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.

Financing the War

Fiscal Policy

Monetary Policy

= War Bonds

War bonds were savings bond sold to individuals by the government during World War II. These types of bonds were known as Series E bonds (later replaced by Series EE bonds in 1980) and were first made available for purchase on May 14, 1941 in denominations of $25 up to $10,000. The main function of these bonds was to give funding to the government, however they also served other purposes.

Lowering Inflation

Generally during times of War, the inflation rate rises because many goods are not produced for domestic benefit. More money is spent, but less goods are available on the market. The monetary policy for fighting inflation is to decrease the money supply. In a normal economy, the Federal Reserve will sell treasury bonds (to banks) to lower the monetary base.

However, the Federal Reserve does not have power over the sale and purchase of savings bonds purchased by individuals. When Americans purchased war bonds, they were effectively removing money from circulation, therefore lowering the Money Supply. This helped control inflation throughout the war.

Selling Bonds

With the boost in available jobs and higher wages during World War II, the average disposable income was rising. A massive advertising campaign encouraged workers to purchase War bonds to support the War effort. The fact that so many people were willing to forgo their disposable income for cause showed that people had a positive attitude toward the war and felt their investments were safe. Many companies offered payroll deduction plans in exchange for War bonds. Since consumers were not spending their disposable income on goods, the money spent on war bonds became savings.

=Numbers

During World War II, the US government sold more than $185 Billion worth of War bonds to finance the war. This accounted for over half of the war's $304 billion cost.

Unemployment

Rationing and Postwar Consumption

Rationing Overview

Prior to the attack on Pearl Harbor, the United States had no intention or plan for rationing, yet within sixteen months after the historic event, the government installed thirteen major rationing programs. The programs, in order of their installation, are tires, automobiles, typewriters, sugar, bikes, gas, protective rubber footwear, fuel oil, coffee, shoes, stoves, processed foods and meats, fats, oils and cheese. All of the programs except for the last two were implemented during 1942. At first the government tried price controlling, but the price levels were at a point where demand exceeded supply, which created the need for rationing. Supplies were low because the government needed to supply the troops, our allies and newly liberated places.

During the United State’s involvement in the war, industrial factories stopped making consumer items and began to produce war materials. Ration coupons took over as currency. People could clearly see the effect that the war was having on their own soil. Yet, in 1943 two thirds of people surveyed said that their meals were not different since rationing started and three quarters said that they size of their meals had not changed. Then in 1944, ninety percent of women surveyed said they had enough meat and seventy five percent said they had enough sugar. More than a third claimed they could not use all there canned goods before they expired. Even the quality and quantity of the wartime diet increased, especially in low income households. The American rationing system was so effective because of the “native good sense of the American people and because, on the whole, the amateurs who organized and administered it rose to the situation and discharged their responsibilities with vigor, imagination, and courage.”

"Plant to Conserve- Can to Preserve"

The government launched big campaigns to urge American citizens to conserve on everything. Shown to the right are some of the images they used. The government encouraged people to make “victory gardens,” which were gardens an individual household could use to get vegetables. They also encouraged home canning, to help preserve food longer. There were community canning centers set up to help people. The government put so much emphasis on food production that they referred to it as America’s “first line of defense.” In 1943, twenty million households (three fifths of the population) produced more than forty percent of he vegetables that Americans consumed. The government marketed conservation as highly patriotic, as seen on the rightand left. It was the way American citizens not in Europe can help fight the war and defeat the Axis. A pamphlet for the Office of Price Administration in 1943 stated:

“American meat is a fighting food. It’s an important part of a military man’s diet, giving him the energy to outfight the enemy. It helped the Americans drive the Japs from Guadalcanal. It’s feeding our troops on world battlefronts. It helped sustain the heroic British 8th Army in its blistering drive from Egypt to Tunisia. It aided the Red Army in breaking the German lines at Stalingrad and Leningrad. It’s helping soviet troopers roll the Axis forces back. Meat from our farms and packing houses is playing a part almost on par with tanks, planes, and bullets.”

Postwar Consumption

There are many theoretical reasons why economies prosper after a war. First, greater government control over the economy is a good thing, which lingers even after the war has stopped. The government can ration and control prices, keeping them fair. Another argument is that there is a technology race between the two states at war, thus speeding up innovation. Also, because foreign resources that were once available are not anymore, there becomes a nee to produce within the country, boosting the job market.

After the war ended, Americans had a lot of pent up consumption. Rationing was like a dam for consumption, so after the war when the dam broke, peoples’ spending rushed out. The government had propaganda for mass consumerism, as they saw it as the way to have a successful postwar economy. In their advertising, they said that consumption was not selfish but doing your duty to keep America in prosperity. A bridal magazine stated, “the dozens of things you never bought or even thought of before … you are helping to build greater security for industries of this country … What you buy and how you buy it is very vital in your new life- and to our whole American way of living.” The housing market was huge after the war. In 1960, a quarter of the homes in America were built in the fifties. In 1940 forty four percent of the citizens in America owned a home, but in 1960 that number had increased to sixty two percent.

Economy of the US during WWII