Business Tides
Succession and Business
January 6, 1964
The shocking assassination of President Kennedy was followed by hours of panic on the markets of the world. The reminder once again that sudden death—whether through violence, accident, or natural causes—can come to a President in office, and the recognition that our statutory provisions for succession when there is no Vice President are unsatisfactory to many, and that the provisions for the event of “disability” are vague and inadequate, led to considerable discussion of possible remedies.
Because these have a vital bearing also on the question of maintaining business confidence, or at least minimizing business uncertainty, in the event of the recurrence of such a tragedy, I felt justified in discussing the problem in two successive columns (Dec. 2 and 9). I expected to drop the matter there. But to my astonishment more letters have poured into this office on these two columns than on any I have written in years. And at least half of these letters have been based on a misunderstanding of what I proposed. I can only assume that I failed to make myself clear, and that the misunderstanding of my correspondents is shared by others who did not write. So I should like to take up two of these proposals again.
DISABILITY
The first concerns the problem of Presidential disability. The Constitution provides: “In case of the removal of the President from office, or of his death, resignation, or inability to discharge the powers and duties of the said office, the same shall devolve on the Vice President, and the Congress may by law provide for the case of removal, death, resignation, or inability, both of the President, and Vice President, declaring what officer shall then act as President, and such officer shall act accordingly until the disability be removed or a President shall be elected.”
The defect of this provision is that it neglects to define “inability” or “disability”; or to specify who is to certify it if the President himself is unable or unwilling to do so; or to declare who has the authority to say whether or when the disability has been removed. It would be highly embarrassing, at best, to put such decisions on the Vice President or the person next in statutory line of succession. I suggested that the most satisfactory solution of this problem would probably be to empower Congress itself to make these decisions, if a President were unable or unwilling to do so, and to appoint, in the absence of a Vice President, an Acting President to discharge the powers and duties of the office until Congress declared the President’s disability to be removed. Such an amendment, it seems to me, would reflect the intention of the existing constitutional provision, but make explicit what is now obscure.
NO INTERREGNUM
As such a change would itself require a constitutional amendment, I went on to suggest that Congress should in the same amendment provide for the contingency of a successor to the President when there is, as now, no Vice President in office. I proposed that such an amendment should provide that Congress itself, sitting as a single body, choose the new President to fill the unexpired term. It was this proposal that was so widely misunderstood. Many correspondents assumed that while Congress was voting the nation would be left without a head. They overlooked the next sentence, in which I suggested that “the amendment could direct the Speaker of the House . . . to act as President pro tem, etc.” Until Congress’s decision on a new President was reached, in brief (even though that would probably not take more than a few days), the Speaker would exercise full Presidential powers. There would be no interregnum.
On one point, however, my wording was clearly to blame. In an unwise effort at compression I referred to the bitter struggle between President Andrew Johnson and Congress as “culminating in the attempt to impeach him (which failed only by a single vote).” Many correspondents have written to point out, quite correctly, that Andrew Johnson was impeached by the House, and that it was his conviction by the Senate which failed only by a single vote. 
January 13, 1964
For 30 years, with minor intermissions, our government has been following a policy of monetary inflation. The cost of living has more than doubled. Since the end of 1939, the money supply (demand deposits and currency outside banks) has been more than quadrupled—from $36 billion to $152 billion.
Since the end of 1957, the government has been worrying about a “deficit” in the balance of payments. Measured from that date, this deficit has reached a total of nearly $19 billion—an annual rate of more than $3 billion.
During this period government policy has increased the active money supply from $136 billion to $152 billion, or nearly 12 percent. It has increased total money supply (including time deposits) from $193 billion to $261 billion, or 35 percent. During this period, also, it has granted more than $24 billion, or $4 billion a year, in foreign aid. It has failed to cover this amount in its annual budgets, which have run a cumulative deficit in the period of more than $30 billion, or some $5 billion a year. And during this period, finally, our monetary authorities have by deliberate policy been holding down both short-term and long-term interest rates “to encourage employment and economic growth.”
BLAMING CITIZENS
In brief, the deficit in the balance of payments about which the government professes to be so worried has been brought about by its own policies. It has been annually giving more money and goods away to foreign countries than the amount of this deficit. By inflating, it has raised prices and costs in this country and made us less competitive in foreign trade. By holding down interest rates, it has made it less attractive for foreigners to lend or invest their money here at the same time as it has encouraged Americans to invest their dollars abroad to get a comparatively better return.
But the government refuses to acknowledge that this has been the result of its own policies. So it is looking for scapegoats. It puts the blame on its own citizens. It blames American investors. It is demanding an almost prohibitive penalty tax on the purchase of foreign securities. Nothing could be more absurd, because American investors, unlike the government, are not giving their money away to foreigners. They are buying assets for it. They are earning a return on it. In fact, in the five years 1958 to 1962 the aggregate net outflow of $16.6 billion for new foreign investment was offset by $15.4 billion of income from previous investment. And in 1962 alone such income amounted to $3.8 billion compared with a net outflow for new investments of $3.3 billion.
MERCANTILISM
If an American investor who buys foreign assets is “hurting our balance of payments,” isn’t an American tourist who buys consumer goods abroad hurting it still more? “Indeed he is,” replies the government, “and that is why we have reduced the duty-free tourist allowance to $100.” But why doesn’t it also put a maximum limit on what each tourist can spend in travel, or even prohibit our citizens from traveling abroad at all? It is the logical next step. But what logic would there be in stopping even there? What about American purchases of German cars, of Japanese cameras, of Irish linen, of English tableware, of Scotch whisky, of French perfumes, of Brazilian coffee, of foreign anything? Why not put a prohibitive tariff on all of these things, and solve our “balance-of-payments problem” once for all?
But, someone may say: “This is mercantilism. This is madness. It would be, moreover, completely futile, because our exports depend upon our imports. It is only through selling to us that foreigners can get the dollars to buy from us. If we cut down our imports we must in the long run cut down our exports by the same amount.” Precisely so. And in the same way we must cut down our exports by as much as we cut down our foreign investments.
The government’s proposed remedy is not only immediately harmful but in the long run futile. But it will not adopt the only solution, which is to halt its own inflation.
January 20, 1964
An $11 billion tax cut is being proposed in the face of a combined deficit for the fiscal years 1964 and 1965 until now officially estimated at $18.4 billion, and placed even by the new budget estimates at some $15 billion. We are borrowing money to cut taxes. The proposed tax cut is a fraud. Unless we are willing to slash expenditures we simply cannot afford at this time a tax cut in the sense of a tax reduction that would reduce revenues.
But we can afford tax reform. We can and should cut tax rates wherever these rates are so high that they actually diminish revenues. It is enormously probable that this applies to all personal-income-tax rates above 50 percent. All these rates together bring in about $1 billion, or less than 1 percent of our total annual Federal expenditures.
But if these rates were eliminated, and present tax progression stopped at 50 percent, the government would not lose this $1 billion. On the contrary (though, of course, no exact estimate is possible) there would probably be an increase in revenues from this change even in the first full year, and a much greater increase in succeeding years.
FOR A 50 PERCENT TOP
The reason is, of course, that taxpayers allowed to keep at least half of every additional dollar they earned (instead of only 47 cents or only 9 cents) would once more want to earn extra dollars that they now have no incentive to earn. Their production would increase. They would have not only a restored incentive to invest; they would have the funds to invest that are now siphoned into nonproductive government expenditure. And these increased investments would mean increased jobs, more productive and hence higher-paying jobs, and an increased rate of economic growth. Our frequently deplored slow rate of growth is mainly owing to our tax system—our excessive penalties on high incomes, profits, and capital gains.
Any tax rate above 50 percent is prima facie confiscatory. To abolish the confiscatory rates is, of course, politically the hardest thing to do. Politically the easiest thing to do is to cut the lowest rates still further—say from 20 percent down to 14 percent. But this would mean a tremendous loss of revenue, which with existing expenditures the government could not afford.
What would be possible, however, with only slight loss of revenue, would be to abolish the jump from 20 to 22 percent in the rate on taxable incomes (for single persons) between $2,000 and $4,000. This would not only reduce the overall average rate on incomes in this bracket, but on all incomes in brackets above it.
THE GREAT ILLUSION
There are now altogether 24 different tax rates in our graduated income tax. Halting the progression at 50 percent would wipe out fifteen of these discriminatory rates, reducing them to a total of nine. If, in addition, the new tax law were to abolish the 22 percent bracket (and extend the 20 percent bracket) in the first year, and then in the next six years abolish successively the 26, 30, 34, 38, 43 and 47 percent brackets, with the government meanwhile keeping expenditures under control, the country at the end of that time would be left with only two tax brackets—of 20 and 50 percent respectively. It could then decide whether it wanted to keep the higher penalty rate.
Perhaps the greatest harm done by the progressive income tax, particularly the existing steep graduation, has been to create the illusion that a rich minority of “fat cats” are paying the bill. That this is an illusion should be plain. The basic 20 percent rate brings in 87 percent of the entire revenue from the present income tax. It has been calculated, in fact, that a flat income tax of 23½ percent, with present exemptions, would bring in all the revenue now brought in by the whole scale of graduated levies from 20 up to 91 percent.
If there were a flat proportionate tax, each of us would realize that he, and not “the other fellow,” was paying his share of our huge Federal expenditures. Not until enough of us recognize this truth will there be any hope of holding those expenditures within reasonable bounds.
January 27, 1964
President Johnson has declared an “all-out war on human poverty.” It is a laudable aim. It has, in fact, been the aim of rulers, statesmen, economists, reformers, religious leaders—of every man of goodwill—from time immemorial. It is an aim shared by all free-enterprise economists since the time of Adam Smith and by all socialists and Communists since the time of Karl Marx. The problem does not concern the end but the means. What is the best way to abolish poverty?
Unfortunately the means Mr. Johnson recommends are dubious. He proposes more and bigger government-spending programs—“to build more homes and more schools and more libraries and more hospitals than any single session of Congress in the history of our republic,” and to “budget the most Federal support in history for education, for health, for retraining the unemployed, and for helping the economically and the physically handicapped.”
NOT BY INFLATION
Whether it is possible to do all this and still cut the total of Federal spending may be reserved for later consideration. But even on the face of his own budget projections this program will involve a combined deficit in the current and next fiscal year of $15 billion. This gap will probably be financed by inflation—i.e., by printing more money, by lowering the purchasing power of the dollar and so raising prices. This cannot help the poor. Regardless of the immediate result, the long-run result of inflation must be to distort the structure of production, and hence to slow down the rate of balanced economic growth. This cannot help the poor. For the government to borrow $15 billion now to reduce taxes $11 billion means that taxes must later be raised to a still higher level to pay off the new debt. This must discourage production and employment, and cannot help the poor.
The economic proposal by Mr. Johnson that would do most harm of all would be to impose a still higher legal penalty for overtime even than the present stiff penalty rate of 50 percent. This could only raise costs of production, lift prices, reduce sales and output, and hence reduce employment. It could not help the poor.
Mr. Johnson proposes to give Federal funds to “the chronically distressed areas of Appalachia,” to expand “area redevelopment,” to “distribute more food to the needy through a broader stamp program.” All these are merely new forms of the age-old proposal to take from the rich and give to the poor, to take from the more productive to give to the less productive. What the reformers who back such proposals forget is that you cannot “redistribute” the fruits of production without drastically reducing production itself.
For this “redistribution” reduces incentives at both ends of the economic scale. As the productive have more of their income taxed away from them, they have less incentive to exert themselves to earn it. As the poor get increased handouts and subsidies, they too have less incentive to improve their condition through their own efforts. The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success.
RESTORE INCENTIVES
The way to cure poverty is not through inflation, “sharethe-wealth” schemes, and socialism, but by precisely the opposite policies—by the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.
The way to combat the remaining pockets of poverty is to keep this system; to reduce government intervention instead of increasing it; to reduce government spending and punitive taxation—in brief, to increase the incentives to the initiative, effort, risk-taking, saving, and investment that increase employment, productivity, and real wages.
February 3, 1964
In his State of the Union Message, President Johnson made a recommendation that, if adopted, could do immense harm. He proposed “legislation authorizing the creation of a tripartite industry committee to determine on an industry-by-industry basis as to where a higher penalty rate for overtime would increase job openings without unduly increasing “costs, and authorizing the establishment of such higher rates.”
Employers are already compelled by Federal law to pay a premium rate of 50 percent above the regular wage rate for all overtime in excess of 40 hours a week. This legal compulsion of course benefits specific workers under special conditions. But it is doubtful whether even stiffer penalty rates would help the whole body of workers, particularly when we consider them in their role as consumers as well as workers. Compulsory overtime rates increase marginal labor costs of production. In one way or another this increase in costs must reduce both production and employment below what they otherwise would be.
A firm that is subject to stiff competition, especially foreign competition, will not be able to pass on its increased costs in higher prices for its product. It may therefore have to abandon the idea of increased production and overtime employment. If firms in a given industry do not have to fear foreign competition, they may be able to add most of their increased costs to their prices. But with higher prices, sales will fall off, and both output and employment will be reduced.
ABILITY TO COMPETE
Oddly enough, President Johnson, when he is talking about a compulsory 35-hour week instead of a 40-hour week, recognizes this effect. In a paragraph preceding his overtime recommendation, he said: “I believe the enactment of a 35-hour week would sharply increase costs, would invite inflation, would impair our ability to compete and merely share instead of creating employment.”
What bothers Mr. Johnson is that some firms are employing workers overtime, instead of hiring additional workers, in spite of the 50 percent premium rate. He assumes that an even heavier overtime penalty would force the employment of more workers. But would it? It is a striking fact that, in November, when the seasonally adjusted rate of unemployment was 5.9 percent of the working force, 7.2 percent of all hours in manufacturing were overtime hours, paid for at premium rates. This seems to imply that industry could have employed the whole working force at regular hours. Why didn’t it? Since managers always try to keep costs down, and would avoid a 50 percent penalty rate if they could, it seems probable that among the job seekers they did not find enough with the necessary competence or skill to be worth employing at regular rates.
THE NEED OF PROFIT
Whatever the explanation, a still further increase in the legal overtime rate could only make the situation worse by increasing costs. Mr. Johnson’s proposal is even more disturbing from a legal than from an economic point of view. It would be discriminatory as between industries. It would subject each industry to the arbitrary decision of a board on which the government members would cast the deciding vote.
The solution of the problem of unemployment lies in a different direction. As even J.M. Keynes wrote in 1932: “Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”
How long will it take for the world to learn this? How long will it take for us to learn that profits and employment go hand in hand, go up and down together, and that the first is indispensable to the second? Thanks to the initiative of the American Economic Foundation there will be a Hall of Free Enterprise at the coming New York World’s Fair devoted to teaching this lesson. It deserves the support not only of big- and little-business men, but of every worker.
February 10, 1964
On paper, President Johnson’s first budget has some merits which should be stated at the very beginning. It gives at least lip service to economy. And it estimates administrative budget expenditures in fiscal 1965 at $97.9 billion, which is half a billion less than the 1964 estimate.
But how probable is it that these estimates will be realized? Here a score of doubts arise. The new obligational authority asked for by the President for 1965 is $103.8 billion. This is $1.2 billion higher than 1964, and a new high record.
How reliable, then, are the new budget estimates? Let us begin on the spending side. The estimated reduction of $500 million compared with 1964 is achieved by an estimated reduction of $1.3 billion in national defense and of $1.1 billion in other expenditures. This is partly offset by an estimated increase of $1 billion in expenditures for “space” and interest, and of $900 million for the “attack on poverty.”
Yet many of the estimated reductions in other expenditures are very doubtful. For example, farm subsidies are estimated at $5.1 billion, down $1.3 billion from 1964. But this reduction seems to rest merely on a pious hope. The estimate for new obligational authority for foreign aid is surprisingly low at $2.4 billion (compared with $2.5 billion in 1964). But the President adds: “The 1965 budget does not allow for sudden opportunities that sometimes present themselves in international economic affairs.” By this he refers to opportunities “to provide any additional funds needed,” for which he promises to send in special requests.
A NEW HIGH RECORD?
Finally, a score of welfare programs are to be expanded, and the President adds a half dozen more “to attack poverty.” It is unlikely that all these together will add less than $1 billion to spending. In brief, it is highly improbable that total spending in 1965 will actually be less than in the current fiscal year. It is much more likely to hit a new high record. On the revenue side of the budget, we are asked to believe in a paradox. The budget assumes that taxes are being cut $11 billion a year, fully effective in fiscal 1965. Yet estimates of receipts from personal income, corporate, and other taxes are all higher than in either 1963 or 1964. They are $93 billion for 1965, up $4.6 billion over 1964 and $6.6 billion over 1963. The argument is that lower tax rates will create so much prosperity that they will actually increase tax revenues.
RATES VS. REVENUES
To judge how plausible this argument is, let us look at it in detail. The greatest percentage cuts in tax rates are in the lowest incomes. For adjusted gross incomes of $3,000 and under, the reduction in aggregate tax liability is 38.3 percent; for incomes from $3,000 to $5,000, 26.2 percent; for incomes from $5,000 to $10,000, 19.9 percent, etc. This means that for the new income-tax rate brackets to yield as much revenue as their corresponding old rate brackets, taxable incomes in the less-than-$3,000 bracket would have to rise 60 percent; in the $3,000 to $5,000 bracket 35 percent; in the $5,000 to $10,000 bracket nearly 25 percent, etc. Of course as personal incomes increase they get into higher tax brackets. But even so, is the new revenue estimate plausible?
The probabilities are very high that spending in 1965 will be higher and revenues lower than guessed at in the budget, and that the deficit in 1965 will be much bigger than the $4.9 billion estimate.
In view of the past record, this would not be surprising. For the fiscal year ended June 30 last, for example, President Kennedy originally forecast a surplus of $463 million; there was a deficit of $6.3 billion.
But even on its face, the new budget is fiscally irresponsible. It will be the 29th deficit in 35 years. It is unconvincing for Mr. Johnson to call it a “giant step toward the achievement of a balanced budget.” It is larger than the majority of the preceding 28 deficits. And it is based on the fallacious theory that a big deficit is necessary and sufficient for full employment. The one result it does guarantee is inflation and a further loss of confidence in the dollar.
February 17, 1964
The Jan. 27 issue of the Investment Dealers’ Digest reprints a letter from Secretary Dillon under the following prefatory note:
“Concerned about the effects of the proposed Interest Equalization Tax on foreign securities, the editors of the Digest were especially impressed by an article on the subject which appeared Dec. 16 in Newsweek. Written by Henry Hazlitt . . . it seemed to sum up succinctly the negatives of the proposal. We wrote to Secretary of the Treasury Douglas Dillon for his comments on the legislation and on Mr. Hazlitt’s article. The Secretary’s Jan. 8 response is published below in full.”
In his reply the Secretary begins with a concession: “It is true that in the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” But this is my main point.
The Secretary goes on to argue, however, that this does not meet the immediate problem in our balance of payments. This, he insists, can only be met by his proposed “temporary” tax on foreign securities. But if this immediate problem is so urgent, why do we continue to give away billions of dollars in foreign aid? The crucial difference between foreign investment and foreign aid is that, when we invest in foreign countries, we in the long run get our money back, with interest. But when we give away foreign aid we get no money back. Anyone who opposes foreign investment on the ground that it hurts our “balance of payments” should doubly oppose foreign aid.
