The Development of the Affluent Society

THE DEVELOPMENT OF THE AFFLUENT SOCIETY

Wartime Prosperity

As World War II drew to a close many Americans wondered if it would be followed by a return to depression and massive job losses. Huge government outlays for the defense production ended unemployment, made the American worker the best paid in the world, and raised the financial expectations of the American public. Government spending for goods and services soared from $11 billion in 1939 to $117 billion in 1945. The gross national product (GNP) went from $100 billion in 1940 to $200 billion in 1945. With 6 percent of the world's population, the United States was producing 50 percent of the world's goods. As a result the personal consumption of civilians rose by 25 percent, reaching the highest level in U.S. history. In 1939 about 15 percent of Americans were unemployed; by 1945 that rate had been reduced virtually to zero. Before the great stock market crash of 1929, fewer than one-third of Americans had earnings that put them in the economic middle class. After the war two-thirds qualified. At the same time, about 14 million soldiers and sailors were poised to return to the labor market.

The End of Laissez-Faire

The initial New Deal spending programs of Franklin Roosevelt had been harshly attacked by laissez-faire economists and businessmen, who believed that the economy would right itself if business were left to look out for its own interests with a minimum of government regulation. For three-quarters of a century American business had built a consensus that government intervention in the free-market economy was detrimental to economic health. "That government which governs least, governs best" was their motto. Yet government provided lands, canals, railways, tax exemptions, and other forms of aid to large corporations without providing comparable benefits for the poor ordinary working people. Many businesspeople feared that governmental intervention would undermine the work ethic and create dependency. They saw periods of high unemployment as beneficial because they lowered wages and forced the "lazy" to work. In previous depressions their advice had been to "wait it out" while the economy eventually balanced itself. The Great Depression, however, was so destructive that the Roosevelt administration believed government intervention was a necessity, not only to ward off political upheaval but to stave off massive starvation in some areas.

The New Deal Primes the Economic Pump

In 1932, when Roosevelt was running for his first term as president, the unemployment rate stood at 25 percent nationwide, while in some areas it was half the working population. In heavily industrialized cities such as Toledo, Ohio, more than 75 percent of working men were unemployed. There was no unemployment insurance, no welfare, and no public housing. Private charities such as the Salvation Army were expected to pick up the pieces, but they were quickly overwhelmed. To increase employment and consumer spending the New Deal invested in public works, public jobs programs, and Social Security as a way to prime the pump of economic recovery. The idea was originated by John Maynard Keynes, a British economist, who argued that government spending could stimulate consumer purchases, which in turn would encourage production to meet increased demand. Yet, the funds injected into the economy by Roosevelt's New Deal programs were insufficient to overcome the Depression. The massive amounts of money required for war production, however, not only returned the nation to full employment but catapulted the entire economy into overdrive. Economists concluded that Keynesianism worked, and, based on that conclusion, they planned for the future.

The Permanent War Economy

Roosevelt had looked upon the opponents of the New Deal as antiquated and out of touch with reality. He blamed "economic royalists" for having mismanaged the economy and condemned their heartlessness toward the unemployed. The old-line laissez-faire businessmen equated Roosevelt's programs with communism. Yet by the end of World War II many of Roosevelt's harshest critics had come to see government economic intervention and planning as beneficial to them. In 1940 about 175,000 firms accounted for 70 percent of the nation's manufacturing output, while the 100 largest corporations provided the other 30 percent. By war's end this ratio was exactly reversed. Control of the U.S. economy had been concentrated in the hands of a tiny minority. Fundamentally, government expenditures had returned business and government to the cozy relationship they enjoyed in the days of laissez-faire. With every other major industrial economy in the world in disarray, the American economy boomed. Some of this largesse was distributed to working people through New Deal programs or in wages. Such prosperity meant that for the first time in American history, government intervention into the economy benefited the wealthy and the poor.

The Welfare/Warfare State

Because the social welfare programs of the New Deal had meant the difference between disaster and survival for millions of Americans during the Depression, it became politically dangerous to cut spending on them, though extreme right-wing politicians called for ending various programs from time to time. By the end of World War II most Republicans who had previously opposed the welfare state embraced it. Both of Thomas Dewey's presidential bids featured rhetorical support for the New Deal. The flip side of providing a safety net beneath the unemployed and underprivileged was that industrial and financial profits could also be maintained by government spending. New Dealers and conservative businessmen implicitly struck a bargain: if corporations wanted to benefit from U.S. tax dollars, they would have to approve government revenues for unemployment compensation, veterans benefits, public housing, and public-health programs. Previously seen as tax giveaways to the undeserving poor, social-welfare measures were now perceived as boons to business as well. For example, public works such as highway and hospital construction ensured that federal revenues went to construction firms, which in turn would hire some of the very taxpayers whose money was paying for the building projects. Social Security and unemployment checks would be spent, thus stimulating the consumer economy. Spending for the military-industrial complex would provide such economic benefits on an even grander scale. By the early 1950s such diverse groups as businessmen, union leaders and workers, engineers, government bureaucrats, and liberal and conservative intellectuals reached a consensus that continued government spending for welfare and warfare was economically and politically necessary.

Benefits of the Welfare/Warfare State

At first the benefits of a permanent war economy linked with social-welfare spending seem unassailable. During the war the government had invested approximately $20 billion in new factories, virtually ending unemployment and giving workers considerable disposable income. Because of wartime rationing, there were few goods to purchase, so they put their money into bank accounts, resulting in a $140 billion savings pool available for banks to invest in new industrial and service sectors of the economy. During the war American productivity rose at about 7 percent annually, but between 1945-1960 shot up to 10 percent per year. Defense expenditures dropped between 1946 and 1948, but federal spending on education, health, and highways doubled. After the Korean War, defense spending more than doubled from $70 billion in 1950 to $151 billion in 1960. With such rates of profit, increasing funds were available for investment in new technologies and new industries. Agricultural income rocketed from $4 billion in 1940 to $12.3 billion in 1960, but acreage cultivated rose only by 4 percent. Farm-machinery improvements and chemical fertilizers, developed as off-shoots of war production, made the difference. During the war a synthetic-rubber industry had been created by the government; after the war the petrochemical industry took it over. The Marshall Plan provided more than $12 billion in aid to Europe; much of this money was used to purchase goods from the United States. Even after the plan ended in 1952, continued foreign aid became a mainstay of government spending. Profiting at record levels, U.S. corporations invested overseas. Ten giant oil companies opened up Middle East oil and sunk new wells in Venezuela. Coca-Cola spread everywhere, provoking somewhat humorous fears about the "coca-colonization" of the globe. American exports rose from $20 billion in 1944 to $125 billion in 1970. By 1950 American steel companies were working at 98 percent of capacity; back orders for refrigerators—virtually unattainable during the war—were the largest on record. Sales of automobiles were so rapid that the Big Three auto companies actually lowered prices. As the decade of the 1940s ended, the Christmas buying season of 1949 was the most profitable in retail history. Many believed that the new partnership of business and government would avert future depressions, end poverty, and usher in the golden age of affluence.

Sources:

Richard). Barnet, The Roots of War (New York: Atheneum, 1972);

John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1960);

Seymour Melman, Pentagon Capitalism: The Political Economy of War (New York: McGraw-Hill, 1970);

Melman, The Permanent War Economy: American Capitalism in Decline (New York: Simon & Schuster, 1974).