Business Tides
Abridging Free Speech
January 4, 1965
The National Labor Relations Board, in a 4-to-1 decision, has held that the General Electric Co. did not bargain in good faith with the International Union of Electrical Workers.
It would take a full recital of the record to show just how fantastic this decision is, but two aspects of it deserve special consideration.
The board majority argues that the company was not bargaining in good faith because it purportedly made an offer with a “‘take-it-or-leave-it’ attitude.” What did the board expect the company to do? Did it expect it to keep on making further concessions indefinitely, after it had already conceded as much as it felt it could afford? Or did it (as the company asks) expect General Electric to hold back from its initial offer, for last minute settlement, some substantial item that the IUE had demanded, so as to allow the union to create the appearance of having forced this item from the company against its will? Does the board expect sham and ritualistic play-acting at the bargaining table, or protracted oriental haggling?
As the NLRB itself decided in the Philip Carey case in 1963: “That the respondent considered its offer as final is a matter of its own judgment. One need not listen to argument endlessly. There comes a point in any negotiations where the positions of the parties are set and beyond which they will not go.”
DOUBLE STANDARD
But in the eyes of the NLRB majority, General Electric was guilty of other crimes. It sought “to create the impression that the employer rather than the union is the true protector of the employees’ interests.” Many economists would say that this is the simple truth. It is, after all, the employer who provides their jobs and their wages or salaries; they might get these without the union, but not without the employer. But, whether this is true or not, is the employer to be forbidden to say it?
The NLRB majority held the company guilty of “the purpose of disparaging and discrediting” the union officials in the eyes of the union members. Its decision said nothing whatever about the disparagement of the company by the union leader, James B. Carey, though the board’s own trial examiner referred to Carey’s “explosive temperament (several times to the point of threatening physical violence)” and to his “uninhibited” talk and “invective.”
But what is most amazing is the board’s ruling that it was an unfair labor practice even for General Electric to try to influence or communicate directly with its own employees. Is an employer to be denied the right to keep its employees and the public informed regarding the facts or his point of view on issues under negotiation? Are the rights of union members to know what is going on to be limited solely to what the union officials want to tell them?
REMEDIES
The NLRB’s decision is in effect a denial to employers of the right of free speech guaranteed by the Constitution and even by Section 8 (c) of the Taft-Hartley Act: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice under any of the provisions of this act, if such expression contains no threat of reprisal or force or promise of benefit.”
All anti-employer laws and rulings are, in the long run, anti-labor laws and rulings. Whatever penalties, uncertainties, and harassments cause investors to hesitate in starting new businesses or new plants must retard more employment or better wages.
What can be done? There is no point in arguing that the NLRB ought to make less one-sided and fantastic decisions. Recently it has been making more and more one-sided and fantastic decisions. A salutary step might be to abolish the NLRB and give the regular constitutional courts full jurisdiction, in law and equity, in all cases arising under the Taft-Hartley Act. A minimum reform would be to strike the “good faith” provision from the act, which enables the NLRB to find employers guilty of not making enough concessions. Has the Taft-Hartley Act become, in effect, a one-sided legal compulsion on employers to make concessions? 
January 18, 1965
The history of liberty is the history of the limitation of governmental power, not the increase of it.” So wrote Woodrow Wilson. Yet in his terms as President he presided over an enormous increase in the power and size of government. And every President since Herbert Hoover has presided over a still further increase in the power and size of government.
Each President has insisted on giving his program a new label—the New Deal, the Fair Deal, the New Frontier, the Great Society—and yet each program has been essentially an expansion of the previous program—a further boost in spending, a bigger bureaucracy, an aggrandizement of governmental power, an increased intervention in the daily life of the private citizen.
It would use up all the rest of this space even to list the new Federal programs or expansions of old programs—for education, housing, health, conservation, the “war on poverty”—that Mr. Johnson proposed in his State of the Union Message. Ten years ago, when the Federal government was spending only two-thirds as much as it is today, the Hoover commission found that it embraced 2,133 different functioning agencies, bureaus, departments, and divisions. How many does it embrace now? How many more will it embrace if the President’s new program is enacted?
THE GREAT FICTION
The Federal government is spending 167 times as much in a single year as it was in the year before we entered World War I. Will every President, every year, be expected to think up more and more functions for the Federal government to take over from the private sector to the “public sector,” until there is no private sector or initiative left?
The great miracle about all the wonderful new things that the government is going to do for us under the Johnson program is that they are not going to cost anybody anything. Instead of asking for an increase in taxes to meet all his recommended increases in expenditure, the President promises “a substantial cut in excise taxes” so that “more money will be left in the hands of the consumer.” He even assures us that the increased spending and tax cuts will carry us “along the path toward a balanced budget.” Once we cut the annoying connection between expenditures and taxes, all other miracles become easy.
Mr. Johnson’s State of the Union speech is a perfect illustration of the French economist Bastiat’s definition more than a century ago: “The state is the great fiction by which everyone tries to live at the expense of everyone else.” Nobody will pay for the education of his own children, but everybody will pay for the education of everybody else’s children. Nobody will provide for his own old age, but everybody will provide for everybody else’s old age. No one will pay his own medical bills, but everyone will pay everyone else’s medical bills.
DOLLAR ENDANGERED
What is overlooked is that the government cannot pay anything to anybody without ultimately taking the money from someone else. All production, and all real income, must come from private initiative and private enterprise. The government does not add to production; all it can do is to change the particular goods or services produced. What it encourages in one direction it must discourage in another. Every subsidy or handout to A, B, or C must be paid for by an added tax on M, N, or O (and probably on A, B, and C as well). Increased government expenditures, instead of meeting more human needs, may meet fewer, because more taxes tend to deter production more than government expenditures tend to increase it.
The great miracle is supposed to be brought about by deficits. But deficits mean inflation, which is a disguised tax that reduces the purchasing power of everybody’s money. Our inflation has done that comparatively little in recent years because so much of our increased money supply has flowed abroad through a deficit in our balance of payments. But this cumulative deficit has been undermining the strength of the dollar. Once confidence in the dollar goes, it will be impossible to measure the extent of national and world calamity. Our first order of business is to see that this does not happen.
February 1, 1965
Since the end of 1957, our official gold stock has fallen from $22.8 billion to $15.4 billion. In the same seven years the country’s money supply (demand deposits and currency) has risen from $136 billion to $161 billion. If we also include time deposits, our money supply has increased from $193 billion to $285 billion. So against our active money there is now less than a 10 percent gold reserve, and against our money supply including time deposits there is only a 5 percent gold reserve.
All this is nowadays considered academic because our own citizens can no longer demand gold for their paper money. But vis-à-vis foreigners our position is increasingly embarrassing. Against our gold supply we now have short-term liabilities to foreigners of $28 billion (against only $15 billion at the end of 1957).
25 PERCENT RESERVE
We are obliged to keep by law a 25 percent gold reserve against the combined note and deposit liabilities of the Federal Reserve banks. This requires as of now a legal gold reserve of a little more than $13 billion. This means, it is being said, that we can legally let only about $2 billion gold move abroad in response to demands by foreigners.
So many people are asking that the 25 percent gold-reserve requirement be abolished entirely as “meaningless.” This, they tell us, will “free” all our gold reserves for foreigners who want to convert their dollars into gold; and once foreigners know that this huge supply is available, they will not want to convert; our gold hemorrhage will be stopped, and confidence in the dollar will be restored. The President has let it be known that he will either ask for such a change in the law, or at least removal of the gold-reserve requirement against deposits if not against notes, so “releasing” nearly $5 billion more of gold.
There are serious factual misconceptions as well as economic fallacies behind these proposals. Though it will of course be necessary, if gold convertibility is to be maintained, to let gold be drawn out even if our gold reserve falls below 25 percent, this is already provided for in the law as it stands. But the law also provides for progressive tax penalties and rises in interest rates as the gold reserve is allowed to fall. Are the advocates of reducing or wiping out the 25 percent gold reserve asking for the abolition of these penalties—and of any other restriction on the expansion of credit? How can the removal of such penalties or restrictions on monetary expansion increase foreign confidence in the dollar?
NEED FOR DISCIPLINE
It is, in fact, a little difficult to see the basis for the belief that making our whole $15.4 billion of gold legally free to leave the country will completely reassure foreigners. Our total short-term liabilities to foreigners now reach $28 billion (of which $24.6 billion are to banks and official institutions). Against these we have only $6.9 billion short-term claims on foreigners. Whatever way we figure it, our gold falls short.
Abolishing the last vestige of a legal gold reserve against our money would not solve anything. It would further shake confidence of Americans in their own currency, and would give at best a short-run reassurance to foreigners.
Only one thing will cure the deficit in the balance of payments and assure confidence in the dollar. That is monetary discipline. And the government does not intend to have any.
If the government really means to maintain dollar convertibility at $35 an ounce in gold, it must immediately stop further expansion of the money-and-credit supply. In today’s ideological atmosphere such a proposition will be regarded with blank incredulity. For it is the fixed (but fallacious) belief of our government authorities that it is necessary to have cheap money and a continuous expansion of the money-and-credit supply to maintain “economic growth” and “full employment.” So the authorities are systematically blind to the effect of this cheap money and inflationary expansion in causing the deficit in the balance of payments and the declining confidence in the dollar. Instead of stopping the policies that are causing the disease, they plan to extend the penalties on Americans who lend or invest abroad.
February 15, 1965
In 1932 the Hoover Administration was spending at the rate of $4.6 billion a year. “Stop the spending!” candidate Roosevelt demanded. The majority of voters agreed, and elected him President. Today the Federal government is spending $121.4 billion a year, and planning to spend $127.4 billion in 1966, a new record, 28 times as much as in 1932. The increase alone in next year’s spending will be greater than the whole amount spent in 1932. But the Johnson Administration insists that this is “not extravagant,” and Congress probably will agree. Such is fiscal progress.
“For three long years,” warned President Roosevelt on March 10, 1933, “the Federal government has been on the road to bankruptcy. . . . [By the end of the fiscal year 1934] we shall have piled up an accumulated deficit of $5 billion. . . . Too often in recent history liberal governments have been wrecked on the rocks of loose fiscal policy.” The deficit that President Johnson is deliberately planning for fiscal 1966 will be the 30th in 36 years. It will bring the accumulated deficit since the end of 1930 not to $5 billion, but to $306 billion. Yet the concern most frequently voiced today is not over whether we may suffer the consequences of loose fiscal policy, but whether our deficits and spending are big enough to assure “growth” and “full employment.”
