Business Tides
The Limits of Taxation
January 7, 1952
How much taxation can our economy stand? This question will become more insistent than ever when Mr. Truman presents his new budget.
One of the latest efforts to answer it appears in a pamphlet published by the United States Chamber of Commerce under the title: “How Much Can Our Economy Stand?” The pamphlet calls attention to some startling facts.
For the three fiscal years, 1952 through 1954, government expenditures will take on the average approximately one-third of each dollar of the income of every person in the country.
Though Mr. Truman, in his budget message last year, stated that the government “must practice rigid economy in its nondefense activities,” he went on to advocate nondefense expenditures higher than in any previous year in our history and nearly double those of the fiscal year 1948.
To analyze a $57,000,000,000 military appropriation, the Senate Appropriations Committee had the assistance of only one technical staff member.
Personal income taxes now range from 22.4 percent on the lowest bracket to 92 percent on the highest.
According to Secretary Snyder’s estimates, there is $68,000,000,000 of personal income available for additional taxation; but more than 73 percent of this amount falls in the income tax bracket of less than $2,000.
If the government seized all personal income above $6,000 it could not get more than $6,500,000,000 additional revenue. This would fall nearly $1,000,000,000 short of this year’s foreign-aid program alone.
The corporation income-tax rate, which never exceeded 40 percent during the second world war, was raised by the 1951 Tax Act to 52 percent. In addition, an excess-profits tax takes 82 percent of corporation earnings in excess of 83 percent of the average of the best three years from 1946 through 1949. Federal taxes can run as high as 70 percent of a corporation’s total earnings.
The Canadian Minister of Finance, D.C. Abbott, said in April 1951: “I am not happy about corporation tax rates when they go over 50 percent. . . . It would be only too easy to take a superficially popular line and increase these taxes to a point which while yielding larger immediate revenues would do great damage in the longer run to the economy as a whole.”
Heavy progressive taxation in the United States is retarding capital formation and the growth of production. Until the past decade our productivity per man-hour increased about 2.5 percent per year. Since 1940, however, the rise in productivity has been below the long-term trend.
The Chamber’s pamphlet concludes that our present tax programs penalize saving and risk-taking and destroy the incentives to work. This conclusion carries additional force if taken in connection with a study made by the Australian economist Colin Clark in the (London) Economic Journal of December 1945. There, as the result of a survey of a large number of countries which he summarized in impressive tables, Clark concluded that “the critical limit of taxation is about 25 percent of the national income, or possibly rather less.” That conclusion was based, as he has since written, “not upon theoretical considerations but upon a study of the actual experience of attempts which had been made, at various times and places, to exceed this limit.”
A 25 percent limit is, of course, purely empiric, not “scientific.” The factors involved are so complex, indeed, that the precise limit to taxation under all conditions is probably indeterminable. Yet Clark’s statistics do, as he declares, “appear to give very considerable support to the hypothesis that once taxation has exceeded 25 percent of the national income (20 percent or less in certain countries), influential sections of the community become willing to support a depreciation of the value of money,” the political forces making for inflation become irresistible, and production is seriously undermined.
We urgently need further statistical studies of the limits of taxation. 
January 14, 1952
As I have pointed out in this column before, the distinction between “economic” aid and “arms” aid to Europe is in practice very questionable. Any money or material we give to a European government for any purpose, however specifically earmarked, can simply release that much of its own funds for other purposes. The only way we could make sure that no such diversion of resources was taking place would be to dictate and supervise every item of that government’s budget—which no one dares to propose.
Here are this fiscal year’s armament expenditures of our aid beneficiaries stated as a percentage of (1) their gross national product, and (2) their total governmental expenditures. Our own record is compared.
Defense Expenditures
| Country | % of G.N.P. | % of T.G.E. |
| Belgium-Luxembourg | 5.3 | 20.7 |
| Denmark | 2.7 | 18.0 |
| France | 9.3 | 32.2 |
| Italy | 5.0 | 26.7 |
| Netherlands | 7.0 | 24.0 |
| Norway | 5.0 | 22.2 |
| United Kingdom | 9.6 | 29.5 |
| Greece | 8.3 | 27.5 |
| Turkey | 5.4 | 25.2 |
| United States | 14.0 | 68.0 |
The United States, in short, is spending on armament not only more than five times as much absolutely as these other nine nations combined ($47,000,000,000 against a total of $8,600,000,000); but it is spending for more relatively—14 percent of its gross national product compared with an average of less than 7 percent for the nine beneficiaries.
Now many Europeans contend that this is just as it should be. They would impose a sort of international progressive income tax. Prof. James Meade of the London School of Economics advocated this explicitly in the October 1951 issue of Lloyds Bank Review: “The United States, with its higher real income per head, should contribute a higher proportion of its national income to the common defense. Indeed, it is inevitable that the progressive principle should be adopted.
Baldly stated, this is the view that the man or country that works more, saves more, and produces more somehow owes part, if not half, of the difference to the man or country that works less, saves less, and produces less. The London Times has carried the “progressive principle” to even greater lengths. “If it is true, as; seems likely,” it wrote on Dec. 19, “that Britain’s [armament] effort is the maximum that is possible economically, and the United States effort is the maximum that is possible politically—for there can hardly be any economic limits to her capabilities. . . .” In other words, no burden can possibly be too big to lay on our taxpayers.
But the second percentage column of the foregoing table is even more significant than the first. The United States is devoting 68 percent of its total Federal expenditures to armament. (Or 75 percent, if our foreign arms-aid program is included.) This means that only 25 to 32 percent of our total government outlay goes for nondefense items. But the arms-beneficiary countries are spending an average of only 25 percent of their total budgets on defense, which means that they are spending 75 percent on nondefense items. They are robbing their own national defense at the cost of comparative luxuries. It is their nondefense expenditures that are responsible for three-fourths of their economic strains and inflation.
Why must American taxpayers pay $5,200,000,000 for Europe’s defense? Why cannot the Europe’s arms-beneficiary governments reduce their nondefense expenditures from $21,400,000,000 to $16,200,000,000, and themselves add the difference to the modest $8,600,000,000 they are spending for defense? Why, because European politicians prefer to spend money on deficits for nationalized industries, food subsidies, socialized medicine, pensions, and other handouts calculated to snare votes at home, should the American taxpayer be called upon to dig in his pocket for what these politicians refuse to pay for their own nations’ defense?
January 21, 1952
The most promising approach in a long time to the Federal budget problem is the resolution introduced by Rep. Frederic R. Coudert, Jr., Republican of New York, to limit total expenditures in the coming fiscal year to revenues from present taxes.
If this resolution were passed and adhered to, it would end deficit spending and the inflation that flows from it. It would put a maximum ceiling on overall expenditure for the 1953 fiscal year of, say, the $70,000,000,000 now estimated as the probable tax receipts under existing tax laws; and if the President asked for a total of $85,000,000,000, Congress would send his budget back and require him to submit a new one with $15,000,000,000 slashed from it.
This should not be treated as a partisan proposal. It has already had the endorsement of Lewis W. Douglas, onetime Director of the Budget under Franklin D. Roosevelt and our former Ambassador to Great Britain. It is an essential first step if Congress is to reclaim the reality of its power of the purse under the Constitution.
But passage of the Coudert resolution, or one essentially like it, would be a first step only. To make it most effective it would need to be supplemented along the lines indicated in this column (Newsweek, Dec. 24, 1951). Not only should Congress limit the President each year to a total overall maximum expenditure, but it should continue, as in the past, to require him to get separate authorization for each special purpose. And the President should not be allowed to spend the whole of these separate authorizations if their total exceeded the overall maximum Congress had previously fixed. He would have to make his own specific cuts (but be permitted no specific increases) to bring the sum of the special authorizations within the authorized overall total. In other words, he could spend only whichever sum was lower.
This double limit would permit Congress to say in effect: “If we are to avert further inflation our government, like everyone else, must live within its income, X billions of dollars is the largest tax burden that can safely be laid on the American economy at this time without destroying incentives and disrupting production. Our government must keep its total expenditures within that sum. We in Congress are seldom in a position to know precisely what specific sum is necessary for each specific purpose or what precise amount can safely be cut from each specific request. We are therefore often compelled to give the President the benefit of the doubt on specific authorizations. But we do know that the American economy cannot stand more than the overall ceiling we have fixed. It is up to the President to make his own detailed cuts; but he must cut his suits to fit his available cloth.”
Congress could not use this plan to evade its own clear budget responsibilities. If it first fixed an overall expenditure ceiling of, say, $70,000,000,000, and then went on to authorize a series of special appropriations totaling $80,000,000,000, including pet projects of its own not asked for by the President, it could not reasonably complain if the revised budget presented by the President cut out all the projects or increases added by Congress or (what might be even more serious) included all the authorized pork-barrel or inessential expenditures but applied the whole required cut to some essential activity with the straight-faced argument that the overall total permitted by Congress did not allow enough funds for it.
The double-limit plan, in short, though it would put more specific responsibility on the President, would fail if Congress tried to use it to evade its own legitimate responsibilities.
But what is immediately essential, regardless of the procedure used, is that total expenditures for the new fiscal year be kept at least within the revenues that would be raised by existing taxes. The only alternative is a further wave of inflation whose fateful consequences cannot be foretold. By every calculation of possible yields from still higher income-tax rates, by every test of a tolerable burden, the tax ceiling has already been reached.
January 28, 1952
At this time of year the conscientious congressman or editor, or for that matter any conscientious citizen anxious to “keep abreast of things,” has an enormous amount of homework to do. The President dumps in his lap three messages—on the State of the Union, on the Budget, and on the Economic Report. The first anyone can usually assimilate; it is comparatively short, and read by the President in person. The budget message is a necessary evil. But at least we could be spared the economic report. Its information is secondhand. Its chief recommendations are and ought to be found in the other two messages. And the rest consists mainly of giving “scientific” and “economic” reasons for what the President has done or wants to do for political reasons.
The economic report, in brief, is Administration propaganda paid for by the taxpayers, and it promulgates more fallacies than the rest of us have time to answer. The latest opens with the declaration that; “The past year has been marked by great gains in our basic economic strength.” The unwary reader might be led to suppose from this that the ideal way to increase our economic welfare is to have an immense diversion of men and resources to war and armament.
On the next page we learn that “Our total [1947] output, measured in 1951 prices, was more than $90,000,000,000 higher than in 1939.” Our curiosity piqued by this, we turn to tables in the rear, and find that our 1939 total output, measured in 1939 prices, was $91,000,000,000. But measured in 1951 prices it was $179,000,000,000. So we have increased the total output even of 1939 by $88,000,000,000, simply by changing the measuring rod! We can get our national income up to any figure merely by depreciating the dollar.
We are not surprised to learn a little later that “true economy” is something vastly different from economy. True economy means “the making of necessary outlays,” and all of Mr. Truman’s proposed $85,000,000,000 of outlays are of course necessary. And anyway, it is better “to run a deficit of limited size and duration in the Federal budget” than “to run a deficit in our national security effort.” And much more semantics of the same kind.
The truth is that all three messages are profoundly disheartening. They contain no acknowledgment anywhere that inflation is caused by the government’s own policies of reckless spending, deficit financing, low interest rates, using the Federal Reserve Banks as a dumping ground for government securities—in short, of increasing the supply of money and credit. Instead, on top of unparalleled armament and civilian spending, Mr. Truman can think only of still more spending—subsidized housing, socialized medicine, Federal aid to education, bigger social-security payments, bigger “public assistance,” bigger veterans benefits, the St. Lawrence Seaway and power project, bigger farm price supports, bigger handouts to Europe, bigger handouts to the “underdeveloped” countries.
And after asking for all these expenditures that increase inflation, he promises to “control” and “contain” inflation by the fraudulent, dangerous, and disruptive device of price control. He asks, in addition, for still more strait-jacket controls over the economy. Not once does he promise to halt inflation—by simply ceasing to create more money and credit.
Not only does Mr. Truman show no understanding of inflation. He shows no understanding of how and why wealth is created. His cure for the bottomless poverty of Asia, like his cure for everything else, is more handouts from the U.S. Treasury. This, he tells us, will avert “stomach Communism,” The phrase is revealing. It implies that Communism is a cure for empty stomachs rather than a cause of them. The real cure for empty stomachs is capitalism. It is economic freedom that brings maximum production of food and clothing and housing. And not until the “underdeveloped” nations understand and adopt a free market economy will they emerge from their misery.
February 4, 1952
For the last eighteen years, whenever a congressman or a mere taxpayer has ventured to express concern about the ever-mounting total of Federal spending, he has been promptly squelched by some Administration spokesman with the rhetorical question: “Where would you cut?”
The question is seldom asked as a sincere quest for information. It is a taunt, uttered in the assurance that there are certain politically sacrosanct causes, and that none will dare question the amount of any expenditure made in the name of such causes. The sacred word in Washington today is “defense.” In our cities it is “education.” In England it is “full employment.” Any private business that tried to run its budget on this incantation basis would soon be on the rocks. And so, eventually, will a government.
The basic fallacy involved in the question “Where would you cut?” is that it assumes the burden of proof to be on those who wish to make economies. But the real burden of proof obviously belongs on the executive who proposes the spending. It is his job to make a positive case for every dollar of that proposed spending. And in the whole fantastic new budget of $85,400,000,000 there are very few places where this positive case has been seriously made. Mr. Truman’s defenders seem to think it is enough to say of any questioned item: “Secretary Brannan has asked for it,” or: “The Army has asked for it.” But no private firm could afford to assume that a mere unsupported request was a sufficient reason for increasing the spending budget of one of its departments.
Mr. Truman asks, for example, the tremendous sum of $10,500,000,000 for “military, economic, and technical assistance” to foreign governments in the next fiscal year. He demands this huge sum on familiar rhetorical grounds: “We cannot . . . isolate ourselves from threats to other free men,” etc. But he never tells us why the amount should be $10,500,000,000, nor why the NATO governments of Europe cannot pay more than $8,600,000,000 this year for their own armament, though they manage to find $21,400,000,000 for nondefense expenditures, largely socialistic. (See this column Dec. 10, 1951, and Jan. 14.)
Those who assert it is the responsibility of Congress rather than the President to bring spending down to a bearable level by cutting the budget item by item have simply never stopped to consider what this would mean. The $85,400,000,000 for which Mr. Truman asks is the aggregate amount to be spent by 1,252 different organizational units. How can Congress determine to exactly how much, if anything, each of these 1,252 spending or getting units is entitled? Particularly when the individual budget of each one of these agencies or categories is in turn usually made up of hundreds of items?
What we do know is that wherever Congress has pried into the details of the present Administration’s spending it has almost invariably found gross waste. On Dec. 11, for example, House investigators found that the Army had ordered enough front-axle housing gaskets for jeeps to last more than 104 years, enough engine valve tappets to last for 79.4 years, enough engine clutch washers to last for 84.7 years. And so on. This is a tiny sample of the waste. It is simply impossible for Congress to go into an infinity of such grisly details.
The individual taxpayer, in brief, is seldom in a position to say precisely where the budget should be cut, but he can say how it should be cut. We will not have an orderly and responsible budget until we reform our entire budgetary procedure. (See this column Dec. 24, 1951.)
But the first and indispensable step is for Congress to adopt the Coudert resolution. It should send Mr. Truman’s unbalanced and irresponsible budget back to him with the request that he submit a revised budget cutting his proposed $85,400,000,000, of spending down at least to the $71,000,000,000 of revenues expected under present tax laws. If the President declines this opportunity to use his own scalpel, he can hardly complain if Congress applies a meat ax.
February 11, 1952
One of the grounds of the steel-workers’ union demand for higher wages before the War Stabilization Board is “increased productivity.” The new wage pattern set by the WSB decision will ostensibly apply only in steel, but precedent may impose it on all industry. The principle of “annual improvement” increases in wages therefore deserves far closer scrutiny than it has hitherto received.
1—Most of the clauses in wage contracts providing for “productivity” increases are fraudulent, because the specified annual wage increase must be granted unconditionally, whether or not the anticipated increase in productivity actually occurs.
2—Virtually all labor operates with tools or machines of some sort. There is no such thing as pure “labor productivity”; there is only combined labor-land-capital productivity. The production ascribable to labor cannot be physically separated from the production ascribable to machines.
3—An increase in the productivity of a particular machine, plant, company or even industry does not necessarily imply a general increase in productivity. Or vice versa. The Bureau of Labor Statistics has estimated that from 1939 to 1950 productivity per man-hour (which in longhand means man-machine-method-management hour) went up 23 percent in the bituminous coal industry but down nearly 13 per sent in anthracite. Would John L. Lewis favor, say, raising wages 23 percent in the bituminous mines and cutting them 13 percent in the anthracite mines?
4—The overall increase in man-hour productivity is very difficult to measure. An estimate hitherto widely accepted among statisticians is that in the long-run past, productivity has risen about 2½ percent a year. But there is little evidence that this rate has held in recent years. Estimates recently released by the Manufacturing Census of 1947 show that the physical output of manufacturing was 84 percent higher in 1947 than in 1939—using 1939 “weights”—and 69 percent higher using 1947 weights. But man-hours in manufacturing increased in that same period by 68 percent. Therefore, using 1939 weights, productivity per man-hour increased only 9½ percent in those eight years, or at an annual rate of barely more than 1 percent. And if we use 1947 weights we find no increase in productivity per man-hour at all! Yet vast sums of capital were invested in that period in new tools.
5—Between 1939 and 1947 straight-time hourly earnings increased 89 percent, and gross hourly earnings 95 percent. In the same period wholesale prices of manufactured products rose 82 percent. In the absence of a real increase in physical productivity, higher hourly wages can only be paid, in the long run, out of higher prices.
6—Throughout our history, competition and the free market economy have been solving, infinitely better than any bureaucrat could, the problem of how the gains of increased productivity should be distributed. To the extent that added productivity has been brought about by an increase in the individual worker’s own effort or skill, the gain has gone directly to the worker. To the extent that the gain has been brought about by more capital investment (more or better factories and machines) enough of the gain has gone to the investor to pay an adequate return. But any increase of profits to the pioneers and risk-takers has been transitory. In the long run the gains from higher productivity have been diffused through the whole nation in the form of lower prices than otherwise to consumers. In other words, we have increased the ratio of wages to prices.
7—The proposition that the whole increase in productivity brought about by a new or better machine should go to the particular worker who operates the machine is absurd on its face. It completely contradicts the principle of equal pay for equal work. Its application would give no incentive to any investor or employer to buy or build a machine, no incentive for progress, no gain for consumers. It would not merely be inflationary, but reactionary and disruptive. And no one would be worse hurt by it than labor itself.
February 18, 1952
In the spring of 1947 I was a dinner guest in the home of a Cabinet minister of a European country that shall remain nameless. Generous portions of butter were served. “From the black market,” volunteered my host. “Everybody in this country has to go to the black market for butter; nobody could get along on the official ration.” And he seemed quite forgetful that he was a member of the government that had imposed a price and a ration that he himself felt forced to violate.
He was merely part of what has become an established world hypocrisy. Today bureaucrats try at nearly every point to stop the market process from functioning. Fortunately for production and trade, they are never completely successful. So they denounce the markets that they have illegalized, but cannot prevent, as “black.”
But they have more respect for the black markets than they pretend. This was unconsciously revealed by Sir Stafford Cripps when he slashed the official value of the pound in 1949 from $4.03 to $2.80—and gave as his reason for choosing the latter figure the fact that this was the value the black markets of the world had been placing on the pound!
When free markets are forbidden, black markets become the best and often the only available guide to real values. If they did not exist, moreover, in many parts of the world the most essential commodities would either not be raised, made, bought, and sold at all, or only in far smaller quantities. Millions of people in the world today literally owe their very lives over the last dozen years to the black market, which is the only resort when price fixing has become too absurd, disruptive or intolerable.
