Financial History of the United States: Fiscal, Monetary, Banking, and Tariff, Including Financial Administration and State and Local Finance

By Paul Studenski; Herman E. Krooss | Go to book overview

CHAPTER 31:
DEFLATION OR INFLATION: PEACE OR WAR

The vast changes which the depression and World War II wrought in the economic and social structure resulted in a postwar period fraught with uncertainty, insecurity, and indecision.

The five years 1946 through 1950 were characterized by continuous inflationary pressures, but the experiences of the depression could not be forgotten. Living in constant fear of unemployment and the threat of deflation, the people and the administration sublimated the American dream and made the quest for security the paramount objective of their economic policy. Inflationary government policies, such as continued heavy Federal spending, price supports, housing loans, tax reduction, and an easy-money policy, commanded popularity and were followed by the administration. At the same time, the constant infusion of rigidities into the economy in the form of government and monopolistic private price and wage supports gave support to scepticism regarding the economy's ability to maintain a continuous high rate of growth.

Internationally, the postwar years were even more heavily clouded by uncertainty and insecurity. The hopes for one world had not materialized. Instead, the war had accentuated the cleavage between the capitalist and the communist worlds. Nevertheless, the public and the administration ardently wished to believe that peace had been reestablished and normal life had once again become possible. As the "iron curtain" enclosed a larger and larger area of Europe and Asia and as the "cold war" became increasingly serious, there was a desire to escape from reality. Despite pleas from military leaders and internationalists, the public was not enthusiastic about making the sacrifices necessary for vigorous measures of national defense and for continuous financial assistance to friendly nations. Governmental policies during this period reflected the state of public opinion and were inconsistent and often self-defeating. The outbreak of the Korean War in June, 1950, brought the true state of international affairs painfully to the public mind and put an end to governmental indecision regarding the financial and economic measures to be pursued, while at the same time making it clear that continuous inflation was going to be the real threat.

Political and Economic Setting. Politically, the first few years after World War II were colored by President Truman's Fair Deal, a revival

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