controlling consumers in the event of future wars

Controlling Consumers in the Event of Future WarsAuthor(s): Stephen EnkeSource: The Quarterly Journal of Economics, Vol. 72, No. 4 (Nov., 1958), pp. 558-573Published by: Oxford University PressStable URL: http://www.jstor.org/stable/1884336 .

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CONTROLLING CONSUMERS IN THE EVENT OF FUTURE WARS

By STEPHEN ENKE

I. Introduction, 558. -II. Some alternative wars and their economic impacts, 558. - III. Alternative suggestions for an over-all expenditure ration, 563. - IV. A pessimistic but realistic program, 569. - V. Concluding comment, 572.

I. INTRODUCTION

The rationing and price control schemes of belligerent governments during World War II stimulated several alternative proposals by economists.' However, most of them were ignored by those in authority, at least in the United States, perhaps because they were offered too late. Since 1945, with one notable exception,2 there have been almost no carefully considered programs for limiting private consumption and diverting resources to government use in the event of another major war. Also, during recent years, the nature of the wartime problem has become drastically changed, for the United States is now subject to heavy thermonuclear attacks in the event of an "all-out" war; accordingly, one urgent task of government is to plan today the consumer controls needed in anticipation of attack on this country. Also, there are other conceivable wars, somewhat resembling those of the past in their economic impacts, to which formerly suggested rationing schemes may still be applicable.3

II. SOME ALTERNATIVE WARS AND THEIR ECONOMIC IMPACTS

Obviously no one can well describe all the possible wars involving the United States that might occur during the next decade or so.

1. See Section III below. 2. T. Scitovsky, E. Shaw, and L. Tarshis, Mobilizing Resources for War

(New York: McGraw-Hill, 1951). 3. A few general references may be useful for those who have devoted little

attention to the subject of war economics. One of the best is Studies in War Economics, Institute of Statistics, Oxford University (London: Blackwell, 1947). Also of interest are H. W. Spiegel, Economics of Total War (New York: Appleton- Century, 1941); Horst Mendershausen, The Economics of War (New York: Prentice-Hall, 1943); E. Stein and J. Backman (ed.), War Economics (New York: Farrar & Rinehart, 1942); L. V. Chandler and D. H. Wallace (ed.), Economic Mobilization and Stabilization (New York: Holt, 1951); J. K. Galbraith, A Theory of Price Control (Harvard University Press, 1952); K. Knorr, The War Potential of Nations (Princeton University Press, 1956), and A. C. Pigou, The Political Economy at War (New York: Macmillan, 1941; originally published 1921). More specific citations are listed subsequently.

558



CONTROLLING CONSUMERS IN FUTURE WARS 559

Actually, for this analysis, the only wars that are relevant are those having such a serious impact upon the economy of the United States that the federal government would seek to impose drastic mobilization and rationing controls. And of this set of wars, two subsets must be distinguished: those in which the United States' economy remains physically intact, and those in which its major cities and a substantial fraction of its population are destroyed.

Budget Impacts Assuming No Attacks on the United States Some approximate idea should be given of what is meant by a

war having a substantial impact upon the domestic economy, assuming no attacks on the United States. Today, towards the end of the fifties, the federal government is taking from 16 to 17 per cent of the gross national product, and military expenditures (including those for the Atomic Energy Commission and foreign military assistance) amount to slightly over 10 per cent. Most economists would probably agree that these military expenditures could be sustained at twice the current level without recourse to "mobilization" and "rationing" schemes any more specific than those of government spending and taxes.4

A more difficult question is how rapidly the federal government could increase its expenditures for military purposes without encoun- tering specific shortages that would cause it to control private purchases or pre-empt goods. During the Korean War, although admit- tedly from a low base of about $15 billions, Department of Defense expenditures increased threefold within two years, and at a time of high employment. Almost a decade later, the potential GNP is now larger in constant dollars and there is some slack in employment of resources, so that it seems reasonable to suppose that annual increases in military expenditures of from $5 to $10 billions each year, for several years, can be financed from taxes.5

If these surmises are valid, it means that there is no need to establish new federal agencies to mobilize and ration unless the nation is confronted with an emergency that requires federal expenditures to increase annually for several years by more than $10 billions to a level exceeding about $100 billions.

