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June 2024
7min read

If the New Deal did not succeed in ending the Great Depression, the Second World War most certainly did. On December 29,1940, FDR gave his famous “Arsenal of Democracy” speech, describing massive aid to Britain and China as the best way for America to stay out of the fight. The United States needed a huge rearmament program anyway, though, because except for our navy, we were a third-rate military power.

With the attack on Pearl Harbor, the United States became in fact the arsenal of democracy. In the four and a half years after Roosevelt’s speech, American industry turned out 296,400 airplanes; 86,330 tanks; 64,546 landing craft; 3,500,000 jeeps, trucks, and personnel carriers; 53,000,000 deadweight tons of cargo vessels; 12,000,000 rifles, carbines, and machine guns; and 47,000,000 tons of shells.

The nation accomplished this feat, perhaps the most remarkable one of the entire industrial era, by temporarily converting its economy from freemarket to centrally planned. The War Production Board, headed by Donald Nelson, a former Sears, Roebuck executive, controlled all vital resources and allocated them according to the most urgent needs, creating entirely new industries when required. Synthetic-rubber production was nonexistent in 1939; in 1945 the country turned out 820,000 tons.

And this huge production was accomplished without harming the civilian economy. While certain things were rationed, Americans were able to maintain a more normal existence than the citizens of any of the other major combatants. The United States had the strength to simply build a war economy on top of its civilian one, and the gross national product expanded by 125 percent between 1940 and 1944, growing from $88.6 billion to $198.7 billion.

At war’s end, the United States was truly the only Great Power in the world, militarily as well as economically. The defeated powers, Germany and Japan, had seen their economies destroyed along with their capacities to wage war. The Soviet Union had suffered more than 20 million killed. Britain and France were effectively bankrupt.

All of them had endured terrible damage to their homelands. But the continental United States, sheltered by vast oceans, had been physically untouched by the war. Its economic capacities, far from being diminished, had been greatly enlarged. America accounted for more than half the world’s production. The center of international economic gravity was now in the American heartland.


Fortunately both for itself and for the rest of the world, the United States did not try to retreat once more into isolation, as it had after World War I. As the world’s greatest power, it had an obligation to lead, and it did so. A new world monetary order was established even before the war was over, at a New Hampshire resort called Bretton Woods. The agreement made there set up the International Monetary Fund and the World Bank to help stabilize currencies. The dollar would be fully exchangeable for gold, but only by foreign governments, not by citizens, and it would function as the world’s primary reserve currency. This meant that it also became the primary currency of world trade, as it has remained. Today, if, say, Saudi Arabia sells a tanker-load of oil to Japan, the deal is done in dollars, not in yen or riyals.

Also, the United States forgave the war loans it had made to its devastated allies, greatly improving their economic situations. And it provided massive aid not only to those allies, but equally to its defeated enemies through such programs as the Marshall Plan and the World Bank. This helped get these countries back on their feet while also providing large and growing markets for American goods. World trade began to grow quickly and leave behind its near collapse of the 1930s. And the United States led the way to continuing tariff reductions. In 1953 world trade totaled $167 billion. Just 17 years later, it was $639 billion. Today it is over $1.7 trillion.

The Second World War had a far greater effect on the American economy than had the First, and there was much foreboding regarding the country’s economic future after it. Although unemployment had almost vanished, memories of the Great Depression were still painfully fresh. Many economists, fearing the consequences of the end of war production, predicted that a renewed depression was inevitable. After all, there had been a sharp recession after the end of the first war.

But it didn’t happen. Instead, pent-up demand more than kept the economy humming. During the war, nearly everyone who had wanted a job that paid good wages had had one, in industries largely given over to military production. Civilian durable goods and housing had just not been produced. In 1943 the United States auto industry turned out a grand total of 100 cars, all for government use.

But because everyone had been working, per capita disposable income had doubled during the war years, and that increased income had gone almost entirely into savings. Americans put away $14.3 billion in 1940 and $44.7 billion in 1945, a savings rate never approached before (or, for that matter, since). Now, with industry switching back to civilian production, the demand for automobiles, washing machines, and so on, kept the factories busy.

The demand for housing, the construction of which had lagged seriously during the Depression and ceased entirely during the war, also drove the economy. Increasingly this housing was of an entirely new type, suburban single-family houses on small plots. Since the dawn of the Republic, the major trend in population movement had been from country to city. Cities had taken the lead in population by 1900, and that lead had kept increasing. But after the war, the suburbs began growing quickly, ultimately becoming the dominant political power centers.

With the country suburbanizing, the population of cities began to decline. Indeed, every major city in the Northeast except New York—ever the exception—has seen steep drops in population since 1950, often by as much as half. The surrounding areas, once farmland, are now tessellated with tract housing. So while cities have often remained the economic engines of the country, with their workers commuting in from the suburbs, their political clout has dwindled.

