Not so very long ago the United States Senate was barraged with pressures from Mississippi and other states to adopt a policy of "easy money." Farm prices were down. Interest rates were high. Unemployment was increasing. The rate of business failures was unprecedented. Wages had dropped. The farmer, the worker, the housewife – all were in debt – all wanted Congress to act through inflationary policies through so-called easy money.
This grim picture has a disturbing ring of familiarity. It is not fundamentally different from the picture which has confronted the Senate in Washington during the first few months of 1958. But the pressures which I have described did not occur in January of 1958, but in January, 1878 – exactly eighty years ago. And these pressures bore heavier on no man than they did upon the brilliant freshman Senator from Mississippi, Lucius Q.C. Lamar.
The key issue at that time was the issue of so-called "free silver" – to increase the availability of cheap money by requiring the free coinage of all the silver pouring into the Mint from the new western mines. Such a move would raise prices for the distressed farmer, lower the value of the consumer's debts and make work for the unemployed worker.
Lamar was expected to support the bill. The already impoverished states of the South had been particularly hard hit by the panic of 1873. The South foresaw itself in a state of permanent indebtedness to the financial institutions of the East unless easy money could be made available to pay its heavy debts.
Vachel Lindsay's poem expressed clearly the helplessness and bitterness with which the South and West watched the steadily increasing financial domination of the East:
"And all these in their helpless days
By the dour East oppressed,
Mean paternalism
Making their mistakes for them,
Crucifying half the West,
Till the whole Atlantic coast
Seemed a giant spiders' nest."
But Lucius Lamar, after months of careful study, decided to oppose the "free silver" bill. He felt the arguments for it were unsound and exaggerated. He felt enactment of such a measure would be an ethical wrong and a practical mistake. He felt that an artificial and uncontrolled departure from the principles of sound money would in the long run only increase the nation's economic distress.
And so Lucius Lamar opposed the bill – attacked it with a scholarly analysis – and, even more courageously, deliberately rejected the instructions of the Mississippi Legislature which had elected him. His conscience, his years of objective scholarship and his concept of legislative duty would not permit him to do otherwise. "I prize the confidence of the people of Mississippi," he said, "but I never made popularity the standard of my action. I profoundly respect public opinion, but I believe that there is in conscious rectitude of purpose a sustaining power which will support a man of ordinary firmness under any circumstances whatever."
For the key decisions which face us in Washington today are not unlike those which confronted Lucius Lamar and his colleagues just 80 years ago. We, too, are faced with the twin evils of recession and inflation. We, too, are under pressure to attack one while ignoring the other. We, too, know that to attack both – simultaneously and consistently – is difficult, if not impossible, of achievement. And yet the future stability of our economy – and consequently our future strength as leader of the free world – depends in large measure upon how we balance and reconcile our approaches to these two critical problems.
Permit me to make it clear at the outset that I am offering no easy explanation of what brought on the current economic slump. Nor do I offer any easy solutions for ending it. Once a recession is underway, even the most expert economists are uncertain or in disagreement as to its cause. Once the recession has ended, they are equally uncertain or in disagreement as to what ended it. Each party may blame the other for causing the recession – each branch of Government may take credit for ending it – but the hard truth of the matter is that the redistribution of credit and blame in such a situation is somewhat speculative, to say the least.
Nevertheless, certain actions were taken in the past which hindsight at least enables us to consider as unwise – which we now realize contributed to, ignored, or accelerated the business slump. And there are other weapons in our economic arsenal which, if wisely employed, could be helpful in ending the slump. In short, economics may still be a mysterious science – and business cycles may still be in some measure uncontrollable – but Congress and the Administration nevertheless retain considerable responsibilities – a responsibility to appraise the mistakes of the past, in the hopes they will not be repeated – and a responsibility to act effectively for the future, in the hope that the slump may thus be alleviated. Whatever blame or credit is to be assigned should be distributed in these broad terms.
