The years 1946 to the early 1970s was an era of economic expansion, broadly shared among all income classes. America had emerged victorious from WWII as the world's dominant economy with an expanding middle class, the envy of the world.
Government spending on wartime materiel had lifted America out of economic depression. With the cancellation of lucrative defense contracts, instead of sinking back into depression, the stage was set for several decades of economic expansion. What were the conditions that set this off?
For the first time in nearly a generation, conditions were right on both the supply and demand sides of the market. Let's briefly review:
During the 1930s, America had the capacity to produce. However, consumers lacked the money with which to buy the goods, giving producers no incentive to hire. So unemployment was high. The economy languished because of deficient demand.
During the war, 1941-45, defense related employment gave consumers the income with which to purchase, but civilian goods weren't available, a shortage of supply.
With 1946 and war's end, both supply and demand conditions were in place. Untouched by enemy bombs, the nation's industrial plant rapidly converted to peacetime goods. Technological efficiencies achieved under wartime duress and new products resulting from defense-related research ensured supply. The supply problem was solved.
The pent up demand of some 15 years - demand for automobiles, farm and industrial machinery and equipment, housing, appliances, and the vast array of private and public goods and services accompanying these products - was there. And, most importantly, so was the income and accumulated savings among all income classes to make that demand effective. The demand problem was solved.
With consumers of all income classes satisfying their demands with their rising incomes and accumulated savings, and with business and industry expanding production and employment, the economy soared. Returning veterans, many upgrading their education and skills through the G.I. Bill, purchased homes, and started families, precipitating the so-called "baby boom" from 1946 to 1964.
During the 1950s, President Eisenhower pushed the development of the Interstate Highway system, billed initially as a defense initiative. This public sector program accommodated the explosion of automobiles and related services.
But what about the massive public debt that approximated 103 percent of GDP by the mid 1940s? Due primarily to economic growth, it declined to 90 percent of GDP by 1950 and continued to decline through the golden age of capitalism to 38 percent by 1970. Nor did high marginal tax rates on upper income brackets diminish effort of the nation's most highly compensated CEOs.
A further note on the demand side - for maximum effective consumer demand, the fruits of an expanding economy must be broadly shared, rather than all floating to top management. The golden age of capitalism was characterized by "income compression," a reduction in disparity between income classes that we had not seen before, and haven't seen since.
With widely shared prosperity during capitalism's golden age, Americans achieved middle class status in unprecedented numbers. The income gains of the middle class not only assured continued effective demand, but also contributed to a strong sense of community and faith in the efficacy of democratic capitalism.
There is yet another condition for macroeconomic stability and prosperity, too often given short shrift by politicians and policy-makers. That essential condition is integrity of the nation's financial markets. It was a breakdown of our financial system during the late 1920s that precipitated the Great Depression. And it was a breakdown of the financial system, tied to the housing bubble and in conjunction with a "perfect storm" of related factors, that precipitated the Great Recession beginning in 2008.
Thanks to reforms made during the Great Depression, the nation's financial system functioned relatively smoothly during the golden age of capitalism. Among the chief reforms made during the 1930s was the Glass-Steagall Act. This act created the Federal Deposit Insurance Corporation (FDIC) that guaranteed safety of bank deposits. Federally guaranteed safety of deposits prevented panic and discouraged people from making a "run on the bank" with rumors of bank weakness.
Paradoxically, the existence of an institution such as the FDIC makes it less likely that it will be needed - that is, until the recent spate of bank failures due to some combination of deregulation, including revocation of Glass-Steagall, hubris, malfeasance and, arguably, gross incompetence.
Another provision of Glass-Steagall was to limit commercial banks affiliation with securities firms. It provided a separation of commercial and investment banking. Commercial banking should be a staid profession, the socially and economically beneficial activity of accepting deposits and making business and home loans. Leave high stakes casino-like ambitions to the Wall Street gang - but keep a regulatory rein on them and don't let them get "too big to fail," lest their failure threaten the entire economy.
In 1933, the Securities and Exchange Commission (SEC) was created with the objective of regulating the stock market. Those Wall Street firms subject to regulation, and bitterly resisting it, tend to forget, or deny, that well-regulated financial markets and reputation for transparency and integrity are essential to the health of the financial system and, as we have recently experienced, to the entire economy.
In summary, fulfilled supply and demand conditions, a relatively broad distribution of income with a middle class that shared in the gains, and regulated, smoothly functioning financial markets were necessary conditions for the golden age of capitalism.
The increasingly unequal distribution of income during the past several decades, and deregulated financial markets complicit in the housing bubble, go far toward explaining how we got into the current recession, and why we are so slow in recovering from it.
