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Frank Demby

America’s War Economy

(September 1941)

From The New International, Vol. VII No. 8 (Whole No. 57), September 1941, pp. 200–4.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

AFTER MORE THAN two years of the Second World War, and after more than one year of the “Defense” Program, the single outstanding fact which emerges in any study of the economic situation in the United States is that America has entered upon a period of war economy. Already, approximately 25 per cent of the national income is being spent for purposes of armament. This amount will steadily increase until, before long, the major proportion of American resources, both human and material, will be devoted to the production of means of destruction. The American public is still almost blissfully unaware of what this will mean in terms of the daily routine of normal life. Rising prices, increased taxes, shortages of consumers goods, fast-increasing government controls – all, however, point to the inescapable fact that the “honeymoon” period is over. From now on, as the war economy develops further, the mass of the people will become well aware of what a war economy means. The standard of living will go down. The routine of normal life will be seriously interrupted due to the increasing dislocations produced by the insatiable appetite of the war machine. The atmosphere of crisis will become chronic, for war is but an expression of far-reaching social crisis.

The developing war economy brings in its train a series of important questions – political, social and economic in nature. I am particularly concerned, in this article, with some of the economic questions raised by the entrance of the United States into a period of war economy. Two basic questions immediately arise: Who pays for the war economy and how do they pay? Who profits from the war economy and how do they profit? These questions, in turn, give rise to a third basic summary question: What will be the effect of the war economy, in its short-term and long-run aspects, on the future development of American economy?

Early this year, in one of his fireside chats, the President warned the people that they would have to expect sacrifices. While the full implications of these sacrifices remain to be unfolded, the broad outlines, as well as some of the details, are already quite clear. The 1940 and 1941 revenue bills, for example, unmistakably reveal the intention of the government to make the working masses bear the brunt of the burden of financing the imperialist war effort of the United States.

The Tax Bill

At this writing, the final form of the 1941 revenue bill has not yet been established. The bill is “in conference,” as a result of several very important changes made by the Senate in the House version. However, it appears that the more drastic Senate version will more nearly approximate the final form of the Bill than that of the House. This will mean a sharp increase in the income tax on the lower income brackets, for the Senate has lowered the exemption for married persons from $2,000 (until 1940 it was $2,500) to $1,500, and for single individuals from $800 (until 1940 it was $1,000) to $750. By this measure 5,000,000 persons who never previously filed a federal income tax will now have to do so. Due to exemptions, it is expected that only about half this number will actually have to pay an income tax in 1942. Altogether, more than 20,000,000 people will now pay an income tax. This does not appear to be very drastic when it is recalled that about 60,000,000 people in the United States receive some form of income. But it must be remembered that the income tax was originally hailed as a progressive form of taxation because it was presumably based on ability to pay.

An income tax which broadens the base as the current bill proposes, begins to violate the “principle” of ability to pay. It definitely imposes severe hardships on those who can least afford to pay. Consider, for example, the case of an unmarried worker making $20 a week ($1,000 a year) – and there are many in this category. Before 1940 he did not pay any income tax. Under the 1940 act, he paid an income tax of $4.00. Under the Senate proposal for the 1941 act, this worker, who has great difficulty maintaining a bare subsistence level, will have to pay an income tax of $21 – more than one week’s pay and an increase of 425 per cent in his income tax. A married worker with no dependents earning $2,000 a year previously paid no income tax. Now he will have to pay an income tax of $42. Remember that this is only the income tax. The TNEC has estimated that approximately 25 per cent of the income of those in the lowest income brackets is already taxed indirectly through various forms of excise taxes.

The indirect tax burden is also be to increased – by more than one billion dollars. This will add tremendously to the tax load borne by the working class and the middle classes. Virtually the same percentage of income received will be paid by the worker and the millionaire, when all forms of taxation are considered!

