Freeman

OUR ECONOMIC PAST

Private Capital Consumption: Another Downside of the Wartime “Miracle of Production”

MARCH 24, 2010 by ROBERT HIGGS

Although the so-called miracle of production in the United States during World War II persuaded many economists and others to accept the validity of the basic Keynesian model, this interpretation rests on important errors of commission and omission to which I have called attention over the years. (See especially the studies brought together in my 2006 book, Depression, War, and Cold War.) Among these errors, one that has yet to receive adequate attention is the wartime consumption of private capital—as it were, a drawdown of the economy’s private stock of seed corn to feed the soldiers.

Although official macroeconomic data for the war years have many problematic aspects, we may consult them as a point of departure. These data show that net private domestic investment plunged from $9.1 billion in 1941 to $0.3 billion in 1942, and for each of the following three years the amount (in billions of current dollars) was negative: –4.1, –2.9, and –0.2, for 1943, 1944, and 1945, respectively. Thus for the four war years combined, the private capital stock fell by $6.9 billion, or by an amount half-again greater than the amount added during best year of the 1930s (namely, 1937). This showing seems bad enough, but the actual decline was greater than the official data indicate.

While privately owned capital declined during the war, privately operated capital increased because the government spent more than $17 billion for manufacturing plants, equipment, and reconversions between July 1940 and June 1945—an amount equal to almost two years of net private investment at the 1941 rate. These plants were operated for the most part by private corporations under management contracts, and after the war some of the facilities were sold to their wartime operators or other private parties. Much of the government-financed capital would prove to be ill-suited to the profitable production of civilian goods in the postwar economic environment, however, and hence its postwar value was much less than the amount the government had spent to build it during the war.

In any event, the official figures overstate the increase in the privately owned or operated capital stock during the first half of the 1940s because the standard formulas for computing depreciation fail to take into account certain extraordinary conditions, especially “the accelerated depreciation resulting from intensive plant use and scarcity of replacement parts” to which economist Glenn McLaughlin called attention in the American Economic Review for March 1943.

According to a 1945 War Production Board report,

Plant utilization in the munitions industries increased sharply after Pearl Harbor . . . . [T]he average utilization of facilities in the metal products industries late in 1944 was about two-thirds above the prewar level, after having reached nearly twice the prewar level in the spring of 1943; the increase in the remaining industries, though smaller, was still substantial. . . . [T]he increased utilization of existing facilities contributed nearly as much to the increase of total industrial output during the war as did the construction of new facilities; though the contribution made by more intensive utilization was much more important in the earlier part of the period, particularly in 1940 and 1941, than it was in 1943 and 1944. [Emphasis added.]

Double-shift and even treble-shift operation of plants became much more common during the war.

Writing in the Survey of Current Business in 1963, Murray Foss reported that in a comparison of conditions in 1940–44 with those in 1934–39, hours of usage per year increased by 53 percent for railroad freight cars, by 54 percent for freight locomotives, and by 34 percent for passenger locomotives. Hours of usage per year per spindle in the cotton textile industry increased by about two-thirds during the war years.

 

Repairs Forgone

While the capital stock was being used far more intensively, the lack of replacement parts and repair materials kept producers from doing even normal upkeep on their property. In the housing sector, rent controls induced landlords to forgo ordinary repairs. For apartment houses and small structures, index numbers of repair and maintenance expenditures fell some 20 percent during the war. According to a 1945 report of the director of war mobilization and reconversion, the motor-carrier industry during the three peak war years obtained “only 195,000 new trucks and buses,” which amounted to “less than 10 percent of the number it would normally require for replacements and expansions,” while increasing its loads each year and hastening wear and tear on its fleet of vehicles. For the overall economy, this report concluded, “wear and tear on plants has been far above normal, while repairs and replacements have been below normal.”

In addition, official depreciation estimates fall short of the truth during the war years because they fail to correct for inaccuracies in the price indexes. In a situation of pervasive price controls, even if a firm tried to make adjustments for the declining purchasing power of money, the dollar amounts it allowed for depreciation understated the actual amounts it needed to set aside in order to replace its worn-out plant and equipment later, in the postwar environment, when prices would no longer be suppressed and actual market (that is, higher) prices would prevail. The statisticians at the Commerce Department apparently took the official price indexes at face value even for the years when price controls were in effect.

According to official estimates published in the Survey of Current Business in April 1970, the private stock of fixed business capital lost more than 7 percent of its real value between 1941 and 1945. After inclusion of the government-financed additions to the industrial capital stock, the privately operated total increased in value by an estimated 15 percent.

However, by taking into account the measurement errors in the wartime depreciation estimates incorporated into the official figures—errors caused by inaccurate price indexes and by the inappropriate application of uniform, standard depreciation schedules during a period of accelerated actual depreciation—we may conclude that the true drop in the privately owned stock of capital was even greater than the official figures show during the war years and that the increase in the stock during the second half of the 1940s was greater than shown. Moreover, depreciation figures applied to the industrial capital stock the government financed during the war are too low for the same reasons. Thus for the capital stock, as for the economy’s real output, the official data have misled us by making the wartime expansion appear bigger than it really was and the postwar expansion smaller than it really was.

ASSOCIATED ISSUE

April 2010

ABOUT

ROBERT HIGGS

Robert Higgs is a Senior Fellow in Political Economy at The Independent Institute. He is also the Editor at Large for The Independent Review, the Institute's quarterly journal.

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