Verle Johnston

English

Research Papers in Economics

August 14, 1981 
Summer of '  41 
Here we have an economy that, while 
confronting problems of unemployment and 
inflation, suddenly is forced to deal with the 
sh¥pest peacetime increase in defense 
spending in the nation's history. The summer 
of 1981 ?  No, this all happened in the summer 
of 1941. 
There are striking parallels between today's 
events and the events of 40 years ago. But 
there are also striking dissimilarities-such as 
differences in the levels of prices and wages. 
However, we might find it useful to review 
those earlier events, to see how the nation 
dealt with rather similar problems in that 
long-ago period-a period that only 
one-third of  today's population is old enough 
to remember. 
Low living costs ... 
The cost of living was quite different then, as 
can be seen from checking price lists for 
various items in the San Francisco Bay Area in 
the summer of 1941. The typical supermarket 
customer could buy milk for 12 cents a quart 
and bread for 8 cents a loaf, while fruits and 
vegetables generally cost 5 cents a pound. 
The shopper could find ground beef at 17 
cents a pound, pork shoulder at 19 cents a 
pound, and chicken at a relatively expensive 
30 cents a pound. For the discriminating 
palate, Napa Valley Chabl is or Burgundy cost 
95 cents a fifth. 
A couple stepping out in style could do so in a 
$28 suit for him, and a $15 dress for her. They 
could find a six-course dinner at any number 
of  good Italian restaurants for 65 to 75 cents 
each. Drinks were 15 cents at most 
neighborhood bars, but up to 30 cents in the 
more exclusive downtown hotels. The cost of 
a hotel room ranged between .$3.50 and 
$6.50. For those who could not afford a new 
$745 Nash Sedan (25.8 miles to the gallon), 
the public-transit fare was 5 cents, and taxi 
fare was about 35 cents for the first mile. 
For those prepared to miss "One Man's 
Family" and "I Love A Mystery" on their 
$18.98 Emerson table-radio (oron their $390 
Stromberg-Carlson console), Katherine 
Cornell could be seen on stage for $2.00 in 
George Bernard Shaw's "The Doctor's 
Dilemma". And there was always a movie for 
25 to 35 cents, including such 1941 hits as 
The Maltese Falcon, The Wagons Roll At 
Night, and also International Squadron 
("Starring in His Most Important Role by 
Far-Ronald Reagan"). 
For the 1112  million inhabitants of the Bay 
Area-less than one-third as many as 
today-apartments in good residential areas 
could be rented for between $30 and $60 a 
month. New homes could be purchased for 
$5,500, including $550 down and monthly 
payments of $36. Property taxes were less 
than $100 a year on most homes, but irate 
taxpayers still could be shocked by a city 
budget of $69 million (compared with 
$1,200 million today). 
...  and wages 
While living costs were relatively low in 
1941, so were wages and salaries. 
Nationwide, the hourly pay in durable-goods 
manufacturing averaged about 80 cents-
and with a 41-hour average workweek, 
weekly pay averaged $33.56. In retail trade, 
earnings averaged $22.17 a week, or about 
$1,050 a year. (Incidentally, Federal Reserve 
employees averaged $1,600 in 1941.) And in 
professional categories, doctors averaged 
$5,100, dentists $3,800, and lawyers $4,800 
that year. 
Nonetheless, costs and prices both rose 
substantially in 1941  in the wake of sharp 
increases in defense spending. The consumer 
price index increased 5 percent, compared 
with a one-percent increase in 1940. Factory 
hourly wages increased about 10 percent for 
the year -and weekly wages jumped 18 percent on the heels of a strong increase in 
the average workweek. 
The unemployment rate meanwhile 
dec  I  i  ned, from 14  V2  percent of  the I  abor force 
in 1940 to below 10 percent in 1941. A major 
contributing factor was the Selective Service 
Act, wh  ich Congress passed in 1940 but 
renewed by only a one-vote margin in the 
House of Representatives in August 1941. 
Draft calls, plus voluntary enlistments, more 
than doubled the size of the armed forces, to 
about 1.6 million in late 1941. (But 45 per-
cent of the 2 million initial registrants were 
rejected as physically or mentally unfit.) 
Civilian employment increased 6 percent 
during 1941, with 2.6 million added to 
defense-industry payrolls and another 
400,000 added to civilian-government pay-
rolls. Meanwhile, agricultural employment 
dropped by over 400,000 as farm workers left 
their fields and orchards to join Rosie the 
Riveter in defense plants and shipyards. 
Size of stimulus 
Heavy defense spending provided the 
stimulus for the sharp increase in economic 
activity, with a new appropriation bill 
responding to each advance of the German 
forces in Europe. Already, in May 1940, 
President Roosevelt obtained a $900-million 
appropriation from Congress to modernize 
the armed forces. In July of that year, 
Congress passed an additional $5-billion 
defense appropriation, largely to finance a 
70-percent increase in naval tonnage. And in 
March 1941, when U-boats were sinking 
Allied shipping at a rate three times faster 
than the rate of ship building, the President 
signed HR 1776, the "Lend Lease" bill. The 
measure authorized the President to sell, 
lease, exchange, or transfer"  any defense 
article to any country whose defense was 
deemed vital to the U.S." With an  initial 
appropriation of $7 billion, and final 
spending of $50 billion, the u.S. shipped 
overseas not only tanks, guns, ships, and 
planes, but in addition, millions of cans of 
Spam, boxes of cornflakes, and other 
