Louis Proyect: The Unrepentant Marxist

September 24, 2011

Did World War Two end the Great Depression?

Filed under: economics,financial crisis,war — louisproyect @ 9:08 pm

When commentators continue to refer the most recent financial crisis as “the Great Recession”, they are obviously invoking the other crisis qualified by the adjective “great”, namely the one that began after the stock market crash of 1929. The intractable nature of the current slump has many economists invoking FDR’s New Deal even as the reality sank in long ago that Obama was much more like Herbert Hoover than FDR.

Now some economists—either professional or amateur like me—question whether the accouterments of the New Deal would have had any real impact at all. And one of them has dared to suggest how the Great Depression ended in terms conveyed to me as a new recruit to the Trotskyist movement in 1967, namely that it was WWII rather than the CCC, etc. that was responsible for the recovery. In a November 10, 2008 op-ed column titled “Franklin Delano Obama?”, Paul Krugman wrote:

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

Harry Magdoff made the same argument in an open letter to an economist whose article included a sentence that troubled him: “Today’s neo-liberal state is a different kind of capitalist class than the social-democratic, Keynesian interventionist state of the previous period.” In questioning the value of Keynesian interventions of the sort that are found on a daily basis in places like the Nation Magazine, Harry concurred with Krugman:

The onset of a marked recession [in 1937-38] after years of pump-priming startled Washington. Questions began to be raised about the possibility of stagnation in a mature capitalism, the retarding effect of monopolistic corporations, and other possible drags on business. These concerns faded as war orders flowed in from Europe, and eventually they disappeared when the United States went to war. The notion of the “Keynesian Welfare State” has tended to disguise the fact that what really turned the tide was not social welfare, Keynesian or otherwise, but war. In that sense, the whole concept of Keynesianism can be mystification.

Of course, America’s recovery after the start of WWII was in itself a perverse confirmation of the need to adopt Keynesian stimuli, which was the point of Krugman’s column. Liberal economists advocate deficit spending to stimulate the economy but prefer that it be used to build bridges rather than bomb them.

As Randolph Bourne put it during WWI, “war is the health of the state”. While he was writing about the ideological conformity that takes place during war, you might as well extend that to the health of the economy as well. For the entire 20th century and continuing into the 21st, military spending has served in a bastardized Keynesian fashion to keep the system afloat.

Indeed, the late Lynn Turgeon—a long-time subscriber to Michael Perelman’s PEN-L mailing list—wrote a book titled “Bastard Keynesianism: The Evolution of Economic Thinking and Policy-Making” in 1996 that had an introduction with the lead sentence: “The economics of World War II represented a thundering validation of Keynesian economics, as expounded in Keynes’s General Theory”. Indeed, it didn’t really matter which economist a war economy named as its chief guru, as long as it put into practice the kind of massive state spending that was synonymous with Keynes. As Michael Perelman once put it in a message to the post-Keynesian Economics mailing list (now defunct), “Like Lynn Turgeon, I was impressed with Silverman, Dan P. 1997. Hitler’s Economy: Nazi Work Creation Programs, 1933-1936 (Cambridge: Harvard University Press). The book suggests that, if you filter out the racist elements, Hitler’s economic policy were, in effect, a clearer version of the New Deal.”

Apologists for the capitalist system would obviously be troubled by any attempts to connect WWII with the end of the Great Depression since it leads to a political conclusion that condemns the very system they believe in. If it takes millions of dead soldiers and civilians to produce a recovery, isn’t that in and of itself an imperative to overthrow that system?

One strategy is to debunk the notion that the war did lead to a recovery. Two pillars of the establishment—Brad DeLong and Lawrence Summers—have made such an attempt in a 1988 Brookings Institution paper titled “How Does Macroeconomic Policy Affect Output?” They write:

By the time World War II began and the government began to exert command over the economy, more than five-sixths of the Depression decline in output relative to the trend had been made up. It is hard to attribute any of the pre-1942 catchup of the economy to the war. Neither the federal government’s fiscal deficit nor the surplus on trade account became an appreciable share of national product before Pearl Harbor.

Christine Romer, who was quoted in a new book to the effect that the Obama White house was a male chauvinist pig sty dominated by men like Lawrence Summers, agreed with DeLong and Summers in a 1991 paper titled “What Ended the Great Depression” that begins:

Between 1933 and 1937 real GNP in the United States grew at an average rate of over 8 percent per year; between 1938 and 1941 it grew at an average rate of over 10 percent per year. By any prewar or postwar metric these rates of growth are spectacular, even for an economy pulling out of a severe depression.

In the December 1994 Journal of Economic History, J.R. Vernon answers the claims of Summers, DeLong and Romer in a paper titled “World War II Fiscal Policies and the End of the Great Depression”. While no Marxist (and not even a radical by any appearances), Vernon makes some essential points. To start with, he stresses that more than half of the recovery took place between 1941 and 1942—in other words when war spending had geared up. Government purchase of goods and services ticked up by 54.7 percent in this one-year period and continued to increase as the actual war began. Furthermore, in examining Romer’s figures, he comes to the conclusion that by the fourth quarter of 1940, only 46 percent of the recovery had been accomplished.

In a way, all of this is moot for several reasons. To start with, even if Romer, Summers and DeLong were correct there is no possibility of a New Deal inspired recovery is in the works. If there is anything that the Obama presidency has demonstrated, it is that Herbert Hoover rather than the New Deal inspires it.

And if you take Krugman at his word that a world war could do the trick, it is precluded by the nuclear facts on the ground. American capitalism had no compunction about blowing up most of Germany and Japan in the course of preparing for postwar reconstruction led by American investments, but in the epoch of the hydrogen bomb only the cockroach will be left to do business.


