The Economy: The Year of Tight Money And Where It Will Lead

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Paradoxically, 1966 has been by far the most prosperous year in U.S. history, yet has produced considerable concern about the future of business. Though production, profits and personal income jumped impressively, the economy developed some bothersome growing pains. And money was the root of many of these evils.

During the year, interest rates climbed by one-fifth or more, and many would-be borrowers could not get credit at any price. For lack of money, scores of communities put off plans for needed schools, parks and highways. Thousands of prospective home buyers were compelled to postpone their dreams to another year; the cost of mortgage loans climbed to 6½% or more, and construction of housing plunged 19% to a postwar nadir. Tens of thousands of investors shifted their money out of stocks and into higher-yielding bonds, Government securities and savings accounts; the stock market skidded 25% from February to October and, despite a recent rally, is still 20% below its early-year high.

The essential reason for these problems was that the U.S. tried to accomplish an uncommon amount and strained its resources of manpower, materials, machines and money. In 1966, the nation simultaneously expanded the war in Viet Nam, extended a host of domestic programs, and escalated its standard of living. Considering all the demands put upon it, the economy performed remarkably well. The output of goods and services, growing by well over $1 billion a week, swelled from $681 billion to $739 billion; the number of jobs rose by 2,200,000 and 75 million Americans were at work; the average income for a family of four rose from $9,772 to $10,304. But if the nation's cup ran over, that was simply another way of saying that it ran out of capacity.

The inevitable result was that, after six years of healthy, balanced growth, the pleasures of expansion turned into the pangs of inflation. Consumer prices pushed up 3.6% and industrial production expanded by an unsustainably high 8%. Striving for stability, the Government put its reliance largely on one weapon: the manipulation of monetary policy. Money became costlier and harder to borrow than at any time in 40 years.

Opportunity Lost. It is now clear that a chance was missed in 1966. It was a year when the transitory requirements of politics prevailed over the laws of economics. Early in the year, before inflation became acute, President Johnson might have used all three basic tools that have been popularized by the Keynesian new economics — tax and budget policy as well as monetary policy — to curb the economy's overexuberance. He did not. Says a top official of the U.S. Federal Reserve: "There was a wonder ful opportunity to show that the new economics works both ways, and that with proper tax measures we can not only promote growth but preserve a reasonable balance. A golden opportunity was lost in 1966."