Business Tides
The Price-Control Straitjacket
January 1, 1951
The proclamation of a “national emergency,” followed by the immediate imposition of price control, was a double misfortune and a double diversion. It diverted public attention away from our military defeat in Korea, and even from our foreign policy in general, to internal controls. And it diverted public attention away from the sole cause of inflation—the government’s own money and credit policies—to a false and irrelevant remedy built on a false diagnosis.
Price fixing is not even a partial or a supplementary remedy for inflation. It is not a remedy at all. If the volume of money and credit is kept from expanding, there is no need for price control. If the volume of money and credit is recklessly encouraged to expand, price control is worse than futile. It must merely unbalance and disrupt production.
But these basic facts are still not understood in Washington—not in the White House, not in the Treasury, not by most members of Congress. And so our economy is being snarled in the red tape of price control.
There cannot be such a thing as intelligent price control. Price control is unsound in principle. Yet the theory today seems to be that the reason the OPA made a mess of things is that the Hendersons and Bowleses and Porters did not know what they were doing. It is true that they did not know what they were doing, but it is also true that they were being asked to do something that not even geniuses or archangels could do well.
Our present price controllers have begun, not by trying to hold down the price of foodstuffs (of, say, bread or milk) but by rolling back the price of—automobiles! They have announced cloudy, confused, and obviously unworkable overall “voluntary” and “honor system” standards for price ceilings. These are certain to break down. This will then “oblige” the controllers to impose their threatened mandatory price ceilings.
The controllers did not dare to announce parallel wage standards. The union bosses, who had at first demanded price control without wage control, suddenly switched tactics and demanded “wage stabilization” standards which were in fact wage-boosting.
But government price control is inevitably political, and perhaps even present discriminations are no more flagrant than in the past. “At the moment of writing this [I wrote in Newsweek of Oct. 28, 1946] our whole price-control system is a mass of fantastic contradictions. The price of whisky is controlled, but the price of milk is not. Lamb prices go where the market sends them; but automobiles are held down by government edict so that he poor can buy their share of Lincolns and Cadillacs.”
Present discriminations do not prove, however, that Bernard Baruch’s dream of “an overall ceiling across the entire economy,” made nondiscriminatory by a rollback or freeze of all prices and wages as of June 25, would have been any better economically even if it had been politically possible. For the advocates of both selective and overall price ceilings overlook the function of free prices, which is to maximize and balance production continuously in accordance with today’s, not yesterday’s, supply and demand. Only free markets can balance and synchronize the relative production of thousands of different commodities, and bring the quickest conversion to production of war goods.
The worst feature of price control is that it concentrates public attention on a false remedy which can only put the economy in a straitjacket, and divert attention from the remedies that really need to be applied. It is the very government that pretends to be “protecting” us against “inflation” by price controls that is causing the inflation by its monetary and credit policies-by unbalanced budgets, bad taxation, wasteful spending, and by holding down interest rates and monetizing the public debt.
And because these elementary things are still not understood, we are returning, on an even greater and more dangerous scale, to all the errors of the past. 
January 8, 1951
Overnight, without any serious consideration of past experience, present facts, theory, or consequences, the economy has been put into the straitjacket of price control. This has happened because most people still do not understand that price control creates far more problems than it “solves.” It has happened because, in spite of the Niagara of books, pamphlets and editorials in the last ten years, most people still do not understand what inflation really is, what causes it, and what can cure it.
Fortunately, the problem of inflation is in at least some respects much simpler than it is commonly thought to be. There are not a hundred different causes. There is only one: an increase in the volume of money and credit in relation to the volume of goods. When people have more dollars to bid for the same supply of goods, they will bid prices up. Putting the matter another way: just as each individual bushel of wheat will exchange for less, other things being equal, when the supply of wheat is increased, so each individual dollar will exchange for less, other things being equal, when the supply of dollars is increased.
At the end of 1939 the combined total of demand deposits and currency outside banks was $36,194,000,000. At the end of May of 1950 it was $109,700,000,000. In other words, the supply of money in the pockets and bank accounts of consumers and other buyers had more than tripled.
It was said and commonly believed in the second world war that prices were high because of the “shortage of goods.” This was not true then, and it was certainly not true after the war, when prices went higher still. The cost of living right at the end of the second world war, in August 1945, was 29.3 percent above the 1935–39 level; the cost of living in May 1950 was 68.6 percent above that level. The wholesale price index rose from 105.7 in August 1945 to 155.9 in May of 1950. This was certainly not because goods were scarcer in May of 1950 than during the war or in the prewar period. On the contrary, the official index of industrial production in May of 1950 was 95 percent higher than in the prewar period 1935–39.
Why were prices so much higher in spite of the fact that goods were so much more abundant? The answer lies in the volume of currency and demand deposits, which was not only three times as high in May of 1950 as in the 1935–39 period, but $12,000,000,000 higher than at the end of July of 1945.
A similar explanation must be given for the rise in prices since the outbreak of war in Korea. It is not due to a greater “shortage of goods.” The index of industrial production, in fact, has risen from 195 in May to 214 in November. But in that period there has also been an increase of some $5,000,000,000 in demand deposits. The secret of the rise in prices, in other words, is that more money has come into existence to buy even the increased supply of goods.
Even sophisticated bankers and economists get confused about this subject because the causation often seems to be the other way round. It is not always the increase in the money and credit supply that comes before the rise in prices. Often (and this happened after the outbreak of the Korean war) it is the price rise that comes first. But what most people overlook is that unless an increase in money and credit followed immediately, the price rise could not be sustained.
A typical chain of causation is this. War breaks out. Manufacturers and speculators think that the demand for certain goods is going to increase, making them higher in price. Therefore they begin to buy and hold them immediately. But to buy and hold them at a higher price they need more credit. This is usually forthcoming from the banks as a matter of course. If the banks refused this credit, however, or were not allowed to expand their total volume of advances, or if interest rates were raised to a point that discouraged this further expansion, no substantial general rise in prices could be sustained. The rise in the price of war goods would be offset by declines in other commodities.
Inflation is a monetary and credit phenomenon—and nothing else.
January 15, 1951
On Dec. 28 the Federal Reserve Board announced increases in the legal reserve requirements for the 6,900 member banks of the Federal Reserve System as a measure to curb credit. The increases, to be spaced out over the period from Jan. 11 to Feb. 1, took the form of a rise of 2 percentage points in demand deposits and 1 percentage point in time deposits. The board explained that the effect of this measure would be to raise required reserves by member banks by about $2,000,000,000, and that this would make unavailable about $12,000,000,000 in potential bank credit.
It must be said in favor of this measure that it seeks to curb inflation in the only field in which it really can be curbed—that of monetary and credit policy. But it must be added in all candor that this step is wholly inadequate in itself, that it is little more than a token measure, and that even its small effects will be and are being offset by inflationary countermeasures on the part of the Federal Reserve authorities themselves.
As the National City Bank of New York points out in its January monthly bank letter: “As the reserve requirement increase was announced, there was evidence in the market that the Federal Reserve Banks had again put pegs under the government security market to maintain their price levels.... For most of the banks, doubtless, the adjustment will be accomplished with the greatest mechanical facility. Government securities will be sold with the Federal Reserve the buyer. In effect, banks will ship a part of their government securities to the Federal Reserve where they will get a credit of idle, unusable cash. By and large, the whole of the operation—increasing cash reserve requirements with one hand and supplying the cash with the other—is self-defeating. . . .
“Pegs, rigidly maintained, invite any and all holders of marketable government securities to turn their holdings into cash, for spending or lending, any time they please. Those holdings, outside the Federal Reserve Banks and Treasury investment accounts, run to $130,000,000,000.”
Monetary authorities have long recognized that changing cash reserve requirements is at best a supplementary—and an awkward—method of credit control. But if it is resorted to at all, it should certainly not be used in the disingenuous and self-defeating way in which the Federal Reserve authorities are now using it. What is sauce for the goose must be sauce for the gander. Whenever the reserve requirements of the member banks are raised, the reserve requirements of the Federal Reserve Banks ought also to be raised. The latter’s reserve requirements used to be 35 percent against deposits and 40 percent against notes. But under the Reserve authorities’ plea of emergency they were lowered by Congress in 1945 to a uniform reserve requirement of only 25 percent.
The most direct and immediate way in which Congress could put the country on notice that it is determined to prevent inflation, and knows the direction in which the danger really lies, would be to restore the former reserve requirements of the Federal Reserve Banks themselves. It should, in addition, give the Federal Reserve Board discretionary authority to raise even such requirements, just as it already has discretionary authority to raise requirements of member banks. And if Congress also allows the board discretionary authority to let a Federal Reserve Bank’s reserves fall below, say, 40 percent, it should only be with the proviso that such a bank cannot increase the net volume of its investments and advances as long as its reserves are below that ratio.
But even such legal requirements, though important, would be chiefly symbolic and supplementary. Nothing can take the place of proper credit policy on the part of the Federal Reserve authorities themselves. As Governor Eccles of the Federal Reserve Board said a year ago: “In making a cheap money market for the Treasury, we cannot avoid making it for everybody. All monetary and credit restraints are gone under such conditions; the Federal Reserve becomes simply an engine of inflation.”
January 22, 1951
President Truman’s tremendous economic demands on this country, in his State of the Union message to Congress, are so closely related to his foreign policy that it is difficult to discuss them purely on their own merits. Mr. Truman chooses to ignore the fact (pointed out by Mr. Hoover) that this country is already bearing an altogether disproportionate share of the burden of the collective defense of the 53 “democracies.” What the President now proposes, in effect, is that we assume an even more disproportionate share of that burden.
Even today, for example, Mr. Truman blandly recommends that we continue the Point Four program. Our government is to “help people who are striving to advance from misery, poverty and hunger”—all over the world. And it is to do this by forcing the American taxpayers to drop still more money into “underdeveloped” countries so that their governments will not have to make the reforms necessary to attract private capital, either domestic or foreign. The Point Four program not only puts an added strain on our own economy; it retards world production. It bypasses the prods and incentives of free enterprise to substitute the principle of the free lunch.
Mr. Truman lists ten subjects “on which legislation will be needed.” These include still bigger appropriations and still higher taxes—but not government economy. As an afterthought, however, he declares that the government “must practice rigid economy in its nondefense activities.”
Unfortunately, too much weight cannot be attached to this single sentence of lip-service. Mr. Truman has been making similar declarations over a long time now, yet on net balance the very opposite continues to happen. It is to be observed, further, that in this message Mr. Truman did not specify just what nondefense expenditures were to be cut. He did specify, on the other hand, many non-defense expenditures that were not to be cut. He even spoke of “rounding out,” “improving,” and adding—in other words, of making bigger—social insurance, old-age pensions, unemployment benefits, government health insurance and socialized medicine.
Mr. Truman asked for “improvement of our labor laws” to increase production in the emergency. If taken seriously, this proposal would mean the suspension of the present legal penalty rate on all weekly working hours above 40. He asked for “improvement of our agricultural laws, to help obtain the kinds of farm products we need for the defense effort.” By far the best way to do that would be to repeal all our “parity,” control, and subsidy laws and let the supply and kinds of farm products be determined by demand through free prices.
Mr. Truman asked for “revision and extension of the authority to expand production and to stabilize prices, wages, and rents.” Congress should not extend this authority but contract it. If Congress could force the Administration to abandon its policies of monetary inflation, none of these price-fixing powers would be needed.
To quote from a statement by the Committee for Economic Development on “Paying for Defense”:
“Experience in the United States and in other countries has demonstrated that this [a system of general price and wage controls and rationing] is not an effective solution to the inflation problem, especially if the problem lasts for a long time. Even while the controls are nominally in effect, price increases break through in black markets, in deterioration of quality, and in the disappearance of low-priced goods from the market. Price ceilings and wage rates come to be determined in a political bargaining process which pushes up the prices and incomes of the groups most powerful politically at the expense of those less powerful. And when the controls finally come to an end, either by formal decision or by erosion in fact, the dammed-up inflationary pressure breaks out in open inflation. [Meanwhile] prices are prevented from performing their economic function of directing production . . . and economizing the use of scarce resources.”
January 29, 1951
Senator Byrd was using the language of restraint when he declared that President Truman’s budget of $71,000,000,000 for the next fiscal year was “the very height of fiscal irresponsibility.” Mr. Truman no longer seems to attach any meaning to figures, or even to pledges. He has repeatedly promised “rigid economy in nondefense activities.” And he solemnly continues his lip-service to “strict economy” in the very budget in which, as Senator Byrd points out, proposed nondefense spending is increased “to the highest level in the history of the nation.”
Mr. Truman threw in practically the whole Fair Deal spending program—compulsory health insurance, bigger unemployment benefits, Federal subsidies to education, including nursery schools, more public power projects, including the St. Lawrence Seaway, more government housing, more handouts to foreign countries for “economic recovery,” and on top of all this, the Brannan farm plan, the year-to-year cost of which is indeterminable.
It may be doubted whether Mr. Truman seriously intended this as a budget or meant it only as a campaign document—so that, in 1952, he can tell the pressure groups that he asked for everything, and only a niggardly Congress denied it.
The response of Congress to this budget was much milder than it should have been. Senator Byrd’s estimate that it could be sliced by $7,000,000,000 was very moderate. Representative Taber’s contention that it could be cut by $4,000,000,000 was even more so. I hazard the guess that with proper Federal policies and proper administration of spending, the whole $16,000,000,000 difference between the proposed $71,000,000,000 of spending and the $55,000,000,000 of prospective tax yields could be cut, making it possible to balance the budget without increasing taxes any further. And the result could be both more production and better defense.
Mr. Truman still talks of government expenditures as if they came out of some fourth dimension, and bought more things than were bought before. All they do is to change the direction of spending. What the government pays out to Paul it must take from Peter. What it spends on government project X it must take away from unborn or unexpanded private projects Y and Z. For every speech Mr. Truman makes on how many “new needs” he is meeting by his $71,000,000,000 of expenditures, millions of mute inglorious taxpayers could make a speech on how many old and new needs they will be unable to meet because these billions will be taken away from them.
It is not enough for government to prove (though it seldom attempts even this) that every dollar it spends meets some vague “need” or other; it must show that every dollar it spends meets a greater need than it would have met if the man who earned it had been allowed to spend it on his own family or for his own projects.
Nor should we allow the magic word “defense” to save a proposed expenditure from serious scrutiny. Once Congress permits the Administration to set up a sacred and untouchable category of expenditures, it will find the Administration shoving every proposed expenditure possible under that category. Today “defense” covers a multitude of fiscal sins.
If there is any fiscal responsibility in Congress itself, it will return Mr. Truman’s 1952 budget to him without approval, and request him to submit a responsible, balanced budget with a certain specified number of billions sliced off the expenditure side. It will bind itself, in return, not to increase by its own appropriations either the total or any individual item of this revised budget. But it will not bind itself not to make any further reductions in individual items when the individual appropriation bills come before it. And its separate committees—including the Armed Services and Military Affairs Committees—will increase their technical and research staffs and make a far less perfunctory scrutiny of expenditure requests than they have in the past.
February 5, 1951
How preposterous can the situation get? The Administration starts the inflationary fire, fights it by pouring on more gasoline, and then talks as if it were completely mysterious in origin. Or it hints that the fire was started by business, by the “speculators,” the “hoarders,” the “profiteers,” or by the buying public. And it acts on this assumption when it insists on the completely false remedy of price control, which puts the economy in a straitjacket of prohibitions, allocations, rationing, licenses, and subsidies, unbalances and disrupts production, creating artificial shortages. All this is called total mobilization.
Take the Secretary of the Treasury, John W. Snyder. He is personally a mild-mannered, quiet, unassuming, amiable, loyal, and honorable man who thinks of himself as a conservative. He would be shocked beyond measure to learn that he is more responsible than any other single man for the existing inflation in this country and the almost universal fear of further inflation. And he has earned this No. 1 position not only by his past record but by his extraordinary announcement on Jan. 18 that the long-term rate for marketable Federal securities must be held to 2½ percent. He might just as well have announced outright that he is determined to have more inflation.
Mr. Snyder’s attitude stems, of course, not from any desire for inflation, but from a tragic lack of understanding of economic cause and effect. Inflation, always and everywhere, has one basic cause—an increase in the supply of money and bank credit. At the end of 1939, demand deposits and currency outside of banks totaled $36,000,000,000. At the end of May of 1950 this total had reached $109,000,000,000. At the end of December of 1950 it had reached $117,000,000,000. This is not merely the cause of inflation; this is the inflation. The increase in commodity prices is merely a consequence.
And the principal cause in turn of this increase in money and bank credit has been the artificially low interest rates maintained by the Treasury.
This cheap money policy has not merely swollen the volume of private borrowing; it could be maintained—in connection with the policy of pegging government bonds above par—only by encouraging the member banks to load up with government bonds and by forcing the Federal Reserve Banks to buy as many of those bonds as is necessary to maintain the predetermined rate. They bought these bonds by creating deposits or printing money.
All this is now an old story among monetary economists and bankers. But Mr. Snyder has never understood it. He can see the problem only from the immediate short-run interest of the Treasury—to pay as low an interest rate as possible. “Any increase in the 2½ percent rate,” he says “would seriously upset the existing security markets.”
Any increase in prevailing interest rates would of course mean a lower price for present outstanding bonds. But Mr. Snyder refuses to see that the only alternative to accepting this comparatively mild consequence is an uncontrollable inflation. In the face of overwhelming economic opinion and evidence to the contrary, Mr. Snyder persists in declaring that a cheap money policy and inflation have nothing to do with each other.
If Mr. Snyder stood alone in this appalling blindness the situation would not be so grave. But he is supported in Administration circles by a conspiracy of silence. Within the Federal Reserve System there is some real understanding of the situation; but—with a few honorable exceptions like Allan Sproul, president of the Federal Reserve Bank of New York—there is precious little courage. Mr. Snyder’s statement clearly implies that Chairman McCabe of the Federal Reserve Board acquiesces in the policy of maintaining the inflationary 2½ percent interest rate. In lieu of any genuinely effective overall action, the board on Jan. 16 announced the token gesture of increasing required stock margins from 50 to 75 percent. Meanwhile, an ominously growing bureau prepares to “cure” inflation with the colossal hoax of price control.
February 12, 1951
The confusion at Washington has reached such a point that even the price controllers admit that they don’t know what they’re doing. They announced the so-called overall price-and-wage freeze on Jan. 26. The very next day an executive of the Office of Price Stabilization said that his agency was working intensely to “cure the absurdities and inequities inherent in such a sweeping order.” How many times this order will be changed or amended no one can predict. But what can be predicted with complete confidence is that no matter how many times the order is changed or amended it will still be riddled with “absurdities and inequities.”
Those who, like Bernard Baruch, honestly believe in what they call “an overall ceiling across the entire economy,” assume that the nondiscriminatory and nonpolitical way in which this could be done would be to freeze all prices, wages, rents, fees, and so on as of a particular date. Mr. Baruch originally recommended June 25, the day hostilities broke out in Korea.
This proposal—or a proposal to take the prices of any other date or period as the basis for an overall freeze—has fatal defects. It treats the prices or price relationships of that date as peculiarly “normal,” “fair,” or “right.” But the general price level of that date reflects the money supply of that date; and the specific prices and price relationships reflect the individual state of supply and demand for each commodity on that date. Even if we disregard changes in the supply of money and credit, the commodity supply-and-demand relationships of yesterday are never those of today.
The function of free prices, free wages, and free markets is to direct production into the goods that are most needed and away from the goods that are least needed; to balance and synchronize production as among thousands of different commodities; to bring about a voluntary allocation of land, capital, and labor to their most efficient and productive uses.
Even an honest overall price-and-wage ceiling, therefore, would deprive us of the invaluable guidance that free prices give. It would misdirect and waste capital, labor, and other productive resources. It would cause both hardships and wastes in consumption. It would disrupt productive relationships and bring on artificial bottlenecks and shortages. But what we are getting is a dishonest “overall” price-and-wage ceiling, which is much worse. It is riddled with special exemptions and discriminations. It exempts farm prices under “parity.” It tries to free the farmer while controlling the processor and distributor. It treats wages quite differently from industrial prices. It holds some prices at the peak and “rolls back” some others. It is going to straighten out “inequities”—which means, as experience shows, that it is going to hand out political favors and penalties. Our price control, in brief, is saturated with politics.
