World War II and the Ending of the Depression

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WORLD WAR II AND THE ENDING OF THE DEPRESSION

World War II had a profound and multifaceted impact on the American economy. Most obviously, it lifted the nation out of the Great Depression of the 1930s. As late as 1940, unemployment stood at 14.6 percent; by 1944 it was down to a remarkable 1.2 percent, and the gross national product (GNP) had more than doubled. But the wartime economic mobilization did more than end the Depression. It greatly increased the size, power, and cost of the federal government. It corroborated the argument of the British economist John Maynard Keynes that deficit spending could stimulate economic growth, with consequences not only for government fiscal policy, but also for the agenda of New Deal liberalism. It virtually revolutionized the tax structure by vastly increasing the number of taxpayers, making personal income taxes a larger source of federal income than corporate taxes, and inaugurating the withholding system. It enlarged the economic and political power of big business, spurred the mechanization of agriculture and the further consolidation of big agribusiness, and increased the size and influence of organized labor. It catalyzed major breakthroughs in science and technology, including the development of the atomic bomb. It contributed to the resurgence of conservatism in Congress that had begun in the late 1930s. And among its other consequences, it made the United States overwhelmingly the dominant economic power in the world.

As the United States became the "arsenal of democracy" during World War II, economic mobilization brought a double victory for the American people by ending the decade-long Great Depression at home, as well as playing a pivotal role in defeating the Axis Powers abroad. President Franklin D. Roosevelt's New Deal of the 1930s had contributed to economic improvement after the calamitous collapse of the American economy that had led to unemployment of at least 25 percent by 1933. It had also provided essential assistance to the impoverished and unemployed. But the New Deal had not ended the Depression. Indeed, after some recovery from 1933 to 1937, the sharp recession of 1937 to 1938 sent economic indexes plummeting again, with unemployment reaching 19 percent. The economy then headed up again, but in 1940 unemployment still stood at a Depression-level 14.6 percent.

By 1940, however, the war in Europe and the American national defense program provided economic stimulus, and in 1941 and 1942 defense spending and mobilization for war began to send the economy to new levels of prosperity. With the United States accounting for about 40 percent of all war goods produced worldwide by 1944, the GNP rose from $91 billion in 1939 to $126 billion in 1941, to $193 billion in 1943, and to $214 billion in 1945. Civilian employment increased by eight million workers, to some fifty-four million, between 1939 and 1944, at the same time that the armed forces mushroomed from one-third of a million to 11.5 million. Unemployment virtually vanished, falling to just 1.2 percent in 1944. National income soared from $73 billion in 1939 to $183 billion in 1944. And as the United States prospered, the economies of the other major nations were distorted and damaged by the war. In 1947, the United States produced about half of the world's manufactured goods, three-fifths of the world's oil and steel, and four-fifths of the world's automobiles. Such newer industries as aviation, petrochemicals, and electronics also grew in size and importance because of the war—as did new technologies in those and other areas, including computers. One leading economic historian has argued that such American economic dominance was perhaps "the most influential consequence of the Second World War for the postwar world."

World War II thus brought the return of good times for the American people and laid foundations for the unparalleled prosperity of the postwar era. Even allowing for wartime inflation and shortages, the new employment opportunities and higher incomes produced increased consumer spending and rising living standards. And while there was very little redistribution of income during the war, personal income increased so dramatically—it nearly doubled among the lowest 40 percent of families—that it seemed to many that the war had worked a revolutionary change in their circumstances and aspirations. Wartime shortages of workers also led employers to hire women, African Americans, and other groups in larger numbers and better positions than before. In addition to their wartime training and experiences, armed forces personnel received important educational and economic benefits from the G.I. bill.

Economic mobilization not only produced widespread prosperity, rising living standards, and new opportunities, but also helped to enhance and institutionalize the economic and political power ofbig business, big farming, and big labor. In manufacturing, defense contracts tended to go to corporate giants with a demonstrated capacity for high-volume, high-quality production. Just thirty-three firms won more than half of all prime war contracts awarded from 1940 to 1944. The proportion of workers employed by businesses with 10,000 workers or more rose from 13 to 30 percent of the total. Working with the military, in an early manifestation of what came to be called the "military-industrial complex," big business resisted spreading war contracts around more, lobbied successfully for curtailing antitrust efforts, and helped prevent early re-conversion to peacetime production by smaller firms.

