Business Tides
The ‘Purchasing Power’ Theory
January 6, 1947
The CIO argument for another general wage increase of 25 percent has caused such deep concern not merely because the statistics on which it is based are so misleading but because the policy the labor organization advocates is a threat to the survival of the free-enterprise system itself.
In the period 1929 to 1945, wages and salaries averaged 69.6 percent of the national income. Corporate profits averaged 4.9 percent. After allowing for wages from non-corporation sources, a 25 percent increase in wages, without any increase in prices, would wipe out corporate profits several times over.
The CIO will no doubt answer that this does not apply today because corporate profits are now so “fantastically high.” As George Terborgh has shown, however, corporate profits, even on the high guess of Robert Nathan, are today actually lower in relation to the national income than in any other full-employment, peacetime year on record.
Here is a fact that will repay contemplation. The last sixteen-year period, two-thirds of which was a period of mass unemployment, and the rest of abnormal profit taxation, has led us to forget what level of corporate profits, in relation to the national income, has been normal with full employment. The thesis of the CIO seems to be that high profits mean depression and low profits prosperity. The statistics show the precise opposite. Full employment goes with high profits, and mass unemployment with low profits or deficits.
From 1929 to 1945 the years of highest profits were the years of highest employment, the years of lowest profits the years of lowest employment. When corporations as a whole took a loss, in 1931, 1932, and 1933, we suffered the greatest mass unemployment in our history. The year in which labor got the greatest percentage of the national income it has ever had was 1932. From 1909 to 1929, the lowest profits came in 1921, the year of greatest depression and unemployment. A dozen of the 21 years from 1909 to 1929 were years of substantially full employment. In those dozen years the average ratio of corporate profits to national income was not 5 percent, but 9.75 percent.
The statistical case for the CIO purchasing-power theory, in brief, is simply nonexistent. The chief of the many fallacies on which the CIO purchasing-power theory rests is that of mistaking consequences for causes. It is true that when production is highest, real income is highest and real purchasing power is highest (though these must not be confused with income or purchasing power stated as monetary totals without allowing for price levels). But that is because production, real income, and real purchasing power are, in effect, three names for the same thing.
It does not follow that we can invoke or perpetuate prosperity merely by raising wage rates above their existing level, whatever it may happen to be. Even if this step had the first results that the purchasing-power theorists suppose, it would obviously deduct as much from the purchasing power of investors, employers, and all other groups in the nation who normally contribute about 30 percent of its purchasing power, as it would add to the purchasing power of labor.
But such a step does not have even the first results that the purchasing power theorists imagine. If the wage increase is confined to the strong unions, it forces an increase in the prices of what these unions make. That means a rise in the living costs, and a corresponding decline in the real purchasing power, of all other workers. If the wage increase is general, it must force a general increase in prices that cuts back the real purchasing power of everyone, including the workers who have received the increase. This rise in prices discourages buying, and therefore produces a contraction in production and employment. If, finally, an attempt were made to take the wage increase entirely out of profits, as the present CIO program contemplates, marginal producers would be thrown immediately out of business. Mass unemployment would once more be upon us.
That is why the present CIO plan is the most dangerous anti-labor program that has ever been proposed. What we need are the particular wage rates and prices that will encourage the highest possible employment, payrolls, production, and sales. These equilibrium wage rates and prices can be found only by free markets. 
January 13, 1947
The decision of the Supreme Court in the Mount Clemens Pottery case on June 10 has brought on union claims for alleged unpaid wages that could completely ruin great American industries. We can find the simplest way to extricate ourselves from this “portal-to-portal” mess by retracing the legislative and judicial blunders that got us into it.
The Fair Labor Standards Act of 1938 prescribes a minimum hourly wage of 40 cents. But it goes on to provide that an employer must pay “not less than one and one-half times the regular rate” for all hours above 40 a week. It is the latter provision that extends the control of the Federal government over the wages, high or low, of practically everybody. It benefits most the highest paid and penalizes most the employer who pays most. If he pays his workers only 40 cents an hour, he is penalized only 20 cents more for overtime, but if he pays them $1.50 an hour, he is penalized 75 cents more for overtime.
But Congress at least stopped with this blunder. It did not go on to redefine what constitutes an hour’s work. This meant that it accepted the established customs of industry in this respect. This was the sensible view taken by the special master appointed in the Mount Clemens Pottery case, by the Circuit Court of Appeals in overruling the district court, and by the Supreme Court minority.
But it was not the view of the Supreme Court majority. Mr. Justice Murphy argued that walking time to the place of work within the employer’s premises must be considered part of the working hours, because “without such walking on the part of the employees, the productive aims of the employer could not have been achieved.” On this logic, there is no reason why he could not have gone on to include in working hours the time spent by the worker in traveling to work from his home, or even the time spent in getting up, dressing, or reasonable sleep-for without such activities on the part of the employees, the productive aims of the employer could not have been achieved either.
Justice Murphy even boldly declared that “the statutory work-week includes all time during which an employee is necessarily required to be on the employer’s premises.” Yet there is no such definition whatever of the workweek in the statute. It is arbitrarily imposed by the Supreme Court.
This is a glaring case of judicial legislation. If the Supreme Court is to be free to rewrite legislation in this way, under the guise of telling Congress what it really meant to do, then it becomes a third house of Congress whose members cannot be reached by the voters and whose laws cannot be vetoed. This is intolerable. There is a simple way in which Congress can rebuke such judicial usurpation as it must be rebuked, and at the same time prevent the immeasurable harm that the Mount Clemens Pottery decision could work. It should pass a joint resolution reading somewhat as follows:
“In using the word ‘work-week’ in the Fair Labor Standards Act Congress did not mean to redefine this common term or to set aside long-established contracts or customs which had absorbed in the rate of pay of the respective jobs recognition of whatever preliminary activities might be required of the workers for that particular job. ‘Work-week’ is a simple term used by Congress in accordance with the common understanding of it. For the courts to include in it items that have been customarily and generally absorbed in the rate of pay but excluded from measured working time is not justified in the absence of affirmative legislative action.”
These are not my words. They are taken straight out of the dissenting opinion of the Supreme Court minority in the Mount Clemens Pottery case. This joint resolution could be supplemented, under ample precedents, by an amendment to the Fair Labor Standards Act closing the Federal Courts to all suits of the type now being filed by unions. Congress need not stand by helpless when a court presumes to tell it that its own law means what it does not mean.
If it wants to go farther, and undo some of the harm it has itself done, Congress should reduce the legal minimum overtime wage rate to 50 percent above the legal minimum regular rate. This would confine its intervention to the wages of marginal workers. It should stop trying to regulate everybody’s.
January 20, 1947
The most important thing about the budget for 1948 is its overall dimensions. It calls for expenditures, in the second full year of peace, of $37,500,000,000. This is more than was spent in four whole years just before the war or in twelve whole years around the ’20s. It permits no reduction whatever in the present wartime level of tax rates. And it provides a balanced budget only on the most optimistic assumptions.
A regular technique has now been established for disposing of those who express concern about a peacetime budget of these dimensions. It is to ask tauntingly: “Where would you cut?”—as if no answer could be given except something like “I’d refuse to pay the interest on the national debt,” or “I’d cut out national defense.” Sensible budget economies, of course, can never be made by offhand amateur efforts to throw out arbitrarily whole categories of expenditures. But it is absurd to conclude that substantial budget economies therefore cannot be made at all.
What is mainly wrong with the rhetorical “Where would you cut?” is its implicit assumption that the burden of proof is on those who wish to cut. The burden of proof, on the contrary, must be on those who wish to make the expenditures. Any dollar of expenditure that they cannot affirmatively justify ought not to be made. It is the duty of Congress, acting on behalf of the American people who are asked to pay the bill, to scrutinize every dollar of these proposed expenditures with the utmost care.
The duty of scrutinizing requests for funds falls upon the Congressional appropriations committees. They need to do a far less perfunctory job than they have done in the last sixteen years. They need expert investigators. They need examiners who know what questions to ask and what evidence to require. Such a procedure would squeeze down present estimates, with few exceptions, all along the line.
The biggest items, of course, would profitably repay the closest scrutiny. Perhaps we do need to spend more than $11,000,000,000 for national defense in 1948. But the question is not closed by mere rhetorical insistence that “We cannot imperil our national defense.” This sum for one peacetime year is more than we spent on defense in the whole fourteen years from 1926 through 1939, in the latter half of which the Nazi and Japanese aggressions were yearly mounting.
It may be replied that we were starving our armed forces at that time. Yet it is still appropriate for Congress to ask first, whether we now need to spend more than $11,000,000,000 a year on defense, and second whether, if so, the armed forces are proposing to spend all the money in so effective a way that we shall actually be getting $11,000,000,000 worth of defense.
The same type of scrutiny might be made regarding expenditures for veterans’ benefits. For 1948 these are set down at $7,343,000,000. This is the estimate of the President a year ago for veterans’ benefits even in the current fiscal year. It exceeds our entire Federal expenditures for all purposes whatsoever in the fiscal year 1938. It will bear examination. If the President’s estimates for national defense and veterans’ benefits, as well as other major items in our national expenditure, are to be considered sacred and untouchable, we shall never get economy.
A final fact must be borne in mind when the budget is discussed. There are few Federal expenditures for which some plausible defense cannot be found. People tell us that we “must” keep this or that item in the budget because it does this or that good. What is forgotten is that every dollar of budget expenditure means the removal of a dollar from somewhere else by taxes. It is money that the taxpayers could and would otherwise use to buy things that they need themselves. Where the taxpayers are corporations, it is money that would probably be used for expanding plant, increasing production, providing employment and higher wages out of increased productivity.
The unparalleled burden of taxation on this country today discourages and retards increased production and industry growth at a thousand points. It is hurting our strength for either war or peace. This above all is what should be constantly kept in mind.
January 27, 1947
President Truman’s recent economic report to Congress was a self-contradictory document, in which conflicting economic philosophies nestled cozily side by side. The report was full of expressions of faith in a free economy. Yet one recommendation after another was based on the assumption that the economy would not in fact be stable without government intervention and control at a score of crucial points. The phrase “consumer purchasing power” kept beating through the message like a tom-tom. The net result was a victory for the old New Dealers over the new Council of Economic Advisers.
For if there is any consistent basic assumption in the report, it is that the maintenance of “consumer purchasing power” is the one thing that matters. If this term means merely monetary purchasing power, it is naked inflationary doctrine. If it refers to real purchasing power (after price rises are allowed for) it confuses consequence with cause. It looks at everything purely from the consumer’s side. The problems of production below receipts from sales are ignored.
The president recommended that Congress should extend rent control beyond next June. The only reason he gave is that “a large increase in rents would substantially reduce consumer purchasing power.” But an increase in rents would not reduce national purchasing power at all. Landlords would have just as many additional dollars as tenants had fewer. The real difference would be that a larger percentage of the nation’s monetary purchasing power would go for rents, leaving a smaller percentage over for everything else.
The prices of other things (if there were no further monetary inflation) would fall to compensate for the rise in rents. The cost of living therefore would not on net balance increase.
Such a readjustment, it is true, would create strains in the economy. In many lines costs have already gone up to a point where producers could not absorb a price decline. This does not mean that it would be a mistake to remove rent control in June. It means, on the contrary, that it would be mistake not to make at least a beginning now in allowing rents to rise. For these economic strains will have been caused by the very fact that rent control in the first place was so much more stringent than any other form of price control.
To prevent a serious problem of readjustment to resume when rents are allowed once more to resume their normal relationships to the general price level, we should allow any future monetary inflation (if, as is probable, we fail to prevent such inflation) to be absorbed through a rise in rents instead of a still further rise in other prices. If we wish to continue rent control after June we must at least remove rent control from all houses not yet built, and allow at least a 10 or 15 percent increase in rents of existing apartments for the coming year.
The President wants social security benefits revised upward. These payments, he thinks, will “provide a desirable support to mass purchasing power.” If these additional social-security payments are financed by a budget deficit, they will simply produce the inflationary consequences that the President elsewhere in his report deplores. If the payments are financed out of taxes, as much purchasing power will be taken away by greater taxes as is added by the payments. There will be no net increase in “mass purchasing power.” On the contrary, bigger and longer unemployment insurance payments, as experience has shown, only buy more unemployment. This reduces production and real purchasing power.
The most topsy-turvy conclusion in the report is that: “In the present economic situation, it is clear that it would be unsound fiscal policy to reduce taxes.” The real conclusion, of course, is that it is entirely unsound fiscal policy to maintain such a fantastically high level of government expenditures. If expenditures were slashed sufficiently, then a substantial cut in taxes would still leave the desired surplus. The present level of taxation is a constant threat to production. It is a threat to the very maintenance of a healthy free enterprise system. Not unless the executive departments justify every dollar of the proposed huge $37,500,000,000 expenditure for 1948 can the President’s conclusion about existing taxes be accepted.
February 3, 1947
Now that the International Monetary Fund is no longer a dream but a reality, all the problems that were so lightly set aside by the rhetoric and propaganda used to get the plan adopted by Congress are beginning to emerge in their full dimensions. The whole approach at the Bretton Woods monetary conference was unsound. The International Bank, and particularly the fund, were set up to deal merely with the symptoms and consequences of international monetary chaos and not with its causes. The irony of the fund is that it could work only under practically ideal conditions, in which it would not be needed.
The first thing to remember is that monetary chaos is not primarily “international” at all. It exists basically within each nation. If each nation’s currency unit were freely convertible into a definite weight of gold, if there were no overissue of its currency, so that this convertibility could be at all times maintained, then the relationship of one currency to another would necessarily be fixed and stable. If the dollar were always convertible into, say, one-thirty-sixth of an ounce of gold, and the pound into one-ninth of an ounce of gold, then pounds would always be freely convertible into dollars at a ratio of one to four. But where there is no common unit of measurement there cannot be anything more than, at best, a temporary and unreliable exchange stability.
The Bretton Woods arrangements ignored all these basic considerations. They tried to cure international monetary instability by hiding its symptoms or preventing its consequences. They provided in the fund that when any nation’s currency started to slide downward, the nations with relatively strong currencies must use them to buy the weak currencies at par. Of course a currency can be kept at par by doing this—as long as the strong nations are willing to throw their money away and as long as that money holds out.
United States Steel or any other stock could be kept at par as long as someone with sufficient funds kept in a standing bid to take all the stock offered at par. But the SEC and the stock exchange would soon bring charges against such a bidder of flagrant manipulation. If a private agent, moreover, used his client’s money to buy stocks or anything else above the open-market price, he would be sued for breach of trust or dissipation of funds. But when governments do such things, they are given pleasanter names and are justified by the complex reasoning of “economic experts.”
The managers of the fund are not even permitted to make their buying of currencies contingent upon internal reforms in the nations whose currencies they are supporting. Insistence on such reforms is regarded as “interference” in the internal affairs of such nations or outside “dictation” of their policies. The nations with sound currencies are merely permitted—in fact, obliged—to finance the inflationary policies and all the other economic errors of the nations with sinking currencies.
The only real remedy for this fantastic situation would be for the United States to withdraw entirely from the fund. The articles of agreement themselves permit it to do this “at any time.” At the very least, if the fund is not to end in a disastrous failure, the United States ought to insist on an amendment unequivocally authorizing the managers of the fund to withhold the use of its resources from any nation which in their opinion is following either internal or external policies not conducive to exchange stability.
Among such policies the amendment should list specifically excessive deficit financing, excessive expansion of currency or bank credit, trade discrimination against other member nations, unreasonable exchange controls, a policy of autarchy, of military or diplomatic aggression, and so on.
When governments could no longer have their economic errors subsidized from the outside, at least major follies might be brought to a halt in time. Meanwhile, our government continues to pour out billions of dollars of foreign loans. A great deal of these will certainly never be repaid in full. Not only is our government failing to get really compensating monetary and trade reforms in exchange for these funds, but it is aggravating a domestic boom and inflation, and preparing a corresponding reaction for the future.
February 10, 1947
Persistent union propaganda has made most people overlook the most important single fact about the corporations. This is that the chief beneficiaries of the corporations are the workers employed by them. Labor must be paid before it can be determined what funds are left over for either the stockholders or the bondholders. The employees are not only first in priority but overwhelmingly first in the amount they receive.
Let us take as an example the year 1944. It was, with the exception of 1943, the year of highest corporation profits on record. Yet in that year, for every $1 left over after taxes for the stockholders, General Motors paid out $8 to its employees. United States Steel $15, du Pont $5, Bethlehem Steel $23, General Electric $8, Curtiss-Wright nearly $40, and Westinghouse Electric $15.
The Department of Commerce found that the employees received 61 percent of all corporate distributions in 1944, and that after deduction of other costs and taxes there were left for net profits 9 percent. The employees, in other words, got from the corporations in that year between six and seven times as much as was available for the stockholders.
The best data we have shows that the executives of manufacturing concerns get on the average about 6 percent of the total of wages and salaries paid out.
These facts, unfortunately, do not at all correspond with the general public’s idea or the average worker’s idea of the facts. In a recent survey, two-thirds of the workers interviewed actually believed that industrial companies pay out more to the stockholders and to top management than they do to the workers. The typical factory worker, it was found, believes that wages take only about one-fourth of the money paid to workers, executives, and stockholders. The truth is that workers get five-sixths to even higher proportions of this total, depending on the conditions of particular years.
When we consider the stake that business has in this matter—when we consider that the ideas upon which the average worker and the general public act have the power either to preserve or destroy not only individual corporations but the whole private-enterprise system—it is incredible how little business has done to make these basic facts known. Practically all corporations today print reports to their stockholders; only a meager handful print reports to their jobholders. Half of the 50 largest manufacturing corporations do not bother to make public their annual payroll figure, though it is certainly far in excess of their dividend figure. Here is an incredible failure in “public relations.”
For illustrative purposes, I should like to call attention to one of the outstanding exceptions—the Johns-Manville Corp. Last June it published a two-column advertisement in more than 100 mediums throughout the country under the head “A Report to the Public by Johns-Manville.” “Here are the highlights,” this advertisement declared, of Johns-Manville’s annual statement in the critical year of 1945:
| Total income | $886,000,000 |
| For all costs (except those shown below) | 41,000,000 |
| To employees for salaries and wages | 36,500,000 |
| To government for taxes | 3,500,000 |
| To stockholders in dividends | 3,000,000 |
| Leaving in the business | 2,000,000 |
These items were then explained in more detail. It was explained, for example, that earnings after taxes were 6 cents per dollar of total income, that wages and salaries were 42½ cents per dollar of total income, that taxes were 4 cents per dollar of total income, and so on.
Within the next few weeks and months the great bulk of the corporation reports for 1946 will be published. This Johns-Manville “jobholders’ report” illustrates the kind of thing that every great corporation should do, first in its own selfish interest, and second in the interest of the whole private-enterprise system, which involves the interest of all the workers. For unless the workers understand the private-enterprise system, and understand what it means for them, they will destroy it. And unless management makes it possible for the workers to understand the system by taking every opportunity to explain the real facts, it will merely be cooperating in its own destruction.
Profits are the form of income that are now under most persistent attack. Yet when we consider the whole economy it is amazing how small profits actually bulk.
February 17, 1947
MEXICO CITY—Mexico is in the midst of a Florida boom. Real-estate values are fabulous. Prices are high even for Americans. There is a tremendous volume of building. Whether in the middle of the city or in the outlying country, one sees feverish new construction everywhere—new homes, new office buildings, new luxury hotels, new factories. And the new buildings are aggressively and often handsomely “modern.” The Mexican architects are bolder than all but a small handful of our own in handling modernism.
The statistics amply confirm first impressions. Wholesale prices had risen by 1946 about 130 percent above the level of 1939. In the same period the cost of living has risen on various indexes from 170 to 200 percent. Foodstuffs alone have gone up 210 percent. Weekly wages and salaries have not begun to keep pace with this. As compared with 1939 they had risen on the average only 107 percent by 1946.
Among the workers those in the petroleum industry (operated by a government corporation) have done best. In 1946 their average weekly wage was 107 pesos, compared with 81 pesos for the railway workers, 70 for the miners, 58 in the textile industry, and an average of 55 pesos in some 34 other industries. (The peso equals about 20 cents U.S.)
Explanations of the rise in prices and the cost of living are as diverse in Mexico as they are for the smaller rise in prices in our own country. Some Mexicans blame it on the expenditures of American tourists. But though tourist expenditures are estimated in Mexico to have risen on net balance from $4,000,000 a year in 1938 to $88,000, 000 in 1946, they would not begin to be sufficient to account for what has taken place.
The best-informed thought in Mexico ascribes the inflation to the increase in the volume of money and bank credit. Money in circulation rose from 517,000,000 pesos at the end of 1938 to 1,720,000,000 at the end of 1946. Checking accounts in the same period rose from 224,000,000 pesos to 1,787,000,000. This is a rise of 373 percent in the volume of money and credit from the end of 1938 alone.
There has been no corresponding increase in physical production. Industrial output has been spotty, with spectacular rises in some lines and sharp declines in others. But the general index of industrial production was up in 1946 only 32 percent above the 1939 level. This great increase in the volume of money and small increase in overall production are enough to account for the rise of prices and living costs without looking further.
