FDR’s American Economic Miracle 1938-44, or the First Economic Bomb – The USA from 1938 to 1944 (Part 1)

June 12, 2013 12:00 am Published by Leave your thoughts

1 Background

“Granted that the United States had peculiar advantages in the quantity of resources, in freedom of intervention from the enemy, and in the great quantity of slack which existed in the economy before 1940, it remains a logical and revealing approach to ask precisely why the productive effort in other economies fell short of that in America.”

Alan Millward, “War, Economy and Society, 1939-45”, (Harmondsworth: Penguin, 1977) p 75.

The adminstrations of President Franklin Delano Roosevelt developed two great innovations – first, the understanding about how to create an economic explosion (or an economic bomb) and second, the knowledge about how to construct atomic bombs. The first of these developments partly funded the second.

The 32nd President of the United States had started to provide investment for wartime production to supply lend-lease armaments to the UK prior to America entering the war. When the USA entered the war after the 7thDecember 1941 attack on Pearl Harbour, Churchill certainly appreciated the enormous potential economic power of the USA and is reported as having said:

“Silly people – and there were many – might discount the force of the United States,” he mused, but America was like “a gigantic boiler. Once the fire is lighted under it, there is no limit to the power it might generate.”

Richard Parker, John Kenneth Galbraith, A 20thCentury Life, Old Street Publishing Ltd, London, 2005, p143.

This short article is about how that “gigantic boiler” produced the first economic miracle.

Once the USA declared war, FDR was determined to use his wartime powers to create a consensus between business and government to enhance the progress of the war effort. He seemed to act to ensure that various co-opted business leaders and agencies had similar overlapping powers to provide some competition in making progress, and to guard against the possibility that any one agency could thwart his desired developments. He brought businessmen directly into government war production councils to link the power of government with the productive intelligence of the business community.

The President was also focused on doing whatever was necessary to ensure the Allies won the Second World War. A big part of that was to provide the funds to equip US industry with the plant and equipment required to win the war. FDR did everything possible to encourage patriotic saving in War Bonds, but these were not enough.

2 Necessity was the mother of the invention of Investment Credit Creation

More armaments – aircraft and ships, tanks and vehicles, rifles and ammunition – and all the other machineries of war were required. US industry needed to invest massively to produce these goods. So FDR did something unprecedented. He instructed the Federal Reserve Bank to create the Investment Credit required by US manufacturing industry to produce the goods to win the war. The Americans created large flows of investment credit – long term, low-repayment business loans – to ensure that no investment required by the war effort was held up by lack of funds. That signal and the funding went out from the Federal Reserve Bank, down through the twelve regional FRBs, through the US banking system and into private industry in all parts of the country

The great economic innovation in the wartime United States of America was the creation of an immense flow of credit to support the construction of industrial plant and equipment for the war effort. The American government willed the ends – of vast steel factories, great new production facilities for ships, aircraft, and armaments – and willed the means, by authorising the “Fed” (the Federal Reserve Bank) to create credit for business expansion. This is the heart of the secret of rapid economic development – if the power of the banks and the government to create credit is allied to the capability of businesses to invest that money then the economy will prosper.

3 The financing of the US economic miracle 1938-44

Table 1 below shows how the economic miracle of US wartime production was financed. The excess of wartime spending over tax and savings receipts was very large, however one assesses it. The extent of government deficit financing – the excess of expenditure over receipts – rose from less than $1.2 billion in 1937/8 to a peak of $57.4 billion in 1942/43. What is usually called the “deficit spending” of the American government in wartime ranged from 5.6% of GDP in 1938/39 ($3.8 billion out of a GDP of $67.3 billion) to 31.3% of GDP in 1942/43 ($57.4 billion out of a GDP of $183.8 billion). This was an impossible amount for the country to generate as national savings – it was too concentrated into the years of 1941-44. The average amount of Investment Credit Creation by the Federal Reserve Bank was about 15% of GDP throughout the 1938-44 years, but it was very “peaky” and exceeded 30% of GDP in 1942/43.

Table 1 Deficit Spending and Public Debt in the USA, 1937/8-1947/8



“Public Debt”

Total Increase

(ending 30 June)

Millions of US Dollars












































– 6,010

Source: Reproduced by permission from the United Nations Statistical Yearbook, 1949/50, Table 158, p469.

The “public debt” and investment credit created to fund these vast programs was dwarfed by the immense productivity gains made by American industry during and after the war. The results of the wartime productivity are an indelible part of the American economic record. Key data is in Table 2, which shows that during the years between 1938 and 1944:

– Productivity per head increased by about 53%, or 8.5% pa; because the working population increased by about 3.4% pa, real output increased at an average rate of about 12.2% pa;

– Output of machinery increased from an index of 65 to 352, an increase of 441%, equivalent to about 40% pa;

– Shipping launched increased by 72 fold, from 160 thousand tons to 11.58 million tons. Initially only 8% of world production in 1938, it represented 85% of world production, or over five times the output of all the rest of the world put together, in 1943;

– Industrial production went up from an index number of 79 to 212, an increase of 168% or an average rate of 21.8% pa;

– Industrial construction boomed from 2.5 million sq. metres in 1938 to 41.8 million sq. metres in 1943 (up by a factor of over sixteen!) and remained thereafter at over four times the pre-war average.