$6 BILLION INCREASE
Mr. Johnson was able to squeeze at least his “administrative budget” spending below $100 billion to the Macy’s bargain figure of $99.7 billion. Practically all the newspapers headlined that figure alone. The true spending of more than $127 billion (whether as measured by the “total cash payments” budget or the “national income account” budget) barely got a mention in most of the news stories.
There is not space here to analyze in detail the various bookkeeping gimmicks by which even the “administrative” spending figure was kept below $100 billion. (Those interested may consult articles in The Wall Street Journal of Jan. 26 and 27.) But one major point must be made. The new budget increases real spending over the present fiscal year, not by a mere $2.2 billion, but by at least $6 billion (as shown both by the full-cash and the accrual-basis budgets).
The theory of the new fiscal policy is that we must plan big budget deficits to prevent even bigger budget deficits. Nevertheless, on the argument that the “1966 administrative budget deficit of $5.3 billion is $1 billion lower than the 1965 deficit,” Mr. Johnson concludes that we are making “continued progress toward a balanced budget.” The argument is unconvincing. True, his estimated 1966 deficit is $1 billion lower than his revised estimate of the 1965 deficit. But it is $400 million more than his original estimate last year for the 1965 deficit. And if he has underestimated the 1966 deficit by the same amount, it will be $6.7 billion—or more than the $6.3 billion now estimated for 1965. Mr. Johnson’s assurance may prove to be as much a will-o’-the-wisp as Roosevelt’s of Nov. 29, 1935: “We can look forward with assurance to a decreasing deficit.”
EMPLOYMENT RECORD
But now nearly everybody is placidly accepting deficits as normal practice, in bad times and good. They are necessary, it is said, to assure “full employment.” But in the past they have notoriously failed to do so. In each of the years from 1931 to 1940 inclusive, the Federal government ran a deficit average 3.6 percent of the gross national product. During those ten years there was average unemployment of 18.81 percent of the labor force. The same percentage of GNP and of the labor force today would mean that even deficits averaging $22 billion a year could be accompanied by more than 14 million annually unemployed.
But isn’t the deficit policy a smashing success today, as its champions contend? President Johnson in his Economic Report boasts that “unemployment dropped from 5.7 percent in 1963 to 5.2 percent in 1964 and was down to 5 percent at year’s end.” He neglects to compare the record. In the four Kennedy-Johnson years (1961–64) unemployment averaged 5.5 percent; in the eight benighted Eisenhower years (1953–60) it averaged only 4.9 percent.
March 1, 1965
The deficit in our balance of payments, and our continued loss of gold, are the direct result of our government’s own fiscal and monetary policies, and of nothing else. As long as the Federal government continues these inflationary policies, the dollar crisis will continue. But if the government returns to monetary discipline, and stops trying to push down interest rates or to “pump more purchasing power into the economy,” none of the tax penalties, quotas, and controls that the President proposed in his balance-of-payments message of Feb. 10 will be needed.
Let us recall some of the policies that have led to the present dollar crisis. The government has been inflating the money supply for 30 years. Since the end of 1939 the supply of money has been more than quadrupled. For 1966 the President is deliberately planning to run the 30th deficit in 36 years.
Since the end of 1957 the deficit in our balance of payments has reached a total of $25 billion, an annual rate of $3.5 billion a year. During this period the government authorities have professed to be greatly concerned about that deficit. Yet during these same seven years they have increased the active money supply (demand deposits plus currency outside banks) by 17 percent, and the total money supply (including time deposits) by 48 percent.
During this period, also, the government has handed out some $28 billion, or $4 billion a year, in foreign aid. It is instructive to notice that this aid alone exceeds the cumulative balance-of-payments deficit of $25 billion and its annual average of $3.5 billion in the same period.
INVESTMENT VILLAIN
But the government ignores all this and looks outside of itself to “the private sector” to find the villain that is causing the balance-of-payments deficit. And the scapegoat it picks is private foreign investment. This is not only arbitrary but surprising, because private foreign investment is the one outlay of money that is made with the very purpose of eventually bringing in more money than is laid out.
In the six years 1958 to 1963, for example, the aggregate net outflow of $20.9 billion for new foreign investment was offset by $19.4 billion of income from previous investment. Even Secretary Dillon has conceded that “in the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” So the government’s attempt to discourage America’s foreign investment is at best shortsighted.
END CHEAP MONEY
Instead of trying to make up nearly all of our $3 billion deficit by penalizing our $6.5 billion investment abroad, why didn’t the government pitch on some other major item in the total of nearly $35 billion that we annually spend or give abroad? Since we are abandoning all liberal trade principles anyway, why not put prohibitive duties on luxuries, on perfumes, and liquor and foreign sports cars, and crack down on foreign pleasure travel?
Or if foreign investment really is the culprit, why not simply let interest rates go up here to levels where they would keep investment at home and even attract foreign investment? The cure is not more government interference with markets, but less.
Unless the President, the Congress, and the Federal Reserve curb deficit spending, slash foreign aid, stop pushing down interest rates, short-term or long-term, and stop printing more paper money, the extended tax and other penalty measures that the President has asked for against foreign investment will be simply futile. In the long run they will neither halt the balance-of-payments deficit nor stanch the outflow of gold. On the contrary, the misgivings that the stricter controls themselves arouse may increase both.
But if the government authorities adopt a self-imposed monetary discipline, if they stop the deficits, cut the foreign giveaway, stop flooding the market with more paper dollars, and allow interest rates to rise to free-market levels, the deficit in the balance of payments will stop overnight, and the elaborate tax penalties, quotas, surveillance, and “voluntary” controls of foreign investment will be entirely unnecessary.
March 15, 1965
Since the end of 1957, the government has become increasingly involved in economic policies that must have increasingly harmful results.
On the one hand it has been undermining the value of the dollar by progressively expanding the money supply to hold down interest rates. This has made it less attractive for either Americans or foreigners to lend or invest in the United States, and comparatively more attractive for them to lend or invest abroad.
But then the government, ignoring its own clear responsibility for this result, is determined to find the culprits among American private citizens. It has chosen for its chief whipping boys those American individuals, banks, or corporations attracted by the higher interest rates abroad.
In brief, in order to maintain its own cheap-money policy at home, the government has launched a series of what must be progressively tighter controls on investment, lending, and the foreign exchanges. As long as the government maintains its cheap-money policies, these penalty taxes and surveillance of loans and investments will be futile in their intended purpose of curing the balance-of-payments deficit. These “remedies” will prove, at best, short-lived. In the long run they can only restrict our export trade, and set back both American and world development.
HIGH-POWERED MONEY
Let us examine this process in detail. Since the end of 1957 the country’s active money supply (currency plus demand bank deposits) has been increased by 17 percent. Total money supply (including time deposits) has been increased by 48 percent. But if we direct our attention to the way in which the Federal Reserve authorities, egged on by the politicians, have been increasing the high-powered reserve money supply on which the inverted pyramid of our total money and credit supply is built, we get an even more striking set of comparisons.
The Federal Reserve banks, which are bankers’ banks, can create reserves for the member banks (the banks with which the public deals) against which the latter can in turn, by making loans and investments, create about six times as much deposit “money.” The Fed creates these reserves mainly by buying government securities from the member banks or the open market, and then “monetizing” them.
At the end of 1957 the amount of Federal Reserve credit outstanding was $26.2 billion ($1.1 billion less than at the end of 1952). In 1958 this outstanding credit was increased by $2.2 billion, and in 1959 by another $1 billion. In 1960 it was reduced by $375 million. Then the Fed, under the new Democratic regime, began to inflate in earnest. In 1961 it increased Federal Reserve Bank credit by $2.2 billion; in 1962 by $2 billion more; in 1963 by $3.4 billion more; and in 1964 by $3.3 billion more. At the end of 1964 the total stood at $39.9 billion, an increase in seven years of 52 percent. (Federal Reserve credit went up $13.7 billion though our gold stocks went down $7.4 billion.)
RATES LOWEST HERE
The intention and effect of this increase of credit was to hold down U.S. interest rates. In its February letter the First National City Bank of New York presents a table comparing short-term lending rates in some 60 countries. (The interest rates compared are “the lowest at which business firms of the highest standing can obtain credit on an unsecured, single-name basis.”) The comparisons show that U.S. rates at 4½ percent are lower than in any leading country. The Canadian rate is 5¾ percent. The rates in France, Germany, Belgium, and Japan are above 6 percent. The range in Sweden, Italy, and Britain is around 7 and 8 percent. International comparisons of long-term rates would show a similar difference.
The situation, in brief, is this. The government, by its monetary policies, has brought about artificially low interest rates here. The result has been to divert lending and investment into foreign countries. The government then picks on this foreign investment as the marginal culprit causing the deficit in our balance of payments. But instead of abandoning its own cheap-money policies, it starts lecturing, penalizing, and policing private investors.
March 29, 1965
Nothing more clearly reveals the contradictions and absurdities in our antitrust laws and their current interpretation than the decision of Federal District Judge Lloyd F. MacMahon that the 1961 merger creating the Manufacturers Hanover Trust Co. of New York violated the Sherman and Clayton Antitrust acts.
The court held that the merger violated the Sherman Act of 1890 because it was a “combination in unreasonable restraint of trade.” Just how unreasonable? At the end of 1960, before the merger, the combined assets of the Manufacturers and the Hanover were 14.3 percent of the assets of all New York City banks. On June 30, 1964, the Manufacturers Hanover assets were only 12.3 percent of the total. The largest New York City bank, the Chase Manhattan, represented 21.7 percent of the total; the second largest, the First National City, represented 19.8 percent. Not counting nearly 1,000 branches, there are now 70 commercial banks in the metropolitan area. Would it noticeably affect the competitive situation if there were 71?
One of the gravest aspects of Judge MacMahon’s decision is the uncertainty it creates for all large firms. The bankers who arranged the merger assumed they were doing a perfectly legal thing. They had got the explicit approval of both the New York State Banking Department and of the Federal Reserve Board. But a third branch of government, the Justice Department, filed suit after the merger was effected. Now, three and a half years later, the bank is asked to unscramble itself back into its former two shells.
