The Problems Ahead

November 16, 1964

Three weeks ago, in a column called “Why He Is Losing” (Newsweek, Oct. 26), I listed eight major reasons why it seemed probable not only that President Johnson would win a victory of landslide proportions over Senator Goldwater but why even the Republican minority in Congress would be cut down. These reasons ranged from the prosperity of the country and the power and prestige of a Presidential incumbent to Goldwater’s inept campaign, his ambiguities and belated qualifications, his failure to support his vague generalities with specific and documented statements, and his nearly complete failure to make the economic case at all.

On Election Day, the Republican label on most candidates might as well have read “poison.” It seems altogether probable that the great majority of votes were cast more against Goldwater and everyone associated with him than for Mr. Johnson. Probably the major reasons for Goldwater’s defeat had to do with his personal image rather than with his stated conservative philosophy—the fear, justified or unjustified, that he was “trigger happy,” not only about the nuclear bomb, but about other matters—that he was rash and unpredictable. The saddest aspect of the whole matter is that the election will be interpreted as a defeat for economic conservatism, and yet that the case for economic conservatism was never really made.

MONETARY EXPANSION

Mr. Johnson and the Democrats have won a great victory. But it is easier to win an election than to solve the grave problems with which the country is still confronted. It is outside the province of this column to discuss Vietnam, Cuba, Russia, Communist China, NATO, or the bomb; but the economic problems are no less troublesome.

It is true that through the $11.5 billion tax cut, leading us to the 29th deficit in 35 years, and through policies calculated to hold down interest rates, the Administration has helped to keep going a remarkable period of prosperity. But this has not been done without risks, and these risks are growing.

To keep interest rates down, the Federal Reserve System has bought $8 billion of marketable securities since 1960. This has overstimulated borrowing and expanded the money supply. Between the end of 1960 and September 1964, total commercial bank credit increased at an average annual rate of 8.2 percent. Since the beginning of the current economic expansion in February 1961, the nation’s money supply (demand deposits plus currency) has risen at a 3.3 percent annual rate. Since June it has risen at a 6.4 percent rate. Since February 1961, money plus time deposits have increased 8.2 percent per year. Since last June they have risen at an 8.4 percent rate.

FALSE REMEDIES

The first effect of this abnormal expansion of money and credit has been to take up the slack in various sectors of the economy. But as this is done, the effect must be more and more to push up prices. Living costs have reached the highest monthly level on record. Industrial raw materials rose 15 percent in the twelve months ending in September.

The inflation has been most clearly reflected in the cumulatively mounting deficits in our balance of payments. This has been the direct outcome of our policy of holding down interest rates and increasing the money supply. Instead of halting these inflationary policies, we have imposed a shortsighted tax on purchases of foreign securities. This hurts borrowing countries, obstructs free international movement of capital, and in the long run only hurts our export trade and does nothing to solve the balance of payments.

Another false cure is to try to hold down the price of steel and other commodities by extralegal intimidation. This discriminatory treatment can only hurt the steel industry and therefore steel labor. If our so-called “wage guidelines” were taken seriously they would be dangerous economic nonsense. In practice they are mere pious government talk, though unions are encouraged to regard them as floors rather than ceilings.

This inflation is the great domestic problem that the new Johnson Administration now faces.