The WWII Banking Curse
The massive fiscal/monetary shock of WWII is a poorly understood phenomenon. Of particular interest is the role the banking system could have played in transmitting the fiscal shock of the war into postwar economic activity through the wartime expansion of bank balance sheets. This paper establishes that the commercial banking system, in general, did not play such a direct role. At the state level, $1 of total military spending causes bank balance sheets to decline 10.3 cents by 1949 and 13.9 cents by 1955. However, one subcategory of wartime spending, military facilities spending, offers a useful counterfactual. Facilities spending was paid for directly by the Federal Government, and has a strong positive effect on business lending in the postwar period. This counterfactual suggests that the financial arrangements to facilitate private military production “crowded out” local bank deposit growth and to a lesser extent local lending.
Tax Shocks, Financial Channels and Changes in Output
In this paper, I revise prior explanations for the differing response of the U.S. economy to tax shocks in the 1952-1980 and 1980-2007 sub-periods. I find the Fed is more likely to accommodate tax shocks after 1980. Also, consumption smoothing likely does not explain the change between sub-periods; rather, the shifting effect of tax shocks is driven by the fact that tax policy targets low and middle income households before 1980 and high income households after 1980. This suggests the change between sub-periods reflects different fiscal policy choices, not a change in the response of the economy to revenue shocks.
The Role of Savings during the 1940s, From Wartime Boom to Reconversion.
In this essay I re-emphasize the importance of savings during World War II and the immediate postwar “reconversion” period. There has been a debate among economic historians about how households experienced the boom both during and after the war. I argue that it is in the unprecedented shock to savings–as much as any other component of national income–where most of the wartime and postwar boom manifested itself. A proper consideration of the accumulation of savings during the war itself points to a true “boom” feeling during the war. As well, this paper demonstrates that national product accounting conventions obscure the role of housing in the postwar boom and thus obscures the role of savings rates—which were not negative in the immediate postwar as one would expect. If one treats housing as a consumer durable good instead of an investment good, negative savings rates appear as early as 1947. This demonstrates that there was no need to “spend down” savings to satisfy pent-up demand, as previously accepted. Instead, the postwar housing boom meant that households acquired long term assets and liabilities that did not necessitate the immediate drawdown of the liquid assets accumulated during the war.