Business Tides
Overrule the ‘Fed’?
January 7, 1957
On Oct. 22, Elliott V. Bell, editor of Business Week, made a speech before the American Bankers Association which deserved and has received much attention, not because it contained anything new, but because it supported, in an unusually lucid and plausible form, increasingly popular Keynesian theories concerning who should manage our managed money, and how. These theories lead in practice to a philosophy of perpetual inflation.
Bell’s plan, in brief, is to subordinate the Federal Reserve Board to a “National Economic Council,” which would “coordinate” all monetary and “basic economic policies” of the government under the President, “who would have final responsibility for its decisions, and for resolving conflicts on basic matters.” As Prof. Walter E. Spahr has already pointed out, this proposal is substantially the same as that made by a research staff of the Committee for Economic Development in 1946. The CED group recommended that a central monetary authority under the President be created and “charged with developing and directing a unified program of fiscal, monetary, and price control action to maintain price stability and high employment.”
Spahr has also pointed out that if the proposed Economic Council is to have “the responsibility of determining the basic economic policies of the government,” even “Congress would be compelled to abstain from exercising the powers and responsibilities reposed in it under the Constitution. It would have to do what the council directed it to do. The President would become a dictator.”
INDEPENDENCE?
Bell declares that his plan “would preserve the independence of the Federal Reserve System.” In contradiction to this, however, he questions “whether under present-day conditions the Federal Reserve ought to be able to . . . go counter to the economic policies of the national Administration.” It is clear that the Bell plan would make the “Fed” impotent. If the Fed chairman, as member of the proposed council, wanted to raise discount rates, for example, and other members of the board (which would include the President, Secretary of the Treasury, chairman of the Council of Economic Advisers, “and other top-ranking economic policymakers”) wanted to lower discount rates, they could simply outvote the Fed chairman, who would have to go along with their decision. The Fed’s “independence” would become a bad joke, consisting in the freedom to be overruled.
“In no major country of the world today, except in the United States,” Bell declared, “is there a central bank that can legally, if it wishes, tell the head of its own government to go fly a kite.” Let us put aside the question whether the President is “head” of our government or merely its Chief Executive, subject to the laws of Congress and the decisions of the courts. The situation Bell describes, when you come to think of it, is precisely what the situation ought to be. His comparison is unfortunate. It reminds us of the atmosphere of perpetual monetary crisis, or of racing postwar inflation, in nearly every country today where the central bank can’t tell the government to go fly a kite.
ETERNAL BOOM
The experience of history is that, wherever the central bank is not independent of the government, the government is unable to resist the fatally easy course of financing its needs by borrowing from the bank. It is unable to resist the demands of pressure groups for higher wages, subsidies, price supports, and inflation. The government tries to “stabilize” the boom at its peak, and to prolong it to eternity. It turns the central bank into the central inflation factory. What keeps our own Fed relatively independent today is that its governors serve overlapping terms of fourteen years, and cannot be removed for refusing to inflate.
All proposals of the Bell type begin by asserting that “the state is responsible for maintaining the economic health of the community.” But the irony of such pious assertions of “social responsibility,” as the Guaranty Trust Co. has pointed out, is that they nearly always end by proposals for financial irresponsibility. 
January 14, 1957
In asking for advance authority to commit American troops to “protect the territorial integrity and political independence” of any Middle Eastern nation against Communist “armed aggression” the President has taken an immense step forward in foreign policy. Yet Congress is still faced with an awkward problem. It is being asked to give much wider discretionary powers to a President and a Secretary of State who have ineptly used the discretionary powers they already possess.
Nasser’s seizure of the Suez Canal was a breach of a treaty and an arbitrary seizure of an international agency. We failed to denounce it as such. Instead, we restrained Britain and France and called a futile “users’” conference, whose conciliatory proposals Egypt contemptuously rejected. When France and England in desperation took the only remaining action likely to protect the vital interests of the West, we called the U.N. Assembly into session in order to stigmatize them as “aggressors.”
The President now seems to be proposing to do with American money and at the risk of American lives the very things which he prevented Britain, France, and Israel from doing with their own money and at the risk of their own soldiers’ lives. If the withdrawal of British and French troops now leaves a power “vacuum” in the Middle East, it is a vacuum which our own policy helped to create. The President’s new proposals are a great step forward. But they still, in several respects, fail to face up to realities:
U.N. WEAKNESS
1—The President’s proposals deal with a possible future crisis rather than the crisis that now confronts us. He offers to send troops to defend nations “requesting aid, against overt armed aggression from any nation controlled by international Communism.” But this fails to deal with the problem of “peaceful” Communist infiltration, or to meet clearly the problem of Middle East countries, like Egypt and Syria, that are already under the control of men willing to play with the Communists.
2—The President apparently still wishes to leave the problem of Egyptian-Israeli relations and of the Suez Canal to the United Nations, though that body has so far signally failed to solve either problem. The President’s own speech, however, clearly shows how weak a reed is the U.N. to bind our destinies to: “The United Nations was able to bring about a cease-fire and withdrawal of hostile forces from Egypt because it was dealing with governments and peoples who had a decent respect for the opinions of mankind. But in the case of Hungary . . . the Soviet Union . . . has shown callous indifference to the recommendations, even the censure, of the General Assembly.” What does this mean but that the United Nations is either a hollow fiction as a preserver of world peace, or merely a tool that can be used against the democracies but not against the Communist dictatorships?
3—The President’s message strongly implied that we would act alone in using troops in the Middle East, and not with England, France, or other members of NATO. This would not only put an immensely greater burden upon us, in money and men, delay help, and risk defeat, but its very proposal must further arouse the suspicions and resentment of our allies. We have already, by the recent ambiguities and contradictions of our foreign policy, badly shaken the confidence of those allies.
4—We come at last to the question of foreign aid. The President wishes to continue such aid “for economic and defensive military purposes,” and will ask authorization of a special discretionary fund of $400 million for the Middle East. But how and to what effect will these funds be employed? Are we once more to urge money upon Nasser, to prop up the Egyptian economy that his own actions have done so much to disrupt? Are we to reimburse Syria for its action in blowing up the pipeline that runs across it? Or are we to recognize, at last, that the whole economic foreign-aid program is a colossal failure? Egypt will recover through restoring the Suez Canal traffic and tolls, and the Middle East generally through restoring the movement of oil, far more quickly than with U.S. Government grants.
January 21, 1957
Mr. Eisenhower’s State of the Union message is a curious document, praising free enterprise and government economy in general terms while recommending more government controls and special spending.
His discussion of inflation was typical. He admitted the government’s duty not to become “profligate in its expenditures.” But then he called upon business to “avoid unnecessary price increases” and upon labor to refrain from “wage increases that outrun productivity.” He implied that, if these two groups do not exercise “self-discipline,” the Federal government might be forced to return to price and wage controls.
The truth is that government policy, particularly fiscal and monetary policy, must bear nine-tenths of the responsibility for inflation. Businessmen could not get higher prices for their goods unless government policy provided consumers with more money to buy the goods. Labor could not get excessive wage rates without bringing about unemployment unless government policy pumped out enough new money and credit to pay higher wages and raise prices. And it is inconsistent for the government to ask unions to refrain from higher wage demands while it retains a network of Federal statutes which make it almost impossible for employers to refuse to yield to higher wage demands.
INVESTIGATING THE FED
The President went on to recommend creation of a commission to inquire into the “nature, performance, and adequacy of our financial system.” Any assumption that such a group would consist of disinterested “experts” without already-formed conclusions, and that they would discover hitherto unknown truths, is unrealistic. Once membership of the commission is known, it should not be too difficult to make a shrewd guess concerning its “findings.” We will be fortunate indeed if the proposed commission does not advocate “reforms” that would only make inflation easier.
But the most important immediate decision before Congress, even from the economic point of view, is still the President’s proposal for discretionary power to commit American troops to “protect the territorial integrity and political independence” of any Middle Eastern nation requesting aid against Communist “armed aggression.” This proposal seems to be a belated effort to correct the disastrous blunder the Administration made when it voted with Egypt and Soviet Russia in the U.N. to demand that Britain, France and Israel, as “aggressors,” withdraw from Egypt, and do so without any assurance whatever of a settlement of the Suez Canal problem or the problem of Egyptian-Israeli relations.
WHAT WE DID AT SUEZ
Had we kept out of the situation altogether (or had we at least insisted on a two-sided resolution for the withdrawal of British, French, and Israeli troops from Egypt at the same rate as Russian troops withdrew from Hungary), it is probable that the canal would now be under the control of the British and French, and that Nasser, instead of Eden, would be “discredited.” As it is, Nasser has become impossible; the canal is still blocked, huge oil reserves are cut off and in grave peril of falling under Russian control. The President seems to be proposing to try to do with American money and at the risk of American lives the very things he prevented Britain, France, and Israel from doing with their own money and at the risk of their own soldiers’ lives.
There is grave doubt, even so, that the lone-hand policy now proposed by the President is the best alternative left to us. A much better course might be our simple adherence to the Baghdad pact. In any case there is no need whatever to authorize a bigger and special foreign-aid program. Resumption of Suez Canal traffic and the enormously profitable oil production and oil flow will give the Middle East all the economic aid it needs. If Congress does feel obliged to give the President discretionary power to commit foreign troops abroad, that power should be as restricted and temporary as it can be made. There is no good reason why every foreign crisis should lead to more powers for the executive branch at the expense of Congress particularly when it is the executive branch’s blunders that have helped produce the crisis.
January 28, 1957
A few comparisons for perspective: Average annual expenditures of the Hoover Administration (fiscal years 1930–33 inclusive), $4.1 billion. Of the first Roosevelt Administration (1934–37), $7.4 billion. Of the second Truman Administration (1950–53), $55.8 billion. Of the first Eisenhower Administration, $66.6 billion. In the coming fiscal year, $71.8 billion.
The Korean war, let us remember, lasted three years and one month. All but that last month was fought under Truman budgets. The entire $9.7 billion reduction that Mr. Eisenhower effected in total expenditures between the fiscal years 1953, and 1955 ($74.3 down to $64.6 billion) came out of the military budget ($50.4 down to $40.6 billion). Of the $7.3 billion rise in annual expenditures since 1955, the major part is accounted for by increases in domestic “welfare” spending. No wonder Secretary Humphrey rebelled. “I don’t think,” as he put it, “that you can spend yourself rich.”
Disregarding other huge categories of spending, let us consider the proposal to spend $4.4 billion more on foreign aid in the next fiscal year, on top of the $55 billion or so we have already paid out for this purpose since the end of the second world war.
FUTILE ECONOMIC AID
Our so-called foreign “economic” aid program has from the beginning been based on a mishmash of political confusions and economic fallacies. Politically, it has not promoted good will or gratitude or stopped the growth of Communism. On the contrary, it has engendered suspicion of our motives precisely in the countries to which we have given most. Its effect has been actually to breed anti-American policies on the part of foreign governments eager to prove to their own people that their receipt of aid from us has not made them subservient.
We on our side no longer dare to ask for any political quid pro quo for our aid, or even to insist that the recipient governments follow sound internal economic policies. We are afraid of being accused of attaching “strings” or conditions—although without such conditions our aid must fail to achieve the only results that could justify it. In fact, by freeing foreign governments from making the internal economic reforms that would be necessary to assure and attract foreign private investment, our foreign aid has merely subsidized and prolonged inflation, Socialism, and repressive controls in the countries receiving it. Our “economic” aid has probably on net balance actually retarded recovery in the countries to which it has gone.
OUR COSTLY SILENCE
The proposal for a still bigger economic-aid program merely serves to divert attention from the essential weakness of the rest of the Middle East proposals. Mr. Eisenhower declares boldly that we will now do in the face of every disadvantage what we did not have the foresight to do when we enjoyed every advantage. When Britain, France, and Israel only a couple of months ago were within a few days of controlling the Suez Canal, and protecting their treaty rights and the vital interests of the free world, we self-righteously joined Nasser and Soviet Russia to stigmatize them as “aggressors” and order them out. When the U.S.S.R. threatened to send “volunteers” to Egypt to enforce this edict, and when a hint from us that we would not tolerate this, and might even join forces with France and Britain to combat it, would have nullified the Russian threat, our Administration spokesmen were strangely silent.
Now that the French and British are out, now that we no longer have allies in possession of the area, or even a clear idea of how we would get our own troops into the area, Mr. Eisenhower wants us to warn Russia how firm we are going to be the next time. Having rebuked Britain for a go-it-alone policy, we blandly propose a go-it-alone policy for ourselves, in the same theater and to accomplish essentially the same objectives. The only difference is that having spurned NATO and our proven allies we now promise, in compensation, to submit ourselves once more as in Korea, to the trammels and frustrations of United Nations debate and consent. How great, by the way, is the alleged “moral force” of the United Nations? What did it accomplish in Hungary?
February 4, 1957
In Newsweek of Jan. 7 I analyzed a proposal for a “National Economic Council” to overrule the Federal Reserve authorities. Perhaps so thinly disguised a destruction of the Fed’s independence need not be feared at this time. But another and more subtle threat to anti-inflationary policy seems all too likely to succeed, unless its real implications are recognized.
This is the proposal to restore “selective” or “qualitative” credit controls. It has recently come from Elliott Bell, Sumner Slichter, Walter Lippmann, and other sources too numerous to list. It was put forward a year ago in the President’s Economic Report, and also by Allan Sproul, then president of the Federal Reserve Bank of New York. It has the sanction of precedent. Our government used “selective” credit controls at various times between 1941 and 1952. They are widely imposed today in Europe. But the results hardly warrant emulation. Selective credit control is merely one more step along the road toward a command economy. It leads logically back to investment control and to price control.
Selective credit controls are, in fact, government control of short-term investments. The pressure for them comes from special groups of borrowers who want to be favored at the expense of the rest. It comes from monetary managers who lack the courage to refuse such demands; who lack the courage to let general interest rates rise to the point where they will halt inflation. When the price of any commodity is held down by government control, the demand soon exceeds the supply, and the commodity is then rationed. Selective credit controls are merely government rationing of credit.
DISCRIMINATION
To ration credit is, of course, to discriminate among would-be borrowers. The decision is thrown into politics and determined by political pressures. This has already happened. Buying a house, even if you can’t afford it, is considered so laudable that the taxpayers are forced to guarantee 95 percent of the purchase price for you. Buying a refrigerator to put into the house, or a car to get to work from it, is considered much less laudable, so that the terms on which the seller was allowed to extend credit even at his own risk were tightened or “liberalized” by bureaucratic decree. Buying shares in Wall Street (i.e., investing in large-scale industries that increase production and create jobs) is considered so antisocial that the government forbids the seller or the lender to accept less than a down payment of 70 percent of the full price.
Government “selective” credit decisions are made, in short, on the basis of popular pressures and prejudices. Even if the record were better than this, what are we to say of a system which gives a group of government bureaucrats power to encourage borrowing for one purpose and to discourage it for another; to decide that there should be a boom in industry X but that industry Y should be choked to death? The only reason why “selective” credit controls, here and abroad, have not proved intolerably disruptive is that (for reasons explained in this column of March 5, 1956) such controls seldom achieve their aims.
PRECISE INSTRUMENT
It is possible to deal here with only one or two of the many arguments that have recently been put forward in favor of selective credit schemes. It is contended, for example, that “overall quantitative credit control” is “a pretty crude weapon.” The truth is that it would be hard to conceive of a more precise and truly selective instrument for allocating the supply of real savings among creditworthy borrowers than overall market interest rates that are allowed to reflect the real conditions of supply and demand. It is nonsense to say that a general rise in interest rates hits only “the little fellow” and favors “the big corporations.” One might just as well argue that a general rise in wage rates hits only the little project and helps the big project. Any general rise in costs merely shuts off the marginal projects, regardless of size, that do not seem likely to earn the higher costs.
This is the meaning and function of free markets, in the price of loanable funds as in the price of raw materials and in wages.
February 11, 1957
The late George Orwell coined the word doublethink to mean “the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.” Has this power been acquired by the Eisenhower Administration? It might explain the budget, the Middle East policy, and the Economic Report.
Let’s begin with the budget. We are told by Administration officials that it is the tightest budget that could be presented to Congress, but that it should be cut. The President even told his press conference that “there are literally thousands and thousands” of individual items in the budget, and “anybody that is examining that seriously ought to find some place where they might save another dollar.” It did not seem to occur to him that it was the prior and primary duty of himself, the Budget Bureau, and others who actually put those thousands of items together to search out the possible savings that “anybody” ought to find.
SPEND AND SPEND
When some congressmen did suggest that it might be unnecessary just now to tie an authorization for a special discretionary foreign-aid fund of $200 million for the Middle East on to the proposal for unrestricted military authority, Mr. Eisenhower quickly intervened to say that separation or postponement of the foreign-aid authorization “would destroy what we are really trying to do.” But when he was asked at a press conference how the proposed $200 million would be spent, he replied that he didn’t know, “because the only way I can find out exactly how to spend the $200 million would be through the medium of the Richards mission . . . which cannot leave until the resolution has been passed.” He insists on the $200 million, in short, before the need for it has even been determined.
His new philosophy of spending is also puzzling. Though he is presenting the largest peacetime budget on record, with unparalleled nondefense spending, Mr. Eisenhower is not troubled, because the country is enjoying the greatest prosperity on record, and a growing country can afford to and must spend more to meet its growing needs. But suppose the growth were suddenly to stop? Suppose signs of a depression set in? Then the government must spend more. Asked about deficit spending as a cure for recession, the President replied: “You begin then to apply moderate means, and then more, and if it kept going, finally you would go into every single thing, and very quickly. . . . And there would be no limit, I think, to what should be attempted as long as it was constitutional.” There is, alas, no constitutional limit on deficit spending.
THE ECONOMIC REPORT
The Economic Report is another example of doublethink. It repeatedly praises “our free economy”—and then goes on to advocate the extension of government controls in a score of new directions. It insists on “strengthening competition”—and then proposes a score of measures to protect small business, labor, and agriculture against the effects of competition. It insists that government “must exercise a strict discipline over its expenditures”—then advocates an expansion of most existing categories of spending, and adds entirely new ones for local-school and highway building.
“As long as the American people demand and, in my opinion, deserve the kind of services that this budget provides,” the President declares, “we have got to spend this kind of money.” This implies the existence of a sort of economic Fourth Dimension. Mr. Eisenhower forgets that the government has nothing to give the American people that it does not take from the American people. It has nothing to give the states and cities that it does not take from the residents of the states and cities. It has nothing to give Paul that it does not take from Peter.
Five years ago (Jan. 28, 1952) with Mr. Truman in office, I remarked here that the Economic Report was an unnecessary document, whose chief recommendations are or ought to be found in the State of the Union message or in the budget. “The rest consists mainly of giving ‘scientific’ and ‘economic’ reasons for what the President has done or wants to do for political reasons.”
Has the situation changed?
February 18, 1957
Sen. Margaret Chase Smith has called the Federal budget for 1958 “fantastic.” To appreciate just how fantastic it is, we may begin by comparing once more its proposed record-breaking peacetime “visible” spending of $71.8 billion with the $4.1 billion annual average in the Hoover Administration, the $7.4 billion annual average in the first Roosevelt Administration, the $55.8 billion annual average in the second Truman Administration, and the $66.6 billion annual average in the first Eisenhower Administration.
But this is just a beginning. As Raymond Moley pointed out in Newsweek of Feb. 4, the government is spending huge sums which do not appear in the regular budget. In 1958, for example, it will be paying out $14.4 billion from various trust funds, compared with $9.4 billion in 1956 and only $5.3 billion four years ago. And there are other “hidden” expenditures of billions.
NONDEFENSE SPENDING
One favorite excuse for all this is that defense costs money. Let’s disregard defense expenditures for the last ten years entirely, therefore, and compare nondefense expenditures alone (in billions).
| 1948 | $21.1 |
| 1949 | 26.3 |
| 1950 | 26.4 |
| 1951 | 21.4 |
| 1952 | 20.9 |
| 1953 | 24.0 |
| 1954 | 20.9 |
| 1955 | 24.0 |
| 1956 | 25.9 |
| 1957 | 27.9 |
The President proposes nondefense spending for the fiscal year 1958 of $28.5 billion. This is $7.6 billion, or 36 percent, more than in 1954. It is, in short, the biggest paternalistic “welfare” spending in any country in the history of the world.
Administration officials have an uneasy conscience about all this. So at the same time as they recommend this immensely overgrown spending program they also recommend that it should be cut. But even under pressure from Congressional committees they decline to name any specific place where a cut can be made. Until they are ready not merely to generalize but to specify, their commendation of economy must be set down as merely lip service.
