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Jack Ranger

Boom and Bust in American Prosperity

The Growing Role of Armaments
in the National Economy

(March 1949)

From The New International, Vol. XV No. 3, March 1949, pp. 67–72.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Professor Schumpeter, in his interesting but grotesque book, Capitalism, Socialism and Democracy, remarks that “any prolonged period of depression or of unsatisfactory recovery will verify any pessimistic forecast.”

Conversely, any prolonged period of prosperity will verify, or appear to verify, any optimistic forecast. What we have had in the United States for eight years is a period of prosperity such as this nation (or any other nation) has never in history experienced.

In such an economic climate it was easy for all sorts of capitalist and social-democratic economic theories to win acceptance among intellectuals and labor leaders, at the expense of Marxism. The Marxist analysis and criticism of capitalism tended to be shoved into the background, and “new” theories, which explained nothing but which looked kindly upon capitalism and its work, became the popularly accepted ones.

John Chamberlain and James Burnham, who, in the depth of the depression, were predicting the socialist revolution, became ardent opponents of socialism. Perhaps the next turn of the economic cycle will again work its charms upon such people and their “theories” will reflect the economic ill health of the country.

The next turn of the cycle? When will it come? Because economics is still not an exact science, it is not possible to predict accurately when the post-war economic boom in the United States will collapse. Marxists (and other economists) can predict that the boom will be succeeded by a depression. Under capitalism it could not be otherwise. But no one can put his finger on the calendar and say: “This is doomsday.”

It is, however, possible to enumerate the major factors responsible for the boom, to measure roughly the development of each factor, and to estimate its weight in contributing to the end of the boom and the beginning of the depression.

What Made the Boom?

These are the factors which have joined to build up in the United States since the end of the war the greatest economic boom the nation has ever known:

  1. Tremendous peacetime military expenditures. Today Washington is spending on armaments alone almost twice what it spent for the total national budget before 1940.
  2. Swollen and artificially sustained exports, brought about by the division and ruin of Europe and by U.S. gifts and loans to that unhappy continent.
  3. Unprecedented capital-goods investments by U.S. industry in new plant and equipment.
  4. The gradual building up in the United States of huge inventories of goods at all levels – in the factories; in the wholesale warehouses, in the retail stores, in the granaries, etc.
  5. Increasing mass indebtedness as the people attempt to supplement their inadequate wages and salaries with heavier credit and installment buying. While on the one hand this braces up the mass demand for goods, on the other it prepares the way for the economic devastation to follow when unemployment begins to spread throughout the economic body and people have to renege on their debts.
  6. Public works, now at a level higher than in any other peacetime year. Yes, higher than in the old WPA days.

These are the major factors that have created the boom, that carried employment above the 60,000,000 mark, that have boosted corporate profits each year to record-breaking levels.

The Depression Is Nearer

How much closer to the depression are we today than we were one year ago?

This question is in the minds of all. The sharp increase to 3,000,000 or more in the number of unemployed since the first of the year has jolted every adult’s memory back to the years from 1929 to 1940. Fear of the future, well-founded fear, is widespread. Is this it? Will the army of 3,000,000 grow to 13,000,000 – to 30,000,000 ? Or do the capitalist class and its government have resources which can temporarily stave off the catastrophe? Let us take a closer look at what has been happening.

PRICES: Wholesale prices today are 12.5 per cent above one year ago, at a post-war high of 166.8 per cent of the 1926 average. Retail prices (despite the widely advertised but small drops of recent months) are correspondingly higher than they were a year ago.

The mid-November 1948 index of the cost of living was 172.2 per cent of the 1935–39 base of 100.

This was 4.4 per cent above the November 1947 level, and 29.6 per cent above the living cost index in June 1946, when price controls were lifted. (President Truman still had a Democratic majority in control of both houses of Congress at that time.)

Living costs in November 1948 were 74.6 per cent above August 1939, when the Second World War began. Some food prices have begun to edge down, but food prices are still considerably higher than they were at the beginning of 1948. Rents, on the other hand, continue to climb, as do the prices of many durable consumer items and of freight rates.

Here is the Bureau of Labor Statistics index of wholesale prices, based on 1926 as 100:




























PRODUCTION: The value of all goods produced and services rendered in 1948 in the United States was $253 billion, about $20 billion above 1947.