‘EXPORTS’ GIVEN AWAY
Secretary Dillon contends that foreign aid is “increasingly in the form of U.S. goods and services and hence has a limited adverse effect on our balance of payments. In fiscal 1963, 80 percent of the foreign assistance commitments by the Agency for International Development was tied directly to U.S. goods and services.” This figure has been often used by the Treasury, but without detailed evidence. Congressman Thomas B. Curtis has complained that AID has put out this figure with “no working papers to establish it at all.” And Dillon himself testified in the House hearing on Aug. 20 that only “about half” of foreign economic assistance in calendar 1962 was in the form of U.S. goods and services.
But suppose the 80 percent figure were correct. What would it prove? As Melchior Palyi and other economists have pointed out, “tied” exports for foreign aid generate no payments from abroad. Such “unrequited” exports cannot offset imports for which we have to pay. It is misleading to include them, as we do, with commercial exports for which we get paid.
WILL TAX BACKFIRE?
Secretary Dillon contends that we must levy this tax “only as a temporary measure to meet our problem pending more fundamental solutions,” which, “however, require time.” Yet no fundamental solutions have been adopted. Nor are they even being seriously considered.
The deficit in our balance of payments began in 1958. It has since averaged nearly $3.5 billion a year. It is in the main the result of our own inflationary policies. Since 1957 we have piled up a cumulative budget deficit of $40.5 billion. We are planning another $5 billion deficit for 1965. Our government has also discouraged domestic investment and encouraged foreign investment by holding down interest rates. Yet as one of the “fundamental solutions” for the balance-of-payments problem Dillon astonishingly lists the $11 billion tax cut, which can only make the problem worse by encouraging more inflation and more imports.
The proposed foreign-investment tax may well have exactly the opposite effect from what its sponsors desire. As Allan Sproul, former president of the Federal Reserve Bank of New York, declared in a lecture last November: “We need to avoid experimenting with direct controls, whatever they may be called, which in times of strain may be interpreted as a forerunner of stronger controls of capital outflow, or even of all dealings in foreign exchange, which in turn would heighten the danger of anticipatory withdrawals of foreign funds from our market.”
February 24, 1964
By a vote of 77 to 21 the Senate has passed substantially the same tax-cut bill as that passed by the House in September. So the country is certain to have a new tax law, bad in almost every respect.
A tax cut of $11 billion, accompanied by a sufficient slash in spending to ensure a balanced budget, would have been a genuine stimulus to long-run economic growth. But the present tax cut is a fraud on its face. It is enacted in a fiscal year when the Treasury already expects a deficit of $10 billion, and looks forward to another deficit in the next year of $5 billion. So we are borrowing to cut taxes.
The tax cut may turn out to be deceptive in a double sense. It is called a tax cut of more than $11 billion. Yet in the face of this, the Treasury blandly estimates that tax revenues will be $4.6 billion greater in fiscal 1965, when the cut is fully effective, than in 1964, and $6.6 billion greater than in fiscal 1963.
The theory is that the tax cut itself will make us so prosperous that even the revenues will increase. This would no doubt have been possible if the confiscatory and unproductive tax rates above 50 percent in the higher brackets had been cut down to that level. But the slash is mainly in the lower tax brackets. It reduces the aggregate tax liability by an average of 19 percent. It reduces the tax liability of persons in the lowest bracket by 38 percent.
IMPLAUSIBLE ESTIMATE
It would take an average increase in taxable incomes of more than 20 percent to realize the Treasury’s estimate of higher income-tax revenues. That is just not plausible. If it were achieved in dollar terms through inflation, government spending would increase correspondingly. The 1965 deficit may be nearer to $10 billion than to $5 billion.
There would have been some compensation if the tax cut had been accompanied by real tax reform—if the burdens on production had been lightened; if the punitive income-tax rates above 50 percent had been abolished; if the one-sided capital-gains tax and the double taxation of corporate dividends had been mitigated. Instead, by reducing the already lower rates much more percentagewise than the higher rates, the scale of graduation has been made even steeper. Even the mere token dividend credit of 4 percent (far lower than that of Canada or Great Britain) has been abolished. Though corporation tax rates have been reduced, the reduction is offset by advanced collections.
SOAK THE RICH
Thus a shortsighted soak-the-rich and penalize-the-productive philosophy has prevailed, even though it will stunt our economic growth, and slow down the increase in capital accumulation and investment upon which a nation must depend for all improvement in economic conditions, for any increase in real wages, and for any permanent success in a war against poverty.
In so far as there is any theory behind the tax cut except how to win the coming election, it is an extreme and discredited Keynesianism. It is the theory that the way to increase prosperity and employment is to increase “consumer spending.” If you cut taxes, so the theory goes, consumers will have more to spend, and business, selling more, will provide more jobs. What this overlooks is that our unemployment is the result of excessive wage rates and labor costs in some lines as compared with productivity. So if wage demands go up as much as prices, the unemployment will remain.
When government expenditures are higher than revenues, the difference must somehow be paid for. If the deficit is met by selling bonds to savers, the government will absorb the investment funds that would normally be used by business. What the advocates of the tax cut are really depending on, therefore, is that the difference will be paid for by newly printed paper money. This will further raise prices, lower the purchasing power of the taxpayers’ remaining money, reduce world confidence in the dollar, and increase the “balance of payments” crisis about which the Administration professes to be so concerned.
March 2, 1964
From time to time I have contended in this column that there is no need for a Council of Economic Advisers, and no excuse for an annual Economic Report. I wrote on Jan. 28, 1952, for instance, that the report “consists mainly of giving ‘scientific’ and ‘economic’ reasons for what the President has done or wants to do for political reasons. . . . [It] is Administration propaganda paid for by the taxpayers.”
This year’s Economic Report is just one more example. It is an out-and out campaign document. We learn from it that the Eisenhower Administration just couldn’t do anything right. For instance: “Federal outlays leveled off early in 1957 and then declined, just at a time when expansionary policy was needed to avoid a downturn.” Then, again, between 1958 and 1960: “Federal policy was restrictive and wholly inappropriate to a period of insufficient demand.” And so on.
CAMPAIGN DOCUMENT
All the comparisons in President Johnson’s own eighteen-page economic report (summarizing the council’s 283-page report) boast of the progress since “early 1961”—i.e., since the Kennedy-Johnson Administration came in. “Our record $100 billion expansion since early 1961 has carried us past important milestones in the march toward a better life. . . . In the nearly three years of unbroken expansion since early 1961: GNP is up 16 percent, measured in constant dollars,” etc. And remember: “An expansion as long, strong, and free of excesses as the one we are now experiencing does not ‘just happen’. . . . Government has steadily pursued fiscal and monetary policies designed to promote recovery, accelerate expansion, and encourage business and consumer confidence: in 1961, when the Administration’s quick anti-recession program got recovery off to a flying start,” etc.
I shall not here attempt to check back on the validity of the comparisons that the Economic Report makes with conditions in the Eisenhower Administration. I shall merely mention one comparison that it does not cite: in the eight Eisenhower years, unemployment averaged 4.9 percent; in the three Kennedy-Johnson years, it has been 6.0 percent.
Yet the new Economic Report concedes that, “by all odds, the country’s No. 1 economic problem is persistent unemployment.” How does the Administration propose to solve this? It proposes to solve it by the method that has persistently failed in the past—more monetary inflation.
TAX CUT AS PANACEA
Its great reliance is on the $11 billion tax cut. “Speedy passage of the tax cut . . . will provide a net fiscal stimulus, taking both expenditures and tax cut into account, that will be three times as great in 1964 as in any of the years 1961, 1962, and 1963—will, in fact, provide a greater net stimulus to the economy in 1964—to jobs, production, income, and profits—than in any other peacetime year in history. . . . The tax cut will give a sustained lift, year-in and year-out, to the American economy. When fully effective in 1965, it will send well over $11 billion annually coursing through the arteries of the private economy.”
It is clear that this $11 billion is to consist entirely of deficit spending—that it is to be created by issuing $11 billion of new money and credit. To make this quite plain, Mr. Johnson says: “It would be self-defeating to cancel the stimulus of tax reduction by tightening money.”
Not once does the report suggest that any part of our unemployment may be caused by wage rates or labor costs already above marginal productivity levels, or that any adjustment may be needed. Instead it proposes remedies—e.g., “higher overtime penalty [wage] rates”—calculated to make the unemployment worse.
The remedies that the Economic Report prescribes for all our economic ills, in brief, are more deficits, more inflation, more controls, more statism. Not once does it dawn on the authors of the report that the government has caused our chronic unemployment, caused the balance-of-payments deficit, and caused our slow rate of economic growth, by precisely the nostrums it is advocating as a sure cure for these maladies.
March 9, 1964
The Administration’s pressure for the $11.5 billion tax cut just enacted may be cynically ascribed to an effort to win the coming election. But it is also supported by an economic theory, a theory now widely and sincerely held, that is set forth in some detail in the recent Economic Report of the Council of Economic Advisers.
It is a pure “demand” theory. It assumes that, whenever there is recession or unemployment, the reason must be “insufficient demand.” “Excessive unemployment is the most obvious symptom and one of the worst consequences of a level of demand that falls short of the nation’s potential output.”
Therefore, the report concludes, “the Federal government must adjust its programs to complement private demand. . . . The budget must counterbalance private demand.” “Inadequate” private demand “can be corrected either by expanding government purchases to employ idle resources . . . or by expanding private business and personal after-tax incomes through reduced tax rates.” In other words, the government can deliberately resort to deficits.
But this last word is still unpopular. It arouses distrust, so the council shies away from it. Instead, it invents a new concept—“the full-employment budget.” This is a purely hypothetical budget, with no relation to the real one. It is what the relation of government expenditures and revenues ought to have been, according to the council’s theory, to bring about full employment (or rather, to prevent unemployment from going above 4 percent).
DREAM-WORLD SURPLUS
Let’s see some of the consequences of this new concept. We have had 28 actual deficits in the last 34 years. But when we start talking of “full-employment budgets” most of these turn out to be “surpluses.” In the fourth quarter of 1963 the Treasury was estimating the actual deficit at a rate of $9 billion a year, but it turns out from the new calculations of the Council of Economic Advisers that at the time there was a “full-employment” surplus of $9 billion. In fact, by this new method of hypothetical figuring there couldn’t be a deficit in the “full-employment budget,” no matter what the actual figures showed, as long as there was any unemployment!
The fallacies in this theory should be clear. It is a stale Keynesianism. It takes it for granted that any “idle resources” or unemployment anywhere must be the result of “deficiency of aggregate demand.” By “demand” it means, of course, monetary demand. So this demand is to be increased either by more government spending or lower taxes, and the bigger deficit is to be paid for by printing more money—i.e., by inflation. “When aggregate demand is generally deficient and investment and consumption are expanding too slowly to provide jobs for all those seeking employment, expansionary monetary policy normally can and should accompany expansionary fiscal policy.”
DEMAND AND PRICE
Nowhere does the council recognize that “demand” is merely relative to price. When goods are priced too high some of them must remain unsold. When labor is priced too high some of it must remain unemployed. Unemployment is the result of maladjustment of wages and prices. Given wage-price coordination, supply creates its own demand.
The only way to cure unemployment is to permit, through free-market competition, the necessary adjustments and coordinations throughout the wage-price system, and to encourage saving, investment, and profits. As Keynes himself conceded in 1932: “There is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”
Given workable wage-price relationships, full employment is possible without deficits and without inflation. But even huge deficits and inflation cannot bring full employment if wage rates are encouraged to rise faster than prices and productivity.
To cut taxes and increase our inflationary deficit may give us an overheated economy till election time, but it is a reckless and ominous policy for the longer future.
March 16, 1964
The House passed the $11.5 billion tax cut by the overwhelming vote of 326 to 83, and the Senate by 74 to 19. The President hailed the cut as “the single most important step that we have taken to strengthen our economy since World War II. . . . It will immediately increase the income of millions of our citizens,” he continued, “by reducing the amount of taxes that you must pay. . . . By releasing millions of dollars into the private economy it will encourage the growth and prosperity of this land that we love. . . . ”
But if it’s as easy as all that, a question that may occur to some is: why did we stop at an $11.5 billion cut? Why not omit taxes altogether?
But let’s confine our attention to the situation as the government presents it. It estimates that in the “administrative” budget there will be a combined deficit in the current fiscal year and in 1965 of $15 billion, and that in the “consolidated” budget (reflecting the entire receipts from and payments to the public) there will be a combined deficit for the two fiscal years of $11.2 billion. In other words, for these two fiscal years combined, the government will take in from the public a total of $234.2 billion, but in the same period it will spend a total of $245.4 billion, or $11.2 billion more.
FROM WHERE?
Where do the people who are so jubilant about the tax cut imagine that this $11.2 billion is going to come from?
As the government won’t get it from taxes, there are only two other ways in which it can get it. First, it can sell bonds to the public that the public can pay for out of its real savings. But to the extent that it does this: (1) There will be no increase in “purchasing power,” because the people that buy the bonds will lose that amount of purchasing power for other things, just as if they had turned it over in taxes. (2) If the government takes $11 billion out of the funds available for investment, either private business will be able to borrow just that much less for its own expansion and investment, or everybody will have to offer higher interest rates to tempt more lending and investment.
But the net effect of this might be deflationary. And the President has declared: “It would be self-defeating to cancel the stimulus of tax reduction by tightening money.” We must conclude, then, that the government intends to get the missing $11 billion by, in effect, printing it.
WILL IT BE PRINTED?
The process is indirect. The government sells its I.O.U.’s—bonds, certificates, notes, bills—to the banks The banks “pay” for these by creating deposit credits on their books against which the government can draw checks. The people to whom it makes payments—defense contractors, veterans, farmers, or its own military or civilian employees—then transfer these credits to their own accounts or ask for cash, and the required amount of new (Federal Reserve note) cash is printed.
But how can printing more paper money increase production and employment? It may do so temporarily wherever wage rates have been too high to permit workable profit margins or where labor costs have forced prices higher than the existing supply of monetary purchasing power can support. In either case, however, a readjustment of price-wage relationships could restore full employment just as well. And if labor costs are allowed to rise as fast as or even faster than prices, even with the new money, unemployment will continue nonetheless.
So if the $11 billion gap between revenues and expenditures is met out of new money, that money will raise prices. Americans will pay a hidden $11 billion tax through a lower purchasing power of their dollars.
It is a dangerous game for the government to play. The prospect of continued deficits will undermine world confidence in the dollar. If we try to keep interest rates down by an easy-money policy (with the Bank of England discount rate now raised to 5 percent) still more dollars may flow abroad and cause a further drain on our gold supply. We cannot “strengthen our economy” by weakening the dollar.
March 23, 1964
On March 5, the House passed by 238 to 142 the Administration’s bill imposing a tax on the purchase of foreign stocks and bonds by Americans. It was a sad day for freedom of international investment. From the standpoint of the long-run national interest, it would be hard to imagine a more shortsighted measure.
The bill was passed ostensibly as a cure for the “deficit”—the net outflow of our dollars and gold—in our international balance of payments. Since the end of 1957, this deficit has been running at an average rate in excess of $3 billion a year, and has reached a total of more than $18 billion.
The cause of it has been our government’s own policies. For 30 years, with minor intermissions, we have been following a policy of inflation. The cost of living has more than doubled. Since the end of 1939 the supply of dollars has been more than quadrupled. Since the end of 1957 our active money supply has been increased 14 percent. When we count time deposits, our money supply since the end of 1957 has been increased nearly 40 percent. During this period our government has granted more than $24 billion, or $4 billion a year, in foreign aid. We have run a cumulative deficit in the last six fiscal years of nearly $38 billion, or some $6.5 billion a year.
BLAMING SOMEONE ELSE
On top of all this our monetary authorities have deliberately been holding down both short-term and long-term interest rates. This has been done “to encourage employment and economic growth,” but its effect is to discourage foreigners from investing here and to encourage Americans to invest abroad.
But under no condition will the Administration admit that the deficit in our balance of payments is the result of its own policies. It is determined to blame something or someone else. So it has decided to blame foreign investment and to penalize Americans for buying foreign securities.
Its decision to pick on the purchase of foreign securities as the scapegoat is purely arbitrary. If foreign lending and investment must be the villain, why not tax or forbid short-term bank loans abroad, or direct investments in new plants? Out of scores of major items in the international balance sheet that cause a net outflow of funds the most obvious is foreign aid, which has been running at some $4 billion a year compared with the total annual payments deficit of only $3 billion. The next most likely candidates are “luxury” imports of all sorts, from French perfumes to German cars. Or foreign pleasure travel by Americans.
ONLY TEMPORARY?
Instead, the Administration has pounced on the least plausible item. In the five years 1958 to 1962 the aggregate net outflow of $16.6 billion for new foreign investment was offset by $15.4 billion of income from previous investment. Even Secretary Dillon concedes: “In the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” At best, then, the tax is shortsighted. When we give away foreign aid we get no money back. In the long run reducing foreign investments must mean a corresponding reduction in our exports.
We have succeeded only in the last 30 years in making the U.S. the financial center of the world. Why kick this national asset away?
The proposed tax is being officially urged “only as a temporary measure to meet our problem pending more fundamental solutions.” But no fundamental solutions are being considered. Such solutions would be to balance our budget, to halt our inflation, and to permit our interest rates to go to levels that would halt or even reverse the pressure for lending or investment abroad. Instead the Administration is cutting taxes, planning continued huge deficits, and insisting that money be kept cheap.
The proposed tax, therefore, will not cure anything. If the situation grows worse, the Administration will look for other scapegoats—for example, foreign travel—to blame, tax, and control. And if foreigners suspect this intention, the foreign-investment tax will have exactly the opposite of its desired effect.
March 30, 1964
The billion-dollar line of credit just extended to Italy, chiefly by the United States, but with the help of a few European banks, is another dramatic illustration of the inflation epidemic now sweeping most countries in the world today, and of the intergovernmental cooperation that seems much more likely to prolong that inflation than to bring it to a halt.
The credit was extended, as dispatches put it, “to help Italy cope with a huge deficit in her balance of payments.” But what caused this “deficit” was the Italian Government’s own inflation. Since 1958, Italy’s official money supply has been increased 90 percent. In addition, the government has encouraged a huge creation of private promissory notes, popularly known as “butterflies,” that serve as a substitute for money. There is a budget deficit.
The inevitable long-run result of such policies is to raise internal prices in Italy above world levels. This tends to make Italy a poorer place to buy from and a better place to sell to. Hence it discourages exports and encourages imports. Hence it brings a “deficit” in the balance of payments and gives rise to fears concerning the stability of the lira.
RESULT OF IMF SYSTEM
It is instructive to notice that such consequences are brought about by the world monetary system set up at Bretton Woods in 1944—the IMF (International Monetary Fund) system. They could not happen under an orthodox gold standard. The loss of gold from any country would force that country to reduce its outstanding currency and deposits to bring prices once more in equilibrium with those in the outside world. It could not happen even in a world of paper currencies with free exchange rates, because at the same time as prices rose in the inflating country its currency would fall correspondingly in the foreign-exchange market, and so restore its “balance of payments.”
Prolonged and chronic deficits in the balance of payments, such as we have been witnessing over the last two decades, can occur only when one country inflates faster than its neighbors but still tries to peg its currency in the foreign-exchange market at a fixed ratio with other currencies. Then the discrepancy of prices in that country with prices elsewhere continues. Exports shrink, imports rise. The currency can be kept at the official parity only by huge currency swaps or borrowing from abroad.
