The growing political tension in Europe during 1938 and the outbreak of hostilities in September 1939 contributed, more than any other domestic measure, to relieve the US economy from that phase of depression which, which began in the last quarter of 1937, it had reached its maximum severity in May 1938, with an index of industrial production reduced to 78% of the average for the five-year period 1935-39 and a total of about 10 million unemployed.
As a consequence of the fears of the approach of the conflict there was, starting from September 1938, a growing influx of gold, due in part to the transfer of capital in search of refuge and in part to the greater exports of goods to European countries. prepared for war. After September 1939, the inflow of gold through the movement of capital was considerably reduced, owing to the limitations imposed in the belligerent countries on private transfers; on the other hand, imports of gold increased more and more in the face of exports of goods to the struggling countries, part of which was paid for with the liquidation of assets in the USA following these operations, the official gold reserves of the country, which in the end in 1937 did not reach 13 billion dollars, they went to 17.
In September 1939 the War Resources Board was established to study the needs and sources of supply of defense materials; this was followed, in May 1940, by the Office for Emergency Management for the elaboration of the entire defense program; the assets in the US of citizens of the various occupied countries or in any case entered the orbit of the Axis were then gradually blocked; finally, in March 1941, with the Lend – lease act) the sending of materials of all kinds to countries fighting against the Axis was authorized. At the same time, the financing of the defense program was ensured and measures were taken to minimize the inflationary repercussions of the increase in production for war purposes. Defense spending, which in July 1940 did not yet reach 200 million per month, exceeded 500 million in the following January, reached 900 million in July 1941, and reached 1.7 billion per month on the eve of Pearl Harbor. Part of these expenses was met with an increase in taxation (in 1940 the minimum income tax exemptions were reduced; companies, in addition to subjecting to an increase of about a third of the ordinary tax, were affected by a new tax on excess profits; the rates of other taxes were increased on average by 10%; in March 1941 all new state issues were subject to federal income tax; finally, with Revenue act of September 1941 the entire system of income tax was changed; all these changes ensured the tax authorities increased revenue of about 5 billion); a greater part through the issuance of public debt securities, mainly long-term, which efforts were made to preferably place among private individuals (between June 1938 and June 1941 the public debt increased by almost 12 billion); finally another part through the bank financing of state contracts, allowed and regulated by a law of October 1940.
The policy of the Federal Reserve System (FRS) aimed at achieving two main objectives: to keep government bonds stable on the market – in order to facilitate the placement of new issues – and to reduce the circulating average to a minimum compatible with the needs of defense. The interventions to achieve the first objective were very limited; Instead, legislation aimed at containing the expansion of credit had greater development. Especially important is Regulation W. of the FR Board (August 21, 1941) which established restrictions on installment sales, and the increase, also decreed by the Board, starting from November 1, 1941, of the compulsory reserves of member banks up to the maximum permitted by law (26% of sight deposits for banks in New York and Chicago; 20% for those located in cities where RF banks are located; 14.4% for others; 6% of term deposits for all types of banks). Parallel to the action of the FRS was that of the government, aimed at combating inflation through price control and rationing, implemented through the OPA (Office of Price Administration and Civilian Supply, established in April 1941),
Thanks to the measures reviewed, the US found themselves in December 1941 in the best conditions to start the war. The economic-financial situation of the country at that time can be summarized in the following figures: industrial production index (base 1935-39) = 167; unemployment about 4 million (December 1938 about 9 million); wholesale price index (base 1938) = 111; cost of living index (base 1938) = 104; circulation = 9.6 billion (December 1938 = 5.8 billion); sight deposits = 39 billion (December 1938 = 26 billion); public debt = 49 billion (December 1938 = 37.2 billion), with an interest charge of 1.3 billion (1938 = 1.1 billion); national income for the year 1941 = 97 billion (1938 = 64 billion).
With the participation of the US in the conflict, the whole mechanism set up to channel the available resources towards the purposes of war began to work at full capacity.
Control over war production was entrusted to a new body, established in January 1942 with very broad powers, the War Production Board; the price control became more rigorous with the enactment, in the same month of January, of the Emergency price control act and with the publication, in the following April, of a regulation that bound the prices of most of the goods intended for civil consumption, services and leases to the level of March 1942. With a provision of March 1942 the state guarantee was granted to loans made to finance war production; through various offices several million workers were directed to war production and conveniently trained. Public spending in the four years between July 1941 and June 1945 reached the total figure of 305 billion, over 90% of which directly or indirectly attributable to the war. Thanks to the tax increases decreed by Congress in 1942, to the improvements in the assessment and collection systems made in 1943 and to the higher revenue deriving from the increase in national income, the state was able to collect for taxes in the four years the amount of 125 billion, equal to approximately 41% of the total expenditure. Faced with the imperious need for money to cover the remainder, the Treasury offered for subscription securities with characteristics capable of satisfying the needs of the various categories of investors, and the FRS pursued a complex policy aimed at keeping the rate of interest low. . Depending on the various measures adopted, between June 1941 and December 1945 the banking system absorbed 93 billion of government bonds (22 of which purchased by the FRS), that is to say more than 40% of the issues of the period.
