A Thousand Days

by Arthur M. Schlesinger

  In the aftermath of steel, the problem of achieving full employment without inflation—as Rostow called it, “the chapter Keynes never wrote”—was of particular importance. In essential ways the wage-price spiral was beyond the reach of fiscal and monetary policy. The guideposts had represented a first attempt to master the spiral; but they were evidently inadequate when great corporations or unions lacked public responsibility. An incomes policy, perhaps new institutions assuring a greater public role in wage-price settlements, might be a desirable later step. This could constitute part of a rational economic plan—and, if other things were equal, it was in this direction, I believe, that Kennedy’s economic thought, with its pragmatic and managerial instincts, might have moved.

  But other things, of course, were not equal. Quite apart from the technical problems of transferring French planning methods to the larger and more complex American economy, there remained the American mythology; and this the Yale speech did little to dispel. The old Elis had listened with acute discomfort. The business community as a whole, regarding the speech as blasphemy against the verities, declined the President’s invitation to a dialogue. The President, disappointed, concluded that he would have to bide his time. When Solicitor General Archibald Cox, who had worried about wages, prices and inflation since his term as chairman of Truman’s Wage Stabilization Board, suggested publicly two days after the Yale speech that a way had to be found to bring government into wage-price decisions on a regular basis and at “a fairly early stage,” Kennedy was disturbed, not at the content, he told me, but at the timing. “We have to give the impression of some discipline here,” he said. “I don’t want anyone to say anything about the domestic economy except Doug Dillon and myself. In due course I may want to give a fireside chat on the economic situation. In the meantime no one should say anything.”

  2. DILLON AND HELLER

  The expectation lingered into the summer that the stock market decline might set off a general decline. This produced a renewed drive among the administration economists and their academic associates for an expansionist program. Heller and Samuelson, remembering their defeat over Senator Clark’s public works bill a year before, now decided that the expenditures route would lead into hopeless political thickets. The Council, Harris’s Treasury group and most of the economists agreed that the only practical way to stimulate the economy was through a tax cut.

  There was one conspicuous holdout: Galbraith. The expansion produced by tax-cutting, he argued to Kennedy toward the end of 1962, would be an expansion of consumer goods; and these the American people already had in abundance. But it was “in the area of public needs, notably schools, colleges, hospitals, foreign policy that our need for growth is greatest.” Tax-cutting, as he later put it, was “reactionary” Keynesianism, providing the things the country least needed at the expense of the things it most needed. “I am not sure,” he said, “what the advantage is in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out on the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young, perhaps wisely, stay away, and hoodlums roll citizens for some of the dollars they saved in taxes.” Moreover, fiscal and monetary policy could not immediately help those who entered the labor market under handicaps—the semiliterate, the undereducated, the unskilled young and the Negro. “No general measures,” Seymour Harris added, “are going to solve the problems of the textile, coal, automobile, aircraft and similar towns.”

  Galbraith conceded that it might be politically difficult to get increased spending for public purposes. “That is because public services, though extremely important for people of moderate incomes, are not nearly so essential for the rich. And the rich pay more [in taxes]. The rich and articulate accordingly oppose public spending. That this policy encounters resistance means only that it is painful to the selfish. We must note that the best leaders have always been called spendthrifts by the worst leaders.” As for the argument that the stimulus produced by a tax cut would increase federal revenues available for public use, Galbraith rejected this as a trap: “Those who dislike public spending will move immediately at the next stage for more tax reduction, not more spending.”

  As between stimulus through social spending or through tax cuts, the President, I believe, political conditions permitting, would have preferred the policy which would enable him to meet the nation’s public needs. He had defended The Affluent Society in the 1960 campaign. When Samuelson first mentioned tax reduction in his task force report before inauguration, Sorensen, Feldman and the President-elect himself all expressed surprise and concern. Kennedy remained sympathetic to the public sector during his administration. “You know, I like spending money,” he once told Heller. “What I want from you are good programs by which money can be spent effectively.” The 1962 Economic Report stated his position with clarity: “Growth will require increased public investment, just as it will require increased private investment. . . . We must face the question of public versus private expenditures pragmatically, in terms of intrinsic merits and costs, not in terms of fixed preconceptions.”

  But political conditions, in his judgment, did not permit further social spending; they even cast doubt upon a tax cut. Of the two legislative guardians of tax matters, Wilbur Mills, the chairman of the House Ways and Means Committee, while strong for tax reform, was opposed to reduction, and Harry F. Byrd, chairman of the Senate Finance Committee, was the greatest balanced-budget fundamentalist in the country. The Gallup poll reported 72 per cent of the people opposed to any form of tax reduction which would even temporarily increase public indebtedness. Moreover, on the economic side, Dillon, who felt that the Wall Street decline represented the pricking of a speculative bubble rather than a basic economic slowdown, doubted the need for emergency stimulus. (The sequel proved him right, though without the agitation by the economists for tax reduction in 1962 Dillon and the administration might well not have been right in 1963.) And the Secretary continued both to hope for a balanced budget sometime before his term expired and to fear that emergency tax reduction would deprive the Treasury of the quid pro quo’s it would need to get tax reform through Congress.