Table 2 Some indicators of US growth, 1938-4

Machinery Merchant Vessels Industrial Construction Industrial Production Output per capita at constant prices
(1937=100) (000 tons) (000 sq metres) (1938=100)
1938 65 160 2,501 79 100
1939 83 366 4,235 96 108
1940 108 541 8,947 111 114
1941 175 1,035 17,654 143 131
1942 270 5,671 41,796 176 147
1943 352 11,580 9,932 212 153
1944 348 9,339 8,185 208 164
1945 272 5,968 15,971 180 162
1946 190 501 22,833 150 157
1947 219 165 13,651 165 150
1948 220 126 10,288



Source: Reproduced by permission from UN statistical yearbook 1949/ 50, tables 39 (p.

130); 120 (p. 272); 117 (p. 267) and 149 (p.410).

Is this the United States of America you recognise? Economic growth increasing on average by over 12% pa, industrial production booming at over 20% pa, productivity per head up by about 8.5% pa, industrial construction climbing at over 70% pa on average between the years of 1938 and 1942, output of many industries up by over 20% pa?

What countries have had similar industrial and GDP growth rates? Two immediately spring to mind – Japan (1946-75) and China (mid-1970s to now). Post-war America did not approach these rates of growth.

As Albert Speer, Hitler’s Minister for armaments production in the Third Reich, commented after the war:

“When the United States of America entered the war not only Hitler laughed but so did many experts over the reports of war production plans reaching us from America.

To start from nothing and within five years to produce more than 10,000 bombers seemed to us on the basis of our industrial experience to be Utopia, or, as was said at the time, typical American bragging.

But the Americans exceeded their goal.”

From 1938 to 1944 the United States of America increased its productivity by 64% per capita. The output of the economy increased (in constant $2005 prices) from about one trillion dollars in 1938 to about two trillion dollars in 1944 (see http://en.wikipedia.org/wiki/File:US_GDP_10-60.jpg ). Total growth in the American economy was therefore about 100% over six years – or at about 12.25% compound pa. Then, as now, the economy of the United States of America was the biggest in the world. Its large scale and Anglo Saxon heritage did not act as any barrier to high growth, once the will and the idea of Investment Credit Creation was present.

4 The longer-term results of the American Economic Miracle

Many economists have commented on the relative ease with which peacetime production was converted to wartime production. Motor vehicle production by (say) the Ford factories, for example, was converted to the production of military jeeps and aircraft components. Few economists seem to have noted the equally easy conversion of production resources, initially created to satisfy wartime demand, to peacetime production. The American economy from 1938 to 1944 grew by about 100% and only 12% of that growth was for consumers, so about 88% of that growth was for other uses. With the ending of hostilities, the output of the economy could have fallen by over a third.

Instead, the output of the economy fell by less than 9% from its wartime peak, before growing again in the late 1940s.

The United States of America was the first economy to use economic know-how about how to create an economic explosion – the knowledge about how to create an economic bomb – by using the Federal Reserve Bank to create credit to supply investment funding for the plant and machinery investment required to produce the goods to win the war. The USA was also the first economy to found its subsequent prosperity on satisfying the needs of its domestic mass consumer market as a solution to the problem of continuing to use, in peacetime, the vast production capabilities created in wartime.

The post-war domination of the world by the economic superpower of the USA was caused by the great growth of the American economy during wartime. The first economic explosion due to Investment Credit Creation turned into a permanent fact of political and economic history.

For many western economists, however, these procedures for producing an economic explosion had only been proven to work in a wartime economy. With these opinions, there might have been no economic lessons from that experience which were applicable to peacetime. Of course, some economists then, as now, had no clear idea about what had actually happened, or how it had been brought about.

With the end of the war, the American Government, which had seen economic planning as an unfortunate wartime necessity, abandoned the Investment Credit Creation procedures which had won the war. On some estimates the USA of 1946 had over 50% of the production capacity of the market economies of the world, and perhaps its politicians felt some justified complacency, and so (under President Harry Truman) they abandoned not only Investment Credit Creation but also any form of industrial development policy. This had the result that the American economy went back, within a few years, to growing at the modest long-term rate of two to three percent a year, with investments funded by retained profits.

Yet the lessons of the explosive wartime economic development of the USA were not lost on everyone. The Japanese studied these American wartime economic growth-accelerating procedures and adopted them in peacetime Japan. After the 29 September 1972 Nixon-inspired rapprochement between Japan and China, many Chinese delegations begged the Japanese to “share with them the secrets of how to achieve high economic growth” and they either did that, or the Chinese worked it out for themselves by studying Japanese economic procedures.

And Deng Xiao-P’ing’s China introduced Investment Credit Creation from the mid-1970s, and grew very rapidly in consequence. China is now about to become what the US was – the overwhelmingly mighty superstate – and it could now do what the USA once did, if its economy focused on militarisation, and there is no guarantee that it won’t.

Above all, Western economists and governments now need to understand and adopt investment credit economics a soon as possible to solve their current economic difficulties, restore national prosperity and preserve the peace of the world.


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This post was written by George Tait Edwards

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