But the building boom is very real. In the Federal District more than three times as many buildings were completed in 1945 as in 1939. In terms of peso costs the comparison is even more striking. Total construction in monetary values was four to five times as great in 1946 as in 1939, construction of office buildings alone ten times as great, of factories more than eight times as great.
Part of the explanation of this is that building wages and material costs have not gone up as fast as the volume of money in circulation. The index of building-material costs was up in 1946 only 128 percent above the level of 1939. (Mexico, however, had price fixing until the Aleman regime came in December. Official indexes, I am told, do not fully reflect the higher black-market prices really paid.)
In spite of the fact that Mexican price levels have risen much faster than our own, the exchange rate has been kept stabilized at 4.85 pesos to the dollar since 1941. This is even an improvement over the rate of 5.18 in 1939. This stability has been maintained by a stabilization fund and by agreement with the United States Treasury. But the stability of the peso is obviously threatened by basic factors. Mexico’s high prices are out of line with American prices. This threatens the continuance of the growing American tourist trade. It threatens Mexican exports. It unduly encourages imports.
In 1946 Mexico imported 2,637,000,000 pesos worth of goods—five times as much as in 1938. Yet Mexican exports in 1946 were valued at only 1,384,000,000 pesos (plus about 450,000,000 pesos in gold and silver). It is estimated by some authorities here that a “purchasing-power parity” would today be six or seven pesos to the dollar rather than the present 4.85.
February 24, 1947
MEXICO CITY—If Mexico is to maintain the present exchange value of the peso and put its economy on a permanently sound basis, it must solve the basic problem of providing enough exports to pay for its necessary imports. In 1946 it imported 2,637,000,000 pesos worth of goods and exported only half as much—1,384,000,000 pesos worth (not including about 450,000,000 pesos in gold and silver). Part of the gap can no doubt be covered by long-term borrowing from abroad, but even this will not be encouraged unless the gap is narrowed.
A large part of Mexico’s recent exports reflect a wartime demand that cannot continue. An outstanding example is textiles. Exports of cotton cloth rose from zero in 1940 to 177,000,000 pesos’ worth in 1945, and may fall back to zero again.
Mexico’s principal hope for future exports, according to the best opinion here, lies chiefly in two sources—petroleum and mining products. Yet the outlook for either is far from promising at the moment. The history of oil in Mexico is a perfect illustration of the shortsightedness of seizure and nationalization.
The American and British oil properties were expropriated by the Mexican Government on March 18, 1938. They were turned over for operation to a semi-autonomous government corporation, Petróleos Mexicanos, or Pemex. Incredible as it may seem, this corporation does not publish even perfunctory annual reports. Its operations are shrouded in mystery. The new manager, however, Antonio J. Bermudez, who is highly regarded, has made a few statements within recent months from which a picture of Pemex operations can be pieced together. In 1937, the year prior to the seizure, the payroll of the oil companies amounted to 56,000,000 pesos. In 1941 it had been raised to 91,000,000, and in 1946 to 216,000,000. The number of workers was increased from 13,120 in 1937 to 24,726 in 1946. But this huge increase in personnel and payroll expense has not been matched by any corresponding increase in production. On the contrary, annual production has never since (with the possible exception of 1946) equaled the 47,000,000 barrels of crude petroleum produced in 1937. Average production in the eight years from 1938 through 1945 was only 40,000,000 barrels.
Even this production has been achieved only by the dangerous practice of over-pumping existing wells, which may mean a loss of part of the reserves. Almost no exploration work has been done to bring in new wells. Yet up to 1936 statistics showed that the average life of a Mexican well was less than eight years. An official report in 1937, advocating the expropriation, itself declared that all the existing petroleum fields of Mexico were about to be exhausted with the exception of those at Poza Rica and El Plan. There is no evidence that Pemex makes adequate depreciation or depletion allowances in its accounts. It is widely taken for granted that its deficits are chronic. In fact, some think appropriations, ostensibly for capital works, were really to cover operating deficits.
Petroleum exports, once the chief means of balancing Mexico’s foreign accounts, have declined heavily. This is partly because of the increase in domestic consumption of petroleum, which has increased tenfold since 1925. Sr. Bermudez recently announced that Pemex was exporting a million barrels of petroleum a month. Yet astonishing as it seems, Mexico has recently been on net balance an importer of petroleum products from the United States.
Mexico’s mining problem is similar. Its high-grade metallurgical deposits have been nearly worked out. Virtually no new fields have been brought in since Spanish colonial days. Mining is inordinately taxed. The result has been to drive small producers out of business, to discourage exploration, and to prevent the working of low-grade ores. In 1946, metallurgical production, including gold and silver, was only 60 percent of that of 1929.
Mexico’s budget problem, which lies at the basis of the inflation, is far from solved. Federal expenditures for 1947 are estimated at 1,667,000,000 pesos, 72 percent above the average of the war years, and the greatest in the history of the country.
Yet most of Mexico’s difficulties are man-made. They can be surmounted by the adoption of more farsighted policies.
Chinese Handwriting on the WallMarch 3, 1947
On March 1 the International Monetary Fund, with some 40 members, begins exchange operations. It could hardly start in less promising circumstances. Most of the 40 nations have sent in the “par value” of their currencies. In very few cases do these official values at all correspond with the values as measured by black markets or free markets. The French franc is officially valued at 119 to the dollar; it has been selling on the outside market at 290 to the dollar. The Belgian franc, with an official value of 43 to the dollar, has been selling on the outside market at 60. The Dutch guilder, with an official value of 2.65 to the dollar, has been selling at 6.75. These are among the “stronger” currencies. The situation in Poland, the Balkans, Greece, and China is incomparably worse.
Yet the fund will buy the currencies of all member nations at par. This means that the relatively strong currencies—above all, the American dollar—will be forced to support the weak ones. It means that the United States will throw away further billions of dollars in buying foreign currencies far above their real values. This type of support by subsidizing the unsound policies of the governments that issue these currencies, postpones the day of reform. For the fund managers are given next to no power to insist on internal fiscal or economic reforms before they grant their credits.
Unfortunately the fund managers, instead of pointing to the dangers of this situation, have sought to rationalize it. “For practically all countries,” they said in a statement on Dec. 18, “exports are being limited mainly by difficulties of production or transport, and the wide gaps which exist in some countries between the cost of needed imports and the proceeds of exports would not be appreciably narrowed by changes in their currency parities.” This is not true. There would be a dramatic change in their trade balance if the currencies of these countries were allowed to sell at their real values. It is precisely because their currencies are ridiculously overvalued that the imports of these countries are overencouraged and their export industries cannot get started.
The current situation in China demonstrates how impotent the fund would be to correct any major decline in a currency. In recent weeks Chinese dollars have collapsed from an official quotation of 3,350 to one American dollar to 18,000 and more on the black market. Of the “stabilization” measures announced by the Chinese Government on Feb. 16 only those designed to reduce governmental expenditures and to increase revenues are likely to be effective. One of these is of outstanding importance. It provides for the public sale to private individuals or corporations, either directly or by the issuance of shares, of all government-operated enterprises except “those necessarily requiring government operation.” This proves that the road to Socialism is not, as usually supposed, necessarily a one-way street: A return to private enterprise is not merely possible, but simple.
But practically all the other measures announced by the Chinese Government—those seizing foreign assets of Chinese citizens, prohibiting private transactions in American dollars or dealings in gold, forbidding speculation and hoarding, and imposing price and wage ceilings all over again—must only make matters worse. Insofar as they are not evaded they must increase private fears and discourage trade and production. Yet, though exaggerated in extent, these Chinese measures are typical in principle of those now being taken by most countries to “stabilize” their currencies.
The steps by which China or any other country could permanently stabilize its currency would be far different. They would run somewhat as follows: (1) Reduce expenditures and increase revenues; balance the budget. (Engaged as it is in a civil war, this problem for China, however, is today obviously formidable.) (2) Announce that the volume of currency in circulation will not be increased beyond its existing amount. Keep the promise. (3) Remove internal price controls and all restrictions on trading in the currency. (4) Fix a provisional par value for the currency unit—but do not prohibit transactions above or below that value. (The fund agreement actually compels such a prohibition.) And finally, (5) provide for the ultimate conversion of that currency into a definite quantity of gold.
March 10, 1947
England’s coal crisis is far from a mere cold-weather crisis. The record freeze hastened and intensified a collapse that was certain to come. It is, after all, a generally known fact that it is colder in winter than in summer. This news, however, seems to have come to England’s “long-range economic planners” as a stunning surprise. They are reduced to the humiliation of admitting that everything depends on the weather, and that it is “not feasible so far to give any forecast of conditions beyond noon tomorrow.”
But the British coal shortage was already obvious long before winter set in. The October figures of distributed stocks are crucial. In 1944, these amounted to 18,500,000 tons; in 1945 to 13,800,000 tons; in 1946 to only 10,900,000 tons—the lowest for winter stocks on record.
Behind such figures lies the long-range decline of the British coal industry. In 1913 Britain produced 287,000,000 tons of coal; exports (including bunkers) amounted to 94,000,000 tons—55 percent of all world coal exports. In 1929 coal production was 258,000,000 tons; exports 77,000,000. In 1938 production was 227,000,000 tons; exports 46,000,000. In 1945 production was down to 182,000,000 tons and exports to 8,000,000. In other words, exports had fallen to almost one-twelfth of the former level.
Passing over the results of the coal nationalization program, which has been in legal effect since last July and in formal effect since Jan. 1 of this year, the British crisis is sufficiently explained by the tight network of controls and the chaos of government “planning.” It is impossible to know to what extent that present shortage of miners results from the success of the British labor unions in preventing a free wage market. It is not the absolute level of wages in the coal industry that determines the number of workers attracted to it; it is the level compared with that offered in other lines. But if sufficient British labor cannot be attracted to the mines even by a substantial wage premium, then the obvious remedy is to admit Polish or other immigrant miners who would be delighted to take the work. British controls have prevented either solution.
Great Britain still retains general price-fixing. If it had depended upon free prices as its guide, it is wholly improbable that the present crisis would have arisen. The shortage of coal would have reflected itself long ago in a rise of price. This would have raised a brilliant red light for all to see. Consumers would have been forced, without appeals or allocations, to reduce their demands. Higher wages could have been offered to attract more miners. Imports of coal would have started to Britain long before winter set in. (Our own government still severely limits the quantity and grade of coal that can be exported; so it is only fair to point out that our own “planning” might have prevented this remedy even if Britain’s had been ready to accept it.)
No less serious a cause of the present crisis has been the price-fixing of other British goods. This prevents the British from knowing where their real relative shortages and surpluses are, and from automatically correcting them through the price-and-profit system. One reason why the British people have lost the incentive to work is that they cannot buy what they wish even with the money that their government leaves them after taxes. The economic planners do not trust the people. They tell them in the White Paper that if they are permitted to spend their money as they wish, they will buy “too many luxuries” and “not enough food and clothes and coal; too many toys and not enough children’s boots; too many greyhound tracks and not enough houses”; and so on. So the British people are treated as wards of the state. They are permitted to have not what they want but what the economic planners think is good for them.
Unfortunately the British people accept this totalitarian view. They are told, and the great majority of them still believe, that the “austerity” program of the Labor government is essential to the country’s economic salvation. It is true that individual austerity is something that most of them probably cannot escape. But the kind of planned and measured austerity imposed upon them by the government is not only unnecessary, but the most serious obstruction to their national recovery. Why this is so, I hope to explain more fully in a succeeding issue.
March 17, 1947
The British White Paper, “Economic Survey for 1947,” will repay the closest study by everyone interested in the survival of economic freedom. It typifies the attitude of the most sincere, well-meaning, and intelligent government planners everywhere. It makes no direct attack on the private-enterprise system. It contains, indeed, many statements with which every defender of that system will heartily agree, e.g.: “In the longer view, increased output per man-year is the only way to expand production and the standard of living.”
The White Paper decries “theoretical blueprints.” It tells us that the “essential difference between totalitarian and democratic planning” is that “the former subordinates all individual desires and preferences to the demands of the state,” but that a democratic government must “conduct its economic planning in a manner which preserves the maximum possible freedom of choice to the individual citizen.”
The authors of the White Paper seem to be quite unaware, however, of the extent to which their actual plans contradict these announced ideals. We soon find them declaring that “the government must lay down the economic tasks for the nation; it must say which things are the most important.” This means that neither producers nor consumers are permitted to do this for themselves. After repudiating “economic blueprints,” moreover, the authors of the White Paper set their own “targets.” They tell us by exactly what percentage exports must increase in 1947. “Export targets are being worked out for the individual industries to correspond with the global target.” They insist that the government must control imports “tightly,” and they present a “program for 1947” showing just how much food, raw materials, machinery, oil, tobacco, and consumer goods can be permitted to enter. They have detailed quantitative programs for the production of coal, electric power, steel, railways, shipping, agriculture, building and capital equipment.
The one thing they seem to forget is that under a free price system these problems solve themselves. Production tends to increase most precisely where the greatest relative shortages exist, because under a free price system it is here that the greatest profit incentives are offered.
It is said that less than 10 percent of the British economy is or will be nationalized under present plans, and that “private enterprise” is responsible for the other 90 percent. But at every turn in Britain private enterprise is prevented from functioning. The White Paper itself points to “a large number of direct controls...rationing, raw-material controls, building licensing, production controls, import licensing, capital issues control, etc. Other controls again, such as price control, influence the course of production by limiting profiting margins.” The authors, however, give no sign of recognizing the extent to which these controls have reduced and unbalanced production. They talk, on the contrary, as if production could only be kept in balance by their own constant intervention at every point.
Yet such controls are as unnecessary and harmful in the field of foreign as of domestic trade. If American foodstuffs are more essential to British consumers than American movies, they can be trusted to make that discovery for themselves. If you forbid a British consumer to buy an American automobile, he will use the money to buy a British automobile or some other domestic product instead. That will mean one less British car or other home product available for export. Though the British consumer is deprived of what he wants, the trade balance is not improved. In peacetime “planned” imports are needless and foolish, and “planned” exports are still more so. The British must export what foreigners want, not what the government thinks foreigners ought to get.
Under free exchanges all such problems used to solve themselves. If a country bought more from abroad than it sold, it ran short of foreign balances. Equilibrium was usually soon restored by gold shipments or a corrective movement of prices and exchange rates. But price controls, exchange controls, and blocked currencies now prevent all such automatic signals and adjustments. Here is simply one more illustration of how one control brings on an ever-expanding network of controls.
March 24, 1947
Once more, as in the Mount Clemens “portal-to-portal” case, the Supreme Court has handed down a decision that, unless it is quickly nullified by Congress, must do immense practical harm. Once more the Supreme Court affects to be “interpreting” a law when it is in fact amending it. Once more we have a flagrant case of judicial legislation superseding the actual legislation passed by Congress.
In holding that employers are forbidden under the Wagner Act to object to the unionization of their own foremen, Mr. Justice Jackson, speaking for the five-to-four court majority, sets aside the plain wording of the Wagner Act itself: “The term ‘employer’ includes any person acting in the interest of an employer, directly or indirectly.” If foremen aren’t put in charge for the very purpose of acting in the interest of the employer, who is?
Yet even if the Wagner Act had gone on to list foremen specifically by name among “employers,” it is clear that Justice Jackson’s reasoning would have set aside even this. After citing from the law the very definition just quoted, he blandly goes on to say: “Even those who act for the employer in some matters...still have interests of their own as employees.” No doubt. But as Mr. Justice Douglas pointed out for the court minority, if on such reasoning, foremen are “employees,” then “so are vice presidents, managers, assistant managers...indeed all who are on the payroll of the company including the president.”
Though his decision flies in the face of the plain definition in the Wagner Act, Justice Jackson affects to be able to find no other possible interpretation of the law. “It is for Congress, not for us,” he solemnly declares, to create exceptions to the present “plain terms” of the Wagner Act. Yet if there were any doubt in the act itself about the intent of Congress, it was completely removed last spring when both Houses of Congress passed the Case bill. This explicitly excluded foremen as employees under the Wagner Act. But this measure was vetoed by the President.
Justice Jackson dismisses the argument of the Packard Co. by declaring: “In other words, it wants to be free to fight the foremen’s union in the way that companies fought other unions before the Labor Act.” Are these the words of a judge trying only to interpret the Wagner Act as written? Or are they the bitter words of a man legislating his personal feelings?
The unionization of foremen under this decision will do immense harm to production. The foreman cannot faithfully serve two masters. He cannot act at the same time as the agent of the employer in dealing with labor and as himself a unionized employee hostile to the employer. His divided loyalty to his employer and to his union must go far to nullify the ability of management to manage. It must lead to growing indiscipline and further tension and chaos in labor relations.
The National Labor Relations Board itself, in the Maryland Drydock case, recognized “the dangers inherent in the commingling of management and employee functions.” It acknowledged that unionizing foremen under the Wagner Act would “disrupt established managerial and production techniques.” As Gerard D. Reilly, a former member of the NLRB, pointed out in dissenting in the Packard case, in which the board reversed itself, foremen’s unions cannot really secure their bargaining aims “unless they ally themselves in their policies and tactics with representatives of the employees whom they are hired to supervise.”
But beyond its immediate practical dangers, the foremen’s decision of the Supreme Court majority once more raises a serious constitutional issue. Congress will no doubt now try to undo the harm of the Supreme Court’s foremen decision as it is trying to undo the harm of the same court’s “portal-to-portal” pay decision. But even a new bill faces not only the hurdle of another Presidential veto, but the possibility of still another “interpretation” by the Supreme Court saying that the new law means the opposite of what it says.
If the Supreme Court has unlimited power to say what a law means, even though its “interpretation” flatly contradicts the plain words of that law, then the real power of legislation has passed from the hands of the Congress elected directly by the people to an unelected and irremovable set of nine unpredictable men.
March 31, 1947
During and since the war our government seems to have assumed that it could solve almost any international problem, economic or diplomatic, by the simple process of lending or giving away American money. However necessary financial aid to Greece or Turkey may now be to prevent the further spread of Communist aggression, it could prove worse than futile unless it is recognized to be only a part of a much broader policy or, it might be better to say, reversal of policy. Regarding foreign aid of every kind, it is time we recognized some elementary facts and principles hitherto flouted or ignored.
1—America cannot feed the whole world. Before the war the United States produced less than 9 percent of the world’s food supply as measured in calories. Today, as a result of increase in our own production and the falling off of Europe’s, we produce nearly 12 percent of the total. Even this is hopelessly inadequate to fill the gap left by the decline in European production. America has 140,000,000 mouths to feed; but Europe has 350,000,000. It should be obvious that the real solution is not to distribute scarcity but to restore production. This is prevented in Europe everywhere today—by Russian looting, by socialism and Communism, by “agrarian reforms” which seize land, break up farms and displace populations, by export and import barriers, by exchange controls, and by price-fixing which makes it unprofitable or impossible to grow, transport, or sell food.
2—Food relief and financial help should be extended only on condition that the country aided discontinues policies that discourage or prevent production. Otherwise the help is worse than futile, and merely prolongs the distress it was designed to relieve. A few weeks ago Yugoslavia “suddenly awakened” to the threat of starvation among 5,000,000 people within its borders. Its new appeal for American aid was properly refused. It is only in planned or Communized economies that such awakenings come so late. In a free economy a prospective shortage would have been made known to everyone long in advance by the movement of prices. The rise in price would have drawn food to the area of shortage, and would have given a greater incentive to every producer to increase his output of food. To send food to Yugoslavia without insisting on reforms would have been not only to subsidize Communism but to perpetuate the very policies that create or intensify the food shortage.
3—Additional help to any country goes eventually to relieve the LEAST urgent need which that country is able to meet. This follows from the ability to divert resources. Those that think that if we do not send food to Yugoslavia we starve its people forget that Yugoslavia conscripts an enormous standing army from men who would otherwise work on farms to produce food. To solve Yugoslavia’s food problem by outside gifts is to release the manpower and financial resources to maintain this military establishment. Such aid without stringent conditions would merely support the military threat against our own interests forcing us, for example, to extend more counteraid to Greece.
4—The function of foreign lending, apart from purely political loans or outright charity, should be restored to private hands. Though our aid is worse than useless unless extended with conditions, it is difficult and dangerous for one government to impose conditions on another. Private lenders, however, can do this without arousing international resentment by simply declining, as in the past, to make a loan unless reforms are made in the borrowing country calculated to make repayment probable.
5—The proposed $400,000,000 aid to Greece and Turkey need not be a net addition to other foreign aid already contemplated. In a score of ways we are subsidizing or planning to subsidize socialism, Communism, and strangling government controls throughout the world. These not only reduce production but constitute a further threat to our own free-enterprise system. We can still save most of the nearly $3,000,000,000 we are planning to throw away in a futile effort to stabilize the overvalued currencies of governments following policies that prevent recovery.
6—Don’t count on gratitude in return for foreign aid. We didn’t get it from Communist Russia even from $11,000,000,000 of Lend-Lease. Gratitude between nations is too apt to mean “the lively expectation of future favors.”
