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Discuss what major policies Congress passed during World War 2 that transformed the economic and financial systems of the United States.

The US economy during WW2 underwent a radical overhaul. Indeed, we essentially became Communists for a few years, but the most successful Communists ever.

That probably sounds very weird to you, so let me explain.

It started with the establishment of a draft---even before we officially entered the war. Then came enormous increases in military spending, used to invest in huge factories for making war materiel.

This huge investment in capital made labor much scarcer, allowing workers to bargain up their wages and benefits substantially. Indeed, labor was so scarce during the war that businesses which had previously only hired White men were forced to hire women and minorities just to have enough workers. Unemployment dropped to the staggeringly low figure of 1.2%.

But that's not the Communist part---no, that part came when the government started rationing things, essentially claiming for its own use a large portion of America's steel, gasoline, rubber, and even foods such as butter and meat (good for feeding soldiers), just as they did in the Soviet Union. People had to have ration cards to buy many of these products, and there weren't enough to go around.

A large number of new government agencies were established, like the Office of War Mobilization and the War Production Board, to oversee production in what was essentially a Communist command economy, where the central planners decides who gets what.


All this high spending triggered inflation. In response to the inflation, the government instituted price controls via the General Maximum Price Regulation; this did slow inflation, but also caused even more shortages of goods than the rationing already had. Because of rationing and shortages, personal consumption fell to its lowest level in decades even as total economic output surged to the highest of any country in the history of the world.


This meant that saving went through the roof, and most families ended up living through very hard times during the war but found that their net wealth had dramatically increased by the end of it. Most of this saving was in the form of government bonds, particularly US Treasury bonds and war bonds; the government borrowed an enormous amount of money, but then eventually paid it back and made everyone richer. It was during this period that owning US Treasury bonds became a staple of private saving, establishing what is now the backbone of the financial system not only in the US, but around the world.


Yet it wasn't just borrowing---taxes also rose enormously. By the end of the war, over 60% of all spending in the United States was government spending---and over 50% of all US spending was military spending in particular. For the first time, income taxes were raised to high rates on the general population. (Actually very high rates---the top marginal rate was 90%.)


After the war, people had become accustomed to high wages---and women and minorities had become accustomed to having jobs at all. The attempt to shift back to the old system where White men did most of the work failed; that model was no longer viable. The result was a very contentious period politically but a huge surge in economic prosperity, and ultimately a great deal of social progress as well (primarily in the 1960s).

So we ended up with economic prosperity and social progress; it's a shame we had to fight a war that killed millions of people in order to get there.

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