Did our participation in World War II really end America's Great Depression?

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Regardless of how thoroughly one massages the data, even using the most sophisticated tools known to man, no one has come convincingly close to establishing the widespread, if not virtually universal, view that U.S. participation in World War II was the factor that brought the Great Depression to a close. If this theory were true, it leaves us with a gloomy outlook: We virtually need wars to recover from severe economic downturns.

BUT THIS POSITION is very mischievous for another reason: It is used to support the view that greater stimulus spending – financed with deficits – is needed to generate economic growth in our current economic environment.

The nub of the theory is that World War II provided the massive stimulus that ended the Depression. After all, had not the United States struggled for more than a decade to find prosperity? And with the war’s end, were we not blasted into prosperity? And is it not obvious that the war caused, or at the least was the major factor behind, our marvelous revival?

If only the economic world were that simple.

Frequently cited as alleged evidence in support of this view is that, during the 1940s, U.S. per-capita real income reached its zenith in 1944. This argument can be quickly dispensed with by noting that the overwhelming consensus among economists is that this statistic is fatally flawed.

AS AN INDICATOR of the intensity of our war effort, the ratio of federal government expenditures to gross domestic product (GDP) reached a maximum of about 60 percent in the war years 1944-45. Because of the nation’s commitment to the war’s goals, its citizens had been living in a state of suffocating government controls for more than four years. They ranged from controls on prices and wages to the flat denial to consumers of a vast array of goods whose ingredients were required by the military.

Well-known too is that, at the end of the war, the huge pent-up demand for autos, trucks, homes, infrastructure and appliances was eager to be satisfied by entrepreneurs who had the incentives to undertake risky investments.

Advocates of the end-of-Depression theory argue that the war ended the Depression in the sense that pent-up consumer demand was linked to the war. True enough, but what was the source of the original demand that led to the accumulated pent-up demand? It was certainly not the war effort. These original demands arose from rock-bottom consumer wants and desires, with or without a war. In other words, if during World War II a homemaker decided she wanted a new refrigerator, what is the relevance of the war to this want suddenly appearing?

THE ADVOCATE’S view, if valid, leads to a tongue-in-cheek suggestion for ending recessions: Duplicate the essential economic conditions after World War II. One way is to forbid producers from producing and selling civilian goods to consumers (just as in World War II) until “pent-up demand” builds up (analogous to post-World War II). You say this is absurd. But these duplicate the consumer demand conditions that prevailed after World War II. However, these conditions are not adequate for achieving robust growth. In a free environment, incentives for undertaking risky investments also are necessary.

Of course, after the war, marked reductions in taxes and wartime controls allowed everyone to breathe the fresh air of personal freedom again. Beginning in 1946, the ratio of government expenditures to GDP drastically declined (from a war time peak of 60 percent to an average of 20 percent in the 1946-49 period). GDP then mounted an upward sweep that has been extended, on average, well into the 21st century.

But in the recovery period 1946-50, deficit spending also was drastically reduced, adding dramatically to the confidence of entrepreneurial risk-takers.

In a real sense, the end of World War II marked the absolute depth of the Depression. We had to move vast resources under conditions of contractual freedom from war production to peace activities. This was done without unleashing a program of massive deficit-stimulus spending. Indeed, throughout the 1946-50 period we were subjected to the steady drumbeat of the dire need for massive stimulus programs to avoid the worst of all possible depressions. These warnings stemmed from some of our most reputable economists.

IN THE ABSENCE of any postwar massive stimulus, what caused the revival? The answer was suggested above. Demand for goods was obviously present; what was lacking was a production-delivery system motivated by individual incentives to freely take investment risks. Conditions essential for sparking these incentives are, as always, low taxes to help ensure adequate rewards (and especially the absence of political authorities issuing constant threats to increase taxes on those most likely to undertake risky investments), and fewer government regulations, including the hasty relaxation of those suffocating wartime controls.

Millions of individual contracts for the sale of products and personal services were negotiated under conditions of freedom to contract. These actions helped unleash the animal spirits of innovation and the desire to satisfy human demands. Above all, the repeal of the Excess Profits Tax and the overall reduction in income taxes, coupled with the removal of government controls, allowed private incentives to really flourish – the lifeblood of a free-market competitive economy.

EVEN THOUGH our participation in the war did not end the Depression, we still bear the burden of the war’s debt. Its size pales in comparison, however, to the magnitude of the debt incurred by the miserable failure of current massive deficit-spending efforts to achieve a robust recovery from our existing doldrums.

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

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chascushman
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chascushman 05/19/13 - 07:55 am
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Well said Dr. Beranek. FDR
Unpublished

Well said Dr. Beranek. FDR did one thing for the Depression he put the Great in it.

Riverman1
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Riverman1 05/19/13 - 08:51 am
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Chicken or Egg

This view is an interesting twist because it is usually the conservative maxim that the war ended the Depression and not FDR. Dr. Bernanek believes it was the wartime controls resulting in pent-up consumer desires for goods. This is a chicken or egg discussion. The bigger truth in this article is less government interference and diverting of money from the private sector is good for the economy. That’s a conservative maxim I agree with completely.

