NationStates Jolt Archive

The Great Depression was characterized by massive, unresolvable unemployment that stood above 15% in the US as late as 1939.

So what solved the Great Depression?

The New Deal did not solve the Great Depression; it only temporarily reduced unemployment from 25% in 1933 to a lower figure, using a command economy model, but huge government deficits were accumulated with no end in sight, and the deficits had to be reckoned with sooner or later, whether by crushing taxation or inflation, both of which would've caused another acute economic crisis. Clearly the New Deal only put off unpleasant problems into the future without actually providing a sustainable, long-term solution.

So, did entering WWII, stepping up production of armaments, building tanks, guns, and ships, solve the Great Depression? The vast "economic stimulus" package that the government spent for war industries did bring down unemployment to minuscule levels. (The draft helped too) Many advocates of government spending today argue that our current recession can be solved with a gigantic economic stimulus whose scope is similar to the gigantic economic stimulus FDR paid out in 1942, since obviously the 1942 stimulus seemed to work.

That line of reasoning would be false. Government spending during WWII did not actually solve the depression. We can realize this with a simple thought experiment:

Imagine if, in peacetime, the government spends trillions of dollars to build bombs and tanks during a period of 4 years (the length of America's participation in WWII), but doesn't actually deploy any of these bombs and tanks (since this is peacetime in this hypothetical scenario). If the government suddenly ceases the stimulus (representing the end of WWII), there would be mass layoffs, and unemployment would suddenly go back up to 15% just like before the stimulus began. Nothing would've changed, besides the fact there is now a huge shitload of bombs lying around and there's a huge federal budget deficit. Sure, all those years of employment would result in people with a lot of money in their pockets but the government's deficit would still need to be reckoned with sooner or later, whether by crushing taxation or inflation, which would cause another acute economic crisis. So in reality, massive WWII-related government spending, like the New Deal government spending, only put off unpleasant problems into the future without actually providing a sustainable, long-term solution to end the depression.

If government spending during WWII didn't solve the Great Depression, what did? After all, unemployment stayed low after the war, and all the Rosie Riveters and returning servicemen could still find jobs even if there were no more government stimulus jobs in the war factories. If not the New Deal, if not WWII stimulus package, then surely something had to have solved the Great Depression.


The factor that solved the Great Depression once and for all is: destruction of the world's productive capacity by war, which is the correct answer to the above poll. It was the incredible destruction caused by war which solved the Great Depression. New Deal-type economic stimulus did not solve the depression, and not even the unprecedented "stimulus" of government spending on war-related industries during WWII directly solved the depression, since both those "solutions" only directly put off unpleasant problems into the future without actually providing any sustainable, long-term solutions. It was finally the violence of the war which solved the 1920s and 30s' vast oversupply of inventories and factory capacities that had been keeping employment levels down and perpetuating debt-deflation during the 1930s.

The destruction of the world's productive capacity by WWII provided postwar Americans with many jobs in rebuilding the war damages. Americans produced coal, steel, cement, raw goods, finished goods, and all sorts of knick-knacks to export to the rest of the world for rebuilding all the things destroyed by war. The destruction also provided the rest of the world with many similar jobs rebuilding war damages. Had not the destruction of the war taken place, no lasting recovery could've taken place, because there were so many excess inventories and excess factories throughout the world during the 1930s ready to respond at the drop of a hat to any slight uptick in consumer demand, thus pushing prices down again and extending the period of debt-deflation.

All of this does not bode well for the world today. Today we are in a similar situation as the 1930s: excess productive capacity throughout the world, insurmountable private sector debt levels preventing consumer demand from going back up, and general faith in government interventions, protectionism, competitive currency devaluations, and other factors. Today, will we just keep trying futile government interventions, putting off unpleasant problems into the future, solving nothing? Is there any way we can find a lasting solution to our economic troubles and solve our overinvestments and malinvestments without wreaking violent, physical destruction and without bombing the world's houses, factories, and cities?

So what you're saying is that we should start a thrid global war to solve the current economic recession and off at least some of the surplus population. Brilliant!

So what you're saying is that we should start a thrid global war to solve the current economic recession and off at least some of the surplus population. Brilliant!

I'll go tell Poland someone is about to invade them. I won't say who, that way it'll be a surprise.

Who says I want to start with Poland? I have nothing against Poles. They give strippers something to cling to during their performances.

