Welcome Back to 1961 — Or: The Fed’s Time Machine

What did the world look like in 1961, the last time the Feds funds rate was below 2%?

December 17, 2001

What did the world look like in 1961, the last time the Feds funds rate was below 2%?

Forty years ago, the world was certainly less complicated. Americans drove huge cars — all made in Detroit, of course, and virtually none of those rinky-dink imports. The middle class was only just starting a mass exodus to the suburbs. The baby boom, which had begun a decade earlier, was still in full swing.

The best film of the year was the West Side Story, and in their musical tastes Americans still gravitated toward Henry Mancini and Judy Garland. The New York Yankees were in the World Series — but then again, they nearly always are.

Television was black and white — and there was only a handful of channels, with the programming dominated by three major networks. The sexual escapades of the new president, although widely rumored in Washington, were off limits as a subject of political reporting.

Of course, the new president, taking office in January 1961 was none other than John Fitzgerald Kennedy. Although also a scion of an old, established and politically ambitious family, he could not be more different than George W. Bush.

The spirit of youth, hope and renewal that greeted JFK’s arrival to the White House has been wholly absent from the Bush administration. And yet, despite all these differences, those long by-gone times strangely parallel our own. In fact, many of the developments that started in 1961 still play a crucial role in the lives of ordinary Americans.

The United States is at war today, and as the Fed lowered its interest rates, U.S. Special Forces and a bunch of local rebels were hunting Osama bin Laden in the Tora Bora Mountains in Afghanistan.

But forty years ago public enemy No. 1 was much closer to home. It was Fidel Castro, who had grabbed power in Cuba in 1959 and with whom the United States broke diplomatic relations at the start of 1961.

Cuban exiles landed in the Bay of Pigs in April 1961 in an effort to oust Mr. Castro. Their mission failed — in part, because they got much less military support from the United States than the Northern Alliance in Afghanistan. But it should be kept in mind that Mr. bin Laden is still at large, and Mr. Castro still rules Cuba — 40 years later.

The year 1961 was also crucial in relations between Washington and Moscow. In the late 1950s, Russia turned away from Stalinism and implemented modest liberal reforms. Communist Party boss Nikita Khrushchev became the first Soviet leader to visit the United States and came away impressed by America’s economic achievements.

But by 1961 tensions had risen once more. The Soviets beat Americans by sending the first man into space in April 1961, an event that was followed by the building of the Berlin Wall, the symbol of oppressive Communist power and the Cold War.

The year 2001 could similarly set the tone for relations between the two nuclear superpowers for years to come. The Bush administration has gone from a confrontational stance in early 2001 to reconciliation in the wake of the September 11th terrorist attacks. But relations may take another turn for the worse following America’s unilateral withdrawal from the 1972 ABM treaty.

In the United States itself, the 1950s — just like the 1990s — were a period of unprecedented economic prosperity and growth. By contrast, the 1960s proved a much more troublesome decade, which saw social upheavals and the start of America’s economic decline that lasted through the 1980s. The beginning of the new millennium promises to be equally unsettling. At least its early months have been nothing short of traumatic.

There are even eerie similarities as far as the U.S. Fed is concerned. In July 1961, a lengthy period of monetary tightening began, which lasted through 1966.

In 1961, inflation was virtually non-existent, at 0.7%. By the end of the 1960s, inflation began to spiral out of control, largely because the United States was fighting a war in Vietnam and was running up considerable budget deficits. In 2001, the effort of fighting a war on terrorism has already eliminated the federal surplus and now threatens to push the budget into deficit.

In recent months, as the U.S. economy has been stalling, some economists have begun to compare the economic situation in the United States today with that of Japan a decade ago. Japan’s central bank — much like the Fed today — has been cutting its interest rates. Rates are now at zero, but the Japanese economy remains mired in stagflation.

While the Japanese example is troubling, it is the parallels with the United States of America from 40 years ago that tell us more about the political, military and economic challenges that lie ahead. That is why the Fed’s interest rate cut really does take us for a ride on a time machine.