Nor is the politics going to be taken out. Political favoritism is inevitable in government price control. The appointed price controllers are not solely to blame. They have to deal, for example, with discriminations already built into the law. Our farm-price-parity laws and labor laws are full of built-in inflationary pressures.
Price fixing does not merely put huge economic power, always abused, into the hands of politicians, but it serves to divert public attention away from the fact that it is the government itself that creates the inflation from which it then “protects” the citizens. At the very moment when the government resorts to the fraudulent remedy of a general price freeze, President Truman openly supports Secretary Snyder’s announcement that the rate on long-term government bonds must be kept pegged at 2½ percent. As Governor Eccles of the Federal Reserve Board has pointed out, this can only be continued “by the creation of tremendous sums of money, at the cost of progressive decline in the value of the dollar.”
No serious effort to stop inflation is possible until the government halts this government bond-pegging policy.
February 19, 1951
On Jan. 31, at a meeting that should never have been called, President Truman presumed to lecture the Open Market Committee of the Federal Reserve System on what its policies ought to be in the present crisis. The next day the White House Press Secretary announced: “The Federal Reserve Board has pledged its support to President Truman to maintain the stability of government securities as long as the emergency lasts.” Then Mr. Truman made public a “Dear Tom” letter to Chairman McCabe of the Federal Reserve Board in which he thanked him for “your assurance that the market on government securities will be stabilized and maintained at present levels.”
Governor Eccles of the Federal Reserve Board was “astonished” by the President’s version, denied flatly that the agency had given any such pledge, and made public the board’s own memorandum covering what took place. The memorandum failed to support Mr. Truman’s version.
We need not be diverted by any attempt to appraise the comparative accuracy of these conflicting versions. If we keep our eye on the legal and economic issues involved, it is clear that Mr. Truman is wrong on both.
The President has no more legal right to tell the Federal Reserve Board what to decide than he has to tell the Supreme Court what to decide. To minimize Presidential influence, Congress deliberately made the board an independent body, with fourteen-year terms for each of the seven members, overlapping so that no President should have the appointment of more than one member in any two-year period. The late Senator Glass long ago quoted President Wilson as saying: “The very moment that I should attempt to establish close relations with the [Federal Reserve] board, that moment I would be accused of trying to bring political pressure to bear.” The pressure that Mr. Truman is now bringing to bear on the board is a clear usurpation of power.
President Truman and Secretary Snyder are patriotic and sincere. They simply do not understand the economic consequences of what they are proposing. They wish to force the Federal Reserve Banks to keep buying as many government bonds as necessary to hold them above par, and so keep down the long-term yield to the arbitrary maximum of 2½ percent. Now when the Reserve banks buy such government bonds they pay for them simply by creating deposit credits or printing money in exchange. These in turn become the reserve bases for member banks to create still more money and bank deposits. This creation of more money and bank credit without more goods is not merely the cause of inflation; it is the inflation. Mr. Truman and Secretary Snyder might just as well tell the Federal Reserve Board point blank: “We demand more inflation!”
None of the reasons that either Mr. Truman or Mr. Snyder gives for wanting Federal bonds pegged at par or over will stand examination. Mr. Truman recalled before the Open Market Committee “his wartime experience when he bought Liberty bonds out of his soldier’s pay. When he returned from France and had to sell his bonds to buy clothes and other civilian things, he got only $80 or a little more for his hundred dollar bonds. . . . He did not want the people who hold our bonds now to have done to them what was done to him.”
Now none of the Liberty bonds ever fell quite as low as 80. Some issues did fall within a few points of that price, but only for a few months in 1920. And the decline affected only those people who were forced to sell in those months. The maximum loss even of these people was only about 18 percent. Today, on the other hand, mainly as a result of the very bond-pegging and low-interest policies on which Mr. Truman has insisted, a government bond bought in 1942 has a purchasing power in terms of consumer prices of only 70 percent of what it had then. This is a real depreciation of 30 percent. Which policy—that of the first or the second world war—was worse for the bondholders?
February 26, 1951
In the Feb. 19 Newsweek Raymond Moley dealt with the scandals that have developed in the Reconstruction Finance Corp.; but in the light of subsequent developments and of the wider issues involved, some further comment seems warranted here.
On Feb. 2 an investigating panel of the Senate Banking Committee, after months of inquiry, brought in a report charging improper use of the RFC’s lending authority, political and personal favoritism, and mismanagement. It was the practice of one director, the report found, “to give special attention to matters in which the [Democratic National] Committee was interested.” Other details, including the remarkable rise of an E. Merl Young, husband of a secretary to one of President Truman’s secretaries, from a $1,080-a-year messenger job, to a vice presidency of the Lustron Corp. (an RFC borrower) at $18,000 a year, and finally to an income of $60,000 in 1950, were recorded by Raymond Moley last week.
Though these factual findings were unanimously approved by the subcommittee, consisting of two Republican and four Democratic senators, Mr. Truman at a press conference dismissed the report as asinine. He followed this up by defiantly sending to the Senate the nominations of all five directors of the RFC—even though the last session of Congress had declined to take action on these nominations, and though three of the nominees were named by the Senate subcommittee report as having been unduly influenced in the grant of loans by individuals close to the President.
The subcommittee, however, apparently thinks that it would remove the political element from the RFC’s loans if the five-man board of directors were replaced by a single governor with complete responsibility. The blunt truth is that there is no cure short of the abolition of the RFC itself.
The RFC was set up in 1932 to perform a specific emergency function—to make loans to banks then under pressure, against sound assets which were not legal for rediscount at the Federal Reserve Banks. Once this emergency function was performed the RFC should have been liquidated.
On the contrary, it was not only retained but expanded, and was soon used for making direct loans to business. Such loans were bound to be economically unsound. A solvent and promising business, willing to pay the going rate for money, can obtain it from private lending institutions. Therefore, the firms that turn to the RFC for money must be either those who are unwilling to pay the going rate (already kept unsoundly low by the government’s cheap money policy) or those firms whose credit and prospects are not good enough to satisfy private lending institutions. The RFC, in fact, exists on the self-contradictory assumption that there are loans sound enough to risk the American taxpayer’s money in, though they are not sound enough for any private individual or institution to be willing to risk its own money in.
The $37,500,000 loan made by the RFC to the Lustron Corp, is typical of what happens under such an assumption. According to some estimates, the RFC will be lucky to get back 5 cents on the dollar from that “investment.”
It is argued that the RFC cannot be abolished now because it is needed to make “defense” loans to private business. This argument is without substance. Any solvent, well-managed corporation with a government contract in its hands should have no trouble in borrowing from private banks all the money it needs to fulfill that contract. But if we create a system under which private persons can get the funds from one government agency to set up facilities to solicit contracts from another government agency, we have created still further opportunities for political pressure and corruption. Even as matters already stood, as the Hoover Commission warned in a report on March 31, 1949: “Direct lending by the government to persons or enterprises opens up dangerous possibilities of waste and favoritism to individuals or enterprises.” The RFC should be abolished.
March 5, 1951
“This program,” said President Truman, in asking Congress to give the Indian Government 75,000,000 bushels of grain, “does not constitute a precedent for continuing to provide food to India on a grant basis or for providing similar aid for other countries.” But it does, of course, constitute precisely such a precedent. We cannot do less in future for India or any other country without being accused of less generosity or plain discrimination.
Famine and starvation should, of course, always be prevented or relieved when humanly possible. But we must also ask what caused it, whose duty it is to relieve it, and what steps are essential to prevent its recurrence.
It has gradually, precedent by precedent, become the assumption of most foreigners and most American Fair Dealers that when any real or imagined deficiency of anything whatever exists anywhere on earth, it must be made good primarily, if not solely, at the expense of the American taxpayer. Yet even the Indian Government did not ask us for more than a long-term loan to enable it to buy this grain. Given reasonable prudence, it could easily have repaid such a loan. Why did Mr. Truman recommend a gift?
The process will be this. “America” will give the grain. But the average Indian (nearly 85 percent of the Indian people are illiterate) will probably never know this. For the gift will be to the Nehru government, and the Nehru government will sell the grain to India’s hungry. Moreover, the Nehru government will be allowed to keep for statist schemes even the “counterpart funds” it gets for selling what we give.
Just as Mr. Truman ascribed the Yugoslavian food shortage solely to “the drought,” so he now ascribes the Indian famine solely to “natural disasters—earthquakes, floods, droughts, and plagues of locusts.” Yet the famine has at least been intensified, if not principally caused, by the economic policies of the Nehru government:
1—The Nehru government is a “planning” government, a socialist government. Like all such governments it has embarked on a grandiose “industrialization” program. This means that it has diverted land, labor, and capital from agricultural to industrial production. This has directly reduced India’s production of food. Mr. Truman apparently approves of this compulsory diversion. For he wants to compel American taxpayers to subsidize it. It is explicitly because he wishes the Nehru government to have the funds to continue this “long-range economic development program” that he thinks American and not Indian taxpayers should be asked to pay for the present Indian food deficiency.
2—Specifically, the Nehru government intensified India’s food shortage by its isolationist efforts to become independent of Pakistan (or anywhere else) for cotton and jute. It ordered a reduction in grain-growing acreage to increase cotton and jute acreage.
3—The Nehru government has not permitted free markets in agriculture. It has put price ceilings on grain. These have, as always, discouraged and reduced the production and sale of grain. The government has resorted to forced government procurement of grain from peasant growers. Our government is asking American taxpayers to suffer from these policies and is not suggesting any change in them. Therefore the food shortage is likely to recur.
4—The argument that India cannot pay $190,000,000 for grain because it has only “limited foreign exchange reserves” and an “unfavorable balance of payments” is economic nonsense. These conditions are the result of the Nehru government’s own exchange control measures. It has made dollars scarce in the same way as it has made foodstuffs scarce—by putting artificial price ceilings on them.
In this grain discussion the whole emphasis has been on distribution. But in the long run nothing can save India or the world from poverty and famine but greater production. And there is willful blindness to the fact that government “planning,” price-fixing, and socialism inevitably discourage, reduce, and disrupt production.
March 12, 1951
The Treasury’s announcement that it will offer “non-marketable” bonds bearing 2¾ percent in exchange for issues of its outstanding 2½ percent bonds maturing in 1967–72 must be warmly welcomed as at least a step in the right direction and the first crack in the 2½ percent fetish.
The sole cause of inflation is an increase in volume of money and credit in relation to volume of goods. This has gone steadily forward. At the end of 1939, both demand deposits and currency outside of banks totaled $36,000,000,000. Wholesale prices in 1939 stood at an index number of 77. At the end of May 1950, money- and-credit volume had increased to $109,000,000,000. Wholesale prices in May 1950, had risen to an average of 156. In December 1950, money-and-credit volume had reached a total of $118,000,000,000. Wholesale prices had soared to an average of 175.
This general rise of prices cannot be attributed to any general “shortage of goods.” On the contrary, the index of industrial production, which stood at 109 in 1939, had risen by May of 1950 to 195 and by December to 216. This rise in production was the chief reason, in fact, why wholesale prices between 1939 and the end of 1950 did not rise more than 127 percent, though the volume of money and bank credit increased by 228 percent.
The chief cause for the increase in the volume of money and credit all through this period was the government’s own cheap-money policy, maintained mainly through the device of pegging outstanding government bonds above par. The Federal Reserve Banks were forced to buy the bonds, which were then made the basis for the creation of more money and credit. At the end of 1939 Federal Reserve Banks held $2,484,000,000 of U.S. Government obligations and the commercial banks $16,316,000,000 worth. At the end of 1950 Federal Reserve Banks held $20,800,000,000 worth and the commercial banks $62,390,000,000 worth. Thus a total of $64,390,000,000 out of the whole increase of $82,000,000,000 in money and bank credit since the end of 1939 in effect represents the “monetization” of government securities acquired by the nation’s banking system.
Mr. Truman’s memorandum of Feb. 26 on government debt and general credit policies wrongly identified “stability” of government securities with “full confidence in the public credit,” and this in turn with an artificial parity. Yet obviously the government cannot create real confidence in its own credit by forcing its left hand to buy the bonds that it “sells” with its right. It has managed to keep up the nominal quotation of the bonds only by a process that has led since 1939 to a depreciation in their real purchasing power of 44 percent. In a self-defeating effort to prevent further inflation, while still preserving the fetish of a 2½ percent long-term interest rate for government securities, the President’s memorandum in effect proposed still further direct government control of the entire economy.
The March 3 Treasury announcement is the first clear recognition that its efforts to hold yields on its long-term securities down to 2½ percent have been inflationary. But the new measure does not on its face seem adequate to solve the problem. The banking system could have been much better protected against a halt in the bond-pegging policy, for example, by allowing holders of outstanding long-term government bonds to convert them into bonds bearing a variable-coupon rate (see Business Tides, Newsweek, Oct. 4, 1948).
The inflation, in brief, has been government-created. And the alleged remedy of price-and-wage control (even if there had been no union-leader insurrection) is completely spurious. If the volume of money and bank credit were prevented from expanding, price control would be unnecessary. But as long as money and bank credit are being substantially increased in relation to the volume of goods, price control will continue to be worse than futile; for it distorts and disrupts production at the same time as it destroys economic freedom.
March 19, 1951
We take as our text this week a statement of the program committee of the Committee for Economic Development entitled “Conditions Necessary for Effective Price-Wage Controls.” This statement typifies the views of a large group of business leaders and economists. We choose it for discussion partly to point out what is wrong with it, but also to underline much that is right with it.
The committee specifies four conditions it regards as necessary to make “price and wage controls work as effectively as possible: . . . (1) Drastic steps should be taken to reduce all government expenditures not clearly essential to the defense effort; (2) taxes should be raised sharply and promptly, to restrain consumers’ expenditures as well as to increase revenues; (3) the expansion of bank credit should be checked; (4) a national program to encourage savings should be inaugurated.”
By far the most important of these conditions is the third, which the committee relatively understresses. The increase of $8,500,000,000 in combined demand deposits and currency outside of banks between the end of May and the end of December (together with fears of a still further increase) was the major factor in the inflation of that period.
But the committee argues clearly and courageously for “modification of the present policy of using the government’s monetary powers to maintain a stable market for Federal government securities at low interest rates.”
The first and second conditions specified by the CED committee add up to a demand for a balanced budget. Now a balanced budget is important. But a deficit is an indirect, not a direct cause of inflation. A budget deficit is inflationary only to the extent that it forces an increase in the volume of money and credit. A deficit fully financed by the sale of bonds paid for out of real savings, for example, would not be inflationary. But if the volume of money and credit increases, we can have inflation even with a budget surplus. This is precisely illustrated by what has been happening in the present fiscal year since July 1; for up to March 1 there was actually a budget surplus of $978,000,000.
It is essential, moreover, to insist on drastic reduction of needless expenditures rather than increased taxes to bring about a budget balance. Continued taxes at any such level as $70,000,000,000 a year (in dollars that retain even present purchasing power) would not only retard and discourage production but would make the maintenance of a free economy impossible. A budget of $71,000,000,000 expenditures and $72,000,000,000 taxes would be technically “noninflationary,” while a budget of $55,000,000,000 expenditures and $54,000,000,000 taxes would be technically “inflationary”—but our economy would have a far better chance of survival under the second than under the first. Inflation is a great danger, but it is not the sole economic danger that threatens us.
The CED committee is right in maintaining that price and wage controls will not work effectively unless needless government expenditures are cut, the budget reasonably balanced, and further expansion of bank credit prevented. What it fails to recognize is that if these “conditions necessary for effective price-wage controls” were achieved, the price-wage controls would not be necessary! For given such conditions, the general level of prices simply could not go up substantially or permanently.
It is true that the prices of certain war goods in exceptional demand might go up sharply. But this would leave less money to buy other goods, the price of which would consequently decline. And this change in relative prices is exactly what is necessary. To try to retain the same relative prices, wages, costs, profits (and losses) as those of June 24, 1950, say, is to discourage, retard, or prevent the very changes in the structure of production that we need.
Price control, in short, is not only an unnecessary weapon against inflation, but a positive evil in itself.
March 26, 1951
The global giveaway mania seems to grow by feeding on itself. The latest illustration is the report to the President by the International Development Advisory Board headed by Nelson Rockefeller. It proposes nothing less than a new $4,500,000,000 foreign lending-and-giving program to the so-called underdeveloped areas of the world.
The Administration made Point Four look very modest and innocent at the beginning, you will remember, by asking for only $45,000,000 for the first year, Now this sum was ridiculously small when compared with the grandiose objective of a new world flowing with milk and honey that Point Four was to bring about. It did not take much shrewdness to calculate that if there were 1,075,000,000 people in the “underdeveloped areas,” then the $35,000,000 actually appropriated meant only about 3 cents per ward per year—hardly enough to assure the economic millennium.
Some of us were so cynical as to ask whether the requested appropriation had not purposely been made ridiculously small compared with the tremendous pretensions of the program in order to lure Congress into accepting the principle that the American taxpayer somehow owed all the rest of the world a living. Even Democratic Chairman Connally of the Senate Foreign Relations Committee publicly expressed his apprehensions: “As time goes on I can feel the pressure coming in the window for big projects.”
His prophetic soul did not have to wait long. Here, only one year later, is a program involving altogether 100 times as much as that modest little entry fee of $45,000,000. And as I need hardly point out, we are not going to raise foreign living standards very much by lending or giving out only $2 to $5 per beneficiary per year. Will we be offered next year, perhaps, a really “adequate” program, bearing the same 100-to-1 ratio to this year’s, say, as this year’s does to last?
The stated purpose of this new proposal is to “unify” and “centralize” “all major United States foreign economic operations.” The board finds 23 American agencies already engaging in such operations in addition to 33 different foreign agencies. Its report admits, with masterly understatement, that “in some cases there is duplication.” But it does not specifically recommend the abolition of any one of these overlapping and duplicating agencies. It simply proposes to absorb them in a supercolossal U.S. Overseas Economic Administration.
Moreover, the report not only leaves some foreign hand-out agencies outside even this proposed consolidation; it suggests the creation of several new ones. One of them would be a new affiliate of the International Bank. With the ominous political record of the Reconstruction Finance Corp. before it, the board nonetheless proposes the creation of an “International Finance Corp. . . . to make loans . . . to private enterprise without the requirements of government guarantees.” And finally, though the new overall agency is of course put forward as “a vital part of our own defense mobilization,” it is nevertheless to be a “permanent governmental agency.”
As one who, in vain, wrote a 48 page pamphlet called Illusions of Point Four, it seems to me a rather futile exercise to call attention once more to all the false assumptions of theory and fact that underlie these Point Four proposals. Americans should be indebted, however, to Sir Ramaswami Mudaliar, the Indian representative to the United Nations Economic and Social Council (who demands that the U.S. provide bigger and better giveaway programs), for admitting so frankly that Point Four “may have to be at the expense of developed countries.” “The choice,” he says, “may be between a comfortable motorcar for an average American family or a motor truck for carrying passengers or goods in remote parts of the East.” At least Sir Ramaswami recognizes clearly that we in America must do with less if we give part of our goods away, whereas most of our own Point Four champions seem to argue that the more we give away the richer we will get.
April 2, 1951
On March 19 the delegates of France, Western Germany, Italy, Belgium, the Netherlands, and Luxembourg initialed at Paris a draft treaty running for 50 years to give legal effect to the Schuman plan. It was another major step in the onward march of international bureaucratism, international controlism, and international statism.
The Schuman plan does have two merits. It represents a political rapprochement between France and Germany. And it recognizes, at least in the sphere of coal and steel, the evils of economic nationalism and fragmentation. But it resorts to a dangerously false method of meeting the problem. When we consider what it will mean from the standpoint of peace, freedom, and real internationalism in the long run, it is a grave step backward.
The truly liberal way for the six governments concerned to solve their coal and steel problem would be simply to lower or remove the legal barriers to international trade that they themselves have erected. This would mean the removal of tariffs, quotas, import and export prohibitions, license systems, and exchange controls.
