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Remarks in New York City: "A New Direction for America's Economy"

July 06, 1968

In this year of violence and turmoil, the capacity of the American people to govern themselves is being questioned as never before.

Terrible and tragic events have thrown a dark cloud of self-doubt across our society. At home and abroad, voices are heard castigating America as "sick." Many are ready—even eager—to write the epitaph of the world's oldest republic and to write off mankind's greatest experiment in democratic self-government.

I reject the false argument that all Americans are somehow responsible for the evils that have befallen us and the grave dangers we face. We are a nation made up, not of a faceless mass, but of 200 million individuals. In recent months, in a thousand different conversations, people across the country have opened their hearts and minds to me. These Americans have not given up on themselves. These Americans are vital, hopeful, and idealistic—they still dare to believe in the triumph of dreams in a time of nightmares.

If there is a single quality that sets Americans apart, I believe it is their openness to change. They do not merely cope with change; they embrace it. They are committed to it. They gladly accept the wrenching pain of change in order to seize its exciting promise. Our republic has survived, our great experiment has flourished, because Americans have always regarded their revolution on behalf of human freedom, dignity, and fulfillment as unfinished, perpetually in the process of becoming.

Politics of Responsibility

I shall not attempt to minimize the impact of the profound shocks we have experienced in this fateful year. Nor do I believe that we should surrender ourselves to what Vice President Humphrey has called his "politics of joy." This is no time for taking refuge in comforting self-delusions. America is in more trouble, in more places, than ever before in its history.

Now is the time, I firmly believe, for facing the truth, for seeing it clearly, and for speaking it plainly. Now is the time for the kind of democratic self-government too long neglected. Now is the time for the politics of maturity and responsibility.

Under our system, the people do not await commands from on high. As free men, they know where they want to go and what they hope to achieve. They look to the leaders they elect for guidance, for purposeful direction of the nation's vast energies and immense resources. In the role of manager of the nation's economy, any Administration affects the American people intimately for good or ill. As trustee of the economy and guardian of the dollar, die Johnson-Humphrey Administration, in my judgment, has failed the people abysmally.

Climate of Uncertainty

This role is much broader than the formulation of sound economic policies. We look to our government, first of all, for the creation of a climate in which our common ideals and objectives are secure, so that each of us can be free to pursue his individual goals. Such a climate does not exist in America today. The Johnson-Humphrey Administration has failed in its first and most basic responsibility—the preservation of order in the society. When Americans look toward tomorrow apprehensively, uncertain of what it may bring, they have not lost confidence in themselves. They have lost confidence in those to whom the safekeeping of the future was given.

The rise of a climate of fear and uncertainty, of crime and anarchy, can be traced partly to the emergence of a vacuum of leadership at the center of our federal government. Under our system, there must be a continual dialogue between the people and their leaders, a healthy exchange which insures government truly representative of the popular will. Today, there is no such dialogue. Today, there is a sad estrangement between the people and their government. Where there should be purposeful men listening and leading, guiding the forces of change, there are only weary and confused men, grasping for expedients, talking to themselves, and appointing commissions to study problems for which the supposed leaders have no solution and no plan of action.

The American people are not sick—they are massively frustrated. They speak and no one heeds them. The leaders speak and no one takes their words at face value. What appears to some to be a collapse of the system is in fact a breakdown of the democratic dialogue, a mutual withdrawal of trust between the people and their leaders who have failed them.

In its mismanagement of the economy, we see a particularly revealing failure of the Johnson-Humphrey Administration. It illustrates the erosion of trust, the retreat from responsibility, the growth of a paralysis at the top of the government.

False Prosperity

It may appear that talk of idealism and dreams is unrelated to the cold realities of economics. Quite to the contrary, America's economy is the means by which dreams, individual and national, are realized. The dollar in our pocket is the token of our labor and our aspirations. If its value is protected, the rewards of our labor are secure. If the dollar loses its value, to that extent we labor in vain, and if an uncontrolled loss of value occurs, we are denied the means to achieve the dreams we have deferred until tomorrow.

Until fairly recently, the Johnson-Humphrey Administration could hardly find superlatives glowing enough to praise its management of the economy. Month by month, we were told of the longest economic expansion in the nation's history. Then suddenly, these torrents of self-praise were turned off and the flood-gates of gloomy warnings were opened wide. We have been told, by President Johnson himself, that the nation faces "the worst financial crisis of the post-war era."

