Business Tides
Is a Depression Coming?
January 5, 1953
I put the question in this extreme form because so many people put it that way after the election of General Eisenhower and a Republican Congress. That is because they were conditioned by twenty years of New Deal propaganda to assume that “Republicans-in-power” and “depression” were synonyms, or that the second followed automatically from the first.
But there is an assumption of a quite different nature in the minds of many who raise the same question. This is that booms and depressions originate wholly within the economic system, in accordance with mysterious laws of their own, not subject to alteration or control by political policies. The opposite assumption, on which most politicians operate today, is that governments have now surprised all the secrets of the business cycle, mastered all the devices for countering either an inflation or a slump, and have the will to “keep the economy on an even keel.”
Neither of these extreme assumptions is true. The ups and downs of business are partly due to what economists call “endogenous” conditions, originating from “inside” the business system, and partly due to “exogenous” influences from “outside.” The minor fluctuations seem to be most often endogenous and the major fluctuations exogenous. War or peace, a larger or smaller defense program, extreme monetary inflation or deflation, are “exogenous.”
This is one of the complexities that makes business forecasting such a hazardous occupation. Among their other headaches, the forecasters must try to guess what the politicians are going to do. If Mr. Truman had continued in power, the major guess could have been reasonably safe. He would have continued to inflate. Or more accurately, he would have continued the policy that has come to be known in most countries as “repressed inflation.” This consists in depreciating the dollar by increasing the money and credit supply—then pretending that the consequent rise is the result of “profiteering” and “greed,” and “fighting” it with price control.
The government’s inflationary policies have led to an increase in the country’s supply of money and bank credit from $65,000,000,000 at the end of 1939 to $175,000,000,000 at the outbreak of war in Korea in June 1950 and to $196,000,000,000 now. The outlook for 1953 has now been radically changed, however, by the coming of a new Administration. General Eisenhower’s appointments, both in the Federal Reserve System and in the Treasury, are tremendously encouraging. He has asked William McChesney Martin, Jr. to stay as chairman of the Federal Reserve Board. Martin is a strong believer in a Reserve system free from Treasury domination. The Secretary-designate of the Treasury, George M. Humphrey, has appointed Marion Folsom, treasurer of the Eastman Kodak Co., as Under Secretary, and W. Randolph Burgess, chairman of the executive committee of the National City Bank, as special assistant. The appointment of Burgess is particularly heartening. Few men in this country understand the problems of monetary policy and debt management as thoroughly as he does, and none has better recognized the need for an independent Reserve system.
These men are evidently determined to halt inflation, but their efforts will need public understanding and support. One weakness of trying to continue inflation is that in its later stages it inevitably gets more and more out of control. But trying to halt it also entails serious problems. Inflation always brings discrepancies in price and cost rises, distortions in demand and production, and a great deal of misdirected investment. When the inflation is brought to a halt serious readjustments are unavoidable. They are certain to mean recessions in some lines. We must understand the necessity for these readjustments and be willing to accept them. In that case they can be comparatively mild and short-lived. But if we try to prevent or postpone them by still further inflation, we only build up a much graver ultimate reckoning. 
January 12, 1953
A business forecast, as frequently explained in this column (see “Pitfalls of Forecasting,” Newsweek, Nov. 22, 1948), can never be anything better than a guess. The future of business depends on countless factors, and no human mind can encompass them all. But some guesses are better informed and better reasoned than others. What troubles me about the current crop of forecasts for 1953 is that most of them rest on fallacious assumptions. The most important of these is the assumption that the future of business activity at this time depends primarily on the government’s defense-spending program. If that rises, we are told, business activity and prices will rise; if it is sustained, the boom will be sustained; but if it declines, there’s no telling how much business will deteriorate, unless the government steps in and does something desperate.
This is the assumption, for example, that runs through the 80,000-word report on “Markets After the Defense Expansion” released by the Department of Commerce on Dec. 29, 1952. The report thinks it a “strong probability” that business will be good in 1953, but fears it will turn down in 1954—both largely based on the assumption that defense spending will rise next year and decline thereafter.
If this were true, it would mean that the more resources we are forced to devote to making guns and tanks and shells, instead of consumer goods, the richer we become. Many people do in fact embrace this absurdity. They even go on to tell you with a knowing wink that we owe our prosperity to Stalin and Korea, and that if a real peace broke out it would be an economic disaster.
This conclusion is just as preposterous as it seems. People arrive at it by combining a fallacy with an illusion. The fallacy consists in looking only at the government’s defense payments and forgetting that the money for these comes ultimately from taxes. If defense payments suddenly dropped from the present $50,000,000,000 a year to only $10,000,000,000, taxes could also be cut by $40,000,000,000. Then the taxpayers—both individuals and corporations—would have $40,000,000,000 more to spend than they had before, to make up for the $40,000,000,000 drop in government spending.
Of course such a change would very importantly affect individual industries. Defense output would be hurt as much as nondefense output would be helped. The pattern of production would be transformed. But there is no reason to suppose that the overall volume of output or activity would decline.
The confusion here arises because defense buying is most often financed by inflation. Instead of taking from the taxpayers the money that it uses to buy war goods, the government in effect prints the added money. But we can easily have inflation (if that is what we want) without defense spending. If we simply cut tax revenues by the same amount as we cut defense spending we can keep the same deficit and finance it by continuing to print money. In fact, most of the people who believe that continued prosperity depends on continued defense spending are logical enough to advocate inflation in some other form if we ever have to terminate defense inflation.
It is strange that the superstition that defense spending is necessary for continued prosperity should still prevail. The whole theory got a crushing refutation at the end of the second world war. Immediately after Japan surrendered in August 1945 there was a sweeping cancellation of war contracts. Government economists predicted that unemployment would reach 8,000,000 by the following spring. Nothing of the sort happened. By May of 1946, employment was actually higher than in July of 1945. So were prices. The primary reason was that the government continued to inflate the active money and credit supply. This was pushed up $8,000,000,000 between the beginning of August 1945 and the end of that year. I don’t put this forward as an argument for monetary inflation, but as proof that prosperity is not dependent on defense contracts.
January 19, 1953
Early January is the time when the forecasters, many of them in the government, tell us exactly what the gross’ national product is going to be in the year ahead, and how much 45,500,000 different families are going to spend. Unfortunately for the forecasts, it is also the time when the President presents his budget. The record for the completed fiscal year behind him, as well as his revised estimates for the current fiscal year, remind us that, so far from being able to predict what everybody is going to earn and spend in the year ahead, government officials can’t even predict successfully what the government itself is going to take in and hand out.
Yet contrast the appallingly bad estimates of our own Presidents over the last twenty years with those of George Goschen, for instance, the British Chancellor of the Exchequer from 1886 to 1892. He had none of our ultra-modern statistical techniques. He was utterly ignorant of Keynesian economics. But somehow, year after year, he stumbled on incredibly accurate budget forecasts. For 1892–93 for example, he forecast expenditures at £90,253,000; actual expenditures were £90,375,000. He forecast revenues at £90,453,000; actual revenues were £90,395,000. He missed by only six-hundredths of 1 percent.
The table below compares, for each year since 1934, the President’s estimates (in millions of dollars) of expenditures, receipts, and deficits for the following fiscal year with the realities of that year. We still do not have a responsible budget system. And maybe, also, we haven’t learned as much about economic forecasting in the last 60 years as we think we have.
Fiscal Year |
BudgetEstimate |
Reality |
Percent Difference |
EXPENDITURES |
|||
| 1935 | $ 5,961 | $ 6,802 | + 14 |
| 1936 | 7,884 | 8,477 | + 8 |
| 1937 | 6,173 | 8,001 | + 30 |
| 1938 | 5,756 | 7,626 | + 32 |
| 1939 | 6,869 | 8,707 | + 27 |
| 1940 | 8,995 | 8,998 | ... |
| 1941 | 8,424 | 12,710 | + 51 |
| 1942 | 17,486 | 32,397 | + 85 |
| 1943 | 58,928 | 78,178 | + 32 |
| 1944 | 104,128 | 93,743 | - 10 |
| 1945 | 97,954 | 100,405 | + 2 |
| 1946 | 82,530 | 63,714 | - 23 |
| 1947 | 35,125 | 42,505 | + 21 |
| 1948 | 37,528 | 33,791 | - 10 |
| 1949 | 39,669 | 40,057 | + 1 |
| 1950 | 41,858 | 40,156 | - 4 |
| 1951 | 42,439 | 44,633 | + 5 |
| 1952 | 71,594 | 66,145 | - 8 |
| 1953 | 85,444 | 174,593 | - 13 |
RECEIPTS |
|||
| 1935 | $ 3,975 | $ 3,800 | - 4 |
| 1936 | 3,992 | 4,116 | + 3 |
| 1937 | 5,654 | 5,294 | - 6 |
| 1938 | 7,294 | 6,242 | - 14 |
| 1939 | 5,919 | 5,165 | - 13 |
| 1940 | 5,669 | 5,387 | - 5 |
| 1941 | 6,248 | 7,607 | +22 |
| 1942 | 8,275 | 12,799 | +55 |
| 1943 | 16,487 | 22,281 | +35 |
| 1944 | 33,081 | 44,148 | +33 |
| 1945 | 40,769 | 46,457 | +14 |
| 1946 | 41,255 | 43,038 | + 4 |
| 1947 | 31,513 | 43,259 | +37 |
| 1948 | 37,730 | 42,211 | +12 |
| 1949 | 44,477 | 38,246 | - 14 |
| 1950 | 40,985 | 37,045 | - 10 |
| 1951 | 37,306 | 48,143 | +29 |
| 1952 | 55,138 | 62,128 | +13 |
| 1953 | 70,998 | 268,697 | - 3 |
Fiscal Year |
BudgetEstimate |
Reality |
Percent Difference |
NET DEFICIT |
|||
| 1935 | $ 1,986 | $ 3,002 | + 51 |
| 1936 | 3,892 | 4,361 | + 12 |
| 1937 | 519 | 2,707 | + 422 |
| 1938 | sur. 1,538 | def. 1,384 | ... |
| 1939 | 950 | 3,542 | + 273 |
| 1940 | 3,326 | 3,611 | + 9 |
| 1941 | 2,176 | 5,103 | + 135 |
| 1942 | 9,211 | 19,598 | + 113 |
| 1943 | 42,441 | 55,897 | + 32 |
| 1944 | 71,047 | 49,595 | - 30 |
| 1945 | 57,185 | 53,948 | - 6 |
| 1946 | 41,530 | 20,676 | - 50 |
| 1947 | def. 3,612 | sur. 754 | ... |
| 1948 | sur. 202 | sur. 8,419 | + 4,068 |
| 1949 | 4,808 | def. 1,811 | ... |
| 1950 | 873 | 3,111 | + 256 |
| 1951 | def. 5,133 | sur. 3,510 | ... |
| 1952 | 16,456 | 4,017 | - 76 |
| 1953 | 14,446 | 35,896 | - 59 |
4Revised estimate |
January 26, 1953
No one will take Mr. Truman’s budget for the fiscal year 1954 very seriously, and there is no reason why anyone should. It is, to begin with, a legal absurdity that an outgoing President should be required to frame and present a budget for a year in which he will not be in office and for which he cannot and should not assume any responsibility. Mr. Truman’s budget estimates even for years in which he was in office were hopelessly wide of the mark. He overestimated expenditures for the current fiscal year, according to his revised estimates, by some $11,000,000,000.
But the budget for 1954 is not irresponsible merely because Mr. Truman framed it. As I have pointed out repeatedly in this column, we have an irresponsible budget system. It will continue to be irresponsible as long as Congress insists on the right to increase appropriations, even beyond those the President asks for.
Meanwhile, promises of substantial budget cuts cannot be taken too seriously. The economizers have become timid even in their talk. The “economy extremists” among Republicans hardly dare mention a cut of more than $10,000,000,000. Yet if we take the Truman estimates at face value, we confront a deficit of $10,000,000,000 in the fiscal year 1954 even if we continue all present taxes. If we allow the excess-profits tax to expire on schedule this June 30 (and the termination of this tax is essential to the health of the economy) it might require a slash of $12,500,000,000 in proposed expenditures to balance this 1954 budget.
Contrary to most of what is now being written, it should not be at all difficult or dangerous to make such a slash. When General Eisenhower last June ventured the opinion that the Federal budget could be cut as much as $40,000,000,000 in the next few years, he was scolded even by Senator Taft. But is that goal really so extreme? After all, even in the fiscal year 1951 expenditures were $30,000,000,000 less than the estimate for the present fiscal year. In the fiscal year 1950 expenditures were $38,000,000,000 less than estimated expenditures for the fiscal year 1954.
Two main lines of argument are now put forward against serious economy efforts. One is the familiar device of treating every expenditure as sacred to which the label of “defense” can be plausibly attached. This is like a spoiled son’s argument that it is unreasonable to ask him to cut down his spending at the Twenty One Club or the Chambord Restaurant because a fellow has to eat. No one, it is true, could say prior to an investigation by experts just how much our military expenditures could now be safely cut. But what we do know is that almost every Congressional investigation of military expenditures in the last few years has revealed shocking lavishness and waste.
It is doubtful, moreover, whether whole allegedly sacrosanct categories of expenditures, such as the $7,800,000,000 budget for foreign economic and military aid, can be justified even in principle. The real argument put forward for the military aid is in fact not military but economic. It is the plea that European nations cannot afford to pay for their own defense. The evidence behind this plea has been far from convincing.
The second main line of argument against substantial budget cuts is that enormous sums have already been appropriated or “committed.” But Congress is not impotent. It can review unexpended appropriations, direct that some of them be used in lieu of new appropriations, or authorize the President to curtail expenditures by executive and administrative orders. The amounts that really have been morally and irrevocably committed by Congress are far smaller than most of the present estimates.
Space unfortunately does not permit me to discuss the various procedural reforms recommended by Senator Byrd, Representative Coudert, and Herbert J. Miller of the Tax Foundation, to make our Federal budget more responsible and controllable. But if the will to economy exists, the way is certainly not closed.
February 2, 1953
Exchange control is a totalitarian device which until the outbreak of the second world war was confined to Communist Russia and to Nazi Germany. The democracies fighting Hitler themselves adopted exchange control, imitating Schacht’s techniques, after they became involved in the war. But no responsible statesman in the democracies suggested at the time that exchange control was anything but a war-emergency measure. In fact, though a necessary and inherent part of a totalitarian economy, it is completely incompatible with a free one. Yet England and nearly all the continental countries have retained exchange control since the war. It is the chief cause of their so-called “dollar shortage,” of their “international payments difficulties,” of their chronic excess of imports over exports, of “currency inconvertibility.”
Exchange control is a form of price fixing applied to money itself. The government of a country attempts to fix by fiat the rate at which its citizens are allowed to buy or sell its paper currency in terms of other currencies. This is only another way of saying that the government of a country under exchange control attempts to fix the price at which the currencies of all other countries are allowed to be bought or sold in terms of its own.
The consequences are like the consequences of price fixing in any other field. If the price of meat is arbitrarily fixed by an OPS below what it would bring in a free market, the consumption of—or demand for—meat increases, the supply coming to market diminishes, and there is very soon a “meat shortage.” So the next steps are consumer rationing, slaughter-hour licensing, processing quotas, and so on. In the field of currency, similarly, if the British pound is arbitrarily fixed at a price of $2.80 when the market thinks it is worth only $2.63, there is a “dollar shortage” because dollars are underpriced. Then dollars must be rationed through the imposition of import quotas, and international trade is put under an incredibly complicated system of licensing and controls.
This regiments and strangles an economy far more seriously than any other form of control. Through a system of import licenses and quotas, a government can fix the exact amount of raw material that a given industry or individual firm may use. In that way it can freeze an industry or a firm at any size it wants. It can exercise life-and-death powers over every business or firm that depends on imports. It can indirectly freeze the whole economy and get the entire business community accustomed to lack of freedom, lack of initiative, and lack of incentive. But it can never basically cure the “dollar shortage” that its exchange control has itself created.
Ever since the Bretton Woods agreements of 1944, a bare handful of writers, including myself, carried on a rather lonely battle against exchange control. A terrific crack in the system came in September of 1949; but instead of a return to free markets, there were worldwide devaluations of currencies unparalleled in history. Today the battle against exchange control is no longer forlorn. The turn of the tide may be dated from Dec. 14, 1951, when Canada completely abandoned exchange control. The immediate flow of funds and investment into Canada instead of out, and the rise of the Canadian dollar against the American dollar, was the opposite of the consequence usually feared by those who are afraid to abandon exchange control in their own countries.
The argument against exchange control has now received powerful support in the January letter of the National City Bank of New York. The bank points out that $38,000,000,000 of American postwar aid to foreign countries has not cured their dollar shortage. It doubts that the fantastic proposal of The London Economist for an additional $35,000,000,000 contribution from us would cure it. It points out that free convertibility of the paper pound was successfully maintained in a fluctuating market over the period 1931–39. And it insists bluntly that the way to get convertibility is to let the free market do the job. “The way to make currencies convertible is to make them convertible.”
February 9, 1953
British Government officials are said to have a plan to make the pound sterling freely convertible with the American dollar. The aim is laudable; but there are grounds for grave misgivings concerning the method that may be proposed to achieve it.
One step is indispensable. Britain must abandon exchange control. It must let the sterling rate go free. It must stop forbidding people to exchange pounds for dollars on any terms they can agree upon. The way to restore currency convertibility, in short, is simply to permit it.
Hitherto British officials have been frightened by the mere mention of convertibility. They cannot forget the quick collapse of the effort to make sterling convertible in the summer of 1947. But they still misinterpret the result. Britain was drained of dollar and gold reserves in those few weeks, not because the government had made sterling convertible, but because it had done so on the basis of a fantastically false conversion rate with the dollar. On Sept. 18, 1949, British officials at last admitted that the pound had been grossly overvalued. They slashed the official rate overnight from $4.03 to $2.80. But they failed to recognize even then that the only “realistic” rate for the pound is a free-market rate.
One would like to think that the subject is better understood now. Yet typical of the confusion which still exists even at the highest levels of British economic thought is the article by Prof. Lionel Robbins in the January issue of Lloyds Bank Review of London. This article makes some very sound points in an admirable way. It recognizes the weaknesses of “imperial preference.” It exposes the fallacies of the argument, seriously put forward by influential British and other European writers on economics, that productivity in the United States is so much greater than in England or elsewhere that trade equilibrium is impossible without a permanent aid program. As Professor Robbins points out: “The great principle of the division of labor is founded on just such differences; if there were no differences in productivity there would be no advantage in trade.”
But when it comes to the central issue Prof. Robbins still puts the cart before the horse. He is still opposed to currency convertibility through free exchange rates, the indispensable requirement for full convertibility. “I am yet to be convinced,” he writes, “that the dilemma is escapable that, when the general financial position is strong, free rates are usually unnecessary and that, when it is weak, they are apt to be a source of appalling danger.”
The real “dilemma” is in fact the reverse of this. When the general financial position of a country is strong, a pegged rate for its currency is unnecessary; and when it is weak, a pegged rate is an appalling danger. A pegged rate for the pound, higher than what a free market rate would be, necessarily brings a “dollar shortage.” It creates a chronic excess of imports over exports. It diverts production into the wrong channels, by reducing the relative incentives to export. It encourages the continuance of internal inflation. A pegged rate destroys the pressure-gauge readings by which everyone could measure the extent of inflation and the changes in world confidence in the currency. You cannot tell the real condition of the patient if the thermometer is pegged at 98.6 degrees or the exchange rate at $2.80.
There is no historic justification for Professor Robbins’s fears of a free or “floating” rate for the pound. Convertibility of the paper pound was maintained in a fluctuating market over the period from 1931 to 1939. Canada’s return to a “floating” dollar has been followed by a rise, not a fall, in the quotation for its currency.
Of course, a “floating” rate, one can hope, would be merely transitional to an eventual return to a gold standard. But Professor Robbins does not even hint at this last possibility. American taxpayers should not be called upon to contribute another dollar to the maintenance of exchange control in Britain or anywhere else.
February 16, 1953
President Eisenhower’s State of the Union message to Congress marked a turning point in American history as dramatic and unmistakable as the early messages and fireside talks of Franklin D.Roosevelt twenty years ago. Roosevelt proclaimed the birth of the New Deal; Eisenhower delivered its funeral oration. The Roosevelt-Truman philosophy led us deeper and deeper into a managed economy; Eisenhower reasserted the philosophy of a free economy.
