Business Tides
If Foreign Exchanges Were Freed
January 9, 1950
Even those responsible for the devaluation of some 30 currencies since September admit that the results have been disappointing.
Devaluation was, in fact, the wrong remedy. What was called for was not continued exchange control with lower fiat rates, but the restoration of free exchanges. This is a necessary transitional step to eventual return to a full international gold standard. Gold means real stability based on freedom. Exchange control means a fictitious stability based on coercion.
Exchange control subordinates the citizen to the bureaucrat. Free exchange rates subordinate the bureaucrat to the citizen. Under controls the bureaucrat imposes a fiat rate by telling the citizens: “You must buy and sell sterling (or dollars) at this rate or else.” With free rates the bureaucrat is compelled to woo the confidence of the citizen. He must follow policies that will make the citizens of his own and other countries place a high value on the currency and real faith in its stability. Hence freedom promotes fiscal and monetary reform, while exchange control conceals the necessity for it.
Sir Stafford Cripps must bear the chief blame for the fateful decision to devalue, and for the chain reaction that it touched off elsewhere. But responsibility must be shared also by the International Monetary Fund.
The last annual report of the fund was available to Cripps two months before he announced devaluation on Sept. 18. If the report had recommended free exchange rates he would have been forced to give the recommendation great weight. But it never did. It did strongly hint at the need of “an exchange rate adjustment” for “countries with dollar payments difficulties.” It was this hint that Cripps followed.
The fund report wavers between a philosophy of freedom and a philosophy of statism. It deplores, in the abstract, “restrictions and discrimination” and “multiple rates.” It dreads the prospect of world trade “conducted with inconvertible currencies on the basis of bilateral bargains.” But when the fund faces a specific decision, it usually throws its weight on the side of control. Never once has it unequivocally come out for the abandonment of exchange control. It prefers fiat rates to free rates.
When Peru in November adopted a free rate for its currency, and took one of the most promising steps away from exchange control that has been taken by any nation since the war, the fund gave the action a very cool approval. And the November review of Barclay’s Bank of London explains that “to allow sterling to go free would have been against the letter and the spirit of the Bretton Woods agreement”—under which the fund was established.
In the same report in which the fund deplores “restrictions” we find it urging its member nations to place still further restrictions on private transactions in gold—either at “premium prices” or for “illegitimate purposes, particularly hoarding.” Today nearly every government in the world is inflating and debasing its currency unit, cheating its own citizens of their savings. The fund gives its apparent blessing to this process: “Changes in exchange rates can, and under appropriate conditions should, be an instrument of economic policy.” The real villain, it seems, is not the government that prints and depreciates paper money, but the citizen who tries to protect himself against this depreciation by putting part of his savings in gold.
Yet the fund, in the face of its own record, seems genuinely surprised that the world has not been moving toward freedom. “No member of the fund,” it finds, “which originally availed itself of the provisions permitting exchange restrictions in the transitional period, has subsequently felt itself able to renounce the rights provided.” On the contrary: “In a number of countries, new exchange restrictions have been imposed or existing restrictions expanded.” 
January 16, 1950
The Marshall Plan was based on a wrong diagnosis of the sickness of Europe and a wrong conception of its cure. Its sponsors now hail it as a great success. They attribute to it every economic and political improvement in Europe since it was put into effect. Every setback or deterioration, they explain, has been in spite of the Marshall Plan.
This one-way post-hoc-ergo-propter-hoc logic does not seem to be shared by the beneficiaries. In a recent poll conducted for the ECA in Europe, for example, only four Frenchmen in every 100 questioned thought the Marshall Plan had been a factor in French recovery.
On purely economic grounds, it would do no harm to terminate ERP when the present appropriation expires on June 30. Unfortunately, though there was not the slightest good reason for our doing so, we made an implied promise to the European governments that we would continue our Marshall aid for at least four years. We would only bring on recriminations and charges of bad faith if we were to terminate it now.
On the other hand, even the ECA now talks of terminating aid in 1952 and of cutting next year’s appropriations by 25 percent below that for the current year. But if ERP is to run for only two years more, the logical way to taper off would be to cut the appropriation by one third now and by a second third for the following year. The appropriation for the current fiscal year was $3,778.000,000. This should be cut to, say, $2,520,000,000 for the 1951 fiscal year and to $1,260,000,000 for 1952.
To cut the appropriation by only 25 percent now would either imply at least a three years’ continuance or require European governments to make a disproportionate adjustment at the end of the second year. It seems more reasonable to reduce Marshall aid by $1,260,000,000 in each of the next three years than to cut it by only $944,000,000 in the first (and second?) year and by the remaining $1,890,000,000 in the third.
In tapering off Marshall aid in this simple, proportionate way, Congress should act as soon as possible—long before the end of the current fiscal year. And it should authorize now the appropriation both for 1951 and 1952. This would give European governments plenty of advance notice concerning how much they could expect to receive from us. It would enable them to make their plans accordingly. It would also forestall what would otherwise be constant propaganda for larger and continuing aid. The truth is that the amount set for ERP aid has always been an entirely arbitrary figure. To recognize this frankly would lead to enormous administrative simplification. Congress could simply direct that the reduced total sums it appropriated should be divided among the individual governments in the same ratio as in the current year. This would take from ECA officials a burden of decision that should never have been placed upon them.
In fact, the whole ECA bureaucracy was unnecessary from the first. The elaborate ritual of “counterpart funds” and other such special earmarked accounts is meaningless as a real control. It merely befuddles both Europeans and ourselves. All Congress need do is to authorize the Secretary of the Treasury to pay checks at regular intervals to the ambassadors of the recipient European governments. The ineffective but much-resented interferences of the ECA in the economic policies of these governments would halt. These governments would still have as strong an incentive to reform as any ECA pressure provides. It would be the definite knowledge that the aid was coming to an end.
Such a plan would be far superior to the proposed new “clearing union” for Europe. This “union” would be merely one more futile effort to do what the existing International Monetary Fund is already supposed to do. It would actually apply “incentives in reverse” by giving the most to the countries that succeeded in getting themselves the biggest trade deficits.
If we cannot have sound foreign-aid plans we can at least have simple ones.
January 23, 1950
“This financial program,” insisted President Truman in presenting his annual budget, “provides a sound basis on which to proceed.” He thought his spending policy one of “prudence and restraint.” “It provides for essential activities,” he said, “on a minimum basis and no more.” He spoke of it as if it were an abstemious, almost a niggardly budget. He had denied “request after request for additional funds.” In fact, he declared at one point: “The major question in my mind is not whether we are doing too much [spending] but. . . too little.”
This budget that Mr. Truman considers to be so sound, prudent, restrained, a minimum and perhaps too little, happens to be in simple fact a continuation of the largest peacetime expenditure ever proposed by the head of this or any other government in the history of the world.
The requested 1951 expenditures of $42,440,000,000 would be greater than our total estimated national income in 1932. They would be more than five times the annual rate of spending in the peacetime years of the Roosevelt Administrations. They would be more than ten times the annual rate of spending in the Hoover Administration.
This colossal rate of spending, Mr. Truman argues, is necessary to meet the “demands which the foreign and domestic situations put upon” the people. It contributes “to the welfare of our people.” It “encourages prosperity.” It “maintains high employment.” It promotes an “expanding economy.”
The real truth is the exact opposite. Mr. Truman’s bouquet of fallacies stems from looking solely at what the expenditures do or appear to do for those to whom they are given. He forgets that a government cannot give anything to Paul without taking it from Peter. In brief, he completely forgets the American taxpayer.
Mr. Truman really does assume that we can eat our cake and have it too. He forgets that the government cannot fill a single “need” without making it impossible for the individual taxpayers to satisfy other needs. He declares that “many Federal expenditures constitute direct supports for important sectors of our economy.” But he forgets that the taxes taken to make these expenditures must constitute at least equal direct depressants on other important sectors of our economy. He sincerely believes that he can pass economic miracles by seizing more and more from the American taxpayer and handing it over to someone else.
Yet you do not help the people to meet their needs by taking away from them the earnings on which they depend to meet those needs. You do not maintain high employment by putting further tax burdens on the industries that provide employment. You do not encourage production by burdening the productive to subsidize the unproductive. You do not create an expanding economy by killing incentives and draining industry of the very capital by which productivity is increased and an economy expanded.
Even with the present unparalleled burden of peacetime taxes the government stands to raise only $37,300,000,000 in revenues. This means that it plans a deficit in the 1951 fiscal year of more than $5,000,000,000. This deficit alone would be greater than the entire expenditures of the Federal government in any year in the Hoover Administration. It would come on top of an estimated deficit of $5,500,000,000 in the current fiscal year, on top of eighteen deficits in the twenty preceding fiscal years, and on top of a national debt of about $259,000,000,000.
What is most ominous is that the President no longer seems to consider deficits anything to worry about. He expects the country to be satisfied with the vague assurance that we are “moving toward budgetary balance in the next few years.” Mr. Truman and his advisers seem to believe that they can keep a perpetual boom going by perpetual deficit financing and perpetual inflation. And that belief, as experience shows, has always ended in disillusion and disaster.
January 30, 1950
In the winter of 1944–45, when we were still fighting Germany and Japan, and before the international fund or bank or the United Nations had become realities, I wrote a piece with the above title in the pages of The American Scholar. It took a dim view of the brave new postwar world then being proposed by the bureaucrats.
“The demand now,” I wrote, “is for International Cooperation. But when the concrete proposals for this international cooperation are examined, it turns out to be something radically different from the international cooperation hoped for by the older liberals. It is not the freedom of the private citizens of any country to trade with the private citizens of any other. It is not primarily the cooperation among private citizens of different countries at all. It is primarily cooperation among governments.”
I went on to express misgivings concerning the way in which this might work out. In analyzing the proposed setup of the International Monetary Fund, for example, I voiced the fear that it might encourage inflationary money policies followed by a wave of devaluations—“the modern euphemism for debasement of the coinage.”
I wish I could report that my misgivings proved to be entirely groundless, and that the devaluations since last September of some 30 national currencies did not in fact occur. But they did.
I confess, however, that I did not foresee the full flowering of international bureaucratism. I did not foresee the innumerable sub agencies of the coming United Nations, with their thousands of bureaucrats daily flooding the world with propaganda in favor of still more bureaucratic controls. I did not foresee, for example, the nightmarish project just proposed by “a group of five outstanding economists” at the request of the United Nations Economic and Social Council.
But I can perhaps provide a useful guide to the reader through the current international bureaucratic maze, He will find that the thousands of international-control schemes resolve themselves, on analysis, into one or more of just three basic schemes:
Scheme One: To seize still more from the American taxpayer and turn it over to foreign bureaucrats.
The Marshall Plan, arms aid, and Point Four are mere beginnings. Thus one of the five economists warns that the United States “must be prepared to abandon the practice of doing too little.” We have, for example, handed out only some $28,000,000,000 to foreigners since June 1945, Do we expect to save the world with chickenfeed?
Scheme Two: Each government is to keep constantly inflating, constantly shooting more paper purchasing power into the economy and constantly debasing its monetary unit. No matter what peak of inflation it reaches, it is never to permit any decline below that peak.
The recent recession in the United States, for example, is regarded by the five economists as an “ominous signal.” All sorts of irresponsible gadgets are proposed by the same economists to keep pumping in this paper purchasing power in “emergencies.” Of course, for the record, lip service is also paid to means of curbing excessive inflation, apparently with the calm assurance that no government that values its tenure of office will ever adopt them. The same governments that are to inflate for constant “full employment” are also to help “prevent any continuous upward pressure for wage increases.”
Scheme Three: Don’t permit things to be bought or sold for their real market values, but only for the fiat values put on them by the bureaucrats. (Price fixing, wage fixing, profit control, exchange control, etc.)
My conclusion of 1944 still stands: “If the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life . . . the plain man’s living standards will decline with his liberties.”
February 6, 1950
Whatever may be thought of the President’s tax message to Congress as a 1950 campaign document, there is only one possible judgment of it as a statement of fiscal policy. It is irresponsible.
In his budget message, for peacetime, for a year expected to record one of the three highest national incomes of our history, Mr. Truman planned a deficit of $5,100,000,000. He now joins the popular clamor for reducing excise taxes. He asks Congress to impose compensating taxes, most of which would be even more harmful than the taxes he asks it to reduce. In order to “reduce taxes which burden consumption” he proposes to increase taxes which burden production. But even if all his proposals were carried out, and if the resulting yields came up to his expectations, he would still be recommending a deficit of more than $4,000,000,000.
If there is any fiscal responsibility in Congress itself, its course is clear. It should return his proposed 1951 budget to Mr. Truman without approval, and request him to submit a responsible, balanced budget, with provision for a minimum debt reduction of $600,000,000.
If it agrees that it is desirable to cut excise taxes by, say, $700,000,000, and to allow not less than $600,000,000 for debt reduction, and if it agrees that other taxes are already at if not far beyond the highest levels that our economy can tolerate, Congress should become even more explicit. It should point out to the President that his present proposed expenditures of $42,440,000,000 for 1951 must be slashed by a minimum of $6,440,000,000 to make a responsible, balanced budget possible. The total expenditures under such a responsible budget, in other words, could not exceed $36,000,000,000.
A responsible Congress would further inform the President that he ought not to place upon it the impossible burden of trying to find where all the wastes, inefficiencies, and non-essential items in his budget are; and that if he wishes to avoid what he calls “foolish budget slashes” it is his job to make the cuts himself. Congress should tell the President, in other words, that he will have to learn to get along on a mere $36,000,000,000 in the next fiscal year, even if this is only four or five times the rate at which the Roosevelt Administration spent in peacetime and nine times the rate of spending under the Hoover Administration.
A responsible Congress would go on to demand executive responsibility. The proposals in the President’s tax message are extremely vague. Congress should insist that the Administration spell these out in detail; tell exactly what excise rates it wants on what; exactly what new corporate rates it wants; and exactly what new provisions for oil and mine depletion. Congress should ask the Administration, in brief, to draft and submit the complete text of its proposed tax-law changes. Congress is under no obligation to adopt these Administration proposals; but Congress and the country should insist on knowing precisely what they are. That is the only way to get executive responsibility.
Mr. Truman’s tax message is honeycombed with contradictions. He persists in declaring, for instance, that the deficit of more than $4,000,000,000 which he plans for the fiscal year 1951 “will be due largely to the shortsighted tax reduction enacted by the 80th Congress.” If Mr. Truman really believes what he says, his only consistent course is to recommend immediate restoration of the higher tax rates prevailing before the cut. He actually declares, on the contrary, that “nothing could be more foolhardy than to attempt to bring about a balanced budget in 1951” by “drastic increases in tax rates” or “drastic cuts in essential expenditures.” So he denounces the 80th Congress for bringing about a deficit that he insists upon maintaining.
The country is in grave financial peril unless the Administration can be brought to end this political double talk and recognize its responsibilities.
February 13, 1950
A poor peasant, according to an old folk tale, went to the Wise Man of his village for help and advice. The peasant lived in a one-room mud hut with his wife and four children. He was driven to desperation by the noise, the quarreling, the smell, the dirt, the poor scanty food, the poverty, sickness, and squalor in which his family lived.
“I will help you,” said the Wise Man. So the next day he brought a male goat to the peasant’s hut, saying; “You must feed this goat and take him in and let him sleep in the hut.” “Why, O Wise Man?” asked the peasant. “You will see,” replied the Wise Man. “Come back to me at the turn of the moon.
On the night of the new moon the peasant was back. “O Wise Man, my life is unendurable. The noise in the hut is hideous. The smell is beyond belief. The goat knocks down the children and eats us out of hut and home. I am sunk in wretchedness and despair.”
“I will help you,” said the Wise Man. And he came and took away the goat.
A week later the peasant came to him again, his face wreathed in smiles. “O Wise Man,” he said, “my life now is wonderful. You cannot imagine the change since you took away the goat! The hut is quieter. The horrible smell is gone. My family has once more almost enough to eat. How can I ever thank you enough for taking away that goat? How infinitely wise you must be to have thought of such a marvelous plan!”
I keep thinking of this tale as I read about the new plans of the bureaucrats all over the world. They impose an endless network of restrictions, burdens, coercions, and prohibitions on their own peoples; they all but strangle production and trade. And then their most happy solutions consist in removing one or two of the burdens and prohibitions that they themselves have decreed.
The cleverest new scheme of the ERP bureaucrats in Europe, for example, is to remove 60 percent of the import quotas that they themselves imposed. Last September the bureaucrats of some 30 nations hit upon another wonderful scheme. Instead of forcing people to buy and sell currencies at rates ridiculously above their real market values, and so damming up the flow of international trade, the bureaucrats now force people to buy and sell these currencies at rates much nearer to their real market values. Perhaps an even more brilliant stroke would be to remove all import quotas and allow people to buy and sell currencies freely at whatever rates they could mutually agree upon.
The bureaucrats rightly recognize that there can be no free flow in international trade until currencies are made convertible. To achieve this they now propose complicated “clearing unions” which would provide jobs for still more bureaucrats. They put forward other schemes of wondrous ingenuity. But it hasn’t seemed to occur to a single bureaucrat that the only reason currencies are not now freely convertible into each other is that the bureaucrats themselves are forbidding holders of currencies to buy and sell them freely at market rates. Perhaps the idea of repealing this prohibition will eventually occur to some supergenius.
A few weeks ago the British Labour bureaucrats suddenly increased bacon and candy rations. Though this merely relaxed their own restrictions, the British bureaucrats did this with the air of philanthropists conferring a charity. The step was hailed as still another victory for Planning.
The most brilliant schemes of the planners today consist in tapering off their previous plans.
Even at home our politicians now talk of removing excise taxes. They too are going to confer a great favor by taking out a few of the goats they have forced upon us.
As the demand today is for constructive proposals, this department humbly submits its own. Stop putting needless burdens and coercions on people, production, and trade.
Let the bureaucrats take away their own goats.
February 20, 1950
Sen. Brien McMahon’s proposal that our government contribute $50,000,000,000 over five years for a “global Marshall Plan” is the culmination, the reductio ad absurdum, of the befuddlement on foreign economic policy in which Washington has wandered for the last five years.
Senator McMahon’s proposal is, to put it baldly, a proposal to pay unparalleled tribute. No other word fits. “Tribute” is defined in the dictionary as “a stated sum . . . paid by one sovereign or state to another in acknowledgment of submission or as the price of peace, security, protection, or the like.”
When we were small and considered weak, our minister Charles Pinckney, on being told by Talleyrand that a gift to the Directory might avert war with France, made his famous reply: “Millions for defense, sir, but not one cent for tribute.” Yet today Senator McMahon, at a time when we are by far the strongest nation in the world, proposes that we pay up to $50,000,000,000 as the price of Stalin’s promise to stop threatening us with atomic or hydrogen bombs.
This mere proposal, by the chairman of the Joint Committee on Atomic Energy, is certain to be taken by the leaders behind the Iron Curtain as a sign of fear and weakness. The leaders of the Iron Curtain countries have already found that they can with impunity plant spies in our midst, blockade us at Berlin, beat or imprison our envoys, and insult and vilify us every day. What further move may they not be encouraged to take by this timorous offer of ransom? Even Secretary Acheson’s emphatic rejection cannot fully offset this blow to our prestige.
