Published by EH.NET (July 2007)

Robert Higgs, Depression, War, and Cold War: Studies in Political Economy. New York: Oxford University Press, 2006. xv + 221 pp. $35 (cloth), ISBN: 0-19-518292-9.

Reviewed for EH.NET by Hugh Rockoff, Department of Economics, Rutgers University.

It was a great idea for Robert Higgs and Oxford University Press to publish this collection of Higgs’ papers. The volume brings together ten papers that Higgs has published over the past two decades, which reinterpret some of the key events of the twentieth century. Several of these papers appeared originally in the Journal of Economic History and Explorations in Economic History and will be familiar to economic historians. Others, however, appeared in policy journals, and economic historians may have missed them. The papers reinforce each other, offering a coherent and stimulating view of three crucial events in the twentieth century: the Great Depression, World War II, and the Cold War.

The papers are arranged in chronological order. Chapter 1, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War,” argues that part of the explanation for the persistence of the Great Depression was the “regime uncertainty” created by the New Deal. Investment was depressed not by the decline in income (the old multiplier-accelerator model), high real interest rates, or other conventional economic determinants of investment, but rather because of “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” (p. 5). Potential investors were afraid to commit their funds because they did not know what Roosevelt and the New Dealers would do next. Low levels of investment in turn depressed the economy as a whole. This is not a new argument. Joseph Schumpeter (1962, 64-5), as Higgs notes, and other prominent economists had made the same point. Higgs, however, argues the point in detail, and brings in forms of evidence, such as opinion polls, that economic historians often ignore. He makes a strong case.

I find that papers by Higgs always lead to more questions. This is not a criticism, but rather an indication they address important issues. Terms like “regime uncertainty” and “security of private property” cover a lot of ground. Were investors afraid mainly of higher corporate taxes? Increased union power? Minimum wage laws? Social Security? Abandonment of the gold standard? Outright nationalization? Higgs quotes Elliot Brownlee (1996) to the effect that it was tax policy that most concerned business. Higgs, however, seems to be neutral on what if any policies contributed the most to the low level of investment. Indeed, his argument seems to be that it was all of these things together that contributed to the new regime, and that trying to parse out the effect of particular New Deal policies would be counterproductive. Before giving up on the Depression era as a source of information about how policies affect the economy, however, it makes sense to me to probe further. We want to know which, if any, policies are likely to have substantial unintended consequences for investment. Must we simply put the Depression era aside?

One of the pieces of evidence that Higgs uses to make this point is a graph of relative yields. He shows that the yields on long-term bonds spiked relative to yields on short-term bonds (for a given rating) when Roosevelt’s anti-business rhetoric was reaching a peak. This graph does add support to his argument, but I am skeptical that it is as decisive as Higgs suggests. The following simple table shows the yields on BAA corporates, AAA corporates, and long-term government bonds. The data are from The yields on the private sector bonds fell during the New Deal. And the spreads between private and public yields, which could be interpreted as the premiums for holding privately issued securities, also fell. Apparently, economic contractions were the really scary things for investors in the bond market. To be sure, there are many possible interpretations of this data. The anti-business rhetoric and actions of the Roosevelt administration may have depressed the stock market and accelerated the flight to safety that landed investors in the private bond market. Large-scale government intervention could even have been construed as a good thing for debt issued by large firms if investors thought that these firms had now become too big to fail. My point is simply that threats to property rights are difficult to tease out of the financial data. I doubt that the debate that Higgs has started on this issue is over.

Table 1. Interest Rates, 1929-1939


BAA yield


AAA yield


Bond yield


Long-term bond


Long-term bond


In chapter 3, “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” Higgs challenges the notion that in World War II a combination of high government spending and extensive government intervention in the form of price controls, rationing, and so on rescued the country from the Depression and allowed Americans to enjoy guns and butter at the same time. Higgs has a good point. Conventional economic time series point to the war economy as a kind of economic heaven on earth. In 1944 the standard measure of unemployment was 1.2 percent of the labor force, inflation was a reasonable 2.21 percent (the GDP deflator), and real GDP per capita was at an all time high, a level that would not be reached again until 1953 (Millennial Edition of Historical Statistics). Clearly, the numbers suggest that the policy of massive government spending and government controls, including price controls, had worked wonders. Higgs rightly and convincingly attacks this view. The statistical case for economic heaven on earth is created by comparing apples with oranges. Unemployment rates were low, Higgs insists, in part because young men were drafted into the armed forces, price indexes are misleading because of hidden price increases and other distortions produced by controls, and real GDP per capita is misleading because, among other things, it treats an intermediate good, munitions, as final product. Every undergraduate and graduate student of economics (and not a few of their professors) would benefit from reading Higgs’ essay (and the related essays in Chapters 4 and 5). They would learn that economists need to think about the meaning of economic statistics. They might even learn that knowing some economic history can help them understand the time series they use.

Higgs’ argument still leaves open the question of why so many contemporaries, and so many historians, including historians who lived through the period, consider it a prosperous period. One issue that deserves more attention, I believe, is the role of savings. Americans built up large holdings of liquid assets during the war. These were a source of utility for their holders, even if expectations of postwar deflation led people to overestimate their ultimate value. Workers may have viewed jobs in defense plants, moreover, as a way of acquiring skills that would be valuable after the war, as an investment in human capital. (But see Casey Mulligan (1998) for the argument that conventional economic forces cannot explain high wartime work effort.) Even enduring the hardships of moving to a war production center ? and Higgs rightly emphasizes the costs of moving to and living in war production centers ? may have been viewed as an investment that would pay dividends after the war.

