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Threatened Fabric. Most Europeans regard U.S. willingness to raise taxes as the gauge of its resolve to put its fiscal affairs in order. Technically, budget and payments deficits can be curbed by any combination of higher taxes and lower spending that bites deep enough. Since last fall, the impasse between Congress and the President over the mixture has thwarted meaningful action. Now there are a few signs of movement. Two weeks ago, Johnson offered to trim his budget request for fiscal 1969 by $9 billion—but only if Congress approves his plea for a 10% income-tax surcharge to siphon an equal amount from the U.S. economy. Last week the President called for national "austerity," warned that the dangers confronting the dollar are "immediate and serious." Said he: "The fabric of international cooperation upon which the world's postwar prosperity has been built is now threatened. If that fabric is torn apart, the consequences will not be confined to foreign countries but will touch every American."
There was a certain irony in that message. For years, experts vainly tried to convince the President that the dollar was sliding toward an avoidable crisis. Its current predicament springs from Johnson's 1965 guns-and-butter policy, under which he vastly stepped up the Viet Nam war effort and expanded the Great Society programs without making a corresponding effort to raise funds. The war was supposed to cost $10 billion a year. Instead, the price tag jumped to $20 billion, then to its current $30 billion. "Our country is overcommitted at home and abroad," warned Robert Roosa in 1966, not long after he resigned as Treasury Under Secretary for Monetary Affairs. Even that year, Johnson might well have persuaded Congress to enact more taxes. Instead, the Administration devised packages of restrictions limiting the uses to which American citizens could put their dollars abroad. First came a tightening of President Kennedy's "voluntary" restraints against bank lending and corporate investment; finally, last January, came outright controls on capital and a controversial plan to tax tourist travel.
Such controls left the fundamental causes of the dollar-threatening payments deficit uncurbed. Last week Federal Reserve Board Chairman William McChesney Martin summed up the result in gloomy terms. "We are faced with a budgetary problem that has been getting progressively worse—a sad progression toward undermining the currency," he told the Economic Club of Detroit. "The dollar is stronger than gold, but like it or not, the world no longer has the confidence in the dollar that it once had. People doubt that we can handle our own affairs." Economist Raymond Saulnier, who was chairman of the Council of Economic Advisers in the Eisenhower Administration, took sharp aim at the Johnson Administration: "When you live in a managed economy," he said, "you run the risk of mismanagement."