May 18, 2018–The following article kicks off a series documenting the extraordinary qualitative leap in American economic productivity during the World War II mobilization.
Part One: FDR and Jesse Jones Prepare the Way
By Stuart Rosenblatt
The United States finds itself hopelessly mired in an economic crisis of its own making, as we have abandoned the principles and policies that built our country into the envy of the world. It is past time to cast off the intellectual and financial madness that has gripped the country since the murder of President John F. Kennedy, and return to the policies and principles which built the country. This means returning to the American System outlook of scientific and technological progress last implemented in the Kennedy Space program, and previously applied in the Franklin Roosevelt New Deal and the WWII crash program of industrial expansion.
This report will focus on the World War II economic mobilization. The New Deal infrastructure development policy had transformed the United States and lifted us out of the Great Depression. It created a new infrastructure “platform”, including transportation networks (Works Progress Administration) of roads, bridges, and canals; power projects including the Tennessee Valley Authority, Bonneville, Grand Coulee, Hoover, and other dam and levee programs; and the widespread utilization of automobile, bus, subway, and other mass transit programs. The extensive application of electric power for everything from plant and equipment to every-day household products, like washers and dryers, irons, and vacuum cleaners further expanded the economy.
The transformation of the United States from a relatively lower level of technology at the turn of the 20th century, into a growing industrial giant, has been well documented in the recent book by Robert Gordon, The Rise and Fall of American Growth. From 1930-1938, the United States created a new infrastructure foundation. But the depression was still not conquered, and there were lingering problems of large scale unemployment and cultural pessimism. The severe recession of 1938, brought about by a withdrawal of federal spending underscored the fragility of the gains made during the 1933-37 New Deal.
Ironically, it was the unprecedented WWII economic mobilization, spurred on by the urgent need to defeat the Axis military juggernaut, which finally lifted the United States out of the Great Depression, and paved the way for the post-war economic expansion. Because the vast majority of the goods produced during the war effort were consumed in the conflict, the contribution to the real economy was less than it could have been. Despite that, GDP increased dramatically (over 10% per year!) during the war build-up, and the standard of living of the population also grew, despite the hardships of wartime rationing. As I have previously reported, Gordon argues that productivity of the economy, measured as Total Factor Productivity, the contribution of new technologies and increased labor output, also increased at a higher rate than that achieved during the New Deal
This paper will elaborate that war mobilization, with special emphasis on the crucial role played by both the government and its partner, the Reconstruction Finance Corporation, a federally-created financing arm of the government. The RFC, launched in the tradition of the National Banks of Alexander Hamilton, John Quincy Adams, and Abraham Lincoln, ran many of the key programs of the war time economy.
This report is based largely on the work of several authors: Steven Fenberg’s Unprecedented Power; Richard Freeman’s “How Roosevelt’s RFC Revived Economic Growth (EIR)”; Maury Klein’s A Call to Arms, Mobilizing America for WWII; Gordon Wright’s Billions for Defense; Robert Gordon’s The Rise and Fall of American Growth; and Jesse Jones’s Fifty Billion.
A Paradigm of a Real Economic Recovery
Over the past 40-50 years, most Americans have lost sight of what a real economic recovery looks like. The World War II economic mobilization dramatically exemplifies its characteristics.
First, there was the dramatic upshift in the overall output of the nation, unprecedented at that time or since. It was “non-linear,” a qualitative leap into a new “platform” of energy throughput and physical output. It was a total economic “crash program” to meet the emergency, and had within it science driver programs to create the potential for even larger economic development. Much of that potential, like the full utilization of nuclear energy and isotope separation, remain unfulfilled.
In the process we created a fully mechanized military, jettisoning the use of horses (!), primitive airplanes, tanks, and other antiquated vehicles.