Also, the rapid spread of air conditioning following the war greatly facilitated migration to the warmer parts of the country, causing the economies of these areas to both grow and diversify. Migration was from south to north in the first half of the twentieth century, but the current reversed in the second half. Nothing exemplifies this shift so much as the decline of the political power of the self-described “Empire State.” In 1940, with a population of 13.5 million, New York ranked number one in population by a comfortable margin and had 47 electoral votes. After the 2000 census, New York, with a population of 18 million, stood only third and will have just 31 electoral votes in the next presidential election. Although the state’s population grew by 38 percent over those 60 years, other states had grown so much faster that New York has lost 34 percent of its electoral votes.

None of this is to say that the late 1940s were a period free of major problems for the American economy. Both inflation and labor unrest bedeviled the country in the immediate aftermath of the war. Strict wage and price controls had been imposed shortly after America entered the fight, and now there was intense political pressure to dismantle these wartime regulations. It was done perhaps too rapidly. Had Roosevelt lived, he might have been able to use his vast prestige to slow the process. But his successor, virtually unknown to most Americans before he entered the White House, was helpless to do so. Nevertheless, he got most of the blame for what ensued, and “to err is Truman” became a national joke.

With the controls lifted, prices adjusted to market realities suddenly, and inflation roared to life. Farm prices shot up no less than 14 percent in a single month and were 30 percent higher by the end of 1945. They rippled through the rest of the economy too. Meanwhile, with corporations having prospered mightily during the war, enjoying a 20 percent increase in profits, labor wanted its share of the pie. Strikes, forbidden during the war, multiplied so fast that by January 1946, fully 3 percent of the American labor force was on the picket line.

Many people felt the labor movement had become too powerful, and in response Congress passed in 1947, over President Truman’s veto, the Taft-Hartley Act. This gave companies many rights denied them by the Wagner Act of 1935, such as the right to express their opinion on organizing efforts (as long as no intimidation was involved). It also outlawed the closed shop, in which workers must belong to the union before they can be hired, and allowed states to outlaw the union shop, where workers are obligated to join after being hired.


Many states, especially in the South, did so. Companies attracted by the low cost of living in the South and its right-to-work laws began building factories in the old Confederacy. The American South, for 80 years almost a Third World country inside a First World one, began to catch up with the rest of the nation in economic development.

But by the time Taft-Hartley became law, labor unrest was already waning. There had been 116 million man-days (1.43 percent of total days) lost to strikes in 1946. In 1947 only 34.6 million were. By the 1990s, the average number of man-days lost to strikes had dropped to a mere 5.1 million (0.02 percent of total days). Both labor and management had learned how to maximize their broad common interests and minimize their inevitable conflicts.

The mid-1940s proved the high-water mark for organized labor, with unions representing 35.5 percent of the nonfarm work force in 1945. Today they represent only 13.5 percent.

One cause of the fall in union membership was the revolution in American higher education made possible by the GI Bill, one of the most consequential pieces of legislation in American history. Among its provisions, the GI Bill provided generous allowances for tuition for veterans wanting to attend college. The strength or the response rar exceeded anyone’s predictions, and millions of families that had never had a college graduate now sent their boys and, increasingly, girls to college. Today women make up more than half of all graduating seniors. In the 1930s only about 3 percent of the population had college degrees. Today nearly 25 percent do.

The new economy that began to dawn after World War II would empower individual workers to an unprecedented extent. One way it did this was by the spread of pension and profit-sharing plans offered by businesses and by a rise in the number of individual investors. Even at the height of the 1920s boom, less than 10 percent of the American population had any investments beyond savings accounts. But when Charles Merrill formed Merrill Lynch in 1940, he set out to tap the potential market of the average middle-class citizen. He succeeded beyond his wildest dreams, and by 1960 Merrill Lynch was bigger than the next four firms on Wall Street combined.

Merrill Lynch offered fully trained representatives and careful research to reassure customers that their money was in a safe place and being invested wisely. Slowly, the public so scarred by the memories of 1929 began to return to Wall Street, and families that had never invested before began to do so. Many put money into mutual funds, which allowed them to invest in stocks and bonds without having to pick them individually. The mutual funds and corporate and government pension funds became major players on the Street, fueling a rising volume that continues to this day. The first year to see a billion shares traded on the New York Stock Exchange was 1959. Today, average daily trading exceeds 1.2 billion.

Wall Street abounded in opportunities at the time, for it had not fully shared in the postwar boom. On December 31,1949, the Dow Jones stood at 200, only twice what it had been in 1940, even though the gross national product had nearly tripled. Many blue-chip stocks were selling for less than four times earnings, despite paying dividends of 8 to 12 percent.

Finally, in 1954, the Dow began to climb sharply and passed its old high of 381.17. It would continue up for another decade and more, passing 1,000 for the first time in 1967.

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