The Great Depression and the war

Was it necessary for America to go to war in order to establish a sustained recovery in its capitalist economy or did the New Deal and Keynesian-type policies of easy money (low interest rates) and fiscal stimulus (tax cuts and government spending) do the trick well before the war economy became dominant?

It is a key argument of Marxist economics (at least in my version!) that capitalist economies can only recover in a sustained way if average profitability for the productive sectors of the economy rises significantly.  And that would require the sufficient destruction in the value of ‘dead capital’ (past accumulation) that is no longer profitable to employ.

From that flows the argument that the Great Depression of the 1930s in the US economy lasted so long because profitability did not recover throughout that decade.  I checked the data from the US Bureau of Economic Analysis for the period.  To get the rate of profit, I measured corporate profits against net fixed assets in the corporate sector, valued on a historic cost basis.  The evidence is clear (see graph): in 1938, the US corporate rate of profit was still less than half the rate of 1929.

It was the same story for the mass of corporate profits too.  Even by 1940, profits were still below that of 1929.

Indeed, it is clear from these graphs that profitability only picked up once the war economy was under way, by 1940 onwards.

But maybe profitability in the capitalist sector is irrelevant to economic recovery and what matters is monetary and fiscal stimulation of effective demand (i.e investment and consumption).  That would be the Keynesian explanation of the depression: namely that there was a ‘liquidity trap’ that had to be released by ‘easy money’ policies and fiscal spending to stimulate the private sector; a ‘magneto problem’, as Keynes called it.  Arch-Keynesian economists Brad de Long and Larry Summers wrote a piece way back in 1998 entitled Does macroeconomic policy affect output?, Brookings Papers on Economic Activity (1988:2), pp. 433-80.  In their paper, they argued that US economic recovery was already well under way by 1942 when the US entered the world war.  De Long and Summers calculated that more than five-sixths of the decline in output relative to trend that occurred during the Depression had been made up before 1942. They found it “hard to attribute any of the pre-1942 catch-up to the war.”   So the Marxist account that it was war that transformed US capitalism and got it out of the Great Depression is wrong.

However, their estimates have been contested by Professor John Vernon. Vernon agreed that the US economy completed its recovery from the Great Depression in 1942, restoring full-employment output in that year after 12 years of below-full employment performance. However, Keynesian-type fiscal policies were not the most important factor from 1933 through 1940.  Only after that did they become the most important factor, when the recovery was less than half-complete. So it was World War II fiscal policies that were instrumental in the overall restoration of full-employment performance (see Vernon’s World War II Fiscal Policies and the End of the Great Depression, Journal of Economic History, 1994).  Vernon shows that more than 80% of the 1941 increase in real GNP can be attributed to World War II-associated federal fiscal policies. “Thus World War II fiscal policies did much more than simply complete a recovery already largely accomplished: they were, for more than half the recovery, the major determinant in the restoration of full-employment performance.”

If US economic recovery from the Great Depression did not start until the world war was well under way, then it lends support to the view that Keynesian-type monetary or fiscal policy won’t work and the Marxist view that capital values must be destroyed to restore profitability to get capitalist economic recovery.  And remember, the destruction of capital values means the bankruptcy of many companies, a huge rise in unemployment and even the physical destruction of things and people in their millions.

I had a new look at the evidence starting with GDP, the main indicator used by De Long and Summers.  By 1938, the level of US real GDP was still below the level of 1929.  There was no significant rise in US real GDP until 1940, after which GDP really took off to reach double the 1929 level by 1944.

And if we look at the key Keynesian categories of consumption and investment, we find that US investment levels again did not take off until 1941 and, most interestingly, consumption continued to fall, dramatically once the war began.

So there is no evidence of recovery before the war ‘kicked in’.  Investment took off from 1941 onwards to reach, as a share of GDP, way more than double the level that investment stood at in 1940.  Why was that?  Well, it was not the result of a pick-up in private sector investment.  What happened was a massive rise in government investment and spending.  In 1940, private sector investment was still below the level of 1929 and actually fell further during the war.  The state sector took over nearly all investment, as resources (value) were diverted to the production of arms and other security measures in a war economy.

But is not increased government investment and consumption a form of Keynesian stimulus, but just at a higher level?  Well, no.  The difference is revealed in the continued collapse of consumption.  The war economy was paid for by restricting the opportunities for workers to spend their incomes from their war-time jobs.  There was forced saving through the purchase of war bonds, rationing and increased taxation to pay for the war.  Government investment meant the direction and planning of production by government decree.  The war economy did not stimulate the private sector, it replaced the ‘free market’ and capitalist investment for profit.  Consumption did not restore economic growth as Keynesians (and those who see the cause of crisis in under-consumption) should expect; instead it was investment in mainly weapons of mass destruction.

