Bert G. Hickman

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: The Korean War and United States Economic Activity, 1950-1952
Volume Author/Editor: Bert G. Hickman
Volume Publisher: UMI
Volume ISBN: 0-87014-363-8
Volume URL: http://www.nber.org/books/hick55-1
Publication Date: 1955
Chapter Title: Forward Buying in World War II
Chapter Author: Bert G. Hickman
Chapter URL: http://www.nber.org/chapters/c2915
Chapter pages in book: (p. 40 - 46)cent of the civilian labor force was unemployed at the time of
the outbreak of hostilities in Korea; by early 1951 the ratio had
dropped to 3 per cent—a low figure by peacetime standards—and
remained at that level through 1951, as employment was virtually
unchanged (Chart 3).
These facts are sufficient to explain why a much larger increase
in real gross national product was possible in 1940—1941 than in
1950—1951. But why were inflationary pressures strong in 1941,
despite large-scale unemployment, and weak in 1951, when the
economy was operating at a high employment level? Part of this
question has already been answered: it was the relaxation of con-
sumer demand that permitted the transfer of resources to the gov-
ernment sector without serious inflationary consequences in 1951.
Conversely, supply forces were in part responsible for the inflation
of 1941, as will be shown presently. Serious shortages of resources
existed in the latter part of 1941, notwithstanding the fact that a
large fraction of the labor force was still unemployed.
ForwardBuying in World War II
Thebuying waves of late 1950 had a historical precedent. Both
production and prices increased after the invasion of Poland on
September 3, 1939. The rise of industrial production and prices
was rapid but short-lived (Charts 13 and 15). Note that whole-
sale prices advanced sharply in September and remained steady
through the remainder of the year. Industrial production, on the
other hand, continued to increase throughout the last quarter of
1939, before declining through the first four months of 1940.
Forward buying by businessmen was responsible for this surge
of activity. Manufacturers' new orders and the sales of manufac-
turers and wholesalers increased sharply in September as buyers
reacted to the coming of the war (Chart 16). Much of this increase
in the value of sales must be attributed to the abrupt rise of whole-
sale prices during the month. The sales of manufacturers and
wholesalers then dipped slightly in October and rose once again
in November, as prices remained stable.
An increase in personal income accompanied the increase in
40CHART 16
INDEXESOF PERSONAL INCOME, RETAIL, WHOLESALE, AND MANUFACTURERS'
SALES AND INVENTORIES, AND MANUFACTURERS' NEW ORDERS,
SEASONALLY ADJUSTED, MONTHLY, 1939—1942
o Unadjusted for seasonal variations.
Source: Personal income, National Income Supplement, 1957, SurveyCurrent Business. Manufacturers'
new orders, Survey oi' Current Business, Annual Supplement, 1942. All other series by release from
the Department of Commerce, Office of Business Economics. Conversion to June 1940 base by the
author.
41
Index (June Index (June
1940 1941 1942production, and the growth of income induced a growth of retail
sales (Chart 16). However, there was no advance buying on the
part of consumers; the personal saving ratio rose sharply in the
fourth quarter of 1939 (Chart 20). Under the circumstances, re-
tailers were proceeding cautiously. Although retail inventories
increased moderately in the last three months of the year, the
inventory—retail sales ratio fell steadily (Chart 17).Wholesalers
also acted to prevent an accumulation of stocks relative to sales.
Thus it soon became obvious that no wartime shortages were
yet in sight. The period of the "Phony War" began with the fall
of Poland at the end of September, and there was no acceleration
in the growth of consumption, fixed investment, or government
expenditures during the fourth quarter of 1939 (Charts 12 and
18). Since the demand for final products did not justify the sharp
increase in industrial production, manufacturers accumulated
stocks quite rapidly, and the ratio of inventories to sales rose
abruptly in December. Manufacturers reacted by decreasing pro-
duction in January, and production and prices then settled for
several months, although not to the levels that had preceded the
boomlet.
This review of the speculative boomlet of late 1939 and the
reaction of early 1940 provides an important clue to the interpre-
tation of the developments of late 1940.Industrial production
revived in May 1940, the month of the invasion of France, and
began a continuous expansion which was not to culminate until
