A Short Story About How We Got Here
This is a short story about what happened to the U.S. economy since the end of World War II.
Capital Thinking · Issue #1002 · View online
That’s a lot to unpack in 5,000 words, but the short story of what happened over the last 73 years is simple: Things were very uncertain, then they were very good, then pretty bad, then really good, then really bad, and now here we are.
And there is, I think, a narrative that links all those events together.
Not a detailed account.
But a story of how the details fit together.
How This All Happened
Morgan Housel |The Collaborative Fund Blog:
Since this is an attempt to link the big events together, it leaves out all kinds of detail of what happened during this period.
I’m likely to agree with anyone who points out what I’ve missed. My goal isn’t to describe every play; it’s to look at how one game influenced the next.
If you fell asleep in 1945 and woke up in 2018 you would not recognize the world around you. The amount of growth that took place during that period is virtually unprecedented.
If you learned that there have been no nuclear attacks since 1945, you’d be shocked. If you saw the level of wealth in New York and San Francisco, you’d be shocked. If you compared it to the poverty of Detroit, you’d be shocked. If you saw the price of homes, college tuition, and health care, you’d be shocked.
Our politics would blow your mind. And if you tried to think of a reasonable narrative of how it all happened, my guess is you’d be totally wrong.
Because it isn’t intuitive, and it wasn’t foreseeable 73 years ago.
Here’s how this all happened.
1. August, 1945. World War II ends.
Japan surrendering was “The Happiest Day in American History,” the New York Times wrote.
But there’s the saying, “History is just one damn thing after another."
The joy of the war ending was quickly met with the question, “What happens now?”Sixteen million Americans – 11% of the population – served in the war. About eight million were overseas at the end. Their average age was 23. Within 18 months all but 1.5 million of them would be home and out of uniform.And then what?
What were they going to do next?
Where were they going to work?
Where were they going to live?
Those were the most important questions of the day, for two reasons. One, no one knew the answers. Two, if it couldn’t be answered quickly, the most likely scenario – in the eyes of many economists – was that the economy would slip back into the depths of the Great Depression.Three forces had built up during the war:
- Housing construction ground to a halt, as virtually all production capacity was shifted to building war supplies. Fewer than 12,000 homes per month were built in 1943, equivalent to less than one new home per American city. Returning soldiers faced a severe housing shortage.
- The specific jobs created during the war – building ships, tanks, bullets, planes – were very suddenly not necessary after it, stopping with a speed and magnitude rarely seen in private business. It was unclear where soldiers could work.
- The marriage rate spiked during and immediately after the war. Soldiers didn’t want to return to their mother’s basement. They wanted to start a family, in their own home, with a good job, right away.
This worried policymakers, especially since the Great Depression was still a recent memory, having ended just five years prior.
In 1946 the Council of Economic Advisors delivered a report to President Truman warning of “a full-scale depression some time in the next one to four years.”
They wrote in a separate 1947 memo, summarizing a meeting with Truman:
We might be in some sort of recession period where we should have to be very sure of our ground as to whether recessionary forces might be in danger of getting out of hand … There is a substantial prospect which should not be overlooked that a further decline may increase the danger of a downward spiral into depression conditions.
This fear was exacerbated by the fact that exports couldn’t be immediately relied upon for growth, as two of the largest economies – Europe and Japan – sat in ruins dealing with humanitarian crises. And America itself was buried in more debt than ever before, limiting direct government stimulus.
2. So we did something about it: Low interest rates and the intentional birth of the American consumer.
The first thing we did to keep the economy afloat after the war was keep interest rates low. This wasn’t an easy decision, because a burst of inflation when soldiers came home to a shortage of everything from clothes to cars temporarily sent inflation into double digits:
The Federal Reserve was not politically independent before 1951. The president and the Fed could coordinate policy.
In 1942 the Fed announced it would keep short-term rates at 0.38% to help finance the war. Rates didn’t budge a single basis point for the next seven years. Three-month Treasury yields stayed below 2% until the mid-1950s.
The explicit reason for keeping rates down was to keep the cost of financing the equivalent of the $6 trillion we spent on the war low.
But low rates also did something else for all the returning GIs. It made borrowing to buy homes, cars, gadgets, and toys really cheap.
Which, from a paranoid policymakers’ perspective, was great. Consumption became an explicit economic strategy in the years after World War II.An era of encouraging thrift and saving to fund the war quickly turned into an era of actively promoting spending.
Princeton historian Sheldon Garon writes:
After 1945, America again diverged from patterns of savings promotion in Europe and East Asia … Politicians, businessmen and labor leaders all encouraged Americans to spend to foster economic growth.Two things fueled this push.
Morgan Housel