Guns vs Butter—Crowding In, Crowding Out, and World War II

A classic economic example of tradeoffs on the production possibility frontier is “guns vs butter”—a government that wants to produce more armaments is going to need to produce less consumer goods such as butter. The example takes that specific form, I believer, because the United Kingdom had a very severe butter rationing regime during World War I. But playing around with FRED’s great historical data yesterday I noticed something funny. As Europe went to war in 1939 and the United States started arming itself butter consumption actually went up not down.

That turns it into a nice example of a totally different economic phenomenon—“crowding in” due to effective fiscal and monetary stimulus. The Great Depression and the recession-within-a-Depression of 1937 had left the country with enough excess capacity for both guns and butter.

And yet the dream of buttery plenitude was not to last. Pearl Harbor was bombed in December of 1941 and as the United States entered the war excess capacity completely dried up as more and more resources were put into war production. “By Christmas of 1942 a serious shortage of butter and other fats had developed” and throughout 1943 and 1944 butter was rationed at home to make sure everyone got a little with plenty left over for the troops.

So there you have it. As a simple rule of thumb guns-vs-butter and tradeoffs works. In the long term, if you keep making more and more guns you’ll end up with less butter. But the reality is more complicated. Sometimes war production can stimulate butter production. Rather tragically, the FRED dataseries on this ends in September of 1941. I’d love to see how actual consumption fared during the rationing period and especially what happened in 1945 when the war was still going but rationing was lifted.