IN A FIRESIDE CHAT on December 29, 1940, Franklin Roosevelt first used a phrase that would prove enduring when he called upon the United States to become “the great arsenal of democracy.”
War had broken out in Europe on September 1, 1939, after German troops invaded Poland, and France and Great Britain stood by their pledges to come to Poland’s aid. Few Americans thought the Nazis anything but despicable, but public opinion in the United States was overwhelmingly to stay out of the conflict. Many newspapers, from the communist Daily Worker to those owned by William Randolph Hearst, were strongly isolationist. This isolationism had manifested itself in law in several ways. In 1934 Senator Hiram Johnson of California had pushed through a bill forbidding the Treasury to make loans to any country that had failed to pay back earlier loans. That, of course, included Britain and France. On November 4, 1939, Congress had passed the Neutrality Act, which allowed purchases of war matériel only on a “cash and carry” basis.
Seven months later France fell to the Nazi onslaught, and Britain stood alone. In the summer of 1940 Germany proved unable to defeat the Royal Air Force in the Battle of Britain and thus gain the air superiority necessary to mount an invasion across the English Channel. It tried instead to bludgeon Britain into submission with the blitz and to force Britain into submission by cutting off its trade lifelines across the Atlantic. It nearly worked. As Rudyard Kipling had explained decades earlier:
For the bread that you eat and the biscuits you nibble,
The sweets that you suck and the joints that you carve,
They are brought to you daily by all us Big Steamers—
And if any one hinders our coming you’ll starve!
While the Royal Navy was far larger than the Kriegsmarine in total tonnage, it was critically short in escort vessels to protect convoys against U-boat attack. As early as May 15, 1940, the new prime minister, Winston Churchill, was undiplomatically frank regarding what Britain needed from the United States to survive. “Immediate needs,” he wrote, “are: first of all, the loan of forty or fifty of your older destroyers…. Secondly, we want several hundred of the latest types of aircraft…. Thirdly, anti-aircraft equipment and ammunition…. Fourthly, [weneed] to purchase steel in the United States. This also applies to other materials. We shall go on paying dollars for as long as we can, but I should like to feel reasonably sure that when we can pay no more, you will give us the stuff all the same.”
Roosevelt realized what was at stake in terms of America’s own security. He knew that Germany was no immediate threat to the United States, safe behind the vast Atlantic. But he also knew that a triumphant Nazi state, lord of the Old World and all its economic and manpower resources, would be a mortal threat to the peace and liberty of the New World in the not-too-distant future. The president felt that Britain must survive long enough to hold the Nazis at bay while the United States rearmed, and he was able to bring the American people around to see where their true interests lay.
The day after receiving Churchill’s letter, he appeared before a joint session of Congress and asked for a supplemental defense appropriation of $1.3 billion, a very considerable increase in the total federal budget for that year. He also asked for the production of “at least 50,000 planes a year.”
At the time American military forces were puny. The army had about three hundred thousand soldiers—fewer than Yugoslavia—and was so short of weapons that new recruits often had to drill with broomsticks instead of rifles. The equipment it did have was often so antiquated that the chief of staff, General George C. Marshall, thought the army no better than “that of a third-rate power.” The navy, while equal to Britain’s in size, lacked ammunition to sustain action, and much of its equipment was old or unreliable.
On September 16, 1940, Congress approved the first peacetime draft in American history, and 16.4 million men between the ages of twenty and thirty-five registered. The act called for the training of 1.2 million soldiers and 800,000 reserves in the next year. But it specified that none was to serve outside the Western Hemisphere and that their terms of service were not to exceed twelve months.
Getting congressional and public approval for measures to increase the country’s military preparedness was much easier than getting approval for aiding Britain. Roosevelt, at no small political risk to himself, for the election of 1940 was only months away, agreed to transfer fifty destroyers to Great Britain in exchange for fifty-year leases on bases in British New World possessions. And, more important, he began to formulate an all-aid-short-of-war strategy that he presented to the people as the best way to avoid war itself.
Even before Roosevelt’s “arsenal of democracy” talk, Britain’s financial situation was getting desperate. Britain’s dollar and gold reserves were approaching exhaustion. On his return from Britain on November 23, the British ambassador, Lord Lothian, was blunt, to put it mildly, when he told the reporters who met his plane, “Well, boys, Britain’s broke. It’s your money we want.”