The war decisively ended the depression.  American industry was revitalized by the war and many sectors were oriented to defence production (for example, aerospace and electronics) or completely dependent on it (atomic energy). The war’s rapid scientific and technological changes continued and intensified trends begun during the Great Depression. As the war severely damaged every major economy in the world except for the US, American capitalism gained economic and political hegemony after 1945.

In many industries, company executives resisted converting to military production because they did not want to lose consumer market share to competitors who did not convert. Conversion thus became a goal pursued by public officials and labor leaders. Auto companies only fully converted to war production in 1942 and only began substantially contributing to aircraft production in 1943.  Pearl Harbor was an enormous spur to conversion.  From the beginning of preparedness in 1939 through the peak of war production in 1944, the war economy could not be left to the capitalist sector to deliver.  To organize the war economy and to ensure that it produced the goods needed for war, the federal government spawned an array of mobilization agencies which not only often purchased goods but closely directed those goods’ manufacture and heavily influenced the operation of private companies and whole industries.

The military services were largely able to curtail production destined for civilians (e.g., automobiles or many non-essential foods) and even for war-related but non-military purposes (e.g., textiles and clothing). And the Department of the Treasury introduced the first general income tax in American history and “war bonds” sold to the public. Beginning in 1940, the government extended the income tax to virtually all Americans and collected it by deductions from wages at source.  Those subject to income tax rose from 4 million in 1939 to 43 million in 1945!

With such a large pool of taxpayers, the American government took in $45 billion in 1945, an enormous increase over the $8.7 billion collected in 1941, although still far short of the $83 billion spent on the war in 1945. Over that same period, federal tax revenue grew from about 8 percent of GDP to more than 20 percent.  All told, taxes provided about $136.8 billion of the war’s total cost of $304 billion. To cover the other $167.2 billion, the Treasury Department also expanded its bond program, which served as a valuable source of revenue for the federal government.  By the time war-bond sales ended in 1946, 85m Americans had purchased more than $185 billion worth of the securities, often through automatic deductions from their paychecks.

The Office of Price Administration attempted to curtail inflation by maintaining prices at their March 1942 levels.  And the National War Labor Board limited wartime wage increases to about 15%.  Although wages rose about 65% over the course of the war, the national living standard barely stayed level or even declined.  About 10.5 million Americans who either could not then have had jobs (the 3.25 million youths who came of age after Pearl Harbor) or who would not have then sought employment (3.5 million women, for instance). Almost 19 million American women (including millions of black women) were working outside the home by 1945.  Labour mobility was huge.  About 15 million civilian Americans moved. Migration was especially strong along rural-urban axes, especially to war-production centers around the country, permanently altering their demographics and economies.

As Guiglelmo Carchedi summed it in a recent piece (Behind and beyond the crisis, International Socialism, no 132, October 2011 “Why did the war bring about such a jump in profitability in the 1940‐5  period?  The denominator of the rate not only did not rise, but dropped because the physical depreciation of the means of production was greater than new investments. At the same time, unemployment practically disappeared. Decreasing unemployment made higher wages possible.  But higher wages did not dent profitability. In fact, the conversion of civilian into military industries reduced the supply of civilian goods. Higher wages and the limited production of consumer goods meant that labour’s purchasing power had to be greatly compressed in order to avoid inflation. This was achieved by instituting the first general income tax, discouraging consumer spending (consumer credit was prohibited) and stimulating consumer saving, principally through investment in war bonds. Consequently, labour was forced to postpone the expenditure of a sizeable portion of wages.  At the same time labour’s rate of exploitation increased.  In essence, the war effort was a labour‐financed massive production of means of destruction.”

I am not suggesting from this that the current Long Depression will only end with a new world war at the expense of millions of lives and destruction of material wealth.  But what the story of the Great Depression and the war shows is that, once capitalism is in the depth of a long depression, there must be a grinding and deep destruction of all that capitalism had accumulated in previous decades before a new era of expansion becomes possible.  There is no policy that can avoid that and preserve the capitalist sector.

Let Keynes sum it up “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” from The New Republic (quoted from P. Renshaw, Journal of Contemporary History  1999 vol. 34 (3) p. 377 -364).

18 Responses to “The Great Depression and the war”

  1. Guilherme Says:

    Correlations with major depression are interesting. However, which country will provide the “widow’s cruise” (the perfect Keynesian world) for the reconstruction of capital destroyed in nations ?