This brings me back to the problem with which I began – and the problem which faced Lucius Lamar 80 years ago – the conflicting currents of inflation and recession. Our greatest responsibility – and our most difficult one – is to appraise these threats accurately, to judge which threat is more imminent, to determine which remedies will be most effective in combating the one without letting the other get out of hand. That is the challenge facing the Congress as it resumes this week its attack on the recession – that is the challenge facing the President as he attempts to decide what measures to request, what administrative actions to initiate, what bills to veto – and that is the challenge facing you, and all groups like yours, as you consider carefully the resolutions you will pass and the pressures you will bring to bear.
Like Ulysses of old, we must steer our course between the Scylla of inflation and the Charybdis of recession. If we founder upon the hidden shoals of either shore, the damage to our ship of state may be irreparable. Recession looms so much larger tonight in Washington that it is easy to forget any other danger. The temptation is to reverse our course immediately, and at full speed, without regard to future threats. To some in the business community, on the other hand, in areas not yet hard hit by recession, the only real danger is uncontrolled inflation – and all anti-recession measures advanced by others are opposed.
Neither view is correct – neither considers the long-range effect on the economy and nation. And I would emphasize my theme of twin dangers with two statements.
First, that a failure last summer to apprehend accurately the relative risks of inflation and recession helped accelerate the present slump; and
Secondly, that a similar failure this year to balance these two failures properly will in the long run only add to our economic distress and instability.
Permit me to illustrate each of these points in more detail. First, what happened last summer. The Administration's eyes were on the threat of inflation – on the steady rise in consumer prices which had repudiated previous campaign promises, increased the cost of government, and shaken their principles of sound money and a balanced budget.
Mr. William McChesney Martin, Jr., Chairman of the Federal Reserve Board, told the Senate Finance Committee that inflation was the nation's number one problem, in what he called "a period of unusual prosperity." Secretary Humphrey stated: "I do not see any recession or depression or anything of that kind in the offing." Though he recognized that the business community would necessarily go through what he called "an adjustment," the Secretary stated that he did "not really believe it will result in any marked unemployment."
The facts of the matter are that the economy had already begun to soften by AUGUST, 1957. The handwriting was on the wall. The Federal Reserve Index of industrial production had failed to keep up the pace which had in December, 1956, taken it to its highest point in history. Plant expansion was off – consumer resistance was up. The rate of resistance was up. The rate of business failures had climbed – the farm economy had continued to suffer. The pattern of factory shutdowns and inventory reductions was becoming more fixed.
Nevertheless, the Administration went right ahead concentrating its attention upon the danger of inflation. The Federal Reserve Board on August 8th increased its tight money policies by advancing the re-discount rate from 3% to 3-1/2%. Mr. Martin and Secretary Humphrey stated that such a move would encourage more savings and investment, and discourage consumption. The President, at his press conference, urged consumers to "buy less."
During the same period, the Administration – anxious to keep within the debt limit and balance the budget, in order to slow down inflation – severely cut back its orders and expenditures. The Budget Bureau froze nearly $200 million in appropriated funds, refusing to release them for the housing and other projects authorized by Congress. The Defense Department in particular drastically cut back its purchases from the peak reached in the early part of the year – a peak due in part to the Suez crisis and other international developments. Defense spending dropped from an 18 billion dollar rate in December, 1956, to a 12 billion dollar rate in the fall of 1957.
The effect of these Administration moves on an already softening economy was disastrous. Many businessmen were shaken by the stretch-out in defense contracts. Others were unable to afford the expensive bank credit necessary to maintain a liquid position and a reasonable level of purchases. Unemployment rose – and consumer confidence fell. Stock market prices declined 100 points.
Finally, in the words of the Federal Reserve Board Chairman, "by mid-November, information becoming available – incomplete though it was – indicated that a general downward adjustment was setting in." Only then, with the recession ten months old, were discount rates reduced. Defense spending was accelerated – appropriated funds were released – and the President now urges consumers to "buy." One cannot help but be reminded of the remark attributed to Calvin Coolidge in 1930, when he said – at the height of the depression: "It seems that we are in for some hard times."
