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Working Paper #45

Wartime Socialization of Investment
A Reassessment of U.S. Capital Formation in the 1940s


    There are circumstances which make the consumption of capital unavoidable. A costly war cannot be financed without such a damaging measure . . . . There may arise situations in which it may be unavoidable to burn down the house to keep from freezing, but those who do that should realize what it costs and what they will have to do without later on.
    —Ludwig von Mises ([1940] 1998, 52)

Only once in U.S. history, during World War II, did John Maynard Keynes‘s vision achieve full-fledged realization. In the oft-quoted final chapter of his General Theory, titled “Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead,” Keynes declared: “The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest,” and it will have to undertake “a somewhat comprehensive socialization of investment . . . though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative“ (1936, 378). Economists and historians have studied extensively the wartime tax measures and the wartime interest-rate fixing, but the “somewhat comprehensive socialisation of investment” that occurred in the United States from 1941 to 1945 has received much less attention.

Of course, it has not been overlooked entirely. Indeed, among contemporary analysts and early postwar writers, nearly all of whom subscribed to the “miracle of production” interpretation of the government’s wartime economic management, the government’s wartime takeover of capital accumulation received considerable, and generally favorable, recognition.

For example, Elberton Smith, author of the impressive official history The Army and Economic Mobilization (1959), in describing the War Department’s multifaceted involvement in capital accumulation, remarked that “war plant expansion in the three years ending with 1943 was equal to half the investment in manufacturing facilities during the preceding two decades“ (440). In Smith’s view, “the American economy in World War II exhibited the greatest capital expansion in its history—an expansion which went far toward guaranteeing the successful outcome of the war“ (475).

Speaking with pride of the more than $9 billion dollars that the Reconstruction Finance Corporation’s subsidiary, the Defense Plant Corporation (DPC), had channeled into industrial capital accumulation during the war, Jesse Jones noted: “At the close of World War II, Defense Plant Corporation’s investment alone embraced 96 per cent of the nation’s synthetic rubber capacity, 90 per cent in magnesium metal, 71 per cent in the manufacture of aircraft and their engines, 58 per cent in aluminum metal, and nearly 50 percent of the facilities for fabricating aluminum” (Jones 1951, 316). Massive industrial investments also were financed directly by the War Department (Smith 1959, 447, 496-99), the Navy Department (Connery 1951, 345), and other government agencies (Smaller War Plants Corporation 1946, 48).

In 1969, Robert J. Gordon shocked the economics profession by announcing that “$45 billion of U.S. Private Investment Has Been Mislaid” (221-38). Of that “mislaid” amount—“an estimate of cumulative 1940-65 U.S. government expenditures on privately operated plant and equipment (in 1958 prices), minus the small portion already included in the official OBE [Office of Business Economics] capital stock data“ (221)—some 62.5 percent had been undertaken from 1940 through 1945 (my calculation from data in Gordon’s table 4, page 233). Gordon argued that [the existence of this vast amount of previously unmeasured capital explains in part how the private American economy produced so much during the war and early postwar years with such a small measured increase in the stock of capital relative to the level of the late 1920’s“ (232).

Recently, Gordon (2000) has refined his earlier estimates of the U.S. capital stock in the nonfarm nonhousing private business sector, “changing from fixed to variable retirement, and . . . adding GOPO [government-owned privately-operated] and highway capital” (46). On the basis of his new estimates of the nonfarm nonhousing private business capital stock, he concludes that “instead of declining by 7.4 percent between 1930 and 1944, total capital input actually increases by 28 percent,” a finding that he declares to be important and “highly relevant to the puzzle of how the United States succeeded in producing so much during World War II” (46-47).

Like Gordon, Alexander J. Field has considered recently how taking properly into account the government’s capital accumulation during World War II might help us to understand better the broad contours of U.S. productivity change in the twentieth century. Field observes: “There remains an unresolved dispute over the usefulness for civilian production of this capital after the war. Some have criticized the transfers to the private sector as sweetheart deals; the valuations reflected in the sales, however, have been defended on the grounds that substantial retrofitting was often required to make them suitable for civilian production” (2003, 16).

The valuation of privatized government-financed plants and equipment is but one issue among many that bear on our understanding of the government’s wartime capital accumulation and its consequences for the performance of the postwar economy. So far, however, students of this topic have overlooked a number of complications that cloud the meaning of the standard data used to study it.