The McMahon proposal obviously lacks sense. Would we make ourselves safer by pouring billions of our dollars into Russia, by reducing our economic and military strength to increase hers, by intensifying the problems of our free-enterprise system to mitigate the problems of her Communist system? And if for four years Stalin has unswervingly refused to call off the atomic-bomb race, even when we were far ahead of him, and even at the risk of the annihilation of millions of Russians and of his own regime, does it make sense to suppose that he will reverse his stand now for a mere monetary bribe?
It is time we asked ourselves frankly, in fact, whether an atom-bomb “agreement” might not actually be more dangerous than the present known lack of agreement, by binding us and not the leaders of Russia. These are the same leaders who have broken promise after promise, who believe that the end justifies any means, who live by systematic perfidy. The proposals for international “inspection” of the vast depths of a totalitarian Russia are not realistic. Even if our inspectors finally did catch up with a plant in Russia that had been working on the bomb—after we had poured in our $50,000,000,000 to help finance it—what recourse then?
But the real point of this article is economic. Senator McMahon himself calls his proposal a “global Marshall plan” and casually drops Point Four inside it. It is a supergiveaway program. It is not only politically preposterous, but it rests on the same fundamentally false economic assumptions as the Marshall plan and Point Four. It wrongly assumes that the American capital thrown into such schemes is a net addition to the world’s capital. It is in fact a mere diversion of such capital. And it is a diversion, in the main, from productive private enterprises into far less productive collectivist projects.
Such schemes do not encourage private lending abroad; they discourage such lending. They do not speed up recovery and development of world resources; they retard that recovery and development. For as long as foreign countries can get easy money, seized from our taxpayers, out of the United States Government, they will neither give the assurances nor make the economic reforms that they would have to make to attract private investment.
It is time we called a halt to the giveaway mania.
February 27, 1950
Congress has unwisely committed itself to two more years of the Marshall plan. Because of this, I suggested in this column of Jan. 16 that the simplest way to taper off the plan would be to cut the amount by one-third next year and by a second third for the following year. The simplest way to do this, in turn, would be to abolish the ECA bureaucracy, to divide the sums among individual governments in the same ratios as in the current year, to present the money as a gift, attach no conditions to it, authorize now the appropriations for both years, but put these governments on notice that our aid will definitely terminate at the end of this two-year period.
This plan is the simplest we could adopt. It is least likely to be misunderstood. Politically it would give no ground whatever for the criticism that we were trying to interfere in the “internal” affairs of the governments concerned. Let us call it Plan A.
But Congress may quite properly want to insist on economic and financial reforms in Europe in exchange for our aid. In that case the best plan would still be to abolish the ECA bureaucracy and to turn our aid program over to the Export-Import Bank. The bank should be authorized to make loans guaranteed by European governments that conformed to half a dozen simple but mandatory requirements of eligibility unequivocally laid down by Congress. For example:
1—No loan should be made directly to any government, but only to some specific productive enterprise, private or governmental. Each loan must be fully guaranteed, however, by the government of the borrowing country.
2—If the loan is to a going enterprise, private or governmental, that enterprise must be currently operating at a profit.
3—If the loan is made to start any new enterprise, that enterprise must be private. Native investors must supply equity capital equal to not less than a third of the total capital.
4—The guaranteeing government must itself be operating on a balanced or overbalanced budget.
5—The borrowing country’s volume of money and bank credit must at least not be growing faster than its physical volume of production.
6—The borrowing country must at all times maintain free convertibility of its currency, if not by going on a gold or dollar basis, then at least by permitting free exchange rates.
Let us call this Plan B. It may be objected that few European governments would be willing to make the reforms necessary to qualify for such loans. But as long as governments do not make these reforms, our aid to them is misdirected and wasted anyway. If at the end of six months any governments had not availed themselves of the loanable funds allotted to them, these funds could be made available instead, in the already established ratios, to governments that did conform with the eligibility requirements.
Plan A and Plan B could not of course be in effect simultaneously. But Congress could if it wished put Plan A into effect for, say, six months or a year to give European governments plenty of time to adopt the reforms necessary to make themselves eligible as guarantors for loans from the United States under Plan B.
Finally I should like to suggest Plan C. This is not a third alternative; it could be combined with either A or B. Under Plan C we would offer to forgive our entire loan of $3,750,000,000 to the British Government in lieu of further advances to that government under ERP. As these advances do not promise to be more than about $1,250,000,000, in the next two years in any case, the British Government should be greatly tempted to avail itself of such a choice. It would be relieved of $3,750,000,000 in indebtedness, and it would improve its net position by some $2,250,000,000. From our standpoint, it would save us about $1,250,000,000 in further cash advances. And it would remove what will be otherwise a source of resentment and recriminations between Britain and America for many years. This is precisely the opposite of the original purpose of the loan.
March 6, 1950
By the time this article appears, the legal and economic outcome of the coal strike may be fully known. But the confused ideas and laws which brought on this crisis will condition the terms on which it is settled, and the precedents set may even decide the very nature of our future economy.
The immediate cause of the crisis was President Truman’s failure to invoke the injunctive provisions of the Taft-Hartley Act until too late. There was not a shred of excuse for this irretrievable loss of time. The Taft-Hartley Act provides: “Whenever in the opinion of the President . . . a threatened or actual strike or lockout affecting an entire industry or a substantial part thereof. . . will, if permitted to occur or to continue, imperil the national health or safety, he may . . . direct the Attorney General to petition any district court” etc. (My italics.) The threatened emergency was obvious to everybody else weeks and even months before Mr. Truman got around to admitting its existence. By the time he did, our national economic life was already in such peril that John L. Lewis could dictate almost any terms he pleased.
But the causes of the coal crisis go much farther back than Mr. Truman’s procrastination. The Taft-Hartley Act, notwithstanding its injunctive provisions and all the nonsensical charges about its being a “slave labor” law, merely continues the basic provisions of the Wagner Act with a few minor amendments. Like the Wagner Act, it turns the government itself into a union-organizing agency. It legally compels employers to negotiate with a Petrillo or a Murray or a Lewis no matter how unreasonable his demands. It sanctions and builds up industrywide unions. It encourages strikes by taking nearly all the risks out of them. It practically deprives the employer of the right to declare that the strikers have quit their jobs and to offer permanent employment to others to take their place.
Our one-sided laws are in turn the result of a confused ideology which believes that unions can do no wrong and that they can be granted sweeping legal immunities without danger of abuse, including immunity from the antimonopoly laws. The unions are granted a sweeping “right to strike” which is interpreted to include not merely the acknowledged right to the individual to quit his job but the spurious right forcibly to prevent anybody else from taking the job that he has deserted.
Under cover of protecting these spurious “rights” of the unioneers everybody else’s rights are abridged. The railroads were deprived of their right to run coalburning trains and the public of its right to travel on such trains—even when there was still officially no emergency at all. The states and cities suspend the right of private ownership and use of coal, the right to supply or get current or the right to turn on electric lights. And all to protect the precious right of John L. Lewis to paralyze the economic life of the country until he can dictate the terms on which he will refrain from doing so.
The government continued to force the operators to negotiate with Mr. Lewis as the spokesman for the miners after those miners defied his public orders to return to work—which meant that, if his orders were given in good faith, he was no longer their spokesman. Because the government made itself impotent even to enforce its own injunction, it was proposed to seize the mines. Instead of punishing the strikers, it was proposed once more to punish the struck-against. Such action is not only unnecessary and irrelevant, but it erodes the concept of private property and brings us nearer to nationalization by default. Meanwhile miners’ union goon squads are permitted to roam the country and to resort to mass picketing, intimidation, or violence to prevent anybody else from mining coal.
Yet no one proposes to reexamine first principles; no one proposes to enforce the common law against violence, vandalism, and intimidation, and no one proposes simply to repeal the Taft-Hartley Act, period.
March 13, 1950
The Administration is now possessed with a mania for “lending” or giving away the American taxpayer’s money to any foreign government that it can coax into taking it. This mania grows by what it feeds on. The Marshall plan is only one channel for it. In addition there are the Export-Import Bank, the International Bank, the International Fund, the arms aid program, and the proposed global catchall. Point Four. Our foreign policy can almost be summed up in four words: “Give ’em more money!”
If none of these government handouts had been devised, Europeans would still have had great need for American capital. They would have had to apply for private loans. And they could have got these only by restoring the confidence of American private investors. It is not difficult to specify the reforms they would have had to make to inspire such confidence:
1—They would have had to assure anybody who put money into Europe that he could get it out again. This means that they would have had to make their own currencies freely convertible into dollars. They could have done this simply by dismantling their wartime exchange control.
2—They would have had to assure foreigners holding pounds, francs, or lire that these currencies would not depreciate. This means that they would have had to halt monetary inflation. To do this they would have had to return to balanced budgets.
3—To return to balanced budgets European governments would have had to give up nationalization, which has meant huge deficits in the nationalized industries. They would have had to reduce to manageable dimensions food subsidies and overgrown relief and “social security” programs.
4—They would have had to stop threatening still further nationalization, expropriation, and seizure.
5—They would have had to relax or abandon controls over wages, prices, interest rates, and profits.
6—They would have had to reduce excessive taxation.
If Europe had been obliged to attract private capital, such reforms would already have gone far farther than they have. They would have brought not only far more production, but the freer and more balanced trade, the “currency convertibility,” the “multilateralism,” and the “integration” for which our ECA officials have made futile exhortations. The reason for their futility is clear. As long as foreign governments can pick up easy money from our own government they don’t have to make these reforms.
As a result European recovery has not only been slow and precarious, but the recovery that has taken place has been in the wrong direction. Production indexes have gone up; but the added production is not primarily for export, as it should be, but for home consumption. So foreign trade is still unbalanced, and Europe’s self-induced “dollar shortage” remains.
The dilemma of the Marshall plan and of Point Four, the dilemma of every government-to-government handout, is plain. If our government imposes no conditions on its handout, the money is worse than wasted. If it does impose conditions, they provoke foreign resentment.
Our ECA officials vacillate between the horns of this dilemma. First they say that they won’t interfere in the “internal” affairs of these countries. Then, of course, the European governments getting our aid make in return none of the economic reforms so desperately needed. The British bureaucrats repay us by discriminating against American motion pictures and American oil companies. The French repay us by threatening the sale of Coca-Cola. Then our ECA officials talk of “getting tough.” But when it comes to a showdown they cannot risk insisting on reforms that would be really effective. So we end by subsidizing foreign-government discrimination against our own industries.
In short, government “loan” and gift programs like the Marshall plan and Point Four do not promote world recovery; they retard it. We are subsidizing and prolonging statism and socialism abroad, and imperiling our own free-enterprise system to do it.
March 20, 1950
Having himself helped to deliver it one staggering blow after another over the last five years, President Truman is now curious to know why the nation’s coal industry is sick.
Even if the kind of commission of inquiry he asks for, mainly appointed by himself, could be nonpolitical and objective, it is not needed. For the essential facts about the coal industry are already known. These facts are that John L. Lewis, aided by Congress and the President, has won too many Pyrrhic victories. As a result, coal labor costs are too high, coal is overpriced, the supply is never dependable, and coal is losing out everywhere to the competition of oil, natural gas, and water. In 1947 coal supplied 50 percent of the nation’s energy; last year its contribution was down to 38.5 percent. Of 1,142 new railroad locomotives on order, only twelve will be powered by steam.
It is not the coal industry that needs to be investigated but the President’s own incredible labor policy.
Mr. Truman has repeatedly demanded the repeal of the Taft-Hartley Law, called it “unworkable,” denounced it as a “slave labor act,” and otherwise encouraged Mr. Lewis and other labor leaders to flout it. He failed to act under the injunction provisions of the law until weeks and even months after he should have acted. Then a Federal judge held that though the miners continued to strike after the injunction, they were not in contempt because, don’t you see, they were merely acting “as individuals.” This made the injunction meaningless and the government impotent. And nobody in the government even drew the logical conclusion that if Mr. Lewis could not get his own back-to-work order respected he should no longer be dealt with as the miners’ spokesman.
So, because of the crisis that Mr. Truman himself helped to bring about, he asked Congress for power to seize the mines. Having made the government impotent to deal with the strikers, he threatened to crack down on the struck-against. This seizure threat forced the prompt surrender of the mine operators. If it hadn’t, Congress would no doubt have given Mr. Truman his requested legislation.
Yet the legal situation that such a law would create would be fantastic. Thanks to present law Mr. Lewis is dictator of the nation’s coal industry. It is considered an infringement of his sacred constitutional rights even to prevent him from ordering three-day weeks to deprive the nation of coal. But under Mr. Truman’s seizure law property rights could be abridged every time Mr. Lewis chose to create a crisis. Then the government could step in and dictate wages and profits while it ran the mines. Though this would abridge rights, there is no assurance that it would end strikes. For miners could still refuse to work “as individuals.”
Mr. Truman seems to have forgotten entirely that even when he seized the railroads in May of 1946 he did not end the strike that had been declared against the generous wage decision of his own fact-finding board. On that occasion Mr. Truman was finally reduced to proposing that he be given the totalitarian power to throw the strikers into the Army and force them to run the trains that way.
Mr. Truman’s labor policy was already bankrupt in 1946, and he has learned absolutely nothing from his experience since then.
The power of industry wide unions was never so menacing as now. The simplest solution would be to repeal the Wagner-Taft-Hartley Act, lock, stock and barrel, and so restore free, two-sided wage bargaining.
If this solution is deemed at the moment politically impossible, then the second best course is to remove the sweeping immunities of the labor unions from the antimonopoly laws, and above all to stop compelling individual employers to deal with industry wide unions. If nationwide unions continue to be imposed on industry by law, they will in time make it impossible for our private-enterprise system to function. This is the alternative that confronts us.
March 27, 1950
If Congress wants to save the American taxpayer $600,000,000 it could find no better way of doing it than to reject the ECA proposal that we pour that amount into a “European Payments Union.”
This proposed “Payments union” would merely seek to do for Western Europe, and by the same methods, precisely what the International Monetary Fund already seeks to do on a global scale. Assuming that this scheme ought to be carried out at all, why not utilize the already existing IMF to do it? Why not at least place the proposed regional organization inside the existing global fund? Why set up an entirely new, competing, overlapping, and duplicating institution?
But the questions to be raised about this scheme go much deeper than organizational ones. What is proposed is that $600,000,000 more of the American taxpayer’s dollars be thrown into a huge kitty, together with fresh and practically automatic loans of the European governments to each other.
The purpose of this is to enable these European countries to buy more goods from each other. There is no reason to suppose that the scheme wouldn’t, at least temporarily, achieve this result. Anybody can buy more goods if somebody else gives him the money to do it with.
But at what cost, and at whose expense, will this be done? It is argued that if the European countries are encouraged to buy more from each other they will need to buy less from the United States and the rest of the “dollar area,” and so “save dollars.” But by the same reasoning (unless they have unemployed resources), if they sell more to each other they will have less left over to sell to the dollar area—and certainly less incentive to sell it. In other words, they will have less incentive to earn dollars.
There are strong reasons for thinking, in fact, that the tendency of the proposed European payments union would be to turn Western Europe and the sterling bloc into one big soft-currency area—and to reduce the trade between this soft-currency area and the rest of the world. For this intra-European trade would be financed by a new dose of easy dollars and inflationary credit. This inflationary credit would tend to raise price levels still further within the area, increase its price incentive for dollar imports, and reduce still further its ability to export competitively into the dollar area. Moreover, though the member nations promise to cut down their quantitative restrictions on imports from each other, the scheme contemplates that they would continue to discriminate against the outside world, and even be encouraged to do so to “save dollars.”
In short, the scheme threatens not only to turn Western Europe into a big walled-in soft-currency area, but actually to increase on net balance the dollar deficit of that area. It would tend to delay rather than promote worldwide multilateral trade. It would tend to delay rather than accelerate general currency convertibility, and above all the convertibility of sterling and European currencies into dollars.
The greatest single step toward a free and balanced international trade would be to restore the general convertibility of currencies into each other. This can be done only by the abolition of exchange control. The traders of every country must be allowed once more to buy and sell their own or other currencies at whatever rates are established in free markets.
To prevent currency depreciation and violent fluctuations governments must stop resorting to police methods. They must turn to the restoration of confidence. This will require a halt to inflationary policies and to threats of more socialism and expropriation. Ultimately it will require a return to the international gold standard. For Britain it will require to begin with the blocking or funding of the old overhanging sterling debt. But in general what is needed to promote world recovery and restore world trade is not still more bureaucratic tinkering, but the restoration of economic freedom.
April 3, 1950
Every year since the end of the war the Administration has asked for the extension of rent control “just for one year more.” There is no reason, as I hinted in this place last year (Newsweek, March 14, 1949), why this could not go on forever. For the Administration wants rent control extended “until the supply of housing has caught up with the demand.” But “supply” and “demand” are meaningless except in relation to a price. It is rent control itself that keeps supply from catching up with demand. It perpetuates the very problem it pretends to solve.
Rents are out of line with all the rest of the price structure. Weekly factory wages are now 151 percent above the 1935–39 level. Rents are up only 23 percent. The cost of living is 67 percent higher than in 1935–39. Clothing is 85 percent higher; food prices 96 percent higher. Less than 13 percent of wage earners’ spending went for housing in 1949, compared with more than 18 percent in 1935–39. Since 1939, the cost of building has increased between 100 and 140 percent.
Statistics do not indicate a real overall housing shortage. The Census Bureau found that there were both fewer persons per occupied dwelling unit and more rooms per unit in 1947 than in 1940. But rent control itself has brought about the appearance of a housing shortage. For it encourages tenants already in possession to use space wastefully at low rents. And it intensifies the problem for people unlucky enough to be caught without a roof, forcing them to bid high for the little space open to them.
The best solution is to let Federal rent control lapse on June 30. This, no doubt, has drawbacks. In some states and cities it would bring tenants back to economic reality with a sudden jolt. In other states and cities the local politicians are already taking over rent control on the purely demagogic principle that tenants have more votes than landlords, and are entitled to occupy their present quarters at prewar rents indefinitely—no matter how much their own incomes have gone up in the last ten years or so.
One possible political compromise, if there should be any extension of Federal rent control, would be to permit landlords in the next three years to raise rents by no more than 15 percent a year, and to provide for automatic decontrol thereafter.
One might playfully imagine another compromise, which might provide a more rapid economic education than any other. Prohibit the landlord from raising any rent whatever on his own initiative, but when a lease expires allow him like an auctioneer to accept the highest bid. Then if Paul is occupying an apartment at $50 a month, and John bids $60, Thomas $70, and Peter $75, Paul will have to meet Peter’s bid or surrender his apartment to Peter.
Under such an arrangement rents would come almost immediately into line—and into working relationship—with other prices and incomes. No one could denounce the landlord for asking an unreasonable or outrageous rent. He would not be asking any rent at all, but merely accepting what he was offered. Politicians could no longer picture the situation as a class struggle between landlords and tenants. It would be recognized as essentially the competition of tenants with each other.
