Would the Depression Return?

The Great Depression was widely expected to return once the war was over. After all, it seemed as if the enormous level of government spending during the war was the only thing that had gotten the country out of the depression; cut spending and the economy would sink back into depression. Many, perhaps most, economists agreed with this analysis. Economists and policymakers therefore pressed for a commitment by the government to maintain the high level of employment after the war. The result was the Employment Act of 1946.

According to the act, the federal government’s responsibility was to “promote maximum employment, production and purchasing power.” The adjective maximum was purposely ambiguous, but the entire statement was generally understood to mean that the government would act quickly to shore up the economy if a severe recession threatened. The Council of Economic Advisers, with an adequate professional staff, was added to the Executive Office of the President. The president, assisted by the council, was directed to submit to Congress at least annually a report on current economic conditions, with recommendations for legislative action. The statute further provided that the House and the Senate were to form a standing Joint Economic Committee, which would study the report of the president and the council, hold hearings, and report, in turn, to Congress. Although no “investment fund” was provided to make up for shortfalls in private spending when unemployment was high as many liberal economists had hoped, a watchdog agency was established to keep Congress and the president systematically informed about economic conditions. A compromise piece of legislation, the act acknowledged the government’s role in maintaining full employment but did not say how the government would achieve its goals.

The expected depression did not materialize. During the war, people had accumulated large stores of financial assets, typically money and government bonds. They did so partly because they could not buy consumer durables during the war and partly because they were saving for the bad times they thought lay ahead. Once the war was over, these savings created a surge in demand that contributed to a postwar rise in prices and to the reintegration of workers from the armed forces and defense industries into the peacetime labor force.