  No one appreciated the political difficulties more acutely than the President. He told me in mid-July that the real choice was between trying for a tax cut and failing, and not trying at all. But he seemed almost prepared to make the attempt and then carry the case to the country in the fall elections if it appeared as if we were really heading into a depression. Thus he looked eagerly for each new set of economic statistics during the summer. Then, when the July figures showed no intimations of crisis, he decided against an emergency cut. The economic indicators were not desperate enough, and the political indicators too desperate.

  The debate, however, had not been in vain. Kennedy emerged from the discussion convinced that if the economy did no more than move upward at its present rather languid pace it would make little dent on the persisting problem of unemployment. This problem worried him more and more. It called, he believed, for new stimulus; and, after the discussions of the summer, he thought that new stimulus might at last be within political possibility. Almost as important, Dillon, who up to this point seemed to regard tax reduction as essentially an adjunct to tax reform, now concluded that there was a case for reduction on its own merits as a spur to production. The Treasury thereafter diminished its insistence on a balanced budget; and Kennedy and Dillon proceeded to get assurances of cooperation from Wilbur Mills on a bill combining reduction and reform. On August 13, when the President announced his decision against a tax cut in 1962, he promised a comprehensive tax reduction bill for 1963.

  The growing accord between Heller and Dillon was a source of relief and reassurance. The President’s economic advisers, in the midst of their sometimes heated discussions, had preserved amiable relations. Dillon was the man of wider experience and superior bureaucratic authority and skill.
Nonetheless, Heller was fluent, resourceful and persuasive; and, on the basic issue of deficit spending, it was the Secretary who gave ground and by 1963 came to accept the position for which the professor had been contending since 1961. Still, if Dillon was moving to the left on doctrine, Heller was moving to the right on associations. He was becoming a familiar figure at business meetings, and his agreeable intelligence and candor were disarming earlier suspicions. Moreover, in July 1962 the Treasury announced, with Heller’s concurrence, the liberalization of depreciation allowances, a measure intended to increase capital investment but representing an act of government generosity to business which even the Eisenhower administration had never undertaken. By this action, along with Heller’s goodwill missions, the enactment in October of the investment tax credit and the President’s decision—regretted by some of his associates—to put the communications satellite system under private ownership, the administration sought once more to overcome the mistrust of the business community. This time it was in order to win business support for tax reduction—i.e., to get businessmen to back a measure enormously to their advantage but contrary to their superstitions.

  3. THE RIDDLE OF GOLD

  Tax policy, now resolved at least in principle, was one great battleground between Heller and Dillon. The other was the question, which haunted all economic discussions, of the balance of payments. It was this question which gave the Treasury its most potent leverage over general economic policy. Beginning in 1958, gold had begun to leave the United States in alarming magnitudes in order to meet the deficit in our international payments. The growing pressure on our reserves encouraged those who wished to apply the classical deflationary remedies—high interest rates, government retrenchment—this in spite of the fact that, as Dillon later put it, “the slow growth of our economy was enhancing the relative attractiveness of foreign investment.” A pre-inauguration task force, headed by George Ball, had admonished Kennedy that the payments and reserve problems “are being used in an attempt to frustrate expansionist programs at home and abroad and are giving aid and comfort to resurgent protectionism. As long as they remained unresolved, they may seriously hamper the freedom of action of your administration.”

  Dillon brought in Robert Roosa, an enormously able economist from the Federal Reserve Bank of New York, to handle the payments crisis. In 1961 the Treasury hoped to control the problem by a wide range of piecemeal measures: tying the bulk of foreign aid to purchases within the United States, reducing overseas military expenditures, offering credit guarantees to promote exports and the like. In due course, the so-called ‘twist’ provided a middle way in monetary policy between relative tightness internationally and relative ease domestically: it held short-term interest rates high enough to keep fluid funds in the country, while making long-term rates low enough to make credit available for domestic investment. And Roosa, with considerable artistry, organized an intricate strategy in defense of our gold reserves through a series of currency ‘swaps’ and other bilateral international transactions.

  Beyond the measures to reduce the outflow of gold, the Treasury in 1961 saw the problem as basically one of technical manipulation among central banks. But Heller and James Tobin on the Council, George Ball in State and Carl Kaysen in the White House took a different view. While admiring Roosa’s virtuosity, they saw in it an artist’s pride in making a poor system work when the imperative need was for a new system; it was, they said, as if Roosa actually preferred walking a tightrope without any net. Instead of a policy of dazzling improvisation, they wanted a basic reconstruction of the international payments mechanism.

