When, after every great war, it is proposed to demobilize the armed forces, there is always a great fear that there will not be enough jobs for these forces and that in consequence they will be unemployed. It is true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them—though what has been chiefly remarkable in the past has been the speed, rather than the slowness, with which this was accomplished. The fears of unemployment arise because people look at only one side of the process.
They see soldiers being turned loose on the labor market. Where is the “purchasing power” going to come from to employ them? If we assume that the public budget is being balanced, the answer is simple. The government will cease to support the soldiers. But the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the soldiers. And the taxpayers will then have additional funds to buy additional goods. Civilian demand, in other words, will be increased, and will give employment to the added labor force represented by the former soldiers.
If the soldiers have been supported by an unbalanced budget— that is, by government borrowing and other forms of deficit financing—the case is somewhat different. But that raises a different question: we shall consider the effects of deficit financing in a later chapter. It is enough to recognize that deficit financing is irrelevant to the point that has just been made; for if we assume that there is any advantage in a budget deficit, then precisely the same budget deficit could be maintained as before by simply reducing taxes by the amount previously spent in supporting the wartime army.
But the demobilization will not leave us economically just where we were before it started. The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians. If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste. They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth of everybody, is higher.
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