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Home , April 1969, John Howard Griffin, May 1969

The “Recessions "are now generally considered fundamentally preventable, like airplane crashes and hurricanes." Arthur Okun

A Setting for the Keynesian Experiment

The BIG story of the 1940s and 1950s was war - WWII in the 1940s and the Cold War in the 1950s - which is why the course "skips" two decades and we pick up the story again in the 1960s. The Great Depression and WWII had "pulled" political leaders away from their comfort zone regarding the size and scope of government activity, and after a little backtracking in the 1950s, new leaders, led by "action intellectuals," pushed for a much more active role for government in the 1960s. This was to be the decade where the anti- depression policies of the 1930s morphed into anti-recession policies of the 1960s. First, however, we will fill in some background and look briefly at the 1940s and 1950s where the stage was set for the 1960s. We'll see a continuation of many of the earlier trends - industrialization, urbanization, globalization, regionalization, driven by demographics, technological change and public policies - and a reversal of a few including inequality, indebtedness, and concentration. We'll also see a new "force" that will prove to have a defining effect on the 1960s - militarization driven by the Cold War. First, though, a little history.

World War II

The 1940s opened with the US going to extreme lengths to avoid conflict in Europe and Asia as it reverted to its isolationist roots. The Neutrality Act of 1935 precluded any shipments of armaments to warring nations, the Neutrality Act of 1937 specified all sales to belligerents must be on a cash basis, and in 1939 arms sales were permitted only if they were not transported on American ships. With the US firmly on the sidelines, Japan embarked on its Asian land grab in 1931 when it seized Manchuria, and by 1937 it was invading China, a country in the midst of a bitter civil war. In Europe, Hitler had successfully taken Germany out of its depression by building an impressive military machine, and the West was not ready to stand in his way. In late1938 Hitler was given a piece of Czechoslovakia, the Sudetenland, on the promise this was his last land grab, and in Spain, Franco's fascists, with the support of Germany and , won the Spanish Civil War. By the summer of 1939, Hitler had taken all of Czechoslovakia, and after signing a Treaty of Friendship and Alliance with Russia in August, Germany attacked Poland on September 1st. Within the` days Great Britain and declared war against Germany and WW II had begun.

In little more than a month Poland was defeated and after a lull in the action, Germany moved against Denmark and in April of 1940, and Holland, Belgium, and France in May. By the end of June, France had signed an armistice with Germany, but the US remained on the sidelines. It was, however, preparing as if war was inevitable. The US adopted its first peacetime draft and sharply increased defense spending, which did precisely what Keynes predicted; it gave a direct boost to the economy through the surge in aggregate demand that produced the multiplier effect.

In addition to increases in its own defense spending, the US was also supplying the Allies. Initially, England paid in gold for its supplies to conform to the “cash-and-carry” stipulations of the Neutrality Act, but by early 1941 it was unable to pay its bill and the US was constrained by the Neutrality Act not to lend money for Allied purchases. Roosevelt’s solution to the problem was the Lend-Lease program: the US would lend the Allies war material as long as it needed it, or until it was destroyed. Isolationists who did not want the US dragged into a European war opposed the policy, but in March of 1941 it became law and the basis for US supplies to the Allies through 1945. This action transformed the gold inflows into budget deficits as the US government financed the continued military "lending" to Great Britain and the other allies. The US economy continued to soar and by mid year the unemployment rate was nearing single digit rates and the automobile industry was finishing its biggest year ever. Anticipating further mobilization, the

1 government ordered a 50% reduction in auto production for the following year, but this became a non-issue by the end of the year as the US entered the war.

There was no question about the magnitude of the demand surge accompanying the mobilization. Between 1940 and 1945 defense spending increased from $1.6 billion to $83 billion, an increase partly funded by increases in income taxes. In addition to raising personal income tax rates, in 1943 Congress instituted withholding of taxes so individuals would have taxes taken out of every pay check rather than one payment in March for the entire year. By the time the war was over the income tax rates ranged from 23 to 94% and the government’s receipts from the income tax rose from $.9 billion to $18 billion, excess corporate profits were taxed at rates up to 90% and corporate tax receipts rose from $1.2 billion to $16 billion. Profiteering from the war was to be limited by these confiscatory taxes.

Despite the tax increases, taxes were substantially lower than expenditures so the government ran a large deficit that peaked in 1943 at $54 billion, almost one-third of the entire nation's production (GDP). This deficit was financed with borrowing heavily marketed by the government with their "Buy Bonds" campaign, and the Fed did its share by keeping interest rates low so early investors would not lose as interest rates rose as they did in WW I.i Another lesson learned in WWI was that war creates inflation, so now prices were to be restrained by the Office of Price Administration.ii A combination of price controls and rationing managed to keep inflation negligible for the duration of the war, with any real scarcity reflected in the black market prices or shortages. It was also a time of forced savings, with workers unable to spend their income due to limited supplies of consumer goods.

The war made very clear the power of aggregate demand. Between 1938 and 1944, increased spending on the war was the driving force behind a surge in GDP. After the downturn in 1938, US GDP growth averaged about 13% a year through the war’s end, which was about four times the long-term growth rate of GDP. As you can see in the graph before, prior to the US entry into the war GDP growth was in the high single- digits, and once it entered the war GDP growth averaged 17% a year.iii

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The rapid growth in the economy was also reflected in a rapidly declining unemployment rate. The US unemployment rate in late 1939 - at the outset of WW II when Germany invaded Poland – was 15%, down from the Great Depression peak of 25%. In the following two years before the US entered the war, when it acted as what Roosevelt described as the “Arsenal of Democracy,” the unemployment fell to 3.5% and by mid 1942 it was less than 1%.