What kind of prosperity is it, Americans must ask, which suddenly carries us to the brink of disaster?

It is a false prosperity, founded on a timeless device of deception— inflation.

Runaway Inflation

In the last five years, the Johnson-Humphrey Administration has undone the work of the previous decade. Since the last Presidential election, the general price level—that is, the price level of our total output of goods and services—has risen over 10 percent.

Not only has the price level been rising, the rise has also been accelerating. Inflation occurred at the rate of just under 2 percent in 1964; at more than 2 percent the following year; at more than 3 percent the next year. Last year, the rate was 3.5 percent. So far this year, the rate is above 4 percent. Next year, if the most stringent measures are not taken, the rate of inflation could climb above 5 percent.

What does this mean in practical terms?

It means almost everything costs more—the food we eat, the clothes we wear, the apartments and homes we live in. It means that the cost of services, especially hospital and medical services, are skyrocketing. At every turn in our daily lives, we encounter the hidden tax of inflation, requiring that we pay more for the same or for less. Even the price of bread is up a cent—and in some supermarkets, the "pound" loaf now weighs only 15 ounces.

Inflation means that those who have put money aside in the bank, and who believe they are earning interest at the rate of 4 percent, are in fact earning nothing. Inflation has robbed them of the reward of their thrift and sacrifice.

In terms of dollars, Americans are earning more than they ever did. In terms of what those dollars will actually buy, many Americans are worse off than they were two or three years ago. When higher social security and income taxes are deducted, when the invisible tax of inflation is deducted, the average weekly pay-check of the non-farm worker is actually less than it was in 1965—and he is steadily losing ground.

The "Money Illusion"

American breadwinners and their wives realize that they are victims of the "money illusion." Those workers who can bargain for higher wages are trying hard to keep ahead of the wage-price spiral. Collective bargaining in 1964 brought wage settlements averaging 3.2 percent; the following year, 3.8 percent; the next year, 4.8 percent. Last year, new wage contracts jumped 5.7 percent. This year, the increase is above 6 percent. But unchecked price inflation all but destroys these seeming wage gains. Each rise in wages now brings a rise in prices. We are caught up in a deadly cycle of futility.

In the beginning of a period of inflation, only its temporary good effects are seen in rising wages and employment. But as the artificial stimulant wears off, as the dosage is increased and increased again, the good effects disappear and the bad effects—the lasting and deeply harmful effects —come into view.

We no longer hear about the Johnson-Humphrey Administration's War on Poverty. But on the neglected front of inflation, the government has inadvertently blocked the advance of the poor—just one of many unforeseen but tragic side-effects of irresponsible fiscal policies.

To those who have little or no bargaining power, to those who are trying to live on fixed incomes, steadily worsening inflation means steady reduction in an already low standard of living. The poor—whose plight evokes such sympathy in Washington—are made even poorer.

The Balance of Promises

Fiscal irresponsibility also produces unforeseen but seriously harmful consequences overseas. Certainly, it was not the intention of the Johnson- Humphrey Administration to weaken American prestige and influence abroad. Certainly it was not the Administration's intention to diminish America's credibility when its policies in Vietnam were under worldwide attack. America, as the leader of free nations whose allegiance cannot be coerced, can keep its allies only by keeping its word. But the Administration's word has been undermined by its deeds—and even more, by what it has left undone.

In recent years, Americans have become familiar with a complicated and seemingly remote problem—the balance of payments crisis. We can understand it better if we think of it as simply a balance of promises crisis. America, as the financial bulwark of the free world, promised foreign nations holding dollars that those dollars were as good as gold. Year in and year out, however, more dollars poured out from these shores than our overseas trade and investments could earn. And year in and year out, the Administration promised an early end to this deficit.

Last spring, the confidence of foreigners collapsed and the slow retreat from the dollar became a panic-stricken, headlong flight. For a few days in March, Americans traveling abroad suffered an unexpected and unthinkable humiliation when hotels and merchants refused their dollars and traveler's checks. How could anyone doubt the mighty dollar! But skeptical foreigners did, and so did their governments. Our reserves of gold, which had been trickling away, suddenly gushed out. These reserves now stand at the lowest point since the Great Depression, a sadly revealing measure of the decline of American prestige.

