MONEY America lives with the crisis
WILLIAM JANE WAY
Living with crisis has become such second nature to Americans that when a qualitative change in the nature of our troubles hits, it all too easily gets passed off by the soph- isticated as merely more of the same. It took such heralds of the new age as the Econo- mist more than three years to recognise that the Lai-McNamara escalation in Vietnam had transformed an unwinnable war into an unfightable one. Now a similar funda- mental shift in the American money game has taken place: two-digit interest rates have become commonplace, bankruptcies are rising, the long-term capital market does not exist, and credit, from being merely ex- pensive, is becoming unobtainable.
For twenty-five years the western econ- omy, centred on and feeding off the Amer- ican economy, has been depression-proof. It has been depression-proof because in- vestors and consumers have recognised that democratically responsive governments can- not survive financial panic and mass unem- ployment—the successive keynotes of de- pression as distinct from recession—and because they have made their spending decision accordingly. Recessions have come and gone, progressively briefer; interna- tional monetary upsets have been tolerated; currencies have been devalued under pres- sure. But the universal faith has held : no government could be foolish enough to attack the fundamental precondition of full employment—that everyone believes gov- ernment will guarantee it.
It took McNamara's 1960-style mana- gerialism, in the service of Dean Rusk's 1950-style cold war moralism, to provide LBJ with the opportunity to perpetrate America's Vietnam disaster. The same two forces—managerialism and moralism—are responsible for America's financial disaster. For generations, it seems, in good times and bad, the Federal Reserve's exponents of the 'old economics' have been waging war against inflation. From time to time, when a weak or distracted President has failed to keep the Fed in line, it has indulged its prejudices at the expense both of the econ- omy and of the Administration of the day. But by and large, any President, if he cares to, has the muscle to keep the Fed from destroying the conditions of post-war pros- perity—as LBJ did in 1966 when the 'credit crunch' threatened to smoke out the real financial cost of Vietnam.
Today, however, the Fed has new allies. They are the quantifying practitioners of the 'new economics'. Like McNamara's whiz-kids who 'programmed' Vietnam, the new economists tend to suffer from the de- lusion that people—American consumers and investors as much as Vietnamese peas- ants and ideologists—will behave as com- puters are programmed to say they ought to behave. Last year's surtax and this year's money squeeze have been the first fruits of the unholy alliance between the old and the new economists. The aim has been two-fold: to restrict 'aggregate demand' for goods and services to a non-inflationary level and, more important, to end 'inflationary expectations.'
Nicholas Darenport is on holiday.
The economists have been talking and acting as if the way people behave can be tuned like a radio at the will or whim of governmental policy-makers. More speci- fically, they have been attempting to deal with two major qualitative changes in the American economy—the enormous demand for social investment and the unprece- dentedly stringent market for skilled labour —by purely quantitative management of the amounts of income and money people have to spend. The result was predictable (and was predicted in these pages): they have closed down the long-term capital market for productive economic investment as well as for social investment, and they have given every earner and spender, be- ginning with the holder of marketable skills, a growing incentive to accelerate his intake of cash now.
To date, the Fed and its allies have not been able to break 'inflationary expecta- tions': on the contrary, they have trans- formed a moderate inflation into an all-out scramble for higher wages and more cash and credit. Their failure to date, in fact, offers a glimmer of hope. It means that the structural changes in the American econ- omy can, just possibly, still be dealt with by appropriate means—by priorities which bring a measure of relief to the vastly over- loaded capital market and by the integra- tion of today's unemployables into the skills- starved labour market. The alternatives are stark. Outright failure in the declared war on inflation raises the analogy of the Viet- nam war, in which losing with only 30,000 Americans involved was not bad enough:
the war had to be lost with 550,000 Amer- icans involved. The only thing worse would be success in breaking the 'inflationary ex- pectations' of Americans—a success which would mean the removal of the safety net which has underwritten twenty-five years of prosperity.
The big question at the time of writing is whether or not the financial crisis will be pushed to the extreme: whether or not the money market will follow the bond market into total, panicked seize-up. Certainly, any indication before the seize-up strikes that the Fed is willing to put money back into the banks will provoke a reflex one-two res- ponse. Both the stock and bond markets. insufficiently chastened by four years of the peace-is-just-around-the-corner will-o'-the- wisp, will rally frenetically. And immediately thereafter, the bond market will be sand- bagged by the incalculable backlog of new issues from both governmental authorities and corporations, leaving the stock market to ride out the inevitable re-escalation of interest rates. The Fed can put off the day of reckoning; it can, of course, wave the white flag to inflation altogether. If it does not, panic there will be, and a traumatic one at that. How else can a generation's worth of expectations be broken?
Meanwhile, President Nixon, it may be recalled, has had a first-hand experience of the money managers in full flight: arguably, the Fed's deliberate choking off of the re- covery from the 1958 recession made the difference in Nixon's 1960 defeat. Some- what more recently, the political import of the current tax and credit squeeze has been brought home: the surtax extension, .presi- dentially endorsed, passed the House of Representatives by only five votes and its progress through the Senate looks certain to be no easier. In fact, Nixon's (and the Republicans') windfall gain of anti-black and anti-student votes gives the Demo- cratic majorities in Congress every incen- tive not to help bail the Administration out of the sort of threat—hard times at home-
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Fis for Four letter word which has been the Republicans' millstone ;ince the Great Depression. That is to say, Nixon has the sort of trouble on the finan- cial front that he understands: immediate political trouble. The trouble is bad enough to make it an open question whether he can afford to wait for Apollo to return from the moon before he heads for the mid- pacific and on to Bucharest.
Treasury Secretary Kennedy has, in any case, opened up the formal lines of com- munication by his meeting with twenty-five leading bankers this Monday. The bally- hooed purpose of the conclave was an official warning against higher interest rates. It may be expected. however, that the traffic was two-way; for, as things stand, the banking fraternity knows that the only uncertainty about higher charges for the use of money is whether or not they will be published as a formal increase in the prime lending rate. It may be too much to expect that the crucial lesson has been learned: forcing the banks to do the Government's job of rationing strategic resources in time of crisis (and that is what money is today) is as economically unworkable as it is politically irresponsible.
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