Economics and the Public Welfare. Benjamin M. Anderson

to 162 as the closing price of February 1917, and after our entrance into the war it declined rather sharply to 127 for November 1917, rallying thereafter to 150 as the closing price of October 1918. The decline in stocks from the October peak of 1916 came long before the rise in commodity prices was ended and well before any decline had manifested itself in general business profits.

      Profits of industrial corporations were very great in 1915, 1916, and 1917. War taxes cut into them in 1918, but they were still impressive. Dividends

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      were increased but the corporations, in general, prudently recognized that they were in an extraordinary situation, that war profits could not be expected to last, and that it was well to provide for contingencies. A very large proportion of their profits was therefore retained and added to corporate surpluses, as shown by the following table.

      ADDITIONS TO CORPORATE SURPLUSES^* (In millions of dollars)

Year
1913	1,400
1914	585
1915	2,117
1916	4,939
1917	4,732
1918	1,986
1919	4,330
1920	1,397
1921	-2,685
1922	1,676

      * From America’s Capacity to Consume (Brookings Institution), p. 109.

      The stock market, in the course of World War I, kept its head amazingly well. Businessmen and men dealing in securities were constantly asking themselves how long the war would last; how much value a new plant that had been created to meet war demands would have after the war; how permanent the higher level of commodity prices was; what kind of losses would have to be incurred in readjustment after the war. And by October 1916 they concluded that prices of stocks had gone high enough.

      Money Market and Capital Market. There was, further, despite the continuance of cheap call money due to the abundant gold in the United States, a progressive pressure on the supply of real capital in the form of investors’ savings; there was a disposition to capitalize earnings on a higher yield basis. It is to be observed, however, that stock prices in 1916 yielded before bond prices did, contrary to previous experience in the movements of American securities prices. The best prices of standard bonds during the whole war period were reached in December 1916, nearly three months after the peak of stock prices.

      Stock Prices and Corporate Profits. It may be noticed, also, that the general average of stock prices had declined a great deal before any real difficulties appeared for any great industry. In 1917 stock prices had a sharp decline late in the year as railroads came under heavy pressure from rising costs unaccompanied by rising rates, and an acute crisis was relieved by President Wilson’s proposal in December 1917 that Congress put the

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      government behind the railroads. But none of this was in evidence in October 1916, when stock prices reached their peak and turned down.

      Part of the extraordinary war profits was undoubtedly due to the fact that wages, as shown by our table above, lagged behind wholesale prices in their rise.

      Wages and Prices in World War II. In World War II wages rose far faster than wholesale prices, and corporate profits and additions to corporate surpluses were far more moderate in relation to the national income. In World War I the thing was left to the natural play of the markets. In World War II we had elaborate governmental policy designed to hold down corporate profits and to encourage wage increases.

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4

       Our War Economic Policy

      The United States entered the war on April 6, 1917. Our war economic policy had to be rather rapidly improvised. Basic in it was the belief in a free economy and a determination to maintain sound money and sound public finances. There was, however, recognition that the ordinary market forces, left to themselves, would not suffice to bring as speedy a shifting from peace activities to war activities as the emergency called for. And there was recognition that if the government merely added a great increase in expenditure to existing civilian expenditure and competed against the people for goods and supplies and services, there would be an inordinate further rise in commodity prices. Goods were already very scarce, as we had been pouring out great quantities of exports to Europe and as our own people, with money incomes increased by the war prosperity, had been resisting the export of goods by bidding up prices.

      Taxes and Loans—Sprague’s Proposal. The traditional policy of the American government in financing a war had been by war loans, with enough increase in taxes to provide for the interest and amortization of the war loans. We had financed the Spanish-American War on this basis. But there came a speedy realization that, for the war on the scale which we were about to engage in, this procedure would be quite inadequate. One of the most influential figures in bringing this forcibly to the attention of the Congress and the President and the country was Professor O. M. W. Sprague of Harvard University, who wrote an article calling for an all-tax policy which had the significance of a great state paper. Sprague had been watching developments in England and other belligerents closely. He had seen how an immense increase in government spending, based on government borrowing and especially government borrowing from the banks in those countries, had generated a great rise in prices, wages, and profits, which in turn had led to a further rise in prices, wages, and profits as the people spent their unusual income competing with the government. He urged, correctly, that except as goods could be brought in from the world

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      outside the country, the war must in any case be fought with the current production of the country. If we had full production, the government’s increased consumption and utilization of commodities must in any case come out of the current real income of the people. We could not save ourselves current sacrifice by creating loans for future generations to pay, though by borrowing we could easily enough leave a burden of debt for the future. He proposed that we should forthwith impose taxes equal to the government’s expenditure, so that the people might by taxes be forced to relinquish their ability to compete with the government.

      The proposal was overly drastic, but in the compromise that came out of it we adopted the definite policy of heavy and growing taxes and the further policy of borrowing from the people instead of borrowing from the banks, to the full extent this could be done. If the people gave up their income to the government through the purchase of government bonds out of current income, we should similarly hold down their ability to buy and to compete with the government. Bank credit was to be used in moderating the transition and in softening the shock. Men might borrow from the banks on a margin to buy bonds and pay off the loans in installments, in effect giving to the government part of their income before they got it, but the savings would come in subsequent months and be paid to the banks.

      Federal Reserve bank credit likewise was to be used in this process, but the government was not to borrow directly from the Federal Reserve banks. Rather, the Federal Reserve banks were to rediscount for other banks against government war paper.

      To an amazing extent the policy was successful. The facts are well brought out in a chart issued by the board of governors of the Federal Reserve System.¹

      The