ITALIAN EXAMPLE
Unless the U.S. Government got the strictest guarantees out of the Italian Government this billion-dollar credit was unwise, for the lira crisis could probably be halted overnight if the Italian Government stopped inflation and sufficiently raised its discount rate. It is ironic that the principal rescuer, the U.S. Government, has itself been suffering from a balance-of-payments crisis for six years and is taking no effective steps to halt the inflation that causes it.
The Italian crisis is merely the most recent. Two years ago it was Canada. A few years before that it was Britain. India is suffering from a huge balance-of-payments problem because it is trying to combine inflation and socialism with an overvalued rupee. Our Latin American neighbors have had payments crises whenever they failed to devalue enough to offset their internal inflations.
Of the original 44 currencies represented in the fund (in 1946) nearly all have been devalued (following the British action in September 1949), some of them several times. Most of the 89 currencies now in the fund have had checkered careers.
This is no accident. The whole purpose of the fund was to save countries from having to redeem their currencies in gold on demand. The whole purpose is to permit them to expand credit and currency continuously, through mutual “drawing rights,” borrowing, and “central bank cooperation.” The inflationary game can be kept going indefinitely (at the expense of the world’s bondholders, savers, consumers) as long as this international expansion is uniform. Danger arises only when one country starts inflating faster than the rest, and then it must be propped up by the rest. World inflation will continue as long as we keep the IMF system.
April 6, 1964
President Johnson’s call for “a national war on poverty,” with the objective of “total victory,” is going to be hard for the Republicans to combat. Who isn’t against poverty?
There is an air of moderation about the President’s proposals that adds to Republican difficulties. He asks for an added expenditure in the first fiscal year of less than $1 billion—only, as he points out, 1 percent of our national budget.
Then again, he assures us that “The war on poverty is not a struggle simply to support people, to make them dependent on the generosity of others. It is a struggle to give people a chance.” And he follows this with proposals for government job-training and employment programs.
But soon the thoughtful reader becomes aware that what the President is proposing is a set of more government interventions to try to cure evils brought about by previous government interventions. It is not a coincidence that so much of the unemployment that exists today in this country is among the unskilled. One of the chief reasons is the Federal minimum-wage law. Hundreds of thousands who could otherwise find work are kept out of the labor market altogether if their earning power is less than $1.25 an hour.
THE CAMEL’S HEAD
A generation or two ago a young beginner might work for nothing until he learned the business. His father might even pay an employer for his training. Today minimum-wage laws and union restrictions make such apprenticeship on an adequate scale practically impossible. So, under the poverty program, workers are to be trained at taxpayers’ expense. But we may be sure that each union will oppose this free job-training by government.
Another doubt likely to occur to the thoughtful observer is whether Mr. Johnson can achieve “total victory” over poverty with an expenditure of only $970 million a year. This comparatively tiny price tag for such a vaultingly ambitious goal, one suspects, is merely a way of getting the camel’s head in the tent. If the history of social security is any guide, we can expect the price tag to increase geometrically as the years go on.
In fact, we may not have to wait long. On the very day that the President’s program was announced, the head of the National Farmers’ Union declared that it represented “only an infinitesimal fraction of what needs to be done to wipe out poverty in America. . . . We should be talking about tens of billions of dollars.” This, of course, would lead to a wild inflation that in the long run would only multiply the poverty problem.
WAGE WITHOUT WORK
A few days after that, a 32-member group calling itself the Ad Hoc Committee on the Triple Revolution declared that every American should be guaranteed an adequate income as a matter of right whether he works or not. This fantastic proposal would destroy all incentive to work, not only on the part of those who expected to be supported, but on the part of those who would be asked to support them out of their own earnings. There could be no faster way to impoverish the nation.
The only real cure for poverty is capitalism—the system of private property, free markets, and free enterprise. This system has made us the most productive and richest nation in the world. It has continued to achieve its miracles even in the last generation. It has raised the average weekly factory wage from less than $17 in 1933 to $102 today. Even after the rise in prices is allowed for, it has more than doubled our real per capita disposable income—from $923 in 1933 to $2,127 in 1963.
As some commentators have already pointed out, the state known as poverty is relative, not absolute. What we call poverty in the U.S. would be regarded as affluence in Africa, Asia, or Latin America. And in any system that allots its rewards in proportion to skill and output there will always be a bottom fifth, no matter how high average income goes. But impatient efforts to wipe out poverty by severing the connection between effort and reward can only lead to the growth of the Leviathan state and destroy the progress this country has so dearly bought.
April 13, 1964
Will we recognize in time that it is our own unsound policies that have been causing the deficit in our balance of payments (with our loss of gold) in thirteen of the past fourteen years? Will we adopt corrective measures before it is too late? The outlook is not promising. In fact, nothing more disheartening has occurred in this regard than the publication (on March 19) of a report on the U.S. balance of payments by the Congressional Joint Economic Committee.
The report puts all the blame on foreigners. The U.S. has been altogether virtuous. “The main factors contributing to this unfavorable payments position have been substantial currency devaluations by other countries, the rebuilding, with American help, of the war-damaged economies of Europe and Japan, and heavy commitments abroad for private investment, economic and military assistance, and defense programs.” Not a word (except for a few Republican footnotes) about the 28 deficits in the Federal budget in the last 34 years, nor about the multiplication in our issue of paper dollars, nor about our cheap-money policies.
It appears that our deficit has been caused by the bad policies of the countries that have a surplus. For these wicked countries “counter inflation with tight-money policies and high interest rates.” This embarrasses our own inflation by encouraging capital export and dollar export. The committee suggests that these countries either follow inflationary cheap-money policies so that we can keep our own going, or revalue their currencies upward.
BEAM IN OUR OWN EYE
The committee self-righteously accuses the surplus countries of imposing “quantitative restrictions on imports, controls on capital exports . . . [and] export subsidies. These measures are inconsistent with free market economic principles and have contributed substantially to the U.S. balance-of-payments deficits.” This blandly ignores that our government itself imposes quantitative restrictions on imports (e.g., sugar and oil), has asked for a punitive tax on the purchase of foreign securities, and pays export subsidies on farm products.
But the committee’s recommendations are even worse than its diagnosis. Because, at the end of 1963, only $2.6 billion of the total U.S. gold stock of $15.6 billion was “free” gold available to “defend the dollar,” because this “free” gold reserve has declined by an average of nearly $1.4 billion a year since 1957 and might be “eliminated within two or three years,” the committee recommends that “The U.S. gold stock should be freed immediately of its domestic reserve function and made fully available for international monetary purposes.”
THE LAST BARRIER
This recommendation can only shake confidence in the dollar. The reasoning behind it is ironic: “For many years U.S. residents have not been permitted to redeem their dollars in gold. The only remaining domestic function of gold is to place limits on the expansion of the domestic money supply. But this expansion can be limited equally well without requiring a gold reserve against Federal Reserve liabilities.”
Now the chief function of a minimum legal gold reserve has always been precisely to place limits on the expansion of the money supply. If even the 25 percent legal gold reserve had been combined with the requirement of domestic as well as foreign convertibility, the enormous expansion of the U.S. money supply in the last 30 years could not possibly have taken place; the Treasury would have been long since drained of its gold. The official argument at the time American citizens were deprived of their right to convert to gold was that all that was really necessary was to maintain convertibility for foreigners. But now that we have issued so many paper dollars as to threaten even our ability to do that a Congressional committee is asking for the repeal of even that 25 percent requirement—i.e., of the last legal barrier to more inflation.
The last recommendation of the committee, to “expand international liquidity,” means that its proposed ultimate cure for our own monetary ills is a worldwide inflation.
April 20, 1964
In 1947, when the foreign-aid program was first launched under the name of the Marshall Plan, I wrote a critical book on it called Will Dollars Save the World? In it I pointed out, among other things, that intergovernmental grants raised an insoluble problem regarding conditions:
“Intergovernmental loans are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. They may even be used for the precise opposite of the purpose that the lender had in mind. But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or ‘American imperialism’; or ‘interfering in the internal affairs’ of the borrowing nation.”
In the original debates on the foreign-aid program this dilemma was simply ignored. Even in the seventeen years since then it has been only dimly and occasionally suspected. Thus our government has alternated between one policy and the other. For a time it would try to attach conditions. When this gave rise to outcries of “Yankee domination” our government would hasten to assure the recipients that the aid was offered “without strings.” Then when the aid was shockingly abused we would return to a halfhearted insistence on some conditions.
SUBSIDIZING SOCIALISM
Today we seem to be following the worst policy of all. We have been imposing conditions, but exactly the wrong conditions. We tell our neighbors in Latin America that they will get aid in proportion to their commitment to “programs of economic and social progress.” But we have been interpreting this phrase to mean “land reform,” subsidized housing, bigger social-security payments, i.e., programs of government planning and socialization. (The Johnson Administration, however, has recently given signs of recognizing the dangers in this policy.)
What we have to recognize (as I pointed out in my 1947 book) is that the dilemma of conditions “is, in fact, inherent. It lies in the attempt of one government to bribe another into following economic policies which that other government does not believe in sincerely enough to follow without the bribe. The dictation must be resented even if accepted. The people in the borrowing nation are led to feel that they have sold their economic birthright for a mess of pottage. Everything that goes wrong is blamed on the conditions [of the aid]. The ill will caused by this is in itself enough to offset any good will [the aid] might have brought.”
TO MAXIMIZE GROWTH
This dilemma of conditions does not arise in private foreign investment. Such investment, in the first place, is usually in private firms. If a business in Ruritania, say, seeks a loan from American investment bankers, the conditions suggested by the American bankers are not essentially different from those that would be suggested by Ruritanian domestic investors. The American private investors would ask whether the proposed new plant promised to be profitable, what guarantees were offered, etc. If the applicant for a loan were the Ruritania government itself, foreign investors would not be interested unless the government seemed likely to balance its budget, to refrain from printing more money, from exchange control, and so on.
In short, the loans would not be politicalized. They would encourage free enterprise, instead of socialism, in the borrowing countries. They would tend to go into the most profitable enterprises—i.e., into the enterprises that promised to maximize real wealth creation. They would tend to promote maximum economic growth.
Government-to-government foreign aid has the opposite effect. It tends to discourage or drive away private foreign investment, because the recipient nations get this aid without making the necessary fiscal or monetary reforms. Worse, the American Government, in order to continue to make it possible to give away foreign aid that is wasted and abused, has asked for a punitive tax on the very private foreign investment that tends to maximize world economic growth.
April 27, 1964
In a recent speech delivered in Johannesburg before the South African Institute of International Affairs, the eminent European economist, Wilhelm Röpke, called attention to the dangers both of our present “world without a world monetary order” and of American domestic policies that are weakening the dollar and “exporting inflation” to the rest of the world.
The prevailing impression is that the International Monetary Fund has given us a kind of world monetary order. Professor Röpke admits that this represents some improvement over the situation only ten years ago, which still deserved no better name than that of international economic disintegration. But he does not see the IMF system as one that provides any reassurance for the future. The present international monetary system, he declares, “has become an enormous world machinery for breeding and transmitting inflation.”
The United States, for example, because of inflationary policies, has a deficit in its balance of payments. This means that gold and dollars have been flowing abroad, where they become reserves against which Europe creates its own additional currency and bank deposits. But while these countries thus “import” inflation, the U.S. not only refuses to deflate but even to stop inflating.
U.S. WAGE INFLATION
“The root cause of the balance-of-payments difficulties of the United States is the internal wage and fiscal inflation which has been allowed to develop in that country during the last decade. The official assurances that these sources have been stopped carry little conviction because both wage inflation and budget deficits financed by bank reserves rather than by genuine savings have increased without interruption. It is not sufficient in the American case merely to hold wage increases within the limits which the government has designated as . . . socially desirable.”
Röpke goes on to quote in support of this judgment the words of Dr. Holtrop, the president of the Dutch central bank, in his annual report: “In the private sector the exports of both goods and capital would without doubt be favorably affected by a lowering of American production costs. To this cost aspect, however, too little attention is as yet being paid. Most of those who discuss wage policy at all confine themselves to saying that wages must not rise more than the improvement of per capita productivity permits. But in the case of countries with an obstinate balance-of-payments deficit that standard is inadequate. Countries in that position can perhaps stand some raising of real wages, but hardly a rise of nominal wages.”
A RETURN TO GOLD
Professor Röpke continues: “Since the American monetary authorities, however, dare neither to let the unemployment caused by trade-union power take its course nor to neutralize it altogether by a correspondingly full measure of inflation, the sad result is that the United States is that country which, in the midst of all its incomparable wealth, has managed to have both some measure of inflation and a large volume of unemployment, in other words, the worst of two worlds. The intemperance of the American unions is, in turn, bolstered up both by the Administration’s policy of deliberately favoring organized labor and by its overall economic philosophy. The latter is based for the most part on monetary expansionism of a rather extreme kind. . . . In the meantime, no stone is left unturned to mobilize foreign help for supporting the sick dollar.”
But as Professor Röpke points out, this cannot cure the real illness. The immediate solution is a reform of American policies, and the ultimate solution is a world return to a full gold standard.
Readers of this column will not be unfamiliar either with the diagnosis of the defects of the IMF system, the criticism of American fiscal, monetary, and labor policies, or the proposed cure of a return to the full gold standard that Professor Röpke recommends. But I report his views in the hope that Washington will be more impressed by this testimony from one of the outstanding authorities in Europe.
May 4, 1964
In practically every country of the world today the great fetish is an increase in the rate of “economic growth.” And the almost universal assumption is that that can best be promoted by inflation.
This policy, however, is almost never recommended under that name. The growth planners simply argue that growth has been slow because of an “insufficiency of aggregate demand.” They think this can be rectified by more government spending. Some of them are candid enough openly to advocate government deficits and the creation of more money, i.e., inflation.
Those who propose the inflationary solution for unemployment usually forget to ask what has caused the unemployment. The cause is nearly always some discoordination of prices and wages. An injection of new money can, it is true, at least temporarily increase employment if it restores wage-price coordination if, for example, it leads to increased demand or higher prices for products without leading to higher wage rates.
Yet any price-wage adjustment brought about by inflation is likely to be only temporary. For unions, encouraged by demand for more workers, or trying to “catch up” with higher living costs, will demand still higher wages, with the result that the discoordination of wages and prices may occur all over again, and the situation can be cured once more only by a still fresh dose of inflation. On the other hand, if governments follow sound labor policies, inflation is unnecessary.
ILLUSORY PROFITS
Inflation is not only unnecessary for economic growth. It is the enemy of growth. It distorts and falsifies economic calculation. An economy grows and functions at its maximum rate, and the production of thousands of different commodities and services can be kept in optimum balance when producers, on the basis of current prices and wages, can make reasonably correct anticipations of supply and demand, of costs, profits, or losses.
But when inflation forces up prices, prices do not all rise in the same proportion or at the same rate.
Businessmen cannot distinguish between what is lasting and what is merely temporary, or know what the future demands of consumers will be or what the real costs of their own operations are. Depreciation and replacement allowances will be inadequate. Profits will be overestimated. Businessmen everywhere will be deceived. They will be using up their real capital when they think they are increasing it. They will think they have profits or capital gains when they really have losses.
By distorting economic calculation and creating illusory profits, inflation destroys the function of the free market in penalizing inefficiency and misjudgment and rewarding efficiency and good judgment. Because nearly everything seems to prosper, there are all sorts of maladjustments and investments in the wrong lines. Solid work tends to give way to speculation and gambling.
EFFECT OF CONTROLS
The price and wage rises brought about by inflation will lead to demands for price and wage controls. But such controls will reduce and distort production, and do far more harm even than the inflation itself.
What is likely even before price controls is some sort of exchange control, to prevent the quotation of the home currency from falling in terms of other currencies. But the effect of such exchange controls will be to bring about a deficit in the balance of payments. It will discourage exports, because they will be overpriced compared with foreign goods. It will encourage imports. The exchange authorities, to prevent this, will institute quota and licensing systems. But these will disrupt foreign trade and domestic production.
Thus the long-run effect of inflation can only be to distort production and to retard economic growth. Of course, this effect can be concealed from many people for a long time. For prices and wages and incomes will all be constantly going higher in dollar terms. The official gross national product figures will be constantly soaring. The euphoria can temporarily lull all misgivings. But eventually the bitter moment of truth must arrive.
May 11, 1964
BUENOS AIRES—My chief impression after a three-week lecture tour in Latin America (one week in Guatemala, two in the Argentine) is that the two countries I visited would be immensely better off if their respective governments, as well as a flock of international agencies, would only let them alone for a while, and stop trying to “aid” them, to “stabilize” them, or to speed up their “economic growth.” But then, I suspect, this conclusion would apply to many other countries as well.
The Argentine is still suffering from the consequences of Perónism. Before Perón came into full power in 1946, the country was prosperous and progressive. The economy was comparatively free, the currency stable. The peso was 4 to the dollar. As I write, the peso is 136 to the dollar—one thirty-fourth of its former value. Since 1940 the money supply has been increased 50 times, the cost of living 65 times.
Not all of this happened under Perón. The inflation still goes on. Perón was forced out in 1955. Yet the cost of living in the Argentine is nearly six times as high today as it was in 1958. And no one seems to know how the inflation can be brought to an end. The deficit is out of control. In the first five months of the current fiscal year, revenues covered only 37 percent of expenditures. The cash deficit is running at an annual rate of 169 billion pesos. Yet the government shows no disposition either to cut expenditures or to raise taxes. A large part of the budget deficit consists of deficits in government-owned and government-managed industries, particularly the railroads. It is estimated that on railways alone (loaded with excess employees) the deficit for the current year will reach 60 billion pesos.
DOLLAR RESTRICTIONS
The government blames the depreciation of the peso on “speculation.” On the very weekend of my arrival (April 12), it promulgated a set of currency restrictions forbidding the transfer of gold, currency, and securities out of the country, severely limiting travel allowances, restricting dollar and other foreign-exchange purchases, and ordering the exchange of dollar export earnings into pesos within five days after receipt.
Of course the effect of these measures can only be the opposite of that intended. When dollars are not free to go out they will not come in. When Argentine businessmen and others are restricted in the amount of dollars they can buy or send out each month they will use this permission to the limit—and look for other ways to send out more. On the first business day following the new controls an international black peso-dollar market started up with its center in Montevideo, in which the peso went to a further discount in dollars.
HERITAGE FROM PERÓN
One reason for the alarm was that too many people remembered the graft and disruption that followed the imposition of exchange controls under Perón. Practically the whole press, with the exception of the extreme left and the Perónistas, opposed the new measures—for the most part with remarkably well-reasoned arguments. A particularly brilliant analysis of their probable effect was published by Rodolpho Katz in his Economic Survey.
I had an interview with President Arturo Illia, who has been in office since last July. I was impressed by his ease and informality, his courtesy, modesty, and openmindedness, and his sincerity. He believes that the new exchange restrictions are temporary, and that there will be no need to broaden them. But many Argentines wonder about his understanding of economic affairs and deeply distrust some of the economic advisers around him.
As for Guatemala, I have left myself room only to remark upon the complex system of price controls and production quotas that the United States has forced upon Guatemala through the International Coffee Agreement which we sponsored. Our government has promoted nationwide union monopolies, nationwide crop-price supports and acreage controls, and compulsory world price-fixing and quotas in coffee and other commodities. But when American businessmen attempt the same thing on a comparatively tiny scale, it puts them in jail for it.
May 18, 1964
Even economists who originally favored a tax cut as an economic stimulus are beginning to express fears that the recent one was excessive and may touch off an inflationary boom in the current year. Many of them had assumed that the tax cut in the first year would be between $4 billion and $5 billion. The cut of $11.5 billion (or even $13 billion as estimated by some economists) may, they fear, be so large as to “introduce a destabilizing force.”
