4/29/2017 WhatEndedtheGreatDepression?

FoundationforEconomicEducationWorkingforafreeandprosperousworld

What Ended the Great Depression?

(/people/burtonwfolsom/)
Burton W. Folsom (/people/burtonw
folsom/)
Wednesday, February 24, 2010

W hatfinallyendedtheGreatDepression?Thatquestionmaybethemostimportantineconomichistory.If
wecananswerit,wecanbettergraspwhatperpetuateseconomicstagnationandwhatcuresit.

TheGreatDepressionwastheworsteconomiccrisisinU.S.history.From1931to1940unemploymentwas
alwaysindoubledigits.InApril1939,almosttenyearsafterthecrisisbegan,morethanoneinfiveAmericansstill
couldnotfindwork.

OnthesurfaceWorldWarIIseemstomarktheendoftheGreatDepression.Duringthewarmorethan12million
Americansweresentintothemilitary,andasimilarnumbertoiledindefenserelatedjobs.Thosewarjobs
seeminglytookcareofthe17millionunemployedin1939.Mosthistorianshavethereforecitedthemassive
spendingduringwartimeastheeventthatendedtheGreatDepression.

SomeeconomistsespeciallyRobertHiggs(http://www.independent.org/store/book_detail.asp?bookID=65)
havewiselychallengedthatconclusion.Letsbeblunt.Iftherecipeforeconomicrecoveryisputtingtensof
millionsofpeopleindefenseplantsormilitarymarches,thenhavingthemmakeordropbombsonourenemies
overseas,thevalueofworldpeaceiscalledintoquestion.Intruth,buildingtanksandfeedingsoldiersnecessary
asitwastowinningthewarbecameacrushingfinancialburden.Wemerelytradeddebtforunemployment.The
expenseoffundingWorldWarIIhikedthenationaldebtfrom$49billionin1941toalmost$260billionin1945.
Inotherwords,thewarhadonlypostponedtheissueofrecovery.

EvenPresidentRooseveltandhisNewDealerssensedthatwarspendingwasnottheultimatesolutiontheyfeared
thattheGreatDepressionwithmoreunemploymentthaneverwouldresumeafterHitlerandHirohito
surrendered.YetFDRsteamwasblindlyweddedtothefederalspendingthat(asIargueinNewDealorRaw
Deal?)hadperpetuatedtheGreatDepressionduringthe1930s.

FDRhadhaltedmanyofhisNewDealprogramsduringthewarandheallowedCongresstokilltheWPA,the
CCC,theNYA,andothersbecausewinningthewarcamefirst.In1944,however,asitbecameapparentthatthe
Allieswouldprevail,heandhisNewDealerspreparedthecountryforhisNewDealrevivalbypromisingasecond
billofrights.IncludedinthePresidentspackageofnewentitlementswastherighttoadequatemedicalcare,a
decenthome,andausefulandremunerativejob.Theserights(unlikefreespeechandfreedomofreligion)
imposedobligationsonotherAmericanstopaytaxesforeyeglasses,decenthouses,andusefuljobs,butFDR
believedhissecondbillofrightswasanadvanceinthinkingfromwhattheFoundershadconceived.

RooseveltsdeathinthelastyearofthewarpreventedhimfromunveilinghisNewDealrevival.ButPresident
HarryTrumanwasonboardformostofthenewreforms.InthemonthsaftertheendofthewarTrumangave
majorspeechesshowcasingafullemploymentbillwithjobsandspendingtobetriggeredifpeoplefailedtofind
workintheprivatesector.Healsoendorsedanationalhealthcareprogramandafederalhousingprogram.

But1946wasverydifferentfrom1933.In1933largeDemocraticmajoritiesinCongressandpublicsupportgave
FDRhisNewDeal,butstagnationandunemploymentpersisted.Bycontrast,TrumanhadonlyasmallDemocratic
majorityandnomajorityatallifyousubtractthemoreconservativesouthernDemocrats.Plus,thefailureof
FDRsNewDealleftfewerAmericanscheeringforanencore.

InshorttheRepublicansandsouthernDemocratsrefusedtogiveTrumanhisNewDealrevival.Sometimesthey
emasculatedhisbillsothertimestheyjustkilledthem.

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SenatorRobertTaftofOhio,oneoftheleadersoftheRepublicansouthernDemocratcoalition,explainedwhyhe
votedagainstmuchoftheprogram:Theproblemnowistogetproductionandemployment.Ifwecanget
production,priceswillcomedownbythemselvestothelowestpointjustifiedbyincreasedcosts.Ifweholdprices
atapointwherenoonecanmakeaprofit,therewillbenoexpansionofexistingindustryandnonewindustryin
thatfield.

RobertWason,presidentoftheNationalAssociationofManufacturers,simplysaid,Theproblemofourdomestic
economyistherecoveryofourfreedom.

AlfredSloan,thechairmanofGeneralMotors,framedthequestionthisway:IsAmericanbusinessinthefuture
asinthepasttobeconductedasacompetitivesystem?Heanswered:GeneralMotors...willnotparticipate
voluntarilyinwhatstandsoutcrystalclearattheendoftheroadaregimentedeconomy.

Taft,Wason,andSloanreflectedtheviewsofmostcongressmen,whoproceededtosquelchtheNewDealrevival.
Insteadtheycuttaxratestoencourageentrepreneurstocreatejobsforthereturningveterans.

Aftermanyyearsofconfiscatorytaxes,businessmendesperatelyneededincentivestoexpand.By1945thetop
marginalincometaxratewas94percentonallincomeover$200,000.Wealsohadahighexcessprofitstaxthat
hadabsorbedmorethanonethirdofallcorporateprofitssince1943andanothercorporatetaxthatreachedas
highas40percentonotherprofits.

In1945and1946Congressrepealedtheexcessprofitstax,cutthecorporatetaxtoamaximum38percent,andcut
thetopincometaxrateto86percent.In1948Congressslicedthetopmarginalratefurther,to82percent.

Thoserateswerestillhigh,buttheywerethefirstcutssincethe1920sandsentthemessagethatbusinessescould
keepmuchofwhattheyearned.Theyear1946wasnotwithoutupsanddownsinemployment,occasionalstrikes,
andrisingprices.Buttheregimecertaintyofthe1920shadlargelyreturned,andentrepreneursbelievedthey
couldinvestagainandbeallowedtomakemoney.

AsSears,RoebuckandCompanyChairmanRobertE.Woodobserved,afterthewarwewerewarnedbyprivate
sourcesthataseriousrecessionwasimpending....Ihaveneverbelievedthatanydepressionwasinstoreforus.

Withfreermarkets,balancedbudgets,andlowertaxes,Woodwasright.Unemploymentwasonly3.9percentin
1946,anditremainedatroughlythatlevelduringmostofthenextdecade.TheGreatDepressionwasover.

Gettrained

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endedthegreatdepression%2F&__hstc=98883969.133e1d08ba3ff3c3d2a078b37e3d

Burton W. Folsom (/people/burtonwfolsom/)

B urtonFolsom,Jr.isaprofessorofhistoryatHillsdaleCollegeandauthor(withhiswife,
Anita)ofFDRGoestoWar.HeisamemberoftheFEEFacultyNetwork
(https://fee.org/about/faculty/).

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