  A variety of views united in the pressure for world monetary reform. From London Harold Macmillan sent doleful warnings about the decline in international liquidity: how, he would ask, could the west expect to move four times as many goods with only twice as much credit? Heller and Kaysen saw the payments problem as distorting both the domestic and foreign policies of the New Frontier. Ball and Tobin particularly stressed the political aspects, and did so in terms which evoked Roosevelt’s opposition to the London Economic Conference and Jackson’s fight against the United States Bank.

  The issue, in their view, was whether the control of high financial policy should rest with central bankers and currency speculators or with responsible governments. Bankers and speculators, they pointed out, did not want too much international liquidity. As long as liquidity was tight, they could threaten any country with ‘loss of confidence’ and thereby influence its national policies. So long as we had to worry about ‘confidence,’ we were not masters in our own house. Moreover, the theory of confidence held by European bankers was largely derived from the views propagated in the United States by the natural opponents of a Democratic administration—the financial community and the conservative press. Our own conservatives thus weakened foreign confidence in the dollar—and then used the issue of confidence as a weapon against domestic policies they always opposed anyway.

  The presumption of the European bankers filled Ball and Tobin with indignation. After all, they pointed out, the American gold crisis was in great part the result of American expenditures for European recovery and defense. Yet the European bankers, as Tobin put it, “by occasional withdrawals of gold and constant complaints . . . have brought tremendous pressure for ‘discipline’ upon the United States.” The adjustments imposed on our economic policy, he added, “have not served the world economy well. Neither were they essential.” He concluded: “International financial policy is too important to leave to financiers.”

  We could not hope, Tobin and Ball continued, to muddle through on our present course without risk of a gold run or serious damage to the domestic economy. The solution lay not in unilateral action by the Treasury—this only left our gold stock at the mercy of European bankers and speculators—but in international monetary machinery. Ball proposed multilateral agreements among governments designed to insulate the United States from excessive gold losses while working to restore long-term equilibrium. Tobin declared it technically and politically possible to reform the international monetary system by putting the world banking functions, now performed by the United States and Britain, into an international institution. One way or another, the United States had to regain its freedom of action. Once governments had enough liquidity to move around in, they could design their national policies without regard for the international bankers.

  Dillon stoutly and powerfully opposed these doctrines. He insisted that there was no problem of international liquidity so long as our own payments deficits kept the world supplied with dollars. He doubted that we would have the bargaining power to negotiate international monetary reform until we had first strengthened the dollar at home. He said that any sweeping reform, like the plan devised by Robert Triffin of Yale, would involve an invasion of sovereignty which no Congress would countenance. And, in the meantime, the short-run remedies were having temporary effect. The gold outflow in 1961 and 1963 was at half the 1960 rate, and our payments position materially improved.

  The balance of payments remained a constant worry to Kennedy. Of all the problems he faced as President, one had the impression that he felt least at home with this one. He used to tell his advisers that the two things which scared him most were nuclear war and the payments deficit. Once he half-humorously derided the notion that nuclear weapons were essential to international prestige. “What really matters,” he said, “is the strength of the currency. It is this, not the force de frappe, which makes France a factor. Britain has nuclear weapons, but the pound is weak, so everyone pushes it around. Why are people so nice to Spain today? Not because Spain has nuclear weapons but because of all those lovely gold reserves.” He had acquired somewhere, perhaps from his father, the belief that a nation was only as strong as the value of its currency; and he feared that, if he pushed things too far, ‘loss of confidence’ would descend and there would be a run on gold. But he was determined not to be stampeded into restrictive domestic measu
res, and he brought steady pressures for remedies which would not block expansion at home. The problem perhaps constrained him more in foreign affairs. He thought, for example, that the continuing payments deficit gave France, with its claims on American gold, a dangerous international advantage; and at times he even briefly considered doing things which would otherwise run athwart his policy, like selling submarines to South Africa, in the hope of relieving the strain on the balance of payments. While he was intellectually sympathetic to the reformers, it seemed to him, as he once said to Kaysen, that, when they put up their ideas, Dillon regularly and gracefully shot them down. He saw Dillon’s continuation in Washington as his best insurance against a gold panic in New York. When he was satisfied that the Treasury recommendations were serious and solid, he would not go against them.

  Then toward the end of 1962 the drain spurted again, and the problem began to assume a new character. At that time the gold flight was coming increasingly from the sale of foreign securities on the American market. The Treasury devised new expedients in 1963, such as the interest equalization tax on the purchase of foreign securities. More and more, everyone regarded control of long-term capital outflow as the key to the situation. “The great free nations of the world,” Kennedy said in June 1963, “must take control of our monetary problems if these problems are not to take control of us.” As the debate continued, the Treasury was beginning to recognize international monetary reform as a need independent of the correction of the American payments disequilibrium. Soon Dillon and Roosa were talking (minus the Jacksonian overtones) somewhat as Heller, Ball and Tobin had talked two years earlier. Once again, Dillon had moved closer to Heller.