April 7, 1947
In a recent Gallup poll the question was asked: “About how much do you think a married man with two children who earns $50,000 a year now pays in Federal income taxes?” The typical answer was $9,000. The actual tax on such a net income, however, is around $24,000. It would be instructive to learn how many people know that a $300,000 net income shrinks to $66,000 after taxes and a $1,000,000 income to $161,000.
In its March letter the National City Bank publishes some illuminating income-tax tables. One of these shows how much is actually left at various income levels for the taxpayer himself out of every extra dollar he earns. The figures are for a married man with two children and legal deductions of 10 percent of his gross income.
When the Gallup poll asked people how much they thought a man who earns $50,000 a year ought to pay in income taxes the median average answer was $7,500. This is only about a third of what such a man actually does pay. The taxpayer is allowed to keep less than half of everything he earns above $22,000. The question of “fairness,” however, is one on which it seems impossible to get agreement. No matter how much is taken from the big incomes, some people cannot see why those who earn more than they do should be allowed to retain any amount higher than they themselves can earn.
| Gross Income | Taxpayer keeps out of each additional dollar |
| $2,000 | $1.00 |
| 4,000 | .81 |
| 8,000 | .75 |
| 16,000 | .59 |
| 32,000 | .41 |
| 64,000 | .29 |
| 128,000 | .15½ |
| 350,000 | .13½ |
It seems more profitable from a pragmatic standpoint, therefore, to consider not so much the “fairness” of the tax structure as its practical effects on the economy. One obvious effect (considering the present corporate as well as personal income-tax structure) is to soak up the principal sources of capital funds. The funds that the present tax structure takes are precisely those that would have gone principally into investment—that is, into improved machines and new factories to provide the increased labor productivity which is the only permanent and continuous means of increasing wages.
An even more important effect of taking so much of the taxpayer’s earnings is to diminish or remove the incentives to bringing such earnings into existence in the first place. This means not merely a loss to the taxpayer who does not trouble to earn the money. It means a loss to the wealth of the whole nation. It means a loss even to the Treasury itself. Another table compiled by the National City Bank, based on reports of the Bureau of Internal Revenue, strikingly illustrates this result. (The dollar figures stand for millions of dollars.)
| 1926–28 average | 1942 average | |
| National income | $77,000 | $122,000 |
| Incomes over $300,000 | ||
| Total amount | $1,669 | $376 |
| Taxes paid | $281 | $292 |
| Top tax rate applicable (%) | 25 | 88 |
| Number of returns | 2,276 | 654 |
Let’s see what this means. During the same period that the total national income increased 58 percent, total incomes over $300,000 fell 77 percent. If each individual’s income had risen by the same percentage, total incomes over $300,000 would have risen by a much greater percentage, for all incomes previously above $190,000 would now be counted among the incomes over $300,000. Yet even if the aggregate of such incomes had risen no more than proportionately to the whole national income, the total would have reached $2,637,000,000—seven times greater than it actually was. And if this income had been taxed at the same schedule as in 1926–28, with a top tax rate of only 25 percent, the yield to the Treasury would have been about $444,000,000.
It would have been, in other words, about 50 percent greater than the actual yield from the greatly reduced incomes taxed at a top rate of 88 percent. For there can be little doubt that overwhelmingly the most important reason for the contraction of incomes over $300,000 in 1942 compared with 1926–28 was precisely the increase in the top personal income-tax rate from 25 percent to 88 percent. In other words, there can be little doubt that a sharp reduction in the top tax rates prevailing today would eventually greatly increase rather than reduce revenues.
April 14, 1947
In the present temper of the country, and under our political setup, the champions of government economy labor under a heavy handicap. They work first of all against the implicit assumption that the burden of proof is on those who wish to economize to point out exactly where and how they would do so. The burden of proof, on the contrary, must always be on those who are asking for the appropriations. They should be made to justify affirmatively every dollar of expenditure they propose.
It is right here that we encounter the first great dilemma of budget-making. Only those asking for the money are in position to know intimately how much is really needed. Yet these are precisely the persons whose personal interests are most directly involved. Their usual interest is to obtain as large an appropriation as possible. And the farther away any official is from the point of origin of the request the less he can know at firsthand about its justification. Requests for Army funds may be filtered up from captains to colonels, colonels to generals, generals to procurement officers or an Assistant Secretary of War, from him to the Secretary, and thence to the Budget Bureau or the President. Each in turn must rely in large part upon the word and judgment of his subordinates.
It follows from this that even a very conscientious and economy-minded Bureau of the Budget can do only a partial job of screening out wasteful and unnecessary expenditure. It can only cut down or eliminate the items that look excessive or wasteful on paper or in replies to questions. And what a conscientious Budget Bureau can only do inadequately by working full time, Congressional appropriation committees, without such a conscientious Budget Bureau, must do far less adequately. Their so-called investigation is too often perfunctory. They cannot hope to do this task well unless they are assisted, not only by a staff of full-time experts who know what questions to ask the department heads requesting money, but by field examiners who can see for themselves how money has been, is being, or could be spent.
If the appropriation committees, acting half-blindly, go into a huddle and emerge with a proposed slash of $6,000,000,000, or 16 percent off the amount that the President has requested, without publishing in detail the wheres and whys of their cuts, they find their well-intended efforts denounced from all sides.
The department heads who have asked for the appropriations accuse them of “undermining the national defense,” or torpedoing foreign aid, housing, social security, or what-not. Newspaper editorial writers who are not in a position to know the real facts join in the clamor. Their usual line is that the President must be supported. They forget that even the President has been obliged to rely for his estimates on many anonymous and not disinterested subordinates. The beginning of any Congressional budget control would consist in the establishment of an adequate staff of experts to act as the eyes, ears, and legs of the Congressional appropriation committees.
But we shall never have any real fiscal responsibility at Washington without far more basic reforms even than this. The first of these would be to adopt the wholesome rule that has prevailed in Great Britain since the time of Queen Anne—to wit, that the legislative body cannot make any appropriation whatever not recommended by “the government.” Only such a rule can prevent raids on the Treasury by Congressional logrolling. Only by making the executive solely responsible for the budget can there be a responsible budget.
The proper function of members of Congress is to act on behalf of the people as watchmen of the Treasury. They cannot be suitable guardians of the public till as long as they are themselves permitted to stick their hands into the till. The proper use of the legislative power of the purse is to deny the purse to the executive for wasteful or unjustified expenditures. Congress will do this best only if it is itself removed from the temptation of trying to buy votes with the people’s money. It will be a vigilant watchdog only if it is itself denied access to the Treasury. As Henry Jones Ford has put it: “There is no propensity of human nature more marked than jealousy of opportunities that one does not share.”
April 21, 1947
GENEVA—This former seat of the League of Nations is still the best listening post in Europe. Bordered by Germany, Austria, Italy, and France and speaking the languages of all, Switzerland is the meeting place of nationals who have penetrated the curtains of its frontiers to say the things it is useless or dangerous to say at home. The most ominous situation that emerges from these reports is that of Germany.
The comfortable assumption of most of us has been that the sickness of Germany and Europe is a temporary consequence of war destruction and will be cured almost automatically by the passage of time. But closer examination makes it clear that prostration has been brought about mainly by postwar governmental policies and that it grows worse, not better, every day. The economic chaos in Germany is the product of many causes—war and postwar destruction, Russian and other Allied seizure, displacement of populations, dismemberment of the country, watertight political and economic zones, the level-of-industry plan, and currency inflation, which is wholly out of control.
In addition, there is one cause as important as any of these, though it has so far received amazingly little outside attention. When the occupying powers took over Germany, they accepted virtually the whole existing Nazi system of economic controls. This included the Nazi device, imitated by the whole world, of great monetary inflation on one hand with its normal consequences prevented on the other by a system of price, wage, exchange, and production control.
Such a repressed inflation not only destroys all economic liberty but is far more harmful in its ultimate economic consequences than an open inflation. It removes all incentives; it deprives the price system of its whole function in directing, allocating, and synchronizing production as among thousands of different goods and services.
The result has been an appalling waste of manpower in Germany. There is full employment, with millions of people wastefully and wrongly employed under German planned economy. Wages, prices, and rents are purely nominal, and almost no activity is permitted except by special official license. The available food rations are so small nobody can live on them. Workers are paid in useless marks. Under these conditions a primitive barter economy has grown up outside the planned economy. True German currency consists of brandy for large transactions and cigarettes for small ones. City workers must devote an increasing part of their time, at the expense of their regular jobs, to home gardens. They are officially encouraged to do what is officially prohibited in the French zone.
Textile firms and makers of kitchen utensils are legally required to pay workers 10 percent of their wages in goods, but after a few weeks these are useless except to barter for food stuffs which are supposed to pass through official markets at official prices. So workmen spend their weekends in cycling or trudging many miles into the country to bring back a few wretched potatoes. Potatoes are actually exchanged singly. Apart from any other aspect this is an appalling waste of labor. German industry entered the postwar period with high stocks of raw materials put aside for this purpose. German production in the last two years has been living on these stocks. They are now nearly exhausted. Where German producers are paid in marks at official prices, the worthlessness of these marks and official restrictions prevent them from replacing the raw materials they have used up. This threatens a further drying up of production. Until it is cured through currency reform, a return to free markets, and foreign exchanges and credits on a commercial basis, the German paralysis at the heart of Europe must drag down the rest of the world.
As the recent Hoover report has pointed out, American and British taxpayers are contributing nearly $600,000,000 a year to prevent the Germans from starving simply because the Germans are prevented from producing for themselves. This has contributed to the serious European shortage of fertilizers and coal. “The whole economy of Europe.” as Mr. Hoover declares, “is interlinked with German economy.... The productivity of Europe cannot be restored without the restoration of Germany as a contributor to that productivity.”
April 28, 1947
GENEVA—The traveler in Switzerland, if he depended on first impressions, could easily imagine himself in a paradise of peace and plenty. Physically untouched by the war, incredibly neat, with every utilizable square inch of soil seemingly under cultivation, the whole Swiss countryside looks like one enormous golf course that has just been rolled and mowed, and the tourist, though he may sometimes have trouble getting sugar or butter, is extremely well fed. True, he must present ration coupons in restaurants, but he seems to get all that he can use in the cities. Stores display a surprising variety of quality goods. Industry also seems prosperous.
Switzerland exports 90 to 95 percent of its entire production of watches, about half of which go to the United States. Switzerland is actually compelled to ration its own exports in money values (though not quantity). Its exports of watches are at record levels. They rose from 195,000,000 francs’ worth in 1939 to 492,000,000 francs’ worth in 1945.
But beneath this smiling surface, Switzerland has her serious problems. Rations for Swiss families are more severe than those for the tourist. There are separate rations for sugar, jams, pastry, flour, cheese, butter, lard, meat, bread, and milk. Wholesale prices have more than doubled since 1938. The cost of living has risen in the same period more than 50 percent in spite of price controls which hold down rents to the 1939 level. The inflation is reflected in the rise in bank-note circulation from 1,700,000,000 francs at the end of 1938 to 4,100,000,000 at the end of 1946. The budget is still out of balance.
A great problem in a small industrialized country like Switzerland is that, in a world of super trade barriers, it is absolutely dependent on foreign trade. It must export or die and import or die. The basic function of its exports is to buy imports. Yet, though the present demand for its exports is unlimited, Switzerland is cut down to about half its prewar supplies of coal. It is short of raw materials. It is forced to make bilateral agreements with other nations.
To supply its essential import needs, it insists that nations receiving credits from it use part of the money to buy some of its luxury products as well as the machinery they need. Where these special bilateral agreements do not exist, it obliges each private trader to develop his own bilateralism. The exporter must arrange an approved import equal to his export and the importer an approved export.
Switzerland is almost the only country in the world today where it is both legal and respectable to deal in foreign currencies at the reevaluations put on them by buyers and sellers. These Quotations are published daily in the newspapers. As the convex mirror of an automobile focuses a large world in small space, the Swiss market in foreign banknotes gives a miniature survey of the currency chaos.
This market certainly reflects the local supply and demand situation in these banknotes. There is more dispute concerning the extent to which it reflects their real values. Is there, for example, a real discount on the American dollar or only a temporary one due to special conditions in Switzerland? The question is difficult to answer with confidence, yet discounts on other currencies seem to reflect rather accurately the known general conditions. Here are quotations in Swiss francs on April 14 of some outstanding banknotes compared with their official rates:
| Market | Official | |
| Dollar | 3.65 | 4.30 |
| Pounds sterling | 10.65d | 17.34 |
| French francs (100) | 1.70 | 3.60 |
| Italian lire (100) | .55 | 1.91 |
| Belgian francs (100) | 6.90 | 9.90 |
| Dutch guilders (100) | 60.00 | 162.00 |
| Swedish kroner (100) | 85.00 | 119.50 |
It will be noticed that the free dollar, or what the Swiss call the financial dollar, is selling in Switzerland at a discount of about 15 percent. The reasons for this are too complex to go into here, but the situation has some strange results. The Swiss National Bank will exchange up to $125 a week for American tourists, converting travelers checks into Swiss francs at the official rate of 4.30. It is then perfectly legal for the tourist to go around the corner and buy dollar bills with the francs at the rate of 3.65, thus coming out with nearly $150. As the first part of the transaction is recorded on his passport, however, he can’t keep pyramiding the deal.
May 5, 1947
PARIS—Some experts here tell you that the key to France’s economic problem is coal; others insist that the real key is currency. Certainly, both problems strike the visitor on his first day. Shortage of coal means shortage of electric power. At night the streets of Paris are dark. The currency chaos is equally evident in the bundles of ill-assorted bills one is forced to carry in denominations ranging from five to one thousand francs each. An unpretentious restaurant meal costs around 500 francs; a really good meal, 1,000 francs and up. At the official exchange rate, this means from about $4 to well above $8, Even translated at the present black-market rate of slightly less than 200 francs to a dollar, meals and most items of clothing soar far above New York levels.
The franc has an internal purchasing power on official indexes of less than one-eighth its value in 1938. Allowing for black-market prices, foodstuffs are more than thirteen times as high as in 1938. Today, the franc is worth only one-fortieth of what it was in 1914 in terms of dollars, and perhaps only one-hundredth in terms of goods. This long-term decline has meant the steady erosion of the French middle class, with its conservative capitalist psychology and traditional habits of thrift.
The budget continues unbalanced. The volume of money in circulation continues to mount. Prices, especially of foodstuffs, mount with it. The Blum orders for a 10 percent reduction in prices caused a momentary arrest in this upward movement. But for the most part French price controls are ignored or evaded. Where some of them are seriously enforced they disrupt deliveries and distort production. Farmers are called upon, for example, to deliver all their wheat above certain deductions for seed and farm consumption to authorized agencies at official prices. But the price of wheat is fixed too low in relation to actual prices received for meal or other cereals. The result is that farmers have been wastefully feeding wheat to livestock. This reduces the amount available for direct human consumption and adds to the difficulties arising from the destruction of one-third of France’s sown wheat by last winter’s frosts.
The great official overvaluation of the franc has made many imports cheap in terms of francs, but French exports, including tourism, are very high priced in terms of foreign currencies. This reduces and discourages French exports. It makes France more dependent on outside loans, principally from the United States, to continue its imports.
Despite such policies, some lines of production have recovered astonishingly. Iron and steel output in February are 85 percent of the 1938 average, but 180 percent of the output in February 1946. Automobile output in February was 80 percent of the 1938 average and almost double that of the corresponding month in 1946. Production of coal in February was actually 108 percent of the monthly average in 1938 and is now around 115 percent. But France normally imports about one-third of its coal, and coal imports in February were only 34 percent of the 1938 figure. Coal is still the chief bottleneck in French production.
High hopes are placed by the French in a plan drafted by Jean Monnet, which was approved by the Blum Cabinet in January. It calls, among other things, for a balanced budget, a 48-hour week, and modernization of “key resources”—coal, electricity, steel, cement, agricultural machinery, and transport. But the political obstacles to its serious application are great, particularly as concerns the budget. It depends also on substantial credits from the United States.
The fate of French economy rests today mainly on political factors. The chief of these is the strength of the Left, above all of the Communists. Communists occupy key posts in the government. They dominate the most powerful labor union, Confédération Générale du Travail. For reasons of international policy, Communists now play “conservative,” work for increased labor output, restrain wage demands, discourage strikes, sometimes even break strikes; but these tactics may be reversed at any moment. The French are no longer defeatist in spirit. But they live like inhabitants of a town built on the sides of a volcano, speculating uneasily in sidewalk cafes on the meaning of the rumbles beneath their feet.
May 12, 1947
BRUSSELS—It is only an hour’s airplane trip from Paris to Brussels, but in that hour one passes from shortage to comparative plenty. The most dramatic evidence comes at night, when the streets are ablaze with electric signs, contrasting with the blackness of Paris or London. Belgium’s output of electric power in March was 80 percent higher than the rate in 1936–38. This in turn was made possible by a coal output ranging from 85 to 90 percent of prewar levels.
In Belgium, as in France, the complaint is that coal is the great limiting factor on production. Yet an index just prepared by the newspaper Agence Économique et Financière gives Belgium’s overall industrial production as 108 percent of the prewar level in March, with an estimate of 112 for April. This compares with an index for France of about 88 percent of the prewar level and for Holland of about 80.
Comparative plenty is also found in the stores. There is a wide variety of imported clothing. Nylon stockings have actually become a glut on the market. Cigarettes seem plentiful. In restaurants one has little trouble getting coffee, tea, sugar, butter, California oranges, and other fresh fruits. For Belgium has deliberately followed a different policy from that of its French and British neighbors. It has not discouraged or prevented imports.
The Belgian authorities figured correctly it was worth risking a shortage of foreign exchange in order to stock up adequately with materials for industry, to “fill the workman’s belly,” and to give production incentives to their people. The policy has paid handsome dividends. Belgium has not lost exchange, though the statement of the National Bank of Belgium for April 17 shows a decline of 5,716,000,000 francs in gold compared with the corresponding date a year ago. It shows a compensating increase of 5,135,000,000 francs in foreign exchange holdings.
Belgium has sought to deal with inflation through its causes rather than by trying to suppress its symptoms and results. Immediately after the German occupation, the government mopped up a huge excess of outstanding currency to prevent any further inflationary effect. The authorities boast that since the end of 1945 they have been able to prevent the total supply of money from increasing. There is still a heavy budgetary deficit, however, and this problem is far from solved. Yet the country has been remarkably successful in holding up the value of its currency, which has actually gone to a premium over the British pound on the outside market. This spectacle—together with governmental pledges against nationalization or new taxes on capital—has increased Belgian confidence and led to the voluntary repatriation of Belgian funds from abroad.
The Belgian Government has been working hard for the reduction of foreign trade barriers. It has removed almost all restrictions on imports. This policy is no doubt inspired by self-interest. Belgium is a “transformation” country heavily dependent on foreign trade. But the policy is also farsighted. Just as foreign exchange controls force domestic controls and vice versa, so external and internal free trade go together. Since early 1945 Belgium has been steadily relaxing price controls and rationing. In any case, it seems unable to enforce controls. It is estimated that about 80 percent of all Belgian agricultural products go through the black market.
The desire of Belgians for freedom of trade has led to perhaps the most heartening single development in the whole of Europe. This is the pending customs union between Belgium, the Netherlands, and Luxembourg. The agreements, already signed by representatives of the three governments, now await ratification by their legislatures. They contemplate adoption by Belgium and Holland of identical tariff schedules, designed more for revenue than for protection, and the gradual elimination of trade barriers between the two countries. When this union has been completed, “Benelux” will be the greatest foreign trading market in the world next to Britain and the United States.
But the real importance of the union is symbolic. When other countries are rushing toward more economic nationalism, tighter trade controls, and dreams of autarchy, when they pay freedom of trade chiefly lip service, Belgium and Holland are getting a model for action.
May 19, 1947
AMSTERDAM—Holland suffered far more from the war than Belgium did. The Germans had to evacuate Belgium in a few days without time to destroy. Holland was occupied for months longer. Rotterdam and other cities had been ruthlessly bombed; the retreating Nazis systematically demolished houses, factories, power plants, railroads, and bridges. They systematically looted cattle, farm equipment, locomotives, cars, barges, cranes, thousands of industrial machines, and scores of factories, including a complete steel mill and Holland’s sole aluminum plant. They broke the dikes and flooded the land. Holland, which had had one of the highest living standards in the world, lost more than 40 percent of its productive capacity. Industry was paralyzed. It had to start again from the bottom.
Holland has lost also, as a present source of income, the Dutch East Indies, with more than seven times the population and more than 50 times the area of the mother country. It has lost Germany as its largest single source of supplies and second largest customer. Half the machines used in Holland are of German origin. With Germany an “economic desert,” broken or worn parts cannot be replaced and whole machines become useless. For good or evil, the economy of Holland depends heavily upon that of Germany. The Dutch do not carry their hatred of the Germans, as some of them put it, “to the point where we want to cut off our own right hand.”
