The '68 boom and all that

By Gerard Jackson
web posted December 6, 1999

First the good news. That some commentators have compared the economic similarities of the '60s with those of the '90s is a welcome attempt to use history as a means to inject some substance into the present economic debate. The bad news is that these commentators got it wrong. And once again I blame Keynesianism for their errors. They point out that more Americans than ever held stocks in '68; that the worst value stocks seemed to be the best-performing ones; that 1968 saw the first budget surplus in about 10 years and the 1961-69 expansion was the longest uninterrupted one in American history.

What is missing is money supply -- the key factor and the one that is generally overlooked by media commentators as well as many who ought to know better. Examining the monetary situation in the '60s will cast, I believe, considerable light on the present situation.

The tail-end of the Eisenhower administration saw a monetary tightening that brought on the 1960-61 recession, which also contributed to a Kennedy victory. Though the monetary breaks had been tightened they were quickly released in 1960 causing a monetary surge. This had the effect of stimulating output. However, the monetary breaks were slapped on again bringing monetary growth to a standstill by the end of 1961. The squeeze was so tight that money supply actually contracted in the third quarter of 1962. Needless to say, the economy faltered in the first half of 1962 and had definitely slowed in late '62 and into early 1963.

To counter the incipient recession interest rates were forced down and monetary growth accelerated. All of which seemed to do the trick. From 1963 GDP grew by 5 per cent and unemployment fell below the 5 per cent level. (Does any of this sound familiar?) In late '64 money supply slowed only to be offset by another burst of monetary growth in 1965 as the Reserve sought to fend off rising interest rates through buying government securities. To avoid the inflationary consequences a credit squeeze was implemented in 1966 which was quickly followed by another monetary burst which in turned fuelled the budget surplus. Once again the breaks were applied and monetary growth dropped to 2 per cent. By 1969 the economy was in recession.

The obvious thing is that the '60s expansion was certainly not the smoothly running boom that so many have come to believe. (The record for the longest running boom really belonged to the '20s if we exclude the slight 1924 turndown). More importantly, however, is that the economic fluctuations were caused by a roller-coaster monetary policy. The lesson: Money matters. But money is exactly what is missing from the current debate, along with any meaningful grasp of capital.

What has marked out this monetary boom is the absence of severe fluctuations in monetary policy that characterised the 1960s. The Fed has simply kept pouring booze, in the form of credit, into the party goers. But sooner or later, the party will be over and a lot of people will wake up with one hell of a financial hangover.

Gerard Jackson is the editor in chief of the peerless The New Australian, that continent's only free-market online magazine.




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