their higher
82 schooling, but also included favorable conditi ons for loans, job training and apprenticeships, which impacted the lifetime quality of the work veterans were able to compete for. The control and rationing system, while working in its lifetime, was removed too quickly and the desire for inflation cont rol was left unfulfilled. Without the controls regulating the demand of the consumer, generally already flush with cash after the privations of the war, the price of goods increased much more quickly than anyone would consider desirable. Here, the rapid ev acuation of the state from maintaining regulations in the market was the result of an internal battle that signified a passing of the guard: the New Deal inspired OPA squared off against the WPB and its stronger business ties and irrelevant by late 1946. These controls, while still a major factor in the daily life for American civilians in the early period of reconversion, did not have the reach they had in Great Britain, where they applied to more facets of life and lasted longer. As a result, their eventual absence, while felt in the wallet, would not have been the seismic event it would have been in Britain. Additionally, the controls in the US after the war generally h ad the job of managing inflation, while the ones in Great Britain had to manage inflation and allocate scarce materials to certain sectors and people; even when faced with famine conditions overseas, the United States government was reluctant to reintroduc e food controls in order to meet overseas obligations, feeling people would rather submit to lowered use of grain voluntarily (Bentley 1998, 152). Instead, some officials went to the extent of
8 3 making anti r of rationing as lazy, controls were so comparatively short lived in the United States, even with the cost of higher inflation. As far as financing the war went, how succe ssful the country was in doing so depends on what is analyzed. If simply comparing the crisis Great Britain had not only repaying loans but generating dollars in order to pay for the basic needs of the populace, then it could be seen as very successful, si nce nothing of the sort happened in the United States. However, the strategies for how it was paid differed. President Truman favored maintaining the high taxes of the war in 1948, since the full employment and high prices of the time meant the debt could be paid off more quickly, as well as bringing back the excess profits tax, which was repealed earlier because of industry pressure. Eventually, with the downturn in 1949, Truman had to abandon this idea, and focused on controlling inflation and managing s ocial programs (Poole 1951, 906). In terms of paying off the debt for the war quickly, then, this era was not successful. Taking a larger view as to what constituted financing, this era was also one where the United States sent billions of dolla rs of aid overseas in cash and goods. It was in this situation that it was best able to also export its shifting views on the role of the state; often, to receive the aid, European countries had to promise to adopt freer trade policies (encouraging governm ents to leave or minimize their work in international markets) and to take a harder line against communism.
84 In the most general scheme of deciding whether this was a success or failure, it is worth considering the predictions of some economists during the war; some of the Keynes influenced economists generally anticipated a post war depression (Higgs 2006 112), since the massive government expenditure to pay for the war would end. Since in Keynesian theory the government multiplier plays a major role in spurring GDP growth, cutting the economy off from the massive amounts spent with the end of the war, without a comparable rise in private investment, would lead to a depression. What ended up happening instead was, that while the GDP did decline by ten percent from 1945 to 1946, the private investment increased by 156 percent; since the drop off in government spending could be largely attributed to the seventy five percent decline in defense spending, the drop in government spending was actually m inimal in the day to day life of civilians, especially compared to the large increase of private investment. Although by just looking at the figures it would accurate to call it a downturn, the immediate post war saw a large growth in private investment an d other 1930s. Even taking into account the downturn in 1949 and the missteps in removing controls, it seems as if the United States was successful in not only tra nsitioning from a command to open economy, but successful in trying to implement those ideals elsewhere as well. However, one area that declined with the end of the war was in the power of unions. Compared to Great Britain, where the party in power at le ast tried to keep workers involved in the political process, the United States government, already full of
85 businessmen and officials sympathetic to business, generally favored corporations with the end of the war (and the end of the need to keep workers ha ppy). With strikes getting threatened by the federal government and certain union members getting blacklisted or targeted for their communist leanings, the hope to continue with the gains made during the war was on the way to failure. Long term Results O ne of the biggest and farthest reaching results of the post war conversion efforts was the establishment of the Bretton Woods monetary regime. Designed by Americans and British, it was adopted by many countries and not only tried to facilitate the convers ion of currencies by pegging them to the US dollar, but also established the IMF and future World Bank, both of which have had and continue to have enormous influence on the economic progress of developing countries. The two institutions, initially meant to help administrate and manage funds for the rebuilding countries of Europe, found new life by acting in developing countries (Todaro and Smith 2006, 696) The IMF, for instance, offers loans to countries in need, while the World Bank tries to promote ec onomic growth in needy countries. However, the offered loans often come with conditions countries can find hard to meet (Todaro and Smith at the expense of the very poor (T odaro and Smith 2006, 700). Another long term effect would be on the experience of the wave of privatizations in each country during the 1980s. While e ach country had a s hift towards conservatism in this era, the move to privatize in Great Britain struck at the idea of the state being
86 involved in day to Ma frontiers the voters of 1945 desired greatly and sacrificed much to establish. In the case of coal, the British government seemed to go through what the US government went through in the immediate post war, seeing the trade unions as exploitative in their bargaining position and much less inclined to meet their demands (Baijal 2000, 1104).