My objective in the present article is to display and discuss the official data that purport to measure the wartime capital accumulation, to identify several problematic aspects of those data, and to indicate at least the direction, if not the precise magnitude, of some strongly warranted adjustments. The theme of my inquiry is that previous analysts have failed to take fully into account the incomparability of capital accumulation undertaken by private entrepreneurs and capital accumulation undertaken by government officials—an incomparability that looms especially large when the latter’s projects are dedicated to highly specific military purposes. Here, as in so many other areas of economic analysis, we cannot penetrate to the essence of the matter unless we have a clear understanding of the economic principles that Ludwig von Mises ([1920] 1935) and F. A. Hayek (1935) expounded in their contributions to the socialist-calculation debate prior to World War II. Unfortunately, the analytical insights that I present and the measurement corrections that I propose here may serve only to deepen some of the mysteries that previous analysts believed they had solved by taking into account the government’s wartime capital accumulation.

Wartime Socialization of Investment

The basic data on which analysis usually rests appear in Table 1. They come from the national income and product accounts produced by the Bureau of Economic Analysis in the U.S. Department of Commerce (available online at The values are expressed in current dollars. In due course, I shall have something to say about inflation-adjusted values—an especially tricky matter during the 1940s because of the government’s massive military-mobilization, resource-allocation, and price-control measures substantially affecting the greater part of the decade—but much of what we need to know does not require an attempt to arrive at “real” values.

Table 1: Private and Government Fixed Investment, 1940-1950 (billions of current dollars)

Private Domestic Investment
Government Investment
Gross (all kinds)
Net (all kinds)
Net (all national defense only)
Net (national defense structures)
Net (national defense equipment)
1940 13.6 5.6 4.4 2.9 0.6 0.5 0.1
1941 18.1 9.1 10.8 8.8 6.7 3.4 3.3
1942 10.4 0.3 28.5 25.0 24.3 10.0 14.3
1943 6.1 -4.0 39.1 32.8 32.9 5.3 27.6
1944 7.8 -2.6 36.6 27.7 28.3 1.9 26.4
1945 10.8 0.1 24.1 13.9 14.2 1.1 13.2
1946 31.1 18.5 3.5 -7.5 -7.4 -0.4 -7.0
1947 35.0 19.4 4.6 -6.1 -7.3 -0.7 -6.6
1948 48.1 29.8 7.0 -2.7 -5.1 -0.5 -4.5
1949 36.9 16.8 9.7 0.9 -3.1 -0.5 -2.6
1950 54.1 32.4 9.8 1.8 -2.9 -0.4 -2.0

Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Tables. Table 5.2. Gross and Net Investment by Major Type, accessed November 26, 2002.

As the data displayed in table 1 make clear, a massive shift occurred during the early 1940s in the source of U.S. investment spending. In 1940, gross private domestic investment amounted to $13.6 billion ($5.6 billion net), whereas gross government investment came to just $4.4 billion ($2.9 billion net), including net national defense investment of an almost negligible $0.6 billion. In contrast, at the peak of war production, in 1944, gross private domestic investment had dropped to $7.8 billion (negative $2.6 billion net), whereas gross government investment had soared to $36.6 billion ($27.7 billion net), including net national defense investment of $28.3 billion. Plainly, this tremendous shift illustrates “the socialization of investment” with a vengeance.

For the four years from 1942 through 1945 as a whole, gross private investment fell to such low levels that it failed to compensate for the depreciation of the private capital stock. For that period, net private investment summed to negative $6.2 billion. In U.S. history, the only comparable evaporation of private capital occurred during the early years of the Great Depression (for periodized data from 1891 to 1989, see Edelstein 2000, 390-91). For those same four war years, however, net government investment summed to $99.4 billion, of which net national defense investment amounted to slightly more than 100 percent (the government did not invest enough in its nondefense capital stock to compensate for its depreciation).
Then, even quicker than the government had displaced private investors during the early 1940s, the latter displaced the government between 1945 and 1946, when net private domestic investment increased from approximately zero to $18.5 billion—an unprecedented amount—setting in motion an investment boom that continued thereafter for many years, restoring genuine prosperity to an economy that had wallowed for sixteen years in peacetime depression and wartime privation (for an extended analysis of this generally misunderstood macroeconomic rebirth, see Higgs 1997). In stark contrast, between 1945 and 1946, gross government investment fell from $24.1 billion to just $3.5 billion (net from $13.9 billion to negative $7.5 billion), and the national defense capital stock began a sustained decline that extended into the 1950s.