Who Will Really Pay

I do not have the space to analyze the various types of excise taxes proposed. Moreover, this field of taxation is much more subject to change than the income tax before the President affixes his signature. One example will suffice, however, to show the colossal injustice involved. Both the Senate and House have passed a provision calling for a $5 a year “Use” tax on owners of motor vehicles and boats. It is expected that more than $160,000,000 will be raised through this entirely new tax. This is one of the most vicious examples imaginable of a violation of the ability to pay principle in taxation. Firstly, in many cases, automobiles have assumed the proportions of a necessity to their owners. Why include boats (which category presumably covers yachts as well as motorboats) in the same provision with automobiles? Secondly, of the approximately 30,000,000 automobiles subject to this tax, there can be no doubt that the owners of the majority of these cars will find it difficult to pay this tax, whereas a $5.00 tax on the owner of a Packard or Cadillac will hardly put a dent in the owner’s pocketbook. The same is true for virtually every type of excise or miscellaneous tax proposed. The workers and the middle classes – those who work for a living – will finance the imperialist war. They are the ones who will make the real sacrifices under the war economy. In contrast, take the case of a man with an income of $1,000,000 a year, having two dependents. His tax is raised from $717,056.40 to $735,972.40 – an increase of almost $19,000, but it still leaves him more than a quarter of a million dollars on which to struggle along! The excise and miscellaneous taxes hardly figure in the tax burden of the wealthy at all. Nor does this take into account the well known fact that one of the biggest frauds in the present tax structure is the ability of the wealthy to dodge a considerable proportion of their tax burden through the many clever devices that their expensive lawyers have worked out. It was undoubtedly in response to pressure designed to eliminate one of the favorite tax-dodging methods of the rich – making property “gifts” to their spouses – that prompted the House Ways and Means Committee to propose the highly controversial joint returns. This would have compelled all married couples to file a single joint income tax return. The real burden of this device, too, would have fallen, as I pointed out in Labor Action, on the middle income groups and the upper strata of the working class. This is not the way to prevent tax-dodging by the wealthy. Higher estate and gift taxes would be a much more stringent proposal.

Profits Insured by Congress

If there still be any doubt that this tax bill is class legislation in favor of the bourgeoisie, a brief glance at the corporation income and excess profits taxes should dispel any lingering illusions. The present corporation income tax rate is 24 per cent of net profits. Slight increases in the surtax rate on corporations have been proposed – 5 per cent on the first $25,000 of net income and 6 per cent thereafter by the House, and 6 and 7 per cent respectively by the Senate. The Senate more than made up for its slight increase in the corporation surtax rate by eliminating the special 10 per cent tax on corporations not earning enough profits to come under the excess profits tax schedule passed by the House.

If taxation is to be based on ability to pay, what is obviously required here is a corporation income tax with progressively higher rates, corresponding to the personal income tax. Why should a Corporation like General Motors, with a net income around $200,000,000 a year, pay the same rate of income tax as a small corporation with a net income of $200,000 or less? And if the argument is made that the large corporation does pay a higher rate of tax because of the excess profits tax provisions, the answer is that fundamentally this is not the case since the excess profits tax remains a pure swindle. The proposed increase of 10 per cent in the excess profits tax schedule (making the tax run from 35 per cent to 60 per cent) is no more than a drop in the bucket, as a glance at current corporate earnings will show. Due to the maintenance of alternate methods of computing the excess profits tax by either the average earnings method or the capital investment method, most of the large corporations have been able to keep their excess profits down to very modest sums. Consequently, they pay a very small excess profits tax. Moreover, the new provision allowing a credit of 125 per cent for all new capital investment will actually lower the excess profits tax in some cases. An excess profits tax of anything less than 100 per cent, and without all the “liberalizing” amendments that have been introduced, cannot be considered a genuine excess profits tax.

The tax burdens outlined above represent only the beginning, severe though they are. As the war economy develops, taxes will continue to increase. Their pattern, however, is established, so long as the capitalist government remains in control of the situation. The motto in Washington is: Soak the poor; Go easy on the rich.

