World War II and the start of the economic recovery
Letter to the Editor

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Article Highlights

  • The biggest trigger to growth in #WWII a steady rise in private capital investment

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  • The root of prosperity was the same in #WWII as now: private capital formation and investment, not gov't spending

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  • An economic lesson to learn from #WWII

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Everyone should be grateful for Richard Rumelt's "World War II Stimulus and the Postwar Boom" (op-ed, July 30) debunking the notion that the massive government spending during World War II led to an economic boom, and for reiterating what other economic historians have known for some time--that the war cut personal consumption as Americans saved their paychecks in record amounts.

Mr. Rumelt, however, doesn't tackle the other Keynesian myth used to explain the post-war boom, namely that when the war ended Americans rushed out to spend those savings on long overdue goods like cars and refrigerators, triggering an avalanche of consumer demand. Indeed, his reference to rising household debt might seem to confirm this. As Milton Friedman and Anna Schwartz showed some time ago, people's liquid asset savings continued to grow after the war, from a record $151 billion at the close of 1945 to $168.5 billion by the start of 1948. The biggest trigger to growth was a steady rise in private capital investment, which had also fallen during the war but then jumped from $10.6 billion in 1945 to $40.6 billion in 1948. While the personal savings rate fell, the private investment rate relative to GNP soared from 5% to almost 18%, with the biggest leap coming in 1946--a leap which would not be reflected in GNP numbers until two years later. Meanwhile, business savings almost doubled from $15.1 billion to $28 billion, providing a sure way to finance expansion and hiring.

In short, the root of prosperity was the same then as now: private capital formation and investment, not consumer or government spending.

Arthur Herman is a visiting scholar at AEI.


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About the Author

 

Arthur
Herman
  • Arthur Herman is a historian and author of the Pulitzer Prize finalist Gandhi and Churchill: The Epic Rivalry That Destroyed an Empire and Forged Our Age (Bantam, 2008), the Mountbatten Prize–nominated To Rule the Waves: How the British Navy Shaped the Modern World (HarperCollins, 2005), the New York Times bestseller How the Scots Invented the Modern World (Three Rivers Press, 2001), and many articles on foreign and military policy. At AEI, Dr. Herman authored a new book that traces the mobilization of American industry, technology, and material production over the course of World War II.
  • Email: arthur.herman@aei.org
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    Name: Neil McCray
    Phone: 2028625826
    Email: neil.mccray@aei.org

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