Did the New Deal and World War II End the Great Depression?

OAKLAND, Calif., March 10, 2009―The United States has entered its worst economic period since the 1930s, and wars in Iraq and Afghanistan continue to drain our resources. Though the public is now questioning the benefits of war, the belief that President Franklin D. Roosevelt’s New Deal ended the Great Depression prevails. As the inevitable calls for President Obama’s own New Deal commence, renowned historian and economist Robert Higgs’s comprehensive examination of political economy in the United States from the 1930s through the Cold War has become undeniably relevant.

In Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity (April 30, 2009 / The Independent Institute / $22.95), now available in paperback, Higgs, Senior Fellow at the Independent Institute, provides clear evidence that FDR’s New Deal actually prolonged the Great Depression and that World War II did nothing to create prosperity. No amount of money pumped into a depressed economy can bring about genuine economic recovery, he observes, unless investors and business leaders feel secure in their property rights.

The New Deal involved an “unparalleled outpouring of laws that significantly attenuated private property rights,” which triggered uncertainty among investors and made them reluctant to invest in long-term projects, thereby extending the Great Depression. Higgs also demonstrates how little-known changes in weapons procurement policy in 1940–41 transformed the role of defense contractors in the political economy, why the U.S. civilian economy foundered during the Second World War, and how historians and economists have disregarded or misunderstood the economy’s rapid postwar return to genuine prosperity.

“War is the quintessential government activity,” writes Higgs. Employment figures were stellar during World War II only because a number of men equivalent to 22 percent of the prewar labor force were drawn into the military, mostly by the draft, at below-market wages. Making- the critical distinction between wartime prosperity and genuine prosperity, he confirms that the economy did not actually recover fully until after World War II.

In his evaluation of the Cold War, Higgs considers the opportunity costs of the era’s military economy. Between 1948 and 1989, the national security elite used its unique access to information to promote its own interests, dishing out massive amounts of political pork and corporate welfare. He analyzes the connection between congressional parochialism and national defense, citing examples such as the Pentagon’s unnecessary purchase of Pennsylvania anthracite coal during the 1960s, 1970s, and 1980s for shipment to U.S. bases in Germany. Such measures are often dismissed as “small potatoes,” but they add up to at least $10 billion a year in selfish, wasteful Congressional spending.

The Cold War generated major changes in the allocation of resources. Why, asks Higgs, did the military receive such large appropriations when the country was not involved in a “shooting war”? Research has shown that despite initial protests, many people “suspend their reason, critical faculties, and long-term judgment, reacting emotionally and with heightened deference to political leaders” during a perceived national emergency. Moreover, investors in the top defense contractors earned a far greater total market return than those in the overall market.

Depression, War, and Cold War debunks a myriad of central myths and misconceptions about the growth of the U.S. government during the 20th century. With its strong theory and carefully analyzed evidence of the nature and effects of government power, this reassessment of how America has been shaped and misshaped is a vital resource for helping us navigate the current economic crisis.

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity
By Robert Higgs
Published by The Independent Institute
April 30, 2009 | Paperback | $22.95 | ISBN 978–1-59813–029–4

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