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July 29, 2011

Historical Echoes: What’s Missing in This 1953 Portrait of the American Economy?

New York Fed Research Library

In its January 1953 issue “The American and His Economy,Life magazine presents a sidebar entitled “How Future Looks to Five Economists,” in which Paul Samuelson, John Kenneth Galbraith, and other eminent economists discuss the national outlook, given the impending defense cutbacks. Samuelson states, “Congress and the new administration have the power to alleviate any recession that might be brought on by reduced defense and investment expenditures.” The others are also optimistic, citing additional offsetting factors. What’s missing? Except for one oblique reference to “credit easing,” no one mentions the Fed or monetary policy—even though economists knew then that expansionary monetary policy (that is, lowering interest rates) can help offset contractionary fiscal policy (such as government spending cuts).

Why no mention of monetary policy as a means to dampen or prevent job loss and a recession? Perhaps it’s because the economics of the era focused primarily on the impact of fiscal and regulatory policy. In addition, the Full Employment and Balanced Growth Act, also called the Humphrey-Hawkins Act, was not passed until 1978. This law officially enshrined the Fed’s “dual mandate,” that is, to pursue the highest level of employment consistent with price stability.

The article in which the sidebar appears, “Where Do We Go from Here?
A Careful Analysis Provides This Answer: We May Have a Mild Recession, but There Is Little Chance We Will Again Suffer a 1929-style Depression
,” provides some interesting reading. It includes a graphic illustrating the progress of the 1949 recession (zoom to see clearly). The Fed gets a brief mention in the text, with a quote from Chairman William McChesney Martin. However, his remark—that a sharp rise in private debt should “not be viewed with equanimity”—relates to preventing excesses during a boom, not to using monetary policy to help sustain jobs during a downturn.

To see how things turned out in 1953-55, visit this Minneapolis Fed webpage, which compares this U.S. recession with previous ones.

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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