World War II and the start of the economic recovery
Letter to the Editor

Library of Congress

Turret lathe operator machine parts for transporting plans .

Article Highlights

  • The biggest trigger to growth in #WWII a steady rise in private capital investment

    Tweet This

  • The root of prosperity was the same in #WWII as now: private capital formation and investment, not gov't spending

    Tweet This

  • An economic lesson to learn from #WWII

    Tweet This

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.


Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Arthur
Herman

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
    MON
  • 28
    TUE
  • 29
    WED
  • 30
    THU
  • 31
    FRI
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.