By a combination of expedients and renewed promises of swift reform, the decline of the dollar has been temporarily slowed. But the Administration has bought only time; it has not regained the confidence its policies forfeited. Only a truly convincing shift to new policies of prudence and restraint can accomplish this all-important objective.

This brings me to the central question concerning the threat of inflation. Can the Administration which created the peril be relied upon to meet it squarely? I believe the answer is no.

The Economics of Popularity

The Johnson-Humphrey Administration, since it admitted the danger, has tried to blame everyone and everything but itself. There is no mystery about what causes inflation. It springs from the desire of politicians to bestow upon the people more favors than the people are prepared immediately to pay for. In every year since 1961, the federal government has spent more money than it has taken in. Through the end of the current fiscal year, which has just begun, these cumulative deficits will total a staggering nearly $70 billion.

When federal expenditures are enormously more than federal revenues, the politicians pursuing popularity through inflation turn to the Federal Reserve system and create money literally out of thin air. To finance the Treasury, the Federal Reserve system has expanded the money supply at a breathtaking rate. During 1967, the money supply grew at 7 percent, the fastest rate of growth in the entire period since World War II.

Stop-as-you-go

William McChesney Martin, chairman of the Federal Reserve Board, is a dedicated public servant who has occupied his position longer than any other man. He sincerely believes in the prudent management of America's finances. But he has been left holding the bag. The Johnson-Humphrey Administration, by refusing to put the nation's fiscal affairs in order, forced Chairman Martin to assume, with the limited powers available to him, the whole responsibility for curbing inflation. The result has been a stop-and- go policy of monetary restraint and ease, in which every attempt to slow down the expansion of the money supply has been defeated by the urgent necessity to finance the Treasury's huge deficits.

In the summer of 1966, the Federal Reserve's efforts to tighten up caused near-panic in the markets and resulted in a brutal credit squeeze. The housing industry was thrown into a recession from which it has not yet fully recovered. As money was alternately tightened and eased, and as federal deficit spending continued, the expectation of further inflation became fixed in the minds of lenders. Interest rates have now soared to their highest levels since the Civil War. Prospective homebuyers face mortgage rates of more than 7 percent. Interest rates are likely to remain high for some time to come, with all the bad effects for the economy that this implies.

Vietnam Alibi

The Johnson-Humphrey Administration left Chairman Martin to battle inflation alone as long as it could. When it could no longer ignore the plain consequences of its own policies, the Administration found a convenient excuse for inflation—the Vietnam War. It claimed that all the trouble began in mid-1965 when the American commitment to the war was greatly expanded.

This is simply not true. Inflation was evident in the rising prices of raw materials as early as the fall of 1963. By the summer of 1964, the average level of all wholesale prices was climbing fast. Clearly, inflation had taken hold and become widespread many months before Vietnam began having significant financial or economic consequences.

Between mid-1965 and mid-1968, federal expenditures grew by $60 billion. Less than half of this increase, some $25 billion, could be attributed to the war. The rest was in civilian programs.

When President Johnson faced the moment of truth on the battlefield in Vietnam, he committed the troops and resources necessary to stave off imminent defeat. However, he flinched on the home front. There was no moment of truth in America because the President did not take the people into his confidence. He escalated the war by stealth; he encouraged the belief that Americans could go on enjoying guns-and-butter and the deficit-financed favors of the Great Society without giving the war in Southeast Asia a second thought.

Self-deception

By deceiving himself, the President deceived the American people. By failing to mobilize the American economy for war, he guaranteed serious economic disorder. History may record that the President's refusal to establish clear priorities was the pivotal error of his Administration, a decision not to choose that forced all subsequent choices to be bad ones as events slipped out of control.

As the war expanded, the Administration's deception of itself and the American people grew. Early in 1966, as the Administration prepared its budget for fiscal 1967, the defense portion was based on the assumption that the war in Vietnam would end by the middle of the summer of 1967. It was further assumed that the 185,000 American troops in Vietnam would rise to only 250,000. At the same time, however, General Westmoreland was asking for a force of 400,000 troops. And it was evident even to outsiders, that the strategy approved by the Pentagon and being pursued on the battlefield would require at least that many troops.

