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were added to inventories and, therefore, were not sold to
consumers. During the first half of 1949 a sudden and severe
change occurred and business began to liquidate
inventories, thereby decreasing payments for the production
of goods and throwing onto retail markets a larger volume
of goods for immediate sale than were being manufactured.
Although the percentage change in aggregate inventory
holdings of all businesses was not large, the sharp shift
from inventory accumulation to inventory liquidation within
a few months represented during those months an extremely
severe reduction in the rate of business expenditures. The
effect of this shift on
the national income was moderated by a rising trend of
Government spending and by sustained expenditures not only
by business for capital purposes but also by consumers.
Although inventory changes have been a major cause of
instability in 1949, they should be a stabilizing influence
in the immediate future.
 
Consumer Expenditures
 
            Since the end of the war consumer expenditures
have had a more stimulating effect on business than is
customary. This was due to a sharply rising volume of
expenditures for consumer capital goods, such as
automobiles, electrical equipment and house furnishings,
which were financed in large part either by substantial war
savings or by credit. Although these sources of funds may
become less dependable with each passing year, they
represent for the time being an important contribution to a
good level of business operations. Another consideration is
that Government efforts to stabilize the economy through
social security and other devices may lead to a somewhat
higher proportion of current income spent by consumers as a
whole.
 
Government Policies
 
             The Government has made it clear that it
intends to do
everything in its power, through devices such as management
of the Government budget and private credit, price supports
and social security programs, to maintain the economy at a
high level. The most effective governmental contribution to
prosperity in 1949 probably was not the measures taken
early in the year when recession was feared but rather was
the reduction of taxes and the increase of military and
other expenditures legislated in 1948. Regardless of its
unfortunate longer-term implications, the
resulting gradual substitution of a Federal deficit for a
large surplus undoubtedly has had a sustaining effect on
the economy, an effect that will be extended by payments to
veterans beginning in January of between $2 and $3 billion
of refunds on war life insurance.
 
              Although we are extremely skeptical of the
ability of
Government to take the proper action at the proper time by
way of managing the economy, we believe Government policy
will continue as a sustaining factor for the next few years.
This belief is predicated largely on the outlook for
defense expendi-
tures which already are running at a $14 billion annualrate,
plus over $1 billion of military aid to foreign countries.
Both of these seem more likely to expand than to contract
under the threat of Russian atomic power and Communist
aggressiveness throughout the world, particularly in Asia.
The increase of Government expenditures and deficits will
be influenced also by our economic and political policies
abroad.