January 2013
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The WWII Economic Myth

D-day June 6, 1944.

One of the big economic myths out there is that if it was not for the massive federal spending for the military during WWII we would still be in the Great Depression.

According to the myth after the 1929 stock market crash, capitalism failed, and FDR with his great economic central planning saved the day. There is usually no explanation of why if FDR was inaugurated in 1933 we were still in a depression in 1940 with unemployment at 14.6%. During those years the textbooks focus on the central planning work programs and regulations like the SEC and the WPA.

Anyway, so in 1941 the USA began preparations for the possible entry into WWII and on December 7, 1941 we were officially at war. The economy was saved at last by massive federal planning and spending. There is usually an economic endorsement of this planning is needed for a modern economy to exist. Without this central planning evil capitalist would employ children in steel mills and we would revert back to the darkest days of the industrial revolution. This is the standard version of economic history in just about any textbook in any high school in America.

100% propaganda and balderdash.

Briefly, Hoover plunged the economy into the depression with higher taxes 25% to 63%, the Smoot-Hawley tariff bill, increased spending, 48.9% by 1932 with, of course, the ensuing deficits. He also organized agricultural cartels that worked to fix prices of basic food products at artificially high price levels establishing the USDA to serve as the price enforcement police. Fought against price reductions in crude oil when huge deposits were discovered in West Texas, and largely unknown in any history books, fought for high union wages and demagogue companies that cut wages even though prices of goods and services were plummeting.

FDR, 1933-44, is portrayed as a economic hero who saved America from the Great Depression, yet in 1940, after seven years of FDR economic policies, unemployment was 14.6%.

FDR was the same as Hoover to a large extent. He raised taxes to 79%, confiscated gold from the people, devalued the dollar from $20.67 to $35 for an ounce of gold, or 69%, with the predictable inflation passed along to Main Street America at a time they could least afford it, passed pro union legislation making wages in many industries noncompetitive resulting in the predicable layoffs, and for good measure the Federal Reserve doubled the reserve requirement for banks.

One minor economic myth about the Federal Reserve from 1929 to 1933 is that they reduced the money supply; the usual number is 27%. This is completely false. The money supply was indeed rapidly shrinking but only because of the incompetence of Hoover and fear that the banks had overextended their balance sheets. Both 100% correct. The reality, according to the Federal Reserve, is that the monetary base, the money used to increase loadable funds to the public, was increased from $6.1 billion in 1929 to $7.6 billion in 1933 by the time FDR was inaugurated.

The textbooks never tell these stories, or that the Federal Reserve created the stock market and real estate bubble of 1925-29 by increasing the money supply 61.8%. The standard textbook tells of capitalism mysteriously exploding in 1929 and our wise overlords steering the economy back to health with great public’s works programs, regulations, and finally WWII spending.

Herbert Hoover, 1929-33, justifiably gets the blame for the Great Depression because of his poor economic policies but his policies are almost identical to FDR’s.

The results of this successful propaganda campaign are remarks like the following appearing on a newspaper message board:

“In my opinion we can out grow the deficits if we can get the economy running at full capacity and growing. It is how we took care of the deficit after WWII which was a much bigger piece of the GDP than the present deficit.”

This thinking embraces the standard Keynesian economic thought we have today where if the government just spent enough money the economy would grow.

But isn’t this what happened after WWII?

Not even close.

There is simply no way the economy would have recovered after WWII if the federal government would have continued spending money and consuming resources. The official White House record on this is very clear.

Spending and Deficits.

1940 spending $9.7 million. 1940 federal consumption, percent of the GDP 9.8%. 1940 deficit -3.0%

1943 spending $78.6 million. 1943 federal consumption, percent of the GDP 43.6%. 1943 deficit -30.3%

1945 spending $92.7 million. 1945 federal consumption, percent of the GDP 41.9%. 1945 deficit -21.5%

1948 spending $29.8 million. 1948 federal consumption, percent of the GDP 11.8%. 1948 surplus +4.6%

The percent of the economy going to federal consumption in 1943 was an astonishing 43.6%. In real terms of the 1940/1943 comparison the public consumed $91.5 in 1940 compared to $86.6 million dollars worth of goods in 1943. In 1943 people had LESS to consume than before the war even though GDP had increased an astonishing 96%. This should be obvious, if the federal government increases its consumption of goods and services there is less in the private sector to meet the needs of the people. In real terms you may have had a job in WWII but you definitely consumed less.

By 1948 consumption had increased to $237 million, a 174% increase in consumption with a reduction in federal spending by 68%, from $92.7 million to $29.8 million. Clearly the economic lesson of WWII is when the federal government finally let go of the American people with poor central banking, poor economic regulation, less federal spending, and budget surpluses the economy responded with a huge economic boom.

The post WWII economic boom lead to the baby boomer generation, 1946-64.

Please feel free to verify this publicly available data using the White House Historic Data Tables and the Federal Reserve Economic Data web sites.

Economic policy is two parts, fiscal and monetary. Both can be mismanaged as is what happened from 1929 to 1940. Having sound fiscal and monetary policies means people can make a decent honest living without government assistance.

To simplify good fiscal policy is when the federal government sets spending limits as a percent of the GDP, say 18%, and sticks to a budget. There is no magic money fairy. Federal spending comes from taxes, borrowing, or printing money. The federal government may provide desirable programs but they are not free, they cost society resources that must come from the productive private sector of the economy.

Sound monetary policy is even simpler, stop printing money, stop setting artificial interest rates, stop setting the reserve requirement for banks. Artificially low interest rates are preventing the economy from recovering today and set the stage for the housing boom and bust in 2003-04 when the federal funds rate was lowered AFTER the 2001 recession to 1%. It is that simple, stop printing money for Wall Street and politicians, stop artificially interfering with interest rates, let banks manage their own reserves.

The politicians and economists who work predominately for government universities try to confuse the public about the subject of economics. The ulterior motive is greed and power. Wall Street benefits by the central bank indirectly stimulating stocks and increasing liquidity in member banks like Goldman Sachs and JP Morgan. Politicians benefit by having their budget deficits monetized by the Federal Reserve. The loser is the public who pays for this theft with taxes and inflation.

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