The story of our most prominent economic statistic, gross domestic product (GDP) – the value of the economy’s annual output – is mostly a war story.
The outbreak of the Second Anglo-Dutch War in 1664 prompted William Petty (1623-1687) to wonder if Britain had the capacity to produce enough armaments to defeat Holland and enough income to pay for the war with taxes. Realizing that the answer to each question depended on the “size” of the British economy, Petty devised a measure of it. He called his measure national income.
Over the next 250 years, wars, curiosity and more data inspired efforts to further develop the concept of national income and ways of estimating it. World War I (1914-1918) moved many in Congress to call for regularly published estimates of national income. The Great Depression moved Congress to allocate money to make it happen. The U.S. Department of Commerce began publishing national income estimates regularly in 1935.
On September 1, 1939, Germany invaded Poland. Britain and France then declared war on Germany. Across the Atlantic, the Roosevelt administration and the U.S. military began preparing for the possibility that the U.S. would eventually enter the war.
Two questions loomed over war preparation. Could the U.S. produce enough armaments fast enough to win the war? If doing so required converting civilian goods production to armaments production, how much would civilian living standards suffer?
Commerce Department economists recognized that national income was of no use in answering either question. National income measured incomes paid from the production of final products that households or businesses purchased for their own consumption or investment. Many government functions, including national defense, were treated as intermediate products, which did not count toward national income.
What was needed to answer the two looming questions was a measure of the economy’s output of all final products that also shed light on the economy’s capacity to produce a different output mix. Commerce had one in the works it called gross national product (GNP).
War preparation fast-tracked Commerce’s GNP project. The first GNP estimate came in January 1942. It suggested that the president’s proposed 1943 defense budget of $56 billion (up from $1.6 billion in 1940) could be met by reducing consumer durable goods production by 70 percent, business investment by 80 percent, and basic consumer goods production by 4 percent. The calculation became the basis for the country’s armaments production plans.
Economists Milton Gilbert, Simon Kuznets and Robert Nathan were largely responsible for developing the GNP measure. Along with economist Stacy May, Kuznets and Nathan were also largely responsible for the timing of D-Day.
By March 1942, President Roosevelt and U.S. military leaders wanted a major allied invasion of Nazi-occupied France no later than July 1943. British Prime Minister Winston Churchill warned that the invasion required overwhelming force; failure would add years to the war. In April, the military delivered the inventory of armaments for the invasion to the economists at the War Production Board – Kuznets, Nathan and May – who were to estimate when a fully-supplied invasion would be feasible.
June 6, 1944 was D-Day. Planning for a late-spring 1944 invasion began in November 1942, three months of heated debate after Kuznet’s study showed that the U.S. economy could not feasibly produce the armaments for the invasion before March 1944.
GNP includes output produced by U.S. companies abroad and excludes output produced by foreign companies in the U.S. GDP measures output produced on U.S. soil. As the better measure of domestic economic activity, GDP has become indispensable in conducting monetary and fiscal policy, investing, business planning, and assessing the trajectory of the U.S. economy.
Reg Murphy Center