It is high time the black market received the recognition it deserves. It gets it with the publication of The 1951 Black Market Yearbook by Franz Pick. Born in Czechoslovakia, educated at the Universities of Leipzig and Hamburg, Dr. Pick in 1945 started in New York a monthly report on world black money markets. His book lists the official and black-market fluctuations in the prices of dollars in the currencies of 54 countries, gold in 33 international trading centers, and of silver, platinum, and diamonds.
The book is dedicated “to the more than 2,000,000,000 victims of inflation, who, for obeying the law, have been punished by the law.” It is full of fascinating tables, graphs, and other information. You can find here that at the end of 1951 the black-market value of the British pound was $2.40 (compared with its official parity of $2.80); that the black-market value of the West German mark was 5.13 to the dollar (close to the official par of 4.20); that the German Eastern zone mark sold at 21 to the dollar; that black markets in American dollars flourish even in draconian Moscow, where the Russian ruble trades at 25 to the dollar (officially it is 4 to the dollar); that the Nationalist Chinese yuan had reached 425,000,000 to the dollar in September 1949; that the Chinese Communist dollar was 38,500 to the American dollar at the end of 1951, but the National Taiwan dollar in Formosa was less than 27 to the American dollar; and that in Cairo, gold sovereigns that bear the effigies of Kings, and not of Queens, are preferred by Mohammedan hoarders.
To these facts and tables Dr. Pick adds his own comments and predictions. His definitions are unconventional: Hoarders are “individuals who have no confidence in the skill of their country’s monetary management, and who prefer illegal ownership of gold or hard currency to the legal expropriation by patriotic possession of paper money.” Devaluation is “the unpunished crime of state bankruptcy.”
Dr. Pick believes that the future of the dollar “is not as rosy as the hoarder in Buenos Aires or Shanghai sees it to be.” He concludes that world inflation is likely to continue, and that “black markets are here to stay,” because “more and more people will disregard existing regulations in order to preserve the remaining value of whatever possessions they may have.”
February 25, 1952
No one seriously expects that Congress will obediently extend price control for two more years, repeal the Capehart and Herlong amendments, and “strengthen” the Defense Production Act by giving the President the still more sweeping discretionary powers he now demands. What seems most likely to happen is an extension of substantially the present or a “weaker” price-control law for another year. But unless this is accompanied by stringent Congressional curbs (which are improbable) on further monetary inflation by Federal Reserve policy, Mr. Truman will have achieved the real purpose of his message, which is both to continue price control and to throw the blame on Congress for any further inflation.
The basic cause of inflation is the increase in the supply of money and credit. This increases most people’s monetary purchasing power, cheapens the dollar, and forces up prices. Not once, however, does Mr. Truman’s message acknowledge this overwhelmingly dominant cause. True, after devoting seven-eighths of his message to the need for “strong price control” as the remedy for inflation, he does get around in the end to “other” (and presumably subordinate) “anti-inflation powers needed to do a completely effective job.” Even here, however, he throws his whole stress on the alleged need for curbing the kind of credit which is least inflationary—consumer installment credit. He says not a word about curbing the overall growth of bank credit, particularly the most inflationary kind, Federal Reserve credit.
What, then, is Mr. Truman’s own theory of the chief cause of inflation? It is almost impossible to tell from his message. He implies reasons that are clearly wrong, and then contradicts even some of these. He talks at times as if inflation were caused by “scarce supplies” of goods. This, however, is contradicted by the Federal Reserve Board, which shows industrial production at an index rate of 218 in January 1952, compared with 199 in June of 1950 and 109 in 1939. Moreover, he himself goes on to point out that “the wholesale price index rose 17 percent in the seven months from June 1950 through January 1951, and the consumers’ price index rose 8 percent”—when, as he adds, “there were no shortages of any kind.”
Then what caused the price rise? According to the President, “consumers” and “businessmen” went on a “buying spree.” But he never asks where they got the extra money for the buying spree. Had those who drafted his message looked up the figures, they would have found that in this same period when wholesale prices increased 17 percent, the country’s bank loans increased 17 percent; and in this same period when the consumers’ price index rose 8 percent, demand bank deposits increased 8 percent! It was this increased bank credit that financed the price rise.
In calling for “stronger” price control, Mr. Truman is particularly outraged by the Capehart amendment, under which price ceilings must allow for cost increases incurred between the Korean war outbreak and July 26, 1951. But his own examples prove how necessary this amendment is, in common fairness, if we retain the folly of price control. One product, he says, had to be granted a 5 percent price increase under the amendment, though the OPS had previously scheduled a 4 percent reduction. But this simply means that without the amendment the OPS would have blindly or ruthlessly imposed a further squeeze in the profit margin of a firm whose profit margin had already been reduced by rising costs!
His whole attack on the Capehart amendment reveals that Mr. Truman wants to use price control to effect a political redistribution of income by cutting profits even below the pre-inflation level to make possible still higher wage awards by the WSB—the “Wage Stimulation Board.”
Price control is a fraudulent “protection” against the money inflation that the government itself permits or creates. Congress should force a halt to any further increase in the money supply, and let price control expire.
March 3, 1952
In this excellent new book, How to Keep Our Liberty (see Books), my colleague Raymond Moley has a prefatory “Note on Terminology.” Like all of us who try to write sense on economic and political questions today, he is troubled by the strange perversions and reversals that have taken place in recent years in the meaning of words: A ‘liberal’,” as he points out, “was once a person who opposed the intervention of the state in the life and affairs of the individual. Now the word is used as self-description by those who favor such intervention.”
So Moley defines his own chief terms in advance. “Interventionism” accurately describes the trend toward a socialist state, but he thinks a shorter and better word is “statism.” He defines it as “a policy or philosophy that advocates a progressive trend of intervention by government in economic, social, and personal life.”
The term with this meaning fills a long-felt need. Moley’s own book, in fact, is largely devoted to counteracting the danger of statism, and we have to identify and label a trend or a philosophy before we can effectively combat it. But as Moley points out: “Recent use of the term [statism], mainly by opponents of the trend, has anticipated the lexicographers.”
I should like to supplement my colleague’s remarks on the word with a few notes of my own, as I happened to play a part in its adoption. I first became acquainted with the term “etatism” in the writings of the Austrian economist Ludwig von Mises, whose great book Socialism I reviewed in The New York Times in 1937. He used the term to mean “the doctrine of the omnipotence of the state, and, as a policy, the attempt to regulate all mundane affairs by authoritative commandment and prohibition.”
Though Mises probably did more than any other writer to establish the term and the meaning, neither was original with him, as I have since learned, but goes back some half a century. It was originally used by French critics of interventionism (état is the French word for state). A chapter entitled Etatism is to be found as early as 1907 in a French book on individualism by Albert Schatz.
But while a word with the same meaning was essential in English, it seemed to me that etatism would be very difficult to popularize or even naturalize. A simpler solution appeared to be to translate “etat” into “state.” But “state,” in this country, is most often used as opposed to “nation” or “Federal.” “Statism” might be thought to mean states’ rights.
These objections did not seem too serious. But next came the problem of spelling—“stateism” or “statism”? The first involved a redundant vowel; the second ran the danger that the “a” would be pronounced, by analogy, like the first “a” in “statistician.” Consulting the dictionaries, however, I found in my old edition of Webster’s New International: “Statism (from State). Statecraft. Obs.” So it was simply necessary to revive an obsolete word with an established spelling and pronunciation and use it in the new meaning. I began using the word in that sense in this column and then in a book Will Dollars Save the World? published in 1947 and condensed in The Reader’s Digest.
Whether I was anticipated by other writers in using the word in this sense I do not know. But there is an interesting epilogue. John Foster Dulles frequently used the term with this meaning in his New York Senatorial campaign of 1949. In the Political Science Quarterly of December of that year, Prof. Lindsay Rogers, puzzled by this use, looked the word up in the dictionary, found only such obsolete meanings as “statecraft,” and assumed that people must be wrongly using it now because they did not know what it meant!
But if the enemies of liberty are allowed to pervert fine words to base meanings, surely the defenders of liberty have a much better right to develop a new word or meaning to describe and identify the great threat to liberty in our time. That threat is statism, the philosophy behind totalitarianism of every brand.
March 10, 1952
Evidence has been rapidly accumulating in recent weeks that inflation has come to a temporary halt. The government’s old index of wholesale prices, which rose from 157.3 at the outbreak of the Korean war in June 1950 to a peak of 184 in March a year ago, had fallen in the week ended Feb. 19 to 174.8. The Dow-Jones daily spot commodity price index, which reached as high as 224.61 in February of last year, and as high as 197.85 in early December, had fallen by Feb. 27 of this year to 186.48. On the stock market, industrial shares have declined sharply since the middle of January.
The break in wholesale commodity prices has been pretty general. It has been particularly severe in grains, and in the metals and raw materials—copper, lead, zinc, wool, rubber—that went up most following the outbreak of the Korean war. The severe shortages of steel, aluminum, lead, and copper that appeared to exist a couple of months ago have been easing or disappearing. Spots of unemployment have developed. And in a few lines—cotton textiles, for example—there is a definite depression.
This decline has been the consequence of several main causes:
1—The expectation in recent weeks that a truce would be arrived at in Korea.
2—The deferment of government schedules on many war items.
3—Recognition that previous fears of shortages had been exaggerated. This has brought a halt to “inventory hoarding.” In addition, the need of corporations for cash to pay income-tax installments, or for other purposes, has been causing them to reduce inventories or to sell part of them.
4—Profit margins are now being squeezed by price ceilings on one side and by higher taxes and higher wage demands on the other.
5—In recent months, the Federal Reserve authorities have ceased to follow inflationary policies.
It is the last factor that needs particularly to be emphasized. The banking system has not for a long time been buying long-term 2½ percent government bonds at par or better. On Feb. 20 the Federal Reserve Banks held $22,400,000,000 of government securities, a reduction of $1,250,000,000 from Jan. 2, and the lowest holdings since May of last year. Interest rates have been allowed to creep higher. The rate on short-term bank loans to commercial borrowers, for example, rose from an average of 2.68 in June 1950 to 3.27 in December 1951. The rate on long-term U.S. government bonds was allowed to rise from an average of 2.33 in June of 1950 to an average of 2.70 in December 1951. Total loans of reporting member banks of the Federal Reserve System were $34,633,000,000 on Feb. 20, a decline of $870,000,000 from Dec. 26, compared with an increase of $278,000,000 in the corresponding period a year ago.
To sum up, what has been taking place is a lull in the inflation. The business and price readjustments that have been occurring are unavoidable whenever an inflation is allowed to come to a halt. If the government is now content simply to let things alone; if it does not start pumping new money into the system; if Mr. Truman keeps Federal expenditures in the next fiscal year to the $71,000,000,000 that he expects to raise from present taxes, and does not embark on a course involving a stupendous deficit of $14,000,000,000; and if the War Stabilization Board does not precipitate a new round of wage increases by its steel decision, the inflation will halt in its tracks.
So the present situation is a test of the sincerity of the Administration, of Congress, of farmers and union members, and of businessmen. If they are really opposed to inflation they will not start taking or demanding desperate measures to keep it spiraling upward. The Administration will not ask for a continuation of price control, for there will be no longer any excuse for it. All that Congress will need to do is to remove the temptation from Federal agencies to start inflating again merely by removing their present powers to do so. (For details, see this column, Nov. 26, 1951.)
March 17, 1952
A year or so ago a leading Mexican banker wrote me that agitation for price control was rising in his country, and that those who favored it were citing the United States as the great example of how successful such controls had been in the second world war. Could I send him a list of the outstanding studies, pro and con? More recently, I received letters from students assigned to the negative of the topic chosen for national intercollegiate debate: “Resolved, that the Federal Government should adopt a permanent [sic] program of price and wage controls.” These students had been referred to some of my Newsweek articles or to my Economics in One Lesson. Could I refer them to further literature against price controls?
The answer was not easy. In favor of government price control there were tons of official propaganda in all languages, and plenty of theoretical fireworks by academic statists and New Dealers. But analyses and documentation critical of price control, except those buried in legislative hearings, were appallingly scarce.
At last, however, a good critical literature on price fixing is beginning to emerge. I should like to speak here of three outstanding recent pamphlets: Price Fixing for Foodstuffs, by Earl L. Butz, head of the Department of Agricultural Economics at Purdue University (American Enterprise Association, 4 East 41st St., New York City, 17); American Agricultural Policy during Rearmament, by Karl
Brandt (Food Research Institute: Stanford University, Stanford, Calif.); and The Price of Price Controls, by the Committee on Economic Policy (Chamber of Commerce of the United States, Washington, 6, D.C.).
Every one of these pamphlets is opposed to price control, and each is excellent in the field it covers. They combine a sound theoretical analysis with telling illustrations and facts. They recognize that inflation is caused primarily by increase in the supply of money and credit, and that the way to halt inflation is to halt this increase. They all point out that free-market prices perform a vital function. “Price is the device that determines how we use our resources and how we distribute our national product. Prices tell producers what to produce and tell consumers what and how much to consume” (Butz). And they explain how price control destroys this guide. They show how price ceilings curtail and distort production, encourage wasteful consumption, create shortages, and necessitate priorities, rationing, and subsidies to make them work at all over any long period. They point out that price control inevitably means profit control and gives a government bureaucrat power of life or death over an industry.
They cite liberally from the absurdities of price control in the second world war. “A lumber producer testified,” says the Chamber of Commerce pamphlet, “that his customers desperately needed one-inch boards, but due to OPA ceilings he could not sell these and break even, but he could sell three-inch boards and make a small profit. His customers were required to recut lumber to their specifications at increased cost.” “Early in 1942 [writes Butz] some farmers were being fined 42 cents per bushel for wheat grown in excess of their quota, at the very same time their neighbors were purchasing ‘feed’ wheat from the government [imported from Canada] which was subsidized approximately 49 cents per bushel.” Butz also points out that retail food prices have risen no more than factory wages since before the second world war.
FOOTNOTE ON ‘STATISM’
Since the appearance of my column of March 3 on “Statism,” a correspondent has pointed out to me that the word “Stateism” was used in a speech in Omaha as early as February 1940 by Herbert Hoover. The former President there contrasted the concept of “Stateism with its political bureaucracy, directing, dictating, and competing with farmers, labor, and business,” and controlling “price, wages, farms, . . . industrial output, and investment,” with the concept of “a free enterprise regulated to prevent abuses.”
March 24, 1952
The whole foreign giveaway program—whether it is labeled “direct military aid,” or “defense support” (the latest euphemism for economic handouts), or Point Four—needs to be completely reexamined. In this task neither Mr. Truman’s message to Congress nor his radio and television appeal to the nation will be found of help. Both appeals were chiefly rhetorical and openly partisan.
Mr. Truman accused anyone who wants to cut his $7,900,000,000 request by even a small amount as “demagoguing in favor of economy.” He resorted to inventing straw men as the only alternatives to his quixotic giveaway schemes. Straw Man No. 1 was to make “premeditated and deliberate war” on Soviet Russia. As no influential group in this country is proposing such a thing, it was recklessly irresponsible for Mr. Truman to feed Communist propaganda by talking as if there were one. Straw Man No. 2 was to “abandon our allies and hole up on this continent.” No influential group is suggesting this either; and it was equally irresponsible for Mr. Truman to give our European allies the false impression that there is such a group and such a proposal.
Neither Senator Taft nor former President Hoover has proposed that we repudiate the Atlantic treaty. And neither of them, nor any other serious person, has proposed that we actually cut off trade and stop buying necessary goods from the European continent. But a responsible body of opinion here has doubted that it is wise or necessary to pour heavy American land forces into Europe in peacetime and to give away as many billions to as many countries as Mr. Truman and his aides recommend. (We have giveaway—i.e., “economic”—missions today in 40 countries.)
Mr. Truman’s message and radio appeal were distinguished by self-righteous rhetoric, gross caricature of opposing views, and a contemptuous absence of facts. He assured the public that his figure of $7,900,000,000 was “not just taken out of the air” but was “the result of many months of careful study.” But in his whole message to Congress he gave not the slightest hint of how the figure was arrived at. How much did the other NATO nations spend, individually and collectively, on defense and other items of their government budgets in the twelve months ending June 30, 1950? In the twelve months ending June 30, 1951? In the current twelve-month period? How much of their own money are they planning to spend for these purposes in the next fiscal year? What is the ratio of these sums to their respective national incomes? And the ratio of their defense to other government expenditures?
Nowhere in a message of 7,000 words devoted solely to the subject did Mr. Truman find room to mention any of these figures. How did our bureaucrats decide how much European arms and goods it is up to us to supply? And above all, how did they decide that American taxpayers had to give these arms and goods to European taxpayers—that the latter just cannot afford to pay for any of these themselves?
When Mr. Truman’s message does venture into the realm of fact, we get a howler: “Europe has moved faster toward integration in the last five years than it did in the previous 500.” This is blandly said at a time when inter-European trade is sunk in currency chaos and tied up in the most vicious network of exchange and import controls in centuries!
Mr. Truman’s message is obscure even on the most basic facts. He is asking for “only” $7,900,000,000, but his budget two months ago set down a total of $10,500,000,000 for foreign aid. Presumably this is still the amount he actually plans to spend on foreign aid in the 1953 fiscal year. Why is there no mention of this fact in his message or radio talk? Again about $7,000,000,000 is already available for foreign aid. If Congress does vote all the new funds requested by the President, then apparently some $15,000,000,000 will be available all together for such aid. Why wasn’t this even mentioned by the President? Surely the subject needs clarification.
March 31, 1952
From Sept. 3 to Oct. 1 last year there appeared in this space a series of articles called “Inflation for Beginners” which have since been made available to Newsweek readers in the form of a pamphlet. These articles sought to explain how and why: “Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit.”
There was nothing peculiar or particularly original about my explanation. It corresponded closely, in fact, with “orthodox” doctrine. It is supported overwhelmingly by theory, experience, and statistics. It may be pointed out once again, for example, that the doubling of retail prices since 1939 has been primarily caused by the increase in the supply of money and credit (currency plus bank deposits) from less than $65,000,000,000 at the end of 1939 to $188,000,000,000 today.
But this simple explanation still meets with considerable resistance. The Truman Administration denies or ignores it, because it places responsibility for inflation squarely on its own doorstep. Few of the academic economists are helpful. Most of them are attributing present inflation to a complicated and disparate assortment of factors and “pressures.” Labor leaders vaguely attribute inflation to the “greed” or “exorbitant profits” of manufacturers. And most businessmen have been similarly eager to pass the buck. The retailer throws the blame for higher prices on the exactions of the wholesaler, the wholesaler on the manufacturer, and the manufacturer on the raw-material supplier and on labor costs.
This last view is still widespread. Few manufacturers are students of money and banking; the total supply of currency and bank deposits is something that seems highly abstract to most of them and remote from their immediate experience. As one of them writes to me: “The thing that increases prices is costs.”
What he does not seem to realize is that a “cost” is simply another name for price. One of the consequences of the division of labor is that everybody’s price is somebody else’s cost, and vice versa. The price of pig iron is the steelmaker’s cost. The steelmaker’s price is the automobile manufacturer’s cost. The automobile manufacturer’s price is the doctor’s or the taxicab-operating company’s cost. And so on. Nearly all costs, it is true, ultimately resolve themselves into salaries or wages. But weekly salaries or hourly wages are the “price” that most of us get for our services.
Now inflation, which is an increase in the supply of money, lowers the value of the monetary unit. This is another way of saying that it raises both prices and “costs,” And “costs” do not necessarily go up sooner than prices do. Ham may go up before hogs, and hogs before corn. It is a mistake to conclude, with the old Ricardian economists, that prices are determined by costs of production. It would be just as true to say that costs of production are determined by prices. What hog raisers can afford to bid for corn, for example, depends on the price they are getting for hogs.
