The '90s boom and the '60s — what you don't know but should
Gerard Jackson
The only problem with history is that people keep forgetting it. What brought this to mind is that some Democratic commentators are still drawing comparisons with the Clinton years and the 1960s. Ordinarily this would be welcomed as a serious attempt to inject some substance into the present economic debate. Unfortunately, in their efforts to justify their own policies Democrats poison every subject they touch
It is easy to blame Keynesianism for their errors. For example, in making their comparison they point out that more Americans than ever held stocks in 1968; that the worst value stocks seemed to be the best-performing ones; that 1968 saw the first budget surplus in about 10 years and the 1961-69 expansion was the longest uninterrupted one in American history.
What is missing is money supply — the key factor and the one that is generally overlooked by media commentators as well as many who ought to know better. Examining the monetary situation in the 1960s will cast, I believe, considerable light on the present situation.
The tail-end of the Eisenhower administration saw a monetary tightening that brought on the 1960-61 recession, which also contributed to a Kennedy victory. Though the monetary brakes had been tightened they were quickly released in 1960 causing a monetary surge.
This had the effect of stimulating output. However, the monetary breaks were slapped on again bringing monetary growth to a standstill by the end of 1961. The squeeze was so tight that money supply actually contracted in the third quarter of 1962. Needless to say, the economy faltered in the first half of 1962 and had definitely slowed in late 1962 and into early 1963.
To counter the incipient recession interest rates were forced down and monetary growth accelerated. All of which seemed to do the trick. From 1963 GDP grew by 5 per cent and unemployment fell below the 5 per cent level. (Does any of this sound familiar?)
In late '64 money supply slowed only to be offset by another burst of monetary growth in 1965 as the Reserve sought to fend off rising interest rates through buying government securities. To avoid the inflationary consequences a credit squeeze was implemented in 1966 which was quickly followed by another monetary burst which in turned fuelled the budget surplus. Once again the breaks were applied and monetary growth dropped to 2 per cent. By 1969 the economy was in recession.
The obvious thing is that the 1960s expansion was certainly not the smoothly running boom that so many, including Republicans, have come to believe.
More importantly, however, is that the economic fluctuations were caused by a roller-coaster monetary policy. The lesson: Money matters. But money is exactly what is missing from the current debate, along with political balance and any meaningful grasp of capital.
What marked out the 1990s monetary boom is the absence of the severe fluctuations in monetary policy that characterised the 1960s. The Fed simply kept pouring booze, in the form of credit, into the party goers. But sooner or later, the party had to end — and end it did with many waking up one hell of a financial hangover.
The same process is happening under President Bush. When this party also comes to an end you can count on the media and academia to blame both the GOP and the market, regardless of any evidence or theories to the contraries.
It's time more people realised that playing politics with economics can have dire consequences.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 2 August 2004