Abiding Interest

As 1961 draws to a close, U.S. economists are confidently looking forward to a rare phenomenon: a burst of economic expansion unaccompanied by the customary dampeners of tight money and sharply rising interest rates.

Historically, U.S. interest rates have almost invariably risen during recovery periods, when increased credit-buying by consumers and increased borrowing of expansion capital by industry have put a strain on the money supply. And last week the U.S. economy showed every sign of having completed its convalescence from the 1961 recession: in November, Washington reported, retail sales shot to an all-time monthly high of $19.3 billion, 5% over November a year ago, and the Federal Reserve Board's industrial production index also reached a record level of 114% of the 1957 average.

Not by the Calendar. All these symptoms of boom rang a tocsin in the minds of those who feared they meant higher interest rates and a consequent stifling of economic growth. But, as one Government economist noted last week, to assume that this recovery must produce increased interest rates because previous ones did so is to "substitute calendars for analysis." In the 1961 recovery, the most important upward pressures on interest rates are notably missing.

In the recession just past, interest rates did not fall as far or as fast as in previous slumps--mainly because of the Treasury's successful effort to keep short-term rates high in order to discourage "hot money" from flowing abroad and increasing the U.S. balance-of-payments deficit. As a result, the traditional push to get back to pre-recession interest rates has less steam than usual. At the same time, U.S. businessmen already have enough excess capacity so that their estimated outlay on new plant and equipment for this year dropped last week to $34.5 billion. 3% below 1960. This means that industry has no need to borrow heavily. Still another potential squeeze on the money supply--heavy federal borrowing--will be averted if the Kennedy Administration holds to its repeated pledges to balance the 1962 budget.

Gentle Warning. Much of the credit for the present stability of interest rates belongs to the Federal Reserve, which correctly judged that the recession would be mild and so did not overstimulate the economy with too much easy money. The still high rate of unemployment, however, acts to check any inclination by the Federal Reserve to slow economic growth with tighter money--a mistake that the Fed, abetted by the Eisenhower Administration, made after the 1958 recession. Fortnight ago. Fed Chairman William McChesney Martin Jr. gently warned that he would not continue to sluice additional bank credit into the economy indefinitely. This was a polite way of saying that he was prepared to raise interest rates if the demand for money increased too rapidly. But the consensus among U.S. economists last week was that there was unlikely to be any significant increase in interest rates for some time to come.

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