There will be no real economy until the government is ready to slash drastically or to halt entirely whole categories of spending. And it is not hard to point out what some of these categories are. We may begin with expenditures that the Federal government should avoid on principle—e.g., the proposal of Federal aid for local school construction. (The economic fallacies and political dangers of this program were discussed in this column of Dec. 26, 1955.)
WHERE TO CUT
Next we come to expenditures which, even if we admit that there is a case for the Federal government getting into them at all, are completely contraindicated in the midst of an inflationary boom like the present one. They can only increase inflationary pressures. These would include Federal aid for the grandiose interstate highway system, and mounting subsidies and other artificial stimulants for “low-cost” housing.
Next, we come to the proposal to spend a total of $4.4 billion on foreign aid in 1958. Probably three-quarters of this amount could with advantage be stopped at once. Most of the net proposed expenditures of nearly $5 billion for agricultural subsidies (mainly for supporting food prices above the market or rewarding farmers for not producing) represents huge and inexcusable waste. Veterans’ benefits for 1958 are scheduled at more than $5 billion—$570 million higher even than in 1955.
Clearly it is not a problem of knowing where cuts in the budget can be made, but of daring to say. It has been customary for years to treat our mounting military budget as sacrosanct; yet Congressional investigations, and the Hoover report, have exposed profligate waste.
When Mr. Eisenhower announced his $72 billion budget for 1958, a few newspapers wistfully recalled his 1952 campaign promise to reduce spending to $60 billion a year by 1955. But this $60 billion goal, far from having become chimerical, could be achieved in the new fiscal year, to the great economic benefit of the nation. All that is needed is the political courage and will to achieve it.
February 25, 1957
To all those who are so justifiably concerned about the dangers of further inflation, the most dismaying development of recent weeks was an announcement by Mr. Eisenhower (in his press conference of Feb. 6) that unless business and labor imposed on themselves certain unspecified self-restraints, the government would have “to move in more firmly with so-called controls of some kind, and when we begin to control prices and allocations and wages, and all the rest, then it is not the America we know.”
This statement, unfortunately, cannot be dismissed as a mere slip of the tongue. It was preceded by a distinct hint in the President’s State of the Union message that unless business and labor exercised “self-discipline” the government might be forced to return to price and wage controls.
FALSE REMEDY
It should not be necessary to point out at this late date that price and wage controls are a completely spurious “cure” for inflation. We need merely recall the words of Mr. Eisenhower himself, in his first State of the Union message on Feb. 2, 1953: “Direct controls, except those on credit, deal not with the real causes of inflation but only with its symptoms. . . . They have proved largely unsatisfactory or unworkable. They have not prevented inflation; they have not kept down the cost of living. . . . I am convinced that now—as well as in the long run—free and competitive prices will best serve the interests of all the people.”
The truth is that government policy alone—particularly fiscal and monetary policy—must bear practically the full responsibility for inflation. For the actions of private bankers, businessmen, and labor leaders that increase inflation are themselves encouraged by monetary policy.
The Eisenhower Administration is spending more “welfare” funds in more directions than any of its predecessors. It supports laws that continue to undermine the ability of private employers to resist union demands for excessive wage rates. It is artificially supporting farm prices. It is artificially stimulating an unprecedented housing boom. It has encouraged or permitted the country’s money and credit supply to increase by $23 billions since it came into office. For an Administration with this record to turn around and blame private business and labor for the inflationary result, and to start disrupting production with price and wage controls, would be the height of irony.
The remedy for inflation lies wholly in a change of governmental policy. And it lies not in giving still more discretionary, arbitrary, or dictatorial powers to government bureaucrats, or still more discretionary powers (more “techniques,” “tools,” or “weapons”) to our monetary managers but, on the contrary, in taking away some of their present discretionary powers and obliging them to abide by fixed and predictable rules.
It must be pointed out once more that a free competitive enterprise system cannot function effectively in the face of constant uncertainty concerning what the monetary managers are going to do—particularly when those managers may not even know themselves. The country is especially fortunate today to have at the head of the Federal Reserve Board a man who combines the rare understanding, integrity, and courage of Chairman William McC. Martin, Jr. But the political pressures put upon him are excessive. They could be substantially lessened, and the dangers of inflation similarly lessened, by changes in our monetary rules or laws.
RULES VS. DISCRETION
I suggest two: (1) Congress or the Federal Reserve Board could adopt a rule similar to that put into effect by the Bank of Canada last November, under which the discount rate is changed weekly so as to maintain a fixed margin of ¼ percent above the latest average tender rate for treasury bills. (2) The legally required gold certificate reserves of the Federal Reserve Banks could be restored approximately to the former requirement of 35 to 40 percent instead of the present “war emergency” requirement of only 25 percent adopted in 1945. Our controllers will not control inflation until they accept controls on themselves. Meanwhile they should stop scolding the American people.
March 4, 1957
The English-language edition has just appeared here of an important and illuminating book—Common Sense Economics by L. Albert Hahn (Abelard-Schuman, $4.50). In addition to being a brilliant refutation of some of the chief fallacies of Keynesian economics, it includes one of the most persuasive discussions of the business cycle, as well as the shrewdest theoretical analysis of price formation on the stock markets, that I have ever read.
But the reader should be warned that the book is not, as its author seems to imagine, a simple introductory text—“a sort of minimum economics for the businessman.” For an introductory work Hahn’s exposition is much too technical, condensed, and abstract. And though Hahn’s style is studded with incisive epigrams, his book is not on the whole easy to read, because his sentences are often involved and “Germanic.”
Yet readers who come to the book with an adequate theoretical background will value it highly. Its correctives are particularly needed at the present time, when nearly every government in the world, most notably including our own, is looking at events through Keynes-colored glasses, and assuming that the present inflationary boom can be continued forever, provided only that the government will continue to spend and spend, inflate and inflate.
PROPENSITY TO WORK
Hahn shows what is wrong with this theory and policy. “The propensity to work,” he insists, “and not the propensity to spend, is the foundation of national income and wealth.” No inflation, he points out, can be continued forever. The stimulus of any dose of inflation, no matter how large, must ultimately exhaust itself.
The government is then faced with a dilemma—or rather a trilemma. If it tries to deflate the money and credit supply back to where it was, it will bring on price collapse, unemployment, bankruptcies, and perhaps prolonged depression. Even if it decides merely to prevent the inflation from going farther, it may find itself in trouble. For during any prolonged inflation more and more people begin to act on the assumption that the inflation will continue. Many security prices and commodity prices, many wage rates, many ambitious building and other capital-investment projects, are based not merely on the existing inflation but on the belief in a still further inflation. When it is clear that an inflation has been stopped, these anticipatory prices fall. Overambitious investment plans are scaled down or abandoned. This creates what European economists call “the stabilization crisis.”
INFLATION A SWINDLE
If, unwilling to take the risk even of a stabilization crisis, the government continues to inflate (by cheap-money policies, housing subsidies, mortgage guarantees, farm subsidies, and even bigger spending), the boom may indeed be kept going longer. But it can be kept going only at an ever-increasing risk, not merely of a greater economic crisis at the end, but of a collapse of the nation’s currency and credit.
And there is no assurance, even so, that continued inflation can keep a boom going up to this point, much less that it can guarantee continued “full employment.” It can keep prices rising, but it cannot assure continuance of volume prosperity. The supposed magic of inflation, in fact, consists entirely in the maintenance of “the money illusion.” Once that is seen through by all major groups, the boom collapses. Inflation is essentially a swindle and cannot be openly planned. Creditors increase the interest rates they demand to compensate for the expected further depreciation of the currency. Labor unions demand wage increases that outrun both price and productivity increases. Inflation can “work” only as long as prices keep ahead of costs and maintain profit margins. The moment costs run ahead of prices, the joys of the spree are over, and only the headache remains.
And the sad part is that the whole binge is seen to have been unnecessary. Reasonably full employment could have been maintained all along without inflation, by a sufficiently free and fluid adjustment of wage rates to prices and of prices to each other.
March 11, 1957
With a great flourish of trumpets, the leaders of six European nations—France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg—announced on Feb. 20 that they had agreed on the creation of a European “common market” which would also include their overseas territories. The plan is to introduce gradually a single or common market among the six nations, without tariffs or other barriers.
Is this step really, as one newspaper called it, perhaps “the greatest step so far toward the economic and, eventually, the political union of Europe?” There are strong reasons to doubt it.
1—The proposed lowering of tariffs among the participating nations will take place only over a period estimated at from twelve to seventeen years. The caution is understandable; but it recalls previous planned “transitional periods” (such as that envisaged by the International Monetary Fund) which somehow never seem to come to an end.
2—If the proposed common market were ever to become a reality, it would of course have the internal advantages of a customs union (like the German Zollverein of 1833). But it must remain meaningless until the six nations either adopt a gold standard, or abolish exchange controls and import quotas and make their currencies freely convertible into each other in any amount. This cannot happen as long as the currencies of the six countries remain on a paper basis, and have only a limited and controlled convertibility into each other at purely arbitrary valuations. As long as the currency of any one of the six nations is undervalued or overvalued at its “official” price, and as long as exchange controls and import quotas are continued, the so-called “common market” will be a sham, a hollow rhetorical phrase. The same criticism will apply, of course, as long as agricultural commodities are excluded from the “common market.”
3—This European “integration” is something that the dispensers of American foreign aid, most notably Paul G. Hoffman, have been urging for several years. But it is a little hard to understand just what advantage it will be to the Italian and French motor industries, for example, to continue to be able to keep out American competition but to be forced to accept full German competition—to be able to keep out the Ford say, but not the Volkswagen.
4—One of the mysteries of the whole episode is the paternalistic pressure which our government has applied to bring about the proposed European “common market.” If the United States were urging an all-round reduction of tariffs, or were itself planning to become a member of a free Western world common market, our government’s attitude could be understood as an acceptance of the general advantages of free trade—of cheaper imports for our consumers and wider foreign markets for our exporters. But we advocate this as a medicine good for Europeans but not for ourselves. We intend to maintain our own tariffs against the products of the six nations. We give our blessing to a “common market” from which we are to be deliberately excluded. And we will probably be called upon to finance the scheme, directly or indirectly, just as we put up the $350 million kitty for the misconceived European Payments Union.
5—If such a common market would be good for the six nations involved, why wouldn’t it be good for all nations—or at least for all nations under free governments?
A PROSAIC SUGGESTION
The idea of universalizing the common market helps to bring out the main flaw in the plan as it stands. If each nation, simply acting individually, were to put its currency on a sound basis, abolish exchange control and quotas, and start reducing its own tariffs, all the real benefits of the proposed common market, without its drawbacks, could be universally achieved—and without the necessity of elaborate intergovernmental agreements or supranational statist controls.
But the suggestion that each nation put its own house in order is doubtless too prosaic. It would merely enable the world to catch up with the currency stability and the relative freedom of international trade which was accepted as a matter of course, say, back in 1913.
March 18, 1957
The testimony before a Senate committee that high union officials used union funds to engage in organized gambling, bootlegging, and vice has produced some moral indignation—but not enough to lead to any serious move in Congress for legal changes adequate to curb the immense irresponsible private power of unions, and of union officials over their own rank-and-file members.
Fortunately there is increasing evidence of a tendency in academic circles to challenge the century-old premises on which most present one-sided pro-union legislation is based. In a later article I hope to discuss at length two important new books—The Labor Policy of a Free Society, by Sylvester Petro, and Why Wages Rise, by F.A. Harper. But I should like to take up first a remarkable article which appeared in the September issue of Encounter, a monthly magazine published in London.
The title of this article is “Are Trade Unions Necessary?” Its author is Peter Wiles, a fellow of New College, Oxford. “In strict economics,” Wiles begins, “there is scarcely any case for the continued existence of trade unions in a fully employed welfare state.” He then runs through a whole series of traditional pro-union arguments, and starts knocking them down right and left. There is space to quote only a few excerpts.
SPIN OUT THE JOB
“Even in previous conditions of our society, trade unions may well have done more harm than good; modern social history is very sentimental, and handles them quite uncritically. . . .
“Shortening of the hours of work did little economic harm when the working week was 60 hours, and may even sometimes have increased actual production; it is certainly not harmless in the twentieth century when 44 hours is the standard working week.” (Forty hours here.)
“Full employment? But trade unions can only establish fixed employment, by making it more difficult for employers to sack labor—and even then they usually also make it more difficult for them to hire labor. . . .
“Again, trade unions can maintain what we may call unproductive employment, i.e., they can spread the work by resisting the introduction of labor-saving machinery or by making their members spin out the job in hand. These two measures are obviously worse than fixed employment; indeed from the economic point of view they are simply crimes. . . .
“Even if it be admitted that collective bargaining keeps down profits, or increases the general share of wages in the national income, this is not a good thing at all. For it hits investment, since a firm only desires to install machinery if it is profitable, and most of the finance for such things comes either from its own or someone else’s profits. And without investment economic growth is slowed down. . . . A really severe cut in profits would stop progress altogether. . . .”
CLOSED-SHOP RESULTS
“Of course, collective bargaining is a potent source of injustice in the distribution of income. It is truly amazing that anyone should suppose this crude, selfish, violent, and piecemeal process to contribute to social justice. . . . All that collective bargaining can ensure is that some workers do better than others. . . .
“The closed shop is about the worst threat to liberty in modern Britain. . . . It is a terrifying example of the moral blindness of this post-Christian, post-Liberal age that men have been driven to suicide because a union sent them to Coventry. . . . What grosser tyranny is there than that?. . . .
“It is not only a question of persuading the trade unions to be reasonable over this or that. Economic reasonableness contradicts their very nature, their history, and their deepest inclinations. . . . The question is trade-union abolition.”
The final sentence does more honor to Wiles’s courage than to his judgment. It is an infringement of individual freedom for government to abridge the right of voluntary association. But it is surely the government’s duty to protect the individual worker against compulsory association, and it should certainly stop forcing employers exclusively to “recognize” and “bargain with” any particular union, no matter how unreasonable its demands or conduct may be.
March 25, 1957
Nearly everyone, including the President, who proposed it, seems to agree that the $72 billion budget for the fiscal year 1958 should be drastically slashed. But when it comes to any specific spending program, some special interest is sure to cry out that it cannot be touched. The President himself gave an amusing illustration of this in his press conference of March 7. A friend out West had written to say he “was very much upset about the size of the budget,” but in his last paragraph expressed the hope that there would be no cut in drought relief. Yet in this very conference Mr. Eisenhower, while he told how he was asking every government agency and department to suggest cuts in its own spending, expressed grave concern about proposals to make any substantial cut in foreign aid.
The situation suggests that there is only one feasible political device to get substantial cuts in the 1958 budget. This is for Congress to tie every cut it makes in expenditures to a specific tax cut. Only in this way can Congress dramatize the connection between expenditures and taxes, and offset the special political interest in favor of an expenditure by the interest of taxpayers in favor of tax relief.
CUT FOREIGN AID
Let us take, as an example, the foreign-aid program. The public and Congress now express mounting doubts about the need or wisdom of that program. The recent Fairless report, certainly, does nothing to dispel these doubts. It merely reiterates all the question-begging generalities that have passed for argument in the last ten years. It mentions once in passing that about 2,000 separate foreign-aid projects are annually authorized in Washington, but makes no “detailed program examination” whatever. It does not even list the countries that are still receiving aid from us. (There are 54 of them, not including our dependencies.) Yet the program involves not merely appalling waste, but positive mischief.
Sen. Mike Mansfield has estimated that a $3 billion annual cut could be safely made in the sums that our government has been spending abroad. It would seem advantageous to cut at least $3 billion out of the $4.4 billion that the President proposes to spend in the fiscal year 1958 for foreign military and economic aid. Out of appropriations left over from past years, the government will have at least $3 billion to spend for foreign aid in 1958 even if Congress does not appropriate an extra penny. Congress, therefore, need make no appropriation at all for foreign aid for 1958. It can simply recommend that spending for this purpose be limited to $1.2 billion in 1958, and tie this recommendation up with a tax cut of $3.2 billion.
50 PERCENT TAX CEILING
There are any number of places, of course, where such a tax cut could advantageously be made. I suggest, by way of illustration, a cut in the normal personal income tax from 20 to 18 percent, and a cut of all personal income tax rates above 50 percent down to a 50 percent ceiling.
Roswell Magill, president of the Tax Foundation and a former Under Secretary of the Treasury, has declared: “If we could afford just one modest tax accomplishment in 1957, this 50 percent rate ceiling is the one which I should choose.” He estimates that the revenue loss would be about $734 million, even without taking into account the probable increases in reported income as a result of the rate reduction itself. (The confiscatory tax rates up to 91 percent produce little revenue. The basic rate of 20 percent accounts for 85 percent of the total yield of the income tax.) Cutting income-tax rates to a maximum of 50 percent would bring a sharp increase in American production, investment, and the availability of risk capital for new enterprises.
A cut in the normal tax from a 20-percent to an 18-percent would mean an additional loss in revenue of about $2.4 billion; but it would also mean income-tax relief and increased incentives for everyone.
Any attempt to oppose or veto such a tax cut in order to maintain foreign-aid expenditures at their present level would bring home to the American people what foreign aid is really costing them. Other tax cuts could be tied to other spending cuts, with similar educational results.
April 1, 1957
The buck-passing between Congress and the President as to which one’s duty it is to slash the $72 billion budget, and how and where, not only darkens the hope that much real reduction will finally be achieved, but emphasizes once more that we will never get real economy until we set up a genuinely responsible budget system. What we have today is mere window-dressing, a make-believe budget system.
Under such a mock budget it is impossible to fix responsibility. The House can plausibly pass a resolution, as it did, requesting the President to “indicate the places and amounts in his budget where he thinks substantial reductions may be best made.” It’s his budget. He and his executive departments and agencies put it together. His Budget Bureau approved it. He recommended it. He himself has admitted that “there are literally thousands and thousands” of individual items in the budget. It does seem grossly unfair to put the burden of passing upon each of them on a body of 531 men, each of whom must pass upon hundreds of other questions.
Yet the President could also plausibly dodge responsibility by replying, as he did, that it was up to Congress to say which program “they don’t want to carry out if they are going to make big savings.” And this retort was supported by Cabinet members who pointed out: “We usually get more than we ask for.”
A WHOLESOME RULE
Responsibility is still further befogged by the Congressional habit of making appropriations for years ahead. It is estimated, for example, that the Administration could spend at least $3 billion more on foreign aid even if Congress failed to appropriate another penny for it. Responsibility is also hopelessly confused within Congress itself by the Senatorial habit of raising the appropriations of the House, and forcing an upward compromise, and by the Congressional practice of assigning appropriations to entirely different committees from those that must raise the money.
All of this would be impossible under a really responsible budget system. In Great Britain the wholesome rule has been established for more than two centuries that Parliament may reduce but not increase any spending recommendation made by the executive government. Under such a system the responsibility for the amount of spending, for a budget balance, and for the kind, rates, and yields of taxes, can be inescapably pinned on the executive.
FOR AN ITEM VETO
Is it utopian to hope that such system could be established here The practice in many individual states, certainly, gives no reason for despair. In New York State the governor’s annual budget must not only give estimated expenditures and revenues for the next fiscal year, be must be accompanied by bills containing all the proposed appropriation and any proposed new taxes. The legislature (I quote the state constitution) “may not alter an appropriation bill submitted by the governor except to strike out or reduce items therein.” If the legislature wishes to increase or add any appropriation, it must be by separate items or bills “each for a single object or purpose which “shall be subject to the governor’s approval.”
In 39 states, in fact, the governor has the power to veto individual items in appropriation bills. Senator Byrd of Virginia two years ago proposed a constitutional amendment to authorize the President to veto any item in an appropriation bill. In 1937 a similar reform was urged by Republican Senator Vandenberg, and supported then by President Roosevelt. It is the very minimum step toward a responsible Federal budget.
It is not, of course, the only step. Hardly less important would be adoption of the recommendation of the Hoover commission that Congress stop appropriating enormous sums that may not be spent for several years, and appropriate money only for actual spending in a given year. A joint House-Senate budget committee, as recently recommended in the Senate, would also help. What is needed, in short, is a thorough reform in our fiscal procedures. Until we get such a reform, the outlook for real economy will not be promising.
April 8, 1957
Just how pernicious does a government subsidy or control scheme have to become before there can be any hope of getting rid of it?
The question keeps recurring in connection with the farm program. It is hard to realize quite how grotesque this program is until we examine it crop by crop. Let us look at cotton, for example.
The following quotation is condensed from a book published last year, Farmers at the Crossroads, by Secretary of Agriculture Ezra Taft Benson (as told to Carlisle Bargeron):
“The story of cotton is a tragic one. Becoming frightened at the problem of abundance, cotton farmers elected to live by rigid high price supports. What has been the result?
