A guest post by Benjamin Cole
Who knew? The U.S. Federal Reserve from 1964 to 1969 bought more Treasury securities than the U.S. Government sold.
Today, that Fed action would be called “quantitative easing” or QE.
But back then, there was no catchphrase for QE, and Kansas City Fed economist V. Vance Roley called the process “money financed debt,” in a paper he wrote in 1981 for the Kansas City Fed Economic Review entitled, The Financing of Federal Deficits: An Analysis of Crowding Out.
It is an astonishing paper!
Roley notes, “Federal Reserve purchases of Treasury securities in the 1964-1969 period were larger than the total debt accumulated by the federal government. Thus, during this five-year period, not only was the accumulated debt money financed, but the net debt outstanding actually declined by $1.1 billion.”
Egads! I never read that before. The late 1960s economic surge coincided with an unnoticed QE program?
The Good Ol’ Days
The late 1960s were boom-times in the U.S. Unemployment shrank to 3.5 percent. In just six years from 1964 through 1969, the number of people employed in the U.S. grew by 14.1 percent, to 77.9 million, annual averages. From 1964 through 1969, the U.S. economy expanded in real terms by 32.8 percent.
Think about that: output per capita in the U.S. rose by nearly a third in just six years, in the late 1960s. It never got any better than that, btw.
Inflation and “The Story”
Of course, today the 1960s is recalled as a period of powerful inflation, provoked by “Guns and Butter,” in remembrance of President Lyndon Johnson’s war in Vietnam, yet new social programs.
And the Fed was “too loose.”
That is “The Story” as recycled by modern U.S. economists.
There is some truth in “The Story,” but only some. Prices rose in the six-year period by 15.8 percent.
In the last and worst year, 1969, the PCE deflator rose—hold onto your hats—by 4.5 percent. By a government index that some contend overstates inflation.
Okay, so maybe inflation was moderate and not runaway, but how about 1960s Guns and Butter, federal deficits—you know, “The Story”?
Federal Spending Just Blah
Well, federal spending 1964-1969 ran around 18 percent of GDP for most of the period, lower than today (and lower than for most of the non-inflationary 1990s). LBJ liked Guns and Butter, but total federal spending was within the usual bounds.
Deficits were hardly worth mentioning: At less than 1 percent of GDP throughout the 1960s, except for 1967 at 1.1 percent of GDP, and then 2.9 percent in 1968. But by 1969 the federal government was back in surplus!
Yes, Guns and Butter and big federal deficits, i.e., “The Story” is…well, revisionism.
Moreover, the federal debt outstanding as percent of GDP, shrank all through the 1960s, from 56 percent to 38.6 percent! Americans became less indebted by federal government in the 1960s, an example usually connected to prudence, not spend thriftiness.
The Slut-Easy Fed?
Okay, maybe the federal government was not so sloppy in the late 1960s. But “The Story”—the Fed was looser than a drunk sailor, no?
Well…as for the Fed, it raised the discount rate from 3.5 percent in 1964 to 6 percent by 1969. Maybe the Fed “should” have hiked rates more, but usually raising rates is not considered “loose.”
For fans of M2, it rose at about a 7 percent rate through the latter 1960s, a strong but not egregious clip, and certainly not too strong considering the real growth going on.
The Rest of The Story
What is interesting about the 1960s is not only the mischaracterizations, but the omissions.
Who knew that the Fed had conducted QE in the late 1960s, buying back even more federal debt than was issued? And why does not that QE program ever get some credit for the late 1960s boom-times (and yes, blame for the moderate inflation)?
But “The Story”—that deficit spending and an undisciplined Federal Reserve led to runaway inflation in the 1960s—seems badly in need of a re-do.
As I have said before, today macroeconomics is not about economics; it is politics in drag, and macroeconomic history mere revisionism.
It is funny what is found in the footnotes of history—that QE might have played a role in the historic 1960s boom.
So…if the Fed raised rates, and the federal government deficits weren’t much, what did cause the moderate inflation of the 1960s?
I think it was strong economic growth and powerful structural impediments or institutional imperfections. It was an era of powerful private-sector labor unions, and strong national manufacturers, such as the Big 3 automakers, or Big Steel. Oil prices were controlled by the Texas Railroad Commission. It was an era before international trade, and the consequent Wal-Mart revolution, and then dollar stores. The Internet (Craigslist) came even later. In the 1960s, whole industries were regulated on price (which is to say self-regulated), such as transportation, telecommunications and banking.
In short, in the 1960s we had an economy prone to inflation, as was found out in the 1970s.
The sad thing is, today U.S. central bankers express hysterical fear of inflation—yet the structural impediments and institutional imperfections that caused inflation in the 1970s have largely disappeared in the last 40 years.
But stories, like “The Story,” die hard.