  1. It certainly wasn’t the New Deal that ended the Great Depression and nor was it the War as Keynesianism either. But what the War did was completely break apart the previous political arrangements that had become a fetter to further development. Because of the War the whole poltical superstructure was blown away and under US tutelage economic globalisation in the name of the containment of socialism (at home and in the form of the Stalinised Soviet Union) was able to take off.

    It is difficult to see what could possibly trump globalisation apart from socialism and of course to get there would require the destruction of the current political arrangements by extreme violence. Most likely, if there is not to be socialism, is perhaps some extended period of steep decay like the Dark Ages of yore from which there may be no escape.

    Keynesianism today is impossible. The depression is being hugely deepened by the bank bail out which is sucking all activity out of the economy by valorising the counterfeit bonds of Wall Street. For states to borrow this money back for investment would cost truly eye-watering rates of interest and would simply add to the debt and thereby the depression.

    Comment by David Ellis — September 24, 2011 @ 9:29 pm

  2. GDP in 1929 was 87.3 [chained 1937] billion dollars (NIPA Table 1.1.6A)
    GDP in 1936 was 87.4 billion dollars.
    GDP in 1940 was 104.3 billion dollars.

    Production of goods and services had most certainly recovered long before Pearl Harbor.

    Comment by D R — September 24, 2011 @ 9:58 pm

  3. Lou,

    According to the historian David Kennedy, “in 1940, after more than a decade of depression…nine million workers were out of work at the time of the fall of France…Average plant utilization was about 40 hours a week. As much as 50 percent of capacity stood idle in automobile manufacturing plants alone. As the war crisis now snapped the drooping American economy to attention, all those dormant resources could be swiftly directed to martial purposes with minimal disruption to the fabric of peacetime life. In that sense, not only did the war rescue the American economy from the Depression; no less significant, the Depression had in turn poised the economy for phenomenally rapid conversion to war production.” [Freedom From Fear” Oxford University Press, page 617]

    Kennedy’s book has plenty of references from those contemporary theorists-policy makers about what the condition the economy was in as well as the first generation of scholars looking back on the economic conversion. His material on government procurement is consistent with Vernon’s analysis. Iirc, although it’s been many years since I read it, Dudley Dillard’s “The Economic Development of the North Atlantic Community” also intimates it was the war that ended the Depression.


    Comment by Eubulides — September 24, 2011 @ 10:33 pm

  4. Romer made her reputation adjusting economic statistics in a way that minimized the effectiveness of Keynesian-type policies. I recall her debating Robert Gordon, who seem to do a good job of minimizing her work.

    Comment by michael perelman — September 24, 2011 @ 11:26 pm

  5. Very funny, Louis.

    Of course I presume that we all care about unemployment, in spite of the fact that not a word of it appeared in your essay. It hardly requires many words to say “It’s true that output had recovered before Pearl Harbor, but we had yet not reached full employment.”

    More seriously, the claim that the “recovery” was only half or so complete by the end of 1940 doesn’t mean that the war ended the depression any more than Fat Man and Little boy ended the war. Yes, the use of nuclear weapons came at the tail end of the war, and perhaps the bombings hastened things up. Japan, however, was already doomed.

    If we take the 1929 unemployment rate (3.2 percent) to be “full”, then by 1933, we had 21.7 percentage points of slack. From 1933 to 1937, the unemployment rate fell 10.6 percentage points. (http://www2.census.gov/prod2/statcomp/documents/CT1970p1-05.pdf Series D 85-86) At that rate, we’d have found full employment by 1941 anyway. If you wish to argue that there was a disastrous error in policy in 1937 that delayed full recovery– I’m open to that. If you want to argue that the New Deal didn’t have anything to do with the pre-war fall in unemployment– I’m open to that as well. But make an argument!

    Comment by D R — September 25, 2011 @ 12:03 am

  6. The period of open warfare (guns shooting), which includes the 1939-1945 interval labeled “World War 2”, began in 1931 with the Japanese invasion of Manchuria, and ended in 1953 with the armistice ending the shooting of the Korean War.

    The period of 1931-1937 was one of intermittent warfare between China and Japan, which developed into the total war of 1937-1945, known as the Second Sino-Japanese War. By 1937, China was buying U.S. military equipment (and even mercenary services, e.g., “The Flying Tigers”).

    Japan, building up its military during the 1930s, bought oil and steel from the U.S. until the embargo of these about a year before the Pearl Harbor attack. The British also ordered military supplies from the U.S. in the mid-late 1930s (e.g., aircraft; the P-51 was originally a British commission); and the U.S. itself began a rearmament in about 1937 (e.g., concern over the exposure of the US-occupied Philippines to Japanese expansion; and control of western Pacific sea lanes).

    So, the U.S. had a steadily growing export business in steel, oil, and military equipment during the 1930s. After about 1936, the rearmament of the U.S. itself greatly increased the demand for these products. The expanding crisis in Europe from 1937-1939 (Spanish Civil War, Munich, anschluss, Hitler-Stalin Pact) added to American fear/isolationism, and also saw increased British (and Continental) demands for US-manufactured military supplies; and this export trade was organized in 1941 as the Lend-Lease program (till 1945, and included the UK, USSR, China, France, and Allied Nations).

    There was steadily increasing demand for US industrial products and military equipment and supplies for nearly a decade before the U.S. itself entered the fighting of WW2. This economic stimulus moved the country out of the Great Depression. Based on this history, it seems fair to argue that the magnitude of this business (investment from domestic and foreign sources) was the necessary stimulus to change the economic state of the U.S. (end the depression), but it does not seem necessary — from a strictly economic point of view — that the industrial production stimulated by the new demand be primarily for war material, and that there be wars raging to rapidly consume the output stream, and maintain an continuing demand.

