Review of Austrian Economics - The Ludwig von Mises Institute

Vedder and Gallaway: The Great Depression of 1946 29
In short, rather than "pent-up demand" preventing a depression,
the evidence is more consistent with a distinctly non-Keynesian
interpretation: A downward adjustment in labor supply and real
wages, accompanied by a more responsible (non-deficit) fiscal policy,
served to stimulate investment and consumption spending. Relative
price adjustments brought about what Keyensians perceived to be an
increase in aggregate demand, rather than the other way around.
Conclusions
Modern standard statistical sources suggest there was a very severe
economic downturn in 1946. The evidence does not support that
conclusion, and it is clear that statistical revisions have served to
distort the historical experience. Keynesian economists ex ante predicted
a major downturn after the war, but when it did not come they
ex post abruptly changed their tune and argued that a surge in private
spending, especially consumption and investment spending, prevented
a downturn.
The evidence shows that aggregate demand rose too little and too
late to explain the low unemployment that prevailed in the first two
years after V-J day, the period in which demobilization was completed.
What did happen was that labor markets, partially constrained
by non-price factors in the wartime period, were allowed to
function in a manner that prevented a serious decline. Labor supply
abruptly fell, but in addition real wages, adjusted for productivity
change, also fell, preventing a massive rise in unemployment.
To the extent aggregate demand was stimulated at all, it was
because of the relative price changes outlined above. Lower adjusted
real wages meant higher profits and rates of return on investment
spending. A dramatic shift in governmental demand for loanable
funds, far from contracting the economy as Keynesian economics
suggests, kept interest rates at historic lows. Rising wealth associated
with the high returns on capital led to increased consumption
that ultimately led to a durable goods explosion—but one that took
place long after reconversion had occurred without any major unemployment.