The wealth effect: A contemporary update to the age of affluence

At the end of World War II there was a great interest in estimation of reconversion prospects for the United States economy. A main question was: Would be the United States return to the conditions of the Great Depression of the 1930s or maintain a high level of employment and grow without inflation? Franco Modigliani and James Duesenberry independently proposed dynamic versions of the macroeconomic consumption function, and A.C. Pigou had recently suggested that the consumption function should include a term for real cash balances, a wealth effect which was relevant, given the accumulation of liquid assets during the austere consumer environment of the War. Also, from the original discussions of the mathematical models of the Keynesian system, there was consideration about the effects of the distribution of income on aggregate consumer spending. Those various lines of thought were discussed in a memorial conference for Franco Modigliani at the New School University in 2005. The present paper was on the memorial program, and examines the statistical content of the questions about reconversion prospects in the mid 1940s. It also extend the analysis through the rest of the 20th Century, with consideration of the macrodynamics of the early postwar period into the age of affluent consumer.