Bodhisattva
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Bodhisattva 05/19/13 - 09:04 am
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1933-1936 under the initial

1933-1936 under the initial part of the New deal US GDP grew at a compound annual rate of about 9%.
1937-GOP pressured FDR to balance the budget and reduce stimulus elements in the New Deal.
1938-GDP dropped from $911 billion to $879 billion.
1339-1940 FDR went back to New Deal plans in 1940 GDP $1..01 trillion.

Unemployment
Hoover:
1929-3.1%
1930-8.7%
1931-15.8%
1932-23.5% FDR elected
1933-24.8%
1934-21.6%
1935-19.9%
1936-16.8%
1937-14.2% (GOP begins to pressure for balanced budget)
1938-18.9% (FDR restarts New Deal spending after GOP plans bombs)
1939-17.1%
1940-14.5
1941-9.7

Looks like it worked to me. Look at the numbers professor instead of trying to inject the evil thoughts and plans of Thomas Friedman in the column. Sure he made a handful of people filthy rich at the expense of killing and impoverishing entire populations of indigenous peoples. As long as making money is involved I guess that passes as a great role model for some.

deestafford
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deestafford 05/19/13 - 09:24 am
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What a great column...on par with what one would read from

the brilliant DR Thomas Sowell. Hats off to DR Beranke for writing a column which should be the basis for an economics college course...wishful thinking on my part.
Most people don't know that we had had numerous recessions before the Great Depression and they were of short duration because the federal government stayed out of them and let the free market and capitalism corrected them. Herbert Hoover's policies put the wheels of the Great Depression in motion and FDR put the gas pedal down and made it into the longest in US history by "knowing more than anyone else on how to run the economy". (Is it funny how people who have never had a job in the pubic sector always seem to know everything?) Progressives armed with Keynesian theory on steroids made what should have been short duration into the longest economic downturn in US history. obama's policies and economical ignorance have done to the recession what FDR did to the depression.
Most people do not know that Truman had wanted to manage the economy with wage and price controls and other restrictive economic policies at the end of WWII but the economy got away from him and boomed in spite of his desire to be a junior-FDR. Contrary to what meant people think Truman was a progressive. The post WWII boom shows what happens when the government gets out of the way of the free market and capitalism and has low taxes.
If one wants to really learn about the Great Depression, what led up to it, and how FDR made things worse, buy a copy of the paper back book, "The Politically Incorrect Guide to The Great Depression and the New Deal." It is fantastic! Another great book to educate one on economics is "The Politically Incorrect Guide to Capitalism."
To appreciate what low taxes and less government involvement does to a country's economy read what President Coolidge's cutting of taxes and government spending did to usher in one of the greatest booms in history---The Roaring Twenties.

deestafford
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deestafford 05/19/13 - 11:04 am
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To show how bad FDR made things, Bod needs to look at

Canada's unemployment rate during the same time frame. By the way, Canada had no "New Deal".
1923-1929.......3.1%
1930...........9.1
1931...........11.6
1932...........17.6
1933...........19.3
1934...........14.5
1935...........14.2
1936...........12.8
1937...........9.1
1938...........11.4
1940...........9.2
1941...........4.4

An example of how ignorant FDR was when it came to economic: In July 1941, he suggested to his budget director a proposal for a 99.5% tax rate on all income over $100,000. When the director was clearly startled by the proposal, Roosevelt replied, "Why not? None of us is ever going to make $100,000 a year." Ignorance of economics and desire to punish the rich residing in the White House...seem familiar?

soapy_725
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soapy_725 05/19/13 - 10:42 am
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Good old FDR and the power of the government printing press
Unpublished

Mid 1930's President Roosevelt attempts to have the Constitution changed to allow for 15 Justices of the Supreme Court, thereby allowing him to appoint six Justices. Some of his programs were ruled unconstitutional by the sitting nine justices.

Darby
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Darby 05/19/13 - 11:36 am
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William Beranek, Ph.D. should pack it in and

go home...

Bodhisattva has spoken. His ready access to liberal web sites answers all our questions, large and small.

It is a little strange though, that no matter the question, the answer is ALWAYS the same.

Liberalism and socialism is the way to our salvation and to a prosperous, safe and secure future.

Can't argue with that kind of genius. Or can you?

chascushman
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chascushman 05/19/13 - 02:27 pm
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A worldwide depression
Unpublished

A worldwide depression started in 1929. By 1936 most of the world was out of the depression but the socialist/stupid policies of FDR keep the US in a GREAT depression until WWII.

jcp275
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jcp275 08/04/13 - 12:52 pm
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The Gread Depression Never Ended

There have been numerous theories on what caused the great depression but when you read them all and collate the data it seems to have been caused by the same things that are happening today.

I believe the only reason we don't slip back into what happened in 1929 is technology and the ability of the government and financial market place to make changes that keep us afloat.

Unfortunately I believe we are approaching the end of our rope. None of the formulas that have postponed the inevitable end for almost a century seem to work any longer. We have created a system where debt is sustaining our economy and we are no longer able to make the payments.

Our financial system is like a software program that has become so complex that no one can make a change without it having a negative impact on some other part of the program. When this happens in the world of software you take a step back and rewrite the program.

Unfortuately the human race only makes drastic change when it is profitable or a disaster of mega proportions makes us change.

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