Whole new industries were created. The synthetic rubber industry only existed in laboratories in 1939, but the war mobilization led to the replacement of natural rubber. The development and utilization of bauxite, copper, magnesium, and other metals occurred during the war, as did many breakthroughs in the derivatives of oil. While 100% octane gas had been achieved for automobiles in a very rudimentary way, it was perfected for the use of military aircraft during the war. Radar and other electromagnetic forms of communication and detection were fully elaborated for usage by troops, airplanes, and ships. Penicillin and other drugs were also made available for mass immunization.
The most profound breakthrough was atomic power. The massive crash program to split the atom involved over 100,000 scientists, engineers and support personnel, and permanently transformed the population and production potential of the United States, and civilization.
There was also a radical upgrading of existing technologies. Airplane construction, a boutique industry before the war, became a mass production driver for whole sections of the economy. Shipbuilding embraced mass production techniques that had previously only been adopted in the auto industry. Liberty Ships, the lifeblood of the trans-Atlantic supply chain, went from eight months to produce one ship, to mere weeks or even days. All of this ramped up the need for steel, aluminum, and other metals.
Electric power was already in high gear during the New Deal, but now it was applied to all forms of production. Everything began to be electrified: warplanes, ships, all war plants, even torpedoes, had electric inputs.
Another result of the effort was the expansion of existing cities and the creation of brand new ones. The West was finally integrated into the nation, as cities like Seattle, Portland, San Francisco, Los Angeles, San Diego, and others became boom towns overnight. Were we to launch a similar crash program now to rebuild and expand our industry and infrastructure, we could finally develop the entire interior of the nation.
To accomplish this phenomenal growth, the nation needed a reliable source of credit that could be wielded for the public good. In the case of the war mobilization, as in the earlier New Deal, this was the Reconstruction Finance Corporation (RFC). The RFC functioned as a Hamiltonian National Bank in directing vast amounts of credit into crucial areas of military production. But it also was an arm of the government, insofar as it depended on government funding (appropriated by Congress, borrowed from the Treasury) to provide its capital base. That money was then loaned out to a myriad of operations to galvanize the entire operation, without the endless delay of going through Congress or the military bureaucracy to accomplish its tasks. The RFC was so important that it was known as the “fourth branch of government” by media and government officials alike. It was the biggest bank in the country, and probably in the world, doling out over $25 billion in loans and guarantees during the conflict, and over $50 billion during its existence.
The economic parameters achieved in the war period document the upshift. They include the increase in living standards of the whole population, the noticeable increase in productive power of labor, and the dramatic rise in Total Factor Productivity (see chart), which measures the impact of new technologies and new innovations in all areas of life on the output of the economy.
Driving this entire process was the unleashing of human creativity. Technological breakthroughs were occurring at all levels in the economy, but they could not be implemented without virtually the entire population being able to apply them. People “got smarter,” as seen from the use of “suggestion boxes” on the shop floor, to the rapid upgrade of skill levels in every key industry. One result was the spread of cultural optimism across the country.
How was it done? This report will cover four phases of the mobilization: the prewar 1939-1941 period; the Lend-Lease program; the WWII mobilization itself from 1942-43; and the last two years of the war.
Phase I: Preparations in 1939
President Roosevelt knew the world was careening toward war from the time he entered office. The world could not survive half-fascist and half-free. Because the population was predominantly isolationist, FDR had to move slower than he would have liked in preparing the country for the inevitable. Thus, in addition to addressing the immediate needs of a population suffering from the Depression, the New Deal infrastructure buildup was critical to paving the way, so to speak, for a war buildup. It created massive new infrastructure projects that would prove instrumental in the WWII industrial mobilization.
Projects built in the Pacific Northwest, including the Bonneville and Grand Coulee dams, and the Hoover Dam in the Southwest, along with the massive Tennessee Valley Authority, would provide the water and power to drive many projects, including the Manhattan Project and the ramp-up of aluminum production. By building an enormous road and bridge network, and saving the rail system, FDR ensured relatively easy movement of necessary goods throughout the nation. He also refurbished all the arsenals and military installations along the way. When war broke out, the leading supplier of defense production manpower was the Works Projects Administration. Many Civilian Conservation Corp teams went right from land restoration projects into military service.