When one keeps this history and situation in mind, the extent of Holland’s recovery is amazing. A miracle of reconstruction has been wrought on the railways. Destroyed bridges have been rebuilt. The rubble of bombed towns has been cleared away. Housing progress has been made despite shortages of wood and glass, which must be imported. The inundated ground is dry again; the dikes repaired. Most of the flooded land has been brought back to cultivation far earlier than anyone had dared hope.
The Dutch Government has embarked on a program of national austerity. The motto is: “work hard, consume less, save more.” A factory, indeed, is not allowed to set a work week of less than 48 hours without special permission from the government. The unions have accepted a wage freeze. A tax running up to 90 percent has been imposed on all increases in capital value during the war even though these are measured in depreciated guilders. A bill now under discussion will impose a general capital levy of a smaller percentage.
The Netherlands economy is tightly controlled inside and out. Every import and export requires both a foreign-exchange permit and a special permit. Rents are frozen. There is strict price control and rationing of food, clothing, and cigarettes. Membership in a trade group is compulsory in every firm. Raw materials are allocated on the basis of use in 1938. No new firm may be started and no existing firm expand without a special license obtainable only if it can prove “need” for its own existence.
Businessmen complain that controls have been multiplied to a point where no one any longer understands them. Initiative is smothered. Even the traditional Dutch integrity and respect for law crack under the strain. As every business firm depends for its very existence on the good will of some civil servant, the inevitable result is the emergence of corruption. People complain that the rations are too small. Black markets have developed in cigarettes, eggs, gin, butter, meat, clothing and ration coupons.
There is heavy smuggling between Holland and Belgium, which is uncontrollable because the border runs through village streets and even houses. Austerity has been driven to a point where it undermines effort. People lose the incentive to work when they cannot buy what they want with the money they earn.
Holland tries to solve its formidable exchange problem by separate bilateral agreements with more than a dozen countries, but all such agreements undermine a free multilateral market and the freedom of consumers. Though Holland, like most of its neighbors, regards these bilateral agreements as a temporary expedient, they are tying themselves into an entangling web from which extrication will not be easy. The expedients they adopt perpetuate the very conditions they are intended to cure.
May 26, 1947
STOCKHOLM—Neutrality has obvious advantages. You are struck by the freshness and brightness of Stockholm, its nocturnal wealth of neon lights, its rich display of goods, its fine food, and not least of all by the clothes of its men and women, so much newer and smarter than one finds elsewhere in Europe.
The net effect is one of prosperity and opulence. Industrial production is in fact 30 percent above that in 1935 and at the highest level ever reached in spite of the shortage of coal and constant complaints of the shortage of manpower. The money value of foreign trade last year broke all previous records. Many firms have enough orders on their books to keep them in full production for years to come.
Yet there are signs of serious trouble ahead. On March 15 the government suddenly imposed a licensing system to curb nonessential imports, among them motorcars, fruits, and coffee. The public was jolted by the re-imposition of coffee rationing. These measures were taken because of the alarming reversal in Sweden’s trade balance. An export surplus of 674,000,000 kronor in 1945 had turned into an import surplus of 842,000,000 kronor in 1946. Though exports had actually mounted from 1,757,000,000 kronor in 1945 to 2,529,000,000 in 1946, imports more than tripled, jumping to 3,370,000,000 kronor. A great part of these imports represented not the coal, oil, and raw materials that Swedish industry is so eager to get but consumer luxuries. This meant an alarming drain on the central bank’s gold and foreign exchange reserves, which dropped from 2,973,000,000 kronor last June to 1,364,000,000 by March 15.
This result is generally blamed here on the freedom of private individuals to import. It is, however, a perfect illustration of how one control makes another necessary until nothing can be left alive. Last July, following Canada, Sweden revalued its currency upward by about 16 percent because it feared an American price rise. By making its imports cheaper, however, it simply encouraged an increase in the volume bought. The government, moreover, held down the export prices of timber, pulp, and paper below the world market and so reduced the amount of foreign exchange that Swedish exports could bring in. Its rigorous internal price fixing more importantly left “an inflationary gap” between the supply of money and the supply of goods at official prices. The excess money naturally flowed into abnormal purchase of imports. Under free exchanges the situation might have corrected itself automatically by a fall in the krona, making imports more expensive and exports more profitable. But in Sweden, as elsewhere, it is illegal to buy or sell currencies in accordance with the values established by supply and demand and no self-adjustment takes place.
Sweden has bilateral trade treaties with nearly every country in Europe. These also create inflexibility. Sweden is bound to take luxury import quotas from treaty countries. A sudden import ban must therefore hit principally American exporters because the United States has not taken part in the bilateral-treaty game.
The recent outflow of gold and exchange reserves was most disturbing, however, in connection with the huge volume of foreign loans and credits extended by Sweden. Part of these went to Norway, Denmark, Finland, and Holland, as Sweden’s contribution toward rebuilding Europe. Part were extended to facilitate Swedish exports. Hardest to explain from Sweden’s standpoint is its loan to Russia. This reaches 1,000,000,000 kronor, bringing the total of Sweden’s foreign credits to 4,500,000,000. Comparing population and national incomes, this total would be equivalent to at least $45,000,000,000 from the United States.
The Russian credit is variously explained as good-neighbor policy, a substitute for vanished German trade, and an anticyclical measure. But it means, in the next few years, a tremendous drain of unrequited exports.
A final factor in the Swedish trade picture is the actual and potential flight of capital. Social Democrats of the Swedish labor party are in power. Wartime government controls have not been appreciably relaxed. There are rumors of devaluation of the krona. There is fear of further socialization. The combined income and capital taxes are almost confiscatory. And the threatened flight of capital brings hints of even more stringent controls.
June 2, 1947
LONDON—England’s major economic troubles today seem not so much the result of its war losses, appalling as these were, as of its postwar policies. Temporary impoverishment was inevitable, but the postwar series of special crises in coal, food, and dollars was not. The underlying assumption beneath the present strangling network of economic controls is that a free market and price system is at best a fair-weather system, a luxury a country can afford only when it is already well off. It is the precise function of free prices, however, to allocate production among thousands of different commodities and services and to relieve the most serious shortages most quickly by providing the greatest profit and wage incentives precisely where those shortages exist. A free price system last fall would certainly have signaled the impending shortage of coal long before the Labor government was awake to its existence. It would have encouraged imports of coal from America then, instead of waiting until now. It would have enabled higher wages or bonuses to be paid for increased production. It would have attracted more men to mining. If the miners had been free to spend their money for things they really wanted, higher money wages would have meant higher real production incentives.
On May 7 Emanuel Shinwell, the Minister of Fuel and Power, indiscreetly declared before a meeting of union delegates that “the organized workers of the country are our friends; as for the rest they don’t matter a tinker’s cuss.” This statement, which has since become a source of great embarrassment to the Labor party, does supply a key to the real nature and animus of recent British planning. The essentially collectivist and egalitarian philosophy behind it begins to emerge more clearly. A ceiling has been put on imports and particularly on the purchase of so-called luxuries because “dollars are short” and “we cannot afford it.” But who are “we”? Certainly not the individual who wishes to buy.
The real principle applied here is “If I can’t afford to buy it, you shan’t be allowed to buy it. If organized labor cannot have it nobody shall have it.” This is most clearly illustrated in food. The overall food supply is not nearly as bad as is commonly supposed. Though it lacks interest and variety, the Minister of Food estimates in terms of calories it is only 6 percent below the prewar level. But analysis of its distribution is instructive. In April wage rates in Britain were 68 percent above their 1939 level. Weekly wages were about 80 percent higher. The cost of living index, however, has gone up only 31 percent. Food considered separately had risen only 22 percent. This means that the average British worker is considerably better off in terms of goods than he was before the war.
One can say that this is a very good thing, but one cannot argue at the same time that production is low because nutrition is low (the coal miner in particular gets a much higher than average allotment) and one cannot call it austerity. Austerity is not being imposed on the British nation as a whole; it is being imposed through heavy taxes on the British middle and upper classes to subsidize the British working class.
Food prices are being subsidized to the extent of $1,572,000,000 a year in spite of the fact that the British worker is spending a much smaller percentage of his income for the same amount of food than he did before the war. It is the middle and upper classes who have now been reduced to something approaching the workingman’s diet.
Insofar as austerity has been imposed on the whole British people, it consists in refusing to permit either consumers or producers freedom of choice. The consumer is not free to spend his money on things he himself wants but only on things government officials think are good for him. The producer is not free to make what he wishes but only what government officials think is good for the country.
The whole system of priorities, allocations, quotas, and licenses causes endless delays, keeps efficient concerns from expanding, and keeps inefficient concerns in business. Production is lost all around not merely because an army of men is created to issue orders rather than produce, but because producers themselves must spend so much of their time trying to get licenses and allocations instead of finding out how to reduce costs and prices and make the goods consumers really want.
June 9, 1947
NAZISM was defeated in war. Hjalmar Schacht, the Nazi economic wizard, is in jail. But when Schacht and his surviving comrades survey the world today, they must feel consoled. Intellectually Schachtism has conquered Europe. The system of price control, wage control, profit control, interest control, exchange control, foreign-trade control, bilateral treaties, rations, priorities, allocations, quotas, with a special license required for almost every move, and with a mounting currency inflation hidden and repressed by these devices—this is Schachtism. And this is the system which nearly every country in Europe has now embraced. If it does not repudiate outright the free-market and free-price system, it regards that system as a luxury that it may be able to afford after its recovery has already been achieved.
The central economic problem of the world today is Europe, and the central economic problem of Europe is Germany. Yet in Germany the looting, the “level of industry” plan, the combination of a chaotic currency with legal prices and wages far below what a free market would bring, destroy production and all incentives. In misdirected efforts to prevent Germany from again becoming a menace to the world we have made it a burden to the world.
It should be possible to prevent it from becoming either—by permanent supervision, by forbidding war production, by permitting full peace production, by setting up a stable currency, by abolishing the whole system of price and wage control, allocations and licenses, by imposing reparations up to the point where they do not endanger output or disrupt world economy, and finally, by forcing on Germany entire freedom of trade with other nations.
This last policy, the opposite of Hitlerian autarchy, would make Germany heavily dependent on imports at the same time as it would increase world efficiency. To protectionists and government planners and socialists, it should be pointed out that from their point of view it ought to be the worst of punishments to deprive Germany of protection and planning and socialism.
It is precisely because Germany exhibits a bankrupt Schachtism in extreme form that it is so instructive an example. But elsewhere the same disease is illustrated in milder forms. Let us take a sort of composite photograph, and call it Ruritania. The situation in Ruritania will be found to apply with only minor modifications to most of the countries of Europe.
Ruritania’s budget is unbalanced. Heavy sums are being spent on armaments, on food subsidies, and on increasing pensions, family allowances, and other forms of social security—but obviously, the government points out, none of these expenditures can be reduced. Tax rates have been kept up or increased on the higher incomes. A capital levy has been added. Further nationalization is discussed. Sales taxes on luxuries, with one or two exceptions, have been reduced.
It is surely not the finance minister’s fault if these arrangements are not bringing in more revenue. Meanwhile the volume of money in circulation has risen enormously and is still rising. The government, however, is holding down interest rates so that it can borrow cheaper and encourage business borrowing. The policy also increases the inflationary pressure, the volume of money and bank credit, and ultimately the government’s general expenditures; but about this nothing is said by government spokesmen.
But if the government is creating inflation, it is determined to prevent the unpopular consequences of this inflation. It blames all price rises, not on its own inflationary policies, but on the greed and rapacity of producers and sellers. It fixes ceiling prices on everything. Holding down prices to arbitrary levels of course dislocates all profit margins. But as goods are produced in accordance with relative profit margins there is a huge misdirection and waste of capital and labor. Necessities are underproduced; luxuries are overproduced; there are universal complaints of “labor shortage.”
Where inadequate profit margins discourage or prevent production, and where prices fixed below the market over encourage consumption, an attempt is made to correct the situation by rationing, arbitrary priorities, and allocations. The shortages brought about by bad price control are treated as inescapable and inherent. As all output is interdependent, production all around is slowed down to that of the item in shortest supply, whether coal or timber or “labor.”
Price control economically necessitates wage control; but wage control in turn politically necessitates price control; and no one knows how or where to break out of the circle.
On its foreign trade Ruritania imposes controls made necessary by, and in turn necessitating, its internal controls. The country has an inflation and wishes to conceal it. It does this internally by price fixing. But one consequence of this is that the volume of money is kept in excess of the total volume of goods at official prices. This produces the “inflationary gap”—i.e., the amount of money or money incomes with no outlet.
If imports are allowed to come in freely, all this excess money, as Sweden discovered, will be used to buy them. Yet Ruritania wants imports of raw materials and machinery, and wants to get them as cheap as possible. It can do this by keeping its official exchange rate arbitrarily high and making it a crime to buy or sell its currency below this rate. This makes foreign goods cheap in terms of its own currency; but it also makes its own export goods extremely, if not prohibitively, expensive in terms of foreign currencies. The high rate for its currency, in short, encourages imports and discourages exports. It is also likely to make the American traveler feel that he is being swindled by the obligation to convert his dollars at the official exchange rate, and so provokes resentment and discourages tourism.
Ruritania tries to cure all this, not by allowing its currency to seek its natural supply-and-demand level, but by refusing to permit any import to come in except by special license. It orders manufacturers to set aside specified goods for export and forbids its own citizens to buy at any price the goods set aside for export.
The result of refusing to permit its own citizens to buy “luxury” imports with their own money, however, is to hurt the luxury export trade of all other countries. Yet each European country has its own luxury exports which it is eager to push to get dollars or other exchange to buy necessary imports. France has its wines and brandies, perfumes and laces. Holland has its tulip bulbs and fancy cheeses. Switzerland has its embroideries and resort hotels. Each argues that it is unsound and unrealistic to expect people in these trades to turn to other work. Their capital and long-acquired skills are irrevocably invested in what they are doing. It is often a way of life inherited from their fathers and grandfathers. To force them into other lines would involve huge losses and radically dislocate the whole national structure of production. So each country tries to force other countries to take its luxury exports while refusing to take theirs.
The stalemate is broken by bilateral trade treaties in which each country forces its neighbor to take some of its luxuries along with its necessity products. These treaties, however, do not merely leave matters where they would have been under freedom of trade. Both necessities and luxuries are exchanged against each other at artificial prices which do not have to meet world competition. Each country is forced to take, not the goods that its consumers want, and in the proportions that they want them, but the luxuries that its neighbor is most eager to get rid of.
Bilateralism is politically popular because its basic principle, “Buy where you sell,” is easier to understand than free multilateralism. It is obviously imitated from Schacht and Hitler, who in turn revived a mercantilist fallacy centuries old: “The sneaking arts of underling tradesmen,” wrote Adam Smith in condemning it, “are thus erected into political maxims for the conduct of a great empire; for it is the most underling tradesmen only who make it a rule to employ chiefly their own customers.”
Bilateralism is a necessary part of a “planned,” that is to say, a dictated, economy. An internally dictated economy would break down immediately if it permitted free international trade. Internal and external controls necessitate each other. Bilateralism is ideal for government “planners,” because it permits them to say just how much of this or that shall be sold or bought, and to or from just what country. This enables them to keep their hands on all the strings of business, to retain life and death control over particular industries, and to throw trade this way or that in accordance with the foreign political policy of the moment. But none of this makes for peaceful, free, or stable world trade.
Once we in America have recognized the real nature of the European disease, it should be clear that we have been applying the wrong remedies. Between July 1, 1945, and July 1, 1947, it is estimated, the United States will have contributed abroad nearly $817,000,000,000 in cash and goods. In general, we have been pouring these gifts and loans into Europe without conditions, or with wholly inadequate conditions. It is not surprising that we have achieved such small results from such huge sums, and that the crisis grows worse instead of better.
The operations of the Export-Import Bank have drifted insensibly from commercial loans to political loans, and then to thinly disguised relief. The managers of the International Fund have next to no power to insist on internal fiscal or economic reforms before they grant their credits. The $25,000,000 credit recently granted to France, for example, will be used to keep the franc far above its real purchasing power, and at a level which encourages imports and discourages exports. This will merely prolong the unbalance of French trade and create a need for still more loans.
Such a use of the resources of the Fund not only fails to do good but actually does harm. The International Bank has at least the power to refuse loans unless the borrower is “in position to meet its obligations.” But it also lacks clear power to insist on reforms.
It is now contended in Administration and other circles not only that we must make further huge loans to Europe, with equally inadequate conditions, but that there is no use dealing with this matter on a “patchwork, one-at-a-time” basis. We must treat Europe, we are told, on a “Continental plan,” and lend it as a unit one huge sum.
This is much as if a banker were to call all his applicants for loans into a single mass meeting and say: “Listen, it’s just too much trouble to deal with each of you separately, to find out just how much each of you really needs, and whether your individual plans, past record, and present business methods are such as to give reasonable assurance that the money will be properly used and has a good prospect of being repaid. I’ve only got a limited amount of money anyhow, so I’m turning it over to you fellows in a lump and you can divide it among yourselves.”
The real need is the exact opposite of this. Instead of this whole-lump approach, what is needed is a far more careful and critical examination than we have yet been willing to make, of the particular problem of each country and the precise merits of each application for aid. No loan should be granted except in exchange for far-reaching reforms that would really make it possible for the loan to achieve its purpose. Among reforms on which lenders should insist are balanced budgets, a termination of inflationary policies and of exchange controls, and reasonable restoration of external and internal freedom of trade.
After the first world war two types of loans, as W. Randolph Burgess recently pointed out in London, were especially effective—the Central Bank stabilization loans and the League loans. They were effective because each was preceded by a thorough review of the position and program of the borrowing country. The loans were accompanied by expert aid and supervision. The granting of the credit thus became itself an assurance to the world that an effective program had been adopted. Big results were obtained with moderate means.
All this underlines the need of returning the business of international lending as soon as possible to private hands. There could still be an important role for the International Bank while such a shift to private hands was going on. It could stand ready to take the unsold balance of any loan it approved, provided private investors had already subscribed to a certain percentage of it. In this way the Bank would make only loans that had met some test of the market. It would not place itself in the position of imposing conditions, but would merely be a bond buyer.
Certainly it would add to clarity of purpose and better international relations all around if from now on relief were clearly relief, politics were clearly politics, and loans were really loans.
June 16, 1947
In recent months there has been increasing concern, as there ought to have been, about rising prices and living costs. And in political discussion the chief blame, as so often in the past, has been placed on the American businessman. Producers and sellers have been asked by the President to hold prices down, as if everything depended solely on their decisions, and as if all they had to decide was whether to hold out for “reasonable” or “unreasonable” profits. But the plain truth is that the rise in living costs has been brought about overwhelmingly by governmental practices. It is the very people who now point accusatory fingers at the businessman whose policies have done and are doing most to bring about the rise in prices.
The primary cause of the rise in prices has been the mounting volume of money and credit. This has more than tripled since the outbreak of the war. The increase has been mainly the result of the cumulative deficit in the Federal budget financed chiefly by borrowing from the banks. You cannot give people three dollars for every dollar they had before and not expect them to bid up prices. For the rise in the price level must be mainly explained from the side of increased money rather than from the side of shortages of goods. Industrial production in March, in fact, was estimated by the Federal Reserve Board to be running 89 percent higher than in 1935–39. But this was more than offset by income payments 163 percent higher than in 1935–39.
The Administration has certainly made no vigorous attack on this basic cause of higher prices. It continues to spend five times as much money a year as in the immediate prewar period. Through Federal Reserve manipulations it continues to keep interest rates dangerously low. This policy maintains the vast excess of bank deposits and money circulation and encourages further monetization of the public debt.
The government, again, has adopted a consistent policy of promoting wage rate increases. It has done this through Federal laws which take the risks out of striking and make it all but impossible to resist wage-increase demands. It has done it through direct imposition of higher wage rates by so-called “fact-finding boards,” by Presidential intervention, or by property seizure and direct government negotiation of higher wage contracts with unions. As a result of these policies, average weekly manufacturing wages in March, before the latest 15-cent-an-hour increase got started, were 99 percent above the 1939 level and the highest on record. Hourly wages in March, also at the highest point ever reached, were 86 percent above the 1939 level. Wages are normally about eight times as great as profits. To force up wages is to force up prices.
Another major cause of the rise in prices in recent months, which is only now beginning to receive the attention that its real importance warrants, is our national policy of creating a huge export surplus by government gifts and loans to foreign countries. Our exports of goods and services to the rest of the world during 1947 are officially estimated to total $16,000,000,000, an all-time peacetime high, compared with annual exports of goods and services of only about $4,000,000,000, before the war. Against this we are expected to import only about $8,000,000,000 of goods and services. The export surplus of $8,000,000,000 a year is inflationary. It means that we are paying out $8,000,000,000 in wages, salaries, and profits for goods and services that we do not get. It adds $8,000,000,000 to the excess purchasing power competing for the goods that are left.
Mr. Truman keeps making his drive for “voluntary price reductions” against industrialists. But the great rise in prices has in fact taken place in foodstuffs and farm products. It is on these that the abnormal foreign demand made possible by our gifts and loans has chiefly concentrated. On May 31, on Mr. Truman’s own figures, wholesale prices of farm products were 78.4 percent above the 1926 level. All commodities other than farm products and foods were up only 32.3 percent. All this does not mean we should halt forthwith the gifts and loans to Europe that create our export surplus. We have world responsibilities that we cannot evade. But we must frankly recognize the major inflationary effects of this policy and try to offset it by other means. The government can at least stop artificially supporting prices of farm products.