November 1943. The index of wholesale prices reached its iow
in August 1940, and by the end of that year was slightly above the
level of late 1939. However, it was not until the second quarter
of 1941 that prices began to advance at a rate comparable to that
of the inflationary phase of the Korean expansion (Chart 15).
It has been shown that the rapid inflation of late 1950 was pro-
moted by large-scale forward buying. Why did not a similar wave
of anticipatory buying accompany the defense program in 1940
and early 1941? The answer seems to be that the abortive buying
wave of late 1939 was still alive in the memories of businessmen,
and that they were waiting for signs of real shortages to appear
42CHART 17
RATIOOF INVENTORIES TO SALES: MANUFACTURERS', RETAIL, AND WHOLESALE,
MONTHLY, 1939—1942
Ratio
43
0
1939 1940 1941 1942
Source: By re'ease from Dept. of Commerce, Office of Business Economics. Ratios computed by authorCHART 18
GROSS PRIVATE DOMESTIC INVESTMENT AND ITS COMPONENTS, AND NET FOREIGN
INVESTMENT, SEASONALLY ADJUSTED QUARTERLY TOTALS
AT ANNUAL RATES, 1939—1942
National Income Supplement, 195/, Survey of Current Business.
before undertaking extensive new forward commitments. A Prior-
ities Board was established in September 1940, and manufacturers'
new orders increased substantially during that month (Chart 16).
However, the flood of orders in no wise compares with that of the
preceding September and was not sufficient to exert a
upward pressure on prices (Chart 15), given the productive slack
in the economy.
The inflationary pressure would have been stronger had con-
sumers acted as they did in 1950.However, they did not.
44
Billions of dollars
+ 20
+15
+10
+5
1939 1940 1941 1942100
90
80
70
60
50
40
30
20
10
9
8
7
6
5
4
3
2
I
CaIRT 19
DISPOSABLEPERSONAL INCOME AND PERSONAL SAVING,
SEASONALLY ADJUSTED QUARTERLY TOTALS AT
ANNUAL RATES, 1939—1942
Source: National Income Supplement, 1951, Survey of Current Business.
Consumption increased along with disposable income, but so did
personal saving, and the ratio of saving to income rose (Charts 19
and 20). It was their experience of shortages during World War
II that led consumers to expect them in 1950. Such foresight was
not developed in 1940.
Thus the divergent price developments of 1940 and 1950 were
45
Bilitons of dollars
200
1939 1940 1941 1942
Ratio scalein part the result of a difference in expectations. Government ex-
penditures and expenditures for producer durables and construc-
tion all increased more rapidly in percentage terms between the
second quarter. of. 1940 and the first quarter of 1941 than in the
corresponding period of 1950—1951, even before correction for
price changes. It is of course true that a large volume of unutilized
resources existed in 1940, so that defense and related expenditures
could be increased without pressing seriously on the volume of
resources available for the production of consumer goods. On the
other hand, the boomlet of 1939 proves that underemployment
is no guarantee against short-period inflation promoted by active
inventory speculation. In fact, had consumers acted in 1939 as
they did in 1950, the boomlet would probably have carried higher
and lasted longer, despite the fact that no defense mobilization was
undertaken at that time. Furthermore, the preceding discussion
has made it clear that resources wereavailablefor the production
of civilian goods in 1950. The violent rise in prices in 1950 must
be attributed to the inventory speculation of consumers and busi-
nessmen rather than to government competition for resources.
TheRole of Consumer Saving in 1941 and 1951
Thelull in consumer spending which followed the second buying
wave of the Korean period was reflected in a sharp rise in the ratio
of personal saving to disposable income (Chart 20). During the
inflationary phase of the expansion the saving ratio had fluctuated
violently with each change of expectations, and it stood at a low
level in early 1951 as a result of the heavy buying of January and
February. The ratio then increased sharply in the second quarter
and remained at a high level through the rest of the year, averaging
8.8 per cent in the last three quarters, as compared with 3.6 per
cent in the first quarter.
In view of the important stabilizing role of personal saving in
1951, it is interesting to observe that the saving ratio was consider-
ably higher in 1941 (Chart 20). The ratio rose steadily from the
third quarter of 1940 to the fourth quarter of 1941. The successive
46

The Korean War and United States Economic Activity, 1950-1952

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