4. The United Kingdom government has taken a quarter of the national GNP in peacetime by traditional fiscal means.

5. This is not to say that the efitire amount could or should be raised from existing taxes. It might be necessary to tax articles, activities, and payments that are now untaxed. A wide range of goods are still produced and sold in the United States that might be made subject to a purchase tax; this would also serve to discourage production of consumer goods during a period of national emergency.



560 QUARTERLY JOURNAL OF ECONOMICS

Economic Impacts Assuming Atomic Attacks on the United States It is always possible, of course, that an "all-out" war between

the Soviet Union and the United States might occur on very short notice, and not after a year or so of hostilities in other areas of the world. In this case there would probably be no large-scale preliminary mobilization. Economic controls, if there were still an effective government to impose them, would then follow a heavy nuclear inter- change between the two powers and would be designed primarily to restore the economy. Economic demands resulting from reconstruction and rehabilitation would be unprecedented. The question then is not whether mobilization and rationing measures are required, but rather whether suitable ones can be prepared before the need for them arises. Such a program must, of course, be operable in a postattack period.

In the event of an "all-out" war with the Soviet Union in the sixties, it seems probable that the United States will "lose" at least 100 to 150 major towns and cities. The survival of no city having a population of over say 100,000 people can be counted upon. In this connection "lose" probably means that the city can make no contribution to the economy, that few of its buildings and houses are habitable, and that two-thirds of the population are dead, will soon die, or are hopelessly incapacitated. For cities receiving a bomb or missile in the megaton range of yield, the area of almost complete physical destruction may be roughly a five-mile radius. The danger from radioactive fallout will be serious for several hundreds of miles "down wind" from multiple target areas, and with prevailing westerly winds it may be necessary for initial survivors in the Atlantic Coast states to remain under cover for days or weeks following a major attack.

The Soviet Union might attack not only population targets but also some specialized economic facilities, such as petroleum refinery and steel mill centers. The loss of petroleum refineries and adjacent tank farms would have a serious impact on both railroad and truck transportation. Otherwise transportation - except for port facilities - is hard to "target"; railroad track and highway routes, together with rolling stock and motor vehicles, will survive, except within cities. Also attacks might be made on hydroelectric dams and gen- erating stations, of particular importance in the western states.

Although the prospect of losing all major United States cities, and perhaps a third of the national population, is certainly an appall- ing one, much will survive. Although over half of the industrial capital of the country may be destroyed or unusable, over half the




population and labor force may endure. While a very high propor- tion of the managerial and technical classes will be lost in city attacks, some will be in rural areas and live. A large fraction of all equipment and labor used in heavy construction and in the extractive industries will survive. The direct impact of nuclear attacks on agriculture, except in areas of heavy fallout, will be slight, and in any event most of the urban demand for foods and fibers will have gone; however, agricultural output will still depend on petroleum products, probably fertilizers, and steel for canning. The people who survive will also be an important depository of social capital, and will not have for- gotten how things are done; the ex-urban population of the United States is not an uninformed peasant class.

Postattack Economic Problems Postattack economic problems are, of course, numerous and oner-

ous. A few of the more important and less familiar ones may be worth mentioning. There is little need to dwell on the obvious need to reconstruct and rehabilitate.

Maintaining Productive Specialization. There is a grave danger, during the panic and disorder following heavy attacks, that people will seek their satisfactions directly, perhaps even by pillaging, rather than indirectly through the economic system. Today the practice of productive specialization is taken for granted. However, in the aftermath of nuclear raids, will these people continue to report for work that satisfied their immediate wants so indirectly?

