War did not end the Great Depression

March 2, 2009
It's time to set the record straight. It was not World War II that moved America out of the Great Depression.

When we talk about the American economy, we discuss the actual or "real" goods and services produced in this country. To compare one year with another, we must remove price changes so we can measure output in constant dollars.

This measure of economic activity is called real gross domestic product. In 2008, the real value of goods and services produced in this country stood at $11.7 trillion, adjusted to prices of 2000. In 1929, GDP peaked at $865 billion in the constant prices of 2000. Thus, our economy last year was 13-1/2 times larger than in 1929.

From that peak of $865 billion in 1929, the U.S. economy contracted to $636 billion in 1933, a decline of 27 percent. Those four years of contraction saw annual decreases in real GDP of 1.3 percent to 13 percent. Thereafter followed four years of recovery. In 1937, real GDP stood at $911 billion, or 5.3 percent above the 1929 level.

Not only was the severe recession over, but the American economy was back to a higher level than its previous peak. There was a brief setback in 1938, but even then we stayed above the 1929 level. From there on, beyond 1938, the economy moved still higher to reach today's unimaginable levels of wealth.

Thus, when war production began to support our European allies in 1939, the American economy had already recovered. Federal spending on the armaments and personnel of war moved the economy still further ahead. But the base of the economy had been re-established not just above the bottom in 1933, but above the 1929 peak as well.

It is spending, not tax cuts, that directs the flow of resources. After World War II, the great strides of this nation were made by federal spending and federal support of private spending. The GI bill (federal spending, not tax breaks) sent millions of veterans to college. A side benefit was a decrease in the number of people seeking employment that allowed wages to rise dramatically.

The Marshall Plan (federal spending) made it possible for Europe to buy the goods from us it needed to rebuild its economy. Insuring loans for housing Americans was a promise of federal spending, an underwriting of private lending. Highway, bridge, sewer and water systems benefited from federal assistance.

Those who argue today that federal spending will not do the job of getting us out of our current difficulties neglect the truth of the past. Those who argue that this crisis is greater than that of the early 1930s base their arguments on supposition, not evidence. The decline in the first year of this recession has been at an annual rate of 2.2 percent, while in the first year of the Great Depression that fall was 8.6 percent.

Unemployment rates and the stock-market declines are not (yet?) near the magnitudes of the Great Depression. While not as deep as the Great Depression, this downturn is more extensive because more of us have money in the stock market and more of us have investments in the homes we own. Thus, even without the severity of the Great Depression, the current crisis has bearing on the lives of a large percentage of the population.

Today, the federal government, including the Federal Reserve, is acting more promptly than in the Great Depression, when a large portion of the populace was satisfied to let the markets adjust themselves. Today, we have unemployment compensation, Social Security, Medicare and Medicaid to soften the blows of the recession.

Recessions leave serious scars on families and institutions. What is lost in production cannot be recovered. Opportunities forgone may never be available again. However heroic the measures of the moment, the decline in wealth, while transitory for some, will be permanent for many. And remedies of the past are not necessarily helpful in times as different as ours from those of Cal Coolidge and Al Capone.


Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
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