Wow, an essay thread. Cool.


So, what's your point? What's there to argue? Sure, one could pick apart your essay bit by bit - and that will come, rest assured - but what do you propose? Do we start a war? America is already in two, ironically enough, and yet our economy is still terrible.

Do you have any proposals of your own, or is this going to be a '[insert principle], prove me wrong!' thread?

Yes, I have been telling everybody that this will end in war. Of course this time it will be the US which is like teh Germany at the end, because we sent all of the heavy machine tools overseas.

Then the chinese will give us a marshal plan, and we can have a Wirtschaftswunder and end up making all the nice cars or someshit. (Though like 40 million will be dead or something).

The UK can be italy, and australia can be romania. We all know how that ends. LOL.

Wow, an essay thread. Cool.


So, what's your point? What's there to argue? Sure, one could pick apart your essay bit by bit - and that will come, rest assured - but what do you propose? Do we start a war? America is already in two, ironically enough, and yet our economy is still terrible.

Do you have any proposals of your own, or is this going to be a '[insert principle], prove me wrong!' thread?

This is an information thread, and also an open discussion thread.

I honestly don't know how to solve any of these problems, which are more monumentally gigantic than many people think. Hopefully someone will come up with good ideas in this thread that don't involve the War Keynesian proverbial "broken window" (i.e. WWIII)

If you have any objections to the reasoning I laid out in the OP I'd like to hear those too.

Do we start a war? America is already in two, ironically enough, and yet our economy is still terrible.

Also, not to be morbid but the two countries we're fighting wars in have never had much industrial capacity to destroy, so the economy can't benefit from that.

America is already in two, ironically enough, and yet our economy is still terrible.
That's just because we haven't destroyed all the major industrial sectors yet. We've been going for the small potatoes to force peace, fake liberty, and the American lifestyle on them because some people think they know better and are doing this for the welfare of people who don't want the 'help'. Altruism strikes again!

For the war to work as economic stimulus you have to smash all the factories and kill a goodly portion of the labor force. This was the real genius of the 'strategic' bombing stuff.

So it was not Increase in Demand A, nor Increase in Demand B, but Increase in Demand C?

What exactly was the difference?

So it was not Increase in Demand A, nor Increase in Demand B, but Increase in Demand C?

What exactly was the difference?

Only Increase in Demand C was accompanied by Decrease in Supply. A and B did not address supply- and actually aimed to expand supply, thus perpetuating the economic inbalance and delaying recovery.

So it was not Increase in Demand A, nor Increase in Demand B, but Increase in Demand C?

What exactly was the difference?

You have to remember that it wasn't really a 'cure' for the global depression per se. If you asked people in most of the countries that took part: "Are you better off today than you were in 1929?" most of them would answer no.

Certainly you can't say that the British economy was improved by the UK's participation in the war.

You have to remember that it wasn't really a 'cure' for the global depression per se. If you asked people in most of the countries that took part: "Are you better off today than you were in 1929?" most of them would answer no.

Certainly you can't say that the British economy was improved by the UK's participation in the war.

1939 you mean?

1939 you mean?

No, I mean 29, before the depression began. Though technically the 'depression' ended in 33. The persistent unemployment lasted through 1940 however, causing a general air of misery however.

But sure 1939, if you want.

I just think, from a global perspective, saying that WWII 'ended' or 'solved' the depression - which was a global phenomenon in the free market economies - is a misleading way of looking at it.

Sure, it looks that way in the US, but a large part of that is because the US got to seize everybody's assets and then smash everything else up. I've no doubt I could solve the US economic malaise right now if I could order the country to go on some kind of international looting binge (above the usual level).

We can realize this with a simple thought experiment:

Imagine if, in peacetime, the government spends trillions of dollars to build bombs and tanks during a period of 4 years (the length of America's participation in WWII), but doesn't actually deploy any of these bombs and tanks (since this is peacetime in this hypothetical scenario). If the government suddenly ceases the stimulus (representing the end of WWII), there would be mass layoffs, and unemployment would suddenly go back up to 15% just like before the stimulus began.
Not necessarily. For one thing, the govt wouldn't be employing 10% of the workforce into making bombs, dropping the unemployment to 5%. They might need only employ 5%, the other 5% would be employed from the economic boom arising from the govt-employed 5%. They need to spend their money on something and then there's the increase in demand for raw materials to build said armaments.
Sure, unemployment would rise again if the govt shut down all munitions factories all at once but likely not back to 15% level.

