Economy of the US during WWII

Economy of the US during WWII

The emergence of the Great Depression in the United States caused a downward spiral in the U.S. economy. Banks, shops and factories were shut down, which led to the lowest business activity in the modern history of the U.S. Not only did the Depression have a profound negative affect on the stock market it also caused high unemployment. The attempts of the government in the 1930s to recover the economy from the Depression did not succeed. The milestone in bringing the U.S. economy back on track was the largest world conflict of the 20th century - World War II.

One of the main contributors to the recovery from the Depression were the World War II fiscal policies. Government management of the economy through the use of fiscal policy (spending and taxing) proved to be a permanent legacy of the war years.Labor income tax rates and, to a lesser extent, capital taxes rose during World War II. Moreover the US government issued considerable debt during the war in order to finance the high Government expenditures.

Since the estimate is that WWII fiscal policies accounted for 81.3% of the 1941 increase in real GNP, very little of the recovery is left to be explained by monetary policies. Money growth was very rapid and volatile during World War II. The high government expenditures caused by the purchasing of wartime supplies led to an increase in the money supply. These government expenditures were financed by taxes and "war bonds". Because of the massive increase in government spending, which was much higher than the collected taxes, the budget deficit rose substantially during war.

During the war, the government controlled American consumption of many items from rubber to meats and other foods through rationing. This was necessary because of all the troops, allies and newly liberated countries that America needed to supply. When the war ended, the American citizens had pent up demand for consumption, which the government exploited to keep the American economy rising.

Through high unemployment people began to save their money rather then spend frivolously, which caused aggregate demand to decrease essentially resulting in companies being forced to slow production of certain goods. Unemployment was still a large problem till Franklin D. Roosevelt was elected as President of the United States. Through his policy of the New Deal Roosevelt was able to create government jobs for the American people. Although this did not solve the problem of high unemployment it certainly helped to relieve some of the affects unemployment had on the economy. Yes, the New Deal was incredibly effective in getting the economy running again, but it still did not solve all the problems that caused the Great Depression. As the US entered the war, the unemployment rate fell due to in part the need for military goods and services and the need to fill the vacancies of the workers fighting in the war. This helped lead to more opportunities for minorities and women to be included in the labor market.