What Big Business Demands

The real program of the bourgeoisie is always that presented by the National Association of Manufacturers. In the field of taxation, the NAM has stated its reactionary program in unambiguous terms. Its representative, Livingston W. Houston, chairman of the finance committee of the NAM, testified last month before the Senate Finance Committee in favor of a general sales tax, as well as approving the broadening of the income tax base. The NAM, as well as other organizations representing industry and finance, have already indicated that their basic tax program for next year will not only include a general sales tax (the most reactionary type of tax possible) but also a payroll tax. Volumes of propaganda will be forthcoming during the next year in an attempt to show that the only way to prevent inflation and to preserve the credit of the United States is to tax more heavily the 75 per cent of income earners who get less than $5,000 a year. The surest way to tax this overwhelming majority of the population, in a manner which will make it “almost unnoticeable” to them, is through the sales tax and the payroll tax. So the propaganda will run. It will not mention, however, the really vital point – by levying a sales tax and/or a payroll tax the big bourgeoisie will be utilizing the emergency represented by the developing war economy to accelerate the process of wiping out the middle classes and to saddle the working class with a yoke which will make it impossible for them to breathe.

The answer to the question, Who pays for the war?, gives us already a pretty good picture of what a capitalist war economy looks like. It is hardly one which is designed to appeal to the broad, popular masses, whose support is so essential for the carrying out of the imperialist war program. But, as long as the masses are willing to delude themselves with the utterly false notion that Roosevelt can somehow or other stop fascism, the masses will make these sacrifices, even though with much grumbling.

If the masses can stomach the tax program, it does not at all mean that the remainder of the war economy picture appeals to them. The dislocations caused by the war economy are already becoming quite irritating. At the moment, though, these irritations are mere pin-pricks. What is really getting the goat of the masses, particularly the factory workers, is the absolutely fabulous profits which the big corporations are making – profits which are rolling in despite every attempt to conceal them and at a time when the workers are beginning to feel the pinch of a rising cost of living brought about by steadily rising prices. These huge profits cause an instinctive reaction on the part of workers. They violate their innate sense of fair play. “Why should the big bosses make millions while we sweat and slave for long hours and through an intensive speed-up, while we march and drill until we are utterly worn out in the conscript army, and while our wives are having an increasingly more difficult time making ends meet on account of prices going up practically every day?” These are becoming the daily thoughts of the workers. They are behind almost every strike that takes place. The workers feel that if the actions of the bosses represent good patriotism, they might as well get their “cut” of this temporary prosperity. Who knows how long this war boom will last? These sentiments are not the product of our imagination or wishful thinking. They are repeatedly testified to by eminent representatives of the bourgeoisie. The admittedly low morale of the army and the general apathy of the civilian population to the war are eloquent, if silent, confirmation of the deep-seated existence of this sentiment.

The New Prosperity

A war economy without huge profits, however, is simply something that is absolutely inconceivable to the rulers of America. Take these huge profits away and 99.9 per cent of their enthusiasm for war disappears. Reports of corporate earnings that appear daily in the financial sections of the newspapers make it appear that the good old days of 1928 and 1929 are here again. Led by the aircraft industry and munitions manufacturers, and closely followed by chemicals, steel, auto, rubber, petroleum, mining and construction, the boom in profits extends all the way through the consumers’ goods lines, like food, textiles and department stores, to that most bankrupt of all capitalist industries, the railroads. Even the public utilities show substantial increases in profits. Industry as a whole is expected in 1941 at least to equal the fantastic profits of 1929. In any cases, they will undoubtedly be exceeded.

