Did World War 2 End the Depression?

[Puppycow]

Basic question about one of those things we often hear: "World War 2 ended the Depression"

1) Is it true?
2) If so, what was it about the war that ended the depression? Just spending lots of money and getting everybody employed in some capacity or another? Was it the creation of lots of new manufacturing capacity? Was it new science and techology created for the war effort that was repurposed after the war?
3) Should the government be spending that much money now to get us out of this downturn? Are we spending enough? On the right things?

 

[drkitten]

Basic question about one of those things we often hear: "World War 2 ended the Depression"

1) Is it true?

More or less. Even a fairly biased source admits that. Actually, a study of the real growth rates of the GDP suggests that from 1933-1941, the economy was already in a strong recovery (10% growth per year, which is simply phenomenal) but it hadn't hit the consumer level yet.

WWII is when the consumer finally got money into his or her pocket.

The problem. of course, is determining why.

2) If so, what was it about the war that ended the depression? Just spending lots of money and getting everybody employed in some capacity or another? Was it the creation of lots of new manufacturing capacity?

Here's where the economists really start to differ. There are a lot of things that go into it.

* Unemployment dropped as the military sucked up all available manpower and then some.
* Federal spending shot way up.
* Investment in capital/production went up. People were saving

Perhaps most importantly,

* exports shot way up as the Allies bought huge amounts of "stuff" from us, whether that be food, oil, or munitions.

3) Should the government be spending that much money now to get us out of this downturn?

Hell, yes. But we need to spend it better (over the long term).

At the moment, it's still 1929, or maybe 1930. We've not yet seen the bottom (which historically happened in 1933) and there are some immediate issues (like the credit freeze) that need to be dealt with.

Once the credit freeze is dealt with, we are going to need to some capital investment of the sort that produces jobs and exports. While I support the Citibank bailout (because we need to unfreeze credit first), that's not going to produce jobs and exports by itself.

 

[Free Thinkr]

The problem. of course, is determining why.

Money.

 

[MRC_Hans]

I agree with drkitten, with one addition. The war spurred a rapid technological advance, much of which was subsequently channelled into civilian uses. Just to mention one example, jet engines might have taken decades longer to get into common use, had it not been for the war.

One reason (except for what I hope is generally improved wisdom) we did not get a war from the 1980ies depression and won't get one from this one, is that now the civilian industry is a larger consumer than the military.

Hans

 

[drkitten]

Money.

Er, no.

Just "money" isn't the reason -- see the "broken window fallacy."

If it really were as simple as that, we really could spend our way out of a depression by simply digging holes and filling them again --- or, as Keynes is famously supposed to have suggested, building ships, taking them into the open ocean, and sinking them.

 

[drkitten]

I agree with drkitten, with one addition. The war spurred a rapid technological advance, much of which was subsequently channelled into civilian uses. Just to mention one example, jet engines might have taken decades longer to get into common use, had it not been for the war.

Yes, but that's not an explanation for the end of the Depression -- as you point out, the technology was only channelled subsequently into the civilian sector, by which time the Depression had already ended.

Scientific/technical progress is, of course, fantastically good for the economy, but it tends to be a much longer-term improvement. I can't think of any examples off-hand of countries that managed to research their way out of a recession. To get out of recessions, you tend to need the good old-fashioned remedies like jobs, exports, and money.

 

[Puppycow]

More or less. Even a fairly biased source admits that. Actually, a study of the real growth rates of the GDP suggests that from 1933-1941, the economy was already in a strong recovery (10% growth per year, which is simply phenomenal) but it hadn't hit the consumer level yet.

Thanks for such a great answer. BTW, both of the links above appear to lnk to the same paper. Is this correct?

 

[drkitten]

Thanks for such a great answer. BTW, both of the links above appear to lnk to the same paper. Is this correct?

No, it's not. Damn clipboard.

Try http://www.nber.org/papers/w3829.pdf

 

[Puppycow]

Er, no.

Just "money" isn't the reason -- see the "broken window fallacy."

If it really were as simple as that, we really could spend our way out of a depression by simply digging holes and filling them again --- or, as Keynes is famously supposed to have suggested, building ships, taking them into the open ocean, and sinking them.

Oh, this thingy. I had that confused with "The Broken Window Theory" of crime prevention.

OK, makes sense to me.

