US Economic History 8 — Post-WWII Boom: Transition to a Consumer Economy

Release Date
May 25, 2017


Economics History

The American economy boomed in the years after World War II. Video created with the Bill of Rights Institute to help students ace their exams.
This is the eighth video in a series of nine with Professor Brian Domitrovic, which aim to be a resource for students studying for US History exams, and to provide a survey of different (and sometimes opposing) viewpoints on key episodes in U.S. economic history.

    1. Top Three Myths about the Great Depression and the New Deal (video): Professor Steve Davies busts three common myths about the Great Depression, including the idea that World War II ended the Great Depression. 
    2. The Myth of U.S. Prosperity during World War II (FEE article): Robert Higgs explains that the idea that the US economy flourished during World War II is a myth and explains why we need to look beyond the unemployment rate and national output. 
    3. Did the US provoke Japan’s attack on Pearl Harbor? (blog post): Professor Yvonne Chiu explains how “economic warfare” contributed to Japan’s attack on Pearl Harbor. 

Brian Domitrovich: The American economy boomed in the years after World War II. In 1945, at the close of the war, the United States was responsible for 50% of the world’s economic production, while having only 5% of the world’s population. Unlike the many war ravaged countries around the world in 1945, our cities and industries were intact, and we became the sole powerhouse of the global economy. During World War II, the United States had dedicated the vast proportion of it’s industrial plant to military uses.
As the government rationed consumer goods, those working in the factories saved a large portion of their wages and bought war bonds. After the war ended in 1945, there was an immense boom in consumer goods production as the nation’s factories made the transition from military to civilian uses. Even though postwar inflation ate up a portion of people’s savings, consumers still devoted their resources to buying goods that had been unavailable or in short supply during the war.
The federal government accounted for 45% of the nation’s economic expenditures in 1945, the last year of the war, but only 13% two years later in 1947. Aside from the war bonds’ savings, returning soldiers also had spending power via the GI bill which provided funds for investing in the future, such as higher education, home mortgage loans, and small business startup costs. Widespread optimism about their financial futures accompanied the great baby boom of the postwar years. So many children were born, that the rate of increase of the American population doubled to almost 2% per year.
The housing challenge presented by this development was met by suburbanization. Millions of single family homes were built on the outskirts of cities with workers commuting to the office or factory by car, as groceries and consumers goods became available at car accessible shopping plazas, and then shopping malls. Cities became linked together via vehicular traffic with the creation of the interstate highway system in 1956.
Advertising in the 1950s accounted for as large a share of the American economy as did new car purchases. Recreation expenditures surged with Disneyland attracting vacationers from across the nation. However, economic growth was not consistent in the 1950s. There were four recessions between 1949 and 1960. Structural unemployment, the number of unemployed at the peak of each business cycle, kept rising throughout the decade. Youth unemployment was very high, peaking at 18% in 1958. The rate of African-American unemployment was double that of Whites, and unions remained inhospitable to welcoming African-Americans into all of their organizations. Tax rates were also very high in the 1950s. The top rate of the federal income tax was 91%, more than double today’s. The bottom rate for low earners was 20%, exactly twice today’s. In the severe recession of 1957/1958, economic production fell at a rate similar to that of the Great Recession of 2008 to 2009.
The much stronger decade of postwar economic growth was the 1960s. From 1961 to 1969, the country saw no recessions, and the rate of economic growth more than doubled. Job growth was also three times greater in the 1960s than in the 1950s. Tax cuts contributed significantly to the incredible growth of the 1960s. The top and the bottom rate of the federal income tax both went down by nearly 30%. The top rate from 91% to 70%, the bottom rate from 20% to 14%. All of these booming years seemed remarkable, especially since most people at the time could remember the difficult years of the Depression and World War II. By the mid-1960s, it was common for Americans to call what they were experiencing, postwar prosperity.