FDR’s explicit ramp-up to war started in 1939, parallel to the escalating actions of the Hitler and Japanese governments. His January 4, 1939 address to Congress focused mainly on foreign affairs, as he prepared the nation for the inevitable conflict ahead. “Events abroad have made it increasingly clear to the American people that dangers within are less to be feared than dangers from without. Once I prophesied that this generation of Americans had a rendezvous with destiny. That prophecy comes true. To us much is given; more is expected. This generation will ‘nobly save or meanly lose the last best hope of earth’… “ (Fenberg, p. 326)
While FDR did not state his immediate needs in the speech, he told aides that he had three agenda items for action. He wanted three bills passed in Congress: first, to extend the existence of the RFC, which was then slated to expire on June 30; second, to increase the military capability of the nation; and finally, to reorganize the executive branch of government, especially the financial apparatus.
The Reconstruction Finance Corporation was renewed at the end of February 1939, by a unanimous vote. On top of its far-ranging other achievements, FDR would move the RFC into preparing for the war effort.
In March 1939, Congress passed the second bill FDR wanted, increasing the appropriation for the Army to a total of $860 million. Additional money would be deployed to build up the Navy, starting with the construction of two state-of-the-art battleships. The military budget would significantly expand production of war planes. All this occurred as Germany seized Czechoslovakia on March 15.
The final piece of legislation, to reorganize the executive, passed on April 3, 1939. Among other provisions, it created the Federal Works Agency, which unified the various jobs programs, including WPA. It created the Farm Credit Administration, which brought the various farm credit agencies under the control of the Department of Agriculture. It also created the Federal Loan Agency, a super-agency which oversaw the Reconstruction Finance Corporation and its various offshoots , which included Fannie Mae, the Export-Import Bank, the Federal Home Loan Bank Board, Home Owners’ Loan Corporation, Federal Savings and Loan Insurance Corporation, and Federal Housing Administration.
In July 1939, Roosevelt appointed Jesse Jones to chair the Federal Loan Agency, thus giving Jones power over the entirety of Federal credit generation. Jones resigned his chairmanship of the RFC to take this post.
On August 30, 1939, Jones delivered one of his numerous national radio broadcasts. This one focused on explaining the function of the Federal Loan Administrator to the population. He patiently went through all the agencies under his control, touting their accomplishments, very much including the RFC. He concluded his speech with a prescient analysis of the looming military conflict, “Our banks … and industrial institutions have a great deal of unused capacity, and our government is prepared to meet any reasonable condition that may arise.” (Fenberg, p. 337)
That “condition” was not long in coming. On September 1, 1939, Germany invaded Poland, and then rejected the ultimatum from England and France to withdraw. On September 3, those nations declared war on Germany.
That same evening Roosevelt delivered a Fireside Chat to a very nervous nation. While again stating America’s commitment to neutrality, as we had not yet been attacked, he nevertheless urged his countrymen to “think things through”, to not ignore what is happening overseas, and “go about our own business.” …“This nation will remain a neutral nation, but I cannot ask that every American remain neutral in thought as well.” (Fenberg, p. 337)
Unprepared for War, or Aid to Allies
FDR knew that the United States was ultimately threatened in this war, both on the European and Asian fronts. To face this threat, the United States had a second-class military. It would have to be totally rebuilt. In 1939 the U.S. ranked 18th in the world in the size of its army, with 170,000 men under arms. By contrast, in 1940 Germany had between five and six million men under arms, and another 500,000 in the Luftwaffe.
The U.S. Army lacked everything: manpower, tents, camps, equipment, uniforms, weapons, and qualified men to train new troops. Some recruits used sticks in place of rifles. All basic equipment was in short supply, including modern semi-automatic weapons, fresh powder, mortars, and machine guns. Even their helmets were those used in the last war. What few artillery pieces existed were also from WWI, and ammunition was scarce for every type of gun.