In the short run, both prices and costs are determined by the relationships of supply and demand—including, of course, the supply of money as well as goods. It is true that in the long run there is a constant tendency for prices to equal marginal costs of production. this is because, though what a thing has cost cannot determine its price, what it now costs or is expected to cost will determine how much of it, if any, will be made.
If these relationships were better understood, fewer editorial writers would attribute inflation to the so called “wage-price spiral.” In itself, a wage boost (above the “equilibrium” level) does not lead to inflation but to unemployment. The wage boost can, of course (and under present political pressures usually does), lead to more inflation indirectly by leading to an increase in the money supply to make the wage boost payable. But it is the increase in the money supply that causes the inflation. Not until we clearly recognize this will we know how to bring inflation to a halt.
April 7, 1952
Nothing has more clearly revealed the complete hypocrisy of the Administration’s so-called stabilization program than the Wage “Stabilization” Board’s decision in the steel case. The board granted the steelworkers’ unions practically every major demand of whatever nature. It awarded straight general wage increases of 17½ cents an hour, plus higher premium pay for workers on second and third shifts, plus reduction of geographical differentials, plus holiday pay and longer vacations. On top of all this, it recommended the union shop. Altogether, it is estimated that these changes would raise the steel industry’s direct labor costs by 25 to 30 cents an employee hour.
The industry itself estimates that these increases would cost the companies about $1,000,000,000 a year, which would require an increase of about $12 a ton in steel prices (now about $110 a ton) to offset it. It is not believed likely that price officials will grant increases of more than $5 or $6 a ton at most. But no one denies that some increase in the price of steel will be unavoidable.
Yet Nathan P. Feinsinger, the Wage Board chairman, blandly assures us that its recommendations, if adopted, “would not start another round of wage increases or set a new pattern.” This statement is flagrantly contrary to fact and experience. Philip Murray has already revealed that he will now extend his demands to steel fabricating plants. We shall soon hear from other labor leaders. As three of the Wage Board’s industry members declared: “Rather than resolving disputes, it is creating more disputes; rather than combating inflation, it is creating more inflation.” In the Wright Aeronautical case, as they point out, the board’s recommendation even exceeded the original union demand.
Technically the Wage Board’s “recommendation” is not binding. But in plain fact the pressure on industry is such that the board’s decision amounts to one-sided compulsory arbitration. The board solemnly tells the parties to the dispute to go ahead and arrive at its foreordained result by “collective bargaining”! This turns collective bargaining into a sham and a mockery. What is left to “bargain” on when the board has announced in advance that its decision is “in all respects fair and equitable”?
It is especially ironic and absurd, as the industry members of the board point out, that “the largest [wage] increases in history” should be recommended by a board “which purports to be engaged in stabilizing wages.” Worse, the board threw “the weight of the government in support of the proposition that employees should be required to join a union as a condition of holding their jobs.”
The board’s recommendations constitute compulsory arbitration for the companies but not, of course, for Philip Murray. He can simply threaten to strike if he does not get precisely the settlement he wants. And apparently no one in Washington questions the right of union leaders to bring the production of steel or anything else to a halt, even in wartime, unless their demands are met. As long as we grant legalized monopolies to industrywide unions, the only way we can prevent strikes is to give the union leaders just what they ask for.
Even if a sincere attempt were made to impose wage and price ceilings by a uniform rule, the economy would not be free and the controls would not work. But the existing situation is infinitely worse. Completely different standards and formulas are applied, and different agencies set up, to fix prices on the one hand, and to “stabilize” wages on the other. This process is a disguised and dangerous way of trying to effect a political redistribution of income. The insincerity of the whole “fight” against inflation is further emphasized by the objections of the Treasury and of Leon Keyserling to discontinuance of the inflationary bond-support policy by the Federal Reserve Board.
But Congress has one way out, before too much further damage is done. It can let the whole mess of price fixing and wage “stabilization” powers expire on June 30 next.
April 14, 1952
If the government does not increase the money supply, price ceilings are unnecessary. If the government substantially increases the money supply, price ceilings are futile. They represent a hypocritical effort by the government to “protect” the consumers against the consequences of its own inflationary policies.
But price ceilings, though in the long run futile, are never harmless. They curtail and distort production, encourage wasteful consumption, and intensify shortages. They give a set of government bureaucrats life-or-death powers over industry. They are used as a political weapon to try to distribute economic favors and penalties. And when wage controllers and price controllers (usually two different sets of officials loath to recognize each others’ existence) try to push up wages and hold down prices, they put dangerous strains on the economy.
What Congress ought to do now, of course, is simple. It ought to allow the whole network of price fixing and wage “stabilization” to expire on June 30. The Controlled Materials Plan in its present form should expire with it. War contractors could be granted enough “tickets” to get priorities for the strategic metals or other raw materials they need for themselves or their subcontractors. The remaining supply of such materials would then be “allocated” by supply and demand working with free prices in free markets. Today the rationing and allocation problem is created by price controls. Arbitrary ceilings hold these materials below the prices to which free markets would bring them. This creates shortages both by reducing production and by encouraging wasteful consumption.
But confused economic ideas and the present political atmosphere combine to make it highly improbable that Congress will do anything so simple and sensible as to allow price-and-wage control to expire. Too many congressmen honestly believe that under present conditions price fixing is really necessary. Others will vote for its continuance for purely political motives. They are afraid of being accused of favoring the “profiteers,” and of refusing to give the President the “weapons” to “fight” inflation. They are afraid of being blamed if prices actually do continue to go up.
If price fixing is destined to be prolonged, therefore, at least two main safeguards are necessary to minimize all the harm which it would do.
The first is to extend the price-control powers only for a short term (not more than a year at most), and in addition to put several emergency triggers on their termination. Congress should provide that the price- and wage-fixing powers can be terminated at any time by a vote of either House of Congress or by Presidential proclamation. With Congress always in a position to terminate the powers, the control officials would have to pay constant regard to sentiment in Congress and refrain from arbitrary rulings in defiance of that sentiment. Mr. Truman, on the other hand, could not argue that he was being forced to continue price fixing by Congressional edict, and his successor would be free to terminate the powers as soon as he wished.
But even more important would be an amendment to deprive the Federal government of its present power to inflate. This could best be done by depriving the central Federal Reserve authorities of their power to lower the rediscount rates or to order the purchase of government securities in the open market by the Federal Reserve Banks. (See this column of Nov. 26.)
If the Federal government no longer had the power to inflate, it would have no excuse for using its price-fixing powers to “combat” inflation. Prices would not rise (or at most very moderately), and therefore Congress would not be blamed for a price rise. Price-fixing powers would lose their popularity with the Administration, because they would be accompanied by deprivation of the power to inflate. In fact, in order to get back its power to inflate, the Administration might itself order termination of the price control law. But this action would educate the country in the real economics and politics of inflation.
April 21, 1952
Mr. Truman’s attempt to justify his illegal act in seizing the steel industry was demagogic, intemperate, and full of distortions. Under his Wage Stabilization Board’s “fair and impartial” recommendations, he contended, “the steel workers would simply be catching up with what workers in other major industries are already receiving.” Well, according to government statistics, the workers in all manufacturing industries are earning an average of $1.64 an hour and the steel workers an average of $1.88 an hour. The workers in all manufacturing industries are earning an average of $67 a week and the steelworkers an average of $78 a week. How much more do the steelworkers have to get above the average in order to “catch up”?
Mr. Truman can’t be referring to living costs, because the earnings of the steelworkers have already gone up 13½ percent since the outbreak of war in Korea, whereas living costs have gone up only 11 percent. What is Mr. Truman’s catch-up formula? How does he let everybody catch up with everybody else and still pretend to hold wages down?
The moment Mr. Truman turns to prices and profits; he considers all talk of catch-up formula outrageous. He never tires of denouncing the Capehart amendment, which is only a limited catch-up formula for price ceilings.
The President’s discussion of steel industry profits is a statistical nightmare. “The steel companies,” he says indignantly, “are now making a profit of about $19.50 on every ton of steel they produce.” This is double nonsense. After taxes and other costs, as Clarence B. Randall, the president of the Inland Steel Co., has estimated, the steel companies in 1951 made less than one-third of this amount. And neither Mr. Truman’s $19.50 nor the steel industry’s estimate of about $6.50 was made on every ton of steel. Either figure is an average. Marginal companies have been making considerably less, and they would have to halt production if their narrower margins were wiped out.
The most glaring omission from Mr. Truman’s speech was of course his complete failure to mention the fact that his board’s order would establish compulsory unionism throughout the steel industry, compelling every worker in it to knuckle down to Philip Murray to hold his job
Let us glance back over the last twenty years and reexamine the economic ideology that has dominated the government, and the policies to which it has led. The New Deal began with the assumption that the unions—all unions—were so weak that they needed the paternalistic help of the government. It also assumed that unions could do no wrong. It compelled an employer, however small, to “recognize” and “bargain” with the union, however large, that once succeeded in getting the votes of more than 50 percent of his workers. No matter how unreasonable the demands made by a union leader, the employer was forced by law to “bargain” with him and him alone. This union leader was in effect granted a Federal certificate of monopoly.
But this is not all. The employer had to bargain “in good faith.” How does one bargain in good faith? Obviously, by making concessions. Even this is not enough. The employer must concede all the union’s final demands, whatever they are. For if he does not, the union will strike. And then, of course, it is not the union but the employer who, in Mr. Truman’s phrase, is guilty of being “willing to stop production.”
This is the baneful logic that has led Mr. Truman to his present course. Industrywide unions are Frankenstein monsters created by Federal law. They have the power to bring the whole industry of the country to a halt unless their demands are met. For there is no longer any way to combat a strike. The government has legally deprived the employer of whatever effective way he formerly had of combating a strike. He is not allowed to break off negotiations with the union—or threaten to discharge strikers and hire other permanent workers in their place. The strike must succeed. If the employer will not himself yield to the union demands, the next step is for the government to appoint an “impartial” wage board to recommend that this is the only “fair and reasonable” thing for him to do.
Of course, if you are a New Deal President, you do not stop there. You know that if the companies are permitted to charge higher prices to pay the higher wages, the public will blame you for the higher prices. So your next step is to forbid the companies to ask higher prices while compelling them to pay higher wages. If the companies say no, then you seize and denounce the companies and blandly argue that no other course was ever possible. You contemptuously ignore the legal procedure prescribed by Congress. You seize private property without a shadow of legal authority on the contention that this is the only way to prevent a strike.
You pretend that this course is bold, though it is really pusillanimous. You take it because you have legally deprived yourself of all power to combat a strike, because you don’t know how to stop it except by buying it off, by forcing employers to pay the ransom demanded and because, for political reasons, you have made the government completely subservient to union policy. Of course by buying off one strike threat, you reward it and buy yourself a hundred others. You leave yourself no way to solve these in turn except by seizing each industry successively until you have brought on some form of fascist-socialism.
The minimum legal lessons for Congress are plain. It must allow the President’s price-and-wage-fixing powers to expire on June 30. No government can be trusted to use such powers wisely or impartially, and least of all the present one. Congress should also repeal altogether the Wagner-Taft-Hartley Act; but if it lacks the clarity and courage to do that, then it must at the very least withdraw the present legal compulsion on employers to recognize and bargain with industrywide unions.
There is only one alternative: Either we make it legally possible once more for a strike to be broken, or we yield completely to constantly mounting union demands. There is no other alternative and no longer any excuse for believing that there is one.
April 28, 1952
We often hear of the “equalization of incomes” in England. We seem less aware that a similar transformation has been going on right at home. But in measuring either the growth or “redistribution” of incomes there are many traps for the unwary.
On March 5, for example, The New York Times carried a long article by Will Lissner announcing a “social revolution” since the 30s. “The poor,” he wrote, “have become better off. Where three out of four families had incomes of less than $2,000 a year in 1939, only one out of three fell into that class ten years later. The well-to-do . . . have become more numerous. In the late ’30s, one family in about 50 was in the $5,000 and over income class. . . . In the late ’40s, one family out of six. . . . Over the decade [that of 1939 to 1949] median family incomes rose from $1,231 to $2.949.” And much more to the same effect.
As they stand, such comparisons, if not meaningless, are grossly misleading. They are in terms of “current dollars” (though this fact is not explicitly pointed out by Lissner), and the cost of living rose substantially in the decade selected (more than 70 percent, in fact), so that an income would have to go up at least that much in dollars in order to remain the same in terms of what it would buy. Not only is this readjustment not made in the foregoing figures; the reader is not warned of its need or given the basis for making it for himself. Yet without such an adjustment all sorts of statistical miracles are possible in any inflation. Today a Frenchman with the equivalent of $3,000 is a millionaire in terms of his own francs.
There has, however, been a striking “redistribution” of incomes in the United States, as the recent studies of Simon Kuznets and others show. The full Kuznets findings are still [on] press, but summaries have already been made public by two of his colleagues in the National Bureau of Economic Research, Arthur F. Burns and Geoffrey H. Moore. I have room to cite only a few comparisons. The upper 1 percent of income recipients in the U.S. received 16 percent of the countrywide total income in 1913. 17 percent in 1929, and 9 percent in 1948. How substantial the shift has been between 1929 and 1948 can be shown by one comparison. To achieve perfect equality of incomes, the share going to the upper 1 percent could have declined only 16 points (from 17 percent to 1 percent). But it actually declined by 8 percentage points, or half the mathematically attainable maximum.
How did this shift occur? Analysis can give at least part of the answer. Most wealthy people receive a relatively large portion of their income from property rather than from salaries. In 1929, for example, the upper 1 percent received 32 percent of their aggregate income from dividends, interest, and rent. Now on a per capita basis, employee compensation increased 134 percent between 1929 and 1948, “entrepreneurial” income 145 percent, rental income only 26 percent, and dividends only 6 percent: while interest payments per capita actually declined 21 percent.
Higher money income per capita is of course always desirable to the extent that it means a real increase in purchasing power. But whether greater equality of income is desirable or not may depend largely on how it is brought about. To the extent that it depends on maintaining artificially low interest rates, it is dangerous because such interest rates create and continue inflation. To the extent that it depends on holding down rents to uneconomic levels it means that in the long run not enough housing will be built or kept in repair. To the extent that it is brought about by excessive corporation taxes and excessive personal income taxes on the higher brackets it will undermine and eventually destroy incentives to the investment and production on which we all depend. But to the extent that it is brought about by a real increase in productivity on the part of the lower income groups it is not only wholly desirable, but tends to be solid and permanent.
May 5, 1952
Strangely little attention has been given to the striking parallel between the economic and political policies of President Truman, culminating in his seizure of the steel industry, and the economic and political policies of the Argentine dictator Perón, culminating in his seizure of the newspaper La Prensa. Yet the parallel has been underlined by Mr. Truman himself. Asked whether he could also seize newspapers under his “inherent powers” doctrine, he replied that a President has the power to do anything that (presumably in his own judgment) is for the best interest of the country. A week later, while denying any intention to seize the press, Mr. Truman reaffirmed his power to do so in an “emergency.”
The parallel is even more striking because both seizures were made on practically the same excuse. Mr. Truman contends that his seizure of the steel industry was the only way to prevent a strike; Perón contended that his seizure of La Prensa was the only way to settle a strike. Mr. Truman’s way of preventing a strike was to order the employers to pay a thumping wage increase, Perón turned La Prensa directly over to the unions. Yet Perón took pains to act with more color of legality than Mr. Truman. He did not seize La Prensa by his personal ukase. He asked for, and got, a Congressional law authorizing the seizure.
The parallel may be extended. Neither Perón nor Mr. Truman has any faith in free enterprise or free markets. Both want to fix prices; both want to dictate wages. Each gives as his excuse for this that he is “fighting inflation”—the very inflation that his own monetary and fiscal policies have created. (Since Mr. Truman became President in April 1945, the money supply of this country—adjusted deposits plus currency—has been increased from $138,000,000,000 to $183,000,000,000. Since Perón became President in 1946 the currency of Argentina has been increased from 2,581,000,000 pesos to 17,704,000,000 pesos.) Each poses as the champion of the “underprivileged,” the descamisados, the “shirtless.” Each courts and subserves the unions.
What has caused this parallel to be overlooked is the persistence of the spurious interpretation that Communist propaganda long ago imposed on Western intellectuals. This is that Fascism is essentially a movement of the conservatives of the Right—“the last desperate effort of capitalism to save itself.” This interpretation has from the beginning ignored the open facts. Fascism, Nazism, Perónism, have all been bitterly hostile to “plutocracy” and to “laissez faire capitalism.” None of them tolerates free prices, free wages, free markets. They demand government control of wages, prices, profits, dividends, interest rates, investments. “Nazism” is, we should not forget, merely a contraction of the official title, National Socialism—or, more completely, the “National Socialist German Workers’ “party.
It is a groundless myth that German labor was from the beginning opposed to Hitler. As Ludwig von Mises wrote in Omnipotent Government in 1944: “Although the closed-shop system was not carried to the extreme in Weimar Germany that it is today in Nazi Germany . . . it had gone far enough. . . . [The worker] had to join one of the unions. . . . German labor was not greatly disturbed when the Nazis finally forcibly incorporated all trade-union members into their Labor Front.” It was too late when German labor at last became disillusioned—when it found that by gleefully conniving at Hitler’s crackdown on employers, it had put its own neck in the noose.
We need not labor the moral. American workers and American intellectuals have been off guard for the last twenty years, because they have been looking for the danger of fascism from the wrong direction. If they acquiesce in lawless action now, because it is taken in the name of unionism, of jacking up wages and slashing “outrageous” profits, they’ll deserve precisely what’s coming to them once they have allowed the doctrine of executive omnipotence, above the law, to establish itself.
May 12, 1952
In the course of his opinion holding that the seizure of the steel industry was illegal, Judge David A. Pine pointed to some of the presuppositions behind the Administration’s argument:
“Assuming the disastrous effects on the defense effort envisioned by the defendant, that can come about only in case of a strike, and that presupposes that the United Steelworkers will strike notwithstanding the damage it will cause our defense effort. It also presupposes that the Labor Management Relations Act, 1947, is inadequate when it has not yet been tried, and is the statute provided by Congress to meet just such an emergency. And it further presupposes, as defendant apparently does, that, this statute being inadequate, Congress will fail in its duties, under the Constitution, to legislate immediately and appropriately to protect the nation from this threatened disaster. I am unwilling to indulge in that assumption. . . .”
Judge Pine might have mentioned still another unstated presupposition in the Administration’s argument. This is that when the head of an industrywide union threatens to bring a whole industry to a halt unless his demands are met, there is no way to counter his threat; we must simply hasten to grant his demands. The Administration has come to regard it as unthinkable that a strike should be allowed to fail, or that employers should have once more the freedom that they had prior to the passage of the Wagner Act to discharge strikers and peaceably hire other workers in their place.
And Congress has made itself impotent by its own legislation. It has put in the hands of irresponsible private individuals the power to bring the whole industry of the country to a halt. And instead of acting to take such power out of these hands. Congress treats the strike orders of a Philip Murray or a John L. Lewis like some inescapable “national emergency.”
The truth is that twenty years ago the whole labor policy of the country took a wrong turning. Congress was sold the one-sided idea that there was only one cause of labor disputes—unfairness to labor. On that assumption it concluded that there was one all-sufficient cure for labor disputes, which was to make every union stronger, to strengthen its bargaining position further, to help it to win strikes or prevent it from losing them. It put more legal weapons into the hands of union leaders at the same time as it illegalized counterweapons by the employers. In 1932 it passed the Norris-LaGuardia Act (reputedly drafted by Felix Frankfurter) which put paralyzing restrictions on the right of the Federal courts to grant injunctions against strikes and strike practices.
The next major step of Congress (after the temporary Section 7a of 1933) was the Wagner Act of 1935. Under this the government itself was in effect set up as a union organizing agency. It provided the election machinery. It named the “appropriate bargaining unit.” It threw any “company-dominated” union off the ballot—which seemed to mean, in practice, any union that could be shown to be on friendly terms with the employer or that was not affiliated with the AFL or the CIO.