Families on the outside would have as much right to bid for a new lease on an apartment as the particular family in it. What quarters you occupied, and at what rent, would no longer be determined by past individual luck or accident but by present conditions. Living quarters, like food and clothing, would once more be rationed by the purse. The economic principle would once more be emphasized that under competition prices are not determined by the greed or arbitrary whim of sellers but by the competitive bidding of buyers. Above all, rents would go to the level where they would give the maximum balanced stimulation to private building, remodeling, and repairs, thereby increasing the quantity and improving the quality of housing for the greatest number of families.
April 10, 1950
The action of the House on continuance of ERP does not indicate that we are going to use any more common sense in dealing with the European economic problem in the future than we have in the past.
The Administration has dismissed all critical discussion of the Marshall plan as “partisan” and “isolationist.” It attempted to drive the new ERP bill through Congress under a barrage of emotional slogans and scare words. Though we originally offered Marshall aid to Communist Russia itself, it is now represented as our chief weapon for “combating” Communism. Once more it is implied, by the President, that refusal to vote for the Administration bill may bring on the third world war. “Failure to enact its full amount,” he writes, “would do irreparable damage.”
Properly resenting these tactics, but without leadership of their own, a bipartisan majority in the House did have the temerity to cut the authorization by the moderate amount of $250,000,000. They also cut the authorization for Point Four by $20,000,000. But they failed to recognize that in accepting the premise of Point Four—that the American taxpayer owes the rest of the world a living—they were letting him in for a bottomless obligation.
If the Senate is interested in the kind of revision that is really needed in the ERP program it could not do better than to read the article by Dr. William Röpke in the Commercial and Financial Chronicle of March 16. Writing from his European watch tower in Geneva, Dr. Röpke says supremely well what some of us have also been trying to say over here for the last three years. The present economic troubles of the countries of Western Europe, he points out, spring mainly from the nationalistic policies being pursued within those countries:
“It is no longer necessary to define those national policies. They are familiar ever since Hitler came to power and, under the guidance of Dr. Schacht, set the example of a type of national economic policy which we propose to call National Collectivism. It is the well-known combination of repressed inflation, collectivist controls, ‘full employment’, exchange control, state monopolies, bilateralism, subsidies, fiscal socialism, ‘cheap money’ policies, and the strange mixture of the restriction of private consumption and of public waste which goes under the name of Austerity. . . .
“With the exception of Switzerland and Belgium, all European governments still practice National Collectivism to the extent that they feel compelled to retain exchange control. It is exchange control, which is the real keystone of National Collectivism. . . .
“The devaluations certainly eased the strain, and they were in most countries the indispensable condition for the removal of exchange control. . . . But the chance offered by the devaluations has not been used, which means that the European governments resemble a surgeon who opens the abdomen without removing the inflamed appendix.”
Dr. Röpke then turns to the proposed European Payments Union. “It is being realized by most observers that convertibility of currencies is the cardinal problem. To restore convertibility, however, is tantamount to abolishing exchange control. Not daring to face this thorny issue, many people prefer to believe that there is something ‘almost just as good.’ It is the idea of a European Clearing Union. . . .
“The crucial point, however, is again whether the national governments retain exchange control or not. If they do, then the idea of a European Currency Union has hardly more sense than an American currency system would have if the United States would split into forty-nine systems of state collectivism and of state exchange control. If they abolished exchange control, then we have all the monetary integration we need without the new cumbersome machinery of a European Monetary Union.”
As a result of the evangelistic and intolerant fervor with which its sponsors promote the ERP over here, none of these economic realities is getting any serious attention.
April 17, 1950
The amendments made up by the Senate Foreign Relations Committee to the House-approved Point Four program are nearly all in the right direction. The real question is whether they go far enough.
Certainly the committee was wise in rejecting the House provision for United States Government guarantees of private investments abroad. Such guarantees mean that we would allow private investors to keep the profits of their investment but would force the American tax-payer to assume the losses. This would be intolerable.
Listen to Secretary Acheson’s defense of this proposal: “Protection from some of the risks [to foreign investment] cannot be provided by treaty no matter how sincere the intentions of the participating governments. Therefore, a bill has been introduced [to guarantee and insure private investors] specifically against expropriation, confiscation and seizure, and against inability to convert local currencies.”
In other words, because these foreign governments sincerely cannot prevent themselves from seizing American property or forbidding currency conversion it is up to the American taxpayer to make good.
Chairman Connally of the Senate Foreign Relations Committee has expressed apprehensions that the initial $45,000,000 sought for the Point Four program for the coming year would be only the start of a more ambitious and costly program. “As time goes on,” he says, “I can feel the pressure coming in the window for big projects.”
So the committee put a five-year limit on Point Four. But will this time limit prevent pressure for further extension five years hence? The ECA, remember, was to last only four years. Of course, Administrator Hoffman reassures us, “ECA aid should be terminated on its schedule date of June 30,1952. . . . But even with ECA liquidated I doubt if expenditures for foreign aid can be held below $2,000,000,000 annually. “ECA aid,” in other words, will stop; but we are to continue global spending under some other name. “Point Four,” perhaps? And after five years of Point Four, “Point Forever”?
It is of the first importance that Congress reject the principle of Point Four. Once we accept the implied premise of that program—that it is the duty of the American taxpayer to subsidize “underdeveloped areas” everywhere, i.e., that the American taxpayer owes the rest of the world a living—we let ourselves in for endless and bottomless responsibilities.
It is impossible in this space to unravel all the fallacies and misconceptions behind the Point Four program. I have myself written a 48-page pamphlet analyzing these in detail.1 Here I can merely list some main conclusions:
1—The fact that Point Four so strikingly parallels the proposals of the official head of the Communists in this country in 1944 is at least reason for careful scrutiny.
2—Point Four will not add to the total invested capital of the world. It will at best merely divert that capital from one channel to another—largely from private projects to government or socialistic projects.
3—We cannot give our cake away and eat it too. We can speed up the capital development of other countries only at the expense of our own capital development. We cannot get rich by giving our exports away.
4—The British peanut fiasco and our own Lustronhouse loans illustrate in advance what typical Point Four projects would be like.
5—Even if a Point Four program were necessary, the International Bank for Reconstruction and Development and the Export-Import Bank already exist to do precisely what is proposed under Point Four, and are already doing it in ample prudent volume.
6—The assumptions that global government handouts or “loans” promote sound private international investment, accelerate a return to free enterprise, or speed up world recovery or world development, are the exact reverse of the truth.
2 Illusions of Point Four. Single copies on request from the Foundation for Economic Education, Irvington, N.Y.
April 24, 1950
In the first three months of this year, according to official estimates, there has been an average of nearly 4,500,000 unemployed.
This is paradoxical and premonitory. For this unemployment, the greatest since prewar days, exists not in a depression but in the midst of an inflationary boom. It exists, in fact, in a period when the Administration boasts that personal incomes have reached the highest levels in our history.
Yet this paradox is not inexplicable. It is simply what discerning economists predicted was certain to happen if we continued to push up wage rates and labor costs faster than prices and productivity. And we have kept boosting labor costs recklessly through union policy, pension demands, government “fact-finding” awards, the Wagner-Taft-Hartley Act, and the new law jumping minimum-wage hourly rates from 40 to 75 cents last January.
The presumptive effect of this last factor is striking. Unemployment averaged 3,395,000 throughout 1949 and stood at 3,489,000 in December. This January it shot up to 4,480,000.
Does the Administration recognize the cause of this unemployment? Has it taken warning? On the contrary, it does everything to intensify the problem. In a message to Congress on April 6, President Truman called for a further increase in unemployment benefits. For existing unemployment he offered two explanations, both wrong. He explained that more people have been coming into the labor market every year. But they have been doing that since the beginning of our history, with the annual increase in population. Increased population means not only more people looking for jobs; it also means more consumers and consumer demand.
Mr. Truman’s other explanation is that “as new plants and equipment have been added . . . businessmen have been able to produce more with the same number of workers.” This assumes the immemorial fallacy that machinery creates net unemployment. But as man-hour productivity increases, prices go down or wages and profits go up, and per capita demand increases with per capita supply.
Because he makes the wrong diagnosis, Mr. Truman proposes the wrong remedy. We need not examine here the real revisions required in unemployment insurance. It is enough to point out that all Mr. Truman’s own arguments ignore the salient fact that as we increase the amounts and period of payment of unemployment benefits we encourage an increase in unemployment itself. The more we pay men who are idle, the more we reduce the penalties and increase the incentives for idleness. Mr. Truman wants to pay a man who has been earning $60 a week as high as $42 a week for not working. But if this man is offered another $60 job before his unemployment benefits expire, he may logically ask himself: “Why should I work for only $18 a week?” Or if he is offered a temporary $42 job: “Why should I work for nothing?”
Our national labor policy is, in fact, the equivalent of the farm price support policy. Government support boosts the price of farm products so high that part of the supply must remain unsold. The taxpayer is then forced to hold the unsold surplus. Government and union labor policy, likewise, pushes up wage costs to the point where part of the labor force must remain unemployed. Then the taxpayer must pay unemployment benefits to this idle labor. “Surplus” labor rots in storage like “surplus” eggs, butter, and potatoes.
The present American situation—of high unemployment even at the peak of an inflationary boom—is not unprecedented. Precisely the same anomaly occurred in Germany in 1927, and for the same reasons.3
In 1927 economists like Gustav Cassel warned in vain that the German wage policy was senseless. Will such warnings today, in America, prove equally futile?
4See The Economics of Illusion. By L. Albert Hahn. Sequier Publishing Co., New York. Pages 238–241.
May 1, 1949
The British Labor government is spending $3,248,000,000 a year on social services and food subsidies and only $2,186,000,000 on defense. Yet instead of reducing these “welfare” handouts to leave more to spend on armaments, the British bureaucrats think it is up to the American taxpayer to make good Britain’s defense deficiency. Other European bureaucrats think likewise. What they spend on collectivist experiments is none of our business. Our business is merely to make good the shortage this creates in other directions. Ours not to ask the whys, ours but to subsidize.
In fact, instead of continuing to discuss what is wrong about the British budget, it would be just as well if we drew a moral for ourselves from the one thing that is right about it. It is balanced. For the fiscal year ended March 31 it shows a surplus of $1,537,000,000. For the new year which began April 1 it plans a surplus of $1,240,000,000.
Contrast with this the officially estimated deficit in our own budget of $5,400,000,000 for the current fiscal year and $6,200,000,000 for the coming fiscal year. Congress’s own staff of fiscal experts thinks these will be closer to $6,700,000,000 and $7,300,000,000 respectively.
In all fairness we must not overlook the ironic fact that our own current deficits can be mainly accounted for by ERP and arms aid to Europe, and that the British surpluses can also be largely accounted for by this same ERP and arms aid. Still, it remains remarkable that hard-pressed socialist Britain shows a balanced budget, while rich “capitalist” America, at the peak of its biggest boom, cannot bring its expenditures within its revenues.
The basic explanation is simple. Britain has a responsible budget system. And we have not.
In Britain the executive branch is made completely responsible for the budget. Both sides of it. The Chancellor of the Exchequer not only submits all his proposed expenditures in detail but submits at the same time the detailed taxes and tax rates by which he proposes to raise the revenues.
Parliament cannot tinker with this budget. It cannot increase an expenditure here or reduce a tax there. It must accept or reject the budget as a unified whole. And upon its ability to submit a budget acceptable to Parliament the government stands or falls. Compared with this, our so-called American budget is meaningless make-believe. The President submits his guesses of what expenditures and revenues are going to be. This is not accompanied by any overall tax bill, or by any bill at all. Congress neither accepts nor rejects this “budget.” The President may later propose still more expenditures as an afterthought. Congress may vote still more expenditures on its own initiative or reduce some unpopular tax regardless of the effect in throwing the budget further out of balance. The President and Congress then blame each other, and both deny responsibility.
We shall never approach the fiscal responsibility of the British system until Congress submits a self-denying Constitutional amendment to deprive itself of the power to vote any expenditure not recommended by the President. It must of course retain the power to reduce proposed expenditures. Stripped, like the British Parliament, of the power to raise, it might at last exercise its power to cut. As Henry Jones Ford pointed out: “There is no propensity of human nature more marked than jealousy of opportunities that one does not share.”
Congress can never be expected properly to exercise the vital function of guardian of the people’s purse as long as it is permitted to stick its own hands in that purse. If the President did not fear to be outbid by Congress, he would propose smaller spending in the first place. But as long as three branches of government—President, House, and Senate—are all free to compete with each other in offering handouts to pressure groups with the taxpayer’s money, the taxpayer’s prospects are not bright. Somewhere there must be a restraining hand. And it is most likely to act as such when it has no other power than the power to restrain.
May 8, 1949
The danger of authoritarianism in this country is increased by the persistent failure of our self-styled liberals to recognize its real source. The leading article in The New York Times Magazine of April 23—“Portrait of the Authoritarian Man,” by Samuel H. Flowerman—typifies this state of affairs.
Flowerman tells us that “social scientists, interviewed and tested more than 2,000 persons” and found a “ready-made ‘authoritarian personality’.” Did they? Pseudo-science notwithstanding, there is no such thing as a typical “authoritarian man” but only an authoritarian ideology. It is the difference in ideology, and not in persons, that basically explains the contrast in political climate between 1950 and, say, 1910.
Flowerman implies that the totalitarian ideology is dominantly conservative. Error. It is dominantly radical. Soviet Russia—the greatest totalitarian power today—ought to be sufficient illustration. True, the Communists once explained Nazism as the last desperate stand of “capitalist conservatism.” But it is impossible to swallow this explanation of a movement that proudly called itself National Socialism and was vehemently anti-banker, anti-gold, anti-creditor, anti-“plutocrat,” and anti-capitalistic in its tirades and decrees.
Flowerman declares that the “opposite” of the “authoritarian personality” is the “extremely democratic personality.” Confusion. The true opposite of the authoritarian is the libertarian. A self-styled “democracy,” or “people’s government,” like Soviet Russia, that repudiates the principles of liberty is a phony democracy.
Flowerman implies that racial bigotry is an invariable and central characteristic of the authoritarian mind. Again Soviet Russia shows that this is not necessarily so. Totalitarianism, it is true, always needs scapegoats—but not necessarily racial scapegoats. They may be “Jews,” kulaks, “wreckers,” “American spies,” “profiteers,” speculators, employers.
Flowerman thinks it an “offset” to authoritarianism that “Americans traditionally scoff at authority.” Does he mean that we should admire the people who pass red lights, spit in the subway, and rob their neighbors? Those who fail to respect law within its proper bounds do not insure real liberty but imperil it.
“Certainly research findings indicate,” writes Flowerman, “that so far the key to the difference between the authoritarian and democratic personalities lies in the relationship between parents and children. Learning to disagree with one’s parents may be the capstone of a democratic personality.” Some of us had previously supposed that one should learn to seek and believe the truth, even if one’s parents also believed it. The real difference between the authoritarian and his opposite, the traditional liberal or libertarian, is this. The authoritarian has no faith in the people, and unlimited faith in the bureaucrats. The libertarian distrusts excessive power in the bureaucrats, because he has a real faith in the people. That is why he believes that the fundamental liberal institution is the free market. The free market means free voluntary relations between buyer and seller, worker and employer. It means free prices, free wages, free production, free trade. To the authoritarian such freedom means chaos. He distrusts any economic arrangement that is not planned from the center and from the top. He must fix prices, wages, profits, rents, allocate raw materials and labor. He cannot believe that international trade will balance unless he intervenes to balance it. He must control foreign exchanges, restrict travel, license or prohibit imports.
Once embarked upon this “social engineering,” he must keep widening the circle of his prohibitions and coercions until he has wiped out all economic liberty and all other liberty with it. His intolerance of liberty must grow because any liberty whatever will imperil his plan.
It is in this ideology—statist, collectivist, socialist—that the real menace of totalitarianism lies, rather than in children who agree with their parents.
May 15, 1950
President Truman has made his annual plea to Congress to extend rent control for just “another year.” But if his arguments are sound we should logically prolong rent control indefinitely. “Until supply is near enough to demand,” he says, “so that the forces of competition will again operate effectively to protect the tenant, rent control should continue.” This puts the cart before the horse. If the forces of competition were really allowed to operate they would bring rents to a level where supply and demand would balance.
“Supply” and “demand” are meaningless terms except in relation to a price. It is precisely the function of price to bring supply and demand into balance. As long as rents are held arbitrarily below the level to which competitive bidding among renters would bring them, there must be a “shortage” of housing. Rent control perpetuates the very problem it pretends to solve.
It is the strange paradox of rent control that the very dislocations it brings about are triumphantly cited as arguments for its prolongation. “A sudden and simultaneous removal of rent controls,” the President tells Congress, “would precipitate a wave of exorbitant rent increases.” (He nowhere says what he thinks an unexorbitant, or reasonable, increase would be.) “Such increases,” he continues, “would seriously reduce the purchasing power of millions of families.” They would also, of course, increase the purchasing power of other families by an exactly equal amount. This correlative fact he never mentions.
Suppose, for a moment, that clothing prices, instead of rents, had been held down until now to 23 percent above the prewar (1935–39) level, instead of being permitted to rise in a competitive market, as they have, to 85 percent above. If anyone were then to propose that such clothing price control now be ended, it would doubtless be argued in reply that this was premature, because (1) a serious clothing shortage still existed (as under such imagined stiff price control it certainly would), and (2) that if controls on clothing prices were suddenly and simultaneously removed, it would precipitate a wave of price increases averaging perhaps 50 percent, which would seriously reduce the purchasing power of millions of families. The argument could be made with even more force if similar controls had arbitrarily held down food prices.
A control of any sector of the economy, in short, becomes an argument for its own perpetuation. When we turn to a generally controlled economy, hardly anyone has the courage to argue for freedom in any one sector because of the obvious dislocations this would bring with the controlled sectors. This is strikingly illustrated in an analysis of British rent control by F.W. Paish in the April issue of Lloyds Bank Review. Professor Paish finds the British Rent Restriction Acts a “lawyer’s nightmare.” They create inequities between tenant and tenant, tenant and landlord, and above all “between those who are lucky enough to have rent-restricted houses and those who have no houses at all.” They impair the landlords’ ability and incentive to maintain premises in good condition: “Much property is being allowed to degenerate into slums.” They erect grave impediments to the mobility of labor. But as a “solution” to all this, Professor Paish puts forward a scheme more complicated and desperate than rent control itself.
Let us not judge him uncharitably. What man dare suggest isolated freedom of rents in an economy whose other main sectors, including foreign trade, food, and wages, are still under controls? It is impossible to have an economy half-slave and half-free.
The best solution to our own problem is to let Federal rent controls lapse now. If there must be another political compromise, let it be one that at least makes a real start toward nationwide decontrol. It might permit landlords to raise rents by a maximum, say, of 15 percent a year for the next three years, and then expire automatically. “Rent control,” says John H.Williams, “may benefit tenants in the short run, but in the long run it merely reduces the amount of housing.”
