From Bretton Woods to World Inflation

February 11, 1945

One of the fallacies that have given rise to the belief that we can be saved from disaster after the war only by a continuation of huge Government spending and deficit financing is the assumption that “production” and “purchasing power” are two entirely different things. “Production” is thought of as goods, “purchasing power” as money. It is assumed that “purchasing power” must be kept above “production” if the latter is to expand. Those who believe this are finally led to the crude inflationary theory that we can keep going after the war only by the process of constantly increasing money payments regardless of production—which means constantly expanding bank credit or issuing more money from the printing presses.

Economists have long recognized the real truth of the matter. This is that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, radios, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for motion pictures, for automobiles, and for other things that the shoe producer wants. In the modern world all this happens not by direct barter but by indirect exchange through the medium of money. This merely complicates, and does not change, the essential process. In the aggregate, supply and demand are not merely equal but identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things.

In recent years this basic truth has been challenged by Lord Keynes among others, notably in his General Theory of Employment, Interest and Money, published in 1936. But Lord Keynes does not appear to have dealt with the essentials of the doctrine, but rather to have taken advantage of an error of illustration (promptly rectified) in John Stuart Mill’s statement of it. This is pointed out in a reply to Keynes’ criticism by Prof. Benjamin M. Anderson in The Commercial and Financial Chronicle. As Dr. Anderson concedes, the doctrine that supply creates its own demand assumes certain conditions. It assumes a condition of equilibrium. It assumes that the proportions among various goods and services must be right; that the terms of exchange, the price relationships, among different commodities must be right. It assumes the existence of free competition and free markets to bring about these proportions and price relations. It assumes the absence of paralyzing governmental interference with the markets.

But these necessary qualifications do not change the central truth of the doctrine. We can get post-war prosperity and full production when free enterprise and free markets are allowed to bring about the conditions of equilibrium. We do not have to keep pouring more money into the spending stream through endless Government deficits. That is not the way to sound prosperity, but the way to uncontrolled inflation.

President Roosevelt’s message to Congress recommended adoption of the Bretton Woods agreements. My Times editorial suggested acceptance of the proposed International Bank (with the specific power to make exchange-stabilization loans) but at least postponement of any Congressional acceptance of the Fund.