In his State of the Union speech to Congress on January 6, 1941, Roosevelt declared that his policies were aimed at protecting the essential human freedoms of speech and religion and freedom from fear and want. He proposed what soon became known as Lend-Lease. Churchill, a month later, would memorably if disingenuously describe Lend-Lease as a matter of “Give us the tools and we will finish the job.” Roosevelt, a few days earlier, had described it a bit more prosaically, but no less disingenuously, as the equivalent of lending a neighbor whose house was on fire a garden hose, expecting to get it back when the fire was out.
Congress, after a great national debate, approved Lend-Lease on March 11, appropriating $7 billion. By the end of the war, Lend-Lease aid to the Allies would amount to $50,226,845,387. Churchill called it the “most unsordid act in the history of any nation.” It was also, of course, an act of singularly enlightened self-interest. It not only helped the Allies battle Germany and Japan effectively, it also did not create a vast and unpayable debt that would be an impediment to American action in the postwar world as the First World War debts had been in the previous decades.
Britain was still very short of escort vessels, and the Battle of the Atlantic showed signs of going Germany’s way in 1941. Hemmed in by public opinion and congressional restrictions, Roosevelt maneuvered around them. While American warships did not attack German U-boats, American sightings, by both plane and ship, were passed on to the British. In a move of deft politics if dubious geography, Roosevelt got around the restriction against posting American military personnel outside the Western Hemisphere by simply declaring Greenland and Iceland to be part of the Western Hemisphere, and he stationed patrol aircraft there.
Slowly the United States became more and more involved in safeguarding the Atlantic sea lanes, and the USS Greer was attacked in Icelandic waters on September 4. The USS Reuben James was sunk by a German torpedo on October 30. But isolationism was still a potent force in American politics. On August 18 the extension of the Selective Service Act had passed the House by a single vote, 203–202.
ISOLATIONISM VANISHED from the American political landscape on the morning of Sunday, December 7, 1941, when Japanese carrier aircraft attacked and gravely damaged the U.S. Pacific Fleet at Pearl Harbor. The next day Congress declared war on Japan, and on Thursday, December 11, Germany and Italy declared war on the United States.
The Japanese armed forces ran riot in the Pacific for the next six months, taking Hong Kong, the Philippines, Malaya, Singapore, the Solomon Islands, the Dutch East Indies, and Burma, while threatening Australia and India. In the Atlantic, German U-boats sank numerous American ships within sight of the East Coast (indeed, they often used the lights along the shore to silhouette their victims until blackout regulations were implemented). In North Africa, German troops pushed British forces back toward the Suez Canal, vital both to holding the Mediterranean and to denying Middle East oil to the Nazis. In the Soviet Union, the Wehrmacht plunged ever deeper into Russia.
The huge manpower reserves of the United States, Russia, and the British Empire supplied all the military personnel that was necessary. But if the United States and its hard-pressed Allies were to win the war, this country would have to become indeed the arsenal of democracy.
It did, in one of the most astonishing feats in all economic history. In the first six months of 1942, the government gave out more than $100 billion in military contracts, more than the entire gross national product of 1940. In the war years, American industry turned out 6,500 naval vessels; 296,400 airplanes; 86,330 tanks; 64,546 landing craft; 3.5 million jeeps, trucks, and personnel carriers; 53 million deadweight tons of cargo vessels; 12 million rifles, carbines, and machine guns; and 47 million tons of artillery shells, together with millions of tons of uniforms, boots, medical supplies, tents, and a thousand other items needed to fight a modern war.
The Ford Motor Company alone produced more war matériel than the entire Italian economy. By 1944 its Willow Run plant was turning out B-24 bombers at the rate of one every sixty-three minutes. Henry J. Kaiser, who at first knew so little about ships that he referred to the front and the back instead of the bow and stern, brought the techniques of automobile mass production to shipbuilding. He reduced the time needed to build a liberty ship—the standardized freighter of seventy-two hundred tons and thirty thousand parts—from 244 days to 42. A total of 2,710 were produced during the war, each, in Roosevelt’s words, “a blow for the liberty of the free peoples of the world.”
At the Tehran conference in 1943, Joseph Stalin, of all people, offered a toast “to American production, without which this war would have been lost.”