CONSUMER PURCHASING POWER: This is lower today than at any time since 1942, according to statistics of the President’s Council of Economic Advisers. Climbing prices have not only wiped out an actual gain in per-capita income after taxes, but have sent the purchasing power of that income reeling backward.

In 1939 the share of national income going to employees was 65.9 per cent. By 1946 it stood at 65.4 per cent. Then price controls and rationing were completely removed, a blow aimed straight at the living standards of the masses. In 1947, the share of national income received by employees dropped sharply to 62.9 per cent, and during the first half of 1948 declined further to 61.9 per cent.

PROFITS: The complement to this decline in the proportion of national income going to the employees is the growth in the share going to the owners of industry.

In 1939 corporate profits (before taxes and including inventory valuation adjustments) comprised 8 per cent of the total national income; by 1946 this had been raised to 9.4 per cent. Corporate profits then jumped to 12.2 per cent of the total national income in 1947 and to 12.3 per cent in the first half of 1948. Between 1946 and the first half of 1948, the distribution of our national income had been shifted, through reducing the relative share going to employees by 5.4 per cent and through boosting the corporate profits share of the national income by 31 per cent.

According to the Commerce Department, corporate profits in 1948 increased more than any other type of income.

As to volume, profits rose from an annual rate of $24.7 billion in the first quarter of 1948 to a rate of $30.9 billion in the second quarter, excluding $2.5 billion in paper profits on inventories. By the third quarter profits were at an annual rate of $35.6 billion. The profits of unincorporated business and the rental income of landlords rose from an annual rate of $46 billion to an annual rate of $51.9 billion between the first and second quarters of 1948, and continued to grow during the rest of the year.

Corporation profits after taxes also set a new alltime record. The rate reached $21.7 billion a year in the third quarter of 1948, or 20 per cent above a year ago, which in its time represented an all-time high. Profits in 1948 were more than double those in 1929, year of the crash.

Mass Indebtedness Rises

According to the Federal Reserve Board, “during the three years since V-J Day, the American public has gone into debt more than in any other period in history.” The board estimated that by the end of 1948, some 40,000,000 American families would owe more than $50 billion for home mortgages and consumer goods.

Mortgage debt jumped $10 billion in the three post-war years, to a present total above $32 billion, chiefly as the result of home buying at inflated prices, the Reserve Board said.

Credit given to retail buyers expanded over $9 billion since the war’s end, to a total of $15 billion. This figure, despite regulation “M” and the moans of Mr. Kaiser, is rising steeply and represents a great danger to capitalist stability. Consumer credit in June 1947 totaled $10.8 billion, which was 38 per cent above that of June 1946. From June 1947 to January 1949 the masses went into debt another $4.2 billion.

At the close of 1948 total private debt had reached an all-time high of $190 billion. The total of public and private debt neared $425 billion, compared with a total of $192 billion in 1929. If we were keeping books on an individual, this would be the statistical expression of bankruptcy, or very nearly so. The prosperity of the immediate past has mortgaged the future, and the overhead expenses and wars of capitalism are not at an end. At the same time, consumers are saving less and less. By 1947, almost three of every ten “spending units” spent more than they received, according to the Federal Reserve Board. This reflected the continued “heavy” use of liquid assets and credit to buy durable goods and other consumer goods and services. One spending unit (one family, approximately) in ten neither saved nor “dissaved” in 1947. Those who saved (the wealthy) tucked away about $25 billion in 1947, while the dissavers (the workers, by and large) spent about $11 billion above their incomes.

More than twenty-five out of every hundred consumer units with incomes of $3,000 or more in 1947 spent more than they made that year, against fewer than twenty of every hundred in 1946. “Top income units accounted for a larger part of net savings in 1947,” was the Reserve Board’s way of saying that the rich got richer, the poor got poorer.

This is an important point. Economists in early 1949 continued to refer to the vast amount of savings for the nation as a whole. Pointless statistics! The people who have the savings are the rich, who live comfortably and buy accordingly. But these people constitute a very tiny segment of the population. If they all spent with the most reckless extravagance, they could still not create that mass purchasing power which is necessary to sustain capitalism at a high level.

Real Earnings Dip

Not only has the workers’ relative share of the national income been whittled down, but their real earnings have been steadily declining. In terms of the 1939 purchasing power of the dollar and after provision for the meager tax relief granted in 1948, the average weekly take-home pay of a single worker (with no dependents) in manufacturing had dropped from $30.32 in 1944 to $26.86 in the first half of 1948. For a worker with three dependents the decline was from $34.89 to $30.24 during the same period. The percentage decline in real take-home pay for the above workers was 11.4 and 13.3, respectively.