The production and supply of basic raw materials in the United States was dwarfed by that of the German Army. After the German blitzkrieg attacks against Europe, coal, oil, bauxite, armaments factories, as well as airplane and shipbuilding sites, all fell under German control. Coal available to Germany increased from 186 million tons per year to 327 million tons. Its steel-making capacity rose from 25 million tons to 42 million, dwarfing Britain’s paltry 17 million. Its petroleum-refining capacity and availability increased tenfold.
Only in steel manufacturing did the U.S. out-produce the Germans: 26.4 million tons annually to Germany’s 20.7 million tons. Not only were planes in short supply, but so were pilots, mechanics, and instructors. Germany had 650 top notch airports, all of which could be used for military purposes; the U.S. had 20 military air bases and only 200 other air bases that could be converted for military usage.
A major change in thinking was underway beginning in 1940 as the nation girded for war. In his 1940 election campaign FDR pledged U.S. neutrality as a way to win votes and ensure his re-election, but he had no illusions as to the direction that the world was going. And he knew the nature of war itself had changed qualitatively. War was now mechanized, fast, and brutal. It was also waged in the air, an element that had been introduced in WWI, but never exploited. This was to be a war of production and logistics, the amount of firepower and supplies available per soldier, versus that of the enemy.
Author Geoffrey Perrett put it succinctly, “Perhaps there once was a time when courage, daring, imagination and intelligence were the hinges on which wars turned. No longer. The total wars of modern history give the decision to the side with the biggest factories. The economically inferior may win battles; they do not win the all-out wars.” (Arms, p. 63)
In 1956, Ford Motor Company executive and innovator Charles Sorenson, wrote in his autobiography of his time with Ford. “Orators, columnists, professors, preachers, and propagandists performed magnificently with the theme that World War II was a war between two ideologies. But whatever inflamed people’s minds in warring countries, victory was on the side of the heaviest-armed battalions. The conflict became one of two systems of production. “(Arms, p. 63)
This War would be conducted by the White House
By 1940, the issue was how to expand the U.S. war production before war had been formally declared, to be able to “hit the ground running” when it happened. Having been in the middle of the WWI war-time effort as Under-Secretary of the Navy, Roosevelt had participated in the industrial mobilization and its aftermath. He knew the positive accomplishments and the pitfalls to be avoided.
In World War I, the U.S. industrial mobilization was led primarily by the private sector. Of the $6 billion spent in 1917-18 on construction of new plant and equipment, but not on the entire war effort (troops, deployment, food, arms, etc. ), only $600 million was contributed by the government. The War Industries Board (WIB), chaired by Wall Street financier Bernard Baruch, oversaw the effort, but was really at the mercy of the major production corporations. The biggest contribution of Baruch and the WIB was the introduction of standardization of production across company lines, which streamlined the manufacturing efforts and greatly enhanced American productivity and output. (Billions for Defense, p. 2, $50 Billion, p. 316)
Instances of war-profiteering were so prolific that Congress impaneled the Special Committee on Investigation of the Munitions Committee, to investigate. The findings were not pretty.
So, knowing that the country was headed for war, by 1939 FDR had decided that the war would be run by him personally and the New Deal officials he trusted. Power to decide investments and war strategy would be located in the White House. While he needed the corporate leadership to help create and run the war industries, he had no intention of ceding power to them. Nor was he about to sacrifice the New Deal social innovations to Wall Street or corporate tycoons. All crucial decisions about conduct of the economic mobilization were to be under his control.
There were four institutional forces that Roosevelt needed to conduct the war drive. There was the business community, especially the corporate leaders of the major U.S. companies directly involved in the buildup, which felt that only they knew how to produce what the country needed. Of course, they had to maintain their existing domestic industries, earn their profits, and protect their economic domains. They were at odds with the New Dealers who were suspicious of the motives of the corporate czars, were all-in on the war effort, and thought they should direct the energies of the nation. However, they were mostly academics and policy wonks, had never produced a darn thing, and were unschooled in the ways of industrial innovation. These two groups were continually, and many times for good reason, taking each other’s measure.
