12.07.2012 0

Did World War II end the Depression?

By David Nace — In the words of Franklin Delano Roosevelt, December 7, 1941 was a day that would live in infamy.  The Japanese attack on Pearl Harbor claimed the lives of 2,400 Americans and caused millions of dollars in damage.  Despite the horrific destruction that the attack caused, it may also have been the day that Japan saved the American economy.

America had experienced many economic downturns or panics, as they were once called, during its history.  The Panic of 1920 as the result of the end of World War I was as severe as the initial recession from the 1929 Stock Market Crash.  However, because Presidents Harding and Coolidge did not allow the federal government to intervene, the economy quickly recovered.

What turned the 1929 Stock market Crash into the decade long Great Depression were the interventions by Herbert Hoover and to a much greater extent, FDR.  Hoover passed the Smoot Hawley Tariff to protect American farmers and manufacturers from foreign competition, but it helped to bring world trade to a standstill.  He also encouraged employers not to reduce wages.  FDR ran for office in 1932 opposing Hoover’s interventions, but once in office his actions that made Hoover’s interventions look mild.

FDR immediately enacted the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act (AAA).  The NIRA allowed manufacturers to form cartels to set prices for their products in exchange for unionization of their plants.  The AAA destroyed crops and livestock to keep agricultural prices high.  These bills helped to make union members and farmers key voting blocs for FDR.

These New Deal policies helped to get FDR reelected in 1936, but they resulted in wages and prices that were much higher than market conditions would dictate at a time when few people had money.  This resulted in very high unemployment throughout the 1930’s.  Just as today, FDR blamed the high unemployment, not on his misguided policies, but on rich people not hiring enough people, and raised their marginal tax rates, allegedly to help pay for his vastly expanded federal programs.

The result was an entire decade of high prices, high taxes and high unemployment.  It was the Japanese bombing of Pearl Harbor that finally ended the unemployment problem through the induction of 12 million people into the military.  Cost plus government contracts for military supplies allowed manufacturing plants to operate profitably at the high union labor rates that they had foolishly agreed to under the NIRA, before it was ruled unconstitutional in 1936.

If the policies that created the Great Depression sound eerily familiar, they should.  President Obama has followed almost the exact policies to reward unions and other key voting blocs for the last four years.  If it required the attack on Pearl Harbor and our subsequent entry into World War II to recover the last time these policies were used, what will it take for America to recover from another four years of similar policies?  When will the American public recognize that while resentment and envy may help to win elections, they are not the policies to build an economy upon?

David Nace, an Executive Vice President of a Pennsylvania construction and engineering company, is a Liberty Features Syndicated writer.

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