Instead, the Schuman plan imposes new controls for old ones. It frowns, it is true, on private bigness, integration, or cartelization. But it will sanction and enforce all these things under intergovernmental direction. Under the plan the supranational control authority will have power to fix maximum, minimum, and “just” prices for coal and steel; to fix wages, production quotas, and consumption priorities; to subsidize submarginal companies; to guarantee private loans and to direct investment, financing expansion here and prohibiting it there. And to do all this the plan sets up elaborate bureaucratic machinery with consultative committees, and its own Assembly, Council, and Court of Justice.
In brief, in the name of freedom of competition the plan will prevent the very adjustments that it has been the immemorial function of competition to bring about—to allow and encourage the free expansion of efficient producers, to weed out the inefficient, to economize resources, lower prices, and promote maximum output.
Hardly was the ink dry on signatures to the Schuman plan than the French Government announced new plans to set up new supranational agencies with power to fix prices and allocate markets for Europe’s wheat, sugar, dairy products, wine, and whatnot. And the U.N. Economic and Social Council, meeting in Chile, voted 13 to 0 that governments of the world combine “to regulate at equitable levels and relationships the prices of essential goods moving in international trade, including capital goods, essential consumer goods and raw materials”—in other words, to fix prices on practically everything.
All this is to be piled on top of what is already the greatest aggregation of overlapping intergovernmental agencies and collectivist controls that the world has ever known—from the International Fund to the European Payments Union, and from exchange controls to the wheat pact.
The fact that existing agencies and controls are either breaking down or promoting further economic chaos, instead of leading to any demand for their abolition, leads merely to demands for still more agencies, still more bureaucrats, still more controls. It is never the controls that are blamed for the resulting chaos, but the few remaining elements of freedom.
When the brief attempt to make pounds convertible into dollars broke down in 1947, the British Government blamed free convertibility, and not its absurd officially pegged price of $4.03 for the pound. When Erhard finds it almost impossible in Germany today to maintain a few tiny islands of economic freedom in a sea of controls, it is the partial freedom, not the control, that is ridiculed.
The situation would not be quite so ironic if the bureaucrats of the world were frankly repudiating a free market economy. But world economic freedom is being strangled to the accompaniment of suave assurances that it is in the clutches of its friends.
April 9, 1951
The present price law expires on June 30, and the Administration is of course attempting to get even greater and more arbitrary control powers out of Congress. But if any economic sense prevails in Congress it will reduce and not increase the government’s control powers. Above all it ought to reduce if not eliminate the Administration’s power to fix prices.
I have argued so often on this page against price control that it will perhaps be more effective, and certainly more varied, if I cite the opinions and arguments of others. So I begin with a quotation from Frank H. Knight of Chicago, retiring president of the American Economic Association, from the American Economic Review for March:
“Of late, I have a new and depressing example of popular economic thinking, in the policy of arbitrary price fixing. Can there be any use in explaining if it is needful that fixing a price below the free-market level will create a shortage and one above it a surplus? But the public oh’s and ah’s and yips and yaps at the shortage of residential housing and surpluses of eggs and potatoes as if these things presented problems—any more than getting one’s footgear soiled by deliberately walking in the mud.”
I turn next to an article, in the same issue of the same learned quarterly, called “Is Price Control Really Necessary?” It is by Profs. Wytze Gorter and G.H. Hildebrand of the University of California at Los Angeles. “The duty of professional economists,” they declare, “is clear: to demonstrate once again the superiority of the price system over direct controls, even in the management of a preparedness economy.” And they proceed to advocate a pay-as-we-go system (which they call a “cash and carry fiscal-monetary policy”) with free prices and free markets, as “an alternative to the interminable queues, stamps, boards, and bureaucrats” of price control.
Exhibit C is a little 24-page pamphlet on Inflation, by F.A. Harper, just published by the Foundation for Economic Education. (Irvington-on-Hudson, N.Y. No charge for single copy.) I commend this for the simplicity and clarity with which it states the case against price control. Professor Harper begins by pointing out: “Inflation means too much money. The way to prevent inflation, is to close down the money factory. It is just that simple.” If it closes down the money factory, the government must live within its income. Inflation is a form of tax. When the government starts to appoint “inflation fighters” it is in effect illogically setting up a branch for the purpose of fighting the payment of the inflation-tax that it has assessed through another branch.
Price-ceiling laws, as Harper goes on to point out, were imposed at least as far back as 3,800 years ago in ancient Babylonia. They have always created shortages. Our memories are so short, however, that we have even forgotten the “meat famine” that price ceilings created in this country in 1946. Harper proceeds to give an elementary lesson on the way in which the free market price equalizes supply and demand and maximizes production and consumption, whereas arbitrarily fixed prices cause disequilibriums—distortions, surpluses, and shortages. “When the free market is allowed to operate and to set the price at a point where supply and demand will equate, each person will have purchase tickets in the market which correspond to the supply of something he puts into the market.”
In spite of the conclusiveness of the case against price control, the general ideological and political confusion is such that there is little practical hope that Congress will allow price control to terminate. But we can hope that it will at least put a light trigger on any renewal of its economic control legislation, that it will extend any control law for no more than a year, and retain the power to terminate even that at any time upon the vote of a simple majority of either House. Congress should not continue to be helpless against bureaucrats who issue nonsensical orders in the name of carrying out the will of Congress itself.
April 16, 1951
Congress can do most to curb inflation by granting the Administration and its agencies fewer control powers, not more.
Price control is not a remedy for inflation. It actually tends to increase and prolong inflation. It distorts and prevents production, and so brings about needless shortages. It diverts the attention of the general public from the real cause of inflation—the increase in money and credit.
It does not follow that the best way to combat inflation is to grant the Federal Reserve authorities more power over money and credit. On the contrary, a more effective step would be to deprive the Federal Reserve authorities of some of the powers they have been abusing for so many years.
Suppose, for example, that Congress deprived the Federal Reserve Banks of the power to buy more government securities. The Treasury would then be obliged to pay high enough interest rates to make its securities attractive to investors on their own merits. It could no longer force the Reserve Banks to peg the price of its bonds. In effect, the government would have to stop selling its bonds to itself. The Reserve system could no longer hold down interest rates artificially by monetizing government bonds.
If government agencies were no longer permitted to increase the supply of money and credit through this device, interest rates would rise. And permitting interest rates to rise—i.e., making credit more expensive—has been the traditional way of bringing inflation to a halt.
Simply permitting interest rates to rise might be enough to halt the present inflation. There are still the possibilities, however, (1) that member banks might increase their holdings of government securities and (2) that, in spite of higher interest rates, private credit might continue to expand. There are several ways in which such developments could be checked.
Further limitations might be put on the power of the member banks to increase their holdings of government securities. The Federal Reserve authorities might be empowered to raise member bank reserve requirements still further. But they should certainly not get this additional power unless it is accompanied by the obligation to increase the reserve requirements of the Federal Reserve Banks themselves. Their reserve requirement against combined liabilities, now only 25 percent, should be restored to the 35 to 40 percent level that existed before 1945. Such an action on the part of Congress would not only restrict further potential credit inflation but would create an immediate increase of confidence in the dollar. Congress should restore the old legal requirements before still further inflation has occurred. The combined reserve ratio of the Federal Reserve Banks is already down to 46.6 percent compared with 56.5 percent a year ago.
Raising legal reserve requirements is a relatively clumsy way of controlling credit. This supplementary device is necessary chiefly because the Federal Reserve authorities have not shown the courage to make full use of the powers they have always had—to increase the discount rate to a noninflationary level and, if necessary, to sell part of their holdings of government securities back to the market. Combined action of this sort could halt inflation overnight.
Just as Congress could do more to curb inflation by placing restrictions on the Federal Reserve authorities than by granting them further control powers, so it could do more by taking some powers from the Federal bureaucracy in general than by adding new ones. Above all, in a time of inflation Congress should discontinue subsidies to farmers, and the “parity” price nonsense, and reconsider all other legislation which arbitrarily forces up production costs.
The Federal Reserve authorities are always asking for more powers for the ostensible purpose of “combating inflation.” But they have in fact used the powers they have in order to create inflation. The way to halt inflation is not through controls by government but through controls on government.
April 23, 1951
On April 6, 7, and 8 I attended a conference on “the economics of mobilization” at White Sulphur Springs under the sponsorship of the University of Chicago Law School. There were some 70-odd participants, consisting of university professors of economics and law, representatives of labor, banking, and business, editors, members of Congress, government officials, former price control directors and the present Director of Price Stabilization, Michael V. DiSalle.
In view of the diversity of views expressed, DiSalle could hardly be blamed for remarking that “the experts are much more effective talking to nonexperts than they are talking to each other.” But the chief reason why this was so was that many of the professional economists present abandoned their function as economists in order to become amateur politicians. They did not talk of the economic consequences of price control but of its political popularity. They made no real answer to the argument of those who held that the only way to prevent further inflation is through proper monetary and fiscal policy, and that price-wage control not only fails strike at the root causes of inflation but impairs the general efficiency of the economy and even of the armament effort.
This contention, shared by most of those who came to the conference from the University of Chicago itself, will not be unfamiliar to the readers of this column. As pointed out at the conference, the country’s bank loans rose from May 31 to the end of 1950 by nearly 20 percent, while demand deposits increased more than 9 percent. It is this increase in money and bank credit that financed the rise of 11 percent in wholesale prices and of 6 percent in living costs.
What was most remarkable about the conference was not the political defense of existing price and wage controls but the number of those who condemned the whole policy not merely in details but in principle.
There was instructive discussion of some technical questions. Herbert Stein, for example, of the Committee for Economic Development, pointed out that even where such direct controls as priorities and allocations might be necessary, price controls would still be both unnecessary and undesirable.
As examples, Stein cited such industries as machine tools and steel. These are already working at capacity; they cannot make some deliveries for many months; and they customarily fill first the orders longest on the books. In place of such a “private rationing system,” Stein advocated government priorities and allocations to permit the quickest military deliveries.
Few persons, I believe, would venture to deny the need for this particular kind of priority in wartime or in a defense emergency. But there are several implications of this kind of control which are usually overlooked by those who are most insistent on it. It is not needed where prices have risen too much, but, as Stein points out, where prices haven’t risen “fast enough and far enough to . . . eliminate an excess of demand.” Price ceilings, so far from reducing the need for such priorities, simply make their need “more widespread and more persistent.” Such priorities are “a means of supplementing the allocating function of price where prices do not rise enough to do the whole job.”
This is the opposite of the doctrine usually voiced. It is recognized by most economists (though not yet, apparently, by our present price fixers) that price ceilings do not make sense without priorities, allocations, and rationing. But the converse is not true. Though price ceilings make allocations necessary, allocations do not make price ceilings necessary. On the contrary, they tend by themselves to hold down prices, by reducing demand. They work much easier without price ceilings than with them. For administrators are not then confronted with the impossible task of trying to solve all three determinants in the supply-demand-price equation simultaneously. In brief, though price ceilings cannot work long without rationing, rationing works better without price ceilings. Rationing helps price ceilings, but price ceilings thwart rationing.
April 30, 1951
Congressman Howard Buffett of Nebraska, one of the ablest members of the House Banking and Currency Committee, sent out a questionnaire on inflation and the gold standard to the nation’s bank presidents and bank chairmen. He sent out 16,748 letters in all, and got back 666 replies. These replies came from banks representing more than 20 percent of the nation’s bank deposits and showed a remarkable consensus.
There were four questions in all. No. 1 was: “Do you believe that price and wage fixing will effectively prevent inflation?” Only 7 percent of those answering the question said Yes; 93 percent said No.
Question No. 2 was: “Have you been able to find satisfactory evidence that Congress can resist spending pressures without the historical restraint of a currency redeemable in gold on demand?” Only 7 percent said Yes; 93 percent said No.
Question No. 3 was: “Do you believe expansion of the money supply can be effectively restrained when long-term government bonds are rigged at the 2½ percent level?” Only 9 percent said Yes; 91 percent said No.
Question No. 4 was: “Would you support the Reed bill, HR 324, to promptly reestablish redemption in gold of our currency at $35 an ounce? I was the introducer of this bill in the 80th Congress. (Copy attached.)” Seventy-three percent of those replying said Yes; 9 percent said in effect Yes but not now; 7 percent were undecided, and 10 percent said No.
Individual replies to the Buffett questionnaire were interesting for their comment. But the most interesting and encouraging, to my mind, came from outside the banking field—from Allan B. Kline, president of the American Farm Bureau Federation. He wrote in part:
“Nothing but disaster can result if we allow the delusion that price and wage ceilings can stop inflation to prevent the adoption of policies which actually will control inflation by bringing about (1) strict economy in government expenditures, (2) a pay-as-we-go tax program, (3) effective credit controls, and (4) a sound management of the public debt. . . .
“Fixing prices and wages would unquestionably reduce production. . . .
“In the present situation . . . we must cut nondefense program expenditures throughout the Federal budget. As an indication of our willingness to do this in agriculture, we are recommending that the authorization for a 1952 agricultural conservation program be reduced from the budget recommendation of $285 million to $150 million. . . .
“We aggressively oppose the extension of price and wage controls beyond the present expiration date of June 30, 1951, since these controls are diverting attention from the things which must be done if we are to have an effective program for the control of inflation.”
My own answers to the Buffett questionnaire would include a clear-cut No to questions No. 1 and No. 3. To question No. 2 I would reply that a currency redeemable in gold on demand is a necessary restraint on Congressional spending pressures but not in itself a sufficient one. To question No. 4, I would agree in principle with the purpose of the Reed bill, which is to return to a gold standard, but I would have reservations about the “promptly” and about the rate of $35 an ounce. The gold standard cannot be considered in isolation. We can restore and maintain it only as an integral part of an entire system of economic freedom, unhampered markets, solvency, prudence, and good faith. Finally, the conversion level at which we return to a full gold standard must take account of the tremendous American and foreign inflation and the rise in world prices since 1934.
But what is centrally important is to recognize that a return to reasonable monetary stability, an end to inflation, a resumption of freedom of world trade, an escape from bureaucratic arbitrariness and caprice, will be possible in the long run only with a return to a full gold standard. And it is heartening to find that there are still men in Congress with the vision to see this and the courage to fight for it.
May 7, 1951
The main reason we have inflation in this country today is that, by and large, we have asked for inflation.
It is amusing to hear politicians talk of inflation as if it were a visitation from without, in spite of our will, like a flood, a hurricane, an army of locusts, or the bubonic plague. The truth is that we could stop inflation, if we wanted to, overnight.
Not by price control, of course, which is an irrelevant and completely fraudulent remedy for inflation, favored by some groups precisely because it can never really be successful. The government can halt inflation by the simple process of ceasing to create inflation. All it has to do is to keep the budget balanced (as it is in the current fiscal year) and stop monetizing its existing debt by buying its own bonds through the Federal Reserve Banks. If it did this, interest rates would go up for the simple reason that they were no longer artificially held down. And higher interest rates would discourage the expansion of private credit.
These steps alone might prove to be enough. If they weren’t, then the Federal Reserve authorities could take the initiative in selling government securities, raising discount rates and raising legal reserve ratios. That’s all. The Federal Reserve authorities already have practically all the powers they need; what has been lacking is the will to use them.
Inflation is caused by an increase in the volume of money and bank credit in relation to the volume of goods. Halt this increase, and the fear of any future increase, and you halt inflation.
We hear predictions that if the Federal Reserve authorities used their existing powers to halt inflation all sorts of terrible things would happen. It is true that outstanding government securities, lacking an automatic buyer at an artificial price, would fall. But this problem could easily be taken care of by allowing long-term bonds to be converted into new bonds at a higher rate of interest. We also hear predictions that commodity prices would stop rising, and might even fall. But the people who complain of this are admitting that they prefer the certainty of more inflation to the risk of even a little deflation.
And this brings us to the heart of the problem. Ever since 1932 the world has been haunted by the specter of deflation. Rather than face up to even a touch of it, people have asked for greater and greater doses of inflation. Since the end of the second world war, whenever there has been even a slight sinking spell in prices, there has been a resumption or speeding up of inflation as the cure.
The farmers have demanded subsidies, support buying, “parity” prices. Industrialists have granted huge wage increases and then demanded inflation in order to pay them. Labor-union officials seem secretly to welcome continuous price advances because then they can demand, and get, a continuous series of wage increases—thus proving to the rank and file how necessary the union officials’ services are. Most of us still retain the delusion that under inflation we can gain more in our role as sellers and producers than we must lose in our role as buyers and consumers.
The pressure on the politicians to continue a policy of inflation is enormous. For the fetish of today is “full employment.” This can be achieved, for a time, by continuously adding to the supply of money and credit while holding down the consequent rise in prices and wages just enough to assure that demand is kept always a little in excess of supply. The scheme works only by a tremendous growth in state power and by progressively depriving the people of more and more economic liberty by imposing price and wage control, allocations, rationing, labor direction. In the end it breaks down anyway, by demoralization of the currency.
But it will clarify thought in the meanwhile if we recognize that we are getting into this policy of “repressed inflation” because this is the policy we have been asking for. When we seriously want a halt to inflation we can get it within 24 hours. True, any attempt to halt inflation brings the risk of some deflation. But to refuse that risk is to ask for more inflation.
May 14, 1951
The President’s message to Congress asking for extension and “strengthening” of the Defense Production Act is a very curious document, replete with passages that cannot be reconciled with each other.
At one point he even declared plainly: “Price and wage controls do not cure the basic cause of inflation—the inflationary gap between the supply of goods and the volume of buying power. The cure can come about only by closing the gap.” In other words, price and wage controls are not only irrelevant, but distract attention from the real cure for inflation.
Yet Mr. Truman nevertheless went on to insist on “stronger” price and wage controls. He even announced that government policy planned to permit or encourage the very “inflationary gap” that causes inflation. In the next two or three years, he said, there will be “more money available for people to spend” at the same time as there will be “much less civilian goods for people to buy.” This can only mean that while Mr. Truman talks bravely about taxing away surplus income, “paying for government expenditures as we go,” and tight credit restrictions, he does not seriously expect to adopt these programs.
There are other inconsistencies no less serious. In one breath he urges “holding the line on food prices.” In the next he praises the “parity principle,” which forces up food prices, as “the basis for our agricultural laws” and “the best guide we now have available to judge what is a fair return to farmers.” And then he seeks to conceal this contradiction by advocating food subsidies—apparently on the theory that if the American people are forced to pay part of the higher food prices as additions to their tax bill instead of to their grocer and butcher bills they will never notice it. The fiasco of England’s food subsidy program seems to hold no lessons for Mr. Truman except a yearning to imitate it.
Again, Mr. Truman continues to apply a double standard to price control and wage control. He asks for “ceilings” on prices and rents; but wages and salaries he merely wants to “stabilize.”
He urges everybody to invest again in U.S. savings bonds. “After the war,” he says, “those savings helped many a family.” He neglects to add that as a result of his own and his predecessor’s “inflationary gap” policies, which he proposes in the main to continue, those bonds have a much lower purchasing power than when they were bought. He is trying to get savings through exhortation while ignoring incentives.
If Congress is well advised, it will not give Mr. Truman the kind of Defense Production Act for which he now asks. It will allow the present wage-and price-fixing powers to lapse entirely, on the following grounds: (1) As even the President now concedes, they do not cure the basic cause of inflation. (2) They divert public attention away from the real cure. (3) The price regulations put into effect in January, as the President himself admits, “inevitably . . . froze all sorts of distortions and inequities into the price and wage structure.” (4) Our present price fixers have apparently learned nothing from the mistakes of OPA; their new meat-price-control orders threaten to bring on a meat famine paralleling that in the fall of 1946. (5) Even the best-intended price control unbalances and reduces production. (6) No political-minded administration can be trusted to refrain from using price-and wage-fixing powers to propitiate powerful voting groups and to make scapegoats out of weak ones.
(Example: If the “parity principle” is “the best guide” to what is “fair,” why apply it only to farmers? Why not to everybody? Yet no one has proposed to apply the parity principle to rents, say, as well as food prices.)
Mr. Truman wants the life of the new Defense Production Act extended for two years. But Congress could assure more careful executive compliance with the act by extending it only for one year, and by providing, in addition, that it could be terminated at any time even before then by a majority vote in either house.
