WHAT ENDED THE GREAT DEPRESSION?
Question from a reader-”I’m confused about a question that rests at the heart of efforts to revive the economy. What ended the great depression? Was it the war, war spending, or some other mechanism? I think I’ve taught, and I easily accepted that it was the war spending along with the ‘full employment’ of labor that cracked the downward spiral of the 1930′s. I just can’t imagine that all the wasted resources paid for with war debt during the war.could have had less of an effect on the nation’s economic future than the spending now necessary to create jobs, provide healthcare, and rebuild the infrastructure of the nation.”
Answer—This is a controversial topic on which economists and investors disagree, and we’ll probably never know the answer. Although the unemployment rate improved markedly from about 25% at the depths of the depression to about 11% by the late 1930s, the nation’s economy was still depressed prior to the war. Some observers claim that the New Deal programs just did not spend enough while others feel that the government spending actually hampered the recovery.
In our opinion, it was the war spending that ended the depression, although it wasn’t that simple, and it doesn’t mean that we can necessarily spend ourselves out of the current crisis. Although some people erroneously concluded that the war itself was good for the economy, it was really the spending that did it rather than the war. Viewed simply, it seems that if a nation spends enough it can spend its way out of depression, and that the problem before the war was that the nation just did not spend enough. Carrying this thought further, you are probably correct to think that spending on items that can be used rather than destroyed is more helpful to the economy.
Having said that, the problem is not that simple. World War ll brought the nation back to full employment, but since so much of the wartime production was wasted there were not enough products and services on the market to meet the potential demand created by the newfound income resulting from the production of war goods. Therefore, to prevent soaring inflation the government resorted to rationing a wide array of key products and the sale of war bonds to siphon off income into savings and depress consumption. This resulted in a big buildup of savings that was available for consumer spending after the war. In addition the military force was expanded to about 11 million in a population far smaller than today’s. And, of course, transferring 11 million people out of the labor force into the military was a huge factor in reaching full employment. Let’s also not forget that there was a paucity of civilian big ticket items produced during the war, resulting in a big increase in replenishment demand in the post-war period.
Therefore conditions after the war were ideal for a resumption of prosperity—lots of consumer savings, little debt, loads of pent-up demand and millions of newly-released veterans who needed housing. In other words there was an abundance of consumer liquidity that took many years to run down. Conditions are obviously a lot different today. While the economy is far less depressed than during the 1930′s, consumers are still heavily in debt, savings are low, housing is in oversupply and foreigners own too much of our government debt. Overall, we have a lot of doubt as to whether, as a nation, we can spend ourselves out of the recession, although doing nothing would be disastrous as well. That’s why we have been so bearish on stocks.
My answer:
1. The war.
2. The baby boom after the war.
3. New innovations in many areas (transport, telecommunication, computing etc.) to improve overall quality of life. A lot are spin-offs from technologies invented for the sake of fighting the war.
4. An impoverished world outside of North America and Europe means little competition.
Here are two problems we face now:
1. Technology has made the life of most people, at least in the so called developed world, comfortable and efficient enough that any improvement will give only marginal returns. Our desires, while theoretically unlimited, have practical limits.
2. There is an overcapacity in production of most of the things that the average person needs for a reasonable standard of living. Worse still, even though the quality of these things are mediocre or even poor, we have lowered the bar to accept that as the norm. High quality products are either not available or are not affordable for most people. The opening-up of a vast labor pool in China and other developing countries created an over-supply of human labor worldwide.
FDR died. His people were out or sidelined pretty quickly by Truman. This meant that there would be no resumption of the pre war depression policies.
The GI Bill. Wow. How did the government ever get this one right? The highly educated workforce that resulted was a big part of the booming post war economy.
to add to Comstock’s & ATP’s excellent financial points,the war galvanized the people, they had a common goal (geez i wrote gold -had to go back on it).
they knuckled down and worked their ass off. fear was a motivator. they went back to the basics of what built the country.
i’m not sure there’s enough people around here that remember those basics. like you just can’t erase numbers on spread sheets….. Warren….how well did that work out for lehman bros.? creating value out of paper and ink always comes back to bite you.
if they can’t remember the basics, there will be enough fear in the next 10 yrs. to remind maybe enough of us. its our only hope (not the guy with that as his campaign slogan.)
shoulda dismantled the banks,washed out the stock holders…..tough, but it would have been better in the long run….kicking the can down the hill all we’ve done
look at the debt/GDP curve and tell me the bottom of the hill isn’t coming up?
my nieces are gonna think we are idiots.
Adam Smith’s groundbreaking book Wealth of the Nations published in 1776 holds the anwsers. The need for financial regulation to prevent excess and the invisble hand to correct excess if regulation is ignored.
1930′s depression was the result of unregulated bank lending. The invisile hand corrected excess. FDR re-establishes regulation.
2000′s depression was the result of removing the 1930′s regulation. Excess expand like never before. FED put a glove on the invisible hand and now can’t figure out how to take the gloove off.
Time. Time heals all wounds.It took TIME to burn off the excess debt of the 20′s. FDR’s “New deal” did nothing , but confuse following generations to believe in excess government spending as a means to wealth.
Time.
Time will be the primary function for getting us out of this current depression and that assumes we do not shoot ourselves in the foot.