As for inflation, it remained under control during WW II. Inflation in the US during its involvement in WW I (April 1916 – November 1918) averaged 16%, but during US involvement in WWII inflation averaged less than 5%.

What remained unresolved as WW II drew to a close was whether the inflation-free expansion of the war years could be repeated in a peacetime setting when none of the extraordinary measures - price controls, rationing, and confiscatory taxes - could be expected to be left in place. The concern was that in the absence of these external controls, expansionary macro policies would produce less of an output effect and more of a price effect - fewer jobs and higher prices. These fears were heightened in the post WWII period when the unemployment rate rose sharply, GDP declined, and inflation soared.

Post World War II

By the end of WW II in August of 1945 there was need for a new world order, and with the leadership of the US, this is exactly what it got.

What eventually emerged victorious from the wreckage was a hybrid system that combined political liberalism with a mixed economy. As the political scientist Sheri Berman has observed, “The postwar order represented something historically unusual: capitalism remained, but it was

3 capitalism of a very different type from that which had existed before the war -- one tempered and limited by the power of the democratic state and often made subservient to the goals of social stability and solidarity, rather than the other way around.

It offered neither salvation nor utopia, only a framework within which citizens could pursue their personal betterment. It has never been as satisfying as the religions, sacred or secular, it replaced. And it remains a work in progress, requiring tinkering and modification as conditions and attitudes change. Yet its success has been manifest -- and reflecting that, its basic framework has remained remarkably intact.iv

The major battles about how to structure modern politics and economics were fought in the first half of the last century, and they ended with the emergence of the most successful system the world has ever seen. In fact, at the end of the 20th century “The world order created in the 1940s [was] still with us, and in many ways stronger than ever.”v

So what was this new world order that has been deemed so successful and what role did economic policy play in it? In 1942, only months after the US had entered the war, two American economists wrote, “It is increasingly understood that the essential foundation upon which the international security of the future must be built is an economic order so managed and controlled that it will be capable of sustaining full employment and developing a rising standard of living as rapidly as technical progress and world vi productivity will permit.” Within two years, at a meeting of the allies in Bretton Woods, New Hampshire, the details of the international financial system that would facilitate the growth deemed necessary in the new world order was agreed upon, and in the 1970s unit we will examine this in some detail. In a “reaction to the economic rivalry and political turmoil of the 1930s and the resulting world war, [what emerged] can be called the liberal democratic order. It culminated in a wide range of new institutions and relations among the Western industrial democracies, built around economic openness, political reciprocity, and multilateral management of an American-led liberal political system.”vii Central to any success at achieving its goals of peace and prosperity, was containment of the , “which was based on the balance of power, nuclear deterrence, and political and ideological competition.viii

In 1945 Roosevelt, Churchill, and Stalin met at Yalta to divide up post war Europe, but there was a growing fear that the territorial expansion of communism had only begun and the boundaries between capitalist and communist countries were not secure. The situation was described by Winston Churchill at a speech in March of 1946 at Westminster College in Fulton, MO: "From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Soviet Russia desires the indefinite expansion of their power and doctrines." The sentiments were echoed by George Kennan, US minister- counselor in who warned that the western powers must contain Russia, the kick-off to a policy of ix containment that dominated defense policies into the 1990s.

Evidence of the communist threat was not hard to find. After the war, Greece found itself in a bitter civil war with communists in 1946, while Turkey was being pressured by the Soviet Union (USSR) for water access to the Mediterranean. Czechoslovakia "fell" to the communists in a bloodless coup in 1948 and the Russians closed down Berlin to land and water traffic, which President Truman responded to by ordering a massive airlift that broke the blockade by May of 1949. In Asia, the tentative peace between China's nationalists and communists ended with Japan's surrender, and by the end of 1949 Mao Zedung's communists controlled China. In Vietnam, by 1947 Ho Chi Minh was leading communists in a civil war against France who was receiving money and arms from the US. The Cold War turned hot in Korea. At the close of WW II Japan gave up Korea, which it had taken in 1905, and the country was divided at the 38th parallel into a communist North and a free South. In 1949 the US brought home its troops and in June 1950 launched an attack on South Korea. Within days the US was sending troops and materials to Korea for a "war" that lasted until the summer of 1953.

At home, the House Un-American Activities Committee opened hearings into Communist influence in the movie business that often featured congressman leading the anti communist charge. This set the stage for Senator Joseph McCarthy's speech on February 9, 1950 at the Republican

4 Women's Club in Wheeling, West Virginia where he stated he had a list of 205 cases of individuals loyal to the Communist party, and in the next few years the nation found itself in the grips of a witch hunt reminiscent of the earlier one in Salem, MA.x By 1954 McCarthyism, which was the subject of the movie, Good Night, and Good Luck, finally died out, although Congress added the words "under God" to the Pledge of Allegiance and required "In God We Trust" to appear on US currency and president Truman issued an executive order requiring a check on loyalty of all federal employees.

