May 24, 1952 THE ECONOMIC WEEKLY seemed to be at loggerheads. A compromise was reached. In The American Economy in 1951 March the public was offered the choice of converting at par 2½ per THE Bank does 83 per cent higher than in 1944, cent long term bonds into non- not foresee the possibility of a It exceeded by 8 billion dollars the marketable securities, carrying 2¾ slump in the near future overtaking production of even the peak year per cent. These could also be con­ the American economy in its Annual 1944. Those who had been talking verted into marketable 5 year notes Report for 1951. According to this of stagnation were proved wrong. carrying 1½ per cent. Thus the report, by the end of the last year Steel mills added 4 million tons ingot largest block of securities was saved the US telt a definite easing of the capacity, aluminium and electrical from the . For the next six pressures generated by the impact of industries expanded by 10 per cent. weeks the Federal Reserve System the Korean war. On the eve of the Industrial construction was twice as and the Treasury often supported the Korean war the US economy had re­ high as in 1950. And even though market in order to soften the fall. covered from the of 1949 defence construction had to be cut By April 12, the adjustment was and was working close to capacity. due to shortage of materials and complete. The impact of the Korean war was credit, more dwelling units were built so sudden that it created a scramble than in any other year except 1950. At the same time several other for goods. The defence programme Again, though defence took away an measures were adopted to check cre­ assumed an uncertain aspect because even larger share than before, the dit expansion. The reserve require­ the US had entered war. Besides, standard of living of people did not ments were raised and greater margin an entirely new programme of foreign suffer. of securities (75 per cent from 50 per aid seemed likely to take the plan of Despite the amazing progress pro­ cent') was required. Real estate and Marshall aid, which was tapering oft. ductive capacity, production at the consumer credit was curtailed. The There was feverish stockpiling for end of the year, however, remained Voluntary Credit Investment Pro­ defence. As this could not happen the same as in the beginning. This gramme to limit the use of credit for without having repercussions on the was because shortages and high prices non-essential purposes, also helped to expectation of the public, consumers often cut into production. The check credit expansion. anticipating wartime shortages began cessation of the buying panic led to All these together succeeded in to buy goods to hoard them up. growth of saving and mounting retail checking credit expansion in the Businessmen began to build up their stocks. This led to lower orders and second quarter. It began to level off inventories. Manufacturers' inven­ production had to be curtailed in in the third quarter. The increase tories swelled because of defence many lines. Thus the Federal Re­ was only 400 million dollars as com­ orders. Consequently an upsurge of serve index of output of household pared to 2 billion dollars in the pre­ . durables dropped bv 44 per cent vious quarter. The rate of expansion When these anticipations did not between February and July. moved down from 4.52 to 1.82 materialise, the pressure of inflation In addition to a general decline in which is the normal seasonal rate. slackened. Stockpiling was not done spending, the credit policy of the But the volume of business loans re­ as feverishly as before and there was Federal Reserve System was greatly mained the same. With increasing more orderly allocation of raw ma­ responsible for checking the inflation. tightness in the market, rates went terials. Economic policy was chang­ For, in March 1951 it withdrew its higher. The rate on prime commer­ ed and expenditure was spread over official support from the market for cial loans went up to 3 per cent from a longer period and directed more Government securities and thus 2¼ per cent. Short-term rates towards building up capacity than made it impossible for banks to moved up and the long-term rate actual turning out of equipment. In obtain freely reserves which could be became 2¾ per cent. the last quarter of 1951, defence the basis of multiple credit expan­ On the whole, in the last half of spending fell from 6 billion dollars sion. the year the Federal Reserve System to 2 billion dollars. At the same With the outbreak of the Korean remained neutral in the security time consumer scare buying ceased war and the upsurge of inflation, it market. 'It did, however, enter the as the anticipated shortages did not was found necessary to control, the market, whenever necessary, to main­ materialise and personal saving went resources of member banks to pre­ tain a receptive and orderly market, up to 9 per cent in the last three vent inflationary credit expansion. especially when small offerings tend­ quarters of 1951. This led to a This could not be done so long as ed to have disproportionate effects. decline in retail inventories though they were free to sell their security It also entered the market to relieve defence orders kept up manufactur­ holdings in an officially supported the stringency of dealers, but at the ers' inventories. Basic commodity market and obtain the necessary re­ same time, entered into repurchase prices which had risen in February, sources. Clearly, it was necessary to agreements with them. By the end 1951 by 47 per cent from June, 1950 withdraw the support so that security of the year, the market was able to fell to 25 per cent in July; wholesale prices would fall in a credit-hungry do without official support and secu­ prices also declined slightly but the market and fear of capital loss would rity holdings of the Federal Reserve cost of living continued to rise. The have prevented any sales. Such a System were the same as in mid- changed spending alone should not move dictated by monetary policy be held responsible for checking: in­ would have given a shock to the That the American economy was flation. The Government froze bondholder, disrupted the market in better balance at the end of the wages and prices in January. In and made it unresponsive to further year than in the beginning, is the March the Federal Reserve System issues. This would be extremely in­ final assessment of the Annual took steps to control the expansion convenient from the point of view Report. Yet inflation, and not stag­ of money supply. of the Treasury which was engaged nation, seemed to be an everpresent Tin's was also a year of astounding in frequent funding and refunding danger. Defence spending was large growth. Production in real terms operations. So, some sort of a policy and mounting while personal saving remained as difficult to predict as was higher by 9 per cent than in of support was clearlv necessary. ever. 1950, 21 per cent than in 1947 and Monetary policy and fiscal policy 523