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12 Tax Review 1 (1951)

handle is hein.tera/tafoutaxt0014 and id is 1 raw text is: TAX RE VIE W JANUARY 1951,

Published by The Tax Foundation, Inc., 30 Rockefeller Plaza, New York 20, New York
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The Economic Impact of the Rearmament Program
More Production, Effective Bar to Inflation, Must Not Be Hampered by Controls.
by DEAN G. ROWLAND COLLINS AND Di. MARCUS NADLER
O NCE again the democratic countries are called upon to increase their military strength
in order to prevent aggression and possibly a third world war. Although the lessons and
experiences of the Second World War are still relatively fresh in memory, the announcement

of an expanded rearmament program created
regard to its possible effects on the economy.
The first reactions were a sharp rise in com-
modity prices and a rush of buying by many
individuals in an effort to hedge against in-
flation.
The impact of the current rearmament on the
economy differs materially in several important
aspects from that caused by the program inaug-
urated in 1940. In the first place, in June 1940,
when military expenditures began to increase in
the United States, there were approximately 8.3
million people unemployed in the country and in-
dustry was operating substantially below capacity.
Secondly, prices were low, the wholesale price index
in 1940 averaging 78.6 (1926 = 100) as compared
with 95.3 in 1929. Thirdly, the public debt of the
United States on June 30, 1940, stood at only
$48.5 billion while liquid assets in the hands of indi-
viduals amounted to $51 billion. Moreover, the
country was emerging from the severe depression
of the thirties, and the habit of holding down pur-
chases was strongly entrenched. Experience with
rapidly rising prices and commodity scarcities was
limited since the rise in prices shortly after the
First World War was short-lived and was followed
by a sharp break in 1920. Finally, while it was
realized that military expenditures would be large,
it was expected they would be drastically curtailed
at the end of the war and that the country would
again return to normal conditions.
Under these circumstances, the rearmament pro-
grain at first caused relatively little dislocation in
the economy. It led to an increase in employment
Copyright 1951 by The Tax Foundation

considerable uncertainty and confusion with
and in the demand for raw materials and manufac-
tured goods and resulted in greater utilization of
the existing productive capacity. Hence, the infla-
tionary forces, aside from the effects of the growing
Federal deficit, were not significant. This is evidenced
hy the fact that, despite the expanded purchases from
this country by some of the belligerents and the
increased military expenditures and lend-lease ship-
inents in the second half of 194.1, the wholesale
commodity price index rose very slowly at first,
going from 77.5 in June 1940 to 80.8 in January
1941. And even in December 1941, on the eve
of Pearl Harbor, the index of 92 was still well below
the predepression level. Because of the large reser-
voir of unemployed persons, the rearmament did
not cause any tight labor situation but merely ab-
sorbed idle labor and made possible business activity
at a higher level than before.
A Different Situation
The situation today is entirely different. In June
1950, at the time of the Korean incident, the index
of the physical volume of industrial production
(1935-1939= 100) stood at 199, a peacetime rec-
ord, employment aggregated 61.5 million, the num-
her of unemployed was only 3.4 million, and in
many segments the economy was operating at
capacity. A material increase in the output of mili-
tary goods could therefore be achieved only through
a cutback of civilian production and diversion of
labor from civilian goods to war materials. The

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Vol. X1I, Nro. 1

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