Capital Is Capital?

As I have just shown, during the war the government spent huge amounts of money to purchase durable military and industrial assets, thereby adding substantially to the stock of government “capital.” In the official accounts, no mystery attends the process of capital accumulation. If the government purchases a durable good, then ipso facto it adds to the gross capital stock, and thereby (given that the value of such purchases exceeds the value deducted as depreciation according to standard accounting formulas) it presumably increases the economy’s future potential to produce valuable goods and services. In this so-called “perpetual inventory” method of accounting for capital formation (Wasson, Musgrave, and Harkins 1970, 20), investment dollars flow like water into a capital-stock bathtub from which at the same time depreciation causes a certain drainage. Just as all drops of water matter equally when one is filling or emptying a tub, so all dollars of investment spending count equally when one is constructing a time series of capital stock. Here, in its official accounting representation, capital becomes something like the “homogeneous mass” imagined by capital theorists such as Frank Knight (Hennings 1987, 330)—a dollar spent for “capital” is a dollar spent for “capital.”

Whatever virtues this view may have in relation to the economic theory of a market system—and hardly anything has been more hotly disputed by economists than capital theory (Hennings 1987)—it has definite shortcomings in application to government capital formation. When private entrepreneurs make investments, they hazard their own property or the property that others have entrusted to them. Therefore, they must appraise carefully the prospect that the capital goods they purchase will give rise to an income stream sufficient to justify the present expense, the risks of loss, and the delays they anticipate before they can appropriate future income. Ultimately, the success of any private investment turns on the ability to use capital goods in a way that, directly or indirectly, consumers validate by purchasing final goods in the market.

Government officials follow different stars in making their investment decisions: politics, ideology, and even personal vanity (“empire building”) have a much greater chance of carrying the day. For the government, no consumer-determined bottom line spells the difference between success and failure, because the government has the power to extract taxes from citizens in order to finance the investments initially and to subsidize money-losing projects afterward, in defiance of consumer preferences.

Never does the contrast between the private investor and the government investor loom larger than it does during wartime, especially during a modern “total“ war, such as World War II, when perceived military necessity counts heavily with those responsible for making government investments. The wartime investment program in the United States from 1940 through 1945 illustrates the contrast unmistakably. “This unprecedented expansion of industrial capacity was not directed by business executives; nor did dollar-a-year men exercise effective indirect control over it. Rather, it was semiautonomous bureaucrats in pursuit of national security goals and insulated within the increasingly powerful Pentagon who directed this effort” (Hooks 1991, 140; on the most important of these bureaucrats, Under Secretary of War Robert P. Patterson, see Eiler 1997).

If it were possible, as some so-called market socialists have maintained, for government officials to calculate all the shadow prices needed to operate a wartime economy efficiently, and if the officials proceeded to make their decisions on the basis of those shadow prices, then matters would be different; but it is pointless to assume that pigs can fly. Government decision makers are not private entrepreneurs, and absent well-defined and well-established private property rights, they cannot possibly act as effective surrogates for such entrepreneurs, even if they wished to do so—this unavoidable reality is the most fundamental lesson that Mises and Hayek taught us about the impossibility of rational socialist calculation, and the utter failure of the centrally planned economies in the USSR and elsewhere attests to the iron logic of that lesson. As John Cochran has summarized the issues that are most pertinent here,

    The concept of capital is not a category of all acting, but only a category of acting in a market economy. Capital is an essential element in entrepreneurial planning. It is an estimate of the market value at a definite date of a particular business plan. . . . A given business or entrepreneurial plan implies a time structure of production for the individual enterprise—a pattern of inputs (capital goods, labor and natural resources or land) applied at earlier dates followed by a pattern of outputs sold at later dates. . . . Without private ownership of the means of proudction, there can be no markets for resources, no money prices for resources, and thus no monetary calculation and no capital. (2003, 3-4)

Therefore, whenever government officials undertake a massive investment program, we must expect them always to generate what Mises (1947) called “planned chaos.”