Dividends were the highest in 1948 of any year since the war. Cash dividends publicly reported approximated $5.75 billion, compared with $5.17 billion in 1947. (Publicly declared dividends are estimated to represent 60 per cent of all dividends paid.)

High as these dividends appear to be, stockholders’ returns averaged less than one half the available earnings of corporations. The corporations sought to justify their retention of profits by asserting the investment market was unable to furnish them funds for expansion. It was said that investors were “reluctant” to subscribe for new stock issues.

Though there is a grain of truth in this interpretation, it would be more correct to say that investors were refraining from buying stock because the corporations were slighting dividends at the expense of diverting the profits to new plant or equipment, or simply of retaining the profits. Whereas in 1929 dividends accounted for 6.7 per cent of the national income, in 1933 they accounted for 5.2 per cent of the national income, and in the first half of 1948 for only 3.3 per cent.

Industry’s investment in plant and equipment in 1948 was $18.4 billion, almost exactly the extent of 1947 profits. The Chicago Journal of Commerce pointed out that this was “a comparatively new phenomenon. In the old days new plant and equipment were made possible largely by equity capital.”

With profits on such a lavish scale, big business is using them for the purpose of itself financing a tremendous expansion of physical plant.

“But isn’t that what capitalism is for?” asks the defender of capitalism. “Isn’t that the ‘creative destruction’ that Schumpeter and other social-democratic apologists hail?”

To be sure! All that should be pointed out is that

  1. the expansion is being financed from the surplus value taken from the workers;
  2. that by and large it is being financed by each business itself, creating still greater concentrations of capital in the hands of the few;
  3. that it is an anarchistic planning (without allowing for the possibilities of consumptive forces in America or the world buying back what the enhanced new plant will be used to produce);
  4. that it is contributing to inflationary forces by taking such huge amounts of building materials and steel; and
  5. that in the coming depression this huge productive apparatus will result in a greater unemployment than would have been the case had the new plant been created according to a harmonious plan.

How It Looks to a Capitalist

Let us see how a capitalist looks at this expansion of industry’s physical plant. M.J. Lovell, director and counsel of the National Association of Shirt and Pajama Manufacturers, wrote an interesting letter to the New York Journal of Commerce on this point. He said that the American shirt industry had suffered from “two fundamental defects in the last 22 years which had prevented that industry from being one of the greatest in the country – its comparatively low wage scale, and the industry’s tremendous capacity to produce.”

Mr. Lovell assured his readers that “the first of these inherent weaknesses has been corrected and the industry now pays a wage comparing favorably with that of the best in the land.

“The second defect in the industry is one which has been considerably enhanced, namely, its capacity to produce,” he continued. “While the former capacity of the industry was about 16,000,000 dozen shirts per year, this has now been increased to 20,000,000 dozen shirts per year.”

Mr. Lovell lamented the fact that statistics showed that when the industry was producing at 75 per cent of capacity, it furnished enough shirts to meet the normal demands of consumption, but when the industry produced in excess of 75 per cent it was overproducing, with the result that inventories piled up and more goods were offered for sale than the consumption warranted, thus resulting in a lowering of price.

Now, according to him, the installation of additional machinery and the improved efficiency of the production methods has increased the capacity potential of the shirt industry by 25 per cent.

“Why shouldn’t the industry be able to produce at 100 per cent of capacity without over producing insofar as consumption in the country is concerned?” plaintively asks our philosopher of the shirt.

That indeed is the question, which Marx answered some time ago.

“The annual shirt consumption in the United States amounts to only three shirts per man per year,” declares Mr. Lovell. “If the male population could be induced to buy only one shirt per man per year more, it would take up the slack between production at less than capacity and full production, with the resultant savings in cost and therefore in price to the consumer.”

But, alas! capitalism does not provide the worker with the wherewithal to purchase “one shirt more,” nor does capitalism permit the capitalist to produce at capacity for very long.

Our daily papers during the January sales told the story of what has been happening to Mr. Lovell’s shirt industry – and to a lot of other industries. The news stories in the back financial section told what was beginning to happen to employment.


Because workers have not received back in wages the value of what, they have produced, the masses have not been able to hold up their purchases to match their production. Consequently goods are piling up higher and higher in the factories, warehouses and stores. The government takes huge amounts of these surplus goods and gives them away abroad, but still the goods pile up.