Securing Government Income. Continuation of some government functions is necessary unless the country is to slip into a state of anarchy. To some extent federal and state governments can commandeer property and conscript unwilling labor. However, if governments and their immediate contractors are to hire labor and buy supplies, they must give something of value in exchange. The problem then is to prearrange matters so that the government has goods or money of value to use as means of payment. It is true that, during World War II, the United States Treasury financed itself as much or more from new money credits as from tax receipts, and to some extent this can and will be done again, but public acceptance of all federal obligations may weaken seriously if it is generally known that the government is collecting few taxes. And the government may find it hard to collect corporate and personal income taxes when private assets are destroyed; many corporate, individual and bank records are lost; and many people are seeking to support themselves directly.

Uncertainties Regarding the Ownership of Wealth. Of less immedi-




ate concern following nuclear attacks, but a problem which over time will become increasingly troublesome, is that there will be great uncertainty regarding the ownership of wealth. Real property valued in hundreds of billions of dollars will have been destroyed, and tens of millions of people will have been killed. There will be assets without ascertainable owners and people without knowledge of their property. Determining successive testators will often be impossible. An enormous number of firms will be bankrupt on paper. Life insurance companies will be confronted with unprecedented claims, dwin- dling premium income, and assets secured with damaged property.

Unsuitability of Traditional Price Ceilings and Specific Rations Enough has been written elsewhere regarding traditional price

controls and commodity rations to indicate that they are probably inappropriate in the postattack period of "all-out" atomic war.

Traditional controls, with their frozen maximum prices, are predi- cated on an approximate continuation of past market conditions; if demands and supplies vary markedly in the schedule sense, historic prices are no longer valid. Institution of specific rations for a wide range of commodities and consumer units is an administrative task that, in the postattack confusion, may be beyond the abilities of government officials and local volunteer boards. The enforcement of price ceilings presumes a situation in which most buyers have a long- run interest in preserving the purchasing power of their money, and so to some extent can be counted upon to report violations, but in a bombed-out economy would-be buyers are likely to be desperate to acquire needed goods at once. Much of the public support for traditional controls can be associated with a belief that a war can be carried on concurrently with business more or less as usual, and that the important thing is to prevent large and haphazard income effects upon households. Considerations of this kind will count for little at a time when tens of millions have been killed and more millions of temporary survivors are struggling for the necessities of life.

Last, but of significance, price ceilings and specific rations do almost nothing to resolve the three problems of economic aftermath discussed above.

Nevertheless, the major "Western" powers engaged in World War II, e.g., the United Kingdom, the United States, Australia and Canada, all had maximum price regulations based on some historic period and all rationed commodities to households in more or less specific quantities. Accordingly these are the kinds of controls that the public will probably expect in the event of another war of any




consequence, and which lawyers will always draft without consulting economists. Hence there is a need now to discuss alternative regulat- ing schemes that better satisfy fundamental economic objectives. These goals are: (1) adapting production and consumption according to the ever-changing capabilities and requirements of a war economy that is under enemy attack; (2) allocating each commodity so that it will become re-employed in its new and most important uses; (3) devoting a minimum of resources to the production of goods for civilian use; (4) protecting the very poor from a reduction in real income; and (5) keeping the necessary administrative burden at a minimum.6

III. ALTERNATIVE SUGGESTIONS FOR AN OVER-ALL EXPENDITURE RATION

In wartime, when aggregate consumption and hence differences in individual consumption must be reduced, the price system alone cannot be trusted to decide how civilian goods should be distributed among households because its results unduly reflect income inequal- ities as well as variations in need. However, commodity rationing can overcome income differences only by a wasteful disregard of the peculiar needs of each person and the altered wants of a wartime economy. Accordingly, there have been a number of suggestions for the establishment of some sort of over-all money or point ration to be expended by households on consumer goods.7

The essential problem is to arrange matters so that each household, making allowances for its size and composition, has about the same total command over consumer goods. This means that the "money" used by consumers to purchase goods must be rendered distinct from funds that they receive and disburse as entrepreneurs or men of property. And all this must be done in such a way that, in addition to satisfying the five criteria already enumerated, con-

6. The following references provide a fair idea of traditional controls in action: Arthur R. Burns, et al., Operating under Wartime Marketing Restrictions (New York: American Management Association, 1943); William A. Nielander, Wartime Food Rationing in the United States (Baltimore, 1947); Jules Backman, Rationing and Price Control in Great Britain (Washington: Brookings, 1943); Great Britain, Ministry of Fuel and Power, Committee of Enquiry into Evasions of Petrol Rationing Control (London, 1948); Canada, Wartime Price and Trade Board, World Inflation with Special Reference to Price and Supply Controls (Ottawa, 1944); Australia, Rationing Commission, Rationing in Australia (Melbourne, 1944).

