Student Scholarship

Document Type

Research Paper

Abstract

This paper, submitted in January 1951, examines the formulation and implementation of inflation-control policy in the United States during the early stages of the Korean War. The author argues that while moderate business fluctuations are inherent and even useful in a capitalist economy, the extreme swing toward severe inflation following the outbreak of hostilities in Korea necessitated urgent government intervention. 

The problem of inflation is defined as a condition where effective demand, driven by a swollen money supply, exceeds the available supply of goods and services. The author details how World War II financing through bank borrowing created a massive monetary overhang that was prematurely released when direct controls were lifted in 1946. The start of the Korean War triggered a new inflationary spiral characterized by scare-buying, hoarding, and skyrocketing prices for building materials and consumer goods. 

The text explores two primary methods for controlling this spiral: indirect measures (monetary, fiscal, and credit policies) and direct measures (price-wage ceilings and rationing). Initially, the administration favored indirect controls to maintain economic flexibility and production incentives. However, as the military situation intensified, public demand and economic dislocation made direct controls under the Defense Production Act of 1950 inevitable. 

The study identifies key agencies in this process, including the National Security Resources Board, the Treasury Department, and the Federal Reserve Board. It highlights the institutional friction between the Treasury, which sought low interest rates to manage the national debt, and the Federal Reserve, which argued for higher rates to restrict credit expansion. Ultimately, the author concludes that while policy formulation is often slowed by competing interests and political pressures, the transition to a war-like economy necessitates a coordinated effort to suppress inflation and preserve the nation's economic stability.

Research Highlights

  • The Problem: Rapidly escalating inflation in the United States during the late 1950s, catalyzed by the Korean War and the transition to a mobilization economy, threatened national stability and the purchasing power of military appropriations. 

  • The Method: Analysis of the 1950 Defense Production Act and the specific roles of the National Security Resources Board, the Treasury Department, the Federal Reserve, and the Economic Stabilization Agency in formulating monetary and fiscal policy. 

  • Quantitative Finding: The national debt reached $258.4 billion in 1950, five times the level of 1940; the total money supply increased from $70 billion in June 1940 to $170 billion by 1946; and the purchasing value of the dollar reached an all-time low of 59 cents by 1950. 

  • Qualitative Finding: Federal policy shifted from a reliance on indirect controls, such as interest rate hikes and credit restrictions, to mandatory direct controls like price-wage freezes following the December 16, 1950, emergency declaration; inter-agency friction between the Treasury and the Federal Reserve centered on debt management versus money supply contraction.

Publication Date

1-1951

Faculty Sponsor

Archive

Download

Share

COinS