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What Role Did the Government Play in the Prosperity of the Post–World War II Years?

Most observers of the past regard the twenty-five years following World War II as a golden age of economic growth and prosperity in the United States. Success was measured both by national economic statistics and by the material circumstances of individuals’ lives. Life magazine gushed that Americans’ shopping carts “became cornucopias filled with an abundance that no other country in the world has ever known.” Between 1950 and 1960 alone, the gross national product increased by more than one-third, median family income grew by 30 percent, and two million factory jobs were created. The percentage of people who lived in poverty fell from around one-third at the end of the war to 15 percent in 1966.

Many factors contributed to the astonishing advance. The baby boom spurred population growth and increased the demand for commercial products. American companies faced limited competition from abroad as other nations such as Germany and Japan recovered from the war’s devastation. Relative stability in the Middle East gave U.S. industry and commerce access to cheap oil, especially critical for the auto industry that boasted the largest U.S. corporation and depended on products from a host of other industries. The application of new technologies increased productivity in industry and agriculture alike. Above all, federal government activities, unnoticed and overt, worked in myriad ways to sustain and increase demand for the products of the American economy.

The government stimulated business enterprise in the name of national security both during and after the war. It sold facilities built for military purposes during World War II to private interests, and its wartime-sponsored research produced advances in areas such as plastics, aviation, and computing. Defense spending, especially after the start of the Korean War, supported many corporations and employed millions of workers. The government’s foreign aid programs helped U.S. manufacturers to sell products abroad. And the Interstate Highway and Defense System Act of 1956, prompted in part by security considerations as its name suggests, stimulated a raft of industries from construction to fast food restaurants.

Federal contributions to the production of “human capital” for economic expansion were also linked to national defense. The GI Bill provided college or technical education for nearly eight million veterans by the late 1950s, and the federal government sent millions of dollars to universities for defense-related research, reaching $1.57 billion a year by the late 1960s.

Housing, a key industry in the postwar economic boom, benefited from government action in several ways. Homeowners may have associated government housing programs with public projects erected for the poor, but they themselves relied heavily on federally backed low-interest mortgages through the Federal Housing Association and the GI Bill of Rights. These government programs that enabled ordinary Americans to buy homes promoted the construction industry, which in turn expanded demand for everything from cement mixers to electric appliances, and created jobs for carpenters, electricians, plumbers, and others. A California suburban developer remarked, “If it weren’t for the government, the boom would end overnight.”

The tax code also contributed to a thriving economy by shifting money into the hands of those who were most likely to spend it. Until the 1960s, the wealthy paid income tax rates as high as 90 percent, and corporate taxes were 52 percent. This progressive tax system helped to moderate somewhat a sharply unequal distribution of national income: The top 20 percent of families saw their share of income drop from over 50 percent in the 1930s to 45 percent in 1957, while the bottom 40 percent saw their portion rise from 12 to 16 percent. The tax code also underwrote purchasing power by allowing deductions for employers who provided health care and pensions to their employees. In addition, the government subsidized homeowners by allowing them to claim income tax deductions for interest they paid on housing loans, thereby contributing to the booming housing industry.

Finally, the New Deal welfare state sustained a market for American products, even when the economy slipped into recession. Congress amended Social Security to extend unemployment insurance and old-age pensions to new segments of the population and increased benefits under both Truman and Eisenhower. By 1960, more than five million families received $10.7 million in benefits. Government support for labor unions meant that some eighteen million workers earned higher wages than they were likely to have received without collective bargaining. Many of these workers also enjoyed guaranteed cost-of-living increases, company pensions, and health insurance. All of these programs not only improved Americans’ material lives but also, by sustaining consumer demand, helped to keep the economy humming.

Questions for Analysis

Summarize the Argument: According to the author, what is a major explanation for the success of the American economy in the 1950s?

Analyze the Evidence: What examples are given to demonstrate the role of the federal government in promoting economic prosperity?

Consider the Context: What factors aside from government action contributed to the higher standard of living enjoyed by most Americans in the 1950s?