7. The leading examples are M. Kalecki's general rationing plan (Bulletin Institute of Statistics, Oxford, Jan. 11, 1941); W. Allen Wallis' expenditure ration and progressive consumption tax (American Economic Review, XXXII (Sept. 1942)), and the establishment of white and black bank accounts for consumers by T. Scitovsky, E. Shaw, and L. Tarshis (op. cit.).




sumers have an incentive to make the greatest possible contribution to production.

Kalecki's General Rationing Plan Kalecki suggested in 1941 that the government, instead of setting

money and point prices for various goods and establishing specific or point rations for various groups of commodities, should combine these into a single expenditure ration covering all goods bought by consumers at retail stores.8 He did not consider administrative difficulties to the extent that Wallis, Scitovsky, and others did in later proposals. He did not concern himself with the possibility that large sums might be diverted to procuring consumer goods not normally acquired at retail shops. As his proposal is less complete than others that will be considered, and as the operation of the scheme was developed less fully by its author, its main interest is historical.

Wallis' Expenditure Ration and Progressive Consumption Tax In 1942 Wallis proposed a total expenditure ration that would

be varied uniformly, depending on occupation, age, household mem- bership, etc. The amount of the ration could be increased by an individual, at a cost, and this would provide some accommodation for persons committed to higher living expenses. This flexibility would come from superimposing, upon the basic total expenditure ration, a rapidly progressing block rate tax on consumer outlays in excess of this sum. The effect, of course, would be to increase markedly the cost to the buyer of purchases made in excess of his expenditure ration. Because it would not be practicable to require individual accounting for all consumption expenditures, it was proposed that all income not saved (as evidenced by investment in United States bonds) should be treated as consumer outlays. Each individual would file a federal income tax in the usual way and the consumption tax would then be calculated by (1) making such adjustments as considered appropriate to arrive at a total net income figure, (2) sub- tracting purchases of United States bonds and income tax payments, (3) deducting the expenditure ration and any other outlays (e.g., already contracted life insurance premiums) exempted from the tax, and (4) computing the consumption tax on this final balance. This tax would presumably be a temporary war and recuperation tax and it would be in addition to the federal income tax.

From some viewpoints the Wallis plan resembles other proposals. Fixed prices coupled with quantity rations are the equivalent of the

8. Op. cit.




value rations for each commodity: and so an over-all expenditure ration can be viewed as the aggregate of many specific price ceilings and specific rations, but with the important superiority that individual preferences can be given a free rein. In many respects, inasmuch as it includes almost all expenditures by people as consumers, it encompasses Kalecki's suggestion. Also, it can be regarded as a Treasury scheme to sell bonds, with a quota assigned each person on the basis of taxable income, with penalties levied on the unco- operative.9

Although probably an imperfect device for World War III, some scheme of expenditure ration and progressive consumption tax cannot be dismissed out of hand, especially if it were instituted during some Korea-like war and before the onset of World War III.

The advent of Soviet bombers and missiles over the United States, assuming this ration and tax were already in effect, would obviously require modifications in the scheme. Many employing firms that had been making payroll deductions for income tax, bond purchases, and estimated consumption taxes would no longer be in existence. Collection, at probably higher rates, would be very difficult. The Treasury might simply have to instruct all employers to deduct certain large fractions from each paycheck, depending on earned income, and wait until later to ascertain tax liabilities and rebates. Unfortunately these large deductions would, at the time, appear to employees as a considerable tax on pay. Accordingly, there might be a considerable increase in the number of self-employed households, making unrecorded sales of such things as farm produce, and attempting an abnormal degree of uneconomic self-sufficiency.

