Review of Austrian Economics - The Ludwig von Mises Institute

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Vedder and Gallaway: The Great Depression of 1946 19 Keynesian analysis argues that changes in aggregate demand determine the level of both nominal and real economic activity. Using armed forces employment as our measure, military activity peaked in the second quarter of 1945. From that time to the trough of the mild downturn in the first quarter of 1946, government purchases of goods and services fell an extraordinary 67.5 percent, or $65.7 billion. Table 4 Eight Key American Economic Indicators, Quarterly Data, 1945 I to 1947 IV Quarter Money GNP a Unemp. Corp. Rate h Profits 0 Ind. Prod d Layoff Rates* Average Workwk Manuf. Govt. Purch. g Housing Starts h 1945 I $217.6 1.10% $10.2 123 0.67 45.4 $98.6 123 II 219.2 1.17 9.6 117 1.23 44.6 97.3 156 III 210.4 2.11 6.9 98 5.57 42.0 80.2 191 IV 206.8 3.66 6.5 86 1.77 41.4 55.2 393 1946 1 197.7 4.14 8.8 84 1.77 40.7 31.6 718 II 205.3 4.02 11.5 87 1.37 40.1 26.2 685 III 215.6 3.66 15.5 93 0.77 40.2 25.5 630 IV 220.7 4.07 18.0 96 0.90 40.5 26.9 625 1947 1 225.1 3.81 18.4 98 0.87 40.5 24.6 702 II 229.3 4.08 17.6 98 1.17 40.2 25.4 747 III 233.6 4.06 17.6 99 0.90 40.1 25.5 912 IV 244.0 3.72 19.3 101 0.87 40.8 26.1 1,007 a Seasonally adjusted, in billions. Civilian unemployment rate, seasonally adjusted. c After-tax corporate profits, in billions, seasonally adjusted, industrial production, seasonally adjusted. 1947-1949 = 100. e Layoff rates per 100 workers in manufacturing, not seasonally adjusted. Average hours worked per week, manufacturing, not seasonally adjusted. g Government purchases of goods and services, not seasonally adjusted, in billions. Housing starts, in thousands, seasonally adjusted. Sources: Geoffrey H. Moore, ed., Business Cycle Indicators (Princeton: Princeton University Press for the NBER, 1961); GNP: Department of Commerce, National Income & Product Accounts of the United States (Washington: Government Printing Office, 1981); Government Purchases: 1949 Statistical Supplement to the Survey of Current Business (Washington, D.C.: Government Printing Office, 1950).
20 The Review of Austrian Economics, Vol. 5, No. 2 Over the same period, consumption spending rose but $14 billion, barely 20 percent of the fall in government spending. Whatever the merits of the "pent-up" demand argument, there was only a modest increase in consumption during the critical period of demobilization and reconversion, to be sure in part because of capacity constraints on consumer goods industries. Investment spending rose a more robust $21.6 billion, and net exports by $9.8 billion, but collectively the increases in demand fell about $20 billion short of decline in government spending, leading money GNP to fall a rather sharp 10 percent. By the end of the first quarter of 1946, the process of reconversion was largely completed. Nearly seven million persons had left the armed forces, and government spending had fallen well over 90 percent of the way from the wartime peak to what would be the postwar low in 1947. Federal finances had moved from a massive deficit position (equal to 20 percent or more of GNP) to a budget surplus. Monetary policy also moved towards a much more contractionary stance, although monetary growth was still high by long term historical standards. Bank deposits and currency grew slightly over seven percent from the second quarter of 1945 to the first quarter of 1946, less than half the nearly 15 percent growth observed over the preceeding three quarters (the third quarter of 1944 to the second quarter of 1945). The growth in bank reserves similarly declined by about 60 percent. 44 As the nation moved from a radically expansionary to a contractionary fiscal policy in less than a year, and as it dramatically slowed the extraordinary monetary expansion, did the nation witness what the Keynesian paradigm suggested would happen, and what virtually all economists predicted? No. Unemployment in the first quarter of 1946 averaged slightly over four percent. To be sure that was more than the rate of less than two percent existing in early 1945. Also, even our revised national income statistics would indicate there was some output decline. Yet the rate of unemployment "peaked" at a rate low by historical norms, below the average of the prosperous 1920s, or the 1950s. Unemployment was low, long before any "pent up demand" had an opportunity to play a role. Automobile production was still depressed in early 1946, and expenditures on other major consumer goods were still well below normal peacetime, much less abnormally high, levels. 44 See Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1969 (Princeton: Princeton University Press for the National Bureau of Economic Research, 1963), pp. 717-18, 741-42.
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