To assume from this that the situation is fundamentally similar to the “Golden Age” of the late 1920s would be to make a fatal error. There are significant differences. This profit boom is occurring in a war economy. This means that the principal market for the products of industry is the government. Without “national defense” orders, which have already passed the huge total of $50,000,000,000, industry, particularly heavy industry, would collapse instantaneously. Along with this increasing dependence of industry on government goes a steady invasion of government by industry. The dollar-a-year men have overrun Washington like a swarm of locusts. Many of the leading and most capable representatives of big business have resigned from their official posts in their respective corporations to assume key posts in the OPM and other Washington bureaus. By sheer coincidence, since most of the dollar-a-year men come from the large and well established corporations, their corporations have received the lion’s share of government contracts. In other words, the market, which becomes increasingly the government, becomes increasingly monopolized by a handful of super-giants.

Big Business Gains

The tendency toward concentration of industry and profits which appears as a part of the normal development of capitalism in the epoch of imperialism – a process which clearly set in here in the United States during World War I – is thus reinforced and accentuated as the American war economy develops during World War II. Almost any industry becomes a good example of this tendency. Naturally, the war industries are the best examples. Let us take, for example, the chemical industry.

A review of twenty-two leading corporations indicates a combined net profit of $41,091,152 after income and excess profits taxes in the second quarter of the current year, against $36,396,307 correspondingly in 1940; net profit for the first quarter was $39,458,325, against $40,262,327 in 1940. (New York Times, September 14)

The second quarter of 1941 thus represents the highest profit ever made by the chemical industry in any year. For in the first six months of 1941, twenty-seven companies showed a combined profit of $88,180,705. This compares with $78,997,654 in the first half of 1940 and 172,500,859 in the second half of 1940. Eleven large companies (this excludes the income that duPont receives from General Motors dividends) earned $43,755,445 in the first half of 1941, as against a net profit of $45,075,800 in the first half of 1940. However, when duPont’s dividends from General Motors are included, the figures become $61,255,445 and $62,575,800 respectively. Whether duPont’s General Motors dividends are included or not (and General Motors, of course, is one of the six corporations that has received more than 50 per cent of all “defense” orders), the fact is inescapable that a small portion of the number of firms in the field receives the bulk of the orders and the bulk of the profits. If figures were available for the really big chemical concerns, like duPont, Allied Chemical and Dow Chemical, the concentration of profits would be much more startling.

As a matter of fact, the profits of the giant corporations are even greater than these figures indicate, for I have presented the official figures for net profits, without considering the earnings before provision is made for taxes. The following table (again of eleven leading chemical companies, excluding General Motors’ dividends to duPont) represents a typical picture:

First half





Earnings before taxes



Federal taxes*



* Income and excess profits taxes and contingency reserves against future
tax increases.

Earnings before taxes are thus 74 per cent higher in the first half of 1941 as compared with the first half of 1940. Many industries will show an even higher percentage increase in gross profits. The aircraft industry, for example, is well over 100 per cent. It is true that taxes have increased, but not nearly as much as appears from the figures presented. The joker, of course, is in the phrase, contingency reserves. Just what these are or how much they amount to is never revealed in statements of this kind. Corporation directors always explain to their stockholders that putting aside of such huge amounts for taxes on the ground that they don’t know just what kind of a tax bill Congress will pass and they have to be prepared, as good managers, for any emergency that may arise. Moreover, they usually add, we live in a period of uncertain times. Sound and conservative business practice dictates to us the necessity of storing up surpluses for the “rainy days” that may lie ahead. This may be sound business practice – if not on the grounds indicated by corporation directors – at least from the point of view of concealing fabulous profits. It might be added that profits statements never make any mention of huge salaries and bonuses paid to officers and directors. The tendency, however, is for these to increase and this becomes another effective method of concealing huge profits.

Government and Business

The profits picture is not complete without at least mentioning that the dependence of profits on government contracts brings with it a feature that can hardly be disagreeable to the corporations. Government contracts are always so worded, either through a cost-plus provision or some other device, that the huge profits of the big corporations are guaranteed by the government. There is no risk attached, except the risk that the war may end. The defenders of free private enterprise and “private initiative” may find the trend toward increasing government intervention in industry rather alarming – as indeed it is from some points of view – but they always conveniently forget to mention the one factor which endears state monopoly capitalism to the hearts of big business: profits are guaranteed and competition eliminated by the government.