I do not say that inflation was not a problem in the summer of 1957. On the contrary, industrial prices were rising during the very period industrial production was declining. The high cost of credit and construction materials was in fact partly responsible for management's decision to curtail expansion. But those attacking the problem of inflation failed to appreciate fully the dangers of a real recession – the economic waste in idle facilities and manpower which would result – the human distress of unemployment, exhausted savings and farm foreclosures. My second point is that we must not make the opposite mistake today in our attack upon the recession. Let no one believe that we can ignore the recession, any more than we can ignore the still-present threat of inflation. All the optimistic assertions, inspiring slogans and appeals for confidence in the world are insufficient to guarantee a prompt and full recovery. Congress and the Administration must act – we must act promptly, decisively and effectively.
But we must avoid action for the sake of action – for the purpose of appearing concerned in an election year – for the purpose of putting through otherwise dubious programs under the anti-recession banner. There are many medicines offered the patient today – the problem is to determine which prescription fits our current ailment, which will make it better and which might precipitate some new affliction.
Public Works
The emphasis thus far has been on public works. Without question, the resulting increase in government spending will create both jobs and confidence. It will improve the demand for construction machinery and building materials. To the extent that the projects built are desirable on their own merit – schools, public buildings, dams, highways and the like – we have increased the nation's assets by this amount.
But we must expect no miracles from the enactment of these programs.
Plans must be formulated and specific projects designed. Sites must be selected and land acquired. Contracts must be negotiated and subcontracts let. In short, actual construction and employment does not take place for some time. It offers little help now to those workers without a job, businessmen without customers and communities without purchasing power.
Moreover, useful public works cannot always be directed to areas of greatest need. Construction activity in Tennessee may be of very little, if any, benefit in Detroit. The employment of additional welders and carpenters on a dam near Phoenix is of small comfort to the unemployed textile workers of Greensboro. There is no assurance that an increase in highway and airport construction will increase the demand for new automobiles and aircraft.
It is for these very reasons that a rash of public works programs reminds us again of the ever-present danger of inflation. Once underway, a public works project becomes very difficult, both politically and economically, to slow down or stop. Yet, as I have indicated, they will not be underway until next year or later – by which time we may again be confronted with the problem of heavy budget deficits and run-away inflation.
It has been estimated that more than 90% of the total cost of some of the slower-moving projects – such as dams and highways – will not be spent for more than a year after initial authorization. Certainly it is our hope – if not our firm conviction – that a year from now the economy will be progressing at full speed. Our other anti-recession programs will have gotten underway. The impact of new public works expenditures, new budgetary deficits and new Federal borrowing at such a time may be dangerously inflationary.
The budget deficit for the end of this fiscal year – the year for which we were once promised a surplus – is now estimated at upwards of 5 billion dollars – and that is in the absence of any tax cut. This is due in part to the fact that last year's great "economy" wave resulted in very little economy at all – simply a postponement of inevitable appropriations, a juggling of figures and a substitution of popular for unpopular expenditures. It is also due in part, though very little of it, to the anti-recession measures thus far acted upon. Actually, however, the bulk of these expenditures will not show up until fiscal year 1959 and later – at which time we may expect an even greater deficit, resulting in still greater inflationary pressures if the recession is over.
Defense and Other Spending
In short, we should be more interested in programs which more immediately increase spending, production and employment. An acceleration of defense spending is perhaps the best and most obvious – although increases in payments to the unemployed, the involuntarily retired and others in urgent need of funds are also important. This kind of activity is more likely to help those who need it most where they need it and when they need it. The government deficit created will operate upon an economy in a state of recession, not inflation. Defense goods will be secured at a time of lower cost, not higher prices – and defense goods secured in 1958 need not be secured in 1959 at a time when we may wish to cut back government expenditures.