These misgivings are not unjustified, and could be based on more than the tax cut itself. It is obvious that the government intends to finance the deficit by borrowing from the banks, i.e., by inflation. In fact, the U.S. money supply was being increased with unusual rapidity even before the tax cut took effect. If we define the money supply as demand deposits plus currency, it grew at an annual rate of 4.2 percent from August 1962 to March of this year, compared with an average annual rate of 2.2 percent from 1951 to 1963. If we define money supply to include time deposits, it has grown over the last three years at an annual rate of 8 percent, far above its long-term average.
DIFFICULTIES
A number of European economists, in these last three years, have been telling us that we are not inflating enough; that we ought to have even bigger deficits, and increase our money supply even faster, if we want to “increase effective demand,” and bring “full employment” and a “higher rate of growth.” But the First National City Bank of New York, in a series of four tables in its May letter, shows that the chief European countries have now got themselves into serious difficulties as a result of pursuing just such policies. These tables show, respectively, the increase in consumer prices, wages, money supplies, and industrial output, in 1961, 1962, and 1963, over the preceding year, and the cumulative increase over the three years 1961–63, in each of eight countries. I have condensed three of these into a single table (right) showing the cumulative three-year increase.
Several significant conclusions may be drawn from this table. Europe’s recent inflation has been attributed to wage increases and other “cost-push” factors, but it is quite clear that neither the wage nor the price increases could have taken place without an increase in the money supply to permit or promote them.
It is true that, in one sense, Europe in the last few years has had an “imported” inflation—built on gold and dollars from the United States. But the European central banks were not obliged to build a pyramid of credit on this imported gold and dollars. They could simply have allowed these imports to build up their reserve ratios, or they could have correspondingly reduced holdings of domestic assets.
This European inflation has not helped European economic growth. It has undermined the competitive position of several countries. Because of the rise of wages beyond marginal productivity, it is estimated that wage costs per unit of production increased from 1959 through 1963 by 17 percent in the Netherlands, 20 percent in Germany and France, and 28 percent in Italy. The increase was about 10 percent in the United Kingdom and nil in the U.S.
True, this European inflation has hurt the exports of some of these countries and sucked in imports, giving France and Italy, for example, deepening trade deficits. One incidental result has been to make our own balance-of-payments problem less than it would have been.
Percent increase 1961–63 in . . .
| Prices | Wages | Money | |
| Belgium | 3.9 1 | 9.8 | 26.7 |
| France | 13.6 | 29.6 | 57.1 |
| Germany | 9.8 | 32.2 | 31.9 |
| Italy | 14.7 | 23.8 | 57.7 |
| Netherlands | 6.8 | 24.1 | 25.9 |
| Switzerland | 9.9 | 18.1 | 37.1 |
| United Kingdom | 10.9 | 12.4 | 8.4 |
| United States | 3.5 | 8.8 | 8.8 |
But it would be folly to assume that the problems brought about by our own inflation can be solved by European inflation. These inflations may help to encourage and prolong each other; but the prospects of international long-term stability and growth are only hurt by them.
May 25, 1964
In government circles in nearly every “underdeveloped” nation today there is a fixed idea that the economic salvation of the country lies in industrialization.
Among outstanding examples are Egypt with its zeal for dams and India with its mania for a government steel mill. But examples can be found everywhere. I met a typical one in a recent visit to the Argentine. Argentina has now imposed a practical prohibition on the import of foreign cars in order to create a home automobile industry that not only assembles cars but makes the parts for them. Some of the chief American and foreign producers have established plants there. But it is estimated that it costs today about two-and-a-half times as much to make a car in the Argentine as it would to import one. Argentine officials are apparently not worried about this. They argue that a local automobile industry “provides jobs,” and also that it sets the Argentine on the road to industrialization.
Is this really in the interest of the Argentine people? It is certainly not in the interest of the Argentine car buyer. He must pay, say, about 150 percent more for a car than if he were permitted to import one without duty (or by paying a merely nominal revenue-raising duty). Argentina is devoting to car-manufacture capital, labor, and resources that could otherwise be used far more efficiently and economically—by producing more meat, wheat, or wool, say, to buy automobiles rather than to make them.
REDUCED EFFICIENCY
The effect of all government-forced or subsidized industrialization is to reduce overall efficiency, to raise costs to consumers, and to make a country poorer than it otherwise would be.
But the authors of the import prohibition might reply with a form of the old “infant industries” argument that played such a large part in our own early tariff history. They may contend that once they can get an automobile industry established, they can develop the domestic know-how, skills, efficiencies, and economies that would enable an Argentine automobile industry to be not only self-supporting but capable of competing with foreign-automobile industries. Even if this claim were valid, it is clear that a protected or subsidized industry must be a loss and not a gain to a country as long as the protection or subsidy has to be retained.
And even if a self-supporting motor-car industry were finally established, it would not prove that the losses in the period of hothouse growth were justified. When the conditions are in fact ripe in any country for a new industry capable of competing with the equivalent foreign industries, private entrepreneurs will be able to start it without government subsidies or prohibitions on foreign competition. This has been proved again and again within the United States, for example, when a new textile industry in the South competed successfully with the long-established textile industry in New England.
AT ANY COST?
There is another fallacy behind the industrialization mania. This is that agriculture is always and necessarily less profitable than industry. If this were so it would be impossible to explain the prosperous agriculture within any of the industrialized countries today.
A popular argument of the industrialization-atany-cost advocates is that it is impossible to point to a purely agricultural country that is as wealthy as “industrialized” countries. But this argument puts the cart before the horse. Once a dominantly agricultural economy becomes prosperous (as the early United States) it develops the capital to invest in domestic industries and therefore rapidly becomes a country of diversified production—both agricultural and industrial. It is diversified because it is prosperous rather than prosperous because it is diversified.
It is the great superstition of economic planners everywhere that only they know exactly what commodities their country should produce and just how much of each. Their arrogance prevents them from recognizing that a system of free markets and free competition, in which everyone is free to invest his labor or capital in the direction that seems to him most profitable, must solve this problem infinitely better.
June 1, 1964
It is doubtful whether any other type of public regulation of economic activity has been so widely admired as the regulation of the securities markets by the Securities and Exchange Commission. The purpose of the regulation is to compel full disclosure of the facts about a security and to prevent or punish fraud. No one can defend ignorance or fraud. But have the SEC and the complex regulations it enforces in fact achieved their intended purpose of protecting the investor? And did they pay their cost?
This is the question that Prof. George J. Stigler of the University of Chicago set himself in the April issue of the Journal of Business published by that university. He assumed it might be capable of statistical answer. So with the help of an associate he compared the fate of new issues of securities in the period of 1923 to 1928, inclusive, before the SEC, with the fate of new issues of securities in 1949 to 1955, inclusive, after the SEC. He examined what happened to the market prices of new issues, in each period, in each of the five years after they came out. To eliminate the effects of general market conditions, he compared these market prices, not absolutely, but relative to the market average.
SEC AND INVESTORS
His results were negative. That is, his comparisons “suggest that the investors in common stocks in the 1950s did little better than in the 1920s, indeed clearly no better if they held the securities only one or two years,” and “that the SEC registration requirements had no important effect on the quality of new securities sold to the public.”
He arrived at “two main conclusions: (1) it is possible to study the effects of public policies, and not merely to assume that they exist and are beneficial, and (2) grave doubts exist whether, if account is taken of costs of regulation, the SEC has saved the purchasers of new issues one dollar.” In a footnote he adds: “The costs of the program, that is, probably exceed even a reasonably optimistic estimate of benefits.” Allowing for “costs of the delays imposed . . . as well as costs of operating the SEC, the full costs of registration for new stock issues could be 5 percent of their value.”
Stigler’s statistical results are of course not conclusive. In a matter of this nature, no statistical result could be conclusive. For the question to be answered is: what would have happened if there had been no SEC regulations? And might-have-beens can never be proved. But Stigler’s statistical results from comparisons of the pre-SEC with the post-SEC at least raise a strong presumption. There is no evidence that investors fared any better after the SEC was given control over the registration of securities than they did before.
DID CONSUMERS SAVE?
Earlier, Stigler and an associate undertook a study of the effects of state regulatory commissions on the electric-utility industry. They came to the tentative conclusion that these effects had been quite small: “It is very doubtful whether consumers have been saved as much by public regulation of the electrical utilities as they have had to pay, directly and indirectly, for regulation.”
Yet historically, regulation of the electric utilities tends to increase rather than diminish; and since the SEC was established it has increased year by year the scope and complexity of its regulations and requirements and asked for increased powers. As Stigler puts it:
“One great invention of private enterprise . . . is bankruptcy, an institution for putting an eventual stop to costly failure. No such institution has yet been conceived of in the political process, and an unsuccessful policy has no inherent termination. Indeed, political rewards are more closely proportioned to failure than to success, for failure demonstrates the need for larger appropriations and more power.”
The prevalent economic ideology has entirely forgotten the function of the free market. It assumes that the solution of every problem must be more government intervention, more government control, and more government spending. It is being carried along by its own momentum, and disdains the application of any factual tests to its results.
June 8, 1964
In 1930, the national debt was $16 billion. In 1945, at the end of World War II, it was $260 billion. During the war, while the debt was piling up, the general assumption was that this borrowing was proper and even unavoidable in a time of crisis, but that once the war was over the debt would be gradually reduced or paid off. Instead, in the eighteen years since the end of the war, the national debt has been increased to $308 billion, or an average of $6,500 for every family in the United States.
Today interest on the debt alone amounts to $11 billion a year, or more than three times as much as the government spent annually for all purposes in the years 1926 to 1930.
There is curiously little concern about this. On the contrary, every once in a while some writer emerges to ridicule what little concern there is. J. David Stern did this in the January Atlantic. Even academic economists belittle the problem.
Stern’s argument was summed up in the statement that “the nation is growing faster than its debt.” One academic economist, trying to prove the same point, epitomized his argument in the following table:
| 1945 | 1963 | |
| National debt | $260 | $305 |
| Gross national [product] | 214 | 585 |
The triumphant conclusion the professor drew from this table was that “the national debt, when viewed as a burden to a year’s production, has been more than cut in two.”
DEBT VS. GNP
The figures are official, and the conclusion is technically correct. The complacency of the conclusion is unjustified.
The reason the national debt is less of a burden is that, through inflation, the purchasing power of the dollar has been steadily reduced. It has been reduced 63 percent since 1933 and 43 percent since 1945. Let us state this another way. By failing to balance its budget, by borrowing, by monetizing the debt, by printing more dollars, by steadily diluting the dollar’s purchasing power, the government has in effect repudiated 63 cents of every dollar it borrowed in 1933 and 43 cents of every dollar it borrowed in 1945.
To put it bluntly, the creditors, the holders of U.S. Government bonds, have been cheated.
Let’s make this even clearer by an illustration from another country. At the end of 1923, the purchasing power of the German paper mark fell to less than one-trillionth of its 1913 value. This meant that prices rose more than a trillion times. Therefore Germany’s “GNP,” measured in paper marks, rose more than a trillion times. As a result, its accumulated debt, represented by borrowings of marks of a much higher purchasing power, was reduced to practically no burden on the economy at all. Though Germany was the extreme case, the situation did not differ in principle from what happened in France (where the franc eventually fell to less than one one-hundredth of its 1913 value) and a score of other European countries.
‘A PRETENDED PAYMENT’
Adam Smith, writing in 1776, was perfectly familiar with this method of disguised repudiation. “When national debts have once been accumulated to a certain degree,” he wrote, “there is scarce, I believe, a single instance of their having been fairly and completely paid.” But governments usually covered “the disgrace of a real bankruptcy” by the “juggling trick” of “a pretended payment” in depreciated currency.
So the relationship that seems to give some present-day writers so much satisfaction—that the national debt, in dollar terms, has been falling in relation to the gross national product in dollar terms, is simply the outcome of the steady depreciation of the dollar. The more inflation we have, and the more the purchasing power of the dollar is depreciated, the more the national debt will “fall” in relation to the GNP, because the GNP, measured in rising prices, will rise in relation to the debt, and so these writers will have increasing reasons for statistical satisfaction.
Do we have any serious intention of ever paying off our national debt in dollars of at least present purchasing power? If so, isn’t it about time we balanced the budget and made an honest start?
June 15, 1964
Italy in recent years has been Europe’s fastest growing economy. In the ten years ended in 1963 its total statistical output of goods and services more than doubled. But now it has been suddenly plunged into what the Wall Street Journal calls “the worst economic distress to hit any member of the European Common Market since shortly after the Market’s 1958 birth.”
Italy’s apparent economic miracle was at least partly the result of its inflation. This inflation was also the greatest in any European country in the last three years. In those three years prices in Italy increased 14.7 percent, wages 23.8 percent, and the money supply 57.7 percent. But Italy’s imports have soared. It suffered a balance-of-payments deficit last year of more than $1 billion, draining its reserves of dollars and other foreign exchange. The Italian Government has been forced to tighten credit. Unemployment has reappeared. Stock prices on the Milan exchange have fallen to the lowest level in four years.
Italy is merely the latest illustration of the truth of the warning issued recently by Robert Marjolin, vice president of the Common Market’s Commission: “Sooner or later, continuing inflation will lead to a halt in expansion or even to a recession, touched off by automatic factors . . . and also by government action. This action will have to be more drastic the longer it is deferred.”
THE EUROPEAN RECORD
Yet inflation in other European countries, in France, Belgium, Holland, Germany, Switzerland (discussed in this column of May 18), has been only slightly less in extent than that in Italy. Both wages and prices have been rising faster in Europe than here. According to the figures of the International Monetary Fund, wages in the U.S. and Britain rose only 3.5 percent last year, but in Germany 7, in Belgium 7.6, in Holland 7.8, in France 8.8, and in Italy 10.2 percent. Similarly, consumer prices in the U.S. rose only 1.2 percent last year, but in Belgium 1.9, in Britain and Germany 2.8, in Switzerland 3.7, in Holland 3.8, in France 5, and in Italy 7.3 percent.
As a result of this situation, there has been a shift in the balance of payments. Our situation has improved. In the first five months of the present year the deficit in the U.S. balance of payments shrank to a seasonally adjusted annual rate of about $1.5 billion, compared with $3.3 billion in the calendar year 1963 and $3.9 billion in 1960.
THE U.S. RECORD
Yet this should not be a reason for American complacency. We are still running a deficit in our balance of payments, not a surplus. And though the rate at which this deficit is piling up has slowed down, we should not forget that this deficit is cumulative. In the six years from the end of 1957 to the end of 1963 it has amounted to $19 billion. Foreigners now hold $25.9 billion of our short-term liabilities, and our gold stock is down to $15.7 billion.
We cannot count on being bailed out by European inflation. We too are still inflating. Since the end of 1962 we have increased our money supply by 5 percent, and, including time deposits, by 10 percent. In April our consumer price index went to the highest level on record.
Yet our government officials, instead of trying to halt our inflation, criticize European countries for trying to halt theirs. Secretary Dillon told a Vienna conference that raising interest rates to discourage an inflationary expansion of credit was not an “appropriate” way to fight inflation. Is that because higher interest rates abroad cause capital to flow out of the U.S.? Instead of allowing higher compensatory interest rates here, our Treasury prefers to hold interest rates down and to tax American investments abroad. Yet while it discourages sound private foreign investment, our government contributes most of a $1 billion credit to prop up the inflated Italian lira.
In a recent survey the National Industrial Conference Board found that in 39 countries living costs have risen in the last five years in every country but El Salvador. Today inflation is considered the great economic panacea. But what happens when, as in present-day Italy, an inflationary boom begins to turn sour?
June 22, 1964
When Nehru died, a number of newspapers pointed out that whatever his merits may have been, he had failed to solve India’s economic problems. Millions of Indians still live in abject poverty. Ninety percent of the houses in the country are one-room hovels, with no facilities whatever. Food consumption by the masses continues below acceptable standards. The use of cloth has steadily declined. India’s national income rises only about 2 percent a year, roughly the same as population growth. Industry is stagnant. Unemployment has risen.
And all this is in spite of massive foreign aid. Since 1948, the United States has spent $5.3 billion in all sorts of aid to India, from outright grants to loans and sales of surplus farm commodities for rupees. The week before Nehru’s death a consortium composed of the World Bank and ten nations pledged more than $1 billion for the fourth year of India’s current Five-Year Plan.
India’s poverty is immemorial. But the failure of conditions to improve in the seventeen years of Nehru’s rule, even with these massive doses of foreign aid, is not mysterious. India’s economic growth has been choked by the economic, fiscal, and monetary policies that Nehru and his party imposed on the country.
DOCTRINAIRE SOCIALISM
Nehru was a doctrinaire socialist. The establishment of a socialist society was, in fact, the principal goal of Indian economic planning. This objective was formally accepted by the Indian Parliament in 1954. In the words of the second Five-Year Plan: “The adoption of the socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector.”
In various ways the Indian Government has been throttling what is left of private industry, and diverting production into uneconomic channels. Government-imposed price controls have driven scarce funds from areas where they are most needed. Under selective and arbitrary price ceilings, investment in coal mining, cement manufacturing, and fertilizer production has lagged. Private steel mills have been starved of funds and unable to expand their facilities.
Though heavy government spending and deficits have led to inflation and rising domestic prices, the official value of the Indian rupee has remained unchanged since World War II. The result is a gross overvaluation of the rupee. Its official quotation is kept up only by exchange control. This overvaluation has penalized and discouraged exports, subsidized and encouraged imports, led to a startling increase in India’s external debt, depleted its currency reserves, and caused acute shortages of foreign exchange. It is estimated that without foreign aid, India’s balance-of-payments deficits would have averaged more than $800 million annually in recent years.
DISSERVICE TO INDIA
So our aid to India has gone mainly to subsidize and prolong socialism, price controls, and an artificial value for the rupee. As the eminent Indian economist B.R. Shenoy wrote in the May 21 issue of The Wall Street Journal: “Foreign aid actually is doing a disservice to the Indian economy. . . . Aside from helping to perpetuate industrial white elephants, foreign aid . . . provides the foreign exchange needed for illicit export of capital; for illegal imports of gold . . . for speculative accumulation of inventories; for the construction of urban property as a hedge against inflation; and for luxury living for those few who succeed in manipulating the nation’s economic controls to their own advantage.”
In brief, aid to India, in so far as it has not been merely a futile effort to fill a leaking tub, has been encouraging and prolonging socialism, controls, inflation, and an overvalued currency. And what is happening in India is typical of what is happening in other “underdeveloped” countries into which we have been pouring taxpayers’ dollars.
When, if ever, are we going to use foreign aid to encourage sound currencies, balanced budgets, private property, free enterprise, and increased productivity?
June 29, 1964
About three months ago (March 22), a group calling itself the Ad Hoc Committee on the Triple Revolution (not a gag) came out with a manifesto, which made the front pages, declaring that:
“The traditional link between jobs and incomes is being broken. The economy of abundance can sustain all citizens in comfort and economic security whether or not they engage in what is commonly reckoned as work. . . . We urge, therefore, that society, through its appropriate legal and governmental institutions, undertake an unqualified commitment to provide every individual and every family with an adequate income as a matter of right.”