For the remainder of the decade the US engaged in a long running war against the spread of communism - a war that included a CIA fostered coup in to topple a government believed to be unsympathetic to the wishes of the West (1953), a division of Vietnam between free and communist (1954), a military coup in Egypt in 1952 that laid the foundation for a 1956 war between Israel and Egypt, and the use of Soviet tanks to crush a revolution in Hungary in 1956.xi On October 4, 1957 the Soviet Union opened a new dimension to the "war" when it started the space race with the launch of the satellite Sputnik.xii Things looked even bleaker in 1958 with a coup in , a revolution in Cuba that put Fidel Castro in power, and a civil war in Lebanon that raised the threat of another coup and prompted the decision to send US marines into Lebanon. The division of the world as the eve of the 1960s can be seen in the following map from a wonderful site - Historical Atlas of the Twentieth Century.

The existing world "order" received another shock in 1947 when India, led by Gandhi, gained its independence and then was divided into India and Pakistan. This was the beginning of the dismantling of the European's colonial empires that controlled much of Asia and Africa at the end of WWI, and before the decade was over Indonesia had gained its independence from the Netherlands.xiii

5 In the Middle East, the groundwork was also being laid for the Palestinian-Israeli conflicts that continue to plague the region. In 1947 the UN agreed on the partitioning of Palestine into two states and on May 14th, 1948 Israel became a sovereign nation recognized by the US. The next day it was invaded in the first Arab-Israeli war.xiv

The US responded to the rising international risks in 1947 with passage of the National Security Act that provided a new structure to the defense establishment - a civilian Secretary of Defense, the Joint Chiefs of Staff, the National Security Council, and the CIA. Mounting unemployment and poverty in Europe were seen as breeding grounds for the communists and by the end of the year president Truman requested aid for Europe.xv Military cooperation was to be promoted by the North Atlantic Treaty Organization (NATO) created in 1949 as an alliance of 12 independent nations committed to each other's defense.xvi

A good defense – the military-industrial complex that President Eisenhower would identify in his farewell speech in 1961 – was important, but so was a good offense. To suppress challenges to its peace and prosperity vision, countries needed a venue for multilateral discussions and rapid economic growth. The US also took the lead in the movement to create international institutions to shape the international world order in the post WW II era. The first was the established in 1945 at a conference in .xvii It was also accepted that the globalization process of the late 19th and early 20th century, which had been reversed by the beggar-thy-neighbor trade policies of the Great Depression, should be revived to create a lasting peace. To promote growth through trade, the Bretton Woods agreement outlined of a new international order centered on three new international institutions - General Agreement on Trade xviii and Tariffs (GATT), World Bank, and the International Monetary System.

Within Europe and Japan, economic growth was jump started with help from the US. In West Germany, the initial postwar plan by the Allied overseers was to severely reduce Germany’s manufacturing industries, but soon the Cold War made a vibrant German economy more important and in March of 1948 Congress signed into law the European Recovery Program, better known as the Marshall Plan, designed to pump tens of millions of $s into Europe to create the economic stability necessary for the survival of democratic institutions. In Japan the US took a more direct approach by occupying the country and rewriting its constitution, but here to the emphasis was on promoting economic growth.

In Europe there was also a movement toward Churchill's dream of a United States of Europe. In 1951 Belgium, France, Germany, Italy, and Luxembourg signed the Treaty of establishing the European Coal and Steel Community, and in 1957 they signed the Treaty of creating the European Economic Community (EEC) - what would later become the European Union (EU).

At home, returning soldiers had some catching up to do - and one result was the baby boom generation. There was also some catching up to do for the years of doing without - the 1930s when there was too much unemployment and too little money and then the 1940s when there were too few "things" because of rationing. The "favorites" were consumer durables that had just reached the markets before the Depression, and at the top of the list was the TV that had been around on a limited scale in the 1920s. It was a small screen packed in a big box to hold a big picture tube that provided a fuzzy black-and-white picture, and in 1946 the mass production of TVs to be sold at a price of $385 began.xix What followed was a long line of consumer durable products and the extension of consumer financing to facilitate these purchases. In the 1947 the 1st microwave oven was sold, Land introduced instant photography that would become the 1st Polaroid instant camera in 1948, the modern 33 1/3 rpm long-playing album appeared, as did the 1st transistor, a device that would eventually replace the vacuum tubes and allow the move toward smaller, more mobile electronic devices.xx

Where were these people with the appliances going to live? The answer appeared in 1947 when on Long Island the suburban development in Levittown opened. The rows upon rows of identical homes on winding streets in communities "carved" out of the farmland and forests certainly do not look much like today's McMansions, but this is where it all started. It wasn't pretty but it was the beginning of the suburban subdivision and it did provide affordable housing for returning soldiers to raise those baby boomers. The move to the burbs, which would dramatically alter where Americans lived, worked, and shopped, received another boost with passage of the Federal Highway Act in May of 1954 that created the Interstate Highway

6 System. One person who recognized the significance of this was Ray Kroc who opened the first McDonald's restaurant (1955), and we know where this led - to those strips" of fast food outlets. The decline of "Main Streets" and the rise of big boxes began when the nation's first shopping mall was opened outside of Detroit (1954), just in time for consumers use the first credit card - the Diners Club card introduced in 1951. The odds were still high people would be driving a large car produced by one of the Big Three auto companies (GM, Ford, Chrysler), but by the end of the 50s the first wave of small cars appeared. American Motors and Studebaker had successful lines of small cars and in 1959 the Big Three introduced their own small cars - the Corvair (1960), Falcon, and Valiant. We were also beginning to see the first real signs of auto imports as the Volkswagen bug appeared, as did the first small cars from Toyota (1957) and Nissan.

