Mobilization and Money – How Did We Pay For World War II?

New Economic Perspectives has the article Mobilization and Money. The discussion is about how the government paid for the war build-up and execution of the war, and how did it prevent inflation when there were few civilian goods to buy.  The summary at the end is as follows:

By my calculations, the fiat money flowed like this: First, the sovereign government issued and paid the people dollars to build the war machine; second, the people paid the sovereign government back some portion of the dollars they’d earned by purchasing War Bonds and paying taxes; third, the sovereign government destroyed the dollars it received in taxes and for War Bonds, thus enabling it to pay the people even more dollars to produce ships and bombers without creating a spiraling inflation; fourth, the sovereign government redeemed the War Bonds with interest, paying the people with new fiat money—but rather than being inflationary, these new dollars were absorbed by the rapidly growing post-war economy, the people using the money to buy the newly abundant goods and services produced by what was now the most technologically sophisticated, creative, well educated, productive and equitable social economy in world history.

But now, somehow, we’ve lost our way and our momentum. We’ve convinced ourselves that our sovereign monetary system works by a different logic—a logic that leads inexorably to a perpetual and growing shortage of Federal spending power. Given the real threats now racing our way with the same inevitability as was Nazism in 1938—climate change, rising sea levels, super-storms, extended droughts, gigantic forest fires, loss of fisheries and ocean acidification, water and food shortages, nuclear terrorism, and the possible failure of democracy itself—it seems we might want to consider another great mobilization to defend ourselves—if we can ever remember how to do it.

Of course there was rationing and price controls, but that does not detract from the part  war bonds and taxes played in taming inflation.  It just proves that there can be more than one thing going on in the economy at one time.  You don’t have to restrict yourself to using only one tool in the tool box to solve a problem.

The question is, “What economic principle allowed us to do this in World War II, but does not allow us to do it now?”  Anyone care to hazard a guess?  We had a gold standard then, but we don’t have one now. That should make it easier to do now what we did in WW II. Our current  foreign creditors do not seem to be complaining about our monetary policy. So that can’t be what is stopping us.


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