The manifesto ran to 29 typewritten pages. It carried among its 26 signers such names as W.H. Ferry of the Fund for the Republic, Gunnar Myrdal, the Swedish economist, and Linus Pauling, the ban-the-bomb scientist. It seemed too obviously crackpot, at the time, to be worth serious analysis. But lo! on June 7 the Sunday magazine section of The New York Times carried an article by Michael D. Reagan, one of the manifesto’s signers, seriously explaining why the government should provide, say, $3,000 a year “without question to any jobless applicant.”
So perhaps the proposal is worth a second look.
PERMANENT JOBLESS?
The first thing we may ask is whether there is any reason to accept the revolutionists’ statement of facts. According to them, there is a “cybernation revolution” going on, “brought about by the combination of the computer and the automated self-regulating machine. This results in a system of almost unlimited productive capacity which requires progressively less human labor.” “A permanent impoverished and jobless class” is being established. “Fewer and fewer people are involved in production of goods and services.”
These statements are based mainly on the fact that “the official rate of unemployment has remained at or above 5.5 percent during the ’60s.” But the triple revolutionists never mention in their 29-page statement that the number of employed persons over the last twelve months, at around 69 million, is at the highest level in our history.
And they treat the unemployed as if they were a static army, though three-quarters of them are unemployed for less than fifteen weeks. Less than 1 percent of the total working force is unemployed for more than six months. This hardly suggests that the “permanent jobless class” is very large, or that “the underlying cause of excessive unemployment” is “cybernation,” or “machines taking over production from men.”
HOW MANY WOULD WORK?
Now about the remedy of a guaranteed income without work. Reagan makes the mistake of going into details that the Ad Hoc Revolutionists wisely slurred over. He would guarantee every family $3,000 a year, but doesn’t think it would cost much. For example, in 1962, 9.3 million families were earning less than $3,000 a year. They earned an average of $1,795. “If they are to be brought above the poverty level, they will need an additional $1,205 per family”—or a total of only $11.2 billion.
I suggest that there may be a few problems. This $1,795 income is an average figure. Many families earned less, others more. But as the $3,000 total is guaranteed anyhow, why still bother to work for their present income? And what about families earning, say, $3,100 a year? They would get nothing from the government. Why work all year for only $100? Wouldn’t they either quit, or demand a basic $3,000? Wouldn’t every family demand a basic $3,000 handout—just as old-age pensions are a flat amount regardless of one’s other income? How many of us would work to support the rest?
To cut the connection between work and income is to cut the connection between production and income. The scheme would lead to diminishing production and universal impoverishment. But it is no accident that the newspapers are beginning to be filled with such utopian schemes and dreams. When President Johnson tells us he can solve the immemorial problem of poverty in his Administration he is going to encourage others to tell us that they can do it overnight.
July 6, 1964
Almost everybody knows that if a commodity is overpriced some of it will remain unsold. But hardly anyone except a few economists—certainly no union leader or politician—seems willing to recognize that wherever labor is overpriced some of it will remain unemployed.
Because this basic cause of unemployment is unrecognized or unacknowledged, union leaders and politicians blame the bulk of it on other alleged causes. The two most popular scapegoats today are “automation” and lack of training.
The automation scapegoat is by far the more frequent. We are constantly being told that it has created a huge army of “permanent jobless.” The unemployment statistics do not support this. Out of 4.3 million unemployed in March, for example, fewer than 600,000 were unemployed for more than six months. This means that fewer than one in seven of the unemployed, and only one in every 130 persons in the total potential labor force of persons 14 years of age and over, was out of work for more than six months. The total number of employed persons in the U.S. has been rising each month to new high records. “Automation,” in the long run, creates as many jobs as it destroys.
NEW BUGABOO
But recently a new bugaboo has been getting the blame for “permanent” unemployment. This is lack of training and lack of special skills. This is a real cause of temporary unemployment. But it is not in itself a cause of permanent unemployment. Nor is there any good reason for supposing that it is a greater cause even of temporary unemployment than it has been in the past. Yet both allegations are constantly being made. Quite recently James R. Dumpson, welfare commissioner of New York City, declared:
“The kind of unemployment we now have is the kind that isn’t eliminated by an expanding economy. The jobs that economic expansion produces go begging as far as the unemployed are concerned, because they cannot fill them. The economy has moved on—and passed them by.”
Such statements are refuted by the statistics just cited. Six out of seven of the unemployed get new jobs within six months; three out of four get new jobs within fifteen weeks.
It is true that the highest percentage of present unemployment (averaging 5.3 percent in April) is found among youths of 14 to 19 (16.3 percent) and among non-whites (9.6 percent). But a large part of the blame for this must be put on a minimum legal wage which makes it uneconomic to employ some of these people, who would otherwise be employed at a lower rate (which could still yield an income above the typical relief payment).
LEARNING BY DOING
The question remains of unemployment through lack of adequate training and skill. There is no good reason for thinking that the percentage of this unemployment would be substantially higher today (without the minimum-wage law) than in the past. At all times some industries are contracting while others are expanding. Some skills are being rendered useless while others are coming into demand. But before the minimum-wage laws and abuse of union power this situation was taken care of by the system of apprenticeship.
Apprenticeship has been well defined as “a contractual relationship between an employer and a worker under which the employer is obliged to instruct the worker, and the worker is to serve the employer, on stated terms.” It is learning by doing; it is on-the-job training; it is learning to swim in the water. Government training programs are no substitute for this. They are a burden on the taxpayer and far less helpful to the worker.
Apprenticeship can be encouraged mainly by removing the legal and union obstacles that have been put in its way. Minimum-wage requirements could be removed entirely from bona fide apprentices. And it may be pointed out that even government subsidies for on-the-job apprentices (though I do not necessarily advocate such subsidies) would be far less expensive, far more effective, and add to production more than relief or than present government work-training programs and those proposed in the anti-poverty bill.
July 13, 1964
In the issue of June 15 I referred briefly to the disturbing speech of Secretary Dillon in Vienna on May 21, in which he chided European governments for keeping their long-term interest rates too high, and told them that this was not an appropriate way to fight inflation. That speech calls for further examination.
The reason for Dillon’s concern is not mysterious. If long-term interest rates in Europe average around 6 percent, while they range here between 4 and 5 percent, then foreign and even American investors will want to invest in Europe, where they can get a higher return, rather than here. The result, as Secretary Dillon and his advisers see it, is that this will prolong and increase that “deficit in the balance of payments” about which the Administration is so concerned. “Europe’s” inconsiderateness in pushing its interest rates so high “left us,” according to the Secretary, “no recourse but direct government action.” That action was to recommend a stiff tax penalty on American purchases of foreign securities.
Let us look at some of the dubious assumptions behind this reasoning.
A PRICE PREMIUM
Dillon talks as if “Europe” is intentionally keeping long-term interest rates high. But European governments and private borrowers certainly don’t want to pay any higher interest rates than they have to. What has happened is simply this. European governments had already been following for the last few years the inflationary policies that Dillon assumes to be needed. (He declares that “the prevention of inflation remains vitally necessary,” but the policies he has been carrying out increase inflation.)
European inflation over the three years 1961 to the end of 1963 led to average price rises of 9.8 percent in Germany, 10.9 percent in Britain, 13.6 percent in France, and 14.7 percent in Italy. (See this column May 18.) European long-term interest rates are high because they contain a “price premium” which reflects a fear of further inflation. Even Dillon concedes that “relatively recent experience with inflation has discouraged postwar European investors from the purchase of bonds.”
It is not Europe that has been artificially holding long-term interest rates up, but our government that has been artificially holding them down. We have done this by increasing the money supply. Since the end of 1957 the money supply, including time deposits, has been increased $79 billion, or 40 percent. One of the chief ways in which it has been increased is by the purchase and monetization, by the Federal Reserve System, of $34.5 billion of U.S. Government securities—$10.5 billion more than at the end of 1957, $3 billion more than a year ago.
‘INCOME POLICIES’
It is our money-creation, bond-buying, low-interestrate, budget-deficit policy-in brief, our inflation—that has caused the very deficit in the balance of payments that the Administration wants to cure. And as long as these inflationary policies continue, any tax penalty or prohibition on foreign investment, “temporary” or permanent, is not going to cure the balance-of-payments deficit. In the long run any reduction in our foreign investment will tend to reduce our exports by a corresponding amount. It will reduce the dollars available to foreigners to buy our goods.
If the Administration persists in its inflationary policies, and tries to offset them with direct controls on foreign investment, it will only plunge deeper and deeper into controls. Dillon’s own words foreshadow this. He advocates “income policies to restrain upward pushes on the cost-price structure” caused by inflation. “Income policies,” a phrase ominously familiar in Europe, means controls of wages, salaries, profits, rents, interest, and other forms of income. It means moving toward a regimented economy.
And all because the Administration clings to the exploded Keynesian assumption that a perpetual creeping inflation—caused by chronic budget deficits, ever-increasing money supplies, and perpetual low interest rates—is necessary to full employment. It is neither necessary nor sufficient. What is indispensable, however, is a coordination of wages, costs, and prices achieved through a restoration of real freedom of markets.
July 20, 1964
The last fiscal year ended on June 30 with a deficit of about $8.8 billion. This was more than the entire amount spent by Franklin D. Roosevelt in any fiscal year till 1939. It will be followed by a deficit in the current fiscal year officially estimated at $5.8 billion (and it will probably be much larger). The two deficits taken together will be the biggest for any two-year period in peacetime.
Yet no one showed any particular concern about this. The New York Times report hailed it as a great achievement. “The deficits in the last three years, while believed to have spurred the economy, have clearly not been inflationary.”
Most of the comment, indeed, has been to the effect that the deficit has not merely been harmless, but beneficial. And this reflects the present Administration’s own underlying fiscal philosophy, which is that a budget balance should be attempted only when the economy is at the level of “full employment.” This it defines as unemployment of 4 percent or less of the labor force. The President’s economic advisers have often expressed their conviction that previous efforts to balance the budget when the economy was operating with idle plant and idle labor only prolonged and increased unemployment.
Because of this fiscal philosophy the present Administration does not expect to see the budget balanced until the fiscal year 1967, which ends three years from now.
WHY BALANCE EVER?
But if the Administration’s economic assumptions are correct, why balance the budget even then—or at any time? If the country is enjoying full employment, as a result of deficit spending, why needlessly endanger that prosperity by returning to a budget balance?
We can be sure that, if ever the blessed full-employment goal were achieved, this argument would be put forward. And it is hard to see how it could be politically resisted. In fact, there are already commentators who contend that the government cannot afford ever again to run a surplus, and that balanced budgets are “economic suicide.”
It is instructive to recall the series of rationalizations that have brought us to this point. At first it was argued that a balanced budget was harmful only in “bad” years. The necessity of balancing the budget was accepted, but it should be only a “cyclical balance” over a series of years. But the cyclical theorists never revealed how long their cycle was, or how they or anyone else could know at any time just where we were in a cycle. If an average cycle is six years, say, then to offset the expected cumulative three-year budget deficit of $21 billion at the end of this fiscal year there would have to be an average $7 billion surplus in each of the next three years. The professed cyclical balancers would be appalled at such a prospect.
34 YEARS, 28 DEFICITS
So their theory is now that we should always run a budget deficit as long as there is any unemployment. And though we have already run 28 deficits in the last 34 years, they deplore only the six surpluses.
What will be the result if their theories continue to be followed? It was crushingly demonstrated in the ’30s that even heavy uninterrupted deficits cannot cure mass unemployment. But more deficits can and must lead to further increase in the national debt, further increase in the money supply, a further rise of prices, and a further depreciation of the dollar. The purchasing power of the dollar has already been reduced 63 percent since 1933 and 43 percent since 1945.
It is true that in the last ten years the dollar has depreciated “only” 12 percent. But this result looks good only in comparison with the dreadful international record. The New York First National City Bank’s annual review of comparative rates of depreciation shows that in the last ten years the German mark has lost 18 percent of its purchasing power, the British pound 23 percent, the Italian lira 25 percent, the French franc 34 percent, and the Argentine, Brazilian, Chilean, and Bolivian currencies respectively 91, 94, 95, and 97 percent.
Whether the deficits are “planned” or unplanned, the result is always the same.
July 27, 1964
In the preface to his new book, The Republican Opportunity in 1964 (Duell, Sloan and Pearce, 148 pages, 95 cents), my colleague Raymond Moley, after explaining how in recent years the terms conservative and liberal have both been torn from their original meaning to describe the precise opposite of what they meant to our forefathers, offers his own description of the present American “liberal” in the modern sense:
“The liberal favors a generous extension of Federal power in areas that have hitherto been the responsibility of the states, the communities, and private organized effort; he believes in and supports more intervention of governments, especially the Federal government, in economic life, even to the extent of setting up government-owned and government-operated businesses; he favors a huge expansion of federally supported personal-welfare programs; he would undertake Federal expenditures on national-resource development, urban reconstruction, and area development. And he justifies the great enlargement of Federal expenditures involved in these programs on the ground that such expenditures promote economic growth. In the face of large deficits there has been added to the liberal’s economic philosophy the concept of deliberately planned deficits in anticipation of larger revenues in future years.”
440 NEW LAWS A YEAR
It struck me how accurately this describes the philosophy and attitude of President Johnson and the Democratic “liberals” in the present Congress. This was illustrated a couple of weeks ago when it was disclosed that the President, in the belief that the passage of the Civil Rights Act had “opened the way to a new creative period” (as one news dispatch put it) in which the government can tackle new domestic problems, had convened a group of special committees, drawn largely from the academic community, to draft recommendations for future legislative and governmental action.
In other words, the President is sure we need still more laws, and if he doesn’t know exactly what they ought to be, he appoints committees to think them up. And these new laws are to be piled on the 800 or so laws that each Congress passes. It passed 4,399 public laws in the last ten years.
What are new laws? They fall into two main categories. First are those that revise previous laws. This implies that Congress made mistakes in the previous laws that the new laws supplant. If, at a moderate estimate, each new or old law contains an average of ten provisions, this means that in every hundred such new laws Congress passes in a session, it may be correcting as many as a thousand previous mistakes. It also implies that it is constantly changing the rules under which people act, so that they cannot launch on new businesses or other long-term enterprises with any assurance that the rules are not going to be changed on them.
A CLEAR CHOICE
The second category of new laws are those that deal with activities not previously covered by law. This means that the government is compelling people to do something or refrain from doing something that they were not previously compelled to do or refrain from doing. In other words, the individual’s liberties are restricted in still another direction.
Congress has become a mass-production factory for legislation, turning out an average of 440 new laws every year. And yet it is continually being prodded by Presidents and in the press for “do-nothingism.” “Progress” and a “creative period,” we are given to understand, consist in the passage of still more hundreds of new laws, or the appropriation of still greater sums to be taken from A and handed to B.
Raymond Moley defines “conservatism” in his book as meaning “a halt in the expansion of government in domestic life and, above all, a reduction in size and scope of the Federal establishment.”
This is what Barry Goldwater stands for, and it is, in the main (with some exceptions), the philosophy that the new Republican platform expounds. For the first time in many years we may witness a Presidential election offering the voters a clear choice of contrasting governmental philosophies.
August 3, 1964
Barry Goldwater made a tactical blunder in his acceptance speech, but it is not difficult to see how he fell into it. His opponents, both in the Democratic and the Republican parties, have been calling him and his supporters “extremists,” and calling themselves—especially those that represented the extreme left wing of the Republican Party—“moderates.” Goldwater, in an unthinking moment, accepted these labels and tried to turn them against his opponents: “I would remind you that extremism in the defense of liberty is no vice . . . [and] moderation in the pursuit of justice is no virtue!” The storm broke; and Rockefeller revenged his defeat by instantly finding these words “dangerous, irresponsible, and frightening.”
Now “extremist” and “moderate” are both rhetorical labels, and Goldwater would have been justified in pointing out that the former is not necessarily synonymous with evil or the latter with good. Is it necessarily wrong to be extremely honest or extremely fair? Is it necessarily praiseworthy to be only a moderate liar or a moderate embezzler?
THE ART OF POLITICS
But linguistic analysis does not pay off politically. Politics is conducted with emotionally loaded catchwords. The trick is to apply the approbatory ones to your own side and the derogatory ones to your opponents. Thus the “liberals” are having a field day with “extremist” and “moderate.” A columnist on an outstanding newspaper, for example, solemnly praises Mr. Johnson’s $8.3 billion deficit for 1964 and his planned future deficits as “moderate” fiscal policy, and dismisses the advocates of balanced budgets as “extremists”!
Goldwater’s appropriate response would have been to repudiate the label of “extremist” as applied to his own position and “moderate” as conferred by his opponents on themselves, and insist that his position is the moderate one and theirs the extreme one.
The art of politics consists in large part in taking over for oneself any label that has acquired prestige and pinning disparaging labels on one’s opponents. This sometimes results in a reversal of traditional labels, and as words are the counters of thought, it has deeply confused and perverted political and economic thinking. In the United States today, for example, the word “liberal” has been torn from its original meaning and designates exactly the opposite of what it meant in nineteenth-century France and England and still means on the European continent.
TRUE LIBERALISM
The true liberal tradition is the tradition founded and developed by such figures as Hume, Adam Smith, Jefferson, de Tocqueville, Cobden, Mill, Macaulay, Gladstone, and Lord Acton. They stood for limited government, decentralization, checks and balances; freedom of trade, production, and markets; low taxes with low spending and balanced budgets; the integrity of the currency, and non-inflation. They were against excessive government intervention; against statism and paternalism; against the piling up of new laws, compulsions, prohibitions. In brief, they believed in personal liberty. Liberal and liberty come from the same root.
When the statists and paternalists appropriated the word “liberal” for themselves, the original liberals allowed them to do it, and so were forced to call themselves first “libertarians” and then “conservatives.”
Years earlier, they allowed Karl Marx to pull a similar trick on them. About six years after the publication of The Communist Manifesto, Marx and his followers coined the smear word “capitalism” to convey the implication that the system of free markets, private property, and economic liberty was a system imposed on the world by the capitalists and for the capitalists. That implication still sticks to the word. It explains why defenses of “capitalism” under that name are infrequent and apologetic.
The battle of catchwords is unlikely to be abandoned in our time, let alone in the present campaign. But we are more likely to reach sensible solutions of our problems by using words in their traditional descriptive sense, rather than emotively as weapons. Is it too much to hope that at least the leaders in the coming debate will recognize this?
August 10, 1964
The Republican Platform points out that the Democratic Administration has “burdened this nation with four unbalanced budgets in a row, creating deficits totaling $26 billion, with still more debt to come, reflecting a rate of sustained deficit spending unmatched in peacetime.” And the platform goes on to pledge a reduction of not less than $5 billion in Federal spending and “an end to chronic financing, proudly reaffirming our belief in a balanced budget.”
It is true that this does not go as far as the Democratic Platform on which Franklin D. Roosevelt was elected in 1932, which promised “a budget annually balanced,” but some people are alarmed because the Republicans mentioned a balanced budget at all. In doing so, Edwin L. Dale, Jr. contends in The New York Times (July 14), they “have rejected the fiscal revolution of the 1960s. They have done so even though, so far at least, the revolution seems to be proving a smashing success.”
“The revolution,” Dale goes on, “is quite simply a rejection of the desirability of a balanced budget until such a time as the economic boom achieves full employment.” And though the Administration has not “trumpeted” this “revolution,” it has in fact “begun to use the Federal budget as an economic weapon in the spirit of the late Lord Keynes, with a result that budget balance has been purposely postponed.”
To describe planned deficits as revolutionary is like describing intentional profligacy or irresponsibility as revolutionary. In the history of government, deficits are older than surpluses, and probably more frequent.
