CREDIT & THE BUDGET

How a Flexible Policy Works

FEDERAL fiscal policy, a formidable subject beloved by economists, is as obscure and unintelligible to almost everyone else as nuclear physics. Yet the Government's fiscal policy directly affects more people than almost anything else the Government does. By increasing or decreasing the supply of money, the Government indirectly determines such things as 1) how much a person can borrow, 2) whether he can get a mortgage on his house and how much it will cost him, and 3) whether he will get or keep a job. Last week a joint committee of Congress held the first full-scale hearing on the Administration's fiscal policy.

Led by Banker-Economist John D. Clark, onetime Truman adviser, the Democrats called the Administration's policy a failure. They charged that mistakes in manipulating money rates had cut off the boom in 1953 and prolonged 1954's recession. Clark argued that the "new fiscal managers set out to upset the business boom as soon as they took office in January 1953. The tightening of credit and increase in interest rates smothered a business boom." Furthermore, added Clark, the Administration should lower bank reserves, ease credit still more, thus give the economy "an extra push" back to 1953 levels.

In answer, Secretary of the Treasury George M. Humphrey argued that the big boom was out of hand in 1953 and "any further sizable expansion of credit could result only in uneconomic competition for scarce labor and materials at the risk of further price rises." The situation "called for monetary and credit restraint." As for now, concluded Humphrey, "there is nothing . . . that would lead me to believe we should do anything drastic."

On the record, the relative stability of the U.S. economy since 1953 was the best evidence Humphrey had on his side. The cost of living, which rose to 115.4 (1947-49 = 100) in 1953, has only fluctuated .7 point in the past ten months, and is now at 114.5, nearly a point lower than last year.

To achieve this stability, the Administration, aided by other factors, had indeed "upset" the boom. The boom had pushed prices, production and inventories all to record levels in 1953, and as business gobbled up all the credit available, interest rates rose. By boosting its rates on a new long-term bond issue, the Treasury nudged interest rates still higher, thus tightening credit and money all along the line. However, many economists think the credit pinch came too fast and too hard. Within a month, the Treasury's new 30-year, 3 1/4 bonds fell below par; in the market flurry, mortgage money almost evaporated and credit in general was tight. But the Treasury soon reversed itself and with the help of the Federal Reserve Board eased credit again (TIME, July 6, 1953).

Actually, the market slump was not so much the result of what the Administration did as the way it talked about it. It floated its new long-term bonds in such a spate of talk about a return to hard-money policies, tighter credit and balancing the national budget that businessmen worried about a real money pinch. Later, when the Treasury eased rates, it failed to publicize the move properly. As a result, the worries about tightening credit persisted; businessmen cut down on inventories and buying long after the squeeze was over.

Since then, the Administration has been careful to talk softly, not upset the mercurial money market. Its clearly marked policy is one of "active ease," i.e., low interest rates and plenty of credit. The Treasury Department and the Federal Reserve Board, which were often at odds over policy during the Truman Administration, have worked in harmony to keep the money markets operating smoothly. Furthermore, the Administration has given up another hard-money idea, at least for the time being: balancing the national budget. Last week Secretary Humphrey announced that this fiscal year's deficit would be about $4.7 billion, but that he hoped it could be held under $3 billion next year.

Does the U.S. need a further easing of credit? To most economists the answer is just the opposite. The Administration, for example, is worried about the stock-market boom, but there is no move afoot to try to check it. The greatest worry is the vast supply of mortgage credit, especially veterans' loans which permit houses to be bought with little or no money down.

However, the officials feel that there is no practical way to tighten mortgage credit without nipping credit all along the line, which would be damaging to the business upturn. The Government hopes that eventually housing, credit will tighten of its own accord.

In any case, the Administration has learned that the secret of a successful fiscal policy is flexibility. There is no doubt that the policy will remain flexible. And the Administration will not hesitate to tighten up credit--or ease it further--in the interests of keeping a stable economy.

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