  2. Daniel de França MTd2 Says:


    It seems that unprofitable capital was destroyed, not in USA, but in Europe, and USA had to renewed it, now profitable. The rise kicks in right after the war begins and that is explained by the fast and destructive blitzkrieg tactic.

  3. paulc Says:

    The charts do show growth increasing somewhat prior to 1937. FDR’s decision to balance the budget led to renewed recession in 1937. Without that the upward trend in growth, profit and rate of profit evident in the charts would surely have continued to some extent. It’s at least necessary to add FDR’s renewed austerity moves [spurred by his misreading of trends through the mid thirties] into the analysis mix.

  4. Dimitris Says:

    But there was no massive destruction of capital in the USA because of the war, that happened in Europe and Asia, so how did the war produced such a rise in the profitability of the private sectrory in America? I think the answer lies in the massive “experiment” of planned economy the government enforced in order to win the war. After the war and the demobilisation the economy was once again on the verge of a recession but then came the cold war and the campaign against Korea and the defence budget rose significantly once again.

    • michael roberts Says:


      I think the first part of what you say is broadly right and what my post was basically trying to say. The war economy was not Keynesianism in the sense of fiscal and monetary ‘stimulus’ but the state-direction of the capitalist sector by edict that, as a by-product, produced big profits for US capitalism as the supplier of Allied military power. Both the capitalist sector and the working class was forced to do the bidding of the state in the interests of US capital, as eventually perceived by the majority of the US ruling class. Remember the war was opposed by the majority of the US elite right through to late 1941.

      When the war ended, the US economy took a dip until US capitalism could convert back to civilian production and sell to a credit-financed Europe and Japan. European capital got off its knees once European labour had been defeated in post-war struggles and took advantage of the huge physical destruction of capital that created high profitability (at a lower scale of production to begin with). The Golden Age began. In my view, the Golden Age 1948-65, was not based on a “permanent arms economy” from the Cold War, but from much higher rates of profit in the productive sectors of capitalism, driven by innovation from the war (cheapening constant capital) along with plentiful and cheap labour (variable capital), especially in Europe and Japan. The arms economy eventually became a burden on the productive sector by the time of the Vietnam war and thus contributed to the turn into crisis from 1965-82 (the revolutionary age in southern Europe, the ex-colonial countries).

  5. Dimitris Says:


    thank you for your reply

    I think you are right about the “permanent arms economy”, it was not the cause of the Golden Age of Western capitalism, but I think it played a significant role, especially immediatelly after the end of the war when the economy was on the brink of a recession because of the demobilisation by creating a smoother transitional period. We can also argue that the arms economy and the conditions of greater involvement of the state in the economy, in terms of planning and investment that produced, was a significant factor in the successful management of the effective demand in an enviroment of high levels of proffitability. That contributed to the duration and the depth of the postwar growth, until it started to have a negative effect on profits, as you mention.

  6. Silvano Says:

    Why UK didn’t experienced a boom phase after WWI?

  7. bob montgomery Says:

    Didn’t the Nazi economy under Schact operate the same way? Keynesians argue that recovery by 1935/36 resulted from massive public works spending and rising consumer and producer demand. But in reality the Nazi state actually looted consumer (worker) income thru direct deductions which ultimately ended up being collected by the giant banks and then funneled to the war industries– steel, auto, coal, metallurgy etc. A major part of this sequestering of consumer income involved “financial disintermediation”– the compulsory bypassing of savings and loans banks, as well as the stock market (didn’t the regime limit both S&L and the capital markets too??). So there was a massive elimination of small and medium capital, largely in the consumer goods sector. Also, this state-directed (Reichsbank and Treasury ministry) process involved compulsory “rationalization” of production– so producers in heavy industry which lacked sufficient capital went under and concentration of industrial capital increased. The main point is that the Nazi economy worked to force the market to restore profitability by depressing consumption and destroying less productive capital.
    Bob Montgomery

