Introduction
The Great Depression, which started in 1929, was characterized by severe unemployment, deflation, a drastic decline in output, and falling stocks and businesses. The country’s industrial production reduced by 47%, the wholesale price index by 33%, and the real GDP by 26% (Jaworski 1048). Studies also show that the nation’s unemployment rate surged to around 25% in 1932 (Jaworski 1048). Following the stock market crash, there was a sharp decline in private spending and nominal money supply. The nominal stock decreased by 26.51%, leading to the massive failure of banks. At least 9,000 commercial banks closed during that period (Jaworski, 1049). Many Americans filed for bankruptcy, while others lost their homes due to unemployment. The country’s recovery started in 1933 with substantial output and real GDP growth (Vatter and Walker 65). The Second World War helped to bring the United States out of Great Depression in the following ways:
Increased Employment Opportunities
The war changed the labor and economic market in the United States. According to Vatter and Walker, the unemployment rate reduced to below 5% by 1941 due to the country’s involvement in the war (110). The government needed more people to produce weapons and food for soldiers, which meant more employment opportunities for citizens. While millions of Americans joined the army, they left their positions for previously unemployed workers. Employment is vital for economic development because it improves the living standard of the employed, enables the creation of wealth, and contributes to the growth of the consumer market. With employment, families could meet their financial obligations and had the means to purchase produced goods and services, boosting the consumer market.
The significant increase in employment rates positively impacted wage rates. According to Tassava, there was a 65% surge in income, providing an opportunity to improve people’s living standards. However, the government-controlled wages and encouraged personal savings in terms of war bonds, limiting the size of individual disposable income. Although the war bonds only had an annual return of 2.9%, they were crucial investments for Americans and a source of income for the federal government (Tassava). In addition, commercial entities like banks bought bonds valued at $24 billion by the end of the war (Tassava). Even with the government control and rationing, private spending was 48%, accounting for approximately 4% of the nation’s real GDP (Tassava). The Second World War, therefore, marked a crucial change in the labor market, which, in turn, helped resolve the underlying economic crisis.
Revitalized Businesses
Many businesses shifted from manufacturing consumer goods to manufacturing war supplies and military vehicles. As a result, the war provided the U.S economy with a ready market for guns, ammunition, military equipment, planes, and tanks. The United States became the largest supplier for military supplies to Allies due to the mass production of military goods/services. Several government programs created during that period led to the revival of various businesses. The Reconstruction Finance Corporations helped lift banks from the crisis, while the Home Owners’ Loan Corporation revived the mortgage and homeownership market (Fishback 1437). In addition, large farm owners benefited from relief spending from the federal government.
Increased Government Spending
Government spending also increased, further improving the country’s economy. According to Jaworski, government spending increased from 31% to 72%, accounting for approximately 73% of the real GDP between 1941 and 1945 (1049). The federal government created several agencies, campaigns, and programs to support its war effort, expanding the public sector. For example, the Works Progress Administration (WPA) led to approximately 3.800.000 jobs, construction of about 122.000 public buildings, 285 airports, 644.000 miles of new roads, and 77.000 new bridges (Vatter and Walker 89). President Roosevelt developed two sets of the New Deal, which were implemented in two phases.
The First New Deal, which took place between 1933 and 1935, allowed the government to increase its spending. About 15 laws were enacted after the First New Deal to finance different sectors, contributing to the revival of the banking, agricultural, and industrial production sector (Fishback 1439). The Second New Deal, which started in 1935, was followed by a set of public-funded programs mediated by government spending to bring the country out of the economic depression (Fishback 1439). A study conducted by Fishback showed that Roosevelt’s policies contributed to the growth of the U.S. economy (1478). The New Deals programs increased consumption activity in the country.
Although heavily contested, Roosevelt’s expansionary monetary policy was the driving force behind the country’s economic recovery. Based on data on the country’s real GDP, the annual growth rate of the U.S economy was 7.2% between 1933 and 1940 (Vatter and Walker 75). In addition, research shows that federal government spending increased from 6.5% to 11% of the GDP between 1933 and 1941 (Vatter and Walker 75). This increase in expenditure accounted for an annual growth rate of 6.9% during the war period.
Conclusion
To sum up, the Second World War brought the United States out of the Great Depression by creating employment opportunities, providing a ready market for military supplies and equipment, and increasing government spending. In addition, government spending revitalized the economy by financing the public sector, which created more employment opportunities. It is worth mentioning that economists heavily contest the beneficial effect of World War II in reviving the United States out of the great depression.
Works Cited
Fishback, Price. “How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s.” Journal of Economic Literature, vol. 55, no. 4, 2017, pp. 1435–1485.
Jaworski, Taylor. “World War II and the Industrialization of the American South.” The Journal of Economic History, vol. 77 , no. 4 , 2017 , pp. 1048–1082.
Tassava, Christopher. “The American Economy during World War II.” EH.net, Web.
Vatter, Harold and John, Walker. History of the U.S Economy Since World War II. Routledge, 2015.