September 1945 - at long last, the war was over. The American economy with its industrial base untouched by enemy bombs had produced the planes, ships, tanks, guns and other materiel needed for the war.
The employment induced by wartime spending had jolted the economy out of a decade of depression and into full employment and prosperity. This was the ultimate vindication of the economist, John Maynard Keynes. He had held all along that the cause of recession is deficient demand. The Great Depression of the 30s could be cured by increasing government demand, thereby creating employment, which would create yet further demand, and tax revenue for the government.
That's exactly what happened with the sharp increase in government spending during WWII. Because of the demand for war materiel, the government had to curtail private demand for civilian goods in order to keep inflation in check. To do this, the government increased taxes, borrowed money from the public through sale of war bonds, and instituted a system of price controls and rationing.
All told, economic policy was successful in achieving the multiple objectives. This success was aided by a sense of patriotism as both the human and economic costs of the war were broadly shared across the spectrum of society. And as a practical matter, any personal economic inconveniences, whether through taxes, rationing, or price controls, were ameliorated by the fact that most American civilians lived far better during the war than during the decade of the Great Depression.
But now, 1946, the war was over. As wartime spending had lifted the nation out of economic depression, what was going to happen? Defense contracts were being canceled. And how would the nation absorb and employ some 12 million veterans returning to civilian life?
Recall that during the 30s, people needed goods, but didn't have the money to make demand effective. Then during the war, people had the money, but the goods weren't available as resources were devoted to wartime production.
However, in 1946 the conditions for a functioning economy were in place - people had money to make effective their demands for goods and services, and the nation's resources could now be turned toward peacetime production. Sure, there was the matter of conversion and retooling. But firms such as Chrysler, Ford, and General Motors that produced aircraft and tanks could easily enough change back to producing automobiles. And because people now had money, the automakers could sell them.
What even the most devoted advocates of free markets tend to forget is that policy measures to increase supply when consumers don't have spending power is like pushing string. But if consumers have the money with which to make demand effective, we can be assured that supply will be forthcoming.
A tremendous backlog of pent-up demand had built up through the 30s and early 40s. By 1946 consumers had the income, and wartime savings, much of it accumulated through purchase of war bonds, to make that demand effective. And American industry met those demands by employing workers and putting capital to peacetime use.
On a personal note, my dad had purchased a model WC Allis Chalmers tractor right before the war. But during the war, he still used horses for much of the farm work and he hauled milk to the cheese factory in a rickety old truck. As soon as they were available after the war, he bought a new Farmall H tractor and a new Chevrolet farm truck - and got rid of the horses. Those actions were replicated throughout the nation's agricultural economy. It was with postwar prosperity that farms upgraded to indoor plumbing.
Throughout America, kitchens were upgraded with new stoves, refrigerators, toasters, and kitchen sets. Production and sale of automobiles soared. The combination of technological innovation, pent-up demand for products, and, the crucial element, broadly shared prosperity marked by a more even distribution of income, put America on a path to unparalleled economic expansion.
Instead of shutting down, as some critics feared, factories retooled and replaced their outdated, worn-out capital equipment. That retooling was itself a source of increased aggregate demand, creating employment.
The returning veterans, aided by intelligent government policy, easily enough found employment to produce for an increasingly prosperous America. The G.I. Bill made college and higher education of all forms available to those to whom it was previously unavailable. The nation's colleges and universities were filled with mature, serious students who would become the managers, engineers, teachers, accountants, and other professionals that would staff business, industry, government, and academia in an increasingly prosperous America.
The returning vets who had postponed normal family life married, began families, and needed homes. Government policy made available low interest loans, fueling a vast construction boom.
In addition to booming consumer demand, there was continued government demand in the form of assistance to the war-torn nations, friend and foe alike. We assisted our former allies in Europe, and we needed to rebuild Germany and Japan as democratic, capitalist allies, as our former uneasy ally, the Soviet Union, was seen as a new threat.
On top of all this, the wartime industries had spurred technological innovations in the form of plant layout, production organization, and process engineering. But not all was peaches and cream. While wartime patriotism had enabled the government to hold down inflation, once the war was over, the dam broke, and prices rose. The agricultural sector was soon to lag. Opportunities for women and minorities still lagged in the work place.
But all told, the period from the end of WWII to the early 1970s was one of unparalleled, widely-shared increasing prosperity. It came to be known as 'The Long Boom," or "The Golden Age of Capitalism," and, quite appropriately, as "The Age of Keynes."