May 22, 1950
Both houses of Congress have not only voted to continue the ERP program for another year, but in addition—the Senate by the narrow margin of a single vote—to underwrite the indefinite commitment of Point Four. This raises the global giveaway program to a new dimension. In the starry eyes of its proponents there is no discernible limit to this program. When it was first proposed to give billions to Europe, a few tried to point out that most of the arguments for the proposal—such as curing an alleged “dollar famine,” boosting foreign living standards, “combating” Communism, or buying peace—could be just as well used as pretexts for throwing billions of the American taxpayers’ funds all around the world. ERP proponents eventually conceded the logic of this corollary. But instead of reexamining their European policy, they merely demanded its worldwide expansion under the name of Point Four.
The majority in Congress now seems seriously to believe that the real issue is whether the first-year authorization for Point Four should be $25,000,000, as voted by the House, or $45,000,000 as voted by the Senate. This point is, of course, of negligible importance. It is as if the buyer of a $500 television set were to raise a fuss about making a down payment of 45 cents instead of a quarter, when the real object of the seller is to get his name on the contract. The television buyer, at least, is getting definite value for his money, and he knows that there is a definite limit to what he will have to pay. But the taxpayers who will be forced to finance Point Four all over the world know neither what it is that they are buying nor what it will eventually cost them. As the global giveaway expands, the arguments for it become constantly vaguer and more rhetorical. Its advocates talk as if you could buy peace the way you buy potatoes. Isn’t it cheaper, they ask, to spend $20,000,000,000 for peace than $103,000,000,000 a year for another war? If anyone asks whether the global giveaway program in fact provides any assurance of peace, the usual answer is that of course it doesn’t, but isn’t it worth a calculated gamble? And if anyone goes on to ask whether this particular gamble has been or could in fact be calculated, or whether the whole program doesn’t simply divert attention from the bankruptcy of our talk-tough-but-act-soft, call-names-but-appease policy toward Russia, he is simply dismissed as an “isolationist.”
The economic arguments for ERP as at present set up, and still more for Point Four, cannot stand analysis. But when one points out, for example, that the so-called “dollar gap,” whether in Europe, India, or Argentina, is brought about solely by exchange control and is otherwise pure humbug, the argument, even if understood and accepted, is dismissed as unimportant. The real reasons for the Marshall plan and Point Four, one is told, are not economic but political.
But when we stop to scrutinize these alleged political reasons, we find them even less convincing than the alleged economic reasons. We are fighting socialism and collectivist controls in Europe by subsidizing their continuance (so that the head of Britain’s Board of Trade can now announce, for example, that Britain’s foreign-exchange control will be kept as a “permanent instrument”). We are fighting Communism by financing it in Yugoslavia. Mr. Truman proposes to fight Communism in China by sending food there—though this would directly or indirectly make more food and other supplies available to the Chinese Communist armies and to the Soviet Union. And he proposes to fight Fascism in the Argentine by relieving the financial difficulties of Perón. Those who are proposing to toss the American taxpayers’ money so recklessly to foreign governments are of course in no position to recommend withholding anything from pressure groups or special interests at home. So foreign and domestic extravagance are turned into arguments for each other, and the spending mania grows by what it feeds on.
May 29, 1950
George Fairdeal and his wife, Alice, are having breakfast.
Alice: But if we decide to buy the new house, dear, we’ll have to give up that trip to Europe this summer.
George: Why? Why not do both?
Alice: But we’ve only got $1,000 in the bank. If we use that to take title to the house, we won’t have anything left for the trip!
George: You always worry about where the money’s coming from. If we have to, we’ll borrow it.
Alice: From your brother Bob again? We’ve been getting more deeply in debt to him every year!
George: Oh, don’t talk like a Republican! Bob’s one of the family. As I always say to him: “We just owe it to ourselves.”
Alice: And how about the money for Jane’s singing lessons?
George: Don’t worry! My family’s going to have everything! The best!
Alice: Now be sensible, dear. What’s our income from the store?
George: About $3,500 a year. And that’s not bad. It’s more than the income of most families in the country today. I was just reading—
Alice: I’m not complaining, dear. But if it’s $3,500 then we can’t spend $4,500. And if we spend our $1,000 savings in Europe we just won’t have it for a new house of our own. We can’t get a quart out of a pint jug. That’s all I’m trying to say.
George: Raise your sights, Alice! Dream big dreams and plan big plans! Our national income is running today at a rate of $223,000,000,000 a year! Hot diggity! And ten years from now it’s going to be $350,000,000,000!
Alice: But we’re running into debt, dear—now! Remember? Some day we’ll have to pay Bob back. When are we going to start? And how about saving something? Suppose one of us gets sick? And what are we going to live on in our old age?
George: This is the richest nation in the world. The government ought to pay our medical bills. The government ought to give us old-age pensions! They can afford it!
Alice: When you say the government ought to pay our medical bills, George, aren’t you really saying that other families ought to pay our medical bills for us?
George: Oh, bosh! The government has plenty of money.
Alice: Where does it get it?
George: Eh—from taxes. And I’m willing to pay my share of increased taxes for socialized medicine!
Alice: But we’re an average family. Suppose we have the average amount of sickness and pay the average tax? Then everybody else may be paying our medical bills but we’ve taken on everybody else’s medical bills! We’re no better off than when we started. And we can’t save for our own old age because we have to pay out the money in taxes to provide for everybody else’s old age. It’s just silly to think that everybody can be supported at the expense of everybody else!
George: We gotta distribute things fairer. Equalize things!
Alice: Do you mean, dear, that everybody who earns more than we do should have the difference taken away from him? Wouldn’t that reduce his incentive to earn? And if his money is spent on those who earn less than we do, won’t the people who get the handouts also have less incentive to earn? So wouldn’t practically everybody produce less? And wouldn’t that leave less of everything to distribute?
George: Don’t be an obstructionist, Alice! The government ought to spend more on hospitals—
Alice: But won’t that leave less for education, for instance?
George: The country should spend more on both! We must have—
Alice: But won’t that leave still less for food or housing or whatever else we’re already spending money on? All you’re saying, dear, is that every family should be forced through higher taxes to spend its money on the things you think it needs instead of on the things each family itself thinks it needs. The more they spend on one thing the less they have left to—
George: Oh, bicker, bicker. I’m still hungry, Alice. How about some of that coffee cake we had yesterday?
Alice: We ate it, dear.
George: (flabbergasted): We did?
June 5, 1950
The Schuman proposal for “pooling” the coal and steel production of France and Germany was followed by a chorus of unqualified praise and endorsement. Nothing in recent months has so clearly illustrated the present matter-of-fact acceptance of a statist and collectivist ideology. The few voices that asked whether this might not mean merely one more state-dominated cartel were hardly heard.
Let us examine the text of the proposal: “The French Government proposes that the entire French-German production of coal and steel be placed under a joint high authority. . . . A president will be chosen by the governments by common agreement; his decisions will be enforceable in France, Germany, and the other member countries. . . . The setting up of the high authority in no way prejudges the question of ownership....”
Now decisions by a “joint high authority” presuppose (1) the nonexistence or cessation of free competition among the individual companies; (2) that major decisions on policy would be made not by the heads of the individual companies, but by a single head; and (3) that the industries as a whole would be directed in the same unified way as a monopoly or a typical international cartel.
The “high authority” who directed the industries would be politically appointed. Such a setup does prejudge the question of ownership because under it the managerial authority that is the usual prerogative of ownership would be held by governments. The profits of the individual companies would necessarily be government-determined. The proposed setup would be, in short, another step toward government management and state socialism.
“The functions entrusted to the joint high authority will be . . . to modernize production and improve its quality....” This implies that the “high authority” will decide what new machines will be installed in which producing units. In short, a politically appointed head will decide the amount, nature, and distribution of investment in the steel and coal industries. The text calls specifically for an overall “production and investment plan” and an overall “reconversion fund to facilitate the rationalization of production.”
The plan envisages “the institution of a mechanism for equalizing prices”—i.e., central price control rather than free competitive markets. Wages would also be “equalized”—i.e., state-controlled and dictated.
“The flow of coal and steel between member countries will be immediately exempted from all customs duties and may not be subject to freight differentials.” Standing by itself, this part of the proposal would merit the highest praise. But what does it mean as merely part of a new quota or allocation system or state-controlled monopoly under which, for example, the more efficient companies would not be permitted to expand production and markets at the expense of the inefficient, high-cost companies?
The plan brings out the ambiguity in the newly fashionable word “integration.” What is proposed is a cartelized state-dictated “integration” rather than the only kind of integration reconcilable with efficiency and freedom. Let governments remove the international trade barriers they have themselves set up. Permit producers to make and sell as much coal or steel as they can. Permit consumers to buy coal or steel or whatever they want wherever they can get the lowest price. Let the relative efficiency and profitability of individual enterprises, and the relative demands of consumers for products of every kind, determine how much capital is invested, where, and in what. It is the restoration of free markets and free trade that will do most to increase world production, raise living standards, and promote peace.
It is indeed encouraging that France, on its own initiative, has made a sweeping proposal for economic cooperation with Germany. But in the long run no step can be really constructive unless it moves in the direction of freedom.
June 12, 1950
The Truman Administration is beyond comparison the biggest peacetime spender in our history. At the height of an inflationary boom it still flounders in deficits. Yet until a few weeks ago we were told that the spending was temporary, made unavoidable by the cold war. The deficit was “inadvertent,” or the fault of the Republicans. In a speech on May 15, however, Leon H. Keyserling, the new chairman of the President’s Council of Economic Advisers, came out frankly in favor of spending for its own sake. Spending itself is so necessary, it seems, that “when the costs of the cold war can safely be reduced we should use some of that saving to expand the programs of resource development and human security.” In other words, instead of economizing or trying to reduce the burden of taxes, we should then increase other spending.
“In 1929,” says Keyserling, “Federal expenditures represented only about 3 percent of the nation’s total production of goods and services. But this did not produce a healthy economy. During the most recent three years Federal spending has averaged about 15 percent.” And this spending has “lifted our total national product” and “restored faith in the American way of life.”
This is economic nonsense. It takes the credit away from the inventors, investors, managers, and workers responsible for our economic growth and assigns it all to the bureaucrats. By itself, in fact, government spending does not add a single dollar to purchasing power. It merely changes the directions in which money is spent. When the Federal government was spending 3 percent of the nation’s income, it took only 3 percent of it away from the nation’s taxpayers. When it spends 15 percent of the national income, it must in the long run take 15 percent away from the taxpayers. The taxpayers have as much less to spend for goods and services as the bureaucrats have more.
“The test,” continues Keyserling, in his speech of May 15, “of whether Federal spending is wise or unwise is this: Is it putting people and other resources to work for purposes which are more useful to our economy as a whole than the other purposes for which this same manpower and other resources would be used if the Federal spending did not occur?”
And Keyserling’s own implied answer is that he and Mr. Truman know how to spend money more usefully and wisely than the people who actually earned it. If you permit the citizen to spend his own money on the things he himself wants, he will run the economy into the ditch. The way to save him is to take the money out of his irresponsible hands. Let the bureaucrats spend it to expand their pet “social” programs. They know what the taxpayer needs better than he does himself.
Government can increase monetary purchasing power, not by spending per se, but only by deficit financing and by printing money and expanding credit. In short, by inflation. And the Federal government is now inflating by every direct or indirect means: by increasing its deficit, forcing down interest rates, supporting government bonds, increasing government loans for farm price supports, for housing, for small business, for big business, for artificial exports, and by political loans to every “democratic” foreign government from Tito’s Yugoslavia to Perón’s Argentina.
Inflation is always politically popular in the early stages. It raises prices, increases profit margins, promotes “full employment,” expands incomes, wages and profits in terms of dollars, and makes everyone feel richer. The present inflationary boom can doubtless be kept going for a long time yet. But the bigger and longer such a boom, the bigger and more certain, other things equal, the eventual bust.
One of the chief ironies of the present situation is that the very people who have been most derisive about a “boom-bust economy” are the ones now most zealous in whipping up the present inflationary boom to ever new and dizzier peaks.
June 19, 1950
In his talk on June 6 President Truman made it clear that he is still fighting the 1932 depression. And he is fighting it by inflation. In the midst of the 1950 flood his main efforts are devoted to combating the 1932 drought. The rains are falling; the rivers overflow their banks; there is grave doubt that the flood can be controlled. But of all these dangers Mr. Truman is oblivious. “Remember that 1932 drought,” he says. And he orders his rainmakers to bring another monetary downpour.
Inflation works its apparent magic because it depreciates the value of the currency unit and hence raises prices. Rising prices usually mean higher profits. The prospect of these brings the feverish activity and “full employment” that are the boast of every inflating government.
Inflation can go on for a long time and to great lengths. We need not cite here the horrible modern examples of Germany, Greece, and China. But the French currency unit, for example, has depreciated to a hundredth of its 1914 value (which is as if the 1950 dollar had no more purchasing power than the 1914 cent), and the danger of further inflation in France is still not altogether past. In general, inflation will go as far as political forces push it. And inflation is still politically popular here.
Once a nation embarks upon a “full employment” policy through monetary inflation, it can only continue that course either by inflating at an accelerative rate, or by resorting, as Britain and nearly every country in Europe has resorted, to “repressed inflation” through government controls.
Today our government is resorting to monetary inflation to keep “full employment,” and is encouraging a the same time the chief counterforce to full employment—higher wage rates. Inflation brings its activity and employment by pushing prices ahead of costs. But if wage rates are forced up faster than prices, then marginal profits, and hence activity and full employment, are threatened. No matter how high prices are forced, if labor costs are forced up relatively still higher, they must bring unemployment.
From this standpoint, the new General Motors five-year labor contract is a disturbing sign. Whatever General Motors may be able to take on (as one of the strongest corporations in the world), our economy could not stand the general adoption of this settlement as a precedent. The pension provisions are a formidable boost to present labor costs. And no economy can guarantee in advance to pay every year a “productivity” wage increase of 4 cents an hour, because no one can be sure there will in fact be that much real increase in productivity. As for the cost-of-living escalator clause, I need merely quote Bresciani-Turroni’s 1931 book on the German inflation: “The inflation proceeded with quickened pace especially. . . after the workers had obtained money wages which varied with the index number of the cost of living.”
We seem about to witness a new race between prices and labor costs. The amount of employment or unemployment will depend on which phase gets started first, and when.
Commenting on my article (Newsweek, June 5) on the Schuman plan for a European coal and steel pool, an American economist of European background writes from Paris:
“The whole press here seems to have lost its head. One reads only the crudest sentimental nonsense.... Such a pool would certainly create a common interest between German and French industrialists. It would yield them huge profits, because it would not charge competitive prices but prices based on the highest costs. In case of war every country would again manage its own plants anyway.
“The truth is that the greatest cartel in the world is being created. The funniest thing about it is that it is happening under the noses of hundreds of Americans busy fighting such comparatively minor trusts as the I.G.... It seems that a ‘bold’—and vague and sentimental—slogan works better in our world than logic.”
June 26, 1950
The most encouraging world economic development in recent weeks is the news that real stabilization of the franc and the removal of exchange controls is being discussed in official French circles. The most discouraging is the foreign-policy manifesto of the British Labour Party. Together these developments symbolize the present conflict between international liberalism and isolationist socialism.
Whether French officials have in mind going on a gold basis, or going merely on a dollar basis, has not yet been made clear. Either decision would involve the serious initial problem of choosing a tenable rate. A rate fixed in dollars rather than gold would make the French economy a tail to the American kite. And as long as our own political authorities display their present carelessness about maintaining the integrity of the dollar, the wisdom of such a French decision would be highly dubious.
But what is most encouraging is that French officials are discussing the abolition of exchange control. Even by itself this would be an enormous step forward. Only freely convertible currencies will make possible free multilateral trade. That is what economic internationalism means.
The British Labour Party pamphlet unintentionally reveals a truth that socialists have always ignored or denied—that socialism does not promote international integration, but disintegration. It is nationalistic, isolationist, autarchic—not by accident, but inherently. What is most important in the Labour Party pamphlet is not that it rejects the Schuman plan, but its reasons for doing so—the general philosophy it enunciates. The British Labourites could properly have rejected the plan on the ground that what it proposes is merely a gigantic cartel. They rejected the plan, in fact, not on the ground that it would set up a monopoly, but on the allegation that this monopoly would be private and not governmental. The real truth is that, pernicious as a private European coal and steel monopoly would be, an inter- or supra-governmental one—using not merely economic but political power to exclude outside competition—would be far more so.
The British Labour Party declares that it “fundamentally rejects” proposals for freeing European trade by the removal of “customs duties, exchange controls, and quotas. . . . The sudden dismantling of internal barriers to trade would in the short term cause serious dislocation, unemployment, and loss of production. . . . Whole branches of industry . . . would go bankrupt.”
This is a tacit admission that these branches of industry could not stand competition and freedom of trade. It is a tacit admission that production in Europe under exchange controls, quotas, bilateralism, and other “internal” trade barriers is grossly uneconomic and wasteful. It is a tacit admission that national socialism and national planning are not reconcilable with international freedom of trade, including free exchange markets and full currency convertibility.
All this throws a brilliant light on the application of the Marshall plan. President Truman on June 10 once more denounced the “isolationists,” whom he identified as those who express any misgivings about our foreign giveaway programs. Yet it is the ERP program itself that has not only been tolerating, but sanctioning and subsidizing the isolationist policies of its British and other European beneficiaries—their exchange controls, bilateral treaties, quota systems, import prohibitions, their direct governmental discriminations against American goods. Our ECA officials have echoed and subscribed to all the isolationist European nonsense about a so-called “dollar shortage”—which is brought about purely by exchange control itself—and about a so-called “dollar gap”—which exists precisely because there is an ERP to fill it.
Our present foreign policy might be described, in short, as one that sanctions and subsidizes the economic isolationism of every country but our own. Yet freedom of trade has no meaning unless it is two-sided.
July 3, 1950
Rather than reiterate my own reasons for questioning whether the Schuman coal and steel pool proposal is a real step toward free trade and economic integration (Newsweek, June 5), I quote from the excellent summing up of George Winder in The London City Press of June 9:
“What Mr. Schuman proposes is a substitute for free trade—an effort to obtain its advantages without conceding the freedom which is its essential condition. Free trade brings about the integration of trade by giving the individual freedom to buy and sell as he likes. Mr. Schuman is attempting to give us the advantages of free trade by denying freedom. He intends to impose integration by setting up an international body with power to dictate to national producers. . . .
“However disinterested are the aims of those who desire to bring about this unification, we can be sure that, if it is attained, it will be run for the benefit of iron, steel, and coal producers and their employees, and not for the benefit of the peoples of Europe as a whole. . . .
“The integration of the iron, steel, and coal industries would require that the less efficient units should close down, and the more efficient would expand their production.... Any politician, however, who imagines that the British iron and steel worker, and the British coal miner, or their French and German counterparts, would allow units of the industry which provides their livelihood to be closed down by the fiat of an international body, has lost all sense of reality. . . .
“But the economic unity of Europe, by means of free trade, is within the bounds of attainment....”