But once these principles are agreed upon, their implementation is more difficult. The Administration has not yet been able to accelerate defense procurement to the rate required. The Congress has not yet been able to agree upon improvements in unemployment compensation. Other simpler, quicker solutions are discussed – and chief among these is a tax cut.
Tax Cut
It is difficult to appraise both the effect and the wisdom of a reduction in taxes – primarily because there is no agreement as to its nature. Should it be retroactive – temporary – across the board? Should it be in the amount of two, five, or ten billion dollars? Should it be limited to excise taxes, corporation taxes, or personal income taxes? The experts disagree on these questions. They disagree, also, on when such a decision must be made – on when economic conditions warrant such a move.
There is a general agreement that – with or without a recession – taxes today are a handicap on business and a burden to us all. I might add that my personal view is that a primary area for tax relief is that of small business. The normal tax rate on corporate income should be decreased and the surtax rate increased, in order to treat small corporations with income of less than $25,000 more equitably without a loss of revenue. Smaller corporations should also be relieved of such onerous restrictions as the accumulated earning tax, the forced sales presently necessary to satisfy estate taxes, and the restrictions on retirement plans; and they should be permitted to depreciate their used equipment in the same manner that a large business can depreciate new equipment under the 1954 Code. Other areas of tax relief are also obviously desirable.
But there is also agreement on the inevitability of continued large governmental needs over the next several years. Consequently, a tax cut, however tempting, must be carefully weighed in terms of whether the recession makes it necessary – and what good it would accomplish.
The advantages of a tax cut, should it be deemed necessary, might be summarized as follows. Its psychological and cumulative effects would be greater than its cost. It would directly stimulate spending and indirectly stimulate investment and employment. The resultant budget deficit, it is said, would provide only the amount of inflation necessary to end the recession.
But here again the threat of inflation rears its ugly head. In a recession characterized by a relatively small decline in savings and consumption, it is said, the increased spending resulting from such a tax cut would be very slight compared to the loss in Federal revenues. Such a tax reduction could mean at most only a few dollars more a week to the individual consumer, and nothing to those now unemployed. But it would multiply the size of next year's deficit at the very time when inflation may be our chief adversary.
Opponents of a tax cut prefer to end the recession through the new expenditures and easier money policies already mentioned. For a tax cut, much like public works is – once granted – withdrawn only with considerable political and economic difficulty. The question is raised, moreover, whether and how soon a tax cut would be felt in the areas of greatest need – the manufacturers of producer goods such as steel and petroleum, and durable goods such as automobiles and refrigerators.
To this, the reply is made that a tax cut would build up consumer confidence, demand and debt – thus stimulating production and employment in these critical areas. And so the argument goes, back and forth. The lack of current data, the inability to foresee the effect of other current programs and uncertainty as to the present course of the economy all make this decision even more difficult than that which confronted Lucius Lamar 80 years ago.
It is said that when Gertrude Stein was on her deathbed she raised her head feebly and asked: "What is the answer?" Her relatives and friends, fearful of her life and uncertain of death's meaning, remained silent. With a weak smile, Miss Stein then said: "In that case, what is the question?" With that she died – and the episode has been regarded as a final demonstration of her wisdom and philosophy.
If, as you meet tonight concerned with the recession, you have been asking: "What is the answer?" – then I have disappointed you. For I have offered no answers. But if on the other hand, we are concerned not only with answers but with correctly identifying the right question – with determining the real nature of our problems and dangers – then I hope that we have a better understanding of them tonight.
It is easier to talk in terms of appealing answers and quick solutions – to win applause and headlines by offering dramatic remedies or bitter recriminations.
But in the words of Woodrow Wilson: "We must neither run with the crowd nor deride it – but seek sober counsel for it – and for ourselves."
Source: Papers of John F. Kennedy. Pre-Presidential Papers. Senate Files, Box 900, "Mississippi Economic Council Dinner, Jackson, Mississippi, 16 April 1958." John F. Kennedy Presidential Library.