Thus, in March 1942, two military officers complained to the executive committee of the Army-Navy Munitions Board with regard to the vast industrial construction program then under way:

    If we continue as at present, we shall have plants standing useless for lack of equipment or raw materials, or other things. Other plants will be turning scarce materials into items which cannot be used to oppose the enemy because of the lack of other things which should have been made instead. We shall have guns without gun sights, tanks without guns, planes without bomb sights, ships held up for lack of steel plates, planes which we cannot get to the field of battle because of lack of merchant bottoms. (qtd. in Smith 1959, 453)

Of course, a government investment program may make some sense in relation to the achievment of strictly technological, military, or political objectives—arguably winning World War II was such a problem that the U.S. government solved for the most part by throwing gigantic amounts of money at it (Novick, Anshen, and Truppner 1949, 9; Rockoff 1996)—but in relation to economic rationality, it remains planned chaos, and its legacies must necessarily bear all the marks of its essential character.

In relation to the U.S. government’s capital accumulation during World War II, the upshot is that many resources were completely wasted from the outset (for striking examples, see Jones 1951, 342-44, and McCartney 1988, 56-70); construction costs were pushed “substantially above normal levels” (Smith 1959, 502, citing evidence from the Truman Committee hearings); and many wartime investments proved to have little or no value after the war, despite the contrary impression we might gain from an official time series on capital stock.

Simon Kuznets argued that when the government purchases durable military assets, “their survival beyond the initial year releases capital resources for other purposes, and while their services cannot be considered final product, the capital stock embodied in them, like other types of capital that serve a protective purpose, should be included” in estimates of overall capital formation (1961, 470). It is difficult to see, however, how the mere physical survival of obsolete and permanently mothballed munitions, such as those thousands of otiose propeller-driven warplanes parked forever in the western deserts (photos in Cohen 1991, 405), “released” anything or contributed in any way to a valuable purpose. To suppose otherwise would seem to entail making a fetish of physical durability at the expense of keeping genuine economic value at the center of our economic analysis.

The Composition of Wartime Government Investment

Although economists and historians have focused their analysis of the government’s wartime investment on its purchases of industrial plants and equipment, the preponderance of the investment took other forms. As table 2 shows, outlays to construct strictly military facilities—so-called command installations, as opposed to industrial facilities—gobbled up $13.9 billion from 1941 through 1945, in contrast to $8.6 billion spent on industrial structures. By the end of the war, the War Department alone had invested in 2,996 command facilities (Smith 1959, 448). These spanned a wide range of uses:

    Some idea of the scope of the Army’s far-flung empire of command installations in World War II may be inferred from the following partial list of establishments within the zone of interior alone: Army posts, camps, stations, forts, training and maneuvering areas, artillery and other ranges for the Ground Forces; airfields, air bases and stations, bombing and gunnery ranges for the Army Air Forces; storage facilities—from remote ammunition depots to metropolitan warehouses—for all branches of the Army; repair and maintenance stations for all types of equipment; hospitals, convalescent and recreation centers; military police camps, Japanese relocation centers, prisoner of war camps; a network of harbor defenses and other installations throughout the entire country for defense against enemy attack; holding and reconsignment centers, ports of embarkation, staging areas, and related facilities to mount the tremendous overseas expeditions of troops and supplies; local induction centers, radio stations, laundries, market centers, special schools and offices (including the $78 million Pentagon building); and, not to be overlooked, research laboratories, proving grounds, testing centers, and supersecret installations symbolized most completely by the atomic bomb. (Smith 1959, 444)

(Elsewhere, Smith also lists another category: 770 national cemeteries, occupying some two thousand acres of land [1959, 448]). A similar itemization might have been compiled for the Navy, whose bases, depots, repair yards, and other facilities spanned the globe.

Table 2: Gross Government Fixed Investment, 1940-1950 (billions of current dollars)

All National Defense All Defense Structures Defense Industrial Buildings Defense Military Facilities
1940 4.4 0.8 0.6 0.2 0.5
1941 10.8 7.2 3.6 1.3 2.1
1942 28.5 26.0 10.3 3.4 6.5
1943 39.1 37.4 5.8 1.9 3.3
1944 36.6 35.4 2.5 1.2 1.1
1945 24.1 22.7 1.7 0.8 0.9
1946 3.5 1.5 0.3 0.1 0.2
1947 4.6 0.9 0.2 0.1 0.3
1948 7.0 2.0 0.4 0.2 0.2
1949 9.7 2.9 0.4 0.2 0.2
1950 9.8 2.4 0.5 0.2 0.2

Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Tables. Table 5.14. Gross Government Fixed Investment by Type, accessed November 26, 2002.

