penditures, and so approach a balance d system were sharply reduced in calenda r budget with some surplus for debt re- 1955 to negative amounts. The increase duction (see Appendix I) . in the money supply was held to minima l levels through 1956 (about one percent Substantial emphasis on monetary over the year), and both short- and policy, both of a general nature and con - ,long-term interest rates rose sharpl y sideration, at least, of specific control s ( Chart 2) . ( over consumer credit), was also char- acteristie of this period, One major issue of this period con- cerned the causes of the inflation tha t Assorted policies to promote economic was occurring. On the one hand, many , growth included measures to strengthe n argued that with an unemployment rate competition, promote thrift, and im- of 4 percent or more, it was not excessive prove human and natural resources . aggregate demand that was causing in - Such recommendations can be found i n ~flation, but rather the "cost-push" of all the. Economic Reports of :-the Presi- rising wage rates and "administere d dent. prices." It was also argued that the rela- it is evident from Table 2 that in the tively high level of unemployment wa s 1955-57 expansion the total effect o f a reflection of "structural unemploy- ,Federal government finances as reflected ment" unemployment attributable t o in the cash budget was restrictive, an d such things as geographical and occupa- more so than had been expected. During tional immobility in the labor force — ...the early part of the expansion (fisca l so that increased aggregate demand was 1956) the actual surplus far exceede d not the appropriate cure . Rather, meas- y the budget estimate. However, in the ures were needed to meet unemploy- latter part of the expansion (fiscal 1957 ) ment in those particular areas which ha d the actual surplus fell short of the been hard hit by changes in industr y budget estimate, When the subsequen t and to train unemployed for the kinds o f recession approached its trough (i n jobs available, mid -19 5 8), t eh estimated surplus turne d The Recession of 1958 . Since eco- I into a deficit. nomic activity had begun to decline in It is also notable that in these years the latter part of 1957, one might have .the cash surplus substantially exceede d expected that the Budget for 1959 (pres- the administrative budget surplus, From ented in January 1958) would have in- World War II until 1958 the trust fund s cluded discretionary measures to mee t showed a sizable cash surplus whic h the recession. Increasing defense needs added to the restrictive effects of Fed- incidentally provided some stimulus , eral operations, and nondefense expenditures rose sub- stantially but not on the basis of initial This business expansion reached its budget requests, On the tax side, n o peak in July 1957 . Major discretionary changes were recommended and further actions taken to check inflationary pres- extension of Korean War rates was agai n sures, which were substantial, were i n requested. A surplus of $466 million the monetary area. As shown by Chart 3 , was estimated in the Budget for fisca l the "free reserves" (total reserves fo r 1959. In fact, mainly as a result of th e bank deposists less borrowings at th e recession, the actual deficit was $12.4 Federal Reserve Banks) of the banking billion, the largest in the post-Worl d 16 Chart 3 FREERESERVES t CHANGE IN MONEY SUPPLY, AND ,OTIER SELECTED FINANCIAL SERIES ,":Monthly; 19484966 c a ` qTl (Ir) uw1 (J) (A a W (r a w y 9~, fr rear ► ( L► + 1 1 Tr7 anga m app . onn. o ant, +11 +11 1 —s t -11 +16 , (onn rota, uce miring a q. 6 1 rm +11 ` 44 to -~ 71 v so 111 . otporo or ingc, (ann, to dol,( 40 --~ 1Tr +20 +15 112, C an a i bu loan onn, at d J, 10, +10 . .a M CD Moving 5 tar ( 1 +S M ` ' Chong in con am allm t debt (o is, bll, dol.) +10 ~ _ +S Note: Scales " L" are logarithmic; scales "A" are arithmetic. Shaded areas are periods of recession, "h" peak, "T" = trough. Source: Reproduced from U.S. Department of Commerce, Business Cycle Developments . 