How did the US get out of the Great Depression during WWII? If there was no money, how could the government start paying soldiers and factory workers?


How did the US get out of the Great Depression during WWII? If there was no money, how could the government start paying soldiers and factory workers?

In: Economics

Europe was destroyed (farms and factories) and the US stil had both. They loaned euope money to rebuild and euopeans spent that money on American grain and technology. Those loans were repaid with interest + the US became a bigger exporter accelering growth.

The problem of the great depression was that no money was flowing through the system.

The New Deal opened up lines of debt where anxious wealthy people could put cash for it to be safe. It used that money to fund infrastructure, employ people, and pull the economy out of a tailspin. The plains were reforested enough to stop the Dust Bowl.

Then, WWII meant massive amounts of government spending on weapons and vehicles. That meant a lot of employed people. They bought things, which meant stable industries.

The issue wasn’t that there wasn’t any money. The issue was that fewer loans were being given out (believe it or not but when a bank loans out money they are lending money that they don’t actually have – this is known as Fractional Reserve Banking – it allows the same money to be used by multiple people) and there was less spending (so businesses fired people, went bankrupt, etc).

With the New Deal and WW2 the government started spending. This got more money moving through the system so that people could be employed and start spending money and then they could take out loans and get the economy going.

The great fallacy is that the economy is a zero sum game. People imagine it is like running a business and when you have spent all the money it is all gone. This is not how the economy works.

The economy and wealth of a country is the sum total productive output of the country. If you put people to work making things someone (even the military) wants, the country will have more money.

A better way to think about it is a household, not a business. If everyone pitches in and fixes busted things, refinishes furniture, weeds the garden, cooks, cleans, etc, everyone in the house gets to live in a nicer home. If half the household lays on the couch belching, not so much.

The economy is NOT a zero sum game. For one country or one industry, or one community to benefit, another one does not have to lose. If I paint my house and clean my dishes, my house is a nicer home, that does not effect anyone else’s home.

Edit: someone pointed out that I didn’t circle back and explain how this answered OPs question. The answer to OPs question is that they created wealth enough to pay for the war by putting everyone to work. Everyone got up off the couch and started helping out.

Great depression basically ended before WW2 most economies around the world were growing rapidly at the start of 1939, this was accelerated as countries started rearming governments borrowing money to buy guns and planes etc.

1) The US entry into WWII created a massive requirement for war materials. The government signed large contracts with private contractors to build/provide these essential war materials. The private contractors in turn hired tens of thousands of Americans in their factories/mills/mines etc.

2) The US government instituted a military draft and increased recruiting, which helped bring down joblessness.

3) The US government increased taxes and had bond drives to generate currency in order to pay for the massive expansion of the military.

Appreciate everyone’s responses, thank you! I better understand now that the money wasn’t gone—it just wasn’t flowing (to oversimplify the awesome answers here).