Mobilizing the economy was achieved more by government support and subsidy than by controls and coercion. Though federal power over materials, priorities, manpower, and production increased significantly during the war, expansion was facilitated by such assistance to business as tax breaks, subsidies, low-cost loans, and contracts that guaranteed the cost of production plus a profit. War contractors also received federal assistance in postwar demobilization. To bring needed experience and expertise to economic mobilization, moreover, executives from such business giants as General Motors, U.S. Steel, General Electric, and Sears, Roebuck were brought to Washington and played key roles in the war mobilization agencies. These "dollar-a-year men," who remained on their corporate payrolls while accepting a nominal salary from the government, further augmented the influence of big business. In all, big business emerged from the war with its reputation enhanced and with enlarged economic and political power.

Organized labor and big commercial farmers also experienced gains during the war. Membership in American Federation of Labor (AFL) and Congress of Industrial Organizations (CIO) unions rose by about 50 percent during the war, and AFL and CIO leaders played significant roles in wartime mobilization agencies, though without the same influence as business. Big commercial farmers represented by the "farm bloc" in Congress saw that farm prices received relatively high ceilings in the wartime price control efforts. To make up for the loss of farm labor, more farmers turned to mechanization, which contributed to the ongoing depopulation of parts of rural America and to the consolidation of large commercial farming. The growing size and influence of big business, big labor, and big farming gave clearer shape to the modern American political economy that had been emerging over the previous half century.

So also did the larger size, power, and cost of the federal government. To manage wartime economic mobilization and organize the material, manpower, and money needed to win the war, the number of civilian employees of the federal government quadrupled, to some four million. Such agencies as the War Production Board (WPB), the Office of Price Administration (OPA), the Office of Economic Stabilization (OES), the National War Labor Board (NWLB), the War Manpower Commission (WMC), the Office of Scientific Research and Development (OSRD), the Office of War Mobilization (OWM), and the Office of War Mobilization and Reconversion (OWMR) greatly increased the power of the federal government over virtually every aspect of the economy. The mobilization agencies got off to a slow and stumbling start, but by 1943 became far more efficient and expanded federal power over the economy well beyond what the New Deal had done. Wartime agencies and powers were curtailed in the postwar era—but in 1950, the federal government had two million civilian workers, twice the 1940 level. To finance war mobilization, annual federal expenditures rose from $9 billion to nearly $98 billion between 1939 and 1945. In all, the government spent some $300 billion during the war—twice as much as in all its previous history going back to 1789.

Less than half of federal spending was financed by taxation, but that required an enormous effort that profoundly and permanently changed the tax system. Wartime taxation, especially the Revenue Act of 1942, greatly expanded the reach of the tax system, as the number of taxable individual incomes rose from four million in 1939 to almost forty-three million by 1945. With so many more people paying taxes, the government introduced the withholding system. And for the first time, individual income taxes became a larger source of federal revenues than corporate taxes—another pattern that continued into the postwar era.

But the greater part of wartime spending was financed by borrowing, through war bonds and other devices. And by underwriting full-production, full-employment prosperity, the massive deficits—of some $50 billion in each of three years, a sum amount twelve times the highest deficit of the New Deal years of the 1930s—corroborated the arguments of John Maynard Keynes. Keynesian economic analysis had maintained that large-scale, purposeful deficit spending could stimulate economic growth and produce full-employment prosperity. Keynesian analysis became increasingly central to economic theory and government policy, and the new tax system of the war years enabled government fiscal policy—taxes and spending—to be implemented more quickly and easily.

Wartime prosperity had other political implications as well. For one thing, it helped reorient liberal policy. Partly because of some of the inefficiencies and the business domination of wartime mobilization agencies, liberals became less attracted to microeconomic planning and regulation, and, as deficit spending produced full-fledged prosperity, they become more attracted to macroeconomic policy to achieve full-production and full-employment prosperity by means of Keynesian fiscal policy. Liberals proposed expensive and expansive social programs that might produce both reform and prosperity. But the return of prosperity made Depression-era social welfare policies seem less necessary and less attractive to many Americans, and wartime prosperity and frustrations produced striking Republican gains in the 1942 elections that made a congressional conservative coalition of Republicans and conservative (mostly southern) Democrats more powerful. The conservative coalition stymied social reform—except for the enormously important G.I. Bill—and remained in control of the Congress in the postwar era.

See Also: EUROPE, GREAT DEPRESSION IN.