“Twenty-five years ago, cotton grew on 43 million acres of United States farm land. In 1956 the acreage is 17.4 million.
“Twenty-five years ago, before American cotton growers began to hold the price umbrella for foreign cotton producers, cotton production abroad totaled 12 million bales. This past year foreign production was 25 million bales.
“Twenty-five years ago the United States exported 7 million bales of cotton. During the past year our exports were 2 million bales.
“After 25 years of the utmost government solicitude, cotton has lost markets everywhere. Its producers have lost freedom. Cottonseed-oil supply is limited and soybean oil is increasingly taking its place. The pity is that the road back is a long, long one. Markets once lost are not easily regained.”
CONTINUED FOLLY
This may still stand as a pretty good summary of the present situation, except that, whereas cotton exports were only 2.2 million bales in the crop year ended July 31, it is estimated that they will reach 6.5 million bales in the present crop year. But it is ironic to call these figures “exports.” They are simply the amount of cotton our government is now managing to unload on foreigners at a huge loss to the American taxpayer.
In the summer of 1939, as a result of the price-support program at that time, the government accumulated in storage some 11 million bales of cotton, equal to a full year’s American production. The second world war came along and bailed the government out. So we continued the folly. In the summer of 1950, the government once more accumulated over 6 million bales of cotton. This time the Korean war came to the rescue. We continued the folly. As the president of the New York and New Orleans cotton exchanges summed the present situation in a joint statement a few weeks ago before a Congressional committee: “In effect the program has resulted in subsidies to every foreign competitor of the American cotton farmer and textile manufacturer and in encouraging the development of artificial fibers which have rapidly increased in production to the disadvantage of every farmer.
A WAY OUT?
Last year the government piled a more noxious subsidy on top of existing subsidies. This is the “soil bank,” a subsidy for not producing. It differs only in name, not in substance, from the various acreage reduction and plow-under schemes tried out under Henry Wallace beginning in 1933.
Is there any way out? Some people in the cotton trade have suggested that the government loan level against cotton should be set only to “give protection in case of dire need.” Other have recommended direct “compensatory payments” to cotton growers, but only against the amount of cotton consumed domestically, leaving all sales and prices to the open market. Either of these substitutes, at the start, would at least be less pernicious than the scheme we have. But, like it they would also probably prove self-perpetuating, and follow the same laws of malignant growth.
I should like to repeat a proposal put forward in this column a year ago. Let the government either give back the present cotton surplus to the growers who produced it, or sell it back to them at less than it would cost the growers to produce more. Then leave prices, production, consumption, any exports to the free market, and junk once for all the whole fantastic prices support and crop-restriction program.
April 15, 1957
The decision regarding what should happen if a President is unable “to discharge the powers and duties” of his office can have crucial consequences for business. After studying the problem for three months the President and Attorney General have come up with a solution which seems to satisfy no one. If we break the problem into segments, in fact, it becomes clear that part of what they propose is unnecessary, and the rest inadvisable.
They propose a constitutional amendment to provide, first, that if the President were disabled and realized it, he could delegate his powers to the Vice President and could resume them when he had recovered. But this could be done by a short and simple law under the Constitution as it stands. The relevant provision (Art. II, Sec. I) is only 83 words long:
“In case of the removal of the President from office, or of his death, resignation, or inability to discharge the powers and duties of the said office, the same shall devolve on the Vice President, and the Congress may by law provide for the case of removal, death, resignation, or inability, both of the President and Vice President, declaring what officer shall then act as President, and such officer shall act accordingly, until the disability be removed, or a President shall be elected.” (My italics.)
A POWER OF CONGRESS
This provision is said to be vague concerning what or who determines Presidential “inability.” But it explicitly gives Congress power to decide all such details by legislation. If Congress, therefore, under this provision, explicitly authorized the President to transfer the powers and duties of his office temporarily, it is inconceivable that the Supreme Court would hold that Congress had acted beyond its constitutional powers.
The constitutional amendment proposed by the Attorney General, however, would go farther, and provide that if the President were disabled but unable to delegate his powers (in the event of a stroke or insanity, say), the Cabinet could decide by majority vote to have the Vice President assume the President’s powers until the President stated in writing that he was resuming them.
Now this proposal would put a crucial decision in the hands of mere Presidential appointees. And as it would require a constitutional amendment to do this in any case, it raises the question whether we should not, while we are at it, go farther and abolish the office of Vice President altogether.
If anyone besides the President himself is to have the power of relieving him of the duties of his office, even temporarily, it should clearly be Congress. Congress, in fact, already has this constitutional power under the impeachment provision. Following that precedent, a new amendment might provide for a President’s removal for disability by a majority vote in the House confirmed by a two-thirds vote in the Senate.
FIFTH WHEEL
One way of solving the problem of who should succeed the President in case of his disability or death would be to abolish the office of Vice President, and give Congress the power to choose the President’s successor; but with the provision, say, that if death or disability occurred before the Congressional mid-term elections, a new Presidential election would be held at the same time as those elections to fill the unexpired term.
There are many possible variations on such a plan, and they would need to be carefully considered. But there is certainly nothing novel in the proposal to get rid of the wholly unnecessary office of the Vice Presidency, and to let the Senate choose its own presiding officer. As long ago as 1803, the Vice Presidency was compared to “a fifth wheel to a coach.” Yet, as John Quincy Adams wrote in 1841, it can place “in the Executive chair a man never thought of for that office by anybody.”
To remove the problem from all personal or partisan considerations, no proposed constitutional amendment on the subject should become effective before the election of 1960. Meanwhile Congress should by simple law authorize the President temporarily to delegate his powers and duties to the Vice President.
April 22, 1957
The efforts of the President and Congress to pass on to each other responsibility for cutting the 1958 budget do not provide an encouraging spectacle, but they do provide an instructive one. They emphasize more than ever that we do not have a responsible budget system. There will be no real economy until we get one.
There are glaring inconsistencies both in the statements of the President and in the actions of Congress. Just before the Republican convention of 1952, Mr. Eisenhower expressed the opinion that the Federal budget could be cut as much as $40 billion in the next few years. In October of 1952 he declared: “My goal, assuming that the cold war gets no worse, is to cut Federal spending to something like $60 billion within four years.” In the same month he said:
“We must find a substitute for the purely temporary business of bolstering the free nations through annual handouts. That gets neither permanent results nor real friends.” Also in the same month (speaking of an annual budget of $70 billion) he said:
“We can’t afford what we’re spending and stay strong enough to lead the world to peace.” But now he declares, deploring even diminutive cuts in his own $72 billion budget: “If we are going to wage peace abroad, and try to provide the leadership and the services at home that our people demand, then we have got to pay for it.”
IGNORING ITS OWN LAWS
Congress, in its Reorganization Act of 1946, provided for joint meetings of the tax and appropriations committees of both houses at the beginning of each session to draw up a legislative budget for the ensuing fiscal year. Since 1949 it has completely ignored its own legislation on this point.
Buck-passing regarding economy would not be possible if we could once establish a responsible Executive budget system. Under such a system the Executive not only presents an itemized list of all proposed expenditures, but of all proposed changes in taxes necessary to meet those expenditures. This budget is accompanied by bills containing all the proposed appropriations and any proposed new taxes. The Legislature has the power to strike out or reduce expenditure items in such a budget, but not to add or increase any.
This rule against legislative increase has prevailed in Britain for more than two centuries. Under such a system budget responsibility is inescapably fixed upon the Executive. But he gains great advantages in compensation. The President, for example, would know in advance that Congress could not destroy courageous economies by making lavish appropriations of its own to pressure groups. If the President is sincere in his professed desire for economy, he will recommend a constitutional amendment to Congress, now, to create such a responsible budget system.
CONGRESS AS WATCHDOG
And if Congress on its side is sincere in desiring economy and a really responsible budget, it will not hesitate to accept such a self-denying amendment. It will even draft and submit one, whether or not the President asks for it. Congress, too, would find great compensations for giving up the power to increase or add appropriations. Congressmen would no longer be hounded by constituents or lobbyists demanding more appropriations for their districts or their pressure groups. Congressmen could refer all such demands to the Executive branch, and they would surely exercise far more than now their power to reduce proposed expenditures. “There is no propensity of human nature more marked than jealousy of opportunities that one does not share.” Instead of competition between the President and Congress in spending, there would be competition in economy.
Perhaps it is utopian to hope that Congress could be persuaded to deprive itself completely of the power of increasing expenditures beyond those asked for by the President. But it might be willing to go at least as far as the Legislatures of many states, and limit itself to power to add proposed expenditures only in separate bills, individually subject to Presidential veto. Congress should be the watchman of the Treasury. It can be counted on to perform its duty as watchman only if it does not itself have access to the Treasury.
April 29, 1957
Americans, groaning over their April 15 tax payments, must have read with a mixture of envy and incredulity the budget announced by the British Chancellor of the Exchequer on April 9. Here are we, confronting the largest peacetime spending plan in our entire history, and being told by the Administration that it is naïve of us to expect any tax relief this year. And there is Britain, planning to spend in the fiscal year 1958 less than in 1957, and giving appreciable tax relief to its own citizens.
Several important lessons can be drawn from this comparison. Suppose we begin by comparing the American and British budgets over the past eleven years. Let us compare, for example, the official estimate of expenditures, before the beginning of each fiscal year, with the actual expenditures made in that fiscal year. The following table is in billions of dollars for American fiscal years ending June 30, and in billions of pounds for British fiscal years ending March 31.
| American Expenditures | British Expenditures | |||
| Year | Est. | Act. | Est. | Act. |
| 1947 | $35.1 | $39.0 | £3.89 | £3.91 |
| 1948 | 37.5 | 33.1 | 3.18 | 3.21 |
| 1949 | 39.7 | 39.5 | 2.98 | 3.18 |
| 1950 | 41.9 | 39.6 | 3.31 | 3.37 |
| 1951 | 42.4 | 44.1 | 3.45 | 3.26 |
| 1952 | 71.6 | 65.4 | 4.20 | 4.05 |
| 1953 | 85.4 | 74.3 | 4.23 | 4.35 |
| 1954 | 78.6 | 67.8 | 4.26 | 4.27 |
| 1955 | 65.6 | 64.6 | 4.52 | 4.30 |
| 1956 | 62.4 | 66.5 | 4.56 | 4.50 |
| 1957 | 65.8 | 68.9 | 4.74 | 4.87 |
The first thing to be noticed is how close Britain’s estimates of expenditures come to the actuality and how widely our own government misses. In the eleven years 1947 to 1957, inclusive, the furthest the British Treasury came from predicting the result was in 1949; it missed by 7 percent. Its average percentage error for the eleven years was only 2.3 percent. Compare this with the American record for the ten completed years from 1947 to 1956 inclusive. (The actual 1957 result will not be known until the end of June.) For 1947 and 1948 the estimates missed by more than 11 percent; for 1953 and 1954 they missed by more than 13 percent. The average percentage error for the ten years was 7.62 percent.
It is true, of course, that the President must make his estimate of expenditures for a fiscal year almost six months before that year begins, whereas the British Chancellor of the Exchequer publishes his estimate about a week after the fiscal year has begun (and when it is definitely known what actual expenditures were in the fiscal year just closed). But even if we take the revised estimates of expenditures made by the President a whole year later, more than six months after a fiscal year has begun, his average percentage error turns out to be 5.52 percent.
WORTH DREAMING ABOUT
The basic reason for these differences is not that British Treasury experts can foresee the economic future better than ours can. The basic reason is that Britain has a responsible executive budget system and we have not. When the British Chancellor of the Exchequer presents the budget, he is presenting not a mere set of estimates or a hopeful guess, but a pledge, a program, and an overall bill. Parliament must accept or reject this as a unit; it cannot kick it around or simply disregard it. We could approach such a system here if Congress retained its power to reduce proposed expenditures but relinquished its power to increase them. New York and many other states have such a system. Even to give the President power to veto individual items in appropriation bills—a power for which Mr. Eisenhower has now asked—would help enormously.
The possible rewards of a responsible budget system to the American taxpayer are illustrated by Britain’s latest budget. The British Government plans to spend £4,827,000,000 in the next fiscal year. This is only 23.4 percent more than it spent in the 1947 fiscal year. We are still planning to spend about $71.5 billion in 1958, or 83.3 percent more than in our 1947 fiscal year. Now if we also were planning to spend only 23.4 percent more than in 1947, we would be planning to spend only $48.1 billion in 1958—a saving of $23.4 billion. . . .
Well, a responsible budget is at least worth dreaming about.
May 6, 1957
Admittedly the President’s letter to Speaker Rayburn is in large part a political document, designed to pin responsibility on Congress rather than the President for the $72 billion budget. When Mr. Eisenhower declares, for example, that billions of dollars of proposed 1958 spending are “unavoidable” because they are “rigidly prescribed by law,” he forgets that such laws can be changed, and that he himself has already had four years in which to recommend changes.
Nor must some $45 billion of proposed 1958 expenditures be treated as sacrosanct merely because they ostensibly “will support programs related to the protection of our country.” Some of these programs—particularly those relating to foreign aid—may be wholly unjustified; others may conceal great wastes. In its duty to scrutinize and economize, Congress should not be too much intimidated by the President’s sweeping declaration that “a multibillion-dollar reduction in 1958 expenditures can be accomplished only at the expense of the national safety and interest.”
Yet the President’s letter to Speaker Rayburn includes some statesmanlike proposals of the first importance. Congress cannot ignore these without raising serious questions about its own sincerity or judgment.
THE FOURTH DIMENSION
Mr. Eisenhower, for example, begins by acknowledging frankly a fundamental truth that a few of his recent statements have seemed to overlook: “I am sure many members of the Congress are as gratified as I am to note the growing awareness of private citizens that the dollars spent by the Federal government are in fact their own dollars, and that Federal benefits are not free but must be paid for out of taxes collected from the people.” Amen. Federal funds do not come out of any Fourth Dimension. When the Federal government meets more “needs” through Federal spending, the individual taxpayer is able to meet fewer needs of his own out of his own earnings.
At the end of his letter, Mr. Eisenhower names ten “steps” that he strongly urges upon Congress. Although all these recommendations deserve consideration, some raise complicated issues. Limits of space oblige me to concentrate upon recommendations seven and ten. Step seven is of major importance: “Enact bills approved by the Administration to implement Hoover-commission recommendations, such as the authorization of appropriations on the basis of annual accrued expenditures,” etc.
But step ten goes even farther. If adopted, it might enable the President to put into effect most of the other nine. This is the request to “grant the President the power now held by many state governors to veto specific items in appropriations bills.”
THE ‘ITEM VETO’
This proposal, so far from being novel, has been raised in one form or another for nearly a century. It is a power already possessed by the governors of more than three-quarters of our states. It is essential to even minimal budgetary responsibility. It a would be desirable, in fact, to go much farther, as do many of our states (as well as foreign governments). Congress might voluntarily relinquish the power to increase expenditures recommended by the President while retaining the power to reduce them. Only such a system could eliminate “pork barrel” appropriations. As the late Senator Vandenberg put it: “Congress long since learned that if you put a little something for each of the 435 Congressional districts in one appropriation basket, pretty nearly everybody will help carry the basket.”
There is no danger that the “item veto” would give the President excessive budgetary power. Congress already has an absolute veto, when it chooses to exercise it, on any appropriation proposed by the President. The “item veto” would not even give the President equal power of absolute veto over any expenditure proposed by Congress; Congress could simply overrule his veto by a two-thirds vote.
In place of competition in spending, what is needed is a system in which both the President and Congress have power to restrain the spending of the other. Only such a system can protect the taxpayers.
May 13, 1957
As a result of the revelations concerning Dave Beck and his Teamsters union, the Eisenhower Administration is asking for still further Federal statutory intervention in the field of labor relations—the public disclosure of union receipts and expenditures, especially regarding pension and welfare plans. But Prof. Sylvester Petro of the New York University School of Law, I am confident, would suggest first of all a simpler solution, which is to cease making labor unions and their agents immune from the laws against violence, coercion, extortion and fraud which apply against everyone else.
“No other private association,” writes Petro in his new book The Labor Policy of the Free Society (Ronald Press. $5), “has displayed so much corruption and arrogance as some trade unions have. No other private association has so habitually terrorized and exploited both members and nonmembers, or so institutionalized the practice of compelling persons to become members. The combination . . . is no mere coincidence. . . . Internal corruption in some trade unions and the external dangers to society posed by many trade unions can all be traced directly to compulsory, coercive practices.”
FREE EMPLOYEE CHOICE
Petro has written what seems to me by far the best analysis of the law of labor relations that has yet appeared. This is because he has tried to think out the basic political and legal philosophy most consonant with a sound free society; because he has given great study and thought to the economic consequences of alternative labor laws and policies; because he is a student of the common law as well as statutory labor law; because he is thoroughly informed on current court and NLRB decisions; and most of all because he has an excellent legal mind.
Petro begins by examining the basic institutions of a free society—personal freedom, freedom of contract, and private property. He dismisses the specious contrast between property and human rights: “Property rights are human rights, and nothing else.”
The right of association is also basic. Trade unions must be protected in the free exercise of that right. But neither employers nor trade unions can be permitted to engage in violent, coercive, or fraudulent conduct. Action otherwise illegal is not made legal by concert. Unions have a full right to strike, peaceably, for higher wages or better working conditions. But they have no right to use violence, intimidation or coercion to prevent other workers from taking the jobs they have voluntarily vacated. Petro would illegalize, for example, all mass picketing as a form of intimidation and a clear violation of the central principle of “free employee choice.”
WHY WAGES RISE
There are several important problems in labor law that Petro does not seem to me to have fully solved or clarified. This is not surprising when one considers the inherent difficulties of the subject as well as the intemperate and confused thinking that customarily beclouds it. But his book is full of courageous and magnificent common sense, and throws a brilliant light on a hundred points. His attacks on certain features of the Taft-Hartley Act, on the Norris-LaGuardia Act, on President Truman’s seizure of the steel plants in the 1952 strike, on the Supreme Court’s argument that picketing is just a form of “free speech,” and on the same Court’s recent doctrine of pre-emption, are beautiful specimens of relentless legal reasoning. He calls in forthright terms for the abolition of the National Labor Relations Board, and the complete repeal of the Norris-LaGuardia Act. His book deserves to be widely quoted and studied for a long time to come.
As a fitting companion to the Petro book, I suggest Why Wages Rise by F.A. Harper (Foundation for Economic Education, Irvington, N.Y., $1.50). Harper supplies the economic basis on which many of Petro’s propositions rest. He proves by reasoning and statistics that wages rise because productivity rises; that productivity rises mainly through increased investment in equipment made possible by profits; and that labor unions do not and cannot, by themselves, raise the general level of real wages for the whole body of the workers.
May 20, 1957
A spirit of narrow partisanship exists in both major parties in Washington today which does not promise well for economy. The President began by presenting a record-breaking peacetime budget recommending unjustifiable additions and increases. Then he blandly suggested that his own budget should be cut, but that it was up to Congress to find out where to cut it. When Congress thought it had found a few places, the President suggested that such cuts would threaten not only national welfare but world peace. Nearly every department head has protested against the cuts made.
The Democrats, on the other hand, seem to be evenly divided between those who think Federal spending should be cut and those who think it is still niggardly. Adlai Stevenson, for example, holds that a budget of the magnitude of the President’s “is the least we dare have,” which implies that huge spending is necessary for its own sake. It is foolish, he thinks, for the Democrats to try to “out-Republican the Republicans on the issue of budget-cutting.” In short, government economy should be considered exclusively a Republican goal!
CAMPAIGN ORATORY
Then there is the “advisory council” of the Democratic National Committee, a strange group who seem to think that party policy should be set, not by the Democrats in Congress, but by Democrats out of office. Their statement on economic policy blames inflation on “big business,” instead of on the huge spending and cheap money which they themselves advocate. They declare that “small increases in wages are used as the excuse for large increases in prices.” If those who signed this statement had been interested in the truth rather than in campaign oratory they could have easily found that since 1952 hourly factory wages have gone up 22.7 percent while consumer prices have advanced only 4.6 percent.
Fortunately there are in both parties responsible men sincerely interested in economy rather than in trying to pin the blame for its absence on the other party. They include Secretary Humphrey and Under Secretary Burgess, Senator Knowland and many other Republicans; and, among Democrats, Speaker Rayburn, Senator Johnson, and, outstandingly, Senator Byrd. It is true that it is hard to find detailed agreement concerning just where cuts should be made and exactly how much they should total. Individual proposals for total cuts have ranged from $2 billion to more than $6 billion. Even the larger figure may be too modest. If, for example, like the British, we were planning to spend in fiscal 1958 only 41 percent more than in the average of the four years 1947–1950, our new budget would be $18.5 billion less than it actually is.