The contrast with the previous Administration was most striking in the discussion of price control. This lay not merely in Mr. Eisenhower’s decision not to ask for a renewal of the present price- and wage-control legislation which expires on April 30, but in the reasons that he gave for this decision. He began by pointing out—what has never been clearly acknowledged in the executive branch in the last two decades—that the basic cause of inflation is government policies themselves. He knows just what those policies are and what must be done to halt them:
“The first order of business is the elimination of the annual deficit. . . . A balanced budget is an essential first measure in checking further depreciation in the buying power of the dollar.” He wisely warned that expenditures should be reduced before any reduction of taxes. He called on the Federal Reserve Board for proper restraint on credit expansion. And then he pointed out: “The great economic strength of our democracy has developed in an atmosphere of freedom. . . . Direct controls, except those on credit, deal not with the real causes of inflation but only with its symptoms. . . . American labor and American business can best resolve their wage problems across the bargaining table. . . . Controls in their present forms . . . have proved largely unsatisfactory or unworkable. They have not prevented inflation; they have not kept down the cost of living. . . . I am convinced that now—as well as in the long run—free and competitive prices will best serve the interests of all the people.”
With equal wisdom Mr. Eisenhower recommended that “material and product controls should be ended, except with respect to defense priorities and scarce and critical items essential for our defense.” In spite of this clearly thought-out position, which apparently has the full support of Congressman Wolcott, who heads the Banking Committee of the House, of Speaker Martin, and of Senator Taft a group in Congress headed by Homer E. Capehart, chairman of the Senate Banking and Currency Committee, still wish to give the President “stand-by” powers over prices that he has not asked for. The mere existence of such stand-by legislation would bring an element of crippling uncertainty into innumerable; business decisions, particularly those? involving long-range plans and long term price contracts. Senator Capehart even wants to retain a skeleton controls organization. This would mean the retention on the public payroll of people with nothing to do—but nonetheless with a vested interest in persuading the President, Congress, and the country that the imagined “emergency” for which they had been retained had already arrived.
The economic soundness of the Capehart proposal needs to be seriously examined. Inflation can be prevented by proper monetary and fiscal policy; but if it is not, then it only does added harm to try to disguise the inflation by price control. For in time of total war, price rises for particular products, and relative changes in prices, induce conservation in the use of scarce goods, and lead to maximum production most quickly of the things that are most needed. Efforts to prevent these relative price changes do not speed up economic “mobilization” for war, but retard or prevent it.
As for the immediate situation, the Administration will probably find that once a definite date has been set, a few months off, for the termination of price and wage controls, it becomes almost impossible to relinquish such “controls “gradually.” The simplest and most workable procedure is to lift them immediately.
February 23, 1953
President Eisenhower recommended the removal of price and wage controls for the right reason—because “free and competitive prices will best serve the interests of all the people, and best meet the changing, growing needs of our economy.” But the termination of controls has probably met its widest approval for the wrong reason—that they are “no longer needed” except for prices “pressing upward against their ceilings.” People who now acquiesce in the removal of price controls only for this reason will be demanding their reimposition at the first sign of another price rise. What we need to understand, if we are not to be easily stampeded into taking controls back, is that wherever conditions of real competition exist price fixing is always harmful. It is never more so than when “prices are pressing upward against their ceilings”—i.e., when they are being arbitrarily held substantially below the levels to which the free play of supply and demand would bring them. For prices have constant and indispensable functions to perform. Their changes give the quickest and best information obtainable concerning the existence and extent of surpluses and shortages of supply in relation to shifts in demand. They also promote the quickest and most efficient adjustment of supply to meet a new pattern of demand. A higher price for a scarce commodity is an immediate deterrent to its wasteful consumption and an immediate incentive to its increased production. The free play of prices, in brief, can bring a quicker conversion from peacetime output to war-needed output than any set of bureaucratic regulations.
Why, then, is there so much clamor for the imposition of price controls when a war breaks out? One reason is embodied in the specious slogan: “No one must be allowed to make a profit out of war.” But any control that slows down war production and brings shortages of vital goods merely aids the enemy.
Another reason for the clamor for controls is a predilection for price “stability” for its own sake. But price stability at the cost of shortages and disrupted production is too dearly bought. That a free price sometimes shoots up and then falls again is never a proof (though price controllers invariably regard it as one) that the price flurry was unnecessary. It probably brought about the very increase of supply that corrected it. A more sophisticated argument for price control is that the supply of some goods is “inelastic,” so that even a great increase in their price will not lead to an appreciable increase in their supply or rate of output. Only in rare cases does this academic contention describe actual facts. What those who make it usually have in mind are such things as housing, where the supply is not really “inelastic” but tends to respond to changes in price, rent, or demand only after a production-time lag. Yet the existence of such a lag is not a good reason for losing further time by forbidding any price incentive at all. And whether or not a rise in price brings an immediate increase in supply, it forces more economical consumption. A favorite analogy of those who argue that price control is indispensable in “total war” is that of a city under siege. The analogy is misleading. A city under siege cannot produce its own food, water, or fuel; a nation at war usually can. Price ceilings are usually harmful, moreover, even in a city under siege. They remove one of the chief deterrents to wasteful consumption. Priorities, allocations, and rationing may, of course, prove indispensable in a city under siege and in a nation engaged in total war. But priorities and rationing best achieve their purpose without price ceilings. Such ceilings merely give compulsory rationing more work to do.
But the rise in the average level of prices in wartime is caused chiefly by an increase in the supply of money and bank credit that the government has deliberately encouraged or enforced. But if the money supply is firmly controlled, there can be no spectacular general price advance and no excuse for government price ceilings.
March 2, 1953
We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.
President Eisenhower has shown great political courage in his own resolve to halt inflation. What is perhaps even rarer in our political life, he has shown a clear understanding of the steps that must be taken. He and his chief financial advisers also see these steps in their proper order. First we must cut expenditures enough to balance the budget. From then on we can cut both expenditures and taxes by the same amount. Meanwhile we must stop using the banks as a dumping ground for additional government securities, and stop holding down interest rates arbitrarily. In brief, we must stop inflating the money supply.
But this program is already meeting serious opposition. Even the Republicans in the House want to start cutting taxes right away, and talk about cutting expenditures later. (The House Appropriations Committee, however, at least made an excellent start by cutting the first spending bill before the new Congress from a requested $2,300,000,000 to only $904,000,000.)
Again, the new Secretary of Agriculture, Ezra Taft Benson, ventured to make some rarely sensible and courageous remarks about price-support policy, and a Democratic senator has already called for his dismissal. Though Mr. Eisenhower has promised to support farm prices at 90 percent of “parity” until December 1954, as required by present law, the opposition is already talking hysterically about the decline in farm prices and shouting that even the present inflationary support program is not enough.
But the opposition to a halt in inflation threatens to become even greater than this. Nearly all of us think we are against inflation, but most of us, on examination, are two-faced about it. We are deflationists in our role as consumers, but inflationists in our role as producers. We want to see the prices of what we buy go down, but the price of what we sell go up. City workers think food prices are too high; farmers think industrial wages are too high. Yet though beef and veal are still selling at retail at 193 percent above the 1935–39 level, as compared with only 91 percent above as the average for all items, many who presume to speak for the cattle raisers are already talking about the recent fall in beef prices as if it were an intolerable disaster. And though average weekly factory wages are 222 percent higher than in 1935–39, compared with an increase in living costs of only 91 percent, the American Federation of Labor recently called upon all its affiliated unions to press for still higher wage rates this year “as a necessary measure to head off a major depression in 1954 or 1955.” Another substantial boost in wage rates now, in fact, without a further expansion of the money supply to make the wage boost payable, would be precisely the way to bring on unemployment.
But the opposition to halting inflation will not come merely from farm and union leaders. To halt inflation may require a further rise in interest rates. This will be opposed by many business borrowers at the banks—precisely because it would discourage a further expansion of bank credit.
Just as inflation never means a uniform rise in all prices, so a halt to inflation would not mean a uniform “stabilization” of prices. On the contrary, the prices of some goods would be bound to fall; and the producers of these goods would start protesting. A halt in inflation would reveal, also, that the optimistic illusions which inflation breeds have resulted in the misdirection of investment into industries whose facilities have become relatively overexpanded. These industries would want inflation continued for their special benefit.
The Eisenhower Administration, in brief, must count the political cost of disinflation in advance, and be ready to pay it. And the rest of us must have the understanding to support it in that determination.
March 9, 1953
Dozens of different figures are now compiled, officially and unofficially, which purport to represent our personal or national “savings.” A day seldom passes without some discussion of these figures in editorials, speeches or business forecasts. A frequent conclusion is that these savings present “unused purchasing power” which could “cushion’’ a slump. This conclusion is dubious and so are the figures themselves. There are astonishing discrepancies in the estimates, partly because of differences in concept and definition of savings, and partly because of different ways of estimating their amount. The Council of Economic Advisers, on the basis of the Department of Commerce figures, estimates that net personal saving amounted to some $18,800,000,000 for 1952. The Securities and Exchange Commission, on the other hand, estimates that for the third quarter of 1952 total gross savings of individuals were running at an annual rate of $15,000,000,000 (compared with a Department of Commerce estimate of a rate of $20,300,000,000 for net personal saving in the same period). The annual rate of saving must not be confused with cumulative savings, which in turn must not be confused with liquid assets. Even if the layman can keep all these distinctions in mind, he may doubt how much better off he is. He looks up the latest figure of total deposits in savings banks, and finds it to be $22,300,000,000. In addition there are $2,600,000,000 in the postal savings system. He also finds that there are $40,000,000,000 in time deposits in commercial banks. Should he include these in savings? If so, why not add also the $99,400,000,000 in demand deposits in the commercial banks. Surely they are the depositors’ “savings”! And why not go on to the value of life-insurance reserves, the assets of savings and loan associations and of government pension and trust funds, the value of government bonds, and corporation bonds and stocks?
But what the layman has been adding up, the statisticians will now tell him, is the value of “liquid assets.” And he will get different totals for these depending on whether he consults the Federal Reserve Board or the Securities and Exchange Commission. Last year the SEC estimated that at the end of 1951 individuals had accumulated a total of $340,000,000,000 in liquid assets. This specifically did not include corporate securities, which would have raised the figure by $210,000,000,000 more. But this total would come close to equaling the estimates of national wealth! After the layman has collected such figures and (if possible) reconciled them with each other, what practical or predictive use can he make of them? Do savings, for example, provide a “cushion” against depression?
The first thing the layman is forced to recognize is that a “liquid asset” for the individual is not necessarily a liquid asset for the community as a whole. One man’s quick asset is usually somebody else’s quick liability. Considered individually, people have available savings. But collectively they cannot spend their savings—for the simple reason that these have already been spent.
When a man puts $1,000 in a savings-bank deposit, for example, the savings bank buys, say, a newly issued $1,000 bond with it, and the corporation that sells it the bond buys, say, a $1,000 machine tool with the proceeds. The depositor’s $1,000 has been spent on a machine tool. If the depositor later withdraws his $1,000 to spend it on consumption, the savings bank (in the absence of some offsetting deposit) has to sell its bond to someone else. But if this someone else buys the bond, he cannot then spend the same $1,000 on his own consumption. His new saving must compensate for the former depositor’s “dissaving.”
The only way in which savers can collectively spend their savings (except to the small extent that these have consisted merely in hoarded cash) is through new borrowing, direct or indirect, at the banks, against their securities or other assets as collateral. But this means that new money must come into existence. And this is a form of inflation.
March 16, 1953
The death of Stalin opened up wide possibilities. The most hopeful, (made unlikely by the quick appointment of Malenkov) was that it might have the same sort of dramatic sequel as the death of the Mongol Khan Ogdai in 1241. That sequel has been vividly described by Winston Churchill: “The chivalry and armed power of Europe was completely shattered by the Asiatic hordes. . . . It seemed that nothing could avert doom. . . . But at the critical moment something happened—the Great Khan died. The succession was vacant and the Mongol armies and their leaders trooped back on their ponies across the 7,000 miles which separated them from their capital in order to choose a successor. They never returned till now.”
The worst possibility is that Malenkov or those around him may decide that the best way to consolidate their power at home is to launch immediate aggressions abroad and to call for more “unity and vigilance.”
The probabilities, however, are favorable. History and the nature of the Russian despotism justify the hope that the would-be successors of Stalin, like the potential successors of Lenin and Caesar, will intrigue or war against each other.
But the consequences of Stalin’s death may depend much more on what we do about it than on what immediately happens in Russia itself. We have a tremendous opportunity. Much depends on whether we know how to exploit it.
We have missed almost every such opportunity in the past. By officially recognizing Stalin’s despotism we lost far more than we gained. In the war against Germany we had one opportunity after another to impose terms and conditions on Stalin, or to extract concessions or guarantees from him in return for the immense aid we were supplying. We missed them all. We continued to act as if we were mainly dependent on Stalin when he was mainly dependent on us. We bribed him to get into the Japanese war when there was no need for such a bribe. We surrendered more principles to get him into the United Nations, when we should have done far better to keep him out. The one real act of the United Nations against aggression—in Korea—was possible only because Stalinist Russia had made the mistake of a temporary walkout.
If Stalin is gone, the Communist ideology remains. Our chief task is still to know how to combat it. Neither the Roosevelt nor the Truman Administrations gave any evidence that they knew how. They not only tried to appease Russia, but they showed constant sympathy for anticapitalistic ideas and measures both abroad and at home. At home they encouraged monetary inflation, which is the kind of heady stimulant that undermines and can eventually destroy private enterprise and the free market. Truman in effect supported Iran in its breach of contract with the Anglo-Iranian Oil Co. and its seizure of the properties. He openly espoused the socialist “principle of nationalization.” He even offered American aid to Mossadegh, the weeping, pajama-clad dictator, to help him finance the oil seizure.
Our policies in recent years have rather consistently encouraged such foreign “nationalization”—i.e., expropriation with inadequate compensation or none at all. Our representatives abroad have encouraged and even demanded so-called “land reforms” that violate all the principles of private property, demoralize production, and are hardly distinguishable from Communist land seizures.
In brief, the ideology fashionable in Washington and Europe in the last twenty years has favored the doctrine that the way to combat Communism is to compromise with it or to imitate it. If this doctrine persists, even the present opportunity may be lost. We can combat the ideology of Communism only with the ideology of freedom. Right principles will dictate right policies and right tactics vis-à-vis the Communist menace. President Eisenhower, unbound by the ideology of his last two predecessors, has a golden chance to use the death of Stalin to restore hope and peace and honor in the world.
March 23, 1953
It was in Britain and in Europe, and not here, that the catchy slogan originated: “Trade, Not Aid.” The implication of this was that the countries of Europe no longer were asking for subsidies and handouts. All they were asking for was that the United States remove the artificial barriers that it had put in the way of receiving imports. They would do the same, and then they would balance their foreign trade through their own efforts.
But in practice European officials have been giving an appallingly one-sided interpretation to their own slogan. It turns out to mean more demands on us without corresponding concessions. Some of their demands are entirely justified. They ask that we simplify our customs procedures, that we abolish any quota limitations on imports from them, and that we lower our tariffs still further. We should do all these things. They are as much in the interest of the American consumer as of the European producer.
But the quid-pro-quos that European officials offer are virtually non-existent. They usually fail to suggest any reciprocal lowering of their own tariffs. Even when they do, they make such a reduction worse than meaningless by proposing to continue quotas and discriminations against American goods, and to continue bilateralism, special license requirements for imports, price-pegging for their own currencies, and rationing of dollars. Moreover, their “Trade, Not Aid” slogan turns out to mean, after all, “Trade, Plus Aid.”
All this was illustrated in the series of talks just completed between British and American officials on the problem of convertibility of the pound. The British officials seem to assume that to make the pound convertible would be primarily a favor to the United States, and that therefore we should be willing to pay them to do it. What they appear to have in mind is that we put up some $2,000,000,000 to $4,000,000,000 as a stabilization fund to support the pound. Of course as long as we stood ready to pay over $2.80 to anyone who wanted to convert a pound into dollars we could make the pound “convertible” at that rate as long as our money held out. But at the end of that time we would be just where we were at the start (except for our $4,000,000,000) and the problem would remain unsolved.
The blunt truth is that “convertibility” of the pound is not a problem that even British officials (let alone ours) have to solve. All that British bureaucrats have to do is to stop preventing its convertibility. The British pound is pegged at $2.80 by law. Except under specified conditions, it is made inconvertible into dollars by law. All the British bureaucrats have to do is to repeal these prohibitions. Then currency convertibility will take care of itself, as it has from time immemorial.
Two unwarranted fears have hitherto prevented this simple solution. The first is that the pound will sink and keep sinking. It will do so only if the British Government follows policies that undermine confidence in the pound. But if it keeps the discount rate high, if it keeps the paper pound scarce, if it keeps its budget balanced, if it turns its back firmly against threats of further socialism and property seizure, it will find such a fear groundless, as Canada did when it freed its own dollar.
The second fear is a “flight of capital.” This also is groundless unless government policy provokes such a flight. As an extra safeguard, the government could adopt, as a transitional measure, the device used by Peru. That country, although it forced its exporters to turn the dollars they had earned over to the government, gave them equivalent dollar “certificates” in exchange which they in turn were allowed to sell within Peru for whatever price (in soles) they could get in a free market from would-be importers. Thus there was at least free convertibility within national borders.
It is primarily to Britain’s advantage, rather than to ours, to make its currency convertible. If the will exists, the techniques of doing it present no serious problem.
March 30, 1953
The other day I met a friend who is a large stockholder in General Motors, and he told me a story. A few weeks before, his son had used somewhat excessive strength on the mixing valve in his bathroom and broke the handle off. The local plumber couldn’t repair it, so he ordered and installed a new valve. The valve turned out to cost $22.50. The installation, at $4 an hour, brought the total up to $100.
That sounded steep enough; but it was not until my friend had made some mental calculations that he realized how steep it really was. His income falls into the 90 percent tax bracket. So he figured that in order to acquire the $100 with which to pay this plumber’s bill, he had to receive $1,000 in dividends from General Motors. (For the benefit of the non-mathematical, $1,000 in dividends minus $900 in taxes on them leaves $100 to pay a plumber’s bill.)
But this is only the beginning. In order to pay $1,000 in dividends, General Motors has to earn more than $4,000 before taxes. (General Motors earned $1,502,000,000 before payment of taxes in 1952. It had to pay $943,000,000 in taxes, leaving it $559,000,000 in net income, out of which it paid $362,000,000 in dividends. So for every $1,000 it paid out in dividends, it had to earn $4,149 before taxes.)
But in order to earn $4,149 before taxes, General Motors had to sell $21,570 worth of cars—say eighteen Chevrolets—to its dealers. (GM total sales and income in 1952 amounted to $7,645,000,000.) To sum up, because of cost and tax erosion, in order for my stockholding friend to replace a bathroom valve, General Motors had to make and sell eighteen Chevrolets.
“So what?” some reader may ask. “If this fellow pays a 90 percent income tax, he must be rolling in it. Don’t expect me to weep.”
The point of the story is not that anyone should stop to weep, but that a few of us should stop to think. The question is not what our incredible burden of taxation is doing to this rich individual or that, but what effect is going to have in the long run on our whole economy—on productivity, wages, and employment.
Obviously a continuation of this rate and kind of taxation must undermine incentives, discourage new business ventures, and even prevent the formation of new capital for such ventures. For every dollar that General Motors paid to stockholders last year, it had to pay $3 to the government (not counting what it collected and paid in excise and sales taxes). The case of General Motors, in this respect, is not exceptional. The Department of Commerce estimates that corporate profits before taxes in 1952 were $39,700,000,000; that out of this the corporations had to pay $22,600,000,000 in taxes, and that they paid out $9,100,000,000 in dividends. In other words, the government took an average of 57 percent of all the earnings of the corporations. And for every dollar that the corporate stockholders got in dividends, the government got $2.48.
Even this does not tell us what the stockholders were able to keep in dividends after paying personal income taxes. A stockholder whose income gets into the top tax bracket of 92 percent can keep only 8 cents out of each dollar of dividends. The government gets the other 92 cents. Adding this to the $2.48 that it has already taken from the corporation gives the government $3.40. In other words, the government gets 42 times as much out of the average corporation as the investor in the top income-tax bracket is allowed to get and keep.