    However, it may be hard to imagine a “peaceful” economic cycle of equal magnitude and vigor that could have been devised to hoist the U.S. economy out of the Great Depression and accelerate it into its Post-War Boom of 1953-1971 (or 1977). It is interesting to note that the value of the market represented by the New York Stock Exchange did not recover its value at its 1929 peak (before the October crash) until 1953. In this sense the Great Depression spanned from Hoover to Ike. The slowly accelerating demand for U.S. steel, oil and arms during the 1930s lifted the U.S. economy somewhat out of the 1933-1935 doldrums by the late 1930’s, when the stimulus of U.S. rearmament jolted it into a degree of growth that could be thought of as ending the depression by the start of U.S. participation in the fighting of World War 2 (1942). War keynesianism had a Film Noir Period postwar recess, with a recession during 1946-1949 during the short period of WW2 demobilization, prior to its reactivation for the Korean War, and continuing thereafter.

    As noted, the war keynesianism of the ~1938-1945 period finally generated enough wealth by 1953 to restore the market value to its 1929 pre-crash level. Twenty-five years is a long time to wait for your stock portfolio to recover from a crash. Perhaps the sting of this, plus the revelation of how an economy could be hyper-stimulated by war (the amphetamine of the economy?), are what has caused the political-economic management class of the U.S. to maintain the Pentagon capitalism we have.

    Comment by Manuel Garcia, Jr. — September 25, 2011 @ 12:07 am

  7. Thanks to Manuel for the profound contribution.

    Comment by louisproyect — September 25, 2011 @ 12:09 am

  8. D.R., I am not sure how old you are but I am 66 and my mom who lived through the depression told me lots of stories about what it was like. Her family had chicken once a month and that was it. My father joined the army in 1939 because he couldn’t find work. After the war started, things began to hum again. No amount of statistics mongering will change my mind on this. I only cited Vernon to give people a sense of the debate. More to the point in many ways, WWII was the key to American domination after 1945. Those days are gone forever. No amount of Jared Bernstein’s advice to the ruling class will change that.

    Comment by louisproyect — September 25, 2011 @ 12:18 am

  9. The other thing is that the right wing did everything they could during that period to obstruct and sabotage the New Deal with the Supreme Court and its “Four Horsemen” as its main vehicle tossing out the National Recovery Act and various other key programs. This is what led FDR to his crude, misguided, but well intentioned, scheme to pack the Court.

    Ironically much of this critique of the New Deal comes not so much from the far left but from right wing apologists like John Flynn for whom this trope was a stock in trade. Since Reagan, of course, it’s been all the rage among neo-cons and the like. If the forces these critics are rooted in had done less to wreck it, however, maybe the New Deal could have accomplished more than it did. Melvin Urofsky’s recent biography of Brandeis has an excellent overview of the struggle between FDR, the right wing and the courts over the New Deal.

    Comment by Tom Cod — September 25, 2011 @ 12:24 am

  10. D.R. mistakes Pearl Harbor as the beginning of the war. U.S. planners at the State Department and other government agencies had already decided that U.S. intervention in the war was going to happen long before the end of 1941 and started making the appropriate preparations.

    Comment by Binh — September 25, 2011 @ 12:39 am

  11. Um. Not that we care about output numbers around here, but from 1931 to 1937, net exports fell from $200 million to $100 million. Gross exports rose from 4.4 percent of GDP to… 4.4 percent (whoops!) We are talking about a $700 million increase in exports over six years– during which time GDP rose more than $17 billion. I don’t think that it is fair to say that the fall in unemployment over this time can be explained by “a steadily growing export business.”

    Nor does domestic military spending explain it, unless you believe a $300 million increase in “defense” expenditures stimulated many billions in economic activity. That’s one “profound” fiscal multiplier.

    The “1933-1935 doldrums” saw 9.9 percent annualized growth in GDP and knocked off 4.8 percentage points of unemployment. Oh, if only we could suffer such economic troubles today.

    Comment by D R — September 25, 2011 @ 12:46 am

  12. The “1933-1935 doldrums” saw 9.9 percent annualized growth in GDP and knocked off 4.8 percentage points of unemployment. Oh, if only we could suffer such economic troubles today.

    D.R., you are fixated on numbers. You really need to read some James T. Farrell or John Steinbeck. If things were improving so rapidly, they would have not written the novels they did.

    Comment by louisproyect — September 25, 2011 @ 1:11 am

  13. I am fixated on arguments which do not fit the facts. I apologize if this upsets you.

    Comment by D R — September 25, 2011 @ 1:30 am

  14. Of course things picked up just prior to the war as the wealthy began to invest in armaments and preparation for it but had it not been for the actual war that would only have ended in bankruptcy as the recent bail out has done. The war was necessary not to kick start the economy, it couldn’t do that per se otherwise Keynes would be right and we know he isn’t, but to remove the political barriers that had made further economic development possible. America knocked some heads together under the policy of containment and under its leadership globalisation emerged. There is nowhere politically left for imperialism and capitalism to go except backwards as we see globalisation being reversed and the Western imperialist nations once again at each others throats. They might manage one more joint effort to obliterate China but that will just be the prelude to them obliterating each other. However, first things first. The working class will get the first bite at the cherry. It will need to take it.

    Comment by David Ellis — September 25, 2011 @ 10:05 am

  15. What I am trying to say is that it was not the economic activity of the war that gave rise to the post-War boom but the new political arrangements resulting from it that pushed aside the old political order including the British empire and the dominance of European capital that had become a vice-like fetter. We mustn’t forget also that without the imperialist policy of containment being met with one of self-containment by the Stalinists then there wouldn’t have been no post War capitalism to have a post War boom. The world would long ago have been socialist and maybe by now stateless but that is conjecture of course. Globalisation was a possibility always open to capitalism and after two world wars thanks to the US they took it and as we know no system slips from the world stage until its potential has been completely exhausted as it has now.