May 21, 1951
At this moment Congress has a rare opportunity. The economic situation and political sentiment at last combine to make it possible to return to free markets—to get rid of both price ceilings and “parity” price supports at a single stroke.
The price-control program is heading into obvious absurdities and inconsistencies. The government is asking for subsidies and “parity” to put farm income and food prices up, and price ceilings to hold them down. It wants to put its foot on the gas and the brake at the same time. The result of that kind of driving, as it ought to have learned, is not to maintain an even rate of speed, but to stall the motor.
The public is becoming disillusioned with price control. So are special groups. Neither workers nor employers can understand wage ceilings that are riddled with exceptions, or escalator clauses for some and not for others. Meat producers and congressmen from cattle- raising states are appalled by the ineptitude of the beef-price “rollback” and predict that it will bring the same sort of beef shortage as in the fall of 1946.
The influential American Farm Bureau Federation is now opposing the continuance of price control in general, and not merely for farm products. This is something different from the tactics of those groups which have put themselves in the untenable position of demanding tight price control for what they have to buy, while vehemently opposing it or demanding loose standards, for what they have to sell.
Of course the OPS warns that without price control living costs may skyrocket. But Congress can prevent this by insisting on a balanced budget and an end to the credit expansion policies of the Treasury and the Federal Reserve System. This is the real remedy for inflation; price control is a fraudulent one.
Labor officials are right in fearing wage control. Farm groups are right in opposing price control. Price ceilings on farm products—whenever those ceilings are below free-market rates—chronically bring black markets or food shortages. In Yugoslavia and India today price ceilings have even brought famines, which are then blamed on “droughts” or “floods” or anything but government policy.
As a condition for granting relief from wage control and price control, Congress and the consumers have a right to demand a quid pro quo. They should remove not only the ceilings but the floors. Congress should not only allow wage control to lapse, but should repeal the Walsh-Healey Act. In addition, it might fix the minimum legal hourly overtime rate at $1.12½ (50 percent above the minimum straight-time rate of 75 cents) and leave higher overtime rates to be determined by collective bargaining.
As applied to agriculture, Congress should end the whole “parity” price formula. That formula constantly raises the food prices paid by city workers. It is a built- in “inflationary pressure.” It tries to freeze forever the price relationships that happened to prevail in a carefully selected five-year period nearly 40 years ago. If that formula is really sound it ought to be applied universally—to steel, aluminum, freight rates, rents, neckties, haircuts—in fact, to the price relationship of every commodity in 1910–14 to every other.
I cannot recall that any member of the farm bloc ever suggested this. In February of this year farm prices averaged 13 percent above even the parity level. This is another way of saying that industrial and other prices averaged 11 percent below the parity level. The farm bloc did not recommend correcting this inequity. “Parity” is a one-way street.
Of course the whole principle of freezing past price relationships is wrong, whether they happen to be the prices of 1910–14 or of June 24, 1950. We freeze the price structure merely at the cost of distorting the structure of production. The very function of free prices and free wages is to balance and synchronize production as among thousands of different commodities and services. Optimum employment and production need two-way freedom for wages and prices. Controls are no substitute for the graded incentives of the market.
May 28, 1951
The Administration has asked not merely for a two-year extension of the present Defense Production Act, but for a large increase of control powers. And no doubt many congressmen fear that if they do not grant these additional powers, they will be blamed for any further inflation on the ground that they failed to provide the “weapons” to “combat” it.
Yet if it wishes to frame a really effective law against inflation, Congress cannot permit itself to be intimidated. It should allow the present powers of price and wage control to expire entirely. Price and wage control is a fraudulent weapon against inflation. It merely distorts and reduces production.
Nor should Congress grant most of the additional powers for which the Administration now asks. If there were no price ceilings on food, then obviously there would be no excuse for the food subsidies that the Administration wants. Those subsidies would in any case serve no purpose except to conceal the real rise of food prices in an increased tax bill. Again, if other prices are not held down by government edict, there is less excuse for the differential subsidies, the “power to give special financial aid to high-cost producers,” for which the President has asked. Differential subsidies easily lend themselves to favoritism and abuse. With the example of the RFC before it, Congress should be slow to create more opportunities for influence and free mink coats.
Congress should also hesitate to grant a sweeping renewal of rent control. If it insists on imposing more rent control, it should be in the form of permitting no more than a 10 or 15 percent increase each year until rents have caught up with the average rise in other prices and costs since 1935–39.
Jess Larson, who was head of the War Assets Administration after the second world war, has told Congress to act “very hesitatingly” in granting the government the sweeping powers it asks for to build its own new defense plants. Disposing of government plants after the second world war, he points out, cost nearly $1,000,000,000 “just for overhead,” not counting the loss to the taxpayer on the sales themselves. It would not be too much to require the Administration to get specific Congressional approval for each plant it wanted to build.
All this does not mean that the whole Defense Production Act should simply be allowed to expire. Extension of some powers is needed. Even more, some explicit curbs are needed on existing government powers.
Congress should not merely remove ceilings on prices and wages; it should at the same time remove present legal floors on agricultural prices and discriminatory floors on wages (as represented, say, by the Walsh-Healey Act and the penalty overtime provisions in their present form). Congress should continue to authorize material allocations and priorities. These are more effective, in fact, when not accompanied by price and wage ceilings (see Business Tides, April 23).
Most important of all, Congress in the new law must strike at the real cause of inflation. It should: (1) Declare that the root cause of inflation has been the increase in the supply of money and credit, and that the government-bond-support policy of recent years has been inflationary because it has produced this increase in money and credit. (2) Declare that the Federal Reserve Board is not subordinate to the Treasury, and should not be forced to support government obligations issued by the Treasury at inadequate interest rates. (3) Restore the required legal reserve ratio of the Federal Reserve Banks against deposits and notes to at least 35 percent, and authorize the board to increase this reserve ratio even further. And if it permits the board to increase further the reserve ratios of member banks it should do so only on condition that the board orders at the same time a corresponding increase in the required reserve ratios of the Federal Reserve Banks themselves.
Congress can act to combat inflation only by forcing the Treasury and the Federal Reserve System to live up to the responsibilities they have shirked for the last ten years.
June 4, 1951
The Supreme Court has ruled that retailers are free to ignore “fair trade” agreements, designed to prevent price cutting, if they do not sign them. It is too early to say exactly what the practical result of this decision will be. Some lawyers contend that it in effect nullifies all the “fair trade” laws in 45 states. Others argue that it nullifies only the “non-signer” clause of state fairt-rade laws, and even this only as it applies to interstate, not intrastate, commerce. But while manufacturers are apparently still free to refuse to sell their products to a retailer who will not sign a fair-trade contract, many of them doubt the practicability of attempting to get a contract from every dealer.
The non-signer clause, in existing state fair-trade laws, provides that when a manufacturer has obtained the signature of even one retailer to a minimum-price agreement, all other retailers in the state are bound by it. According to the new Supreme Court decision, the Federal Tydings-Miller Act, which was previously thought to uphold the state fair-trade laws in full, simply permits an individual retailer and a distributor to fix a minimum retail price that would otherwise be illegal. “When they seek, however,” continues the six-man majority of the court, “to impose price fixing on persons who have not contracted or agreed to the scheme, the situation is vastly different. That is not price fixing by contract or agreement; that is price fixing by compulsion. . . . Contracts or agreements [the phrase used in the law] convey the idea of a cooperative arrangement, not a program whereby recalcitrants are dragged in by the heels and compelled to submit to price fixing.”
Whether or not this is a correct interpretation of the words of the Tydings-Miller Act or of Congressional intent, it is sound legal and economic principle. The chief valid argument in favor of price-maintenance laws is that government should permit freedom of contract and uphold voluntary agreements. But this argument cannot be applied in cases where no real contract or voluntary agreement exists.
Most of the other arguments in favor of price-maintenance laws are dubious. No doubt they make some things easier for the salesman for the manufacturer. The small retailer’s markup on the product is practically guaranteed; his larger or more efficient retail competitors, he is assured, cannot cut prices on him. But this also works the other way. The larger retailer may place a smaller order than otherwise because he cannot offer his customers any special price advantage. And the retailer who is overstocked or needs cash can’t cut his price to whatever level he thinks will move the goods.
The manufacturer’s real protection for his brand name lies in maintaining the quality of his product rather than in maintaining a uniform retail price for it. He is more likely to gain and keep consumer good will by trying to prevent retailers from selling his product at more than a “fair” markup than at less than one. And if the average price of his product is lowered by individual price cutters, he is likely to sell more of it rather than less.
It is often argued that price-maintenance laws, by protecting the small retailer, promote rather than prevent competition. This would no doubt apply to carefully drawn laws designed to curb clearly unfair practices—for example, against selling below actual cost with the deliberate intent of putting small competitors out of business in order to raise prices again later on. But that such practices are really frequent may be seriously doubted. In any case, preserving competition should not be identified merely with preserving inefficient competitors. Retailers exist for consumers, not consumers for retailers.
When we look at the problem from the standpoint of the interest of the consumer, we recognize that there is no merit in any law which tries to hold up prices arbitrarily merely to “help the small retailer.” Higher prices reduce consumption. Less consumption means less production, less employment, and lower living standards.
June 11, 1951
The Administration’s foreign giveaway program has grown by feeding on itself. The State Department wants to meet new foreign problems chiefly by handing out money because it has met past foreign problems chiefly by handing out money. It keeps changing the reasons for handouts but never the practice.
It now wants to spend $8,500,000,000 in the next fiscal year for foreign aid. Of this sum, $6,250,000,000 would be for “military” and $2,250,000,000 for “economic” assistance. Just why we must give away additional billions for “economic” aid is not clear. Even Mr. Truman admits: “The original goals of the Marshall Plan have been largely achieved.” Why, then, start setting up new goals? Italy’s index of industrial production is running about 30 percent above the prewar figure; the United Kingdom’s, 50 percent above; France’s, 40 percent above. Even if we grant the debatable proposition that it was the American taxpayer’s duty to restore Europe’s production to the prewar level, on what theory is it his duty to continue pouring in gift money now that European industrial production is well above the prewar level?
Similar questions may be raised about “military” aid. The North Atlantic Treaty, however desirable or even essential, was in itself an unprecedented and tremendous commitment. It is far from clear why we must take on the additional task of paying for part of the armament of practically all our Allies. This is an economic, not a military decision. It is for the military experts to say that a given Western European country needs so many tanks or planes. But it does not follow that we should turn all of them over as gifts. If a country buys them, it sends us other goods, military or civilian, in exchange—and so gives reality to the “mutual” part of “mutual aid.”
To give arms to Europe is to assume that Europe cannot afford to pay for these arms out of its own resources. This, to repeat, is a purely economic, not a military assumption; and there is no evidence to show that it is justified. Western Europe in 1951 is planning to spend only about 8 percent of its gross national product for armament compared with an American expenditure of about 15 percent. There is nothing to show that the sums we are giving to Europe for armament are not purely arbitrary in amount—or even that they are necessary at all.
The division, moreover, between “military” aid and “economic” aid is also in practice purely artificial. To give European governments $1,650,000,000 in “economic” aid is to relieve them of that burden. They can then spend that much more money on increased armaments without adding to the total they would otherwise have had to lay out. If, on the other hand, we give them $5,240,000,000 for “military” aid, then, unless their total rearmament budget is at least $5,240,000,000 more than it would otherwise have been, we have simply released all or part of their own funds for other kinds of expenditures. The only way we can be sure of protecting our gift funds against such a diversion is to dictate every item in the European budgets—which no one would seriously recommend.
What our foreign aid does, in effect (whether it is labeled “military” or “economic”) is to put heavier burdens on American taxpayers in order to relieve European taxpayers. And as every American is not richer than every European, “foreign aid” puts heavier burdens on many poorer U.S. taxpayers so that lighter burdens may be put on richer European taxpayers.
The politics of our foreign-aid program are as mystifying as the economics. Mr. Truman begins by telling us that the purpose of our handouts is to help the “free nations.” Now we find that these include the Communist dictatorship in Yugoslavia and the Fascist dictatorship in the Argentine. Most fantastic of all, Mr. Truman proposes to reward the Persians for seizing vital oil from the Atlantic Treaty nations by giving Iran still more money. If the present situation in Iran is not enough to puncture the iridescent bubble of the Point Four dream, is anything at all capable of waking the White House to realities?
June 18, 1951
As the June 30 deadline approaches, when the present price-and-wage control law is due to expire, the statements of the price controllers take on a note of desperation. Mr. Truman professes to fear “an unmanageable torrent of inflation”—which could, in fact, only be caused by his own fiscal and monetary policies. Eric Johnston, Economic Stabilization Administrator, declares that those who oppose the continuance of price and wage controls are led by special interests whose whole attitude is “damn the consumer, and full pockets ahead.” They are “grinding their own ax without thought for the welfare of anyone or anything else . . . at a time when men are dying in battle in Korea for a free way of life.”
It is sad to find Eric Johnston impugning the intelligence, motives, and patriotism of those who disagree with him. Nor does it seem wise for the advocates of price control, in their own interest, to put the argument on an ad hominem basis. Their own sincerity and disinterestedness are not altogether above question.
How seriously, for example, can we take Bill Green, president of the AFL, when he pleads for wage controls instead of free collective bargaining? “If price controls were scuttled,” he says, “wage stabilization would have to go and there would be no limit to the amount of wage increases unions could obtain from employers.” It is surely suspicious to find Bill Green worrying about how high wages might soar unless the government held them down with a firm hand. Some of us suspect that “wage inflation” would not be a very serious problem if the government itself refrained from inflating money and credit and stopped creating boards and “stabilization” formulas that force wage increases on employers.
It is not for nothing that the Wage Stabilization Board is beginning to be called the Wage Stimulation Board. It began by issuing a so-called “catchup” formula under which wages were “allowed” to go 10 percent over the Jan. 15, 1950, level. But what a government board once “allows”, it is taken to approve, sanction, and practically to direct. Then on April 25 Economic Stabilization Director Johnston approved a 6-cent-an-hour cost-of-living increase for nonoperating railway workers. This was 3½ cents above the 10 percent limit. On May 18 the WSB itself allowed a 9-cent-an-hour increase for packinghouse workers, which punched such a gaping hole in the ceiling that even the Board said: “We are fully aware that this decision looks in the direction of a new policy.”
Meanwhile the Board approved cost-of-living escalator contracts signed before Jan. 26, 1951. It has now unanimously approved automatic so-called “productivity increase” pay boosts in contracts signed before the same date. What sort of ceiling is it that is full of holes at the beginning and moves upward with every new major decision? And how long does the Board seriously think that it can use an arbitrary date to approve increases for some workers and withhold them from others? Already Eric Johnston wants to give wage increases to everybody to compensate for the rise in living costs since Jan. 15, 1950. Many labor leaders are willing to “accept” this fake wage control for their own groups in the hope of imposing real price control on others.
As for farm groups, they hardly know where they stand at the moment. A government that has already lost $276,000,000 (through the Commodity Credit Corp.) so far in this fiscal year, in its efforts to hold some farm prices up, is trying to roll meat prices down. It seems on the verge of duplicating the consequences of meat price control in 1946. On June 6, as a typical example, one of the “Big Four” packers slaughtered only one-tenth of its normal quantity of cattle at its Chicago plant because the cattle raisers and feeders would not offer any more at the government ceiling prices.
Even if price and wage control were put in the hands of economic geniuses and political saints it could not be made to work. It creates and intensifies shortages. But when it is cynically used as a political football, it becomes altogether intolerable.
June 25, 1951
Regardless of what Congress actually does before June 30, it is instructive to consider what a sensible anti-inflationary legislative program would be like if we could get it.
1—What is primarily needed is not more controls by the government but more controls on the government. It is government policy, and government policy alone, that creates hyperinflation. Inflation means an increase in the volume of money compared with the volume of goods. It is government policy that either permits, encourages, or directly produces such an increase.
2—The enormous increase in the volume of money and credit since 1939 has been directly caused by the policy of cheap money and government bond support followed by the Federal Reserve System. That policy should be definitively stopped by Congressional direction. And whether or not powers are given to the Federal Reserve to increase still further the required reserves of member banks, Congress should restore, at least to their pre-1945 level, the required reserves of the Federal Reserve Banks themselves. It is absurd to control the low-powered credit of installment buying and the medium-powered credit of member bank loans, while failing to put even normal restraints on the high- powered credit created by the Federal Reserve Banks.
3—Congress should insist that the Administration keep the Federal budget balanced. Budget deficits cause inflation by forcing an increase in the volume of money and credit. The budget should be kept balanced mainly, of course, by drastic slashes in unjustified expenditures rather than by still more burdensome taxation.
4—Price control should be dropped. It is a fake remedy for inflation. It creates and intensifies shortages. It prolongs inflation by diverting public attention from the real cure, which is simply for the government to stop printing more money. It leads to ever-widening government controls, which tend to stay long after the “emergency” which was the original excuse for them has passed. The controlled economies of Europe, and the permanence of rent control almost everywhere, are typical examples. The price controllers neither understand nor trust the workings of a free market.
5—The Administration’s priority and allocation powers, though they have so far been handled rather ineptly, should be continued. The controllers usually try to tie in price control with allocation powers. But while price control creates a need for rationing and allocation, the causation does not work the other way. Allocations work best without price control.
6—No good case has been made out for any of the additional powers asked for by the Administration. The proposed food subsidies, for example, would be merely a way of concealing real inflationary increases in costs by adding them to your tax bill instead of to your butcher or grocer bill. The only way the British Labour Government could keep the cost of meat subsidies from going up was to forbid British consumers to eat more than two mouthfuls meat per week. Where there is no price control, there is no excuse for a food subsidy.
7—There is no convincing case, either, for giving the government the blanket discretionary powers it has asked for to build its own “defense” plants. It has not proved that it cannot get private industry to build and operate such plants, and at a far lower cost than the government could. If there should turn out to be a real need for a few plants that private industry would not in fact build, the Administration could go to Congress for specific authorization to build each of those plants. If any project were alleged to be top secret, it could appear in a Congressional bill as project X4Y, but at least a few key members of the Military Affairs Committees should know what it is.
8—In the light of sad experience, any extension of controls should carry a double termination trigger. In no case should extension run for more than a year. In addition, the new law should be terminable at any time by a majority vote of either House of Congress. Congress should never make itself impotent to repeal emergency powers that are being abused or that have ceased to be needed.
July 2, 1951
Mr. Truman’s radio appeal of June 14 exposed more than ever the logical and factual weaknesses of the Administration’s case for price control.
“These people who say we should throw out price controls and rent controls,” the President said, “are all wrong. They are just as wrong now as they were back in 1946. They told us then that if we would just put an end to price controls, everything would be rosy and prices would stay right in line.”
Though prominent labor leaders and farm groups have been opposing the continuance of price-and-wage controls, Mr. Truman picked the National Association of Manufacturers to symbolize the whole opposition. “The NAM,” he said, “put full-page advertisements in the papers all over the country [in 1946] saying if we would just take off price controls, there would be plenty of things to buy at reasonable prices.”
The NAM did make the mistake of implying that if price controls were removed, the competition and increased production resulting would in themselves bring down prices. But what Mr. Truman has forgotten is that this mistake was not confined to the NAM. It was President Truman himself who, on Feb. 14, 1946, declared: “Production is our salvation. . . . Production will do away with the necessity for government controls.” And Chester Bowles, his price administrator, said four days later: “Production is the only answer to inflation.”
I recall these statements because I quoted and took issue with them in an article in The New York Times of Feb. 25, 1946. I pointed out then that such statements represented “at most only a half-truth. . . . For prices are determined not only from the side of supply, but from the side of demand. Demand is now far greater than it was before the war because money incomes are far greater. And money incomes are greater principally because the supply of money and bank credit has been almost tripled since the outbreak of the war. . . . The solution to the problem of high prices, in brief, is not production alone. It is the production of more goods combined with the cessation of production of more money and bank credit.”
Returning to the subject in The Times of May 6, 1946, I wrote: “Unless there is a radical change in our monetary and credit policy, the upward pressure on prices today seems likely to continue for at least several years. . . . The cure for the present inflation is a change in Federal fiscal and money policy, not constant renewals of price control.”