June 23, 1947
It is unfortunate that Secretary Marshall, in his speech at Harvard, could come so close to diagnosing the real economic disease of Europe and then miss it. He pointed out that “in many countries, confidence in the local currency has been severely shaken.” But he did not tell us why. It is because the governments of these countries have insisted on living beyond their fiscal means; because they have financed the difference by printing more money; and because the ideology and vested political interests within these countries give little assurance that this process can be brought to a halt.
But there is an obstacle to European recovery even more serious. The money, though fallen in value, would still facilitate production and exchange if commodity prices and foreign rates were free to move in response to actual supply and demand. But precisely this is prevented by government controls which make it a crime for anyone to buy or sell goods in accordance with the shrunken value of the currency. The European farmer refuses to plant wheat, or feeds it wastefully to livestock, not, as Secretary Marshall says, because “he cannot find the goods for sale which he desires to purchase,” but because the distortions of price fixing either make it more profitable for him to sell wheat in the form of poultry, hogs, or beef, or make it unprofitable for him to raise wheat at all. And the principal reason why he cannot get goods in the cities is because price fixing in turn discourages and prevents production and sale in the cities.
Secretary Marshall’s speech at Harvard represents an advance in American policy in at least one important respect. It indicates that further financial aid will not be forthcoming from this country except under conditions. But it is extremely vague regarding what these conditions ought to be. There must, said Mr. Marshall, be “some” agreement among the countries of Europe as to the requirements of the situation. Everything depends, however, on precisely what this agreement is. It is not important whether or not some European nations agree to a “joint” program. What is important is whether the programs they adopt, jointly or individually, are really such as to promote economic recovery.
Secretary Marshall’s reluctance to suggest a definite program is understandable. He does not wish to put the American Government in the position of “dictating” to Europe or “interfering in its internal affairs.” But this is the inescapable dilemma of government lending. For unless the American Government does impose conditions, its future loans, like its past loans, will merely subsidize and prolong the socialistic and restrictive policies that are strangling production and making recovery in Europe impossible.
We now seem ready to make loans to practically any government that says it is anti-Communist, even though the policies it follows mean that the loan will soon be used up, that it will be back for more, that private enterprise in that country is tied hand and foot, and that the borrowing government, in short, though it is “fighting the Communists,” is meanwhile pursuing the very economic course that leads toward Communism.
All this suggests that, instead of framing still more grandiose foreign lending schemes, our government ought to get out of the foreign lending business as soon as possible. The best immediate policy is to leave all further foreign loans either to private hands or to the International Bank, which is compelled to take credit-worthiness into account because of the fact that it must sell its debentures to private investors. If the International Bank sends an expert economic mission to each country that applies for a loan, if it frankly tells each borrowing country that investors will not be interested unless that country makes certain specified economic reforms, then a loan may really achieve its purpose. Under such conditions, in fact (as experience with the League of Nations loans proved after the first world war), it is not the loan itself that is important in assuring recovery, but the reforms made in order to get the loan.
June 30, 1947
It is not surprising that union officialdom should have fought with every weapon in its armory against what it unscrupulously tagged the Taft-Hartley Slave Labor Bill. The new law is not perfect. It retains some mischievous provisions from the old Wagner Act. It includes several provisions which may prove difficult to enforce. But it represents nonetheless an immense step forward. As compared with the last dozen years, the whole climate in which labor negotiations are conducted will now be profoundly improved.
Where the Wagner Act started off with the falsehood that only the transgressions of employers burden or obstruct commerce, the new act from the beginning is two-sided. It declares that neither labor nor management has a right to engage in “practices which jeopardize the public health, safety, or interest.” The new law defines foremen, and exempts employers from the legal obligation to bargain collectively with them, so clearly that not even the National Labor Relations Board or the Supreme Court majority can “interpret” the provisions away. It makes the general counsel of the new five-man NLRB a direct appointee of the President instead of a creature of the board. This should make the counsel independent and help to separate the board’s prosecuting from its judicial functions.
The new law removes the Wagner Act’s specific endorsement of the closed shop. It sanctions only the union shop, provided the union itself is “open.” It authorizes the checkoff only on the written agreement of each employee affected. For the first time the new law makes it an unfair labor practice not only for an employer, but for a union, to “restrain or coerce” employees in the exercise of their bargaining rights. The new law illegalizes the secondary boycott. It illegalizes “excessive or discriminatory” initiation fees. It restores freedom of speech to the employer when his expression of opinion contains “no threat of reprisal or promise of benefit.” The new law makes collective bargaining for the first time a “mutual obligation” of employers and unions. The new law makes it clear for the first time that the obligation to bargain “does not compel either party to agree to a proposal or require the making of a concession.” The new law holds both parties to a collective bargaining contract. It requires a 60-day notice on either side before the termination of an existing contract. It deprives any employee who strikes within this 60-day period of his status as an employee under the act unless his employer willingly takes him back. The new act allows an employer as well as a union to petition for a bargaining election. It withholds recognition from unions that refuse to file statements revealing officers’ salaries, methods of election, initiation fees and dues, qualifications for membership and grounds for expulsion, and audited financial statements. No union is given protection under the act whose officers refuse to file affidavits that they are not Communists.
Where the old Wagner Act declared that in proceedings before the NLRB “the rules of evidence prevailing in courts of law or equity shall not be controlling,” the new act just as specifically requires that such proceedings “shall, so far as practicable, be conducted in accordance with the rules of evidence applicable in the district courts of the United States.” Where the Wagner Act held that in court appeals the findings of the NLRB as to the facts should be conclusive “if supported by evidence,” the new act insists that they must be “supported by substantial evidence on the record considered as a whole.” These two procedural changes alone will make an immense improvement in the fairness with which labor relation cases are tried.
The new law repeats from the Wagner Act the provision that nothing in it shall be construed “so as either to interfere with or impede or diminish in any way the right to strike”; but this time it adds the significant provision “or to affect the limitations or qualifications on that right.”
This is by no means a complete list of the important changes. The new law does not guarantee labor peace. No law could. But it provides two-sided bargaining and should improve the whole atmosphere of labor relations.
July 7, 1947
The series of crippling “protest” strikes which have taken place since the enactment of the new labor law ought to have surprised no one. The union leaders by their hysterical attack on the Taft-Hartley measure as a “slave labor” bill, and the President by the reckless language of his veto, openly invited precisely this result. Mr. Truman repeatedly called the measure “unworkable,” He declared that it would “open up opportunities for endless lawsuits.” He warned employers that they would “regret the day it was conceived.” He predicted that it would “cause more strikes, not fewer.” He repeatedly said that it left unions no means of protecting their rights “except by striking” and “no option but the use of economic force.” In the light of this provocative language, Mr. Truman cannot disown responsibility for the strikes that have followed the veto which he must have known would be overridden.
Under the Constitution it is the President’s sworn duty to enforce this act in good faith. Yet he can do this now only by doing everything in his power to disprove and discredit his own predictions. It is not realistic to expect this. By his reckless course he has thrown justified suspicion in advance upon every appointment he makes under the new act and every ruling or decision made by his appointees. For the President’s veto and warnings will be borne out only if the new law is so administered that it does cause more strikes instead of fewer, if it is so interpreted that it does open up endless lawsuits, and if it really does cause employers to regret the day it was conceived.
It has been suggested that Mr. Truman should recognize his self-created dilemma by asking the whole National Labor Relations Board to resign, and appointing only administrators recommended by the Congressional sponsors of the new labor law. Such a drastic course might solve this particular problem. But the major constitutional dilemma would remain. Mr. Truman’s fight a year ago for all-out prolongation of price control, and his veto then of the Case Labor Disputes Bill, were repudiated by the voters in November. It must be said in Mr. Truman’s favor that he then interpreted the sweeping verdict of the polls correctly, and appeared to accept it gracefully. He said: “The people have elected a Republican majority to the Senate and House of Representatives. Under our Constitution the Congress is the lawmaking body. The people have chosen to entrust the controlling voice in this branch of the government to the Republican party. I accept this verdict in the spirit in which all good citizens accept the results of any fair election.” And Mr. Truman promised to “cooperate in every proper manner” with the new Congress.
Mr. Truman’s course in recent months has shown that these fair words meant precisely nothing. For feeble and unconvincing reasons he vetoed a tax-reduction bill that had been passed by heavy majorities in both Houses. This was only the second time in our history that a President had ventured to veto a general tax measure. He then vetoed—but this time unsuccessfully—a major labor bill that had cost Congress five months of work—a bill that he himself described as “perhaps the most serious economic and social legislation of the past decade.”
Immediately after the political upheaval last November it was suggested, by members of the President’s own party and adherents of his policies, that he could create “a notable precedent in American history” by resigning, after allowing Congress to propose a man whom he would name as Secretary of State and who would then constitutionally succeed him. Those who dismissed this suggestion as “silly” could not have stopped to weigh the full consequence of the traditional course. It meant two years of recrimination and deadlock.
The present division and paralysis at the heart of our government makes it next to impossible today for either Congress or the President to frame sound economic policies and put them into effect. This situation darkens the whole economic outlook, domestic and foreign.
July 14, 1947
The President’s scolding message on the new rent-control extension law not only implied that Congress should have kept indefinitely almost every wartime control over rents and building, but that no real housing can be built now except by still further government intervention. Yet Congress needlessly left itself open to attack by drafting this rent-control extension with astonishing clumsiness, even from a purely political point of view.
Though Mr. Truman greatly overstated the case against the “voluntary” rent increase of 15 percent, it is subject to legitimate criticism. Nobody wants a rent increase. The individual tenant, therefore, before “agreeing” to such an increase, is really forced to decide what future Federal or state rent-control laws are going to be, how long they will last, and whether his acceptance of a 15 percent increase now will in fact buy sufficient good will from his landlord to assure him a lower rent in the long run. This “voluntary” provision, in other words, forces the individual tenant to gamble on political and psychological factors he cannot measure.
In exempting hotels, again, while keeping rent controls on other residential space, Congress managed to create an exaggerated impression of how much rents in general would rise if all controls were removed. As long as rents in general are legally held below the market level, existing tenants take advantage of this to keep spread out and to use space less economically than otherwise. By increasing the number of people who are compelled to bid for the uncontrolled space left over, this forces up the market price of such space compared with what it would be if all rents were free.
The biggest political mistake of all, however, was Congress’s refusal to provide that any state that wished to do so could at any time take over rent control within its own boundaries. This would not only have saved Congress from a political headache. It was the only Constitutional thing to do. There is not in the Federal constitution a single clause that could plausibly be interpreted to give the Federal government the right to regulate rents in peacetime. If rents are not essentially local, nothing on earth is local. Houses and apartments do not move across state lines. The Federal rent legislation is a symptom of how little anyone any longer cares about states’ rights or the limits that our Constitution put on Federal powers.
Mr. Truman in his rent-control message denounced the “brazen operations” of the “real-estate lobby.” The truth is that nowhere in the world does the landlord lobby begin to compare in power with the tenant lobby. Since the outbreak of the war rents have been held down far more than any other major item in the cost of living. In this country, compared with the prewar level, foodstuffs have risen 88 percent, clothing 84 percent, house furnishings 82 percent, all items together 56 percent. Rents have done most to pull this average down. They have risen only 9 percent. We can get some measure of the existing discrimination against the landlord if we ask ourselves what the reception would be to a proposal to treat the landlord as well, or even half as well, as other sellers—to permit him, say, to increase rents by as much, or even half as much, as the average percentage increase that has taken place in all other items in the cost of living.
What is not yet understood is that freeing rents from controls would not in the long run even increase the cost of living. It would merely restore the natural market relationships of prices, rents, and incomes to each other. If people once more had to spend the former proportion of their incomes for rent, they would have just that much less monetary purchasing power left over to bid up the prices of all other things. With rents alone arbitrarily held down, workers whose monthly incomes have more than doubled need spend only half the former percentage of their income for housing. This means that old tenants use space more wastefully, so intensifying the problem of those who happen to have been caught outside. The “housing shortage” is itself in large part a product of the very rent control that “protects” us from it.
July 21, 1947
More and more the strange idea is being put forward that America must make loans or gifts to foreign countries, not primarily to save them but to save itself. We are told that we must make these gifts or loans not as a humane or charitable duty but out of shrewd self-interest. Newspaper commentators in the recipient countries have more and more been interpreting our generosity to them on this theory. On June 25 Pravda declared that the Marshall Plan was influenced by a desire to prolong a postwar “boom in the United States” and to “lessen the ripening economic crisis” here.
That Communist Russia should hold such a view is not surprising. It fits in perfectly with all the other claptrap that Communists have long preached about capitalism. But the theory is just as eagerly embraced elsewhere.
A year ago, in its issue of July 12, 1946, the Eastern Economist of New Delhi put it forward in its most candid form. “The United States Lend-Lease plan of helping the Allies in the recent war has been acclaimed as an act of unparalleled generosity,” it said. “But it was also a brilliant and ingenious way of solving what would otherwise have been an intractable problem. . . . The productive power of America has multiplied itself so fast that it is now admitted that she cannot continue to give 60,000,000 jobs unless she is able to have a large export trade. . . . In such circumstances it would not be such a foolish thing (as some might imagine) to give away goods to other countries, for on balance it would be better to part with surplus goods than to create unemployment. . . . Machinery should be set up by America whose purpose would be to provide gifts of loans to countries.... The United States . . . will buy the goods, give them as gifts, and reimburse itself by additional internal taxation. . . . If this is to play the world’s Santa Claus, the United States is both rich enough and should have sense enough to fill the role.” This idea, in both crude and sophisticated guise, now runs like a refrain through the French and British press.
More surprising, it is endorsed by some American businessmen and even by some American economists. Yet it is unadulterated nonsense.
If we could create prosperity merely by making goods to give away, then we would not have to give them to foreign countries. We could make the goods to give away to our own poor. We could furnish them with free overcoats, free lunches, and free automobiles; build any amount of good new housing, which we badly need, and turn it over to them. Simplest of all, we could turn over to them direct additional money taken from the taxpayers and let them buy with it whatever they themselves wanted. Why confuse the issue by bringing in foreign nations and foreign trade?
It ought to be clear to the meanest intelligence that nobody can get rich by giving his goods away. What seems to confuse otherwise intelligent people when this proposition is applied to a nation instead of an individual, however, is the fact that particular firms and persons within the nation can profit by such a transaction while the rest of us are forced to absorb the losses. The exporter may profit because he makes additional sales. But if the foreign loan is not repaid, then the loss must be made good out of increased taxes on every American. American consumers will then have just that much less money to buy American goods. Domestic business will lose as much as export business has gained. And the country will be poorer by the amount of goods it has given away.
This would be the consequence of unsound foreign loans at any time. But the country is now in the midst an unprecedented inflationary boom. Precisely when this inflation should be prevented from going further, a government foreign-loan policy can only intensify it. The theory that we need to create an export surplus by unsound governmental loans would be foolish enough even if we had unemployment and wished prices to go up; it becomes downright idiotic in a period of full employment and when everyone is already complaining of high living costs.
July 28, 1947
In 1939, according to the Bureau of Labor Statistics, average weekly wages paid in all manufacturing industries were $23.86. In bituminous coal mining they were almost exactly the same—$23.88, In January of this year, weekly wages in all manufacturing industries had advanced 98 percent to $47.02. In the same period, weekly bituminous coal wages had been boosted 191 percent to $69.54. These were the highest weekly wages paid in any industry. The cost of living had gone up only 53 percent. The wholesale price of bituminous coal went up in the same period 43 percent.
Such was the situation before John L. Lewis’s final triumph a few weeks ago. Then he boosted the hourly wage rates of soft-coal miners from $1.18½ to $1.63⅛. He won $13.05 for an eight-hour day against $11.85 for a previous nine-hour day. This means that for the most productive periods the miners’ weekly wages were raised from a former $69 to $75 to $78, depending upon when overtime begins.
All during the period that Mr. Lewis’s strike threats were forcing the soft-coal industry to add another rise of about 30 percent in total labor costs, President Truman did nothing. Or rather, he seemed to do everything to strengthen Mr. Lewis’s hands. Though the Taft-Hartley bill was finally enacted over his veto, his known opposition made it weaker than it would otherwise have been (particularly in dealing with an industry wide union like the United Mine Workers). By calling it “unworkable” he encouraged unions to flout it or treat it with contempt.
Immediately after the damage was irreparably done, however, the President expressed “deep concern,” not about the wage increase itself, but about the possibility of “a substantial increase in the price of coal.” This, he feared, would “renew the inflationary spiral.” “The people of the country,” he went on, “have the right to demand that their prosperity shall not be imperiled by immediate increases in the price of coal and in the price of steel.” In other words, he finds nothing to fear when Mr. Lewis or any other labor leader forces any increase whatever in wages. Our economy, it appears, is only “imperiled” when such wage increases are reflected in prices.
Mr. Truman did not stop to tell us what the result would be if this increase were not reflected in prices. In 1946 the average net operating profit margin to American mines on a ton of soft coal was 13 cents. The United Mine Workers Journal—which can be counted upon for a low estimate—contends that the cost of soft coal will not be raised more than 65 to 67 cents a ton by the new labor settlement. If the price of soft coal did not go up now, therefore, this would mean an average net operating loss to the mines of something in the neighborhood of 52 cents a ton. Would it help the miners, or the steel industry, or production and employment, if the soft-coal mines had to close down because they were losing money?
Do Mr. Truman’s advisers know by just how much the coal mines and steel companies should or should not increase the price of coal or steel in order to make just the “right” profit? In view of the heavy losses in the coal or steel industry in bad years, do Mr. Truman’s advisers know just how high profits should be in good years to attract both the absolute and relative amounts of new venture capital to assure the right production of steel or coal in relation to other production? Do they know what the profits of industry in general should be to accumulate or attract sufficient new capital to provide new jobs and bring about a permanent increase in real wages?
Mr. Truman’s coal-price statement is even more disturbing to the business outlook than the latest forced boost in coal wages and the distortions in the economy which it will set up, serious as these are. For Mr. Truman’s statement is a resumption of the effort to talk down prices by exhortation and veiled warnings. It looks suspiciously like the groundwork of a campaign to restore price control. To encourage a further increase in labor costs while holding down prices would be, of course, the quickest and most certain way to bring prosperity and production to a halt.
August 4, 1947
The President’s 82-page Midyear Economic Report, though it contains much instructive material, is clearly intended on the whole as an apologia for the Administration’s policies. The “Foreword and Summary” is purely political. The report refers frequently to our “free” economy; yet it tacitly assumes that the government must control everything in this economy and must constantly tell prices and wages what to do. That the government should simply assure an open competitive field, and then let price and wage relationships adjust themselves in a free market, is an idea that never seems to occur to the authors of the report.
There is a great deal of boasting in the report about our “$225,000,000,000 economy.” But there is no reference to the fact that the purchasing power of the dollar in which this “gross national product” is measured is only 55 cents as compared with the dollar of 1935–39. If the gross national product were stated in terms of the prewar price level, it would seem considerably less impressive. The report does not point to the huge increase in money and credit that has been the real cause of the rise in prices. It treats the rise in prices, in fact, as if it were mainly the result of arbitrary decisions by greedy businessmen.
Throughout the report there is an attempt to minimize the rise in wages at the same time that a great deal of alarm is expressed about the past or possible rise in prices. The ordinary reader would hardly suspect from the tone of all this comment (and he is certainly not told) that while compared with the prewar period 1935–39 wholesale prices have increased 83 percent, weekly manufacturing wages have increased on the average 112 percent. Nor would the ordinary reader suspect, from the studious efforts to minimize the rise in weekly soft-coal wages, that they have gone up twice as much as other industrial wages, and are more than 200 percent above the prewar figure.
While further price rises are deplored throughout the report, we are told that “in some cases wage increases are still needed.” The President recommends an increase of “at least” 62½ percent in the present legal minimum-wage level. He does not say what the effect of this might be in causing unemployment among the very people it is intended to benefit, or in forcing up wages above the minimum to maintain existing differentials. He also wants wages increased that have risen “substantially less than the increase in the cost of living.” But he fails to draw the simple corollary that, unless wages which have increased more than the cost of living are correspondingly reduced, this will simply increase the cost of living still further.
The President’s report opposes “tax reduction now” on the ground that it “would add to inflationary pressures and would also prevent debt reduction.” But it says not a word about accomplishing this by cutting the government’s unparalleled peacetime expenditures. On the contrary, it proposes increased social-security benefit payments, housing subsidies, and government aid to Europe. Whatever the merits of these measures, they must add to inflationary expenditures.
In recent years it has become fashionable to believe that it is the government’s function to “stabilize” the economy and to “compensate” for the mistakes of private business. This belief rests on the assumption, not merely that government officials will always know better than businessmen what to do, but that they will put aside all political considerations and do it.