9. Naturally there are a number of administrative difficulties. Wallis recognized the problem of consumer liquidation of all kinds of assets, and agreed that it would be necessary to guard against liquidation by sale or mortgage to business, banks, or with other money receipts not subject to the consumption tax. Another difficulty is that there will be considerable variation in the debts persons owe at the time such controls as these come into effect. There would probably have to be a moratorium on servicing certain classes of historical debt and provi- sion might be made to exempt from the ration the repayment of certain other commitments. Interest and redemption arising from net obligations contracted subsequent to imposition of the tax would, in most cases, be included in the tax base. Unfortunately it will be impossible to prevent some persons holding large cash hoards at the time that the expenditure ration and consumption tax are introduced; while this superiority endures, consumption goods, new and old, will be in part distributed according to wealth held in the form of cash balances. Also, persons entering the control period with considerable stocks of jewelry, furniture, cars, and housing, etc. will naturally be advantaged during the service life of these goods, whether used by them, exchanged, or sold; however, it is probably in the general interest that these initial stocks of consumer goods be redistributed among users.




It is doubtful whether a productive consumption tax could soon be implemented if none had been in force before the attack. If the government decided, after an attack, that it wished to implement some kind of expenditure ration, it would probably be forced into a system not unlike the multiple consumer account scheme to be described. It could make the surviving banks its main operating agents and the limited amount of circulating legal tender its principal instrument of control. '

An important weakness of the Wallis scheme would be the possibility that retailers, and others receiving currency payments by consumers, will divert a fraction of these for their own use, rather than depositing them in their blocked bank accounts. It is true that some states levying sales taxes have experience in checking sales receipts, but the temptation will be strong and tax enforcement may be weak during this chaotic period. Accordingly, at an early period, the government would probably have to replace circulating legal tender with a new ration money, linked to initial recipients at the time of an authorized withdrawal from a bank, perhaps by perforating the paper notes with the recipient's permit number.

Multiple Consumer Account Proposals of Scitovsky and Others Many of the difficulties outlined immediately above are resolved

- but, of course, at some administrative cost - by a multiple account plan suggested by Scitovsky and others.2

According to this plan a Ration Authority provides each consumer unit with a ration permit, which is a receipt for income taxes, a certificate of income realized during a previous period, and an identification for rationing purposes. The ration permit would be stamped with the consumer's registration number as a precaution against multiple ration allowances for any one consumer unit and as

1. Immediately after attack the federal government could prohibit all cash withdrawals from banks except in accordance with its rules. (All denominations above say $20 might be recalled as a measure against people who had hoarded currency.) It would be provided, as soon as possible, that all payments by firms to those supplying materiel, labor, or other means of production, be by check. This check would not be cashed, but would have to be deposited by the payee. Consequently, every recipient of income would have to obtain an account, pos- sibly in a new emergency bank. The government would determine the cash withdrawals permitted consumer units each week or month and thus establish an expenditure ration.

2. Op. cit. Actually chap. 3 of Mobilizing Resources for War, which describes this alternative plan, was written by E. Shaw. In addition, a number of economists at The RAND Corporation, including the present author, contributed parts of the multiple account plan discussed here. Accordingly, a few liberties have been taken with it.




an aid to punitive measures against black market use of ration money. The permit is essentially the community's acknowledgment that the holder has contributed in the recent past to the national product and hence is entitled to buy some share in current national output.

Each consumer unit maintains a white account at some one bank. All consumer purchases are made directly (by writing checks on it) or indirectly (with ration money or small change obtained as a withdrawal). A consumer, assuming he has regular (black) funds to make the purchase, can periodically acquire white balances up to a specified amount. This amount is determined by his bank, which inspects his ration permit and the government table that determines the expenditure ration of the particular consumer unit. (All legal tender except coinage is withdrawn from circulation.) Hence all funds held by a person as a consumer are either in the form of white (free) funds, ration money (the equivalent of white funds) or black (blocked) funds.