What ended the Great Depression was a return to a stable to Debt to GDP ratio. Google compound interest and you will see why debt cannot grow fast than gdp for extended periods. The moron Fed chairman didnt get it
Probably time.
“I have yet to see any problem, however complicated, which, when looked at in the right way did not become still more complicated.”
“It seems that all economic systems and philosophies suffer from the same intrinsic flaw…human nature.”
While not being able to quantify this reasoning, I think after the war was over, there was simply no other country in the world that could be an eceonomic leader other than the US. Most other major economic powers were dealing with the affects from the war and the US stepped right in and began to manufacture everything people needed throughout the world.
This time is so different and confusing, nobody knows where this all ends. It is simply one huge expirement.
great article…
as for those who wrote comments, did you completely not read the part about the fact that there was pent up demand and savings?
Excerpted from http://www.wsws.org/articles/2009/jan2009/lett-j08.shtml
The Depression has sometimes been described as a “realisation” crisis. By this is meant that the surplus value extracted from the working class could not be realised in the form of money because of insufficient demand. But the analysis cannot stop there. The question which must be answered is what is the source of this lack of demand?
Marx observed that the creation by capital of surplus value is conditional upon the expansion of the sphere of circulation, that is, the market. “The surplus value created at one point requires the creation of surplus value at another point, for which it may be exchanged” (Marx, The Grundrisse, p. 407).
The increase in the extraction of surplus value in the United States—arising from the development of new methods of production in the 1920s—was not matched in the rest of the world. The constrictions of the European nation-state system meant that the vastly more productive methods of American capitalism could not be developed on the European continent. Rather than the long production runs of American industry, the European economy was characterised by cartels and restrictive agreements. This meant that the surplus value extracted at one point, the United States, was not matched by a sufficient extraction of surplus value at another, Europe.
The US had established itself as the pre-eminent capitalist power. But it was dependent on the European and world market. That was the significance of its entry into World War I. In the 1920s, the US was the chief source of loan funds which sustained the German and European economy in the brief period of expansion in the mid-1920s. But the provision of loans to Europe was not a viable long-term solution.
There is no question that war expenditure provided a boost to the American economy. But it could not provide a permanent solution. Here an analogy with medicine suggests itself. A shot of adrenalin can work wonders if the underlying health of the patient is good. But it cannot overcome a chronic condition.
During the war, discussion in US economic and government circles centered on the question of what would happen when the war was over? There was a recognition that unless some of the fundamental structural problems of the world economy were resolved then the US would be rapidly plunged back into the conditions of the 1930s—with potentially explosive political consequences.
In order to understand the basic causes of the Great Depression it helps to consider how it was overcome. The reconstruction of Europe—the Bretton Woods Agreement of 1944 and above all the Marshall Plan of 1947—opened the way for the economic expansion of Europe based on the development of American production methods and American investment. But this was only achieved through a war in which hundreds of millions died.
Keynesian measures, including war expenditures, provided an adrenalin-like stimulus, but they did not bring a solution to the crisis of the 1930s. In the present situation they may again provide a limited stimulus. But they cannot overcome the breakdown of the capitalist economy now taking place.
I’ll give you my brief response to this article. The Great Depression ended due to a mixture of private sector prudence and government spending. The key was fixing the private sector balance sheets (which takes a long time after these kind of excesses). In terms of government spending it’s important not to lump all kinds of spending together. There is bad spending and good spending.
An example of bad spending is the current healthcare bill. An example of good spending is infrastucture. Spending that is an investment in the long-term well-being of the nation is not always bad. Austrians like to say governments spending is bad. Well, what if we are invaded by China? Would the Austrians complain if we mobilized and spent $1T to attack them and defend everything America stands for? No. So it’s not so black and white.
I don’t have much time today so my note is short and not descript enough, but there is no magic bullet here. It will be a combo of EFFICIENT government spending and private sector de-leveraging that gets us out of the current crisis. That’s my opinion.
Infrastructure building is not necessarily productive. Japan built bridges to nowhere after the slump in the 80′s and that hasn’t saved them from the deflationary spiral. Also, infrastructure like high speed rail is only beneficial if there are enough passengers and if they are well managed to make them economically viable. Don’t forget there is a cost to running and maintaining them.
There is plenty of need and thus aggregate demand worldwide. However, due to the increasingly lopsided concentration of wealth in the hands of a relatively small percentage of the population, people with the needs do not have sufficient means to satisfy them, hence the insufficient demand. Unfortunately, redistribution of resources via government and taxation more often than not create waste through misallocation and corruption.
We need an end to the entitlement mentality pervasive in the rich and poor alike. Businesses and individuals need to face the consequences of their bad judgment and be allowed to fail. The government’s role should be limited only to providing a peaceful and just social environment to encourage all individuals to maximize their potential and flourish on their own.
What ended it for the US? destruction of every other county’s production capacity. Probably not repeatable.
I personally think the lesson of WWII is that destroying the manufacturing bases of Japan, Britain, and Germany and killing off a substantial portion of the working aged men in the U.S., Britain, Germany, France, and Japan will definitely get you back to full employment. Once you’ve done that, then they’ll be plenty of stuff that needs to get done. Nobody ever mentions that, however, as it erodes confidence that there is a reasonable solution to the problem. Hence, extend and pretend. It doesn’t change the total pain, it just spreads it out.