  8. Choppa Morph Says:

    I’d like to make a couple of points.
    In the first place I think the following statement is confusing:
    “It is a key argument of Marxist economics (at least in my version!) that capitalist economies can only recover in a sustained way if average profitability for the productive sectors of the economy rises significantly. And that would require the sufficient destruction in the value of ‘dead capital’ (past accumulation) that is no longer profitable to employ.”
    It’s profitable to employ capital (*any* capital – constant or variable) when it makes a profit. So you must have assumed a qualification there such as “no longer as profitable to employ as it used to be”. Capital that doesn’t make any profit at all is more than “dead”.
    So we’re left with the more familiar equation that the quantity (value) of constant (ie non-living, accumulated) capital must be reduced in proportion to variable (ie living, workers’ labour) capital employed, if the rate of profit is to stay the same or rise.
    This makes the destruction of constant capital a much starker historical necessity for the health of capitalism than you seem to want to admit.
    You write: “I am not suggesting from this that the current Long Depression will only end with a new world war at the expense of millions of lives and destruction of material wealth.” But this is exactly what you are suggesting unless you clarify what you mean by an end to the Long Depression or how the destruction of material wealth can be accomplished without destroying millions of lives.
    The historical and political choices we face are stark – in the orthodox Marxist-Bolshevik view it’s a question of “socialism or barbarism”, that is to say, a non-capitalist world or the destruction of civilization. If you don’t envisage a world war resolving the profitability dilemma of the capitalist class, what do you see in its place?
    In the second place, and fundamentally, I lack the basic Marxist historical perspective of social development and change in your critique of profitability.
    Marx assumed a non-reversible historical progression of modes of production driven by the development of the forces of production. When the forces of production mobilized by slave-owning society became too vigorous for the property relations of slave society to contain, these relations burst asunder and were replaced by feudal property relations, which in their turn were replaced by capitalist relations.
    Now, Marx and Engels, and following them Lenin and Trotsky (and such orthodox Marxist economists as Preobrazhensky in his The New Economics) viewed all developments in the imperialist world economy in this perspective.
    By 1867 Marx had already come to the conclusion that classical competitive capitalism was dead and that with the full development of the credit system the capitalist mode of production had reached its ultimate limits. (This is clear from the chapters on Interest-bearing capital and the credit system in Capital III, especially ch 27 “The role of credit in capitalist production”, eg
    “III. Formation of stock companies. […]
    2) The capital, which in itself rests on a social mode of production and presupposes a social concentration of means of production and labour-power, is here directly endowed with the form of social capital (capital of directly associated individuals) as distinct from private capital, and its undertakings assume the form of social undertakings as distinct from private undertakings. It is the abolition of capital as private property within the framework of capitalist production itself.”)
    Lenin subtitled his work on Imperialism “The Ultimate Stage of Capitalism” – not so much “высшая” “highest” as meaning “this high for the moment but can go higher” but as meaning “this is as high as it gets and will ever get” – ie all the theoretical categories potentially contained within the capitalist economic system had emerged and were realized in actual social existence.
    Philosophically and scientifically capitalism already had nowhere left to go as far as Marx was concerned. And as the quote shows, he was absolutely convinced of this, hedged no bets, and took the ultimate demise of capitalism for granted (but NOT the victory of socialism!!! – capitalism was historically finished as a viable mode of production, but the character of its end was not historically ascertained – it was still being worked out in the living class struggle.)
    This historical perspective of transition between two major modes of production – capitalism and socialism – is fundamental to any critique of capitalism that aspires to follow Marx’s theory in a principled way without eclectically sidestepping its inopportune and stigmatized historical and political elements.
    If this perspective is missing, then the only audience for which a fundamental critique of capitalism has any real meaning (the revolutionary working class) is left dangling in the air as to the practical social and political context and consequences of what is being said.
    In other words, it is essential to be clear about whether this present crisis can be resolved within the capitalist framework or not. And if so, why and on what conditions, and if not, then why not.
    Capitalist theoreticians are professional jesters – what they say doesn’t matter. The capitalist economy regulates itself blindly and can only be analysed (as far as the principal regulator, value, is concerned) after the event. Marxist economists on the other hand are advisers in a war. And our war doesn’t fight itself. So every word counts.

    • Cameron Says:

      In the essay on imperialism Lenin says:
      “Capitalism has been transformed into imperialism.
      Cartels come to an agreement on the terms of sale, dates of payment, etc. They divide the markets among themselves. They fix the quantity of goods to be produced. They fix prices. They divide the profits among the various enterprises, etc.”
      Fix prices? Fix quantities? No more anarchy in production?
      There is no theoretical proof for this highest/final/ultimate stage. This is all based on observations not science. But let’s assume he’s correct. Then laws such as the LTV and FROP no longer operate. In this stage rate of profit will always be high enough since cartels can “fix prices”. Price is not an expression of value. It’s whimsically decided by cartels.

      This theory simplifies political economy. I have and continue to see the damage done by it.