If we are ever to have another golden age of capitalism, it will take a basic understanding of the necessary conditions for it to occur, and far more political wisdom than we have recently seen.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
Government spending on wartime materiel had lifted America out of economic depression. With the cancellation of lucrative defense contracts, instead of sinking back into depression, the stage was set for several decades of economic expansion. What were the conditions that set this off?
For the first time in nearly a generation, conditions were right on both the supply and demand sides of the market. Let's briefly review:
During the 1930s, America had the capacity to produce. However, consumers lacked the money with which to buy the goods, giving producers no incentive to hire. So unemployment was high. The economy languished because of deficient demand.
During the war, 1941-45, defense related employment gave consumers the income with which to purchase, but civilian goods weren't available, a shortage of supply.
With 1946 and war's end, both supply and demand conditions were in place. Untouched by enemy bombs, the nation's industrial plant rapidly converted to peacetime goods. Technological efficiencies achieved under wartime duress and new products resulting from defense-related research ensured supply. The supply problem was solved.
The pent up demand of some 15 years - demand for automobiles, farm and industrial machinery and equipment, housing, appliances, and the vast array of private and public goods and services accompanying these products - was there. And, most importantly, so was the income and accumulated savings among all income classes to make that demand effective. The demand problem was solved.
With consumers of all income classes satisfying their demands with their rising incomes and accumulated savings, and with business and industry expanding production and employment, the economy soared. Returning veterans, many upgrading their education and skills through the G.I. Bill, purchased homes, and started families, precipitating the so-called "baby boom" from 1946 to 1964.
During the 1950s, President Eisenhower pushed the development of the Interstate Highway system, billed initially as a defense initiative. This public sector program accommodated the explosion of automobiles and related services.
But what about the massive public debt that approximated 103 percent of GDP by the mid 1940s? Due primarily to economic growth, it declined to 90 percent of GDP by 1950 and continued to decline through the golden age of capitalism to 38 percent by 1970. Nor did high marginal tax rates on upper income brackets diminish effort of the nation's most highly compensated CEOs.
A further note on the demand side - for maximum effective consumer demand, the fruits of an expanding economy must be broadly shared, rather than all floating to top management. The golden age of capitalism was characterized by "income compression," a reduction in disparity between income classes that we had not seen before, and haven't seen since.
With widely shared prosperity during capitalism's golden age, Americans achieved middle class status in unprecedented numbers. The income gains of the middle class not only assured continued effective demand, but also contributed to a strong sense of community and faith in the efficacy of democratic capitalism.
There is yet another condition for macroeconomic stability and prosperity, too often given short shrift by politicians and policy-makers. That essential condition is integrity of the nation's financial markets. It was a breakdown of our financial system during the late 1920s that precipitated the Great Depression. And it was a breakdown of the financial system, tied to the housing bubble and in conjunction with a "perfect storm" of related factors, that precipitated the Great Recession beginning in 2008.
Thanks to reforms made during the Great Depression, the nation's financial system functioned relatively smoothly during the golden age of capitalism. Among the chief reforms made during the 1930s was the Glass-Steagall Act. This act created the Federal Deposit Insurance Corporation (FDIC) that guaranteed safety of bank deposits. Federally guaranteed safety of deposits prevented panic and discouraged people from making a "run on the bank" with rumors of bank weakness.
Paradoxically, the existence of an institution such as the FDIC makes it less likely that it will be needed - that is, until the recent spate of bank failures due to some combination of deregulation, including revocation of Glass-Steagall, hubris, malfeasance and, arguably, gross incompetence.
Another provision of Glass-Steagall was to limit commercial banks affiliation with securities firms. It provided a separation of commercial and investment banking. Commercial banking should be a staid profession, the socially and economically beneficial activity of accepting deposits and making business and home loans. Leave high stakes casino-like ambitions to the Wall Street gang - but keep a regulatory rein on them and don't let them get "too big to fail," lest their failure threaten the entire economy.
In 1933, the Securities and Exchange Commission (SEC) was created with the objective of regulating the stock market. Those Wall Street firms subject to regulation, and bitterly resisting it, tend to forget, or deny, that well-regulated financial markets and reputation for transparency and integrity are essential to the health of the financial system and, as we have recently experienced, to the entire economy.
In summary, fulfilled supply and demand conditions, a relatively broad distribution of income with a middle class that shared in the gains, and regulated, smoothly functioning financial markets were necessary conditions for the golden age of capitalism.
The increasingly unequal distribution of income during the past several decades, and deregulated financial markets complicit in the housing bubble, go far toward explaining how we got into the current recession, and why we are so slow in recovering from it.
If we are ever to have another golden age of capitalism, it will take a basic understanding of the necessary conditions for it to occur, and far more political wisdom than we have recently seen.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