The elimination of competition is essential for a smoothly functioning war economy. In a period such as this, anti-trust laws, which were always a joke, become an absolute farce. A by-product of this process is the rapid development of the tendency to eliminate the small business man. Not all the “defense clinics” or the appointment of Floyd B. Odlum of the huge investment trust, Atlas Corporation, to the task of increasing subcontracts, can conceal the fact that small business men are having increasing difficulty in getting the necessary raw materials. The operation of priorities necessarily means that the big corporations get bigger and the small ones are wiped out. To remain in business today, a manufacturer increasingly finds it necessary to have a private wire to Washington. But this the small business man cannot do, except in rare cases. The big manufacturer, however, has no difficulty at all in getting a hearing in Washington. He is already represented there by the dollar-a-year men.

Already, hundreds of small businesses have been forced to the wall. In the next six months, the figure will run into thousands. Even many large corporations are forced to close, at least temporarily, as the transition from a peace economy to a war economy is made. Government experts predict an increase of two million unemployed from this source alone during the next year.

In short, a war economy, while it may solve temporarily some of the problems of a dying capitalist order, only accentuates the basic contradictions inherent in capitalism. Lack of space alone prevents a detailed examination of all the economic effects of the developing war economy. Organizationally, the structure of capitalism is being changed in the direction of a far more complete development of state monopoly capitalism. The rapid rise in prices, the astronomical proportions of the government debt, the beginnings of rationing, the introduction of credit controls, the huge expansion of credit through increasing bank loans (accompanied by a decline in excess reserves), the rise of money in circulation to an all-time high – these are some of the indicators of the approaching storm.

Inflationary Dangers

Face to face with the threat of an uncontrolled inflation of gigantic proportions, the bourgeoisie stumbles around in its efforts to prevent it like a drunken man on a tightrope. Voluntary measures cannot bring a halt to rising prices. Bootlegging and quality depreciation continue apace. Tax anticipation notes and voluntary savings are a mere soporific. The American bourgeoisie must make up its mind in the course of the next few months to institute rigid price control and forced savings or the inflation will be beyond control. The American ruling class, this means, is squarely confronted with the dilemma: inflation or totalitarianism. There is no escape from this dilemma under capitalism. It is merely a question of time, and the time becomes increasingly short when the American bourgeoisie will be fairly stuck on one of the horns of this historical dilemma. And the worst of it is, from the capitalist point of view, that a pronounced trend in either direction will produce a revolutionary crisis.

At present we are confronted with a war economy running, at best, at 0 per cent efficiency. Production still lags way behind the demands of the war situation. Red tape and bureaucracy clog the wheels far more than is necessary under capitalism. The American war economy will become more effective. Of that there can be little doubt, although it may well require actual participation in a shooting war to bring this change about. By 1943–44, perhaps a bit sooner, the dénouément should be reached. And if, by some miracle, American capitalism weathers World War II without any fundamental changes having taken place, it will find that organizing the economy of the western hemisphere and of the entire world is a far more difficult task than that of organizing the domestic economy of the United States.

The thought of the transition to a peace-time economy makes the bourgeoisie shudder. And well they may, for a disillusioned and undefeated working class will hardly put up with the only solution the bourgeoisie can offer – a permanent war economy. The war economy cannot be made permanent without the establishment of an American fascism. And this requires far more than defeating Hitler. It means crushing the American workers.

Society has come to an absolute impasse, even in the richest and most highly developed of all capitalist countries, the United States. The fetters which bind the forces of production and condemn the overwhelming majority of the population to steadily increasing misery must be cast off. The only road that can avoid chaos and barbarism is the road that Marx outlined as the historic mission of the proletarian – the socialist emancipation of society. Much will undoubtedly happen before the issue is finally joined, but the decade of the 1940s will be decisive in determining whether mankind will march forward toward socialism or continue its relapse into barbarism.

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