This was also a time where blacks that had fought and worked with whites during the war years, began to assert their civil rights more forcefully. The process began in the 1950s with the Supreme Court's rulings that separate was not equal in schooling in the1954 Brown vs. Topeka Board of Education case, and gained momentum the following year when Rosa Parks' got on the bus in Montgomery, AL and refused to sit in the back as the law required. Things looked as if they would change when in 1957 the Civil Rights Act was passed giving the Justice Department the right to bring suits for blacks, but the promise was not to be realized soon, and in the following year Little Rock's schools were closed for a year to avoid integration.

On the macroeconomic front, a wage-price spiral followed peace with inflation approaching 20%. The result was considerable labor unrest in the winter of 1945-46, most notably strikes by autoworkers, steelworkers, coal miners, and railroad engineers. The coal strike forced a slowdown of the nation's factories and was ended only after president Truman ordered the mines seized, while the railroad strike was ended by a threat to take over the railroads and draft all strikers. Public sentiment turned against labor unions during the unrest and in June of 1947 the Taft-Hartley Act was passed over Truman's veto. This legislation ended closed shops (only dues paying union members could be hired) and secondary boycotts, imposed mandatory cooling-off-periods for a category of strikes, and allowed states to pass right-to-work legislation that eliminated union shops (all workers would need to join the union) within the state.

By the early 1950s rising inflation produced more labor unrest, and President Truman took little time in dealing with the problem when in August, 1950 he seized the railroads to avert a strike and in September he raised income taxes (Revenue Act of 1950) and established a wage and price stabilization program. In April of 1952, Truman once again ordered government seizure of the steel mills to avert a strike, but in June the Supreme Court ruled the seizure illegal. Despite these efforts to reign in the power of labor unions, in the nation's factories labor unions' influence continued to grow and in 1955 the nation's two largest unions merged - the AFL and the CIO joined to form the AFL-CIO. With much of the industrialized world having been destroyed during WW II, America’s industrial workers in the 1950s and 1960s enjoyed a "window of opportunity" in which US industries had little foreign competition, and the nation's blue-collar workers were the main beneficiaries. As we will see later, it was a window that would begin closing on them in the 1970s as European and Japanese companies and workers began to once again compete with US companies and workers.

On the technology front, there were a number of developments that would eventually have an enormous impact on the economy and society, but not quite yet. In early 1946 the world had its first electronic digital computer, ENIAC. It did not look much like today's computers with its 19,000 vacuum tubes and weight of 30 tons. In 1951 the first UNIVAC computer was sold to the Census Bureau, in 1952 CBS used a UNIVAC machine to predict the 1952 election, and two years later a private sector company - GE, purchased the first UNIVAC. Transatlantic phone conversations became a reality in 1956 and by 1959 people were xeroxing documents at work. On the medical front, the first organ transplant was performed in 1950 and a polio vaccine invented by Dr. Salk came onto the market in 1955 offering hope against a feared disease that had paralyzed Franklin Roosevelt

The stage was now set for the 1960s - a decade that brought you "sex, drugs, and rock-and-roll” as those baby boomers came of age and headed to college. It also brought us discretionary fiscal policy. The number of Bachelor's degrees awarded in the US more than doubled in the 1960s as the boomers entered college in record numbers, in part a response to the GI Bill of Rights of 1944 that committed the federal government

7 to providing funds for education. When in school one of the books they read was (1961) about John Howard Griffin, a white man who transformed himself into a black man to see what life was like for a black man in the 1950s in the south. It was ugly and it certainly helped efforts to gain equal rights for Blacks.xxi

The advances made by Blacks in the 1960s, beginning with passage of the second Civil Rights Act (1960) that gave Blacks more support with voter registration, were not all peaceful despite the pleadings of Martin Luther King for nonviolence. In 1961 the freedom riders' efforts to open up bus stations in the South produced riots, as did James Meredith's efforts to enroll at the University of Mississippi in 1962. The high point of the civil rights movement was the march on Washington on August 28, 1963 that included Martin Luther King's I have a dream speech. Within a year of that march, President Johnson signed the Civil Rights Act of 1964 that prohibited racial discrimination in the use of federal funds and in public places such as hotels, amusement parks and established the Equal Employment Opportunity Commission. Things deteriorated quickly, though, as many of the nation's largest cities became engulfed in riots for the next three summers following the riots in Harlem in 1964. The largest were in the Watts section of during the summer of 1965, Detroit in 1967, and in smaller riots in Newark, Rochester, Cleveland, Cincinnati, and Chicago. The nation also mourned the deaths of Martin Luther King and Robert Kennedy, leaders in the civil rights movements who were assassinated in 1968.

There were four additional books that had an impact on public policy. 1. Rachel Carson's publication of A Silent Spring (1962), a warning of the dangers of toxic chemicals and pesticides, was a catalyst behind the environmental movement.xxii 2. Michael Harrington's The Other America (1962) exposed large pockets of poverty in the midst of prosperity and acted as the catalyst for president Lyndon Johnson's War on Poverty program that included Medicare, a medical care program for the aged that we hear so much about today.xxiii 3. 's Unsafe at any speed; the designed-in dangers of the American automobile (1965) described, using the automobile industry as an example, how American consumers could not trust the nation's corporations to design safe products. The resulting debate eventually led to the creation of a number of government agencies in the early 1970s including the National Highway Traffic Safety Commission (NHTSA), Occupational Safety and Health Administration (OSHA), and the Consumer Product Safety Commission (CPSC). 4. Betty Friedan’s The Feminine Mystique (1963) inspired women activists who formed the National Organization of Women (NOW) in 1966 and was most likely an influence on the Roe v Wade decision in the early 1970s in which the US Supreme Court gave women the right to abortions.