This may seem like a wonderful racket for the government while it lasts. But Congress should not be entirely astonished if it wakes up one day to discover—we hope not too late—that this division of the profits does not furnish the highest incentives for private investment in new enterprises; and that new venture capital has been drying up, with unpleasant effects on wages, employment, and production, and even on government revenues themselves. If we do not want to repeat the present predicament of England, we should not imitate the policies that brought her to it.
April 6, 1953
No sooner have we got rid of the self-imposed incubus of price control than agitation has begun for setting up stand-by wage- and price-control powers to take effect immediately should we ever get into a third world war. The proposal is unsound both economically and politically.
Senator Capehart of Indiana has taken the leadership in pressing for this legislation. He has been supported by the testimony of Bernard M. Baruch. It was Baruch’s testimony in the summer of 1950, in favor of “an overall ceiling across the entire economy,” that was chiefly responsible for the subsequent enactment of price-control legislation. Baruch’s prestige in many fields is richly deserved. But his price-fixing proposals disregard the most elementary economic facts and principles.
In 1950 he proposed that all prices and wages be “rolled back” to and frozen as of June 25, the day hostilities broke out. Now he is supporting the Capehart plan for an across-the-board, 90-day freeze of prices and wages in an all-out war. He has even urged that such a freeze should be extended to a year.
Of all forms of price control, an overall freeze is the most unworkable and the most harmful. To provide that in the event of a total war prices and wages must be absolutely frozen is like providing that in the event of a theater fire everybody must be strapped to his seat to avoid disorder.
Baruch often refers to our control experience in the first world war. The late Benjamin M. Anderson, in his book, Economics and the Public Welfare (1949), pointed out: “Wages we did not try to fix in World War I. . . . Price fixing we engaged in cautiously. There was . . . recognition of economic fundamentals. Prices have work to do. Prices have the important function of accomplishing priorities, allocations, and rationing. . . . It is the work of free prices and freely moving wages to determine whether labor and supplies shall be drawn to the production of commodity ‘A’ or of commodity ‘B.’ Rising prices mean more production. Falling prices mean less production. . . . With freely moving prices and freely moving wages, the goods in most urgent demand are produced, and the production of the less urgently demanded goods declines. Price fixing by itself tends to derange perversely the control of production and consumption.”
At the outbreak of total war, what is desperately urgent is the quickest possible change-over from civilian output to military output. It is precisely this that a blanket price-and-wage freeze would prevent or delay.
And how would a blanket-freeze formula be applied? To wages, for example? If we froze weekly wages we would discourage or prevent overtime work, just when such work was most essential. If we froze hourly rates, but allowed the customary 50 percent overtime premium, we would immediately get more overtime in the production of military goods. But this would raise the unit labor cost of such goods. If we did not allow the price of these goods to go up, we would discourage or prevent their production. If we did allow the price of these goods to go up, the blanket-freeze formula would already be breached. (An overall wage freeze would, of course, also prevent the producers of military goods from offering higher wages to attract labor away from the production of civilian goods. This would necessitate government direction of labor—i.e., telling each worker what job he must take.)
On Jan. 26, 1951, our price controllers actually announced a so-called overall price-and-wage freeze. The very next day an executive of the Office of Price Stabilization said that his agency was working intensely to “cure the absurdities and inequities inherent in such a sweeping order.” In total war we may need quick priorities and rationing—but these work best without price controls.
If the government follows proper fiscal and monetary policies in a total war it will not need price control. If it follows inflationary fiscal and monetary policies, price control will be not only futile but pernicious.
April 13, 1953
In recent weeks there have been signs of a recession. Wholesale prices, of course, have been sliding since they reached a peak of 116.5 in February-March 1951. By March 10 the price of steers dropped nearly 30 percent from the beginning of this year. Though the Office of Price Stabilization removed the last price ceilings on March 17, the decontrol has had no important effect on the average level of wholesale prices. The official index, in fact, dropped slightly to 110 in the week ended March 24. At the end of March, the Dow-Jones spot commodity price index stood at 168; a year previous it was 192. Chrysler announced automobile price cuts on March 25. On March 30 the stock market suffered the worst break since Oct. 22, 1951.
The stock-market break was generally attributed to the latest Korean peace overtures. Now if we take these seriously, they might adversely affect the price of securities in two ways. Some corporations are heavily dependent on direct war orders. If these declined, they might not find it easy to replace them. A drop in defense spending, moreover, could mean an end to inflation. Commodity and stock prices based on the assumption of continued monetary inflation would fall.
It would be absurd, however, to rush from this to the conclusion that a truce in Korea, or a lessening of the threat of a third world war, would be bad for our economy in general. Such a conclusion assumes that the best thing for business, employment, and the well-being of consumers would be the continued wasteful production of arms and ammunition.
This is merely a special case of the ridiculous reasoning which assumes that prosperity depends on the volume of government spending. What this reasoning overlooks is that the less the government must spend on armament or anything else the more it can reduce taxes. Then people can spend more of their own money for the things they want rather than have it seized by the government to be spent on the things it wants.
“War prosperity” is produced not by the volume of defense spending but by the inflationary method of financing it. It is produced, in other words, by an increase in the supply of money and bank credit. As the present inflationary boom shows signs of slackening off (which it did long before the latest Korean truce overtures) there will be increasing pressure on the Eisenhower Administration to resume inflation in one form or another. The increased pressure for more and higher farm price supports is a mere foretaste.
Willingness to accept some adjustment and recession now will be a test of the sincerity of all those who have been affecting to deplore inflation. More important, it will be a test of their understanding. It is true that the present inflationary boom could be kept going for a time by further doses of inflation. But to inject these now would be to build up for an inevitable crisis and collapse.
In an article in the Feb. 19 issue of The Commercial and Financial Chronicle, the economist L. Albert Hahn drew a striking parallel between the present inflation as it has developed since the autumn of 1949, and a previous “second postwar boom”—from 1921 to 1929. Both booms, he pointed out, rested on money and credit inflation. Between the end of 1948 and today total loans and investments of the commercial banks have been increased from $114,000,000,000 to $140,000,000,000. This compares with a rise from about $38,000,000,000 in 1921 to $50,000,000,000 in 1929.
Wholesale prices in the present period have increased (even after their recent decline) by roughly 12 percent. Wholesale prices between 1921 and 1929 actually showed a slight decline, in spite of monetary inflation. This led to the false belief that there was no inflation; and warning signals were ignored. Hahn argues that a monetary and credit inflation without a price rise (“inflation without inflation”) can be as dangerous as any other. To prevent a future depression, he advises, we must put “brakes on the [present] boom before it enters its excessive phase.”
April 20, 1953
I predicted in this place last week that fears of peace in Korea would lead to “increasing pressure on the Eisenhower Administration to resume inflation in one form or another.” Typical of the comment already appearing is a dispatch in The New York Times of April 8 from James Reston.
“The Soviet ‘peace offensive’,” it begins, “has had at least one good influence [in Washington]. It has alerted the government planners whose job it is . . . to make provision for the day when defense spending will not assure full employment. . . . For seven years the Russians have tried to scare us into isolation and inflation; now, as the experts here see it, one of their objectives seems to be to smile us into disarmament, deflation, unemployment, and depression. . . . Labor union leaders . . . already have started appealing to the President to plan at once for the day when the vast government orders for munitions will drop off. . . . The observers think that . . . the Soviet hierarchy is trying to bring the United States up against the major problem of keeping its people employed when it shifts to a modified peace economy.”
Notice how the dispatch rolls “disarmament, deflation, unemployment, and depression” all into one package, implying that the first necessarily involves the last. Notice the implied labor-union-leader plea to maintain the present fantastic rate of government spending at all hazards.
It was only a few months ago that the Russian Communists were accused of threatening war mainly to force us to spend ourselves into inflation and bankruptcy. Now they are accused of threatening peace to force us to economize ourselves into unemployment and depression. A regular technique seems to have developed among our would-be planners, official and unofficial. If they want to get us to do something, they immediately charge that the Russian Communists are trying to force us to do the opposite.
“In the Soviet mind,” The Times dispatch continues, “the capitalist world cannot close the gap between its production and consumption without vast expenditures for war.” Whether or not this is the Soviet theory, it is certainly the theory of most of our home-grown planners. They might admit, perhaps, that we don’t need vast expenditures for war. But we certainly, in their opinion, need vast government expenditures for something if we are to “close the gap between production and consumption.”
As this column has often pointed out, this theory is pure Keynesian nonsense. It is astounding that it could have survived the experience immediately after Japan surrendered in August 1945, when a sweeping cancellation of war contracts was followed by even higher employment in the spring of 1946. How often must it be pointed out that if the government spends, say, $10,000,000,000 a year less on defense, the taxpayers have $10,000,000,000 more of their own money to spend on themselves?
What the planners and “experts” in The Times dispatch are really arguing for is the continuance of monetary inflation. Indeed, a school is now developing that openly embraces Perpetual Inflation. Listen to Prof. Seymour Harris of Harvard. Perhaps the present Administration’s monetary authorities, he writes in a letter to The New York Times of April 5, “will tell us where, in the absence of bank purchases [of government bonds], the money is to come from which will be required over the next 25 years on the conservative assumption that real income would rise by 100 percent and prices by only 50 percent. . . . For when the banks buy, additional deposits are created.”
In other words, Harris insists that even if production of commodities doubles, their prices ought to be raised by at least 50 percent. This result could only be brought about, of course, by an enormous further inflation (of some 200 percent) in the money supply.
With such doctrines on the loose, the Administration is going to find it extremely difficult to hold to a course of economic, fiscal, and monetary sanity.
April 27, 1953
A book just published, Money, Men and Machines, by Waddill Catchings and Charles F. Roos (Duell, Sloan & Pearce-Little, Brown, $2.50), attempts to supply a new answer to the problem of how to avoid both “inflation” and “deflation” and still keep continuous full employment.
Catchings is chiefly known as co-author with William T. Foster of Money (1923) and Profits (1925). Roos was director of research for the NRA and is now president of the Econometric Institute in New York. Their book is short, lucid, handsomely printed, and extremely readable. It contains, among other merits, a well-reasoned argument for economic freedom and an excellent description of the workings of what the authors call the “price-and-profit mechanism” in our system of private competitive enterprise.
But the answer that the book offers to the problems of “monetary management” is vague and disappointing. The authors are opposed both to the orthodox solutions of the past and practices of the present. They accuse the Federal Reserve Banks of “mismanagement of our money supply” in 1929, in 1937, and in 1948–49. They don’t like what they call the Reserve Board’s “zigzag methods of monetary manipulation,” by which they mean the lowering and raising (especially the raising) of discount rates.
They speak constantly of the dangers of a “dear-money policy” but never define “dear” money. “Throughout much of 1951 and 1952,” they write (p. 109), “the Federal Reserve System pursued a dear-money policy. The result was that the long-term interest rate rose by more than 10 percent, and the short-term rate by more than 50 percent.” These increases, calculated in this way, sound startling. But the authors neglect to tell us that even after this “dear-money” policy the average interest rate on four-to-six months’ prime commercial paper in 1952 was only 2.33 percent, and on three- month Treasury bills only 1.76 percent. On the best-grade corporate bonds the average yield in 1952 was 2.96 percent—as compared with an average yield of 5.07 percent, for example, in the ten years from 1920 to 1929 inclusive. If the short- and long-term interest rates of 1952 represented “dear” money, it would be interesting to know what the authors’ idea is of really cheap money.
Their own proposals, as I have said, are vague. The Federal Reserve Board is to be “directed to provide a supply of money that is adequate but not excessive.” This is not a solution, but merely a statement of the problem, which is precisely how to determine what money supply is “adequate” and what is “excessive.” “It is only necessary for Congress to declare that the purpose of managing money is to provide the people with the amount they need to produce according to their ability and desire.” This is just as nebulous.
Catchings and Roos don’t like the international gold standard: It “sacrificed domestic prosperity for the stability of foreign exchange.” And instead of control of the money supply through changes in the discount rate, they prefer the clumsier method of changing reserve requirements. But they do not consider what the effect of this would be on interest rates, nor do they tell us whether they would try to change reserves or reserve requirements while forbidding consequent changes in interest rates.
In short, the reasoning of the authors, on their central proposal, is confused. By an “adequate” supply of money, they obviously don’t mean an unchanged supply. “To be adequate, our money must increase regularly from year to year.” The wage-price spiral, they correctly tell us in italics on page 90, exists “only because the Reserve Board allows the money supply to increase.” But on page 101 we learn that if a wage-price spiral does start, we must provide more money to sustain it.
The basic proposals of Money, Men and Machines would be inflationary in effect. If we intend to halt inflation, we must begin by allowing interest rates to rise. And eventually we must return to a real gold standard.
May 4, 1953
Congress has allowed its Constitutional power of the purse to slip through its fingers. As Roswell Magill, former Under Secretary of the Treasury, recently testified: “Congress has lost annual control of expenditures.” He pointed out that $53,000,000,000 of the $78,600,000,000 expenditures proposed for the fiscal year 1954 is “not subject to control or review” by Congress this year. “Even if Congress failed to appropriate a dime during this session, the agencies and departments of the Federal government would have available for expenditures on June 30, 1953, more than $100,000,000,000 of unexpended balances from previous authorizations.”
As a first step to cure this situation, and to stop the deficits that the Federal government has incurred in twenty out of the last 23 years, Representative Coudert of New York has introduced a bill (H.R. 2) to provide that Federal expenditures shall not exceed revenues except in time of war or grave national emergency.
The bill provides, in other words, that there shall be no more deficit financing and no more resort to printing-press money, except upon at least a two-thirds vote of each house and a resolution declaring a national emergency. Such a measure would put a statutory limit on spending. It would tie spending directly to tax revenues. It would enable Congress to reassert its power of the purse and regain annual fiscal control.
The Coudert bill has the support of several governors and of the Conference of State Taxpayer Executives representing 38 state taxpayer associations. One of the witnesses in its favor was Governor Herter of Massachusetts. “Ten years spent here in Congress,” he said, “taught me one lesson so well, and gave me one warning so imperatively, that I shall not forget either. The lesson was that unless Congress maintains rigid control over the spending agencies of the Federal government we may one day find ourselves facing a national crisis of the first magnitude; and the warning was that Congress has lost such control. I believe that nothing more important can be done at this session than to regain it and thus establish national solvency.”
Governor Herter also reminded Congress that the procedure prescribed by the Coudert bill is essentially no different from the one which already exists in many states, including his own. “As governor, it is my Constitutional duty to submit [an annual] budget . . . and at the same time to submit a schedule of revenues to balance what I propose to spend. . . . The legislature may thereafter increase appropriations beyond my recommendations, but it may not be adjourned until it has provided the revenues to pay for what it appropriates.”
I am sorry to report that the new Secretary of the Treasury and the new Director of the Budget, while endorsing the aims of the Coudert bill, opposed the procedure it prescribed as too “inflexible.” This objection is without substance. The most flexible spending control that Congress can exercise (without actually abdicating its Constitutional responsibilities) is to set an overall ceiling on expenditures and allow the executive branch a very wide latitude in proposing whatever budgetary allocation of detailed expenditures it deems wise within that overall total. This is the way every individual business firm and every individual household is compelled to operate. Its total expenditures must be kept within its total income. If this is a “strait jacket,” it is a desperately needed one.
Nothing, certainly, could be more unrealistic than the procedure so often recommended—that “Congress should vigorously pare down spending, bill by bill and item by item.” A Federal budget of $78,000,000,000 is made up not merely of thousands, but of hundreds of thousands of individual items. No assembly of 531 men can possibly have the time and the knowledge to consider the merits of each item. But it can and does know that a chronically unbalanced budget and an intolerable burden of taxation can lead us to disaster.
May 11, 1953
It has remained for John L. Lewis to make the most sensible suggestion of any witness before the Senate Labor Committee on what to do about the Taft-Hartley Act: “Since management has cried out so sorely against the Wagner Act and all the manifold injustices alleged to be contained therein, let them now join us in repealing the Taft-Hartley Act in toto, lock, stock, and barrel, including the Wagner Act itself, upon which Taft-Hartley is founded. This would give to this country, its employers and employees, an opportunity . . . to practice for a season true, free, and genuine collective bargaining without governmental interference. . . . Leave the Norris-La Guardia and the Clayton Acts as the Federal rule and guide in the field of labor-management relations. . . .”
Most of us, including Senator Taft and a multitude of business groups, have forgotten that the Taft- Hartley Act is merely an amended Wagner Act, and retains most of the unsound principles embodied in the parent law. The Wagner Act abridged the freedom of the employer to hire or discharge, negotiate or bargain. It abridged his freedom to employ associates of his own choosing. He was forced to deal with the particular unions certified by a government board, no matter how unreasonable their demands or how unsatisfactory their performance. The union leaders were, it is true, certified through an “election,” but the Labor Board decided what unions it would allow on the ballot, and it could gerrymander the “appropriate” bargaining units pretty much to suit itself.
The Wagner Act in effect turned the government into a union-organizing agency. The frankly avowed purpose of its sponsors was to increase the power of unions. Its way of seeking “to diminish the causes of labor disputes” was to encourage strikes by granting strikers immunity from discharge, and often even holding out the promise of back pay after a strike.
The act was openly one-sided. The only “unfair” acts it forbade were acts of employers. The employer could not “refuse to bargain collectively” with his employees (an extremely vague requirement never satisfactorily defined). There was nothing in the act, however, to prevent even the government-certified union from refusing to bargain with the employer. The certified-union leaders became government-certified monopolists. The law in effect authorized unions to paralyze the economic life of the country or dictate the terms on which they would refrain from doing so.
The Taft-Hartley Act retained most of the abridgments in the Wagner Act on the bargaining freedom of employers, but sought a semblance of balance by trying to impose a few curbs on union leaders. Therefore most union leaders have denounced it as a “slave labor” act. Yet a good deal of the one-sidedness and hypocrisy of the Wagner Act has been retained in Taft-Hartley. In its one pretense of balance, the Wagner Act declared it to be an unfair practice for an employer either to “encourage or discourage membership in any labor organization.” The “discourage” was interpreted with a severity that infringed the employer’s very freedom of speech. But the Wagner Act at another point specifically authorized a closed shop—i.e., it authorized the employer to discriminate totally against nonunion members. And the Taft-Hartley Act specifically authorizes a “union shop” under which the employer must fire anyone who does not join a union 30 days after his employment.
The effort, in brief, to “balance” abridgments of the bargaining freedom of employers with allegedly corresponding restrictions on union leaders has worked badly. It has led to increased governmental meddling with individual and collective bargaining. This meddling has created, exacerbated, and prolonged far more labor strife and strikes than it has prevented. Last year’s steel strike is an outstanding example.
Why not, as John L. Lewis suggests, try the pre- New Deal labor-law situation for a while?
May 18, 1953
The announcement of President Eisenhower on April 30 that he would ask Congress “to appropriate $8,500,000,000 less new money for fiscal year 1954 than had been asked for by the previous Administration” made a good one-day headline. But it will not bring much comfort to taxpayers who examine the situation closely. This $8,500,000,000 is not a proposed cut compared with the previous rate of Truman spending. It is merely a cut from President Truman’s estimate for a fiscal year when he would not be in office and for which he knew he could not be held responsible. And it is a cut only in requested new appropriations, not necessarily a cut in actual rate of spending. In last week’s issue, Newsweek estimated that the Eisenhower spending budget for the fiscal year 1954 would approximate $74,200,000,000. This would be about the same as is being spent in the present Truman-Eisenhower fiscal year which ends on June 30. But it would be $8,000,000,000 more than was actually spent in the last full Truman fiscal year of 1952 and almost $30,000,000,000 more than was spent in the Truman fiscal year 1951. The Korean war was being fought during the whole of both these years.
Mr. Eisenhower complains that when he took office he found “a total carry-over of $81,000,000,000 in appropriated funds, largely committed. . . . It’s just as if the late Administration had gone to the store and ordered $81,000,000,000 of goods, which we’ve got to pay for as they’re delivered, in addition to paying the regular household running expenses.”
