History And The American Economy: Where Have We Been? Where Should We Go? Part 3 of 3

Part One --- Part Two --- Part Three --- Part Four --- Part Five Thanks in part to the New Deal (and to natural economic cycles), in the second half of the 1930s, the economy began to recover. The eruption of World War II accelerated the recovery process.

War is typically good for the economy and in this case it generated full employment and effectively ended the Great Depression. Because of wartime rationing and shortages of just about everything, however, there weren’t many consumer goods. Instead of spending their paychecks, Americans saved them.

When the war ended, Americans began spending their savings. There was pent-up demand for just about everything, especially housing, cars, and basics like furniture and appliances. The baby boom also fueled consumer activity: millions of kids needed new schools, school buses, teachers, books, shoes, food, etc.

But Americans also enjoyed full employment -- and big paychecks -- thanks to the Cold War. Millions of people worked in the aircraft industry, for example, and in munitions, and in highway construction. (The national interstate system was originally intended as a defense project: if needed, the government could use the highways to move weaponry).

In the 1970s, this “industrial-consumer" economy began grinding to a halt. European and Asian nations devastated during WWII had recovered and rebuilt, thanks to funds provided by the U.S. Marshall Plan, the World Bank, and the International Monetary Fund. These new economies rested on highly efficient industrial systems that could compete with and often surpass American manufacturing.

At the same time, the oil-production nations gained political clout (in part because European colonialism ended) which allowed Saudi Arabia and other oil-rich nations, to gain more control over their resources. (The U.S. economy, of course, was dependent on that oil. If you want to know when, why, and how our current oil-terrorist woes began, study up on U.S foreign relations in the 1970s.)

The result? In the 1970s, and with alarming speed, the U.S., industrial production faltered as companies shifted manufacturing overseas. The structural underpinnings of our economy began to give way.