A Random Walk in the History of Economic Thought, 1900–1950
Chapter 8: Finance in a Period of War, Debt, and Taxes
The decade of the 1940s began with the US economy still in the doldrums. War changed that picture. As part of the total effort that World War II required, federal government spending during the war was about 40 percent of gross national product (GNP) for the period (compared to 25 percent for World War I). This large amount of government spending finally ended the great depression of the 1930s. From a trough in the business cycle in June 1939, the economy expanded to a peak in February 1945. During this period the unemployment rate fell to a record low of 1 percent and GNP doubled. The economy had a slight recession with a trough in October 1945, then another recovery that peaked in November 1948. The next recession lasted until October 1949, when a recovery began that lasted until July 1953. To be sure, these recessions were serious, but the main economic problem during the period was inflation. Wartime price controls held inflation in check for the first half of the decade, but their removal brought about a postwar inflationary period. While the wartime government spending stimulated the economy, it did not bring about a period of growth in the stock market. War may be good for business, but there are lags in its effects on the economy. Moreover, the beginning of any war is very uncertain and World War II was no exception. While we now might think that the allied victory was inevitable, that was not as apparent...
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