Blocked (black) consumer balances are obtained in various ways. The most important one is income from productive services such as labor, the loan of money, the lease of land, etc. Bank deposits held at the onset of the control scheme would be transferred to black balances. Other sources of black funds are the sale of securities, the realization of mortgages, inheritances and the like. Black balances are used for payment of financial obligations; that is, for payments not involving a purchase of consumer goods or of resources for the production of consumer goods. To prevent black balances seeping into unauthorized consumption, it might be required that no consumer's black balance can be debited on an interpersonal transfer unless there is a credit to the payee's black account.

Retailers and others who sell to consumers receive ration money, coinage, or checks on white accounts. These must be deposited by each seller, in his firm's blue account, held at a single bank. All nor- rnal operating expenses of all business firms, including wages, are paid from these blue accounts. Payments to householders for services rendered - as distinct from payments to other firms - are credited to black accounts. Interfirm payments on current account, including payments by retailers to other firms for stock in trade, etc., are paid from blue accounts into blue accounts. (Business firms also maintain red accounts for capital transactions.)

Households, in short, earn money by contributing to production. These funds are paid into their black account.3 A certain fraction of

3. Actually, in Mobilizing Resources for War these are paid into white accounts, and consumers qua consumers can only draw on these up to the amount




these can periodically be transferred to a white account which is the source of funds for consumer purchases. The remainder, which may not be so transferred, cannot contribute to the inflationary "gap." Consumer expenditures are paid into the blue accounts of firms selling goods and services to consumers, and these are used to cover operating expenses.4

In a war of survival, it is to be expected that annual transfers to consumers' white accounts will be considerably below their annual earnings, as reflected in payments into their black balances. These last will accordingly accumulate fairly rapidly unless withdrawals are made for taxes, government bonds, or other investments. To prevent the latter contributing to inflation and diverting resources from the war effort, there would almost certainly have to be some form of investment control.

This multiple consumer account system is sufficiently novel and restrictive that it is unlikely to be put into force prior to an "all-out" war. However, in the event of any prolonged and serious inter- national tension, it is hoped that consumer units will be registered in advance, ration permits will be issued even if not used, and the various accounts for consumers and firms will be established at least in embryo form. Duplicate ration permit and bank account records should be maintained in physically secure places, on magnetic tape, outside major cities. Ration money should be held in readiness at various points. Public education in the operation of the multiple account plan should be begun. Implementation of the multiple consumer account scheme will be difficult in any event, but it may be impossible without these preattack measures.

Assuming that the plan is established, and is administered suc-

of an unused expenditure ration. However, this really means the establishment of a subsidiary account within the white account. It would seem to be adminis- tratively simpler to allow all permitted transfers to white accounts to be used for consumption.

4. Housing and durable consumer goods such as automobiles are a perennial difficulty for all rationing schemes. The government would probably have to ascertain the house or automobile ownership of each consumer unit. Rents from houses owned but not occupied would have to be paid into the owner's black account. Consumer units occupying their own homes would probably receive a smaller expenditure ration. The proceeds of any car sale by a consumer that left it owning one or more cars should probably be paid into the seller's black account. Extra houses and cars owned by a consumer unit might be susceptible to government purchase with black money. Private yachts and airplanes might be handled in the same manner. Most other durable consumer goods are either of modest value or their ownership is not registered in peacetime. In all these latter cases consumer units might be permitted to buy and sell consumer goods for white balances, or of course exchange them. Such transactions would not increase the enforceable claims of consumers as a whole on the current production of the economy.




cessfully, what is its economic value? Does it satisfy the five criteria originally listed (see p. 563)? Does it contribute anything to the three special postattack problems mentioned above (see pp. 561-62)?

Certainly, the specific spending of expenditure rations by consumers being uncontrolled, those resources still devoted to satisfying consumers should adapt more readily to new demand patterns. There being no specific rations, consumers will be more likely to buy what they want, rather than draw their various rations and then try to make exchanges. By limiting white balances and ration money, the government can, in principle at least, reduce to a very low level the diversion of resources to satisfying consumers. As prices should remain low, the poor who cannot work will be protected as most or all of their limited incomes is withdrawable in ration money. Whether the administrative burden, which will fall primarily on the banks, is less than that of traditional controls is hard to say: certainly the public should lose less time waiting when applying for different specific rations.

