A boom that paused
By the start of 1967 the United States had been expanding for almost six years, one of the longest peacetime upswings to that point. Output grew very quickly in 1964, 1965 and 1966, helped by a large tax cut passed in 1964 and by rising government spending. In 1967 the pace slowed. Real output grew at something like 2.5 to 3 percent, a good deal weaker than the year before, and the first half of the year was soft enough that some commentators talked of a pause or “mini-recession”. Businesses had built up stocks of goods during the boom and spent part of early 1967 working them down.
The slowdown was mild, and the economy picked up again in the second half. It did not turn into a full recession, and by the end of the year the worry was once more about overheating rather than weakness.
Jobs and incomes
Work was plentiful. Unemployment averaged roughly 3.8 percent over the year, a level that economists of the period regarded as close to full employment. The rate was much higher for young people and for Black workers, a gap that was visible in the cities and became part of the argument over the summer disorders such as the Newark riot and the Detroit uprising. Median family income was somewhat under $8,000 a year, and most households were better off in real terms than they had been at the start of the decade.
The labour market also fed a steady stream of wage demands. A long strike by the United Auto Workers against Ford in the autumn of 1967 was the most prominent example, and it reflected a mood in which unions wanted pay to keep pace with both productivity and rising prices. At the bottom of the scale, the federal minimum wage rose in February to $1.40 an hour, with coverage extended to millions of workers who had not been included before.
Prices begin to creep
Consumer prices rose by roughly 3 percent over the year. That sounds mild by the standards of the 1970s, but it was high for the postwar United States, where annual increases had often been 1 to 2 percent in the early 1960s. Policymakers worried that a tight labour market and heavy government demand would push the rate higher, and that is what happened in the following years. The concern in 1967 was less about the level than the direction.
For households the effect was gradual. Food, housing and services crept up, while some consumer goods such as appliances and cars were comparatively stable. New products and cheap credit encouraged spending, and sales of new cars, television sets and other durable goods stayed strong. The spread of color television was one example of a purchase that many families were making on instalment terms.
The budget and the war
The central problem was the federal budget. President Johnson had committed the country to two large undertakings at once. One was the Great Society, which included Medicare and Medicaid, federal aid to education and the War on Poverty. The other was the war in Vietnam, where Vietnam troop levels rose to close to half a million by the end of the year. The phrase “guns and butter” was used for the attempt to pay for both without sacrificing either.
Military spending climbed as the war expanded, and the cost of the new social programmes grew as they came into full operation. At the same time, Johnson was reluctant to ask Congress for a tax increase, partly because he feared that doing so would invite a fight over the Great Society itself. In his State of the Union message in January 1967 he proposed a temporary surcharge on income taxes, about 6 percent, and later in the year the request was raised to 10 percent. Congress, and in particular Wilbur Mills, who chaired the House Ways and Means Committee, made approval conditional on cuts in domestic spending. The two sides did not settle until the middle of 1968, when a surcharge was passed together with spending restraints.
In the meantime the deficit widened. The federal deficit for the fiscal year ending in mid-1967 was fairly modest, but the figure for the following year was far larger, in the region of $25 billion, the biggest since the Second World War. These numbers look small beside later budgets, but at the time they alarmed financial markets and officials, partly because of what they implied for inflation and for the dollar.
Interest rates and the Federal Reserve
In 1966 the Federal Reserve had tightened credit sharply, producing a “credit crunch” in which banks and savings institutions struggled to lend and the housing market suffered. In 1967, with growth slowing, the Fed eased policy and interest rates fell back for a time. As the budget deficit grew and prices accelerated, rates rose again toward the end of the year. This swing between tight and easy money was a reminder that the government was relying heavily on monetary policy because tax policy was stalled.
The dollar and the world
The deficit and the war also had consequences abroad. Under the postwar Bretton Woods arrangements, the dollar was fixed to gold at $35 an ounce and other currencies were fixed to the dollar. American spending overseas, including the cost of troops, added to a persistent balance of payments deficit, and foreign governments held large quantities of dollars. As confidence in currencies wavered, the strain showed first in Britain, where the pound devaluation of November 1967 shook the system, and then in the gold market, where the London Gold Pool came under pressure and ultimately collapsed in March 1968. These episodes are separate stories, but they grew out of the same imbalance: the United States was spending and borrowing more than the fixed-rate system could comfortably bear.
Business and everyday spending
Away from Washington, the economy was changing in ways that were less visible in the statistics. Companies were adopting IBM mainframes to handle payroll and inventory, the first cash machine was beginning to attract attention, and fast-food chains were expanding rapidly. Many of these developments reflected a long boom in which American firms invested heavily and consumers had money to spend. For a sense of how ordinary life felt at the time, the details of daily life in 1967 add the texture the aggregate figures leave out.
Looking back
Historians often describe 1967 as a year when the economic consequences of the Vietnam commitment became harder to ignore. The economy remained strong and employment was high, but the choices that had been postponed, over taxes, spending and the value of the dollar, began to accumulate. Several of the figures above are approximate, and later revisions of the official data have changed some of them slightly. The broad picture, though, is consistent: a prosperous economy with rising prices, a growing deficit and a government unwilling to choose between its domestic and foreign ambitions.