(Elsewhere, Smith also lists another category: 770 national cemeteries, occupying some two thousand acres of land [1959, 448]). A similar itemization might have been compiled for the Navy, whose bases, depots, repair yards, and other facilities spanned the globe.

Scanning the foregoing summary, one is struck by how many of the command facilities were highly specialized for aiding the operations of the wartime armed forces. Such facilities had little if any value for peacetime uses. Even those that the armed forces wanted to retain for strictly military purposes after the war proved grossly excessive in view of the drastic reduction of military personnel strength after 1945. Small wonder that the Pentagon has spent more than half a century fighting (against local politicians and members of Congress, among others) to close bases still remaining from the massive base construction undertaken in the early 1940s to accommodate an armed force that eventually numbered more than 12 million men and women at its peak strength in 1945 (Twight 1990, Edelstein 2001, 74-75). Even today base closures continue to be made episodically as political opportunities allow.

Industrial and military structures together account for less than one-fifth ($23.9 billion) of the total gross national defense investment ($128.7 billion) from 1941 through 1945. Clearly, the big gorilla of the government’s wartime investment program consisted of the purchase of equipment (column 7 of table 1 shows this fact directly as a cumulative net investment of $84.8 billion in equipment during the same years). Again, as we have seen in relation to command facilities, the bulk of this investment (at least 90 percent) took the form of highly specialized military goods—combat airplanes, tanks, warships, guns, ammunition, and other such purely military durable assets—that had little if any value for use in peacetime activities. In the workaday world, there’s just not much call for phosgene-filled mortar shells, mustard-gas-filled bombs, and white-phosphorus-filled munitions (items among those dealt with during the deactivation of the Huntsville Arsenal in the late 1940s; see, not to mention the specialized equipment for producing atomic bombs. Even the strictly military equipment quickly became obsolete. Many readers will recall visiting or seeing photographs of the endless rows of aircraft parked in the western deserts or the scores of ships rusting peacefully at their moorage near the mouth of the Sacramento River in California. According to estimates by Simon Kuznets, annual military capital consumption, which had been nearly negligible before the war, reached $6.35 billion in 1945 (compared to $19.1 billion of depreciation allowed for the economy’s entire nonmilitary capital stock), and it continued to rise in the late 1940s, reaching $11.7 billion in 1950, as the wartime stock of munitions quickly wore out, wasted away, or grew obsolete (Kuznets 1961, 499).

Distortion of the Capital Structure

Despite the conventions of orthodox macroeconomics and the views of certain capital theorists, the actual capital stock is neither a homogeneous physical putty nor a financial mass of undifferentiated, fungible dollars. In a modern economy with an extensive division of labor and highly articulated roundabout production, the capital stock consists of a vastly heterogeneous, intricately related collection of produced means of production. If the economy is to function effectively, the capital stock must assume a certain structure, so that the “planned chaos” I illustrated earlier does not cripple its operation. In general, whatever the usefulness of the government’s wartime investment program for the immediate purpose of gaining military victory, it gave rise to serious distortions of the capital structure and thereby had less value for postwar productive purposes than the sheer amounts spent on durable assets during the war might seem to imply. Viewed in longer-term perspective, a great deal of the government’s investment constituted what is known in modern Austrian economics as malinvestment (Mises 1966, 559-61, Lewin 1994).

Even though manufacturing accounted for less than 28 percent of the national income in 1940 (U.S. Bureau of the Census 1975, 239), approximately nine-tenths of the government’s wartime industrial investment flowed into that sector (Gordon 1969, 232-33), and within manufacturing, the investment went predominantly to a handful of industries: “aircraft, engines, and parts; explosives and shell loading; shipbuilding and repair; iron and steel and products; chemicals; nonferrous metals and products; ammunition, shells, bombs, etc.; guns; machinery and electrical equipment; petroleum and coal products; combat and motorized vehicles; and machine tools” (McLaughlin 1943, 100-09). As a contemporary analyst remarked, “In general, the proportion of public financing has been at a maximum for those industries whose expansions have been most disproportionate to probable postwar needs; . . . specialized war plants . . . possess questionable peacetime value; . . . [and] some of the special-purpose machinery will be worthless for peacetime operations” (McLaughlin 1943, 109, 114, 116). Some $12.2 billion of the government’s total spending for industrial facilities ($17.2 billion), or approximately 71 percent, went into the metals and metal-products industries (U.S. Smaller War Plants Corporation 1946, 38, citing War Production Board data). According to a 1946 study by an analyst for the Board of Governors of the Federal Reserve System, “Prevailing opinion seems to be that about two-thirds of the Government owned war plants will not be adaptable to postwar production” (Dirks 1946, 14; for a more optimistic judgment, see U.S. Smaller War Plants Corporation 1946, 39-40).