The British Labour Party pamphlet rejects the Schuman plan, not because it would involve coercion, but because it would not involve enough. “Any industries concerned in European planning,” it insists, “should be subject to government direction in their own country.” Government “must be able to decide the investment policies of the basic industries. . . . Nothing less than public ownership can ensure this fully.... If there is any threat of a recession in world trade, it is then vital to maintain and perhaps increase investment in these industries. But this is just the time when private capitalists, fearing for their profits, restrict production.”
In other words, it is precisely when events have proved that steel is already being produced in excess of demand that socialism would increase steel capacity—not because anybody wants to buy more steel, but to maintain “full employment and stability”!
The National Executive Committee of the British Labour Party, which composed this pamphlet, does not know that it is precisely relative prices, profits, and losses that in a free-market economy decide the balance of production among thousands of different commodities. If this free-market yardstick is thrown away, nothing remains but naked government coercion. It is then the politicians and bureaucrats who decide arbitrarily how much of each thing is to be produced.
But at least the socialist authors of this pamphlet have a candor missing in our crypto-socialists at home. They do not pretend to be for socialism and the free market at the same time. “Our population,” they write, “would not tolerate the flagrant injustices of a free-market economy in which workers live in squalor yet see the shops bulging with goods beyond their reach.” No doubt the free-market squalor they have in mind is in the United States, where average factory wages are still only $57 a week, as compared with the magnificent average of $20 a week in Socialist Britain. I wish the authors had explained in more detail, however, how industry keeps going here and in other squalid free-market economies by turning out goods that nobody can buy.
Just why our own government thinks it must continue to force American taxpayers to underwrite all these economic errors, and support and subsidize these anti-recovery policies, is a question, as I have learned by sad experience, that it is futile to raise.
July 10, 1950
Its dramatic collapse on the news of the Communist invasion of South Korea reflected the judgment of the stock market that a war today would have a drastically adverse effect on the prospect for profits. Though war means huge war contracts, it also means a huge increase in corporate taxation. But what caused the violent market break on June 26 was not merely fear of the inevitable consequences of war per se, but fear of the kind of economic policies which might be put into effect.
Modern war, aggressive or defensive, is necessarily a collective enterprise and must necessarily invoke compulsion. But the preservation of a certain irreducible minimum of the individual’s economic liberty, together with the kind of economic deterrents and incentives that normally guide him, is necessary not merely for its own sake, but for maximum and most efficient war production.
It is precisely this that is forgotten by most of those who come forward with plans for rigid economic controls to be imposed immediately upon the outbreak of war. The files of the National Security Resources Board are presumably stuffed with proposals for ready-made legislation and plans to be handed to Congress and Federal agencies on M Day. And most of these plans are known to be based on the assumption that what will be necessary in case of war is a more or less completely regimented economy.
One of the favorite proposals of these war planners, for example, is an overall freeze of prices and wages as of the day before the outbreak of the war. The idea behind this (apart from control for its own sake) is “to prevent war profiteering.” But it is hard to think of any economic measure that would more surely embarrass and slow down the transition to an effective war economy.
The relationship of prices to each other, and of prices to costs, is based on the constellation of supply and demand at any given moment. These are the prices and costs, wages and incomes, calculated to maximize and balance production in accordance with the relative demand for thousands of different commodities and services at that time. But relative war demand is radically different from relative peace demand. And there is no more certain way to slow up the transition to a war economy than to try to freeze for wartime the price relationships adapted to peacetime.
It is commonly thought that blanket price ceilings are necessary in war to prevent a general rise in prices. But the way to prevent this is through money and credit policy. Speaking broadly, there cannot be a general rise in prices in wartime unless there is a corresponding increase in the volume of money and credit. If no increase in the volume of money or credit were encouraged or permitted, the tendency would be for rises in the prices of “war” goods to be compensated by declines in the prices of “peace” goods. The price “level” would remain virtually the same.
It is the shift in relative prices that tends to produce the quickest transformation from a peace to a war economy. Producers are attracted by the higher prices and profits in the war goods to start producing them immediately, while they are driven out by losses from the production of “peace” goods. The higher prices of war goods, moreover, permit producers of them to offer higher wages to workers than those obtainable in peacetime production, and so facilitate the quickest shift of labor as well as management into war production.
If this sort of quick voluntary shift is prevented by blanket price and wage controls, then the government has to fall back upon an enormously complicated set of coercive orders. This compulsory bureaucratic system—which is almost certain to be influenced by political pressure-group considerations—can never be as effective as flexible free markets.
We should always do what we can to prevent wartime profiteering, but this must always be subordinated to the chief end, which is the most effective conduct of the war itself.
July 17, 1950
For a period of either prosperity or depression, peace or war, the tax bill passed by a vote of 375 to 14 in the House and now before the Senate is on net balance a bad measure.
In the new fiscal year for which there is already an estimated deficit of $5,133,000,000 (without allowing for added costs in Korea) the bill would cut excise taxes by about $1,010,000,000. To compensate for this it would increase other taxes, chiefly on corporations, by about $1,000,000,000. This means that in a period of peak prosperity and inflation the House voted a deficit of more than $5,000,000,000.
Some of these excise taxes—notably those on railroad freight and passenger travel, and on telephone and telegraph messages—are without excuse in peace times. But the way to make possible their removal was to cut Federal expenditures by a few billions, not to place still heavier burdens on other forms of production.
Some of the cuts in excise taxes are hard to understand, especially in view of the taxes substituted for them. There is a tax on radio sets and on movie admissions but not on television sets. There is a tax on croquet balls and mallets but not on fencing equipment. A tax is retained on all railroad freight including coal, but the tax on $65 watches was removed because these are “necessities.”
The House bill attempts to compensate for these excise cuts by soaking the corporations. The real purpose of the provision to speed up corporation tax payments is to make the current inexcusable Federal deficits look smaller; in the long run this device will not add a dollar to Federal revenues.
The House bill still treats corporations as if they were separate and additional individuals, instead of merely a way in which individuals organize for production. Corporate income taxation is double taxation. To tax corporate income 38 or 41 percent, and then tax dividends by individual income-tax rates, is to tax the same income twice. This puts a heavy penalty on corporate production and discourages investment in new corporate enterprises. It strikes directly at the job-creating organism. It retards increases in real wages.
It is estimated that an average of $8,000 in capital is invested in every job in American industry today; it is precisely this capital that makes these American jobs as productive and remunerative as they are. The Ways and Means Committee’s majority report argues that it increased corporate rates by only 2 or 3 percentage points. It refuses to face the ominous long-run implications for production of a 41 percent tax takeout of corporate earnings even before the investor is asked to pay individual income tax on the dividends he receives.
The committee majority, still treating corporations as if they were individuals, taxes corporate incomes at graduated rates and proudly points out that it has reduced taxes on “small” corporations earning less than $167,000 a year and increased them only on corporations earning more. This means that a rich stockholder in a small corporation has his tax reduced while a small stockholder in a big corporation has his tax increased.
The Republican minority report, one must admit, says some excellent things: “Taxes are eating at the foundation of our free-enterprise system.” The new bill shifts “the tax from some of the consumers to a more concealed tax on all of the consumers.” “As a natural corollary to reduction of excise taxes there should be a drastic reduction in Federal expenditures.”
How true! And if military expenditures must now be increased, then a slash in nonmilitary expenditures becomes more imperative than ever. But what of acts? When President Truman on June 23 courageously vetoed a discriminatory veterans’ bonus disguised as a postal pay increase, two out of three Democrats in the House, and four out of five Republicans, voted for the added expenditure over his veto. “Federal expenditures must be immediately reduced,” say the Republican committee members. Do you reduce by more political handouts?
July 24, 1950
The direct cause of inflation is an increase in the supply of money and credit. When more money competes for the same supply of goods, prices are forced up. Today we have three times as much money and credit in this country as in 1939.
A Federal budget deficit is directly inflationary only to the extent that it is financed by the creation of more money and credit. On the other hand, government-agency loans to foreign countries or to private corporations and individuals at home are inflationary—even if they do not appear as part of the conventional bookkeeping budget deficit—to the extent that the loans are not covered out of current taxation. These government-agency loans, in brief, are part of a concealed government deficit.
All government expenditures go in the first instance to specific people and industries. The total inflation today, therefore, may be said to be caused by four major specific inflations: the armament inflation, the farm inflation, the export inflation, and the housing inflation.
They all have one thing in common. Regardless of the original purpose for which any of these programs was started, they have all created a special vested economic interest in their own continuance on the present scale. Thus the foreign-aid program was started to “put Europe on its feet”; but it is now argued that it must be continued to keep our artificially inflated export trade boom from collapsing.
The outstanding case is housing. There would have been a huge private housing boom today even without “government aid.” But the government decided to give the boom continuous shots in the arm. The result has been to skyrocket costs out of all proportion to the increase achieved in production. As Marriner S. Eccles, governor of the Federal Reserve Board, pointed out on March 15, the government has turned to “the creation of new money to finance construction at a time when activity is already fully utilizing available supplies of material and labor.”
In articles in The New York Times of July 9, 10, and 11, Paul P. Kennedy ably summarized the major inflationary devices to which the Federal government has resorted to keep the housing boom at a peak. These include everything from high mortgages at low interest rates to direct subsidies. Under the 1950 National Housing Act “the builder, on pure speculation, may receive a construction loan of 85 percent. This loan is insured up to 95 percent of his price when he finds a government-insured purchaser. Thus the extreme limit of his speculation becomes 5 percent on a product in which the gross profit can go several times higher.”
Once this kind of inflationary boom is established, the politicians don’t dare let go. They now express the fear that “any appreciable slowing up of building now would have a telling effect on the entire economy.”
The present government-financed housing boom, in short, is a perfect illustration of the political naïveté of all the “compensated budget” and “compensatory economy” theories. Well-meaning proponents of these theories now protest that what they proposed was government deficits, pump-priming, or housing programs only in bad times, not in booms. But they reckoned without the politicians, who must be entrusted with such programs. Office holders want to stay in office. They are enthusiastic for any proposal that gives them the credit for starting a boom, but never for one that makes them take the responsibility for stopping it. No matter how dangerous the inflation they have started becomes, they keep it whipped up for fear of the consequences of letting it sag. But this only increases the danger and havoc of a subsequent bust.
The “compensated economy” doctrine, because it rests on merely mechanical reasoning, has inherent economic weaknesses too. But because it overlooks the psychology and interest of the politicians, the irony is that the doctrine seems likely to end in practice either in increasing the violence of business fluctuations, or in driving us toward rigid government controls to prevent this.
July 31, 1950
President Truman showed moral courage as well as good sense in ordering a slowdown in the Federal government’s own program of artificial stimulation to housing. He showed good sense also in not asking for price controls and consumer rationing now.
But it was doubtful wisdom to threaten the imposition of price controls and rationing “if a sharp rise in prices should make it necessary.” Such a threat could help to bring about the very price rise that he fears; because many consumers may take it as a hint to hoard before the rationing starts.
The proponents of price controls completely ignore the vital regulating function that prices play in a wartime no less than in a peacetime economy. Higher prices reward and stimulate the production of the key war commodities at the same time as they discourage and penalize wasteful consumption. As I pointed out in this column of July 10, it is precisely the shift in relative prices that tends to produce the quickest transformation from a peace to a war economy. Prevention of a general rise in prices is to be achieved, not through the imposition of price controls, but through money and credit policy.
The chief result of overall price ceilings is not to speed up a war effort but to entangle it in red tape. The economy then breaks out with all the diseases so familiar under OPA: lopsided and unsynchronized production, delays and shortages caused by dilatory or inept price-control decisions, needless deterioration in quality, discriminatory decisions as among different producers, and other abuses.
Here are some parts of an economic program for the present crisis:
1—No mere token contraction of the government’s own housing program, but the total suspension of this inflationary stimulus for the duration of the crisis.
2—Suspension of our arms aid to any country not interested enough to send even a token force to Korea.
3—Suspension of the whole ECA gift program as at present set up, and its conversion to an exclusively arms-aid program—and then only to European countries which are actually sending military aid to Korea and increasing their military expenditures correspondingly. There is no excuse for scattering money around the globe for the vaguely defined purpose of “halting Communism” as long as the crucial place to make sure that it is actually halted is on the Korean battlefront.
If it is really the “United Nations” that is now conducting a “police action” in Korea, it cannot do this by the mere fiction of having armies made up almost exclusively of American boys fighting and dying under a United Nations flag. The chief hope of preventing a third world war is to convince Stalin right now that if he or his puppets make an aggressive move anywhere, they will have to fight not merely us but the rest of the world. But the other members of the United Nations are most likely to convince him, not by offering to mediate or even by applauding our efforts from the sidelines, but by their own participation in the struggle now.
4—The Point Four program, which even on the rosiest view looks toward a remote future, should be completely suspended until the Communist military adventure has been halted in South Korea. Until then it would be an indefensible dissipation of funds. If there is anybody to whom we need to show our “know-how” at the moment, it is to the North Korean Communists.
5—Put real credit control into effect. Limits to installment buying and curbs on commodity speculation are mere token controls. They divert attention from what is really needed. We must restrict high-powered credit before we worry about merely derivative credit. We must restrict commercial bank credit, and above all Federal Reserve credit. We must put an end, especially, to the highly inflationary government bond-pegging policy.
Until the Federal government is willing to accept these suspensions of its own inflationary measures, it is not consistently entitled to ask Congress for stringent priority and allocation powers over business.
August 7, 1950
From laxity and unconcern prior to June 25, Washington has swung over to hysteria. Technically we are still fighting only a “police action” in a tiny country. Yet Washington acts as if our only hope of national survival lay in immediately turning our whole economy inside out and frightening to death the very corporations responsible for our unparalleled production. The proposed measures into which Congress is being stampeded reflect not so much real war necessities as the familiar demands of a statist and controlist ideology.
Congress should, of course, appropriate without delay whatever additional amounts can be spent quickly without misdirection or gross waste. But even if all of the President’s additional appropriation request of $10,500,000,000 is really necessary, is it also necessary that the Federal government should add that net amount to the expenditures it had already planned? Most of the bureaucrats and congressmen who are so sternly calling on the consumers and taxpayers for more sacrifices are singularly silent about any cut in their own pet programs for handing out taxpayers’ money to pressure groups or diverting resources to inessential “welfare” or pork-barrel projects. Apparently, aside from mere token cuts, these are to go on as usual.
Yet Arthur Krock, writing in The New York Times, considers $7,000,000,000 a “moderate” estimate of what could be cut from the Fair Deal budget if some of its programs were suspended during the crisis.
Nor is the nonmilitary budget the only one that needs to be critically examined. The American public is entitled to a much more convincing explanation than has yet been offered of why the almost $50,000,000,000 spent on “defense” in the four fiscal years since July 1946 bought apparently so little of it. The sum is not negligible. We spent on defense in the last fiscal year alone as much as we spent in the whole sixteen fiscal years before Pearl Harbor.
The chairman of the House Armed Services Committee now wants to know “just what” there is on hand to show for the military expenditures of the last four years. This is a laudable, if belated, curiosity. One would have supposed that a committee properly carrying out its responsibilities to the American people would have been checking on this at least every quarter. The armed services committees urgently need a numerically adequate permanent full-time staff of military experts and investigators, responsible to Congress alone, to check on the requests from the services and to know at all times how much defense the people are getting for their money.
The ideological hysteria of the moment is reflected in the demands, even on the part of so-called conservatives and professed believers in a free enterprise system, for overall government economic controls, including a blanket “freeze” of prices and wages. Such demands stem from a complete misreading of the lessons of the last war. These controls and freezes would tie the economy in red tape. They would delay or prevent the very price and wage readjustments that are most necessary. It cannot be pointed out too often that the only way to control the general level of prices is through money and credit policy.
The Administration has still to show real awareness of how serious, compared with present practices and proposals, money and credit control would have to be to accomplish this purpose. It must begin with restraints on the Treasury and Federal Reserve System. We must severely limit the expansion of credit by the Federal Reserve Banks themselves. These banks must abandon the inflationary policy of cheap money rates and government bond-pegging. The government must shut down on all new loans from the RFC or the Export-Import Bank. Commercial bank credit must be restricted by allowing interest rates to rise, by tightening reserve requirements, and by scrutinizing new loans. Demands for installment-credit and real-estate mortgage control only divert attention from these more serious credit controls.
August 14, 1950
Congress is being stampeded into granting—in fact, into forcing upon—the Administration all-out controls over the American economy. These would include not only powers to allocate and ration but to impose an overall freeze on prices and wages. The selling label for these powers is “total mobilization.”
The contention is that unless price controls are slapped on instantly there will be a runaway inflation. This fear rests on a lack of understanding of economic cause and effect. If the government refuses to print more money, or to permit an expansion of credit, then the average level of prices can rise very little or very briefly, even in wartime. For if civilian consumers and the government have between them no more money than before, then the more they pay for some commodities the less they can pay for others. Except within narrow limits, a general advance in prices is not possible unless the supply of money is increased correspondingly to finance it.
To seize on price control, therefore, in peace or war, as the way to “fight inflation,” is to adopt a fake remedy as disruptive as it is irrelevant. If the government adheres to noninflationary money and credit policies, general price control is not necessary. If, on the other hand, it resorts to money and credit inflation, any attempt to offset the effects by price control is worse than futile. Price control always restricts, unbalances, and disorganizes production. It brings artificial shortages. So far from “mobilizing” the economy, or speeding it up, price control puts it in a strait jacket.
General price control is at once an ineffective and a crippling device by which a government pretends to protect its citizens against the inescapable consequences of its own fiscal and monetary policies. But it has the merit for the bureaucrats of deflecting attention from their own irresponsible monetary policies onto private scapegoats known as “profiteers.”
It was assumed during the last war that the high prices were primarily the result of war scarcities. They were not. They were primarily the result of the overissue of money and credit. In the five years since the end of the second world war we have been producing goods in vastly greater volume than in the period from 1935 to 1939. This June, in fact, according to the Federal Reserve Board, industrial production was running at 199 percent of the 1935–39 rate. Yet retail consumer prices were 70 percent higher in June than in 1935–39.
Why did we have higher prices with more abundant goods? We don’t have to go far for the answer. There is in existence at present more than three times the volume of money and credit as in 1939. It is this increase in monetary purchasing power, brought about by government policy, and not a continuance of war shortages or so-called “profiteering,” that caused the high prices prior to June 25 of this year.
The Administration’s real duty now is not to start dictating prices and wages but to halt its own inflationary policies. It must ruthlessly slash needless nonmilitary expenditures. Senator Byrd, in an itemized statement, has estimated that the whole appropriation of $10,500,000,000 that the President requested could be taken out of the present nonmilitary budget.
This is the Administration’s economic job No. 1. The government must stop holding up prices of foodstuffs artificially; it must stop financing an inflationary housing boom; it must stop subsidizing an inflationary export boom. It must stop its inflationary government bond-pegging policy; it must stop its inflationary low-interest rates. Both the Federal Reserve System and the commercial banks must tighten down on new credit. Present hostilities and preparedness must be financed as far as possible out of taxation, or out of bonds paid for out of real savings. Congress should authorize the Administration to levy during this fiscal year excise taxes ranging as high as 50 percent on civilian nonessentials.