Prices in fact continued to go up, not because price control was taken off, but because the Administration continued to increase the supply of money and credit. At the end of April of this year, the total of demand and time bank deposits and currency outside of banks was $15,000,000,000 more than at the end of June 1946.
Mr. Truman, in his recent radio address, of course utterly ignored the fact that the upward pressure on prices today comes from his own Administration’s monetary and fiscal policies. And he went on to imply that those who, like himself, favored the price control, were inspired only by the loftiest patriotism, while those who opposed price control were merely “lobbyists,” who “placed private interests above the national interest.”
“After the representatives of the Administration testified in favor of a good, strong law,” he explained, “the
Congressional committees heard from 124 witnesses, representing all sorts of private organizations. And do you know how many of them came out for the bill? Twenty, just twenty.” Instead of concluding that this might indicate some possible weaknesses in the bill, or some real dangers to producers and production, Mr. Truman implied that the 104 opposing witnesses were all placing their “private interests above the national interest.”
Mr. Truman’s strange idea is that the only way to be a real friend of the consumer is to make things tough for the producer. But it is a little hard to see just how the consumer gains by measures that discourage production.
July 9, 1951
The International Monetary Fund was born in July 1944. One of its declared purposes was “to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign-exchange restrictions.” A few weeks ago it issued its second annual report on exchange restrictions. The report concluded that “despite the existing uncertainties and difficulties . . . many countries are in a position to undertake substantial removal of discrimination and relaxation of nondiscriminatory restrictions and to make significant progress toward convertibility.”
On the surface this conclusion sounds promising. Yet the full text of the report leaves one with no good reason to believe that progress toward monetary stability and removal of restrictions will be any greater in the next seven years than it has been in the last seven.
For the report is riddled with qualifications, loopholes, and exceptions. For example: “It is the view of the Fund that, if countries have favorable balance of payments conditions and are experiencing increases in their reserves providing a reasonable basis of exchange stability it is in their interest, and in that of the international community, to relax or remove restrictions unless such action would produce conditions justifying the intensification or reintroduction of those restrictions.”
More examples: “In certain cases, strategic considerations may well require the retention of control machinery, even if it is not required for financial reasons.” “The Fund recognizes that there are a number of countries still experiencing basic or structural balance of payments difficulties limiting their ability at this time to make progress toward the removal of restrictions.” “It must be recognized, however, that some countries pursuing substantial development plans may not be in a sufficiently strong balance of payments position to permit them to dispense with the selective application of controls.”
The sad truth is that the schizophrenia of the Fund—which makes it simultaneously both for and against exchange restrictions—was built into its very conception. In accordance with the theories of the late Lord Keynes, the Fund was established on the assumption that governments can print paper money and fix the value of their monetary unit by simple fiat; and that this rate both can and should be maintained by police coercion. Section 3 of the Articles of Agreement even provides that a member government must not permit exchange transactions to take place within its territory at rates which are different from the parity level.
Other Keynesian theories embodied in the Fund Agreement are that the maintenance of a nation’s monetary unit at parity by convertibility into gold on demand is an outworn, needless, or at best a permissible window-dressing requirement; and that the bureaucrats have the right to alter the exchange value of their nation’s monetary unit overnight—thus cheating both domestic and foreign holders of its currency at any time this seems to serve their government’s advantage.
Is it any wonder that the end product of these ideas has been increasing currency chaos, an endless series of inflations, a bewildering network of exchange controls which put domestic economies in a straitjacket and disrupt or strangle international trade? The managers of the Fund urge constantly and rightly that all currencies be made freely convertible. But they also want to retain exchange control. Now exchange control and free convertibility are irreconcilable. The way to get free convertibility of currencies is simply to stop prohibiting it—to stop price-fixing in currencies, to stop policing the rates, to stop seizing, licensing, and rationing exchange. But the Fund grants the central principle of exchange control and then deplores all the corollaries.
If we want not merely convertible but stable exchange rates—. Well, some day, somewhere, somebody, even in an official position, may triumphantly rediscover the gold standard.
July 16, 1951
The present outlook is for continued inflation and a bad “control” law, but not for the reasons assumed by Administration propaganda. The new law threatens to be bad not because it will give the Administration too few “weapons” to “fight inflation,” but because it will give it political weapons it ought not to have at all. And the Administration will still be free to follow inflationary policies.
Says Michael V. DiSalle, head of the Office of Price Stabilization, in fighting the ban against rollbacks: “If all you can do is grant increases, then necessarily your price level will be continuously higher.” If this is not a non sequitur, it must be because it implies: (1) that the Administration will continue to print more money to force prices up further; (2) that the OPS must grant requested increases; and (3) that the intention of the OPS was to grant wage and price increases to favored groups and then hold the index numbers level by forcing price reductions on unfavored groups.
Never before has price control been treated quite so openly and shamelessly in this country as a device for handing out political favors to some groups and penalizing others. A year ago Bernard Baruch recommended “an overall ceiling across the entire economy,” which would roll back all prices and wages to their level of June 25, 1950. This was economically unsound, but sincere and politically impartial. Among its implications were that everyone should be locked at precisely the income he was already receiving, and that relative profit incentives and deterrents should have been kept just where they were for “peace” production on the day before Korean hostilities broke out.
Hardly anyone seriously advocates this today. Now everyone talks of “correcting inequities.” But how do you determine precisely what constitutes an economic inequity? And how precisely do you measure the extent of the inequity? No one is seriously and openly proposing to legislate an absolute equality of incomes. No one, in fact, has even suggested consistent and coherent economic standards for measuring “inequities.” The standards applied in practice are not economic but political. Where the votes are, there the favors go.
Thus the so-called Wage Stabilization Board raises wages with practically every major decision. Eric Johnston, the Economic Stabilization Administrator, insists that “good reasons” have been shown for every exception that has been made in the so-called wage ceiling. The most favored class next to the wage earners are the farmers, but their political strength is spotty. Congressmen from the city districts want to hold down farm and food prices by edict; congressmen from the rural districts want to boost farm and food prices by “parity” formulas, support prices, and other edicts. Those who are least likely to get price-increase awards in Washington are the landlords and the manufacturing corporations.
What chiefly stands in the way of any serious effort to prevent further inflation is sheer economic illiteracy. It is this that has made it possible for the politicians to blame inflation on “the selfish private interests,” the “greedy sellers,” the “profiteers”—in short, on the producers of the country. The naïve faith in price fixing rests on a complete lack of understanding of the function of free markets and the function of relative prices, costs, profits and losses in directing, balancing, synchronizing, and maximizing production. Punitive price fixing pretends to benefit consumers by killing the incentives to production. It pretends to benefit workers by undermining the sources of their employment.
Meanwhile, in the whole hullabaloo about an “antiinflation” law, no attention whatever is being paid either by the price fixers or by Congress to the real cause of inflation, which is the government-created increase in the quantity of money and credit. Instead of putting curbs on the money factory—i.e., on the Federal Reserve System—Congress is having its attention diverted to a fraudulent cure for inflation, price fixing.
July 23, 1951
In its budget estimates for the fiscal year 1951 the Administration made a series of bad guesses. The President originally figured that the government would spend $42,400,000,000, take in $37,300,000,000, and end up with a deficit of $5,100,000,000.
This estimate was made in January 1950. Had Mr. Truman foreseen the outbreak of war in Korea that June, his deficit guess would probably have been even larger. Last January, after six months of actual fighting and mobilization, he turned in a revised estimate reducing the expected Federal deficit to $2,700,000,000. Less than three months later this was changed to an expected surplus of $2,900,000,000. When the fiscal year had actually closed on June 30 last, actual government expenditures had come to $44,700,000,000, receipts to $48,000,000,000, and the surplus to $3,300,000,000.
So in spite of an unexpected year of war, an estimated deficit of $5,100,000,000 became an actual surplus of $3,300,000,000. This was an error of $8,400,000,000—an amount greater than the total average annual expenditures for all purposes in the Roosevelt Administrations prior to the second world war. This huge error merely comes on top of a record of chronic bad guesses. The table below compares, for each year since 1934, the President’s estimates (in millions of dollars) of expenditures, receipts, and deficits for the following fiscal year with the realities of that year.
Even if we disregard the five war years, 1942 to 1946 inclusive, and the wartime year 1951, we find that in the remaining eleven peacetime years there was an average error of 20 percent in estimating expenditures, an average error of 13 percent in estimating revenues, and appalling errors and reversals in estimating surpluses and deficits. In short, a government that presumes to plan and forecast for everybody, cannot even estimate with reasonable accuracy what its own expenditures, revenues, and surplus or deficit are going to be. It cannot predict even its own action, and makes errors of a dimension that would bankrupt a private business in no time.
Fiscal Year |
Budget Estimate |
Reality |
Difference |
EXPENDITURES |
|||
| 1935 | $ 5,961 | $ 6,802 | + 14 |
| 1936 | 7,884 | 8,477 | + 8 |
| 1937 | 6,173 | 8,001 | + 30 |
| 1938 | 5,756 | 7,626 | + 32 |
| 1939 | 6,869 | 8,707 | + 27 |
| 1940 | 8,995 | 8,998 | . . . ..... |
| 1941 | 8,424 | 12,710 | + 51 |
| 1942 | 17,486 | 32,397 | + 85 |
| 1943 | 58,928 | 78,178 | + 32 |
| 1944 | 104,128 | 93,743 | - 10 |
| 1945 | 97,954 | 100,405 | + 2 |
| 1946 | 82,530 | 63,714 | - 23 |
| 1947 | 35,125 | 42,505 | + 21 |
| 1948 | 37,528 | 33,791 | - 10 |
| 1949 | 39,669 | 40,057 | + 1 |
| 1950 | 41,858 | 40,156 | - 4 |
| 1951 | 42,439 | 44,700 | + 5 |
RECEIPTS |
|||
| 1935 | $3,975 | $ 3,800 | - 4 |
| 1936 | 3,992 | 4,116 | + 3 |
| 1937 | 5,654 | 5,294 | - 6 |
| 1938 | 7,294 | 6,242 | - 14 |
| 1939 | 5,919 | 5,165 | - 13 |
| 1940 | 5,669 | 5,387 | - 5 |
| 1941 | 6,248 | 7,607 | + 22 |
| 1942 | 8,275 | 12,799 | + 55 |
| 1943 | 16,487 | 22,281 | + 35 |
| 1944 | 33,081 | 44,148 | + 33 |
| 1945 | 40,769 | 46,457 | + 14 |
| 1946 | 41,255 | 43,038 | + 4 |
| 1947 | 31,513 | 43,259 | + 37 |
| 1948 | 37,730 | 42,211 | + 12 |
| 1949 | 44,477 | 38,246 | - 14 |
| 1950 | 40,985 | 37,045 | - 10 |
| 1951 | 37,306 | 48,000 | + 29 |
Fiscal Year |
Budget Estimate |
Reality |
Difference |
| NET DEFICIT | |||
| 1935 | $ 1,986 | $ 3,002 | + 51 |
| 1936 | 3,892 | 4,361 | + 12 |
| 1937 | 519 | 2,707 | + 422 |
| 1938 | 1,538 sur. | 1,384 def | . . . ..... |
| 1939 | 950 | 3,542 | + 273 |
| 1940 | 3,326 | 3,611 | + 9 |
| 1941 | 2,176 | 5,103 | + 135 |
| 1942 | 9,211 | 19,598 | + 113 |
| 1943 | 42,441 | 55,897 | + 32 |
| 1944 | 71,047 | 49,595 | - 30 |
| 1945 | 57,185 | 53,948 | - 6 |
| 1946 | 41,530 | 20,676 | - 50 |
| 1947 | 3,612 def. | 754 sur. | . . . ..... |
| 1948 | 202 sur. | 8,419 sur. | + 4,068 |
| 1949 | 4,808 sur. | 1,811 def | . . . ..... |
| 1950 | 873 | 3,111 | + 256 |
| 1951 | 5,133 def. | 3,300 sur. | . . . ..... |
July 30, 1951
In 1901, the Iranian Government granted, on terms and for a consideration that must have been satisfactory at the time, a concession to what is now the Anglo-Iranian Oil Co. In 1933, Iran granted the company another 60-year concession under which the government got a greatly increased share of profits. A few months ago the Iranian Government repudiated its contract and seized the properties of the company, including its huge installations. The company’s value is estimated at $600,000,000 to $1,000,000,000.
In the wicked nineteenth century the British Government would probably have sent warships and troops immediately to Iran to protect the lives and property of British citizens. Such action is now universally condemned as “imperialism.” So the British, after delays and vacillation, submitted the dispute to the International Court of Justice at The Hague. When the British got a verdict substantially in their favor, however, the Iranians denounced the court and rejected its decision.
What happens now? How does the International Court enforce a decision when a country spurns it? Through the United Nations? Is it likely that the U.N. would order international troops to protect British property? Would any nation besides Britain actually send troops for that purpose? And would not the fatal delays involved in the whole process in fact decide the issue against Britain?
So far as we can see at the moment, the actual result of present procedure is that Britain and the Atlantic Pact nations have lost a vital source of war—strategic oil. Worse, the probabilities seem high that, in one way or another, Iran’s oil will now fall under the control of the Kremlin before a year has passed. Stalin will have won another great bloodless victory—bloodless, at least, for the Russians.
The course of our own government in this affair has been peculiar. After the irresponsible Mossadegh had rejected the Hague Court’s decision, President Truman sent him an astonishing message. In it he wrote: “You know of our sympathetic interest in this country in Iran’s desire to control its natural resources. From this point of view we were happy to see the British Government has on its part accepted the principle of nationalization.”
This seems to support the Iranian contention that a government is entitled to sell a concession, invite foreign capital in, then repudiate its contract and seize the capital. It clearly supports the “principle of nationalization”—i.e., the principle of government seizure, ownership, and management, the principle of socialism. And through the Export-Import Bank Mr. Truman has offered the Iranian Government $25,000,000 to reward its expropriation and to finance its socialistic planning.
In the old days before the Export-Import Bank, ECA, and Point Four, the governments of economically “underdeveloped” countries, like Iran, before joyfully seizing the foreign investments already made there, would have had to reckon with the consequence of an immediate halt to any further significant investment from abroad. But today they can get American Government funds by a simple form of political blackmail. They need merely threaten to seize Western investments, or to bring about a famine by bad policies, or to go Communist, or not to like us.
As long as they have such easy ways of getting money, such governments need not and will not bother to set their economic house in order. They need not fear the usual consequences of breach of faith. Point Four is based on the assumption that what the “backward areas” chiefly need is technical advice. What they really need is internal political stability, order, and good faith, and the adoption of policies calculated to attract the confidence rather than distrust of domestic as well as foreign private capital. That is why our government foreign give-away and lend-loose programs do not in fact tend to increase world production. On net balance they retard world production and the rise of living standards.
August 6, 1951
Nothing in recent years has more clearly signaled the imminent danger to our whole system of private competitive enterprise than a few passages in the President’s Midyear Economic Report to Congress.
Mr. Truman assumed the tone of a high authority on economics lecturing to a Congress that would be irresponsible and unpatriotic if it did not adopt without criticism, change, or delay all of the “sound and strong” legislation that he himself is recommending. Yet on Nov. 9, 1946, it was Mr. Truman (as the Mansfield, Ohio, News-Journal reminds us) who said: “The law of supply and demand, operating in the market place will, from now on, serve the people better than would continued regulation of prices by the government. . . . Accordingly I have directed immediate abandonment of all controls over wages, salaries, and prices.” Whereas on June 14 of this year he declared: “These people who say we should throw out price controls and rent controls are wrong. They are just as wrong now as they were back in 1946.”
What is most serious in Mr. Truman’s economic report, however, is his proposal for government control of all business profits through discretionary price control. “As a general rule,” he declared, “price increases should not be approved, even where some costs have risen, if the industry is earning a fair and equitable level of profits.” He added: “Some rollbacks will be needed in selected cases, for example, where prices or profits are excessively high.”
Though he himself once failed to make a success of a haberdashery business, Mr. Truman now seems to have taken over the naïve assumption of many labor leaders and bureaucrats that profits are something that occur automatically, and that the chief task of government is to prevent them from becoming “excessive.” This ignores the whole way in which a free market and a competitive system work. Profits are never automatic, never guaranteed, and never uniform. The rate of profit is different for every firm, even within the same industry. In 1947, the latest year for which statistics are available, 169,000 active corporations reported a loss compared with 382,000 that showed a profit.
And the margin of profit does not depend merely on luck. It depends on whether an enterpriser is making a product that consumers really want, and on whether he is making a better or worse product, or making it more efficiently or less, than his competitors. Present and prospective relative profits (and losses) are, in fact, the great guides to production. They determine what commodities and services are produced, exactly how much of each of these thousands of different commodities and services is produced, and how it is produced. The differences between profit margins are both the measure of, and the constant spur to, economy and efficiency. To impose on all firms some bureaucrat’s idea of a uniform “fair” profit would be to destroy the whole complex and delicate mechanism of incentives and deterrents which determines the ever-changing balance of production in a private competition system. It would force the substitution of a totalitarian system as crude and clumsy as it would be intolerable.
The President still does not realize that the real cause of inflation is the increase in money and credit brought about by his own policies. He even rebukes the Federal Reserve System for its timid efforts to halt this increase. “General credit measures,” he says, “do not discriminate between activities which should be supported, and those which need to be restrained.”
The implication of this is that Mr. Truman’s political appointees, and not the consumers of the country, should have the right to say what production is good and what is bad, what should be subsidized at the taxpayer’s expense, and what should be forbidden. This would be still another way, even more direct than profit control, to give the government life-or-death powers over every firm and business. It would be a long step down the road to economic serfdom.
August 13, 1951
After his outburst at Detroit, denouncing all criticisms of his policies as “smears,” “slander,” and “lies” from “doubters and defeatists,” neither the tone nor content of Mr. Truman’s statement on signing the new economic controls legislation came as any surprise. It was a purely political document designed to throw the entire blame for any further inflation onto the Republicans in Congress. Take, for example, his comment on the Capehart amendment. “This complicated amendment will force price ceilings up on thousands of commodities, clear across the board. It is like a bulldozer, crashing aimlessly through existing pricing formulas, leaving havoc in its wake.” This violent simile was apparently considered a complete substitute for bothering to tell the American people what the Capehart amendment actually provides. It is simply intended to prevent the OPS from fixing price ceilings that would deprive retailers and wholesalers of at least their “customary percentage margin of profit” in the month before the Korean war.
If we accept the premises of price control, it might be argued that this amendment is “inflationary” in the sense that it permits a customary percentage mark-up rather than merely a customary dollars-and-cents markup. But this argument is not consistently open to those who, like the President, have supported the cost-of-living escalator clauses in wage contracts.
The new Defense Production Act is really a very bad law, as Mr. Truman insists. But it is bad, in the main, for precisely the opposite reasons from the ones he gives. It is bad not because it has failed to impose price and wage controls that are sufficiently “strong” or “tough,” but because it continues the flagrant fraud of price and wage control. It cannot be repeated too often that price control is not a cure for inflation. It regiments the economy and ties it in red tape. It inevitably has consequences which provoke demands for more and more controls and lead toward economic totalitarianism. It actually prolongs and intensifies inflation because it unbalances production and causes shortages—and above all because it diverts public attention away from the only real cause of inflation, which is the increase of money and credit.
In the whole course of the debate on the new law the only genuine anti-inflation amendment that got to a vote was that offered by Rep. Jesse P. Walcott of Michigan. This declared: It is the further intention of the Congress that none of the powers contained in this act . . . with respect to the stabilization of prices and wages, shall be used unless other indirect means of effectuating such controls and stabilization presently provided in other acts for use by the Secretary of Treasury and the Federal Reserve Board have been utilized. . . .” This merely expressed the intention of Congress that in addition to using the fraudulent “anti-inflation” measure of price control, government agencies should also use the genuine anti-inflation measures involved in raising discount rates, tightening bank reserves, and in ceasing to monetize the government debt.
But this amendment, the only test of sincere and intelligent anti-inflation sentiment in Congress, was turned down, on almost straight party lines, by a vote of 169 to 149.
