The Great Depression, which began in 1929, did not end until the United States was actively engaged in World War II. Some economists believe that the country's entrance into the war -- which spurred increased industrial and labor production for the war effort -- was the primary reason the Depression ended. Other academics, however, oppose this view and believe the economy would have improved even in the absence of increased military production.
Keynesians' Aggregate Demand Theory
The key to understanding how World War II helped end the Great Depression is to understand the work of an economist named John Maynard Keynes. Keynesians, as his followers are known, believe that a recessed or depressed economy can recover if the aggregate demand for goods and services increases. Production thereby also increases to meet the demand, which in turn leads to increased employment. The effect is circular, and starts with demand. As such, Keynesian economists frequently support government policies that allow the government to demand goods and services to increase aggregate demand. This is frequently known as "stimulus" policy, and the New Deal is a prime example (see Reference 1).
Keynesian economists, following the idea that aggregate demand motivates an economic recovery, believe that massive government wartime spending helped end the Great Depression. The economy's aggregate demand is made up of all demand for goods and services -- including the government's. While the New Deal increased demand for goods and services through relief programs and infrastructure purchases, these outlays paled in comparison to the massive increase in government-generated demand brought on by preparation and entry into World War II. Between 1940 and 1942, when the U.S. entered World War II, government purchases nearly quadrupled, which added significant demand to the economy, according to the website of San Jose State University's Department of Economics (see Reference 2). In February of 1941, a full percent of American labor was employed building military materials in preparation for a potential war; this only increased once the U.S. actually entered the war. This massive spending put money in people's pockets from the government that could then generate demand and revive the economy (see Reference 3).
Traditionally, the Keynesian argument proposes that it does not matter what is demanded by the economy -- as long as large amounts of something are demanded -- to bring about a recovery. If the government ordered millions of pounds of useless paper, the economy might still recover. Others, however, argue that what the economy demands is as important as how much. In this theory, economists look at how World War II introduced new sectors to the economy that previously did not exist. The creation of the aerospace industry, which was quite small before the war, is a prime example. In 1940, for example, the military had 28 airfields, but by the end of World War II, it had over 1,000, noted Louis Hyman, an assistant professor of history at Cornell University, in a column in "Bloomberg News." This created opportunities for the aerospace industry to boom and employ people, thereby recovering the economy (see Reference 4).
Opponents of the World War II Theory
While the Keynesian argument that military spending helped end the Depression remains compelling, many economists oppose the theory. Others suggest quite the opposite: that wartime spending hampered an economic recovery. Economists such as William Beranek, a professor emeritus of financial economics at the University of Georgia, believe that wartime restrictions and increased taxes left Americans unable to spend their money as they wished. This meant that, while Americans might have demand for many consumer goods, they were unable to buy them. Taxes and the fact that the economy was geared toward military production left Americans with demand for consumer goods that simply were not being produced. These economists suggest that the end of the war, which freed Americans to buy as they pleased, helped the economy recover fully and completely (see References 1 and 5).
- Stephen Horowitz and Michael J. McPhillips: The Reality of the Wartime Economy: More Historical Evidence on Whether World War II Ended the Great Depression
- San Jose State University: Department of Economics: The Recovery from the Great Depression of the 1930s
- The New York Times: The Opinion Pages: The Conscience of a Liberal: Oh! What a Lovely War!
- Bloomberg: How Did World War II End the Great Depression: Echoes
- The Augusta Chronicle: More Evidence that World War II Didn't End the Depression
- Jupiterimages/Stockbyte/Getty Images