1930s shipyard with battleship symbolizing economic recovery

How Military Spending Shocked the Economy During the Great Depression

Samir D’Costa in Business & Economy August 2025 • 4 min read.

"Uncover the Surprising Local Economic Effects of Government Spending in the 1930s"

The Great Depression, an era synonymous with economic hardship, saw unemployment rates soar above 25%. In response, the U.S. government initiated various spending programs, but one less-explored avenue was the naval expansion of the 1930s. Driven by geopolitical concerns over Japan’s growing naval power, this military buildup offers a unique lens through which to examine the effects of government spending on local economies.

Economists often use the concept of a “multiplier” to describe how much additional output is generated by each dollar of government purchases. While much of the existing research focuses on modern policies or broad fiscal measures, a closer look at historical, localized events like the 1930s naval expansion can provide valuable insights. By analyzing how specific counties responded to federal contracts, we can better understand the dynamics of government spending during times of economic crisis.

This article delves into Christopher Biolsi's research, which leverages novel county-level data on shipbuilding contracts awarded during the Great Depression to estimate a local government spending multiplier. It highlights the significant impact of these contracts on manufacturing output, employment, and household consumption, challenging conventional wisdom and offering a fresh perspective on fiscal policy effectiveness.

The Naval Expansion: A Response to Geopolitical Tensions

1930s shipyard with battleship symbolizing economic recovery

In the early 1930s, the United States was party to a series of naval treaties, including the Washington Naval Treaty of 1922, aimed at preventing an arms race. However, as Japan began to expand its military presence in the Asia-Pacific region, concerns grew among U.S. policymakers. By 1933, President Roosevelt recognized the need for a long-term naval building program to keep pace with Japan's growing fleet.

This shift in policy led to the Vinson-Trammell Act of 1934, authorizing the U.S. government to build up its navy to treaty allowances. While some opposed the expansion, fearing it was driven by shipbuilders seeking profits, the bill passed, marking a significant increase in federal spending. The key to understanding the economic impact of this naval expansion lies in the contracts awarded to private firms across various U.S. counties.

Contracts were awarded annually from 1933 to 1938.
The program aimed to modernize the U.S. Navy.
Concerns over Japanese aggression motivated the spending.
Contracts included battleships, submarines, cruisers, and more.

The data from these contracts reveals a concentration of beneficiaries in the northeastern part of the country, particularly in urban and industrialized areas. While this raises questions about the randomness of contract allocation, it also provides a defined scope for analyzing the localized economic effects.

The Multiplier Effect and Policy Implications

Understanding the multiplier effect, where initial government spending sparks broader economic activity, is crucial for evaluating fiscal stimulus. In this historical context, the research suggests that targeted government investment can indeed stimulate local economies, particularly during periods of widespread economic weakness. These findings resonate with modern economic debates and offer a valuable historical perspective on the potential benefits and challenges of government-led initiatives.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1016/j.red.2018.10.005, Alternate LINK

Title: Local Effects Of A Military Spending Shock: Evidence From Shipbuilding In The 1930S

Subject: Economics and Econometrics

Journal: Review of Economic Dynamics

Publisher: Elsevier BV

Authors: Christopher Biolsi

Published: 2019-04-01

Everything You Need To Know

What specific legislation enabled naval expansion during the Great Depression, and what geopolitical concern drove this policy?

The naval expansion during the Great Depression led to the Vinson-Trammell Act of 1934. This act authorized the U.S. government to build up its navy to treaty allowances in response to growing geopolitical tensions, primarily concerns over Japan's increasing naval power. The contracts awarded to private firms across various U.S. counties as a result of this act spurred manufacturing output, employment, and household consumption.

Can you explain the 'multiplier effect' in the context of government spending during the Great Depression?

The multiplier effect refers to the concept where initial government spending generates broader economic activity. During the Great Depression, specifically the naval expansion, the research suggests that targeted government investment stimulated local economies. Christopher Biolsi's research shows how these contracts had a significant impact on manufacturing output, employment and household consumption. This provides a historical context for understanding how fiscal stimulus can work.

How did Christopher Biolsi's research contribute to understanding the economic impact of the naval expansion during the Great Depression?

Christopher Biolsi's research utilizes novel county-level data on shipbuilding contracts awarded during the Great Depression. This data is used to estimate a local government spending multiplier. The research highlights the effect of contracts on manufacturing output, employment and household consumption to provide a fresh perspective on fiscal policy effectiveness.

What were the primary geopolitical factors that influenced the decision to expand the U.S. Navy in the 1930s?

The naval expansion in the 1930s was motivated by geopolitical concerns, particularly the rise of Japan's naval power in the Asia-Pacific region. The United States was initially party to naval treaties, such as the Washington Naval Treaty of 1922, but as Japan expanded its military presence, U.S. policymakers, including President Roosevelt, recognized the need to build up the U.S. Navy to maintain balance and protect interests in the region. This led to the passage of the Vinson-Trammell Act.

Where in the U.S. were the economic effects of the naval expansion most concentrated, and what implications did this geographic concentration have?

The economic effects of the naval expansion were concentrated in the northeastern part of the United States, particularly in urban and industrialized areas, due to the allocation of shipbuilding contracts. These contracts led to increased manufacturing output, job creation, and household consumption in those areas. This raises questions about the randomness of contract allocation, and how government contracts during a crisis can impact local economies. This has implications for understanding how government investments can drive economic growth in specific regions.