Recession of 1957
In August 1957, the country slipped into a recession that would increase unemployment by 7 percent and reduce corporate profits by 25 percent by April 1958. One of the reasons the President had promoted the Interstate System was just such a situation-that he would have a public works program that could be expanded or contracted to control the economy.
The recession of 1958 helped Democrats win a sweeping victory in the congressional elections, increasing their number in the Senate from 49 to 65. Lyndon Johnson quickly discovered that a large majority would be harder to keep unified than a narrow one. Younger liberal senators were challenging his leadership.
During the decade of the 1950's the ghost of the '29 crash remained as both an economic and political presence that tested the limitations of fiscal orthodoxy. In that period, unemployment increased more rapidly than the total increase in the level of employment. In 1947, with employment at 60,168,000, the proportion of unemployed was 3.9% of the work force. While employment increased in 1960 to 64,520,000, unemployment had risen to 5.7%. The experiences in the recessions of 1952-1953 and 1957-1958 pointed to serious defects in the American economy. In both cases, despite general recovery measured by increases in the Gross National Product, personal income, factory production and manufacturing orders, unemployment failed to decline to pre-recession levels. A further indication of the problem was the increase in the duration of unemployment. In 1947, 7% of the unemployed remained out of work 27 weeks or more. By 1960, 11% were unemployed 27 weeks or more.
The phenomenon of prices continuing to rise during a recession represented a sharp break with the past. But it set the pattern for the future. In the three recessions since the one of 1957-58, prices continued to rise (though at a diminished rate). Thus, today there is no longer any expectation that a recession will bring inflation to a complete halt. But in 1959 the failure of recession to end inflation was regarded as a novel and ominous development. In the first 5 months of 1958 a great deal of attention and debate, both within the administration of President Eisenhower and in the Congress, was devoted to the possibility of an anti-recessionary tax cut. Although the unemployment rate remained high, the recession ended officially in April 1958, and a measure proposed by Senator Paul H. Douglas in June to reduce individual income taxes was defeated 65-23.
Tight monetary policy contributed to the weakness of the 1959 recovery. Despite open-market purchases in 1959, the increase in the System's holding of securities was not enough to balance the gold outflow. In addition, the discount rate was raised and interest rates followed. A tight policy continued into 1960.
The trough of the recession had been reached in April 1958. Although System holdings of securities rose throughout the year, shortand medium-term interest rates rose very sharply between July and September, and, in the latter month the discount rate was raised. The fact that open-market purchases continued during 1959, as evidenced by the 2.7 percent increase in System holdings of securities, might lead one to question whether a tight money policy was being followed. But declines in the Treasury's gold stock were continuing due to the balance of payments deficit.
The recession in 1957-1958 revived interest in area redevelopment legislation for both political and economic purposes. At that time, Douglas gained important new support from Republican Senator Payne of Maine. The Douglas-Payne bill differed little from Douglas' original measure, and in 1958 it passed both the House and Senate, with impressive bipartisan support.
Eisenhower was not convinced of the desirability of this legislation, and vetoed the bill. He objected to those features that served to limit local responsibility and to increase unwarranted government expenditures. He specifically opposed the 100% grant for public facilities, the loosely-drawn criteria for eligibility, the inclusion of rural districts, the inclusion of long-term loans, the high loan limit, and the low interest rates.32 Eisenhower and his economic advisors were not unsympathetic to the hardships of depressed areas and the country's need for economic growth. But they believed that breaking the rules of community responsibility and fiscal conservatism was too great a price to pay. Moreover, the dominant thinking in the Administration emphasized aggregate rather than structural considerations.
Despite the presidential veto, legislators continued to introduce bills dealing with depressed areas. After the 1958 election, partisan lines had solidified to the point where a compromise bill introduced by Senator Hugh Scott (D-PA) and another Administration bill failed to make any headway. Without the support of Payne, whom Edmund Muskie had unseated in Maine, Douglas reintroduced his bill with minor changes. Despite political wranglings, the bill passed both Houses, and in 1960 reached the President's desk. In spite of the exhortations from Cabinet members, including Secretary Mitchell and Vice President Richard Nixon, Eisenhower again vetoed the bill. The climax of the saga of area redevelopment legislation awaited the outcome of the 1960 presidential election.
Although it was later determined that the peak of the business cycle was reached in August 1957, and in hindsight, action to fight a recession was called for, the Federal Reserve raised the discount rate one-half percentage point in that nonth to 3.5 percent. Four months later the error was apparent and the discount rate was lowered to 3 percent. By April 1958 four more reductions brought the rate down to 1.75 percent. In this same period, required reserve ratios at member banks in New York and Chicago were reduced in four steps, from 0.20 to 0.18.
A deliberately tight fiscal policy slowed the growth of expenditures in 1959 and 1960, contributing to the weak recovery frm the 1957-58 recession. Government purchases of goods and services actually declined because the Eisenhower Administration and many in Congress wanted a large actual budget surplus.
Their desire, however, was not prompted by any simplistic notions that deficits are always bad and surpluses always good (and the larger the better). Rather, four cmplex factors came into play. First, inflation was feared and this fear intensified because, for the first time, prices had continued to rise during the just-past recession. Second, economic growth as a national objective received much interest and many felt that a Government budget surplus facilitates that growth by making resources available for capital formation.
Third, the deficits in the nation's international balance of payments that had been occurring almost continuously since World War II became, for the first time, a matter of rather widespread concern and many believed that a surplus in Federal budget would, in ways that were never specified, alleviate the problem. Fourth, many held that fiscal parameters should be set so as to produce deficits in recession and large surpluses as recovery continued.
Because the recovery from the 1957-58 downturn was very sluggish (a new recession began in April 1960), actual revenues did not grow sufficiently to produce the hoped-for large surpluses. The increases in the full employment surplus between 1958 and 1960, and the huge surplus of $12.8 billion that would have existed in 1960 had the unemployment rate been around 4 percent.
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