The 1960s was an active decade for the Supreme Court with a number of decisions that affected many aspects of life - the redrawing of political boundaries that gave urban areas more voting influence (1964), the establishment of suspects rights in the Miranda case (1965), and the end of prayer in school which was found to violate the First Amendment (1962). In 1967 became the first Black on Supreme Court.

In the international arena, the decade opened with a US U-2 spy plane being shot down over Russia, and in his farewell address to the nation in 1961, President Eisenhower, a former general who led the D-Day invasion of France in WWII, delivered his famous warning about the growth of the military-industrial complex.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

8 The message proved to be right on, but it did not prompt any reigning in of the military. Later that year the Berlin Wall was erected to stop the flow of people from East Germany and the disastrous Bay of Pigs invasion of Cuba failed, which prompted Soviet Premier Nikita Khrushchev to deliver his "we will bury capitalism" speech at the UN. WW III looked very possible in the fall of 1962 during the Cuban missile crisis, but by 1963 the US was selling grain to the Soviet Union and China and signing the Nuclear Test Ban Treaty outlawing atmospheric testing of nuclear weapons.xxiv The rest of the decade would be dominated by the that would eventually lead to over 58,000 American combat deaths in a conflict "marketed" to the American people as a game, a very deadly game, of dominoes.xxv Looking at the map you can understand how some viewed the war in Vietnam as an effort to repel Communist China’s efforts to expand communism's the sphere of influence. If Vietnam fell to the communists, then the next xxvi domino would fall as the communists moved into - then Laos - and then Thailand. Forty years later the story line would return as the Bush administration promoted the invasion of Iraq as an opportunity to plant the seeds of democracy in Iraq – and once it was planted there then it would spread to neighboring Syria – then to Saudi Arabia.

In Africa, the 1960s was the decade when much of central and southern Africa gained independence and the Soviet Union and the US led efforts to bring them into their sphere of influence. In the Middle East there was another Arab-Israeli war- this one the 6-Day War in 1967 that resulted in Israel's taking of West Bank, the Golan Heights, and Jerusalem.xxvii

And before we leave the 1960s, we need to mention briefly some of the innovations that occurred in the decade. In the space race the tide turned in America's favor by the mid 60s when John Glenn orbited the earth in 1962, a year after Yuri Gagarin had become the first human space traveler. In 1965 Gemini 7 orbited the earth 206 times and rendezvoused with Gemini 6 setting the stage for Neil Armstrong's 1969 "giant step for mankind" that delivered on President Kennedy's promise to have an American on the moon before the end of the decade. This was also the decade of the laser (1964), minicomputer (IBM's 360 computers in 1964), Japan's Bullet Train (1965), commercial communications satellites (1965), and ARPANET - the forerunner of the (1969). On the medical front, this was the decade of the pill (1960) that gave us the free love generation, Valium (1963) that helped its mood, heart transplants, and the Surgeon General’s first announcement of a link between smoking and cancer (1964). It was also the decade of the Ford Mustang (1965) and the QE2 (1969), although its future turned bleak after the first flight of a Boeing 747 (1969).

In business this was a decade of oil discovery in Alaska (1968), formation of OPEC (1960), cash machines (1967), the opening of Domino's Pizza (1960) and Wal-Mart (1962), and McDonald's listing on the NYSE. It was also the decade when the Prudential Center in Boston was constructed and construction on the World Trade Center in NYC was begun. In the area of entertainment, arts and leisure, we saw our first weight- watchers, make their appearance on the Ed Sullivan Show (1964), the first Super Bowl (1967), Roger Maris' 61st home run (1961), and GI Joe showing up on store shelves (1964). Star Trek (1966) and Sesame Street (1969) were aired on TV, while at theaters the movies Psycho (1960), Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb (1964), Doctor Zhivago (1965), The Graduate and

9 Bonnie and Clyde (1967), Planet of the Apes (1968), and and Butch Cassidy and the Sundance Kid (1969) were playing. And the decade ended with Woodstock (1969).

Now it's time to look at developments in macroeconomic theory and policy.