Also, prior to USA's entrance to WWII, they were already building up the armies, and then after WWII the govt didn't just stop all munitions factories. They kept quite a few going to rebuild the army. So your 'simple thought experiment' is inaccurate. It should read, "build-up for a few years followed by a massive build-up for 4 years followed by a much reduced but sustained build-up for several years. Also, several thousand young men of working age are taken out the back and shot during the 4 year expansion".

For the war to work as economic stimulus you have to smash all the factories and kill a goodly portion of the labor force. This was the real genius of the 'strategic' bombing stuff.

Aye, worked well for a good 30 years after the war. Our new war slogan: Drop bombs not Acid

No, I mean 29, before the depression began. Though technically the 'depression' ended in 33. The persistent unemployment lasted through 1940 however, causing a general air of misery however.

But sure 1939, if you want.

I just think, from a global perspective, saying that WWII 'ended' or 'solved' the depression - which was a global phenomenon in the free market economies - is a misleading way of looking at it.

Sure, it looks that way in the US, but a large part of that is because the US got to seize everybody's assets and then smash everything else up.

Yeah I agree.

Note to all, this is an anti-war thread btw not a pro-war thread :D

Not necessarily. For one thing, the govt wouldn't be employing 10% of the workforce into making bombs, dropping the unemployment to 5%. They might need only employ 5%, the other 5% would be employed from the economic boom arising from the govt-employed 5%. They need to spend their money on something and then there's the increase in demand for raw materials to build said armaments.
Sure, unemployment would rise again if the govt shut down all munitions factories all at once but likely not back to 15% level.

The government-created boom wouldn't be sustainable if the cities and factories all over the world aren't destroyed though.

Also, prior to USA's entrance to WWII, they were already building up the armies, and then after WWII the govt didn't just stop all munitions factories. They kept quite a few going to rebuild the army. So your 'simple thought experiment' is inaccurate. It should read, "build-up for a few years followed by a massive build-up for 4 years followed by a much reduced but sustained build-up for several years.

The Iraq and Afghanistan wars can count as the "reduced but sustained" baseline level of military expenditures in my simple thought experiment.

Also, several thousand young men of working age are taken out the back and shot during the 4 year expansion".

Good point. I should've included the part about the shootings out back.

The factor that solved the Great Depression once and for all is: destruction of the world's productive capacity by war, which is the correct answer to the above poll. It was the incredible destruction caused by war which solved the Great Depression. New Deal-type economic stimulus did not solve the depression, and not even the unprecedented "stimulus" of government spending on war-related industries during WWII directly solved the depression, since both those "solutions" only directly put off unpleasant problems into the future without actually providing any sustainable, long-term solutions. It was finally the violence of the war which solved the 1920s and 30s' vast oversupply of inventories and factory capacities that had been keeping employment levels down and perpetuating debt-deflation during the 1930s.

The destruction of the world's productive capacity by WWII provided postwar Americans with many jobs in rebuilding the war damages. Americans produced coal, steel, cement, raw goods, finished goods, and all sorts of knick-knacks to export to the rest of the world for rebuilding all the things destroyed by war. The destruction also provided the rest of the world with many similar jobs rebuilding war damages. Had not the destruction of the war taken place, no lasting recovery could've taken place, because there were so many excess inventories and excess factories throughout the world during the 1930s ready to respond at the drop of a hat to any slight uptick in consumer demand, thus pushing prices down again and extending the period of debt-deflation.

I don't think you have the picture completely accurate. While the destruction of much of Europe would have helped Europe, it wouldn't have helped America too much. Two things happened after World War II that prevented unemployment from diving

1) F***ing; yep, I am referring to the Baby Boomer generation. You had millions of children born in the decade after World War II, and that requires a lot of production - families needed housing (remember that there had been a shortfall of houses for a number of years), children eat food, go to school and so on; also remember that these children aren't seeking jobs. You have an increase in aggregate demand without an increase in the size of the labour force - that in itself would keep unemployment low. The irony is that unemployment started climbing again in the early 1970s as these children started looking for work.

2) New gadgets; in the 1930s and 1940s a number of new gadgets were invented that were must haves in the home; television, washing machines and fridges. Services became more widely demanded as well; air travel became popular as C-47s became DC-3s and finally airlines were able to make money without needing mail contracts. These goods and services required production and support facilities and the jobs created didn't replace much of what had existed before.