Multiple consumer accounts, unless supplemented in ways such as described in the next section, may make only a partial contribution to the special postattack problems already mentioned. Unless ration money can command many essentials, and at a price that represents less work for the buyer than if he sought to obtain them directly by his own eff orts, the public will tend to abandon specialized production. The government's ability to secure adequate taxes is also dependent upon households using the marketplace and satisfying their wants indirectly by working for others; if this condition is met, and assuming output per capita is not down to the subsistence level, multiple consumer accounts should effectively divert gross national product to government enterprises. Lastly, it is clear that no rationing scheme per se can resolve the third postattack problem of uncertain ownership of wealth, and this is really a subject in itself; however, inasmuch as most money assets of households will be held in black balances, which can only be converted into white money in rationed quantities, sales of assets for black balances will not effect the distribution of consumer goods. Obviously, in view of the widespread confusion, panic, and shortages that can be expected during the postattack period, any ration scheme must be supplemented with a positive program of production and distribution.

IV. A PESSIMISTIC BUT REALISTIC PROGRAM

It is not unrealistic to suppose that the nation may find itself in an "all-out" war, under nuclear attack, without any prior household registration, issuance of ration permits, or establishment of




embryo multiple accounts in local small town banks. On the other hand, because it means government spending and does not incon- venience voters in peacetime, it is quite possible that the federal and state governments may have established large dumps of petroleum products, preserved foods, and other stocks outside major cities. There should also be stockpiling and distribution of "camping" type items.5

These stocks, assuming the government prepositions them outside target areas and protects them with force if necessary, could constitute one of its greatest immediate postattack assets. In addition, it can "purchase," with promises to pay, many consumer items in the undamaged areas, and move these to deficit areas for distribution. It is important, except in very small quantities and immediately after enemy attack, that it does not give these valuable things away. It should sell them, not for regular legal tender, but for a new war emergency money (WEM) that is already printed and difficult to counterfeit.

The WEM would enter circulation as government payments, and particularly as wages to people working on vital reconstruction projects. Thus work for the government, and perhaps for some of its contractors, is in effect rewarded with a money that can be used at government stores to buy things that most people want urgently. To the extent that a worker does not want these items, but prefers things that can be obtained at regular stores or through private sale for ordinary money, he should find a ready market for his WEM. The buying and selling of WEM for regular legal tender should be encouraged by the government, which could supervise the exchange and publicize the going rate. It does not undermine the scheme if a worker, or someone else holding WEM, uses it to acquire consumer goods through private sale; in fact, the longer WEM is in circulation before it is presented at a government store, the more "free" work and goods the government has had.

Logically, the innovation of WEM by the government is not absolutely necessary; but psychologically it may be a very useful innovation. The government can better popularize its policy of selling prestocked emergency supplies, rather than giving them away, if it sells them for a money that was initially earned on important reconstruction projects. It is true that survivors happening to hold large amounts of legal tender at the time of enemy attack will be advantaged if they can buy WEM for cash, but the price will be high,

5. E.g., tents, sleeping bags, oil stoves, blankets, foul weather gear, axes and shovels, tarpaulins, lumber, nails, common hardware, etc.




and the earner of the WEM will be happy with what seems a high dollar wage. The government is probably anxious, too, to make it appear that the prices of many essentials are not rising very rapidly, and this it can do to some extent by keeping WEM dollar prices in government stores and WEM dollar wages on government-sponsored projects at something like the prewar norm: if there were no WEM, and no specific rationing, these wages and prices would probably rise to very high levels, and the government would appear to be leading the inflation of prices and wages.

Irrespective of whether WEM is introduced, the essential feature of this pessimistic but realistic program is that the government sells needed things that it has prestocked, produces after the attack, or "buys" with deferred means of payment. This is a difficult decision for a supposedly representative government to make, especially if the war is continuing and public support is vital, but the government must have some means of obtaining labor and materiel other than conscripting and commandeering. The government must fully exploit, by exchanging them for labor and other materiel, all goods of value that it can control. Most of the taxes that are most financially productive in normal times will now have a very restricted tax base or be uncollectable. Hence, if the government is to remain an effective organization, it would seem to have no alternative, during the first and worst days following major enemy attack, but to make people pay for the goods the government can provide.