10 1960s Setting i When a government borrows funds by selling bonds, normally this increase in demand for funds will cause interest rates - the price of borrowing - to rise. The Fed in this situation, however, was "forced" to buy the government bonds and pay for them with newly printed money. The result was the Fed gave up control of the money supply since any time the government increased borrowing the money supply increased. A more complete discussion of the relationship between the Fed, money supply, and interest rates can be found in the 1970s unit. The inflation of the early 1950s also created a division between the Treasury, which wanted to keep interest rates low to keep down the costs of the government's debt, and the Fed, which wanted to control the money supply and raise interest rates to control inflation. The major debate centered on the independence of the Fed. During WW II the Fed had kept interest rates low to facilitate the financing of the war. By pegging interest rates at a certain level, say 3%, the Fed loses control of the money supply. There were some who wanted to see this practice continued, very possibly because any freeing of interest rates would result in higher rates, and this would reduce the value of existing bonds investors owned. ii Supporters On October of the4, 1942 status the quo New supported York Times their reported position that by raisingRoosevelt the hadspecter appointed of a link Associate between Justice high interest Byrnes rates of the and Supreme Court to be Director of Economic Stabilization to "command the war upon inflationary living costs, and ordered the immediate stabilization of farm prices, urban and rural rent, wages and salaries paid in industry." Byrnes was very much aware of the possible interpretation of the rising power of the government when he responded to a question concerning the location of his new office. "It is in the left wing, but there is no political or economic significance in my assignment there." iii Catherine Rampell, “The Fed’s G.D.P. Forecast, in Context,” New York Times, February 16, 2011 iv Gideon Rose, “Making Modernity Work,” FA J?F 1012 v G. John Ikenberry, “The Myth of Post–Cold War Chaos,” May/June 1996 vi Alvin Hansen & C. P. Kindleberger, “The Economic Tasks of the Postwar World,” Foreign Affairs, April 1942 vii Gideon Rose, “Making Modernity Work,” FA J?F 1012 viii ibid ix In 1947 the journal Foreign Affairs published an anonymous article entitled "The Sources of Soviet Conduct" outlining the containment theory, an article that was quickly recognized as having been written by Kennan. In the following year, South Africa instituted its own containment policy when the Afrikaner Nationalist Party began instituting a policy of separation for societies four groups - a policy known as apartheid. For a wonderful movie that captures some of these events, you should see Power of One. x In 1950 the McCarran Internal Security Act was passed and all "communist" groups were required to register with the Attorney General and the president was given powers to detain. Truman, sensing the government was overstepping its bounds, vetoed the bill, but it eventually became law. McCarthyism finally died out in 1954 when the US Senate voted 67-22 to condemn him for "conduct contrary to Senatorial traditions," but the climate of fear that he created lived on for the remainder of the decade. xi For some information on the coup, a good source is the CIA Documents on the 1953 Coup in Iran. Included there in the summary is the following: "By the and at 1952, it had become clear that the mossadeq government in Iran was incapable of reaching an oil settlement with interested Western countries; was reaching a dangerous and advanced stage of Illegal, deficit financing; was disregarding the Iranian constitution in prolonging Premier Mohammed Mossadeq's tenure of office; was motivated mainly by Mossadeqs desire for personal power; was governed by irresponsible policies based on emotion; had weakened the Shah and the Iranian Army to a dangerous degree; and had cooperated closely with the Tudeh (Communist) Party of Iran. In view of these factors, it was estimated that Iran was in real danger of falling behind the Iron Curtain; if that happened it would mean a victory for the Soviets in the Cold War and a major setback for the West In the Middle East. No remedial action other than the covert action plan set forth below could be found to improve the existing state of affairs. ... Once it had been determined definitely that it was not in American interests for the Mossadeq government to remain in power and CIA had been so informed by the Secretary of State in March 1953, CIA began drafting a plan whereby the aims stated above could be realized through covert action. xii Russia had beaten the US into space, triggering a national soul-searching focused on the adequacy of an education system deemed far behind in science and mathematics. Lyndon Johnson, Senate Majority Leader from , held hearings to determine the extent to which the US was in the "space race" and took the lead on taking the US to the moon. Then things got worse on November 3, 1957 when a second Soviet spacecraft was launched into orbit, this one carrying a dog named Laika, and in the following month when the US rocket Vanguard managed to barely make it off the pad before it fell back to earth. Finally on January 31, 1958 Explorer was launched and the US was back in the ‘space race,’ but it was in the position of catching up.

11 xiii The independence movement continued in the 1950s with the emergence of Guinea, Ghana, Libya, , , and in Africa, plus Cambodia and Laos in Southeast Asia, as independent nations. In the 1960s and 1970s the process picked up speed with virtually all of Africa's colonies becoming independent nations as well as . xiv The League of Nations in 1922 appointed Britain to rule Palestine, an area that Britain identified in the Balfour Agreement of 1917 as the preferred home of a Jewish state. By the mid 1930s the influx of Jews had created conflicts in the area so Britain began restricting migration to the region by 1939, but this did not end the conflict between the Jews and Arabs. In fact the problem was beginning to look intractable to the British who "dumped" the problem into the hands of the newly formed United Nations. The result was a series of wars. During the 1947 war there were significant losses of life on both sides and Israel added some territory - the Gaza strip. Peace was never achieved in the area after the war and the second Arab-Israeli War, the Sinai War, broke out in 1956 when Israel invaded the Sinai Peninsula followed by a British and French invasion of the Suez Canal. The US eventually brokered a deal to keep the Russians from entering in on the side of the Egyptians who would now find political and military support from the Soviet Union. The situation is described as follows: [The History Guy: Arab-Israeli Wars: Suez War (1956)] As part of Egyptian President Nasser's nationalist agenda, he took control of the Suez Canal zone away from the British and French companies which owned it. At the same time, as part of his ongoing struggle with Israel, Egyptian forces blocked the Straits of Tiran, the narrow waterway that is Israel's only outlet to the Red Sea. Israel and Egypt had clashed repeatedly since their 1948 war as Egypt allowed and encouraged groups of Palestinian fighters to attack Israel from Egyptian territory. In response, Israeli forces constantly made cross-border raids in retaliation. Britain and France, both of whom were in the process of losing their centuries-old empires, decided on a strategy straight our of their 19th Century Imperial histories. This plan led to a joint invasion and occupation of the Suez Canal zone by Britain and France. This was meant to reassert control of this vital waterway to the British and French companies stung by Nasser's bold nationalization. At France's suggestion, planning was coordinated with Israel, a fact that all three nations denied for years afterwards. On October 29, 1956, Israeli troops invaded Egypt's Sinai Peninsula and quickly overcame opposition as they raced for Suez. The next day, Britain and France, following their part of the script, offered to temporarily occupy the Canal Zone and suggested a 10-mile buffer on either side, which would separate the Egyptian forces from the Israelis. Nasser of course refused, and on October 31, Egypt was attacked and invaded by the military forces of Britain and France. In response to these developments, the Soviet Union, which at the time was ruthlessly suppressing an anti-Communist uprising in Hungary, threatened to intervene on Egypt's behalf. President Eisenhower of the United States pressured Britain, France and Israel into agreeing to a cease-fire and eventual withdrawal from Egypt. The United States, caught by surprise by the dual invasions, was more concerned with the Soviet war in Hungary and the Cold War than with Britain and France's dealings involving Suez. The last thing President Eisenhower wanted was a wider war over Suez. The war itself lasted for only a week, and invading forces were withdrawn within the month. As a result, Egypt now firmly aligned herself with the Soviet Union, which armed Egypt and other Arab nations for the continuing struggle against Israel. When the war had ended Israel had captured the Sinai Peninsula, but under pressure from the US it returned the land with the exception of a small strip of land called the Gaza Strip that was still in the news in 2006. xv British aid to Greece was cut off in 1947 and Truman believed the US needed to step in if the two nations were to fight off the communists - a policy known as the Truman Doctrine. It soon became apparent, however, that the problem was not constrained to Greece and Turkey. On , 1947 James Reston reported in the New York Times that the Truman administration "is increasingly convinced that the reconstruction of a sound democratic economy west of the Stettin-Trieste line is the only really effective barrier to expanding communism..." This sentiment was echoed by Secretary of State George Marshall in May of 1947 at a speech at . xvi Four more European nations later acceded to the Treaty between 1952 and 1982, and on 12 March 1999, the Czech Republic, Hungary and Poland were welcomed into the Alliance, which now numbers 19 members." (NATO web site). xvii According to the UN, "the forerunner of the United Nations was the League of Nations, an organization conceived in similar circumstances during the first World War, and established in 1919 under the Treaty of Versailles "to promote international cooperation and to achieve peace and security. "[For a timeline of events check out the site Milestones in United Nations History.] xviii According to the UN, "the forerunner of the United Nations was the League of Nations, an organization conceived in similar circumstances during the first World War, and established in 1919 under the Treaty of Versailles "to promote international cooperation and to achieve peace and security. "[For a timeline of events check out the site Milestones in United Nations History.]

