One way to look at our current predicament is through the lens of Irving Fisher’s theory of debt deflation: as everyone tries to work off excessive debt, the combination of a contracting economy and falling prices puts everyone deeper in the hole. But how do you get out? I’ve drawn the above chart using debt data from Historical Statistics of the United States Millennial; it shows the debt-deflation spiral of 1929-1933, and the partial recovery of the New Deal years.

It also shows something I haven’t seen emphasized: the role of WWII in cleaning up private-sector balance sheets. During the war years there was very little private borrowing, thanks at least in part to wartime restrictions; meanwhile there was both strong economic growth and a lot of inflation. The result by the war’s end was a very low private debt level relative to GDP.

How big a role did these improved balance sheets play in the fact that the postwar economy didn’t fall back into depression?