Echoes Dispatches From Economic History
How Did World War II End the Great Depression?: Echoes
It is commonly opined, in high school history classes and backyard barbeques, that government spending in the run-up to World War II "got us out of the Depression." This narrative conveys the sense that the end of the Great Depression was both accidental and necessarily belligerent.
But exactly how World War II got us out of the Depression is generally ignored -- even though it provides a lesson at odds with the accepted interpretation.
The war did provide a unique demand for entirely new industries. While airplanes had only been incidentally important in World War I, it was believed that they would be decisive in the 1940s. The problem, for the U.S. military, was that it had only a few planes, and fewer resources to construct them with. The government couldn't simply go to the market and buy some planes; it had to create the market. And it did.
In a genius marriage of finance and policy, the government founded the Defense Plant Corporation, or DPC, in 1940. The DPC was run by a committee of public-minded businessmen from all stripes of commerce: William Knudsen, who had helped organize Ford's production line and then became the president of General Motors Co.; Donald Nelson, a vice president at Sears, Roebuck & Co.; and Ralph Budd, president of the Chicago, Burlington and Quincy Railroad, to name a few.
Before the DPC's founding, government-financed capital spending accounted for only 5 percent of the annual U.S. investment in industrial capital. In 1943, thanks to the DPC, the government accounted for 67 percent of U.S. capital investment, utterly transforming not only how much was produced but what was produced.
In 1940, for instance, Dow Chemical produced only 6 million pounds of magnesium -- needed for aircraft hulls -- per year, in one plant in Michigan. DPC loans to Alcoa soon helped expand production to 600 million pounds per year. In 1939, the military had 28 airfields. During the war, it built 1,000 more across the U.S. In one stroke, the government created the necessary infrastructure and the manufacturing capacity to enable an entirely new industrial sector.
By the end of the war, the U.S. aerospace industry was four times the size of the car industry, which had been the mainstay of the economy for 20 years.
Today, what's most exciting is how quickly and efficiently the DPC moved in transforming the economy. Its practical policies cobbled together different strategies for promoting the new industry, including direct government ownership (sold off after the war), direct financing, indirect insurance for private capital and accelerated depreciation schedules. It wasn't ideological, it was simply logical -- and, for the time, financially sophisticated.
What's sad today, at least for historians, is that the DPC is mostly forgotten. A fantastic history of it was written by Gerald White, but outside of a few specialists, it isn't well known. The story of U.S. aerospace development has been seen as the inevitable triumph of technology demanded by wartime. Actually, American aerospace wasn't inevitable, but the result of smart decisions made by hard-minded policymakers and industrialists.
The Depression ended not simply because the military needed more materiel, but because the government used wartime demand to transform what America made. Financing all those investments helped lead the country out of the Depression and established a new and important sector for the economy. Aerospace and its related industries became a key component of the postwar boom.
Private capital once again had a place to be profitably invested -- which is the secret to any economy's success.
(Louis Hyman is an assistant professor of history at Cornell University and the author of "Debtor Nation: A History of America in Red Ink." The opinions expressed are his own.)