The United States accomplished this awesome feat of industry by turning the world’s largest capitalist economy into a centrally planned one, virtually overnight. Central planning has always proved dismally inefficient at producing the goods and services needed by a consumer economy (largely because the consumers have so little say in what is produced). But central planning has done far better at producing the instruments of war.
When the president first moved to put the American economy on a wartime footing, he relied on the alphabet soup for which the New Deal had become famous. The NDAC (National Defense Advisory Commission), the OPM (Office of Production Management), and the SPAB (Supplies, Priorities and Allocations Board) all came into existence during 1941 but coordinated poorly if at all with one another. In addition, the navy and the army (of which the air force was a part until 1947) continued to operate their separate supply administrations, which often worked at cross purposes with each other and furiously resisted any outside interference from other parts of the government. And with the American economy finally booming again (unemployment fell below 10 percent in 1941 for the first time since 1931, and continued to fall rapidly all year), American companies were not interested in dancing to any tune called by Washington.
With Pearl Harbor, the president quickly realized that a different approach was needed. In early January 1942 he called in Donald Nelson, who was the OPM’s director of priorities. Nelson had been the executive vice president of Sears Roebuck, earning $70,000 a year when he went to work for the government at $15,000. Roosevelt told Nelson he wanted him to take over the job of organizing war production.
“I will if I can boss it,” Nelson replied.
“You can write your own ticket,” the president promised him.
Nelson, Vice President Henry Wallace, and the president discussed the shape of the new agency that would take over the functions of the earlier ones. Nelson suggested calling it the War Production Administration, but Roosevelt suddenly realized that its initials would then be WPA, and decided that War Production Board would have to do instead.
Nelson went back to his office and drew up an executive order creating the WPB and giving it the powers he thought necessary to make the American economy into a war machine and himself the powers as chairman needed to make it an effective and efficient bureaucracy. The president signed the order, and Donald Nelson became, with some exaggeration, the CEO of the American economy.
He was perfectly suited to the job. Born in 1888 in Hannibal, Missouri, he had taken a degree in chemical engineering and planned to get his PhD in the subject, but he went to work for Sears Roebuck as a chemist and stayed for the next thirty years. He soon moved over into management and rose steadily.
During the 1930s Sears stocked in its stores and sold by catalog more than one hundred thousand items, from hat pins to prefabricated houses. (Franklin Roosevelt had once joked that the way to convince the Soviet Union of the superiority of the capitalist system would be to bomb it with Sears Roebuck catalogs.) For years it was Nelson’s job at Sears to learn what items were needed by the retail and catalog operations, find out who would sell them or make them at the best price, and see that the merchandise got to where it was needed, when it was needed. It was the perfect training for his new job as head of the WPB, for Nelson had developed a familiarity with the width, depth, and breadth of American industry that was second to none.
At the WPB, Nelson had three overwhelming priorities. First, he had to find out from the services and the Allies what was needed to win the war. Second, he had to inventory the raw materials the country had on hand, together with the country’s industrial resources. Finally, he had to find ways to fill any gaps between supply and demand.
The most acute shortage throughout the war was rubber. Most of the supply had come from plantations in British possessions in Southeast Asia. These had been largely overrun by the Japanese advance. The collection of wild rubber from its native habitat in the Amazon rain forest—an industry destroyed early in the century by the development of the plantations—was revived and several latex-producing plants that would grow in the United States were cultivated, but it was synthetic rubber that saved the day. In 1939 the United States had produced little if any. In 1945 Du Pont and other companies turned out 820,000 tons. While this sufficed for critical war needs, there was very little available for civilian use, and rubber was nearly unavailable. The war years would long be remembered as the golden age of flat tires and endlessly patched inner tubes.
Tires were the first product to be rationed, only three weeks after Pearl Harbor, and many rubber products were simply unavailable in the marketplace throughout the war. This was true as well of most industrial goods, such as refrigerators and automobiles. Indeed, between 1943 and 1945, the American automobile industry produced exactly thirty-seven automobiles. By the end of the war, thirteen rationing programs were in effect, covering such scarce commodities as gasoline, sugar, coffee, butter, fats and oils, red meat, and shoes. But rationing was nowhere near as severe as it was in Britain, where so much more had to be imported through the Atlantic lifeline.
