Washington

ATLANTIC

August 1949

on the World today

ARE we headed for a slump? The question vies with espionage as the major topic of discussion in Washington this summer. A seasoned market operator from New York, joining one of these discussions, observed that in his experience depressions never came when they were expected. On that theory there will be no slump. For a depression has been forecast all the way back to the end of hostilities, and has been predicted with confidence for the last year by a widening circle of pundits.

The President has reason to be dubious about economic predictions. In the first post-war winter he himself was taken in by the dire forebodings of the counselors around him. They told him there would be millions of unemployed by the spring of 1916. This was the reason he got behind the campaign to maintain the take-home pay which had been depleted by the shrinkage of overtime after the war. He felt that bigger wages would soften the blow of economic adversity.

As it happened, the post-war scare was unwarranted. There was more than enough purchasing power to buy the peace goods after they had come out of the factories. Reconversion was accomplished without runaway inflation.

But the forebodings did not come to an end when the post-war fear had been shown to be unfounded. The Jeremiahs looked askance at the boom and foresaw the next stage in the economy: namely, the catching-up process. When supply had caught up with the pent-up demand, then we were told to watch out for the bust. This stage arrived last fall. In industry after industry a buyer’s market has taken the place of a seller’s market. The readjustment is now in full swing.

Neither the President nor Secretary Snyder is pessimistic. While the indexes have been falling, Mr. Truman has remained sanguine. Indeed, he has consistently refused to take note of the handwriting on the wall when it was in full sight of the White House reporters. As for Secretary Snyder, he has been stressing the soundness of the economy in speech after speech. Some of his speeches look a bit curious in the light of subsequent figures. But he continues to be confident.

Federal Reserve vs. the Treasury

Mr. Snyder’s job is to keep the bond market stable, not only because of the obligations to millions of investors but also because of the need to keep the interest burden on the government exchequer manageable. Here he runs athwart the Federal Reserve authorities, and, by so doing, exposes them to the charge of inconsistent administration of credit policy.

The Federal Reserve is the only agency in government which took action when the recession started to get under way. On five occasions it has relaxed credit by lowering margin requirements. But at the same time the system has been tightening credit by selling government bonds! One action makes credit cheaper, the other makes it dearer. Expressed in terms of the market prices for bonds, one action would put them up, the other would pull them down.

That there is no consistent policy in this respect is due to the fact that the Treasury insists on a stable government bond market. Bonds must be controlled, says Mr. Snyder, on the up side and the down side. The contradiction in credit policy will not be resolved while the Treasury and the Federal Reserve are separated and have different functions.

Federal Reserve action in selling bonds — and so drawing credit out of the banking system — is doubtless done against its own better judgment. In other words, the Treasury forces this step. On only one thing is there agreement — that things will get worse before they get better.

When do we prime the pump?

How soon will agitation for pumppriming gather momentum? The Administration’s view is that when joblessness rises to about 5 million, then make-work schemes will be necessary. So far, unemployment is under 5 million.

There is always unemployment in a planned or an unplanned society, For instance, some jobs are seasonal; there are always some people who are shifting jobs; there are always some businesses that are changing processes. Under conditions of full employment the estimate of unavoidable unemployment is at least 2.5 millions. So the state of unemployment at present is not serious in a working force of 60 millions.

Nor are the indexes anything like as horrendous as they are advertised. One of the hopeful signs is the high level of retail sales. They are, to be sure, dropping, but the falling off looks worse than it is, because the figures are expressed in dollars which are picking up in buying power. In other words, volume is being pretty well maintained, when account is taken of off-seasonality.

There is reason for complaint that bear items are mishandled by the newspapers. There was, one read, a “sharp” drop in personal incomes in April. It was the fourth monthly drop in a row. But, looked at closely, the decline was tiny, from an annual rate of 214.6 billions in March to 213.7 billions in April, or four tenths of 1 per cent. Certainly nothing to be alarmed about, especially in the light of the fact that national income was 2.5 per cent higher than in the corresponding month of 1948.