And yet there is not an economist worthy of the name who does not know that the basic cause of inflation always and everywhere is an increase in the volume of money and credit. Every congressman, not to speak of Messrs. Truman, DiSalle, and Johnston, would do well to read the Federal Reserve Bulletin for July. “Monetary expansion,” it begins, “which had been at a very rapid rate in the last half of 1950, was interrupted in the first half of 1951.” It is this change, and not any miracle of price control, which slowed down the previous violent rise of wholesale prices. Where these had gone from an index number of 157.3 in June of 1950 to 180.1 in January of this year, they had actually dropped back to 177.9 by the week ended July 31 last.
August 20, 1951
On Aug. 3 the Wage Stabilization Board made a recklessly inflationary decision. All wage earners within its jurisdiction are to be allowed to obtain cost-of-living escalator wage increases it “voluntarily” negotiated.
The board showed not the slightest awareness of the disastrous consequences of parallel decisions in Austria and Germany in the ’20s. “Those who have forgotten the past,” as Santayana has reminded us, “are condemned to repeat it.”
Anyone interested in the facts can find them in a book by the Italian economist Costantino Bresciani-Turroni, published in Italy in 1931 and in an English edition, under the title The Economics of Inflation, in 1937 (London: Allen and Unwin). “It was observed in Austria as well as in Germany,” writes Bresciani-Turroni, “that the inflation proceeded with quickened pace especially after the workers had obtained money wages which varied with the index number of the cost of living.” This is an understatement. The system of fixing wages on a cost-of-living index became general in the summer of 1923. The cost-of-living index number in Germany rose from 3,816 in May of 1923 to 7,650 in June, 37,651 in July, 586,045 in August, 15,000,000 in September. . . .
This consequence was not merely coincidental. As I wrote (Newsweek, June 7, 1948) when the General Motors wage settlement was first announced which established the “cost-of-living adjustment” as a precedent here: “We must remember that the consumers’ price index represents an average of many different prices. If companies whose products have risen in price much less than the average were nonetheless compelled to pay wage increases equal to the average, they would either be forced out of business or forced to raise prices. If the price index were thus forced up, this would of course in turn require still further upward cost-of-living wage adjustments.”
George W. Taylor, chairman of the Wage Stabilization Board, has tried to defend the new decision by saying: “If prices are stabilized there will be very little movement in wage rates under our cost-of-living resolution.” This has surface plausibility, but it is not true. If each particular wage is allowed to catch up with the existing average percentage rise in wages or in prices generally, then the average wage itself must go up.
This points to the fallacy in all the so-called “catchup” wage formulas. They force an increase in production costs of goods that have hitherto not had the average price rise; hence they lead to demands for price relief. They force firms to borrow more money at the banks to meet increased payrolls. This increases the money-and-credit supply. Increased money in the hands of workers bids for a reduced volume of civilian goods. The increases thus forced in the price of goods become in turn the cause under the escalator provision for still further increases in wages—and so ad infinitum.
The attempt is already being made to argue that this universalized escalator clause was made necessary in wages to compensate for the action of Congress in allowing price increases to meet increased costs under the Capehart amendment. This defense puts Capehart before the horse. Congress passed the amendment because it was convinced that wages were not going to be stabilized anyway. It felt that increased wage costs must therefore be permitted to come through in prices. Continuance of existing wage escalator clauses had already been sanctioned by Eric Johnston months before the Defense Production Act came up for renewal. Every realist recognized that this discrimination as between different labor groups could not and would not be long maintained.
But Congress made the wrong response. Instead of insisting on catch-up price-fixing to match catch-up wage-boosting, Congress should have allowed price- and wage-fixing powers to expire altogether, and concentrated on the only real cure of inflation, which was to pass laws designed to halt the further increase in money and credit.
August 27, 1951
The renewed Defense Production Act, with its emphasis on price control, is a fraudulent remedy for inflation. The only genuine anti-inflation proposal that even got to a vote in connection with it was the amendment offered by Rep. Jesse P. Wolcott. This amendment—which would have put pressure on the Treasury and Federal Reserve Board to start using the real anti-inflationary powers that they have long possessed—was defeated by virtually a straight party vote. In the Senate the matter was never even brought up. As a result we now have on the books a so-called anti-inflation measure unmarred by a single clause calculated to halt inflation.
There is only one way to stop inflation. That is to stop the further increase in the supply of money and credit. Congress has not only the right to regulate money and credit, but the clear constitutional duty to do so. One of the enumerated powers of Congress (not of the President) is “to coin money” and “regulate the value thereof.”
Now the value of our present money is not stable—precisely because Congress has neglected its clear duty. It has delegated excessive discretionary powers to the executive and to his appointed officials, and it has done this at the request of these officials.
The original Federal Reserve Act provided that the Federal Reserve Banks must hold a reserve in gold and lawful money of 35 percent against deposits and 40 percent against notes. On June 12, 1945, under the plea of the Federal Reserve authorities that further inflation might be necessary, Congress reduced the required legal reserves of the Federal Reserve Banks to only 25 percent against deposit and note liabilities combined. Germany had already surrendered a month before. Hostilities against Japan ended less than three months later. Yet the Federal Reserve authorities have never requested that the former Federal Reserve ratios be restored, and Congress has never restored them. The duty of Congress is plain. It must restore the required legal reserves of the Federal Reserve Banks to their former level. It must do this whether or not the Federal Reserve authorities request it or even if they actively combat it; for there is almost no case on record in which a Federal agency has asked for limitations on its own powers or discretion. In fact, because of the Administration’s present irresponsible course, it is desirable that Congress:
1—Restore the minimum legal reserve ratio of the Federal Reserve Banks from the present 25 percent to at least 35 percent against combined deposit and note liabilities.
2—Authorize the Federal Reserve Board to raise the legal reserve requirement to 40 percent—and even (as an emergency measure) as high as the actual reserve ratio existing at the time of the Board order. Such a power would make the Federal Reserve Board itself clearly responsible for any further failure to halt inflation. And it would provide a conclusive answer to those who have been opposing a restoration of the former Federal Reserve Bank legal reserve requirements on the incredibly confused ground that even this restoration would still allow further inflation. Of course it would; but it would allow far less further inflation than the present legal requirement. And if Congress in addition empowered the Board to raise the legal reserve ratio of the Federal Reserve Banks as high as their actual reserve ratio at the time of the order, then the responsibility for further inflation would be clearly upon the Board.
3—Authorize the Reserve authorities to raise the legal reserve requirements of member banks as high as their already existing reserve ratios. But only if (a) reserve requirements of the Federal Reserve Banks have already been raised to at least 40 percent and (b) if Reserve Bank required ratios have also been frozen where they are. In short, the Federal Reserve authorities should no longer be permitted to exempt their own goose while they tie up the other fellow’s gander. Especially as new Federal Reserve credit is the reserve basis for new member-bank credit, and hence many times as inflationary.
September 3, 1951
No subject is so much discussed today—or so little understood—as inflation. The politicians in Washington talk of it as if it were some horrible visitation from without, over which they had no control—like a flood, a foreign invasion, or a plague. It is something they are always promising to “fight”—if Congress or the people will only give them the “weapons” or “a strong law” to do the job.
Yet the plain truth is that our political leaders have brought on inflation by their own money and fiscal policies. They are promising to fight with their right hand the conditions they have brought on with their left.
Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. If you turn to the recent American College Dictionary, for example, you will find the first definition of inflation given as follows: “Undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie.”
In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary: “A substantial rise of prices caused by an undue expansion in paper money or bank credit.” Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word “inflation” with these two quite different meanings leads to endless confusion.
The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it.
Let us see what happens under inflation, and why it happens. When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase—or does not increase as much as the supply of money—then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A “price” is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.
In the old days, governments inflated by clipping and debasing the coinage. Then they found they could inflate cheaper and faster simply by grinding out paper money on a printing press. This is what happened with the French assignats in 1789, and with our own currency during the Revolutionary War. Today the method is a little more indirect. Our government sells its bonds or other IOU’s to the banks. In payment, the banks create “deposits” on their books against which the government can draw. A bank in turn may sell its government IOU’s to the Federal Reserve Bank, which pays for them either by creating a deposit credit or having more Federal Reserve notes printed and paying them out. This is how money is manufactured.
The greater part of the “money supply” of this country is represented not by hand-to-hand currency but by bank deposits which are drawn against by checks. Hence when most economists measure our money supply they add demand deposits (and now usually, also, time deposits) to currency outside of banks to get the total. The total of money and credit so measured was $64,099,000,000 at the end of December 1939, and $174,200,000,000 at the end of June this year. This increase of 171 percent in the supply of money is overwhelmingly the main reason why wholesale prices rose 135 percent from 1939 to June of this year.
September 10, 1951
It is often argued that to attribute inflation solely to an increase in the volume of money is “oversimplification.” This is true. Many qualifications have to be kept in mind.
For example, the “money supply” must be thought of as including not only the supply of hand-to-hand currency, but the supply of bank credit—especially in the U.S., where most payments are made by check. And it is an oversimplification to say that the value of an individual dollar depends simply on the present supply of dollars outstanding. It depends also on the expected future supply of dollars. If most people fear, for example, that the supply of dollars is going to be even greater a year from now than at present, then the present value of the dollar (as measured by its purchasing power) will be lower than the present quantity of dollars would otherwise warrant.
Again, the value of any monetary unit such as the dollar, depends not merely on the quantity of dollars but on their quality. When a country goes off the gold standard, for example, it means in effect that gold, or the right to get gold, has suddenly turned into mere paper. The value of the monetary unit therefore usually falls immediately, even if there has not yet been any increase in the quantity of money. This is because the people have more faith in gold than they have in the promises or judgment of the government’s monetary managers. There is hardly a case on record, in fact, in which departure from the gold standard has not soon been followed by a further increase in bank credit and in printing-press money.
In short, the value of money varies for basically the same reasons as the value of any commodity. Just as the value of a bushel of wheat depends not only on the total present supply of wheat but on the expected future supply and on the quality of the wheat so the value of a dollar depends on a similar variety of considerations. The value of money, like the value of goods, is not determined by merely mechanical or physical relationships, but primarily by psychological factors, which may often be quite complicated.
In dealing with the causes and cure of inflation, it is one thing to keep in mind real complications; it is quite another to be confused or misled by needless or nonexistent complications. For example, it is frequently said that the value of the dollar depends not merely on the quantity of dollars but on their “velocity of circulation.” Increased “velocity of circulation,” however, is not a cause of a further fall in the value of the dollar; it is itself one of the consequences of the fear that the value of the dollar is going to fall. (Or, to put it the other way round, of the belief that the price of goods is going to rise.) It is this belief that makes people more eager to exchange dollars for goods. The emphasis by some writers on “velocity of circulation” is just another example of the error of substituting dubious mechanical for real psychological reasons.
Another blind alley: in answer to those who point out that inflation is primarily caused by an increase in money and credit, it is contended that the increase in commodity prices often occurs before the increase in the money supply. This is true. This is what happened immediately after the outbreak of war in Korea. Strategic raw materials began to go up in price on the fear that they were going to be scarce. Speculators and manufacturers began to buy them to hold for profit or protective inventories. But to do this they had to borrow more money from the banks. The rise in prices was accompanied by an equally marked rise in bank loans and deposits. From May 31, 1950, to May 30, 1951, the loans of the country’s banks increased by $12,000,000,000. If these increased loans had not been made, and new money (some $6,000,000,000 by the end of January 1951) had not been issued against the loans, the rise in prices could not have been sustained. The price rise was made possible, in short, only by an increased supply of money.
September 17, 1951
One of the most stubborn fallacies about inflation is the assumption that it is caused, not by an increase in the quantity of money, but by a “shortage of goods.”
It is true that a rise in prices (which, as we have seen, should not be identified with inflation) can be caused either by an increase in the quantity of money or by a shortage of goods—or partly by both. Wheat, for example, may rise in price either because there is an increase in the supply of money or a failure of the wheat crop. But we seldom find, even in conditions of total war, a general rise of prices caused by a general shortage of goods. Yet so stubborn is the fallacy that inflation is caused by a “shortage of goods,” that even in the Germany of 1923, after prices had soared hundreds of billions of times, high officials and millions of Germans were blaming the whole thing on a general “shortage of goods”—at the very moment when foreigners were coming in and buying German goods with gold or their own currencies at prices lower than those of equivalent goods at home.
The rise of prices in the United States since 1939, or since the outbreak of war in Korea, is constantly being attributed to a “shortage of goods.” Yet official statistics show that our rate of industrial production in June of this year, for example, was two and a quarter times as much as from 1935 to 1939, and 12 percent higher than in June of 1950. Nor is it any better explanation to say that the rise in prices is caused by a shortage in civilian goods. Even to the extent that civilian goods were really short, the shortage would not cause a rise in prices if taxes took away as large a percentage of civilian income as rearmament took of civilian goods.
This brings us to another source of confusion. People frequently talk as if a budget deficit were in itself both a necessary and a sufficient cause of inflation. A budget deficit, however, if fully financed by the sale of government bonds paid for out of real savings, need not cause inflation. And even a budget surplus, on the other hand, is not an assurance against inflation. This was shown in the fiscal year ended June 30, when there was substantial inflation in spite of a budget surplus of $3,500,000,000. A budget deficit, in short, is inflationary only to the extent that it causes an increase in the money supply. And inflation can occur even with a budget surplus if there is an increase in the money supply notwithstanding.
The same chain of causation applies to all the so-called “inflationary pressures”—particularly the so-called “wage-price spiral.” If it were not preceded, accompanied, or quickly followed by an increase in the supply of money, an increase in wages above the “equilibrium level” would not cause inflation; it would merely cause unemployment. And an increase in prices without an increase of cash in people’s pockets would merely cause a falling off in sales. Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply.
The accompanying chart compares the percentage increase in the money supply (currency plus bank deposits) since 1939 with the rise in wholesale prices and in the cost of living during the same period. The correlation is obvious—though the factors involved are too complex to expect it to be exact. The chief reason why prices have not increased as much as the money supply is that the production rate of goods has also greatly increased since 1939.
A warning must also be given concerning the accuracy of the two price indexes themselves. They show apparent stability from the end of 1942 to the middle of 1946, and a sharp rise then when price control was taken off. But this is chiefly because official price and cost-of-living indexes tend to become fictional under price control. They do not measure the realities of black market prices, shortages, rationing, queues, favoritism, deterioration of quality and non-existent goods. When price control is taken off, the government’s increase of the money supply has its full effect on the official price indexes.
September 24, 1951
As long as we are plagued by false theories of what causes inflation, we will be plagued by false remedies. Those who ascribe inflation primarily to a “shortage of goods,” for example, are fond of saying that “the answer to inflation is production.” But this is at best a half-truth. It is impossible to bring prices down by increasing production if the money supply is being increased even faster.
The worst of all false remedies for inflation is price fixing and wage fixing. For if more money is put into circulation, while prices are held down, most people will be left with unused cash balances seeking goods. The final result, barring a like increase in production, must be higher prices.
There are broadly two kinds of price fixing—“selective” and “overall.” With selective price fixing the government tries to hold the prices merely of a few strategic war materials or a few necessaries of life. But then the profit margin in producing these things becomes lower than the profit margin in producing other things, including luxuries. So “selective” price fixing quickly brings about a shortage of the very things whose production the government is most eager to encourage. Then bureaucrats turn to the specious idea of an overall freeze. They talk of holding or returning to the prices and wages that existed on the day before war broke out in Korea. But the price level and infinitely complex price and wage interrelationships of that day were the result of the state of supply and demand on that day. And supply and demand seldom remain the same, even for the same commodity, for two days running, even without major changes in the money supply.
It has been moderately estimated that there are some 9,000,000 different prices in the United States. On this basis we begin with more than 40 trillion interrelationships of these prices. And a change in one price always has repercussions on a whole network of other prices. The prices and price relationships of June 24, 1950, were presumably those roughly calculated to encourage a maximum balanced production of peace time goods. They are obviously the wrong prices and price relationships to encourage the maximum production of war goods. Moreover, the price pattern of a given day always embodies many misjudgments and “inequities.” No single mind, and no bureaucracy, has wisdom and knowledge enough to correct these. Every time a bureaucrat tries to correct one price or wage maladjustment or “inequity” he creates a score of new ones. And there is no precise standard for measuring the economic “inequities” of a particular case that any two people seem able to agree on. Coercive price fixing would be an insoluble problem, in short, even if those in charge of it were the best-informed economists, statisticians, and businessmen in the country, and even if they acted with the most conscientious impartiality. But they are subjected in fact to tremendous pressure by the organized pressure groups. Those in power soon find that price and wage control is a tremendous weapon with which to curry political favor or to punish opposition. That is why “parity” formulas are applied to farm prices and escalator clauses to wage rates, while industrial prices and rents are penalized.
Another evil of price control is that, though it is always put into effect in the name of an alleged “emergency,” it creates powerful vested interests and habits of mind which prolong it or tend to make it permanent. Outstanding examples of this are rent control and exchange control. Price control is the major step toward a fully regimented or “planned” economy. It causes people to regard it as a matter of course that the government should intervene in every economic transaction.
But finally, and worst of all from the standpoint of inflation, price control diverts attention away from the only real cause of inflation—the increase in the quantity of money and credit. Hence it prolongs and intensifies the very inflation it was ostensibly designed to cure.
October 1, 1951
The cure for inflation, like most cures, consists chiefly in the removal of the cause. The cause of inflation is the increase of money and credit. The cure is to stop increasing money and credit. The cure for inflation, in brief, is to stop inflating. It is as simple as that.
But while simple in principle, this cure often involves complex and disagreeable decisions on detail. Let us begin with the Federal budget. It is next to impossible to avoid inflation with a continuing heavy deficit. That deficit is almost certain to be financed by inflationary means—that is, by directly or indirectly printing more money. Huge government expenditures are not in themselves inflationary—provided they are made wholly out of tax receipts, or out of borrowing paid for wholly out of real savings. But the difficulties in either of these methods of payment, once expenditures have passed a certain point, are so great that there is almost inevitably a resort to the printing press.
Moreover, though huge expenditures wholly met out of huge taxes are not necessarily inflationary, they inevitably reduce and disrupt production, and undermine any free enterprise system. The remedy for huge governmental [deficits] is therefore not equally huge taxes, but a halt to reckless spending.
On the monetary side, the Treasury and the Federal Reserve System must stop creating artificially cheap money. That is, they must stop arbitrarily holding down interest rates. And they must stop buying at par the government’s own bonds. When interest rates are held artificially low, they encourage an increase in borrowing. This leads to an increase in the money and credit supply. The process works both ways—for it is necessary to increase the money and credit supply in order to keep interest rates artificially low. That is why the “cheap money” policy and the government-bond-support policy are simply two ways of describing the same thing. As long as Federal Reserve Banks buy the government’s 2½ percent bonds, say, at par, they hold down the basic long-term interest rate to 2½ percent. And they pay for these bonds, in effect, by printing more money. This is what is known as “monetizing” the public debt. Inflation will go on as long as this goes on.
The Federal Reserve System, if it were determined to halt inflation and to live up to its responsibilities, would not only halt this process of holding down interest rates and monetizing the public debt, but it would take the leadership in raising interest rates. It should never have departed, in fact, from the tradition that the discount rate of the central bank should normally (and above all in an inflationary period) be a “penalty” rate—that is, a rate higher than the member banks themselves get on their loans.
Congress should immediately restore the required legal reserve ratio of the Federal Reserve Banks to the previous level of 35 and 40 percent, instead of the present “emergency” level of 25 percent put into effect as a war-inflation measure in June, 1945. Congress should in addition authorize the Federal Reserve Board to increase this reserve ratio even further. Legal minimum reserve ratios are admittedly an awkward method of limiting the potential supply of money and credit. But they are an added safeguard when other methods are not properly used. As long as the Federal Reserve authorities, moreover, insist on the power to control the reserve ratios of member banks, they should also be obliged to control their own. An increase in reserve bank credit can cause far more inflation than an equal increase in member bank credit.
As a last resort the monetary authorities could actually freeze the credit supply, allowing no net increase in loans at all. But this will never be necessary if other measures have been wisely taken.
It can be said, finally, that the world will never work itself out of the present inflationary era until it returns to the gold standard. The gold standard provided a practically automatic check on internal credit expansion. That is why the bureaucrats abandoned it. In addition to its being a safeguard against inflation, it is the only system that has ever provided the world with the equivalent of an international currency.
