Bill Martin's Red Flag

The nearest thing, in economic terms, to waving a flag in front of a bull is to raise the memory of that great Amer ican trauma, the stock-market crash of 1929. Last week, in the midst of record prosperity, one of the nation's senior economic policymakers waved the red flag -- and thereby showed how both ered and uncertain even the healthiest of bulls can become. With some well-timed but somewhat ill-chosen words, William McChesney Martin Jr., pres tigious chairman of the Federal Reserve System, brought out the mercurial char acter of Wall Street psychology, which finds it hard to accept the idea of indefi nitely continuing good times, even when business is most loudly proclaiming its confidence.

For months the U.S. economy has been in a state of virtual euphoria, hearing the President declare that "I do not believe recessions are inevitable" and reveling in the onward-and-upward statistics. Lately, many economists have begun to question just how long the 52-month boom can continue, and only two weeks ago the President's chief economist, Gardner Ackley, cautioned that "our expansion is going to slow down a bit in the months ahead." Still, nothing had prepared the public for the shock caused by Bill Martin when he stood up and told the U.S. that it could tumble into a 1929-type depression if the leaders of the U.S. economy do not show some caution.

"Indeed," said Martin, in a speech to a Columbia University alumni luncheon, "we find disquieting similarities between our present prosperity and the fabulous '20s." Then he listed a dozen similar ities, including virtually uninterrupted progress for seven years, a large in crease in private debt, a continuous growth in the supply of money and bank credit, weakness in the balance of pay ments. "And most importantly," added Martin, "then as now, many Government officials, scholars and businessmen were convinced that a new economic era had opened, an era in which business fluctu ations had become a thing of the past, in which poverty was about to be abol ished, and in which perennial economic progress and expansion were assured."

Silent Fuming. Martin said much more -- notably, that there are major differences as well as similarities be tween the economies of 1929 and 1965 -- but the rest was all but ignored in the furor that followed. The stock mar ket, uncertain and sliding for several weeks, plunged sharply: the Dow Jones industrial average fell 19 points in the three days after Martin's speech, dipped briefly below the psychologically im portant 900 mark, then closed the week at 900.87. Congressional leaders called for an investigation of the state of free-world economies. Lyndon Johnson at first fumed silently, but finally could not resist saying: "I guess when you have 4,000,000 or 5,000,000 people working in the Administration, you're not always sure what one of them is going to say. If any of our people get concerned about the economy going too fast or too slow, I wish they would stop worrying and get the kids jobs"--in other words, do something forceful and direct to ease unemployment.

Several hours after Martin spoke, Columbia University gave him an honorary doctorate of laws, citing him as "a man of strong beliefs, strongly held."

He certainly is that. He wrote the speech himself, as usual did not clear it with the White House, seemed unperturbed by the fuss he had caused. Being a conservative central banker who is technically independent of the Administration, he has fretted more than Johnson and his aides about recent price rises, about the surge in installment credit (which jumped in April to a record $60.8 billion), about the nation's balance-of-payments problem --and, not least, about that incessant, glowing talk out of Washington.

To counter all this, the Federal Reserve has been quietly and gradually tightening up the money supply and pushing up short-term interest rates--a move that Lyndon Johnson, an easy-money man, does not mind so long as the Board does not tamper with the easy rates for long-term money, which businessmen use for expansion. Part of the fuss over Martin's speech was caused by the belief that it heralded higher interest rates; in fact, the Board plans no further tightening.

Aggressive Tone. Many economists agreed that the time had come for i warning, but many more felt that Bill

Martin had exaggerated his case and made some inexact comparisons in issuing it. Some of the Federal Reserve staffers who got an advance look at the speech criticized its aggressive tone and its gross comparisons with the 1920s. Government economists were astounded that Martin did not cite more of the economic defenses that the U.S. has acquired since then: unemployment insurance, bank-deposit insurance, tougher controls over stock markets and savings institutions, and a much surer grasp of such cycle-moderating tools as taxes, interest rates and federal budgets.

Martin and the Government's economists agree on one major point: there is no immediate danger of recession. The prime economic indicators still point up. Next month U.S. consumers will get a big lift when new legislation raises social security payments by 7%. The law is retroactive to Jan. 1 and all the extra payments for the year's first nine months will be handed out in the next three months--a total spur to the economy of $1.75 billion. What Government economists worry about, however, is what they can do for an encore to moderate the letdown that they expect later in the year. Federal spending is scheduled to flatten out further in the fourth quarter, and higher social security taxes on Jan. 1 will begin to deplete consumer income by $5 billion a year.

In sum, practically all the experts believe that gains will come much harder in the months ahead--and businessmen, knowing that, may now be a bit more wary of mergers, expansions or borrowing that could get them into trouble later on. Bill Martin overstated his case, but, by shocking the nation into a realization that it cannot have continued prosperity without some problems, he may have done it a service.

This file is automatically generated by a robot program, so reader's discretion is required.