If such steps are taken we need not fear inflation, and we will get the all-out production that only free markets and a free economy can provide.
August 21, 1950
It obviously makes no sense today, as Senator Byrd has pointed out, to convert our own economy to a restricted wartime basis, and at the same time to continue to spend nearly $4,000,000,000 to build up Europe’s economy on a peacetime basis. Yet this is still substantially what we are planning to do.
As late as June 21, the Senate committees of Foreign Relations and the Armed Services, “after hearing the testimony of Administrator Hoffman concluded it would be unwise to divert” any EGA funds from their original civilian-welfare purpose to the military aid program.
Tucked away in the table of this report are two columns of extremely significant figures whose significance the joint committee apparently did not consider great enough to call attention to in the text. I reproduce them here. The column TNI represents the percentage relationship of the military expenditures of each country to its total national income. The column TGE represents the percent of military expenditures of each country to its total government expenditures:
| %TNI | %TGE | |
| United States | 6.9 | 36 |
| Belgium | 3.8 | 12 |
| Luxembourg | 3.0 | 8 |
| Denmark | 1.8 | 13 |
| France | 7.9 | 21 |
| Italy | 5.0 | 19 |
| Netherlands | 9.1 | 27 |
| Norway | 3.2 | 14 |
| Portugal | 6.0 | 30 |
| United Kingdom | 7.4 | 20 |
These Western European countries are in far greater and more immediate peril from Russian aggression than the United States. Yet they have been spending only an average of 5 percent of their national incomes on defense. Even more indicative of the dream world in which they have been living is the second comparison. While 36 percent of our own government expenditures were going into defense, even prior to the Korean war, these nine countries were devoting to military defense an average of only 18 percent of theirs.
In the face of their country‘s obvious peril, in other words, these governments have been devoting less than a fifth of their expenditures to defense and spending the other four-fifths largely on socialistic experiments—especially to cover the deficits of their nationalized industries.
It may be politically and diplomatically impossible to terminate EGA now. But at least it must be converted at once into an exclusively arms-aid program. And we must ask in return for far better assurances that so-called arms-aid funds will actually add to the might of European armaments.
For our arms-aid funds, of course, do not necessarily add to Europe‘s defense simply because they are specifically earmarked for defense. If an aided European government merely spends the same amount on defense that it would have spent out of its own funds anyway, this means that our arms aid has simply released that government‘s own resources for additional nondefense expenditures. To assure that we are not throwing our arms aid away on nations with no will to use it, a good rule might be to make only those governments eligible that agree to devote at least as great a proportion of their total expenditures to defense as we do. It is impossible for us to help defend Europe unless Europe is determined to defend itself.
If any European country is unready to give evidence, right now, that it is willing to fight Communist aggression, by sending at least token aid, including men, to Korea, or if it complains that it cannot afford to increase its armament expenditures just now because it must first improve its standard of living, we can simply suggest that it will have to do that without our help.
By importuning the European governments to rearm with our money, we are giving some of them the dangerously perverted impression that they are rearming not for their own survival, but as a favor to us. The governments of Western Europe, even more than our own, need to awaken to realities before it is too late.
August 28, 1950
Overall price and wage control would not only unbalance and disrupt production. It would divert public attention away from the only real remedy for inflation, which is to refrain from expanding money and credit.
We are not likely to do this unless we bring the budget to a balance or near-balance. There has been some recognition of this need in Washington, but the emphasis has been thrown in the wrong place. It has been all on imposing still more drastic taxes, with at best a perfunctory acknowledgment, unaccompanied by serious action, of the need for reducing non-military government spending.
Any congressman who still doesn’t know where these non-military economies could be effected might consult the August letter of the National City Bank of New York. “With the widespread anxieties over possible shortages,” suggests the bank, “expenditures of $1,066,000,000 in public funds to hold up [farm] prices and remove agricultural products from the market seems more than ever indefensible.” It goes on to recommend cutbacks in the new “welfare” programs which the President proposed to launch this year, in the record-breaking $961,000,000 “rivers and harbors” bill, and in civilian ECA.
If such economies were made, the problem of increased taxation would prove far less formidable than it appears at present.
Two forms of war taxation deserve careful study. The first is the so-called “excess-profits” tax. It would promote clarity of thought to call this, rather, a war-profits tax. Zealots hostile to free enterprise regard almost any profit as “excessive,” and seize on the phrase “excess-profits” tax to put forward punitive schemes which have nothing to do with war. A war-profits tax is simply an effort to skim off most of the windfall profits due to war itself.
How are we to identify such profits, however, and segregate them from those that would have been made anyway had peace continued? It has been usual to regard as specifically “war profits” all profits made in excess of those in the three or four years before the war. There is a plausible presumption in favor of this. But in no case can one be sure that the presumption is more than roughly correct, and in many cases it is unjustified. In all growing industries (e.g., television) at least part and perhaps all of the increase in earnings would have occurred anyway.
There is talk of applying the principle of a war-profits tax not merely to corporate but to individual incomes, This would no doubt be consistent. But it would clearly apply unjustly in many cases—to people with fluctuating incomes, say, and particularly to young workers who would have been promoted to higher-paying jobs even in peacetime. Should a lower absolute corporate or individual income be taxed more than a higher income, even in the event of war, simply because the recipient is not accustomed to it? We must remember, finally, that a drastic corporate “excess-profits” tax, as we learned during the last war, encourages higher costs and a wasteful use of men and materials.
Particularly appropriate to wartime, however, is an excise tax on civilian-consumption goods. This should be charged separately to the consumer, and labeled a war-purchase tax. Congress might fix a minimum uniform tax on all goods except foodstuffs (say 2 to 5 percent) and authorize the Administration to impose an added tax in its discretion, at any rate up to a maximum of 50 or even 100 percent, on any luxury or other product the civilian production or consumption of which it wished to discourage in wartime. This would be a far more flexible and less disruptive way of dealing with certain commodities, such as gasoline, sugar, and rubber, than the hit-or-miss rationing of the last war.
To prevent such a war-purchase tax from becoming a permanent part of the tax structure, Congress should grant such a power for not more than a year at a time, and should retain, in addition, the right to terminate it even before then by a vote of either House.
September 4, 1950
While the Administration is demanding and getting fake weapons and needless powers to “fight” inflation, it is driving ahead with the very policies that produce inflation.
Inflation is directly caused by an increase or expected increase in the supply of money and credit in relation to the supply of goods—and (apart from deterioration also in the quality of money) by nothing else. All other so-called causes or “pressures” are at most only indirect.
One of the most important of these indirect causes is a governmental cheap money policy. Artificially low interest rates increase the demand for loans—particularly from marginal productive or marginal speculative ventures. This means the creation of more bank deposits—i.e., of more money bidding for goods—of more inflation. The Treasury insists on continuing precisely such a policy.
In the last decade the Federal Reserve System has been used primarily as a huge engine of inflation. The Federal Reserve authorities have been subservient to the Treasury. They have carried out its shortsighted interest-rate policies and allowed the banking system to be used as a dumping ground for government securities. This is the chief way in which the nation’s volume of money and credit has been more than tripled between 1939 and the present. This is the primary cause of the inflation of the last ten years.
But on Aug. 18 the Federal Reserve Board increased the discount rate of the Federal Reserve Bank from 1½ percent (a fantastically low rate in the face of inflationary danger) to 1¾ percent. This was a very cautious move indeed—but it was in the right direction. Its chief importance was symbolic. Yet the Treasury on the same day moved in precisely the opposite direction. It announced that it would offer $13,570,000,000 of thirteen-month notes at only 1¼ percent interest. And Secretary Snyder publicly reproved the Board’s anti-inflationary gesture. “A stable and confident situation in the market for government securities is our first line of defense on the financial front.” He added that we must “fulfill our responsibility to the millions of Federal security holders throughout the nation.”
But this merely meant that Mr. Snyder was putting low borrowing rates for the Treasury ahead of every other consideration—including the certainty that this policy must produce still more inflation. To maintain artificially low interest rates not only encourages general inflationary borrowing; it compels the banking system to support and load itself up with U.S. government securities issued at such rates. The Federal Reserve Banks now hold $18,577,000,000 of these, and the country’s commercial banks more than $66,000,000,000. The money and deposits created against these securities are the chief reason why present wholesale commodity prices are more than double those of 1939. The Federal Reserve Banks at that time held only $2,484,000,000 in government securities and the commercial banks held only $16,000,000,000.
Mr. Snyder’s belief that his bond-pegging and low-interest policies protect Federal security holders is the exact opposite of the truth. It is mainly because of these very policies that every dollar invested in Federal securities in 1941 has a purchasing power of only 61 cents now. This is a real depreciation of 37 percent.
Nothing can now prevent a serious inflation except a termination of the Federal Reserve and Treasury policies of the last decade. Interest rates must be allowed to rise. Government bond-pegging at present rates must be abandoned. The Treasury must sell its bonds to nonbank investors. The reserve requirements of the Federal Reserve Banks must be restored at least to the old 35–40 percent level, and preferably put even higher. And when the government has made these self-denying reforms, the reserve requirements of the commercial banks must be tightened.
If these measures are taken we will not need price controls against inflation. If they are not taken, price controls, as in the past, will be worse than futile. They are false anti-inflation weapons. They merely impede, unbalance, and disorganize production.
September 11, 1950
Before passing the economic controls act, Congress got into a last-minute snarl over whether it should insist on “across-the-board” price- and wage-fixing, or permit “selective” price-fixing. The truth is simply that there are dilemmas in either course.
“An overall ceiling across the entire economy” is the Baruch proposal. Its purpose is to insure that “prices, wages, rents, fees, and so on” will be controlled in an impartial, non-discriminatory, nonpolitical manner. Baruch thinks he would insure this by recommending that all prices and wages be “rolled back” to and frozen as of June 25, the day hostilities broke out.
But the proposal has fatal defects. It ignores the whole function that free prices, free wages, and free markets play in our economy. That function is to direct production into the goods that are most needed and away from the goods that are least needed. Free prices provide a wonderfully flexible but inextricably interrelated system of incentives and deterrents, which constantly balance and synchronize production as among thousands of different commodities. The free price system provides a voluntary and “automatic” allocation of capital and labor.
The Baruch plan would try to freeze for wartime the price relationships that were adapted to a past situation in peacetime. It would prevent the very adjustments necessary to get the immediate, voluntary changes in the structure of production that war requires. It would force the government into compulsory rationing of materials and labor—into allocation problems of bewildering and unmanageable complexity. It would drive us straight back to the absurdities of the last war, when OPA was controlling the price of oyster shells and Cadillacs, mink coats and paper clips. The Baruch plan would strait-jacket production. It would dangerously retard, not advance, the prosecution of the war.
And it would not even, in the end, have the one merit of being politically nondiscriminatory. Labor would not tolerate the compulsions involved. Demands would come from every side for the correction of “hardships” and “inequities.” Many of these demands would have undeniable merit. But once the door was opened every powerful pressure group’s demands would be granted under the euphemism of “correcting inequities.”
It must be pointed out once more that if credit control were tight enough, there would be no need for blanket price and wage control, because the general level of prices would not rise. The relationships of individual prices and wages to each other would change, of course, as they should. On the other hand, if money and credit are substantially expanded, blanket price controls are worse than futile. In the end they break down, but they constrict production in the meantime.
If we try to avoid the evils of blanket price control by “selective” price control we merely create other evils. Selective price control becomes political and discriminatory almost at once. It becomes an excuse for holding down prices while permitting or encouraging wages to rise. And in the long run the price of a finished commodity can be held down only by controlling also the price of the raw materials and labor that go into it, the prices of substitute products, and so on. Selective price control, once inaugurated, tends to spread in ever-widening circles toward blanket price control.
But suppose the price of a particular product starts to soar above the level thought necessary to insure the required production of that product? This is the most plausible case for selective price control. Even here a better solution would probably be a heavy excise tax on that product. Such taxes could be either a flat percentage of the whole price of the product, or, say, 75 percent of the amount by which the price exceeds that considered necessary to bring out sufficient production of that product. Congress, in wartime only, could delegate to the Administration discretion to levy such flexible taxes. These taxes would discourage wasteful consumption, reduce war profits, and increase revenues to the government.
September 18, 1950
Neither Congress nor the Administration can take any legitimate pride in its economic or fiscal record since the outbreak of war in Korea.
Congress failed to provide for control of what most needs control. It provided controls that are not needed and can only create confusion or harm.
What is needed is the most stringent credit control. Without this, inflation is certain. With this alone inflation can be halted. Yet Congress provided only for the control of derivative credit, such as installment buying and real-estate mortgages. It did nothing to curb the expansion of the money supply or bank credit at the source.
When everyone in the Administration and in Congress professes to be “fighting inflation,” and when the average combined reserve ratio of the Federal Reserve Banks is still 54 percent, it is a scandal that the Federal Reserve authorities should be permitted to retain the “emergency” legal reserve ratio of only 25 percent adopted in 1945. The minimum ratio requirement should now be restored to at least the former levels of 35 percent against deposits and 40 percent against notes. And the Treasury must be prevented from continuing to float its securities by inflationary means. Until such measures of self-restraint are adopted by the government itself, all its other so-called “anti-inflation” measures or exhortations must be set down as hypocritical and futile.
At least lip service, it is true, has been paid in Congress and the Administration to a balanced Federal budget as a preventive against inflation. But apart from the protests of a small Congressional minority symbolized by Senator Byrd, virtually all the emphasis has been thrown on getting this balance by still more crushing taxation. When Congress directed the President to cut his proposed annual expenditures by about 1 percent, to be taken out of the nonmilitary budget, Mr. Truman called the requirement “arbitrary” and didn’t see how he could conform with it “without impairing essential government services”! It is only the taxpayer, apparently, who is to be told that he will just have to learn how to get along on less. The austerity is to be all his; political pork must not be touched.
The same government that is crying for more power to keep down prices is still using hundreds of millions of the taxpayers’ money to keep food and other farm prices high. And when every spare dollar and resource is needed for defense, we are still handing out billions to European bureaucrats to enable them to play with more civilian “welfare” schemes.
The Defense Production Act embodies the false economic theory that the way to combat monetary inflation is through blanket price control. Its idea of “total mobilization” is total government restraints. Price control at best is an effort to “combat” inflation by disregarding its causes and attacking merely its symptoms. The chief effect even of “impartial” price control is to cut production. But in addition the new measure is frankly discriminatory. Explicit protections are written in for farm prices and wages. If these are justified, why shouldn’t they apply equally to all prices? The President, for example, is explicitly directed not to fix any wage below that paid in the month prior to June 25. Why not the same restriction on his price-fixing powers for all prices?
In fixing prices or wages the President is authorized to “make such adjustment as he deems necessary to prevent or correct hardships or inequities.” This is the door through which every political pressure group will try to pound its way. Union leaders, of course, will argue that the whole wage level was “inequitable” as compared with the price level before June 25.
In spite of the Lustron loan and other RFC scandals, the new act authorizes $2,000,000,000 more—$600,000,000 of it under virtually uncontrolled Presidential discretion—for loans to private firms whose credit isn’t good enough to get loans from private investors or banks.
The best provision of the Defense Production Act is the expiration of at least part of it on June 30, 1951, This will give an early opportunity for sober reconsideration by the new Congress.
September 25, 1950
In their ostentatious “fight against inflation,” Congress and the Administration have made nearly every wrong decision possible.
The direct cause of inflation is an increase in money and credit. Practically every other cause is indirect; it operates through this. Yet in its economic-controls law Congress did nothing to prevent expansion in the total volume of money and credit. Nor did the President in his radio talk on the law say a single direct word on the necessity of limiting the total quantity of money and credit. Congress legislated specifically only on such derivative forms of credit as consumer installment and housing loans. And the Treasury insists on financing the war by methods that must swell the volume of money and bank deposits.
Mr. Truman rightly insists that we should pay for defense “as we go.” But the budget balance he speaks of is entirely to be achieved, apparently, by an increase in the already ominous burden of taxes. Not once did he mention a cut in the government’s own unparalleled nondefense extravagance. The sacrifices are all to come from the taxpayers, and none from the bureaucrats or pressure groups that live at their expense.
“The supply of civilian goods will not keep pace,” Mr. Truman blandly predicts, “with the growth of civilian incomes. In short, people will have more money to spend, and there will be relatively fewer things for them to buy. This inevitably means higher prices....” He neglects to say that this will happen only if the government itself continues to spend wastefully or fails to tax away from civilian incomes the amount needed to pay for defense. The way to prevent inflation is to prevent a gap from developing between civilian incomes and civilian goods—not by the hoax of price control.
Not only the Defense Production Act, but Mr. Truman’s radio speech and executive orders foreshadow political discrimination in price and wage control. Mr. Truman tells the businessman: “Hold your prices down.” But he tells the wage earner: “Do not ask for wage increases beyond what is needed to meet the rise in the cost of living.” This sets a double standard. What would have been thought had he reversed it, and said to the unions: “Hold your wages down,” and to the businessman: “Do not ask for price rises beyond what is needed to meet the rise in other prices”?
This double standard is not inadvertent. It appears in the text of the President’s executive orders. Sec. 401 (b4) provides that the Economic Stabilization Administrator shall “establish price ceilings and stabilize wages and salaries where necessary.” It does not say either that he shall establish wage “ceilings” or that he shall merely “stabilize” prices. Is different language applied to the two cases for any other purpose than to discriminate in favor of wages as against prices?
Moreover, the Administrator can “establish price ceilings” all by himself, but before “stabilizing” wages he must consult a Wage Stabilization Board of nine members, three to represent labor, three industry, and three “the public”—all appointed by Mr. Truman. For any businessman to raise his prices unless his costs have increased correspondingly is, Mr. Truman thinks, “just plain profiteering.” No such harsh label is applied to unions that raise wages more than living costs. On the contrary: “Existing inequities in wage rates, of course, can and should be corrected.” If experience in the last war is any guide, all “inequities” in wages will be straightened out by raising the lower wage, never by lowering the higher, and the government will allow wages as a whole to push up while it tries to hold down prices and squeeze profit margins.
Of course neither the honest advocates of “selective” price control nor the doctrinaires who want “an overall ceiling across the entire economy” approve of this kind of political discrimination. But what both of them overlook is, first, that price control, selective or overall, is a spurious remedy for inflation, and, secondly, that once we put in the hands of politicians the power to say what specific prices and wages shall be, that power will inevitably be used as a political weapon.
October 2, 1950
In understanding the real causes of inflation and recommending the means for combating it, one Federal agency has come nearer to realities than any other. This is the Federal Reserve System, which after ten years of subserviency is at last rebelling against the Treasury’s reckless inflationary cheap-money policy.
The best discussion I have read by any Federal official of the true causes and preventives of inflation is a lecture by M.S. Szymczak, a governor of the Federal Reserve System. The lecture was delivered on Aug. 29 before the School of Banking of the University of Wisconsin. An extensive excerpt from it was published by The Wall Street Journal of Sept. 11.