Before the war, for example, the productive capacity of the aircraft industry had been almost negligible, but after swallowing more than $3 billion of the government’s industrial investment budget, the industry emerged from the war as a giant confronting only a tiny, ill-developed civilian market and a vastly shrunken government market for its products. Shipbuilding experienced a similarly spectacular growth, then a similarly anemic postwar demand for its products (U.S. Bureau of the Budget 1946, 116; Smaller War Plants Corporation 1946, 43, 45-46; Hooks 1991, 158-60).

Besides producing unsustainable distortions in the sectoral and industrial composition of the capital stock, the government’s wartime investment program created distortions in the locational distribution of the stock (McLaughlin 1943, 110-13). To some extent these distortions reflected wartime security concerns, as when ordnance facilities were located more than 200 miles from the coast. Some locational malinvestments emerged “naturally” as reactions to other, unrelated government wartime actions that previously had brought about localized scarcities of labor, electrical power, or other resources. Some distortions arose from routine political pressures, especially by Roosevelt administration officials and by members of Congress, which continued to be exerted actively during the war (Eiler1997, 181; Jones 1951). As Glenn McLaughlin remarked in 1943, “Many war plants throughout the country will be physically appropriate for the manufacture of civilian products but geographically inappropriate” (117). Because the new industrial capacity the government financed for war purposes did not conform to the locational pattern that would best meet the demands of the postwar market economy, standard accounting methods of computing its postwar value overstate its actual value.

“Real” Values and Insufficient Depreciation

At places in the foregoing discussion, I have added the current-dollar values of certain variables for various war years, notwithstanding the fact that the purchasing power of the dollar was falling throughout the war. For the purposes I was trying to serve, not much harm was done to my argument by those summations, but for other purposes, such as the determination of the net result of the government’s wartime investment program, the use of constant-dollar values will not suffice, and we must attend to the task of deflation. Unfortunately, wartime price indexes in general are unreliable, if indeed they have any validity at all (Higgs 1992, 49-52).

Matters are even worse in relation to the deflation of durable munitions, which, as we have seen, accounted for the great bulk of the government’s wartime investment, according to the Commerce Department. All economic statisticians seem to have recognized the essential futility of constructing a reliable price index for munitions output during World War II. Having made an attempt to create such an index in his 1945 monograph National Product in Wartime, Simon Kuznets later decided to abandon the effort in his 1961 treatise Capital in the American Economy, remarking: “with the inclusion of additional war and nonwar years, it became exceedingly difficult to adjust the cost of military construction and munitions to levels comparable with normal, peacetime output. Instead, it seemed best to accept the price adjustment used in the Department of Commerce national income accounts” (471). Unfortunately, the Commerce Department accountants themselves had already admitted they could not do the job. In 1954 they had confessed that their “method of deflating munitions expenditures” has “severe limitations,” in large part because “the price information relating to munitions is deficient, largely owing to the fact that there are insurmountable obstacles to the compilation of adequate time series on prices (or quantities) in this area which is characterized by extreme product change” (U.S. Department of Commerce 1954, 157). Therefore, the great bulk of the government’s official capital formation during during the war—its expenditures for durable munitions—cannot be deflated reliably. Because “insurmountable obstacles” cannot be surmounted, we need go no further down this path, except to emphasize the permanent dark cloud that hovers over all data that purport to represent in any way the real value of munitions outputs or stocks over time, especially for periods that include World War II.

Matters may not be so desperate with respect to the deflation of the government’s wartime expenditures for industrial plants and equipment, in particular for the GOPO stock created during the war and, in part, sold to private owners during the immediate postwar years. Table 3 presents the most significant “real” data (expressed here in constant 1958 dollars), those pertaining to the private nonfarm business economy. In the Commerce Department report from which these data are drawn, four different estimates are given, based on two different deflators and two different depreciation formulas, but the four series all show essentially the same profile, and one variant will serve our purposes here well enough.