THE BUDGET PROCESS
But it should not be hard to find agreement concerning just what reforms in budgetary procedure will do most to curb irresponsible spending. Most of these reforms are recommended in reports of the Hoover commission. A few weeks ago President Eisenhower called upon Congress to enact bills approved by the Administration to implement these Hoover-commission recommendations. He particularly emphasized “the authorization of appropriations on the basis of annual accrued expenditures.” In addition, Congress should pass legislation to insure a more thorough and effective Congressional review and check of executive recommendations. And, finally, Congress should grant the President the power for which he recently asked to veto specific items in appropriation bills.
This last step, to be effective, would have to be put in the form of a proposed constitutional amendment. Such an amendment would, of course, have most chance to succeed if offered under bipartisan sponsorship—by, let us say, Senators Byrd and Knowland and perhaps others from both major parties. Procedural reforms that could be effectively accomplished by simple legislation ought to have similar bipartisan sponsorship.
Only through bipartisan support is real economy likely. Such cooperation will incidentally prove better politics for those who adopt it than transparently partisan efforts to put the other party in a hole.
May 27, 1957
A little less than a year ago, those who take Soviet boasts seriously were warning us that Communism might be about to beat capitalism “at its own game—production.” Since then the evidence has been unmistakable that, far from there being any “miracle” of Communist production, the lands behind the Iron Curtain are going through an economic crisis.
The most revealing recent study of Soviet production was in a paper presented before the American Economic Association by Prof. G. Warren Nutter of the University of Virginia and the National Bureau of Economic Research. Warning that we must depend on Soviet official statistics, “where a government with flexible standards of candor has exercised rigid control over the trickle of information it has allowed to the outside world,” Nutter presents tables to show that even on the basis of these official statistics production in Russia lags farther behind that of the U.S. in most basic industries than it did in 1913. His tables cover 37 industries in three benchmark years. I select comparisons for nine basic or representative industries:
| Number of Years Lag | |||
| Industry | 1913 | 1937 | 1955 |
| Steel ingots | 21 | 32 | 29 |
| Electric power | 13 | 21 | 16 |
| Coal | 45 | 49 | 47 |
| Crude petroleum | 14 | 26 | 34 |
| Cement | 19 | 33 | 32 |
| Railroad freight cars | 33 | 51 | 69 |
| Butter | 21 | 38 | 35 |
| Boots and shoes | 23+ | 44 | 44 |
| Cotton fabrics | 28 | 44 | 48 |
| Median 37 industries | 28 | 36 | 34 |
If we take steel ingots as an example, the above table means that the Russian production in 1913 was roughly equal to the production achieved in the United States around 1892, or 21 years earlier; that the lag had risen to 32 years in 1937, and fell somewhat from that point to a level of 29 years in 1955. The comparison is even worse on a per capita than on an overall basis. For the 37 industries in 1955, the median lag in per capita output was 56 years.
A major sign of financial strain in the Soviet Union was the announcement by Khrushchev on April 10 that the Soviet Government had decided to “postpone” for twenty to 25 years the redemption of 260 billion rubles of bonds held by the Russian people. This proved once again not only that the Soviet leaders will repudiate their most solemn pledge, but that they are as contemptuous of their promises to their own people as of their treaties with the “capitalist imperialist” West.
HOW TO DECENTRALIZE
But the most striking evidence of a crisis in Russian production is Khrushchev’s radical plan for decentralizing control. He is planning to abolish most of the giant ministries in Moscow and to shift daily operational control to a separate “economic council” in each of 92 economic regions. This pays capitalism the flattery of partial imitation; but it obviously does not go far enough to be effective.
A far more promising step was taken last year in Poland, when Gomulka declared that “joining of collective farms is voluntary.” As a result, it is now announced, 85 percent, or all but 1,958 of the 12,500 collectives forced together in a decade of Communist rule, have been liquidated.
All that Russia now has to do is to allow such a return to relative economic freedom and quasi-private property not only in farming but in industry. Let the government give the workers and managers shares in their respective industries or plants, say, in proportion to their wages or salaries. Let the new shareholders or partners in each plant elect their own managing partner. Allow everyone to buy or sell shares as he chooses; to change his occupation; to buy or sell or produce or consume what he wishes. Free all wages and prices from government control. Let successful managers reap their reward in profit, and let the burden of losses fall on the unsuccessful managers. Allow and encourage competition. Establish security of private property. Stabilize the currency. Respect obligations and enforce contracts. The result will be an enormous increase in production—of the goods consumers want, and in the proportions they want them.
This, of course, will be capitalism. But the Soviet leaders should find no difficulty in accepting it, provided only they are allowed to call it Modern Socialism.
June 3, 1957
The President’s decision to throw the weight of his great military prestige behind his military budget might have been more effective had he not chosen to defend nearly every other segment of his budget with equal ardor. “No great reductions in it are possible,” he declares, “unless Congress eliminates or curtails existing programs.” If this merely refers to some programs, it is self-evident. But it seems to assume that any program, once started, must continue without re-examination forever.
And this assumption appears to be the chief reason for the continuance of the foreign-aid program. If we had not previously embarked on that program, and got everybody inured to it, and some public figure came along now and suddenly proposed that we give $4 billion away next year to some 60 different countries, he would be thought to have taken leave of his senses. But as we have already handed out some $62 billion on foreign aid since the end of the second world war, the burden of proof is assumed to be on those who would “desert our friends” now.
Let us begin, for example, with the arguments that attempt to belittle the size of the foreign-aid program. Its cost, declares the President, “amounts to only 5 percent of the budget.” But the more extravagant the total budget, the smaller a percentage of it is any given sum. The $3.8 billion proposed for 1958 for foreign aid alone is greater than the entire Federal budget in any fiscal year from 1922 to 1932.
WHAT IT COSTS US
The most realistic way of measuring the present fiscal burden of foreign aid is to ask how much taxes could be reduced if foreign-aid spending did not exist. On the basis of estimates compiled by the Tax Foundation, I find that if no one were taxed at anything higher than a combined normal and surtax rate of 30 percent (which now applies to the income-tax bracket between $6,000 and $8,000 a year), the loss in revenue would be no more than $3.5 billion. Anybody paying any higher personal-income-tax rate than this, therefore, can figure that the addition is what the foreign-aid program costs him personally.
An elementary point constantly forgotten is that it is impossible in practice to tell the difference in net effect between foreign “military” aid and foreign “economic” aid. When we pay for part of a country’s defense, we free that much of its own funds to enable it to buy other things. When we give a country “economic” aid, it has that much more to spend on its military establishment. This means that the constant distinction made between “military” and “economic” aid is of dubious practical importance.
UNPROVED ASSUMPTION
Our military aid (which in 1958 would be some $3 billion, or three-fourths of total foreign aid) rests on the unproved assumption that none of the aided countries can fully pay for its own defense. This assumption is implausible on its face. The President tells us: “Around the world we have provided our allies, over the past seven years, some $17 billion in direct military assistance. Over the same period, the defense budgets of our allies have totaled some $107 billion.” The question naturally arises why these “allies” could not have increased their military budgets an average of 16 percent to pay for the whole of their own defense? A year ago (April 16, 1956) I pointed out in this place that whereas the U.S. was spending some 62 percent of its total budget on defense, thirteen of our principal “allies” spent an average of only 26 percent of their total central government budget on defense.
To claim that we are getting our own defense cheaper by paying also for part of 38 other countries’ defense begs an enormous question. Generally speaking, countries that think they need us for allies continue to want common defense treaties with us whether we help to support them financially or not. Countries that think they do not need us for allies, but only that we need them, may of course consent to take our money. But we merely delude ourselves about what we are buying with it.
The case for foreign “economic” aid is far weaker than the case for “military” aid. But that is another column.
June 10, 1957
“Military” aid will account for about three-fourths of the total cost of the foreign-aid program. Yet a separate examination of “economic” aid may prove enlightening.
Even the heavy program proposed cannot be described as anything more than a token program. It would be a mere bucket of water in the great sea of poverty into which it was poured. The President tells us that “a billion free people . . . live in lands where the average yearly income of each man is $100 or less.” To the nineteen or so “new nations” in which these people live he is proposing to give in total economic aid next year about $1 billion. But this means $1 a year per person—which, other things equal, would raise each man’s annual income from $100 to $101. Will this 1 percent increase remove the specter of Communism? Will it meet what Secretary Dulles calls their “determination to raise their pitifully low standards of living?”
CAPITALISM THE ANSWER
It is not by government-to-government token aid that these countries can fight their way out of their age-old poverty. It is not by the socialistic experiments to which they are resorting in their “determination.” It is not by flirting with Communism or adopting it. They can fight their way out of poverty—and at what would seem a magical speed—by adopting the philosophy and methods which built this country up from a few pioneers, struggling with a few crude tools, to the richest and most productive nation that the world has ever seen. The leaders of the “underdeveloped nations” can also do this—by adopting free enterprise, by adopting precisely the philosophy of capitalism to which they are so hostile.
Capitalism is not, as the politicians of the “underdeveloped countries” suppose, mere “technical know-how,” or the “application of mechanical power.” These are among the results of capitalism, not its causes. Capitalism is a set of economic and political principles. It means freedom to produce and consume, freedom to buy and sell, freedom of contract, 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.
If the “underdeveloped areas” were to adopt these principles, they would immediately attract both domestic and foreign private capital for their own development. For then they would willingly give the minimum assurances necessary to attract private investment—guarantees to private property against nationalization, seizure, or excessive taxation; freedom to withdraw earnings or principal; freedom from vexatious regulations and controls generally.
PRIVATE INVESTMENT
Some of us have been pointing this out with perhaps wearisome repetition for years (e.g., Newsweek, July 7, 1952). The case was admirably put a couple of months ago in a report by the American Enterprise Association. The thesis of the report is that, dollar for dollar, private foreign investment stimulates more economic growth than foreign aid; and that primary reliance on private enterprise rather than government-to-government aid is more likely to produce an efficient and sustained rise in the welfare of the underdeveloped countries, as well as good political relations with the United States. Private foreign investment, in contrast to aid, the report pointed out, minimizes suspicion on the part of foreigners that ulterior motives are involved. It creates no sense of charity; it emphasizes mutual benefits; and it averts insoluble disputes concerning the intercountry distribution of aid.
The Administration’s new plan does pay lip service to the potential role of private foreign investment. But it wishes to subordinate it to a government Development Loan Fund which as Secretary Dulles admits, would “take greater financial risks than those acceptable to existing institutions and would, in fact, be “primarily an instrumentality of foreign policy.” This apparently means that foreign nations would continue to get loans by threatening to go Communist rather than by creating an attractive climate for private investment.
June 17, 1957
Our steeply “progressive” personal income taxes, as students of the subject have long recognized, undermine incentives and slow down the capital formation upon which our economic progress in the long run depends. But as a new 40-page study by the Tax Foundation proves in detail, these confiscatory rates do not even achieve their ostensible purpose of raising revenue.
If a flat rate of 20 percent (now applying only to the lowest taxable income bracket) were applied, for example, to all taxable income, 85 percent of the revenue at 1955 rates would still be obtained. This rate produced $25.5 billion of the revenue from the personal income tax in 1955. All the “progressive” rates together produced only $4.4 billion more.
Our extravagant Federal expenditures are in large part the result of the belief that “the rich” are paying them. This belief is a delusion. If the present rate structure were cut off at a maximum of 50 percent, 98 percent of the revenue at 1955 rates would still be obtained. (The loss in revenue would be only $734 million.) If the present rate structure were cut off at a maximum of 70 percent, 99.5 percent of the revenue at 1955 rates would still be obtained. (The loss would be only $145 million.)
RATES VS. REVENUES
But even these relatively small losses are calculated on the assumption that income in the higher tax brackets would not change. Yet the Tax Foundation’s study provides a very heavy presumption that if the top rates were reduced as indicated, the incomes they affected would not only increase relatively to other incomes as a result of the incentives (or reduced deterrents) provided by the tax cut, but would increase enough actually to increase government revenues from these incomes.
Time and again, when the highest rates were reduced, relative revenues from the high-income brackets rose. During the 1920s the greatest reduction in surtax rates was at the top of the income scale (from 65 percent to 20 percent). Despite this reduction, the share of the total income tax paid by the high-income classes more than doubled—from 30 percent in 1920 to 65 percent in 1929.
The contrast is even more striking when we look at the steady long-term fall in the percentage of the total tax revenues collected from the higher incomes as the rate on those incomes was increased. Despite a huge increase in total personal incomes, we find that in the highest incomes (those of more than $100,000) there has been no long-term upward trend in total income reported. In fact, average reported income per tax return above $100,000 is actually less in recent years than in 1916!
THE $100,000 INCOMES
As neither official national income figures nor price indexes are now generally carried back beyond 1929, I take that year as our base of comparison. The national income increased from $87.8 billion in 1929 to $302.1 in 1953—a rise of 244 percent. The top surtax rates on incomes over $100,000 were increased from 20 percent in 1929 to 74 to 89 percent in 1953. And the total income of those who filed income-tax returns over $100,000 fell from $4.4 billion in 1929 to $2.9 billion in 1953, a decline of 33 percent.
Even this does not show the real contrast. For in 1953 wholesale prices had risen to an index of 110.1 as compared with 61.9 in 1929. This means that the incomes of $100,000 and over in 1953 should in strictness be compared (in real purchasing power) with incomes of $56,222 and over in 1929. As the Tax Foundation study does not make full allowance for all these factors, its conclusions actually understate its case.
The effect of high taxes on incentives to work and invest has been obscured, it is true, by nearly three decades of depression, war, and inflation. But it is enormously probable that cutting off the top progressive rates at a maximum of 50 percent (instead of the present merely punitive 91 percent) would lead to an actual increase in governmental revenues. If Congress can set aside all catering to prejudice and envy, and courageously take this step, it will achieve a major tax reform without endangering a balanced budget.
June 24, 1957
We are being warned from Washington that all hopes for tax cuts that would apply even to part of the fiscal year 1958 are vain and unrealistic. The tacit assumption on which all these warnings rest is that the proposed $72 billion expenditure total for 1958 is sacred and untouchable, and might “have to be” even larger.
Let us, for the sake of argument, grant that the $72 billion budget “can’t” be reduced—or at least won’t be. It is still possible to make, now, major reforms in our tax laws that would not reduce revenues at all.
We saw last week that if the present personal income-tax rate structure were cut off at a maximum of 50 percent, 98 percent of the revenue would still be obtained—even on the assumption that the drastic cut would do nothing to stimulate an increase in taxable income in the high brackets affected. But from the whole history of rate and revenue changes since 1916, as the Tax Foundation’s study shows, it is enormously probable that cutting off the top progressive rates at a maximum of 50 percent (instead of the present merely punitive 91 percent) would lead to an actual increase in governmental revenues.
DISCRIMINATIONS
Other major reforms could be made in the personal income tax that would involve only a negligible loss in revenue. One would be to reduce the present discrimination against irregular incomes. An inventor, novelist, or motion-picture actor may earn $100,000 this year and nothing for the next three years. He would pay (if single) a tax of $66,798. A corporation executive, on the other hand, with a $25,000 income for each of four years, would pay a total tax on his $100,000 of only $39,184. Such discrimination could be greatly reduced by allowing a taxpayer to “average down” his tax for a certain number of years on the basis of his average annual income over the whole period.
There are half a dozen different ways in which the great injustices in the present capital-gains tax could be mitigated.
The corporation tax is another area where a major reform could be made without reducing revenues. At present, corporations pay a “normal” tax of 30 percent on the first $25,000 of net income, and a “surtax” of 22 percent (or a total of 52 percent) on all net income above $25,000. This “progression” is quite unjustified. For a corporation earning $25,000 may be wholly owned by one rich man, whereas millions of low-income stockholders in big corporations are paying nearly 52 percent on their share of the net income of these corporations (before paying their personal income tax). Yet nearly all the bills in Congress to change the corporate income tax would carry this grossly misapplied “progressive” principle still further, either by reducing the tax on “small business” or by levying confiscatory rates (up to 75 percent, for example) on big corporations.
CORPORATE TAX CHOICE
There is a simple tax reform which would discriminate neither against sole proprietorships and partnerships nor against small corporations. This would be to make the corporate net income tax a flat 52 percent, but to allow any corporation the option in any year of paying the personal tax rate on net income instead. In practice (assuming present personal income-tax rates), this would mean that any corporation earning less than $46,000 a year would find it advantageous to pay the personal rates (although the personal income-tax bracket between $44,000 and $50,000 pays 72 percent). This plan would mean a smaller tax than at present for all corporations earning less than about $14,000 a year and a higher tax for others.
The net effect of such a change would be to bring in a higher total corporate revenue than the present system. This could be offset by allowing corporations a lower rate on the part of their net income that they paid out in dividends, in place of the present clumsy and confusing system of dividend credits for individuals.
These major tax reforms could be made immediately, to apply to income of the 1958 calendar year. They would not reduce revenues; they would remove inequities; and they would greatly stimulate economic progress.
July 1, 1957
A year ago (Newsweek, June 25, 1956) I printed here, under the above title, a table showing the depreciation, in terms of domestic purchasing power, of the currencies of 53 countries in the ten years from 1946 to 1955. This table had been compiled by Franz Pick. He has now carried it forward, for the nine-year period from January 1948 to December 1956, in the 1957 edition of his Currency Yearbook. I present the results below, showing the depreciation of 56 currencies in that period.
It is important to keep this appalling worldwide picture constantly before our minds. For it reminds us that inflation is nothing but a great swindle, and that this swindle is practiced in varying degrees, sometimes ignorantly and sometimes cynically, by nearly every government in the world. This swindle erodes the purchasing power of everybody’s income and the purchasing power of everybody’s savings. It is a concealed tax, and the most vicious of all taxes. It taxes the incomes and savings of the poor by the same percentage as the incomes and savings of the rich. It falls with greatest force precisely on the thrifty, on the aged, on those who cannot protect themselves by speculation or by demanding and getting higher money incomes to compensate for the depreciation of the monetary unit.
WHY INFLATION?
Why does this swindle go on? It goes on because governments wish to spend, partly for armaments and in most cases preponderantly for subsidies and handouts to various pressure groups, but lack the courage to tax as much as they spend. It goes on, in other words, because governments wish to buy the votes of some of us while concealing from the rest of us that those votes are being bought with our own money. It goes on because politicians (partly through the second- or third-hand influence of the theories of the late Lord Keynes) think that this is the way, and the only way, to maintain “full employment,” the present-day fetish of the self-styled progressives. It goes on because the international gold standard has been abandoned, because the world’s currencies are essentially paper currencies, adrift without an anchor, blown about by every political wind, and at the mercy of every bureaucratic caprice. And the very governments that are inflating profess solemnly to be “fighting” inflation. Through cheap-money policies, or the printing press, or both, they increase the supply of money and credit and affect to deplore the inevitable result.
The following table is based on official cost-of-living indexes, many of which understate the real extent of currency debasement. Russia and its satellite countries are omitted because disparities between actual and “official” price levels are so wide and the statistics are meaningless. The American dollar, to which so many other currencies are ostensibly tied, itself shows a depreciation of 15 percent in the period. The British pound sterling, the world’s most important trade unit, lost 34 percent, the French franc 52 percent, the currencies of Chile, Paraguay, Bolivia, and Korea, from 93 to 99 percent.
CURRENCY SHRINKAGE
Percentage Decline in Purchasing Power of Monetary units January 1948–December 1956
| Dominican | 2 | Norwegian | 33 |
| Egyptian | 6 | New Zealand | 33 |
| Portuguese | 6 | Spanish | 34 |
| Haitian | 8 | United Kingdom | 34 |
| Swiss | 10 | Thailand | 35 |
| Ceylonese | 11 | Turkish | 36 |
| Burmese | 12 | El Salvador | 40 |
| Dutch Antillean | 12 | Nicaraguan | 40 |
| Ecuadorian | 13 | Mexican | 45 |
| Pakistan | 14 | Colombian | 46 |
| Belgian | 15 | Uruguayan | 48 |
| United States | 15 | Finnish | 49 |
| Indian | 15 | Icelandic | 51 |
| West German | 18 | Australian | 52 |
| Venezuelan | 19 | French | 52 |
| Hong Kong | 23 | Japanese | 55 |
| Guatemalan | 23 | Austrian | 55 |
| Canadian | 25 | Peruvian | 55 |
| Italian | 25 | Greek | 58 |
| Honduran | 26 | Indonesian | 59 |
| Costa Rican | 27 | Israel | 66 |
| Irish | 28 | Brazilian | 70 |
| Malayan | 28 | Argentine | 73 |
| Danish | 29 | Taiwan | 85 |
| Swedish | 29 | Chilean | 93 |
| Netherlands | 30 | Paraguayan | 96 |
| South African | 31 | Bolivian | 99 |
| Iranian | 33 | Korean | 99 |
July 8, 1957
Secretary Humphrey’s defense of the Administration’s economic record was an admirable presentation. It was also (what was not evident in the headlines) a lucid lesson on the causes of inflation, and one of the most impressive answers yet made to the advocates of cheap money.