UNCERTAINTIES
Obviously the court’s decision will unsettle not only the bank concerned but business generally. Laws should be reasonably certain in their application. If in the future a small bank or other business cannot adequately compete and wants to sell out, what existing larger firm (uncertain about future decisions) will have the courage to buy it? Such a prospect can discourage new ventures.
But there is no use arguing even that the merger of the Manufacturers and Hanover actually had beneficial results, because Judge MacMahon says this doesn’t matter. He agreed with the bank’s lawyers that “the general public and small businesses have benefited” from bank mergers in the city. Nevertheless, he said, “practices harmless in themselves, or even those conferring benefits upon the community, cannot be tolerated when they tend to create a monopoly; those which restrict competition are unlawful no matter how beneficent they may be.” It doesn’t even matter if mergers promote efficiency and reduce costs, “for it is the theory of the antitrust laws that the long-run advantage to the community depends upon the removal of restraints upon competition.”
DOUBLE STANDARD
This brings us squarely to the economic question: do the courts, the Justice Department, or our lawmakers know what practices really restrict competition? Or which are in the long run harmful or beneficial? Obviously the merger of the Manufacturers and Hanover ended any competition with each other. But its purpose was to enable them to offer stiffer competition than before to their bigger rivals, the Chase and First National City. There is no evidence that this merger has caused poorer service to depositors or borrowers. The number of bank offices in New York City has increased since the merger from 645 to 698.
The truth is that the courts, the Justice Department, and Congress have shown no consistency whatever in opposition to “monopoly” per se. A bank that does one-eighth of the banking business of New York City is ordered to bust itself up. But a labor union can be industrywide and nationwide, and employers are legally compelled to bargain exclusively with it. The country’s farmers are not only permitted but compelled to restrict plantings, so that consumers can be forced to pay higher food prices. The international coffee agreement, to which this country is a signatory, enforces quotas on export and hence on production, to keep prices up under the euphemism of “stabilizing” them. Why doesn’t the Justice Department sue every senator who voted for that agreement?
April 12, 1965
With either mild or violent inflation taking place year by year in nearly every country, with a currency crisis breaking out somewhere every week, it is obvious that the world monetary system set up at Bretton Woods in 1944 is breaking down. Monetary economists realize that it is breaking down. Almost daily someone puts forward a new plan for world monetary reform.
But the irony is that, though the disease is chronic inflation, nine tenths of the proposed “reforms” are based on the fear that this inflation may suddenly come to a halt, and plunge the world into a deflationary crisis. Therefore all these plans provide for a constant increase in “liquidity”—i.e., a further increase in the volume of credit and of paper money.
It is important to distinguish two schools of currency expansionists. The first are the extreme expansionists who believe that it is necessary to maintain a constant “full employment” boom by constant injections of “new purchasing power” into the economy. But employment does not depend upon the amount of money in existence. What it depends on is a proper coordination of prices with costs and wage rates. If this coordination exists, full employment and production will follow. If this coordination does not exist, if wage rates in key lines race ahead faster than prices and marginal labor productivity, there will be unemployment no matter how much new money is printed.
‘KEEPING PACE’
Yet there is a more subtle and more widespread form of inflationism. It consists in the belief that a constant increase in the money supply is necessary to “keep pace” with the increase in domestic production or the volume of world trade. Hence the chronic fears of a future “shortage of liquidity.” Hence the belief that “there isn’t enough gold in the world to carry on international trade.” Practically all the “world monetary reform” plans are therefore plans for more and more credit expansion and paper money.
Now there is one germ of truth in this belief. If the money supply remains constant, while production and trade expand, there will be a fall in prices. The error in the theory consists in assuming that such a fall in prices will imperil or wipe out profit margins and therefore create stagnation and unemployment. But this assumption overlooks that real costs, and therefore money costs also, will be falling along with final prices. Real profit margins will be retained. The living standards of the workers will be constantly bettered, not primarily through higher money wages, but through a higher purchasing power of their money wages. It is a serious fallacy to assume that a constant money supply would have the same kind of results as a suddenly contracted money supply, combined with inflexible prices and wages.
INVERTED PYRAMIDS
Expansion of the paper-money supply cannot go on forever. Our authorities now think that even a 25 percent gold reserve is an excessive requirement. Yet this 25 percent reserve was only required against Federal Reserve notes and deposits. On top of these notes and deposits (themselves liabilities) we have built another inverted pyramid of commercial bank deposits. Twenty paper dollars are now outstanding against every gold dollar. Foreign central banks count such paper dollars as “reserves,” and have built still another inverted pyramid of money and credit on top of them. Of course under this setup the world’s monetary system is drifting toward a crisis. And this cannot be averted by printing still more paper money.
For an increase of the money supply, in order to increase “liquidity,” is in the end always self-defeating. If a country doubles the amount of its paper money, for example, it merely cuts in half the purchasing power of its monetary unit compared with what it would otherwise have been. It merely does business on a higher price level. But excessive printing of new money discourages saving, unbalances production, and creates instability and uncertainty.
As long as the superstition prevails that the amount of money needs to be constantly increased, the world will never get back to a sound and stable monetary system. Inflation must someday have a stop.
April 26, 1965
If any two government programs have proved themselves to be enormously expensive failures, they are the price-support program in agriculture and the foreign-aid program. Both were adopted ostensibly as “emergency” schemes. Both were originally supposed to serve their purpose in four years at most. Yet both are still in existence, and look as if they will be with us forever. No one any longer talks of a termination date.
The crop-subsidy program began some 30 years ago. It now costs $4.6 billion a year. This is what the whole Federal government and all its programs cost to run in 1933. The purpose of the program is to reward farmers for producing less. Its effect has been to raise the cost of food to our own poor, to pile up huge unsold farm surpluses in government warehouses, and to stimulate food giveaways or cut-rate “sales” to foreign (including Communist) countries.
President Johnson has nothing to propose but a continuation of the program with slight modifications. The government will spend a little less, but in compensation Americans will pay more for wheat and rice.
FARM BUREAUCRACY
Why does the farm program, in spite of its absurdities, go on? Partly, no doubt, because of pressure groups among farmers. But farmers are deeply divided about the wisdom of the program. Perhaps a more direct cause can be found in the 110,000 employees in the Department of Agriculture, most of whose jobs depend on the continuance of the program, and in whose interest it is to find arguments for that continuance.
Let us turn to foreign aid. From the end of the fiscal year 1945 this has come to the staggering total of $110 billion. Congressman Passman tells us that during the current fiscal year our government will be disbursing some type of foreign aid in 99 foreign nations and nine territories; that there are now 22 Federal agencies dispensing some type of foreign aid, and that the total for the fiscal year 1966 will probably exceed $7 billion.
Has this enormous expenditure accomplished its purposes? The evidence shows that it has promoted dependence and government “planning” and socialism abroad, discouraged sound international private investment, and on net balance retarded world economic development.
AID BUREAUCRACY
Has it halted Communism? Has it even won friends and allies? The truth seems to be precisely the opposite. A shrewd Latin American commentator, Rodolpho Katz, in his weekly economic survey published in Buenos Aires, wrote recently: “There is no more pitiful role on the world stage than that of the savior. Help and aid are everywhere received grudgingly and resentfully. The United States is increasingly experiencing the truth of this, but without apprehending it. Having intervened in many countries in the supposed interest of its nationals, having extended generous aid, political and financial, the United States today is the most vilified nation of the globe, simply because it has proffered aid.” And he illustrates this by recent developments in Indonesia, Latin America, and Europe.
Why does foreign aid continue and even expand? Again, a major part of the answer is the bureaucracy that has been built up under it. As Congressman Passman points out: “There are 71,416 individuals, including participants, on its payrolls. . . . No program in the history of mankind has had as many paid lobbyists as the foreign-aid program. . . . [It] is not in reality a Presidential program. . . . It is a bureaucratic program. The President has too much to do to be able to familiarize himself with the many ramifications, misrepresentations, and claims of accomplishment by the paid bureaucrats, government lobbyists, spenders, and recipients.”
May this not also be part of the explanation for the growth of the programs of the Department of Health, Education, and Welfare, with its 85,000 employees? Everywhere the full-time experts on these programs are also the people with the greatest interest in expanding the programs. Congress is forced to depend on their figures and arguments, and the programs become self-perpetuating and self-accelerating.
May 10, 1965
When President de Gaulle insisted on drawing more gold out of the United States in exchange for dollars, his action was interpreted here chiefly as more evidence of his anti-Americanism. And when he called for a return to the gold standard, people here and in England said he was asking for a world that was lost forever.
But then they became belatedly aware that the eminent economist Jacques Rueff, the author of the French monetary reform of 1958 (and the newest member of the French Academy), had been advocating these ideas for a long time. In fact his book, The Age of Inflation, published in paperback by Henry Regnery last year, reveals that he has been publicly asking for the abolition of the “gold-exchange standard,” and a return to a world gold standard, at least since 1932.
He has recently been advocating this reform with increased urgency. Among the proposals for world monetary reform that have attracted recent attention, his stands out for one great merit: instead of proposing new gadgets to continue world inflation, it proposes to put an end to inflation.
‘GOLD EXCHANGE’
The “gold-exchange standard” was formally adopted at an international monetary conference at Genoa in 1922. This meant that central banks were allowed to count as part of their reserves not merely gold, as previously, but foreign currencies that could be exchanged for gold, that is, sterling and dollars. The purpose was to “economize the use of gold” and to allow credit and currency expansion.
Rueff holds that the gold-exchange standard did harm from the very beginning. It “unquestionably triggered the disaster of 1929–1933.” And today it is “chiefly to blame for the balance-of-payments deficit of the United States.”
The evil of the system, as Rueff sees it, is this. Under the old gold standard, when a country lost gold it had to contract its credit and currency correspondingly. But under the gold-exchange standard, when the United States has a deficit in its balance of payments, instead of paying gold to a creditor country, it pays dollars. These end up in the creditor country’s central bank. “But the dollars are of no use in Bonn, or in Tokyo or in Paris. The very same day, they are re-lent to the New York money market, so that they return to the place of origin. Thus the debtor country does not lose what the creditor country has gained. So the key currency country never feels the effect of a deficit in its balance of payments.” The result is that both debtor and creditor expand credit on the same base.