Table 3: Net Fixed Business Capital (billions of 1958 dollars)

Year Privately owned GOPO Total
1940 192.0 0.8 192.8
1941 195.9 5.9 201.8
1942 190.1 21.0 211.1
1943 182.4 36.7 219.1
1944 178.9 44.8 223.7
1945 181.8 50.2 232.0
1946 194.5 35.6 230.1
1947 211.6 27.3 238.9
1948 228.2 23.2 251.4
1949 239.5 19.4 258.9
1950 251.9 17.9 269.8

Source: Robert C. Wasson, John C. Musgrave, and Claudia Harkins, “Alternative Estimates of Fixed Business Capital in the United States, 1925-1968,” Survey of Current Business 50 (April 1970): 23, 36.
Note: Variant calculated by using straight-line depreciation and “constant cost 1.” In these data, used assets acquired by business from government are valued at sales prices, not at the government’s original cost of production.

As the table shows, “real” privately owned capital fell from 1941 to 1944, rose slightly in 1945, then grew rapidly in each of the next five years. “Real” GOPO capital mushroomed from nearly zero in 1940 to a peak of $50.2 billion (in 1958 dollars) in 1945, then began to decline rapidly, losing more than 60 percent of its value by 1949. The total privately operated stock of capital, shown in column 3 of the table, grew steadily from 1940 to 1945, fell slightly in 1946—a decline attributable entirely to the estimated decline of nearly 30 percent in the real value of GOPO capital, a substantial part of that decline representing the transfer of assets to private owners—then grew steadily for the remainder of the decade. From 1940 to 1945, the estimated total stock increased by 20 percent; then, from 1945 to 1950, by 16 percent.

It is almost certain that the Commerce Department figures overstate the increase in the privately operated capital stock during the first half of the 1940s, because the standard formulas for computing depreciation fail to take into account certain extraordinary conditions during the war, especially “the accelerated depreciation resulting from intensive plant use and scarcity of replacement parts” (McLaughlin 1943, 113). According to a War Production Board report,

    plant utilization in the munitions industries increased sharply after Pearl Harbor . . . . [T]he average utilization of facilities in the metal products industries late in 1944 was about two-thirds above the prewar level, after having reached nearly twice the prewar level in the spring of 1943; the increase in the remaining industries, though smaller, was still substantial. . . . [T]he increased utilization of existing facilities contributed nearly as much to the increase of total industrial output during the war as did the construction of new facilities; though the contribution made by more intensive utilization was much more important in the earlier part of the period, particularly in 1940 and 1941, than it was in 1943 and 1944. (U.S. War Production Board 1945, 7, emphasis added)

Double-shift and even treble-shift operation of plants became much more common during the war (U.S. War Production Board 1945, 31-32).

Recently, Lee Ohanian (1997) also has noted that “capital utilization increased substantially during the war” (33, citing Foss 1963). Foss had reported, among other things, that in a comparison of conditions in 1934-39 and those in 1940-44, hours of usage per year increased by 53 percent for railroad freight cars, by 54 percent for freight locomotives, and by 34 percent for passenger locomotives (1963, 15). Hours of usage per year per spindle in the cotton textile industry increased by about two-thirds during the war years (1963, 9).

At the same time that the capital stock was being used far more intensively, the lack of replacement parts and repair materials kept producers from doing the normal upkeep on their property. In the housing sector, rent controls induced landlords to forgo ordinary repairs. For apartment houses and small structures, index numbers of repair and maintenance expenditures fell some twenty percent during the war (Rockoff 1984, 156). The motor-carrier industry during the three peak war years obtained “only 195,000 new trucks and buses,” which amounted to “less than 10 percent of the number it would normally require for replacements and expansions,” while increasing its loads each year and hastening wear and tear on its fleet of vehicles (Director of War Mobilization and Reconversion 1945, 39). At the beginning of 1945, the Director of War Mobilization and Reconversion confirmed that “wear and tear on [industrial] plants has been far above normal, while repairs and replacements have been below normal” (1945, 50).