The Secretary presented “a record of a prospering America with new high levels of employment, rising income, and increasing purchasing power.” True, he had an easier time praising the early record of the Eisenhower regime than the later one, and under questioning by Senator Byrd made some qualifications not in his original statement. He admitted that the national debt had increased, not decreased, in the four Eisenhower years. When Senator Byrd confronted him with General Eisenhower’s 1952 promise to reduce spending to $60 billion, he made the political blunder of replying: “That was before he was elected.” And he had no convincing answer when Senator Byrd pointed out that a slipping back only to the levels of national income of two years ago would result in a budget deficit of $12 billion, or when the senator went on to express the belief that the “new inflation” that started last year will “in all likelihood continue and may, in fact, be accelerated.”
But to one contention Secretary Humphrey did have a convincing answer. This is the contention of the inflationist that the Administration has been reducing the volume of credit, and causing “inflation” and higher prices by raising interest rates.
HOW CREDIT EXPANDED
As to the volume of credit, the Secretary had no difficulty in showing that it has actually “expanded substantially in the last four years.” “There is more credit outstanding today than ever before.” In fact, as the Secretary pointed out, if we count mortgage, consumer, corporate, and other forms of nonbank credit, the total has increased over 1952 by the staggering sum of $146.5 billion ($135.8 billion from “savings” and $10.7 billion “from bank credit expansion, or increased money supply”). The “tight money” complaint, as the Secretary showed, merely reduces itself to this—that the government has put some limits on monetary expansion.
And Humphrey gave the best official answer yet made to the frequent contention that an increase in interest rates raises prices because interest rates are a cost of production. On the basis of the gross sales of all manufacturers, he pointed out that of the cost of an article selling for $100, about 33 cents represents interest During the ten-year period since 1946 “prices of goods that consumers buy rose 27½ percent, or $27.50 on a $100 item [due to labor and other costs], compared with the 20-cent increase due to higher interest.”
INTEREST AS A COST
His comparisons in home-building were no less impressive. A house that cost $10,000 to build in 1946 would cost $19,000 in 1957. If the interest rate on an FHA mortgage increased from 4 percent in 1946 to 5 percent in 1956, then the monthly mortgage payment (on the basis of 15 percent down and a twenty-year amortization) would increase from $51.51 on the 1946 house to $106.58 on the 1957 house. Only $8.71 of this increase would be due to the higher interest cost; the other $46.36 would be due to other costs raised by inflation.
But to hold down interest rates artificially is to encourage borrowing and thereby to increase the money-and-credit supply. It is this increased money supply that raises prices and constitutes the heart of inflation.
The real criticism to be made of the Federal Reserve is not that it has kept credit too scarce and interest rates too high, but that it has yielded to inflationist pressure. It has made credit too plentiful and kept interest rates too low. It is precisely because interest rates are too low that the demand for credit still exceeds the supply. A discount rate of only 3 percent (when 91-day Treasury bills yield 3.404 percent) is inflationary. The Fed might be well-advised follow the example of Canada, and keep the discount rate always at least ¼ of 1 percent above the bill rate. This would also show that the Fed was merely following the market, and not arbitrarily raising interest rates.
July 15, 1957
The report on June 26 of the subcommittee on Fiscal Policy of the Congressional Joint Economic Committee was obviously a political compromise. Like all such compromises it contained double talk; it said two mutually contradictory things at once.
It began by admitting that “the rapid expansion of Federal government spending . . . has contributed significantly to inflationary pressures.” It had much to say about the need for economy. But: “At the same time, a number of soft spots in the economy emphasize the need for continuing alertness . . . which may require revisions in current public policies”—i.e., deficit spending and “relaxation of present general credit controls.”
Now there are always “soft spots,” even in the midst of the biggest inflationary boom. And if we are to abandon anti-inflationary policy the moment it shows signs of being effective, if the only flexibility we are willing to permit is in the upward direction, then we are in effect committed to a continuance of inflation. Stabilization after an inflationary boom is always painful. It necessarily brings some “soft spots,” recessions in some industries. A stable “full employment” economy, with simultaneous full employment in all lines, and no losses or soft spots anywhere, exists only in a Keynesian dream world. A policy aimed at maintaining constant full employment in every line, and with constantly rising wage rates, is a policy of inflation.
A RARE MERIT
But the Congressional subcommittee report does have an outstanding and (in view of present political pressures and confusions of thought) a rare and unexpected merit. It does support the Federal Reserve’s so-called “tight money” policy. It does declare that “public policies to cope with increases in the price level must take the form of general fiscal and monetary restraints on the expansion of total spending.”
The report shows unusual economic sophistication. It throws proper doubt on the recent fashionable “cost-price push” theory of inflation: “Present inflationary pressures frequently are attributed to the so-called cost-price push, as distinct from the traditional inflation resulting from excessive demand. Whether or not the distinction is valid, it is evident that general price increases can occur without increasing unemployment only if demand is adequate to support the higher price level. The basic problem is an inadequate level of savings out of current income.”
This is correct; but it could have been stated much more clearly and forcibly. The “excessive demand” that causes inflation means excessive monetary demand. Excessive monetary demand comes from excessive money supply. Excessive money supply is the result of increasing the supply of money and credit more than the supply of goods and services.
MONEY VS. WAGE RATES
And the supply of money and credit is excessively increased whenever interest rates are held down by Federal Reserve policy below the level at which unhampered market forces would have fixed them. When interest rates are artificially held down by governmental policy, borrowing is over-stimulated; excessive money and credit are created through the banking system, and prices (including wage rates) are pushed up. This is the essence of inflation.
Expansion of the money supply is both the necessary and the sufficient cause of inflation. An increase in wage rates in neither a necessary nor a sufficient cause. Without an increase in the money supply, an increase in wage rates would lead merely to unemployment. Increased wage rates lead to inflation not through economic necessity but through political pressure. First the government sets up or retains a legal framework (the Norris-LaGuardia Act, Walsh-Healey Act, minimum-wage law, Wagner-Taft-Hartley Act) under which wage rates are forced up. Then there are pressures from every side to give everybody the additional monetary means to pay for the goods and services at the higher prices made necessary by the higher wage rates.
We can stop this “wage-price spiral” the moment we have the economic understanding and the political courage to do so.
July 22, 1957
Within the last few months there has broken out in several places the theory that we are now confronted with a “new” kind of inflation. As described by Robert C. Tyson, chairman of the finance committee of the U.S. Steel Corp.: “Our new kind of inflation appears to be cost inflation pushing prices up, rather than price inflation pulling up costs through competition bidding for materials and manpower. We might think of it as a new cost-push type as distinguished from the conventional demand-pull type of inflation.”
Going even farther, a recent study of the National Industrial Conference Board declares: “Although money supply has been checkreined by Federal Reserve policy, business is still on the uptrend. . . . Since prices have continued to rise, the clear lesson of 1956 is that money and its rate of use are not the sole determinants of price. . . . Today, the critical question is: How adequate are monetary controls for coping with price pressures that arise from nonmonetary forces?”
NO STATISTICAL PROOF
Now these theories seem to me to mix truth with error. The Conference Board attempts to prove its case statistically. But as the U.S. Bureau of Labor Statistics pointed out on May 13 in a study of productivity, costs, and prices: “Where the figures indicate that prices and unit labor costs showed about the same increase, or that one or the other showed a greater increase during a particular year or period of years, this should be taken as a description of what happened and not necessarily as an explanation of what ‘caused’ the change. An increase in unit labor costs may lead to an increase in price, but conversely an increase in price can result in strong pressure for increases in wages. . . . The answer to the question of whether the wage increases cause the price increase or vice versa cannot be determined from the figures alone.”
The BLS report goes on to declare: “Average hourly compensation [of workers] in current dollars increased much more than productivity during the postwar period [1947–56]. The former increased by about 61 percent, the latter by 26 percent, leading to an increase in employee compensation per dollar of real product of about 28 percent.”
This sounds ominous, but only because it is confusingly stated. Four paragraphs farther down the report declares: “The increase of about 28 percent in employee compensation per dollar of real product was almost identical with the increase in price between 1947 and 1956.” In other words, the word “productivity” in the first quotation must mean productivity in real terms, not in dollar-value terms. Multiply the 26 percent increase in “productivity” by the 28 percent increase in price level, and we get the same 61 percent increase as in hourly labor income.
ANTICIPATIONS
The Conference Board tries to prove that the increase in the money supply cannot be the cause of the price rise in the last two years, because the money supply has not gone up in this period. But this overlooks longer comparisons, and mistakenly assumes that changes in money supply must reflect themselves exactly proportionately in prices with neither time lag nor anticipations. Expansion of the money supply is both the necessary and the sufficient cause of inflation. Without such expansion, an excessive increase in wage rates would lead merely to unemployment.
I regret having to criticize what are otherwise two excellent and informative statistical reports. And insofar as they describe political pressures, the “cost push” theorists are right. Our politicians put irresponsible and irresistible power in the hands of union leaders, and then plead with them not to use it. They remove the natural economic penalties for recklessness, and then beg for restraint. If the Federal Reserve seriously tried to hold the line on money and credit, while the union leaders kept pushing up wage rates, it is the Federal Reserve, not the unions, that the politicians would blame for the consequent unemployment and recession.
As long as the political climate remains this unhealthy, a halt to inflation is impossible. But with understanding and courage, inflation could be halted overnight.
July 29, 1957
There are so many confusions of thought today concerning the causes and cure of inflation that in calling attention to one error one must temporarily ignore another. One is liable, as a result, to be accused of having fallen into the error one has ignored. This is particularly true in any discussion of the respective roles that wage increases and monetary policy play in inflation.
In answer to the pure “cost push” theorists, I have pointed out that expansion of the money supply is both the necessary and the sufficient cause of inflation; and that without an increase in the money supply, an increase in wage rates would lead merely to unemployment. But while this generalization is essential to a correct theoretical understanding of what is now going on, it was never intended to be, and is certainly not, a comprehensive factual description of what is now going on. For if to the economic forces considered in isolation, we add political and institutional forces, we get a total picture of the present inflation in which wage increases play a crucial role.
POLITICAL PRESSURE
And they play this role because of governmental policy. Governmental policy in this respect has done two main things: (1) Through special legal privileges and immunities, it has built up the power of unions and union bargaining to a point where employers can no longer resist excessive wage demands. (2) When these demands have been granted, excessive pressure is put on the governmental monetary managers to create the money and credit necessary to sustain the wage increase (and consequent price increases) without unemployment. Thus wage, price, and money-and-credit increases act on a ratchet or endless-chain principle to keep the inflation going.
And the “cost push” theorists are right in this—that the political pressure for inflation today comes from the desire to keep “full employment,” to encourage constant wage increases, and to make both possible by low interest rates and credit expansion.
When the Federal Reserve lets interest rates up to the point to which excessive demand tends to pull them, when it seriously tries to keep money and credit from further expansion, it is denounced for a “tight money” policy. It is accused of discouraging home-building, “small business,” or what not. When the steel industry raises prices to meet the higher costs necessitated by excessive wage advances forced upon it, senators denounce the price rise as inflationary, but are silent about the wage rise that caused it. The President pleads for “restraint” on the part of business and labor, forgetting the elaborate legal framework which has made union leaders all-powerful and left employers impotent to resist wage-increase demands.
REAPPRAISAL NEEDED
We do indeed have a built-in inflation. And it is built in by governmental policy. Among its foundation stones are the Norris-LaGuardia Act, the Walsh-Healey Act, the Fair Labor Standards Act. the Wagner-Taft-Hartley Act (and the mass of NLRB and court decisions), and the Employment Act of 1946. Under these laws the government has not merely encouraged but in effect forced the creation of industrywide unions with irresponsible private power to force continuous wage increases.
If the world were under a real international gold standard, with the natural penalties that this sets on excessive money-and-credit expansion, the result of these wage increases would be unemployment. But under nationally managed paper currencies the national managers everywhere are denounced for trying to sit on the lid.
There is no economic problem whatever to stopping inflation. It could be stopped overnight. But this would involve not only courage in the monetary field, but an “agonizing reappraisal” of the labor policy of the last 25 years that neither the Republicans nor the Democrats, as a party, have the courage to make. It is not merely that they do not have the courage to act. They do not have the courage to face the truth about the Frankenstein monster of uncurbed union power that they themselves have built.
August 5, 1957
Last January the Guaranty Trust Co. of New York, in its monthly Survey, discussed a problem that has engaged the attention of leading European economists and is now becoming urgent here. This involves the clash in the economic objectives of governments which assume “responsibility” for the achievement of certain “goals.”
Our own government, for example, now follows Britain and France in pursuing three mutually contradictory aims. These are (1) constantly rising wages; (2) stable prices; and (3) full employment.
It should be obvious that these goals cannot all be achieved at the same time. Even in the short run, any two of these goals can be achieved only at the sacrifice of the third. Thus if we try to have constantly rising wages (regardless of productivity), we can have full employment only if we are willing to allow prices to go up to maintain profit margins, and only if we increase monetary purchasing power enough to enable consumers to pay the higher prices. But this is another way of saying that we must give up the goal of stable prices and encourage a continuous inflation.
If we try to have both constantly rising wages and stable prices, we can have them only at the cost of unemployment, and eventually of mass unemployment. If we want both stable prices and full employment, then the constant annual “rounds” of wage increases, as a result of strikes or strike threats (and regardless of what has happened to productivity), will have to be abandoned.
CAN INFLATION CREEP?
But given the pressures from union leaders and other pressure groups, and given the prevailing obsession that government “must assume responsibility” for everybody’s economic welfare, the de facto choice of Western governments in the last decade or two has been constantly rising wages and full employment financed by a so-called “creeping” inflation.
There are not lacking, indeed, rationalizations of this very course, among the most candid of which is that of Sumner H. Slichter of Harvard. Professor Slichter seems to think that a “creeping” inflation of some 2 percent a year would be just fine. It has already been pointed out by Dr. Winfield Riefler of the Federal Reserve that, even if we assume we could control an inflation to a rate of 2 percent a year, “it would be equal to an erosion of the purchasing power of the dollar by about one-half in each generation.” The legalized robbery that such a “solution” would involve of millions of savings-bank depositors, life-insurance policyholders, bondholders, and of everyone dependent on a fixed or sluggishly responsive income, is itself sufficient ground for rejecting it.
IT WOULD NOT WORK
But it would not even work. The moment an inflation is planned, acknowledged, and foreseen, the game is up. Inflation is a swindle. You cannot tell your intended victim in advance that you intend to swindle him. Slichter proposes his plan mainly in order to meet annual wage demands. But union leaders, if the plan were put into effect, would simply add 2 percent (or whatever the planned annual inflation was) on top of the demands they would have made anyway. In fact, lenders, investors, merchants, speculators would all mark up their demands or change their operations to beat the inflation, which, out of control, would race to a crack-up.
What is still understood only by an appallingly small minority even of the “experts” is that prices, in the early stage of an inflation, usually rise by less than the increase in the money supply, but in the later stage of an inflation always rise by more than the increase in the money supply.
Yet there is one way in which the three goals of rising wages, stable prices, and full employment (when these goals are properly understood) could all be achieved. This way is through the restoration of a sound currency and a genuinely free economy. In such an economy, it is true, wages could not for long rise faster than marginal labor productivity, but they would rise as fast as marginal labor productivity, though the rise in their real purchasing power might be reflected more in lower prices than in higher wage rates.
August 12, 1957
Gardiner C. Means, an economist who invented the term “administered prices” in the ’30s, has come up with the theory that the current inflation is an “administered” inflation. The solution, he thinks, would be for the President to call a conference of business and labor leaders, and get an agreement from them to “hold the line” for a year or two on wages and prices. But his theory of causation is false; and his proposed remedy is not needed, would not work, and would greatly aggravate the very evil it is supposed to cure.
Past inflations, he agrees, have been “monetary” inflations—the result of an increased money supply bidding for the available supply of goods and services. This is correct. And it applies to every inflation, including the present one.
This can be shown by any set of long-term comparisons. At the end of 1939, the total supply of money and bank credit (total bank deposits plus currency outside of banks) was $64.7 billion. In March of this year it was $221.5 billion, an increase of 246 percent. In 1939 wholesale prices were at an index number of 50.1; today they are at a level of 117.4, an increase of 136 percent. The chief reason why wholesale prices have not gone up even more in this period is that there has also been a great increase in production. The increase in the money supply is a sufficient explanation of the present inflation. We do not have a “new kind” of inflation, and we do not need new explanations.
ADMINISTERED BY WHOM?
Neither logic nor statistical comparisons give any support to the “administered price” theory of inflation. If sellers can administer prices to any level they choose, why weren’t prices as high in 1955, or 1949, or 1939, or 1914, as they are today? Why are prices all being raised now? What has prevented them from going still higher?
Certain prices, it is true, are administered (within narrow limits) at levels different from those that a perfectly fluid competition would bring about. The outstanding directly administered prices are those administered by government. This includes all public-utility rates and railroad rates. But these are administered down rather than up. Farm prices have of course been supported by government above free-market levels. Farm products have risen 150 percent since 1939, whereas industrial products have risen only 116 percent.
By far the most important administered price is the price of labor. Wage rates have been administered upward by powerful industrywide labor unions. Since 1939 hourly wages in manufacturing industries have increased by 229 percent.
FALSE CURE
As a cure for all this, Means would have the President call a conference of business and labor leaders at which he would “get agreement from them to hold the line” on prices and wages. Now such agreements would be extremely harmful if they were uniformly adhered to. They would not allow for the relative changes in particular prices and wages necessary to adjust output to changes in supply and demand.
But all hold-the-line legislation or voluntary agreements in the past have broken down under political pressures, chiefly in favor of wage increases. The Means plan left-handedly recognizes this. His proposed agreements would allow “small” wage increases to take account of increases in productivity, and increases “where a major disparity in particular wage rates required correction.” Anyone who remembers our second-world-war experience must know that such loopholes would be exploited to the point where the hold-the-line agreements would become a farce. But even this would be better than their strict enforcement. For to try to hold a uniform line on prices and wages, particularly if the money and credit supply continued to be increased, would have a disastrous effect on production.
And the scheme is wholly unnecessary. All that is needed to stop the present inflation is a halt to the expansion of money-and-credit supply and repeal of the legislation that creates monster unions and gives them a coercive wage-raising power that employers are impotent to resist.
August 19, 1957
When four Federal Reserve Banks raised their discount rates as of Aug. 9 to 3½ percent instead of 3, bringing the level to the highest since 1934, there was the usual explosion by the Patmans and Kerrs in Congress against “tight money.” But as the Guaranty Trust Co. of New York pointed out in its July Survey, present rates appear high only in comparison with the abnormally low rates of the depression years and the artificially maintained rates of the war and early postwar periods.
Longer-run comparisons show, in fact, that present interest rates are still quite moderate for a time of active business. Rates on commercial paper, averaging about 4 percent, compare with 6 percent in 1929 and 7½ percent in 1920. Before 1929, a rate below 4 percent was exceptional. As for the preceding 3 percent Federal Reserve discount rate, never until 1930 did any Federal Reserve Bank set a rate below that level.
Nor is the rate structure in the United States high in relation to those elsewhere. Of the 32 foreign central-bank rates listed in the Federal Reserve Bulletin for July, only five are below that in the United States. This is in spite of the fact that many countries still maintain unjustifiably low central-bank rates. The maintenance of short-term interest rates at too low a level, in fact, is one of the main explanations of the continuance of inflation in those countries. Excessively low rates always encourage overborrowing, which means an expansion in the supply of money and credit, which in turn causes commodity prices to rise even further.
IT CAN’T GO ON FOREVER
What the Federal Reserve authorities and the Treasury Department have been doing in the last two and a half years has not been to make money tighter, but simply to allow the money market to tighten itself as the demand for credit increased.
It is possible, of course, for a government or a central bank to keep money rates low for a long time, either by printing money directly or by permitting the overborrowing and consequent expansion of credit to which excessively low money rates inevitably lead. What is less well understood is that cheap money cannot be continued indefinitely. It sets in motion forces that eventually drive interest rates higher than if a cheap-money policy had never been followed.