$70 AN OUNCE?
There is no doubt that this gold-exchange system—which might better be called the dollar-exchange system—is a major and almost inevitable cause of world inflation. As a minimum reform the central banks should no longer permit their dollar holdings to increase; and they should work out some provision for their gradual repatriation over a period of years.
But Rueff wants to make the reform at one stroke. He therefore suggests that the “world” price of gold be doubled from its present $35 an ounce to $70. This would automatically double the present $14 billion remaining U.S. gold reserves to $28 billion. The world’s central banks could then convert their $13 billion of dollar holdings into American gold, leaving the U.S. still with $15 billion of higher-priced gold. Rueff argues that the U.S. and other countries would then have substantially the same reserves as before, therefore this reform would be neither inflationary nor deflationary. And the world would be back once more on a real gold basis.
But would it happen that way? Would not doubling the price of gold—i.e., cutting in half the legal gold content of every currency unit—not lead to an immediate rise in world prices? Would not most countries, finding their gold reserves suddenly almost doubled, set off on a new inflationary spree? What about the shock to the dollar and to our moral prestige if we broke our often repeated pledge to keep the dollar “immutably” at $35 an ounce?
But whatever the remedy, Jacques Rueff has correctly identified one major monetary disease—the gold-exchange standard.
May 24, 1965
Instead of keeping hands off the wage negotiations in the steel industry, the Administration has in effect said what it thinks the settlement ought to be. On May 4 President Johnson and the Council of Economic Advisers implied that in their opinion the steel industry could give its workers a 3 percent increase in wages this year and still not need to raise its prices. Their action can only encourage the steel union to raise its demands. The Administration has set a mischievous precedent.
Both the statistical comparisons and the economic reasoning in the council’s report on the steel industry are highly questionable. The steel industry has been arguing that since 1957 its labor costs have increased more than 4 percent a year while productivity has increased only 2 percent a year. The council, by not counting periods when strikes occurred (a method it has not applied to other industries), has figured that the steel industry’s productivity has really risen 3 percent a year.
A number of questions arise concerning the government’s “guidepost” calculations. There can be no doubt that hourly labor costs have risen faster in the steel industry than prices. Since 1959 steel prices have risen on the average about half of 1 percent. (Consumer prices have gone up more than 7 percent.) Hourly steel wages have risen 11 percent. Total hourly employment costs have risen 15.6 percent. The government holds, however, that “labor productivity” has gone up by 3 percent a year and therefore hourly wages should go up 3 percent a year.
LABOR PLUS CAPITAL
Even if we accept the 3 percent figure, there are several things wrong with this reasoning. What the government is talking about is not in fact “labor” productivity; it is labor-capital productivity. This has been going up each year not because workers constantly work harder, but because more and better plant and equipment are constantly being supplied. If the whole gain in productivity that results is given to labor, then the incentive to further investment will be destroyed, and economic growth will slow to a halt. In a free market, wages depend on marginal labor productivity. This is a very different thing from average labor-capital productivity.
This is only one of the confusions of thought on which the CEA’s “guideposts” are based. Another is the council’s use of averages. Hourly wages in all manufacturing industries average $2.60. But in the steel industry hourly wages average $3.41 (and with fringe benefits, $4.39). Should wages in every industry go up just 3 percent a year, no more no less, regardless of existing differences, or of changing demand, prices, and profits in each industry?
PROFITS MODERATE
The council deplores the rise in steel prices, especially during the 1950s, but ignores the rise in wage costs that made price increases necessary. If steel price rises were disproportionate, they would be reflected in high profit margins. But the compilations of the First National City Bank of New York show that in 1964 the steel industry’s profit margin per dollar of sales was 6 cents, compared with an average of 6.1 cents in all manufacturing. In 1964, the steel industry earned only 9.2 percent on net worth compared with an average of 12.7 percent in all industry.
The total market value in 1964 of the nation’s steel output was only 2.6 percent of the gross national product. The whole attempt to pick on steel prices as the scapegoat for inflation is not only absurd in itself but draws attention away from the real cause of inflation, which is the constant increase in the money and credit supply brought about by the government’s own policies.
If the steel industry could really grant a 3 percent rise in wages without increasing prices, it would be equally true that if it did not raise wages it could lower its prices. And lower prices are needed to enable it to compete more effectively with foreign steel.
The assumption of government officials that they know just how much every wage and price should or should not go up can only lead to constant meddling and finally to totalitarian wage and price controls that could halt the growth of the economy.
June 7, 1965
The Taft-Hartley Act was in origin an amendment of the Wagner Act. It modified a few of that law’s worst provisions, but it kept some of the most harmful. It gives labor unions a privileged status enjoyed by no other private group. It forces employers to bargain exclusively with them, even when their demands are beyond all reason. It is hypocritical. It makes it “an unfair labor practice for an employer . . . by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization.” And then, notwithstanding, it explicitly sanctions imposition of the compulsory union shop.
But it does, in Section 14(B), make one indirect concession to the individual worker’s right to freedom of choice. That section provides: “Nothing in this Act shall be construed as authorizing the execution or application of agreements requiring membership in a labor organization as a condition of employment in any State or Territory in which such execution or application is prohibited by State or Territorial Law.”
Nineteen states have taken advantage of this to enact laws against making it compulsory for a man to join a union in order to hold his job.
COMPULSORY UNIONISM
Union leaders have fought an unceasing war against Section 14(B). So President Johnson, though as a congressman he voted for Taft-Hartley, and as a senator voted against repealing 14(B), and in 1960 supported Texas’s right-to-work law, is now paying his 1964 election debt to the union leaders. He is asking for the repeal of 14(B).
He gives no argument for his request, except the vague “hope of reducing conflicts in our national labor policy,” and he does not point out frankly that the effect of this repeal may be to force workers everywhere to join a union in order to hold a job.
The effect of compulsory union membership is to relieve unions of any need to make membership attractive to workers. As Prof. Sylvester Petro remarked in his book Power Unlimited (1959), which described in detail the abuses of union power revealed before the McClellan subcommittee of the Senate: “The McClellan record reveals . . . that compulsory unionism is the principal cause of corruption and maladministration of unions; it draws into unions the kind of men who abuse union members, and takes from the members any real power to rid themselves of the looters.”
FREE DECISION
The argument for keeping Section 14(B) is elementary. As former Rep. Fred A. Hartley, one of the sponsors of the Taft-Hartley Act, put it: right-to-work laws “guarantee a worker’s right to join a union”; but also “his right to stay out of a union if he wants to—and I say what’s wrong with that?” As the Committee for Economic Development also recently summarized the case: “The controlling principle should be the right of an individual to decide freely to belong or not to belong to a union.”
The proposed repeal of Section 14(B) is a naked grab for more power by the union bosses. There is only one argument for it that deserves intellectual respect. This is the argument for “freedom of contract.” That argument holds that the law ought not to prohibit a “voluntary” agreement between a union and an employer requiring compulsory union membership; that union membership as a basis of continued employment should be neither required by law nor forbidden by law.
But in the mouths of union leaders this argument is insincere and hypocritical. They insist on the retention in the Taft-Hartley Act of the prohibition of the so-called “yellow-dog” contract—a contract in which a worker agrees as a condition of employment that he will not join a union. Union leaders who insist on legalizing compulsory union membership should be willing to legalize compulsory non-union membership. But as long as they are not willing to do that, they have no right to use the freedom-of-contract argument. Meanwhile, also, opponents of compulsory unionism do have a right to demand the repeal in the Taft-Hartley Act of the provisions sanctioning imposition of the compulsory union shop.
June 21, 1965
Because a paperback edition is now available of John Maynard Keynes’ General Theory of Employment, Interest, and Money, first published in 1936, The New York Times invited John Kenneth Galbraith to write a front-page essay for its May 16 Book Review on the “revolution” that Keynes brought about in economic thought. Galbraith came through with a dozen columns.
It is a typical Galbraith performance. It hails “the Keynesian revolution” as “one of the great modern accomplishments in social design,” and reveals for the first time that “it brought Marxism in the advanced countries to a total halt.” Those who believe from reading their daily papers that there has been an unparalleled spread rather than a halt in socialistic thinking and policy in the last 29 years are apparently the victims of a persistent illusion.
Though Galbraith talks of the “fascinating obscurity” and “unique un-readability” of Keynes’s General Theory, he proceeds to interpret its message with the utmost confidence. He assures us that Keynes’s unintelligibility is a handicap, not to his disciples, but only to his critics. In fact, he scoffs at the very idea that there could be or has been any intelligent criticism of the General Theory: “Those who objected to Keynes were also invariably [my italics] handicapped by the fact that they hadn’t (and couldn’t) read the book.”
REFUTATIONS
I am very happy to assure the reader, nevertheless, that there have been some intelligent refutations of Keynesian doctrine. It would be immodest for me to refer to my own Failure of the “New Economics” (1959). But I can mention with much better grace the anthology I compiled in 1960, The Critics of Keynesian Economics, containing answers by more than twenty eminent economists. And I can point with complete disinterest to the brilliant demolition by Prof. W.H. Hutt, Keynesianism—Retrospect and Prospect, which appeared in 1963.
Keynes initiated no “revolution” whatever in economics. What is original in his book is not true, and what is true is not original. Keynes merely developed a complicated rationale and a novel vocabulary to resurrect seventeenth-century mercantilism and the age-old nostrum of inflation.
Galbraith admits as much. The essence of the Keynesian remedy, he tells us, is to assure sufficient “aggregate purchasing power” at all times by “incurring a deficit.” He even deplores the “double-talk” of those who say we can have both Keynesian policies and balanced budgets.
PRINTING MONEY
Galbraith’s candor stops only in failure to make clear (or even to understand?) that the increases in “purchasing power” brought about by deficits are merely increases in the number of paper dollars. But this must mean that each dollar will soon have a correspondingly lower purchasing power. If real purchasing power could be increased simply by printing more money, India and Africa would have nothing to worry about.
Galbraith does make one indisputable statement: “Keynesian policies are the new orthodoxy.” They are practiced today by nearly every government.