    Comment by David Ellis — September 25, 2011 @ 10:19 am

  16. If you say that it was the New Deal or World War Two that ended the Depression then you are not doing political economy you are doing formal bourgeois economics. This crisis for instance isn’t about some abstract class defending an abstract system for the hell of it. It is not a competition between reasons it is bald class struggle. The banks were bailed out because most of the wealth of the super rich is tied up in its liabilities. Had the states not guaranteed those toxic liabilities based on counterfeit Ponzi scheme style bonds then the rich would not be the rich anymore and the state would not have been the capitalist state. They are defending the established political economic arrangements and are necessarily driving the world economy into depression to do it. THey don’t want to but they have to. The keynesians today are peddling the most revolting illusions. If a Keynesian government of the left came to power the result would be hyper inflation and stagnation and the rise of fascism. Borrowing and stimulating (printing money) is just as big a lie as the idea that you can cut your way out of this situation. The bankers and their super wealthy clients and bought up politicians must be dealt with first before the foundations for a new economic arrangement can be put in place.

    Comment by David Ellis — September 25, 2011 @ 10:31 am

  17. For completeness (of an earlier post), I should mention that the shooting zone during the 1945-1950 interval, of the 1931-1953 period of continuous war, was the civil war in China between the Communist (CPC) and Nationalist (KMT = Kuomintang) forces.

    A chronological list of the shooting zones during the “23 year world war” of 1931-1953 is:

    1931-1937, Japanese invasion of Manchuria,

    1932-1939, Soviet-Japanese Border Wars (in northern Manchuria, with heavy clashes in 1938-1939),

    1935-1936, Second Italian-Ethiopian War (Italian invasion),

    1937-1939, Spanish Civil War (with German, Italian and Russian interventions),

    [23 August 1939, Molotov-Ribbentrop Pact (Russo-German nonaggression pact)],

    1939-1940, Winter War (Soviet-Finnish war initiated by Nov. ’39 Soviet invasion),

    1939-1945 World War 2:
    — 01 September 1939, German invasion of Poland from the west,
    — 17 September 1939, Soviet invasion of Poland from the east,
    — (Winter War occurs in parallel with WW2, 30 November 1939 to 13 March 1940),
    — 10 May 1940, German invasions into, and war with, countries of Western Europe,
    — 10 June 1940 to 16 May 1943, Desert War (Allied-Axis war in North Africa),
    — 28 October 1940 to 30 April 1941, Greco-Italian War,
    — 06 April 1941, German invasions of Greece and Yugoslavia,
    — 22 June 1941 German invasion of Russia (Russo-German War, 1941-1945),
    — 07 December 1941, The Pacific War (Japanese War with America, and Allies),
    — 11 December 1941, Hitler declares war against the USA (now an Allied power),
    — 08 November 1942, US invasion of French North Africa (U.S. joins Desert War),
    — 05 July to 23 August 1943, Battle of Kursk (turning point of Russo-German War),
    — 03 September 1943, Allied invasion of Italy,
    — 06 June 1944, Invasion of Normandy (Allies invade Occupied Europe),
    — 08 May 1945, Victory in Europe Day (for Allies),
    — 15 August 1945, Victory over Japan Day (end of WW2 as a shooting war),
    — 02 September 1945, Surrender of Japan (formal surrender ceremony).

    1945-1950, continuation of Chinese Civil War (1927-1949/1950) (CPC vs. KMT),

    1946-1954, First (or French) Indochina War (a colonial war in Vietnam),

    25 June 1950 to 27 July 1953, Korean War (cease-fire armistice, no peace treaty).

    The industrial capacity of the the U.S.A. (“the arsenal of democracy”) was able to supply steel, oil, guns, trucks, airplanes and boats, as well as numerous other products (e.g., wheat) useful to many of the combatants, including itself, during the 23 year period of war. Since the U.S.A. was only in the fight for a short but intense period (close to 3 years and 8 months within 1941-1945), it was in a better position than other industrial nations (e.g., UK) to capitalize on the export trade stimulated by the various overlapping armed conflicts between the major European and Asian powers, which also drew in small developed nations (e.g., Belgium, Netherlands, Denmark, Norway) and the Anglo-Pacific nations (Australia, New Zealand, Tasmania).

    While the New Deal certainly had a beneficial effect on the US public and economy, as a domestic program to alleviate some of the personal strain of enduring the Great Depression, there can be no doubt that the economic stimulus provided by urgent foreign demands for American industrial and agricultural products, arising from the acceleration of consumption in Europe and Asia due to a long period of large-scale warfare, provided a huge stimulus to the American economy after the mid 1930s. This war Keynesianism ended the Great Depression in the United States.

    The Marshall Plan (1948-1951) can be seen as a “peaceful” version of war Keynesianism. It was born as the Economic Cooperation Act (ECA) of April 3, 1948. The U.S.A. gave a devastated Europe a total of $13B (“This $13 billion was in the context of a U.S. GDP of $258 billion in 1948, and was on top of $12 billion in American aid to Europe between the end of the war and the start of the Plan that is counted separately from the Marshall Plan. The Marshall Plan was replaced by the Mutual Security Plan at the end of 1951.” — from http://en.wikipedia.org/wiki/Marshall_Plan).

    Marshall Plan aid (money) was supplied as grants, loans and credits, which were administered jointly by local governments and American ECA envoys; the envoys were usually American businessmen and they acted as advisors on how to spend the money. It seems obvious that “the Marshall Plan aid was mostly used for the purchase of goods from the United States,” since Europe was largely broke and broken, and since this repatriation of US dollars was clearly one of the intentions of the economic policy behind the program.

    Anyone who has ever primed a hand-pump at a well, to get a drink of water, will understand the basis of Keynesian economics. To prime a hand-pumped well, one pours some water (scooped from a trough, under the well head, that captures water pumped up earlier; or water carried to the pump from elsewhere) down the pump’s pipe, to fill any air gap and provide a column of water that will transmit the suction force, imparted by the pumping at the top, to the body of water down below, so it rises.