attributes of the American Way of Life. 
2 
Thus by the summer of 1941, the defense 
program was well underway. Within roughly 
a year's time, appropriations and contract 
authorizations in support of  the defense effort 
aggregated almost $60 billion, while actual 
defense expenditures jumped from $2 billion 
in 1940 to $14 billion in 1941. Defense 
spending in 1941 reached 11  percent of  GNP 
-compared with 5 percent in 1981 -and 
the increase in that category accou nted for 
more than one-half of the total increase in 
GNP for that year. 
Paying the cost 
To cover the cost of  the'expanded defense 
program, President Roosevelt in mid-1940 
called for an increase in personal-income 
taxes and the imposition of a steep 
excess-profits tax, "so the few don't gain at 
the expense of  the many ...  and so no one 
wi  II be enriched by the national rearmament 
effort." The excess profits tax involved 
graduated tax rates of 25 to 50 percent on 
profits in excess of a "normal" defined as 95 
percent of 1935-39 average profits. 
Meanwhile, Congress reduced income-tax 
exemptions for taxpayers, and increased the 
income-tax rate from 4 to 10 percent on the 
first bracket ($2,000) of  taxable income. As a 
result, the number of individual returns 
jumped from less than 8 million in 1939 to 26 
million in 1941. But social-security taxes 
remained at one percent ($30) for both 
employees and employers on the first $3,000 
of  wages. 
The increase in taxes raised Federal revenues 
substantially, to $3.5 billion in 1941. Still, the 
increase failed to cover the rise in defense 
outlays, and the Federal debt thus jumped 
from $50 billion in mid-1940 to about $68 
billion in late 1941. The nation's banks 
acquired some $4 billion of that increase, 
while the general public financed about $6 
billion through purchases of  savings (defense) 
stamps and bonds. Defense bonds carried an 
annual yield of about 3V3 percent when held 
to maturity-substantially more than what 
savers could earn on long-term governments 
(about 2 percent), Treasury bills (one-tenth of one percent), or savings deposits (subject to a 
2%-percent ceiling). In another step to 
reduce spending pressures, the Federal 
Reserve imposed consumer-credit controls in 
late 1941, with a minimum payment of 
one-third down and a maximum maturity of 
18 months on big-ticket purchases. 
Incidentally, consumer credit outstanding 
then totalled $10 billion, compared with 
more than $300 billion today. 
On the monetary side, the Federal Reserve 
announced a policy of "standing ready to 
advance funds on u.s. Government 
securities at par to all banks ...  that is, to 
maintain conditions in the u.S. Government 
security market that are satisfactory from the 
standpoint of  the Government's financing 
requirements". This policy of monetizing the 
deficit, a feature of wartime finance, meant a 
sharp increase in the money supply 
throughout theWorid War II period. 
Although the 1941  Annual Report of  the 
Federal Reserve Board of  Governors never 
mentioned the term "money supply," various 
monetary aggregates increased between 1  3 
and 17 percent during 1941, and at a similar 
fast pace in later years. Not  surprisingly, then, 
the era of the $5,500 single-family home and 
17-cent-a-pound hamburger rapidly came to 
an end with the summer of 1941. 
Verle Johnston 
Publication-Monetary Policy Objectives 
Copies are now available of  the publica-
tion, Monetary Policy Objectives for 7987 
-Midyear Review. This is a summary of 
the report made by Federal Reserve Chair-
man Volcker to Congress on Ju Iy 21, 1981. 
3 
Free copies of  this publication can be 
obtained by calling or writing the Public 
Information Section, Federal Reserve Bank 
of  San Francisco, P.O. Box 7702, San 
Francisco 94120. Phone (415) 544~2184. 1006 
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT 
(Dollar amounts in millions) 
Selected Assets and Liabilities 
Large Commercial Banks 
Loans (gross, adjusted) and investments* 
Loans (gross, adjusted) - total# 
Commercial and industrial 
Real estate 
Loans to individuals 
Securities loans 
U.s. Treasury securities* 
Other securities* 
Demand deposits - total# 
Demand deposits - adjusted 
Savings deposits - total 
Time deposits - total# 
Individuals, part. & corp. 
(Large negotiable CD's) 
Weekly Averages 
of Daily Figures 
Member Bank Reserve Position 
Excess Reserves (+  )/Deficiency (-) 
Borrowings 
Net free reserves (+  )/Net borrowed( -) 
* Excludes trading account securities. 
#  Includes items not shown separately. 
Amount 
Outstanding 
7/29/81 
150,072 
128,887 
38,745 
53,394 
23,103 
1,370 
6,226 
14,959 
39,158 
27,474 
29,896 
83,689 
75,552 
34,007 
Weekended 
7/29/81 
75 
105 
- 31 
Change 
fro~ 
7/22/81 
- 198 
- 279 
203 
130 
155 
21 
18 
63 
103 
288 
362 
721 
839 
526 
Change from 
year ago 
Dollar  Percent 
12,372  9.0 
12,963  11.2 
5,365  16.1 
6,182  13.1 
- 768  3.2 
486  55.0 
- 97  1.5 
490  - 3.2 
- 3,936  9.1 
- 3,900  -12.4 
803  2.8 
21,680  35.0 
21,807  40.6 
11,594  51.7 
Weekended  Comparable 
7/22/81  year-ago period 
13  - 93 
72  4 
- 59  - 97 
Editorial" comments may be addressed to the editor (William Burke) or to the author ....  Free copies of this 
and other Federal Reserve publications can be obtained by calling or writing the Public Information Section, 
Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. P~one  (415) 544-2184. 

Summer of '41

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Summer of '41

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Research Papers in Economics