OLD AS JOHN LAW
The only thing that could conceivably be called new is the praise and glorification of deficits and paper money, but even this can be traced back two and a half centuries to the days of John Law.
The records of the past do not support the theory that deficits cure unemployment. In each of the ten years from 1931 to 1940 inclusive, the Federal government ran a deficit averaging 3.6 percent of the gross national product. During those ten years there was average unemployment of 18.6 percent of the labor force. The same percentage of GNP and of the labor force today would mean deficits averaging $21 billion a year combined with more than 14 million annual unemployed.
All prolonged unemployment is the result of some discoordination in prices and wages. The champions of planned deficits assume that it is impossible to resist excessive union wage demands, and that the only way to restore or maintain full employment is to keep injecting more monetary “purchasing power” into the economy to make the higher wages payable. Under certain conditions, such as those that have been prevailing in recent months, a deficit increased or continued by tax reduction can temporarily bring prosperity and more employment.
SHORTSIGHTED
But advocacy of prosperity through deficits is advocacy of a shortrun policy—one might also say, of a shortsighted policy. The advocates do not ask themselves how long this policy can be kept up and what its long-run consequences must be. These long-run consequences are plain to anyone who cares to look for them. We can see them in the inflations in Europe today, especially in the inflationary crisis in Italy. We can find an extreme example in Brazil, where the new regime is in trouble because of the 40 percent rise in living costs in the first six months of this year (on top of an 80 percent rise last year), accompanied by signs of a recession and rising unemployment. The new regime, dispatches report, is trying “to reduce the government’s operating deficit, regarded as the main cause of the inflation.”
No doubt our present deficit prosperity can be kept going quite successfully until the election and even beyond. But anyone who thinks that there will be no unpleasant aftereffects should recall: (1) that our cost of living has gone up 72 percent since the end of World War II in 1945; and (2) that our cumulative balance-of-payments deficit has been wholly the result of our government deficits and inflation since 1957, and that further inflation can only make the problem worse.
August 17, 1964
In his brilliant and absorbing biography of Herbert Hoover, published on Aug. 10 to celebrate the former President’s 90th birthday, Eugene Lyons is obliged to refer again and again to the incredible smear campaign launched against Hoover in the early months of his Administration and continued long after his exit from public office.
The campaign, under the paid direction of Charlie Michelson, was enormously successful. In his autobiography, Michelson afterward alluded to “the gloomy occupant of the White House whom we referred to as the author of the Depression.” The smear stuck. “The Hoover Depression” became an established phrase. So did “Hoover bread lines” and “Hoovervilles.” The myth got firmly established for a generation that Hoover had thrown the country into a major depression and that Franklin Roosevelt had bailed us out.
THE DOUBLE MYTH
The facts support neither the first nor second half of the myth. The causes of the collapse and world depression that started in October 1929, go back years before Herbert Hoover assumed the Presidency. They are complex. But they can be summarized as cheap-money policies, credit expansion, inflation. And Hoover was among the earliest to combat such policies. In 1925, as Secretary of Commerce, he warned in a letter to one of the Federal Reserve governors against “inflation with inevitable collapse which will bring the greatest calamities upon our farmers, our workers, and legitimate businessmen.” In a New Year’s statement for 1926 he warned against “real estate and stock speculation . . . with inevitable inflation.” One member of the Federal Reserve Board, Adolph C. Miller, who opposed the cheap-money obsessions of his colleagues, testified in an interview published in the magazine Sphere in July 1935:
“The Board knew that Mr. Hoover, from 1926 on, had been protesting that the money policy of the Reserve System was certain to bring about disaster and calamity. Mr. Hoover before and after he took office was struggling desperately to curb credit extravagance. . . . The record will show that he became the victim of a policy that was anathema to him the whole time it was in operation.”
When the Depression started, Hoover made Herculean efforts to stem it. The most fantastic myth of all was that he “did nothing.” A far more plausible charge is that he did too much. True, he made errors. But they were not those for which he is popularly blamed.
MAINTAINING WAGES
The most serious error, in my estimation, was to call together the leaders in business in November 1929, a month after the stock-market break began, and urge upon them the policies of not cutting prices, not cutting wages, and increasing capital outlay. When there has been a collapse in confidence, in demand, and in the money-and-credit supply, there must be some downward adjustment in prices and wages if sales, output, and employment are to be sustained. When, under such circumstances, prices and wages are inflexible in a downward direction, the result can only be spreading unemployment.
But the doctrine of maintaining or even increasing money wage rates, to “increase purchasing power,” has now become New Deal, Fair Deal, Keynesian, Hellerious gospel.
But the great “error” for which the New Dealers, Keynesians, Hellerites, and Fiscal Revolutionists blame Hoover is trying (unsuccessfully) to balance the budget. I doubt that this was an error. In any case none of Hoover’s opponents at the time thought so. On the contrary, it was the deficits and the “spending” that Franklin Roosevelt denounced. The Democratic platform pledged a budget “annually balanced.”
It is constantly forgotten that the worst disasters in the Hoover Administration came in the last four months, after his election defeat and before FDR took office, when Hoover was powerless and FDR refused to deny rumors that he meant to take the country off the gold standard.
The final myth is that Roosevelt stopped the Depression. In his first two terms, chronic deficits were combined with massive unemployment. Only our entrance into World War II “solved” the problem.
August 24, 1964
The anti-poverty law—or the Economic Opportunity Act of 1964, to use its official title—is primarily a Democratic campaign document and a vote-buying device. It is designed to give the impression that for the first time in our history the Federal government has become aware of the existence of poverty and is doing something about it. Actually we have been piling one “anti-poverty” program on top of another since the New Deal began 30 years ago.
The excellent Republican minority report on the bill to the House listed 42 individual programs “designed to combat and overcome the causes of poverty” already in existence. These programs cost a total of $31.8 billion in the fiscal year 1964. According to the Social Security Bulletin for November 1963, a total of $66.5 billion was spent by all levels of government for “social welfare” purposes in 1962. During the same year, an additional $33.5 billion was spent by private organizations for the same purpose. Compared with this total of $100 billion, the new law’s appropriation of just under $1 billion makes it a merely token (and in no sense new) “war on poverty.”
DUPLICATION
The official title is calculated to give the impression that the new law is just a way of helping people to help themselves. The measure in detail, however, reads like the implementation of Mr. Johnson’s statement in January: “We are going to try to take all of the money that we think is unnecessarily being spent and take it from the ‘haves’ and give it to the ‘have nots’ that need it so much.”
The new law is hard to describe briefly because it is a conglomeration of unrelated programs. The House minority report calls it “a hastily assembled package of odd legislative retreads and rejects, interspersed with a sprinkling of old, unsuccessful experiments and a plagiarized assortment of existing programs.”
Nearly all of the “new” programs duplicate or compete with existing Federal programs. The so-called “Job Corps” providing for work camps will cost $190 million in the first year for only 40,000 enrollees, or $4,700 per enrollee. The first-year cost of the “worktraining” program is another $150 million. Both programs heavily overlap the 1963 Vocational Education Act and the expanded Manpower Act. The $72.5 million “work-study” program will give more assistance to the very same college students now being aided by the massive student-loan program under the National Defense Education Act. Direct loans to low-income farm families duplicate a huge existing Farmers Home Administration program. Loans under Title IV would duplicate what the Small Business Administration is already doing. And so on.
WELFARE STATISM
The first year’s price tag on this new measure—$947.5 million—is relatively small as current spending goes. But it will carry us a giant step deeper into a paternalistic welfare state. Its ultimate effect will be to create a good deal more poverty than it cures. We can be sure that its cost will increase each year. This cost, if paid for out of bigger taxes, will increase the burdens on private enterprise and the deterrents to production. If it is added to the deficit, it will increase inflation, an invisible but destructive tax with its cruelest impact on the poor.
As the House minority report pointed out, no society in the history of the world has so effectively overcome the cruel grasp of poverty as has the United States. In terms of a “war against poverty,” the whole history of America has been a history of sustained and spectacular accomplishment. In 1929 (using 1962 dollars as a standard), more than 50 percent of American families had an annual income of less than $3,000. By 1947 this figure had fallen to 30 percent, and by 1962 to 21 percent. In this same period, American families having an annual income of $6,000 or more rose from 15 percent to 48 percent. Americans earn more, own more, consume more, and live better than any other people on earth.
And we have achieved this result, not by government “anti-poverty” programs, of which we have had proportionately less than most nations, but by our system of free, private, competitive enterprise, which provides maximum incentives to production.
August 31, 1964
India is suffering from high prices and a food shortage. Both have been brought about by the government’s own policies. For years it has indulged in monetary inflation, controls, state planning, socialism, and a forced industrialization that diverts capital and labor away from farming.
Alarmed by the food riots, the government is, taking drastic measures. Most of them are exactly the wrong measures. It has put ceilings on the price of rice, and announced, price controls on matches, oil, kerosene, sugar, and vegetable oils. This is precisely the step that will do most to discourage production of these necessities. When there is a shortage of any product the cure is high prices, not low prices. In a free market, without controls, relatively high prices for a product signal a shortage of that product, and give maximum incentives to producers and importers to relieve the shortage.
The Indian Government, looking for scapegoats, has blamed “speculators” and “hoarders,” and announced the imposition of strict controls on the purchase, sale, storage, and transportation of grains. But speculators and hoarders, when they really act intelligently in their own interest, perform a public service. If they are right in thinking that if they hold back now they will get a higher price later, this means that they are conserving supplies now to relieve an even greater future scarcity. Unless they sell at the point of maximum scarcity, they miss their best market and merely defeat themselves.
RUSSIA VS. INDIA
But the Indian Government, distrusting the whole private-market mechanism, is setting up a government grain corporation to do the food importing and trading. The supreme irony is that just as the Indian Government has announced this new imitation of Russia, Russia has decided to move in precisely the opposite direction. Early in August, Premier Khrushchev proposed that potato and vegetable farms sell their produce directly through their own city stores instead of marketing it through the government trade network. The advantage of such a system, he explained, is that the consumer would be able to reject poor quality produce in one store in favor of higher-quality produce offered by another farm’s store. Because of the unreliable supply system of the state trade channels, and the low quality of the produce offered, Soviet city workers as well as peasants have in recent years been cultivating their own garden plots. In 1962, 70 percent of the nation’s potato crop and 42 percent of the vegetables were produced on these private plots.
PRIVATE PROPERTY
Until now, the net income of the collective farms has been divided among the members on the basis of the work done, computed in workday units. This is to be replaced by a system of payments linked directly to quantity and quality of output. As Khrushchev summed it up in a question he asked a tractor driver in a wheat field: “How would you like it if you were assigned a given plot of land where you would be responsible for all operations, plowing, planting, cultivating, and harvesting, and you would be paid on the basis of the crop produced?”
Marvelous idea! The equivalent of a private lease! It is, in fact, a third of the way back—or forward—to private property. Only two more steps would be necessary to complete the reform. The next would be to allow the individual farmer permanent rights to a plot. This would give him the incentive to conserve and build up the soil to improve the buildings, etc. The final step would be to give each farmer the right to buy or sell plots. The successful farmers would then acquire more plots from the unsuccessful, and production would drift more and more into the hands of the most efficient and productive—thus constantly increasing efficiency and production.
The Chinese Communists are quite right when they accuse Khrushchev of flirting with capitalism. If he continues in this direction, while we continue our drift into socialism, Russia may indeed one day outproduce us. Meanwhile socialist India and Communist Russia must import food from capitalist America to pull them through.
September 7, 1964
After ten months of study, the monetary experts of the ten leading industrial nations of the free world have come up with their report on what should be done about the world’s currencies. At the same time, the International Monetary Fund, with 102 national members, has brought out its own recommendations.
The two reports, in substantial agreement, are what might have been expected. They reject all “extreme” proposals, such as the creation of a new international paper money issued by the IMF, or turning the IMF into a super-central bank that could create reserves internationally much as the Federal Reserve does domestically. Nevertheless, they propose that the IMF be beefed up substantially and quickly, and that this be done in some way that won’t cause a heavy drain on the U.S. gold stock.
The main proposal is that the resources of the Monetary Fund be raised by a “moderate general increase”—say, 20 to 30 percent—in the quotas of the member nations. If this boost is adopted, it will be on top of a 50 percent increase in 1959.
What lies behind this proposal (and behind the far more inflationary proposals that the “group of ten” rejected) is the fear of a “shortage of international liquidity”—the fear that, unless the new gold produced annually is progressively supplemented by new money and credit, there will not be enough to keep pace with and to finance the growing volume of world trade, and that a shortage of “liquidity” would force the world into deflation and unemployment.
MISPLACED FEARS
These fears appear groundless. Accepting the Monetary Fund’s own estimates, let us suppose that world trade rises by at least 4 percent a year in the next decade, while gold holdings (and even the credit based on them) do not rise more than 2½ percent a year. What would happen?
There would, of course, tend to be a gradual lowering of world prices of, say, about 1½ percent a year. Would that be something to dread? Would it wipe out profit margins? Would it precipitate heavy unemployment? There is no reason to suppose so. Prices would tend somewhat lower simply because the supply of goods was increasing faster than the supply of gold. As, in all probability, real and money costs of production would be falling at about the same rate as final prices, there would not necessarily be any real shrinkage of profit margins, or any reason for increased unemployment.
Everyone seems to have forgotten that balanced economic growth can take place quite successfully even with moderately falling prices. An outstanding example of prosperity with falling prices occurred between 1925 and 1929, when full industrial activity was maintained with an average drop in wholesale prices of more than 2 percent a year.
THE DANGER IS INFLATION
The real monetary danger that this country and the world face today is not “shortage of liquidity” or deflation, but a continuance and acceleration of the inflation that has been raging since the end of World War II. This world inflation has coexisted with the life of the Monetary Fund. Of the 48 or so members of the IMF in 1949, practically all except the United States devalued their currencies that year following the devaluation of the British pound. Of the 102 present members of the IMF, the great majority have either devalued since they joined, or allowed their currencies to fall in value since then as compared with the dollar. And the dollar itself, since 1945, has lost 42 percent in purchasing power. In the last ten years alone the German mark has lost 18 percent of its purchasing power, the British pound 23 percent, the Italian lira 25 percent, the French franc 34 percent, and leading South American currencies from 91 to 97 percent.
This is no mere coincidence. It is largely the result of the IMF system itself, which was set up at Bretton Woods by Lord Keynes and Harry Dexter White expressly to allow nations to escape from the discipline of a real gold standard. And all the ingenuity of today’s monetary “reformers” goes into concocting still more devices to enable world inflation to go on without any government having to allow its citizens to convert its depreciating money into hard gold.
September 14, 1964
Throughout the Democratic platform runs the assumption that practically all earthly problems can be solved by more laws, more government spending, and more government power. The preamble lists the “achievements” of the Kennedy-Johnson Administration—i.e., the new laws passed, the new appropriations made, and the new Federal agencies, bureaus, and divisions created on top of the 2,000 or more already in existence.
The list is formidable: the Area Redevelopment Administration; the Economic Opportunity Act of 1964; the Appalachian Redevelopment Act; the Equal Pay Act of 1963; the Manpower Development and Training Act of 1962; the 1961 amendments to the Fair Labor Standards Act; $1 billion of new loans made by the Rural Electrification Administration; more than $1 billion in new loans made since January 1961 by the Small Business Administration; the Community Health Services and Facilities Act of 1961; the Mental Retardation Facilities and Community Mental Health Construction Act of 1963; the Social Security Act amendments of 1961 (still further broadening benefits); the 1961 public-assistance increases; the Higher Education Facilities Act of 1963; the Health Professions Educational Assistance Act of 1963; the Vocational Education Act of 1963; 1963 legislation increasing authorization for loans to college students; the Housing Act of 1961; the Kefauver-Harris drug amendments of 1962; higher disability payments to veterans. And more.
GOVERNMENT UNLIMITED
Practically all these measures, whatever their individual merits, mean still more spending, still more controls over the economy, a still bigger entrenched bureaucracy, still further steps toward almost unlimited government intervention and government power. And what the Democratic platform promises is still more of the same: compulsory medicare, a bigger social-security program, still more unemployment insurance, government training and retraining programs, still more “commodity programs to strengthen the farm-income structure,” a bigger housing program, more handouts for urban renewal and for “Appalachia.” Finally, the platform promises “to carry the war on poverty forward as a total war.”
The spending programs are to be combined with still greater government controls. The minimum-wage level and coverage are to be increased. Compulsory overtime payments are to be increased. The one-sided immunities and special privileges now enjoyed by labor unions are to be increased.
THE NEW MAGIC
The motto of the Democratic platform, in brief, is “Let us continue.” Let us continue to pile up more laws, more compulsions, more agencies, more bureaucrats, more power, more spending, and we will bring you ever closer to an earthly paradise. Or to the Orwellian nightmare of 1984? The platform blandly forgets that government creates nothing, makes nothing, adds nothing, but can merely deflect production from one channel to another, or seize more from Peter to pay more to Paul.
But the Johnson Administration and its fiscal advisers and apologists are trying to convince us that they have discovered a new magic that enables us to eat our cake and still have it—to pay more and more to Paul while taking less and less from Peter. On top of this year’s tax cut there will be more tax cuts. We will continue to pile more deficits on top of the 28 deficits, in the last 34 years. But this time they will be planned deficits, “purposeful” deficits, and will bring us the full employment that they have failed to bring in the past.
This is a complete abandonment of even the pretense of fiscal responsibility. In 1960, the Democratic platform said: “Responsible fiscal policy requires surpluses in good times to more than offset the deficits which may occur in recessions, in order to reduce the national debt over the long run.” But all this is now forgotten, and all we are now promised is “a balanced budget in a balanced economy.” This means a budget balanced only in years of “full employment.” We have had only nine such years (six of them wartime years) in the last 35. The platform pledge is a pledge to continue inflation.
September 21, 1964
For three-quarters of a century the great majority of lawyers, politicians, and economists have praised our antitrust laws. But in recent years these laws, and especially Federal prosecutions under them, have greatly increased in number. Their ambiguities, vagueness, contradictions, and possibly sweeping application have become clearer, and responsible commentators have begun to question their wisdom and probable effects.
The August Survey of the Morgan Guaranty Trust Co. of New York bluntly asks whether the present jumble of antitrust laws, and particularly recent Supreme Court decisions, will in fact promote free competitive enterprise in the United States. “In one momentous year,” it declared—“from June 17, 1963, to June 22, 1964—the Supreme Court of the United States rewrote the rule book governing mergers and acquisitions in American business. Six key decisions were handed down. . . . They either invalidated or cast a shadow of illegality upon mergers that previously had been approved by lower courts and, in some instances, by regulatory agencies as well.”
A FLAT GAMBLE
After analyzing these six key decisions, and the five leading antitrust acts under which they were made, the bank concludes: “The ‘do’s’ and ‘don’ts’ of antitrust are largely what the Supreme Court says they are. The latitude the Court assumes in interpreting and applying the antitrust laws is immense. The provisions of the Sherman Act, for example, have been characterized as having the breadth and generality of the Constitution itself. Oversimplified, this means that the law can be applied or interpreted in different ways as the Court’s rationale in a given case may demand.”
As a result, any decision “to proceed with a significant merger involves a flat gamble on whether the government will sue. In weighing the odds, a company’s owners or directors will hardly fail to recognize an implication inherent in recent antitrust history. This is that really sound mergers from the businessman’s point of view—those that will strengthen his company in its competitive struggle and enlarge its base of operations—are the very ones most likely to be contested by the Justice Department and outlawed by the courts. In consequence, it is likely that fewer and fewer major mergers will be undertaken.”