Another question raised in this essay concerns Higgs’ claim that we should exclude military production from GDP on the grounds that it is an intermediate good that contributes nothing directly to utility. This is true for some people; I suspect it true for Higgs. It is at least possible, however, for people to draw utility from public expenditures: the Space Program comes to mind. One can imagine people taking satisfaction in World War II from knowing that they were forging the tools of victory over Germany and Japan. Surely learning about the Liberation of Paris, and feeling that they had contributed if only by working in a war plant, meant something to Americans of that generation. Perhaps this is why Simon Kuznets (1945), who generally favored excluding defense spending from GDP on the grounds that it was an intermediate good, argued that in a period such as World War II when winning the war was one of the primary “end purposes” of economic life, munitions production should be included in GDP.

The theme of measurement error, and the consequences of misinterpreting economic data, is continued in Chapter 4, “Wartime Socialization of Investment: A Reassessment of U.S. Capital Formation in the 1940s.” Here Higgs takes issue with the estimates of government owned privately operated capital made famous by Robert J. Gordon (1969). Gordon argued that adding government financed but privately operated capital created during the war to standard estimates of total capital helped explain what appeared to be an otherwise unexplainable increase in total factor productivity. Higgs’ point is that wartime capital was subject to very high rates of depreciation, rates that exceeded accounting allowances. Chapter 5, “From Central Planning to the Market: The American Transition, 1945-47,” once again takes up the issue of what GDP measures. Official figures show real GDP per capita falling precipitously from 1945 to 1946. But Americans didn’t see 1946 as a return to the Great Depression. Economic historians can try to adjust the GDP figures. Alternatively, they can simply say that people saw 1946 for what it was, a year of rapid transition to postwar economic prosperity.

Altogether, Higgs mounts a powerful challenge to conventional economic wisdom regarding the accomplishments of the Roosevelt administration during both the New Deal and World War II.

Another major theme is the enormous cost of the Cold War and the enormous waste in military spending programs associated with it. Economic historians, Higgs claims, have not paid sufficient attention to the Cold War. Higgs has made a good start on filling the gap. In Chapter 2, “Private Profit, Public Risk: Institutional Antecedents of the Modern Military Procurement System in the Rearmament Program of 1940-41,” Higgs shows how the military went from competitive bidding to negotiated contracts in which the government assumed most of the risk in the summer of 1940, and never looked back. Chapter 6, “The Cold War Economy: Opportunity Costs, Ideology, and the Politics of Crisis,” describes the cost of military spending during the Cold War, and shows that military spending came mainly at the expense of private sector spending not civilian government spending. Chapter 7, “Hard Coals Make Bad Law: Congressional Parochialism versus National Defense” tells the story of how the legendary Congressman Daniel Flood and other politicians forced the Department of Defense to buy anthracite coal. Some of it was shipped to Germany, a clear case of coals to Newcastle, and some ended up simply stored in the U.S. in a great heap. Chapter 8, “Airplanes the Pentagon Didn’t Want, but Congress Did,” tells a similar story about aircraft production that was kept going long after it was clear that there were more effective ways of spending defense dollars. Higgs writes well and does a good job of pointing out the underlying forces that distort defense spending. And it is not as if the lessons have been learned. The same forces are at work producing the same distortions in spending.

Chapter 9, “Profits of U.S. Defense Contractors,” shows that investing in defense contractors was very profitable over the years 1970-1989. Indeed, combining Higgs’ data with the earlier work by George Stigler and Claire Friedland (1971) leads to the conclusion that investing and holding stocks of defense contractors was a good strategy throughout the Cold War. Chapter 10 “Public Opinion: A Powerful Predictor of Defense Spending,” shows that an index derived from public opinion polls does a good job of predicting national defense spending. Higgs is justifiably cautious about this finding, and is quick to point out that public opinion was only the proximate determinant of defense spending. Ultimately, public opinion was shaped by the arguments made by politicians, experts, and the press. And, of course, public opinion may be misled by experts who claim to have special information not known to the general public, a prescient observation.

This is an important book. Economic historians, no matter their area of specialty, and no matter their ideological preconceptions, should be familiar with Higgs’ arguments. You will not learn any new econometric techniques with which to wow your friends from reading this book. You will not find any data that you can use to quickly turn out a note for a journal. You will find, however, an original and thoughtful exploration of what the great events of the twentieth century tell us about the appropriate role of the government in the economy.


Robert J. Gordon, 1969. “$45 Billion of U.S. Private Investment Has Been Mislaid” American Economic Review, Vol. 59, No. 3 (Jun.): 221-238.

Simon Kuznets, 1945. National Product in Wartime. New York, National Bureau of Economic Research.

Casey B. Mulligan, 1998. “Pecuniary Incentives to Work in the United States during World War II,” Journal of Political Economy, Vol. 106, No. 5 (Oct.): 1033-77

Joseph Schumpeter, 1962. Capitalism, Socialism and Democracy. New York: Harper Torch Books.

George Stigler and Claire Friedland, 1971. “Profits of Defense Contractors,” American Economic Review 61 (4): 692-4.

Hugh Rockoff is a professor of economics at Rutgers University and a research associate of the National Bureau of Economic Research. His paper written with Leonard Caruana, “An Elephant in the Garden: The Allies, Spain, and Oil in World War II,” is forthcoming in the European Review of Economic History.