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            Whether pensions are broadly adopted this year
or next, it
would seem they are becoming inevitable and must be given
important weight in considering the future. Pensions will
theoretically be deflationary in that they divert earnings
to savings and add to the cost of goods, thereby reducing
the effective buying power of consumers. There is a real
chance, however, that the opposite effect may occur in that
with added assurance of old age and other protections
workers may spend more freely than in the past, thereby
adding to their effective buying power. Such reenforcement
of consumer spending may serve to encourage capital
expenditures in the form of further plant expansion or more
new homes.
 
             On the whole, we consider the prospects for
labor income and expenditures by consumers, as discussed in
a previous section, to represent a continuing support for a
good volume of business.
 
Credit
 
             Private debt has expanded greatly since the
war. Bank loans have increased 113% since 1939, corporate
debt, 56%,mortgage debt, 65%, and consumer time payment and open
accounts, 106%. Substantial though these increases have
been, in our opinion they are not excessive in terms of a
reasonable estimate of an average level for postwar
business and prices. Moreover, with the possible exception
of home mortgages, in part guaranteed by the Government,
this credit has been extended carefully and there is little
evidence of speculative use of credit.
 
            The Government's policy toward credit and
interest rates, which was restrictive a year ago, 
has been reversed and has been made effective primarily 
through reduction of bank reserve requirements and 
cessation of the sale of Government bonds by Federal 
Reserve Banks. These changes, combined with some 
liquidation of bank loans, have moderately reduced 
interest rates and raised bond prices. So long as 
business continues at a level approximating the
present, we would not expect any material tightening of
basic interest rates. However, a continued high rate of
capital expenditures by business and the resulting demand
for corporate funds, added to the probable large volume of
municipal financing may well lead to higher yields from
municipal and corporate bonds relative to Governments.
 
                At some point in the future Government
policies of free spending may be interpreted by the
 public as inflationary and exert considerable 
psychological influence on people's willingness to 
hold bonds at high prices; however, we do
not consider credit a source of trouble in the near future.
 
Conclusions and Investment Policy
 
               The preceding discussion suggests that,
although private capital expenditures have lost some of 
their dynamic features of the past few years, they can 
be expected to continue in sufficient volume to support 
a good level of business. Industrial expenditures for 
plant and equipment will decline but public utility 
construction and building activity should be maintained. 
Inventory changes are not expected to be a disturbing 
factor in the near future, as they were in early 1949. 
It does not seem reasonable to expect more than continuance 
of the present level of foreign trade. The most
dynamic element for domestic business now seems to be
increased Government expenditures financed by debt. This
undesirable stimulant, combined with satisfactory private
capital expenditures, should keep business as a whole at a
good though not peek level for the next year or so.