Under this government tutelage union membership was built up from about 4,000,000 just prior to the Wagner Act to some 15,000,000 today. Industrywide unions have been legally granted the right to cripple the
nation, even in time of war.
What is urgently needed now is not ex-post-facto authorization by Congress for further industry seizures by the President, but fundamental revision of our whole labor policy of the last twenty years. No private organization can be allowed to retain the power to coerce the public by paralyzing industry. Congress should clarify the antitrust laws as applied to labor unions. It should drastically revise the Norris-LaGuardia Act. And it should restore the provisions in the Taft-Hartley Act as originally passed by the House (they failed to carry by only a single vote in the Senate) which removed the compulsion on employers to bargain with industrywide unions.
May 19, 1952
Where did Washington ever pick up this preposterous notion that the way to prevent or settle industrywide strikes is to seize the property of the victims of the strikes? The idea was not born in the last few weeks. The late “Clear-it-with-Sidney” Hillman told a special committee of the Senate in April 1941, when strikes were crippling our defense plants, that he opposed any legislation that would interfere with unions but would favor government seizure and operation of defense plants closed by strikes. Even prior to this, under Section 9 of the Selective Service Act of 1940, Congress had given the President statutory authority to seize war facilities. Franklin D. Roosevelt began seizing the plants and properties of employers whenever an important strike occurred in them.
In June of 1943, John L. Lewis called a coal strike against a decision of the War Labor Board and offered to call it off only if the government would seize the mines and operate them itself. Then on June 25, 1943. Congress passed the Smith-Connally “antistrike” act, over the President’s veto, which again authorized government seizure of war facilities, but with the restriction that any plant so seized “shall be operated under the terms and conditions of employment which were in effect at the time possession was taken.” One sequel to this was the seizure of Montgomery Ward in April 1944, when President Avery was carried bodily out of the plant.
According to one private score card, President Roosevelt ordered the seizure of four aircraft-manufacturing companies, three shipyards, all the railroads, all the coal mines, several utility companies, dozens of motor-transport companies and more than 150 industrial plants and shops. Of the 48 seizure orders he issued, 41 were to enforce labor demands. The Truman seizures have covered anthracite and bituminous coal mines, oil refineries, pipelines, packinghouses, railroads, and traction systems. And he ordered all of them ostensibly to stop or to prevent strikes. On this excuse the government has been “in possession” of the railroads of the country for 21 months (since Aug. 27. 1950).
What gives the idea of seizure its strange appeal? The legal logic behind it is too confused to follow. Why should it be perfectly all right to bring the steel output of the country to a halt if private investors own the plants, and wrong only if the government “owns” them? Production is just as crippled, and the national safety as much imperiled, in the first case as in the second. The theory seems to assume that government does not exist to protect the property and interests of citizens, but only to protect its own property and interests. You can strike against the public safety but “you can’t strike against the government,” yet even on this rear-end-first theory, seizure rests on a legal technicality, even on a legal fiction. For the government “owns” the property only for the purpose of settling a strike. And the strike is settled, not because workers fear to strike “against the government,” but because the government manager offers the strikers, out of other people’s money, substantially the increase they asked for.
This is the real motive behind the seizure policy. It is the product of a statist and socialist philosophy, it assumes that private employers can’t be depended on to pay “fair” wages, so the government must seize their property and force them to do so—knowing, of course, exactly what “fair” wages are. In the railway strike crisis of 1946, Mr. Truman even went before Congress to propose a measure under which: (1) When a strike occurred in an essential industry the essential industry was to be seized by the government; (2) under such seizure the President was to “establish fair and just wages”; but (3) the property owners were to be denied any profits!
Government seizure abridges property rights, rewards strikers, and penalizes the struck-against. Its real purpose is to impose a government-dictated wage increase. The threat of it is used not to restrain the demands of union leaders but to force employers to grant them. It destroys free collective bargaining. And it creates the very crisis it professes to solve.
May 26, 1952
At his press conference on May 8, Mr. Truman, asked whether the chief danger was inflation or deflation, replied that the country had to guard against both: and that was why it was necessary to have control powers—to prevent either one.
There is nothing new in this Scylla and Charybdis analogy. It runs like a refrain through the speeches of Leon Keyserling and the reports of the Council of Economic Advisers since that body was created. What is significant is Mr. Truman’s own espousal of the doctrine at this time. On top of the hasty removal of restrictions on the use of “strategic” metals, on state and local bond issues, on housing, on real-estate credit, and especially on general installment buying, on top of the violent denunciations by Administration spokesmen of every effort of Congress to economize at any point, this statement makes it unmistakably clear that what the Administration really fears and fights now is any lull in the inflation, any sag in the boom prior to election. In brief, it is prepared to throw all its “anti-inflation” policies into reverse.
It would of course serve Mr. Truman’s political purposes ideally if he could get Congress to swallow this fighting-both-devils-at-once doctrine. He could then continue both to inflate and to “fight” his own inflation. He could step on the accelerator of credit expansion with his right foot while he stepped on the resulting price increases with his left—always saving the country in the nick of time. The politicians of Europe have made a very good thing of this. The result is known there as repressed inflation.
The principal methods by which governments inflate are: (1) huge governmental spending, particularly deficit spending; (2) monetizing the public debt; (3) pegging or forcing down interest rates; (4) ordering wage boosts; and (5) encouraging private credit expansion. The Truman caliphate has resorted to all these methods. The principal methods by which governments pretend to “fight” inflation are by price fixing and wage fixing, usually accompanied by allocations, rationing, and subsidies.
These two sets of powers give a government unanswerable weapons for punishing political opponents (by crushing taxation, price rollbacks, profit cuts, inadequate allocations, seizures) and for rewarding political supporters (by favorable allocations, price or profit increases, wage increases, and subsidies). Through its life-and-death powers over everyone’s economic prospects, it has the power to keep everybody in line.
Politically attractive as such powers are to a ruling clique, they make no sense economically. They imply that a free economy cannot balance itself, but that the DiSalles and Arnalls and Feinsingers know just how to do it. They imply that inflation is some disaster that falls upon a country from the outside, like a flood or a plague of locusts. Inflation is in fact always and everywhere the creation of governmental policy. It is caused by the increase in the supply of money and credit. The way to halt it here is not to give the President “emergency” powers to halt it, but to deprive him of his present power to inflate. That the Administration knows how effective this deprivation would be is evident from its vehement objections whenever any proposal arises in Congress to free the Federal Reserve System from Treasury dominance.
As for price control, it cannot be repeated too often that as a cure for inflation it is completely fraudulent. It not only diverts attention from the real cause and cure of inflation. It adds further evils of its own. It abridges human liberty, encourages waste, and disrupts production.
The course before Congress is clear. It should allow price-control and wage-control powers to lapse completely. It should deprive the Administration of its present power to inflate. And it should repeal the provisions in its labor laws which compel employers to bargain with industrywide labor monopolies and which give those monopolies the power to bring the nation’s production to a halt.
June 2, 1952
What Mr. Truman calls a “stabilization” program has become in reality a program that attempts to redistribute income.
Since the end of 1939 the government has tripled the supply of money and bank credit. This has been the real cause of the rise in prices. When the money supply is not increased, price control is unnecessary. When the money supply is greatly increased, price control is futile.
As price control is unsound in principle, no formula for it can ever be right. But some formulas are more harmful than others. For present purposes we may distinguish two main approaches, which I shall label respectively the Baruch plan and the Truman plan.
The plan proposed by Bernard Baruch in the summer of 1950 called for “an overall ceiling across the entire economy.” All prices, wages, rents, and fees were to be rolled back to and frozen as of June 25, the day Korean hostilities broke out. This proposal was inspired by fine intentions. But as I pointed out in Newsweek of Sept. 11, 1950, it was economically unworkable and politically impossible. It ignored the whole function that prices, wages, and free markets play in our economy—which is to keep a balance among the output of thousands of different commodities and services, directing production into those that are most needed and away from those that are less needed.
The Baruch Plan would have frozen for war conditions the price and wage relationships that had been adapted to peace conditions. It would have removed every market incentive to change production over to the needs of rearmament. It would have required, instead, a completely totalitarian economy, with the government assigning detailed production and employment quotas, telling every company what to make and every worker what to do.
If carried out consistently, the Baruch plan would have meant that no worker could increase his hourly wage beyond the level at which it stood on June 25, 1950. Demands would have come from every side for the correction of “hardships” and “inequities.” But the moment we began to make these corrections we would be out of the Baruch plan and into the Truman plan. For what constitutes a “hardship” or “inequity” is a matter of opinion. And government inevitably defines “inequities” not in economic but in political terms. The decisions most likely to be made are those that can command the most votes. Politically speaking, profits and prices (except, of course, farm prices) are always too high and wages are always too low. So “correcting inequities,” as I predicted here on Sept. 11, 1950, “becomes an excuse for holding down prices while permitting or encouraging wages to rise.”
And it is as a political device that Mr. Truman has used his price- and wage-control powers from the beginning. He and his agencies have demanded catchup formulas for wages while denouncing even partial catch-up formulas for prices. Though hourly steel wages had already gone up since Korea more than the cost of living, though they were already 14 percent higher than the average of all manufacturing wages, Mr. Truman discovered that steel wages needed still another rise of 14 percent on top of this to “catch up.” But he becomes outraged whenever he speaks of the Capehart amendment, which allows sellers to pass on in prices any additional expenses up to July 26, 1951.
If Congress were now to insist that the same standard be applied to both price and wage control, then either each price would be allowed to go up as much as the cost of living goes up (which would increase the cost of living still further), or wages would not be allowed to go up any more than the cost of living had gone up prior to July 26, 1951—no matter how much further it goes up hereafter. But if Congress continues the President’s existing power to boost wages and to squeeze prices and profits, and adds authority to seize industries, the end result must be to disrupt production and to destroy free enterprise.
June 9, 1952
I have been meaning for weeks to discuss here a remarkable address, now available in pamphlet form, delivered in New York on Jan. 23 by Per Jacobsson, the economic adviser of the Bank for International Settlements at Basle (“Credit Policy: Recent European Experience”; National Industrial Conference Board; 247 Park Avenue; New York 17; 50 cents). This speech describes a gradual return toward monetary sanity in Europe that few Americans seem to be aware of.
At the end of the first world war most countries were eager to return quickly to stable currencies and to the gold standard. But after the second world war, under the influence of Lord Keynes, they preferred cheap money and deficit spending. This, they supposed, was the secret of perpetual “full employment.”
Keynes’s influence, however, was never as great on the continent of Europe as in England and America. “The continental peoples,” Per Jacobsson explains, “have been faced more immediately with the evils of inflation. They have learned to dislike controls. The imposition of controls has been very closely connected with the Nazi and Fascist regimes.” And contrary to the belief so widely held in 1945 and 1946, that between a capitalist United States and a Communist Russia there would stand a socialistic Europe, Europe has in some respects shown itself to be more “liberal in the sense in which Europeans still use this word—indicating adherence to and belief in a free economy—than either of the two principal Anglo-Saxon countries.”
Jacobsson then goes on to describe the monetary and fiscal policies followed in each of the leading European countries. Switzerland led the departure from cheap money, and the free-market quotation of the Swiss franc was for several years above the corresponding quotation of the dollar. Belgium followed sound policy and soon achieved monetary stability. It was criticized, particularly in England, for permitting unemployment; but Belgian workers supported the policy as holding down prices and helping them to achieve higher real wages.
In Italy, by 1947, prices had risen to 55 times the prewar level. But then—Einaudi, as Governor of the Banca d’Italia and Minister of the Budget, raised interest rates, imposed severe credit restrictions, and cut off all food subsidies. These seemed harsh measures-but they stopped the price rise.
“In the following year Einaudi was almost unanimously elected President of the Italian Republic.”
Following a crisis in Germany in October 1950, the discount rate of the Bank Deutscher Länder was increased from 4 percent to 6 percent. Ordinary bank accommodation could be obtained only at rates between 8 and 12 percent. “It was soon found that the program . . . adopted in Germany was working wonders. . . . The success of the German rehabilitation scheme has had a tremendous effect upon European thinking: It has shown us that a country as burdened with difficulties as Western Germany can, through a resolute credit policy, suddenly reverse its position.”
Jacobsson discusses similar changes in Holland and Austria. Since he spoke in January, policies in the same direction have been adopted in France and Britain. On March 11, for example, the Bank of England increased its discount rate from 2½ to 4 percent.
From this international postwar experience Jacobsson draws some of the principal monetary morals. One is the importance, in curbing inflation, of “a restrictive credit policy including the application of higher interest rates. . . . Of particular importance has been the withdrawal of support for the quotations of government bonds. “The first duty of the [U.S.] authorities toward the world,” he adds, “is to maintain the greatest possible stability in monetary and price conditions inside the United States.”
Yet both the President and Congress have been heedless of these lessons. Mr. Truman has been busily removing credit restrictions at the same time as he insists on continued price control. Yet with firm credit policies price control is unnecessary; and without them it is a pious fraud.
June 16, 1952
The decision of the Supreme Court that the President’s seizure of the steel industry was illegal and Mr. Truman’s prompt return of the companies to their owners averted a grave constitutional crisis. But as I write this we are back not only to the immediate problem of how to settle the renewed steel strike, but to a larger problem: What can we do about the present ability of nationwide unions to slow down or halt all industry unless their demands are met?
As a solution to this problem, most of the proposals now before Congress are not reassuring. For they propose to give the President the very seizure powers he usurped. They propose to tell him, in effect, that he was right in the first place—that what was wrong was not his policies, but existing law. They would simply give him the power to do legally what he had done illegally. They would give him the power to repeat with every industry the course he followed with steel.
That course may be summarized as follows: (1) When an industrywide union makes a set of demands, no matter how extravagant, they are turned over to a governmental board, packed with “public” members favorable to the unions, for decision. (2) The board then decides that the industry should grant the union demands practically in full—even though this makes a joke of all the previous “stabilization” standards of the board itself. (3) The union leaders and the President then treat this decision as unilateral compulsory arbitration, completely binding—on the employer. (4) If the employer fails to grant the board’s awards in full, his plant is seized by the President, who then imposes the wage increases, compulsory unionism, or other awards of the board.
The tacit assumption behind Mr. Truman’s whole policy, in short, is that there is only one way to prevent or settle a nationwide strike, and that is to grant practically all union demands.
Such a policy has exactly the opposite result of what the President contends. It “prevents” or “settles” a present strike only at the cost of buying a hundred future strikes. For it amounts to a capitulation by employers, government, and public to every major union demand. It rewards extravagant demands; it rewards strikes and strike threats. Under it the unions obviously get more by striking or threatening to strike than by not doing so. Mr. Truman’s policy, in brief, creates the very evil it purports to avert.
A sound solution lies in precisely the opposite direction. It is to stop governmental encouragement of strikes and governmental rewards for striking. It is to take away from union leaders the special immunities and sweeping monopoly powers that have been deliberately conferred on them by Congress. A thoroughgoing reform would involve the repeal or drastic revision of the Norris-LaGuardia Act of 1932, which makes the granting of a private plea for a strike injunction practically impossible, even where union intimidation and coercion are involved, and the repeal or drastic revision of the Wagner-Taft-Hartley Act, which in effect turns the government into a union-organizing agency. The minimum change would be to restore the provision in the Taft-Hartley Act, as originally passed by the House, which removed the compulsion on employers to bargain with industrywide unions.
Mr. Truman’s high-handed seizure of the steel industry raised a larger and deeper issue, which even an adverse six-to-three decision of the Supreme Court did not remove. This is the danger to our free-enterprise system of the hostility to it shown by the President, not only in his steel seizure, but in his incredible onslaught of May 26 against the public utilities, in which he threatened to invoke the Corrupt Practices Act against them for having the audacity to defend themselves against his attacks. Such governmental hostility, if long continued, must inevitably undermine confidence and discourage and choke off new investment. If that happens, the free enterprise system will have been effectively destroyed. It is up to Congress to erect safeguards against the execution of such demagogic threats.
June 23, 1952
Never has a rebuff to a President been so unmistakable, so prompt, and so richly deserved as that dealt by the Senate to Mr. Truman after he had asked Congress to let him continue to flout the Taft-Hartley Act and to give him industry seizure powers instead. And nothing has so clearly revealed why Mr. Truman can not be trusted with such powers as his argument in favor of them.
Congress, he says, should “encourage the parties to settle their differences through collective bargaining.” But it is precisely his own plan that destroys collective bargaining. When both parties know in advance that their dispute will eventually be turned over to “special [governmental] boards to work out specific proposals” for settlement, then neither party will offer more or accept less than it thinks the special boards will demand of it or award to it.
But Mr. Truman blandly talks as if he can have free collective bargaining and compulsory arbitration at the same time—or even as if they were the same thing! The law he asks for is “to provide for fair and just compensation to the owners for the use of their property during a seizure, and fair and just compensation for the work of the employees.” And this government profit-fixing and government wage-fixing is the way to “increase the incentives for the parties to settle their differences through bargaining”!
Mr. Truman professes to want “sound price and wage stabilization policies” at the same time as he endorses the huge increases awarded to the steel-workers by the Wage Stabilization Board. But before their strike the steelworkers were already receiving an average of $1.88 an hour, compared with an average of $1.64 an hour in all manufacturing industries; steel wages had already increased 20 cents an hour since the Korean war outbreak, compared with an average increase in all manufacturing industries of 19 cents an hour; and steel wages had already gone up in the same period by 12 percent, compared with an 11-percent increase in the cost of living. Even the wage increases and other terms that have already been offered by the steel companies—and rejected by Philip Murray—would rip through the so-called stabilization ceilings and let loose a flood of demands for increases in other industries.
In spite of the constitutional provision that the President “shall take care that the laws be faithfully executed,” Mr. Truman still seems to think that his duty is limited to enforcing only those laws that he happens to like. He tells Congress that for him to apply the Taft-Hartley procedures at this time would be not only “unwise,” but “grossly unfair,” “harmful and futile”; that a court might not grant an injunction anyway, and that even if it did “there is no assurance that it would get the steel mills back in operation.” As Senator Taft has pointed out, these words are “practically an invitation” for the workers to violate the law.
And if the unions would strike even after a Taft- Hartley injunction, why wouldn’t they also strike even after government seizure? The President’s implied but unspoken answer is—because he expects to grant them, at the companies’ expense, the wages and other terms they demand.
Mr. Truman’s seizure solution would, in sum, create the very strikes and strike threats that it professes to cure. It would mean the imposition on industry of the strikers’ terms; and unions would threaten to strike to bring about this very result. It would make a mockery of wage “stabilization.” It would turn price-and-wage control into a political weapon. It would entrench industrywide unions. It would impose compulsory union membership on every worker. It would undermine free enterprise and eventually injure workers most of all.
The real solution, to repeat, lies in the opposite direction. It lies in allowing price-and-wage control to lapse. It lies in having Congress reverse the course it has pursued for the last twenty years—by removing the sweeping grants of monopoly power it has conferred on union leaders.
June 30, 1952
The other night I saw the new British film, The Man in the White Suit.1 It is a comedy with rare merits. (See the review in Newsweek, April 14.) But it is based on the implicit acceptance of an immemorial economic fallacy—the belief that new inventions destroy jobs and disrupt the economy.
A brilliant but erratic chemist, according to the story, develops a synthetic fabric that will neither stain nor wear out. But as soon as government officials, textile industry leaders, and the textile workers get wind of the discovery, they combine in their determination to suppress it. They argue eloquently (and no one in the film attempts a real answer) that once suits and dresses of the new material are put on the market, nobody will have to buy more than one, and that thereafter the whole textile industry will practically cease to exist, with a consequent permanent loss of capital and employment.