Next week: some postwar economic issues
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The employment induced by wartime spending had jolted the economy out of a decade of depression and into full employment and prosperity. This was the ultimate vindication of the economist, John Maynard Keynes. He had held all along that the cause of recession is deficient demand. The Great Depression of the 30s could be cured by increasing government demand, thereby creating employment, which would create yet further demand, and tax revenue for the government.
That's exactly what happened with the sharp increase in government spending during WWII. Because of the demand for war materiel, the government had to curtail private demand for civilian goods in order to keep inflation in check. To do this, the government increased taxes, borrowed money from the public through sale of war bonds, and instituted a system of price controls and rationing.
All told, economic policy was successful in achieving the multiple objectives. This success was aided by a sense of patriotism as both the human and economic costs of the war were broadly shared across the spectrum of society. And as a practical matter, any personal economic inconveniences, whether through taxes, rationing, or price controls, were ameliorated by the fact that most American civilians lived far better during the war than during the decade of the Great Depression.
But now, 1946, the war was over. As wartime spending had lifted the nation out of economic depression, what was going to happen? Defense contracts were being canceled. And how would the nation absorb and employ some 12 million veterans returning to civilian life?
Recall that during the 30s, people needed goods, but didn't have the money to make demand effective. Then during the war, people had the money, but the goods weren't available as resources were devoted to wartime production.
However, in 1946 the conditions for a functioning economy were in place - people had money to make effective their demands for goods and services, and the nation's resources could now be turned toward peacetime production. Sure, there was the matter of conversion and retooling. But firms such as Chrysler, Ford, and General Motors that produced aircraft and tanks could easily enough change back to producing automobiles. And because people now had money, the automakers could sell them.
What even the most devoted advocates of free markets tend to forget is that policy measures to increase supply when consumers don't have spending power is like pushing string. But if consumers have the money with which to make demand effective, we can be assured that supply will be forthcoming.
A tremendous backlog of pent-up demand had built up through the 30s and early 40s. By 1946 consumers had the income, and wartime savings, much of it accumulated through purchase of war bonds, to make that demand effective. And American industry met those demands by employing workers and putting capital to peacetime use.
On a personal note, my dad had purchased a model WC Allis Chalmers tractor right before the war. But during the war, he still used horses for much of the farm work and he hauled milk to the cheese factory in a rickety old truck. As soon as they were available after the war, he bought a new Farmall H tractor and a new Chevrolet farm truck - and got rid of the horses. Those actions were replicated throughout the nation's agricultural economy. It was with postwar prosperity that farms upgraded to indoor plumbing.
Throughout America, kitchens were upgraded with new stoves, refrigerators, toasters, and kitchen sets. Production and sale of automobiles soared. The combination of technological innovation, pent-up demand for products, and, the crucial element, broadly shared prosperity marked by a more even distribution of income, put America on a path to unparalleled economic expansion.
Instead of shutting down, as some critics feared, factories retooled and replaced their outdated, worn-out capital equipment. That retooling was itself a source of increased aggregate demand, creating employment.
The returning veterans, aided by intelligent government policy, easily enough found employment to produce for an increasingly prosperous America. The G.I. Bill made college and higher education of all forms available to those to whom it was previously unavailable. The nation's colleges and universities were filled with mature, serious students who would become the managers, engineers, teachers, accountants, and other professionals that would staff business, industry, government, and academia in an increasingly prosperous America.
The returning vets who had postponed normal family life married, began families, and needed homes. Government policy made available low interest loans, fueling a vast construction boom.
In addition to booming consumer demand, there was continued government demand in the form of assistance to the war-torn nations, friend and foe alike. We assisted our former allies in Europe, and we needed to rebuild Germany and Japan as democratic, capitalist allies, as our former uneasy ally, the Soviet Union, was seen as a new threat.
On top of all this, the wartime industries had spurred technological innovations in the form of plant layout, production organization, and process engineering. But not all was peaches and cream. While wartime patriotism had enabled the government to hold down inflation, once the war was over, the dam broke, and prices rose. The agricultural sector was soon to lag. Opportunities for women and minorities still lagged in the work place.
But all told, the period from the end of WWII to the early 1970s was one of unparalleled, widely-shared increasing prosperity. It came to be known as 'The Long Boom," or "The Golden Age of Capitalism," and, quite appropriately, as "The Age of Keynes."
Next week: some postwar economic issues
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