The President’s report illustrates what happens in real life. A dangerous inflationary boom is being treated as if it were a solid prosperity. Measures like increased social-security payments, housing subsidies, and foreign loans that stimulate exports, which under the “compensated economy” theory would be adopted only in depression, are advocated in a period of unprecedented employment and soaring prices. Further wage advances are encouraged. The net effect of government economic intervention is to push an inflationary boom still farther; for there is always an election ahead, and you must be at the peak of the boom when you get there.
August 11, 1947
The fate of the Taft-Hartley Act, which goes into effect the 22nd of this month, is an ominous illustration of the power of propaganda. The Wagner Act left the individual worker at the mercy of the union boss. The new law protects the individual worker’s rights and interests. It is precisely because the new law does curb the hitherto unbridled powers of union leaders over the rank and file that these leaders opposed its enactment with every technique of propaganda. They did not shrink from any misrepresentation, however fantastic, including the device of denouncing the measure as a “slave-labor” law.
This was not enough to shake the determination of an overwhelming majority of Congress to pass it. Yet it had its effect, not only on the astonishing language of the President’s veto, but on the rank and file of workers. A recent survey conducted by the Opinion Research Corporation found that 54 percent of the employees questioned, and 64 percent of union members, “disapproved” of the law.
But the survey also uncovered a strange paradox. Notwithstanding their declared disapproval of the new law, a majority of workers favored every individual provision of it on which they were questioned. Even a majority of union members favored every feature of it but one. Here is the result:
| Favor law to- | All Employees | Union Members |
| Require 60-day cooling-off period | 78% | 70% |
| Allow companies to sue unions | 77% | 70% |
| Allow freedom of speech for employers | 69% | 61% |
| Require union financial reports | 86% | 85% |
| Prohibit Communist union leaders | 76% | 77% |
| Prohibit union political contributions | 56% | 50% |
| Allow checkoff only with worker’s consent | 68% | 74% |
| Allow union shop only with majority vote | 79% | 77% |
| Outlaw closed shop | 60% | 48% |
| Delay strikes in public service industries | 78% | 70% |
The new labor law makes it an unfair labor practice for a union as well as an employer to “restrain or coerce” individual workers in the exercise of their bargaining rights. It illegalizes excessive or discriminatory initiation fees. It refuses to certify a union or allow it to bring complaints to the labor board unless it has published a report of its receipts and disbursements, as well as a statement giving its name, the names, titles and salaries of its principal officers, the manner of the election, the initiation fees and dues of the union, a detailed statement of its constitution and bylaws showing the procedure followed regarding qualifications for or restrictions on membership, election of officers, calling of regular or special meetings, levying of assessments, imposition of fines, authorization for strikes, authorization for disbursement of union funds, audit of union financial transactions, expulsion of members and the grounds for it.
Every member of a union will want to know every one of these facts. It is only union bosses who find their arbitrary powers threatened, who want to continue to be highhanded, secretive, and irresponsible to the rank and file of their unions, who have anything to fear from such publicity. It is not surprising when such union bosses announce that they will “bypass” the new law.
Equally important protections for the rank and file are the provision requiring written consent of individual workers for the checkoff of union dues, the provision making it unlawful for an employer to buy off a corrupt or blackmailing union leader, and the provision to assure that so-called “welfare funds” really are used for the union members’ welfare and not merely to make labor leaders financially independent of the rank and file of their unions.
If we are thinking not of retaining unrestricted power for a small union oligarchy, but of the rights of the union rank and file and the rights of the individual workers, then the much abused Taft-Hartley Act far more deserves the title of a pro-labor law than the misconceived Wagner Act ever did.
August 18, 1947
Mr. Dalton’s defenders claim that he was unaware of the fact that not only Britain but Canada, Argentina, Spain, and other countries also were suffering from serious dollar shortages....The [British] Government defense is that the whole world is in the grip of a dollar famine that is rapidly becoming so severe that it will produce deflation and unemployment everywhere unless the United States acts quickly to relieve it.”
These sentences from a London dispatch to The New York Times give an accurate reflection, not merely of the views of the British, but of outside nations in general. Their plight, as they see it, is not their fault, but ours. It is not Britain or Europe, but the United States, that must “act quickly.” It is we who must contribute still more loans or gifts to make up whatever deficit in its trade balance the outside world succeeds in bringing about.
It is of the first importance, if the world is to apply correct remedies for the present crisis, that it separate the sense from the nonsense in these allegation of a world dollar famine. In one sense, of course, Britain (or France, or Mexico, or the Argentine) is correct in attributing its troubles to a “dollar shortage.” In the same sense, an American would be correct in saying that the reason he could not pay his grocery bill or buy himself a new car is that he was suffering from a dollar shortage. But such a description does not explain anything. The real question we must answer, either for the foreign nation or the individual citizen, is what causes the dollar shortage.
Now for Britain or Europe or Latin America to describe its plight as a “dollar shortage” is really a way of implying that the situation is somehow our fault. We are being blamed for not supplying enough dollars. The real trouble, however, is that Britain and Europe and Latin America wish to buy more from the United States than they sell to it. They wish to get from us more than they give. They wish to buy more than they can afford to pay for. They are consuming more than they are producing. The only permanent remedy is for them to increase their production or reduce their consumption. As long as they do neither they can only keep up the one-sided trade with us with the proceeds of our loans or gifts. We are in fact supplying the outside world with $1,000,000,000 worth of goods and services every month in excess of what we get in return.
In brief, the trouble at bottom is not a shortage of dollars but a shortage of goods and services to exchange for dollars. To talk of a shortage of dollars in any absolute sense is absurd. In the last two years the United States has contributed to the outside world cash and goods estimated at nearly $17,000,000,000. The gold and dollars now held by the outside world are estimated to reach the unprecedented total of more than $20,000,000,000. Why, in the face of this, does Europe complain more loudly than ever of a “dollar famine”? Why has the world’s trade become so unbalanced? The whole answer would be complex; but the chief responsibility must be placed upon government controls. Most of the governments of the world today, by forcing commodity prices below the levels that supply and demand would bring about, are creating artificial bottlenecks and shortages. When they draw on us for the deficiency, they cause shortages and higher prices even here.
But the gravest case of arbitrary price fixing is the overvaluation that nearly all countries place on their own currencies. They will not accept the verdict of the open market as to what those currencies are really worth. They will not even allow that open market to operate. By keeping their currencies artificially high, they make imports from America relatively cheap in terms of their own currencies at the same time that they make the prices of their exports prohibitively high in terms of dollars. It is this that is chiefly causing the chronic unbalance of trade.
What the world is suffering from today is not a dollar crisis. It is a sterling crisis, a franc crisis, a guilder crisis, a peso crisis. It staggers from crisis to crisis because it will not allow free markets to function.
August 25, 1947
The British press regarded the recent economic proposals of Prime Minister Attlee as “inadequate” and “vague.” The Opposition called them “totalitarian.” But very few pointed out that, wholly apart from their effect on human liberties, the economic remedies put forward by the Prime Minister were precisely the opposite of those that the situation called for.
The fundamental trouble with the British economy today is governmental “planning” itself. The British Government has refused to let the free market work. And when the policy of government restriction breaks down, Mr. Attlee, far from recognizing that the past restrictions have brought about the present collapse, opines that “as things have turned out, we have perhaps moved too far and too fast” in the direction of restoring “freedom of individuals to undertake the kind of work that they prefer.”
Mr. Attlee thinks the trouble with England is “a world shortage of dollars.” The mistaken nature of this complaint was pointed out in this column last week. He is equally mistaken in complaining of the provisions in the American loan agreement for sterling convertibility and for non-discrimination against American goods. Both these provisions were sound in themselves. It is chiefly because of its own economic controls, particularly over sterling, that it has been difficult for the British Government to fulfill these provisions.
“Definite targets,” declares the Prime Minister reassuringly, “are being set for basic industries.” But definite targets were set long ago, and were simply not achieved. Mr. Attlee seems to think that if the targets previously set proved too high for achievement, the remedy is to set still higher targets. “For the year 1948, we must raise our sights.” But this is merely planning by exhortation and rhetoric; it is wish-planning. A nation cannot simply talk itself into higher production. Nor is it the function of government statisticians to decide precisely how great coal production, steel production, or particular exports ought to be. Neither government statisticians nor anyone else can know in advance precisely what steel production ought to be in relation to coal production, or the export of one commodity in relation to another. On the contrary, it is the function of individual consumers and producers, buyers and sellers, to establish the absolute and relative production of thousands of different commodities and services by expressing their decisions through a free market.
“We need,” declares Mr. Attlee, “faith in freedom.” Noble words. But in Mr. Attlee’s economic policy there is no faith in economic freedom, in freedom of the market, freedom of the consumer, or even in freedom for labor. Sir Stafford Cripps declared in the House of Commons on Feb. 26, 1946: “No country in the world, so far as I know, has yet succeeded in carrying through a planned economy without compulsion of labor. Our objective is to carry through a planned economy without compulsion of labor.”
But only eighteen months later Mr. Attlee is already admitting that his new program “will involve some sacrifice of individual liberty—by both employers and workers. . . . We shall have to take some measure of control over the employment of labor.”
In announcing his new plans Mr. Attlee repeatedly called for more “sacrifices” from the British public. But as Prof. John Jewkes of the University of Manchester pointed out last January: “Any plan which calls for ‘sacrifices’ should be subject to suspicion, since the purpose of a plan (except perhaps in case of war or threatened war) should be to lessen sacrifices and not increase them.”
Fanatics have been defined by Santayana as people who redouble their efforts after they have forgotten their aim. So the heads of the Labor government are forgetting their ideals of liberty, forgetting even the material purpose of their plan, and drive grimly ahead with a plan that has become an end in itself. Meanwhile their planned economy is running out of coal, running out of food, running out of dollars. And perhaps most serious of all, it is running out of alibis.
September 1, 1947
To our Stockholders:
Your corporation has always sought to be up-to-date, and to act in accordance with the precepts of the most forward-looking economists and statesmen. Your corporation seeks only service, and not profits. We are happy to report that in the last calendar year we have been of infinite service and have made no profits whatever.
Your corporation has of course kept in mind the importance of constantly boosting wages. Our workers must be paid enough to buy back the product we make, which consists mainly of nuts and bolts. We also wish to boost wages to increase the national purchasing power. In accordance with our understanding of the objectives of the CIO, we last year granted our workers an increase of 15 percent every month over the preceding month.
In January we made the mistake of announcing our first 15 percent increase without consulting the union leaders. We were promptly notified by the National Labor Relations Board that we had been guilty of an unfair labor practice in not having engaged in collective bargaining. We rectified this mistake in February. In our March negotiations, however, the union leaders called our attention to the fact that these voluntary raises on our part were undermining their position with the rank and file, who were beginning to ask whether they needed any high-salaried union leaders at all. The union leaders therefore suggested that the 15 percent increase ought to be granted every month only after they had demanded 30 percent, so that the wage increases each month could appear to be wrung from us. We agreed to this arrangement as the only one under which collective bargaining and a strong union organization could be preserved.
In accordance with the demands for “full employment” we have naturally sought every means by which to make more work. For this purpose we have hired inefficiency experts and specialists in unscientific management who are able through motion analysis to find slower and more complicated ways of doing things and who call attention to points at which labor-saving machinery can be got rid of. Through their expert services we are proud to announce that we succeeded in raising employment 37.2 percent last year with no increase in output whatever.
We have paid special attention to expanding our export sales by granting credits to foreign customers. Our company economist has pointed out to us that it is of no importance whether or not these loans are ever repaid, because they enormously increase our export sales. Moreover, he points out that it will be of particular advantage to the country if the loans are never repaid at all, because in return for our exports there will then be no imports to threaten our home industries.
Your corporation has issued a volume of bonds during the year which greatly exceeds the value of the corporation’s assets. We consider our bondholders, however, part of our corporate family. There is nothing to worry about, because as one big family we merely owe this debt to ourselves.
Your corporation has also contributed outstandingly to the fight against inflation. In accordance with the President’s request, we have constantly reduced our prices. As they are now far below production costs we feel confident that they must be fair. It is in the realm of prices, in fact, that your corporation has made a great contribution not only to prosperity but to economic science. Our company economist has long pointed out to us that if we constantly reduce prices we will constantly increase our volume of sales. We have found this to be so. We have finally found, in fact, that we dispose of the greatest volume of goods when we charge no price for them at all.
In this shining record of achievement, your corporation must report only one fly in the ointment. This, we regret to announce, is our last report. We are bankrupt and going out of business today.
Signed,
I. M. N. ADDLEPATE,
President
The Fund vs. World RecoverySeptember 8, 1947
The greatest single barrier to world recovery (if we exclude for the moment Russia and Communism) is hardly being discussed at all. This is the use of government police power to keep the price of currencies far above their real market value. It is failure to recognize the consequence of this policy that has made the whole discussion of the Marshall Plan, and of Great Britain’s trade and dollar difficulties, so unreal.
Suppose, for example, that a French brandy sells in Paris for 1,200 francs a bottle. The black-market rate for the franc is about 280 to the dollar. Let us assume that in a free market it would be about 240 to the dollar. At such a rate the brandy could be bought for $5 a bottle in American money. But the official rate for the French franc, which the American importer is now forced to pay, is about 120 to the dollar. This means that the brandy must cost him $10 a bottle. The arbitrary exchange rate raises the price as much as would a 100 percent import duty (on top of the duty that we actually impose). And this applies to every French import to this country.
Is it surprising, apart from any other factor, that France is exporting so relatively little to us?
In the same way, if we look at the problem from the other side, a typewriter that costs $100 in the United States would cost a French buyer, if he had to pay 240 francs for the dollar, 24,000 francs. But as he is able, thanks to exchange control and American loans, to get the dollar for only 120 francs, the typewriter costs him only 12,000 francs. And this applies to every American import to France. Is it surprising that Frenchmen would want to buy a great deal from us?
Yet nearly every currency in the world (with a few exceptions like the Swiss franc) is overvalued in terms of the dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity. For it not only encourages other countries to increase their buying from us at the same time as it discourages our buying from them, but it leads to a demand for the dollar as a direct investment because it can be bought at bargain prices. This is the situation which the British encountered when they made the pound for a short time freely convertible into dollars. Nearly everybody who had the right to get dollars asked for them—not necessarily because he wanted American goods instead of British goods, but because pounds were worth less and dollars more than the official rate of exchange between them.
This situation would long ago have corrected itself if it had been left free to do so. When Europe’s imports exceeded its exports, the demand for dollars would have raised the price of dollars in European currencies. This would have made American goods more expensive for European buyers at the same time as it made European goods cheaper for Americans. The balance of trade would have been automatically restored.
Moreover, if importers and exporters were free to buy and sell exchange at the rates that supply and demand warranted, all currencies would be freely convertible at a price. Britain, for example, could convert its “soft” into “hard” currencies at will at prevailing market rates. It is only because people are not allowed to pay or ask the real market rates that the conversion does not take place.
Why is this simple solution to the dollar and foreign-trade problem not adopted? Because under the Bretton Woods agreements (Article IV, Sections 3 and 4) each member of the International Monetary Fund is not merely permitted but compelled to forbid currency transactions within its own borders at other than the official rates. There can be no solution of the world unbalance of trade and of the so-called “world dollar famine” until this provision is revised to permit the restoration of free world markets in foreign exchange, Not until such free world markets exist can we tell what the real “needs” of Europe are. We might find, indeed, that the restoration of free markets in exchange, especially if combined with the restoration of free markets in commodities, would make the whole “Marshall Plan” unnecessary.
September 15, 1947
Union politicians chose the Labor Day week end this year to let loose a Niagara of nonsense. William Green, president of the AFL, denounced the Taft-Hartley Act as “the most oppressive. . . . the most offensive and most reprehensible law ever enacted against the nation’s workers.” He neglected to submit a bill of particulars. Is the worker oppressed by the provision making it an unfair labor practice for a union as well as an employer to “restrain or coerce” him in the exercise of his bargaining rights? Is he oppressed by the provision requiring his written consent for a check-off of union dues? Or by the ban on excessive initiation fees? Or by the requirement that the union officials disclose how their union is run? Or is it perhaps merely the union bosses who resent these curbs?
“We believe industrial peace can be promoted.” continued Mr. Green, “through . . . collective bargaining contracts . . . which we hold sacred and inviolate.” Then why object to the Taft-Hartley provisions holding unions as well as employers legally responsible for living up to these contracts?
Philip Murray, president of the CIO, competed with Mr. Green in lashing out against the “infamous” Taft-Hartley Act. Mr. Murray is worried about the way workers are being “squeezed economically” by higher living costs and “smaller and smaller purchasing power,” He wants to restore price control. That price control always reduces and distorts production, and that in the long run it cannot be made to work at all without wage control, are among the little details about which Mr. Murray never bothers his pretty head. But it is about time someone told him the elementary facts about “shrinking purchasing power” and the “economic squeeze.” The figures of the Department of Commerce show that purchasing power in this country is higher than any levels ever reached before in our history. And the figures of the Department of Labor reveal that while living costs had risen by June of this year 57 percent since 1935–39, average weekly wages in manufacturing industries had risen in the same period by 120 percent. Whoever is being “squeezed” compared with his pre-war status, it is not the average American factory worker.
President Truman also made his Labor Day statement. “Good labor relations,” he decided, “cannot be brought about by legislation.” He called for a “minimum amount of regulatory law.” This was strikingly similar to Mr. Murray’s statement that management and labor can settle their problems “without need of coercion, force, and legislation.” But this seems a rather belated discovery. Neither Mr. Murray nor Mr. Truman objected to “legislation” when it was directed solely against the employer. Only when the Taft-Hartley Act made some attempt to place upon unions duties and responsibilities commensurate with their expanded legal rights and privileges did this outcry against “legislation” come from the self-styled “pro-labor” ranks.
And one wonders about the consistency and sincerity of this outcry against “legislation” when it is accomplished by a plea by the labor leaders and the President for a further increase in minimum wage rates—in other words, for still more legislation, for a further substitution of government coercion for competition or collective bargaining. The simple truth is that nothing would jolt union leadership in this country more than a simple repeal of the [Wagner Act]. What union officialdom really wants is to restore the one-sided Wagner Act and turn the government once again into a union-organizing agency.
These criticisms should end on a constructive note. Why not set aside the Monday following Labor Day as Capital Day? Why not devote at least one day to pointing out the importance of profits as a means of guiding output and encouraging capital accumulation and investment, and to emphasizing the importance of investment for providing new jobs, increasing production and raising wages? Labor Day reminds us that capital depends on labor. Capital Day could remind us that labor depends no less on capital.
September 22, 1947
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. Lenin was certainly right. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as “profiteers” the popular indignation against the more obvious consequences of their vicious methods.
These “profiteers” are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices.
This column up to this point should have been in quotation marks, with a few dots to indicate omissions. The foregoing are not my words, but the words of John Maynard Keynes. They appeared 27 years ago in “The Economic Consequences of the Peace.” If they do not apply with uncanny accuracy to conditions now, it is only because conditions now are worse. European governments today, far from resting content with denunciations of “profiteering,” decree that regardless of how much they have debased their currencies, prices in terms of those currencies must not rise. The result of this direct meddling with the market mechanism has been to distort and prevent production. And to bring on a world crisis.
This is intensified by price control of the paper currencies themselves. It has been made a crime for exporters or importers to buy or sell those paper currencies for less than their “official” rates in terms of other currencies. This has led to a violent unbalance of foreign trade and prevented all the normal processes of self-adjustment from taking place. The European governments are united, however, in describing their trouble as a “dollar shortage,” thus implying that it can only be cured by further huge loans from America.
Our own government accepts this “dollar shortage” explanation. Yet there are more dollars outstanding today than ever before. Between June of 1939 and June of this year, total demand deposits and currency outside banks increased from $33,360,000,000 to $108,500,000,000. This huge outpouring of dollars is the basic cause of the rise in prices in that period. There is more than three times as much money as before bidding for the existing American goods. We too, in short, have debauched our currency.
This is carried further when, with the help of government loans abroad, we ship to foreign countries $12,000,000,000 a year in goods and services in excess of those we receive. The $12,000,000,000 we distribute in wages, salaries, and profits in turning out these excess exports are an addition to monetary purchasing power not offset by an addition to American goods. On top of the basic increase in monetary purchasing power, these excess exports have been the main cause of the recent additional increase in prices.
But government officials, instead of recognizing this inflation as the result of their own policies, blame the business class. They start “monopoly” investigations and prosecutions which are thinly disguised attempts to put the blame for the price increase on business and to reimpose backdoor price control through intimidation. Labor leaders like Walter Reuther demand reimposition of price controls.
Lenin was certainly right.
September 29, 1947
The basic causes for high prices in this country have been frequently rehearsed in this column. The volume of money and bank deposits competing for goods is now more than three times as great as in 1939. This has been reflected in money incomes. Total pay to employees increased from $47,800,000,000 in 1939 to an annual rate of $125,300,000,000 in the first half of this year. Expenditures on personal consumption of all classes increased from $67,500,000,000,000 in 1939 to a rate of $158,000,000,000 this year. Inevitably this has been reflected in an increased demand for food. In spite of the price rise, the per capita consumption of meat in this country, which was 132 pounds in 1939, is now running at an annual rate of about 155 pounds.
