The hidden history of prosperity:
The war was, first, a massive macroeconomic stimulus. Unemployment was still more than 14 percent in 1940. Thanks to more than $100 billion of war-production orders in the first six months of 1942—more than the entire gross domestic product of 1939—joblessness vanished. The war also recapitalized industry that had languished during the Great Depression, and it gave government a central place in developing science and technology. The war was not just a huge jobs program but an unprecedented job-training program. President Franklin Roosevelt also chose to use war production to increase the power of unions as full social partners. A company that wanted defense contracts had to recognize its unions. So the war transformed labor markets.
Second, the war altered incomes. Steeply progressive income taxes with marginal rates as high as 94 percent, limits on executive compensation, and strict controls on the bond market led to a compression of the income distribution that lasted more than a quarter-century. The need to finance the war led to emergency measures pegging the rate on government bonds at a maximum of 2.5 percent. The Federal Reserve simply bought whatever quantity of bonds the war effort required. This meant that a major category of financial industry profit—buying, selling, and speculating in Treasury bonds—was eliminated, at the expense of the rentier class. Economists even have a name for this process: repression of finance. We could use some of that today.