The expansion of money and credit that is necessary to hold interest rates down also raises commodity prices and wages. Higher commodity prices and wages make it necessary for businessmen to borrow correspondingly more in order to do the same volume of business. Therefore the demand for credit soon increases as fast as the supply. Later on, still another factor comes in. When both borrowers and lenders begin to fear that inflation is going to continue, prices and wages begin to go up more than the increase in the supply of money and credit. Borrowers want to borrow still more to take advantage of the expected further rise in prices, and lenders insist on higher interest rates as an insurance premium against expected depreciation in the purchasing power of the money they lend.
THE BRITISH EXAMPLE
When this happens in an extreme degree, we get a situation like that in Germany in November of 1923, when rates for “call money” went up to 30 percent per day. This phenomenon in mild degree is already evident in Britain. The First National City Bank of New York has just pointed out in its August letter, for example, that while the U.S. Treasury 2½s were trading around 86 in June, the British Treasury 2½s issued in 1946, “during the last dying gasp of the cheap-money policy of the United Kingdom,” could be bought at 50, or half the original purchase price. Yet corporate shares in Britain have been bid up to levels where returns to the investor are in many cases substantially lower than on gilt-edge bonds. As one London investment house explains the matter, “The argument is, indeed, put forward that, since the pound has been depreciating in the past decade at an average rate of 4¾ percent per annum, any investment likely to show a total net return on income and capital accounts over a given period of less than this amount is giving a negative yield and should be discarded.”
August 26, 1957
The new camouflaged devaluation of the French franc is not only one more humiliating economic experience for France itself, it is one more dramatic exposure of the bankruptcy of the whole postwar international currency scheme imposed on the world mainly by the late Lord Keynes and Harry Dexter White. This includes the cavalier rejection of the international gold standard as a “barbarous relic,” and the substitution of a built-in system of exchange control with a paper-currency unit pegged by each government at an artificial, arbitrary, and unreal valuation supported by police penalties, import quotas, import licenses, and import taxes, bilateral trade agreements, export subsidies, the International Monetary Fund, the European Payments Union, and similar futile substitutes for sound internal policies.
For a full century before 1914 the French franc, in terms of gold, sold without change at a rate about 145 times as high as it is today. In terms of living costs the situation is as if, in the U.S., a dollar today were to buy half as much as a cent did in 1914. Yet the tragedy of the French franc does not stand out in the world today as some glaring exception. It is, on the contrary, typical of what has been happening to nearly every currency in the world since the outbreak of the second world war.
WORLDWIDE INFLATION
In Newsweek a few weeks ago (July 1), I printed a table showing the percentage decline in the purchasing power of 56 different currencies between January 1948 and December of last year. The median decline of these 56 currencies in this nine-year period was 33 percent. The French franc, it is true, then showed a fall of 52 percent. But thirteen currencies had fallen more. The currencies of Chile, Paraguay, Bolivia, and Korea declined from 93 to 99 percent; the British pound sterling 34 percent, and the American dollar, the supposed world’s currency anchor, 15 percent. Each country has a theory that its own inflation is of some “new type” due to some malicious influence outside of its own control. But in each case the real cause is that the country has printed too much paper money.
When, in September of 1949, some 30 countries, following the example of the British pound sterling, devalued their currencies, reassuring statements were made nearly everywhere that thanks to this great major operation the cancer had been removed; the devalued currencies were now all at “realistic” levels, the balance of trade would once more be restored, and currency units would be permanently stabilized. It was forgotten that if the old practices continued, the process leading to further devaluation would simply start all over again.
BUREAUCRATIC CHAOS
There is, unfortunately, no reason to suppose that the franc is any more likely to remain stable at its new level than it did at its 1949 level. For though some temporary reforms have been put into effect—an increase in the discount rate, a restriction of credit, a cut in government expenditures, an increase in taxes—France has retained the old system of arbitrary exchange controls, with a mere change and simplification of details. Instead of allowing the franc to be freely bought and sold at whatever prices buyers and sellers can agree upon—which would lead to an automatic restoration of the balance of trade—France continues to fix the franc at an arbitrary “official” level, and to try to balance trade artificially by offering a 20 percent subsidy on most exports and imposing a 20 percent tax on imports (except fuels and raw materials “vital” to French industry). Meanwhile, the French economy remains honeycombed with protections, subsidies, vast welfare programs, and rent, price, and wage controls.
The Keynes-White International Monetary Fund system, with its national paper moneys traded at government-pegged prices enforced by police power and a crazy quilt of bureaucratic controls, has led only to continuous inflation, trade disruption, and monetary chaos. There is no substitute for sound internal policies in each country. The only real cure for the present world inflation would be a return to the full international gold standard and the disciplines and restraints which maintain that standard.
September 2, 1957
The new devaluation of the French franc (counted by one researcher as its eleventh devaluation in 21 years) is a still further proof, if any were needed, of the weakness, instability, and bankruptcy of the paper-money exchange-control system built in by Lord Keynes and Harry Dexter White after the second world war under an International Monetary Fund. This system is a tour de force. It combines the alleged disadvantages of the international gold standard with all the real disadvantages of a floating paper-money standard, with none of the merits of the first and none of the compensations of the second.
A floating paper-money standard (as in Britain between 1931 and 1939) is, of course, inherently unstable, subject to every political pressure and bureaucratic caprice. It tends constantly toward more inflation. It is argued, however, as an “advantage,” that prices and wages in the country with a floating paper money can be kept “independent” of world prices and wages.
A floating paper-money system also has the (comparative) advantage that fluctuations of the currency in terms of other currencies do not too greatly disrupt trade between that nation and others, and do not create a “dollar gap” between its imports and exports. For when a country’s paper currency begins to depreciate, the rise of internal prices and wages is offset in the foreign-exchange market by a corresponding decline in the price of that currency in terms of other currencies. And a floating currency is always fully convertible at the market rate.
MASKING INFLATION
What happens, instead, under the present system? Within each country there is constant pressure to maintain “consumer purchasing power,” easy money, ever-rising wages, and “full employment”—in brief, inflation. So each country inflates. But there is an agreement with the International Monetary Fund to maintain the official exchange value of the inflated currency. This is done by forbidding people to buy and sell that currency except at the official rate. This official overvaluation of the currency encourages imports, discourages exports, and creates a “balance of payments” crisis. The inflating country then seeks to offset all this by a maze of import quotas, higher tariffs, export subsidies, and multiple exchange rates. The problem finally becomes insoluble, and then the bureaucrats kick the whole economy downstairs.
The result is a series of violent devaluations, such as the worldwide crisis in September 1949, and the new French crisis today. Devaluation is a drastic remedy, equivalent to cutting off a leg to save a life. Yet as France has illustrated since 1949, the remedy is at best temporary if the patient continues the same practices as in the past. Moreover, each devaluation intensifies fears of further devaluations, of that currency and of others, and so makes the maintenance of the whole system more and more precarious.
RETURN TO GOLD
The entire IMF system of exchange control of paper moneys at arbitrary rates should long ago have been abandoned. But the only official suggestion that this be done has come from Ludwig Erhard, Economics Minister of Western Germany. Other officials talk privately of another devaluation of the franc and a smaller one for the British pound. A still more astonishing proposal is that the pound sterling be left unchanged in value while the American dollar, German mark, and Swiss franc be “revalued” upward by 10 percent. Such proposals have been aptly described as prescribing surgery on the healthy to cure the sick.
The only real permanent cure is a return to the international gold standard. As Philip Cortney has put it: “It should have become obvious by now that none of the important problems (like the prevention of booms and depressions, the establishment of freely convertible currencies plus stable exchange rate, the expansion of multilateral, unhampered international trade, the union of Europe) can be solved without a return to the international gold standard. . . . The gold standard is the only protection of the politicians against extravagant expenditure requests from pressure groups of all kinds. It is the only safeguard against demagoguery and social disorder.”
September 9, 1957
Walter P. Reuther, head of the United Auto Workers Union, has always been an adroit politician and propagandist, but his latest proposal to the three major motor companies is his masterpiece. It devotes 21 eloquent paragraphs to declaring that inflation is a bad thing and that someone should do something about it. So here’s the scheme. Let the automobile companies cut their profits. Let them reduce the prices of 1958 models “to levels averaging at least $100 below” 1957 models. In return, though his UAW will still presumably demand “the biggest wage increase in the history of the union,” he promises to give “full consideration” to the effect of the price reduction on the corporations’ earnings “in the drafting of our 1958 demands.” Such sacrifice is breath-taking.
It may be, however, that Reuther’s proposal will prove a propagandistic boomerang. The heads of the three big automobile companies have all made effective replies. Harlow H. Curtice of General Motors has pointed out that the straight-time hourly wages paid by GM have increased 72 percent since 1947, though the cost of living has gone up only 25 percent. He has also called attention to the “unmistakable similarity” of Reuther’s current proposal to the “publicity maneuver” that Reuther used during his union’s 119 day strike against GM in 1945–46. Then also he insisted that GM could lower the price of Chevrolets by $100 and still grant his wage demand. Then also he demanded that the company “open the books” to prove or disprove its “ability to pay.” And, as Curtice unkindly points out, Reuther also publicly admitted only a few days after the settlement of that 119-day strike that “the whole question of producing the books was merely a public-relations job on our part” to put the company “over a barrel.”
CUT WAGES FIRST?
L.L. Colbert, president of the Chrysler Corp., correctly characterized Reuther’s proposal in his own reply: “While you propose that we absorb all cost pressures already put upon us and ahead of us and, in addition, reduce the price of our 1958 cars, you merely offer to take into ‘consideration’ the financial effect of the proposed price reduction when you confront the automobile industry with your 1958 demands, which you have described as ‘the largest package we’ve ever demanded.’ Would it not be just as logical for the automobile industry to ask the members of the UAW to take an immediate and sizable wage cut, which the companies would then ‘take into consideration’ in pricing their 1958 automobiles?”
Henry Ford II, finally, for his own company, points out that since 1948 Ford wages have gone up 70 percent while the price of the 1957 Ford, “a far superior product to its 1948 counterpart in every respect,” has gone up only 30 percent—“less than half as much.” And Ford sums up: “Thus, having poured gasoline on the fires of inflation, you now stand by and tell us how to fight the blaze.”
THE MEAT HE FEEDS ON
It is easy to prove that Reuther’s proposal is an empty propaganda gesture, wholly without practical merit. It is perhaps more important to ask how it comes about that a single labor leader has acquired the power which this arrogant proposal reveals. The answer is simple. He has this enormous irresponsible private power because Congress has conferred it on him.
The automobile companies are rightly prohibited from combining to fix their prices against the buying public. They do not dare even to negotiate as a unit with Reuther. But he is aided and abetted by the law to monopolize the labor of the entire industry. He is free to play the automobile companies against each other by pulling a strike in one and not in its competitors. The auto companies, on their side, are compelled by law to bargain exclusively with his union, no matter how unreasonable its demands or how insulting its tone. The Norris-LaGuardia Act and the Wagner-Taft-Hartley Act are the meat upon which this our Walter feeds that he is grown so great.
This is the situation to which the Administration and Congress remain persistently and willfully blind. Their impotence is self-imposed.
September 16, 1957
When the governors of the International Monetary Fund gather in Washington on Sept. 23 for their annual meeting, they may be counted on, if past experience is any guide, to deplore the worldwide inflation that has continued ever since the fund was set up twelve years ago. They will no doubt once again recommend that nations balance their budgets, reduce barriers to international trade, move toward convertibility of their currencies, and refrain from creating multiple exchange rates. Some delegates may even suggest that nations stop printing more paper money.
But after this collective homage to the economic virtues has been duly paid, one delegate after another will explain that his own country continues to face a special situation and must continue to impose a few restrictions on convertibility, a few barriers to imports or subsidies to exports, till the “emergency” is over.
EXCHANGE CONTROL
Each year the pretense is kept up that despite “disappointments,” real “progress” has been made toward “convertibility” and “stability.” The blunt truth is that since the International Monetary Fund was established the depreciation and debasement of currencies has gone steadily on from year to year. Worldwide inflation is rampant. And it is governmental policy that permits or creates this inflation. It is the system of the International Monetary Fund itself which encourages, prolongs, and enforces exchange control. This in turn requires for its enforcement a network of internal and external controls, of artificial currency valuations, tariff barriers, import quotas and export subsidies, that regiment national economies, distort prices and production, create so-called “dollar gaps,” and unbalance and disrupt international trade.
The only ultimate cure for this is a return to the international gold standard. But the situation is too chaotic, the network of government controls is too extensive and demoralizing, and confidence has been too profoundly shaken, to permit this to be done overnight. No government knows at what gold value it could safely set and maintain its currency unit to prevent either a dangerous inflation or a dangerous deflation.
There is one indispensable first step. This is to dismantle the entire exchange control system supported by the International Monetary Fund and to let the exchanges go free. This is the step that Ludwig Erhard, West Germany’s Economics Minister, has been almost alone, among high government officials, in recommending. Let us see some of its results:
The so-called problem of convertibility would be solved. Free exchanges would automatically mean free and full interconvertibility of currencies. Tangier, to take an illuminating illustration, is a free money zone. A dispatch from Morocco to The New York Times of Aug. 31 declares: “In Tangier anyone can import anything from anywhere. . . . Since any kind of money is exchangeable into any other kind of money in Tangier’s banks at the free market—that is, uncontrolled—rate, there will be no difficulty in paying for hard-money imports.”
For similar reasons, the so-called problem of the “imbalance of foreign trade” would be solved. In the last week of August, French Finance Minister Gaillard released figures showing that, since the partial devaluation of the franc, France’s $118 million deficit with the European Payments Union had been transferred into a credit balance of $36 million. This is merely because the French franc was allowed to sell nearer to its free market value.
TO RESTORE CONFIDENCE
Free exchange rates, of course, would also solve the so-called “dollar shortage,” which is merely a result of overvalued foreign currencies.
Free exchange rates would not, it is true, solve the problem of inflation or monetary instability. But they would at least reveal such instability from day to day, instead of hiding it, as exchange control does, until the whole false front collapses. When exchange rates were free, they could be stabilized only by policies within each country calculated to restore confidence both of nationals and of foreigners in that country’s currency. Canada has shown the way. Stability begins at home. The only cure for inflation is to stop inflation.
September 23, 1957
As nearly everybody professes to be against inflation (even those who fervently advocate the very things that cause it) it is refreshing to encounter a writer like Sumner H. Slichter of Harvard, who frankly wants inflation and doesn’t think we can get along without it.
He is careful, it is true, to say that he is only in favor of “creeping” inflation, not galloping inflation, though he is often vague concerning the exact point where a creep becomes a canter. He has been at times indiscreet enough to suggest that a price rise of 2 or 3 percent a year would be about right. This proposal has been thoroughly discredited. It has been pointed out that even if we could control an inflation to a rate of 2 percent a year it would mean an erosion of the purchasing power of the dollar by about one-half in each generation.
Even so, this would not accomplish Slichter’s announced purpose. He thinks prices must go up this much in order to meet the unions’ annual wage demands. But the moment Slichter’s inflation scheme was openly put into effect, union leaders would simply add 2 percent (or whatever the planned annual inflation was) on top of the demands they would have made anyway. In fact, lenders, investors, manufacturers, retailers, speculators would all mark up their demands or change their operations to beat the inflation, which would thereupon race to a crack-up. A declining currency must eventually obey the law of acceleration that applies to all falling bodies.
HOW FAST IS A CREEP?
But Slichter is irrepressible. In the September-October Harvard Business Review he not only continues to commend a creeping inflation, but reprimands Neil H. Jacoby, a former member of the Council of Economic Advisers, and C. Canby Balderston, vice chairman of the Board of Governors of the Federal Reserve System, for being against inflation. Space does not permit a detailed analysis of all the errors and confusions in Slichter’s article, but it may be helpful to cite a few examples.
He declares that it is “incorrect” to believe that “creeping inflation is bound sooner or later to become galloping inflation,” because this hasn’t happened in the last 25 years in the United States. Well, our cost of living has more than doubled in the last seventeen years. Pretty good for a creep. And Slichter might take a look at the French franc, which is at considerably less than one-hundredth of its 1914 purchasing power. Or at the median loss of one-third of their value by 56 different currencies in the last nine years alone (Newsweek, July 1).
Slichter is callous about the losses suffered in recent years by the thrifty. Of the millions of savings-bank depositors and holders of government bonds who have seen the purchasing power of their holdings shrink by a third or a half, he writes coolly: “These people have paid the penalty for poor investment judgment.” Their poor judgment consisted, in brief, in trusting their country’s money and in answering their government’s appeal to buy war bonds. Did Slichter warn against buying war bonds when they were being offered? Is he candid enough to warn everybody that it would be poor judgment to buy future bonds as long as “creeping” inflation continues?
WHAT A WINS, B LOSES
Slichter’s fixed idea is that constant creeping inflation is necessary to maintain full employment. This leads him to misstate an argument of Jacoby’s as a “suggestion that prices be kept stable by not permitting unemployment to fall below 4 percent.” The truth is that full employment or its absence has no necessary connection whatever with inflation, but depends wholly upon the maintenance of fluid and functional interrelationships between wage rates and prices. Slichter does not understand the argument that unions cannot raise the real wages of the whole body of workers, and his attempted refutation misses the point.
Finally, in his efforts to minimize the harm done by inflation, Slichter fails to see that when employment is as full as it is today, further inflation must hurt on net balance as many people as it helps, for the gains in dollar income resulting from inflation must be offset by the losses in dollar purchasing power.
September 30, 1957
Just before he retired as director of the International Cooperation Administration on Sept. 12, John B. Hollister issued a farewell directive to the effect that: “The United States is convinced that private ownership and operation of industrial and extractive enterprises contribute more effectively than public ownership and operation to the general improvement of the economy of a country . . . therefore . . . I.C.A. will normally not be prepared to finance publicly owned industrial and extractive enterprises.” This directive was promptly repudiated by the State Department, which was reported to be “flabbergasted” and “angered” by it.
The incident throws a brilliant light on the nature of our foreign-aid program. The New York Times account declared, for example: “More than half of India’s industry is state-owned. Thus, an announcement that the United States intended to follow a harsh line against aid for state-owned industry might logically have been read in New Delhi as a studied public insult. In addition, the department was unhappy about the implication that the United States intended to use its aid program as a form of bribery to stop socialization abroad.”
FOREIGN-AID DILEMMA
These comments reveal quite clearly the dilemma into which the foreign-aid program has landed us. We have been subsidizing, encouraging, and prolonging the continuance of socialism abroad. Therefore, by a strange, inverted logic, to stop subsidizing socialism in foreign countries is to interfere in their internal affairs! Not to subsidize India’s grandiose socialistic program by an enormous further “loan” of about $500 million becomes “a studied public insult.” To stop subsidizing socialistic programs abroad becomes “a form of bribery” to get them to adopt free enterprise!
This dilemma could have been foreseen. I discussed it myself in a book Will Dollars Save the World? ten years ago: “Intergovernmental loans are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or ‘American imperialism’; or ‘interfering in the internal affairs’ of the borrowing nation.”
For ten years the champions of our foreign-aid program have not only failed to face this dilemma but have refused even to acknowledge its existence. When forced reluctantly to confess that their program does subsidize socialism, they reply that it would be “intolerant” to refuse aid to a country practicing socialism. This argument tacitly assumes that foreign socialism, like Epicureanism or Mohammedanism, is merely a private philosophy or religion quite irrelevant to the purpose of our aid. But socialism is a set of policies which reduce and distort production, perpetuate dependence, and nullify the very purpose of our aid.
SUPPORTING DISRUPTION
It is not merely socialism that our foreign-aid program has supported, but disruptive exchange controls, price controls, inflation, import quotas, and export subsidies. In fact, our foreign-aid dispensers once made it a condition of our aid that countries receiving it should discriminate against American goods! (This was called “limiting dollar imports.”)
If the “economic” part of our foreign-aid program were completely abandoned, foreign nations wishing to attract outside capital for development would have to appeal to private investors. This means that they would have to follow policies calculated to assure repayment of the loans made to them. But the free-enterprise policies necessary to create confidence on the part of private foreign investors happen to be precisely the policies that will most rapidly raise the production and living standards of the “underdeveloped” countries and balance their international trade.
The billions our government has given away have not merely failed of both their economic and political purpose, but they have delayed the return to currency convertibility and the restoration of private production incentives that would otherwise have taken place.
October 7, 1957
When it is pointed out to our Republican Administration, as it was to its Democratic predecessors, that our huge national debt continues to mount, a favorite defense is that it has not risen as a percentage of the national income. This reply ignores the fact that the national income has gone up (in dollar terms) largely because prices have gone up, and that prices have gone up because of the currency debasement brought about partly by the very deficit financing that increased the debt. What this defense amounts to, in short, is a boast that the burden of the national debt has not increased because it can now be paid off in debased dollars.