General Westmoreland eventually was given the troops he requested, and the cost of fighting the war, which the Administration had set at $10 billion, soared to $20 billion in fiscal 1967. (It has since risen to nearly $30 billion). Throughout 1966, information on the actual costs of the war— as opposed to the unreal costs set forth in the budget—was held very closely in the Pentagon and the White House. Not only Congress, but even the Treasury, was kept in the dark. If the true costs had been made known, of course, the President might very well have been forced to seek a tax increase or to accept reduced spending on his Great Society programs. The President gambled on an early end to the war—and the entire country paid for that foolish wager and will still be paying for it long after Lyndon Johnson leaves the White House.

The Political Budget

The crucial defense budget for the fiscal year 1967 was inspired, not by economic realities, but by political motives. When the President at last asked for higher taxes, in January, 1967, that request—made belatedly and without any great show of urgency—bore the unmistakable stamp of political motivation. The President then asked for a tax increase of only 6 percent, to be effective at mid-year. But he did not couple this request with a promise of reduced federal expenditures. On the contrary, deficit spending would continue as usual.

What's more, within a few weeks of making the tax request, which would have the effect of restraining the economy, the Administration actually stepped up its efforts to stimulate demand. Funds for housing and highways, which had only recently been frozen, were released. The President requested that Congress reinstate the investment tax credit for machinery and equipment—thus asking for a substantial tax cut for business firms only a few weeks after asking for a tax increase. Instead of facing up to the threat of inflation, the Administration behaved as though the economy were headed into a recession.

Such obvious contradiction and political calculation cost the Administration the trust of members of the Congress and the informed public. When, in August, 1967, the President warned of the onset of ruinous inflation and urgently requested, not a 6 percent tax increase, but a 10 percent increase, he was simply not believed. And he widened the already yawning "credibility gap" by refusing to cut back on federal spending.

Trend Still Inflationary

I have traced this dreary record at length and in some detail because it helps to explain an unparalleled situation. For more than a year and a half, in the face of overwhelming evidence of its necessity, it was impossible for the President and the Congress to agree on a policy of fiscal restraint. The American people were willing to tax themselves to pay for the war in Vietnam, and to forego civilian programs that are not essential. The Congress was willing to act responsibly. But the President had to be virtually dragged to the performance of his duty—namely, to cut the deficit spending which is the cause of our present inflation.

Now the 10 percent surcharge on personal and business incomes has finally been enacted into law. As the price of the tax bill's passage in Congress, the President has reluctantly agreed to cut $6 billion from this year's $186 billion budget.

Let us consider the practical effects of this program. Individuals and businesses will pay higher taxes—that much is certain.

The expenditures of the federal government, however, will not be reduced next year; they will increase. All the President has promised is to reduce the rate of increase in federal spending and thereby reduce the federal deficit. Assuming these promises are fulfilled, there will still be a substantial budget deficit this fiscal year—perhaps as much as $10 billion.

The chief intended effect of the tax increase and spending slowdown is to reassure concerned observers at home and overseas that the Administration at last means to halt inflation. Here, the Administration is saying, is tangible evidence of our resolve to reform.

Will it be persuasive? I seriously doubt it. The long record of irresponsibility has encouraged deep skepticism. What is most worrisome is not a particular year's deficit but the persistent trend of inflationary policies in Washington. A one-shot exercise in restraint may be regarded as merely a pause in a trend which has yet to be reversed.

The Spending Momentum

Beyond the very sizable federal budget deficit next year lies uncertainty. Programs launched during the heady days of the Great Society at a fraction of their eventual cost are expanding rapidly. The costs of the war are unclear. In no sense has the expansion of federal spending been brought under effective control. No one can say with confidence that the budget deficits which lie at the heart of our troubles will not stretch on indefinitely.

Not long ago, Chairman Martin declared: "I happen to believe that the dollar is stronger than gold. I happen to believe it rests on the resources and productivity of the United States. It's government that you have to rely on. Basically, you can't rely on a metal for solvency. Whether we like it or not—there are people in the world who doubt we have the capacity to handle our problems."

These doubts will not be dispelled by a one-shot show of responsibility. Confidence abroad will be restored when the American people bestow their confidence on a new Administration, free of the necessity of justifying the past and unburdened by promises that have not been kept.

The American economic system has enormous latent strength and resiliency. But I do not believe it can survive four more years of abuse by irresponsible federal managers without suffering grave and permanent damage.

