Wall Street History
Wall Street and World War II
[Note: I did a brief piece on World War II and the markets
10/1/99. This is greatly expanded.]
At the start of World War II, the nation was in the throes of the
Great Depression. Despite the best efforts of President Franklin
Roosevelt and his New Deal policies, it wasn''t until the United
States entered the war that the American economy began to
recover, and recover it did in a huge way. Wall Street, however,
wasn''t to go along for the ride.
World War II unleashed the true potential of America. Military
historian John Keegan:
"In the final enumeration of Hitler''s mistakes in waging the
Second World War, his decision to contest the issue with the
power of the American economy may well come to stand first."
Hermann Goering, commander of the Luftwaffe and head of
German industry, was scornful of America''s war capacity.
"The Americans only know how to make razor blades."
Sorry. All the U.S. did was outproduce the entire rest of the
world. And it was our industrial might more than anything else
that saved the day. Following are some facts:
--The U.S. produced over 6,500 naval vessels, including 147
aircraft carriers, 952 other warships, and 215 submarines.
--64,546 landing craft
--3.5 million jeeps, trucks, and personnel carriers
--12 million rifles, carbines, and machine guns
--47 million tons of artillery shells.
And America was not just producing for our own use. For
example, the Soviet Red Army marched in American boots and
two-thirds of their vehicles were American. America sent some
5 million tons of food, enough for half a pound of concentrated
rations for every Soviet soldier for every day of the war.
While the Germans may not have appreciated what they were
initially up against, Josef Stalin certainly did. At the Teheran
summit in 1943, Stalin proposed a toast:
"To American production, without which this war would have
Turning to Wall Street, at the outset of the war, there was not a
sense of panic.
The Dow Jones Industrial Average closed the year 1938 at 154.76.
Yet on September 1, 1939, as the Wehrmacht blitzed Poland, the
Dow stood at 135.25 and the next day actually finished up 3
points. After taking two days off, the market rallied 7% to close
at 148.12. And by September 12, the Dow stood at 155.92,
higher than at the first of the year.
Initially, it was felt on Wall Street that whatever the human
tragedy, war would be beneficial to the American economy as we
supplied our allies. But when the realization began to sink in that
Hitler was going to train his guns on France and Britain, the Dow
began to react.
On May 9, 1940, the average stood at 148.17. Hitler launched
his invasion of the Netherlands and Belgium on May 10. The
Dow fell 2.3% to 144.77. And as the outlook in Europe turned
increasingly depressing, the Dow hit 113.94 on May 24, a 23%
drop in just two weeks.
The market rallied some in the fall as the Battle of Britain raged
on and it became apparent that Hitler''s hopes for invasion would
fall short. By 10/31/40, the Dow Jones stood at 134.61.
On December 6, 1941, the Dow sat at 116.60. Pearl Harbor was
a Sunday. Monday, December 8, saw the Dow drop 3.4% to
close at 112.52.
By April 28, 1942, the Dow had fallen to 92.92. From its peak
of 155.92 on 9/12/39, the market had declined some 40%. And
while it rallied the next three years to close at 166.42 on V-E
Day (May 8, 1945) and 164.79 on V-J Day (August 15, 1945),
taken in total, you can see that the Dow Jones went nowhere
during the war.
The decline that transpired in the early 40s came about while
corporate profits were exploding, from $6.4 billion in 1939 to
$20.9 billion in 1942. But while profits were soaring, trading
volume on the New York Stock Exchange was drying up.
1939 saw average daily volume drop below 1 million shares for
the first time since 1923, averaging 954,000. It slid every year
thereafter until 1942 when only 455,000 shares traded in a
And as you can imagine, during the war, the ranks of investment
bankers and brokers were reduced as the draft took its toll. The
back rooms of many Wall Street firms were decimated by the
loss of their clerks and smaller shops were forced to shut down.
In 1942, over 1,200 companies were listed on the exchange,
twice that of World War I. Back in the 1920s, U.S. Steel
accounted for over 60% of annual NYSE volume. But by 1942,
the big "wheelhorses" that drove the market; 20 companies
which included Big Steel, Bethlehem Steel and Anaconda
Copper, were losing their influence and accounted for only 18%
of market volume.
Americans still had all-too-vivid memories of 1929 and wanted
no part of Wall Street, even as their disposable income rose. We
saved some $4.2 billion in 1940, a figure which rose to $35.9
billion in 1944. But most of it was going into safe, insured
savings accounts and war bonds, not stocks.
At the end of World War II, the average veteran was 28 years
old. Having been born in 1917, the Depression struck in their
early teen years. Historian Robert Sobel comments.
"Hard times and war were their major enemies. They would
want to make up for lost opportunities. They believed the rest of
their lives would be filled with challenges. The veterans
expected to work hard for whatever they wanted. The thought
that one day they might be prosperous was far from their minds.
Their desires were simple."
Many leading economists predicted that the end of World War II
would bring another Depression. One of the most renowned,
Paul Samuelson, commented about a year before the end of the
"The final conclusion to be drawn from our experience at the end
of (World War I) is inescapable. Were the war to end suddenly
within the next six months, were we again planlessly (sic) to
wind up our war effort in the greatest haste, to demobilize our
armed forces, to liquidate price controls, to shift from
astronomical deficits to even the larger deficits of the thirties -
then there would be ushered in the greatest period of
unemployment and industrial dislocation which any economy has
On V-J Day, there were more than 12 million men and women
on active duty. Two years later, the number had been reduced to
1.5 million. Gross National Product fell 1.6% from 1945 to
1946. Factories were disposed of at 20% of their cost.
But during the war, you have to remember that new housing,
appliances, autos, trucks, radios, telephones, etc., were virtually
unobtainable. This pent-up demand, coupled with Americans
savings, led to a postwar boom, not the bust that was feared.
The "Economist''s" Michael Elliott commented decades later.
"When the war in Europe started in 1939, America was
struggling, battered and bruised, from an economic recession that
was far deeper and more wounding than anything known in
Europe.At the end of World War II, by contrast, America
bestrode the narrow world like a colossus. Its military machine,
enjoying scientific and technological advances far beyond those
available to any other fighting men, had won two wars, each a
wide ocean away from home. On the twin rocks of its economic
and military might, America then built a society which was the
envy of the world - a society in which ordinary working people
could enjoy a standard of living, with spacious homes and
modern appliances, beyond the dreams of those in other nations.
The outside world was kept at bay, like children pressing their
noses to the panes of a party to which they have not been
But the fact is that the Dow Jones still just finished at an even
200, when the decade of the 40s was over. Blue chips like
Firestone and Kennecott Copper sold for under 4 Xs earnings,
despite paying 8-12% in dividends!
And it''s a sad fact that it took until November 1954 before the
Dow Jones recovered to its 1929 peak level.
John Steele Gordon, "The Great Game"
Charles Geisst, "Wall Street: A History"
Robert Sobel, "The Great Boom"
Harold Evans, "The American Century"
Oxford Companion to World War II