Let’s overlook its convenient forgetfulness of such sources of demand as style changes, personal size changes, and the desire for a varied wardrobe, and grant the picture’s central assumption that the invention of a stainless and wear-out-less fabric would permanently reduce the demand for clothing to, say, one-tenth of its present level. Then consumers would spend on clothing only one-tenth as much, say, as they do at present. This means that they would have the remaining nine-tenths left over to spend on other things—more and better food, housing, furniture, roads, parks, gardens, entertainment, education, travel. The workers dropped from the textile industry would be absorbed in other industries to produce the added commodities demanded from those industries, As mankind could meet its needs with less effort, the working week might be still further reduced.
These consequences are not a theoretical dream. They are what has always followed historically from each new invention. Less than a generation after the introduction of Arkwright’s cotton-spinning machinery, forty men were employed in the production of cotton textiles for every one that had been employed before. Nylon already represents today something close to the material of which the white suit was supposed to be woven. It makes, for example, a nearly indestructible man’s sock. But it has helped, not hurt, the textile industry. And the cotton growers and silk producers were not able to do anything to prevent its development, production, or sale.
But an even more conclusive answer to the convictions and fears of everyone in the White Suit picture is supplied by the tire industry. Here is an industry, consisting mainly of big units, that constantly increased the life and durability of the product, constantly improved the quality, and constantly lowered the relative price. Some of us can still remember the days when a man who went out for a Sunday drive would reconcile himself in advance to one or two flats before he got home. Here is the startling record, over forty years, of the increasing average number of miles of life of a tire, and the decreasing cost per hundred miles of wear of a “Ford size” tire:
| Years | Miles of Life | 100-Mile Cost |
| 1910 | 3,500 | 87 cents |
| 1920 | 10,000 | 23 cents |
| 1930 | 15,000 | 5.0 cents |
| 1939 | 27,700 | 5.3 cents |
| 1947 | 34,000 | 4.2 cents |
Tire quality, safety and durability are still being improved. Yet where only 2,300,000 tires were sold in 1910, 30,000,000 were sold in 1920, 59,000,000 in 1940, and 100,000,000 in 1950. More tires were sold, it is true, because there were more automobiles. But better and cheaper tires helped to make better and cheaper—and therefore more—automobiles.
Economic and technical progress does not destroy jobs, and capitalism (contrary to the implication of The Man in the White Suit) does not oppose or retard economic and technical progress. On the contrary, capitalism—the system of free, competitive enterprise—is the indispensable condition of maximum economic and technical progress.
[2The title of the film was corrected in the following week’s column to The Myth in the White Suit.—Ed.]
July 7, 1952
Two items in The New York Times, published nearly a month apart, combine to throw a brilliant light on our foreign handout program.
June 16: “The United States will have given away or lent an estimated $40,000,000,000 or more in postwar foreign aid by the end of this month. . . . More than 90 nations and colonies have received military equipment, economic aid . . . and a thousand other items. . . . Even Communist Russia, Czechoslovakia, and Poland were cut in for $1,000,000,000 before the ‘cold war’ developed . . . The end is not yet in sight.”
May 19: “Western leaders . . . are worried about the lack of any clear signs of improvement in production . . . and in the necessaries of life in the non-Communist underdeveloped areas. . . . The only characteristic [of the West] that the Asians have shown they really want to copy is its technical knowledge and its application of mechanical power to the production of goods and services. . . . These leaders also believe that . . . the West . . . must devote very much more of its . . . wealth . . . to the instigation of economic progress in the vast poverty-stricken regions of the non-Communist world.”
The American advocate of Point Four aid shares this in common with the Asiatic politician who receives it—that neither understands what makes capitalism so enormously productive. It is not “technical knowledge” or the “application of mechanical power.” These are among the results of capitalism, not its causes. It is capitalism that produce[s] the machines that produce consumers’ goods. The cure for the poverty of Asia, in brief, is not handouts from the capitalistic United States; it is the adoption of the philosophy of capitalism by Asia.
Capitalism is a set of economic and political principles and institutions. It consists of the marriage of liberty and security. It means freedom to produce and consume, freedom to buy and sell. It means free prices and free markets. With these freedoms it combines the institution of private property; under which a man is entitled to keep the fruits of his labor. It is these freedoms and protections that give so tremendous an incentive to production.
The underdeveloped areas have not yet learned these principles. That is the chief reason why they have remained underdeveloped. The vice of Point Four is that it continues to protect the underdeveloped areas from this knowledge. If they had to go to foreign private investors to borrow the capital they need, these investors would not lend until they were assured of certain minimum reforms (1) guarantees to private property against nationalization, confiscation, or excessive taxes; (2) freedom to withdraw earnings or principal (which would mean the dismantling of exchange control); (3) freedom from vexatious controls generally, such as price fixing, wage fixing, and arbitrary profit limitation. Under such conditions, foreign capital would flow into such areas and speed their development as British capital once speeded the development of the United States.
The reforms that would give most incentive to the investment of foreign capital are happily the same reforms that would give most incentive to the investment of domestic capital. But as long as India or Brazil, for example, can get handouts from the American government without making the economic reforms or giving the economic assurances that private capital would require, then the politicians of these countries need not bother to make these reforms. And so confidence and productivity are not increased. Point Four, in sum, far from speeding up the economic productivity of the world, in fact retards it.
FOOTNOTE ON CONFUSION
My article in the issues of June 30, entitled “Why Not Try Capitalism?”, should have been and was entitled in my original copy The Myth in the White Suit. The substitution was due to one of those last-minute composing room misunderstandings that it would take too long to explain but may not be too late to mention with regret.
July 14, 1952
Settlements have a way of suddenly being made even when they seem least likely; and it is possible that, when these lines appear, the steel strike will be over. But it has not been possible, since the extraordinary decision of the Wage Stabilization Board, to settle the strike without destroying the last pretence of a wage “line” or “ceiling.” The strike can now be settled only by bringing a threat of further inflation. For the terms of settlement, even if they prove no more favorable to the strikers than those offered by the steel companies several weeks ago, will not only greatly raise the cost of producing steel; they will let loose a flood of new wage demands and new strike threats from other unions that will insist on catching up with the steelworkers. And, of course, no consistent reason will be left for refusing these demands.
The steel strike is primarily Mr. Truman’s strike. If he and his board had not interfered, it probably would have been either averted or settled long ago, and on far more reasonable terms than it is possible to settle it now. But the Wage Stabilization Board not only recommended wage increases that destroyed even all its own stretchable standards of “stabilization,” but it assumed authority to recommend a union shop. Then, to make it still more difficult to get a settlement, Mr. Truman’s price controllers announced that they were not prepared to allow the companies to pass on in prices the increased government-awarded wage costs. This was an attempt to use price-and-wage control powers, not to stabilize, but to boost wages and to squeeze profits.
Even if Mr. Truman were belatedly to apply the injunction provisions of the Taft-Hartley Act, as Congress has explicitly requested, it is doubtful that this would settle the strike. For he has publicly declared that the Taft-Hartley procedures at this time would be “grossly unfair” and “futile”; he has denounced the companies for “conspiracy against the public interest,” and he has virtually invited the unions to flout the law. Yet though Mr. Truman’s course has encouraged and prolonged the steel strike, Congress cannot escape its share of responsibility. It helped to create this paralyzing nationwide strike by its own legislation over the last twenty years. It still lacks the courage to repeal or amend that legislation. It has granted the unions special immunities from the antimonopoly laws. Through the Norris-La Guardia Act it has made private injunctions against strikes all but impossible. Through the Wagner-Taft-Hartley Act, it has made it perilous or impossible for an employer to discharge strikers and hire other workers in their place. It has made the government, in effect, a union-organizing agency. And it has forced employers to recognize and bargain with industrywide unions.
In the July issue of its monthly Survey, the Guaranty Trust Co. of New York argues ably and temperately that: “The only solution to the problem that is in harmony with the basic American principles of free labor and free enterprise is to limit the size of the bargaining unit. . . . It may not be necessary in all cases to confine the bargaining unit to the single-plant level, or even the single-company level, What is essential is that the bargaining unit be kept small enough to make it possible for a dispute to be fought out . . . without threatening such serious effects as to necessitate or furnish a pretext for governmental intervention in the public interest.”
The Survey seems to imply that industrywide bargaining should be illegalized. This, in my opinion, is a drastic step that should at least be deferred. What Congress should do immediately, however, is to stop forcing employers to recognize and deal with industrywide unions, to stop legally imposing industrywide unions on employers. For the industrywide unions, as Leo Wolman has summarized it, “can today paralyze the economic life of the country or dictate the terms on which they refrain from doing so.” And the industrywide unions are the creatures of present Federal law.
July 21, 1952
The purpose of the typical party platform is to attract as many and to alienate as few votes as possible. It must try to reconcile or compromise conflicting views within the party. It seeks to find verbal formulas that can mean all things to all men. For these reasons nearly all platforms are full of glittering but vague generalities, and often embody outright contradictions. This year’s Republican platform contains its share.
The platform favors “reduction of expenditures.” But it also asks for more aid for veterans, “amendment of the Old Age and Survivors’ Insurance System to provide coverage for those justly entitled to it but who are now excluded,” and aid to farmers apparently as lavish as any being provided by the Democrats.
The platform deplores the encroachments of Federal jurisdiction. But it believes in “enacting Federal legislation to further just and equitable treatment in the area of discriminatory employment practices.”
The platform favors “the expansion of mutually advantageous world trade.” It promises to “press for the elimination of discriminatory practices against our exports.” It supports our reciprocal-trade agreements “on a basis of true reciprocity.” But then it promises to “safeguard our domestic enterprises and the payrolls of our workers against unfair import competition.” It does not tell us what kind of import competition is “unfair,” One gathers, however, that we may not extend the same cordial welcome to imports from other countries as we expect them to extend toward ours.
Contradictory virtues, too, are claimed for the Taft- Hartley Act. We are told that it guarantees “the right to a job without first joining a union.” But we are also told that it guarantees “the right to establish ‘union-shop’ contracts by agreement with management.” Now, obviously, wherever the majority of a union or a group of union leaders establishes a union-shop contract, the individual loses his right to hold a job without joining a union.
The platform is ambiguous on important points. It promises, for example, to “remove . . . injurious price and wage controls.” Each reader must decide for himself whether this means that the Republican Party will remove all price and wage controls because such controls are necessarily injurious, or whether it will remove only those particular price and wage controls that in its opinion happen to be injurious.
The platform is eloquent in defense of economy and free enterprise. Yet it favors “a farm program aimed at full parity prices for all farm products . . . commodity loans on all nonperishable products . . . expanded soil conservation . . . [and] further development of rural electrification.” Only the Brannan plan could top this for expensiveness.
Yet when all this has been said, the Republican platform, for those who believe in economy and free enterprise, will probably prove incomparably preferable to the Democratic platform; just as the Republican record will probably prove incomparably preferable in this respect either to the past or the prospective Democratic record. On every economic ground this is a far better Republican platform than that of 1948. The monetary policies are courageous and in themselves sound, and would more than justify a change of Administrations:
“1—A Federal Reserve System exercising its functions in the money and credit system without pressure for political purposes from the Treasury or the White House.
“2—To restore a domestic economy, and to use our influence for a world economy, of such stability as will permit the realization of our aim of a dollar on a fully convertible gold basis.”
I am sorry that space does not permit me to point out more fully how much courage, understanding, and good sense are embodied in each of those two declarations. Faithful adherence to them could bring an immediate end to the threat of further inflation.
The platform neatly sums up the New Deal tendency: “For 20 years the Administration has praised free enterprise while actually wrecking it.”
July 28, 1952
Price control today makes no economic sense; and yet it has been renewed. It is not a cure for inflation; and yet it has been retained. It is not a minor nuisance. It distorts and curtails production. It is a dangerous political weapon in the hands of the regime in power—a weapon by which it seeks to reward its friends and punish its enemies. Its prolonged retention imperils the free-enterprise system.
There was no irresistible majority demand behind the continuance of price control. The House, in fact (as shown by the vote on the Talle amendment), wanted to discontinue most of it. Both the House and the Senate passed provisions that rejected the dangerously harmful controls imposed by the International Materials Conference. Yet the Truman-dominated conference committee succeeded in throwing out all these provisions. The House, after less than an hour’s debate, meekly accepted the committee’s reversal. So we still have a price-control law nearly as bad as the one that expired.
The renewal of the law has already done great harm. It has been responsible, for example, for further prolonging the steel strike. Many of the steel companies were willing from the start to accept even the record wage increase awarded by the Wage Stabilization Board if they were permitted to pass on the increased labor costs by a corresponding increase in prices. But up to a late hour Price Administrator Arnall was still standing in the way of a settlement by refusing to grant such an increase.
Yet if price control makes no sense economically, and if even the political demand for it is so doubtful on net balance that Congress did not want to renew it, how did Mr. Truman succeed in getting it renewed? The answer is that while there has been some public awakening to the futility and folly of price control, this awakening has not yet gone far enough. Congress renewed price control because it was afraid that the Administration would otherwise try to pin the blame on it for any further price rise. And yet Congress failed to put into the law the only provisions that would have prevented such a price rise. The real cause of inflation is the increase in money and bank credit. Congress could have prevented the Administration from inflating further simply by making the Federal Reserve Board independent of Treasury or Presidential dictation; by restoring at least the previous 35 and 40 percent required reserve ratios of the Federal Reserve Banks, and by depriving the Federal Reserve authorities themselves of the power to inflate further.
The statement issued by Mr. Truman when he signed the new controls law betrayed the contradictions in his case. “At a time,” he wrote, “when our defense production is still expanding and necessarily contributing to inflationary pressures, the Congress has weakened price controls.” But defense production does not necessarily contribute to inflation at all. It does so only to the extent that it is not financed either out of increased taxation, or out of reductions in previous nondefense expenditures. It does so, in short, only to the extent that it is financed by deficits, themselves financed by increasing the money supply.
Congress, the President complained, “has virtually canceled selective credit controls.” But selective credit controls are the last refuge of the inflationist and the controlist. They encourage bureaucratic favoritism and discrimination between different firms, industries, and group interests. The only honest, workable, and free-enterprise way to stop inflation is through overall credit controls. In fact, it is merely necessary for the Federal authorities themselves to stop inflating—to stop monetizing government bonds, to stop holding down interest rates to inflation-stimulating levels.
But the Administration wishes to continue to inflate, by increasing the money supply, while pretending to “fight” inflation with price control. And Congress, by its new law, has enabled it to do precisely this. What Mr. Truman was really struggling for was not a cure for inflation but a campaign issue. And Congress, because of its own confusion, gave it to him.
August 4, 1952
A couple of weeks ago I risked here the prediction that for those who believe in economy and free enterprise, the Republican platform would probably prove incomparably preferable to the Democratic platform. The prophecy proved to be quite safe.
The Democratic platform opens with the same theme song it has sung for twenty years. It is still fighting the campaign of 1932, still blaming the world depression on Herbert Hoover, still claiming credit for every advance in position or production that anybody has made in the last twenty years through his own efforts.
In its offers to hand out the taxpayer’s money to every imaginable pressure group, the Democratic platform reaches new heights of vicarious generosity. It demands bigger unemployment benefits, bigger public-assistance programs, bigger old-age benefits, more Federal spending for medical care, school lunches, housing of every kind, including that for “middle-income families,” and more handouts to veterans. In fact, America, out of the fullness of your, the taxpayer’s, bottomless income, is going to pour out money to “lift the living standards” of practically everybody on earth, including specifically the Arabs and “the people of the Middle East.” Presumably a Democratic Administration will give Iran still more money as a suitable reward for seizing oil wells and refineries vital to the security of the Atlantic Pact nations and for stirring up anti-Americanism.
The farm handout program deserves special mention. The platform specifically “applauds” Congress’s recent action “in setting aside the ‘sliding scale’ for price support through 1954” and endorses a “mandatory price support program at not less than 90 percent of parity.” Even leading farm organizations have shrunk from such Federal lavishness, fearing its ultimate consequences. But in the Democratic platform this is only a beginning. Undeterred by the potato fiasco, the platform demands the extension of price supports “to the producers of perishable commodities, which account for three-fourths of all farm income.” Everybody is going to subsidize everybody else.
In flagrant contradiction to all this, the platform “solemnly” pledges “the preservation of the financial strength of the government.” It believes “in keeping government expenditures to the lowest practicable level.”
Doubtless the money for all these spending schemes is to come out of some invisible fourth dimension. We cannot expect any serious discussion of the inflation problem in such a platform, and we get none. There is no recognition of the fact that inflation is caused primarily and overwhelmingly by the increase in money and bank credit, and there is no proposal to check this increase. Even the endorsement of price control blandly cancels itself out: “We pledge continuance of workable controls so long as the emergency requires them . . . and their removal as quickly as economic conditions allow.”
The platform’s attack on the Taft-Hartley Act, however, is outstanding for its lack of candor and disregard of facts. It calls for the “repeal” of the Taft-Hartley Act. Nothing, however, would be more calculated to appall the New Deal Democrats and the labor leaders who direct them than the simple repeal of the Taft-Hartley Act. What they want (though they do not admit it) is the restoration of the completely one-sided Wagner Act. In their absurd charges, the drafters of the Democratic platform seem to have forgotten that the Taft-Hartley law was passed in 1947 not merely by a majority of Republicans but by a majority of Democrats in both houses of Congress.
For the platform to say that the Taft-Hartley Act “has been proved to be inadequate, unworkable, and unfair” is a piece of brazen impudence. In the crippling 54-day steel strike the President did not even try to apply or to work the injunction provisions of the law. Instead he allowed the strike to run until he and Phil Murray had in effect succeeded in forcing the union terms on industry.
August 11, 1952
The steel strike was ostensibly directed against the steel companies. But the loss of profit by the companies, and the even greater loss of tax revenues by the government, are now among the less important considerations. What comes foremost is the loss that the strike caused to the country. This has been estimated at some $4,000,000,000. In material terms, it came to 17,000,000 to 20,000,000 tons of steel-equivalent, as Henry H. Fowler, Defense Production Administrator, has pointed out, to “more than the total capacity of Great Britain . . . in a full year’s operation.”
The most telling summary of the loss was made by Defense Secretary Robert A. Lovett: “No enemy nation could have so crippled our production as has this work stoppage. No form of bombing could have taken out of production in one day 380 steel plants and kept them out nearly two months. The weird and tragic thing is that we’ve done this to ourselves.”
Who gained by the strike? The steelworkers? They lost collectively more than $350,000,000 in wages—an average of about $625 each. Even with their new increase, they will have to work a year to a year and a half before they have made up the loss that their self-elected idleness caused them.
Was the strike justified? Necessary? Before it started, the steelworkers were getting $1.88 an hour. This was already 24 cents more than the average wages being paid in all manufacturing industries. As compared with June 1950, at the outbreak of the Korean war, steel wages had risen 12½ percent compared with an increase of 11 percent in the cost-of-living index. On any plausible “stabilization” formula, therefore, or on any concept of “equity” as compared with other wages, there was no ground for any increase in steel wages. Yet the companies were forced to submit the case to Mr. Truman’s Wage Stabilization Board, which recommended an increase of some 26.5 cents an hour, including “fringe” benefits, and called for compulsory unionism in addition.
Immediately all the pressure and propaganda of the Federal government were thrown into forcing the companies to make this settlement. And the companies, in the end, had to grant an increase equivalent to 21.4 cents an hour, as well as compulsory unionism (with a few escape clauses of negligible practical importance).
What may prove to be even greater than the cost of the strike is the cost of the settlement. It destroyed every pretense that the Administration is trying to hold down wages. It proved once again that there is no wage ceiling that a determined union leader cannot tear through at will. There will now be a flood of demands from other union leaders to catch up with or surpass the steelworkers. Once more the government has bought off one set of wage demands at the cost of provoking a hundred others.
