Is a Depression Coming?

January 5, 1953

I put the question in this extreme form because so many people put it that way after the election of General Eisenhower and a Republican Congress. That is because they were conditioned by twenty years of New Deal propaganda to assume that “Republicans-in-power” and “depression” were synonyms, or that the second followed automatically from the first.

But there is an assumption of a quite different nature in the minds of many who raise the same question. This is that booms and depressions originate wholly within the economic system, in accordance with mysterious laws of their own, not subject to alteration or control by political policies. The opposite assumption, on which most politicians operate today, is that governments have now surprised all the secrets of the business cycle, mastered all the devices for countering either an inflation or a slump, and have the will to “keep the economy on an even keel.”

Neither of these extreme assumptions is true. The ups and downs of business are partly due to what economists call “endogenous” conditions, originating from “inside” the business system, and partly due to “exogenous” influences from “outside.” The minor fluctuations seem to be most often endogenous and the major fluctuations exogenous. War or peace, a larger or smaller defense program, extreme monetary inflation or deflation, are “exogenous.”

This is one of the complexities that makes business forecasting such a hazardous occupation. Among their other headaches, the forecasters must try to guess what the politicians are going to do. If Mr. Truman had continued in power, the major guess could have been reasonably safe. He would have continued to inflate. Or more accurately, he would have continued the policy that has come to be known in most countries as “repressed inflation.” This consists in depreciating the dollar by increasing the money and credit supply—then pretending that the consequent rise is the result of “profiteering” and “greed,” and “fighting” it with price control.

The government’s inflationary policies have led to an increase in the country’s supply of money and bank credit from $65,000,000,000 at the end of 1939 to $175,000,000,000 at the outbreak of war in Korea in June 1950 and to $196,000,000,000 now. The outlook for 1953 has now been radically changed, however, by the coming of a new Administration. General Eisenhower’s appointments, both in the Federal Reserve System and in the Treasury, are tremendously encouraging. He has asked William McChesney Martin, Jr. to stay as chairman of the Federal Reserve Board. Martin is a strong believer in a Reserve system free from Treasury domination. The Secretary-designate of the Treasury, George M. Humphrey, has appointed Marion Folsom, treasurer of the Eastman Kodak Co., as Under Secretary, and W. Randolph Burgess, chairman of the executive committee of the National City Bank, as special assistant. The appointment of Burgess is particularly heartening. Few men in this country understand the problems of monetary policy and debt management as thoroughly as he does, and none has better recognized the need for an independent Reserve system.

These men are evidently determined to halt inflation, but their efforts will need public understanding and support. One weakness of trying to continue inflation is that in its later stages it inevitably gets more and more out of control. But trying to halt it also entails serious problems. Inflation always brings discrepancies in price and cost rises, distortions in demand and production, and a great deal of misdirected investment. When the inflation is brought to a halt serious readjustments are unavoidable. They are certain to mean recessions in some lines. We must understand the necessity for these readjustments and be willing to accept them. In that case they can be comparatively mild and short-lived. But if we try to prevent or postpone them by still further inflation, we only build up a much graver ultimate reckoning.