But two questions must be raised about this: (1) Is the whole of this $81,000,000,000 in fact so irrevocably committed (in the form of noncancelable contracts, for instance) that no appreciable part of it can either be rescinded or used for new purposes? (2) Isn’t Mr. Eisenhower planning to continue the same sort of carryover to make it just as difficult to balance the budget in future years? A simple calculation leads, in fact, to the conclusion that on his present proposed spending and appropriation program he will end even the fiscal year 1954 with a carry-over of more than $70,000,000,000 unspent appropriations into 1955.
“I have always firmly believed,” said Mr. Eisenhower in his statement of April 30, “that there is a great logic in the conduct of military affairs. There is an equally great logic in economic affairs. . . . If . . . these two are allowed to proceed in disregard one for the other, you then create a situation either of doubtful military strength or of such precarious economic strength that your military position is in constant jeopardy.”
This is admirably said. But the specific budget decisions Mr. Eisenhower has so far announced seem in fact to disregard economic logic. His message of May 5, urging Congress to authorize $5,800,000,000 for the foreign-aid program in the fiscal year 1954, is an outstanding case in point. True, this was a reduction of about $1,800,000,000 from the previous Administration’s 1954 budget. But Mr. Eisenhower is asking for it on top of some $9,000,000,000 of prior appropriations for foreign aid that still remain unspent at this time.
Nor did the statements either of Mr. Eisenhower or Mr. Dulles really explain why this additional $5,800,000,000 is needed. It is not enough merely to contend that the United States must “carry out its responsibilities of leadership in building up the security of the free world.” It must be shown that this particular method is the way to do this, and that no less than this amount is necessary. The answers to these questions so far have been little better than rhetorical. Our whole foreign-military-aid program, in fact, rests on the constantly reiterated but still unproved contention that Europe cannot afford to pay for its own defense.
Our own economy is in real danger from the present appalling rate of spending and intolerable load of taxes. If it is undermined by these the defense of the whole free world will really be imperiled.
May 25, 1953
In the issue of March 2, I wrote here: “We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.” The answer so far has not been reassuring.
Let’s begin with the budget. The burden of taxation is already as high as the American economy can possibly stand. Inflation can be halted only by a slash in the present fantastic level of Federal expenditures large enough to wipe out our chronic deficits. One would not suppose such a slash to be supremely difficult. The $73,700,000,000 that we are spending in the current fiscal year alone is more than Franklin D. Roosevelt spent in the full eight years of his first two terms. It is nearly $30,000,000,000 more than even Harry Truman spent in the fiscal year 1951, during the whole of which the war in Korea was in progress.
It was less than a year ago that Mr. Eisenhower himself ventured the opinion that the Federal budget could be cut as much as $40,000,000,000 in the next few years. But when he recently announced reductions that would still keep spending in the 1954 fiscal year at a level of $73,500,000,000 (according to the Stam estimates for Congress), there was a chorus of outcries that these economies would imperil the country.
Now it is always possible, even in a budget of these incredibly swollen overall dimensions, to “economize” in the wrong place, to cut down on the wrong thing—on long-range air power, let us say. But what is disheartening is that so few of the critics of specific cuts bother to suggest where the cuts might be made instead. Even on the present program, according to the Stam estimates, there will be a deficit in the current fiscal year of more than $7,000,000,000, and in the next fiscal year of nearly $6,000,000,000. But this is being treated as if it were a matter of no particular concern.
Even more ominous, so far as the outlook for a halt in inflation is concerned, is the attitude being taken both inside and outside Congress toward the efforts of our monetary authorities finally to end the inflationary spree that has wiped out more than half of the purchasing power of the dollar since 1939. Twenty Democrats in Congress, including their leader in the House, Sam Rayburn, and their whip, John W. McCormack, have sponsored a resolution calling on the Federal Reserve Board to start supporting government bonds again at par. If they really understand what they are asking for, they ought to say outright: “We want more inflation.”
Let us see what the course they demand would mean. At the moment of writing this, some of the government’s 2½ percent bond issues are selling around 91 or 92. How many billions of dollars worth of bonds the Federal Reserve Banks would have to buy to bring these up to 100—and keep them there—is anybody’s guess. The Reserve Banks would create deposit credits to “pay” for these bonds. These credits would then become the basis for several times as much new money and bank credit—in short, for inflation.
The action would increase not only the available supply of inflationary credit but the demand for it. In fact, to order the Federal Reserve Banks to buy all government 2½ percent bonds offered to them at par is only another way of ordering them to increase the money and credit supply enough to keep long-term interest rates down to 2½ percent. And such low interest rates, thus artificially produced, encourage more private borrowing. This is the main explanation for the increase in the supply of bank deposits and currency from $63,000,000,000 at the end of 1939 to $192,000,000,000 at the end of this January.
Yet people are shouting about “dear money” and “deflation” when the discount rate is 2 percent and when, as W. Randolph Burgess of the Treasury has pointed out, unemployment is at a minimum, the index of production made a new record high in the latest reported month, and personal income has reached a new high rate of $282,500,000,000 a year.
June 1, 1953
President Eisenhower’s radio talk of May 19 on the budget, and his tax message to Congress the next day, once more illustrated his deep honesty and earnestness in grappling with our major national problems. Yet his announced decisions, on net balance, must be set down as disappointing.
He is planning expenditures for the coming fiscal year of more than $74,000,000,000. This would be higher than was spent in any fiscal year under Truman. It would leave an estimated deficit under present tax laws of $6,600,000,000. Even if Mr. Eisenhower gets all the tax extensions he is recommending (and most of which are unwise), his proposed expenditures would still leave an estimated deficit of $5,600,000,000.
Do expenditures of more than $74,000,000,000 in 1954 in fact represent an irreducible minimum? Mr. Eisenhower himself has some admirable words to say in this connection: “Words like ‘essential’ and ‘indispensable’ and ‘absolute minimum’ . . . are spent with wild abandon.” Yet his actual spending budget is made up in large part of “absolute minimums” that turn out on examination to be very dubiously minimum. He seems to accept the whole $81,000,000,000 of unspent appropriations from the Truman Administration as irreducible and noncancelable, and his own budget apparently contemplates carrying forward some $70,000,000,000 of unspent authorizations into 1955.
Suppose we disregard the evidence of shocking waste in military expenditures uncovered in the last few years by Congressional committees, and accept all the military-spending estimates as irreducible. The budget still includes expenditures with worse than no economic justification. One need merely point for illustration to the billions spent and to be spent on farm-price supports which make food dearer for the American consumer.
The arguments for expenditure on a major item—the $5,800,000,000 being asked as an additional appropriation for foreign aid—are still rhetorical rather than factual. This is illustrated by General Ridgway’s testimony before the Senate Foreign Relations Committee on May 19. He treated concern for economy with some contempt: “I don’t believe the civil authorities would want me to change my professional judgment as to the minimum requirements I believe necessary just because someone says it costs too much. . . . Money values assume somewhat different importance when all you hold dear is at stake.”
This perhaps misses the point that what we hold most dear may depend for protection just as much on our long-term economic strength as on our immediate military expenditures. The $5,800,000,000 that the President and General Ridgway are asking for foreign aid in 1954 is about the size of the inflationary deficit we are planning for that year. It is fair to point out, therefore, that if this amount were not spent for foreign aid in 1954 we could either avoid the deficit entirely, or avoid the tax prolongations that Mr. Eisenhower himself admits to be unsound. (His judgment on the excess-profits tax is that it “actually penalizes thrift and efficiency and hampers business expansion.”)
The huge foreign-aid program is now costly to our own economic health. And it rests on the very dubious contention that Europe cannot afford to pay for its own defense. This is primarily an economic, not a military, contention; and General Ridgway is not a final authority on its soundness.
It is impossible, of course, to consider the budget without considering the wisdom of specific government policies and attempted functions. Even where it is agreed that the taxpayer’s money should be spent in a given direction, there is always the further question, how much? The present budget quandary once more suggests the need for drastic procedural reforms. Certainly a minimum first step would be the adoption of something like the Coudert resolution (see this column of May 4). We still have a budget system under which responsibility cannot be clearly fixed.
June 8, 1953
The original Capehart proposal to give the President power to impose a 90-day freeze on prices, wages, and rents in the event of a “grave national emergency” was so transformed as it emerged from the Senate that the House may not even consider it. This would be just as well.
Though the original proposal was approved by the Banking and Currency Committee by a vote of 12 to 3, the minority report ably summarized the objections to it: “It embodies stand-by control provisions for which the President did not ask. It embodies a philosophy counter to the views expressed by the President in his inaugural address. . . . If enacted into law, it would embed an economic fallacy into the functioning of the American economy for the life of the legislation.”
The minority convincingly refuted the contention of the majority report that it was price controls which finally stabilized prices during the Korean war. “If controls were holding the prices from going higher, the wholesale price-index graph should show a horizontal line at ceiling levels. Instead it shows a sizable drop below ceiling levels. . . . Final removal of price and wage controls has resulted in no general or significant increase in either prices or wages despite the forecasts of alarmists.”
It was the political and not the economic objections of the minority to the Capehart proposal, however, that were effective in securing changes in the Senate. The minority pointed out that under the original bill an overall freeze could be imposed “upon a simple finding that a ‘grave national emergency’ exists. . . . The bill would amount to a grant of power to invoke the freeze whenever bureaucratic advisers . . . could persuade the President to make the required finding.” The Senate therefore revised the bill to require a concurrent resolution of the Senate and House to find that an emergency existed before the President could call for a freeze.
But it was because the Senate majority accepted the economic ideology of the bill’s sponsors that it defeated the proposal of Senator Bricker to strike out all authority to impose a price-and-wage freeze. The Senate bill even requires the President automatically to freeze wages, prices, and rents if the United States declares war on a foreign nation.
All such price-and-wage freeze proposals rest on lack of economic understanding. It is significant that the long majority report never once mentions the huge increase in the supply of money and credit that took place after the outbreak of the Korean war. This was the real cause of the price-and-wage rise, which could have been stopped at any time by proper fiscal and monetary measures. Instead the government encouraged the increase in the money and credit supply, and then “fought” the consequent inflation with price control.
The majority report’s argument depends heavily on a false analogy. It speaks of “economic mobilization” for war. Like Bernard Baruch, it identifies such “mobilization” with a price-and-wage freeze. Now mobilization, in the military sense, means “to assemble . . . an army or a fleet.” It certainly doesn’t mean compelling everybody to stay just where he was before the war broke out. A price-and-wage freeze would be, in fact, the greatest obstacle to economic mobilization for war. Price changes are necessary to tell us the truth about comparative surpluses and shortages. They provide the incentives or deterrents that divert production most quickly into the lines where it is most needed. Free prices act faster than fumbling bureaucrats.
One element of sense in the “economic mobilization” idea is that it may be necessary, on the outbreak of a major war, for the government to put into effect some immediate priorities and allocations. But not only can all this be done without government price fixing; it can be done quicker and better without price fixing. When there are shortages, price ceilings make priorities and rationing more necessary, not less. Priorities and rationing, on the other hand, can in themselves restrain price rises.
June 15, 1953
For the fiscal year beginning July 1 we face an estimated deficit under present tax laws of $6,600,000,000 and, even if Mr. Eisenhower gets all the tax extensions he wants, of $5,600,000,000. We profess not to know how to solve this problem. Yet we are planning to give away $6,500,000,000 to foreign countries.
Our foreign-aid program, once mainly “economic,” is now mainly for “defense.” Congressmen hesitate to criticize it because they think it involves primarily a “military” question. It still involves, in fact, primarily an economic question, for it rests on two invalid economic assumptions: (1) that Europe cannot afford to pay for its own defense and (2) that the amount we give for defense aid all goes to increase foreign defense.
Here are this fiscal year’s armament expenditures of ten of our aid beneficiaries stated as a percentage of (1) their total central governmental expenditures (TGE) and (2) their gross national product (GNP). The record of these European countries is compared with our own:
Defense Expenditures
| Country | % of TGE | % of GNP |
| Belgium-Luxembourg | 23.6 | 6.3 |
| Denmark | 24.2 | 3.5 |
| France | 37.6 | 11.2 |
| Greece | 39.0 | 8.5 |
| Italy | 26.4 | 5.8 |
| Netherlands | 23.3 | 6.2 |
| Norway | 26.5 | 5.0 |
| Portugal | 35.5 | 5.0 |
| Turkey | 40.8 | 6.5 |
| United Kingdom | 37.2 | 12.0 |
| United States | 71.3 | 15.0 |
The United States, in brief, is spending on national defense more than four times as much absolutely as these ten nations combined (some $53,200,000,000 against a total of $11,800,000,000). It is also spending much more relatively—15 percent of its gross national product against an average of 7 percent for the ten beneficiaries.
Many Europeans argue that this is just as it should be. They advocate a sort of international progressive income tax. This rests on the theory that the man or country that produces more and earns more somehow owes the difference to the man or country that produces less and earns less.
Yet the United States, which is giving the defense aid, is spending some 70 percent of its total budget on defense, whereas the countries receiving the aid are spending on the average only some 30 percent of their total budget on defense. This is another way of saying that while we in the United States can afford to spend only 30 percent of our total budget on nondefense items, the European beneficiaries of arms aid are lavishly spending some 70 percent of their total budgets on nondefense items. They are robbing their own defense at the cost of comparative luxuries (including deficits on their nationalized industries).
This relationship cannot be excused on the plea of poverty. On the contrary. In the foregoing table it is Greece and Turkey that have the highest relative defense budgets. Yugoslavia devotes some 80 percent of its total spending budget to defense, and Nationalist China about 57 percent. The ten countries in the table spend altogether a modest $11,800,000,000 on defense and some $34,200,000,000 on nondefense. Suppose we assume that we are contributing some $4,200,000,000 a year to their defense. Why can’t they, instead, take this out of their nondefense expenditures (which would still leave them some $30,000,000,000 for this purpose) and add it to their defense expenditures (which would still be only about half of their nondefense expenditures)?
It is relevant here to point out that whatever money or material we give to a European government for defense aid, however specifically earmarked, can simply release that much of that country’s own funds for additional nondefense expenditures. The only way we could make sure that this diversion is not taking place would be to dictate and supervise every item of that government’s budget. And no one would dare propose such dictation.
June 22, 1953
We are witnessing once more the sad spectacle that has repeated itself again and again over the last twenty years—the utter rout and defeat of the forces for economy.
President Eisenhower, who started off so bravely a year ago with the statement that the Federal budget could be cut as much as $40,000,000,000 in the next few years, is planning to spend in the next fiscal year more than $74,000,000,000—an amount higher than was spent in any fiscal year under Truman. Yet it is not these terrific expenditures that are receiving the brunt of criticism in Congress and in the press, but the one major economy proposed in the military budget. And nowhere else in the budget is a major cut even being seriously proposed.
That the forces of economy should have been routed in 1934, when Federal expenditures jumped to nearly $7,000,000,000 and the debt to $27,000,000,000, was deplorable enough. But that the forces of economy should be just as thoroughly routed in 1954, when Federal expenditures are to be $74,000,000,000 and the Federal debt is scheduled to exceed $270,000,000,000, is enormously more serious. If proposals for government economy are dismissed even more peremptorily today than they were twenty years ago—though the rate of Federal expenditures and the national debt have both increased tenfold—then there must be some persistent factor at work that calls for the most urgent analysis and correction.
That factor is not mysterious. It is the lack of anything approaching a responsible budget system. Even the accounting is so chaotic that no one seems to know where we stand. President Eisenhower has been complaining that he has no real control of the budget because of a carryover into the next fiscal year of some $81,000,000,000 of funds appropriated and committed but not yet spent. He is treating this carryover as practically irreducible and nonre-scissible. Yet the Joint Congressional Committee on Reduction of Nonessential Federal Expenditures (the Byrd committee) pointed out in a recent report that some $5,200,000,000 of this amount was in fact still uncommitted and unobligated. And it added: “Experience indicates the firmness of some of the so-called obligations may be subject to review.” On the other hand, the committee includes not only this $81,000,000,000 in its total of unexpended balances, but more than $20,000,000,000 of “revolving and management funds”—bringing its own total estimate to $102,000,000,000.
Our budget “system” is set up for the spenders, not for the economizers. Almost any of the reforms that have been suggested would do at least some good. This is particularly true of the Byrd proposal for a single annual appropriation bill, and of the Coudert proposal for keeping Federal expenditures within revenues except in time of war or grave national emergency (see this column of May 4).
But we will never have a responsible budget in this country until we have removed the chief reason for irresponsibility. This is the power of the House of Representatives to increase expenditures beyond those proposed by the President and the power of the Senate to increase expenditures beyond those voted by the House. The result is a triangular competition in extravagance.
Nothing quite parallel exists in any other leading country. No other country could afford it. In Great Britain the wholesome rule has been immemorially established that Parliament has no power to increase expenditures beyond those proposed by “the government.” The Congressional “power of the purse” can be rightly understood only as the power of withholding or denying the purse. When Congress can put its own hands in the purse, in order to propitiate pressure groups, then there is no one left to represent the interests of the taxpayers. It is only when Congress has the power of reducing expenditures, but not of increasing them, that competition in economy will supplant the present competition in extravagance.
June 29, 1953
The views of Arthur F. Burns, now serving as Economic Adviser to the President, should be of interest to every businessman, for they may affect the future of his firm. An excellent synopsis of them can be obtained from Dr. Burns’s last annual report, just published, as director of research of the National Bureau of Economic Research, the private organization from which he has taken a leave of absence to assume his government job.
Much in Dr. Burns’s statement is excellent. Government action against depressions, he reminds us, must also mean action against the preceding unsound booms. Yet political officials, “while earnestly resolved to do away with depressions, sometimes seem to neglect the need of controlling booms and trust too exclusively in our ability to check any contraction that may get under way.” What preceding official has had the economic insight, sincerity, and political courage to point this out so clearly?
Dr. Burns says many other good things. “There are no adequate grounds, as yet, for believing that the government will resist inflation with as much tenacity as depression. . . . Not only is the art of contracyclical action as yet imperfectly understood, but there are practical obstacles [such as the existence of political pressure groups] to the effective use of such knowledge as exists.”
But after he has said all this, Dr. Burns still seems to be convinced that governments both can and should undertake what he calls “contracyclical policy.” He quotes with apparent approval the statement of Mr. Eisenhower that “never again shall we allow a depression in the United States. . . . [If signs appear] of any . . . depression that would put . . . men and women out of work, the full power of private industry, of municipal government, of state government, of the Federal government will be mobilized to see that that does not happen.”
Dr. Burns himself makes the following statements: “Since 1929 . . . social control of business cycles has emerged as a political necessity, both domestically and internationally. . . . Our economic system will continue to generate cyclical tendencies. . . . It is reasonable to expect that contracyclical policy will moderate the amplitude and abbreviate the duration of business contractions in the future. . . . Perhaps, before many years pass, an economic general staff will emerge within the government and take on some of the characteristics of military general staffs.”
Some of the implications of these statements are disturbing. They imply that there is some inherent tendency in the capitalistic system to “generate” cycles and depressions, but that continuous government intervention could correct or at least “moderate” this. They assume that party politicians will act with more foresight and objectivity than private producers. An economic general staff, in particular, implies a quasi-military staff giving orders to businessmen on when to expand and when to contract. Some of us had assumed that the main trouble in the Communist, Fascist, and Socialist countries was that they already had such “economic general staffs.”
I would like to suggest a different approach to business cycles. It is no accident that the most violent fluctuations in prices, production, and employment have corresponded with the period of most government interference in business. Most major modern business oscillations have been the result either of credit and currency expansion deliberately instigated by government, followed by inevitable collapse, or at least by failure of government to halt an unsound credit expansion until too late. The best government “contracyclical” policy would be to keep an inflationary boom from starting, not to try to whip it up again after it has begun to flag. Governments need no encouragement to do the latter; it is, in fact, almost impossible to stop them. But they have no appetite whatever for doing the former and have almost never been known to try.
July 6, 1953
It is good news that the Yale University Press has made available a new edition of The Theory of Money and Credit, by Ludwig von Mises (493 pages, $5). In his introduction to the English-American edition in 1935, Lionel Robbins wrote: “In Continental circles it has long been regarded as the standard textbook on the subject.”