What has been the result? There has been an almost continuous worldwide inflation. In the last ten years alone the German mark has lost 19 percent of its purchasing power, the British pound 26 percent, the Italian lira 27 percent, the French franc 36 percent and leading South American currencies from 92 to 95 percent.
In the United States we have had 29 deficits in the last 35 years. The dollar has lost 43 percent of its purchasing power even since 1945. Statistical studies show no correlation over the last 35 years between deficits and percentage of unemployment.
Meanwhile, Keynesian deficits, inflation and cheap-money policies have brought about a chronic deficit in the U.S. balance of payments. Government officials blame this not on their own policies but on American private business. Refusing to abandon those policies, the government imposes “guidelines” on wages and prices, and controls on tourists and investors. It is government addiction to Keynesian policies that made Federal Reserve chairman Martin’s brave warning of June 1 so necessary.
July 5, 1965
If Section 14(B) of the Taft-Hartley Act is repealed, it will be at least partly because most of the proponents of state right-to-work laws have been too timid. They have compromised their own principle. They have not fought compulsory unionism consistently. They have merely pleaded for the right of states to be allowed to enact or retain laws forbidding compulsory unionism. But they have tacitly accepted the Federal Taft-Hartley Act’s explicit sanction of compulsory unionism.
This sanction flatly contradicts other provisions of the Taft-Hartley Act. In fact, it contradicts the professed purpose of the act. For the Taft-Hartley law makes it “an unfair labor practice for an employer . . . by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization.”
As Prof. Sylvester Petro has written in his book Power Unlimited (1959):
“The fundamental principle of the Taft-Hartley Act is the principle of free employee choice. Employees are expressly declared to have the right to join or not to join unions, free of economic or physical coercion by either employers or trade unions. Naturally, all forms of compulsory unionism are inconsistent with that principle. If a man must join a union in order to hold his job, he is being subjected to the kind of economic coercion which the act generally makes an unfair practice. Yet, compromising this fundamental principle, Congress explicitly permitted unions to impose union-shop contracts upon employers and employees, at least in states where such contracts were not prohibited. From that compromise, together with the denial of direct access to the courts, the lethargy of the NLRB, and the Supreme Court’s pre-emption theory, all the abuses associated with the nationwide prevalence of compulsory-unionism conditions have developed.”
It follows that if Section 14(B) is now repealed, the opponents of compulsory unionism, instead of merely pleading for its restoration, should take the offensive and launch a campaign for repeal of the clause in Section 8(A3) in the Taft-Hartley Act which sanctions agreements imposing compulsory union membership as a condition of employment.
If the opponents of compulsory unionism take this course, they will be adhering to their principle consistently. They have weakened their position by accepting this clause and fighting a mere rear-guard action to keep in the act the 14(B) provision that implies the dubious doctrine of pre-emption. “A proper reading of the U.S. Constitution,” as Petro writes, “would suggest that the power of the states to prohibit all forms of compulsory unionism does not depend upon a specific grant by the Federal legislature. That power is, rather, inherent in the sovereign power of the states to protect their citizens from corrupt and criminal abuse.”
FREEDOM OF CONTRACT
Those government and union officials who want to repeal Section 14(B) on the ground of “freedom of contract” are insincerely using an argument that may boomerang on them. The principle of freedom of contract, they contend, requires that union membership as a basis of continued employment should be neither required nor forbidden by law. But if the principle does require that, it equally requires that non-union membership as a basis of employment should be neither required nor forbidden by law. Yet every union official insists on retaining the Taft-Hartley prohibition of the “yellow-dog” contract—a contract under which a worker agrees as a condition of employment that he will not join a union.
If union leaders insist on and get a completely one-sided law, which prohibits compulsory non-unionism while imposing compulsory unionism, they will arouse demands for the entire repeal of that law, and a restoration of the two-sided “freedom of contract” that prevailed before the Wagner Act of 1935, of which the Taft-Hartley Act of 1947 was an amendment.
Those who do not want such a restoration must in consistency agree to outlaw compulsory unionism everywhere as well as compulsory non-unionism.
July 19, 1965
There has long been a need for someone to keep score on the errors of the business forecasters. This is at last being done, systematically and on a broad scale, by the nonprofit National Bureau of Economic Research.
The task has been subdivided among several staff members. One of them is trying to find out how good have been the predictions of turning points in business. He is finding these “often difficult to interpret or evaluate because of vagueness or hedging.” But another staff member, Victor Zarnowitz, had the easier task of comparing numerical predictions of the nation’s gross national product (GNP) with what the official figures turned out to be.
He presents a tabulation on the results of eight sets of annual forecasts. Four of these are company forecasts, another set groups those of 50 business economists. Altogether, the table records the efforts of 300 or 400 individual forecasters.
The errors in these eight sets of forecasts averaged nearly $10 billion a year, up or down, from the actual figures for the eleven years 1953–1963 inclusive. The errors appear small—about 2 percent—when compared with the average level of actual GNP. But, as Zarnowitz points out, they are big enough to make the difference between a good and a bad business year.
HOW TO COUNT ERROR
The average actual year-to-year change in GNP over the period was $22 billion. Thus, as the study notes, the errors were not quite one-half the size of those that would have occurred by assuming that each year’s GNP would be the same as the year before. Furthermore, the errors were almost as large as those that would have occurred by merely assuming that each year would show the same gain in GNP as the average gain in preceding years. Such an assumption would have gone wrong by an average of less than $12 billion—only $2 billion worse than the forecasts.
This, I think, is the valid way to count the percentage of error in a prediction. The predicted GNP should not be compared merely with the actual GNP, but also with the “automatic” prediction. By the automatic prediction I mean the figure that would result from taking the average percentage increase in GNP for, say, the last five to ten years, giving a little extra weight to later compared with earlier years, and making some allowance for the observed economic trend in the three months preceding the prediction. These are the kinds of figures that could be fed into an automatic computer. Then only if a prediction came nearer to the actual figure than did this automatic extrapolation would it deserve a compliment for insight.
MISSING THE TURNS
As Zarnowitz puts it, though the simplest measure of error is obtained by comparing predicted with actual levels, it is more important to compare predicted with actual changes.
And the forecasts have persistently underestimated changes. They have turned out best in “normal” years, worst in abnormal years. They have also turned out worse for longer periods ahead than for shorter. To cite one example: in a semiannual forecast of GNP for 1955–63 by a large group of business economists, the mean errors of change were, for a six-month span, $6.7 billion; for a twelve-month span, $12.3 billion.
In brief, business forecasting is not yet an exact science. Nor will it ever be. We can’t foresee the future by simply extrapolating from any number of figures or trends in the past. There are too many “outside” factors that cannot be foreseen—droughts, floods, tornadoes, wars, revolutions, political decisions, sudden strikes. Estimates of the effects of other factors—monetary policy, deficits, tax changes, economic controls, labor-union demands—must involve a large element of guesswork. Most important of all, economic forecasts themselves affect the future they predict.
Yet to guide our decisions, we must all try to forecast. By intelligent study we may all hope to reduce the extent by and frequency with which our forecasts go wrong.
The aim of every speculator and businessman, however, is not merely to be right, but to be right sooner than his competitors. And that result no science can provide.
August 2, 1965
Secretary Fowler wants an international conference on money. His proposal is based on the fear that unless the world develops “a new and assured source of growing liquidity”—i.e., more money and credit—there may not be enough “to support increasing world trade and investment.” Nearly all the proposals now being put forward for an “improved” international monetary system are based on the same fear-that we are running out of money.
There is nothing new about such fears. In 1875, the British economist Jevons was writing: “In almost every country great complaints have from time to time been made as to the scarcity of the circulating medium, and the urgent need of more. All the evils of the day, the slackness of trade, falling prices, declining revenue, poverty of the people, want of employment, political discontent, bankruptcy and panic, have been attributed to the want of money, the remedy suggested being . . . the issue of paper money.”
The truth is that, except in a deflationary crisis, the existing amount of money is always enough to conduct the business of the country—for the simple reason that it is the existing amount of money that has determined the existing level of prices. If, with other conditions remaining unchanged, we increase the supply of money, each unit of money will be worth less than before. This means that prices will rise.
NOT ENOUGH GOLD?
It is certainly true that, if the money supply is not increased while the economy is expanding, prices must tend to fall. But a gradual fall of prices for this reason is to be welcomed rather than feared. Prices would be falling because the supply of goods was increasing. And real costs as well as money costs of production would be falling along with them. So profit margins (and therefore incentives to production and employment) would tend to remain relatively unchanged.
This situation has often existed historically. Wholesale commodity prices dropped from an index number of 84.7 in 1880, the year after this country returned to the gold standard, to as low as 60.5 in 1896. They had recovered to 73 by 1900 and in 1911 were still only 84.4 (1939=100). Yet this whole 30-year period, though marked by both depression and prosperity, was a period of continuous and strong economic growth.
The opponents of the gold standard argue that there simply isn’t enough gold in the world to finance production and trade. So they want to supplement gold reserves with paper dollars or even with a new “composite reserve unit” of ten or eleven leading paper currencies. But if there isn’t enough gold for reserves and money, why not use silver? Or if we can’t spare silver at present, why not use copper? Or if there isn’t enough copper, how about iron?
SCARCITY GIVES VALUE
Of course each unit of currency would then buy less. It is precisely because gold is scarce that it is valuable as money. It is precisely because its scarcity, unlike that of paper money, cannot be relieved by the mere whim or ukase of political managers that gold holds its value.
Increasing the supply of money is chasing a will-o’-the-wisp. Every increase in supply lowers the value of the monetary unit and raises prices. In the end, the bigger supply of money doesn’t buy any more than, the smaller supply.
There is a shortage of gold in the world today only in one sense—that too much paper money has been issued against it, so that this paper money cannot be made freely convertible into gold at the old ratio. That is why so many people are asking for devaluation. But this would at best provide only temporary relief if the policy of currency and credit expansion continued.
In the twenty years of the International Monetary Fund system, the world has piled up a shameful record of inflation, depreciation and devaluation. Yet instead of demanding a return to balanced budgets and a true gold standard, everybody seems to be devising schemes to support still further inflation, under the Keynesian delusion that only constantly “increased purchasing power” through constant monetary expansion can assure prosperity.