    The Marshall Plan was the US’ way to fix the economic pump in Europe, and prime it with a total investment of $13B over four years, so the economic equivalent of a solid water column would form, and self-sustaining economic cycling (“up flow” = “trade”) would resume, once “pumped.” It was understood that the expenditure of the priming charge (“up front” investment of $13B) would be recovered subsequently along with much more return business into the United States.

    Chomsky has characterized the Marshall Plan as a US government (i.e., taxpayer) subsidy to US business through the mechanism of a recovery plan for European economies. Reanimating the European economies so they could generate new and growing demands for US products, for an extended postwar period (ongoing), was another (smart) Keynesian tactic for growing the U.S. economy.

    In a similar way, the American investment into a build-up of US military bases and forces maintained in Japan after 1949, and originally intended to support the campaigns of the Korean War, pump-primed the Japanese economy. Japan had regained its nominal independence on 8 September 1951, with the signing in San Francisco of the Treaty of Peace with Japan (the occupation by US forces was over, and World War 2 was officially ended).

    One reference notes:

    “Military hostilities in the Korean peninsula further boosted the economy in 1950 because the U.S. government paid the Japanese government large sums for ‘special procurement.’ These payments amounted to 27% of Japan’s total export trade.”

    (from http://en.wikipedia.org/wiki/Japanese_post-war_economic_miracle).

    With the return to independence in 1951, and the complete introversion of focus of postwar Japan into productivity, the economy was grown from its Korean War period of American priming, under the careful supervision of the government in coordination with an industry-banking-labor combine, with the use of planning, protectionism, a social contract for labor security, and a national culture of intense personal dedication to work.

    While the reviving postwar Japan could certainly develop increasingly more demands for American products, the Keynesian kick to the US economy from a reanimated Japan was not a great as many Americans wanted, because the Japanese are hard workers and savers whose yearning for security and prosperity made them fashion protective barriers against the infiltration of foreign control brought about by the Japanese purchase of foreign goods, and the allowing of investments in Japan by foreigners; while simultaneously suctioning in foreign revenue through its aggressive export business of “lower cost” “high quality” manufactured goods.

    In my view, Keynesianism “works” when it is big enough, and that can mean “really big”, like the American pump priming of 27% of Japanese GDP in 1950. A 27% stimulus into today’s $14T US GDP would amount to $3.8T.

    A $700B stimulus, equivalent to the amount of “troubled assets” the TARP law allows the U.S. Treasury to buy or insure, would be 5% of GDP, and average out to about $2333/person (for 300 million people). Imagine what $2300 of “free cash” (un-taxable) FROM the IRS to every taxpayer (and non-payer) by New Year’s Day would do to the national economy — and mood. After all, George W. Bush used to say: “It’s not the government’s money, it’s the people’s money.”

    Comment by Manuel Garcia, Jr. — September 25, 2011 @ 11:24 am

  18. I should have included the 1937-1945 Sino-Japanese War in my list, earlier.

    Comment by Manuel Garcia, Jr. — September 25, 2011 @ 11:41 am

  19. I unconsciously substituted Japanese GDP in 1950 for its “export trade” that year. I don’t the numbers for either, but the point I was trying to make about the size of a useful stimulus can be understood without reconciling this (unknown) numerical inconsistency. MG, Jr.

    Comment by Manuel Garcia, Jr. — September 25, 2011 @ 11:56 am

  20. Where would this $700 billion come from exactly. Corporations are hording their cash and liquidating their investments where they are not asset stripping rivals and destroying jobs and the super wealthy are in a frenzied struggle to get their money out of the bankrupt banks before it is clear that the bankrupt nation states and the bankrupt people have no more to give. To raise $700 billion you would either have to print money until it became valuless which is a technical default that ruins wages, pension, savings, public spending or borrow it at eye-watering rates from the super rich to the same effect. That way lies Weimar style agony. I would support a government that said it was going to tax the rich and invest in public spending and production but will always insist that until the bail out of the banks is halted and a national bank established to lend to the pubic at affordable rates and facilitate investment according to the democratic will then there can be no escape from economic collapse. We must always ensure that our revolutionary program remains distinct from the keynesians who will succeed only in utterly discrediting socialism if it is dressed up in pseudo left language.

    Of course when Bush said it was the people’s money he didn’t mean the working class he meant what they euphemistically call the `wealth creators’ or what we know as capitalist bastards.

    Comment by David Ellis — September 25, 2011 @ 12:32 pm

  21. Oops, something I must note correctly: Spanish Civil War, 17 July 1936 to 1 April 1939.

    Comment by Manuel Garcia, Jr. — September 25, 2011 @ 12:40 pm

  22. I found this an informative discussion with valid points being made on both sides.

    As I understand it Keynes’ policy proposals for getting out of the depression went well beyond pump-priming (especially if they are described as merely creating money) which was seen as one aspect that needed to integrated into a recovery program, implying that the deficit spending need to be specifically targeted towards investments that create employment (ie: public works.) The recovery program also needed to be accompanied by significant institutional reforms particularly of a financial type, as well as reforms that increased labour’s bargaining power and work and life conditions. As was noted even Roosevelt’s watered-down Keynesian-inspired New Deal was only partially and erratically implemented. One reason for the incompleteness was undoubtedly the fierce resistance of the organized American right to institutional reform. But also as Howard Zinn pointed out in “Limits of the New Deal” was there a considerable lack of temerity and imagination in Roosevelt and establishment Democrats.

    It is perhaps worth noting that the side(s) who are arguing against a Keynesian style recovery program are not here offering an alternative program of their own.