 

[MRC_Hans]

Yes, but that's not an explanation for the end of the Depression -- as you point out, the technology was only channeled subsequently into the civilian sector, by which time the Depression had already ended.

Scientific/technical progress is, of course, fantastically good for the economy, but it tends to be a much longer-term improvement. I can't think of any examples off-hand of countries that managed to research their way out of a recession. To get out of recessions, you tend to need the good old-fashioned remedies like jobs, exports, and money.

Well, yes, but it depends on what you mean by ending the depression (other than just succeeding it). We seem to agree that although some improvement was noticeable as early as 1933, the general gloom stuck on all the way to the beginning of the war, perhaps somewhat alleviated by the preparations for war. Now, during a world war, the normal rules are out of action, and it doesn't really make sense to speak of depression/no depression during the wartime.

So what made the depression go away or stay away and triggered a lot of growth after the war, despite lots of lives being lost and much destruction was, among other things, technology advances.

Hans

 

[Free Thinkr]

Er, no.

Just "money" isn't the reason -- see the "broken window fallacy."

If it really were as simple as that, we really could spend our way out of a depression by simply digging holes and filling them again --- or, as Keynes is famously supposed to have suggested, building ships, taking them into the open ocean, and sinking them.

No, I mean actual money.

 

[shadron]

If it really were as simple as that, we really could spend our way out of a depression by simply digging holes and filling them again --- or, as Keynes is famously supposed to have suggested, building ships, taking them into the open ocean, and sinking them.

A bit facetiously, we might note that that latter is what WWII and its prequel was all about, with one addition: we loaded the boats before we sunk 'em.

 

[drkitten]

A bit facetiously, we might note that that latter is what WWII and its prequel was all about, with one addition: we loaded the boats before we sunk 'em.

Except that we also got paid for the boats and contents, instead of paying for them.

And that is a, perhaps the, key difference.

 

[dudalb]

The irony is that World War Two was a direct result of the Depression. The extremists in Germany and Japan would never have gotten in power, and Mussolini never would have gone expansionist if the depression had never happened.

And is something that those who want a total economic collapse because they think it will result in a 'better world with the old system gone" should think about. Severe depressions almost always give birth to wars .

 

[drkitten]

The irony is that World War Two was a direct result of the Depression. The extremists in Germany and Japan would never have gotten in power, and Mussolini never would have gone expansionist if the depression had never happened.

Counterfactual history is always tricky. Both the Germans and the Japanese had always had a strongly militaristic streak, and any government is subject to the temptation of military adventurism to fix problems at home. ("A Short Victorious War," anyone?)

But by and large, I agree.

 

[Nick Bogaerts]

Except that we also got paid for the boats and contents, instead of paying for them.

Lend-lease. We're still paying you for it. There was very little in terms of repayment until 1945, and then you started shelling out for the Marshall Plan.

 

[drkitten]

Lend-lease. We're still paying you for it.

Only because we sucked all the actual money out of you guys with two years of "cash and carry" from 1939 to 1941.

 

[Tailgater]

16 million American worker bees went to war and about 400k+ didn't come back out of roughly 130 million people (about 40% of todays population). 1943 unemployment was under 2%. The war may not have been the root cause of the end, but it helped finish off the unemployment. See Drkitten link post 2.

 

[oggiesnr]

16 million American worker bees went to war and about 400k+ didn't come back out of roughly 130 million people (about 40% of todays population). 1943 unemployment was under 2%. The war may not have been the root cause of the end, but it helped finish off the unemployment. See Drkitten link post 2.

Er...check your maths.

Steve

 

[Corsair 115]

Investment in capital/production went up. People were saving

Yes, but weren't people saving because rationing and the demands for war production meant there were relatively few consumer goods to purchase during the war? In other words, they didn't have much choice except to save since there wasn't much else to spend their money on.

One reason (except for what I hope is generally improved wisdom) we did not get a war from the 1980ies depression and won't get one from this one, is that now the civilian industry is a larger consumer than the military.

I would think the advent of the atomic bomb and subseqent bipolar world is much more what prevented any sort of large scale war between the superpowers. Once nuclear weapons enter the arsenal, any major conflict has the potential to eradicate both sides in short order.

Er...check your maths.

I think what Tailgater was saying was that the U.S. total population during WWII was about 40% of its current total population. (130 million divided by 300 million equals 43%.)