“I do not believe,” he declared, “[direct] controls [including price and wage fixing and rationing] are the present answer to our immediate inflation problem. They deal only with effects and not with basic causes. The basic cause of our inflationary problem is continuing rapid credit and monetary expansion, abetted by current government deficits which threaten to grow larger and larger. . . . If the fuel of inflation is provided, all that direct controls can do is to drive the inflationary pressures underground and to postpone some of their effect. . . .
“The cornerstone of our anti-inflation program must be bold fiscal measures. . . . Financing the expanded military budget cannot be limited to the taxation of wealthy individuals and business enterprises if it is to be useful as an effective anti-inflationary measure. It must restrict spending, and most spending is done by the vast number of individuals and families with low-and middle-bracket incomes. In an emergency situation like the present, our tax changes must be designed primarily to meet the danger of inflation.”
Szymczak goes on to recommend debt-management policies designed to tap real savings by sales of government securities to non-bank investors, so as “to reduce the volume of government financing through banks, which is highly inflationary.” He endorses the restriction of consumer and real estate credit, and the action of the Federal Reserve System in August of raising the New York and other discount rates from 1½ to 1¾ percent. If the measures so far taken are not effective, he adds, “monetary policy will need to resort to even more restrictive use of one or more of the general instruments of credit control at its disposal, namely, open-market operations, changes in the discount rates, and changes in bank-reserve requirements.”
All this is excellent as far as it goes, and Szymczak and those for whom he speaks in the reserve system deserve great credit for their courage and clearsightedness in going even this far. But Federal Reserve officials are still the prisoners of their own submissive record of the last ten years.
The official statement of the Board of Governors on Aug. 18, for example, declared that they were prepared to use all the means at their command to restrain further expansion of bank credit “consistent with the policy of maintaining orderly conditions in the government securities market.” Now this phrase is ambiguous. If we may judge by its interpretation in the past, it is little more than a euphemism for saying that it is the duty of the Federal Reserve System to continue to support government securities at substantially their present artificial inflationary low interest yields. And if this is Federal Reserve policy, it cancels bold words about fighting inflation with “all the means at our command.”
It is the duty of the Treasury itself to make the market for its securities “orderly” by paying rates of interest that will appeal to real investors and—if necessary to protect existing holders—by refunding its outstanding long-term securities at higher rates or even, perhaps, as an emergency measure, with securities bearing a variable coupon rate (see this column, Newsweek, Oct. 4, 1948).
The country cannot continue indefinitely to be the victim of the Treasury’s past as well as present inflationary cheap-money policy. That policy must be terminated now.
October 9, 1950
The latest Bulletin of the Soviet Union’s Academy of Science reveals, according to Harry Schwartz in The New York Times of Sept. 24, that Russian bureaucrats are trying to fix their socialist prices on capitalist principles.
“Prices charged by Soviet enterprises must now be set high enough to cover costs and to permit profits to be made,” reports Schwartz. “In addition they must be based on demand and supply so that prices for scarce commodities will be sufficiently high to stimulate increased production and reduce consumption of such scarce items.
“But these prices are still determined by planning authorities rather than set in markets through the interplay of competitive forces. These principles were apparently used to help frame the major revision of the Soviet wholesale price structure [in 1949 and] this year. During and immediately after World War II Soviet economists boasted that wholesale prices of industrial commodities had remained stable. Only later did they reveal that this policy had been possible because of very large government subsidies to many plants.”
To those who have followed the discussions of the more enlightened socialist theoreticians over the last two decades, not to speak of those who have peered behind some of the curtains of propaganda to the economic realities in Russia, none of this will come as a blasting revelation. Socialism and Communism began as a revolt against the alleged folly and iniquity of capitalism and the free market. The supreme irony is that, once the socialist and Communist theorists had finished their joyous work of destruction in the countries where they had seized power, and were called upon to buckle down to the task of producing the economic paradise which their rhetoric had so long and confidently promised, they found themselves forced, in the end, to try to imitate and revive the very price system they had so eagerly destroyed.
The whole problem is one of which the cocktail-party socialists are blissfully unaware. As long as there is only partial socialism, as in the Western democracies, the problem can be concealed. The city-owned New York subways, for example, are run at a deficit; but the city merely forces property owners, and the private industries within its boundaries that are run at a profit, to make up the deficit. The nationalized railroads of Britain and France are run at a deficit, but the British and French Governments can simply force the profit-making private industries in their countries to pay that deficit. (Of course today, with ERP, they in effect get their nationalized railroad deficits paid for out of the profits of private American business.)
There are many other ways in which partial socialism can camouflage its deficits. Nationalized enterprises don’t make the same kind of deductions for interest, depreciation, and taxes that private industry is forced to make. The Labor government can increase the apparent productivity of the British coal mines by mechanizing those mines at the expense of private projects in which the new capital could be used to more advantage. Or the government, because of its monopoly, can raise coal prices, and so force consumers to make up a hidden deficit by what is in effect a stiff excise tax on coal.
But none of these devices are open as a general practice in a country where socialism, as in Russia, is virtually complete. Partial socialism is parasitic on capitalism; but complete socialism is forced to be self-supporting. A deficit in one part of the socialist economy can only be made up at the expense of another part.
And so, in present-day Russia, the Communists find themselves compelled to imitate the very “profit system” they have spent their lives denouncing. But their imitation, unfortunately for them, can’t take the place of the real thing. Under their system, in which wages, prices, and interest rates are all arbitrarily set by bureaucrats, they can never know what their real costs are, or even what real consumer demand is. They must play capitalism, competition, price and profit system, the way children play house. Only their game is more like blind man’s bluff.
October 16, 1950
The decision of Canada to permit a free market in its dollar may be the first real break in the ice jam of international exchange control.
Exchange control is a totalitarian device first systematically applied by Schacht in Nazi Germany, then endorsed by the late Lord Keynes of Britain and embodied, under his leadership, in the International Monetary Fund.
The Fund was Keynes’s proposed substitute for the gold standard. The gold standard was a triumph of international cooperation. It established in effect a single world currency. For when each country’s monetary unit was convertible on demand into a fixed weight of gold it was also necessarily convertible at a fixed rate into all other monetary units. And the monetary managers of each country could keep their currency on gold only by refraining from inflation or any other act that undermined confidence.
Keynes was opposed to all this, partly because he was at heart—as he confessed in an article in the Yale Review in 1933—an economic isolationist. He resented having England’s internal price level tied to the international price level. He dreamed of a system in which England’s monetary managers could manipulate their own internal price level—by inflation and devaluation—so as to keep constant “full employment” at home regardless of what was going on in the rest of the world. And he actually succeeded in selling to the world’s assembled monetary “experts” at Bretton Woods the idea that gold convertibility was not needed to sustain or stabilize a currency’s value—that the purchasing power of engraved scraps of paper could be made whatever the monetary managers of that country chose to say it was. But to peg them for a while he proposed the Fund, an institution pledged to use the relatively hard currencies (chiefly the U.S. dollar) to buy the soft currencies at whatever arbitrary valuations their governments put upon them.
This system had to be supported by exchange control—that is, by using each government’s police power to forbid anybody to buy or sell its currency at any other than the arbitrary official value put upon it. But the breakdown of the whole system is now becoming evident even to the “experts.”
Its first effect was to choke and unbalance foreign trade. It produced the so-called “world dollar shortage” which at least one British economist, Roy Harrod, had the courage to call “one of the most brazen pieces of collective effrontery that has ever been uttered.” Even Sir Stafford Cripps eventually profited by the expensive education of events, and slashed the arbitrary value of sterling from $4.03 to $2.80 in September 1949—a step which led to the reversal of the sterling area’s balance of payments.
It was a step imitated by some 30 countries, but it fell short of being the right step—which was to set the markets free. And this is what Canada has now had the courage to take.
Canada’s step has been criticized in some quarters because it would mean a “floating rate” that can move up and down every day in accordance with fluctuations of supply and demand and fluctuations in confidence. But the bureaucrats’ headache is the citizens’ salvation. It is precisely the great advantage of a free rate that it compels the monetary managers to act with prudence and foresight and maintain the integrity of the currency at all times. It is precisely because they know that any lapse in confidence will be reflected immediately in the market quotation that the managers of a free-exchange currency are compelled to act with more responsibility than the managers of a controlled one. Because of the public confidence in Canada’s policy, the quotation of the Canadian dollar on the first day of free markets actually rose from the former fixed “official” rate of 91 American cents to a level of 95 cents.
A floating rate for the Canadian dollar is probably intended to be temporary, but it is a necessary transitional step. We will never emerge from the present world monetary chaos until the leading countries return to a gold standard and adopt the measures to create confidence that the gold standard will be maintained.
October 23, 1950
Santayana once defined a fanatic as a man who redoubles his efforts after he has forgotten his aims. The definition would apply equally well to the typical bureaucrat or government planner. The history of ERP is an outstanding example.
The Marshall plan began as a mistaken remedy based on a wrong diagnosis. The European bureaucrats contended that their trouble was a “dollar shortage,” and that the remedy was for the United States to give them dollars. Our own bureaucrats took this at face value and started giving away billions of taxpayers’ money.
But the “dollar shortage” merely got worse. It was being created, in fact, by the very measure ostensibly designed to prevent it—exchange control at absurdly high currency valuations. The European bureaucrats argued that they were losing gold and dollar reserves in spite of their exchange controls, not because of them. But when on Sept. 18, 1949, Sir Stafford Cripps reversed his position overnight and slashed the official value of the pound from $4.03 to $2.80, the effect was an almost immediate reversal in the sterling area’s net flow of international payments. Britain’s gold and dollar reserves are now more than double last year’s prede-valuation level. And in August, for the first month in thirteen years, our own imports exceeded our exports.
Yet though the so-called world “dollar shortage” is curing itself, there is no suggestion from our own ECA that we can terminate or taper off our outward flow of gift dollars. On the contrary, our own officials are still warning us that we must continue to throw our money all around the world even after 1952; they are putting no pressure on Britain to free sterling from controls as the Canadian dollar has now been freed, and they resent hints that British socialism has done anything to offset our aid to Britain.
In 1949 the British nationalized railways lost $58,000,000. This deficit was paid in fact though not in form by American taxpayers. The funds that we turned over to the British Government to pay for things that it would otherwise have had to pay for itself released $58,000,000 of its own funds to pay the socialized railway deficit. The end result is the same as if we had paid for that deficit direct. And now the British Labour Party is going to nationalize the steel industry, and create new deficits.
The slightest suggestion that we should refuse to subsidize European socialism is rejected by our ECA bureaucrats as an intolerable interference in Europe’s domestic affairs. But let any European country attempt to move toward a free economy, or toward prudent finance, let it seriously try to protect the integrity of its currency unit, and our ECA bureaucrats will forget all about “noninterference” and berate that country in no uncertain terms.
A New York Times dispatch of Oct. 2 from Rome, for example, reports that our ECA officials there are appalled to find that the Italian Government has finally balanced its budget! It is to this, and not to the inevitable hangover from the previous inflationary spree, that our ECA “experts” attribute present Italian unemployment. “It is absurd for the [Italian] Government to be showing a surplus” now, according to our ECA administrators. They are “particularly disheartened by the slow rate” at which Italy is spending our money! They are urging “larger expenditures” on the Italian Government and “a more liberal policy of investments”—which are Keynesian euphemisms for Government subsidies to private business and for the philosophy of spend and spend and spend.
Our ECA officials find it particularly hard to understand Italy’s “fear of inflation.” They might get some glimmering of light on the subject if they consulted official index numbers, which show, for example, that the cost of living in Italy was 50 times as high last year as in 1938 and is still 48 times as high.
Queer people, these Italians, definitely in need of a pep talk from someone like Leon Keyserling.
October 30, 1950
The Federal Reserve Banks have kept interest rates abnormally low. They have loaded themselves up with nearly $20,000,000,000 of government securities. In brief, they have failed to make proper use of the two best ways to prevent credit expansion—by raising interest rates and through open-market operations. So to compensate for this failure they are planning to increase the reserve requirements of member banks of the Federal Reserve System to the limit permitted by law.
Increasing reserve requirements is a clumsy method of credit control. But it is far better than permitting a further inflation of bank credit. It is ironic, however, that the Federal Reserve authorities who want to impose higher reserve requirements on the member banks have resisted every effort to restore the reserve requirements of the Federal Reserve Banks themselves. Prior to 1945, the Federal Reserve Banks were required by law to keep reserves in gold certificates of 40 percent against their notes in circulation and of 35 percent against their deposits. By act of Congress on June 12, 1945, these requirements were lowered to a uniform reserve ratio of 25 percent. This was done to permit the Federal Reserve System to inflate more in the war emergency—though Germany had already surrendered the month before, and the Japanese surrender, as it proved, was only two months off.
Though the reserve authorities never had to resort to the lower reserve ratio, they have not only failed since then to recommend a restoration of the former reserve requirements, but have opposed all outside suggestions that this be done. Yet the National City Bank, in its monthly letter this September, pointed out that the Federal Reserve Banks could still buy up about $50,000,000,000 additional government securities—a tremendous inflationary potential—before their note and deposit liabilities would reach the present legal limit of expansion permitted with present reserves.
This situation urgently demands action by Congress. The reserve requirements of the Federal Reserve Banks themselves should be restored at least to their pre-1945 levels. As the average reserve ratio of all the Federal Reserve Banks is now 52.5 percent (from 56.4 on June 21), this legal change can fortunately still be made without causing the slightest hardship.
It is true that this action would do nothing to reduce the already outstanding volume of money and bank credit. Its purpose would be to forestall a further inflationary expansion while there is still time. It would, however, have a tremendous immediate psychological importance. It would put not only the Federal Reserve System but the whole country on notice that Congress is determined to prevent inflation and knows the direction in which the danger really lies.
As long as we have legal reserve requirements, they must be adequate. A legal reserve ratio is a declaration of Congressional policy. The present reserve requirement of only 25 percent is equivalent to a Congressional sanctioning of further gross inflation. If the Federal Reserve Board has in fact no intention of inflating to this point, it should welcome a restoration of the former reserve requirements.
Of course even if the legal reserve ratios were restored to their former levels, it would still leave a tremendous inflationary potential. This is no reason for not taking this step; it is a reason for taking additional measures.
So let Congress restore the Federal Reserve Bank ratio requirements to their previous levels. Or better, let it raise the present flat “emergency” 25 percent reserve requirement against both deposits and notes to a flat 40 percent. Then let Congress in addition give the Federal Reserve Board discretionary authority to raise the reserve requirements of the Federal Reserve Banks even further—just as it already has discretionary authority to raise member bank reserve ratios. And let Congress provide still further that the board cannot hereafter raise the reserve requirements of the member banks without raising the reserve requirements of the Federal Reserve Banks correspondingly.
November 6, 1950
In Newsweek of Oct. 23 this column pointed out that though the so-called world “dollar shortage” had cured itself, there was still no suggestion from our own ECA that we now terminate or taper off our outward flow of gift dollars. In the same issue Newsweek carried an article and charts on the dramatic suddenness with which the “dollar gap” had been closed. Here are some further developments:
On Oct. 22 the joint Senate-House committee on Federal expenditures, under Senator Byrd, reported that $42,591,000,000 had been expended for foreign aid since V-J Day. This adds up to about $283 for every American man, woman, and child. It almost equals the cost of operating the Federal government for the whole six years preceding the second world war.
Senator Byrd said these figures were up to the minute and covered 28 programs of military and economic aid. However, they didn’t cover other programs that President Truman has in preparation. These are expected to include more foreign arms help, another round of Marshall-Plan assistance, reconstruction funds for Korea, and food for Tito’s Yugoslavia. Any reader curious about such matters will find half a dozen new proposals for giving away American money in almost any day’s newspaper. Giving away American money still seems to be, in fact, the Administration’s main solution for every foreign problem.
Lately, however, the American people have begun to wonder what they are getting for all this money. When they see the dollar weakening on world markets, when they see Britain’s “forward” sterling selling at a premium, when they see our (paid-for) imports exceeding our (partly-given-away) exports for the first month in thirteen years, when they see us losing gold at a rate of about $2,000,000,000 a year, they are beginning to ask just why our officials continue to give away dollars to bridge a gap that has already been closed.
Some of them are beginning to wonder what we are getting in return even for our military-aid programs. Three days before the publication of the joint Senate-House committee report just cited, former President Hoover warned that we “cannot long endure the present drain on our economy.” He bluntly raised the question whether, in view of the actions and statements of their leaders, the nations of Western Europe, outside of Britain, “have the will to fight, or even the will to preparedness.” And he proposed, for one thing, that “we should say, and at once, that we shall provide no more money until a definitely unified and sufficient European army is in sight.”
Still another recent development has emphasized the fact that the more zealous apostles of the Great American Giveaway in the last few years have not known what they were about. It is only a few months ago that the European Payments Union was started with great fanfare to solve all the problems of intra-European trade. It was on this argument that Congress was persuaded to throw $600,000,000 of American money into the scheme. And now it is found that West Germany has used up in three and a half months all the credits allotted to it for an entire year’s operation of EPU. The union is “faced with a major crisis.” And the suggested solution is that America throw in more dollars.
The real trouble, of course, is that the European Payments Union is a needless and amateurish piece of bureaucratic gadgetry set up on an unsound basis. (See the analyses in this column of March 27 and April 10.) The real solution of the problem with which the EPU was supposed to deal was not still more bureaucratic machinery but the simple abolition of exchange control. This would have brought at once the full and free convertibility of currencies and the expansion and balance of foreign trade that the EPU has failed to achieve.
The final irony of most of our government giveaway programs is that their effect, on net balance, has been to set back, not to advance, world economic recovery and production.
November 13, 1950
How big a national debt can we stand? What will happen if it ever exceeds that figure?
One of the strangest things about these questions is that they are still being put in the future tense, as if nothing important had happened up till now. A typical letter I frequently get reads something like this: “Years ago economists told us that the nation couldn’t stand a debt of more than $50,000,000,000. But now the debt is $257,000,000,000, and we seem to be doing OK. What about it?”
Congress, it is true, has frequently set a so-called legal debt limit (which could have served a real function as a danger signal), but has as frequently raised the limit as soon as it was approached. Thus in the Second Liberty Bond Act of 1917 it set a legal debt limit of $45,000,000,000. It increased this to $49,000,000,000 in 1940, to $65,000,000,000 in 1941—and it is now set at $275,000,000,000.
The sad truth is that our government has already exceeded the safe debt limits of the past. It has already in practical effect done what a bankrupt—government or individual—always does, which is to make only a partial repayment—to pay its debts off at only so many cents on the dollar.
In form, of course, our government has paid off its debts 100 cents on the dollar, and will doubtless continue to do so. It has reduced its repayment in substance, however, by depreciating the dollar itself, the unit in which the debt is measured. According to official index numbers, the purchasing power of the dollar in terms of consumers’ prices is today only 57.5 percent of its purchasing power in 1935 to 1939. In other words, a citizen who bought a government bond at par in 1935–39 gets back today in real purchasing power less than 58 cents for every dollar he invested. In still other words, he has taken a real capital loss of more than 42 percent.