    Comment by Bernard Leask — September 25, 2011 @ 1:23 pm

  23. It is perhaps worth noting that the side(s) who are arguing against a Keynesian style recovery program are not here offering an alternative program of their own.

    In spite of the complaints of some of your arch-conservatives, Roosevelt is not preparing for a soviet transformation of the United States.

    The NRA aims not to destroy but to strengthen the foundations of American capitalism by overcoming your business difficulties. Not the Blue Eagle but the difficulties that the Blue Eagle is powerless to overcome will bring about communism in America. The “radical” professors of your Brain Trust are not revolutionists: they are only frightened conservatives. Your president abhors “systems” and “generalities.” But a soviet government is the greatest of all possible systems, a gigantic generality in action.

    The average man doesn’t like systems or generalities either. It is the task of your communist statesmen to make the system deliver the concrete goods that the average man desires: his food, cigars, amusements, his freedom to choose his own neckties, his own house and his own automobile. It will be easy to give him these comforts in Soviet America.

    Most Americans have been misled by the fact that in the USSR we had to build whole new basic industries from the ground up. Such a thing could not happen in America, where you are already compelled to cut down on your farm area and to reduce your industrial production. As a matter of fact, your tremendous technological equipment has been paralyzed by the crisis and already clamors to be put to use. You will be able to make a rapid step-up of consumption by your people the starting point of your economic revival.

    You are prepared to do this as is no other country. Nowhere else has the study of the internal market reached such intensity as in the United States. It has been done by your banks, trusts, individual businessmen, merchants, traveling salesmen and farmers as part of their stock-in-trade. Your soviet government will simply abolish all trade secrets, will combine all the findings of these researches for individual profit and will transform them into a scientific system of economic planning. In this your government will be helped by the existence of a large class of cultured and critical consumers. By combining the nationalized key industries, your private businesses and democratic consumer cooperation, you will quickly develop a highly flexible system for serving the needs of your population.

    This system will be made to work not by bureaucracy and not by policemen but by cold, hard cash.

    Your almighty dollar will play a principal part in making your new soviet system work. It is a great mistake to try to mix a “planned economy” with a “managed currency.” Your money must act as regulator with which to measure the success or failure of your planning.

    Your “radical” professors are dead wrong in their devotion to “managed money.” It is an academic idea that could easily wreck your entire system of distribution and production. That is the great lesson to be derived from the Soviet Union, where bitter necessity has been converted into official virtue in the monetary realm.

    There the lack of a stable gold ruble is one of the main causes of our many economic troubles and catastrophes. It is impossible to regulate wages, prices and quality of goods without a firm monetary system. An unstable ruble in a Soviet system is like having variable molds in a conveyor-belt factory. It won’t work.

    Only when socialism succeeds in substituting administrative control for money will it be possible to abandon a stable gold currency. Then money will become ordinary paper slips, like trolley or theater tickets. As socialism advances, these slips will also disappear, and control over individual consumption – whether by money or administration – will no longer be necessary when there is more than enough of everything for everybody!


    Comment by louisproyect — September 25, 2011 @ 1:37 pm

  24. It should be added to the above that in 1934 Trotsky also wrote:


    Of course, the economic superiority of the United States has not disappeared; on the contrary, it has even grown potentially, due to the further disintegration of Europe. But the old forms in which this superiority manifested itself (industrial technique, trade balance, stable dollar, European indebtedness) have lost their actuality: the advanced technique is no longer put to use; the trade balance is unfavourable; the dollar is in decline; debts are not paid. The superiority of the United States must find its expression in new forms, the way to which can be opened only by war.

    Comment by Karl Friedrich — September 25, 2011 @ 4:12 pm

  25. Trotsky was of course right that only war could sweep away the old political arrangements, the old mode (within a mode), the old superstructure, and allow US capitalism to fulfill its promise which it of course did. That promise is now fulfilled and the only new forms that can take us forward are socialist.

    #23 Bureaucratic control of money is of course a complete no-no. Stalin zig-zagged between monetarism and hyper-inflation according to political expediency. A state bank would facilitate investment according to the democratic will and would lend cheaply to small business. The credit cruch proved that in private hands the money supply is not subject to `englightened self-interest’ but becomes a gigantic Ponzi scheme and a counterfeiters charter. However, in bailing out the banks state politicians have bankrupted nations as well. The money supply needs to be in the hands of the state but the state needs to be in the hands of the people.

    Of course, the Keynesian `side(s) are not actually offering an alternative program merely a differently nuanced one to that being offered by the Coalition in the UK and Obama in the US. A full keynesian program is a program for hyper inflation and ruin. A program for austerity for depression and ruin a combination of both a slightly more circuitous route to the same destination.

    A socialist program that reflects objective necessity would, I suggest, be something like this:

    1. Repudiate the bank bail out. Let the private banks go bankrupt. No Bankers Versailles.
    2. One consolidated and nationalised the bank so that investment can be facilitated in accordance with the democratic will and the principles of economic, social and environmental sustainability and so that cheap credit can be made available to small business and others.
    3. Socialise the asset-stripping, cash-hording, job-slashing, investment averse, profiteering monopolies.
    4. Institute a regime of full employment immediately by sharing the available productive work.
    5. Defend desirable and necessary public spending and collect the necessary income tax to pay for it.
    5. Mobilise the labour movement and its allies for a generalised struggle in defence of jobs, wages, pensions, public spending and against inflation, austerity and the ruination of the real economy.

    Comment by David Ellis — September 25, 2011 @ 5:35 pm

  26. I believe that our involvement in World War II may have temporarily boosted the economy at that time with jobs related to the war or women working because of their soldier husbands being gone fighting, but it was also our most expensive.

    Expensive in terms of loss of life for our soldiers, the cost of the Manhattan Project and development of the nuclear bomb and our backing of the rebuilding and occupation of Japan.