UNAVOWED BANKRUPTCY
There are few governments today that cannot make such a boast. At the bottom of this column I append a table, taken from the August issue of Pick’s World Currency Report, showing what has happened in the last nine years to the national public debts of a dozen leading countries. Only three of them are smaller in terms of their own currencies; the other nine are all larger in terms of their own currencies. Yet in spite of the fact that they now owe more in nominal currency units than a decade ago, the United States, Brazil, France, Sweden, and the United Kingdom owe much less in real terms than a decade ago. Though the U.S. debt has increased 24 billion in dollars since 1948, the reduced purchasing power of the dollar has wiped out the equivalent of $42 billion of that debt. Though France increased its debt since 1948 from 3,412 billion to 6,506 billion francs, it also wiped out 3,383 billion francs of the 1948 purchasing power of such a debt.
This is the way governments are today cheating their creditors—precisely the citizens who responded to their patriotic appeals for help.
There is nothing new about this process. It was old when Adam Smith denounced it in The Wealth of Nations in 1776: “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.
“The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment. . . . A pretended payment of this kind . . . extends the calamity to a great number of other innocent people. . . . When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”
Adam Smith then goes on to show how “almost all states . . . ancient as well as modern” have “played this very juggling trick.” It may be added that, since the substitution of paper for metallic money, the trick has become much easier and therefore more frequent. It may also be added that the debtor class today, including as it does most corporation stockholders, is probably as rich as the creditor class, which includes savings-bank depositors and owners of savings bonds.
NATIONAL DEBTS
(In billions of currency units)
| Nominal Paper Units 1948 | 1957 | Adjusted to 1948 Purchasing Power 1957 | |
| United States $ | 252 | 276 | 234 |
| Canada $ | 15 | 14 | 10 |
| Argentina p. | 18 | 95 | 26 |
| Belgium fr. | 245 | 328 | 279 |
| Brazil cr. | 23 | 67 | 20 |
| France fr. | 3,412 | 6,506 | 3,123 |
| Italy l. | 2,315 | 4,805 | 3,604 |
| Netherlands fl. | 26 | 18 | 12 |
| Spain p. | 53 | 90 | 59 |
| Sweden kr. | 11 | 14 | 10 |
| Switzerland fr. | 11 | 8 | 7 |
| United Kingdom £ | 25 | 27 | 18 |
October 14, 1957
The delegates to the International Monetary Fund, representing more than 60 nations, met, talked, heard speeches, and went home. No fundamental change was recommended. No one asked for a basic reappraisal of the whole tottering exchange-controlled paper-money system symbolized by the fund. The one general point of agreement seemed to be that U.S. taxpayers ought to dump more money in the fund to help bail other nations out.
Just before the fund met, however, the British Government made a courageous decision. It increased the bank rate from 5 percent to 7, putting it on the highest level since 1920. It was the only time in this century, except at the outbreak of the first and second world wars, that the bank rate had been raised by two percentage points in a single jump. In addition, Peter Thorneycroft, Britain’s Chancellor of the Exchequer, announced that the government had asked the banks to hold their loans during the next year to the level of the last year. And he pledged that expenditure by government departments and nationalized industries for building and expansion would be held at the present level for two years more.
WHY SO DRASTIC?
These measures are drastic. They will force the British Government and British business to pay substantially higher interest rates for new loans. They caused an immediate break in the security markets. And they were supplemented by a hint that the government would accept even unemployment in its determination to stop inflation and defend the pound.
But one question raised by this move seems to have been all but neglected. Why did Britain’s action have to be so drastic? The answer is that governments have broken their word so often regarding their currencies in the last quarter century that only the most drastic action will convince either foreigners or their own people that they mean to keep it now. The French franc has been devalued again only within the last few months. More than 50 different currencies have substantially depreciated in the last ten years. In Britain itself, Sir Stafford Cripps, in the months before he announced the devaluation of the pound on Sept. 18, 1949, had publicly denied a dozen times that he would devalue. Later, in defending this record, he declared self-righteously: “Even if we had then had some future intention of altering the rate of exchange . . . no responsible minister could possibly have done otherwise than deny such intention.”
UNIVERSAL DISEASE
But though the present drastic action by the British Government was necessary in the circumstances, the question may be asked whether it does in fact, even for the next year or two, give the assurance it was intended to give. British opposition leaders have already denounced the action. Another round of wage-increase demands is expected this autumn and winter. All the British Government can do, as long as Britain’s labor laws remain what they are, is to plead once more for labor-union “restraint”—a plea that has not proved very effective in the past.
Britain’s problem is a universal problem. It is merely a question of degree. When we look at France, India, or most of Latin America, the prospect of checking inflation is even darker. Even West Germany, which has been accused of making its currency too strong, is now threatened with an upward push on its price-wage structure.
The only place where any country’s currency problem can be solved is at home, by its own efforts, through the restoration of sound internal policies. Yet most of the delegates at the International Monetary Fund seemed to think it the fund’s duty to pour in more American dollars to subsidize their domestic socialism and inflation indefinitely. No one talked about a restoration of the international gold standard, which is treated as an impossible dream. In his welcoming address to the fund, in fact, President Eisenhower defined inflation as “the tendency to rising prices,” without once indicating that rising prices are merely the consequence of mounting snowdrifts of paper money. The IMF has not cured rotting currencies, but it has kept them inconvertible.
October 21, 1957
The Soviet earth satellite is first of all a smashing propaganda victory. This is primarily what it was intended to be. It will have immense political and military repercussions. Its most important implication is that the Russians may really have the intercontinental ballistic missile of which they boasted in August. They may be expected to make full use of this implication in stepped-up efforts to threaten, cow, divide, and conquer the free world.
The one possible advantage of the launching of the satellite, from our point of view, is that it may shake us out of complacency and remind us more urgently that we are in a life-and-death struggle between two ways of life. The great danger is that some of us may react hysterically, draw the wrong conclusions, and take the wrong actions.
One possible error is to overestimate the Soviet achievement. What the Russians seem to have proved is that, in the field of physics and military weapons, they have developed scientists and technicians equal to our own. But the Russians have not yet proved that their physicists and military-weapon technicians are ahead of ours. This may depend on a point of fact that has not yet been established, and on which some American scientists have expressed skepticism that their satellite weighs as much as 184 pounds, as the Russians claim.
HOW THEY GOT THE JUMP
How the Russians got the jump on us in launching an earth satellite is, in retrospect, clear. We divorced our earth satellite project from our military ICBM efforts, divided responsibility for it, overlooked its huge propaganda potentialities, talked and boasted freely, and published our planned techniques in detail. The Russians read what we published, but published practically nothing themselves, and secretly drove ahead. The “cooperation” on the “International Geophysical Year” was all one way. In addition, the Soviets have kept us infiltrated with spies.
But perhaps the most important factor is that the Russians acted on the assumption that they were at war with us and we acted on the assumption that we were at peace with them. They hardly needed to send so many spies. Dr. J. Allen Hynek, associate director of the American program set up to trace the course of our own satellite when launched, is authority for the statement that the Russians are watching their own satellite, at 75 stations, through telescopes copied from an American model which he and Dr. Fred L. Whipple gave the Russians in June. But while we thought we were cooperating in a world scientific project, the Russians knew they were competing to be the first to launch an enormously powerful propaganda weapon, as an evidence of their possession of an intercontinental ballistic missile. They took no chances either on coming in second or on public failure. They made no announcement until the satellite had succeeded.
COMMUNIST PRODUCTION
One false conclusion into which we should not hysterically rush is that the “Socialist society,” as the Russians like to call their system, can compete with our free-enterprise system in overall production. I should like to mention here once more the recent study by Prof. G. Warren Nutter (see this column, Newsweek, May 27), who concluded: “Soviet industry seems still to be roughly three and a half decades behind us in levels of output and about five and a half decades in levels of per capita output.” We know from information from a thousand sources that the masses of the peoples behind the Iron Curtain are still wretchedly housed, clothed, and fed. Only a few weeks ago the Central Committee of the Communist Party and the government of Russia announced that the present five-year plan would be scrapped at the end of next year and would be supplanted by a new seven-year production schedule covering 1959 through 1965. Authorities on the Soviet economy interpret this as a left-handed confession that the five-year plan has been failing.
The most serious false conclusion to which we are in danger of coming is that, because of the Russian achievement, all plans for economy in government must now be thrown to the winds. Certainly our government-spending program has contained some false economies. But false economies are the inevitable result of false expenditures. True economy is another name for wisdom in spending. We must save on X to have enough to spend on Y. We must divide our expenditures in the most effective way. We allotted, for example, $110 million to our earth-satellite program. But since the end of the second world war we have spent some $40 billion to $60 billion on foreign aid—a ratio of about 500 to 1.
ECONOMY STILL NEEDED
It may now, indeed, have become pointless to increase our planned expenditures on earth satellites. But if we are really behind Russia, even slightly, in the development of an intercontinental ballistic missile, then we must make this immediately a “crash” program as well as a research program. For the Russian leaders, if they think they have a commanding lead for even a few months, are unlikely to sit idly by and give us time to catch up with them (as we gave them time to catch up on the atomic and nuclear bombs), but will immediately try to wring every possible diplomatic concession or surrender from us or our allies by veiled or open blackmail.
But if the “missile crisis” forces us to spend more in one direction, it can also enable us to save in other directions. If the threat of missile annihilation threatens countries near to Russia, we can obviously provide a far more effective deterrent by speeding our own missile program than by giving these countries more funds to support a few more token ground troops. And we can soon even cut out some present huge “defense” expenditures rapidly being made obsolete through technological advance.
Certainly neither our governmental expenditures nor our total taxes can be increased further without either weakening our economy in inflation or dangerously increasing the deterrents to total national production. Our long-run security depends as much upon the total strength of our economy as upon the development of specific weapons.
October 28, 1957
Free West Germany and Communist East Germany each had a currency called the mark. East Germany had insisted on an official exchange rate of 1 to 1. But in the free market one West mark exchanged for 4½ East marks.
On Oct. 13, without preliminary announcement, Communist East Germany declared all its old currency worthless and called it in. The holders were allowed to turn in 300 old East marks (the purchasing equivalent of about $16) for new East marks. They were told they would receive credit in newly opened (government) bank accounts for anything they held above that amount—but all funds found to have been made in “speculative” ways would be confiscated. As the Grotewohl regime decides what “speculation” means, it can confiscate anything it wants from anybody it suspects or dislikes.
It is said that the East German Government did this to “halt inflation.” But the value put upon a country’s currency unit depends on the confidence in it. A fast overnight trick like this does not build confidence. East Germans will want to make sure not to get caught holding much currency in the future. They will get rid of it as fast as they can. But this will mean currency depreciation and inflation.
No doubt one purpose of the switch was to force every citizen to account for his holdings and to put a final squeeze on what little private business remained. In this sadistic aim the Communist regime should be successful. It has doubtless also succeeded in fleecing West Berlin banks and exchange offices of the 20 million or so East marks they had on hand. But the exchange value of these was only about $1 million—less than the U.S. Government spends every ten minutes. This seems a cheap price for a government to throw away what remains of any reputation for good faith. It has swindled most the very people who trusted it most.
Yet the “democratic” nations are in no position to throw stones. The East-mark swindle is more cynical and ruthless, but no different in principle from the New Deal gold-clause repudiation and gold seizure in 1933 and the steady erosion since then of the dollar, the pound sterling, the French franc, and 50 other currencies. What has happened morally even to the West is revealed in one sentence in a dispatch from Berlin: “Even among West Berliners there was grudging admiration for the surprise achieved.”
A LESSON FOR THE EDUCATORS
Some of the American responses to Sputnik have not been edifying. Several politicians now hysterically demand more spending on everything. Others are using the earth satellite as an argument for more appropriations for their own pet projects, no matter how dubiously relevant. Thus at the closing session of the American Council on Education in Washington the speakers declared that the Soviet satellite had shattered the nation’s “smug complacency” about its schools and colleges, and it was no longer possible to maintain a topnotch school system on a “starved” budget.
The United States is already spending far more on education than any other nation on the face of the globe. It is a little hard to see how the earth satellite calls for still more courses in sociology, medieval history, business English, French, or folk dancing, however worthy such subjects may otherwise be. It is true, of course, that because of the kind of competition in weapons of wholesale destruction that Russian Communist fanaticism has forced on us, it may be advisable for the Federal government to grant scholarships to a certain number of exceptionally brilliant students, chosen by competitive examination, in, say, physics, chemistry, mathematics, and engineering. The whole of these scholarship funds might be charged against the defense budget.
Perhaps even more important, physics and mathematics might be made part of the required high-school curriculum, in place of some of the easy and trivial “elective” subjects that have been displacing them in the last half century. But this local reform would not require any added governmental appropriations, and so presumably does not interest the educationist pressure group.
November 4, 1957
The dispute still boils concerning who or what caused the present inflation. “Labor” and “management” are now blaming each other. Insofar as this dispute is relevant, management has considerably the better of the argument.
The attack on management has been carried on by Walter Reuther on his own, and by other labor spokesmen in the Kefauver hearings. Reuther contends that “exorbitant” profits, not wages, have been the villain promoting inflation. Otis Brubaker, research director of the steelworkers’ union, declares: “Wage increases have not caused a single price increase in twenty years.”
In its October letter, the First National City Bank of New York points out in reply: “Regardless of what year is taken as a base [from 1939 on] wages and total employment costs in the steel industry have far outstripped gains in productivity. Measuring from 1940, the gain in productivity of 56 percent, while substantial, fell far short of increases in hourly earnings and total employment costs amounting to more than 200 percent. The result . . . was an approximate doubling of unit labor costs with inevitable pressure for higher prices.”
PROFIT-MARGIN FALL
A much wider study of the same problem was published by the National Association of Manufacturers in September. It finds that the history of manufacturing since the end of the second world war has been one of rising costs per unit of output—particularly labor costs and taxes. Compensation of employees rose 23 percent per unit of output between 1948 and 1956. Corporate taxes rose 32 percent on the same basis. But prices of manufactured goods rose only 10 percent. The result has been a reduction of 25 percent in profit per unit of output between 1948 and 1956.
The decline in the profit margin of manufacturing industries is particularly striking when it is expressed as a percentage of sales. It dropped from 4.9 percent in 1948 to 3.1 percent in 1956. (By way of comparison, the figure for 1929 was 6.4 percent; for 1937, 4.7 percent; for 1940, 5.5 percent.) Thus, concludes the NAM study, “between 1948 and 1956 profit margins as a percent of sales have fallen from a level characteristic of prosperity years to a level characteristic of recession years.” Higher costs cannot automatically be recouped by higher market prices.
WAGES AND OUTPUT
These statistical comparisons by the National City Bank and the NAM prove that the current inflation is at least not the result of the “greed” of manufacturers for exorbitant profits, as Reuther contends. But they do not prove that “the conclusion is inescapable, “as the NAM study puts it “that the current inflationary push is due to the rising costs of labor and the continuing heavy tax burden.”
The rise in wages, it is true, as both studies point out, has exceeded the rise in “productivity.” But the studies compare money wages to physical output. In any inflation, no matter how caused, money wages are practically certain to rise more than physical productivity. This is simply because both wages and prices rise in every inflation. It does not necessarily follow that the rise in prices has been caused by the rise in wages. Both may have risen from a common cause.
That common cause is not hard to find. Neither the wage rise nor the price rise since 1939 or 1948 would have been possible if it had not been fed by an increased money supply. The money-and-credit supply increased from $64.7 billion at the end of 1939, to $172.7 billion at the end of 1948, to $226.4 billion at the end of 1956. There would have been no inflation, in short, in the last eight or eighteen years without the cooperation and connivance of the monetary authorities.
This does not mean, of course, that union pressure has had no responsibility for the result. Under present labor laws the government has not merely encouraged but in effect forced the creation of industrywide unions with power to impose continuous wage increases. Unless these excessive union powers are reduced they must either lead to unemployment by forcing costs above prices, or create political pressure for still more monetary inflation.
November 11, 1957
Inflation has not been stopped by the Eisenhower regime. But it would be worse if the Democrats returned to power. This is the conclusion one is forced to draw from the economic statement issued Oct. 20 by the Democratic Advisory Council.
“This is the worst peacetime inflation in our history,” it tells us. The authors of that apparently don’t think the American public can either count or remember. In the nearly five years under Eisenhower, wholesale prices have risen about 5.4 percent, and consumer prices, 6.7 percent. Under the Democrats, in the three years from the end of 1945 to the end of 1948, wholesale prices rose 51.7 percent. In the seven years from the end of 1945 till the end of 1952 wholesale prices rose 62.2 percent and consumer prices 47.6 percent.
In those seven Democratic years total bank deposits and currency increased from $151 billion to $195 billion, or more than 29 percent. From the end of 1952 until now, under Eisenhower, they increased to $220 billion, or about 13 percent. The Republican inflation is “worse” than the Democratic only because it comes on top of it. But the annual rate of inflation has been lower.
The Democratic statement goes on to denounce the Republican Administration’s “characteristically negative” policy of “raising interest and tightening the money supply.” The truth is that the Republicans have expanded the money supply, which is now at record levels. What these Democrats must want is a still faster expansion-in brief, more inflation.
HOW TIGHT IS MONEY?
As for our so-called “tight money” policy, whereas the discount rate is now 3½ percent in the U.S., it has been within the last couple of months 4.28 in Canada, 4.5 in Germany, 5 percent in France, Holland, and Sweden, and 7 percent in Great Britain. Are all these central banks “negative” and sadistic, and bent on creating a depression in their own countries? Or are they, perhaps, at last trying to curb inflation?
The DAC statement charges that “tight money” is ineffective, and that it is too effective. “By the ordinary tests of results,” it says, “this policy has failed.” Well, prices have continued to rise. But so has the volume of money and credit. By the ordinary tests of logic, this should simply mean that interest rates were not raised enough to discourage inflationary borrowing. Yet the DAC statement is afraid that raising interest rates “may stabilize living costs by causing unemployment and economic recession.”
The attack of the DAC on Republican inflation is a self-contradiction and a fraud. It pretends to deplore inflation while denouncing the only policies that can stop it and recommending the very policies that create it. The DAC wants cheap money and more credit expansion, which is the essence of inflation. It is “committed unequivocally to the principle of a vigorously expanding economy”—i.e., to a policy of perpetual boom.
BACK TO PRICE-FIXING
Though the DAC statement expresses fear of “unemployment” even with rising prices, it nowhere admits that this could happen only under one condition—that wage rates rose faster than prices and squeezed out profit margins. But even the possibility of excessive wage rates is never mentioned, let alone any proposal to do anything about them. When it comes to prices, however, the DAC wants to get tough. “We must have an active, firm, and broadly based policy to insure price stability. . . . Those who do not respond to leadership in the public interest must understand that this is the course which leads inevitably to controls.” Here then, thinly veiled, is the Democrats’ program: Cheapen money, expand credit, increase inflation, and then “fight” it by discriminatory and totalitarian price controls. This is “repressed inflation,” a policy whose results are typified in present-day France.
It is true that the Democratic Advisory Council is made up mainly of political has-beens and assorted left-wingers; but it has the blessing of the Democratic national chairman. Until this statement is explicitly repudiated by the majority of Democrats in Congress, therefore, it makes the Democratic Party officially the party of inflation.
November 18, 1957
The immediate service of the Russian satellites has been to shake us out of complacency. Their immediate danger is that they may drive some of us into hysterical demands and panicky action. This danger is already evident in the widespread outcry that it is “economy” that betrayed us, and that our salvation lies in spending more in all directions.
So far as long-range missiles and new fuels are concerned, it is obvious that we should spend all we usefully can as fast as we can usefully spend it. But there is a limit to what we can accomplish now merely by spending. We have lost priceless time. And that time has not been lost only by the Eisenhower Administration.
When the Russians captured Peenemünde, the East German rocket-manufacturing center, in the second world war, they stripped it, took over every German scientist and technician that they could, and secretly ordered them to keep developing the rockets and extending their range. The fatal atomic and nuclear warheads, they stole from us. We, on our side, assumed that Russia was our great ally, sincerely seeking “peaceful coexistence,” and that whatever problems couldn’t be solved through the United Nations and foreign giveaways could be easily handled by “top level” conferences and agreements on a basis of mutual trust. On these assumptions we cut our defense expenditures from a level of $90 billion in the fiscal year 1945 to only $12 billion in 1948. Not until after the Korean war partially woke us up did we take an interest again in missiles—after we had given the Russians a six or seven years’ start. It is this appalling time handicap that we must now try to make up.