The first question to be asked today is not how can we stop inflation, but do we really want to? For one of the effects of inflation is to bring about a redistribution of wealth and income. In its early stages (until it reaches the point where it grossly distorts and undermines production itself) it benefits some groups at the expense of others. The first groups acquire a vested interest in maintaining inflation. Too many of us continue under the delusion that we can beat the game—that we can increase our own incomes faster than our living costs. So there is a great deal of hypocrisy in the outcry against inflation. Many of us are shouting in effect: “Hold down everybody’s price and income except my own.”
Governments are the worst offenders in this hypocrisy. At the same time as they profess to be “fighting inflation” they are following a “full employment” policy. And as one writer recently admitted frankly in the London Economist: “Inflation is nine-tenths of any full- employment policy.”
What he forgot to add is that inflation must always end in a crisis and a slump, and that worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of “capitalism.”
Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system and corrupts public and private morals.
But it is never “inevitable.” We can always stop it overnight, if we have the sincere will to do so.
October 8, 1951
PARIS—To a visitor who, like myself, has not been in France since 1947, the improvement in the physical appearance of the country, and in the better neighborhoods of the cities, is in some respects striking. Much of this physical improvement must no doubt be attributed directly or indirectly to American economic aid. Yet the EGA program, as at present conceived and administered, seems largely irrelevant to the real problems that confront France today. These problems might be grouped under three main headings: (1) lack of confidence in the government, (2) lack of confidence in the currency, and (3) lack of incentives for new enterprises and for expanding production.
1—When a Frenchman talks about necessary fiscal or economic reforms, he is apt to add resignedly that they would only be possible under a government with a majority dependable enough to give it reasonable security of tenure and courage. But the French vote for a multiplicity of warring political parties and become collectively disgusted with the overall situation they have collectively created.
Much has been written about the great effect of Marshall aid in turning the tide against Communism in Europe. In France, the statistical proof is not impressive. In November 1946, the Communist vote came from 28.6 percent of the French electorate. In the elections this June the percentage was still 26.5. How much credit Marshall aid can claim even for this reduction of only 2 percentage points is doubtful. For in the light of all that has happened in the intervening four years, no French voter has any excuse for still believing the old myth that Soviet Russia is a great peace-loving nation or that the French Communist Party has the interests of France primarily at heart.
2—The Frenchman’s lack of confidence in his currency is hardly surprising. He has seen the franc decline to one-twentieth of its purchasing power in 1938. He has seen it decline since 1914 to one-seventieth of its former value in terms of the dollar and to less than one- hundredth of its former value in terms of gold. No one should be astonished to learn that the former French habits of saving have largely disappeared and that the kind of saving that does take place is more likely to go into gold-hoarding than into government bonds.
Today the franc is under new pressure of several different kinds. One is the rise in world raw material prices, owing to American rearmament. Another is the increased strain on the budget for increased French armament. A third is the continuing deficit in French socialized industries (of more than 90,000,000,000 francs, for one example, in the nationalized railways in the 1951 fiscal year). A fourth is the political pressure for adopting “l’échelle mobile”—“the moving ladder,” or sliding scale, whereby the legal minimum wage will automatically follow prices upward. A fifth is the persistence of a low-interest-rate policy under which the volume of money and bank credit have continued to expand by 554,000,000,000 francs, for example, from June 1950 to May of this year.
3—Finally, as a result of the whole network of exchange controls, import quotas, tariffs, price controls, allocations, social-security deductions and payments on a huge scale, and the cartelization of business, there has been a great distortion of productive incentives, a growing lack of correspondence between effort and reward, and heavy obstacles to the appearance or success of new enterprises.
I have space to cite only one example. Price-fixing in wheat is unfortunately one of the chief reasons why France’s wheat production since the war has been persistently lower than the average production in 1934–38.
The major problems of France today, in short, barring the menace of Russia, are problems of internal policy. They can be lightened, of course, by continuance of American military and economic aid. But they can be solved only by a courageous recognition on the part of the French that a halt to the present inflation, and the restoration of economic freedom and production, will come primarily only through their own efforts.
October 15, 1951
LONDON—Even if, in accordance with most forecasts, the Conservatives win this month’s elections, the outlook at the moment is not very promising for a return in England to a free-enterprise system as Americans still use the term. What seems much more likely is a mitigated socialism, administered by the very people who declare that they do not believe in socialism.
There are many bold and excellent phrases in the Conservative manifesto: “The attempt to impose a doctrinaire Socialism upon an island which has grown great and famous by free enterprise has inflicted serious injury upon our strength and prosperity. . . . Freedom and abundance—these must be our aims. . . . Confidence and currency are interdependent. . . . The Conservative aim is to increase our national output.” And so on. But when it comes to details, the manifesto promises merely not to carry socialism any further. The Conservatives, in effect, promise to operate existing socialism much better than those who introduced it.
The Conservative manifesto does promise definitely to “stop all further nationalization.” This means repeal of the law to nationalize steel. But the manifesto also promises that “coal will remain nationalized”—though the Conservatives have been repeatedly asserting that coal nationalization has been an utter failure. Quite as important as what the manifesto says is what it does not say. It says nothing about denationalizing the railroads, nothing about denationalizing gas and electricity, nothing about denationalizing telephone and telegraph service, nothing about denationalizing the Bank of England, and nothing about abandoning the National Health Scheme or exchange control. It merely promises to run a few of these schemes more efficiently, to “simplify” and “decentralize” administration, and to “prune waste and extravagance.”
In some respects the Conservatives even try to outbid the Labour Party in socialism, statism, protectionism, and restrictionism. “Housing,” they declare, “is the first of the social services.” And they offer a “target” of 300,000 (mainly government-built) houses a year, compared with Labour’s 200,000. They promise to maintain “guaranteed agricultural prices and markets and protect British horticulture from foreign dumpers.” They warn that: “Food subsidies cannot be radically changed in present circumstances.” And they call for an excess-profits tax—which is hardly calculated to encourage new firms, efficiency, or increased output.
On their side the Labourites contrast the “mass unemployment, mass fear, and mass misery” under the Conservatives in the inter-war years with the miracle of “full employment” that they have brought about. They support this with statistics that are very impressive if taken at face value.
Why, then, are most British voters nonetheless expected to vote Conservative on Oct. 25? One reason, of course, is that they will not be voting on economic issues alone: Many are disgusted by what they regard as the humiliating conduct of the government in the Iranian crisis, for example. Another reason is that, though the Conservatives do not promise them release from socialism, they at least promise not to believe in it, while the Labourites threaten to make it even worse. They threaten to “take over concerns which fail the nation and start new public enterprises wherever this will serve the national interest”; to “limit dividends by law”; to put still more punitive taxation “on the small minority who own great fortunes,” and to “stop all excess profits”—whatever that may mean. (Incidentally, the Labour manifesto’s boast of economic achievements gives not a single line of credit to American aid.)
But one of the chief reasons why many will vote Conservative does not reflect a flattering estimate of the party’s candor. These voters suspect that the Conservatives, particularly if they get a substantial majority in the new Parliament, will proceed to liquidate socialism to a larger extent than they now dare to promise. But whether the Conservatives are in fact prepared ideologically to do this is still an open question.
October 22, 1951
LONDON—On Oct, 3 the British public received the jolting news that the gold and dollar reserves of the sterling area had fallen in July, August, and September by $598,000,000. This loss of gold was greater than that in the entire six months before the 1949 devaluation. As T.W. Kent wrote in Lloyds Bank Review, “the change is almost the most startling of all the dramatic turns in Britain’s postwar economic experience.”
One of the most illuminating analyses of the causes of these recurring British crises is that made recently in The Manchester Guardian by the well-known statistician Colin Clark (Newsweek, Oct. 1), “Not merely the British Government,” he declares, “but virtually the whole British people . . . has allowed itself to cherish three economic illusions”—the illusions of Cheap Food, of Limitless Taxable Capacity, and of Rapidly Increasing Productivity.
The illusion of cheap food, according to Clark, consists in the belief that the recent adverse movement of the “terms of trade” is temporary and that Britain will soon be able again to buy its imports cheaper and to sell its exports dearer. Clark shows convincingly that this belief rests on nothing better than wishful thinking.
His next point concerns taxable capacity. In each postwar year British national and local taxation has been levied at a rate of more than 40 percent of the national income. “In no other country has a rate like this ever been approached.” As early as 1945 Clark contended that the safe limit of taxation was 25 percent of the national income. “This result was based not upon theoretical considerations, but upon a study of the actual experience of attempts which had been made at various times and places, to exceed this limit. In every case the effects were so discouraging to real production, and encouraging to the circulation of money, that within two or three years an inflation supervened sufficient to raise prices (and thus the money value of national income) to a point where the 25 percent ratio again prevailed.” Clark concludes that unless drastic and immediate steps are taken to slash British Government expenditures the present “temporary barriers” to inflation “will shortly all be swept away.”
This conclusion is of course not “scientific.” But it is based on impressive experience. A number of economists in England, in fact, have come independently to the conclusion that taxation is already so high that more of it will not combat inflation because it will so seriously reduce the incentives to hard work, risk taking, and enterprise. This conclusion has a direct bearing on our inflation problem at home. Only drastic slashes in governmental spending can help.
The third economic illusion in Britain, according to Clark, is the belief that British productivity has been increasing at an unprecedented rate. He questions the official claims that real product (not money product) has been increasing at the rate of 5 percent per annum. His own conclusion is that real product per man-hour is rising very slowly and is only about 5 percent higher than that of 1938. About half of this increase, moreover, has been swallowed up in shorter working hours. This conclusion is supported by the London and Cambridge Economic Service, which argues that the rate of increase in real product may now be very small. It is supported also by what is known in special fields. The Girdwood committee estimated in 1950, for example, that to build a given type of house in England the man-hours needed in 1949 were 26 percent above the level of 1938–39—a 20 percent drop in productivity.
Colin Clark, in short, has correctly put his finger on three of the economic illusions that have led to persistent financial crises in Great Britain. But there are many others. He has not put his finger on the central illusion, from which most of the rest are derived. This is that England can be saved by a series of governmental controls. The truth is that these very controls—and above all exchange control—create the evils they are ostensibly designed to combat.
October 29, 1951
When I was in Paris a few weeks ago the press was headlining what it called “l’opération bifteck”—the government’s order rolling back meat prices by 10 percent. The result, of course, was a meat shortage.
To an American it was all very familiar. When President Truman restored meat ceilings in September 1946, the Federally inspected production of beef, which had been 594,000,000 pounds in August, fell to 186,0, 000 in September (only 28 percent of production in the preceding September). Mr. Truman belatedly removed ceilings on Oct. 14, and in November beef production was back to 605,000,000 pounds.
Yet our price controllers seem incapable of learning even from our own experience. They seem determined to repeat and magnify every past error. They have raided hundreds of slaughtering plants and succeeded in bringing about another beef “shortage.” The American Meat Institute reports that in the four-month period of June through September, the 95 leading beef-producing plants were able to buy only 65 percent of the number of cattle they bought in the corresponding period of 1950. At the ceiling prices they were legally allowed to bid, they weren’t being offered any more. Yet in the same four months the receipts of cattle at the twelve leading livestock markets were down only 12 percent compared with the corresponding 1950 period.
What became of the cattle that were not bought by the 95 leading beef-producing plants? It’s a fair assumption that they went through gray-or black-market processors. If these processors are not paying much attention to official ceiling prices, will they pay much attention to the slaughtering quotas that Michael DiSalle has been demanding? Suppose DiSalle got his slaughtering quotas. And suppose even that he was able to enforce them. The first consequence would be sharply reduced competition among packers. (There are more than 3,000 plants.) The efficient packer could not expand, because the quota assignment would not permit him to. New entrants would be presumably barred. The inefficient packer could not be eliminated, because he would be assured of his quota. Incentives to better service and competitive cost-cutting—which help both cattle raisers and consumers—would languish or disappear.
To the extent that the OPS really did prevent black-market operations, it would repeat the 1946 shortage of meat. For by holding meat below the market price, it would both encourage increased meat consumption and discourage meat production. If DiSalle sincerely believes that he can hold meat prices substantially below free-market levels for any length of time without resorting to consumer rationing and eventually to subsidies, then he does not understand the tremendous task he is undertaking.
In Newsweek of Nov. 29, 1948, reporting on a visit to the stockyards of Fort Worth, I tried to explain why any effort to fix meat prices was bound to derange production: “It is the present relative prices of meat in the butcher shops to meat on the hoof, of hogs to corn, of corn to hay and wheat, of hay and corn to steers, of steers to calves, hogs, and sheep . . . it is this incredibly intricate maze of relationships which determines how much corn and wheat will be planted, how many hogs will be raised, how many steers will be slaughtered now, how many held for further feeding, whether on ranges or in pens, for just how long, to just what weights, and so on. . . . The intimate connexity of prices runs through the whole economy. It is the relation of the prices of thousands of different commodities to each other that determines the relative amounts produced of each of these commodities. It is not surprising, in view of these intricate interrelationships, that government price-fixing always upsets the balance of production.”
The worst of all excuses for price-fixing, we may add now, is “fighting inflation.” Price-fixing is a futile but harmful effort on the part of the government to protect the public against the high prices caused by its own overissue of money and credit.
November 5, 1951
The history and contents of the new tax law are one more illustration of what is wrong with our whole budgetary system.
It was irresponsible and hypocritical for the House to vote for colossal appropriations and then try to reject the taxes to meet the appropriations. It was irresponsible for Congress to make these appropriations and then pass a tax law calculated to leave a deficit of more than $6,000,000,000 in the current fiscal year, and an estimated $18,000,000,000 to $24,000,000,000 in the next fiscal year. In combination these fiscal actions were recklessly inflationary.
So far the critics of Congress are right. But when they go on, as most of them do, to support Mr. Truman’s lip-demand for $5,000,000,000 to $10,000,000,000 of still further taxes, they are closing their eyes to the facts. These further sums simply cannot be raised (at present price levels) without irreparable harm to the American economy.
Taxes are now scraping the bottom of the barrel. In the highest brackets of the personal income tax the rates long ago passed the point of maximum productivity. Today they reflect mainly an attempt to punish success. It has already been pointed out in Newsweek that a 100 percent tax on all taxable incomes above $25,000—that is, complete confiscation—would yield only $700,000,000 a year more in revenue, while a similar tax on all taxable incomes above $10,000 would yield only about $3,500,000,000. But even these represent the maximum possible yields, on the assumption that people would be foolish enough to go on earning what they could not keep.
Corporation tax rates now reach 52 percent on corporate incomes, plus 82 percent on so-called excess profits, with a maximum overall rate of 70 percent. Just look at that as an incentive to start new corporate enterprises, to put more capital into old ones, and to expand the capital equipment upon which the growth of all production, the creation of new employment and the increase of all real wages depends. The government takes up to 70 percent of a corporate investor’s earnings on his investment before he even gets them, and then taxes the remainder, when, as, and if he gets it, at personal income-tax rates up to 91.8 percent. This is what we do to encourage new production.
In my Newsweek article of Oct. 22 I referred, in connection with Britain, to the conclusion of Colin Clark, the Australian statistician, that the safe limit of total taxation in any country was 25 percent of the national income, and that any attempt to take more than this is so discouraging to hard work, risk-taking and production that it must lead to inflation. Let us apply this to the United States.
It is expected that the national income for the current fiscal year ending June 30, 1952, will reach $289,000,000,000. Federal tax receipts are now estimated at about $63,700,000,000, and state and local taxes at about $19,000,000,000. This would represent a total tax burden of about 30 percent of the national income. And it would still leave an inflationary deficit estimated at more than $6,000,000,000. If we tried to cover projected fiscal 1953 expenditures of $85,000,000,000 to $90,000,000,000 completely by taxation, we would reach a total tax burden of 40 percent of the national income, which would parallel the plight of Great Britain.
There is only one real fiscal solution. It is a drastic slash in government expenditures. This solution is usually dismissed by Administration spokesmen as “economizing with a meat ax.” But as long as the Administration continues to spend with a steam shovel it is hopeless for Congress to try to economize with a teaspoon. It is wrong, of course, to economize blindly. But it will be disastrous to continue to spend blindly.
The political problem is how to restore Congress and the Administration to a sense of their fiscal responsibilities. While the solution lies mainly in a change in present ideology, it is unlikely to be achieved without reform of our entire budgetary procedure.
November 12, 1951
Now that British socialism has been repudiated at the polls, the world waits to see how far the Conservatives will dare to go in denationalizing and desocializing. They are pledged to “stop all further nationalization,” and specifically to denationalize steel. But apart from this, the outlook is not clear. They have been silent on some nationalized industries and worse than silent on coal. They have given explicit assurance that “coal will remain nationalized.”
A few weeks before the election, at the Reform Club in London, I raised this problem with a group of outstanding economists and financial journalists. Though everyone in the group was anti-socialist, and expected the Conservatives to win, most of them treated denationalization as if it were difficult and all but impossible. Yet from a purely technical standpoint it is infinitely easier to denationalize than to nationalize. The economic problems involved are minor; it is the ideological and political problems that are appalling.
This becomes clear as soon as we candidly examine the obstacles to denationalization. Let’s begin with the cliche that once you scramble eggs you can’t unscramble them. This might be true if you were trying to get each yolk back into its original shell—in other words, if you were trying to reestablish all the original private companies in their original form. But such an exact restoration is pointless and unnecessary. In coal, for example, the more than 1,400 collieries that the British Government took over are now divided into only nine administrative regions. These nine regions could be simply transformed into nine separate private companies. Or, if so few companies were thought to endanger competition, the National Coal Board could subdivide the present regions into whatever number or whatever size of private companies promised to combine optimum competition with optimum efficiency. Then the individual units could be put up for sale.
Such a sale would present no more inherent difficulties than are presented every day by private sales. The government could consult investment bankers as to the best financial setup and the best realizable price for each company, share or bond. Or, without attempting to set a price in advance, the government could open the various stock and bond issues to competitive bidding by investment firms or individuals. States and municipalities constantly offer their own obligations in this way. Nor would the government necessarily have to sell all securities of a desocialized industry at once; it could do so over an extended period. And it could of course retain existing governmental managers until the new owners had had time to reelect or replace them.
A well-advised government would, in offering shares, give priority to the workers in a denationalized industry, allowing them not only to purchase on installment but at a price somewhat below the market.
Some of the misgivings of the Conservatives regarding denationalization have a real enough basis. One is that if any attempt were made to denationalize coal, for example, the mine unions would immediately go on strike. Another is that nobody would buy the British railways today, which are losing money under government management, unless they had assurance that they could alter present costs and rate-and-fare levels. A third is that private investors would not buy back into these industries as long as they had reason to fear (as they now have) that the Laborites, once back in power, would reexpropriate the steel mills, coal mines, or whatnot without any compensation at all.
But none of these fears shows that denationalization is undesirable or inherently difficult. What they do show is how formidable the obstacles to it can be as long as a powerful minority, which could become a majority again, retains the socialist ideology. It is not some mystically inevitable socialist wave of the future that we have to fear, but men’s ideas and intentions in the present. It is the winds of doctrine that blow today that determine the waves of tomorrow.
November 19, 1951
In her column in The World-Telegram of Nov. 1, under the heading “Mislabeled Facts,” Eleanor Roosevelt quoted from a pamphlet published by the Foundation for Economic Education (of which the present writer happens to be a trustee). The quotation was: “The welfare state is a name that has been substituted as a more acceptable one for Communism-Socialism wherever, as in the United States, these names are in general disrepute.”
“It seems to me that much that appears in this pamphlet,” says Mrs. Roosevelt, “is dishonest in its thinking. In the first place, the mere tying together of Communism and Socialism is dishonest. They are two quite different things. . . . We can have opinions as to whether all the things that have been done . . . under the name of ‘welfare state’ are wise. . . . However, that does not make us Communist or Socialist.”
Mrs. Roosevelt frequently affects to deplore the “smear” technique. Yet she begins her criticism of a statement with which she disagrees by calling it dishonest. This is an argumentum ad hominem—an attack, not on the merits of an idea, but on the character and motives of those who advance it. Such an attack not only lowers the level of debate, but is irrelevant to the real question, which is whether or not the idea is true.