Balancing the Economy

There are times when the Federal Government can and should use credit wisely to invest in the future. What we need is not a mechanically balanced budget, but an intelligently balanced economy. We have not yet taken the first step toward such balance—toward regaining control over federal deficit spending and the ever-increasing federal debt. The debt is still expanding and still spreading distortions throughout the economy.

Never in the history of the world has a nation been so abundantly blessed with the economic means to achieve its goals—provided these are clearly defined and skillfully pursued.

The first task is to halt the inflationary trend in our fiscal and monetary policies, to check the drift that defeats our purposes and steadily narrows our range of choices.

If this is done, the dollar will swiftly recover much of its strength, and the essential work of modernizing the world monetary system can go forward on the basis of long-term confidence and not short-term expediency.

Re-directing Foreign Economic Policy

I believe we must re-examine the whole sweep of America's foreign economic policies. We should not try to shore up the past; we should build for the future. All too often, the Johnson-Humphrey Administration has taken its vision of the future from the rear-view mirror. It has tried to preserve existing arrangements and relationships simply because they do exist and without asking whether they fit dramatically changing realities. Ironically, the early postwar goal of creating a true international economic community has receded as a result of these policies, and we are in danger of slipping backward into narrowly nationalistic rivalry and competition. An Administration dedicated to the old politics of irresponsibility, of promise-and-spend regardless of the consequences, has hastened the crisis of the international economic order which grew out of the Second World War.

Our allies and trading partners no longer need our protection as much as they need our example. The guiding principle of America's foreign economic policies should be the expansion of the community of free and mutually responsible nations. Instead of limiting the movement of capital and goods, as the present Administration has, a fresh and practical commitment should be made to openness, to the lowering of all barriers—political, economic, and ideological. To the extent that weakness forces our withdrawal from such a commitment, we lose precious influence over the flow of events and the shape of the future international environment.

Economic Order in the Cities

If Americans have recently become less outward-looking, it is largely because they have been forced to turn inward and face the upheaval centered in our riot-torn cities. America does not lack the resources to deal effectively with the urban crisis. However, the Johnson-Humphrey Administration's mismanagement of the economy has greatly reduced the nation's freedom in the face of this challenge.

The need for modernization of urban America—of the nation that seven out of ten Americans now inhabit—is desperately urgent. Too many of our cities are failing—in physical, economic, and above all, human terms. Too much of the wealth created in our failing cities is pumped out of them and into the remote bureaucracies of Washington. The fraction that does return comes in the form of rigid programs which do not meet the real needs of the cities. For example, federal funds are available on a lavish scale to build often disruptive urban highways, but not to improve languishing mass transit or decaying housing or deteriorating social services.

The cities are reduced to the status of paupers by obsolete institutional arrangements. The cities do not need larger federal handouts; they need a larger and more equitable share of the wealth they produce. But before new economic resources are committed to the cities, they must receive an infusion of the nation's best intellectual resources, drawn not only from the government and the academic community, but also from the relatively untapped business and financial community. In the last century, men of action built the cities. In the next stage of America's urban growth, men of thought and action must use new ideas to rebuild the cities.

The old politics of irresponsibility and the old economics of promise- and-spend have denied America much of its flexibility in dealing with on- rushing change. We can and must break out of the economic straitjacket fashioned by the present Administration. We can and must regain the freedom that comes from sound and sustainable economic growth. Under intelligent management, the economy can grow in a way which makes possible not only tax cuts but also non-inflationary expansion of federal spending out of our increasing national wealth.

The Trillion-dollar GNP

If our economy enjoys sound expansion, I can foresee a gross national product of a trillion dollars by 1972—and I mean a trillion dollars of stable purchasing power. In the same period, I can foresee 82 million civilian jobs—6 million more jobs in the term of the next President—for the American people, whose wages and well-being would increase in real and not illusory terms.

I believe the American people are more than willing to live, not on inflated promises, but on the real wealth they produce.

I believe they are far more mature than their distrustful present leaders assume.

I believe a tide of discontent is running deep and strong within the people, a powerful current which will sweep away falsehood and duplicity, and carry our country again to the firm and high ground of principle.

When America was young, hard work and sacrifice were the only way the people knew to put their dreams and ideals into practice. Now that America is mature, at once seasoned and beset, there is still only one way— the way of responsibility.

APP NOTE: From section three of the volume "Nixon Speaks Out" titled, "For a Dynamic Economy".

Richard Nixon, Remarks in New York City: "A New Direction for America's Economy" Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/326767

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