To this latest edition the author has added a new section of 44 pages on the present problems of monetary reconstruction. No two economists seem to agree in every detail regarding the monetary policies that should now be adopted and the order in which particular steps should be taken, but Mises’s discussion seems to me on the whole the soundest, most thorough, and most illuminating that has so far appeared.
No one, for example, has explained better than Mises the detailed process of inflation and the exact nature of the evils it entails. His basic argument for a return to the gold standard is nontechnical: “The excellence of the gold standard is . . . that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. . . . It makes it impossible for them to inflate.”
Today, unfortunately, only a minority of economists agree that it is both possible and desirable to return eventually to a gold standard. When it comes to such questions as when? under what conditions? how? and at what rate? even this minority of gold-standard advocates is split 40 different ways.
Mises’s answer runs something like this: Monetary reform presupposes first of all a change in the prevailing economic ideology. “There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom.” The first step must be to put an absolute halt to any further monetary inflation. “The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully—i.e., 100 percent—covered by deposits paid in by the public. . . .
“At the same time all restrictions on trading and holding gold must be repealed. The free market for gold is to be re-established. Everybody, whether a resident of the United States or of any foreign country, will be free to buy and to sell . . . to import and to export, and, of course, to hold any amount of gold, whether minted or not minted. . . . In this first period of the reform it is imperative that the American Government and . . . the Federal Reserve System keep entirely out of the gold market. . . .
“It is probable that the price of gold established after some oscillations on the American market will be higher than $35 per ounce. . . . It may be somewhere between $36 and $38, perhaps even somewhat higher. Once the market price has attained some stability, the time has come to decree this market rate as the new legal parity of the dollar and to secure its unconditional convertibility [into gold, and vice versa] at this parity.”
Regardless of their merits, these proposals are unlikely to get serious official consideration at this time. Very few monetary economists, for example, today favor anything as drastic as a prohibition of any increase in bank deposits (and, incidentally, in bank loans) beyond an increase of the same amount in gold reserves. Even most supporters of a return to the gold standard merely wish to stop the kind of credit expansion that comes through bank purchases of government bonds, not the kind that comes from an increase in the total volume of loans to business. And even most of those who favor a restriction on loans to business wish to carry it out solely through increases in interest rates (and perhaps in member-bank reserve requirements) rather than through any direct quantitative limitation.
But though there will be dissent from some of his detailed conclusions, Mises’s answer cannot be neglected by any serious student of the problem of returning to a gold standard. And that return is imperative if the world is not to drift even deeper into monetary chaos.
July 13, 1953
The Eisenhower Administration started out bravely to halt inflation. It refused at first to resume Federal Reserve support of government securities. It tried to get away from the inflationary policy of financing Treasury deficits by short-term notes, certificates, and bills sold to the banks. It resolved to start financing itself with long-term bonds, even though it had to pay 3¼ percent. But as soon as interest rates, as an expected consequence, became a little tighter, a chorus of complaints came from Congressmen, labor officials, bankers whose old bond holdings were dropping in value, and business firms which had to pay more for borrowing. The Administration took fright. In mid-May, the Federal Reserve System began purchasing Treasury bills in the open market. By June 17, it had bought $525,000,000 of government securities.
Then on June 24 it took the most inflationary step of all. It reduced the reserve requirements of member banks. This action, it estimated, would release $1,156,000,000 of reserves, which in turn would give the country’s banks another $5,780,000,000 or so in lending power. All this was frankly done in anticipation of Treasury needs of some $6,000,000,000 of “new money” in the next three months.
Between the end of 1939 and the end of April this year, the country’s supply of money and bank credit was increased from $64,700,000,000 to more than $195,000,000,000. This tripling of the money supply is the inflation that everybody talks about. It is the primary reason for the great increase in prices. Now the government wants to increase the money supply by $6,000,000,000 more. It is back in the business of printing fiat money for deficit financing.
It is being said in apology for the Federal Reserve action that the system could not help itself. The deficit at the end of the fiscal year just closed was $9,389,000,000, the largest in peacetime history. The deficit expected for the fiscal year just begun is $6,000,000,000 to $7,000,000,000.
As one commentator has shrewdly put the matter: “So long as the government runs a deficit the deficit will control the money managers and not the money managers the money.” Yet this is only partly true. The Treasury could conceivably finance the deficit by long-term bonds paid for out of real savings. But it just doesn’t want to pay the interest rate which this would involve.
The new Administration, moreover, cannot escape responsibility for the state of the budget. Mr. Eisenhower was in charge of spending for nearly six months of the fiscal year just closed. He will be in charge of spending for the entire fiscal year just begun. In spite of heavy spending commitments carried over from the Truman Administration, Mr. Eisenhower is not powerless. He could cut the budget in scores of places where he has not done so. There is no sound economic reason, but only political reasons, for the billions we are paying out for high support prices for farm commodities. There is no longer any impelling reason (if there ever was one) for giving billions of the taxpayers’ money away to foreign countries. Yet we are in fact planning to give some $6,500,000,000 away (or just about the amount of the expected inflationary deficit) in the present fiscal year. Several of his statements and actions, indeed (including his appeal to Congress for power to give away “surplus” food to foreign countries) indicate that Mr. Eisenhower has been infected by Mr. Truman’s foreign handout ideology.
In brief, on top of an inflation that the Democrats have been building up for twenty years, a Republican Administration is planning another heavy dose of inflation. This record demolishes the entire dream-theory that we can depend for salvation on something called “governmental contracyclical policy.” Governments know only how to inflate; they have no stomach for halting an inflation, and never try until it has gone so far that it cannot be stopped without threatening a crisis. The best contracyclical policy is to deprive governments of the power to inflate.
July 20, 1953
The United States has spent $92,500,000,000 in foreign aid since 1941. Now, at long last, there are signs in Congress of a revolt against indefinite continuance of the program.
Sen. Walter F. George, Democrat of Georgia, served notice on July 1 that he was voting for the last time for any authorization for the Mutual Security Agency. If the nations of Western Europe were unable to stand on their own feet after seven years of foreign-aid programs, he said, “they never will be.” A still greater surprise came when Sen. Mike Mansfield, Democrat of Montana, a traditional supporter of foreign-aid programs, offered an amendment, which the Senate adopted, to terminate the Mutual Security program on June 30, 1955 (instead of 1958).
There are many reasons behind this change in opinion. Some of them can be found in the facts summarized in a recent study by the Tax Foundation. Industrial production had reached prewar levels in most European countries by 1947, and in all of them by 1951. Agricultural production in general exceeded prewar levels by 1949.
So far as defense aid is concerned, I pointed out in this column of June 15 that the United States is spending on national defense more than four times as much absolutely as ten European arms-aid-receiving nations combined. It is also spending—twice as much relatively—15 percent of its gross national product against an average of 7 percent for the ten beneficiaries. Finally, the United States is spending 70 cents out of every tax dollar on defense, whereas these European nations are spending only 30 cents out of every tax dollar on defense. They are spending the other 70 cents on such things as deficits on their socialized industries, overgrown social-security systems, and subsidies to unprofitable and inefficient industries. Some of them act as if their defense were primarily a favor to us, and we should pick up the check.
It is beginning to be recognized, finally, that our economic aid has not only failed to speed up a return by Europe to sound economic policies, but that it has actually been used to finance the socialization of Europe. As the economist F.A. Hayek has put it: “There can be no doubt that, because of American financial assistance, governments of many countries now control economic activity to a much greater extent than would otherwise have been the case. Because of the form in which the United States has chosen to provide capital for these countries, their governments, in turn, have become the main dispensers of capital. When a government thus becomes the main source of investable funds, if inevitably speeds up the process of government domination of business.”
Will Congress really accomplish anything by setting a deadline for foreign-aid “programming” in 1955, and for spending in 1957? This is more likely to be
interpreted abroad as a promise to keep the handouts going at least until that time. Paul Hoffman used to announce frequently the forthcoming termination of ECA; but it merely changed its name to MSA and cost us just as much.
Why not terminate new foreign-aid appropriations right now? After all, more than $10,000,000,000 of unexpended balances for foreign aid still remain on the books, even if Congress does not appropriate another penny.
If Congress does think it has to appropriate more, why not make the funds available strictly in the form of loans, to be paid off, say, in equal monthly installments of principal and interest over 25 years? Congress would probably be surprised at how little need European governments found for such repayable loans. Congress might even supplement this by limited government guarantees of private loans abroad under the strict conditions suggested by F.A. Hayek in an article in The Freeman of April 6.
We just had a deficit for fiscal 1953 of $9,389,000,000. We face a deficit for 1954 approaching $7,000,000,000. Surely the day of the huge handout to foreign nations, on any sort of facile rhetorical plea, ought to be over.
July 27, 1953
The Senate Appropriations Committee has received a staff report which questions whether the French “will ever put their fiscal house in order and balance their budget by collecting the proper amount of taxes as long as they receive United States aid. . . . Taxation of the rich is on a primarily low level. . . . What we are doing with our economic aid is simply giving the French a certain amount of money and exercising no real control over how it is spent.”
These observations are harsh but justified. Yet there is nothing particularly new about them, except that a Congressional committee staff has now had the courage to make them. It has been inherent in the situation all along that without American dollars the government of France (or of any other country receiving our aid) would either have to spend less money or increase its own taxes. It is also inherent in the situation that the only way in which we could exercise real control over how our dollars are spent would be to dictate and supervise every item of the French budget—which no one has dared to propose.
It is obvious that it does little good—that it is in fact fatuous as well as futile—to “earmark” our foreign-aid funds for specific purposes, to set up special “counterpart funds,” and all the rest. To the extent that we pay for France’s defense, France does not have to use its own money for defense. Therefore its government can use the money it saves on defense to spend for any other purpose it pleases: In the fiscal year 1952, in fact, 62 cents out of every dollar it spent went for nondefense items.
On July 14, a dispatch from Harold Callender, Paris correspondent of The New York Times, attempted to answer the Senate committee staff’s report, but missed the point completely. The Mutual Security Agency, wrote Callender triumphantly, “controls the use of the funds granted to finance a specified list of defense purchases . . . or to increase French productivity. Its control is constant.” But none of this proves that the French would not otherwise be spending their own money for these purposes, or that they could not have increased their own taxes to do so.
As I wrote in illustrating this point in Will Dollars Save the World? published six years ago: “If you make a loan to a family that keeps a car for pleasure, nothing is gained by the assurance that the particular dollars you have loaned have gone only to buy food, and that the automobile was bought and run with the family’s own earnings. Even if you could verify by the numbers on the bills that your particular dollars were spent only for food, you would know that your loan was being used in effect to keep the car—because the family would otherwise have to give up the car and use its own earnings for the food.”
So it is just as fair to argue that the dollars we pour into France pay the deficits on its nationalized industries, or support its overexpanded social-security system, or relieve its rich citizens of taxes, as to contend that they go only for defense or the purposes for which they are “earmarked.” It is also just as fair to say that we are prolonging our excess-profits tax, with all its admitted harm to our new enterprises, efficiency, and production, in order to help subsidize Europe’s socialism, or to relieve Europe’s wealthy citizens of heavy taxes so that they may continue to patronize the luxury hotels on the Riviera.
We are doing all this because we have got ourselves snarled up in economic, political, and moral confusions. We have been sold the idea that we must assume something vaguely called “world leadership”—which turns out to mean “assuming our world responsibilities”—which turns out to mean supporting people all over the world so that they may realize what they call their “legitimate aspirations.” We have acquired a Santa Claus complex, an Atlas fixation, and a giveaway mania. And we are solemnly told by our own leaders that if we ever halt our foreign bounties the world will “lose confidence in us,” and our allies will last only as long as our handouts.
August 3, 1953
The blunders and scandals connected with the Reconstruction Finance Corp. led to a mounting demand that the agency be abolished. So Congress has voted to terminate it—and to create something just as bad to take its place.
The new institution will be known as the Small Business Administration. Congress seems to think this will be better, because it will not be authorized to make any individual loan of more than $200,000. But it may actually be worse. What caused the public demand for the abolition of the RFC were the mink-coat scandals in connection with the $37,500,000 loan to the Lustron Corp. and the misgivings that grew out of the $69,400,000 loans to Kaiser-Frazer. These large loans captured the headlines. But where no one loan is big enough to dramatize the situation, blunders, politics, and corruption may continue to be tolerated.
Loans by a political agency are inevitably more political than economic. Congressmen did not hesitate to bring pressure on the RFC to grant loans to their constituents. Obviously they will hesitate much less to do this in connection with small loans than in connection with large ones.
The sentiment in favor of government loans to private business rests on a belief that there are all sorts of worthy projects, particularly small ones, that cannot get started because private bankers or investors do not have the courage and vision to see the possibilities in them. No doubt there always are a few worthy projects of this sort. Private bankers and owners of loanable capital are not omniscient. But it does not follow that a government lending agency will know how to correct these private errors. On the contrary, it is enormously probable that for every sound project it finances that private capital would not finance, it will finance half a dozen marginal projects, from snack bars to snake farms, that private capital had quite wisely turned down.
Government agencies are bad gamblers from the nature of the case. The private investor risks his own money.
He may stand either to make a handsome profit or to lose his entire capital. Therefore he is likely to scrutinize a project very carefully before he risks that capital. A government agency, on the other hand, is not risking its own money, but merely the taxpayers’. The SBA loans are almost certain to be dubious, moreover, from the very terms under which they must be made. Private-loan sources must be exhausted before a small business can come to the SBA for a Federal loan. This means that the SBA can risk the taxpayers’ money only on projects in which no one has been found willing to risk his own money.
Some people suppose that a government agency will at worst finance some unsound projects, and only the long-suffering taxpayer will take the loss. But at any given time there is a limited amount of available capital. The government does not create any new capital; it merely takes some away from the taxpayer. So the capital that the government agency lends to Y for an unsound and unprofitable project is in effect taken away from X, who would have got it for a sound project from taxpayers who had to turn it over to the government lending agency instead. A government lending agency, in short, because it is never primarily concerned with profitability, not only finances inefficient and unprofitable ventures but indirectly deprives efficient and profitable ventures of funds.
The best thing the government can do for small business is not to “aid” it but to stop penalizing it. The best way to have stopped penalizing it was to have let the excess-profits tax expire instead of forcing its extension. The government, having tied the legs of profitable, efficient, and growing small business by extending the excess-profits tax, is trying to compensate by giving crutches to unprofitable and inefficient small business through a new lending agency. The real way to help small business is to let inefficiency and bad judgment suffer their natural penalties, and efficiency and good judgment reap their natural rewards.
August 10, 1953
Immediately after the House voted to slash $1,115,050,000 from the $5,157,232,000 President Eisenhower had asked for foreign aid, he appealed to the Senate to restore the cut. The Senate Appropriations Committee—and the Senate—promptly restored approximately half of it.
The House rightly decided that, above all in an inflation and in the midst of a private-housing boom, there was no excuse for continuing a public-housing program. It voted to eliminate it. The Senate restored the program to 35,000 houses, whereupon the House was compelled to compromise on 20,000.
The House voted for only some $60,000,000 for the Overseas Information Service. The Senate increased the amount to $80,000,000.
And so it goes. There is nothing unusual in this record. In every session of Congress the Senate pretty regularly outbids the House in its vicarious generosity with the taxpayers’ money. The Senate’s record in this session, in fact, is much better than usual; there are even cases in which it made a smaller appropriation than the House.
The main reason for this superior extravagance of the Senate is simple. The House usually acts first on appropriation bills. A senator has little to gain politically merely by me-tooing the liberality of the House. The way to political credit for generosity is to vote for an increase above the House appropriation. Thus we have a system which creates a three-way competition among the President, the House, and the Senate to outbid the others in the amount of money each recommends or offers for special purposes or to special groups at the expense of the American taxpayer.
It may be seriously doubted whether this corresponds with the intent of the framers of the Constitution. Article I, Section 7, provides: “All bills for raising revenue shall originate in the House of Representatives.” In practice this has been strictly interpreted to apply solely to tax bills; but the framers probably also had appropriation bills in mind. They seem to have thought of appropriations and the taxes to pay for them as inseparable parts of a single legislative process. This is indicated by the odd fact that the Constitution nowhere directly and explicitly, but only by implication, confers power on either house to make appropriations.
There are three ways in which the present triangular competition in extravagance among the President, the House, and the Senate could be ended:
1—The Constitution could be amended so that the Senate would have to wait until the House had acted first, not only on tax bills, but on appropriation bills; and the Senate would be given power to eliminate or reduce, but not to increase, any appropriation made by the House.
2—Better (corresponding to British practice), Congress as a whole would have power to reduce, but not to increase, any appropriation asked for by the President.
3—Still better, the House would have power to reduce, but not to increase, any appropriation asked for by the President, and the Senate would have power to reduce, but not to increase, any appropriation made by the House.
This last arrangement would substitute a three-way competition in economy for the present three-way competition in extravagance. It would change the entire atmosphere of budgetary discussion. With no power to increase appropriations or to outbid the Executive or the Congressional majority, the minority in opposition would devote its zeal and ingenuity to suggesting economies. This would tend to eliminate from Federal public life the worst type of politician, who gets into office by out-promising his rivals concerning handouts from the public till.
It may be objected that this whole proposal is Utopian because neither the Senate, nor Congress as a whole, would ever consent to give up its present prerogatives. But on the other hand, we are rapidly reaching the point where the country can no longer afford the present system.
August 17, 1953
It is fortunate that Congress did not immediately grant the President’s request to increase the legal national-debt limit from its present level of $275,000,000,000 to $290,000,000,000. Immediate acquiescence by Congress, as Senator Byrd put it, would have been “an invitation to extravagance.” A suspended decision, on the other hand, will give both time and occasion to reexamine the whole problem of government spending.
The Administration’s argument for raising the ceiling was that the national debt was already more than $272,000,000,000, and that expenditures between now and Jan. 1 are expected to exceed receipts by $7,300,000,000. In reply, Senator Byrd pointed out that the Treasury already had a $9,000,000,000 cash balance in the general fund, “which should be ample to cover this five-month deficit, and if not, there will remain $3,000,000,000 in addition which may be borrowed under the existing debt limit.”
In addition, Senator Byrd said: “The President has the authority, if he chooses to use it, to place every agency of the government on an expenditure ration and limit the expenditures in such manner as he deems best. . . . We all know there are thousands of ways to reduce government spending that can be accomplished by Executive order without impairing benefits as measured by real value.”
The basic solution of the debt problem, in short, is not to keep raising the debt limit but to balance the budget by bringing expenditures down to a reasonable level of taxation. Spending in the fiscal year 1954 seems likely to equal or approach spending in the year that ended June 30. That itself was higher than in any full Truman year. Yet Mr. Eisenhower fought hard to get Congress to authorize very dubious 1954 expenditures, such as the tremendous sum of $6,652,000,000 for foreign aid.
One of the arguments of Secretary Humphrey in favor of raising the debt limit was the need of keeping a huge cash balance: “You can’t run this government with this level of expenditures on less than about a $6,000,000,000 cash amount because you are spending at the rate of about $6,000,000,000 a month.” This argument may boomerang. It may remind the country that we are now spending in a single month almost as much as Franklin Roosevelt in his first term spent in a full year.
It is of course self-contradictory for Congress to approve tax cuts and expenditure increases that make additional debt inevitable, and then refuse to approve the additional debt. The question has even been raised whether a legal debt limit serves any valid purpose at all. Yet it does. It acts as an alarm clock, a pressure gauge, a “dangerous curve ahead” sign. It is merely a foolish and perilous misuse of these devices to turn off the alarm and go back to sleep, to substitute another pressure gauge when the first one reaches the red mark, or to move the sign beyond the curve instead of in front of it. This is in effect what Congress has been doing over the years. From 1941 to 1945 it raised the debt limit five times. It is worse than pointless for Congress to set a debt limit unless it really means it.
Though it may now be too late for Congress to refuse to raise the debt limit at its next session (or even at a special one), it would be folly to grant that increase without insisting on some quid pro quo in return. This might take the form of passage of the Coudert resolution (already approved by the House Government Operations Committee) which would prohibit the Administration from spending more than it took in during any year except in wartime or of grave emergencies declared by Congress. Congress might even, in return, submit a constitutional amendment to give the President power to veto individual items in appropriation bills. Better, it might deny itself the power to appropriate more than he had recommended. Any one of these moves would help to substitute competition in economy between Congress and the President for the present competition in extravagance.