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.


The OP has fallen prey to the "Broken Window Fallacy" as stated above. Wars are never good for any economy as a whole, and militaristic pursuits are harmful to everyone. Think about it - the destruction of property cannot generate wealth, and the labor and money used to repair the damages could better be used to improve the conditions of the people rather than to simply restore them to their previous state. Since the poll doesn't include a "None of the above" option, I will not vote. As to the cause of the depression and recovery, I generally agree with the Austrian School analysis.

This last conclusion—that the abandonment of FDR’s policies "coincided" with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in 18 years.

In short, it was capitalism that finally ended the Great Depression, not FDR’s harebrained cartel, wage- increasing, unionizing, and welfare state expanding policies.

Where is the option for restoration of world trade under the Breton Woods system?

Or at least none of the above.

Prozac

Prozac

that is for normal depression.
You need the Great Prozac for the Great Depression.

that is for normal depression.
You need the Great Prozac for the Great Depression.

Can I buy that online?

Can I buy that online?

Only one is made at the cracks of Mount Doom every 50 years.
To solve this new Great Depression we must form a quest to Mount Doom and retrieve the New Great Prozac. It is dangerous, the last one who undertook the quest only barely got back alive and he spent the rest of his life in a wheel chair.

Pissaro, your argument is strong, but I believe you are omitting several factors which would change your conclusion.

First, while destruction of industry was undoubtedly major for Germany, Japan and Italy, most of the rest of the involved powers did not suffer from it to anything like the same extent. More notably, several states - The US, Great Britain, Canada, Australia and, despite the tremendous damage, the Soviet Union - actually came out of the war with a larger, more developed and more productive industrial base than when they went into the war. This is also true, to a lesser extent, for the "involved neutrals" - Sweden, Switzerland, Turkey, Spain, Portugal et al, many of which made considerable wealth selling the products of their burgeoning industrial systems to the belligerants.

Second, you don't seem to have taken into account the expansion of the consumer base. One of the greatest damages of the depression was that it removed a large percentage of the population from the ranks of general consumers. When a man can barely (or cannot) feed his family, he has no interest in buying a refrigerator. This was one of the major factors keeping unemployment high during the 1930s - there was no point making goods when no one was prepared to buy them.
However, WWII initiated what was, basically, full employment. And unlike the work schemes of the New Deal, this employment was well paid - GIs got quite a good salary, even better when you consider that they had free room and food. Workers in War Industries were valued, employers paying well to try and poach workers off of other companies. And all of this made the previously unemployed back into consumers again - the market revived from it's previous stupor.

Third, and specifically for the US, you had the effect of War Debt. In 1945 every country on the Allied side save one owed the United States a massive debt - that one being Australia, which the US had bought massive food supplies from on credit. Those debts now came due, and while the various programs (Lend/Lease being the most famous, but hardly the only one) specified very low levels of interest and extremely reasonable repayment schedules, the overall effect was that the US was inundated with foreign money. This payed off the debt incurred by the New Deal and left enough besides to allow very low levels of taxation, another stimulus to the economy.

For the above reasons, I would argue that it is the fact of WWII itself, and NOT the destruction of competing industry, that finally ended the legacy of the Great Depression.

Can I buy that online?

Probably. I bought the great viagra online, and haven't been able to walk for weeks now.:D

Probably. I bought the great viagra online, and haven't been able to walk for weeks now.:D

Luckily for you Obama's Stimulus package includes bringing in teenage hookers from Asia.

Only Increase in Demand C was accompanied by Decrease in Supply.

Not in the US.

Edit: Also, reading your OP example again, your refutation of the "stimulus" idea ignores the possibility that providing people with employment through government spending might generate its own demand. You may be (functionally) paying them to do nothing, but you're still paying them.

Time. Tada.

Altruism strikes again!
Please.

You're going to continue your schtick in this thread, after abandoning another (http://forums.jolt.co.uk/showpost.php?p=14614868&postcount=265)?

So what you're saying is that we should start a thrid global war to solve the current economic recession and off at least some of the surplus population. Brilliant!

That would have worked back when everything wasn't made in China and it was cheap to produce weapons here.