From the first the government was not an impartial arbiter but a party to the dispute. Mr. Truman went on the air to take the side of the unions. He refused to carry out the legal provisions enacted by Congress for precisely such an emergency. He seized the companies in defiance of the Constitution. He prolonged the strike by trying to force a wage increase while refusing a corresponding price increase. When his lieutenants at last granted the price increase, they bitterly threw the full blame for the strike on to the companies struck against. Roger L. Putnam, Economic Stabilization Administrator, accused them of holding “a loaded gun” to the government’s head. He neglected to mention the really loaded guns that Philip Murray and Mr. Truman had held to the companies’ heads.
The leading moral of all this is to get the government out of wage arbitration, and to deprive it of wage-fixing and price-fixing powers. The result of government intervention has been to try to boost wages while squeezing profits; to build up industrywide unions; to encourage and prolong strikes and make their impact more deadly. The ultimate result of such a policy must be disastrous to a free economy.
August 18, 1952
Mr. Truman’s Wage “Stabilization” Board recommended a thumping increase in steel wages that tore through every “ceiling” that the board itself had set. Before this increase was awarded, hourly steel wages, since the outbreak of war in Korea, had already gone up more than the cost of living. They were already 14½ percent higher than the average hourly wage paid in all manufacturing industry. Mr. Truman nevertheless did everything possible, including resort to unconstitutional seizure of the steel industry, to force the WSB wage increase on the companies. He tried to do this without granting a compensating price increase. Finally he found that in order to get Philip Murray an additional 11 percent increase in steel wages he had to allow a 5 percent increase in steel prices.
The next step was for Mr. Truman’s price controllers to start bitterly denouncing the steel companies for the 5 percent steel-price increase. They studiously avoided any mention of the 11-percent wage increase, forced on the companies, that had made the price increase necessary.
And then the next step was for the price controllers to announce that they were going to “isolate” the steel- price increase from any inflationary effect by forcing steel fabricators and distributors to “absorb” the whole of it.
Now this sort of talk is as dangerous as it is foolish. It begins by ignoring the fact that the steel-price increase was forced by the steel-wage increase. And even a price controller must know that it is politically impossible to grant a thumping wage increase to one group, already being paid above the average, while denying a similar wage increase to other groups. By its decision on steel wages the Administration has left itself no consistent or plausible ground for denying similar wage increases around the circle.
It is politically possible, of course, at least for a short time, to “isolate” a price increase by forcing special groups of fabricators to absorb it. But we cannot escape the long-run economic effects of such a policy. These groups of fabricators will have their costs raised without having their prices raised. Their profit margins will be forced down as compared with profit margins of producers in other lines. This means that production by these steel fabricators—and especially any expansion of their productive capacity, and new capital investment in their industries—will be discouraged and reduced. Yet the steel fabricators represent the very kinds of production—of guns, shells, tanks, engines, ships—that the government professes to be most eager to increase. It need hardly be pointed out that this cost-absorption policy is contrary to any principle of equity. It is an attempt to force a special set of producers to assume the entire burden of a cost increase created by a government decision. A’s profit margin and income are to be cut in order to relieve B. This sets up political discrimination as a policy. Nor would matters be helped by an attempt to penalize all producers in order to help consumers. In the long run, it should be obvious, it can never help consumers to hurt producers. To hurt producers is to hurt production, and to leave less of everything for everybody.
The bureaucrats’ belief that they can “isolate” a particular price rise once more reflects their utter lack of understanding of our marvelous productive system. All prices, wages, and costs are interrelated. The change in a single important price sends repercussions through the whole price network and alters the whole balance of production among different commodities.
It remains to be pointed out once more, finally, that price-fixing is a fraudulent remedy for inflation, and that the Administration’s “fight” against inflation is a sham battle. The cause of inflation is the increase in money and bank credit. The Administration is still busy trying to increase money and bank credit. Its new strategy is what its price fixers are calling “controlled escalation.” As even the friendly London Economist has put it, Mr. Truman “is taking every precaution to insure that the inflation continues through the election period.”
August 25, 1952
Sumner H. Slichter is professor of economics at Harvard and enjoys in some circles a reputation as a first-rate economist and even as an eminent “conservative.” He has done some instructive work; but when he writes on the subject of money and inflation, as he has taken to doing frequently of late, the result is deplorable. His article in the August issue of Harper’s, “How Bad Is Inflation?” is an epitome of all the shopworn fallacies that have been put forward as apologies for inflation in the last two centuries.
He begins by dismissing the conclusions on inflation by the American Assembly, a group of distinguished economists, as “uncritical and almost hysterical.” The assembly concluded that “inflation is a continuous and serious threat to the stability of the American economy and to the security of the entire Western world.” This judgment was not hysterical, but restrained.
It is Slichter who is appallingly uncritical. He not only thinks that it is easy for a government to plan and control “a slow rise in prices”; he actually believes that an “extreme” inflation “is not easily started.” It would be interesting to learn what his definition is of an “extreme” inflation, and what his concept is of difficulty. Germany inflated until its mark fell to one-trillionth of its previous value. Nationalist China recently inflated until the yuan reached 425,000,000 to the dollar. In Great Britain prices are three times as high as they were before the second world war; in the Argentine (with no “war” excuse) prices are five to eight times as high; in France, more than 25 times as high; in Italy, more than 50 times as high. None of these countries found it at all difficult to get its inflation going, but most of them are finding it politically impossible to stop.
Slichter’s argument throughout is based on assumptions that are neither proved nor warranted. One of these is that a rising price level is necessary for prosperity. This is refuted by a wealth of historical experience. The great American boom from 1925 to 1929, for example, occurred in spite of a falling price level. And Slichter does not seem to know that depressions are caused chiefly by the collapse of previous inflations.
Nor does Slichter seem to understand how inflation temporarily works its magic. It does so only as long as prices run ahead of costs (mainly wages). Then the prospective restoration or increase of profit margins may lead to an increase in production and employment. But the jig is up once labor gets on to the game, and wages and other costs begin to rise faster than prices. The apostles of permanent inflation (“continuous slow” inflation) are those who believe that labor can be permanently fooled.
Slichter does not explain in his article by exactly what process a “slow” permanent rise in prices—say 2 or 3 percent a year—could be produced. He does not understand why no nation has yet succeeded in keeping an inflation, once started, under control. He forgets that you can’t afford to tell people in advance that you are planning to cheat them. A government can’t plan a “gradual” increase in prices, because if people know that prices will be 3 percent higher, say, next year, they will bid prices up that much right away. If creditors know that the purchasing power of the money they are asked to lend today is going to depreciate 3 percent within a year, they will add 3 percent to whatever interest rate they would otherwise demand; so that instead of lending at 5 percent, say, they will ask 8.
Most fantastic of all, Slichter advocates a continuous inflation to combat Communism. I refer him to the late Lord Keynes, who wrote a generation ago: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. Lenin was certainly right. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Amen. And Slichter, alas, is not that one man.
September 1, 1952
Several excellent comments—by The Wall Street Journal, by Lawrence Fertig in The World-Telegram & Sun, and by the Guaranty Trust Co. of New York in its August Survey—have already appeared on the massive five-volume report put out by the President’s Materials Policy Commission. But a good deal more than this will need to be done both by individuals and groups if we are to have any adequate analysis of what Fortune lyrically hails as “one of the greatest, most readable government documents of the century,” and if we are to have any chance of heading off a new network of government controls.
The technique of this report is familiar. It begins by fearing an alleged “crisis”; it ends by concluding that only more government power, more government controls, more government bureaucrats, can save us from it.
The crisis this time is a “deficit” of raw materials. It seems that in 1900 this country produced 15 percent more than it consumed of raw materials other than foods and gold; that by 1950 this surplus had been supplanted by a 9 percent “deficit,” and that without more government intervention this “deficit” may reach 20 percent by 1975.
Now even if this guess were right it wouldn’t necessarily be alarming. England built itself up to the greatest industrial nation in the world in the nineteenth century by importing raw materials to export finished goods. In a peaceful world of free trade we could play a similar role.
But there is no good reason for supposing the commission’s guesses to be right. They are based on dubious deductions from a set of arbitrary assumptions. Why should we take seriously, for example, the guess that by 1975 we will need only 18 percent more tin a year but 1,845 percent more magnesium? Anyone would be lucky today to make a good guess concerning the 1975 consumption of any one item. It is sheer presumption to try to guess with an air of authority the relative consumption by 1975 of thousands of different items. Who can foresee today the vast changes that may be brought about by new discoveries, conversions, and inventions? Yet a government that has persistently failed to guess even its own fiscal deficit a year ahead has no qualms about guessing every raw-material deficit twenty-three years ahead.
The report undertakes to rescue us by more of the same kind of government interventions that have already become depressingly familiar. It proposes to manipulate prices, production, and exports; to establish quotas, floor and ceiling prices on the model of the International Wheat Agreement; and to create “buffer stocks” to be bought and sold by international authority to offset free fluctuations in supply and demand.
Do government commissions ever learn anything from anything? Have they learned nothing whatever from a hundred dismal and disastrous failures of the past—from the British rubber restrictions scheme, the British African peanuts scheme, the Brazilian coffee “valorization,” our own potato controls, pig controls, cotton restriction, and “ever-normal granary” schemes? Must the world plunge into ever more grandiose international cartels, from the wheat pact to the Schuman plan to this latest proposal?
All these control schemes are the direct result of lack of faith in, and lack of understanding of, the free market. All this recent nonsense about each country’s getting its “just” share of raw materials can only result in endless international bickering. Price controls, combined with “allocations” of raw materials to each country, can only unbalance and distort world supply, increase consumptive wastes, result in allocations to individual firms within countries, and so undermine competition and the growth or shrinkage of individual firms in relation to their relative efficiency. All these schemes can only end by further “politicalizing” every economic transaction—by socializing, regimenting, and eventually totalitarianizing our economy at home and throughout the so-called “free” world.
September 8, 1952
The economic problems of the British and ourselves are more alike than is usually supposed. Both of us are suffering from the monetary inflation created by our respective governments’ own policies; and both of us are suffering even more from the government controls imposed ostensibly to protect us from the consequences of this inflation. The difference between our respective problems is chiefly one of degree, not of kind.
This becomes clearer when we read an admirable article like that of Lord Balfour of Burleigh in the July issue of Lloyds Bank Review of London. His arguments are directed against the controls in Britain, but they apply with equal force against the controls here.
Lord Balfour begins by explaining the “immense superiority” of a free price system. “The price mechanism . . . and direct or physical controls . . . are the two fundamentally different methods of adjusting the demand for any good to the available supply. Under the price mechanism, supply and demand are brought into harmony by the movement of prices; the allocation of the available resources is determined by the operation of market forces. . . . [This] is the kind of situation we took for granted before the war, a situation in which every single consumer in the country could walk into any shop anywhere and buy (up to the limit of his money income, naturally) whatever he wanted. . . . In those days there were no such things as ‘shortages,’ not because physical supplies were necessarily any greater but because prices were uncontrolled and so brought demand and supply into balance. Nowadays, of course, the very expression ‘uncontrolled’ prices suggests exorbitant prices. In reality, as we all know, the free, uncontrolled prices of prewar days were both low and stable by comparison with anything that has happened since. The situation, now so familiar, in which any price that is free to move tends to shoot upwards, is a product of inflation.”
When rationing and allocation take the place of free prices, the decisions are taken, not by the consumers themselves, but by bureaucrats who say in effect: “We know best what you want.” Consistently applied, as Balfour points out, the allocation system leads to direction of labor—a gross violation of freedom. “What do we value most in our way of life? Surely our liberty. Of all freedoms, with perhaps the single exception of freedom to choose our job, none contributes more to our real liberty than the freedom to spend our money as we will and to give free rein to our individual choices and desires.”
Balfour goes on to show that “there cannot really be any dispute about the superior efficiency of a properly working price system. . . . Rationing and controls are merely methods of organizing scarcity; the price system automatically works towards overcoming scarcity. If a commodity is in short supply, a rise in its price does not merely reduce demand but will also tend to stimulate an increase in its supply. In this, the price system stands in direct contrast with rationing and controls, which tend to make it less profitable, or less attractive in other ways, to engage in essential production than to produce the inessentials which are left uncontrolled.”
Balfour’s final step is to show how artificially low interest rates create inflation, and how effective and even “selective” a weapon is an increase in the Bank of England rate. It can not only halt inflation, but it can help to balance trade and to direct production into the desired channels.
It is a pity that so much clearsightedness on the part of the chairman of Lloyds Bank should be marred by a blind spot. He cites exchange control, for example (one of the most vicious controls of all), as an exception, arguing that it “cannot be abandoned until the balance of payments is put right.” But if he had followed the logic of the rest of his article he would have recognized that the unbalance in Britain’s payments is caused by exchange control. Only foreign-exchange rates freed from price control will bring “supply and demand into balance.”
September 15, 1952
Mr. Truman has never been one to let a mere fact get in the way of his campaign oratory. “It was the Republicans,” he said on Labor Day, who “put across the Taft-Hartley Act in 1947.” This is unjust to his Democratic colleagues. The Taft-Hartley Act was passed by a majority of Democrats in both houses of Congress and even passed over Mr. Truman’s veto by a majority of Democrats in the House. The President has been insisting that Taft-Hartley is a slave-labor act and a union-busting act; and yet, after five years of that act, he inconsistently boasted on Labor Day that union membership had grown from less than 3,000,000 in 1933 to a record 16,000,000 now.
Candidate Stevenson was more subtle—but considerably more confusing. He began his Labor Day speech by telling the union leaders that he is no captive of theirs, that “I intend to do exactly what I think right”—but then it turned out, by miraculous coincidence, that what he thought right was exactly what the union leaders were insisting on. What he thought right did not quite coincide, however, with what he thought right just before his nomination. Then he wanted only “modification” of Taft-Hartley; now he calls for outright repeal.
He wants the act repealed, as far as I can make out, so that it can be passed all over again under a different name. Most of his “five general principles” and other ideas are already embodied in the existing Taft-Hartley Act; wherever they are not, it is Stevenson who is wrong. He piously declares that “we cannot tolerate shutdowns which threaten our national safety.” But then he wants to deprive even the government of the right to request an injunction—the only weapon that the Taft-Hartley law provides for at least postponing a nationwide strike that threatens our safety. Even Mr. Truman, in vetoing the Case bill on June 11, 1946, told Congress: “Injunctions requested by the government itself and designed to restrain strikes against the government in . . . a condition of national emergency are, to my mind, an essential element of government authority.”
Though he is supposed to be a lawyer, Stevenson thinks that Congress passed the Norris-La Guardia Act in 1932 “to prohibit the labor injunction.” This is untrue. The Norris-La Guardia Act, although it narrowly restricts the conditions, sanctions injunctions against union “fraud or violence.”
What remedy, then, does Stevenson propose in place of the injunction? He won’t say. “I have no miracle-drug solution for this problem.” In short, he has no solution at all. But what he actually proposes is that the President be given in advance his “choice” of practically unlimited powers against employers. Among these he specifies all the powers that failed so disastrously in the steel strike when Mr. Truman used them legally or by usurpation—government “recommendation of settlement terms”; “arbitration” (presumably compulsory), and “seizure” of companies that don’t accept a union-dominated government’s “settlement terms.” And then Stevenson blandly describes this law—which would allow the President to seize the employer’s property and impose settlement terms—as a law that would “keep these cases out of the White House” and “leave the obligation to settle these disputes where it belongs—and that’s with the parties!” This makes the arguments in Alice in Wonderland sound comparatively sane.
The real defects and contradictions in our present labor laws the Democratic candidate did not even discuss. The employer is prohibited from firing a man for joining a union, but he is permitted, encouraged, and even forced to fire a man for not joining a union. This one-sided denial of individual rights to workers Stevenson passes over in complete silence. And he passes over in complete silence, also, the notorious fact that the reason industrywide unions have the power “to stop the national economy” unless their terms are met is precisely because the Wagner-Taft-Hartley Act legally compels the employer to recognize and bargain with such unions.
September 22, 1952
Once a government undertakes to subsidize or guaranty a favored group of producers against the competition and vicissitudes of a free market, it creates a permanent vested interest in the continuance and constant enlargement of its subsidy or guaranty.
The world upheavals and bad government policies following the first world war led to great distress among American farmers. There was much talk about restoring “fair” prices for the farmer’s products. A strange idea was born. This was that the particular relationship between agricultural prices and other prices which prevailed from 1909 to 1914 represented some sort of mystical “parity,” and that the aim of government policy should be to restore it. Actually those five years were one of the most favorable periods to agriculture, so far as relative prices were concerned, in our entire history.
But even if this had not been so, the idea that there was some mystical “parity” ratio between agricultural and industrial prices, which ought to be permanently maintained, was economic claptrap. If there had been any disinterested logic behind the idea, it would have been applied all around the circle. An attempt would have been made to preserve indefinitely the particular price relationship that existed from 1909 to 1914 between every commodity and every other—no matter what profound changes occurred daily or over the years in supply and demand, in costs or methods of production, or in consumers’ wants.
Fortunately, no such preposterous proposal was ever made. Yet “parity” prices for farm products are still demanded by politicians, and the notion of “parity” prices is still treated with solemn respect.
And the government handouts keep growing. Today, when the farmers are enjoying what would have been regarded in 1934 as unbelievable incomes and prosperity, they are getting not smaller, but far bigger handouts than they were then. Strict comparisons are difficult because of the caprices of government accounting. But in 1934, when farm income totaled $6,117,000,000, government payments to farmers amounted to $250,000,000. In the fiscal year 1952, when farm income had soared to $33,573,000,000, government payments for farm programs had gone up to $1,042,000,000. For the fiscal year to end next June 30 they are planned at $1,804,000,000.
In its September letter the National City Bank of New York presents an instructive history of farm price support. “What started out as an emergency program to cushion the collapse of farm prices during the depression,” it points out, “has been gradually transformed into a permanent program of price supports with a constant upward bias.” Even farm organizations have been unsuccessfully urging Congress to show restraint.
But the two major parties are now competing recklessly with each other in bidding for the farmer’s vote with the taxpayer’s money. The Democratic platform wants “a mandatory price support program at not less than 90 percent of parity.” The Republican platform calls for “a farm program aimed at full parity prices for all farm products in the market place.” Governor Stevenson first piously quotes Jefferson’s fine motto: “Equal rights for all; special privileges for none,” then insists in special handouts to the farmer, and even argues that boosting the prices that the farmer gets doesn’t boost the food prices that the housewife pays. General Eisenhower, not to be outdone, not only stands behind the present price supports at 90 percent of parity, but adds: “And a fair share is not merely 90 percent of parity—it is full parity.”
Where does all this leave the lip-service in favor of government economy? When are we going to learn the economic absurdity of trying to subsidize everybody at the expense of everybody else? And when will the candidates of both parties realize that when they try to bribe each special group in turn, out of the public purse, they are participating in the debasement and eventual disintegration of our democracy itself?
September 29, 1952
The Democratic theme song in the present election is “Don’t Let Them Take It Away.” The implication is that every increase in wealth, income, or production achieved by any American in the last twenty years has been due, not to his own efforts, but to New Deal-Fair Deal paternalism.
This is, of course, nonsense. As Macaulay pointed out in his History of England more than a century ago: “No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous. It has often been found that profuse expenditure, heavy taxation, absurd commercial restrictions, corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the exertions of private citizens have been able to create it.”
Even if it could be proved, in short, that the American people have made great advances in wealth, income, and productivity in the last twenty years, it would not follow that they had done so because of the New Deal and Fair Deal. This may have been merely a continuation of the rate of progress shown throughout our history. And it may have been made in spite of mischievous governmental policies.
But are the American people in fact better off today than they were, say, in 1939? Herbert J. Miller, executive director of the Tax Foundation, has made an impressive analysis to challenge the claim. Some of his results were summarized in last week’s Newsweek, but the question warrants further study.