August 24, 1953
The most important economic achievement of the Eisenhower Administration so far has been the abolition of price control. The Truman Administration had imposed price control on the excuse that it was needed to “fight inflation.” All that it really did was to unbalance and curtail production, bring on shortages, enable partisan bureaucrats to exercise life-and-death powers over particular industries and firms, and encourage the continuance of inflation by diverting public attention away from its real cause, which was the creation of more money and credit by the government itself. Spokesmen for the Truman Administration kept shouting that to allow price controls to lapse would be to turn over the country to “the profiteers” and to let loose the floodgates of an uncontrollable inflation.
President Eisenhower nevertheless moved boldly ahead and dismantled price control within a comparatively few weeks. The predicted “inflation” never came. On the contrary, the wholesale price level fell from an index number of 109.9 in January to 109.4 in June, while the cost-of-living index remained about stationary. Once more a complete demonstration had been made of the fraudulence of price control as a cure for inflation. But if any New Dealer has acknowledged the folly of his prediction, I have yet to hear of it. Instead we have the comic spectacle of Sam Rayburn, for example, simultaneously complaining about a rise in prices and about a fall in prices: “Prices of many commodities are rising. . . . Farm income is down 14 percent.” But farm income is down only because farm prices are down. City workers are paying less for foodstuffs.
What really brought inflation to a halt was the courage of the Eisenhower Administration and its monetary managers in halting the policy of cheap money. But the government suddenly took fright at the complete success of its own hard-money program and threw it into reverse. On June 24 it reduced reserve requirements in order to give the country’s banks some $5,780,000,000 in additional lending power.
This sudden reversal of the anti-inflationary policy was symptomatic partly of a loss of political nerve on the part of the Eisenhower Administration and partly of acceptance of the New Deal economic philosophy. The same performance was repeated in farm policy. Secretary Benson made one bold speech against the fantastic farm-price supports and ran away from it as soon as the bricks began to fly. Mr. Eisenhower in his campaign talked boldly of economy and tax reduction. He has ended by setting up a spending budget for fiscal 1954 of $74,000,000,000—higher than in any full Truman year. He has insisted on a huge foreign-aid program of $6,652,000,000 a year. He has asked for authority to raise the debt ceiling to $290,000,000,000 (though his recent economy order gives renewed grounds for hope).
Finally, and most ominous, he has allowed officials in his Administration to prepare amendments to the Taft-Hartley Act that would scuttle practically every reform brought about by that law and put individual workers, employers, and the country at the mercy of irresponsible union bosses.
It is surely not without good grounds that the Democratic National Committee boasts that most of the Eisenhower achievements in office so far “are merely continuations of Democratic programs.” I happen to agree that one or two of these “Democratic” policies—such as extension of the reciprocal-trade program and the simplification of customs regulations—were sound and praiseworthy. But if Mr. Eisenhower decides to continue the bulk of the New Deal spending, taxing, deficit, inflation, foreign and domestic handout, and pro-union-boss policies, he is not only likely to head the country into economic crises but to lead his party into defeat in 1954 and 1956. The American people in the last election voted for a change. There is still plenty of time for Mr. Eisenhower to renew the courage and convictions of his original start.
August 31, 1953
Nothing has more conclusively demonstrated the complete futility of our foreign-aid program than what has been happening in France. One of the chief purposes of the foreign-aid program was to try to put France politically and economically on its feet, to remove or reduce the influence of the Communists, and to help make France into a strong and dependable ally. Not one of these objectives has been achieved.
Certainly we did not spare expense. A recent report by a Senate staff committee headed by Alex L. Hillman estimated that from April 3, 1948, to Jan. 31, 1953, United States assistance to France and Indo-China alone totaled some $10,900,000,000. This is more aid than went to any other country in that period. What have we got in return?
Certainly not monetary or economic stability. The franc now stands at less than 4 percent of its prewar value. Nor is the situation such as to give anyone confidence that it will be stabilized even where it is. The budget has been chronically unbalanced. The government has been reduced to short-term borrowing at the Bank of France—i.e., to printing more paper money. As A.E. Jeffcoat pointed out in a recent article in The Wall Street Journal, French public spending, which swelled from 1949 to 1953 by 40 percent (while national income rose only 9 percent) presently chews up nearly half of France’s national income. Government “investments” in both nationalized and private industry take up about 26 percent of state spending. Subsidies to groups like exporters and alcohol distillers use up 9 percent of the nation’s budget. The state social-welfare program consumes about 12 percent.
Our aid has not brought political stability to France. A French government now stays in power, at best, for a few months. Weeks may pass with no government at all. About as many voters still vote Communist as before Marshall aid began. The Communists can still impose paralyzing strikes. In fact, the Communists are hardly needed for this purpose. It has now been demonstrated that if any Premier even attempts to take the measures that are absolutely essential to halt inflation and restore solvency, unions of every political color will go on strike.
Has our military aid made France a strong and dependable ally? There is little evidence of it. As I have pointed out here in previous columns, to the extent that we pay for France’s defense, France does not have to use its own money for defense. In the fiscal year 1952, 62 cents out of every dollar the government spent actually went for nondefense items—largely of the welfare-state type specified above.
Has our aid to France and other countries brought us their gratitude, friendship, and good will? Has it made them into stauncher allies? Almost every dispatch from Europe today reports the opposite. On Aug. 10, William Philip Simms wrote to the Scripps-Howard newspapers: “The biggest peril to American people today is not Soviet Russia, but the growing anti-Americanism here in Western Europe. And it is rankest among those for whom we have done the most.” Warren H. Phillips made a similar report to The Wall Street Journal a few weeks before, explaining how anti-Americanism has been caused by our help: “Taking charity by itself is pride-destroying. But it is doubly so when the recipients come to believe that their governments have bartered their foreign policy and domestic political independence, too, in return for U.S. aid.”
The money we are now pouring into foreign aid is worse than thrown away. It subsidizes and prolongs extravagance and socialistic policies that Europe would otherwise have been forced to abandon long ago. It produces anti-Americanism in European foreign policy as a proof of “independence.” Yet we are scheduled to spend the tremendous sum of $6,652,000,000 for foreign aid in the present fiscal year, and the President has implied to Congress that foreign aid must continue indefinitely.
September 7, 1953
President Eisenhower and Congress have jointly appointed a seventeen-member Commission on Foreign Economic Policy, under the able leadership of Clarence B. Randall, which is to make a thorough study of the subject and report to Congress next spring.
Actually, the subject is not nearly as intricate and baffling as it is usually made out to be. Most of what is worth saying on the subject has already been said many times. Lewis W. Douglas, for example, our former Ambassador to Great Britain, has already turned in a report to the President that covers most of what the commission is likely to find out. Given the mixed political composition of the commission, indeed, the country will be fortunate if its report turns out to be, on the whole, nearly as sensible and balanced as the Douglas report. Obviously, the best way to increase the volume of world trade is to reduce or remove the barriers to it. And as it is always sound ethical policy to extract even a mote from our own eye before calling attention to even a beam in our neighbor’s, the first thing for us to do, as Douglas insists, is “to commence to remove from our own policies the impediments to freer trade and currencies.” The Eisenhower Administration has already made a good start by continuing the reciprocal-trade treaties and by some simplification of customs procedures. But to set a good example it should reduce tariffs even further. Certainly it should abolish import quotas, which are far more disruptive to foreign trade and good relations than even a formidable tariff barrier.
Nevertheless, if we were to wipe out the last vestige of our own tariffs and quotas, it is doubtful whether, except in a few special items, our imports would increase very much. For by far the major barriers to our foreign trade today are erected by other nations. Bilateral treaties, import quotas, and prohibitions, and above all, exchange control, which are practiced, with our tacit approval, by most of our aid recipients, not only reduce and disrupt foreign trade incomparably more than tariffs do, but inevitably lead to “planned” and regimented domestic economies.
The Douglas report also emphasized the need of restoring international private investment. This would promote the most rapid world economic expansion, particularly the expansion of the so-called underdeveloped areas. But what is still not generally recognized is that the greatest obstacle to the restoration of international private investment is the existence of governmental handouts from the United States. For private investment is made only where the political and economic climate is attractive. This means, among other things, assurance against socialization, seizure, excessive taxes, onerous price-fixing, wage-fixing, or profit limitation, and obstacles to the transfer of profits or currency. But it has been found by experience (what should have been obvious anyway) that as long as an “underdeveloped” country can cajole or blackmail the United States Government into giving it handouts, it need not make, and will not make, any of the reforms necessary to attract private capital.
Iran provides a perfect illustration. Mossadegh having impoverished both the government and the country by seizing the British oil refineries, his successors demand our aid while still insisting that they must keep the stolen property. And if (under their threat or our fear that they will otherwise go Communist) we are foolish enough to give them this aid without demanding the return of the expropriated property to its British owners (or at the very least reasonable compensation for it), then we shall not only be condoning but encouraging such seizures everywhere, thereby still further postponing any restoration of international private investment. The policy of making U.S. Government handouts to foreign socialistic governments not only fails to enrich the world but tends to impoverish it, because it sets back the economic recovery of the recipient country as well as our own.
September 14, 1953
There has lately been a rising protest against the tremendous tax burden now placed on the American people. The protest is most impressive when it rests, not primarily on the argument that our present tax structure is inequitable (though that is true enough), but on the ground that existing taxes are killing incentives and thereby undermining the productiveness of the entire economy.
An excellent speech on what taxes have been doing to incentives was delivered this spring at a conference of the National Industrial Conference Board by David McCord Wright. Professor Wright devoted himself particularly to assailing the alleged “statistical proof” on the part of some of his academic colleagues “that incentives are unnecessary, that the harder you tax the businessman the harder he will work; and that. . . the American ‘rags to riches’ myth is mostly bunk anyhow.”
Wright did not have too much trouble in disposing of the alleged “scientific basis” of these statistics, or in revealing the bias behind them. He caught some of his colleagues arguing in the same breath that the destruction of capitalistic opportunity has been a good thing, and, anyway, that such opportunity never existed. And he found that they failed also to distinguish between the effects of present onerous taxes on the incentives of the older generation, who formed their working habits and ambitions in an earlier era, and the effects of such taxes on a younger generation who are forming their habits and ambitions now. “The older men,” he concludes, “may stick in hectic business or professional life under present taxes, because, already caught in the rat race, they may still work hard in order to keep their accustomed standard. The younger men, I believe, will increasingly just say: ‘What the hell!’”
Wright’s argument is mainly negative. He shows, that is, that the alleged statistical proof that business executives “will work harder if you tax them more” is spurious and worthless, just as the proposition itself is on its face contrary to common sense.
But he could have gone on to show, if he had wished, that there is plenty of statistical evidence, of a far less dubious nature, that excessive taxes destroy incentives.
In the case of personal income taxes, for example, it is notorious that higher tax rates have failed to yield proportionately higher revenue. In fact, in the highest income brackets there is the strongest statistical evidence for the conclusion that present confiscatory rates have actually reduced Federal revenues. In these brackets, in other words, lower rates would increase revenues.
These results occur because excessive tax rates reduce the income to which they apply. They reduce it by destroying the incentives to earn it. The consequences of this trend, if long continued, are very grave for the future of our economy. Our present taxes are both undermining the incentives, and destroying the funds, for new investment. And it is precisely on these funds that the nation depends for increasing its productivity, which means the productivity, wages, and welfare of its workers.
All this should be obvious from a glance at present tax rates. Corporations pay the government a basic rate of 52 cents out of every dollar of earnings. Corporations that make “excess” profits pay the government 82 cents out of every dollar of them, or as high as 70 cents on every dollar of total earnings. This means that every individual who invests in a corporation, no matter if his own income is $5,000 or less, pays a 52 to 70 percent tax on his earnings out of that corporation before he even gets them . If the corporation pays out all of its earnings in dividends, the stockholder may be taxed anywhere from 22.2 to 92 percent, in accordance with his personal income, out of what remains over from the first tax! Out of a corporate investment that would otherwise return him $1,000 a year, say, a taxpayer in the highest brackets might have just $24 left over for himself. What is that going to do to incentives to new investment?
September 21, 1953
I have tried to explain several times in this column not only why I do not attempt to forecast business conditions but why I do not believe that a science of economic forecasting is even possible. Therefore I was happy to see, in Lloyd’s Bank Review of London in April of this year, the slashing attack by Prof. John Jewkes of Oxford on the fashionable idea that economists can predict the future:
“It cannot be too strongly emphasized that there is nothing in economic science which enables us to foretell events. Those who claim otherwise are dragging their subject down to the level of astrology. . . . There is nothing in history to suggest that the expected will normally happen. . . . Economic prediction as a scientific method is not merely absurd, because impossible, but dangerous, because seductive.”
Yet Professor Jewkes seems to me to commit the rare sin among economists of overstating the case against prediction. He does not distinguish between conditional prediction, which is possible, and categorical prediction, which is presumptuous.
He piles up, for example, a truly impressive list of economic predictions that have gone wrong in the last generation. But he does not distinguish between those that went wrong because the relevant facts were not known, and those that went wrong because of fallacies in economic reasoning that were detectable at the time they were made. Thus he cites the now discredited view “accepted by many economists, and disputed by few” before the war, “that all advanced industrial countries were rapidly passing into a condition of maturity and secular stagnation.” But those who did dispute the view at the time correctly pointed out the fallacies on which it rested.
“It does not need much thought to understand,” writes Jewkes, “why prediction is so hazardous. It can almost be summed up in one word: invention.” But while unforeseen inventions are an important reason why some economic predictions go wrong, they are far from the sole or even the main reason (especially where short-term predictions are concerned). There are two main reasons. One is that the facts and factors which must be taken into account to predict the future are too numerous and complicated for any human mind to grasp. The other is that, in human affairs, predictions themselves change the future they predict. A belief that prices of stocks will rise next year, for example, if prevalent enough in Wall Street, will cause speculators to act in such a way as to bring about a price rise immediately.
Yet Jewkes seems to overstate, as I have said, the case against economic prediction—which means, among other things, the case against business forecasting. And this is all the more remarkable in view of some of his admissions: “Every businessman must make decisions, particularly regarding investment, where hazard and conjecture are inherent. . . . Although no one can be sure about the future, men must by hook or by crook take thought for, and strive to be wise about, the future.”
It is precisely here, I think, that economic reasoning can play a more useful role than Jewkes assumes. While economic forecasting can never be a science, it can sometimes be a help. This necessarily follows from Jewkes’s own admission that economists may properly concern themselves with cause and effect. To understand cause and effect is to that extent to be able to predict. Once we understand, for example, that an increased supply of money causes prices to rise, we can predict that if the government increases the supply of money, then, other things remaining unchanged, prices will rise. An honest business forecaster will, however, make all his forecasts frankly conditional, and merely probable. He is entitled to say: “If X, then probably Y.” This may not seem to offer much to those who are looking for certainty. But it may reduce the number and extent of our bad guesses and increase our batting average of good ones. And that can make a vital difference.
September 28, 1953
ROME—Controlism, statism, and socialism have lost a great deal of their former prestige in Western Europe. Yet even the statesmen who have ceased to believe in controls and government ownership do not seem to know how to get rid of them. Italy is an outstanding example. After eight years of leadership of anti-Fascist and anti-Communist Premier De Gasperi, the government is now in the hands of his former Treasury Minister, Premier Pella, a conservative who used to be described by De Gasperi as his economic conscience.
Although Italy several years ago got rid of general price fixing, a formidable network of controls remains. Under nationwide union contracts an employer cannot drop workers without giving them heavy terminal pay which may run a month for every year of service. This penalty, of course, makes for immobility of labor and forces employers to keep unneeded men. It produces featherbedding and inefficiency and discourages new hiring. If an employer is too inefficient to meet competition and has no more money to pay his surplus workers, the government subsidizes him.
Here we encounter a remarkable agency known as Istituto per la Ricostruzione Industriale, popularly known as IRI (pronounced Erie). This organization owns stock in most large Italian industrial companies. It uses the earnings of the profitable ones to pay losses in others. The government makes up the deficit that still remains. This, of course, promotes inefficiency, keeps the companies in business making the wrong things, reduces the capital available for expansion of needed production, and both directly and indirectly puts a needless drain on the government budget. The government owns and operates the railroads directly. Like our own government it subsidizes its wheat growers. It has kept rent control on old houses, which both discourages new building and further restricts the mobility of workers. Externally, it imposes exchange control and requires special licenses on dollar imports. In fact an Italian must get a license even to set up a new business at home. The individual Italian communes (roughly equivalent to our counties) often impose restrictions on the movement of workers and goods across communal lines. Italy retains the equivalent of general wage control. The Confindustria (a sort of super-NAM) and big unions (Communist and non-Communist) negotiate a master contract covering practically the whole of Italian industry. This is collective bargaining with a vengeance for it sets a bloc wage scale that controls every employer and worker. Registered unemployment is about 2,000,000 out of a working force of 19,400,000. The cost of living, as the result of past inflation, is now 56 times as high as in 1938. Where 31 percent of the electorate voted for Communism in 1948, 35 percent voted for it in the elections a few months ago. Such facts make the Italian economic situation look black. Yet in some major respects, it has never been better. The average hourly wage rates of all industrial workers are 75 times as high as in 1938; thus more than keeping pace with living costs. As measured by per-capita consumption of such important items of diet as sugar, milk, butter, and eggs, the Italians are eating better than ever before. And the official index of industrial production is more than 50 percent higher than in 1938.
Not the least important, Italy’s inflation, as measured by the stability of the lira, has been halted. The official rate of 625 to the dollar was established in 1949 and the black-market rate has now fallen to practical identity with this. The import of gold coins, an important index to the lack of confidence in currency, has dwindled from 43 tons in 1951 to practically nothing. (In short, Italy is still suffering from a totalitarian hangover—from the days of Mussolini’s Fascism—but it is well on the path to reform. If it can now maintain a government devoted to the philosophy of economic freedom, its revival could become one of the most dramatic in the present era.)
October 5, 1953
PARIS—Every economic discussion in France begins and ends with the political problem. If France could once get a stable government, great economic reforms would be possible and therefore it would be worth discussing them seriously. But as long as the political problem remains unsolved, economic discussion remains largely academic and controversialists deal in sweeping generalities rather than in any scrupulous study of the facts.
Take for example the case of wages. France is seething with labor discontent. One is told again and again that the French workers are shockingly underpaid but meaningful statistical comparisons are seldom even attempted. Here are a few for what they are worth: Wholesale prices in July of this year were about 25 times as high as in 1938. The cost of living in Paris was about 23 times as high as in 1938. Average hourly wages in 1952, however, were only about 15 times as high as in 1938.
This comparison, on its face, seems appalling. But the wage figures do not include the heavy social-security benefits. From the standpoint of the employer, these social payments are formidable. They total, on the average, 43 percent of his payroll. This total is made up of such individual items as family allowances, social insurance, workman’s compensation, and a wage tax. But while all this adds tremendously to the employer’s labor cost, it does not correspondingly help the individual worker, whose immediate income depends more on his family status than on his skill and effort. In April of this year, for example, the average wage of unmarried workers was 5,780 francs a week, whereas the average wage of a worker with a dependent wife and two children was 8,410 francs a week.
France has been trying to do, in short, what Italy also has been trying to do. It has been trying to transform the wage mechanism into a huge social-security system. But when a man with a couple of children gets 45 percent more than a bachelor, mainly because of a family-allowance system, the incentive to acquiring children becomes greater than the incentive to acquiring a skill. To put it another way, the incentive to reproduction becomes greater than the incentive to production. Such a system does not help the whole body of the workers; it hurts them instead. It is based on the false assumption that only “distribution” is of any real importance, and that production is somehow fixed and automatic. It leads to many bitter quarrels over exactly how an inadequate cake ought to be sliced and to neglect of the real problem of increasing the size of the cake.
It is the consensus of informed opinion that even when social benefits are included, an unmarried worker is worse off than he was before the war, although a man with three children is better off today. Such a system underpays and discourages the young at the outset of their career, precisely when their income is likely to be lowest anyway.
It should be obvious from the statistics that the workers in France are paying for their own social security. This is merely what economic theory would have led one to expect. But the fact is widely interpreted here as a result of the cupidity of the French employer. The explanation is at best inadequate. It ignores the fact, among a number of others, that French employers, as a result of result of many monopolistic protections, do not have to compete very strenuously with each other. If these employer protections were removed, the result might be dramatically different.