During this period the government should be pursuing a hard- hearted but right-minded policy in related economic areas also. Its fundamental aim must be to promote current output, which means that workers must be currently and adequately rewarded and that at least the out-of-pocket expenses of currently produced goods be covered by their prices. As petroleum refineries, steel mills, and other essential industries return to production under government control, the government should try to arrange matters so that its sales receipts are considerably in excess of its current disbursements. In part it can do this by using its newly acquired industrial monopolies. But it can also contribute to its current cash surplus by paying a rent to the owners of surviving capital, used in these industries, that is in some such deferred form as blocked government bonds or black bank accounts. To the extent that the government also uses deferred payments to "buy" existing wealth having a ready market - e.g., extra family cars and houses unoccupied by owners - it can also increase its current surplus. This "profit" - obtained from what in effect is a temporary and involuntary loan - is needed, of course,




to finance "unproductive" government enterprises such as general administration, reconstruction, and perhaps a continuing war effort.

With the passage of time, it should be possible to establish white and black bank accounts in a single bank for each surviving consumer unit. Ration permits would then be issued. The moratorium originally imposed on all bank withdrawals would be eased by the establishment of expenditure rations for all consumer units, as prescribed in the multiple consumer account plan, with some transfers being made from old bank accounts (now a so-called black account) to new white accounts. Blue and red accounts would be established for firms for the purposes already described (see p. 567).

Eventually, assuming WEM had been used during the worst days, it would probably be desirable to recall it, crediting holders' white accounts with the equivalent dollar value as indicated by the free exchange rate. Circulating legal tender in the hands of consumers might also be made white money.6 By these successive steps the government, assuming no multiple consumer account scheme had been in effect before enemy attack, might arrive at much the same system; in addition, during the immediate postattack period, by "selling" some of the economy's real capital in return for current productive effort, it may have ensured its own and the nation's survival.

V. CONCLUDING COMMENT

In planning consumer controls for future wars it is well to recog- nize the political impossibility of introducing in peacetime the sort of scheme that best suits the worst conceivable wartime situation. Hence it is unlikely that a multiple consumer account system could be introduced during a preattack period unless some Soviet aggres- sion, for the time being localized, convinces most people that an "all-out" war is not far in the future. Hence, the best practicable course may be to prepare for the "pessimistic but realistic" program described above, and plan to put some sort of multiple account scheme into operation not long after the start of a larger war.

For wars that can apparently be kept local, the economic strains are not likely to be so great that multiple consumer accounts are necessary; in these cases, assuming frequent and periodic payroll deductions, something like the expenditure ration and progressive consumption tax of Wallis, described here, would seem to be more

6. It is presumed that, as a measure against preattack cash hoarders, all notes exceeding say $20 were formerly declared valueless unless deposited within a time limit in a bank account previously under moratorium and now blocked for many purposes as a black balance.




than adequate. However, many local wars may not be sufficiently costly to warrant this degree of interference with private economic life.7

In concluding, it may be worthwhile briefly to consider the possible consequences of having no scheme ready - other than price ceilings and specific rations perhaps - prior to attack. Under these circumstances, and with reduced tax collections, the government, however much it may conscript and commandeer, will be forced to create new money to carry on its affairs. Without means to block or subtract excess purchasing power, any price ceilings that may have been imposed will disintegrate. Cigarettes and various other commodities may come to constitute the effective currency. Eventually, the accelerating inflation will decimate the investing classes of America, just as former wars have done in Europe. In view of these alterna- tives there would seem to have seldom been a case where advance planning and limited preparation were so important to the nation.

THE RAND CORPORATION

7. And under no circumstances do traditional price ceilings and specific rations seem to solve any real economic problem, although their political raison d'etre is obvious enough.



controlling consumers in the event of future wars

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