Full text of Business Trends : The Mainspring of the Postwar Boom

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FOR PRESS

AFTER 9: 15 A. M.

SATURDAY, JULY 1, 1950

Prepared by the Research Department of the

FEDERAL RESERVE BANK OF CLEVELAND
Serving the Fourth Federal Reserve District

THE MAINSPRING OF THE POSTWAR BOOM
The sudden resumption of Communist military
aggression, on the far side of the Pacific, has
demonstrated anew the sensitivity of economic
conditions in this country to changes in the international situation. It underscores the difficulty of
making a sound diagnosis of domestic business
prospects without looking into every corner of
the globe. Indeed, the agitated history of the
postwar period to date suggests that the military
intelligence units of the armed forces have been
in a more advantageous position than have
civilian observers, to forecast the potential demands that might be made upon our economy as
a consequence of Soviet strategy.
Three years ago, the touch-and-go crisis in the
Eastern Mediterranean area created an air of
grave suspense which did not subside for months.
Two years ago both the Red coup in Czechoslovakia and the Berlin blockade generated successive waves of acute uncertainties. Last year
it was the over-running of China that posed innumerable questions, both political and economic
in nature. And now the scene has shifted to Korea.
Whether this latest flare-up means that World
War III has already started, or whether this country's dramatic response will put out the fire, is the

only important consideration at the moment.
Perhaps the answer will have emerged by the
time these comments appear in print.
In the event that this latest international crisis
leads into full-scale warfare, any appraisal of the
business outlook in the conventional sense would
be pointless because the exigencies of the situation
would undoubtedly require an almost complete
abrogation of economic freedom. This discussion,
however, is predicated on the assumption that
this government's minimum military objectives,
as authorized by the United Nations, will come
close enough to realization to force a postponement, if not complete abandonment, of a more
serious threat by the enemies of democracy.
Under such hypothetical circumstances the unfavorable domestic economic factors could be
expected to register their influence in the traditional direction if not to the customary degree.
In this connection, it must be recognized that
the real mainspring of the business boom, which
has held sway almost without interruption for
more than four years, has not been the unanticipated high rate of expenditures for national
defense and foreign aid, but rather the unparalleled spending program carried out by in-

Broadcast by Merle Hostetler, Manager, Research Department, Federal Reserve Bank of Cleveland, over
WGAR, Cleveland, with Jim Martin, Morning News Editor, WGAR, Saturday, July 1, at 9:15 a.m.


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Federal Reserve Bank of St. Louis

dividuals and business enterprises with funds
borrowed from institutional and other lenders
and savers.
The millions of houses that have been built
since the war, the record volume of household
appliances and furniture that has been produced
and sold, the tidal wave of motor vehicles that
has rolled off the assembly lines, and the unprecedented peacetime industrial expansion that
has occurred, have not been paid for out of past
earnings, but have involved an unsurpassed volume of borrowing. From 1945 to the present
time, personal and corporate debt has been expanding at the rate of nearly $20 billion per year.
The load of private indebtedness which has
been incurred since the war does not yet represent
a visible burden, partly because of the abnormally
low level to which such commitments had been
reduced in 1945, and partly because it is not yet
so large in terms of the gross national product
as on several occasions in the past.
Nevertheless the postwar expansion of private
debt (as distinguished from the Federal debt)
has reached a point where some slowing down
in the rate of growth may not be far away. And
a mere slowing-down in the rate of debt creation
could have a noticeably adverse effect upon business. The economy has become accustomed to a
consistently strong demand for goods and services
-a demand which has been made effective only
through the extensive use of borrowed money.
When this record rate of new borrowings begins
to taper off, if for no other reason than that a
constantly growing private debt entails an increasing charge against current income, business can be expected to reflect such a change,
even though total indebtedness might still be
increasing.
Barring the outbreak of full-scale war, it seems
logical to assume that the first signs of a slowing
down in the rate of growth will appear in the
field of consumer instalment credit, because this
type of commitment appears to be relatively the
closest to what may prove to be an effective ceiling, in terms of disposable personal income. There
are valid grounds for suspecting that the over-all
increase in such indebtedness in the next twelve

months may fall short of the record $2. 7 billion
gain since a year ago.

It is similarly questionable ;}i,~th;·~~?rr.~wintr by industrial concerns and public u"tilities' for enlargements and improvements will b·e· a~te~t;:hsive .
as in the past several years, unless the :pre~~nt
·-'qt
emergency leads directly to open hostilitie&: _-;' r:. ,
Borrowing by individuals for the pur'r1."t;tse of
purchasing homes may continue -at the e;isting
pace for perhaps another two or three years but
here, too, periodic amortization requirements are
growing larger day by day, and are equivalent to
an increasing percentage of new loans made.
The potential decline in private demand for
credit conceivably may be offset, in whole or in
part, by an increase in public borrowing, not only
by the Federal government for increased national
defense expenditures, but also by sfates, · cities
and other local political subdivisions whose borrowings for public facilities have been . quite
moderate in comparison with· the -scale prevalent
during the 'Twenties. At -present, state and
municipal indebtedness is only a trifle larger
than in 1932-3, when the financial dimensions of
the economy were less than one.;fourth the present proportions, which suggests that at least one
important area of credit expansion is still available for exploitation.
Nevertheless, aggregate indebtedness on all. but
Federal account is now once again nearly as large
as the war-swollen public debt, and the prospects
for continued growth at the present rate is accordingly diminished. It may be of some merit, however, to recognize that in the event of the outbreak
of global warfare~ · the record · level of private
indebtedness does not necessarily represent a
handicap to" wartime finance. In fact an acceleration in the rate of repayment of private debt
would provide a noninflationary outlet for funds
which otherwise would converge on the market
for a sharply limited supply of civilian goods.
While this clearly would be in the interest of all
consumers in the aggregate, the most rapid reduction of private debt conceivable would not suffice
to stem the inflationary consequences of sustained
wartime spending.

Additional copies of "Business Trends" are available upon request.

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