  9. H.A. Cox Says:

    It seems that unprofitable capital was destroyed, not in USA, but in Europe, and USA had to renewed it, now profitanble. The rise kicks in right after the war begins and that is explained by the fast and destructive blitzkrieg tactic.
    michael roberts Says:
    August 6, 2012 at 2:24 pm | Reply

    I think that this statement gets to the heart of the relationship between WW II and the subsequent boom. However, the war not only destroyed ‘unprofitable capital’ in Europe and Japan, it wiped out even ‘profitable’ capital and the whole infrastructure of many countries. This destruction could lead to the boom because the workers of Europe and Japan were not able to make the Imperialist elites pay for their crimes by making a revolution.

  10. Daniel de França MTd2 Says:

    The war itself paid itself with the destruction of profitable capital. Building profitable capital in USA instead of in those countries is equivalent of paying a debt.

    Such capital transfer did not happen after WW1, so there was accumulation of debts which lead to a thing called in accounting “written off”. Which, it meant the hyperinflation of the Weimar Republic and the crash of the NY stock exchange in 1929.

  11. Matt Says:

    The key missing point concerning the inevitable unevenness of the destruction of less profitable capitals has already been addressed: In the WW2 era, this occurred unevenly across nation-states, such that in the US this featured less the outright destruction of capitals than the reorganization (re-composition, raising the organic composition across the board) under state direction and fiat. The uneven destruction of capitals internationally is also necessary for the generation of a hegemonic center for the reorganization of world capitalism. This reorganization of the states system, foreign trade and the world market – the last 3 items in Marx’s “research project” as listed in the 1859 Preface – was also a necessary precondition for the so-called post war “Golden Age”.

    It was the greatest act of “Bonapartist” capitalism in world history.

    Now the really interesting question is: What way out this time? It is hard to imagine an all-out world war as the way this time, nor are there any solid indications that any of today’s powers are really gearing up for such a war. It would certainly be of such immense destructiveness as to leave no hegemon standing. So world capitalism faces an unprecedented historical impasse in this regard. And the leading state powers know this, I believe, though one cannot rule out some mad regime, a “Hitler regime” coming to power in, say the US of today, to get the ball rolling. We can certainly see elements of this both in the past GW Bush government and in its successor legacy of the wingnut section of the Republican Party. But this section is politically a fading demography of middle aged white men. Their future prospects are not good. The US is not a defeated post WW1 Germany full of embittered, still young, veterans plus a totally impoverished middle class (like Hiter himself) with whom the older reactionary generation could link up with. On the contrary, the younger generation in the US has shifted decidedly to the left, if Occupy, the 2008 election of Obama (aside from what Obama really represents), etc., are any indication.

    One could say that the US is “already geared up”, but then what are they waiting for? IMO the US is NOT presently geared to launch such a war; on the contrary the US is increasingly oriented towards low scale interventions in civil conflicts. And therein may lie a clue to the real future: civil war.

    The American Civil War, however internally destructive, was also famously a great kickstarter and reorganizer of a US capitalism still in its childhood. Another great act of Bonapartism in the real time of Louis Bonaparte. Shades of WW2. It would have the advantages of demolishing the most foot-dragging dead weight on the world capitalist economy (the US), while containing the conflict to the same. I’m not predicting that, on the contrary it is useful to point out in order to work to avoid such an awful outcome as a matter of policy for any Marxian socialist movement. Skip the civil war, move directly to the socialist revolution. If it can’t be avoided they convert into a revolutionary civil war. That of course would NOT be functional to the reorganization of world capitalism.

    But it can’t be ruled out.

  12. william smith Says:

    will president Osamabama lead the us into another depression of some sort. A job bill should have been his priority not obama care nor stimulus for the wealthy

  13. Mike Ballard Says:

    Unprofitable fixed capital is destroyed through competition too. Sure enough bombs will do it; but who is saying that outmoded fixed capital was destroyed in Germany, Japan, Italy and the USSR?

    I think your charts demonstrate the need for free market capitalism to be guided by the planned State investments, based on forced savings, controlled wages and production goals, not to mention a whole lot of ‘primitive’ QE.

    The basic contradiction is wage labour and the fact that wage labour is legally tied to so and so many hours of work per week will eventually lead to an inability of the market to absorb what is produced through sale. Giving more the of collective product of labour back to the working class will correct that somewhat, as will shorter work time with no cut in pay; but the contradiction will remain until wage labour is abolished by the workers themselves and common ownership of the collective product of labour is established along with a revolutionary change in the mode of production and exchange based on need, not commodity sale.

  14. James Burns Says:

    Interestingly, prior to WW2, and in the depths of Great Depression, US “War Plan Red” extolled benefits of provoking a world war with British Empire

    Great blog btw, Michael.

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