Sylvester Petro, professor of law at New York University School of Law, discussed the problem in an article in the July Freeman magazine (published at Irvington, N.Y.). He showed that, if current antitrust policies had been applied consistently in the past 75 years, such firms as General Motors, Chrysler, U.S. Steel, and General Electric would probably not be in existence today.
DOUBLE STANDARD
What struck him was the contrast between the way the Federal government treats businessmen under the antitrust laws and the way it treats other groups for doing the same thing: “While sending some people to jail for agreeing on prices, it considers nationwide price-fixing agreements laudable if exacted by trade unions; it visits penalties on farmers for departing from the prodigious price-fixing schemes known as our agricultural policy; it forces uniform prices on airlines and other participants in the transport industry; and finally, as we have seen, it forbids individual businesses to vary their prices downward at will.” He might have added: it conspires in international price-boosting through fixation of export quotas on coffee.
It is hardly necessary to point out that if the antitrust laws and decisions were strictly applied to the labor unions they could not function. Collective bargaining itself would have to be considered unlawful as a combination in restraint of trade. It involves “collective” price-setting.
Professor Petro believes in the equal application of the same law to all. But rather than apply the anti trust laws to unions, which he thinks both impractical and undesirable, he suggests that our antitrust laws themselves need to be seriously re-examined to see whether they are not, in fact, an actual threat to the vigorous growth of a free competitive enterprise system.
September 28, 1964
I am frequently asked by correspondents what they can do personally to protect themselves against inflation. The question is difficult to answer, either specifically, by giving tips on individual stocks (which I would not dare to do), or even in general terms.
The nub of the problem is that inflation forces everyone to become a gambler. If a man puts his money in a savings bank or in a “safe” bond, and the inflation continues, he is a certain loser. He gets back the face value of his savings or his bonds in dollars, but the dollar will not buy as much as the dollars he saved or invested. Even since the end of World War II, in 1945, consumer prices have risen 72 percent, which means the purchasing power of the dollar has shrunk 42 percent since then.
The problem for the individual is that he can never be certain how much further the inflation is going to go or at what rate. Many people assume that the rate of future inflation can be calculated from the past rate of inflation. Even if this assumption were sound, which it is not, endless disputes are possible even about the rate of past inflation.
THE TAKE-OFF DATE
The rate since when? The take-off date has to be arbitrarily selected. As compared with ten years ago (1954), consumer prices have gone up 15 percent, which makes the rate of inflation, as measured by price changes, 1.5 percentage points a year. As compared with 1944, or twenty years ago, consumer prices have gone up 76 percent, or 3.8 percentage points a year. As compared with 1934, or 30 years ago, consumer prices have gone up 132 percent, or 4.4 percentage points a year.
Even if, by some amazing clairvoyance, you knew what the average rate of inflation was going to be in the next year or decade—i.e., how much the consumer index was going to rise—you would not necessarily know how this was going to affect the particular asset you held or were thinking of buying, whether General Motors shares, a house, or a Picasso.
A further problem would be to know how much the past inflation, or the expected future inflation, had already been reflected in, or “discounted” by, the present price of the asset you held or thought of buying.
And this brings us to the centrally important point that it is impossible for everyone to protect himself against the ravages of inflation. Those who gain must do so at the expense of others who lose. Those who are shrewd enough or lucky enough to buy stocks or other assets before they have risen in price to reflect the inflation, must gain at the expense of those who buy later; and still more at the expense of those who do not buy at all, but hold only money; and still more at the expense of those who buy at the top, when past or further inflation has been overdiscounted.
UNEVEN IMPACT
Every day during an inflation, schemes are put forward designed to protect everybody against it. All of them rest on delusion. The most popular is that of insisting that all wages and salaries be raised in direct proportion with the rise in the cost-of-living index. If this could work, it would benefit wage and salary receivers at the expense of all those dependent on other types of income. But it cannot work except on a limited and selective scale.
For inflation, if it operates in a free or relatively free market, always affects the prices of different commodities and services unequally. Let us assume, for simplification, that it sends up the prices of half of all commodities 20 percent and the rest not at all. Then the average price rise is 10 percent. The workers in the favored industries might be able to secure wage rises much greater than this. But if the unfavored industries were forced to pay a wage increase of 10 percent, most of them could not afford it. The result would be wholesale unemployment in those industries. If, in order to make the higher wage rates payable, the government increased the money-and-credit supply still further, the inflation would soon be off to an accelerating spiral. This is exactly how this device worked in the German inflation of 1923.
There is only one way to stop the injustices of an inflation. Stop the inflation itself.
October 5, 1964
The Italian economist Maffeo Pantaleoni (1857–1924) used to maintain that there were really only two schools of economists-the good ones and the bad ones. The division was valid enough but unhelpful on specific issues. A young American economist, George Reisman, has now come up with another division of economists into just two groups, but one that throws real light on the chief economic controversies of our time.
In the October issue of The Freeman, published by the Foundation for Economic Education, Inc., at Irvington, N.Y., he divides all present-day economists into Productionists and Consumptionists.
With the exception of a few isolated mavericks, nearly all economists since the days of Adam Smith until say, 1929, identified the fundamental problem of economic life as production. Man needed wealth. He needed goods and services not only for the amenities of life but to keep alive at all. His problem was how to produce the goods and services to satisfy these needs and desires. The classical economists, therefore, took the desire to consume for granted, and focused on the means by which production might be increased.
NO PROBLEM OF ‘JOBS’
In the twentieth century, economists have returned to the directly opposite view—which happens to be the view that was held by the Mercantilists of the seventeenth century. Instead of the problem being how to keep expanding production in the face of a limitless desire for wealth resulting from the limitless possibilities of improvement in the satisfaction of man’s needs, the problem is imagined to be how to expand the desire to consume so that consumption can keep up with production. The dominant theory today takes production for granted and focuses on the ways and means by which consumption may be increased. It proceeds as though the problem of economic life were not the production of wealth, but the production of consumption.
The “classical” economist, or productionist, realizes that there is no such thing as a problem of “creating jobs.” There is a problem of creating remunerative jobs, but not just jobs.
At all times, the productionist holds, there is as much work to be done, as many potential jobs to be filled, as there are unsatisfied human desires which could be satisfied with a greater production of wealth. The use of more and better machinery does not cause unemployment. It merely allows men, to the extent that they do not prefer leisure, to produce more and so meet their needs more fully and with less effort.
FEAR OF PRODUCTION
The consumptionist, on the other hand, regards every expansion of production as a threat to some portion of what is already being produced. He imagines that production is limited by the desire to consume. He fears that this desire may be deficient, and, therefore, that an expansion of production in any one segment of the economy must force a contraction of production elsewhere. He fears that the work performed by machines leaves less work to be performed by people, that the work performed by women leaves less work to be performed by men, that the work performed by Negroes leaves less to be performed by whites, and that those who work overtime leave fewer jobs available for others.
The consumptionist, Reisman goes on to show, is driven by his basic premise into one fallacy after another. Because he imagines production to be limited by the desire to consume, rather than consumption being limited by the ability to produce, the consumptionist does not value wealth, but the absence of wealth. He is happy to find a scarcity of anything because to him it represents a large supply of unused consumer desire. He lives in constant dread of an absence of “investment outlets” or “investment opportunities.” He dreads “hoarding.” He regards everyone as a potential miser whose consumption demand has to be constantly whipped up. He is busy devising new schemes for the government “to supplement private demand” by spending more money—the increased expenditure to be financed by bigger deficits.
He is, in brief, a Keynesian, a New Dealer, a Fiscal Revolutionist, a self-styled “liberal” and, mirabile dictu, a “moderate.”
October 12, 1964
LONDON—Whatever the outcome of its current election, Britain will continue to be at least a semi-socialist state. In the event of a Labor victory, this is of course beyond dispute. The Labor Party’s manifesto insists on the panacea of “socialist planning.” It is openly contemptuous of the free market: “At the root of Tory failure lies an outdated philosophy—their nostalgic belief that it is possible in the second half of the twentieth century to hark back to a nineteenth-century free-enterprise economy and a nineteenth-century unplanned society. . . . The role of government must inevitably increase.”
The Labor manifesto goes on to explain how the party will plan practically every aspect of everybody’s economic life. The national economic plan will decide how much each industry will be expected to produce, export, and invest and how many men it will be expected to employ. The government will “establish new industries. “Private monopoly in steel will be replaced by public ownership and control.” A “national incomes policy” will decide who gets how much. All the social services—education, public housing, health care, old-age pensions—will be increased. Rents will be recontrolled. Interest rates for housing will be lowered. Labor will increase the building of new houses. Unemployment benefits will be upped.
SUBSIDIZED LEISURE
There is one concession to personal freedom: “It is not the job of the government to tell people how leisure should be used.” But lest this sound too permissive, the manifesto insists that “the government has a duty to ensure that leisure facilities are provided.” It will “give much more generous support to the Arts Council, the theatre, orchestras, concert halls, museums, and art galleries.” It will even “encourage and support independent filmmakers both for the cinema and television.”
Those Britons who would like a somewhat less paternalistic state get little comfort from the Liberals. The Liberal Party manifesto insists that “economic growth must become a major aim.” To give that aim “top priority” a “Ministry of Expansion” must be set up. While both Laborites and Conservatives seem to agree that a 4 percent annual rate of growth would be the right target, the Liberals “would weigh up the implications and decide on a 4, 5, or 6 percent rate of growth.” The Liberals too would have an “incomes policy,” which would “make allowances for groups that would have been left behind.” They would “set up Meat and Grain Commissions to manage the market for both home and imported produce,” boost the existing government building program “to at least 500,000 homes a year,” and increase social-security payments.
LIP SERVICE
When one turns to the Conservative manifesto, one gets at least lip service, and sometimes even eloquent lip service, to the free market. “Competition and free choice are the customers’ most effective safeguards.” “Conservatives believe,” says Sir Alec Douglas-Home, “that a centralized system of direction cramps the style of the British people. Only by trusting the individual with freedom and responsibility shall we gain the vitality to keep our country great.” Ringing words. But how seriously do the Conservatives take them? True, they declare themselves “utterly opposed to any extension of nationalization, whether outright or piecemeal. We propose to complete the denationalization of steel.” But there they stop. They do not propose to denationalize the railroads, or coal, or other industries under public ownership. They long ago lost their nerve on complete repeal of rent control. Now they make the positive pledge: “In the next Parliament we shall take no further steps to remove rent control.” They too will boost unemployment benefits and old-age pensions. They too will have “an effective and fair incomes policy.” They too will “give first priority to our policy of economic growth” of 4 percent a year. They too have now embraced government economic planning.
Does the welfare state, once embarked upon, set up such powerful vested interests for its own preservation that it passes a point of no return? Does it become irreversible?
October 19, 1964
When the 88th Congress finally adjourned, a section of the press broke out in paeans of praise for its accomplishments. Typical was a “news” story on the front page of The New York Times, announcing that what was “likely to earn high ranking in history’s catalogue of achievements” was the expiring Congress’s action in “approving an $11.5 billion tax cut despite rising budget deficits.”
This, it seems, is precisely what is called for by “modern economic theory.” This requires tax cuts, even in the face of huge deficits, “in times of sluggish economic activity and high unemployment.” It has suddenly been discovered by economists, it appears, that “a tax cut, by giving families and business more money to spend, [would stimulate] demand for goods and services, thus increasing production and creating jobs . . . If the theory is valid, Congress has now embarked on a course that may be of vast importance in improving the country’s living standards, both immediately and in the long run.”
FOLLY OF PRUDENCE
If the theory is valid, indeed, then all statesmen of the past, who thought they were acting prudently and responsibly in trying to avoid bankruptcy or inflation by keeping expenditures within revenues, were merely fools. For by withholding handouts from pressure groups, and insisting on keeping taxes high enough to pay for necessary expenditures, these people were not only creating unemployment and depression, but imperiling their own re-election. If the theory is true, then the politicians who vote huge handouts to pressure groups, and refuse to impose the taxes to pay for them, are not, as previously assumed, irresponsible demagogues, but public benefactors. The same actions that buy elections also confer economic blessings on the whole community.
If the theory is true, does it have any limits? And what are they? What would be wrong, for example, with doubling the amount of Federal expenditures and abolishing taxes entirely? Wouldn’t this give families and business still more money to spend, still further stimulate demand for goods and services, and still further increase production and jobs?
Alas, the practice is not new and the theory is neither new nor true. Budget deficits go back to time immemorial. The theory of deficits, paid for by printing more paper money, can be traced back to the very beginning of our history as a nation. The Continental Congress began its disastrous issues of paper money in 1775, because it was afraid to levy taxes. Peletiah Webster, writing in 1790, quotes a member of that Congress as saying: “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer and get a wagon-load of money, one quire of which will pay for the whole?”
PAST FAILURES
If the theory of the beneficence of deficits is new this year, why have we had 28 deficits in the last 34 years?
That deficits do not cure unemployment has been shown over and over again in the last half century. In each of the years from 1931 to 1940 inclusive, the Federal government ran a deficit averaging 3.6 percent of the gross national product. During those ten years there was average unemployment of 18.6 percent of the labor force. The same percentage of GNP and of the labor force today would mean that even deficits averaging $22 billion a year could be accompanied by more than 14 million annually unemployed.
The inflation brought about by “planned” deficits (either through increased spending or tax cuts) can under special conditions, it is true, bring about a temporary increase in prosperity. There is no doubt that our present prosperity and reduction in unemployment owe a lot to recent tax reduction. (The employment record is nothing to brag about, however. Unemployment is still above 5 percent, compared with an average of 4.9 percent in the eight Eisenhower years.) But as soon as the new money in circulation begins to reflect itself in higher prices, and as soon as wage rates, under the stimulus of the automobile settlement, take off on a new round of rises, the present euphoria may give place to sober second thoughts about the unadulterated magic of deficit spending.
October 26, 1964
On the basis of the polls, Barry Goldwater will not only be defeated by a landslide popular vote on Nov. 3 but the Republican representation in Congress will be cut down substantially even from its present minority level.
It is instructive to look at the reasons why this result is probable.
1—The country is enjoying a period of unparalleled prosperity, which heavily favors the party in power.
2—Enormous prestige always surrounds the man who holds the office and title of President. His every word and action command publicity. In addition, President Johnson enjoys an almost unique advantage. In office less than a year, he has become the beneficiary of the Kennedy achievements without getting any blame for the Kennedy errors—in the Bay of Pigs, Berlin, Vietnam, or the steel-price episode.
3—In addition to the prestige of the office, there is the unparalleled power that the Presidency now commands, particularly when combined with party Congressional control. Unwelcome investigations into corruption can be blocked or broken off. A tremendous bureaucracy that owes its appointment or continuance in office to the President can be drawn upon to denounce all criticism. Part of this bureaucracy—e.g., the State and Defense Departments—has access to information unavailable to the opposition. These departments can say that the truth is so-and-so; that the opposition’s charges are “irresponsible,” and that it is not in the public interest that the issue raised should be publicly discussed at all. The challenger is seldom in position to make a convincing reply.
4—The greatest means of mass communication today, the radio and television, which depend on the Federal government for their licenses and their continuance, will tend, with whatever technical “neutrality,” to be overwhelmingly on the side of the President and party in power.
5—When any party has been in power for four years, its flood of messages, speeches, press conferences, and laws establish an ideology that puts the main burden of proof on any opposing ideology. Vested interests are built up in all directions, from war contracts to social security.
6—There is a deep split in the Republican Party, partly caused by Governor Rockefeller’s frustrated ambitions but mainly the result of a profound division of opinion between “conservatives” and “liberals.”
7—Finally we come to the conduct of the campaign itself. Mr. Johnson is a political master, with an uncanny sense of the most effective act or phrase. At least until the Jenkins episode, he had not made a single major political error. Senator Goldwater, on the other hand, has been inept both in choosing issues and in stating them. His positions on dealing with the Communists, on the U.N., on control of the nuclear bomb, on social security, have been grossly misrepresented. But he has been partly responsible for this misunderstanding by his own ambiguities and belated qualifications. He has been too often content with vague generalities. His attacks (and phrasing) have been haphazard. He has not seemed to understand the need for specifying, documenting, and nailing down the details of his case.
8—Above all, he has until now let the case on economic issues—the case for free enterprise, and against inflation, deficits, spending, the monster paternalistic state—practically go by default. In the Oct. 11 issue of The New York Times Sunday Magazine, Prof. Milton Friedman made a brilliant defense of what he assumed Senator Goldwater’s economic philosophy to be. No similar clear and detailed statement has so far come in this campaign from speeches by the senator himself. Yet if the Johnson-Humphrey ticket and the Democrats in general win by the margins that now seem likely, the result is sure to be interpreted as a popular endorsement of more inflation, deficits, spending, paternalism, and more “wars on poverty.”
Unless Barry Goldwater starts spelling out in detail, right now, the case against the Johnson-Humphrey fiscal, monetary, and economic policies—cheap money and chronic inflationary deficits that threaten the dollar, handouts to every pressure group—the prospect of an election result that will discourage these policies is not bright.
November 2, 1964
The economic issues are not the sole issues in this campaign, but they may in the long run prove far the most important.
Let us suppose that the polls are right and that the Johnson-Humphrey ticket is elected by a landslide. The result is sure to be interpreted as an endorsement of all the Johnson-Humphrey economic policies.
It will, of course, be considered an endorsement of the recent $11.5 billion tax cut. But more than that, it will be interpreted as endorsing the policy of huge cuts in taxes even when the country is already facing a huge deficit and has experienced chronic deficits in the past. For the present tax cut, in connection with the spending program, will mean our 29th deficit in 35 years.
Businessmen who endorse the tax cut are taking a superficial and shortsighted view. A tax cut is sound and desirable only when it still brings in enough revenue to meet expenditures. The present tax cut is deliberately inflationary. In the last half of this year the Federal government is pumping in $12 billion more cash payments to the public than it is taking out in taxes. Of course this can bring about a temporary prosperity and “increase of purchasing power”—at the cost of overstimulating the economy and letting loose more inflation.
Deficit-financing and other inflationary policies can temporarily increase employment as long as wage costs do not rise as fast as demand or commodity prices. But the recent automobile wage settlements, far exceeding even the Administration’s own wage “guideposts,” seem likely to set off another round of wage rises that in turn threaten a profit-squeeze and unemployment or a further dose of inflation to keep employment up.
The Administration has favored increased welfare spending in all directions—expanded social security with medicare, high farm supports, high foreign aid, and a “war on poverty” that in its first year will add still another $1 billion to the $45 billion already being spent annually by cities, states, and the Federal government on various welfare programs. All this is going to make it more and more difficult to bring the budget under control.
Obviously the whole program must tend to prolong the deficit in the balance of payments and the international pressure on the dollar. But the Administration has shown no interest in removing the causes of this, but only in suppressing symptoms by imposing an interest-equalization tax on foreign securities and otherwise moving toward exchange controls.
The danger toward which we are drifting, in fact, is that the policies being followed by the Administration will lead to a runaway inflationary boom, that the Administration will not dare to halt these policies, but in desperation will impose an ever-widening network of economic controls which will strangle healthy economic growth.
As against this outlook, Senator Goldwater has consistently expressed his adherence to a system of reduced expenditures, balanced budgets, and free enterprise.