Subject to the needs of financing the war, however, the FRS did not fail to take measures to curb the race to inflation as much as possible. In this regard, the further restrictions on the installment sale credit in the first half of 1942 deserve special mention; the efforts made, in collaboration with the Treasury, to place the largest possible quantity of government bonds offered for subscription among private individuals; the persuasion carried out at the banks to induce them to limit credit in sectors not directly affecting war production; finally, the increase in the coverage margins for transactions in securities, which were brought in February 1945 to 50% of the market value of the securities and further increased to 75% from 5 July 1945.
The heavy expenses incurred by the government for purchases of goods and services abroad and the foreign expenses of the troops determined during the war an exodus of gold from the US and an increase in the availability of dollars in many foreign countries, especially in the United States. Latin America. The official gold reserves of the US fell at the end of 1943 to 21.9 billion and fell to 20.1 billion at the end of 1945. Much of the gold, however, did not physically leave the country, but remained credited to it, earmarked, at the Reserve Banks in favor of governments or central banks of foreign countries (2.2 billion at the end of 1941 and 4.2 billion at the end of 1945). Foreign dollar holdings increased by about 3 billion during the war, reaching 6.4 billion at the end of December 1945.
The unfavorable trend in the US balance of payments for the period under review, in addition to the causes already mentioned, was largely influenced by the fact that during the whole war the majority of US exports were under the rent and loan law and therefore under the law. mostly free. (For the extent of the supplies see rents and loans ; foreign loans in this Appendix).
At the end of the war, the economic-financial situation of the US had undergone the following changes: the industrial production index, after the maximum of 239 (1935-39 = 100) reached in 1943, had dropped to 203; unemployment, after falling to insignificant figures in the autumn of 1944, numbered about one million; the wholesale price index had reached the level of 134, the cost of living index had passed to 128, circulation to 26.5 billion (December 1945); sight deposits at 75.9 billion (December 1945); the public debt of 278.1 billion (December 1945), with an interest charge of 3.6 billion (financial year 1944-45); the national income (year 1945) to 161 billion.
With the end of hostilities almost simultaneously new, complex problems arose to be solved: reconversion of the economy from the organization of war to that of peace; limitation of the increase in prices, which tended to grow strongly due to the imbalance between a large demand, boosted by the liquidity accumulated in the hands of the public during the war years, and a limited supply due to the initial scarce availability of goods and services; various financial problems, internal and external.
The reconversion, which began in many cases before the war ended, and favored with various measures (tax breaks and reimbursement of taxes paid during the war, suspension of rationing and controls in some sectors, sale of state-owned companies to private individuals, etc.) it generally took place without excessive difficulty and in a shorter period of time than expected. The industrial production index, which fell between February 1945 and February 1946 from 235 to 152, increased under the pressure of the strong demand which was postponed to 182 (end of 1946) and 200 (end of 1947).
Less satisfactory results, also due to the influence of opposing interests, were instead obtained in the fight against inflation. In the period between September 1945 and June 1946, thanks to continued government controls, the official wholesale price index only increased from 134 to 144; however, following the almost complete abolition of price controls and subsidies, between July and November 1946, and the abolition, from 1 November 1947, of credit controls for installment sales – both wanted by Congress, despite the contrary warning of the monetary authorities and the repeated calls for more powers to fight inflation made by President Truman – the index rose to 179 at the end of 1946 and to 208 at the end of 1947, highlighting a devaluation of over 50% of the dollar’s purchasing power in terms of wholesale goods. This happened despite the government and FRS interventions to curb inflation through the use of the limited means at their disposal. State spending sharply decreased with the cessation of hostilities, the Treasury used, in the course of 1946, most of its ample cash available for the repayment of short-term public debt (mainly held by the banks), which decreased by 20 billion, helping to limit the expansion of bank credit; with the need to encourage government issuance gone, the FR Board abolished, in the spring of 1946, the 1/2% favor rate introduced during the war for advances on government bonds; in July 1947, as the signs of inflation increased and therefore the need for more vigorous measures increased, the provision that obliged the FRS to purchase bills of exchange from the Treasury banks at a rate of 3/8% was also abolished. At the same time, a policy of increasing the cost of money was initiated, the main steps of which were: the gradual increase in the interest rate on short-term Treasury securities up to 1.16% for three-month and 1-month issues., 25% for those at one year; the gradual increase in the official discount rate up to 1½ per cent, from 13 August 1948; lowering the level of price support for long-term government bonds. The FRS also made use of the other means of market control at its disposal, raising the coverage margins for securities transactions to 100% in January 1946 (which were however brought back to 75% in February 1947) and increasing the required reserves of member banks located in New York City and Chicago in the first half of 1948 from 20 to 24%. These measures proved insufficient, the FRS, having obtained the necessary powers from the Congress, in September 1948 Regulation W with some temperaments and increased the required reserves to 26.22 and 16% of sight deposits respectively for the three categories of member banks and to 7½% of term deposits for all member banks.