If there is any charge of dishonesty or deliberate mislabeling to be brought, indeed, it might much more justifiably be lodged against those who deny any connection between the welfare state and Socialism, or between Socialism and Communism. But I prefer to believe that this denial stems in most cases from mere lack of knowledge and confusion of thought.
The Wohlfahrtstaat concept had its origin in Germany, shortly after Bismarck, in 1881, introduced his first social-security bill for “the welfare of all.” If we leap to Feb. 19, 1949, we find Supreme Court Justice William O. Douglas, in a speech at Occidental College, lumping “laissez-faire economics” with “Communism and Fascism” and hailing “the human welfare state” as “the great political invention of the twentieth century.”
Then on March 20, 1949, in The New York Times Sunday Magazine, Barbara Ward developed the thesis that “In the last four years, the most important single feature on the British scene has been the creation not of the Socialist state but of the welfare state.” “So far,” she argued, “nationalization has touched only a tiny fragment of the economy.” Tiny, indeed. All that had been nationalized was coal, the railroads, civil aviation, telephone, telegraph, gas and electricity service, the Bank of England, and new housing! To contend that nationalization is unimportant in England because it exists only in the key industries is like arguing that Stalin is unimportant in Russia because he constitutes so small a percentage of the total population.
The “welfare state,” in short, has come to mean in practice the Socialist state plus the handout state plus the controllist state.
I must go on to point out, finally, that Socialism and Communism are fundamentally the same. Karl Marx, the fountainhead, used the terms interchangeably. The Russian Communists constantly boast of the achievement of their “Socialism.” They call their country, in fact, the U.S.S.R.—the Union of Soviet Socialist Republics.
Russia is the ghastly symbol of what happens to human liberty when Socialism becomes complete, instead of merely partial as in England, France, or Sweden. The results shock naïve “democratic” Socialists and ex-Communists like Arthur Koestler, who deny that the Russian brand is Socialism at all. They call it “state capitalism,” forgetting that, by their own definitions, this is a contradiction in terms, like speaking of a triangular circle. “Capitalism” means private ownership of the means of production, and Socialism means government ownership of the means of production. What has taken place in Russia, China, and Yugoslavia is not some hideous betrayal of Socialism, but its consummation and inevitable end product.
November 26, 1951
Two years ago a Congressional subcommittee headed by Sen. Paul H. Douglas made a careful study of monetary policy. It emerged with the conclusion that “the freedom of the Federal Reserve to restrict credit and raise interest rates for general stabilization purposes should be restored.” But tucked away in a footnote was a dissent from Congressman Wright Patman: “Steps should be taken,” he said, “to increase the responsibility [i.e., the subservience] of the Federal Reserve System to the executive department.”
Now, by one of those political miracles that happen so often in the Administration’s favor, a new subcommittee has been appointed, headed by none other than Patman himself, to investigate the same subject all over again.
There is the usual affectation of open-mindedness; but no one can be in any real doubt concerning the conclusions at which Congressman Patman is determined to arrive. He has already sent out heavily loaded questionnaires.
Patman, in fact, as the November monthly letter of the National City Bank of New York reminds us, has a long record in support of the crudest and most flagrant inflation. It was “a shame and a disgrace,” he said on the floor of the House on June 27, that the Federal Reserve had allowed government bonds to decline below par. He wanted Congress to compel the Federal Reserve Banks to buy at par or better any government security issued at par. In 1932–35 we find him advocating Treasury issues of paper money to pay off “adjusted service certificates” held by first-world-war veterans. In 1941 he proposed in a radio speech that the government buy the stock of the Federal Reserve Banks: “Then it will not be necessary for the government to issue and sell interest-bearing bonds. Then as money is needed, non-interest-bearing bonds can be delivered to these twelve banks, credit given for them on the books of the banks, and checks drawn by the Treasury to pay any debt that is owed by the government.” In other words, the government can just print all the money it needs as it goes along.
The Patman proposals are a threat of hyperinflation. What is desperately necessary today is the exact opposite of the course he proposes. The Federal Reserve System must be taken out of politics. It must be freed from domination by the President. It is still under that domination. Between June 21, 1950, a few days before the outbreak of war in Korea, and Nov. 14 of this year, the Federal Reserve Banks on net balance had bought nearly $6,000,000,000 of additional government securities, putting out more money and feeding inflation.
The hard fact is that the central bank in practically every nation today has been or is being used as an enormous inflation factory to serve the incumbent government’s political purposes. In view of this hard fact, I should like to advance a counterproposal of my own. Let the Federal Reserve Board retain every power it already has to prevent or to halt inflation. Give it, if necessary, added powers of disinflation. But remove entirely from the board any power to inflate or “reflate.”
This would mean that neither the Federal Reserve Board nor the Federal Open Market Committee would any longer be permitted to lower reserve requirements on its own initiative, to compel open-market purchases of government securities, or to lower rediscount rates. (And that would prevent any repetition, for example, of the disgrace of 1927, when the Federal Reserve Board not only ordered the individual Federal Reserve Banks to lower their rediscount rates, but openly overrode the Chicago bank when it refused.)
Under this proposal, on the other hand, full responsibility would still rest on the board for any further inflation. For it would still have full powers to increase reserve ratios, to recommend sales of securities, and to order a higher discount rate by Federal Reserve Banks when it thought such actions necessary. Any “reflationary” initiative could come solely from the individual reserve banks.
December 3, 1951
For the last two or three years we have been repeatedly told about the “miracle of recovery” brought by the Marshall Plan in Europe. And suddenly another European crisis is upon us; suddenly the British can’t solve their balance-of-payments problem; suddenly the French economy is in another tailspin; suddenly everybody complains about a “dollar shortage” again. And suddenly, once more, it is all our fault.
It seems that, as Europe reminds us, we just can’t do anything right. Not only do we give them too little money, but we give it for all the wrong things. We give it for armament, whereas the real need is for Europeans to live more comfortably. Thus The London Economist says bluntly that “rearmament is a serious threat to the internal stability of Europe” and: “It may prove healthier for Europe to receive more dollars to keep its civilian economies steady and fewer to defend its frontiers.”
The French are sure of it. In a dispatch from Paris to The New York Times of Nov. 10, Harold Callender wrote: “High officials here contend that while the aggregate of United States aid may be sufficient, too much has been earmarked for military use and not enough for civilian economies. ‘Europe is not ready for all the military equipment that is provided, but desperately needs dollars to buy raw materials to keep its industries going,’ said one expert. Moreover,” Callender continued, “the French are annoyed by the slow receipt of [U.S.] aid.”
The situation has reached a point where even American taxpayers are beginning to ask questions. Here is an excerpt from a letter I have just received from one of them in Switzerland: “As I travel through Europe my admiration for the patience of the American taxpayer grows in the same measure as my disgust at the inefficiency and nonchalance of the Europeans. As I look around me all over Western Europe at the business-and-pleasure-as-usual attitude, the crammed theaters and movies, football matches, horse racing, automobile racing, and stores full of everything to buy, I know that nobody ever gives credit to the long-suffering American taxpayer, who has made all this possible through the billions given to foreign countries.”
Why has postwar recovery in Europe proved so transitory and insecure, so vulnerable to recurrent crises? Clearly because it has never rested on a sound basis.
The rate of recovery in Europe after 1947 was no more than what might have been expected in any case, if we judge by the standard of previous postwar recoveries. And the Marshall Plan got far more credit even for this result than it earned. Macaulay in his History of England, reminded his readers that “No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous.” EGA got credit that belonged to what Macaulay called “the exertions of private citizens.”
In fact, it is an open question, when we consider the present French and British crises, whether Europe would not be better off today if we had never given it a dollar of Marshall aid. For then it might have been forced to take the hard course that alone would have brought a durable recovery.
Contrary to the outcries from European officials, the present crises in Europe are not the result of our failure to provide enough dollars, or the result of their own tremendous armament effort. They are the results of their own spending, inflationist, controllist, and socialist policies. In my 1947 book, Will Dollars Save the World, I pointed out that “The report of the sixteen [European] nations shows that they have no intention of abandoning the major policies which have brought them to their present crisis. They will continue as before to impose price control and exchange control, food subsidies, cheap money, ambitious capital investment programs, government-dictated production, nationalization, and socialism.” Well, they are still at it.
December 10, 1951
The central fact about our so-called “arms aid” to Europe is that it is only another name for general economic aid.
When the United States Government gives $5,000,000,000 for defense to European governments, either in the form of cash or military end items, then—unless Europe’s total armament budget shows a net increase of at least $5,000,000,000 over what it would have been if we had made no contribution—we have simply released Europe’s own funds for other governmental expenditures (such as social security, food subsidies, deficits on nationalized industries), or we have allowed European governments to reduce taxes by that much.
The only way we could make sure that none of our funds intended for European rearmament were being in effect diverted to other purposes would be to insist on a minimum defense expenditure by each government and a ceiling on all its other expenditure. Even this would not be enough; we should have to assume detailed supervision. The New York Times reported on Nov. 28, for example, that our officials are finding “an immense amount of waste in European defense expenditures—installations designed to prevent a German invasion of France that make no sense in terms of present-day problems, unneeded Navy outlays, expenditures on obsolete arms and services,” etc.
But no responsible person would dream of recommending that our officials should dictate European budgets. We still face the dilemma to which I devoted an article in Newsweek of Nov. 3, 1947; If we give aid without imposing conditions, it will be dissipated without bringing the results we seek; if we try to impose the necessary conditions, the attempt must bring immediate resentment and ill will.
The argument is frequently put forward that the reason we need to give military aid to Europe is that Europe cannot make the items it requires. This argument is empty. Europe could simply buy the goods from us, as we buy the rubber, tin, and wool we do not ourselves produce. The argument for our military- aid program is basically economic—that Europe just can’t afford to pay for its own rearmament. Let’s see. As no figures are available of our proposed military aid to individual countries, we are compelled to deal with overall figures. The overall “gross national product” of Belgium, Luxembourg, Denmark, France, Iceland, Italy, the Netherlands, Norway, Greece, Turkey, and the United Kingdom is estimated at $128,000,000,000. Total governmental expenditures of these countries this fiscal year will come to about $30,000,000,000. Of this, $8,600,000,000 will be for defense. In other words, these countries are spending on defense less than 30 percent of their total governmental expenditures and only about 7 percent of their national incomes.
On what assumption, then, are we contributing $5,200,000,000 in arms aid? On the assumption that these countries can neither (1) increase their expenditures on defense to 11 percent of their gross national product; nor (2) reduce their nondefense governmental expenditures from $21,400,000,000 to $16,200,000,000 and use the saving for defense; nor (3) increase their national product by 4 percent.
The American public has never been given the factual basis, if any, that supports this remarkable conclusion. The Congress that voted the money wasn’t even curious enough to ask for the factual basis. The Senate Appropriations Committee, before voting for the $7,300,000,000 overall foreign aid program, held hearings for just one day! Who cares for $7,300,000,000? After all, it is only equal to our total Federal expenditures for all purposes in the fiscal year 1938 and to the estimated 1952 deficit.
For purposes of comparison with the European rearmament effort, the United States is spending this year (not even counting the military aid to foreign countries) $47,000,000,000 on defense, which is 14 percent of our gross national product and 68 percent of our total government expenditures.
December 17, 1951
“We didn’t have the courage to put guns ahead of butter; to put security ahead of selfishness; to put the cause of liberty ahead of luxury.” This was the verdict reached by the Senate Preparedness subcommittee headed by Lyndon Johnson.
The evidence does not support this sweeping indictment of the American people. It is true that our defense program has gravely lagged. But the basic cause has not been public apathy. Some of the real causes were cited by the Johnson committee report itself, summarized by Newsweek in the Dec. 3 issue. Others can be found in the Newsweek report of Dec. 10 on the lag specifically in warplane production. If these detailed reasons could be reduced to a single reason it would come down to this: that while Russia since the second world war has continued without intermission to produce for another war, the U.S., in spite of the very heavy governmental expenditures for “defense” even prior to June 25, 1950, suspended major production of weapons and scrapped, converted or mothballed its war facilities.
Since the outbreak of the Korean war the Defense Department has been faced with this problem: Should it resume mass production of weapons now obsolete? Should it order mass production of present guns, tanks, and planes known to be inferior to corresponding Russian matériel? Or should it keep working indefinitely at blueprints and pilot models? Clearly some working compromise must be adopted. It is not uncommon to hear of the Defense Department submitting more than a thousand changes in design or specifications on a single item over the course of the last year. Most of these changes may be unimportant, but some may involve costly delays. Deliveries of definite quantities of an item on definite dates are possible only when a design has been frozen and a clear go-ahead signal given. There is little evidence that the defense production program has been set back in any substantial way because civilian production has been needlessly big. It is easy enough for any official with a taste for coercion and histrionics to order a cut in the allocation of steel or copper or even an entire death sentence for whole industries. But it does not follow that this will speed up defense production; it may do the exact opposite.
And the real need is Production, not Austerity or Sacrifice for its own sake. There are always those, of course, who love to wear loud-colored hair shirts in public. When President Roosevelt declared in May 1940 that there was no reason for the country to become “discomboomerated” by the defense program, the remark met a storm of criticism. But he would have been quite justified if he had said merely that no one should be needlessly discomboomerated. Needless discomboomeration means needless disruption. Yet the hair-shirt wavers demand this purely ritualistic sacrifice. Their main emphasis is not on more guns but on less butter.
The real danger is that our defense program will be snarled up not by too little government interference but by too much. The insistence on price controls is a case in point. Price controls combined with allocations have so greatly distorted the supply-and-demand picture that no one can be sure whether or not we are heading for actual overproduction of steel. Eugene G. Grace, chairman of the Bethlehem Steel Corp., says we are. Government controllers are inclined to scoff at this. But the demand for steel today is not determined by free prices in free markets. As The Wall Street Journal illustrates it, a man who wants 10,000 tons of steel may get ration “tickets” for only 1,000, while a man who can use only 1,000 may manage to get “tickets” for 1,500, and may take that much as insurance.
Manufacturers with whom I have talked think we would be much farther ahead if firms with war contracts got priority tickets for the metals they needed and all other “allocations” were left to the traditional method of a free economy—the play of supply and demand and free prices.
December 24, 1951
In a few weeks President Truman will present Congress with the budget for the next fiscal year. If either precedents or predictions are any guide, the spending he will recommend will be staggering—somewhere around $85,000,000,000, or more than even Franklin Roosevelt succeeded in spending in the whole nine years from 1933 through 1941. But Mr. Truman will blandly announce that his budget has been cut to the bone—that any attempt to reduce it will bring on a third world war or military defeat. He will defy critics of his budget to make a single reduction. His Congressional opponents will, of course, eloquently denounce his “reckless spending,” A corporal’s guard, under the leadership of Senator Byrd, will unsuccessfully propose cuts. The appropriations will end up by being substantially what the President asks for. In fact, it will be unprecedented if Congress doesn’t make a few appropriations and handouts over even Mr. Truman’s veto.
This is the outlook we face. It is a budget out of control.
And none of the proposals that are being seriously considered to give us a responsible budget goes nearly far enough to achieve one.
We will not have a responsible budget in this country, in fact, until Congress has been deprived of the power to make any appropriation not recommended by the President. This is the wholesome rule that has long prevailed in Britain. No expenditure can be proposed in Parliament except by “the government.”
It is still not generally understood that the legislature’s only justified “power of the purse” is the power to withhold the people’s purse from the executive—not the power to put its own hands in that purse. If the watchmen of the Treasury are allowed to put their own hands in the Treasury, they cease to perform their function as watchmen. A congressman cannot be depended on to serve the taxpayers if he must also serve the pressure groups. Congress should have the power to reduce proposed Federal expenditures, but never the power to initiate or increase them.
Such a change in the powers of Congress would raise the whole level and tone of our political life. As Henry Jones Ford pointed out in his Representative Government in 1924, to disable members from introducing measures proposing any added appropriations or salaried offices would “of itself shut out most of the bills congesting American legislative calendars.”
It would do far more. It would eliminate the type of congressman who holds office mainly by promising or giving handouts of the nation’s money to pressure groups in his own district. We will never have a responsible budget as long as the President, the House, and the Senate are all encouraged or even permitted to compete with and outbid each other in spending schemes.
Other procedural reforms are needed and, fortunately, could more easily become realities. For several years there has been a lively debate between those who favor a single overall annual appropriation by Congress or, as now, a series of separate appropriation bills for special purposes. To achieve economy the best solution would be to have both. Each fiscal year Congress should authorize a total maximum overall expenditure not to be exceeded. But it should continue to require the President to get a separate authorization for each special purpose. The President should not be allowed to spend the whole of these separate authorizations if they exceed the total overall maximum that Congress has previously fixed. He would have to make his own specific cuts (but be permitted no specific increases) to bring the sum of the special authorizations within the authorized overall total. In other words, the President could spend only whichever sum was lower.
A third reform would be more full-time research assistants for the major Congressional committees-to try to keep the Army, for example, from again ordering enough front-axle-housing gaskets to last for 104 years.
December 31, 1951
From Sept. 19, 1949, to Sept. 30, 1950, the Canadian dollar, under exchange control, was pegged at 90 American cents. Then the peg was pulled and the rate was left to the mercies of supply and demand. Instead of falling, it went up. It remained around 95 cents, with small fluctuations on either side, until a few weeks ago, when it rose above 97 cents.
On Dec. 14 Canada abolished exchange control entirely. This means that, for the first time in twelve years, Canadians will be able to spend their money for whatever they please, wherever they please. They will again be able, for instance, to buy American securities on the New York Stock Exchange or deal in wheat futures in Chicago. And Americans with investments “frozen” in Canada can now, if they wish, get them out.
Canada thereby becomes the first major country to abolish exchange control. The United States and Switzerland were the only countries that never directly imposed it. Peru, in 1949, set its own currency rate free, but its example attracted little attention. Canada’s step, however, may prove the first real break in the world ice jam of exchange controls. Even Britain seems to have been influenced by it, and has permitted the resumption, within very narrow price limits, of private exchange transactions.
Both the theory and practice of exchange control, in other words, are beginning to fall apart. In Newsweek of Sept. 8, 1947, I wrote: “Nearly every currency in the world . . . is overvalued in terms of the [American] dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity.” But this glaring fact was ignored or denied not only by European but by American bureaucrats, who poured billions of our dollars into Europe to finance its self-created trade deficits.
Then on Sept. 18, 1949, Sir Stafford Cripps completely reversed all his previous pledges and arguments and slashed the pegged rate of the pound from $4.03 to $2.80. Two dozen other nations took similar action within a week. This temporarily improved the balance of world trade; but it was still not the right step. “What was called for,” as I pointed out in Newsweek (Oct. 3 and 31, 1949, and Jan. 9, 1950), “was not continued exchange control with lower fiat rates, but the restoration of free exchanges.”
This is the step that Canada has at last taken. It is the most hopeful international development in many months. The chief remaining obstacle to a world restoration of freedom and sound money is the International Monetary Fund, an unnecessary institution set up, under the influence of the late Lord Keynes and Harry Dexter White, on a completely unsound basis. The minimum reform on which the managers of the Fund should now insist is to strike out Sections 3 and 4 of Article IV of the Articles of Agreement, which prohibit exchange transactions within any country that vary by more than 1 percent from the official parity. This in effect forces the continued imposition of exchange control.
The adherents of exchange control have devised derogatory names for freedom. They call free-market rates “floating” rates, “drifting” rates. What they overlook is that exchange control under fixed police rates merely conceals instability without curing it. It is precisely because free rates do honestly reflect and reveal instability that they force officials to take the steps necessary to restore confidence. And it is precisely this that Finance Minister Abbott of Canada has discovered: “The conclusion I have come to is that we would be better advised not to rely on exchange restrictions but rather on the general handling of our domestic economic situation to keep us in reasonable balance with the outside world.” And the Canadian dollar is strong because he has acted in accordance with this conclusion. For the first seven months of the fiscal year which began April 1, for example, Canada had a budget surplus of $604,700,000. There has been a steadily increasing flow of foreign investment into the country.
