The Depression That Wasn't


There was an individualist interlude between World War II and the Cold War. With a brash new Republican Congress elected in 1946 and with a Soviet Union that still seemed more ally than enemy, the country leaned "right" on economics and "left" on foreign policy. Then the Cold War came along and that brief moment of relative peace and free enterprise was forgotten.

As the debate over federal stimulus rages, Jeffrey Rogers Hummel looks back at that postwar period and finds some "devastating historical evidence against fiscal policy":

The enormous decrease in government spending after World War II, followed by four years of surplus and a nearly 50 percent fall in the national debt as a percent of GDP, constitutes the most contractionary fiscal policy in all of U.S. history….If Keynesian theory were correct, there should have been a massive depression, which is what nearly all economists were predicting at the time. But the demobilization saw no real recession or significant unemployment.

As Hummel notes, this point was also made in Richard Vedder and Lowell Gallaway's Out of Work, a book with many sharp things to say about unemployment.