I am sorry that space does not permit a discussion of the results of rent control in France, or of the quantitative restrictions on credit. But one summary statement is possible: The cure for the evils brought about by present French welfare measures is not still more radical welfare measures; it is the return to a free market, the revival of competition, the restoration—in a word—of genuine free enterprise. But the crucial question is whether this solution will be applied before it is too late.
October 12, 1953
LONDON—Everywhere in the world, where people are still free to express themselves, the prestige of socialism is clearly on the wane. Nowhere is this more strikingly demonstrated than in England. The Labour Party itself is split wide open on the subject of further nationalization. One speaker at the Margate Conference even declared that “nationalization is not the object of this party.”
But it is a little difficult to say exactly how far the change in British social thought has gone. If the British people are beginning to be fed up with nationalization, they still give very few signs of being fed up with government “planning” and its accompanying controls. Nowhere is this better illustrated than in the case of exchange control. Exchange control is a totalitarian measure. Before the second world war it was imposed in Europe only in Hitler’s Germany. Under it the citizens of a country are forbidden to buy or sell their own currency, or exchange it for any other, except at the fiat rate set by the government. To enforce such a control, the government must control all foreign trade. It does not allow exporters to keep or sell freely the dollars they earn. It does not allow its own citizens to buy what they wish from abroad, but only specified amounts of specified goods from specified countries or areas after they have obtained a special import license. A free-born Englishman is not even allowed to spend more than £40 ($112) a year on foreign travel for pleasure.
When the government controls foreign trade in this way it in effect controls the whole economy. Under exchange control a free economy is impossible.
Now the most important step away from exchange control (implying, in fact, its virtual abandonment) is for a government to permit its currency once more to be fully and freely convertible into any other. And this is a more important requirement for sterling than for any other currency in the world. For London has been traditionally the world’s banker. The world did business mainly in sterling.
Banks and business firms everywhere kept sterling balances in London to facilitate their trading operations and as temporary investments. As the value of sterling as a world currency lies precisely in its convertibility (into goods and other currencies everywhere), it follows that anything that prevents or restricts this convertibility lowers the value, the prestige, and the demand for sterling, and retards British recovery and expansion. Yet most of the bankers and government officials with whom I have talked here treat the problem of restoring sterling convertibility with indifference. Some of them even talk as if sterling convertibility were mainly something that Americans were pressing for and as if restoring it would be primarily a favor to us.
Even most of those who want to see convertibility restored treat the problem as too formidable for any present action. The British have, in fact, developed an altogether unhealthy sense of dependence on America. They talk as if the main requirement for convertibility were still further aid from us and a drastic reduction in American tariff barriers (with no corresponding reduction in theirs). Nearly everybody talks, in fact, as if the economic future of England were wholly dependent on the economic future of the United States. As one official put it to me: “When you get a cold, we get double pneumonia.”
The question an American is asked on all sides is, “When are you going to have a depression?” which is like being asked, “When are you going to be sick?”—and a serious answer is expected. This is rather like building up an alibi in advance; the next bad turn for England or Europe is going to be, by prior definition, America’s fault. This state of opinion is pathological. It paralyzes British initiative; and it is not supported by the facts. In 1952, for example, less than 6 percent of the exports of the United Kingdom went to the United States. If England threw away its crutches, it would be surprised to find how strong its legs really were.
October 19, 1953
The slogan “Trade, Not Aid” was coined by the British, but most of them do not really mean it. What they still want, as I have pointed out here before is Trade Plus Aid; and their conception of Trade is one-sided rather than reciprocal. Some of them are candid enough to admit, when pressed, that what they want us to do is to abolish our tariffs entirely, while permitting them not only to keep theirs but to continue to discriminate against American goods by quotas or prohibitions. All this is necessary, they blandly explain, to permit them to “close the dollar gap,” to “restore the balance of payments,” and to “build up reserves.”
And they cannot, some of them insist, make the pound convertible unless America is ready not only to abolish its trade barriers but to make them a loan or gift of, say, some $2,500,000,000 to add to their present “totally inadequate” gold and dollar reserves of $2,500,000,000.
The American observer abroad finds, in fact, that our tariff is Europe’s great alibi. For most Europeans it explains why they buy so much more from us than they sell to us; why they have a “dollar shortage”; and why their currency is weak. And they talk, usually, as if the American tariff were fantastically high, and as if their own countries had merely nominal trade barriers or were virtually practicing free trade.
A few facts might somewhat correct these notions. A study by the United States Tariff Commission has shown that the level of our tariffs dropped from 10.6 percent on all imports and 25.8 percent on dutiable items alone, before the Reciprocal Trade Agreements were adopted to 5.4 percent on all imports and 13.3 percent on dutiable items alone in 1951. By contrast, the American Tariff League has published figures to show that ratio of duties to all imports of the United Kingdom in 1951 was 25.6 percent.
Such crude averages, taken merely by themselves, provide inadequate comparisons. But they are enough to indicate that America is today not the sole or even the chief culprit in the matter of tariff barriers. Compared with the exchange controls, bilateralism, quotas, and prohibitions now prevailing in Europe, in fact, the American tariff is today a minor factor in restricting two-way international trade. As a result of a careful study, for example, Howard S. Piquet, formerly chief of the economics division of the United States Tariff Commission, has estimated that if all our tariffs and quotas were suspended it would mean an increase in our imports today of only $800,000,000 to $1,800,000,000 a year.
Nevertheless our British and other European friends have a case: and it would be well for us to heed it. It concerns immediately not so much the absolute level of our tariff as the uncertainties surrounding its future. A British manufacturer, for example, may hesitate to expand his output or sales for our market, as long as he fears that our customs officials may suddenly make some new adverse decision or that Congress may suddenly increase the tariff rate. So if any of us may presume to anticipate the report of the Randall commission (which, judging from that body’s composition, is likely to be split or ambiguous anyway) I should like to suggest that the President call upon the present Congress to pass a resolution pledging itself not to increase any import duty or impose any further quota restriction during its term. The worldwide economic and political effect of such an act could not fail to be wholesome.
Further measures would of course be desirable. The first of them would be to wipe out all our import quotas. And then we might do well to emulate what we did in the tariff of 1833. This provided for a gradual reduction of rates over ten years to a general level of 20 percent. Why couldn’t we now, say, provide for a gradual reduction over ten or twenty years of all tariff rates above 20 percent down to that maximum level, with the sole exception of rates on items vital in time of war, the continued production of which could not be assured in any better way?
October 26, 1953
In this space last week I discussed some of the things that this country could do to help both itself and the world. My first proposal was that the President call upon the present Congress to pledge itself not to increase any import duty or impose any further quota restriction during its term. My second proposal was to wipe out all our import quotas. My third was to emulate the principle that we followed in the tariff of 1833, and provide for a gradual reduction over ten or twenty years of tariff rates above 20 percent down to that maximum level (with the possible exception of some items vital to defense).
The purpose of this last proposal would be to reduce the hardships of tariff readjustment to a minimum. As Prof. Yale Brozen has put it: “In moving toward free trade, we must reduce our tariffs slowly in order to give . . . those who have invested in skills and equipment specialized to our protected industries . . . the opportunity to depreciate their equipment and to adjust to the new situation.” (See the “economic forum” pamphlet, The Economics of Tariffs, 112 pages, National Industrial Conference Board, $1.)
It may be asked whether, instead of such a unilateral reduction of our tariffs, it would not be better to extend the reciprocal-trade-agreements program for a period of twenty years. Among the arguments of those who favor this are that it would provide us with better leverage in getting tariff reductions from other nations and that more attention could be paid to the specific merits of each tariff rate. But the arguments against continuing the reciprocal-agreements program seem to me to outweigh these. For the program rests on the false tacit assumption that a reduction in tariff rates is primarily a favor to the other country’s producers rather than to one’s own consumers. And precisely because such a program does treat each rate on its own alleged merits, it makes every rate a source of special haggling, multiplies lobby pressures and the pull and tug of special interests, and violates the spirit of the most-favorednation principle even when it adheres to it technically.
We are brought back once more to the question of foreign financial aid. The whole foreign-aid program from the beginning has rested on a false diagnosis of the ills of Europe and the “underdeveloped” countries and a false conception of the remedy. In practice, instead of inducing the beneficiary countries to return more quickly to sound policies and free enterprise, our aid has subsidized socialism and encouraged these countries to continue statist controls far longer than otherwise.
But the foreign-aid program can be terminated with less shock, and the proper reforms encouraged, if for a limited transition period our government would undertake to guarantee private loans to private foreign borrowers against political risks, especially against the risk of nontransferability of profits, along the lines and on the firm specific conditions suggested by F.A. Hayek in The Freeman of April 6. This program, however, should in no case be in addition to present foreign governmental aid, but as a short-lived substitute for it, to ease adjustment to a free system.
At the very beginning of the Marshall Plan, our government could have obtained far more results with far less money if it had offered to make loans solely for currency stabilization on strict conditions of eligibility.
But the time for that has now passed. If a government fails or refuses to follow sound monetary, fiscal, and economic policies, no foreign loan can be large enough to do any permanent good. Its proceeds would only be drained away as were those of our $3,750,000,000 loan to Britain in 1946. If, on the contrary, a country follows sound monetary, fiscal, and economic policies, it can get private loans if it needs them, and is unlikely to need any outside governmental help at all. Perhaps the worst result of our whole foreign-aid program has been to divert attention away from the measures a country must take to help itself and to stand on its own feet.
November 2, 1953
Just before the Republican convention of 1952, General Eisenhower expressed the opinion that the Federal budget could be cut as much as $40,000,000,000 in the next few years. In his State of the Union message on Feb. 2 of this year he said: “The first order of business is the elimination of the annual deficit.” But he has successively explained that he could not balance the budget for the 1953 fiscal year, or for the current 1954 fiscal year. On Oct. 12 his Director of the Budget, Joseph M. Dodge, warned: “The budget-balancing problem in the 1955 fiscal year is at least the same in magnitude as the one we faced this year.”
This pattern, in which the budget is going to be balanced by and by, but of course not now, is ominously reminiscent. Let us recall some statements by Franklin D. Roosevelt:
“The plan is to reduce the cost of current Federal government operations by 25 percent.”—Oct. 19, 1932.
“For three long years the Federal government has been on the road toward bankruptcy. . . . [By the end of the fiscal year 1934] we shall have piled up an accumulated deficit of $5,000,000,000. . . . Too often in recent history liberal governments have been wrecked on the rocks of loose fiscal policy. . . . I give you assurance that if this [passing of the economy act] is done, there is reasonable prospect that within a year the income of the government will be sufficient to cover the expenditures of the government.”—March 10, 1933.
“We should plan to have a definitely balanced budget for the third year of recovery and from that time on seek a continuing reduction of the national debt.”—Jan. 4, 1934.
“We can look forward with assurance to a decreasing deficit.—Nov. 29, 1935.
“We approach a balance of the national budget. National income increases; tax receipts, based on that income, increase without the levying of new taxes.”—Jan. 3, 1936.
“If [the national income] keeps on rising at the present rate, as I am confident it will, the receipts (of the government) . . . within a year or two, will be sufficient . . . to balance the annual budget.”—Oct. 1, 1936.
“The Treasury is all right and we are balancing that budget—you needn’t worry.”—Oct. 3, 1937.
“It has taken courage for the Federal government to go into the ‘red’ . . . but it has been worth it.”—July 8, 1938.
“I here and now prophesy: That the Republican leadership, conservative at heart, will seek to run with the hare and hunt with the hounds, talking for balanced budgets out of one side of its mouth and for opportunist raids on the Treasury out of the other. . . .—Jan. 7, 1939.
“For several years we have been compelled to strengthen our own national defense. That has created a very large portion of our Treasury deficits.”—Jan. 4,1940.
And here are a couple of statements from Harry S. Truman:
“The budget for the fiscal year 1949 calls for total expenditures of $39,700,000,000. Receipts during this period are estimated under existing tax laws at $44,500,000,000. This will balance the budget and provide $4,800,000,000 which should be used to reduce the public debt.”—Jan. 12, 1948. (There was actually a deficit of $1,811,440,000.)
“In a period of high prosperity it is not sound public policy for the government to operate at a deficit. A government surplus at this time is vitally important. . . . I am, therefore, recommending new tax legislation. . . .”—Jan. 10, 1949. (The deficit for the fiscal year 1950 was $3,122,102,000.)
Space forbids further quotations, but the reader, I am sure, gets the idea. Each President began with pious promises of a budget balance, but there were always reasons why this could be done only in some indefinite future, and not now. Meanwhile, the national debt keeps mounting and the purchasing power of the dollar keeps shrinking and a Republican budget director is warning against “the disturbing effects on the economy” of spending cuts that are “too abrupt.” Isn’t this where we came in?
November 9, 1953
The air is full of talk of “recession,” and yet we are still close to what is so far the highest point in the greatest inflationary boom in our history. Look at some of the figures in the latest monthly statistical report of the President’s Council of Economic Advisers. In July, August, and September of this year the country’s gross national product—its total output of goods and services—was running at the tremendous annual rate of $371,000,000,000. This was a slight shade under the rate of $372,400,000,000 in the preceding quarter, but was otherwise the highest on record, comparing with $348,000,000,000 in 1952 and (just for one flashback) with $91,300,000,000 in 1939.
Other comparisons conform. Employment in the third quarter was at the highest level in our history—63,000,000. Unemployment was estimated at only 2 percent of the labor force. Average hourly wages in manufacturing, at $1.77, were also at a record high. So were estimated annual corporate profits before taxes.
Why, then, all the jittery talk about recession? Apparently because every index is not at an absolute peak. Net farm income this year is estimated at about $12,500,000,000, as compared with a postwar average of $14,500,000,000. Cattle raisers, it is true, have been hit hard. But what leads such a situation to be discussed as a sort of national crisis, calling for immediate action at the public expense, is a new ideology.
The assumption seems to run through most public discussion today that we must never tolerate or permit a recession or a readjustment in anything. The reason so many of us talk this way is that we have become convinced that we now know how to prevent depressions or recessions and there is no excuse for not doing so. This explains such statements as President Eisenhower’s: “Never again shall we allow a depression in the United States.”
But do we in fact know how to prevent any future depression or to curb any present recession? Certainly the most popular assumption about how this can be done is wrong. It is assumed that what principally determines the level of economic activity is the volume of government spending. But if Federal spending were slashed from $72,000,000,000 a year to $50,000,000,000, for example, and if taxes were cut correspondingly, the taxpayers would have as much more to spend as the government had less. What would take place, other conditions remaining unchanged, is not a decline in total demand but a shift from a demand for defense items and governmental goods and services to a demand for more civilian goods and services.
If the absolute level of government spending determined the issue, then there would have been a huge depression when Federal spending dropped from $98,700,000,000 in the fiscal year 1944–45 to $60,700,000,000 in the fiscal year 1945–46, and a still worse depression when it fell to $39,300,000,000 in 1946–47. Here was a drop of nearly $60,000,000,000 in the rate of government spending within a two-year period. Yet instead of there being a depression, employment and national income rose.
What has produced these ever-rising monetary totals, these miracles of national income and prosperity, has been, simply, inflation. This is sufficiently pointed up by the new record-high level in the cost of living. The inflation has been brought about by continuous budget deficits (not the same as the volume of spending) and, more directly, by the continuous increase in the supply of money.
But inflation is not a guaranteed way of keeping full employment and averting a recession. On the contrary, it “works” only as long as prices keep ahead of costs and maintain profit margins. If wages shoot ahead of prices, there will be unemployment in spite of inflation. And inflation, contrary to present popular assumption, cannot be “planned” or controlled. Sooner or later it gets out of hand. Those who, under the pretense of “preventing deflation,” would try to keep the inflationary boom whipped up to new peaks, are recklessly playing with fire.
November 16, 1953
Most socialists and left-wingers have few scruples about the kind of argumentative weapons they use in their attacks on private business. But some charges are sillier than others, and one of the silliest is that “accelerated amortization” constitutes a government “subsidy” to business and a sort of scandal. I would have supposed, to cite only one example, that the speech on the subject by Irving S. Olds, chairman of the board of the United States Steel Corp., on May 3, 1951, would have permanently silenced this nonsense. But as late as a few weeks ago Gordon R. Clapp, chairman of the Tennessee Valley Authority, was still repeating it in all its original impurity.
“Perhaps you have heard,” he told the Memphis Kiwanis Club on Sept. 30, “of tax certificates for accelerated amortization.” These, he went on, constitute a “big bonanza,” a “magic Federal-aid program,” “interestfree loans from the taxpayer,” and, in short, government “subsidies” for the private utilities.
He demanded an “explanation” of them, and so I offer one. All plants, machines, and equipment in time either become obsolete or wear out. Suppose a machine costs $1,000 to install and has a probable useful life of ten years. Then the man who owns it ought to deduct, say, $100 a year from his apparent profits on the machine, and set this money aside. At the end of ten years, if his estimate of the useful life of the machine has been correct, he will have deducted a total of $1,000 as an allowance for depreciation, and he will have this amount to replace the old machine that has become useless. If he has not been making this bookkeeping deduction he has been deceiving himself as to the amount of his real profit. If he has not set aside the funds to replace the machine he may find himself out of business.
Now the tax-collecting Internal Revenue Bureau has been very strict regarding the annual rate at which it permits a company to write off depreciation. But under the Revenue Act of 1950, in order to encourage companies to put up new plants deemed essential to the defense program, Congress permitted them to “write off” such plants within a period of five years.
This privilege offered only one advantage to the company that obtained it. If the defense emergency lasted for only five years, and the new plant became useless at the end of that time through lack of orders, at least the company would not have been paying taxes on profits that turned out to be fictitious because they did not allow enough for the loss on the investment. Otherwise a company stands to benefit from the privilege only on the assumption (disappointed after the second world war) that the corporate tax rate will be lower after the specified five-year amortization period than during it.
In the vocabulary of the Clapps, of course, whenever the government seizes less in taxes from you, even temporarily, than it did before, you are being “subsidized” by it. But even by this reckless perversion of words it is hard to see how permission for a shorter amortization period can be called a “subsidy.” For a facility can not be depreciated by more than 100 percent of its value, and it can only be depreciated once. Whether a $1,000 machine is depreciated over one year or over twenty, only $1,000 in all can be deducted, and if the same rate of tax is levied over the whole period, the same total tax is paid to the government.
There is in fact an inequity in the depreciation rules of the Internal Revenue Bureau, but it is exactly the opposite of what Clapp contends. It consists in allowing corporations to deduct only against original investment and not against cost of replacement. A machine bought at $1,000 in 1939 would probably cost more than $2,000 to replace today. In a period of inflation, industry that is allowed to deduct depreciation only against original costs, and not against cost of replacement, is paying taxes on profits that are illusory when measured in real terms. The real tax rate is even greater than the nominal rate, and capital consumption is concealed.
November 23, 1953
The Administration is being forced to adopt all sorts of expedients to keep from breaking through the debt limit of $275,000,000,000. This does not prove that Congress was wrong in refusing last summer to grant immediately the President’s request for an increase in the debt limit to $290,000,000,000. The postponement has not reduced spending, but it has at least drawn increased attention to its prodigious rate and to the continuation of huge deficits and borrowing. And to act as a warning signal is, in fact, the chief function that a legal debt limit can serve.
The Administration will be forced to go again to Congress for an increase in the debt limit, and Congress now has no alternative but to grant it. But it would be folly to grant it without some quid pro quo. The minimum condition (which could be tied to the debt-increased authorization) should be the Coudert resolution or its equivalent. This would prohibit the Administration from spending more than it took in during any year except in time of war or of a grave national emergency declared to be such by a two-thirds vote of each house of Congress.
But even this measure would be only a stopgap. What is now imperative is a responsible budget system: Today the House of Representatives has the power to increase expenditures beyond those proposed by the President, and the Senate has the power to increase expenditures beyond those voted by the House. The result is a three-way competition in extravagance.
The only fundamental cure for this situation would be to adopt the wholesome British rule under which the Legislative branch may reduce, but cannot increase, the total expenditures proposed by the Executive branch. One of the foremost functions of a representative assembly is to act as watchman of the Treasury, and it cannot be depended on to perform that function as long as it is free to put its own hands in the Treasury.
