At a moment of high financial drama politicians and investors are wondering what sort of economic crisis has crept up on them. Not only in the United States, but also in Europe, the stock market closed the week in uncertainty, and in London there have been traces of panic. Now, the world looks to America -- and finds a President determined to push through a radical restructing of the way the world's most prosperous nation goes about collecting and spending its mney.
Some future historian, writing this particular chapter in the world's economic history, would find that there were some elements of strength in the situation. Food prices were lower in the US. There were signs of new moderation in wage agreements. Above all, there was a dramatic decline in world oil prices.
On the other hand there were psychological factors which had been building up for a long time. The load of debt round the world has heavy and in the United States the federal budget had not been balanced for 20 years. A determined effort to halt inflation kept interest rates at an extraordinary level and America's high rates were exported to other countries.
One of the most enigmatic developments was the alteration of mood in the United States, expressed in practical terms in the buying and selling of stocks in Wall Street. A popular new President achieved a stunning double political victory in Congress with the biggest tax cut in history and a proposed reduction in federal spending looking toward the goal of a balanced budget in fiscal year 1984. President Reagan retired for a four-week vacation to his Western ranch with the feeling that the situation was in hand. Meanwhile, back home in Washington, Paul A. Volcker and the Federal Reserve Board continued the administration-backed policy of high interest rates to thwart inflation.
Mr. Volcker repeated the ideology last week: "The basic premise of our monetary policy [is] that a lasting solution to our economic problems of slow growth and poor productivity performance, of exceptionally high interest rates and severe strains on credit-sensitive sectors of the economy is dependent on success in the fight against inflation."
Meanwhile, the stock market began to slip.
On April 27, 1981, the Dow Jones industrial average of 30 leading stocks on Wall Street stood at 1024. With the slow seeping out of values the market was down to 824 on Sept. 25, only five months later.
It was one of the greatest evaporations of paper values in recent history. By one estimate the loss was $255 billion. the loss in paper value of bonds, was even larger, according to some estimates.
Together perhaps -- half a trillion dollars.
Together, administration leaders voiced reassurance. In a firm, confident voice President Reagan made his fifth prime-time statement of economic policy Sept. 24 and reaffirmed his goal of "a balanced budget by 1984."
He proposed new cuts in spending, new tax cuts and other steps toward his goal: "Let there be no mistake. We have no choice but to continue down the road toward a balanced budget."
Instead of rising, however, the stock market fell. Financial markets voted uncertainly. Some observers asked whether the narrow little street called Wall Street was setting American's economic tone. The Dow Jones barometer dropped 11 .13 points.
Investors' mood was mixed, and in his spreading uncertainly voices were heard which at another time would have been unheeded: A frequent doom-caller, Florida investment-adviser Joseph Granville, declared that prices would fall on Sept. 28 , and that the day would go down in history as "blue Monday." That sent a shiver through some who remembered, Tuesday, Oct. 29, 1929, when the inflated Coolidge-Hoover market finally crashed.
The sharpness of questions thrown at government defenders on coast-to-coast Sunday television panel shows indicated the new mood of anxiety and uncertainty in the country. Budget Director David A. Stockman on CBS "Issues and Answers" felt the brunt of this. He declared "the country has been living on a credit card for 10 years," and said that the federal budget "just has enormous momenturm."