The first thing Miller had to do with the statistics so glibly cited by Administration apologists was to adjust them to realities. Mere dollar comparisons are utterly misleading. A married man with two children, for instance, whose net income before taxes was $4,000 in 1939, would have to make $9,139 in 1952 to reach equivalent buying power after taxes and inflation. After reducing the inflated figures to a per capita basis and to a dollar of constant purchasing power, Miller comes up with some surprising results:
1—Per capita personal income, after taxes and in 1939 dollars, rose from $536 in 1939 to $760 in 1951, a 42 percent increase. Yet all the increase occurred between 1939 and 1944. There was a decrease, in fact, of 2 percent from 1944 to 1951.
2—While total individual net worth (assets minus debts) was 9.2 percent greater in 1951 than in 1939 (in 1939 dollars), it was 7.4 percent less per capita, 12.5 percent less per family, and 24.7 percent less per worker.
3—Individuals were 54 percent further in debt in 1951 than in 1939 even when debt is expressed in dollars of constant purchasing power.
4—There was a per capita increase in national wealth (excluding military assets) of about 9 percent in 1951 over 1939. But there was a decline of 4 percent in 1951 compared with 1929. (From $3,501 in 1929 to $3,356 in 1951, in 1929 dollars.)
Miller even understates the evil effects of inflation. It “has not been an unmixed blessing to put it mildly.” But inflation always affects different groups differently. And it can in fact be mathematically demonstrated that, given a state of reasonably full employment, at least about half the population must lose more from a further rise in the cost of living than it gains from a further rise in its own prices or income.
Administration spokesmen, when they forget that their theme is “You never had it so good,” inadvertently admit this. Said the Secretary of Labor in a bulletin of his department last December: “Nearly 45 percent of the wage earners of the United States failed to keep pace with the 10.1 percent rise in the cost of living from January 1950 to June 1951.” And it was just last month that the Bureau of Labor Statistics thoughtlessly reported the rising cost of living has forced the average American city family to spend $400 more than its income after personal taxes (see page 73).
October 6, 1952
“Doublethink,” according to the late George Orwell, who coined the word, means “the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.” It seems to me that “doubletalk,” now used with a vague range of meanings, would be most useful if it were employed only as the strict parallel of “doublethink”—to mean saying two contradictory things at the same time, and professing to believe both.
Doubletalk and doublethink are certainly not new in politics, but Governor Stevenson seems to have raised them to a systematic art. He is either as undecided as Hamlet, or emphatically in favor of both alternatives, like the impetuous young man who jumped on his horse and rode off furiously in every direction.
In his Labor Day speech, as I pointed out here in the Newsweek of Sept. 15, the governor at the same time proposed (1) government “recommendation of [strike] settlement terms,” “arbitration,” and “seizure” of the companies that hesitate to accept the government’s terms, and declared (2) that such governmental interference would “keep these cases out of the White House” and leave the settlement of labor disputes “where it belongs—and that’s with the parties.”
In his speech in Baltimore on inflation Stevenson was simultaneously for huge spending and drastic economy—and got rousing applause for both views. In the same speech he was simultaneously for “a free economy . . . free men . . . free markets,” and “if it has to come, tighter wage controls as well as tighter price controls.”
One trouble is that Stevenson would rather fondle a phrase than wrestle with a fact. He prefers the sound to the meaning of words. He is in favor of “the government’s cutting its non-essential expenditures to the bare bones of safety”—forgetting that if expenditures are “nonessential” they need not be made at all.
Many of his rhetorical pronouncements have a boomerang quality. How can he expect to impress taxpayers, one is tempted to ask, by declaring that the government “must spend every penny as though it were a $5 bill,” when the Truman government is already spending $5 bills as though they were pennies?
But the basic reason why Stevenson cannot talk realistically about inflation lies beyond his own limitations as a thinker and as an economist. He cannot tell the truth about inflation without, like General Eisenhower, putting the responsibility for it squarely where it belongs—on the spending and “cheap money” policies of the Truman Administration. Stevenson’s phrase about $5 bills was unfortunate because it reminds us that it is a literal fact, and not a joke, that the Truman Administration this year is spending more than $5 for every quarter spent by President Hoover in 1930. The $80,000,000,000 we are spending this year is twenty-seven times as much as we spent in 1929. And Stevenson has to pretend that all this has to be spent, and that if the government is now spending $53,000,000,000 for defense, for example, it must be buying us $53,000,000,000 of defense and not, say, only $20,000,000,000 worth.
Stevenson assumes that defense expenditures necessarily raise the average level of prices. But of course they would not do so if the government took just as much away from civilian income in added taxes as it used for added defense expenditures, and if it did not print more money.
It is the increase in the money supply, brought about by governmental policy, that is the basic cause of inflation. The money supply has been increased from $64,000,000,000 at the end of 1939 to $193,000,000,000 today. This is not even mentioned by Stevenson. Nor does he tell us that the Federal Reserve is once more buying government securities and adding to inflation. Instead, like Mr. Truman, he ignores all this, and comes out for the fraudulent remedy of price control “until prices stop going up”—in other words, until the government itself stops pushing them up by printing more money.
October 13, 1952
One gathers from the report of Aug. 22 by Ambassador William H. Draper, Jr. that the European “dollar gap” is chiefly America’s fault. In this Draper reflects both European and American official opinion. The central economic problem, he thinks, is the “balance-of-pay-ments problem of Western Europe vis-à-vis the dollar area.” But the truth is that neither the “balance of payments problem,” the “dollar gap,” nor the “dollar shortage” would exist if it had not been created by unsound policies of European governments. The “problem,” the “gap,” and the “shortage” would all disappear overnight if those policies were changed.
What causes the so-called European dollar gap is the existence of monetary inflation in Europe combined with exchange control. The “unfavorable balance of payments” and the “dollar shortage” would vanish on the day the European governments stopped preventing their own citizens from buying, selling, or holding dollars or any other foreign currency in any amount they wanted and at any price they could agree upon. Europe’s so-called “cure”—exchange control—is the very disease that is choking it.
There seems to have been a tacit conspiracy among the bureaucrats of Europe and the United States in the last eight years that however we diagnose this disease, we must never call it by its real name—exchange control. And so we have been led from absurdity to absurdity. We have created, for example, the needless and futile institution called the European Payments Union, simply because European governments will not permit the only real solution—free exchange rates with full currency convertibility.
Even Draper now accepts the European myth that the balance-of-payments problem “has its roots in the huge excess of United States exports over its imports.” The explanation is completely upside down. To blame ourselves for an “excess of exports” is to blame ourselves for producing too much and for giving the excess away. It is to assume that it is somehow the duty of our citizens to buy European goods whether they want them or not. The problem is not our excess of exports; it is Europe’s excess of imports. The “balance-of-payments” problem would evaporate overnight if Europe allowed its own exporters to keep the dollars they earned or sell them for the best price they could get.
Free exchange rates would create an immense incentive, which they now lack, for European exporters. They would encourage American buyers, who could once more buy European goods at realistic prices. In the same way, either a higher dollar rate, or a halt in European inflation, would curb Europe’s present abnormal demand for American imports. If European production were freed from exchange controls, and once again rewarded in proportion to its efficiency, it would not only increase in total, but much more of it would flow into export channels.
Draper wants us to reduce our own tariffs still further, and to simplify our custom procedures. In this I would heartily concur. But as a barrier to foreign trade, our tariff today is of merely minor and academic importance compared with the insuperable barriers raised by European governments—the rigid import quotas, special licenses, bilateralism, exchange controls and prohibitions.
While European bureaucrats have complained more and more in recent years about the barrier of the American tariff, that barrier itself has been constantly declining. Data from the Department of Commerce show that last year tariff duties amounted to less than 6 cents for every dollar’s worth of imported goods. This compares with about 15 cents during the prewar years 1936–1940, and with 27 cents for every dollar’s worth of imported goods at the turn of the century in 1901–1905. The major immediate reason for reducing our tariffs still more at this time is not economic but political. It would remove the biggest excuse Europe still offers for failure to increase its exports. And it might shame European governments at last into abandoning exchange control.
October 20, 1952
Stalin now demands an entirely new official Communist textbook, and has turned in a 25,000-word memorandum to say exactly what it must contain.
Most of it is the usual hodgepodge of Marxist jargon, obscure dialectics, vilification of capitalism, derision of dissenters, and pure claptrap. Yet it is significant for one ingredient—the revisions that Stalin has been forced to make of Marxist, Leninist, and even of previous Stalinist doctrines in order to bring Communist theory into a more plausible relation with actual Soviet practice. These revisions tacitly concede that complete socialism is unworkable.
Stalin admits that he still doesn’t know how to bring about pure Communism and directly distribute goods to individuals in accordance with “need.” He admits that he still doesn’t know how to get rid of the much-abused capitalist price system. He specifically orders that the new textbook explain “why we . . . do not destroy production of commodities for the open market, money, trade, etc.” He admits that he still doesn’t know how collective farms can be completely socialized.
He even thinks it would be “senseless and criminal” to expropriate “small and medium-size producers in the villages and socialize their means of production.” But this is to concede that capitalism must either be right in principle, or must continue to be tolerated even in Russia (after 35 years of absolute Communist dictatorship) at least as far as “small- and medium-size producers” are concerned. It is as if a state governor were to denounce grand larceny while contending that it is senseless and criminal to illegalize petty and medium-size larceny.
Stalin admits that he still doesn’t know how or when to achieve “the Communist formula ‘from each according to his abilities, to each according to his needs’.” He professes to be operating on the formula “from each according to his abilities, to each according to his work.” He even calls this “the Socialist formula.” But modify it a bit, make it “to each what he creates,” and you have, in effect, the capitalist formula, the basic principle of free enterprise.
Finally, Stalin admits that socialism and/or Communism cannot solve the vital problem of economic calculation, and must depend on capitalism and free markets for the answer:
“Our economic executives and planners made a proposal which could not but astonish members of the Central Committee, since according to this proposal the price for a ton of grain was proposed to be almost the same as the price for a ton of cotton, and in this the price for a ton of grain was made equal to the price for a ton of baked bread. In answer to the remarks of members of the Central Committee that the price for a ton of baked bread must be higher than for a ton of grain in view of the additional expenditures for milling and baking, and that cotton in general costs much more than grain, to which also world prices for cotton and grain bear witnesses, the authors of the proposal found nothing intelligent to answer.”
Stalin, in short, cannot trust even the economic planners that he picks himself. He rejects their guess as to the relative values of cotton and grain; he knows it to be false, because it does not correspond with the verdict of the capitalist world and the capitalist price system, the verdict of supply and demand, of consumers’ choice, the verdict of free markets.
“What would have happened,” he asks, “if the proposals of these comrades had received legal force? We would have ruined the cotton growers and been left without cotton.”
Stalin, in short, now knows what Truman and Bowles and DiSalle and Woods have still to learn—that bureaucratic price fixing is a farce, a fraud, and a disaster; that the economic planners are presumptuous blind men groping in the dark, and that there is no substitute for free markets.
If Stalin lives long enough, and continues his progress, he may end up as the world’s leading classical economist, and its foremost champion of laissez-faire capitalism.
October 27, 1952
In a book published in 1947, Will Dollars Save the World?, I pointed out that intergovernmental loans or gifts were “on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending [or giving] government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’ . . . or ‘interfering in the internal affairs’ of the borrowing nation. The resentment is quickly exploited by the Communists. . . . The dilemma is, in fact, inherent. It lies in the attempt of one government to bribe another into following . . . policies which that other government does not believe in sincerely enough to follow without the bribe.”
I also devoted an article to this theme in Newsweek of Nov. 3, 1947.
The recent tiff between the French Premier and our ambassador is simply the latest illustration of the point. Ambassador Dunn left a letter saying that the United States could not promise the $650,000,000 in economic aid for 1953 hoped for by Premier Pinay, but only $525,000,000. In addition, Dunn left a memorandum indicating that the French would have to increase their military budget if they wanted more U.S. aid. Whereupon Pinay hit the ceiling, let it leak to the French press that he considered the memo “inadmissible,” and won acclaim at home as “a strong man who has been willing to say no to the Americans.”
In its news columns of Oct. 10, The New York Times explained that the Pinay government “has been under fire of the Socialist left and the de Gaullist right for ‘subservience’ to the United States. What is more natural than that the Pinay government should try to ‘get out from under’ by stealing the fire of the opposition on both left and right by proclaiming righteous indignation in the French press over some assumed indignity.” What is more natural indeed? And what could more clearly demonstrate the futility, if not the boomerang nature, of our foreign-aid program?
Our State Department beat a quick retreat. “M. Pinay seemed to think,” it said, “that we were undertaking to say what the French budget will be, and he made it clear that that is a matter for the French to determine—and it is.” Why not carry this further? Why not point out that the French budget is so completely a matter for the French to determine that the American taxpayer, with no say about it, has also no duty to contribute part of it? Why not point out that the way for the French Government to show its complete fiscal independence would be to stop asking the U.S. for more handouts?
The foreign giveaway program was wrong from the start. The real answer was the Atlantic Pact. But this was not in fact even proposed until well after the Marshall Plan had been launched. Under the Atlantic Pact we should undertake to defend against Russian aggression a free Europe that proves its own determination to defend itself. But by our hasty ambition to assume something we like to call “world leadership,” by our overanxiety to shower monetary contributions in the absence of clear showing of need, by our panicky insistence that Europeans increase their defense budgets whether they themselves recognize their danger or not, we have done the precise opposite of what we intended.
We have encouraged Europe to relax its own efforts and to leave its salvation to us. We have increased European “neutralism.” We have permitted to flourish among Europeans the fantastic notion that we need their help more than they need ours. We have given the French the impression that when they increase their armament they do it, not for self-preservation, but as a favor to the United States. We have provided fuel for Communist propaganda that we want to boss and “enslave” Europe.
Incidentally, if we stopped these lavish handouts, we would cut our budget by $9,000,000,000 or $10,000,000,000 annually, which is the difference between continuing inflation and halting it.
November 3, 1952
What is the central issue that will be decided in this election? Perhaps the best way to find the answer to this is to imagine that the election has already been held and that the outcome is already known. Suppose Governor Stevenson has won? What will the voters have said?
The answer is clear. The election of Stevenson and of another Democratic Congress will be almost universally accepted as an endorsement of the record of Harry S. Truman and a call for the continuance of the Fair Deal.
Nobody knows this better than Truman himself. It explains his desperate campaign for the Democratic ticket. He knows that the election of General Eisenhower and a Republican Congress would be a repudiation of his regime, while the election of a Democratic successor would be a “vindication.” Stevenson knows it too. Since his first feeble efforts to disassociate himself from “the mess in Washington” he has not dared to differ from Truman on a single important issue.
What will the voters have endorsed if they endorse Trumanism? They will have endorsed the most unscrupulous campaign of slander that a President has ever stooped to in our history. . . . Truman’s defamation of the very man he had up until a few months ago most honored and appointed to the highest positions of trust. . . . Truman’s whole record of vilification of those who have dared to differ with him, from “too many Byrds” in Congress to the Marines’ “propaganda machine almost equal to Stalin’s.”
They will have endorsed an incredible softness to Communism, illustrated by Yalta, Teheran, and Potsdam; the attempt to force Chiang Kai-shek to take the Chinese Communists into his government; the payment of ransom to a Communist government to release captured American fliers; the tardiness in acting on Vogeler; the virtual abandonment of Oatis; the effort to dismiss the Alger Hiss case as a “red herring,” the Tydings committee whitewash; Truman’s statement that he liked “Old Joe” Stalin; his acquiescence in humiliations to our Ambassadors to Russia; soft now-don’t-do-it-again reproofs even when the Russians deliberately shoot down American planes and men.
They will have endorsed the unbelievable vacillations and zigzags; that bungled us into a stalemate war in Korea, leaving us today with 122,000 casualties and a thin hope that the Communists may still be willing to call it a draw and let us out.
They will have endorsed the widespread corruption symbolized by deep freezers, mink coats, and the Kansas City vote frauds.
In the economic realm, if the voters return Stevenson and a Democratic Congress, they will have endorsed the most reckless spending in our history, the most burdensome and destructive taxes, and a policy of deliberate monetary inflation, especially for the campaign period. In the five and a half months ended Oct. 15, for example, money in circulation was increased $1,157,000,000 to a new high figure of $29,617,000,000—four times the amount outstanding in 1939. This monetary inflation has been brought about by deficit financing, government-bond support, and cheap-money policies. It means soaring living costs and a rotting dollar, which Truman pretends to offset by the futile and disruptive device of price fixing.
Pour on top of this the fantastic campaign against the Taft-Hartley Act, the misuse of the Federal government to organize and build up unions and enforce their demands, and the openly declared aim of Stevenson to deprive the government itself of the injunctive power, even against strikes that imperil the national safety.
The issue in this election, in brief, is whether Federal intervention and Federal power shall be encouraged to grow until they choke out economic and personal liberty and leave us to the mercies of an increasingly arrogant and possibly irremovable bureaucracy.
Those who want this result will vote for Governor Stevenson. Those who have misgivings about it will vote for General Eisenhower.
November 17, 1952
My dear Mr. President:
I want to begin by congratulating you on the fine sportsmanship and patriotic sense of responsibility which prompted you to offer the President-elect an airplane to go to Korea and to invite him to sit in with you in the formulation of the new budget and other problems of the transition period. But this won’t meet the real difficulty that the transition raises, and I am taking the liberty of suggesting another course on your part that I believe will. You now have the opportunity, in fact, to set a history-making precedent that would control all your successors.
The dilemma that now confronts both you and Mr. Eisenhower is inherent in our present inflexible provisions for the transfer of power. Mere consultation, even with the best will on both sides, cannot solve it. You are now put by law in the absurd position of having to prepare a budget for a period—1953–54—in which you will be out of office and for which you cannot reasonably be held responsible. Mr. Eisenhower or his representative, on his side, will be confronted with a document as big as a telephone book, implementing scores of previous policies and made up of thousands of different items. Mr. Eisenhower could not possibly make informed decisions on these without consultation with department heads and bureau heads of his own choosing. It is unfair to ask him to take even an implied responsibility for this budget.
This is not your fault. The predicament, throughout our history, has been built into the provisions for the Presidential and Congressional succession. Prior to the passage of the Twentieth Amendment, the Presidential succession did not take place until the March 4 after the election. I need not tell you what the appalling costs sometimes were of this four-month interregnum. It was in the four months between the election and inauguration of Lincoln that seven states seceded from the Union and set up the Confederacy. Even if Buchanan, the outgoing President, “had been a man of great strength and ability,” as the historian James Truslow Adams put it, “it would have been almost impossible to strike out [on] a policy of his own, when he had only four months to serve and knew nothing of the policy of the man who would soon have to take up the reins.”
The cost of the interregnum period after Franklin D. Roosevelt defeated Herbert Hoover is still fresh in the minds of those of us who lived through it. The deterioration of business confidence between the election in November 1932 and the inauguration in March 1933 was rapid and profound. Roosevelt could not act because he was not yet in office; Hoover could not lead because he lacked public support. The country paid a needless and tragic price in mounting insolvencies, bank closings, and unemployment.
An attempt to solve this problem for the future was made in the adoption of the Twentieth Amendment in 1933. Unfortunately, the amendment did not abolish the four-month interregnum; it merely reduced it to two and a half. So once more we are faced with a period of uncertainty. You now have legal power without a popular mandate, and Mr. Eisenhower now has a popular mandate without legal power. Action is frustrated. Policy must mark time.
There is one clear solution, and to you has come the opportunity to be the first President to propose it. This is to offer to resign now and turn your office over to the President-elect, either immediately or on the first day he is ready to assume it.