In September 1947 business inventories totaled about $40 billion. By July 1948 they had risen more than 20 per cent, to $51.7 billion. Inventories of manufacturers stood at $30.1 billion in July; wholesale inventories at $8 billion, and retail inventories at $13.6 billion. From July to November, total inventories rose another $2.7 billion, to $54.4 billion.

These statistics are seriously disturbing. A Chicago Journal of Commerce report points out that “the essential difference between high inventories this year and last seems to be that this year the increase in holdings is due to buyers’ resistance, whereas last year the rise was due to enforced protective buying by business as a hedge against higher prices.”

“Buyers’ resistance” is the equivalent of “no money in the wallet.” People are not so much waiting for prices to come down as they are trying to make their pay checks stretch from one week to the next.

As progressively serious as the economic situation is becoming in the United States, it would already have reached catastrophic levels if it were not for the arms program and the Marshall Plan aid to Europe.

First let us look at the significant export-import statistics.

In the years 1936 to 1938, U.S. exports averaged $3 billion a year, and imports averaged $2.5 billion.

The Second World War ruined Europe. The ruination of Europe has contributed vastly to the post-war boom in the United States, but now even that prop to our economy is washing away.

In 1947 U.S. exports totaled $15.3 billion – more than five times pre-war – and imports totaled $5.7 billion. Such a gross unbalance could not be continued for long. By 1948, even with Marshall Plan dollars, exports did not total more than $12.6 billion, a decline of more than 15 per cent. The spreading wave of dollar shortages led to an epidemic of import and exchange restrictions in Europe and Latin America.

In August 1948, U.S. exports fell below the $1 billion mark for the first month in almost two years; reaching only $988,200,000; in September, they fell another $61,700,000, to $926,500,000.

Despite the billions that ECA is pouring into Europe, U.S. exports continue to drop steadily. While the principal emphasis of ECA legislation has been on the economic recovery of Europe:

“Congressmen were not unaware,” as the New York Journal of Commerce reporter delicately put it, “that the ECA program presented an opportunity to dispose of some American surpluses abroad. It is certain that some Congressmen and private groups look upon the program as a means to benefit American agriculture and industry rather than as a means to help Europe. Declining exports, if they continue the trend which started last March, may well place the emphasis on aiding America, rather than on recovery in Europe.”

While exports to Europe are decreasing, imports from Europe are rising. This points to increasing European production, and to the end of U.S. sales in Europe at some point in the not-too-distant future.

Let us look at one commodity, coal, in this connection.

In the Ruhr, 1948 monthly coal production exceeded 6,500,000 metric tons, 30 per cent above the 1945 level and 60 per cent of the pre-war level in 1937. In 1948, the weekly average coal production in Great Britain rose to 3,900,000 tons. The 1948 average monthly coal production in Poland was 6,000,000 tons, exceeding the 1937 figure by 500,000 tons. Coal exports from the U.S. fell from 24,000,000 net tons in the January-to-August period in 1947 to 13,000,000 tons in the same period of 1948. These statistics point to the ultimate elimination of the European coal market and the return to our customary outlets in Canada and South America.

The coal illustration shows why it will become more and more difficult for the United States to keep the Marshall Plan going at 1948 levels, even if big business sees this as one of the few ways in which it can keep the system is America going. Europe is getting back into production on more and more items. Tomorrow it will perhaps be automobiles and tractors that are no longer wanted, etc.

The ERP spent $5 billion in nine months of 1948. At home this program had the effect of contributing to shortages or tighter supplies of steel, automobiles, pipelines, bridges, etc. The Marshall Plan, for instance, took 1.5 per cent of U. S. steel produced in 1948.

Abroad, the ERP aid just about equaled the expenditures of the nations of Western Europe for armaments to try to keep their colonial slaves in a state of bondage and to prepare for the coming war against Russia.

While our exports are decreasing, our imports are increasing. In 1948, imports to the U.S. totaled approximately $7 billion, 25 per cent above 1947. As recovery continues in Europe and Asia, the plain implication is that these areas will not only need less from the U.S. but that other areas can begin to fill their wants outside the U.S.

Military Spending

The tremendous expenditures on armaments by Washington constitute perhaps the most important prop of the post-war boom, and one that can and (it appears) will be further increased.