On top of this basic increase in domestic monetary purchasing power have been the shortages in Europe. European demand has been greatly increased by American Government aid which has supplied Europe with additional dollar purchasing power to compete for our goods. This has drained away part of those goods, particularly foodstuffs, and so raised prices further.
These, and prospective new loans under the Marshall Plan, have been the real major causes of the price rise. But politicians and professional business-baiters are ignoring them in a shrill hunt for personal scapegoats. First come “the speculators.” The drive against speculation is reflected in the demand of the Federal government that the nation’s principal grain exchanges double their margin requirements. This strikes merely at a symptom. Speculation is an inherent part of the process of production. Whether a prospector is sinking an oil well, or a department-store buyer is guessing what women’s skirt lengths will be a few months from now, or a miller has contracted for wheat, there is a speculative risk involved. Someone has to assume it. In the grain, cotton, and other markets there has grown up a class of professional speculators willing and eager to assume these risks, so that processors are relieved of them.
The speculator can make money only if he guesses right on future prices. If he guesses wrong he loses. He is popularly supposed to be wicked when he buys grain and holds it off the market in the hope of higher prices. But if his judgment is right, he performs a public service: he conserves supplies to sell at a time of greater scarcity than when he bought. To the extent that the speculator is right he stabilizes prices. Another set of scapegoats now being hunted out by the politicians are the “profiteers.” This is reflected in the drive of the Department of Justice against those perennial scapegoats, the meat packers. Now it happens, if facts matter, that the profit margin on sales of seventeen principal companies in the meat-packing industry in 1946 was only 1.7 percent, compared with an average of 6 percent for industrial companies in general. The “profiteering” drive has turned as well against retail butchers and grocers. Yet even if we assume for the sake of argument that nearly everybody in the business of supplying the world with food is greedy for profits, the assumption does not tell us why such greedy people were not charging just as high prices nine months ago or nine years ago.
The rise in prices has been followed by the inevitable demands from the uninformed for a return to price-fixing. The reimposition of price-fixing in the United States would be particularly ironic. European price-fixing has been one of the major causes of the shortages in Europe.
The rest of the world has turned to the one great remaining free-enterprise country to make up the scarcities that its socialism and “planning” have brought about. This has naturally sent prices here soaring. If now we too reduce prices by decree, we in turn will reduce or remove the incentives to produce.
The one thing that government interventionists cannot learn is that wherever exceptional shortages exist we need exceptional profits to give exceptional incentives to production. The chief effect of the mania for government meddling all over the world has been to prevent free markets from balancing and increasing production.
October 6, 1947
The sixteen European nations reporting on the Marshall Plan calculate their needs for outside help over the next four years at more than $25,000,000,000. Of this some $19,000,000,000 is presumably expected to come direct from the United States Government, some $3,000,000,000 from the International Bank, for financing equipment, and some $3,000,000,000 for currency stabilization loans (presumably—though this is not made clear in the report—from the International Fund). The chief contributor both to the Bank and the Fund is, of course, also the United States Government.
Here is a staggering bill. And when we put it on top of some $15,000,000,000 that the United States will have spent by the end of the present year in rebuilding Europe since V-J Day, it brings the total to around $40,000,000,000.
How much validity do the “deficit” figures presented by Europe really have? The original total that the sixteen nations arrived at, we must remember, amounted to more than $29,000,000,000—apparently not including the $3,000,000,000 estimate for currency stabilization. Not until after our State Department privately protested that this sum was too large was it reduced to $22,440,000,000 (with $3,130,000,000 of it assigned to the International Bank). The estimate now published presumably meets our State Department’s demands, in that it is lower than the original estimate, and tapers down each year. But suppose our government does all that is now demanded of it, and the scheme still breaks down? Will we not be told that it was our fault—that our aid was “too little and too late”—that these were not Europe’s real estimates of its needs, but merely slashed figures put forward to conciliate the State Department and an “economy-minded” Congress?
Even apart from this, what reason is there to take seriously these estimates of annual deficits? The report itself declares: “Unfortunately, the size of the problem has proved greater than was expected. The disruption caused by the war was more far-reaching and the obstacles to recovery more formidable than was realized even six months ago.” But if the sixteen nations admit that they then failed to guess right even six months ahead, what reason is there to suppose that they are now guessing right four years ahead? And if (as we must suspect) the deterioration in the last six months has not been the result of a war that ended more than two years ago but of new factors, and primarily of the unsound economic policies followed by European governments themselves in these last six months, then the prospective European “deficit” could be either much greater or much less than the figures presented, depending upon the future policies followed.
It is impossible, in fact, for any nation to predict its future trade deficit by adding together its future “requirements” of specific goods. For such “requirements” are arbitrary except in relation to some standard, and the standard adopted must itself be arbitrary. There is, moreover, no such thing as a predestined trade deficit independent of loans from outside, of internal inflation, of price fixing, of tariff policies, of trade controls, of domestic production, and of foreign-exchange rates.
One of the most serious factors in bringing about Europe’s recent chronic trade deficit has been overvalued currencies and pegged exchange rates which encourage imports and discourage exports. The unpegging of exchange rates might reverse the trade balance of many European countries almost overnight. Yet there is no indication that a free market will be restored in foreign exchange or, for that matter, in anything else. On the contrary, the report assumes that government economic controls will be tighter than ever. Ambitious production and export “targets” are fixed by the sixteen governments. Is there any reason to suppose that these are more likely to be attained than previous targets which are now consigned to oblivion? The report indicates that Europe will continue in the main to rely on the very controls that have prevented postwar recovery so far.
October 13, 1947
The report of sixteen European nations in response to the Marshall Plan is a skillful presentation of the case for heavy and immediate financial aid from America. But the more the report is examined the less assurance does it give that these nations are even yet prepared to abandon the economic restrictions that have been chiefly responsible for bringing on the present crisis.
Throughout the report there is constant emphasis on production “targets.” We are told precisely how much bread grains, potatoes, sugar, meat and milk these countries intend to produce in each of the next four years; precisely how many tons of coal and steel, and how many kilowatt hours of electricity; precisely how much they intend to expand oil-refining capacity, inland transport and merchant fleets. We are proudly told that “these production programs, taken as a whole, represent an expansion of output similar in general scale to that achieved by the United States in the mobilization years 1940–44.” There seems to be an implication here that to set a target is almost as good as to reach it. Surely the fate of the British targets adopted so confidently nine months ago ought to have sufficiently underlined the difference between ardent hopes and cold realities.
The whole concept of government “production targets” is in origin totalitarian. It is part of the modern mania for imitating Russian Five-Year plans—an imitation that is the sincerest flattery to Communism. Why should the Russian Communists doubt the superiority of their system when they see nearly all of Europe aping one of its basic features? For only under a collectivist concept is it considered the function of government officials to say just how much shall be produced of each major commodity. It is of minor importance that the guesses of the bureaucrats are almost bound to go wrong. Far more serious is the fact that the mere setting of government production targets is in effect a way of setting aside the free market, setting aside a free economy. It is a way of telling the consumers that the things that are produced, and the relative proportions they are produced in, are not to be determined by their own demands but by what government bureaucrats decide in advance is good for them.
The supreme irony is that the only country in the world today that is really producing anything—and for whose goods the rest of the world is therefore clamoring—is almost the only country that does not have government production “targets,” but merely turns out goods in the volumes and proportions determined by supply and demand, free prices and free profits. But just as the rooster Chanticleer was convinced that the sun could not rise until he crowed, so European bureaucrats are still convinced that there can be no production unless they first of all set production targets.
Implicit in production “targets” is the whole system of price control, rationing, allocations, government licenses, prohibitions, and decrees. There is no indication in the sixteen-nation report that this dictated economic system is to be abandoned, certainly not in the near future. Only once in the report is it admitted that the system of price control “is likely to jeopardize production.” But this delicate hint is not elaborated, nor is any conclusion deduced from it. Under present circumstances, the report assumes, “stability cannot exist unless it is constantly reinforced by controls and rationing.”
In short, European bureaucracy still believes what our OPA believed, that price control cannot be abandoned “until supply catches up with demand.” What this overlooks is that artificially low price ceilings increase demand and reduce production and supply, so perpetuating the shortage they were designed to counter. In the European system almost the whole mechanism of economic self-adjustment has been destroyed. Neither prices nor wages nor exchange rates are free to move to the points where they can tell the truth about ever-changing relations of supply and demand and restore equilibrium between them. The result is a chronic shortage of goods and a trade deficit.
October 20, 1947
President Truman had no legal power to order the nation’s grain exchanges to increase their margin requirements to 33⅓ percent. But he forced them to do so by threatening to exercise the legal powers he and the Commodity Exchange Authority did have to do something else. This is a technique of executive usurpation which deserves the careful attention of Congress. The purpose of the present column is merely to examine the economics of the Administration’s action. Its chief effect, like that of the 75 percent margin insisted on by the Federal Reserve Board for stocks, will not be to lower prices, but merely to make the market narrower and day-to-day fluctuations more erratic than otherwise.
When crop shortages or the government’s own monetary or other policies have brought about high prices for food, it has been the technique of governments from time immemorial to blame the result on “speculators” and “gamblers.” What we are dealing with here, therefore, is not something that has merely happened within the last few weeks, but something that happens repeatedly. Let us, therefore, call in some expert witnesses from the past.
“Hasty attempts to control speculation by simple enactments have invariably proved either futile or mischievous.”—Alfred Marshall, in 1890.
“The result of regular speculation is to steady prices . . . A good example of this is afforded by the Gold Law during the Civil War. The discount on greenbacks was mistakenly ascribed to the speculation on the gold exchange, and a law was enacted to prohibit all such transactions. As a result, the premium on gold jumped at once from 195 to 285, with wild fluctuations day by day, to be followed, after the hasty repeal of the law fifteen days later, by just as sudden a recession of the price.”—E. R. A. Seligman, in 1905.
“Speculation . . . tends to make daily market prices conform to the seasonal market price. . . . The general effect of speculation is to lessen fluctuations. . . . For the ultimate consumers, say of wheat, the early and exact adjustment of price brings more even utilization of the available supply. If the crop is short, some lessening of consumption is inevitable; and it is better that the deficit be spread through the season. The sooner and the more exactly the higher price is reached, the more likely is this result.”—F. W. Taussig, in 1911.
“[Blaming speculators] is the recourse of governments in search of a scapegoat. . . . Price fluctuations are reduced by speculation, not aggravated, as the popular legend has it.”—Ludwig von Mises, in 1924.
While Washington is now pointing toward “gambling in grain” in Chicago, Kansas City and Minneapolis as a cause of high food prices, its own direct responsibility might be profitably considered. Passing over its inflationary policy in general, the government is committed to lend the farmer 90 percent of parity on his wheat. At the present time this comes to $2.08 a bushel at Chicago.The result of this, as already pointed out by Edward H. Collins in The New York Times (Oct. 6), is that the trader “has a speculation in which his loss is limited, on the downside, by the policy of the government itself, to about 67 cents a bushel. On the upside, by contrast, the ceiling is ‘infinity.’ Can there be any reasonable doubt that this constitutes an open and shut invitation to violent speculation on the long side?”
One more contemporary witness. “Under the law the government supported prices of potatoes—the best possible replacement for cereal foods—last year and this. Most of the potatoes it acquired last year were diverted to non-food uses, wasted, or destroyed. . . . The Department of Agriculture this year reduced potato acreage goals and stipulated that support would be given only to producers who complied with lower goals. As a result harvested acreage this year will be about 15 percent smaller and the potato crop in prospect is below normal consumption requirements. The potato policy therefore has turned out to be a mistake of the first magnitude.”—National City Bank of New York October Letter.
October 27, 1947
Corporate profits in terms of dollars are now running at the highest levels on record. In 1946 they amounted after taxes to $12,539,000,000. In the first six months of this year, according to estimates of the United States Department of Commerce, corporate profits after taxes were running at an annual rate of $17,000,000,000, an increase over the 1946 rate of about 35 percent.
Such figures are often cited today as a sort of economic scandal. They are taken as prima facie evidence that current profits are outrageous, that they bear an unhealthy relation to wages, and that prices could be substantially reduced without harm. The dimensions of these profits begin to evaporate, however, when we examine them more closely and in their broader context.
1—While corporate profits in recent years have been running at record levels, so have wages and the national income. Dollars themselves, in fact, are so plentiful that they have become cheap. As compared with its 1935–39 wholesale purchasing power, the dollar today is worth only 54 cents.
2—Corporate profits are greatly overstated today even in terms of depreciated dollars because proper deductions are not being made. The market price of a firm’s inventories may have doubled. The dollar increase in inventory value is set down as a profit. But when the firm comes to replace its inventories, as it must, it needs twice as much money to replace the same physical supply as it had before. If it restored only its original dollar investment in inventories, it could do only half its former volume of business. The Department of Commerce in its revised national income statistics published in July takes account of this factor, and deducts from the $12,500,000,000 figure of 1946 corporate profits $4,700,000,000 as an “inventory valuation adjustment.”
The National Industrial Conference Board has pointed out that when these inventory profits are deducted, the net earnings of corporations after taxes in 1946 constituted only 4.6 percent of the national income (less corporate income and excess-profits taxes)—a smaller percentage than in any year since 1935. Even during the first half of 1947 corporate profits, when similarly reduced and treated as a percentage of the national income, were appreciably below 1940 and 1937.
3—Practically all deductions for depreciation are inadequate today. A worn-out or obsolete machine that cost $10,000 ten years ago may cost to replace not $10,000 but $15,000 or $20,000. The tax laws, however, permit only depreciation charges based on original cost, not on higher replacement cost. As a consequence, the Machinery and Allied Products Institute concludes that industry is understating the costs arising from the consumption of its fixed assets, overstating its profits, and in some cases perhaps underpricing its products. In short, there is going on an erosion of real capital not offset by depreciation charges. Economists have estimated that a true corporate depreciation allowance in 1946 may have run from $1,500,000,000 to $5,000,000,000 higher than the allowance actually made.
4—Present corporate profits are the result of unprecedented volume of business rather than of wide profit margins. The combined net income of 24 leading companies in wholesale and retail trade, for example, averaged 2.6 cents per dollar of sales in the first half of 1947, against 3.3 cents in the second half of 1946 and 3.9 cents in the first half. So-called corporate “breakeven points” are today much higher than before the war, and wage costs are far more resistant to downward adjustment. A comparatively small reduction in output or volume of sales, therefore, could mean for many companies today a very sharp reduction or even a disappearance of profits.
5—Corporate profits can be added together for special statistical purposes, but it is misleading ever to discuss them as if they formed a common pool. A high total of corporate profits is no help to an individual company with a deficit. Even major group divisions emphasize this fact. The country’s railways, for example, on present methods of accounting, earned an average of only 2.75 percent on their property investment in 1946.
November 3, 1947
The proponents of the Marshall Plan are right in believing that Europe is in the grip of an economic crisis. They are right in believing that our own economic and political future will be deeply affected by the fate of Europe. They are right in urging that we should do anything we can that promises to increase Europe’s welfare without imperiling our own.
But the proponents of the Marshall Plan mistakenly assume that the crisis in which Europe finds itself today is primarily the result of the destruction and dislocations of the war. They have yet to recognize that, on the contrary, this crisis is for the most part self-imposed. It is primarily the result of the economic policies that have been followed since V-E Day by the governments of Europe.
Europe is caught today in a strangling network of governmental controls. These controls include the pegging of foreign-exchange rates far above their real values. This encourages imports and discourages exports, causes a chronic deficit in Europe’s trade balance, and brings about a so-called “dollar shortage” which is a misnomer for Europe’s effort to buy more than it sells and to consume more than it produces. These governmental controls also include price ceilings which discourage, distort, and reduce production; priorities, allocations, and prohibitions which paralyze initiative; nationalization which brings inefficiency and increases budget deficits; and confiscatory taxes and further threats of socialization which remove whatever vestiges of incentive may be left.
Europe, in brief, has destroyed the price mechanism. It does not permit free enterprise to function. Such a condition, as long as it continues, must nullify any further help that we can pour in. As Wilhelm Röpke has pointed out in the English magazine Time and Tide: “Without a drastic internal reform of the national economy, to put an end to inflation and socialist controls, foreign credits can have no lasting effects, just as a man cannot be kept alive indefinitely by perpetual blood transfusions if the cause of his hemorrhage is not removed.” This is precisely what happened to our loan to England. Though we weakened ourselves by “giving blood,” England is in a graver crisis than before the transfusion was made.
Some supporters of the Marshall Plan assume that this problem can be met simply by imposing “tough conditions” with our loans. But the remedy would perhaps prove worse than the disease. Any European governments that felt forced to accept such conditions to get the loans would resent their imposition. They would regard the conditions as an obstacle to recovery, as unworkable, as imposed primarily for the benefit of “American capitalists” rather than for the benefit of Europe. They would consider any conditions whatever as humiliating, an infringement of their sovereignty and independence. The Communists in every country have already seized upon this issue and are eagerly exploiting it. This is plain in the recent Communist manifesto and in the speeches of Zhdanoff and Vyshinsky.
And not the Communists alone. Even the usually staid London Economist, denouncing the conditions of the American loan as “crippling” and “intolerable,” recently wrote: “Not many people in this country believe the Communist thesis that it is the deliberate and conscious aim of American policy to ruin Britain and everything that Britain stands for in the world. But the evidence can certainly be read that way.”
Our foreign-aid policy, then, is on the horns of this dilemma. If we make loans to European governments without imposing conditions, our funds will be dissipated without bringing the recovery we seek. If we impose the conditions necessary for that recovery, we give color to the Communist contention that this is “a plan for enslaving Europe.” Can we afford to hand the Communists so powerful an issue?
This dilemma is not accidental but inherent. It lies in the attempt of one government to bribe another into following economic policies which that other government does not believe in enough to follow without the bribe.
November 10, 1947
Those who now demand a restoration of price control have one favorite propaganda device. This is to declare that those who urged the termination of price control a year and a half ago told us that prices in a free market would be lower.
Some of those who urged the end of price control did make this mistake. Why did they make it? They made it because they assumed that prices are determined primarily, if not wholly, from the side of supply. But this is precisely the error that they shared with the leading spokesmen of the Administration, including the price controllers themselves. On Feb. 14, 1946, President Truman declared: “Production is our salvation . . . Production will do away with the necessity for government control.” And even Chester Bowles before
a Congressional committee on Feb. 18, 1946, declared: “Production is the only answer to inflation.”
Answering these contentions in The New York Times of Feb. 25, 1946, 1 called attention to the simple fact that “prices are determined not only from the side of supply, but from the side of demand”; that demand was “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.” I concluded that “the solution to the problem of high prices . . . is not production alone; but that as long as money and bank credit continued to mount “they will continue to push up demand and to push upward against prices.”
In his radio address of two weeks ago Mr. Truman admitted that “we are producing more goods for civilian use than ever before in history.” So we now have the production that Mr. Bowles once thought was “the only answer to inflation,” and that Mr. Truman himself announced would “do away with the necessity for government controls.” Yet the inflationary menace seems greater than ever, and the President is demanding “emergency” controls. Why? Because, for one thing, the government has continued to follow artificial low-interest-rate and other policies that continue to increase the total volume of money and bank credit. Adjusted demand deposits of reporting member banks of the Federal Reserve System as of Oct. 22 this year were $47,467,000,000, an increase of $1,278,000,000 over the corresponding date last year.
Another inflationary factor is the government policy of foreign loans. As early as March 18, 1946, when price control was still in full force, I wrote in The Times: “Our aim should be to halt inflation, not to increase it. Yet increased export trade financed by governmental loans is clearly inflationary.” At that time, however, the Administration’s “economic experts” were declaring that “deflation, and not inflation, will be the big problem six months to a year from now.” Replying to this contention in The Times of June 17, 1946, I wrote: “It is precisely groundless fears of deflation, combined with a complacent assumption that inflation is no longer a danger, that help to increase the inflationary danger.” I concluded that “the prospect is still inflation.”
Even today, however, Mr. Truman insists: “An attempt has been made to place the blame [for higher prices] upon our foreign-aid program, but this is not borne out by the facts.” Yet it ought to be as clear as daylight that the abnormal foreign demand for our goods, coming on top of the demands of our own people, is the marginal factor that has been chiefly responsible for the further rise in American prices. This may not be a reason for refusing help, but the Administration should at least be candid with the American people as to what the real situation is. It is a glaring self-contradiction to impose emergency “food-saving programs” and to urge us daily to make great sacrifices to supply the European demand, and in the same breath to pooh-pooh this European demand as a factor in raising American food prices.
Yet this is what Mr. Truman did in his radio address of Oct. 24, and this is apparently to be the Administration line in the special session of Congress.
November 17, 1947
In his radio address of Oct. 24, President Truman declared: “An attempt has been made to place the blame [for higher prices] upon our foreign aid program, but this is not borne out by the facts.” His own economic agencies think otherwise. The Bureau of Agricultural Economics tells us that export demands have “generally helped to hold up” farm prices. The Council of Economic Advisers admits that “the increase in exports” in the second quarter of 1947 “undoubtedly affected the price level during this period.” It adds that “the large foreign requirements have undoubtedly been a factor in the price rise” not merely of grains but of livestock and other food products. That our export and foreign aid program has raised food prices here, therefore, ought to be beyond controversy.
