A guest post by:
Leonard Weinstein, ScD
August 16, 2011
The Great Depression, starting about 1929 and running through the 1930’s, had several root causes, including major government actions and the bubble of buying stock on inadequate margin. I will not get into details on the causes, as the issue of the present write-up is how we got out of the Depression.
It is clear that President Roosevelt’s actions to spend large amounts of money on public projects in the 30’s did cause short-term job increases, and many of the projects had a valuable long-term benefit, especially infrastructure development. However, these gains did not end the Great Depression, and may have made it more severe and last longer than otherwise.
Many think WWII caused the end, and this is in fact almost certainly true. However, how the war ended the Depression is badly misunderstood. Some think that just the fact of massive government spending, and temporary employment supporting the war effort was the mechanism. That is wrong.
There were three major factors that ended the Depression:
- The destruction during the war of most of the industrial capacity of most of the major industrial powers (including in Europe and Japan), but not including the United States, left us with a near monopoly on production of major items. In fact, many of the factories greatly built up their capacity for the war, and the increased capacity was used to advantage after the war. This advantage lasted several decades, and gave us a long head start on establishing markets.
- A pent up needs for automobiles, appliances, and many other items developed due to the manufacturing plants converting to manufacturing supplies for the war. After the war, the conversion back allowed huge amounts of sales of these items. This lasted long enough to establish many businesses solidly.
- The GI bill allowed huge numbers of military personal to buy homes, and even more important, go to collage. The large increase in well-educated people resulting had a major effect on the level of technology that could be developed. The middle class grew to a much larger percent of the population, and consumer buying increased greatly.
There were other causes of the end of the depression, but the three mentioned were the major ones. If increased government spending is used to try to stimulate an economy, it may decrease the depth of the lowest level of a recession, and if natural cycles then result in recovery (economies go in cycles up and down due to the chaotic nature of economics), the net effect may be desirable. However, large and long lasting recessions, or depressions are not helped by realistic spending stimulation. The mechanisms similar to the three above are simply not there. The basic mechanisms of modern economies are best helped by actions that help businesses, not direct help to people. A lot of complex and even uncertain rules, high taxes, and the like are all negative factors to business growth. Demands for wages higher than are competitive on international scales drive business either out of the country or out of the market. Making the assumption that because we grew after WWII, and continued to grow for many years after, misses the point that worldwide major industrial economies are now fully recovered, and even the more backward countries are developing a lot. Considerable lower cost labor is available in many countries, and with good transportation means, products from those countries are more competitive. We need to change our paradigm to overcome those factors, but we have to realize that the gravy days of old are gone.