The most politically difficult job facing Donald Nelson was deciding what was to be produced first and what could wait. The army air force wanted one sort of plane, the navy needed another, and both wanted them now. But there wasn’t enough aluminum available in the early days of the war to produce all the aircraft needed, and it was Nelson who had to decide who waited.
The WPB was divided into several “industrial branches,” each responsible for a particular industry and charged with knowing exactly what every plant in that industry could produce, what it was producing at the moment, what it was already committed to produce in the future, and what inventory it possessed. These data were sent up the line to WPB divisions in charge of overall materials, allocations, production, and procurement decisions. It was at this level that individual orders for equipment and matériel were weighed against one another, approved, given a priority, and sent to the plant that was to produce them, along with requisitions for the necessary raw materials. By the end of 1942 the WPB was the largest of the wartime bureaucracies in Washington, with twenty-five thousand employees. It used as much paper every day as a good-sized newspaper.
IN 1940 THE GROSS NATIONAL PRODUCT was $99.7 billion. In 1945 it was $211.9 billion. Even taking into account the 25 percent wartime inflation (kept in check by stringent wartime wage and price controls), GNP increased by 56.3 percent.
Unemployment, meanwhile, became essentially nonexistent. With 20 percent of the male population in uniform, millions of industrial jobs were filled by women, soon known collectively as “Rosie the riveter.” By the end of the war they constituted fully one-third of the American labor force, and there was hardly a job they did not fill, from cowhands to lumberjacks (nicknamed, inevitably, limberjills). Under some government pressure at first, industrial firms offered on-the-job training in such previously men-only specialties as welding and crane operating.
The war also greatly increased the migration of poor black families from the South to northern industrial cities, which had begun during the First World War. Both of these consequences of the economic requirements of the war would have a great impact on the American economy and take decades to play out. But they both changed the country profoundly and, once again, increased economic opportunities for large segments of the population.
As with all of the country’s major wars, government revenues and outlays rose both sharply and permanently. The government had never spent more than $18.5 billion in a single year (1919) before the First World War. Since the war it has never spent less than $33 billion (and, for all but five years in the late 1940s and early 1950s, never less than $60 billion).
The national debt soared along with expenses. It had stood at $43 billion just before the war. By 1946 it was at $269.4 billion, equal to 130 percent of GNP, by far the highest it has ever been before or since. Once again, bond drives were instituted on a mammoth scale to help fund the war. But only about a quarter of these bonds were taken by individuals. The rest were taken by banks, insurance companies, and other financial institutions. Commercial banks had held less than a billion in Treasury securities in 1941. By 1945 they held some $24 billion.
The United States was able to pay for about 45 percent of the war through taxation, far more than in the First World War or the Civil War. The Revenue Act of 1942 transformed the federal tax system. Before 1942 the income tax largely affected the middle class and the rich. In that year only about four million Americans paid any income tax at all. By the following year, after the personal exemption had been lowered from $1,231 to $624, seventeen million owed income taxes, bringing those taxes, “from the country club…district down to the railroad tracks and then over to the other side of the tracks.” By the end of the war, as more and more Americans took wage-paying jobs, 42.6 million Americans were paying income taxes. Meanwhile rates on high incomes were raised sharply to as much as 94 percent. For the first time, the personal income tax yielded more revenue than the corporate income tax, twice as much by the end of the war.
The Revenue Act of 1942 brought another large and permanent change to the income tax: withholding. Until then, people who owed income taxes simply paid them every year. Now estimated taxes were taken out of each paycheck, which helped greatly to smooth out the Treasury’s cash flow and, once withholding became familiar, also helped to hide the tax bite from the citizenry.
Despite the greatly increased federal taxes and strict wage and price controls, that citizenry was prospering economically as never before. But because so much of the economy was absorbed in war production, there was little to buy over and above necessities. The surplus income went into savings. In 1940 personal savings had amounted to $4.2 billion, the same as in 1929. Over the next five years, personal savings totaled an astonishing $137.5 billion, which went into savings accounts, insurance policies, and government bonds, and to paying down debt. Where little of it went was into Wall Street, despite the enormous growth of corporate profits. The memories of 1929 and the early 1930s were still too vivid.
HAD IT NOT BEEN for wage and price controls, corporations, desperate for workers, would have competed for the available labor by raising wages sharply. Unable to do so, they competed using other, nonmonetary forms of compensation. The most important of these in the long term was hospitalization insurance.