17 Table 3 Original Estimates of Surpluses (-}-) or Deficits () In Administrative and Cash Budgets Compared with Actuals Fiscal Years 1959 .1961 (Millions) Administrative Bud`et() Cash Budget(b) Original Ori Inal Year Estimrte Actual kstfmlte Actual 1959 $+ 466 $12,427 $+ 624 $13,092 r 1960 + 70 + 1,224 + 626 + 750 1961 +4,184 3,856 +5,921 2,300 a. Excludes trust funds. b. Consolidated cash receipts from and payments to the public . Source: Bureau of the Budget. War II period. Receipts fell short of the This sharp turn in monetary polic y budget estimates by $6.1 billion while contributed to the criticism tl i at in th e expenditures exceeded the budget esti- expansion of 1959 restrictive policies mate by $6.8 billion. These "errors" oc- were overdone with the result that ex- curred despite the fact that the level of pansion came to a premature end . GNP assumed in the budget was within The Expansion of 1959. The Federal one percent of the actual for the calen- budget for fiscal 1960, presented in Janu- dar year 1958. ary 1959, again contained no major rec- . Thus, without significant discretion- ommendations for changes in either ary action on the tax side, the Federa l taxes or expenditures . It estimated a slim budget provided a large stimulus to surplus of $70 million for fiscal 1960 . economic expansion in this recession . In fact, actual receipts exceeded the Changes in monetary policy were sub- estimate by $1 .4 billion, and the budget stantial -- increased bank reserves con- for 1960 showed a surplus of $1 .2 billion . tributed -to sharp declines in interes t This was a sharp reversal from the $1 2 rates, which were accompanied by re- billion deficit of fiscal 1959, and it gave ductions in the discount rate at Reserve rise to criticism that the shift in policy Banks . However, it is notable that the had been too sharp and operated to limi t trough in the recession had barely the expansion prematurely. Restrictive passed before interest rates again rose monetary policy was carried to the point sharply, and free reserves were reduced that the money supply actually decline d to a zero level at the end of calenda r in the latter part of 1959 ( Chart 3, p .17) . 1958. The fear of another inflationary ex - pansion similar to that of 1955.57 appar- The peak of the expansion was ently affected Federal Reserve action , reached in the second quarter of calen - 18 F T ► 1 ► T ► 1 t G~ t' tu n :.+ het _ ~ . .kg r :: P so, ON 50 dollars, die, b 1, Jot .) r . I t , 1 00 00 P re+r!de11m relr - . iN —I . it 600 I 550 I Son J too 150 „Y r 10 0 00 00 . ., n . 650 4 . 600 t 400000000"P R~ I III a in. taill . 550 500 450 40 0 350 1 III lit 111 111111111 111 11 Note: Scales "L" are logarithmic ; scales "A" are arithmetic, Shaded areas are periods of recession . "P" = peak. "T" = trough. Source: Reproduced from U .S, Department of Commerce, Business Cycle Developments . 19 e L Ft I 1 4 . Avg. p ured nramylo m e, Stoll =, 2 1 pac nbi tnl 41 ' j -, 110 140 M ice Note, Scales "L" are logarithmic; scales "A" are arithmetic. Shaded areas are periods of recession, "P" peek. .V = trough . Source; Reproduced from U.S, Department of Commerce, Business Cycle Developments . 20 dar 1960. During the remainder of cal- that began in the second quarter of 1960 endar 1960 industrial production an d was relatively mild and short-lived. The gross national product remained stabl e unemployment rate rose to nearly 7 per- in current dollars but declined in con- cent in mid-1961 but thereafter fell to stant dollars (Chart 4) . about 5 1/2 percent where it remained until 1964 (Chart 5) . Treasury bill rates This relatively quick ending of th e fell to less than 21/2 percent and Treas- expansion provided one of the issues of .ury bond yields remained . stable at the 1960 election campaign the issu e about 4 percent . The money supply of whether the countrys rate of eco- (especially if time deposits are- . in- nomic growth could be increased and cluded) rose sharply (Chart 3) . made more stable. Defenders of the ac- tions of the Eisenhower Administration A special feature of this period was claimed, with apparent justification, that the emergence of the balance of pay- ,the inflationary psychology of the 1955 - ments deficit as a major problem whic h 57 period had been largely eliminate d constituted a serious restraint on furthe r and that the stability reached in the easing of monetary conditions,12 An in- :price level was a major achievement. novation in policy was "operation twist," One observer described this episode the objective of which was to hold u p ,in counter-cyclical policy as follows : short-term interest rates to check out- „ . flows of short-term capital to other coun- It was in this setting [of recent in- tries, but to maintain long-term interest flationary experiences] that President rates at current levels so as to avoid --Eisenhower decided that strong meas - ures were needed if the inflationar y checking domestic investment.13 This psychology, which had been built up operation was apparently successful in over the years, was to be curbed befor e changing the relationship of short- an d it caused lasting damage to our econ- long-term interest rates putting the m omy and to our international political position.