SQUANDERING NO CURE
It does not follow, unfortunately, that our progress will now be proportionate to our rate of spending, or limited only by what we spend. We cannot atone overnight for all our diplomatic and military mistakes of the last twelve years. Past false economies cannot be rectified by future squandering. Because we saved on the wrong things, it does not follow that it is wrong to save at all.
This is the point that seems to be missed by those who are now so loudly shouting for a great increase in overall spending. Suppose we have to spend now a few billions more a year in missile development? Does it follow that we must increase our total Federal budget by this sum? Or could we not take the amount out of other expenditures? Our nondefense spending alone now comes to something like $28 billion a year. Among items out of which a good deal of fat might be cut are some $4 billion for foreign aid, some $5 billion for veterans’ benefits, some $3.3 billion for “labor and welfare,” and some $5 billion for agriculture, mainly for price supports and subsidies for not producing.
SUBSIDIES AS USUAL
The political apostles of spending ought to know that they cannot get a quart out of a pint jug. They ought to know that out of a given volume of resources we can spend more in one direction only by saving more in another. But none of them have had the courage to suggest that the increased amounts they insist should be spent on defense should be taken from any of the welfare or subsidy programs with powerful pressure groups behind them. They want increased spending on missiles but spending-as-usual on everything else. It is only the taxpayers who earn the funds, not the groups they are compelled to subsidize, who are being asked to make sacrifices.
And if the apostles of increased spending do not talk about cutting nondefense expenditures, they are even more silent on the possibility of cutting expenditures on many of the “defense” items that are being rendered superfluous or obsolete by the revolutionary advances in missile warfare. As President Eisenhower rightly insisted in his television talk, “we cannot afford waste.” We will need better “selectivity in national expenditures of all kinds.”
In spite of the increased amounts that may be necessary for missile development it is still possible to cut the total Federal budget. It is still possible to remove from the present tax structure inequities and deterrents to investment and production, and so to increase our national strength.
November 25, 1957
EDUCATORS URGE WAKENED NATION. So ran a prominent newspaper headline not many days ago. Yet the facts indicate that it is not so much the public that needs to be awakened as the educators themselves.
This is brilliantly clear from the 226-page report just published by the U.S. Office of Education comparing education in the Soviet Union and in the United States. This study, as summarized by President Eisenhower, shows that “when a Russian graduates from high school he has had five years of physics, four years of chemistry, one year of astronomy, five years of biology, ten years of mathematics and trigonometry, and five years of a foreign language.” In the United States, fewer than one-third of high-school graduates have taken a year in chemistry; only one-fourth have studied physics; only one-seventh have taken advanced mathematics. And we are far behind even in teaching foreign languages. Russian students learn more of all these academic subjects in ten years than ours do in twelve.
BEHIND EUROPE TOO
It is true that the Russian studies are primarily selected to make Russia powerful in war; that Russian schools are instruments of Communist indoctrination. Yet American education in mathematics and the sciences is backward not only as compared with Soviet Russia but with our principal European allies. A dispatch from Germany to The New York Times of Nov. 10 found that “The scientific preparation of West German high-school students for admission to universities and engineering colleges surpasses anything that is offered in the United States public-school system as a whole”; while “high schools in France, Britain, Italy, Switzerland, the Netherlands, Belgium, and the Scandinavian countries also give their high-school students a superior education in the sciences.”
What the Office of Education’s latest study also fails to emphasize is that the present American situation in scientific and mathematical education is an appalling deterioration even from half a century ago. In a biennial survey by the Office of Education itself, in 1951, a table was published comparing “percentages of pupils enrolled in certain subjects in the last four years of public secondary day school [high schools].” Here are some of the comparisons it showed:
| subject | 1900 | 1949 |
| Physiology | 27.4% | 1.0% |
| Earth science | 29.8% | 0.4% |
| Chemistry | 7.7% | 7.6% |
| Physics | 19.0% | 5.4% |
| Algebra | 56.3% | 26.8% |
| Geometry | 27.4% | 12.8% |
MEETING ‘LIFE-NEEDS’?
“Enrollments in both mathematics and foreign languages in the last four years of high school,” the study stated, “were smaller percentages of the total pupil bodies in 1949 than in 1934. . . . Percentage enrollments in algebra, geometry, physics, and Latin have shown progressive decreases in all investigations since 1915.”
Yet the Office of Education approved this trend. “For the most part,” said its summary, “the changes are in the direction of more functional education. They represent efforts to meet life-needs of increasingly diverse bodies of pupils.” Commenting on this, in his book The Restoration of Learning (1955), Arthur Bestor wrote: “It is a curiously ostrich-like way of meeting ‘life-needs’ to de-emphasize foreign languages during a period of world war and postwar global tension, and to de-emphasize mathematics and physics at precisely the time when the nation’s security has come to depend on Einstein’s equation E=mc2.”
Just as some of our military administrators are now blaming our backwardness in missiles chiefly on “inadequate funds,” so most of our educators are blaming their own failures on inadequate funds and calling for huge Federal subsidies. It is our educational system itself, however, and the flabby educational philosophy dominant for the last quarter of a century, that is first of all in need of reappraisal and reform. It is the dominant educationists who have been the real anti-intellectuals, fearful of everything that is difficult and disciplined, including the very knowledge most essential to survival in the modern world.
December 2, 1957
The sudden reduction of Federal Reserve discount rates from 3½ to 3 percent was tantamount to a proclamation that the policy of monetary restraint is at least temporarily abandoned. The action was a victory for the forces attacking “tight money” and pressing for resumption of inflation. It raises once more some fundamental questions about monetary policy.
It is now generally recognized, even by the Federal Reserve authorities themselves, that the reduction of the discount rate from 2 percent in 1953 to 1½ percent in mid-April 1954 was a mistake. It led to a sharp upward spurt in bank loans, and hence to an inflationary expansion of the money supply. It had to be reversed a year later, by the first of seven successive increases—some of which would not have been necessary except for the unwise reduction.
It was once considered the orthodox rule of sound central banking that the rediscount rate should be kept above the rate to prime borrowing customers of the great city banks. This was on the theory that if a member bank overextended itself and had to borrow from the Fed, it should pay a penalty rate rather than make a profit on the transaction. Until recently the Federal Reserve authorities did make it a policy to keep the discount rate at least above the rate on three-month Treasury bills. But Treasury bills were still selling at an average yield of 3.47 percent in mid-November. This did not justify a cut in the discount rate below 3½ percent.
DISCOUNT RATE RULES
A year ago the Bank of Canada announced that until further notice it would adjust its discount rate weekly to maintain it at ¼ of 1 percent above the latest rate on treasury bills. If our Federal Reserve authorities adopted this rule, they would at least make it clear that they were merely following the market and not making money tight out of pure cussedness.
It is often argued that under the American system the discount rate has a merely token importance as compared with open-market operations. This is largely true. This year, for example, member banks have been borrowing an average of less than $1 billion from the Fed as compared with their total reserves of about $19 billion and their total loans and investments of about $139 billion. Yet a sound discount rate should at least be consistent with open-market policy and reflect market interest-rate realities. To cut the discount rate mainly for the “psychological” effect, to give the economy a shot in the arm, is to set a dubious precedent. Was this the most appropriate time—just after the consumer price index had risen for thirteen consecutive months to a new high record—to send up a new inflationary signal?
WHAT MONETARY POLICY?
The new discount-rate reduction raises once more the whole question of just what should be the objectives of Federal Reserve monetary policy. Under a gold standard the primary objective was clear: It was to protect the integrity of the currency by maintaining gold convertibility at all times. Under a paper standard and a Keynesian ideology the objectives become confused. The Employment Act of 1946 declares that “it is the continuing policy and responsibility of the Federal government to use all practicable means . . . to promote maximum employment, production, and purchasing power.” Many interpret this as a standing order for inflation. Chairman Martin of the Federal Reserve Board has suggested that Congress should declare “resolutely—so that all the world will know—that stabilization of the cost of living is a primary aim of Federal economic policy.
A much better solution would simply be repeal of the Employment Act of 1946. But if that mischievous law is kept, it should at least be amended to add the requirement of price stability as an offset to the heavy inflationary bias in the law as it now stands. This is the kind of problem we create when we abandon the gold standard.
Regardless of the monetary objectives ultimately adopted, it remains to be seen whether the reduction in the discount rate will achieve its major objectives. If the unions persist in pushing up wage rates, the cut will lead to more inflation without necessarily leading to more employment.
December 9, 1957
The main technical reason why the Russians are presumably ahead of us in long-range ballistic missiles, as Wernher von Braun has pointed out, is that “the United States had no ballistic-missile program worth mentioning between 1945 and 1951,” when the Russians secretly drove ahead.
But perhaps this technical lapse is symptomatic of a deeper weakness. The Oct. 26 issue of The New Yorker contained an article by Eugene Kinkead about the Army’s research into the factors which led (in the words of Assistant Secretary Hugh Milton of the Army’s Manpower and Reserve Forces) to “American troops turning renegade in such large numbers and apparently so casually” to Communist indoctrination. One out of every three American prisoners, according to the Army’s study, was guilty of some sort of collaboration with the enemy, and one out of every seven was guilty of “serious” collaboration. Practically none of this is attributed by Army doctors or psychiatrists to physical torture or to “brainwashing” in the commonly accepted sense, but to indoctrination which took the form of a blend of leniency and pressure by their Communist captors.
ANTICAPITALISM
The reasons for the ease with which so many of our prisoners went over to the enemy were complex. But surely one of them was that they had already been conditioned to an anti-capitalist ideology. In answers to American Army questioners, they frequently used the word Socialism (as Communist propaganda does) rather than Communism. They would say that “while Socialism might not work in the United States, where the people are for the most part well off to begin with, it was a good thing for China and other less advanced nations.” It did not occur to them that this country was not pretty well off “to begin with,” but got that way precisely because it followed the principles of free enterprise.
We face in the world today a supreme irony. Millions of people are fanatically devoted to the slave system called Communism and are willing to die for it. Yet few of us are zealously devoted to its opposite, the system of capitalism, or willing to die for it by that name. True, the name itself is a smear word invented by Marx and Engels in order to imply that economic freedom and private property constitute a system run by and for the capitalists. But few of us are willing to make sacrifices to preserve this system even when it bears a truer name, such as free enterprise. Many of us do profess to be devoted to “democracy,” but fail to understand that democracy with individual freedom is impossible except on a basis of private property and freedom of enterprise.
SICKNESS OF THE WEST
This paradox is discussed in the course of a brilliant new philosophical work by Ludwig von Mises, Theory and History (Yale University Press, $6). Mises points out that the slavery and debasement under Russian Communism, or any system of complete Socialism, are not accidental: “If an omnipotent authority has the power to assign to every individual the tasks he has to perform, nothing that can be called freedom and autonomy is left to him. He has only the choice between strict obedience and death by starvation.”
Yet leading writers and scientists of the West are contemptuous of economic freedom, the basis of all freedom, and speak with admiration of a system that eclipses all tyrannies of the past in pitiless persecution of dissenters: “It did not occur to the liberal philosophers of the eighteenth and early nineteenth centuries that a new ideology would arise which would resolutely reject all the principles of liberty and individualism and would proclaim the total subjection of the individual to the tutelage of a paternal authority as . . . the most noble end of history.”
This is the weakness and sickness of the West, which is abandoning, in favor of statism and Socialism, the very free-market capitalism which has brought it not only individual liberty but the unparalleled material progress of the last 200 years. “True,” grimly concludes Mises, “Western civilization is decadent. But its decadence consists precisely in the endorsement of the anticapitalistic creed.”
December 16, 1957
It may not seem important to many that the stock market drops violently whenever anything serious happens to the President’s health. But the stock market is our great business barometer. Its fall reflects the uncertainty that develops through the whole economy. And this, in turn, reflects wider uncertainty regarding our national ability to take instant and proper action in response to any internal or external threat. It is not doubt concerning the policies of the President’s successor that creates most anxiety, but the fear of governmental paralysis in a crisis.
Yet this uncertainty is entirely needless and easily removable. Let us look once more at the constitutional provisions regarding Presidential resignation and disability. Article II, Section 1 reads: “In case of the removal of the President from office, or of his death, resignation, or inability to discharge the powers and duties of the said office, the same shall devolve on the Vice President, and the Congress may by law provide for the case of removal, death, resignation, or inability, both of the President and Vice President, declaring what officer shall then act as President, and such officer shall act accordingly, until the disability be removed, or a President shall be elected.” (My italics.)
CONGRESS HAS POWER
This provision is said to be vague concerning what or who determines Presidential “inability” if a President himself is unwilling or unable to do so. But it explicitly gives Congress power to decide all such details by legislation. If Congress, under this provision, explicitly authorized the President to transfer the powers and duties of his office temporarily, it is inconceivable that the Supreme Court would hold that Congress had acted beyond its constitutional powers.
The President’s right to resign at any time is constitutionally beyond doubt. Even here, however, clarifying legislation is desirable. If a President’s health is such as to force him to consider the grave step of resignation, he should not be confronted with the additional problem of financial sacrifice. Congress should provide that in the event of such forced resignation his salary would continue until the end of his term. Appropriate legislative provision also needs to be made concerning the salaries and expenses of both the President and Vice President during any period in which the latter temporarily assumed the powers and duties of the former.
TO DECIDE ‘DISABILITY’
Nor is this all that Congress should and could do by simple legislation. It has the clear power, under the constitutional provision just quoted, to say who should pass upon a President’s disability in the event that he himself is unable to do so. And clearly the only body that should be entrusted with the power of relieving the President of the duties of his office, even temporarily, is Congress itself. Congress, in fact, already has this constitutional power under the impeachment provision. Disability legislation could follow this precedent by providing for a President’s removal for disability by a majority vote in the House confirmed by a two-thirds vote in the Senate.
It is reassuring that the Eisenhower Administration itself is now pressing for speedy Congressional settlement of the problem. This matter is so urgent, in view of the repeated crises in President Eisenhower’s health and of the present perilous international situation, that it would justify calling a special session of Congress immediately if we were not so near to the regular session. Even now, important time could be saved if the appropriate Congressional committees could immediately frame enabling and clarifying legislation to be submitted to the full Congress as the first order of business.
As Arthur Krock has put it: “There is no real substitute in the American governing system for constant hour-by-hour Presidential leadership.” The first need is to enable a President to turn over the powers and duties of his office at least temporarily to the Vice President, and to enable him to do so with clear legal authority and an untroubled mind.
There are wider problems concerning the Presidential succession that might require constitutional amendment. But they can wait.
December 23, 1957
It will be some time before we feel the full impact of the blow to American prestige caused first by the sensational launching of the two Russian satellites and then by our own dismal failure at Cape Canaveral. Had any of the excuses so freely offered after the failure been put forward as clear warnings even 24 hours before it, they might have had the desired effect. As it was, the elaborate advance build-up caused the fiasco to do us the maximum harm. It was not reassuring to be told after the event that failure might have been expected because “this was our first attempt.” This merely underlines our irretrievable loss of six years when the Russians were laying the groundwork for their missile program between 1945 and 1951. That loss cannot be made up overnight. Our very excuses concede that the Russians are far ahead of us in satellite development—and, presumably, in long-range ballistic missiles.
What is disturbing is not merely our present humiliation but the wrong lessons being widely drawn. Most of the Democrats in Congress now blame our present predicament on the alleged “economy-mindedness” of the Eisenhower Administration. This is a strange accusation to bring against an Administration that presented a year ago the record-breaking peacetime spending budget of $72 billion. We are in our present plight not because of “economy,” but because of fantastic misspending. On our entire earth-satellite program we have spent only $110 million out of a total 1958 budget nearly 700 times as great.
WHERE WE CAN CUT
The present pious professions of inability to cut the overall budget ignore the flagrant facts. It has been repeatedly pointed out that our non-defense spending alone now comes to something like $28 billion a year. This includes $5 billion for thoroughly mischievous agricultural price supports and subsidies for not producing. It includes grossly swollen items like $4 billion for foreign aid, $5 billion for veterans’ benefits, and some $3.3 billion for “labor and welfare.” Yet with all the talk in Washington of the nation’s peril, nobody dares suggest slashing these items. It is only the taxpayers, those who earn the money from which these handouts are taken, who are being told they must make further sacrifices.
And what of so-called “defense” spending itself? One hears not a word now of the huge wastes in overbuilding, overbuying, and overstaffing pointed out by the Hoover commission. (In 1954 the Army had a ten years’ supply of women’s uniforms. The Navy had enough canned hamburger to last for 60 years, though it barely keeps for two.) We are still busily turning out obsolescent weapons. The most careful study needs to be given to the persuasive proposals of J. Sterling Livingston in the Harvard Business Review that (1) technical problems of future weapons development should be taken out of military hands and put in a civilian agency and (2) private firms should be given greater profit incentives and more freedom to pursue their own research and development.
FUTILE FOREIGN AID
The most irrational response to the Russian sputniks and our own failure is the proposal to increase still further the huge sums we are giving away to foreign countries. We have already granted them some $60 billion since the end of the second world war. This did not in the least deter the press of these countries from taunting and jeering us when our Vanguard fizzled. Suppose we had given them not a cent, and instead of dissipating our strength had used a fraction of that sum to keep unchallengeably ahead of Russia in military weapons and research? We would have helped those nations, as well as ourselves, far more than we actually have. It is futile to try to buy a nation’s good will when one has lost its respect.
The proposals in Washington to meet the new Russian threat by increasing foreign handouts, spending more in all directions, and resuming debasement of the currency by inflating still further, suggest a panicky motorist who, when he suspects he is on the wrong road, refuses to stop and take his bearings, but frantically increases his speed in the same direction that he has been going.
December 30, 1957
The subway strike in New York occurred because the motormen resented being forced into an all-inclusive union where they could not “bargain collectively through representatives of their own choosing.”
The phrase in quotation marks is one of the declared aims of the Taft-Hartley Act. In New York, the subway bargaining unit is determined by the Transit Authority. But the strike illustrated one of the notorious ways in which the Taft-Hartley Act fails to live up to its own professions. Under that law the National Labor Relations Board determines the “appropriate bargaining unit.” Whatever union gets the majority vote in such a unit thereupon becomes legally the exclusive bargaining agent for everyone, including those who voted against it. By the NLRB’s power to decide the bargaining unit, plus the monopolistic bargaining power then given to the winning union, the right of the individual worker to be represented by an agent of his own choosing is in effect denied.
MORE INTERVENTIONS
To all those who hope for any balance or sanity in our labor laws, Secretary Mitchell’s speech before the AFL-CIO convention on Dec. 5 was disheartening. The Labor Secretary recommends changes that need not or ought not to be made. He opposes nearly every change that ought to be made. He wants to increase still further the multitude of Federal interventions that have had such baneful results since they began a generation ago. He opposes the repeal of those that have done the most harm. He recommends all sorts of detailed regulation of union pension and welfare funds—and then admits, at the end, that “there are laws already on the books, after all, against bribery, against fraud, against murder and embezzlement.” But he is adamant against repeal of pernicious provisions.
Mitchell pays pious lip service to three “general principles.” Present labor law, and his own recommendations, violate all three.
His first announced principle is “to protect by law the right of American working men and women to organize into unions and to bargain collectively through representatives of their own choosing.” The Taft-Hartley Act, as we have seen, thwarts this second right. And the right of the individual worker not to join a union is denied by the Secretary.
His second announced principle is that labor and management “each be free from governmental domination.” But through our network of Federal labor laws both the individual worker and the individual employer are dominated by government. The freedom of the individual worker to get and keep a job without joining a union is denied. The freedom of the employer to seek employees of his own choice, or to replace them, is greatly abridged.
NO RIGHT-TO-WORK LAW
Mitchell’s third principle is “to protect the basic rights of individuals.” But our Federal laws and regulations abridge the basic rights of the individual in favor of the coercive privileges of the group.
Specifically, the Labor Secretary declares, the Administration “will not recommend a so-called national right-to-work law and we will oppose such legislation if it is proposed.”
This brings us close to the heart of the issue. The Taft-Hartley Act contains a self-contradiction. Sec. 8a declares: “It shall be an unfair labor practice for an employer . . . by any term or condition of employment to encourage or discourage membership in any labor organization.” But the “encourage” is canceled by a provision validating the compulsory all-union shop. Mitchell still wants to impose compulsory union membership.
The Taft-Hartley Act should either be amended by a consistent Sec. 8a, which would outlaw the compulsory union shop as well as the compulsory non-union shop (prohibiting an employer or a union from making any hiring stipulation either way), or, if the unions refuse to accept such a two-sided enactment, the Taft-Hartley Act should be repealed. We need not start passing “anti-labor” laws, but we might try repealing a few anti-management laws. Perhaps the best course, in fact, would be the repeal of all labor legislation except that forbidding force, fraud, coercion, or intimidation by anyone.