The constitutional revision which this would imply probably goes beyond what Congressional or public opinion today is prepared to accept. But there are changes which have already been successfully tested in many of our states and which would at least bring us much closer to full budget responsibility.
We may cite as one example the kind of budget procedure that prevails in New York State. Under this system the governor’s annual budget must not only give estimated expenditures and revenues for the next fiscal year, but must be accompanied by a bill or bills containing all the proposed appropriations and any proposed new taxes.
The legislature (I quote the state constitution) “may not alter an appropriation bill submitted by the governor except to strike out or reduce items therein. . . .” Further: “Neither house of the legislature shall consider any other bill making an appropriation until all the appropriation bills submitted by the governor shall have been finally acted on by both houses. . . .” If the legislature wishes to increase or add any appropriation, it must be by separate items or bills “each for a single object or purpose” which “shall be subject to the governor’s approval.” And the New York constitution gives the governor explicit power to do what the President cannot do-veto individual items in appropriation bills.
Congress would probably be unwilling to submit a constitutional amendment to give the President these budgetary powers, unless it got in return added budget powers of its own. In such an amendment, therefore, it might give itself the explicit power to return an unbalanced budget submitted by the President with directions either to balance it or to reduce his proposed total expenditures to some specific maximum.
The basic principle to be followed to attain a responsible budget system is clear. It is to reduce the power of either Congress or the President to spend without restraint and to increase the power of both Congress and the President to limit the spending of the other.
November 30, 1953
In his Newsweek column of last week my colleague Raymond Moley described some of the irremediable harm that had been done to the United States and the world through the influence of Harry Dexter White. But White fathered one institution that is still with us, and still working immense harm—the International Monetary Fund.
Some of us have repeatedly called attention to the harmfulness of the fund since the day of its conception. In the Newsweek of Dec. 31, 1951, for example, I wrote: “The chief remaining obstacle to a world restoration of freedom and sound money is the International Monetary Fund, an unnecessary institution set up, under the influence of the late Lord Keynes and Harry Dexter White, on a completely unsound basis.”
But the analyses of myself and others fell on deaf ears, chiefly because of the myth that the fund was the product of the objective judgment of the world’s monetary experts. Actually, the experts from other countries were in fact government bureaucrats who approved it on the principle that it involved a huge American handout and that you don’t look a gift horse in the mouth.
The story of the part that White played in the formation of the fund is described in R.F. Harrod’s biography of John Maynard Keynes, published in 1951.5 In the light of what we now know about the real aims of White it makes fascinating reading.
In America during the second world war, writes Harrod, there was active discussion of postwar economic problems, “indeed quite an intellectual ferment. In this the central figure was undoubtedly Harry White. . . . He was a very remarkable figure, who should be accorded an honorable place in British annals. . . . When Mr. Morgenthau became Secretary of the Treasury in 1934 he asked Prof. [Jacob] Viner to undertake a study of Treasury problems. Among the economists whom Viner brought in was Harry White. . .. He won the confidence of Mr. Morgenthau. His influence in the Treasury was always more important than the post which he held. . . . During the second [world] war he became the leading figure in the Treasury.
“He . . . was an ardent admirer of Keynes’s economic work; he also had great practical energy and a forceful personality, which could readily dominate a committee. He was blunt and downright in speech, and also fervent. . . . His influence came to extend beyond the Treasury. He made enemies. In his determination to get his way, he adopted methods which might be labeled those of an intriguer. He was distrusted in the banking world, and also by some seasoned public servants. He gained the reputation of being a difficult man to deal with. But he was single-minded in the pursuit of his aims. He was a reformer of genuine conviction.” Harrod lists as among White’s supporters Frank Coe and Lauchlin Currie. “It is probably true to say that but for White’s assiduity and galvanic personality a large scheme of the kind for which Keynes was working in Britain would never have come to birth at Bretton Woods.”
And what was this scheme? It was extremely ambitious, not to say grandiose, and Harrod is lost in admiration of it. “This American group [under White] also produced a bulky volume, which, however, was not a sandwich with a thin layer of internationalism in the midst of it, but all solid internationalism.” It certainly was. It proposed to solve every other nation’s problem at the expense of the American taxpayer. It gave “rights” to other nations to exchange their currencies, at rates far above their market value, for American dollars. It adopted the shiny new White-Keynesian principle (really what debtors have always suspected) that if the debtor can not repay the creditor it must be at least partly the creditor’s fault, and the creditor should be punished for it. The creditor was expected to be, of course, the United States, and the main debtor, England.
And it was finally White who drafted the “American” proposal that “if creditor countries increase their credit beyond a [certain] level, their currencies would be declared ‘scarce’ and would be allotted under a scheme, and thus debtor nations would have a fully authorized right to discriminate against the exports of the creditor countries.”
“This,” correctly declares the British economist Harrod, “was a very remarkable concession. If the United States was really to maintain over a term of years the oppressive role of creditor, which all predicted for her, it would mean that she was by this clause authorizing other nations to discriminate against the purchase of American goods . . . and to maintain their own full employment in the presence of an American depression.”
In fact, when Harrod first read this concession he “felt an exhilaration such as only comes once or twice in a lifetime. . . . Here is the real thing, because it will save us [England] from a slump.” He wrote immediately to Keynes: This “gives us [the British] what we should never have dared to ask for or hoped to get . . . namely, that we (and other countries) should be allowed to discriminate against American goods if dollars are running short. . . . From now on our main object should be to hold the Americans up to the principles of S.F.7 [the concessions].” Keynes in reply expressed doubt that the State Department realized what was being given away by “this document of Harry White’s” and thought it would withdraw approval as soon as it did.
But, triumphantly concludes Harrod in his account: “The Americans did not run out. The scarce-currency clause was incorporated, in a much stronger form than it had in the original draft, in the Bretton Woods Act passed by Congress in July 1945.”
So that was how the IMF and its principles were put over. And in his farewell speech at the Bretton Woods conference, Keynes, speaking for England, was not ungrateful: “I am certain that no similar conference within memory has achieved such a bulk of lucid, solid construction. We owe this not least to the indomitable will and energy . . . of Harry White.”
6 The Life of John Maynard Keynes (Harcourt, Brace, 674 pages, $7.50).
December 7, 1953
It is hard to see how the seventeen-member Randall Commission on Foreign Economic Policy, composed both of protectionists and low-tariff spokesmen, can possibly turn in a unanimous report. But if it is looking for sensible and practical compromise proposals on which a substantial majority might unite, I recommend its earnest attention to the suggestions put forward by Juan T. Trippe, president of Pan American World Airways, Inc., at the recent convention of the National Foreign Trade Council. Trippe proposes extension of the Reciprocal Trade Agreements Act for two years; repeal of the Buy America Act; further customs simplification along the lines of the Jenkins bill, and encouragement of private investment abroad by permitting the President “to conclude reciprocal treaties with other nations, exempting income earned abroad from domestic taxes.”
I should personally prefer, of course, to see the Randall report go much farther than this in the direction of lowering tariff rates and other trade barriers. In fact, I should regard as more urgently necessary than any of Trippe’s proposals the total abolition of our present import quotas.
But while Trippe’s practical suggestions are all in the right direction, his assignment of blame for the present world-trade situation, like that of so many other Americans, is oddly one-sided in its self-reproachfulness: “Many Americans are still isolationists in their economic thinking. . . . Much of our past world-trade policy makes little sense. . . . Twenty-five years ago, our imports amounted to 5 percent of the annual value of our national income. . . . Today, with the rest of the free world in need of dollars to buy our goods and products, our imports are but 3 percent. A generation ago, when Great Britain was the world’s great creditor nation, her businessmen invested abroad each year some 2.5 percent of her national income. Today, we Americans invest abroad but ⅓ of 1 percent.”
The implication here is that this comparative situation is solely or chiefly America’s fault. It is chiefly, on the contrary, the fault of Europe and the rest of the world. Bad as our international economic policies have been in some respects, those of most European and Asian countries have been incomparably worse. Their exchange controls, artificial currency valuations, bilateralism, import quotas, license requirements, and direct prohibitions, not to speak of their network of internal restrictions, have done far more to throttle two-way trade than the American tariff barrier. Indeed, at one point Trippe himself points out that our average tariff rate of 5 percent on total imports compares with an average of 13 percent on total imports for the fifteen Western European countries. Even when tariff barriers are considered merely by themselves, in other words, ours may be less restrictive.
And our comparatively small amount of foreign private investment is certainly far more the result of hostility to private capital in the would-be borrowing countries—with their confidence-destroying policies, such as vexatious laws, excessive taxation, exchange control, currency inconvertibility, and outright expropriation—than of any lack of eagerness of Americans to invest abroad. In fact, as long as these foreign countries get American taxpayers’ money as a gift, they do not need to pay for their imports from us with equivalent exports to us. And as long as these foreign countries get American taxpayers’ money as a gift they have far less need to make the reforms necessary to attract private American capital.
The greatest barrier to a free flow of international trade today, in brief, is not American economic isolationism but European economic isolationism and Asian economic isolationism. That most of Europe, following more isolationist policies than at any time since the seventeenth century, should have succeeded in turning the isolationist charge primarily against us, is certainly not the least remarkable example of the Alice-in-Wonderland ideological climate of the present age.
December 14, 1953
The Eisenhower Administration, which so bravely abolished price controls and made such a promising effort to halt inflation when it first came into office, has reversed its direction. It seems to have embraced almost the whole economic philosophy of the New Deal, and above all its policy of continuous inflation. And it has resumed this policy under the old New Deal-Fair Deal pretense of “fighting deflation.”
The turnabout first became apparent in mid-May, when the Federal Reserve System began purchasing Treasury bills in the open market. Then on June 24 came the much stronger inflationary step of reducing the reserve requirements of member banks. This action was taken to release $1,156,000,000 of reserves in order to give the country’s banks another $5,780,000,000 in lending power. This was frankly done in anticipation of Treasury needs of some $6,000,000,000 of “new money.”
The action had the hoped-for results. In the month of July alone the total loans and investments of the nation’s banks were increased by $4,700,000,000. The country’s money supply (total bank deposits plus currency outside of banks) increased by about the same amount. At the end of September the nation’s money supply stood at the record high level of $204,900,000,000. This was three times the money supply at the end of 1939.
As a result of this policy, interest rates were brought down again. In the week ended Nov. 28, three-month Treasury bills sold to yield only 1.488 compared with a yield of 2.231 in June. Commercial borrowing rates were correspondingly lower, thus encouraging business to borrow more. As of Oct. 15, the cost of living rose for the eighth month in a row, and to a new high level.
In recent weeks, and especially since the Republican Congressional defeat in Wisconsin, there have been increasingly unmistakable signs of a decision in the White House to resume inflation. Secretary Benson has to all but a minor extent capitulated to the extreme farm-price-support demands in Congress. A few weeks ago William D. Mitchell was suddenly fired as head of the Small Business Administration. His chief crime seemed to be that he had been cautious in his lending policies, and tried to save the taxpayers money. Immediately after he left, the SBA indicated that government loans would be available to almost any type of business, not just to defense contractors or “essential” producers.
Then on Nov. 18 President Eisenhower announced at his press conference that the Administration had given up all hope, not only of balancing the budget in the present fiscal year, but even in the fiscal year 1955. He also declared that “when it becomes clear that the government has to step in . . . the full power of government, of government credit, and of everything the government has will move in to see that there is no widespread unemployment.”
The Wall Street Journal, in a news story the next day, declared that this statement was not merely offhand, because the Eisenhower Administration was hammering out, for use “when and if needed,” an elaborate “antirecession program.” This included all the usual Federal Reserve devices for loosening credit—lowering bank-reserve requirements and rediscount rates, and the purchase of government bonds. In addition, the story ran, seven “task forces” were working under Dr. Arthur Burns, chairman of the President’s Council of Economic Advisers, to study Federal credit insurance for home modernization and repair, liberalization of unemployment insurance, Federal aid to new construction, tax relief, public works, and the “whole field of community and private business planning.” Finally, private financial institutions, such as banks and insurance companies, were “being eyed to see where they fit into depression-fighting schemes.”
Most of these “depression-fighting schemes” seem to me to bear a striking resemblance to the New Deal’s inflationary devices, and its philosophy of “spend and spend, elect and elect.” But I could be wrong, and I hope I am.
December 21, 1953
What has to happen in order to awaken the American public and its representatives in Congress to the unreality, hypocrisy, and blindness of our present labor laws?
If facts and crises are capable of teaching anything, New Yorkers, at least, have just received an intensive educational course. A few weeks ago workers in the milk industry decided to shut off the milk supply for 12,000,000 men, women, and children in the New York district until their demands were met. Meanwhile their pickets held up trucks, dumped milk, or poured kerosene over emergency shipments for schools and hospitals. Next, the New York newspapers were hit by a photoengravers’ strike. These photoengravers were getting $120 to $131 for a basic week of 36¼ hours. Some of them, with overtime, earned as much as $10,000 a year. But they demanded a $15 weekly increase and a 32-hour week and refused the publishers’ offer of arbitration.
The photoengravers have only about 400 men in their union. It would have been easily possible to publish newspapers without them. But they threw picket lines in front of the newspapers, and other unions decided to “respect the picket lines.” The result was that practically the whole New York daily press was shut down for eleven days.
This situation, it is true, brought forth some indignant comment about labor-union dictatorship. It was pointed out that the decision of other unions to “respect picket lines” was tantamount to a sympathy strike of their own in violation of contract, and that the constitutional right of the press to publish without restraint had been infringed by irresponsible private groups.
Yet when it came to ways of preventing the recurrence of such a situation, what was mainly heard was demands for still more legal coercion. Editor & Publisher, the industry’s magazine, spoiled an otherwise excellent editorial by calling for a prohibition of strikes and “mandatory arbitration” in “any communications industry.” But mandatory arbitration is merely another name for government wage-fixing. It leads inevitably to complete abolition of a free-enterprise system. And it is hard to see any more reason why newspaper strikes should be prohibited than, say, milk strikes.
What is really needed is a complete reexamination of the basic assumptions and actual effect of our present labor law. The Taft-Hartley Act, like its predecessor the Wagner Act, of which it is merely an amendment, abridges the employer’s freedom to bargain, to hire, and to fire. The ability of the unions to deprive New York’s millions of families of milk and newspapers was made possible by the Taft-Hartley Act. Under that act the milk companies were compelled to bargain solely with the striking milk drivers’ union; and the newspaper publishers were compelled to bargain solely with the local AFL photoengravers’ union. Both sets of employers were legally prohibited from “recognizing” or bargaining with any other union or with individuals.
And this Federal law is supplemented and supported by local police action that enforces the picket line rather than the right to work. But mass picketing, whatever its pretenses to “peaceful persuasion,” is a device for intimidation. For customers, to “respect the picket line” is to support the strike. For employees, to “respect the picket line” is to participate in the strike. And to argue that all picket lines must be respected is to argue that all strikes must be supported, regardless of their individual merits.
But the right to strike does not necessarily imply the right to win a strike, and the right to quit work does not imply the right to prevent others from working. The way out of the present union dictatorship is not compulsory arbitration, but repeal of the Taft-Hartley Act (or removal of its abridgements of the right of either workers or employers to associate or not to associate) and local enforcement of the common law against intimidation and violence.
December 28, 1953
Last week, in connection with the New York milk and newspaper strikes, I pointed out that mass picketing, however much it may pretend to be “peaceful persuasion,” is a device for intimidation, and that the right to quit work does not imply the right to prevent others from working. But these elementary propositions are forgotten or denied today by our labor laws and by our courts. And as long as they are denied we will have union-boss dictatorship and chaotic labor relations.
A typical case was brought to light in New York by a decision of the Appellate Division on Dec. 15. It involved the picketing of a retail liquor store that has been going on for two years. In October 1951, a union tried to enroll the three sales clerks of the store. They refused to join. Thereupon a picket line, with signs intimating that the employer was unfair to union labor, was placed in front of the store. Even after two years of this exhortation, the clerks refused to join the union.
The proprietor, Sydney J. Wood, then petitioned the New York State Labor Relations Board for an election to determine whether the union represented his employees. At that time the union made no claim to represent any of the employees. Yet Wood’s petition was dismissed by a vote of 2 to 1 on the ground that the union was engaged in organizational activity. The New York Supreme Court later dismissed his complaint on the same ground.
Now New York’s Appellate Division has reversed this decision. “The conclusion is inevitable,” it declares, “that the picketing here included an unlawful objective in that it sought to coerce the employer into signing a contract with the union, and as it was doing so by exerting economic pressure against the employer in order to force him to violate the State Labor Relations Act by compelling the employees to join the union against their will or, in the alternative, to drive the plaintiff out of business, plaintiff . . . is entitled to the relief he seeks.”
It is important to notice, however, that this decision did not grant the employer relief because he was being coerced, but because he was being coerced into violating the state labor law. The recent trend of Federal decisions has not been such as to discourage coercive picketing. On Dec. 14, for example, the U.S. Supreme Court handed down two decisions which in conjunction make it almost impossible for the states to enforce sensible laws on picketing. The court ruled in one case that franchised automobile dealers come under the Taft-Hartley Act even when their own automobile buying and selling are wholly within a single state. Under such fantastically extended interpretations of the Constitution’s interstate commerce clause, it is hard to see what important powers over labor relations and local labor peace will remain to the states and cities. In another Dec. 14 decision, in fact, the Supreme Court ruled that states cannot enforce their own antipicketing laws even when these laws coincide with the Taft-Hartley Act.
Mass picketing is commonly defended on the ground that it is merely a peaceful exercise of the right of free speech—a notice to the public that a strike is going on and that the employer is “unfair.” But this purpose could be amply secured if the police permitted, say, no more than two pickets to an entrance. If the police and the law and the labor boards permit a picket line of a hundred, on the other hand, yelling abuse and insults at customers and at workers who continue on the job, then in all consistency they should allow the employer to hire an equally large picket line to yell back counterstatements. Their failure to do so exposes the hollowness of the “free speech” argument. In many cases today, in fact, the police enforce the picket line rather than the right to work. It is the people who try to get through the line who are accused of disturbing the peace.
Peaceable and balanced labor relations are most likely to come through the repeal or drastic revision of the Taft-Hartley Act and local enforcement of the common law against coercion, intimidation, and violence.
- 1C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 2C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 3C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 4Loyal readers of Newsweek had reason for disquiet when the latest issue hit the stands on May 3, 1954. Those who managed to endure the details of the ongoing Army-McCarthy hearings or the deteriorating French position in Indochina sought solace, and more stimulating fare, by flipping through as usual to the business section. There, in a series of pieces over the past month, columnist Henry Hazlitt had offered his typically engaging analysis of contemporary economics, examining, in the context of the recent recession, how a more steeply progressive tax code might dampen both government revenues and business profits. Now, however, his “Business Tides” column—a staple of Newsweek’s back pages since 1946—was nowhere to be found. Weeks passed, spring gave way to summer, but the troubling void remained. Nervous letters began to flood editors’ in-boxes. “I would like to know what has become of Henry Hazlitt’s column in your magazine,” demanded the executive VP of one Midwestern industrial association, echoing scores of other concerned correspondents. “Frankly, it was the principal if not the only reason that I subscribed.” Such missive-writers shuddered to contemplate whether management had discontinued the column, silencing the most clarion voice for economic liberty in American popular media.
- 5“For Your Information,” Newsweek (12 July 1954), p. 1; Henry Hazlitt, Economics in One Lesson (New York: Three Rivers Press, 1988).
- 6Newsweek’s editors elicited a collective sigh of relief upon announcing the return of “Business Tides” on July 12, now that its sixty-year-old author had convalesced from an extended cardiac illness. They also took the opportunity to reintroduce Henry Hazlitt to his audience, describing him as a “genial, quick-moving, soft-spoken Philadelphian” whose forty-year career in journalism began at the Wall Street Journal and included distinguished editorial positions at the New York Evening Mail, New York Herald, New York Sun, Nation, American Mercury, and New York Times. An esteemed literary critic and financial reporter, Hazlitt had cemented his national reputation with a best-selling primer on free market economics, Economics in One Lesson, published the same year he started at Newsweek—where, eight years later, his columns remained “extremely popular with readers.” Hazlitt would remain a fixture at the magazine until 1966, his longevity as a regular columnist surpassed at his retirement only by Raymond Moley’s.