Clearly the nation’s consumers have plenty of money to spend, in savings as well as in incomes. Liquid savings amount to 200 billion dollars spread among savings and checking accounts and government bonds. This is four times the entire national income in the mid-thirties.

It is not sufficient, of course, to have the money — there must be a “propensity to spend.” This is present, in spite of the drop in dollar volume of retail sales. Indeed, economists in the government think that the consumers’ situation, both in means and in willingness to spend them, is, contrary to some of the gloomy conclusions, the strongest factor in the present readjustment. If, they say, the business spenders and the bankers were in the same state of equability as the consumers, then the country could ride out of the difficulty with no damage.

The fact seems to be that business and banking do not share the balanced frame of mind of consumers. Businesses are getting less venturesome. They are postponing improvements, setting aside plans of expansion. The restraint is due, so far as can be gathered here, to falling prices, not to any factor in the Capital or abroad. This is, of course, a perfectly natural reaction. If prices are falling, it is the part of wisdom to postpone outlays until they have fallen further.

The point is that the same caution should apply to consumers, but does not. At any rate, this is the conclusion of the many agencies in Washington which are watching consumer spending and consumer psychology very closely. As for the bankers, the consensus is that they are the most restrained of the three elements in economic society.

It would certainly be ironical if government pump-priming should be indulged in when national income and savings are each bulging over the 200billion mark. Yet this will be inevitable if the fall continues. Under the Employment Act the government virtually assumed a responsibility for avoiding a bust in the American economy. Few people now feel that nature should be allowed to take its course. Aside from any other consideration, the American economy is the pivot of the world economy, and a collapse would be disastrous in world politics.

The Hoover Commission reports

Old-timers are amazed at the nation-wide interest in the Hoover reports on the reorganization of the executive branch of government. The Hoover Commission passed into history on June 12. It left behind it a Citizens Committee, the nucleus of whose membership was selected from 300 expert members of the Commission’s research “task force.” The national chairman is Dr. Robert L. Johnson, President of Temple University. He, like his coworkers, would agree that, aside from the intrinsic merit of the undertaking, their willingness to give their time to this follow-up was inspired by the example of Mr. Hoover. The luster which now attaches to Mr. Hoover’s name is one of the most striking phenomena of the last five years.

Mr. Hoover is thoroughly convinced of the sincerity of the President in respect to executive reorganization à la Hoover. Mr. Truman shares to the full Mr. Hoover’s own conviction. He was particularly impressed when Mr. Hoover rapped the knuckles of the Republican National Committee for seeking to make party capital out of Mr. Hoover’s avowedly last service to the nation.

The Citizens Committee will not only keep up an unremitting propaganda; it hopes that it may watch the progress of reorganization as recommendations are carried into effect. This is especially important. In the past, administration has absorbed reform without sloughing off the sloppy habits of a hundred years. With a quarter of the national income devoted to government spending, the need for citizens to stay on the job as watchdogs is imperative.

The Mood of the Capital

The mood of the Capital is that the Eighty-first Congress is winding up its first session with a record of domestic accomplishment at an all-time low. The Republicans already have their slogan: The Eightyworst Congress.

Secretary Brannan is beating the bushes in a preliminary sort of way about his plan for giving farmers and consumers a Utopia of high incomes and low prices respectively. What the Republicans can say in reply is not vouchsafed. In Congress they seem to be content with witch-hunting, economy, and plain politics. An example is the Republican agitation against David Lilienthal. Here the root of the trouble is that the Atomic Energy Commission has been left pretty much to its own devices. When the Act was passed, the intent was to supervise performance very carefully, and for that purpose the eighteen-man Joint Committee of Congress was established. The Committee has not done its work with anything like the energy and the zeal of the Commission.

There may have been mistakes in management, but the difficulty of the Commission has been to get the Committee to share the responsibility for truly cosmic decisions. Where the Commission has erred has been in not publishing its decisions publicly in the manner of the Supreme Court. Perhaps, however, the Commission would excuse itself on the ground of the hush-hush imposed upon it by the Committee.