War-Time Control, Post-War Continuation

Looking back at the tumultuous decades spanning from the 1940s to the 1980s, it’s clear that global affairs were characterized by constant upheaval, with the shadows of war and the Cold War looming largeDuring this extraordinary period, a stark model of economic regulation emerged worldwide, backed by profound historical reasons.

Throughout World War II, nations were embroiled in fierce battles, and amidst the chaos, their only recourse to achieve victory was through the stringent control of their economies and currenciesThe objective was unequivocal: to funnel the nation’s economic resources into the machinery of war, thus laying a solid foundation for final triumph.

Take the Federal Reserve as an example; a glance at its historical narrative reveals the overwhelming grip the treasury had over it at the time

During wartime, the mandate was simple: everything hinged on the front lines, and every effort was to serve the cause of war.

As the smoke of World War II began to lift, hopeful hearts yearned for peace and prosperityYet the aftermath left a landscape ravaged and chaotic, with industrial ruins widespread, living conditions deplorable, and infrastructure severely damaged, posing an arduous task for reconstruction.

In this context, the war-time model of economic regulation continued to play a pivotal role in the post-war arena, buoyed by its significant inertia from wartimeThe rationale was straightforward; such an extensive rebuilding effort necessitated a coordinated allocation of vast economic resources, and the only body equipped to shoulder such a responsibility was the government.

Take the example of the United Kingdom, which at the time boasted five major banks

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Each year, at the onset of the fiscal year, the Treasury would issue resolute directives to the banks, stipulating the growth rate of their balance sheetsWhat could possibly lay beneath this rather austere protocol?

In essence, by meticulously regulating the growth of bank balance sheets, the British government cleverly orchestrated the growth rates of both broad money and nominal GDPFor instance, if the government estimated a potential real growth rate of 2%, the remaining portion would be compensated by inflationThis strategy was soon adopted by developed nations like the UK and the US, akin to discovering the key to unleash a treasure trove, gradually liberating themselves from the staggering debts accumulated during the war.

Glorious Achievements: Regulation Fostering Economic Prosperity

During this era, regulated economies acted as a magical wand, not only helping developed nations shed their colossal debt burdens but also injecting robust momentum into post-war recovery.

Industry experienced a swift revival, welfare states blossomed like mushrooms after the rain, income distribution became more equitable, and the populace rallied together to paint a vibrant picture of economic prosperity.

A glance back at the evolution of income distribution in the United States serves as a vivid testament to this golden age

On the brink of the Great Depression in the 1930s, the wealth inequality in America was staggering, with a mere 10% of the population capturing half of the nation’s income;

Yet, following the outbreak of World War II, circumstances rapidly changed; to bolster morale and unify efforts, wealth distribution began shifting toward the masses, resulting in 65% of the population enjoying a larger share of the economic pieThis trend persisted into the 1980s, marking a remarkable era of recovery for Western economies.

Emerging Drawbacks: Resource Misallocation Laying the Groundwork for Future Hazards

Nevertheless, nature often exhibits duality, and the same holds true for regulated economiesWhen the government tightly controls economic mechanisms for an extended period, drawbacks subtly arise, akin to a lurking undercurrent

Should government decisions rely solely on subjective judgment or impulsive thinking, any misjudgment would yield dire consequences of resource misallocation, manifesting immediate hardships.

A scenario of high unemployment coupled with soaring inflation becomes the harbinger of gloom, delivering a debilitating blow to the socio-economic landscapeThe trajectory of industrial development in the UK during the 1950s and 60s serves as a poignant reminder of this looming threatAt that time, the UK, disregarding its industrial foundation and international competitive landscape, obstinately pursued growth in the coal, automobile, and Concorde projects.

Two decades of effort and substantial investment bore scant fruit, leading to dismal failure in the face of global competitive waves, with none of the three sectors escaping unscathed.

How did the UK stumble into such a predicament? A closer inspection unveils the stark reality: with a domestic population of merely over 60 million, the UK’s market resembled a cramped pond, incapable of supporting its industrial ambitions.

The Advantage of Large Nations: Massive Market Supporting Transformation

Conversely, the narrative surrounding larger nations differs significantly

Take China, for instance, which endured prolonged military blockades. In the realm of aeronautics, particularly military aviation, China faced stringent restrictions and sanctions from Western powers for over six decades.

This meant that for an exceedingly long time, continuous investment yielded minimal returns, often resulting in annual lossesHowever, bolstered by a vast domestic market, China resolutely persevered, amplifying investments consistentlyEventually, after weathering adversities for 60 years, it began achieving a balance between income and expenditure, culminating in exponential growth by the 1970s.

This experience profoundly illustrates that for nations with gargantuan domestic markets, sound industrial policy and economic resource allocation are not just accelerators for growth, but pivotal mechanisms for breakthrough; however, for smaller nations, adopting similar industrial strategies in light of limited resources and minimal margin for error represents a perilous gamble.

Moreover, the prolonged existence of regulated economies in high-welfare nations has fostered a concerning phenomenon of “reverse elimination”. Under the burdens of high taxation and widespread egalitarian policies, diligent individuals find themselves rewarded disproportionately less for their hard work, as if punished; conversely, those who evade responsibility can do so with ease, living in leisure.

The situation in the UK in the 1970s serves as a textbook instance, with the top personal income tax rate surging to 83%, while corporate tax reached 52%. Imagine the plight of a capable individual, potentially generating immense wealth, but forced to surrender 83% of their earnings—such an environment breeds a lack of motivation to strive onwards.

Equally daunting for firms enduring the strain of a 52% corporate tax burden is the prospect of flourishing