No further tampering with the Constitution would be necessary. You could simply call an immediate special session of Congress and ask it to make the appropriate changes in the Presidential succession law. Congress might simply add a provision, say, that the outgoing President could appoint the President-elect to some office in which the latter would ex-officio succeed to the Presidency on the resignation of the incumbent President and Vice President.
It need hardly be said that such a revised law should impose no economic penalties on resignation. It should provide that the salary of any President who resigned in this way would be continued until Jan. 20, just as if he had remained in office.
The new law should also, preferably, give each outgoing congressman or senator the same right of immediate resignation in favor of his elected successor, under similar salary provisions. The date of transfer of office for congressmen and senators could then be any time between the day after election and Jan. 3, and for Presidents any time between the day after election and Jan. 20. The actual date of transfer, within this period, could vary in each case, depending purely on the mutual wish or convenience of the two parties directly concerned.
There would be nothing obligatory about such resignations. But once legal provision were made for them, and the precedent set, both outgoing congressmen and outgoing Presidents, we may be confident, would be eager to take advantage of it. Nobody likes the label or the status of a lame duck.
The change would be in accordance with the tradition of virtually every democratic government of Europe, and of every parliamentary government of the British Commonwealth, including our neighbor Canada. In such governments the executive does not attempt to carry on a day after he has lost an election or a vote of confidence. But the change here proposed would be more flexible.
The formal inauguration ceremony, of course, could still take place on Jan. 20, whether or not the office had actually changed hands prior to that date. It is not unusual, in democratic practice no less than in coronations, for a formal ceremony to take place after the actual fact that it solemnizes.
If you call a special session now, Mr. President, it may still be possible to reduce the present interregnum period by six or seven weeks. But much more importantly, you have the opportunity to set a permanent milestone in American history, and to avert the possibility of any future two-month paralysis of government which could have consequences as grave as that of 1860–61 or of 1932–33.
November 24, 1952
Not least among gains achieved by the election of Mr. Eisenhower and a Republican Congress is that it provides an opportunity for reexamining both the details and the principles of our foreign-aid program.
A few days before the election a New York Times story disclosed the contents of a “secret Green Book” prepared by the Mutual Security Agency “as a basis for discussion of next year’s program.” And what its proposals chiefly reveal is that MSA officials have learned absolutely nothing from mistakes of the past; that they are dreaming up more grandiose schemes than ever, involving still more bureaucratic agencies and jobs, still more economic controls, still more burdens on the U.S. taxpayer, still more drains on our national resources.
One of the proposals is for “a multi-billion-dollar currency stabilization fund to be called the Atlantic Reserve System.” The reader will not be surprised to hear that: “If coordinating the currencies of the North Atlantic community requires a substantial degree of pooling of resources, the major contributor to the pool by far must be the United States, which possesses over 80 percent of the gold reserves of the system.” Nor should he be surprised to learn of the hope of our MSA bureaucrats that “tying together the major currency systems of the Atlantic community . . . would end the preoccupation abroad with dwindling gold reserves that has prevented expansionist economic policies.”
In plainer English, this means that we are to be asked to give or throw away most of our gold reserves by allowing people everywhere to demand this gold in exchange for practically every European paper currency, no matter how overvalued, and that European governments are not only to be permitted but encouraged to continue the very paper money inflation (“expansionist economic policies” is the MSA euphemism) that causes gold drains.
This scheme is designed to bring about something called “managed convertibility.” The phrase (as well as the whole scheme) overlooks the fact that all currencies were freely convertible into each other when exchange rates and markets were free; that nothing but the existing exchange controls and other bureaucratic restrictions now obstruct this convertibility; that the system we have today is best described as one of managed inconvertibility; and that the way to get full convertibility is not by more management but by less of it.
The Atlantic Reserve System (so far as one can gather until further details are made available) is simply to be thrown on top of several organizations already designed to do virtually the same job—the International Monetary Fund, the International Bank, and the European Payments Union. This is another illustration of the bureaucratic maxim that what’s worth doing is worth overdoing.
Other schemes in the Green Book contemplate an “Atlantic Economic Board” and an “Atlantic Commodity Board.” The latter “would seek to stabilize production and prices of essential raw materials through long-term agreements with leading producer countries and thereby remove the need for restrictive cartel arrangements.” In other words, the “need” for private cartels would be removed by setting up an enormous international governmental cartel, fixing prices and production quotas and allotting consumption quotas—in short, regimenting the world economy.
All this, it need hardly be said, is the very opposite of what the world now needs. What it desperately needs is a restoration of free markets, free prices, free production, free consumption, free trade. In the monetary field it needs an end to bureaucratic parlor tricks, to exchange control, to deficit financing, to artificially depressed interest rates, to more paper money. It needs a return to the gold standard. It is not foolproof and it is not perfect, but it is infinitely better than bureaucratic caprice.
What the world’s bureaucrats have still to learn, in brief, is that it is precisely their controls that create most of the problems they are trying to solve.
December 1, 1952
From 1886 to 1947, an outgoing President could have eliminated the dangerous four-month interregnum before the inauguration of his successor simply by his own act of resigning (together with the Vice President) after appointing the President-elect as Secretary of State. Though this possible course was closed by the Presidential succession act in 1947, it could be reopened by a mere amendment to that act. Such an amendment could be drafted and passed by Congress in less than a week. Yet rather than consider this simple step, many people who began by expressing concern over the risks of the eleven-week interlude before the inauguration of General Eisenhower are now trying to persuade themselves that the risks have been eliminated and the problem solved by a meeting of 70 minutes and a vague joint statement that amounts to little more than a gesture.
The truth is that an interregnum of eleven weeks between the election and inauguration of a new President is as needless, and potentially as dangerous, as the previous interregnum of four months. If it had not been for the interregnum of 1860–61, the disaster of the Civil War might have been averted. Without the interregnum of 1932–33, the banking panic of 1933 could certainly have been averted.
“Again and again,” wrote President Wilson to Secretary Lansing in 1916, “the question has arisen in my mind, what would it be my duty to do were Mr. Hughes to be elected? Four months would elapse before he could take charge of the affairs of the government, and during those four months I would be without such moral backing from the nation as would be necessary to steady and control our relations with other governments. I would be known to be the rejected, not the accredited, spokesman of the country; and yet the accredited spokesman would be without legal authority to speak for the nation. Such a situation would be fraught with the gravest dangers.”
It would be his duty, he went on, “to relieve the country of the perils of such a situation at once,” and if he could gain the consent of the persons involved, he would “then join the Vice President in resigning and thus open to Mr. Hughes the immediate succession to the Presidency.” He concluded: “The whole country has long perceived, without knowing how to remedy, the extreme disadvantage of having to live for four months after an election under a party whose guidance has been rejected at the polls. Here is the remedy. . . .”
Today a change in the law would be needed to adopt this remedy. But advantage could be taken of this, as I suggested here two weeks ago, for Congress to provide specifically that the salary of any President who resigned for this purpose would be continued until Jan. 20, just as if he had remained in office. Certainly no economic penalty should be placed on such a voluntary surrender of office.
Congress could also use this opportunity to deal with the problem of the change-over of Cabinet members. It could authorize the incoming President to appoint for terms of a few months as many Secretaries-General as there were existing members of the Cabinet. Each of these could be assigned to work with his predecessor or chosen successor, as the case might be. No Secretary-General would be granted specific powers, but he would have the standing and salary of a Cabinet member and whatever secretarial help he needed.
None of the legislation here proposed would impose any compulsion on anyone. It would merely permit an outgoing President to resign and turn over his office on any date before the following Jan. 20 that was agreeable to his elected successor. It would give flexibility instead of dangerous rigidity to the period of changeover. Even if Mr. Truman, because of the delay involved by legislation, was not now able to transfer office to Mr. Eisenhower until a few weeks before next Jan. 20, he could still establish a fine precedent and remove a grave risk for the future.
December 8, 1952
A few weeks ago I attended and spoke before the annual meeting of the National Machine Tool Builders’ Association, which this year celebrates its 50th anniversary. The machine-tool industry does not deal directly with the consuming public, but with other industries. It makes the tools that make tools, the machines that make machines. It turns out the machines that turn out trucks, tractors, automobiles, radios, television sets, refrigerators, washing machines, lawnmowers, watches, razor blades, milk bottles, shoes, suits, pills—almost anything you can think of. Machine tools themselves can only be made by other machine tools.
Surely the men in this industry do not exaggerate when they call machine tools the muscles of America; when they point out that the better our tools, the greater our capacity to produce, the higher our standard of living, the stronger our military security. For we must have machine tools to produce guns, bullets, shells, tanks, aircraft, battleships, and bombs. The machine tool is the very basis of America’s industrial supremacy, of our whole mechanical civilization. It has enormously increased labor productivity. It is the secret of America’s unparalleled wages.
For technical reasons, changes in the demand for and output of consumers’ goods give rise to much more violent changes in the demand for and output of producers’ goods. And as the machine-tool builders are producers’ producers, they are the classic example of the prince-or-pauper, feast-or-famine, boom-or-bust industry. Yet Washington has been extremely slow to realize the industry’s special problems. It was not until August 1951 that price relief and priority assistance were extended to it. The price-control program has been stupid generally, yet as applied to machine tools it was almost disastrous.
Instead of offering incentives and inducements for the expansion of the American machine-tool industry since the outbreak of war in Korea, the Truman Administration in the main has provided deterrents.
The so-called excess-profits tax discourages growth generally; but it is particularly discouraging to an industry subject, like machine tools, to extreme swings in profits. For this tax is liable to take years of low earnings as the “normal” base, and so take away an extra heavy slice of earnings in the rare good years. Its effect, in other words, is to cut much more heavily into the average profits of industries subject to wide fluctuations in demand than into the profits of industries benefiting from steady demand. In this way it is depriving the machine-tool industry of the needed reserves for lean years, of reserves for survival, not to speak of funds for the expansion of plant, or for the research necessary to keep ahead of our potential enemies.
The same considerations apply to the renegotiation of government contracts. The general effect of this practice is to place an arbitrary limit on profits, and so undermine the incentive to economies and efficiency in production. It may be seriously questioned whether renegotiation does not reduce defense output below what it would otherwise be, and actually cost the government much more money in the long run than it saves.
Finally, the American machine-tool builder has watched with misgiving a foreign policy which has subsidized his European competitors with his own tax dollars and then effectively prevented him from selling his own goods in the foreign market. Does it make sense even from a military standpoint, he asks himself, for us to build up the European machine-tool industry at the expense of our own, when Stalin’s hordes could overrun Europe and then use all this equipment against us?
The recent proposal by Henry Fowler, the Defense Mobilizer, to set up a government stand-by reserve of machine tools to be ready for use in the event of full-scale war is a step in the right direction. But the new administration should reexamine the whole policy toward the machine-tool industry—and, for that matter, toward industry in general.
December 15, 1952
Some readers may have wondered why a column devoted to business tides has been discussing the “political” problems of an Administration change-over. The reason is that the uncertainties created by the interregnum period can have, and have had, profound effects on business. The bank panic of 1933 was the direct result of the interregnum. That panic caused great unemployment and suffering for years. Its effects are still felt in the retention of such mischievous institutions as the Reconstruction Finance Corp., in the persistence of inconvertible paper money, and in the excessive dread of deflation that has helped to cause continued inflation.
American action could be temporarily paralyzed even now if, for example, the Communist world should make some unexpected aggressive move before the present interregnum was over. And whatever threatens our national security of course profoundly affects business.
Yet there is great national reluctance to consider even minor changes affecting the Presidential office. Though the Constitution makes explicit provision for the resignation of a President, there is a curiously widespread notion that it would be “unconstitutional” for a President to resign before his term expired on Jan. 20. And the proposal that a President be merely enabled by law to resign in favor of his elected successor is regarded by some as directed against the incumbent—though such a precedent, once set, would almost certainly control all his successors.
Fortunately, it is possible to discuss the changeover of a Cabinet with comparative freedom from the misconceptions and prejudices that encumber the discussion of a change-over of the Presidential office. And the Cabinet problem urgently needs consideration at this time. For months Defense Secretary Lovett has expressed a wish to be able to brief his successor fully before that successor takes office. General Eisenhower has taken the unprecedented step of naming his full Cabinet long in advance of his inauguration. His Secretaries-designate have already been holding conferences with incumbent Secretaries.
The new procedure undoubtedly serves the public interest. Yet under existing law it is unfair to the President-elect and his appointees. If they are expected to begin working on their new jobs even before officially taking office, then they ought not to be asked to do it without compensation. Congressman Hugh Scott says it is costing some $20,000 a week to keep a staff of 90 to 100 persons in the Eisenhower headquarters in New York, and that it is necessary in the public interest to keep this organization until Jan. 20. But the funds for it must now be supplied by private subscription.
There is a simple way in which Congress could deal equitably with this situation. It could authorize both an outgoing and a newly inaugurated President to appoint an Alternate Secretary for each existing Secretary. This Alternate would have the rank and the salary of a Cabinet member, and a modest budget for temporary clerical help. As his tenure would have a maximum duration of, say, three months, and as he would have no independent powers, his appointment would not need to be made subject to Senate confirmation.
With such legislation on the books, the President-elect could forward to the outgoing President a list of his intended Cabinet appointments. The outgoing President, as a courtesy, could name these as Alternate Secretaries. Even if this course were not feasible in a given case, the new President, when naming his new Cabinet after he took office, would still be empowered to name members of his predecessor’s Cabinet as Alternate Secretaries for a few weeks to give them time to brief their successors.
This legal provision for a smoother, fairer, and more orderly Cabinet change-over could either be made by Congress independently, on its own merits, or together with a provision permitting more flexibility in the change-over of the Presidential office.
December 22, 1952
On Oct. 18, the Wage Stabilization Board rejected the proposed increase of $1.90 a day for soft-coal miners. It ruled that $1.50 was the highest increase allowable under the stabilization policy. The miners then went on strike. This was embarrassing to Mr. Truman at the height of the election campaign. He saw John L. Lewis, and the strike was called off. As it is well-known that Lewis does not call off a strike and leave for South America merely on a nebulous promise that his case will be “reconsidered,” it was widely assumed that Mr. Truman had given him a definite assurance that he would retroactively approve the full $1.90.
Post-election developments have done nothing to shake this assumption. Mr. Truman’s action of Dec. 3, in discarding the counsel of his own stabilization officials and overruling his own wage board to grant the full $1.90 increase, stripped the last veil from any pretense that wage and price control was being administered honestly and evenhandedly.
The chairman of the board, and its industry members, promptly resigned. The chairman’s statement explained why he could not “usefully or conscientiously continue.” The industry members explained why they could not “be parties to what we believe to be the perpetration of a fraud upon the American people.” “If your action,” they wrote to the President, “means that the small and the weak are to be restricted by wage controls, while the big and the powerful are to be allowed whatever excessive increases result from the threat of a paralyzing strike, then there no longer exists the equality with which all law and all regulation should be applied in a republic. . . . We cannot participate in a program which would require us to grant special privilege to a few, and to make second-class citizens of all others.
“On the other hand, if your action means that all employers and employees may put into effect increases as far in excess of sound stabilization policy as those you have approved for the coal miners, then we must advise again, as both we and the board’s public members advised in our coal case opinions, that wage controls become an empty shell, and a fraud upon the people.”
This logic is inescapable. The efforts of Mr. Truman and his remaining “stabilizers” to rationalize his action have only involved them in further contradictions and absurdities. Mr. Truman pretended that he overruled his own board just to save Mr. Eisenhower from a coal strike. But if he openly yields to every major strike threat, he cannot still pretend to have a stabilization program. Yet he does: “It is therefore my firm intention to continue a strong stabilization program and turn it over to the new Administration as a functioning, effective entity. If the new Administration then wants to scrap price, wage, salary, and rent controls it will be free to do so on its own responsibility.”
The intent behind this is transparent. It is to destroy the substance, and preserve the form; to act “for the record”; to destroy the fact of wage control but to keep the pretense—and then put the blame for “scrapping” the program on the Republicans.
Meanwhile Mr. Truman’s stabilizers talk solemnly of “sealing off” the coal wage increase from the rest of the economy. This neat trick would require not only putting the entire burden on the coal companies, but refusing to all other unions the increases granted to the coal miners.
The new Administration should now drop all wage and price controls—not because Mr. Truman did not administer them honestly and impartially, or because “the need for them has now passed,” or because it would be politically difficult to restore them, but because they are wrong in principle. They do not prevent or combat inflation; they merely curtail and unbalance production. They owe their existence to blind envy and economic ignorance. Inflation is caused by the excessive creation of money and bank credit. At the same time as Congress drops wage and price controls, it should take steps to see that the continuous manufacture of more money and credit is brought to a halt.
December 29, 1952
I take the title from that of an excellent article in the September issue of U.S.A. by Helmut Schoeck, professor of philosophy and religion at Fairmont State College, West Virginia. Dr. Schoeck in his article quotes some words of mine from this place, and I am borrowing in turn a few of his points to write a variation on the same theme.
Envy has been an attribute of human nature from the dawn of history. But it has always hitherto been regarded as a sin. Ovid thought it “the meanest of the vices.” The Bible calls it a “rottenness of the bones.” “From envy, hatred, and malice, and all uncharitableness,” says the Book of Common Prayer, “Good Lord deliver us.”
Yet today envy is glorified as a virtue. Politicians advocate measures, not because they will bring any material benefit to anyone, but on the ground that they may assuage the public envy which they themselves have helped to inflame. Hitler promised that nobody would be permitted to have an income of more than 1,000 marks a month or be allowed to live on the income from investments. Franklin D. Roosevelt once proposed a limit of $25,000 a year on incomes.
People sometimes become Socialists or Communists through a desire to abolish poverty, but when their ill-conceived schemes fail to bring this result, their feeling too often degenerates into mere hatred and envy of the rich. The success of Marx sprang from his contemptuous dismissal as “utopianism” of all peaceable or constructive attempts to relieve poverty, and from his naked appeal to hatred, envy, and class warfare against the well-to-do and successful.
The prevailing ideology today is a diluted form of Marxism, even on the part of many of those who think themselves anti-Marxist or anti-Communist. The emphasis of most “welfare state” proposals today is on hurting or impoverishing the rich rather than on helping or enriching the poor. Most of these measures surely accomplish the former, and usually the opposite of the latter. They level down, not up.
Envy is the main drive behind the present fantastic tax rates on the upper-income brackets. “It should be remembered,” writes David McCord Wright, “that these high progressive rates have almost no revenue significance. They yield only a pittance compared with other taxes and the size of the government budgets. They are merely the reflection of ‘ethical’ prejudice.” It may be added that these rates, by choking incentives and draining savings, do incalculable harm to workers and to the poor. They retard the very growth of capital upon which the growth of productivity and real wages depends.
All this is even truer of the present rates of death and inheritance taxes. Even belligerently New Deal economists admit that such taxes “are unimportant as revenue producers, having as justification only our desire for less inequality of income and wealth”—in other words, the present passion for leveling down.
The main drive behind the so-called excess-profits tax is also to appease envy. The tax ignores the vital function of profits as the chief incentive to efficiency and economy and the regulator of production. It promotes waste and reduces war output. It is defended by such high-sounding slogans as: “No one must be allowed to profit from war.” It would be just as logical to say that no one must be allowed to profit from sickness, or from death, or from arson, or from crime, and for that reason to refuse to pay doctors or undertakers or firemen or policemen. This is envy masquerading as a passion for justice. The general rule of free enterprise is not unjust. It is “to each in accordance with what he contributes; to each what he creates.” The way to achieve maximum output for war is to reward each in proportion to the value of his output.
In the Christmas season, above all, we should remind ourselves that this modern glorification of envy is not part of the Christian ethic. That ethic teaches not envy, but charity and compassion. It advocates individual voluntary help to the less fortunate, not forcible seizure.
“Charity suffereth long and is kind, charity envieth not.”
- 1C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 2C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