August 16, 1965
On July 23 a Federal judge fined eight of the nation’s largest steel companies $50,000 each on charges of conspiring to fix prices of carbon-sheet steel between 1955 and 1961. The judge also set Sept. 21 as the date of sentencing two of the steel executives—with possible penalties running up to a year in prison and $50,000 personal fine. A few days later four steel companies and a trade association were fined a total of $150,000 on charges of conspiring to fix prices on steel forgings.
Both cases were uneasy reminders of the fines and jail sentences imposed in 1961 on some officers of the biggest electrical-equipment companies in the nation.
These men were treated as common criminals. And for doing what? For doing precisely what millions of workers are not only permitted but sometimes compelled to do under the law—for setting noncompetitive prices on what they have to sell.
Let us suppose that the charges against the steel companies are true. (They pleaded “no contest”—which means that they were willing to accept punishment without admitting guilt.) How can the government or anyone else prove that on net balance economic damage was done? And how can anyone determine the extent of the excess costs to the steel companies’ customers? (This is legally important, because any firm that felt it had paid too much for steel because of the alleged price-fixing could bring suit, and, if it won, would be entitled under the antitrust laws to treble damages.) But how can anyone determine how much the fixed price exceeded, if at all, what a “competitive” price would have been?
‘RESTRAINT OF TRADE’
Opening a broader issue, how can the amateur economists who sit as judges in the courts—or, for that matter, how can professional economists—determine whether there has been “restraint of trade,” not to speak of determining how much restraint, when there has been no physical coercion or intimidation?
An extremely efficient firm, perhaps by discovering some improved product or cost-cutting method, may undersell all its competitors and drive them out of business, thus substituting at least a temporary monopoly for previous competition. Has it “restrained” trade? Has it made conditions worse—by offering consumers a better product at a cheaper price or better?
Such questions apply particularly to recent court decisions against mergers. Thus a Federal district court a few months ago ordered the dissolution of the three-and-a-half-year-old merger of the Manufacturers and Hanover banks as a “combination in unreasonable restraint of trade.” Yet the merger had reduced the number of competing banks in New York City only from 72 to 71. The merged bank had only one-eighth of the assets of all New York City banks; and it was presumably able to compete more effectively than before with its two larger rivals, the Chase Manhattan and the First National City banks.
DOUBLE STANDARD
The antitrust laws as at present interpreted are questionable both on economic and on legal grounds. No big business firm today knows exactly when or why it will be held to be violating them.
But if we hold that monopoly is always bad in itself and that government should promote the maximum of competition, how can we justify the policy we follow elsewhere? In the field of labor, our laws not only permit but in many cases enforce monopolistic wage-fixing. Employers are compelled to bargain exclusively with monopolistic union wage-setters. Compulsory non-unionism is illegal; but compulsory unionism is explicitly legal.
Our laws not only permit but enforce acreage restriction and hence price-raising in cotton, wheat, tobacco. Our international agreements permit export quotas and hence price-raising in coffee; and import quotas and hence price-raising in oil; and tariffs to hold up domestic prices.
Do our present antitrust laws rest on farsighted reasoning, or does our treatment of big business reflect a discriminatory vindictiveness? Isn’t it time we reexamined our glaring double standard and contradictions of policy?
August 30, 1965
As the drought in the Northeast approaches crisis proportions, Federal, state and city officials propose desperate measures to increase the water supply. President Johnson signs a $185 million desalting-research bill and calls upon science and industry to develop plans for desalting plants to produce 100 million gallons a day—five years from now. But prior to last week’s Delaware River agreement, New York officials feared that the city might run out of water before next spring. Mayor Wagner says the city has examined every proposal “from tapping the Niagara to sawing off a part of a glacier and floating it into New York Harbor.”
But increasing the supply of water is only one half the problem. The other half, about which something can be done immediately, is to reduce wasteful consumption of water. New York has issued a series of emergency orders. Shut down all fountains. Don’t flush streets. Don’t refill swimming pools. Don’t sprinkle your lawn. Don’t wash your car. Don’t even serve a glass of water in a restaurant unless it is asked for. The latest orders severely cut down on the hours for using air-conditioning units.
EXHORTATION
Such rules are (to some extent unavoidably) arbitrary, inflexible and procrustean. They are creating conflicts. New York City’s water supply department accuses its parks department of illegally watering its public golf courses at night. Parks Commissioner Morris retorts: “We shouldn’t throw 20,000 players off the courses just because of a little bit of water. . . . I flush my toilet only about once a day now and I take a bath only every other day. If you figure up the water I save by giving up these things, you’ve got almost enough for the greens.” And people who work in a round-the-clock business in a modern building without openable windows wonder how many hours they will be expected to sweat or suffocate.
Of course there can be exhortation to the citizens to save water. There has been no lack of it. It is repeated every day. But there is a certain futility about it, and the reason is clear. The individual citizen knows that there is a water shortage. But he may reason: what I personally save will affect less than a millionth of the total consumption. What difference will that make? Moreover, he may darkly suspect that others are cheating—taking long showers, neglecting leaky plumbing, maybe letting the cold water run all night just to cool the room.
EFFECT OF METERS
Yet while New York City officials are toying with all sorts of far-off, far-out schemes for increasing the water supply, they have until now ignored or rejected the simplest way to cut down the consumption—to charge everybody in proportion to the water he uses. Mayor Wagner admits that he has “always opposed universal metering in New York City,” but now his own study panel recommends it.
To install meters, as far as practicable, for every consuming family, would merely apply for water the same market principle and price system that applies nearly everywhere else. When anything—water, or food, or housing, or doctors’ services or hospital care—is provided “free,” or below real cost, it is bound to be wastefully used.
Do New Yorkers waste water? Well, 8 million of them consume 1 billion gallons of water a day—about 125 gallons a person. As each person drinks less than a gallon, there must be immense opportunities for saving in the other 124 gallons.
The knowledge that there was a meter ticking the pennies away would give a constant incentive for economy. Then each person could save water at the points where he himself thought he could best spare it. When water became scarce the rates could be doubled. Or a penalty surcharge could be put on anything above a basic allowance per person.
Ten years ago, 73 percent of Philadelphia’s water was delivered through meters and the city consumed 400 million gallons a day. Today, with 100 percent metering, Philadelphia uses only 325 million gallons a day.
The moral is obvious. People economize on what they pay for.
September 13, 1965
A few months ago, George Champion, chairman of the Chase Manhattan Bank of New York, expressed his alarm over the trend in Washington toward what he called “government-by-guideline.” There are guidelines for wages and prices, guidelines for antitrust enforcement, for labor-management behavior and for television advertising. And bankers have been given a special set of guidelines for the balance of payments and for lending rates.
This trend operates behind a façade of friendliness and partnership between government and business, accompanied by much talk of “reasoning together” and “voluntary restraint.” “But always in the background,” said Champion, “is the subtle threat that failure to comply with the guidelines voluntarily will bring sternly coercive measures—measures applied, for the most part, without public debate in the halls of Congress or legal appeal in the courts.”
Most of these guidelines are misconceived economically. Yet the whole trend toward government by guideline is based on the assumption that bureaucrats know more than the market. This trend, Champion concluded, “is one of the most insidious and dangerous on the national scene today.”
ANOTHER ‘REQUEST’
Since he made his speech, government-by-guideline has shown, unfortunately, no signs of slowing down. On Aug. 18, for example, the White House reported that whereas consumers had received the benefit of about three-fourths of the $1,750,000,000 excise tax reduction enacted two months earlier, some manufacturers (e.g., of phonograph records, pens, pencils and matches) had failed to pass along the reduction. This failure, added the White House press secretary, “bears closer examination.” Meanwhile the government would “request these manufacturers to keep faith with the hope of the Administration and Congress in passing this legislation and to pass on the benefits.”
Here is a perfect specimen of the government-by-guideline technique. Everything is to be “voluntary”; manufacturers are “requested,” not ordered. But if they fail to do what the White House wants, there is a thinly veiled threat that something unpleasant will happen to them, even though the government has no legal right to force any price-tag reduction.
Apart from its disturbing legal implications, the White House statement is economically naïve. Manufacturers do not, as the statement implies, pass along a tax cut in full because they are public-spirited fellows, or fail to do so because they are selfish profiteers. In both cases it is costs, consumer demand and competition that decide final prices, just as they did before the tax was reduced. In the lines that failed to “pass on” the full tax cut, an upward price adjustment may have been overdue. The White House statement implies that prices and profit margins in each line were just what they should have been before tax cuts.
POWER CREATES POWER
How does the government come to have the power to impose guidelines over business decisions that it has no explicit legal authority to control? The answer is simple, and may be stated in the form of a political law: when a government has too much power in any direction, it can easily use it to usurp more power in other directions.
For example, the Federal government now spends one dollar out of every five now spent in the United States. Many business executives fear to oppose even unauthorized government “guidelines” for fear that they will lose government contracts, or have existing ones adversely renegotiated. Or they fear that they may suddenly be prosecuted for violating one of the vague and contradictory antitrust laws. Or they fear that their income tax may be hostilely examined. Or they fear that they may be cited for violating Federal labor laws.
In all these cases enormous discretionary powers rest in the hands of government officials. Even if an Administration never abuses these powers, and never uses them for economic reprisal, the mere fear that it may do so is enough to intimidate most businessmen. A government can usurp still more power precisely when it already has too much power.
September 27, 1965
“No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous. It has often been found that profuse expenditure, heavy taxation, absurd commercial restrictions, corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations, inundations, have not been able to destroy capital as fast as the exertions of private citizens have been able to create it.”
So, in the mid-nineteenth century, wrote Thomas Babington Macaulay in the chapter of his famous History of England describing the state of the country in 1685.
It could easily be proved, he went on, that the national wealth of England had been almost uninterruptedly increasing for at least the six preceding centuries. For example, “in spite of maladministration, of extravagance, of public bankruptcy, of two costly and unsuccessful wars, of the pestilence and of the fire, it was greater on the day of the death of Charles the Second than on the day of his Restoration.” And this economic progress had been proceeding during the nineteenth century with “accelerated velocity.”
CLAIMING THE CREDIT
Macaulay was calling attention to a fact of the first importance, but one that is constantly overlooked. It is systematically ignored today by nearly all governments, who are, at least by implication, constantly claiming for their own policies all the credit for all the economic improvement during their term of office.