But for how much of the rise has export demand been responsible? Here is a more difficult question. It cannot be answered merely by citing statistics. In the 1946–47 fiscal year our exports of wheat amounted to 34 percent of our 1946 production. The wholesale price between May 1946 and May 1947 increased 47 percent. But in the same period (according to the National Industrial Conference Board) our exports of all meats amounted to only a little more than 2 percent of our production. And their average wholesale price jumped 85 percent. Does this mean that our export program was irrelevant to the jump in meat prices?
Only those who are unfamiliar both with foodstuff markets and with the way in which supply and demand are really related will draw such a conclusion. If 100 houses are wanted by only 99 families, one house must go empty; if they are wanted by 101 families, one family may be left in the cold. The demand will have gone up only 2 percent; but the consequent increase in rents may be 20, 50, or even 100 percent. A collector at an auction may pick up a painting, if no one else there particularly wants it, for $100; but other determined bidders may force him to pay $1,000. He gets the whole painting; he does not share any percentage of it whatever with the other bidders. Yet their bidding has forced up the price on him by 900 percent.
In less extreme degree these principles apply to the present situation in meat. It is impossible to tell from the actual percentage of exports what the real effect of export demand has been on the price. Meat prices, moreover, depend not merely on meat exports but on grain exports. When prices of feed-stuffs are forced up prices of meat must soon or late rise also. Grain is fed to animals only insofar as that remains a profitable procedure. Again, expected future exports of grains and meat are as much a factor in present prices as past exports. Finally, to produce our export surplus, wages and profits are paid out which can only be used to bid up prices of the goods that remain at home.
The President’s Council of Economic Advisers tries to belittle the effect of the export surplus by comparing it with the gross national product. It declares that “the high foreign demand has added to the inflationary pressure on prices, but the much larger domestic demand has been the principal cause of the upward pressure.” But such statements leave the real question unanswered. They are like saying, in our rent illustration, that the first 99 families have more effect on rents than the last two families. Such a statement would doubtless be true enough even if the marginal addition of the last two families raised rents, as it might, by 50 percent or more. But the real question now is: Would food and other prices have gone up at all in the last nine months, or would they have gone up even half as much as they did in that period, if it had not been for the unprecedented export demand financed by our foreign aid program?
No one can answer such a question with exact percentages. But I submit that our unparalleled export surplus, two-thirds of which has been paid for by our own government, is a major inflationary force at the present moment. It is not a service to the American people to attempt to present it as a negligible factor.
November 24, 1947
“Shall We Say: ‘No Aid for Socialism’?” So asks the leading piece in The New York Times Magazine of Nov. 9. It answers that if we don’t make unconditional loans and gifts to socialistic governments we will be “stultifying our own assertion that we believe in democracy, and will destroy the foreign democracies themselves.”
The author of this extraordinary piece is James W. Angell, professor of economics at Columbia. Mr. Angell actually finds it “hard to see much difference in principle” between the “type of threatened coercion” practiced by Hitler on his victims and the type involved in our own government’s not making unconditional loans or gifts to foreign countries. Applying this to individuals, the professor would presumably find it “hard to see much difference in principle” between a thug’s threat to beat, blackmail, rob, or murder a businessman and a banker’s reluctance to make the same businessman a loan or a gift unless the latter first sobered up or agreed to run his business in a less wasteful and reckless manner. Both, in the professor’s abstract vocabulary, are “threatened coercion.” Either the definition of “coercion” is being stretched extremely thin or Mr. Angell’s capacity for detecting differences is alarmingly undeveloped. What he appears to be saying is that you “coerce” everybody to whom you don’t give money, and on the asker’s own terms.
Mr. Angell, who teaches economics, puts aside economic considerations as mere irrelevance, and rests his case on political grounds. He seems to feel that, as a “democracy,” we are obliged willy-nilly to pour the American taxpayer’s money into other “democracies.” The shakiness of his standards becomes evident when he explains why Russia and its “so-called” satellite states are not democratic. “This is true not because they have adopted Communist forms of economic organization [his italics], but principally because they are governed by minorities which have ruthlessly suppressed opposition parties and individual free speech.” One implication here is that if majorities instead of minorities were doing the ruthless suppression it wouldn’t be so bad.
Even more extraordinary is the implication that Communism’s “economic organization” and its suppression of individual freedom are quite separate things which perhaps exist together in Russia only by accident. The professor seems capable of believing, in brief, that under an economic organization in which the rulers directly control every job and every medium of expression it is only a sort of unlucky coincidence that individual freedom should not exist.
“It is perfectly true,” confesses Mr. Angell, that certain European governments that have come to us for help “have nationalized some of their industries, and that a number of them have set up state trading monopolies of various sorts. But—so what?” If we treat this taunt as a serious question, we might begin by pointing out that the professor’s statement not only minimizes the extent of socialism and threatened socialism, but ignores altogether the currency chaos cited by the Harriman committee and the appalling network of economic restrictions that today disorganize and throttle European production. The uneasiness in Congress and the country about subsidizing socialistic governments Mr. Angell dismisses as “based on the allegation that socialism is somehow ‘a bad thing’ and morally reprehensible.” It “is not based,” he assures us blandly, “on the ground (quite possibly valid) that socialized economies are somehow less productive.”
The uneasiness, someone ought to inform him, is based precisely on that ground. The fully justified fear of many in this country is that, exactly as has already happened with our loan to Britain, any further help we pour into Europe will be more than nullified and offset by the wastage of socialistic systems that have destroyed the price mechanism and its incentives to production.
This, in fact, is the central dilemma of foreign aid. For the internal economic policies of Europe are immeasurably more important to its production and recovery than any dollars we can supply.
December 1, 1947
As a result of the shortages brought about primarily by their own economic policies, the nations of Europe have turned to the United States, the last great free market in the world, to make up the deficiency. Yet in asking Congress to aid them, President Truman proposes that we imitate over here the very network of allocations, rationing, licensing, trade controls, wage controls, and price controls that has precipitated the present European crisis.
This major irony involves minor ironies. Mr. Truman wants price controls and allocations because “grain, for example, is too badly needed to permit wasteful feeding to livestock.” Yet it is precisely government price control in France which, by underpricing wheat, has caused wasteful feeding of wheat to livestock and intensified the very wheat shortage that we are now asked to make up. It was precisely price control by our own wartime OPA that caused wasteful feeding of wheat to livestock as well as over-fattening of hogs because the OPA did not know how to set up the right corn-hog ratio.
Price fixing here, as in Europe, could only intensify shortages. American producers and consumers can solve these problems through a free market incomparably better than any army of bureaucrats bossing them around.
Mr. Truman wants legislation permitting his new price-fixer to “impose price ceilings on vital commodities in short supply that basically affect the cost of living.” He thinks that this would not at all involve “staple food and clothing items not in short supply or . . . any delicacies or luxuries.” “Vital commodities” and “short supply,” however, are both a matter of arbitrary definition. It is difficult to imagine the future Chester Bowles making his list a short one. No producer would know when his own product was going to be added to the list.
Holding down or reducing the prices of “vital commodities” in “short supply,” moreover, would reduce the comparative profit margins on such commodities and reduce their output. The price controller and the CIO would then protest that producers were making luxuries and not necessities because the profit margin on luxuries was greater. They would demand a return to the very “overall wartime price control” which Mr. Truman says he is avoiding. It is precisely on such grounds that the OPA continued to fix the prices of Cadillacs, caviar, and mink coats, not only during the war, but after V-J Day.
Mr. Truman is trying to stop inflation by all the wrong remedies because he has forgotten its causes. When he declares that “price inflation threatens our entire program of foreign aid” he reverses cause and effect. It is the huge program of foreign aid, adding to purchasing power in this market and reducing our supply of essential goods, which has been the marginal cause of the present price rise. The basic cause of inflation here has, of course, been the increase in money and bank credit brought on by the government’s own fiscal policies. Mr. Truman wants new powers by the Federal Reserve authorities over consumer credit and the banks. But he does not tell us why they have failed to use (except in order to increase the inflation) their traditional and more than adequate powers over open market operations, rediscount rates, and reserve ratios.
The spectacle of a government’s assuming to protect us from the consequences of its own policies by asking for more powers against “speculators,” producers, and “profiteers” is not novel. Writing a century ago, John Stuart Mill declared: “It is not, however, so much the general or average price of food, as its occasional high price in times of emergency, which governments have studied to reduce. In some cases, as for example the famous ‘maximum’ of the [French] revolutionary government of 1793, the compulsory regulation was an attempt by the ruling powers to counteract the necessary consequences of their own acts; to scatter an indefinite abundance of the circulating medium with one hand, and keep down prices with the other; a thing manifestly impossible under any regime except one of unmitigated terror.”
December 8, 1947
The Administration valiantly continues its efforts to protect the American people against the consequences of the inflation that its own policies have brought about. While it lectures “businessmen, bankers, labor leaders, farmers, and consumers”—in short, all the rest of us—on what we should do by our own “voluntary efforts” to “hold prices down,” while it asks for still further powers to crack down on alleged “speculators” and “profiteers,” it blandly continues to feed the fires of inflation by its own acts. It can do this because most laymen do not understand the consequences.
For generations economists and bankers have recognized that artificially low interest rates—i.e., cheap money policies—are inflationary. The chain of causation is simple. Artificially low interest rates increase the demand for loans. Increased bank loans mean a corresponding increase in bank deposits. Increased bank deposits (against which checks are drawn) are just another name for an increase in the money supply. An increase in the volume of money is only another name for an increase in monetary purchasing power pushing up the prices of goods. A cheap money policy, in brief, is the keystone, the central support, of an inflationary policy.
This fact is too patent even to escape the attention of our monetary managers. They concede it in left-handed ways. Testifying on the President’s “anti-inflation” program before the House Banking Committee, Secretary Snyder declared: “To minimize bank credit expansion, restrictive measures have been applied to the money market by the Federal Reserve System and the Treasury. This has been reflected by a rise in interest rates.”
Here is an admission of the close causal connection between low interest rates and bank credit expansion, on the one hand, and between bank credit restriction and higher interest rates on the other. It is an admission that low interest rates are inflationary. Yet in reply to a question the Secretary declared that the Treasury did “definitely not” contemplate any policy that would cause a rise in the present infra-low interest rates. This is tantamount to saying that the Treasury definitely intends to continue this basic inflationary policy at the same time as it presses for ineffective and dangerous “anti-inflation” measures.
There are several reasons for this glaring self-contradiction. The Administration wants to eat its cake and have it too. It wants all the popular benefits of an inflationary boom with none of its unpopular embarrassments. Its most immediate fear is that higher interest rates would cause a decline in the price of government bonds. A fall in government bond prices would, of course, unless some special provision were made, adversely affect the banks of the country that are loaded up with these bonds.
There is not space here to discuss the possible ways of extricating ourselves from this dilemma. It is precisely because a cheap money policy creates such grave problems, indeed, that it ought not to have been recklessly embarked upon in the first place. To continue such a policy would merely intensify the danger and the later difficulty of arresting or reversing it.
In defending the continuance of an inflationary low interest policy, Secretary Snyder declares that “an increase of ½ of 1 percent in the average cost of carrying the public debt, for example, would mean an added burden of $1,250,000,000 a year on the taxpayer.” This is obviously a narrow and shortsighted way to look at the problem. Against this “saving” we must count the inflationary cost to the American people, both as taxpayers and as consumers, of a policy of not raising interest rates to curb inflation. This annual “saving” of $1,250,000,000 to the taxpayers in government bond interest could be far more than wiped out by a forced inflationary increase of $5,000,000,000 or more in all other government expenditures, including those for materials, wages, and salaries, or by a $20,000,000,000 increase or more (here it is impossible to set definite limits) to what American consumers would have to pay to keep the same standard of living that they have now.
December 15, 1947
The program of huge loans and grants from our own to foreign governments is supported by a variety of motives, but the dominant if not determining purpose today is “to stop Communism.” The recent statement of Senator Ives that “all of Europe is apt to go Communistic within a relatively short time without outside aid” is typical of a widespread Congressional attitude.
I certainly do not wish to minimize the Communist danger, but rather to raise the question whether turning a large amount of the American taxpayers’ money over to unsteady European governments representing various shades of socialism is really the most appropriate or effective means to combat that danger. Apparently the reasoning behind the belief that we can buy off Communism with foreign loans or gifts is that nations embrace Communism because they are poor or in economic distress. It seems to be assumed that if we throw in enough American funds or goods to raise their standard of living, these nations will be “strong enough” to reject Communism and perhaps even to adopt free enterprise.
The faultiness of this reasoning should become clear at the moment we confront an actual situation. The Communist-led strikes in Italy and France can nullify our aid, but our aid cannot nullify the strikes. If the French and Italian Governments, for whatever reason, cannot prevent these disruptions to output, far more production will be destroyed within France and Italy than imports from us can make up. We accomplish nothing merely by paying for French and Italian strikes. To combat Russian aggression and world Communism requires far harder decisions than the comparatively easy and somewhat evasive one of merely giving away more American dollars.
We have been confusing cause and effect. It is not true that the nations of Europe are in danger of Communism today primarily because they have run into a series of economic crises. They have run into these crises, rather, mainly because they have adopted monetary inflation, dictated economies, and socialistic controls which have destroyed the price mechanism and its incentives. In brief, it is not true that Europe needs an economic recovery before it can return to ideological soundness. It needs the ideological recovery first, before it can hope for the economic recovery. And until the ideological recovery takes place, the internal policies of Europe will more than nullify, as the case of England has proved, any help we can pour in.
One very hopeful sign of reform is the action of Italy in permitting its currency unit to seek its approximate market level. This meant immediately cutting the official rate of the lira from 350 to the dollar to about 589. The effect must be to stimulate Italy’s export trade, by making its prices more attractive in terms of other currencies. If this is accompanied by other moves toward free markets, and not offset by Communist disturbances, it could bring a dramatic recovery.
On the other side, unfortunately, has been the strengthening of the Labor party’s hold on the British economy through the Gravesend by-election. This was probably brought about, ironically enough, by President Truman’s appeal for the reimposition of price and other controls here. A week before the election took place The New York Times reported from England that Mr. Truman’s appeal had become “a major factor” in the Gravesend campaign, and that the Labor party’s prospects had been “perceptibly improved” by it. “Do you stand with Attlee and Truman on the controls issue,” asked the Labor candidate, “or with Churchill and the price racketeers?”
The argument that Europe has had to adopt “distress socialism” until its economic condition improves rests on the assumption that free enterprise is a luxury that only a rich or already recovered country can afford. The truth is that free markets, with their unrivaled incentives, will bring a faster revival of balanced production than any other system. It is precisely because Europe is in distress that it needs free enterprise now.
December 22, 1947
Any return to a system of government wage and price fixing would dislocate profit margins, dampen incentives, and disorganize production. And proposals for such a system, by centering public attention on false remedies and on symptoms instead of causes, tend to divert that attention from the real causes of inflation and the real remedies for it.
The basic cause of inflation, always and everywhere, lies in the field of money and credit. It is unfortunately assumed that money and credit inflation can safely be ignored today because the Federal budget, for the first time in sixteen years, is balanced. This is like assuming that a river reaches high-water mark the moment the rain has stopped. On the contrary, it keeps rising because it continues to be fed from a thousand swollen rivulets and flooded fields.
Chairman Eccles of the Federal Reserve Board has testified before a Congressional committee that “under present and prospective conditions, it is not only desirable but essential, in the opinion of the Treasury and of the Reserve System, that the established 2½ percent rate on long-term marketable government securities be maintained.” This means, as Mr. Eccles does not hesitate to make clear, that the Federal Reserve will continue to stand ready to buy all government securities offered to it at par or present prices. It is pegging the price. “Such sales have to be met [my italics] by Federal Reserve support of the prices of marketable government bonds so as to protect the 2½ percent rate on long-term issues.” And “the result of these support operations is to increase bank reserves and thus to support further inflation.”
How much inflation? Mr. Eccles is disarmingly frank about that, too, “Commercial banks currently hold about $70,000,000,000 of government securities. This sum is about 50 percent of their total deposits. If they should sell half of these securities and the Federal Reserve System, in providing the ultimate market, should buy them, the banks could acquire an equivalent volume of new reserves. On the basis of these reserves, the banks could expand credit by about six times, or by more than $200,000,000,000.” We have, in short, the testimony of our highest banking official that as long as the Federal Reserve Board continues its policy, the country faces a huge potential further inflation.
How do the Treasury and the Federal Reserve propose to deal with this danger? They refuse to take the one step that could bring it to a halt. That would be to stop providing an automatic market at current interest rates for government securities. What Mr. Eccles asks for, instead, is power to set up a “special reserve” of a maximum of 25 percent on demand deposits of all commercial banks. This “reserve” would be composed not primarily of cash but of “Treasury bills, certificates, and notes.” Of course, to call this a “reserve” is a misnomer. It could not be paid out to depositors demanding cash. It would be, in fact, a requirement that a minimum proportion of the commercial banks’ loans and investments be in short-term government securities. It is an attempt to establish another automatic market for such securities.
It is an attempt, in Mr. Eccles’s own words, to “divorce the market for private debt from the market for government securities.” In the long run such an attempt could not succeed. If the yield on other securities went up while that on government securities stayed down, such a plan would merely drive all government securities into the banking system, where they would become the basis for further credit. On Mr. Eccles’s own testimony his plan would allow a potential credit expansion two and a half times as great as the government securities held.
The United States today is not on a gold standard, except in a Pickwickian sense. It is, as the economist Melchior Palyi has put it, on an inflationary bond standard, the essential feature of which is the automatic monetization of the national debt. And attention is merely diverted by the Administration from this potentially explosive reality when it asks for power to dictate wages and prices.
December 29, 1947
In his message to the special session of Congress, President Truman correctly declared: “We already have an alarming degree of inflation; and, even more alarming, it is getting worse.” Yet like the present leaders of most other countries, Mr. Truman and his economic advisers refuse to attack inflation at its source by halting the further expansion of money and bank credit.
The chief reason for this failure to attack fundamentals is not merely that the public in general does not understand the real cause and cure for inflation, but that it presents no united front against inflation. Its feelings about it are confused and ambivalent. And this is because inflation, like Janus, has two opposite faces. Whether we welcome or fear it depends upon the face we happen to look at. Or, putting the matter another way, we are each of us sometimes Dr. Jekyll and sometimes Mr. Hyde in our attitude toward inflation, depending upon how it seems to affect our personal interest at the moment.
All this is vividly illustrated by Mr. Truman himself. He points with pride to the results of inflation at one moment and denounces them the next moment. He claims credit for its popular consequences and blames the Republicans for its unpopular consequences. Like the rest of us, the President wants to have his shoes small on the outside and large on the inside.
For it should be obvious that high prices, which everybody affects to deplore, and high money incomes, which everyone wants to achieve, are two sides of the same thing. Given the same amount of production, if you double the price level you double the national income. When the President boasted last July that we had “surpassed previous high records” with a gross national product of $225,000,000,000, he was boasting in large part of the higher dollar totals you get when you multiply volume of output by higher dollar prices.
At one point in his “anti-inflation” message Mr. Truman declared: “In terms of actual purchasing power, the average income of individuals after taxes has risen [since 1929] 39 percent.” But a little later he was asking, inconsistently, how “the cost of living can be brought and held in reasonable relationship to the incomes of the people.” Yet if the incomes of the people have in fact already risen so much faster than living costs that the individual can buy nearly 40 percent more goods than he could before, in what does the present “emergency” consist?
“Rents are rising,” complained Mr. Truman at another point, “at the rate of about 1 percent a month,” and such a rise imposes an “intolerable strain” upon the family budget. But as the average weekly earnings of factory workers have gone up 112 percent since 1939, while rents have gone up only 9 percent, the average worker pays, in fact, a far smaller percentage of his income for rent than he did before the war.
“The harsh effects of price inflation,” said Mr. Truman at still another point, “are felt by wage earners, farmers, and businessmen.” Clearly this cannot refer to the inflation of their own prices, but of somebody else’s. It is not the prices they get for their own goods and services, but the prices they pay for the goods and services of others, that they must regard as “harsh.” Why, of all groups, does Mr. Truman now shed tears over the farmer? It should be pointed out that the wholesale price of farm products has gone up 191 percent from the 1939 level as compared with an average of 107 percent in all commodities.
The real evil of inflation is that it redistributes wealth and income in a wanton fashion often unrelated to the contribution of different groups and individuals to production. All those who gain through inflation on net balance necessarily do so at the expense of others who lose through it on net balance. It is an illusion to suppose that the losers can ever be brought abreast of the gainers except by setting the gainers back. And it is often the biggest gainers by inflation who cry the loudest that they are its chief victims. Inflation is a twisted magnifying lens through which everything is confused, distorted, and out of focus, so that few men are any longer able to see realities in their true proportions.