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To facilitate the expansion of international trade and remove the tariff and nontariff barriers to trade, the International Trade Organization (ITO) was proposed, but the US refused to sign because it felt the US would be giving up too much of its sovereignty. What the US did support was the General Agreement on Trade and Tariffs (GATT) that became the institution for resolving trade disputes and lowering trade barriers. It was quite successful, with the agreements being achieved at a series of multi-year international conferences - called rounds (History of GATT rounds) - and in 1995 GATT was replaced by the World Trade Organization (WTO). The new international financial system was supported by two additional international institutions. One was the World Bank, an institution dedicated to helping the world's poorer countries and the International Monetary Fund (IMF) - a quasi-international central bank. In effect the IMF was established to help provide discipline in international transactions and to provide loans to countries experiencing balance of payments problems. xix For those interested in some pictures of the early TV, check out New Era TVs. As for what they were watching, the Ed Sullivan show first aired in 1948 and continued to run into the 1960s when The Beatles made their appearance - something those early boomers will remember. xx After a "pause" during the , spending resumed and a favorite was RCA's color TV system that appeared in 1954. It was "perfect" to watch the first color broadcast - the Rose Bowl Parade ("The Day a Black and White World, Changed into Living Color - January 1, 1954"). (You can also see an ad for original color TV. Color TV was not an instant success with Time magazine identifying color TV as "the most resounding industrial flop of 1956," but there were some "hot" shows - the most notable being the I Love Lucy and Ozzie and Harriet shows that opened in 1951 and 1952. xxi In fact as we look back from the 21st Century, it is sometimes difficult to appreciate the state of race relations in the US as late as 1941. While it was OK to send Blacks to die in Europe and Asia, it was not OK for a Black woman, Marian Anderson, to sing at Constitution Hall in Washington, DC. xxii Pollution has long been recognized as a problem in American cities, but it has only been in the latter part of the 20th century that there has been a coordinated effort to control it. In the 1960s important steps were taken toward cleaning up the nation's air and water. The history of the Clean Water Policies, as told by the EPA, identifies a number of early legislative milestones that led to passage of the Water Quality Act in 1965 that required states to set water quality standards for navigable water. The history of the Clean Air Policies, meanwhile can be traced back even further, but the real push came in the late 1940s and early 1950s after episodes of smog that killed people in Donora, Pennsylvania (1948) and , England (1952) that killed roughly 4,000 people ( Met Office web site). By mid decade the Air Pollution Control Act of 1955 was passed and the Federal government was in the business of funding research on air pollution. This was followed by the Clean Air Act of 1963 that "sought to promote public health and welfare. It granted $95 million over a three-year period to state and local governments and air pollution control agencies in order to conduct research and create control programs. This Act, recognizing the dangers of motor vehicle exhaust, encouraged the development of emissions standards from these sources as well as from stationary sources. Interstate air pollution from the use of high sulfur coal and oil also needed to be reduced; therefore, this act encouraged the use of technology that removed sulfur from these fuels. To continue action in this area, the Clean Air Act promoted ongoing research, investigations, surveys, and experiments." The Act was amended in 1965 and 1966 and in 1967 it was again amended with the nation being divided into "Air Quality Control Regions (AQCRs) as a means of monitoring ambient air. The government also established national emissions standards for stationary sources, which brought about debate because many officials thought it should be dealt with industry by industry, but one national standard was set. These standards established a fixed timetable for state implementation plans (SIPs), and recommended control technologies to achieve the ultimate goals of the SIPs. Despite all of the legislative action, things did not really improve in the 1960s so by the end of the decade there was a growing concern about damages done to the environment. The situation was described by Jack Lewis in The Birth of EPA as follows. "Everywhere television programs, symposia, and "teach-ins" raised the burning question: 'Can Man Survive?' In , U Thant of the United Nations gave the planet only ten years to avert environmental disaster; the following month, he blamed the bulk of planetary catastrophe on the United States. Under Secretary of the Interior Russell E. Train spoke skeptically at the Centennial of the American Museum of Natural History: 'If environmental deterioration is permitted to continue and increase at present rates, [man] wouldn't stand a snowball's chance in hell [of surviving].'" Nothing, however, could have prepared one for the fire that erupted on the Cuyahoga River that runs through Cleveland, Ohio on the way to Lake Erie in June of 1969 when. This burning river, coupled with the nation's first Earth Day in , mobilized forces for a clean environment and finally in his statement to Congress in July of 1970, President Nixon described a government reorganization that created the EPA. "The Government's environmentally-related activities have grown up piecemeal over the years. The time has come to organize them rationally and systematically. As a major step in this direction, I am transmitting today two reorganization plans: one to establish an Environmental Protection Agency, and one to establish, with the Department of Commerce, a National Oceanic and Atmospheric Administration." For a history of the EPA you should check out the EPA History web site where you will find a timeline and links to landmark policies and events in the years since Nixon's formation of EPA in 1970. You may also want to check out the EPA site, A Look at EPA Accomplishments: 25 Years of Protecting Public Health and the Environment where you will find a timeline.