    My perspective is interesting because though I’m 43 and wasn’t alive then, my father had me at 51 and was a veteran that liberated the Phillipines from Japanese occupation and would’ve been 94 this year.

    We also turned Japan into a junior America as their system is modeled after ours free market capitalism.

    The problem (the Depression) wasn’t solved by the war because the root cause was the system itself.

    In our capitalist model throughout history we have seen periods of great success and prolonged periods of great failures.

    What Japan went through after the earthquake is an example of a great capitalistic failure.

    TEPCO that owned the nuclear plant had falsified documents in the years leading up to the Fukushima disaster. Why? To make more money at the expense of the public’s and worker safety.

    Just like America it’s always about money first.

    My point is that no event like WW II or any other can fix a system that is perpetually broken.

    Comment by Deborah Jeffries — September 25, 2011 @ 6:16 pm

  27. DR: You are right on the numbers but my answer is – so what? Read what Magdoff said:

    “It’s true Washington economists were delighted with the appearance of Keynes’s The General Theory of Employment, Interest, and Money because it gave them theoretical handles for analysis and policy thinking (e.g.,the offset to savings concept and a framework for gross national product accounts). Nevertheless, despite a promise of heavy government spending, and Keynes’s theoretical support, the New Dealers were stumped by the 1937-38 recession, which interrupted what looked like a strong recovery. There was then as there is now an underlying faith that capitalism is a self-generating mechanism. If it slowed down or got into trouble, all that was needed was a jolt to get back on track.”

    GDP may have been back to its pre-crash levels but you seem to have forgotten the issue of population growth:

    “By 1937, the best year of the decade, real GDP had just surpassed its 1929 level and there were as many people employed as there had been on the eve of the economic collapse. However, the working population had increased over the preceding eight years and, as a result, unemployment remained, at 14.3 per cent, unacceptably high. Indeed, mass unemployment throughout the depression decade was perhaps the most disturbing economic and social cost of the economic collapse.”

    “It is, of course, unsatisfactory to measure economic progress by concentrating on growth from trough to peak in an economic cycle. In 1937 the economy was far below the long run trend established before 1929 and did not regain that high employment trend until 1942. One reason for this was another sharp economic downturn during 1937-38 in which unemployment rose, output fell by 33 per cent and prices by 11 per cent. This totally unexpected contraction dealt the recovery a shattering blow. From 1938 recovery proceeded apace, increasingly influenced by preparations for war.”

    Click to access Fearon.pdf

    Under the impact of the 1937 recession, unemployment jumped from 14.3% in 1937 to 19.0% in 1938 and manufacturing output fell by 37% from the 1937 peak back to 1934 levels. For ordinary people life was still hell and capitalism was not happily moving forward. Your suggestion that by 1941 the U.S. would have been back at full employment levels (as opposed to GDP) even without the war stimulus is pure fantasy. That’s one hell of a counterfactual that you provide no evidence or argument for, instead blithely assuming, as the bourgeois economists tend to do, that current trends would have continued. Magdoff and Proyect’s whole point is that this was obviously not the case. New Deal measures were unable to put Humpty Dumpty back together again.

    Comment by Nik Barry-Shaw — September 26, 2011 @ 5:40 am

  28. Unemployment was quite high even up through 1938 in the U.S.

    The only country that had significant success reducing unemployment in the 30’s was the national ‘socialist’ state of Germany. Kalecki writes quite about this for those disposed to read about it. It is only in a fascist state that the bourgeoisie feels comfortable with heavy state intervention, presumably because working class resistance has been routed.

    Comment by purple — September 26, 2011 @ 5:56 am

  29. Oh please. Stop telling me what I have “forgotten.” I did not “forget” unemployment, and I did not “forget” population growth. Look at what I actually wrote. It is true that I did not address unemployment in my first comment– Louis made up no specific definition of recovery, but spend much time discussing output, and so I thought it important to point out what output had actually done. I later (perhaps rudely) pointed out what I thought was the problem– that folks were talking past each other and Louis made no effort to address that by simply taking sides.

    My view is that there was rapid progress from a very deep hole, and I spelled out a very crude counterfactual. I freely admit that the evidence to support that counterfactual is thin. All I said was “At that rate, we’d have found full employment by 1941.” That doesn’t mean I believe that absent the war we would have found full employment by 1941. It doesn’t even mean that absent both the downturn of 1937-38 and also absent the was we would have found full employment by 1941. The only thing it indicates is that apart from a serious bump, there was rapid improvement in the economy beginning in 1933. I don’t mean to be glib about the “serious bump” but there was rapid improvement from 1933-37 and then again from 1938 on. I have seen no serious evidence that these movements are explained by WWII.

    I left out the question of growth in population (or labor force) because that actually cuts against Louis’ argument. A prolonged downturn (measured by unemployment rates) sees growth in the labor force exacerbating the problem. But it is not symmetrical. The recovery (measured by unemployment rates) is also hindered by an expanding labor force. So in a deep downturn, it would be unsurprising that unemployment rates fall more slowly that they initially rose.

    I apologize in advance for the numbers, but…

    Even if you discuss real, per capita aggregates, the story is not much changed– we are arguing over (I believe) 0.7 percent population growth per year. Real per-capita GDP was higher in 1939 than in 1929– as was real consumption (per-capita). This is admittedly low bar as economic progress goes. Real, per-capita consumption grew 29 percent from 1933-39, and then another 29 percent from 1939-46. I do suspect the war helped speed things along, but these numbers do not actually support that view– even having turned the unemployed into killers. (No offense intended to Louis’ father.)

    None of this denies that people like Louis’ parents suffered in the meantime. Millions suffered from unemployment over this time and we can safely infer that there remained enormous distributional problems even if the average consumption had “recovered.”