Third was the military, who felt they should run the whole show, as it was, after all, their war. They had to supply the war plan and the basic requirements to meet the objectives. However, those were continually evolving, and much of the military was mired in previous decades of stale bureaucracy and strategic bungling. Finally, there was Congress, which had to appropriate the money for the effort, and luckily they were generally sympathetic to FDR and open to Administration initiatives. But they too played bureaucratic games, and had various susceptibilities toward the corporate and other players, so they did not always move with due speed.
To attempt to co-ordinate all of these varying entities, FDR created a number of war-time bureaucratic authorities. They went by a series of acronyms: National Defense Advisory Commission (NDAC), Office of Production Management (OPM), War Production Board (WPB), etc. They were directly involved in managing the government’s co-ordination of the war effort.
The Reconstruction Finance Corporation
To help him coordinate these forces, FDR called upon one institution situated partially outside the formal structure of government institutions, the Reconstruction Finance Corporation (RFC). As has already been identified, the RFC functioned as a national bank in the tradition of the Alexander Hamilton and his successor banks of the 19th century. Established by Herbert Hoover in 1933 to attempt to deal with the deepening Depression, especially the lack of credit being directed into the economy, the RFC was taken over by Roosevelt early on in the New Deal. It was capitalized by the Congress with an initial borrowing from the Treasury of $1.5 billion. That amount was steadily increased during the New Deal period, as the RFC expanded its purview. It also had a revolving fund capability, so loans that were repaid could be immediately sent back into more projects.
In February 1939, Jesse Jones, the Chairman of the RFC, issued an annual report of the RFC’s accomplishments to date. It was impressive. The RFC had disbursed $7.2 billion ($110 billion in 2009 dollars), of which $5.3 billion had been repaid–74%. It had bought preferred stock in hundreds of banks, recapitalizing them, and allowing them to loan to the economy. It helped fund the Works Projects Administration, the Public Works Administration, and the Tennessee Valley Authority, building infrastructure projects across the country. It created and funded the Export-Import Bank, to help U.S. manufacturers sell to both the Soviet Union and South America; the Federal National Mortgage Association (Fannie Mae); it supplied all the capital for the Rural Electric Administration, which delivered electric power to much of the nation, and funded the Electric Home and Farm Authority (EHFA), which provided capital to finance consumer electric appliance purchases. It also helped fund the Commodity Credit Corporation (CCC), which made available funds to farmers to put a floor under farm prices, and the Home Owners Loan Corporation, which saved hundreds of thousands of homeowners from foreclosure. The list goes on.
FDR had appointed Jesse Jones as Chairman because he knew that Jones, an anti-Wall Street Houston banker and businessman, was committed to loan money for urgently needed programs and make back the investment if possible. He also knew Jones well as an ardent New Dealer, and hard-scrabble Democrat with a heart. Jones was determined to help citizens escape from the grip of the Depression and saw the government as the key institution which could intervene to accomplish that. With only a few exceptions, he would move heaven and earth to accomplish this.
By March 1940, the RFC had loaned out over $10 billion ($150 billion 2009 dollars). Jones told the Federal Home Loan Bank Board at a speech that “We have loaned where private capital was unable to lend or could not afford to take the risk…. the RFC made credit available for the business life of our country. … There is no line of business that we have not aided, and probably every man, woman, and child in the United States has benefitted from the RFC operations.” (Fenberg, p. 345)
A Fortune magazine article in May 1940 identified one key aspect of the “national banking” provisions written into the RFC template, which allowed Jones to accomplish what he did. “One very good reason why the RFC has broadened so extensively is the fact that it is, to a very large extent, outside the budget and possesses a revolving fund of its own… Thus it is a convenient device for getting things done, within its elastic limitations, without the necessity of getting a budgetary appropriation through Congress.” Thus it was a national bank in all but name. (Fenberg, pp. 347-8)
By 1939 Jones and the RFC were ready to mobilize all the credit-generating facilities of the government to join together in the war drive.
(to be continued with Part Two: “ Producing Machine Tool Revolution”)
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