We have been following, in fact, precisely the course governments have followed from time immemorial in melting down their internal debts. In The Wealth of Nations, Adam Smith, of laissez-faire fame, wrote in 1776:
“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.
“The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment. . . . [In 1776 most governments had not yet learned the easier trick of printing paper money instead of coining hard metals.] A pretended payment of this kind, instead of alleviating, aggravates in most cases the loss of the creditors of the public.... It occasions a general and most pernicious subversion of the fortunes of private people; enriching in most cases the idle and profuse debtor at the expense of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those which are likely to dissipate and destroy it.
“When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”
Smith then proceeds to recite examples of such “juggling tricks” of currency depreciation from Roman times on. He describes in effect what is happening to our own Federal debt today. It is too late to forestall “bankruptcy” of the United States. Our problem is to prevent such bankruptcy from going any further than it has.
November 20, 1950
Though Congress has pledged itself to enact an excess-profits tax, it is fortunate that an interlude for sober thought—and a sobering election—has occurred between pledge and passage.
The term “excess” profits is ambiguous. It may refer either to the excess of wartime over peacetime profits or to the excess of profits over a so-called “fair” return. We must distinguish at the beginning, therefore, between what Senator George (Democrat, Georgia) has called a “true war-profits tax” and “establishing a precedent for a permanent [peacetime] excess-profits tax.”
To penalize high profits as such is basically hostile to private enterprise. Any standard of “fair” profits must be purely arbitrary and is based on complete ignorance of how the private-enterprise system works. For it is precisely the differences between profit margins that bring about a dynamic balance of production among thousands of different items, that reward efficiency and foresight and penalize inefficiency and poor judgment. To destroy profit differentials, to punish high profits per se, is to destroy the productivity foundation of the free-enterprise system.
But even the attempt to take away only the so-called “windfall” profits that accrue as a result of war, desirable as this goal may seem from a moral standpoint, faces formidable practical difficulties. Unfortunately there is no certain way of identifying specifically “war” profits and segregating them from “normal” profits.
The usual method has been to regard the average profits of the three to five years before the war as “normal peacetime profits” and to apply the war-profits tax to any excess above this. What we are really trying to tax in wartime is not the excess of wartime profits over past peacetime profits but the excess over what present profits would have been if there had been no war. This must at best be guesswork.
It is easy to see how unfair such a standard could be in many cases if applied to the individual income tax. Paul, let’s say, had a salary in 1949 of $5,000. Today he has a better job and a salary of $7,500. The increase may or may not be the result of the fact that the country is at war. Peter had a salary of $8,000 in 1949 and has the same salary today. Are we to take Paul’s increase of $2,500 away from him as “war profiteering” or tax it at such a rate that Paul would be paying a higher total tax on his $7,500 than Peter pays on his $8,000? Are we to penalize Paul for his $7,500, simply because he is not used to getting that much?
Yet this is the principle that an excess-profits tax applies to corporate earnings—which are merely pooled individual earnings. The presumption that the excess of any particular corporation’s earnings today (or in 1951) over those of 1946 to 1949 can be wholly attributed to war or rearmament is no more reliable than in the case of an individual’s earnings. The earnings of a new industry, such as television, would in any case have shown a spectacular growth. Even a company now working on direct wartime orders might conceivably have had bigger peacetime orders instead.
An excess-profits tax, in short, rests on a hit-or-miss presumption. And there is a more serious objection to it, especially when the rate is excessive. In the second world war “excess profits” were subject to a tax of 95 percent (with a refund of 10 percent of the tax after the war). This meant that the government took 85 to 95 cents out of every dollar that a company saved by economies, leaving only 15 cents to a nickel of it for the company itself. This all but destroyed the normal incentives for economy and efficiency. It led to inflated expense accounts and caused companies to hoard labor and materials without worrying about costs. In short, it reduced total civilian and war production at the very time when it was most essential to maximize such production.
Under a high excess-profits tax the government loses more on the side of expenditures than it gains on the side of revenues. If we must have an excess-profits tax, let the rate be moderate; and let us get by other means the further revenues we may need.
November 27, 1950
One of the great ironies which future historians will observe about our time is that the American free-enterprise system, which out of its unprecedented productivity was subsidizing the controlled economies of Europe, was not only being criticized by the recipients of its charity as being ridiculously out of date, but was itself shamefacedly trying to make amends by starting to imitate the very socialistic systems it was having to support.
One is reminded of this situation by an article by Prof. Wilhelm Röpke of Geneva in a new quarterly published in Frankfurt, Zeitschrift für das Gesamte Kreditwesen, available in an English translation under the title The Journal of Finance and Credits. Dr. Röpke’s article exposes the delusions behind a policy of so-called “full employment.” His description of this policy as it exists in Europe applies with uncanny accuracy to the American imitation of it:
“The measures envisaged include a continuous reduction of the interest rate; deficit spending; in case of need, large-scale public works financed by the creation of credit; the heaviest of taxation on the classes with higher incomes and great wealth, with the object of restricting savings, which are so much feared; encouragement of demands by the trade unions for increased wages, and so forth.”
This policy, which has been pursued by Britain and by nearly every Western European country (with the exception of Belgium, Italy, and Switzerland), puts continuous “full employment” before every other consideration. And its apostles use that phrase to imply that there is no other way to reach their goal except by the inflationary policies just outlined.
“Full employment” is desirable, of course, in the sense that no one wants involuntary unemployment with its consequent loss of income. But “full employment” is not the sole end of human activity. It is not even the primary end. The primary end of economic action is to maximize production. “Full employment” is only a means to the end of maximum production for the satisfaction of human desires. It is one of the central errors of the zealots for “full employment” that they subordinate ends to means.
This initial error is only the first of a chain, and of a series of self-contradictions. It is the “full employment” philosophers who complain most of “chronic private underinvestment.” But it is precisely the same group who most vigorously applaud government policies that paralyze the desire to invest. These policies include stiff taxation of successful investment, ruthless exploitation of the monopolistic position of labor unions, special subsidies at the general expense, threats of ever more socialization, currency manipulation of various kinds, a contempt for private property, arbitrariness and an abandonment of all firm economic principles by governments. Though investment is always directed to an uncertain future, and requires the highest degree of optimism and confidence, all these “full employment” policies make investment more and more of a risk, more and more of a game in which one can lose much but can gain only a little.
The full-employment champions, in short, have no faith in a process of continuous adjustments in conditions of liberty and free competition. The policy they advocate finally results in a continuous competition between a wage policy which seeks to push wages upward, and a credit policy which, to counteract the wage policy, seeks to increase employment.
The upshot of all this, as Dr. Röpke points out, is that the final remedy of the full-employmentists for every trouble is to increase the volume of money and credit. Hence “full employment” tends to result in full inflation. This has to be disguised by repressive measures. And so we get the result of “pent-up” inflation.
Dr. Röpke adds a note. “Full employment” policies, in combination with exchange control, result in Europe in the well-known deficit in the balance of payments. “This policy obviously depends on a foreign benefactor being found.”
December 4, 1950
When Gordon Gray was asked by the President last March to study our “foreign economic policies and programs,” there was little doubt concerning what his conclusions would be. He was hardly expected to conclude that the Truman Administration’s giveaway program had been a mistake.
The report contains a few sound recommendations such as the reduction of trade barriers and of farm price supports. It even pays brief lip-service to the idea that future civilian loans and grants “should be substantially less than we have been spending.” But it winds up by urging on net balance bigger and broader foreign giveaway programs than ever. And it endorses every fallacy and misconception behind our existing giveaway program. Gray is no serious reexaminist.
There is not space to analyze or even mention all these errors here, but I should like to touch on a few central ones.
1—Like all previous Administration documents of the sort, it ignores the central fact that every dollar we send abroad to increase the productivity of foreign countries must reduce by at least an equal amount the increase in our own productivity. We can push forward the capital development of foreign countries only by postponing our own. If we donate X dollars for a hydroelectric plant in France we can’t use the same dollars to build a new hydroelectric plant in the United States. Yet the Gray report never once reminds the reader that we cannot give away our cake and have it too.
The notion that America has such a “mature economy” that it cannot profitably absorb any more of its own capital is monstrous nonsense. We could use almost limitless new capital in adding to the quantity and quality of our housing alone.
2—The emphasis of the Gray report is persistently in the wrong place. It doesn’t once recognize and state clearly that the chief obstacle to the capital development of most foreign countries—particularly the much-discussed “underdeveloped areas”—has been their own governmental policies. These policies are hostile to foreign capital—and almost equally hostile to their own domestic capital.
None of the Point Four zealots seem to have stopped to ask themselves the question: If the natural resources are there to be developed, and foreign capital hasn’t yet come in to develop them, why hasn’t it? Private capital goes where it is offered the highest returns or the lowest risks. It goes to the borrowers who most efficiently fill consumers’ needs and have a record of honesty and repayment. That is why private capital tends to provide the most rapid and best balanced world development. Government handout capital, “invested” for political purposes, in the main diverts, distorts, and retards economic development.
3—The Gray report shows no understanding of all this. It even recommends enactment of the bill for “government guarantees of private investment against the risks of non-convertibility and expropriation.” This bill proposes that private foreign investors be allowed to make whatever profit comes from their investment, but that the taxpayers be compelled to pay the losses. Such a proposition has only to be stated plainly to be recognized as preposterous.
Such guarantees, moreover, in effect condone and encourage the very practices they are supposed to insure against. If such government guarantees do not exist, private capital will flow, as it should, only to those countries that have proved by their actions and record—and not merely by offering smooth assurances or signing “investment treaties”—that they will not interfere with currency conversion and will not expropriate property. For contrary to the tacit assumption of the Gray report, no honest or liberal government is compelled to seize foreign investors’ property or to prohibit foreign investors from converting whatever currency they earn into their own currency—or into any other currency—at the best rates they can get.
There is no room left to analyze the dubious assumptions the Gray report makes about financial military aid to foreign governments. But that can be done at a later time.
December 11, 1950
Over the past five years, the American public has been repeatedly told by the bureaucrats who were throwing its money all over the globe that they were “buying peace.” Every question was dismissed with the breezy answer: “You can’t expect to buy peace cheaply! What we’re getting for the $43,000,000,000 we’ve spent on foreign aid since V-J Day is the biggest bargain this country ever bought!” Passing over the question whether peace can in fact ever be bought with dollars, the American people now see, in Korea, just how much peace they got for their foreign-aid money.
I devoted last week’s article to some of the central fallacies behind our foreign civilian giveaway program. Now let’s look at “arms aid.”
We have already given to Western Europe—as we should have done—a guarantee of our military intervention in case it is attacked. This is in itself a tremendous commitment, unprecedented in our history. We also lightly and casually made similar promises in a dozen remote places of the globe. The one to Korea, for example, was considered of such negligible importance that most Americans never heard of or remembered it until June 25. We have already paid a tremendous price for that unweighed promise and still do not know the total price it will cost us to carry it out. Should we start adding still further commitments when we are not sure we can fulfill those already made?
Unless we attach strict conditions, we may only be deceiving ourselves when we transfer foreign aid from civilian to military projects. The mere fact that our funds are “earmarked” for this or that specific purpose is meaningless. If we pay for part of the military programs of Europe, and these programs are no larger than they would have been without our aid, then our dollars or equipment have merely released that much of the European governments’ own funds for other purposes—say for “welfare” programs or to pay the deficit on nationalized industries. Our contribution has not really gone for defense unless these governments spend the whole of it on defense above the amount they would have spent on defense anyway. And there is of course no certain way of determining what this latter figure would have been.
The contention that we must make heavy gifts of money or equipment to Europe for defense is not primarily military but economic. It rests on the assumption that Europe cannot afford to arm itself. (The Gray report, in fact, warns that we mustn’t push Britain to arm too fast, even with our aid, lest it put too much strain on the pound sterling.) The assumption that European nations cannot afford to arm themselves is untenable. What they are arming against, in fact, are nations with incomparably lower living standards than their own. If Communist aggressors divert enough resources to threaten, Europe must divert enough resources to survive.
If we continue to extend foreign arms aid, we must safeguard it with far stricter conditions than in the past. At least three suggest themselves:
1—The nations of Western Europe are in far greater peril from Russian aggression than the United States. Yet they have been spending an average of only 5 percent of their national incomes on defense and an average of only 18 percent of their governmental budgets (as compared with 36 percent in the U.S.). We should insist that most of the countries receiving arms aid devote a far larger percentage of their incomes and governmental budgets to their own defense.
2—As former President Hoover has insisted, we should “say, and at once, that we shall provide no more money until a definitely unified and sufficient European army is in sight.”
3—We should not give any more military (or civilian) funds to any country that fails to send at least token aid in the Korea conflict. The emergency we have been paying to guard against is already here. If these countries are not willing to fight on our side now, we are not justified in giving them more money in the thin hope that they may be fighting on our side in the sweet by-and-by.
December 18, 1950
The first response to the Korean debacle in Washington, in terms of domestic economic policies, was far from encouraging. It was the hasty passage in the House, by an overwhelming vote, of essentially the Administration’s form of the so-called “excess-profits tax.” The only merit of this tax (especially in the form in which it was passed) is that it carries a specious political label that few have courage to stand up against.
The tax itself will hurt, not help, war production. It will breed wastes and extravagances to offset the revenues it ostensibly raises. It will be inflationary compared with any of its alternatives. It will penalize new firms and industries compared with established ones. It will not impose taxes in accordance with present relative incomes but only in accordance with the relationship of these to past incomes. The principle is so bad that practically no one has seriously suggested that it be applied to personal incomes. Yet the income of corporations is merely the pooled income of individuals.
But there has been a note in the recent economic news from Washington that is even more ominous than this. It is the open abandonment of the Administration’s previously proclaimed (though never followed) pay-as-you-go tax policy for financing rearmament. Congressmen and Administration officials are now blandly saying that of course it will be impossible to finance war production on the scale now needed except by monetary inflation.
This argument rests ostensibly on the size of the sums now contemplated. The new military appropriation of $18,000,000,000 for which President Truman has asked would raise total military appropriations to $49,000,000,000 in the current fiscal year. There is talk of a total budget in the neighborhood of $75,000,000,000 in the 1952 fiscal year, and Secretary Snyder is already predicting a deficit in that year of $10,000,000,000 to $15,000,000,000.
The politicians who think that monetary inflation is now either “unavoidable” or preferable to its alternatives simply do not know what inflation is or what it does. Inflation is not a way of avoiding taxation; it is itself a form of taxation. It is tantamount to a huge sales tax on all commodities, with the rate as high on bread and milk as on jewelry and furs. It is equivalent to a flat unprogressive income tax, without exemptions, on rich and poor alike. It is a flat unprogressive capital levy on all savings accounts, life insurance, government bonds.
And yet those who are blandly proposing this are the very people who still fight tooth and nail against the merest suggestion of a more broadly based income tax, or of excise, sales or expenditure taxes, and who pretend that they want to tax only “the rich” or “the war profiteers.” They favor inflation because it disguises the realities (perhaps as much for them as for its other victims) under endless illusions.
Given a certain maximum production, the civilian population, the consumers, must be deprived of whatever production or consumption is diverted to the war effort. When this is done through honest and outright taxation, taxes take away the same amount of money from the consumer that they turn over to the government. When it is done through monetary inflation, the consumers’ real deprivation is not lessened in the slightest degree. Its incidence is merely far more haphazard and unfair. The average citizen’s nominally higher income is far more than offset by higher living costs. The government too is deceiving itself, for it must spend far more money for the same war preparedness.
In the long run, inflation only increases the real deprivation of the taxpayer. It draws attention away from the government’s failure to slash needless expenditures—which Senator Byrd has estimated at $10,000,000,000. It leads to a demand for price and wage controls, which cannot offset the inflation but merely abridge economic liberties while they reduce, distort, and disrupt production.
There is no magic in inflation except the magic of self-deception. It leads in the end to chaos and collapse.
December 25, 1950
The President’s proclamation of a “national emergency,” however well intended, is a rhetorical gesture that creates more problems than it solves. It will not of itself produce a single additional gun, tank, or plane. It serves no other purpose than to give more powers to an Administration that has not known how to use the huge powers it already had. It was not needed to “arouse” a country already more aroused than Washington.
The phrase “total mobilization” is also a rhetorical solution based on a false analogy. “Mobilization” has hitherto meant the actual assembly of armies for war. It is now being used metaphorically to mean the imposition of rationing, price fixing, and wage fixing. Such controls do not “mobilize” anything. They reduce, unbalance, and disrupt production, and tie the economy up in bureaucratic red tape.
We have once more stumbled into price control by a chain of blunders and bad thinking. On Dec.7, Alan Valentine, Administrator of the Economic Stabilization Agency, asked Ford and General Motors to rescind the price increases on their 1951 passenger automobiles until his agency could examine and determine “the entire question of price.” Both refused. Henry Ford II pointed out that the proposal was discriminatory. General Motors pointed out that its new prices were less than 5 percent over its pre-Korean-war prices, though the increase in its wages and raw-material prices had ranged from 7 to 300 percent, and “no stabilizing action has been taken regarding the prices of these materials.” These replies were good as far as they went. But they did not point out that the chief cause of inflation was the government’s own spending, deficit, and monetary policies. Nor did they emphasize the absurdity of “fighting inflation” by beginning with automobile prices. Here was a government which was not only failing to hold down food prices, but was still deliberately boosting food prices, not only through monetary inflation but by creating artificial shortages and “supporting” the prices of eggs and potatoes. And its first concern was not to reverse these food policies but to protect the poor from paying too much for Lincolns and Cadillacs!
Government price control is inevitably political, and such absurdities are not accidental but systematic. Politicians are afraid to hold down wages for fear of losing the labor vote. They are afraid to hold down food prices for fear of losing the farm vote. They will hold down rents, in war or peace, because the tenant vote is bigger than the landlord vote. And “the big automobile companies” are of course easy political targets. It is naïve to put the power to fix prices in the hands of politicians and expect that power not to be used as a discriminatory political weapon.
But even if the Bernard Baruch dream of completely “nonpolitical” price control could be realized, it would still be harmful economically. The “selective” price control that Mr. Truman wishes to begin with must lead inevitably into overall price control. And overall price ceilings must unbalance and disrupt production.
Price control never offsets inflation; it increases it. It directly discourages production, encourages consumption, and intensifies shortages. It helps to lull the public until too late into believing that “inflation” is being “controlled.” It draws public attention away from the real cause of inflation, which is the government’s own creation of more money and credit. If the public can be led to believe that the culprits are private “profiteers,” then it will not demand the reduction of wasteful public spending, the termination of bond-pegging, the increase in interest rates, and the overall control of credit which are the only real cures for inflation.
Politically, President Truman’s radio address was conciliatory in tone and in parts courageous. He was sincerely trying to act in the national interest. But his proposed economic program can only lead on net balance into muddle and disorganization.
- 1C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 2Loyal 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.
- 3“For Your Information,” Newsweek (12 July 1954), p. 1; Henry Hazlitt, Economics in One Lesson (New York: Three Rivers Press, 1988).
- 4Newsweek’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.
