THE U.S. is a frustrated nation, but not all the blame for that condition attaches to the war in Viet Nam, racial bitterness, campus violence and crime in the streets. Government, business and consumers are deeply troubled by another major source of national tension: the rising pace of inflation. Though the U.S. standard of living is still the highest ever achieved, the value of the nation's currency is dwindling alarmingly. It has gone down by almost two-thirds in the past 30 years. A 1958 dollar is worth only 790 today, which means that a man must earn 26% more after taxes to buy the same goods. This year the erosion in purchasing power has sharply accelerated. A dollar received as recently as January is worth only 960 now, and at the current rate of price increases will shrink to about 920 by Christmas.
Inflation has distorted the entire economy. It has forced the Government to raise taxes, curtail its spending for social programs and reduce the supply of money. One result is that interest rates have climbed to their highest levels in a century, spreading turmoil in the financial markets and discomfort in corporate board rooms. Businessmen gloomily foresee a slow year for profits. Consumers, despite their affluence, feel financially strapped and vexed to the point of outrage at the soaring prices they must pay for both the necessities and the luxuries of life. President Nixon says that an attack on inflation is his number one domestic priority. His economists, led by Chairman Paul McCracken of the Council of Economic Advisers, are guiding a delicate effort to control inflation gradually and avoid bringing on the recession that Nixon deeply fears.
Last week the battle against inflation entered a new and crucial phase. The phase began when the nation's commercial banks raised their minimum interest charge for loans from 71% to an unprecedented 81% — a move that was widely interpreted as a portent of a serious credit crisis. The next day, the Government's top economic policymakers managed to sound downright alarmist as they made a rare joint appearance at a Washington press conference to plead for an extension of the 10% surtax on personal and corporate incomes. That tax, which is due to expire June 30, is designed to fight inflation by reducing demand and increasing the Government's budget surplus.
Red Flags
Chairman William McChesney Martin of the Federal Reserve Board warned that without the surtax "we cannot succeed" in slowly controlling today's "critically serious" inflation. Sitting at his side, Treasury Secretary David M. Kennedy* declared: "The problem is much more difficult than I realized. We can't let this escalate into runaway inflation, and we're very close to that now." If Congress allows the tax to expire, he added, the economy could race far enough out of control to create "the possibility of a serious recession." To prevent that, Secretary Kennedy warned that the Government would have to consider further budget cuts, tighter money and perhaps, as a last and unwelcome resort, the price and wage controls that the Administration abhors.