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There are two prominent views about what ended the Great Depression. The most widely accepted one by far emphasizes U.S. entry into World War II, with its attendant government spending for armaments.1 According to this view, the U.S. economy in 1941, though approaching its potential output, remained well below it, so the war's fiscal stimulus moved the economy completely out of the Depression.2 That the war ended the Depression is a view held not only by economists, but also by the public in general. The second view, in contrast, prominent particularly among economists, sees monetary expansion, which began in spring 1933, as the principal reason for its end.
In this article, I offer another interpretation, arguing that neither of the conventional views is fundamentally correct. I maintain that forces inherent in the economy that promote productivity growth drove the recovery following the 1933 trough and moved the economy back to its trend. This view is not a radically new one, but it is important to recognize that productivity-raising forces promoted recovery specifically during the 1930s-a time when aggregate-demand measures are held to have been fundamental to moving the economy back to its trend.
One of the difficulties of macroeconomic interpretation, indeed of scientific inquiry in general, is that of isolating a dominant mechanism from the complex of operative forces. Among the likely forces promoting the recovery was the return to trend attributable principally to monetary changes, fiscal measures, credit-channel influences, and inherent "mean reversion" influences. Or did it result from purely random developments? The years following the 1937-38 depression facilitate a natural experiment in which some of these influences can be identified and disentangled, and therefore are of special importance in any attempt to identify what ended the Great Depression.
The Current Canonical Chronicle
The trough of the 1929-33 debacle came in early 1933. 3 The ensuing recovery ran to late spring of 1937, when an extremely sharp, year-long depression began, reducing industrial production by 33 percent.4 Its nadir was in May 1938. The ensuing revival carried into early 1942. Figure 1 depicts the evolution of industrial production in the Great Depression decade, showing the respective 52 and 33 percent declines in the two 1930s contractions. Industrial production in September 1939 was at the same...