We can gain a rough idea of the effect this accelerated wartime depreciation by making some conservative adjustments to the Commerce Department’s capital consumption allowances. From the gross and net investment figures shown in Table 1, we can infer that the official allowances for depreciation of the private capital stock during the five wartime production years were as follows, in current dollars: $9.0 billion in 1941, $10.1 billion in 1942, $10.1 billion in 1943, $10.4 billion in 1944, and $10.7 billion in 1945. If we adjust these estimates by adding just 10 percent in 1941, and 20 percent in each year from 1942 through 1945, the total additional depreciation for the entire wartime period comes to $9.1 billion, a far from trivial sum—consider, for example, that it offsets approximately 53 percent of the amount ($17.2 billion) the government spent on new industrial facilities (structures, equipment, and reconversions) from July 1940 through June 1945 (Smaller War Plants Corporation 1946, 37-38). In addition, we may presume that the official depreciation formulas also failed to capture fully the actual wartime depreciation of government-financed industrial facilities, which were also operated at extraordinary intensity, probably more so than the private capital stock as a whole. Given that more than half of the government’s industrial investment had been completed by the end of 1942 (ibid., 37), then an allowance for extra depreciation of the GOPO industrial capital might easily add another $1 billion to the total adjustment for wartime understatement of actual depreciation, bringing that total to more than $10 billion in current dollars, or approximately $20 billion in 1958 dollars (adjustment made by using the implicit deflator for private nonresidential fixed investment, from U.S. Council of Economic Advisers 1970, 180).

If we deduct just half of this amount— $10 billion in 1958 dollars—from the total net fixed business capital estimate shown in table 3 for 1945 (which represents only part of the nation’s total private capital stock), the total falls to $222.0 billion. One implication is that the total net fixed business capital stock increased between 1940 and 1945 not by the 20 percent implied by the official figures, but by just 15 percent. And given the new figure for 1945 (and a corresponding adjustment for the data for later years), another implication is that the total increased between 1945 and 1950 not by the 16 percent implied by the official figures, but by 17 percent. In my judgment, a correct adjustment—arriving at which would require an enormous research effort, if it is possible at all, given the sorts of data that would be required to carry it out—almost certainly would be greater than my crude adjustment here.

Thus, taking into account the undoubted measurement errors in the wartime depreciation allowed in the Commerce Department figures shown in table 3, caused by the inappropriate application of uniform, standard depreciation schedules, we may conclude that the actual drop in the privately owned net stock of capital was even greater than shown during the war years and that the increase in that stock during the second half of the 1940s was greater than shown. Thus, for the capital stock, as for the economy’s real output (Higgs 1992, 1997, 1999), the official data have misled us by making the wartime expansion appear bigger than it really was and the postwar expansion smaller than it really was.


Contemporaries greatly exaggerated the heroic dimensions of the wartime socialization of investment. Their exaggeration reflected, in part, an unwarranted concentration of attention on the manufacturing sector. Although that sector undoubtedly played a central role in the production of munitions, nevertheless it represented less than a third of the entire prewar economy, and the other two-thirds got very short shrift indeed from the government’s wartime investment program. Even within manufacturing, the nonmunitions industries suffered wartime privations of capital formation. Most important, of course, we must recognize that the great bulk (some 83 percent) of the apparent capital formation, as officially recorded (table 1), consisted not of industrial structures or equipment but of military structures (some 14 percent) and of durable munitions (some 69 percent)—weapons platforms, guns, ammunition, and auxiliary equipment and supplies. To have counted such output as capital formation was always, at best, an extremely dubious practice, and the justifications for it that Kuznets and others have proffered are not convincing. If we take into account only those parts of the wartime capital formation that had value beyond their sheer immediate usefulness in winning the war, and if we give appropriate weight to the significant measurement errors that I have described, then we may conclude with reasonable confidence that, in fact, real capital formation during the first half of the 1940s was not proportionally greater than that during the latter half of the decade; indeed, it was more likely a good deal less. The wartime socialization of investment served a definite purpose in allowing the U.S. military-industrial complex to triumph over the nation’s enemies in World War II. Beyond that, its achievements had little if anything to recommend them.


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Acknowledgments: For pointing me toward or helping me lay hands on some of the data exploited in this article, I am grateful to Robert J. Gordon, Barbara M. Fraumeni, Lee J. Alston, and Andres Gallo. For substantive critical comments on a previous draft, I am indebted to Michael Edelstein, Alexander Field, and Hugh Rockoff.

Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications

A revised version of this paper was published in the Journal of Economic History 64 (June 2004): 500-520.

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