    Comment by D R — September 26, 2011 @ 2:32 pm

  30. Louis made no effort to address that by simply taking sides.

    My goal was mainly to refer my readers to the differences. I fully accept the possibility that there was a “recovery” by the start of WWII but the larger point is “so what?” Although I would oppose any efforts to dismantle the New Deal safety net, I don’t see much point in looking at the Roosevelt administration through rose-tinted glasses. I think there is a real analogy between FDR and Otto Von Bismarck who pushed through welfare state provisions in the 1880s, including something very similar to Social Security. His goal was the same as FDR’s, namely to co-opt the working class. There is a tendency for political consciousness to lag behind historical events. Much of the establishment left–the kind that gets interviewed on MSNBC, etc.–looks back on the New Deal in the way that some Trotskyists look back at the USSR in the early 20s. We have to look at the world today through fresh eyes. Social Democracy and New Deal liberalism are dead while revolutionary socialism has to be reinvented to succeed.

    Comment by louisproyect — September 26, 2011 @ 2:47 pm

  31. Thank you, Louis. I mean that sincerely. I very much appreciate your effort to clarify.

    I do not in any way object to revisiting the history of New Deal. Nor, I suspect, do we disagree regarding FDR’s goal. So I hope you do not mind that I will argue that whether or not FDR’s policies can be said to have significantly improved economic conditions after 1933 (some, for example, will argue it was the Gold Reserve Act of 1934 what done it) –that war and war preparations do not appear to explain it.

    Comment by D R — September 26, 2011 @ 3:59 pm

  32. Wow, civility in debate on the internet! What a concept!

    DR: You can’t lump together the 1933-37 period with the 1938-45 period. Everyone knows the economy grew after 1933, faltered badly in 1937-38 and then took off again thereafter. But the idea that things were rosy by 1937 and the problem was merely distributional is just wrong. There was still a lot of slack in the economy and US GDP, though back to 1929 levels, was way off its trend line. This is the real meaning of “recovery” in a capitalist economy, not simply reaching the previous highwater mark. (I suspect this is what Vernon means when speaking of recovery and war mobilization, though I would have to read the article myself.) The question of the subsequent recession can’t be swept under the rug. The 37-38 crash revealed the underlying weakness in the “recovery” and showed that getting the economy back on the rails was not going to be so easy. Instead, Alvin Hansen and other economists began pondering the possibility of long term stagnation, i.e. permanent 15% unemployement and the like. Sweezy and Magdoff wrote in much detail on the weakness of the recovery too.

    Contrary to the assertion that “war and war preparations do not appear to explain” the subsequent take-off, the impact of WWII on the US economy is really beyond doubt. Manual provided a fair bit of evidence that from the late 1930s on war mobilization was the driver of growth. If these arguments are not “serious” (statistical) enough for you, check the numbers and sources in this article on the impact the war mobilization had on the U.S. economy:


    You claim the evidence for your counterfactual is “thin”, I would say non-existent. You really haven’t a leg to stand on unless you provide facts and arguments that show otherwise.

    Comment by Nik Barry-Shaw — September 26, 2011 @ 9:21 pm

  33. NB-S… (*sigh*)

    I am most certainly not lumping the two together– at least in the manner you suggest. I wholly agree with so much of what you write– and this should be obvious if you read what I wrote above.

    Allow me, however, to quote from your source, “American leaders recognized that the stakes were too high to permit the war economy to grow in an unfettered, laissez-faire manner. American manufacturers, for instance, could not be trusted to stop producing consumer goods and to start producing materiel for the war effort. To organize the growing economy and to ensure that it produced the goods needed for war, the federal government spawned an array of mobilization agencies which not only often purchased goods (or arranged their purchase by the Army and Navy), but which in practice closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries.”

    First of all, this is actually an argument in my favor. It is a story of consumer repression– not economic stimulus. In other words, until industry could retool and government actually got around to demanding these goods, war preparations hurt.

    We can see this in NIPA Table 1.1.2: Contributions to Percent Change in Real Gross Domestic Product

    From 1933-36, consumption accounted for more than half of the double-digit GDP growth. In 1937 GDP growth faltered as government expenditures actually fell and in 1938 there was a tremendous fall in investment. The latter was quite nearly across the board– the exception being residential investment, which made a trivial contribution to growth that year. In 1939 and 1940, investment rebounded, but consumption didn’t contribute quite as much as in the earlier period. Not until 1940 did military expenditures finally start to ramp up.

    To wit, Tassava’s story is consistent with my thinking. The counterfactual here is that in 1938 the government recognizes the error in the 1937 fiscal contraction, and more importantly allows manufacturers to invest on the consumer side, rather than disrupting that process. I’m not yet ready to go as far as it seems to lead, but in this story the war not only failed to accelerate progress– it actually interrupted it!

    (I neglect, of course, the massive government-sponsored R&D efforts which yielded large long-run benefits which are not pertinent to the question of the depression per se.)

    On a personal note, may I express my amazement that my crimes have shifted from providing relevant data to failing to provide facts. Have I missed your own counterfactual presentation somewhere along the line? I don’t see your “legs” standing around here.

    Comment by D R — September 27, 2011 @ 12:09 am

  34. I have made J.R. Vernon’s article defending the thesis that WWII ended the Great Depression here:

    Click to access jr_vernon.pdf

    Comment by louisproyect — September 27, 2011 @ 2:32 pm

  35. I changed my mind about the comments that I wrote last night. I now think that there are several different ways to look at the question which all seem equally valid.

    Comment by Curt Kastens — February 2, 2017 @ 11:41 am

  36. […] views on these matters were first put forward in a blog post titled “Did World War Two End the Great Depression”, written in September, 2011. It cited a Paul Krugman Op-Ed piece written in 2008 and titled […]

    Pingback by Why World War II, Not the New Deal, Ended the Great Depression - open mind news — December 11, 2018 @ 9:42 am

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