policy - The Black Vault

THE BDM CORPORATION
year a number of economic policy-makers in Washington began warning that
the economy's splendid performance in 1964 and 1965 was in danger of
producing inflationary pressures.
This advice led to twc developments.
First, the Federal Reserve Board raised the discount rate from 4 percent to
4.5 percent in an effort to restrict growth of the money supply. This was
a significant break from the Federal Reserve Board's consistent backing of
the Kennedy and Johnson administrations' expansionary economic policies,
and indeed drew criticism from both the White House and Congress. The
second development was that in January 1966 the Council of Economic
Advisors submitted a report to Johnson saying that he could not have both
the war and the Great Society without either a tax increase or inflationary
pressure.
Johnson chose not to act on this advice because of its implications
for the domestic legislation he wanted to get through Congress in
1966, with Robert McNamara and others arguing privately that an admission
of the war's true cost would kill any chance of this domestic legislation
being passed.
This decision was made easier by the fact that most economists,
not having a clear indication of the war's ccst, continued to be
optimistic about the economy's ability to sustain both the administration's
domestic and international programs.
Johnson did at this time ask for, and get from Congress, a minor
increase in excise taxes, but it was not until December 1966 that he admitted
that the administration had seriously underestimated the cost of the
war, with his estimate of the error being $10 billion. He therefore asked
Congress for a 6 percent tax surcharge in January 1967,
request when the economy subsequently showed signs of slowing down.
but dropped this
It was
not until August 1967 that he asked Congress for another tax increase, this
time a 10 percent surcharge.
By late 1967 inflation had taken a firm hold on the economy, but
Congress was by no means eager to accept Johnson's prescription for handling
it,
with Wilbur Mills, chairman of the crucial House Ways and Means
Committee, surfacing as the administration's p, imary antagonist on the
issup. After Johnson's January call for a 6 percent surcharge, Mills
challenged the necessity of such a tax increase and insisted on thoroughly
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