This has been especially true since gross-nationalproduct statistics have been compiled. Spokesmen for the Truman Administration boasted that the GNP increased from $211 billion in 1944 to $347 billion in 1952. Spokesmen for President Eisenhower pointed to the increase to $503 billion in 1960; spokesmen for President Kennedy to the increase to $584 billion in 1963; and spokesmen for President Johnson to the increase to $670 billion in 1965. But it remains to be determined to what extent these increases (even after allowance is made for a constant rise of dollar prices) were because or in spite of the government policies followed.
Most European governments boast an even faster “economic growth,” since the end of World War II, in their countries than in our own. But by far the greatest part of the credit for this growth must be given to the efforts of private citizens of these countries to improve their own condition. If the governments also deserve some credit, it is chiefly because they did not put too many restrictions and deterrents in the way.
USUAL AND EXPECTED
The great fact that Macaulay emphasized, “the constant effort of every man to better himself,” is important not only as it affects the question of who or what should receive the main credit for economic progress. It is the tremendously reassuring fact that all of us would do well to keep in mind as we read our daily newspapers. Too many of us become disheartened anew every morning as we read the sorry record of accidents, divorces, quarrels, unemployment, diseases, deaths, burglaries, muggings, murders, riots, looting, racial violence, strikes, fires, revolts, revolutions and war, as well as droughts, floods and other natural disasters. We forget that the newspapers print the “news,” and that the news means the unusual and unexpected.
We do not pick up our newspaper and read such items as “Strange case of virtue in the Bronx” or “More than 70 million people all over the United States went to their jobs yesterday morning, working in factories, offices and on farms till late afternoon. The police did not interfere.” We do not read such items because they are the usual and the expected.
The normal thing, in short, is not merely that most people are leading peaceable lives, but that most people are daily working and producing. Many are producing just enough to meet their current living expenses, but others are able to save something—in brief, to accumulate the capital, the money to create the new tools and equipment, that will make not only themselves but later generations constantly more productive.
October 11, 1965
The newspaper strike in New York City (after the 114-day strike of 1962–63 that helped to put one newspaper, the Daily Mirror, out of business) is one more example of the increasing tendency of unions to make excessive demands whose acceptance would be not only against the long-run interests of the economy, and therefore of the great body of workers, but against the long-run interests even of the majority of union members themselves.
One of the demands of the Newspaper Guild on The New York Times is the compulsory union shop—though 2,200 out of 2,400 eligible employees are already on the union rolls. This would mean that all stories about labor disputes would be written by union members. The compulsory union shop, moreover, is against the interests of every worker considered as an individual. He cannot get employment unless he is a member of the union; and he is not free to leave the union (except at the cost of his job) if he is dissatisfied with the way it is being run.
The main issue that gave rise to the strike is automation. The guild is asking that no man be fired because of automation and that the guild have a veto on the introduction of any labor-saving machine that could place work performed by a guild member under jurisdiction of another union.
VETO ON PROGRESS
Now a veto on automation is a veto on progress. It forces work that could be done more efficiently and with less labor to be done more expensively, less efficiently, and with more labor. In the long run such a veto does not make more jobs but fewer. By depressing the average productivity of labor it correspondingly holds down the average level of wages. What it protects (temporarily) is a continuance of a few specific jobs that already happen to exist. But it does so only by preventing the creation of more productive jobs. It continues Peter’s present job only by closing off Paul’s, or his own, future job.
In the New York newspaper strike, wages are not an issue. But they have been the principal issue in practically all other major union negotiations this year. Labor costs have already been raised on New York newspapers to such an extent that most of them are losing money and one or two more may be driven out of existence.
When a union succeeds in driving wage rates or costs above the marginal productivity rates that a free market would establish, it merely cuts the number of jobs that would otherwise be available. Unions cannot raise real wages above what they otherwise would have been without cutting employment below what it would otherwise have been. Unions cannot raise the general level of real wages; they can at best raise some wages at the expense of others. This result is usually disguised from the general public by the fact that constant increases in man-machine productivity lead to increases in most wages. But the unions—to the extent that they reduce production by work rules, featherbedding and delaying automation—reduce wages below what they would otherwise be.
DOUBTFUL LABOR LAWS
The recent costly strikes and “wage-inflation” resulting from strikes have led to proposals that industry-wide unions be prohibited, or even that strikes be prohibited, and that all disputes be submitted to compulsory arbitration. All such proposals are in the totalitarian direction, and they would in fact create more problems than they solved.
But before the situation becomes still worse, it might be a good idea to take a hard look at the wisdom of the labor legislation that we began passing in the 1930s, and at local law-enforcement attitudes. We might remove, for example, some of the present one-sided compulsions on employers to bargain exclusively with specified unions and some of the one-sided immunities to unions which enable them, through picketing and other forms of intimidation, to force a business to shut down until it has yielded to their demands. Under present laws and rulings, a company hardly dares to warn strikers that it will permanently replace them with other workers and carry on its business. The laws invite strikes both by taking the major risks out of them for strikers and multiplying the risks of employers who try to combat them.
October 25, 1965
At the end of September the International Monetary Fund held its annual meeting in Washington and celebrated its 21st birthday. Secretary Fowler happily announced that the fund had been broadened this year by the addition of Malawi and Zambia. The delegates of the 103 nation-members made speeches. Nearly all of them said that the IMF monetary system has been working very well but is in urgent need of reform.
The system has, of course, been working very badly. The last twenty years have been years of disgraceful world inflation. In the last ten years alone the German mark has lost 19 percent of its purchasing power, the British pound 26 percent, the Italian lira 27 percent, the French franc 36 percent and leading South American currencies from 92 to 95 percent. The keystone of the system has been the American dollar. It has lost 43 percent of its commodity-purchasing power since 1945.
Plainly reform is urgent. But nearly every proposal for reform has been in the wrong direction. Each wants to create more “international liquidity,” which in English means more paper money. President Johnson says that what is needed is “the creation of additional reserves.” Secretary Fowler adds: “We can hardly expect that . . . the world can be satisfied very long to limit future growth in reserves to the very modest level of new monetary gold supplies.”
If this means anything, it means that the new “reserves” are to consist of paper money.
DISGUISING INFLATION
Well, why can’t each country simply print whatever additional paper money it thinks it needs? The reason is that naked inflation is in disrepute. But techniques that disguise it are still fashionable. For the last twenty years the United States has been printing additional paper dollars and sending billions of them abroad. These exported dollars do not put up the prices of American goods; and so our authorities can say that “there has been no (or very little) inflation.” But the dollars do put up the prices of the foreign goods they buy. In addition, our dollars end up as “reserves” in the central banks of other countries. Against these “reserves” the other countries print additional amounts of their own currency. Though this brings on inflation in these countries, it is all considered very respectable.
In still another way the IMF system encourages world inflation. When a country creates a deficit in its balance of payments through its own unsound policies—too much paper money, budget deficits, holding down interest rates, pegging its currency at an overvalued level—it can borrow from the IMF. Or other countries combine to make it a loan. By being continually rescued the monetary sinners are encouraged to continue their sins.
DISSOLVE THE IMF
To the scores of existing plans for international monetary reform I should therefore like to add another. It is the opposite of nearly all the rest. Dissolve the IMF. Or at least make it stop all forms of automatic or easy-to-get credit.
As Karl Blessing, president of Germany’s Bundesbank, said in the most realistic speech at the IMF meeting: “If a country enjoys confidence, it can obtain credit from anywhere; if it does not enjoy confidence, it must, first of all, adopt measures to regain this. I cannot help thinking that too perfect a machinery for financing balance-of-payments deficits weakens monetary discipline and contributes to creeping inflation.”
After the IMF had been dissolved (or had at least halted all no-questions-asked credit or soft loans), each nation would be forced to see both the advantage and necessity of returning to sound money. It could do this by (1) halting any further increase in its paper-money supply; (2) by letting exchange rates go free, and ceasing to try to maintain an artificially pegged value for its currency either by prohibitions on its citizens or by government intervention on the foreign-exchange market; and (3) finally, by making its currency, perhaps in several stages, directly convertible into a fixed amount of gold.
This would restore international cooperation in currency stability instead of the present system of central banks cooperating in inflation.
November 8, 1965
In 1947, in a book on foreign aid, Will Dollars Save the World?, written when the program was first launched, I pointed out that intergovernmental loans and grants “are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or ‘American imperialism’; or ‘interfering in the internal affairs’ of the [recipient] nation.”
In the eighteen expensive years since then, the champions of foreign aid have persistently ignored or denied the existence of such a dilemma. But in practice they have swung uncertainly from one horn to the other—imposing conditions, dropping them when criticized, silently watching the aid funds being misused, then trying to impose conditions again.
And today, two decades and $115 billion later, the danger is that the dispensers of our foreign aid will follow the worst policy of all—imposing conditions, but exactly the wrong conditions.
In signing the new $3.2 billion foreign-aid bill, President Johnson declared that our future foreign aid will go to those countries “willing not only to talk about basic social change but who will act immediately on these reforms.”
‘LAND REFORM’
The next day Senator Aiken of Vermont indicated the nature of the “reforms” that our aid dispensers want. “American aid,” he said, “was based on an assumption that there would be substantial amounts of self-help—that the rich of a poor nation would invest in their own economies, that they would pay their taxes, that they would support land reform and show some interest in the poor of their own societies. This has proved largely a false expectation.”
What Washington apparently now has in mind is to ask of the countries that receive our foreign aid, not that they give guarantees of the security of property, the integrity of their currencies, refrainment from crippling government controls and encouragement to free markets and free enterprise, but that they move in the direction of the welfare state, the redistribution of land and other wealth and government planning.
When Senator Aiken and others demand “land reform,” precisely what are they asking for? Do they mean the breaking up of big estates, with inadequate or no compensation, and the redistribution of land to the peasants? Have they studied the recent history of most such “reforms” in Mexico, for example—and how and why they have been followed by less food production rather than more? When the senator complains that the rich in a poor nation do not “invest in their own economies” but place their funds abroad, has it occurred to him to ask why they do so?
