The Economy: Bill Martin's Red Flag

The nearest thing, in economic terms, to waving a flag in front of a bull is to raise the memory of that great Amer ican trauma, the stock-market crash of 1929. Last week, in the midst of record prosperity, one of the nation's senior economic policymakers waved the red flag — and thereby showed how both ered and uncertain even the healthiest of bulls can become. With some well-timed but somewhat ill-chosen words, William McChesney Martin Jr., pres tigious chairman of the Federal Reserve System, brought out the mercurial char acter of Wall Street psychology, which finds it hard to accept the idea of indefi nitely continuing good times, even when business is most loudly proclaiming its confidence.

For months the U.S. economy has been in a state of virtual euphoria, hearing the President declare that "I do not believe recessions are inevitable" and reveling in the onward-and-upward statistics. Lately, many economists have begun to question just how long the 52-month boom can continue, and only two weeks ago the President's chief economist, Gardner Ackley, cautioned that "our expansion is going to slow down a bit in the months ahead." Still, nothing had prepared the public for the shock caused by Bill Martin when he stood up and told the U.S. that it could tumble into a 1929-type depression if the leaders of the U.S. economy do not show some caution.

"Indeed," said Martin, in a speech to a Columbia University alumni luncheon, "we find disquieting similarities between our present prosperity and the fabulous '20s." Then he listed a dozen similar ities, including virtually uninterrupted progress for seven years, a large in crease in private debt, a continuous growth in the supply of money and bank credit, weakness in the balance of pay ments. "And most importantly," added Martin, "then as now, many Government officials, scholars and businessmen were convinced that a new economic era had opened, an era in which business fluctu ations had become a thing of the past, in which poverty was about to be abol ished, and in which perennial economic progress and expansion were assured."

Silent Fuming. Martin said much more — notably, that there are major differences as well as similarities be tween the economies of 1929 and 1965 — but the rest was all but ignored in the furor that followed. The stock mar ket, uncertain and sliding for several weeks, plunged sharply: the Dow Jones industrial average fell 19 points in the three days after Martin's speech, dipped briefly below the psychologically im portant 900 mark, then closed the week at 900.87. Congressional leaders called for an investigation of the state of free-world economies. Lyndon Johnson at first fumed silently, but finally could not resist saying: "I guess when you have 4,000,000 or 5,000,000 people working in the Administration, you're not always sure what one of them is going to say. If any of our people get concerned about the economy going too fast or too slow, I wish they would stop worrying and get the kids jobs"—in other words, do something forceful and direct to ease unemployment.

Several hours after Martin spoke, Columbia University gave him an honorary doctorate of laws, citing him as "a man of strong beliefs, strongly held."