Library of Congress
Everyone should be grateful for Richard Rumelt's "World War II Stimulus and the Postwar Boom" (op-ed, July 30) debunking the notion that the massive government spending during World War II led to an economic boom, and for reiterating what other economic historians have known for some time--that the war cut personal consumption as Americans saved their paychecks in record amounts.
Mr. Rumelt, however, doesn't tackle the other Keynesian myth used to explain the post-war boom, namely that when the war ended Americans rushed out to spend those savings on long overdue goods like cars and refrigerators, triggering an avalanche of consumer demand. Indeed, his reference to rising household debt might seem to confirm this. As Milton Friedman and Anna Schwartz showed some time ago, people's liquid asset savings continued to grow after the war, from a record $151 billion at the close of 1945 to $168.5 billion by the start of 1948. The biggest trigger to growth was a steady rise in private capital investment, which had also fallen during the war but then jumped from $10.6 billion in 1945 to $40.6 billion in 1948. While the personal savings rate fell, the private investment rate relative to GNP soared from 5% to almost 18%, with the biggest leap coming in 1946--a leap which would not be reflected in GNP numbers until two years later. Meanwhile, business savings almost doubled from $15.1 billion to $28 billion, providing a sure way to finance expansion and hiring.
In short, the root of prosperity was the same then as now: private capital formation and investment, not consumer or government spending.
Arthur Herman is a visiting scholar at AEI.