WHY FUNDS GO ABROAD
If he asks them confidentially, they will tell him. Abroad, they are free to choose their investments. They are free to look for the best returns. They are not subject to excessive taxation. They are not holding a currency that is constantly falling in value. (In the last ten years the currency of the Argentine has lost 92 percent of its purchasing power; the currency of Chile has lost 94 percent; of Bolivia 95 percent; of Brazil 96 percent.) The rich in most such countries live in constant fear of expropriation. Will “land reform” reassure them?
In the last twenty years foreign aid may have made American taxpayers $115 billion poorer, but it has not made the recipients that much richer. The funds have not gone into the most productive ventures, but largely into grandiose but wasteful socialistic projects.
If our economic aid were tapered off, the poor countries would have to try to attract private investment, both domestic and foreign. They would have to give guarantees that capital and profits could be repatriated, and guarantees against currency exchange restrictions, against discriminatory taxation, price and profit controls, government-owned competition and above all against expropriation.
And the government that reluctantly gave such guarantees would be amazed to find how suddenly its country would begin to prosper.
November 22, 1965
The last session of Congress passed bill after bill to enact the Great Society, the complete welfare state. It gave something to everybody. Major programs included medicare, the war on poverty, aid to Appalachia, foreign aid, aid to local elementary and high schools, aid to colleges, aid to farmers, aid to cities. Congress voted money for public health, for economic development, for public housing, for work-training programs, for adult education, for control of water pollution and air pollution, for making salt water into fresh water, for a National Foundation on the Arts and Humanities, and so on and on. It authorized rent subsidies for low-income families, but postponed an appropriation.
The first year’s money-cost of each of these programs was often specified, and sometimes even the rising cost in later years. But neither Congress nor the Administration has so far bothered to put the total cost together, even for the first year, let alone the next five.
SIZE OF THE BILL
That total cost will be high. Senator Dirksen made public a compilation by the staff of the Republican policy committee of just 50 examples of authorizations and appropriations passed in the last session. The total cost of these, over the next five years or so, came to more than $112 billion. The New York Times reports that total Federal government spending will rise a minimum of $10 billion and a maximum of $13 billion in the calendar year 1966 over 1965. Still another unofficial estimate is that total cash Federal spending will rise to $130.2 billion in the current fiscal year ending next June 30 (as compared with $122.4 billion in the 1964–65 fiscal year), and to $143 billion next fiscal year.
Where is the money going to come from? Who is going to pay for the Great Society—and when? There is no evidence that either the Administration or Congress has so far paid any attention to these questions.
Let us suppose that we miraculously resolved to return to balanced budgets, and to pay as we go for the Great Society. How much would taxes have to be increased?
Last January the President estimated total cash receipts for the current fiscal year at $123.5 billion. Just to pay for this fiscal year’s $130.2 billion would mean raising $6.7 billion more. To pay for next year’s expenditures we would have to raise $19.5 billion more. Over the last five years tax revenues have risen an average of $2.8 billion a year in the administrative budget, and an average of $4.7 billion a year in the total cash budget. But even if we assume that they will rise $5 billion next year, we would still have to raise about $14.5 billion more by more taxation.
WHO WILL PAY?
How and where would we get it? Let’s look at our four main revenue sources, which together raise 87 percent of all our tax receipts. Personal income taxes are officially estimated to bring in $48 billion this fiscal year. The tax rates in excess of 50 percent, however, have been bringing in less than $250 million a year—not enough to run the government for a full day. If raised they would probably yield even less. More money would have to come from increases in rates on middle and lower incomes.
The corporation tax yields less than $28 billion. It already takes nearly half of corporate income. If raised it would further penalize and discourage production. Excise taxes yield less than $14 billion. Even if restored to previous levels they would only yield about $1.7 billion more—and of course discourage sales and output. Employment taxes yield less than $19 billion. They will certainly be raised; but they fall proportionately on the lowest incomes, and force the poor to pay for their own welfare benefits.
If our Federal government were bound by the restrictions of many foreign governments, and of some of our states, and were forced to accompany every new spending bill with a new tax bill to raise the money for it, so that everybody knew who was paying as well as who was getting, there would be considerably less enthusiasm for the Great Society.
The current delusion is that the cost will come out of some fourth dimension. But there is strong reason to suspect that in the long run the anti-poverty program will create more poverty than it relieves.
December 6, 1965
It is hard to say whether it is the legal and political or the economic implications of the government’s recent adventures in price-fixing that are most disturbing.
The Administration has no legal authority from Congress to fix prices. Yet by public threats to use its huge stockpiles to flood and depress the market (and also, according to some published accounts, by off-the-record threats of antitrust action, income-tax review and shifting of defense contracts) it has succeeded in forcing the aluminum and copper industries to roll back announced price increases.
Nor did the government state clearly in advance, nor has it stated yet, precisely what its price-fixing standards are, so that an industry or a particular firm may know when it is “violating” them, and by how much.
The best things we have to go by are the government “guidelines” for wages and prices. These turn out to be either very vague or very rigid, depending upon who happens to be involved. If one could state the guidelines as general rules, they would run like this: “Wages in any industry should rise no faster than the national average gain in output per man-hour, or ‘productivity’ (which the government says is 3.2 percent a year); and prices should not go up at all.”
ECONOMIC NONSENSE
If we begin to count up even the government’s own “exceptions” to this, the guidelines dissolve into mist. And if we take a realistic look at the general rule itself, it turns out to be economic nonsense.
Even if we accept the government’s questionable average productivity-gain figure, it is obviously absurd to make the wage increase of an individual worker, or even of all the workers in a single industry, equal to the national average gain in “productivity.” For the “productivity” increase of some workers may be far higher than the national average, and the “productivity” increase of other workers far less. Why should all get the same increase? This would not only be unjust but would retard the flow of workers to the industries where they are most needed.
Again, the “man-hour productivity” that the Council of Economic Advisers “measures” is really man-machine hour productivity. It is not “labor productivity” but the combined productivity of labor and capital; and it has been rising each year not because workers annually work harder but because more and better equipment is put into their hands. If the whole increase went to the workers, and none to the capital investment that made the increased productivity possible, the capital investment (and the increased productivity) would cease.
PRICES ARE GUIDES
Still more absurd is the attempt to hold every price just where it is. The government is trying to apply the Procrustean rule to steel, aluminum and copper, though conditions are radically different in the three industries. Aluminum, for example, even if its price increase had been allowed to stick, would still be selling below its price five years ago. The industry’s return on net worth in 1964 has been calculated at 7.4 percent as compared with a 12.7 percent average for all U.S. industry.
The government’s rigid rule overlooks the whole function of prices in a free economy. Prices are an indispensable guide to producers. The relative profits and losses they lead to determine the ever-changing balance of production among thousands of different commodities and services. It is always harmful to freeze prices. Prices have work to do. Each individual price must be free to tell the truth about conditions in its industry. Government bureaucrats do not know what the price of anything, let alone the price of everything, ought to be. Only the free market, only the unceasing play of supply and demand and competition, can decide. Price-fixing can only choke and disorganize production.
The real author of inflation is the government. It has been averaging an annual cash deficit of $4 billion for the last six years. It has been pushing down interest rates. It has been increasing the money supply recently at an annual rate of 8 percent. It has cheapened the dollar. And now it tries to divert attention from its own inflation (which it calls “expansionary” policies) by making industry the scapegoat.
December 20, 1965
The action of the Federal Reserve Board in raising the discount rate from 4 to 4½ percent was necessary to head off a further inflation. So far from being premature, as suggested by President Johnson, the step was overdue. Interest rates have already been held down by government policy too much and too long.
In a free economy every price has a vital function to perform. That function is to register the state of supply and demand, to guide the economic actions and decisions of all of us, to maintain a constantly balanced and synchronized output of thousands of different commodities and services. Government price-fixing can only misguide and dislocate production.
If there is one price in the economy that is more important than any other it is the interest rate. This is popularly thought of merely as the cost of borrowing “money.” Some economists have called it, more broadly, the price paid for the services of capital. It would be much better to call it the price of time. It is the discount on future goods as against present goods. It affects the price of all securities and all price relationships. The interest rate determines the relative production of capital goods as compared with consumption goods. It affects how much people spend of their income, how much they save and invest and where they invest it.
A COMPETITIVE PRICE
The market rate of interest—or, more realistically, the constellation of market rates of interest—is extremely competitive and fluid. There are more than 14,000 banks in the country, all in daily competition with each other for customers. It is preposterous to assume that they could all conspire to fix any interest rate or set of interest rates. Anybody with cash is free to decide at any moment to become a lender. Interest rates fluctuate daily and hourly in the markets of the world.
And yet the President’s economic advisers presume to know better than the market exactly how high interest rates ought to be. Mr. Johnson recently indicated that he would be gravely displeased if banks raised their “prime rate” to their best customers above 4½ percent. Secretary Fowler solemnly declared that any increase in interest rates would be “premature and unwise.”
How do government officials get that way? They get that way because they and their advisers have come to believe devoutly in the theories of the late Lord Keynes. According to Keynesian theory it is properly a function of government, and not of the market, to fix interest rates. And it is likewise always the government’s duty to fix interest rates very low. The theory is that low interest rates encourage borrowing, investment and full employment.
CAN’T GO ON FOREVER
One thing the theory overlooks is that arbitrarily low interest rates discourage saving. This does not bother the Keynesians because they forget that what is being borrowed and lent is ultimately real capital. They assume that the only thing involved is “money”—and more paper money can be printed at will. Therefore, if you want to push down interest rates all you have to do is increase the supply of money and credit. So Federal Reserve policy had been increasing the money supply in recent months at an annual rate of 8 percent.
It is true that, under certain conditions (such as we have had for the last five years), cheap money and currency expansion can bring about a temporary boom. But the process in the end defeats itself. The increased money supply raises prices and costs. Expectations of further increases in the money supply then cause an increase in interest rates to compensate lenders for an expected fall in the purchasing power of money. (As the cost of living has increased 1.8 percent in the last twelve months, a government bond with a money yield of 4.2 percent has had a real yield of only 2.4 percent.)
Our artificially low interest rates, our budget deficits, our rapid expansion of the money supply have been the basic causes of the rise in prices and costs, the deficits in our balance of payments and waning faith in the dollar. The increase in the discount rate was a step in the right direction. Let us hope that the inflationists in Congress or the Administration do not nullify it.
