What Ended The Depression

by Jonah Goldberg

By the way, I’m actually more interested in this topic than most because of that other thing I’m working on. So if there academics out there who want to join this fray — for a little while — I look forward to hearing from ya. From a reader:


Jonah –

You’re quite right that the consensus among economists is that the New Deal probably prolonged the Great Depression, through it’s ham-handed price controls and attempts at micromanaging the economy. But you’re incorrect to state that there’s no dispute among economists that WWII is what fixed the Great Depression. Actually, there’s a lot of doubt as to whether WWII played an important role in fixing the Depression.

By most accounts the Great Depression is over by about 1934, and the
U.S. economy starts recovering. Then the Federal Reserve, which was
still figuring out how to conduct monetary policy, decided that inflation was a major threat in 1937 and clamped down on the money supply, bringing the very deep recession of 1937-38. After that, the economy started recovering again. Then comes World War II. But if you looks at the trendlines from the recovery in the late 1930s through both the wartime boom and the post-war slump and on inton the late 1940s, it’s not at all clear that WWII causes a change in trend.

In addition, the mechanism through which WWII is supposed to have saved
the U.S. economy is not at all clear. Yes, WWII involved massive deficit spending and borrowing, which in a Keynesian model should stimulate an economy. But the late 1940s involves massive reductions in deficit spending, which in a Keynesian model should have collapsed the economy — and that didn’t happen. The ability of the U.S. economy to move from a wartime footing in the early 1940s to booming peacetime economy in the late 1940s with a relatively short post-war recession in between was quite remarkable.

For some academic evidence on the complexities, see the work of Robert Higgs. A nice accessible piece from a few years ago is at . Or for the hard-core, check his article in the March 1992 Journal of Economic History: “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” As Higgs asks at one point, when you think about it a little, is it really plausible that one of the most costly and destructive wars of all time was actually highly beneficial for the U.S. economy?

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