Medical insurance was something very new. The first hospitalization plan had been introduced only in 1929 when Baylor University Hospital in Dallas, seeking to smooth out its cash flow, had agreed to provide up to twenty-one days of hospital care each to a group of fifteen hundred schoolteachers in return for a premium of $6 a year. This type of insurance quickly spread, soon evolving into the Blue Cross and Blue Shield plans that would dominate medical insurance for decades.
But this model contained the seeds of great problems. For one thing, it was what is called “front loaded”; in other words, it paid for the first dollar of medical or hospital costs, not the last dollar. It covered the costs of a short illness, but not a protracted one. It was a bit like house insurance that paid for a broken window but not for the roof being torn off in a storm. In 1929, however, twenty-one days was a very long hospital stay, and given the level of medical technology at that time, the daily cost of hospital care was about the same, whatever ailed the patient. Also, these policies paid to cure illness but not to prevent it.
And unlike ordinary insurance, it paid the bill, whatever it was, rather than giving the insurance holder a check and letting him decide how best to correct the situation. This made consumers (that is, insured patients) indifferent to the costs involved, a vital element of a well-functioning free market. Further, these policies paid off only if the patient was treated in a hospital, the most expensive form of medical treatment. Thus doctors found themselves under pressure to admit patients to hospitals who might have been treated just as well, and far more cheaply, in the office or at home.
Medical insurance was still quite uncommon on the eve of the war, but it was perk of employment for millions by the end of the war. After the war, the IRS tried to tax this considerable benefit, but Congress quickly stepped in and ordered the IRS to treat it as a nontaxable, deductible business expense of corporations (but medical insurance purchased by individuals had no such tax advantage, an increasingly serious distortion of the labor market as more and more people became self-employed). In 1948 the National Labor Relations Board ruled that health benefits were subject to collective bargaining, and medical insurance spread quickly through the American economy. By 1950 some 54.5 million people were covered by employer-paid health plans, more than a third of the total population.
By removing the threat of economic catastrophe, medical insurance greatly improved the quality of life for those covered. But, because of its peculiar history, when American medical insurance interacted with the revolution in health care that had been gathering force since the 1930s and exploded in the decades after the Second World War, the results would be an economic problem of enormous size for the country.
ON SEPTEMBER 1, 1945, the USS Missouri entered Tokyo Bay, and Japan formally surrendered the next day to the Allied forces, ending the war. More than fifty million people had died, not only soldiers but, for the first time in the history of modern warfare, even greater numbers of civilians. The costs had been immeasurable. But those costs had not been evenly shared by the major combatants.
Germany and Japan lay in ruins. Roosevelt’s assistant Harry Hopkins, flying over Berlin shortly after the war, called it, “a modern Carthage.” The Soviet Union, although greatly strengthened geopolitically, had lost a greater percentage of its population than any other country, and had had much of its most productive areas laid waste by combat. Britain and France were militarily and financially exhausted (Britain, by one estimate, expended about one-quarter of its total national wealth on the war). Their great colonial empires would soon melt away.
The vast territory of the United States and its industrial base, however, had been untouched by the war. Its productive capacity had been hugely increased and its population enriched. Its economy, by far the largest on earth before the war, now produced fully 50 percent of the world’s gross product. Eighty percent of the world’s monetary gold belonged to the United States; most of the rest was stored in the vaults beneath the New York Federal Reserve bank. Under the Bretton Woods Agreement of 1944, the dollar, convertible into gold by central banks, would be the world’s primary reserve currency and the basis of world trade in the future.
The American army was the best equipped in the world and second in size only to that of the Soviet Union; the navy and air force were larger than the navies and air forces of the rest of the world combined. It had a monopoly on the most fearsome weapon of war ever conceived, the atomic bomb. No country in history had possessed such a preponderance of military and economic power.
Most of all, the American people had been greatly energized by the battle, just as they had been by the fearful struggle of the Civil War eighty years earlier. At the cost of $300 billion and four hundred thousand lives, they had not only maintained their own liberty and saved that of countless others, they had brought liberty—for the first time—to many millions more.
Gone from the American body politic was the soul-destroying fear that had gripped the nation in 1933. Gone too was the nostalgic pull of isolationism. The United States now accepted the inevitable—that it must lead the world—because no one else could, and American security would soon depend on it.