The national budget of the government in 1939 was a piddling $8.7 billion, though unemployment was well over the 10,000,000 mark. Came the war, with its vast capacity for destruction: by 1947 the national budget was $42.5 billion. By 1950 it will probably be $45 billion, of which $15 billion is expected to comprise the military budget for the future war (the rest of the budget is devoted mainly to paying for past wars). Government expenditures on arms now amount to one third of the government’s total expenditures. Together with the foreign-aid program, these two items will consume an estimated ten per cent of the nation’s total production of $250 billion in 1950.

Ten per cent! It is instructive to think what would happen if disarmament should strike – ten per cent of the economy chopped off; six million workers let out at a single crack.

For the fiscal year 1949, a military budget of $13.8 billion was authorized, plus $0.8 billion for maintaining the Department of Defense, selective service and stockpiling. Many people expect the 1950 military budget to go as high as $20 billion.

The fact is that government spending for war and war preparations (the Marshall Plan and military aid to Western Europe) is sustaining the U.S. economy. Without it, the depression would in all likelihood already be here. With it, our government is not only failing to pay off the huge national debt but threatens to increase that debt still further and, of course, to increase taxes to carry the debt.

The interest on the national debt alone is today far more than the total national budget was in the 1920s.

In 1948, three years after the end of the war, individuals were being taxed at war rates, With only the scantiest reductions.

Here is a tax comparison for a married couple with two dependents:

Net Income


1939 Taxes


1948 Taxes
















In December 1948 the gross public debt of the U.S. government stood at $252.2 billion, approximately $4.5 billion lower than at the end of 1947.

While President Truman has already launched a program to raise federal taxes, tax increases are also predicted at the state level in 1949. (In 1948, state taxes increased in more than half of the states.) Twenty-seven states now have sales taxes (the most iniquitous tax from the viewpoint of the worker in that it leans most heavily upon him who must spend all that he makes in order to live). Every month these state (and local) sales taxes inch upward.

As to the role of government spending, the February 1949 letter of the National City Bank observed that

the government is immensely more important in the country’s economy than ever before. Federal and local tax authorities now take – and redistribute – from people and corporations a sum equivalent (in 1946) to 23 per cent of the value of all goods and services produced in the country.

The governments themselves were the purchasers of 12 per cent of these goods and services in 1948 and will be a larger factor in 1949. These government expenditures will not fluctuate with business swings. They represent an unshrinking segment of business, and in case of recession they will exert a stabilizing influence proportionate to their weight.

Quite a change from the old Coolidge-Hoover philosophy! The big bourgeoisie in its public press inveighs against government spending, but it clings to the public hog trough like death itself and dares not order the spigot turned off.

Public Works

Together with the spending for armaments and aid to Europe go public expenditures for public works. It is difficult to realize that expenditures by federal, state and local governments on public works in 1948 totaled $4 billion, breaking all peacetime records. This was even before the sharp drop in employment which 1949 ushered in. Public-works expenditures in 1948 were more than 75 per cent higher than in 1936 and 1937, when expenditures were being made freely (by conservative bourgeois standards) to seek recovery from the depression. The construction industry’s information committee recently stated that states, counties and cities spent more than $1 billion on highways, streets and roads in 1948, and expected to spend more in 1949.

Has the Depression Begun?

In January and February of 1949 unemployment went from below 2,000,000 to more than 3,000,000. Employment dropped substantially below the 60,000,000 mark.

Most economists doubted that the sudden increase in the number of jobless marked the beginning of the depression. This is probably correct. There is no doubt that some of the unemployment is prompted by the desire of certain industries to wage psychological warfare against their workers. Particularly is this true of the railroads, which laid off more than 100,000 workers in a few days, principally as a warning to the non-operating unions not to press too hard for the recommendation of an emergency fact-finding board calling upon the carriers to institute the forty-hour week by September 1949, with no reduction in pay from the present 48-hour week level.

But this interpretation of the unemployment that suddenly developed cannot be pushed too far. Big business would not dare go too far in this direction for fear of precipitating a stampede. Most of the unemployment is “legitimate,” and simply represents the growing lack of demand for goods.

What can big business and its government do about it? It can get rid of part of the surpluses by giving them away abroad, or by destroying them. It can step up its arms program. It can step up public works. Public and private debt can pile up some more.

Whether it will take these steps, and whether it will do so in such a way as to be most effective and so as to result in the least possible disturbances and dislocations, no one knows.

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