Not necessarily. For one thing, the govt wouldn't be employing 10% of the workforce into making bombs, dropping the unemployment to 5%. They might need only employ 5%, the other 5% would be employed from the economic boom arising from the govt-employed 5%. They need to spend their money on something and then there's the increase in demand for raw materials to build said armaments.
Sure, unemployment would rise again if the govt shut down all munitions factories all at once but likely not back to 15% level.

Also, prior to USA's entrance to WWII, they were already building up the armies, and then after WWII the govt didn't just stop all munitions factories. They kept quite a few going to rebuild the army. So your 'simple thought experiment' is inaccurate. It should read, "build-up for a few years followed by a massive build-up for 4 years followed by a much reduced but sustained build-up for several years. Also, several thousand young men of working age are taken out the back and shot during the 4 year expansion".

Further, because of the nature of the distribution of the liquid capital, it was virtually impossible to spend even a large portion of it immediately. Through rationing and mobilization, when individual consumers acquired cash, they were effectively forced to save, often in the form of war bonds or torn out sofas. Returning soldiers were also promised a significant stimulus in the form of the GI bill to either go to school or start their own business. The rewards from work were delayed for about five years, and when individuals were able to spend, they spent, and lit off the postwar boom.

European demand is only part of the picture, domestic consumer demand was utterly vital in driving the postwar boom, which was further reinforced by the baby boom.

I'll go tell Poland someone is about to invade them. I won't say who, that way it'll be a surprise.

I'll do it, if no one else wants to.

I'll do it, if no one else wants to.

I've seen Polish women. If you need an ally, just let me know.;)

I've seen Polish women. If you need an ally, just let me know.;)

Much appreciated! :D

Btw, I don't know if you're really a Satanist, but your sig always makes me think of this (http://www.flickr.com/photos/farfromrelevant/94343896/). :tongue:

Much appreciated! :D

Btw, I don't know if you're really a Satanist, but your sig always makes me think of this (http://www.flickr.com/photos/farfromrelevant/94343896/). :tongue:

LMFAO. Close enough. And Yes, I am really a Satanist.

WW2. WW2 brought us out of the depression, just as WW1 set us up for it.

WW2. WW2 brought us out of the depression, just as WW1 set us up for it.

Broken window fallacy.

Broken window fallacy.

Please, elaborate. I've not heard that fallacy before. (Not saying it isn't legitimate, I'd just prefer you to explain it)

Please, elaborate. I've not heard that fallacy before. (Not saying it isn't legitimate, I'd just prefer you to explain it)

I'll leave it to men far better than myself (http://en.wikipedia.org/wiki/Parable_of_the_broken_window) to explain it. :p

So what you're saying is that we should start a thrid global war to solve the current economic recession and off at least some of the surplus population. Brilliant!

I am pretty sure the US couldn't actually increase its military industrial output if it tried.

I'll leave it to men far better than myself (http://en.wikipedia.org/wiki/Parable_of_the_broken_window) to explain it. :p

Ah, right. Well, I didn't say that it helped anyone else, only us.

WW1 set us up for it by moving us into a period of good feeling, while simultaneously setting up and later removing a massive grain market in Europe. With the US almost untouched, the agricultural community jumps on the opportunity and has it pulled out from under them circa 1922. When a depression hit, as capitalism is a very boom-bust system, as is every other economic system used by humans on this planet we call Earth, heightened it to a great amount. Now, there's a lot of financial detail I don't know, and I'm sure these contributed to changing it from a normal depression to a great depression. However, I'm still researching the subject, there's a lot of speculation around it, you know?

Point is, Great Depression comes. FDR allievates some of the effects through his welfare/workfare system, and creates new infrastructure for the US. Not the worst idea ever. But it most certainly does NOT get us out of the depression. When we enter WW2, we go into a second war, in which we come out, once more, almost unscathed. This, of course, leads to a bunch of guys coming home with money in their pockets, and a battered and bruised world with only a few industrialized nation to choose from, one of which has incredible economic power, and very little damage caused by the war.

But, it's still something I'm researching.:D

Broken window fallacy.

Yes, it's a fallacy in its primitive conceptual form.

But in the real world, when you have lots of unemployed productive capacity that you can put to use by money borrowed from people who are not stimulating the economy as much, the reasoning is not really fallacious.

(Or, perhaps more precisely, it is mostly fallacious... but the element of non-fallacy is significant enough to make a real difference.)