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xxiii In a speech on March of 1964, a part of his "Great Society" program announced at a University of Michigan talk in May of that year. On August 20, in the Rose Garden, Johnson signed the Economic Opportunity Act establishing the Office of Economic Opportunity to direct and coordinate a variety of educational, employment, and training programs, which were the foundation of Johnson's 'War on Poverty.'" The "Great Society" program became the agenda for Congress: aid to education, protection of civil rights (including the right to vote), urban renewal, Medicare, conservation, beautification, control and prevention of crime and delinquency, promotion of the arts, and consumer protection." (Lyndon Johnson Presidential Library website). xxiv For those interested in the era you might want to check out the movie 13 Days which accurately captures the fear Americans had of an imminent nuclear war. xxv For info on this there are many sites including PBS that includes a time-line. The apparent trigger was the Gulf of Tonkin incident of 1964 in which North Vietnamese PT boats "allegedly" fired torpedoes at an American ship and the US responded with passage of Gulf of Tonkin Resolution and by the following year there were 200,000 American troops in Vietnam. Not all agree that this was the trigger, however, as evident in a Washington Post story indicating that plans had been in place before the Tonkin incident. (U.S. Planned Before Tonkin For War on North). What we also know, thanks in part to President Kennedy and Johnson's Secretary of Defense Robert McNamara's book, In Retrospect: The Tragedy and Lessons of Vietnam, is that there was a belief that with correct information the US could "manage" the war in Vietnam. Unfortunately, as pointed out by McNamara, things didn't work out quite as planned and the war soon escalated. In 1966 B-52s begin bombing North Vietnam and by 1968 General Westmoreland requested an additional 200,000 soldiers while President Johnson announced his decision not to seek reelection, knowing full well he would not be re-elected. The decade ended with President Nixon's decision to begin bombing Cambodia, a decision that triggered a massive anti war rally in Washington, DC and sets the stage for antiwar protests on the nation's campuses. What we don't know is whether we will be any more successful in western Asia than we were in Southeast Asia and whether we may ever see Donald Rumsfeld write a follow-up retrospective. For those interested in McNamara's reflections on the period, you should see the movie Fog of War. xxvi For those who have followed the War on Terrorism, there is an obvious parallel that is evident if you compare the two maps. Just as the US was stopping the dominoes from falling in Southeast Asia in the 1960s, it was trying to start a similar process in the 2000s. If the US could get Iraq to adopt democracy and capitalism - the first domino - then we could expect neighboring countries to "catch the wave." Just as Cambodia would have followed Vietnam into the fold of communist countries, now we expect Saudi Arabia to follow Iraq into capitalism and democracy. xxvii In Egypt, President Nasser had expelled UN observers who had been on the Sinai Peninsula acting as a buffer between Egypt and Israel since the last war, again closed the Straits of Tieran to Israeli shipping that stopped trade through the port of Elat, and mobilized Egyptian forces and supported attacks on Israel. The pressure was mounting on Israel and on June 5, 1967 it launched a preemptive strike on Egypt, Syria, Jordan, and Iraq and within 3 days it had reached the Red Sea and Suez Canal and controlled the Sinai Peninsula. It then turned its attention on Jordan and Syria in the east and took control of Jerusalem, the . [CIA map of Middle East] After the war the Sinai territory was returned to Egypt between 1978 and 1982. There were also some other notable developments in the Mid East and North Africa. There were a number of coups including ones in Turkey (1960); Iraq, that ushered in the Arab Socialist Ba'ath Party (1963); and Libya, where Muammar al-Qaddafi gained control (1969). There were also new countries that gained their independence in this period - Kuwait, Algeria, and Qatar - and new organizations - OPEC (1960) and the PLO (1964) that Yasser Arafat assumed control of in 1968.

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