In the field of public finance, even astonishing was the speed with which the balance of the state budget was restored, as can be seen from the following figures:
In fact, the 1947-48 budget closed with a surplus of 8.4 billion, thanks above all to the persistence of a high level of taxation and despite the fact that the expenses directly connected with the war still amounted to 22.3 billion. The budget deficits for the years 1948 and 1949 are mainly attributable to the tax relief approved by Congress in April 1948; the main items of expenditure include those for defense (29 and 34% respectively for the two years), for aid abroad (18 and 16%), for assistance to veterans (17 and 13%) and for interest on public debt (13%).
With the end of the war, the US balance of payments underwent a radical transformation. Once the free allocations for rent and loans had ended and expenses abroad decreased sharply, the growing demand for American goods by foreign countries gave rise to the problem of financing export surpluses, which amounted to about 22.5 billion over the three-year period. 1946-48. A part of these continued to be financed with free allocations to the various bodies set up within the UN for assistance to war-damaged countries (first among these UNRRA, which received US contributions for 2.7 billion) or through direct aid, such as aid to the civilian populations of the territories occupied by American troops (2.5 billion until 30 September 1948), Economic Cooperation Act of April 3, 1948, currently being disbursed in favor of the countries participating in the OEEC, according to a four-year plan which provides, for the first year, free allocations for about 4 billion and long-term loans for about one billion (v. economic plan: Marshall Plan). Another part of the exports was financed with the use of dollar holdings and with transfers of gold. In the course of the three-year period 1946-48, net foreign funds held by the banking system decreased by 2 billion, reducing to approximately 4.5 billion; in the same period of time the official gold reserves, despite a payment of 687.5 million to the Interfund, increased by 4.1 billion, passing to 24.2 billion; part of the gold was withdrawn from that deposited on behalf of foreign countries, which fell at the end of 1947 to 3.8 billion. The third source of export financing was loans. Faced with the need to meet war-damaged countries also with this form of help, with the law of July 31, 1945, the lending capacity of the Export-Import Bank was increased from 700 to 3500 million. At 30 June 1948 the Bank had outstanding loans for approximately 2.9 billion, of which 2.2 billion actually disbursed. The main borrowers were France (1.2 billion), Canada (300 million, of which 160 still to be disbursed) and Holland (192 million). Italy had loans for 109 million, of which almost 33 were disbursed. The Bank was also recently commissioned to administer ERP loans. Other loans were granted to complete the rental and loan supplies (pipeline credits) for an amount of approximately 1.2 billion, for the sale in foreign countries of the remnants of war (1.3 billion), to meet the special needs of some countries. Among the loans of the latter category, the one of $ 3,750 million granted to Great Britain in December 1945, to help it overcome the transition period, deserves special mention.
Finally, also in the field of international financial activity, the work carried out by the US to create the Bretton Woods institutes (see) and to ensure their functioning should be remembered. The US participates in the Fund with a share of 2750 million dollars, equal to approximately 34% of the total amount subscribed so far, and in the Bank with a share of 3175 million, equal to 38% of the total current subscriptions, and therefore exercise a predominant influence in both organisms. In order to coordinate the international financial activity with the internal one, the National Advisory Council on international monetary and financial problems was established by law of 31 July 1945 (the same that authorized the participation of the US in the Bretton Woods institutes).
At 31 December 1948 the economic and financial situation of the US was thus modified with respect to that at the end of the war: the industrial production index had dropped to 189; the number of unemployed had increased to about 1.9 million; the wholesale price index had further risen to 206; the cost of living index had risen to 170; circulation had dropped to 25.7 billion; sight deposits had gone up to 85.8 billion and term deposits to 57.3 billion; public debt had further decreased to 252.8 billion and was composed of 45.9 billion short-term Treasury securities, 111.4 billion medium and long-term Treasury certificates, for 55, 4 billion from savings certificates (capitalization securities similar to Italian interest-bearing postal bonds) and the remainder from special issues, tax certificates and non-interest bearing debt; the national income, on the basis of the data of the first three quarters of 1948, was estimated for the whole of 1948 at 221.5 milliards.