87 Conclusion In the effort to start rebuilding the ir wartime economies both the United States and Great Britain had limits and conditions on what they could do, and different priorities in what they wanted to achieve. Both countries, while victorious, faced demobilization from distinct positions ; one wit h infrastructure and industrial capacity hardly damaged, and with the civilian population largely unharmed, another with infrastructure and industrial capacity damaged by wear and war, a civilian death toll in the tens of thousands and a huge debt incurred to pay for all of it. For the British, the success of the Labour Party election platform of 1945 indicated a civilian desire for continued state involvement in the economy after the war; while it would have been necessary at any degree given the amount of damage the country sustained, in addition to the continued shortages of raw materials and food the country would endure, the program embraced by voters, which included the establishment of universal health care and the nationalization of key industries, went beyond mere management of resources until supply became normal. Instead, the involvement the civilians voted for was an embrace of the wartime responsibilities the state undertook in daily living and a desire for it to continue. The practical concer ns forced during the war made the involvement championed by the Labour Party ideology attractive, to a larger extent than if they limited themselves to just managing the economy (which would have already required immense state involvement).
88 The British di d largely succeed in their goals, but sometimes it still fell short of being a total success. For instance, they did achieve full employment, a major goal for the Labour Party and their working class constituents (still fearful of the massive inter war une mployment), but critical industries, most famously coal mining, remained chronically undermanned and made it difficult for the basic industries to get back up and running. In the area of balance of payments, it seems that the situation was so complicated it would be hard to be a success and instead it looked more like damage control. They were stuck in a cycle of being an export dependent nation unable to export, and because of this inability, they could not import either in order to make their exports. While the loans and grants from the US did help them make headway into their deficit, it also illustrated the changed position of the country as one with waning power, especially when the recession in the US in 1949 forced a devaluation of the pound shortl y after. The US also largely succeeded in their goals, but perhaps it is worth wondering if rapid return needlessly hit them in their wallets, with the rapid removal of controls ushering a spike in inflation, justified in the name of keeping government out of the market. The employment rate was also a success, aided partially by the creation of the GI Bill, which kept veterans out of the job market for a certain period of time while still upgrading their skills, a win win situation. However, in both countries, the maintenance of a favorable employment rate came at the expense of new women worker s, already paid
89 less for similar work, and who then were ushered out of the workplace with the removal of things like childcare. Financing the war effort, while giving the country unprecedented debt levels, could be seen as a success in that the US was s till able to lend billions of dollars to other countries. In the sense that this continued American war interests by preventing unrest in these damaged nations, as well as making the American position as the largest nation able to export easier, since the dollar less countries would then be able to purchase goods from the one place offering them. While the debt was huge, there was never a crisis similar to that of Great Britain. In each country, the reconversion process reflected the type of country peopl e wanted to create, since the upheaval and massive change the war wrought offered idealists an opportunity to put their stamp on the future. The A m e r i c a n g o v e r n m e n t s r e t r e a t f r o m t h e m a r k e t w h i l e n o t t o t a l l y t o p r e w a r l e v e l s r e p r e s e n t s a n a d h e r e n c e t o t h e p r e w a r s t a t u s q u o a t l e a s t i n s p i r i t w h i l e t h e B r i t i s h e x p a n s i o n r e p r e s e n t e d a r e j e c t i o n o f t h e i r p r e w a r s i t u a t i o n a n d a d e s i r e f o r n e w c o n d i t i o n s a n d n e w i d e a s
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