HERBERT HOOVER
If any man was entitled to be called the greatest living American, it was Herbert Hoover. In Newsweek of Aug. 17, taking off from Eugene Lyons’s brilliant biography, I discussed the incredible smear campaign that made him the “author” of the great Depression. Because recent praise of him has come so largely from conservatives, it is instructive to recall the early judgment of an outstanding “liberal.” In 1919, in “The Economic Consequences of the Peace,” John Maynard Keynes wrote: “The ungrateful Governments of Europe owe much more to the statesmanship and insight of Mr. Hoover and his band of American workers than they have yet appreciated or will ever acknowledge. . . . This complex personality, with his habitual air of weary Titan . . . his eyes steadily fixed on the true and essential facts of the European situation, imported into the Councils of Paris, when he took part in them, precisely that atmosphere of reality, knowledge, magnanimity, and disinterestedness which, if they had been found in other quarters also, would have given us the Good Peace.”
November 9, 1964
The imposition by the new Labor government of a “temporary” 15 percent surcharge on imports and tax incentives for exports is a disruptive and reactionary step. In the long run it can have only harmful consequences for Britain and the world.
The first effect must be to increase the cost of living for Britons. They will pay some 15 percent more for all the goods they buy from abroad (except foodstuffs, industrial raw materials, and unprocessed tobacco, which are exempt from the surtax). The very purpose of this measure is to discourage and cut down imports. But this means that it will adversely affect all the manufactured exports to Britain of all other countries. To that extent it must hurt and disrupt the export trade and export industries of these countries.
It will of course hurt our own export industries. It will hurt the export industries of the Common Market countries—France, West Germany, Belgium, Holland, Luxembourg, and Italy. It will hurt the export industries even of Britain’s partners in the European Free Trade Association (how ironic that name now sounds)—Austria, Denmark, Norway, Portugal, Sweden, and Switzerland.
SELF-DEFEATING
Immediately after imposing the import surcharge, the Labor government blandly proposed to these partners that they all start speeding up their reciprocal tariff cuts. The British even generously added that they would speed up tariff cuts on the EFTA products even if other members failed to follow suit. But it is estimated that the import surcharges, in effect, double Britain’s tariff walls. Why didn’t the new government simply exempt its EFTA partners from the surcharge in the first place?
It is possible and even probable that the Common Market countries and others will retaliate against the British move by raising their own tariff wall or subsidizing their own exports. The whole policy, in that case, will become self-defeating, and postpone still further the hope for any return to sanity in international trade.
The British excuse for this move was that there is a heavy deficit in their balance of payments and that, as one dispatch put it, they were “bleeding to death” financially. But they had brought this on themselves chiefly by the policy of continuous monetary expansion combined with cheap money. The sure way for a country to get a deficit in its balance of payments is to combine excessive monetary inflation with a pegged rate for its currency. What makes the British case even more serious than ours is that the equipment or methods in many of its industries are antiquated and inefficient.
PRECEDENT OF CANADA
The first and chief cure for the British balance-of-payments crisis would have been to halt its monetary expansion and its cheap-money policies. But, like ourselves, it is afraid to do this partly through political timidity and partly because of the now fashionable idea that cheap money and continuous monetary expansion are necessary to maintain full employment. The Labor government even gave “assurances” that Britain has “no intention” of raising its bank rate. This means that it considers interest rates purely a political decision.
As long, however, as monetary expansion and cheap-money policies are continued, the import super-tariff and export subsidies will have at best a short-run effect. On May 2, 1962 Canada dropped its dollar value to 92½ cents, compared with 95¼ cents the day before and $1.05 in 1959. This meant that overnight its imports were more expensive and its exports cheaper. Yet within two months Canada had a hemorrhage in its balance of payments and lost a third of its reserves. Its continued monetary expansion had brought on a flight of capital.
The United States is in no position to criticize the British action. We wanted them to keep money cheap to help us keep our own inflation going. Their import surcharge is the equivalent of our own “interest equalization” tax. Both are reactionary protectionist steps based on mercantilist fallacies exploded two centuries ago. Both are accompanied by hypocritical lip service to international cooperation and freedom of trade and capital movements. Both, ironically, are done by self-styled “liberal” and “labor” governments.
November 16, 1964
Three weeks ago, in a column called “Why He Is Losing” (Newsweek, Oct. 26), I listed eight major reasons why it seemed probable not only that President Johnson would win a victory of landslide proportions over Senator Goldwater but why even the Republican minority in Congress would be cut down. These reasons ranged from the prosperity of the country and the power and prestige of a Presidential incumbent to Goldwater’s inept campaign, his ambiguities and belated qualifications, his failure to support his vague generalities with specific and documented statements, and his nearly complete failure to make the economic case at all.
On Election Day, the Republican label on most candidates might as well have read “poison.” It seems altogether probable that the great majority of votes were cast more against Goldwater and everyone associated with him than for Mr. Johnson. Probably the major reasons for Goldwater’s defeat had to do with his personal image rather than with his stated conservative philosophy—the fear, justified or unjustified, that he was “trigger happy,” not only about the nuclear bomb, but about other matters—that he was rash and unpredictable. The saddest aspect of the whole matter is that the election will be interpreted as a defeat for economic conservatism, and yet that the case for economic conservatism was never really made.
MONETARY EXPANSION
Mr. Johnson and the Democrats have won a great victory. But it is easier to win an election than to solve the grave problems with which the country is still confronted. It is outside the province of this column to discuss Vietnam, Cuba, Russia, Communist China, NATO, or the bomb; but the economic problems are no less troublesome.
It is true that through the $11.5 billion tax cut, leading us to the 29th deficit in 35 years, and through policies calculated to hold down interest rates, the Administration has helped to keep going a remarkable period of prosperity. But this has not been done without risks, and these risks are growing.
To keep interest rates down, the Federal Reserve System has bought $8 billion of marketable securities since 1960. This has overstimulated borrowing and expanded the money supply. Between the end of 1960 and September 1964, total commercial bank credit increased at an average annual rate of 8.2 percent. Since the beginning of the current economic expansion in February 1961, the nation’s money supply (demand deposits plus currency) has risen at a 3.3 percent annual rate. Since June it has risen at a 6.4 percent rate. Since February 1961, money plus time deposits have increased 8.2 percent per year. Since last June they have risen at an 8.4 percent rate.
FALSE REMEDIES
The first effect of this abnormal expansion of money and credit has been to take up the slack in various sectors of the economy. But as this is done, the effect must be more and more to push up prices. Living costs have reached the highest monthly level on record. Industrial raw materials rose 15 percent in the twelve months ending in September.
The inflation has been most clearly reflected in the cumulatively mounting deficits in our balance of payments. This has been the direct outcome of our policy of holding down interest rates and increasing the money supply. Instead of halting these inflationary policies, we have imposed a shortsighted tax on purchases of foreign securities. This hurts borrowing countries, obstructs free international movement of capital, and in the long run only hurts our export trade and does nothing to solve the balance of payments.
Another false cure is to try to hold down the price of steel and other commodities by extralegal intimidation. This discriminatory treatment can only hurt the steel industry and therefore steel labor. If our so-called “wage guidelines” were taken seriously they would be dangerous economic nonsense. In practice they are mere pious government talk, though unions are encouraged to regard them as floors rather than ceilings.
This inflation is the great domestic problem that the new Johnson Administration now faces.
November 23, 1964
With all the agitation in recent years for equal civil and economic rights for Negroes, it is strange that so little analysis has been directed to the economic delusions and measures that have encouraged discrimination and the economic reforms that might remove or mitigate it.
A book just published in London by the Institute of Economic Affairs and Andre Deutsch—The Economics of the Colour Bar” (15 shillings)—goes a long way to make up this deficiency. It is written by an eminent South African economist, Prof. W.H. Hutt. While it is chiefly devoted to the racial situation in South Africa, the author tells us that it simply uses the experience of that country in an attempt “to expose the ultimate origins of colour injustices generally.”
The central theme of the book is that if South Africa had continued the development of an economy of competitive economic freedom, it would have ameliorated or prevented the racial tensions there. But these have been aggravated by the government’s restrictionist policies and by the efforts of higher-paid white workers to protect privileged positions.
COST OF PREJUDICE
Hutt’s main point is that a competitive free-market system is colorblind: “When we buy a product in the free market, we do not ask: What was the colour of the person who made it? Nor do we ask about the sex, race, nationality, religion, or political opinions of the producer. All we are interested in is whether it is good value for the money. Hence it is in the interest of businessmen (who must try to produce at least cost) . . . to seek out and employ the least privileged classes.”
Employers are not necessarily free, or freer than others, from racial, sex, religious, or nationalistic prejudices. But their prejudices always cost them money. If a Negro can perform as good a job as a white worker for less pay, or turn in a better job for the same pay, a white employer who refuses to employ him simply because of his color merely injures himself. His prejudice reduces his potential profit, and may even imperil his economic survival.
In the eyes of an anticapitalist mentality, employers can never do anything right. They are now getting the chief brunt of the blame for discrimination against Negroes in hiring practices. Yet what they were always blamed for in the past was their failure to discriminate against women, Negroes, immigrants, and others. Read the leftist history books, and you will find American employers being denounced for favoring freedom of immigration so that they could always be sure of a “cheap” labor supply. Or of employing Mexican “wetbacks” in the Southwest, or Negroes anywhere instead of whites.
PHILADELPHIA STRIKE
A main problem of employers in the past, however, has been to get many white-dominated unions to admit Negroes or accept them as fellow employees. A dramatic example was the Philadelphia strike twenty years ago. The country was at war. On Dec. 27, 1943, the Philadelphia Transportation Co. was ordered by the President’s Fair Employment Practice Committee to stop discriminating against Negroes in upgrading employees and training new ones. The company replied that it had no objections provided its employees would not consider this a violation of the union contract. The union protested, and nothing was done.
On July 8, 1944, however, the company posted notices in its barns stating that it was accepting all qualified applicants for employment. Shortly afterward eight maintenance workers, all Negroes, began training as motor-men. On Aug. 1, a strike broke out, accompanied by rioting. It quickly spread to all 6,000 employees. The city’s 1,982 streetcars, 369 subway and elevated cars, and 564 buses were brought to a halt. The strikers voted against returning to work, even under Army control, unless given guarantees against the employment of Negro operators. The strike lasted a week, and was brought to an end only when the Federal government issued an ultimatum that strikers that did not return to work would be drafted into the Army.
Federal law cannot continue explicitly to sanction the compulsory union shop and at the same time to tolerate the closed union.
November 30, 1964
The Republican defeat is causing considerable soul-searching within the party. What went wrong? How can the party be put together again? So far the leading conciliator is Richard M. Nixon, who doesn’t want either the “conservatives” or the “liberals” purged from the party. Each “deserves a party voice, but neither can dominate or dictate—the center must lead.”
It all sounds very reassuring. But what does it mean in terms of specific policies? Just where is the “center”? Why is it superior to either the “right” or the “left”? Why is a “moderate” admirable and an “extremist” dreadful? By what criteria do you identify either? What, in brief, do the terms mean?
What Nixon seems to be looking for is the winning catchwords rather than the right policies. In politics, unfortunately, catchwords and slogans are tremendously important. A large part of the explanation of Goldwater’s defeat was that he got pinned on him, and even embraced, the wrong catchwords. The Rockefeller wing smeared him as an “extremist,” and with calm effrontery called themselves “moderates.” Goldwater’s cue was to insist that he was the moderate and they the extremists. But he made the fatal mistake of defiantly accepting both labels as pinned.
‘EXTREMISM’ UNDEFINED
By far the best analysis of this whole battle of the catchwords was made by Ayn Rand in her Objectivist Newsletter of September. The “moderates” were demanding a repudiation of “extremism,” as she pointed out, without any definition of that term. Extremely what? Moderately what? Is moderate honesty preferable to extreme honesty?
This confusion of labels did not begin in the last campaign; it was merely intensified. For more than a generation now we have been abusing and misapplying the terms “conservative” and “liberal.” In the best sense a conservative means one who wishes to conserve what is best in our heritage. In its origin as a political label in Britain in 1830, “conservative” was opposed to “subversive.” But historically the name has come to indicate opposition to all change, good or bad. Ironically, it is chiefly applied in the United States today to the unapologetic defenders of capitalism, of free private enterprise, free trade, and free markets. But capitalism is a progressive and even a revolutionary philosophy and set of institutions. In the last two centuries, it has changed the face of the earth and the lot of man. It has been doing so at an accelerative rate. The defenders of free enterprise, from Adam Smith on, have been the true liberals.
‘LIBERALISM’ STOLEN
But the noble term liberalism, from the same root as liberty, has been appropriated by the collectivists, the socialists, the New Dealers, the paternalists, the welfare-statists, the controllists. The idea has been propagated that true progress consists not in more freedom but in bigger and bigger government and more and more state coercion and control.
I cannot believe that the vote for President Johnson and the Democrats and against Goldwater and the Republicans was a conscious rejection of the philosophy of free enterprise. The vote against Goldwater was mainly the result of misgivings, however unjustified, about his own judgment and temperament. He never adequately stated the case for free enterprise. Above all, he never adequately analyzed the specific economic policies that the Johnson Administration was supporting.
And so we will have Mr. Johnson pushing economic policies that can only in the long run have the most harmful results—more tax reduction in the face of unparalleled spending, more deficits, more welfare programs, medicare, more controls, more “guidelines” for prices and wages, more power for unions, more monetary inflation, more threats to the integrity and stability of the dollar. It will be a tragedy if the Republicans—and far-sighted Democrats too—do not oppose all these programs with intelligent analysis.
The Republicans, in brief, should not ask what is the most fashionable stance to take or slogan to embrace, but what policies are best for the country. In the long run this will also serve best their own interests.
December 7, 1964
The U.S. Government is faced with a coin shortage and a very awkward problem in relieving it. A few months ago the Treasury doubled its coin-volume goals for this year and 1965. Congress approved construction of a new mint, but it won’t be ready before 1967. Since spring, both U.S. mints, in Philadelphia and Denver, have been working around the clock seven days a week. All twelve Federal Reserve Banks now ration coins to their member banks. In late August, Congress passed a bill indefinitely extending the 1964 date on all coins into 1965—and possibly thereafter—to discourage hoarding or speculation by collectors.
But the problem goes much deeper than the past failure of the government to do sufficient minting. It lies in the rise in the consumption and in the price of silver. The demand for coins has increased because of the constantly rising volume of business as well as of prices—and also because of the increase in vending machines and in coin collecting. But the industrial demand for silver has been rapidly increasing, not merely for its older uses in plate and jewelry, but for photography (for which no present substitute exists), for electronics, and for space technology.
In 1963 world consumption of silver in industry and coinage was estimated at 422 million ounces, whereas new mine production was only about 238 million ounces. This imbalance between production and consumption largely explains the rise in silver prices.
BOOM IN SILVER
Why hasn’t the increased demand and price led to the production of more silver? The answer is that two-thirds of current output is merely a by-product in the mining for other nonferrous metals. Mining activity is mainly determined by the market for these metals rather than for silver. The difference between current production and the much greater current consumption is made up partly by purchases from government stocks.
The price of silver went up to $1.29 an ounce in July 1963. It has not gone higher, in spite of increased demand since, because this is the official price at which the government redeems its silver certificates. As long as it stands ready to do this, $1.29 will remain the ceiling price. But if the government stopped “selling” silver at this price, or if its monetary stock of 1,387,000,000 ounces of silver ran out, the price would be free to move to $1.38 or more. At that price silver coinage in circulation (more than $1 billion) would be more valuable as bullion than as money, and would be melted down or exported.
At the new annual minting rate of 275 million ounces, the government’s silver stock will be used up in five years. Speculative action could bring a crisis much sooner. (Fuller presentations of the existing situation can be found in an article by Elizabeth Gillett in The Commercial and Financial Chronicle of Aug. 27 and in a pamphlet study by Dr. Elgin Grose-close published by the investment firm of Cyrus J. Lawrence & Sons.)
POSSIBLE REMEDIES
Disregarding proposals that would only make the situation worse, three possible solutions have been offered to this problem: (1) an immediate cut in the silver content of all newly minted silver coins to one-half or less; (2) a complete abandonment of silver in subsidiary coins, substituting some cheaper metal; and (3) the Groseclose proposal to revalue all silver in circulation by double.
The snag in the first two proposals is that either would probably lead to immediate hoarding of existing silver coins, causing a serious coin shortage until perhaps the existing full supply had been replaced. The third proposal is designed to avert this, but might cause it to an even greater extent while it was being debated in Congress. It would mean a windfall profit to holders of such coin. More importantly, it would cause great confusion to count a dime as 20 cents, a quarter as half a dollar, and a half dollar as a dollar, particularly if substitute coins circulated side by side.
But the longer action is postponed the more serious the problem will become. A fundamental cause in the rise in the price of silver in the last 25 years, of course, has been the depreciation of the dollar through inflation.
December 14, 1964
Never before has any British Government made so many economic blunders in so few weeks in power. First, the new Prime Minister, Harold Wilson, announced the imposition of a “temporary” 15 percent surcharge on imports and tax incentives for exports. The effect was to injure and disrupt the exports to Britain of all other countries, even of its six economic partners in the European Free Trade Association, and to provoke murmurs of retaliation everywhere. Worse, the action was accompanied by “assurances” that Britain had “no intention” of raising its bank rate—in other words, that it had no intention of taking the first indispensable action toward curing its balance-of-payments problem.
Of course this provoked distrust of sterling, and a rescue operation had to be undertaken. So on Nov. 7 ten of the world’s leading financial powers agreed through the International Monetary Fund to extend $1 billion in aid to Britain. But Wilson shook confidence further by announcing his determination to renationalize the steel industry. He hinted at new punitive taxes against corporations and investors, including a capital-gains tax. He increased pension and other social-welfare benefits.
THE ‘SPECULATORS’
Sterling weakened again. Wilson gave new reassurances. Central banks and others thought there would at last be an increase in the British bank rate at the regular weekly meeting on Thursday, Nov. 19. It didn’t occur. The run on sterling started. Hurriedly, over the weekend, the British Government raised the discount rate from 5 percent to the crisis level of 7 percent. A Swiss banker made the premature declaration that “7 percent will drag money from the moon.” He forgot that it won’t do this if lenders are afraid they won’t get their principal back. The run continued, and wasn’t stopped until Nov. 25 when eleven nations announced that they had put together a record $3 billion rescue package of currencies to defend the pound.
So the pound, once more, is rescued, and is presumably safe for at least the next three months. But what then? The notion so widely circulated in the press that the whole crisis was caused by a group of wicked speculators, “the gnomes in Zurich,” is simply childish. It is hard to imagine any group of speculators foolish enough to imagine that they could permanently depress sterling by their own short sales. The “speculators” in sterling were the holders of sterling all over the world—central banks, commercial banks, exporters, importers, and investors everywhere. They were scared by the Wilson blunders. They wanted to get out. They wanted to protect themselves against being swindled as the holders of sterling were swindled by the devaluation of the pound from $4.03 to $2.80 in September 1949.
THREE CHOICES
The total $4 billion or so of credit at best gives the British Government a breathing spell. Otherwise it solves nothing. The future of the pound depends on the policies that the British Government follows.
It has three possible courses. First, it may try to save the pound by more of the same kind of controls as the 15 percent import surcharge and the export subsidy. It may resort to exchange controls, investment controls, import quotas and licenses, compulsory exports, price and wage controls at home, and all the rest. But the world, and particularly the British, have become disenchanted with these methods. They would mean a return to inconvertibility, and at least two prices for sterling.
Secondly, the British could devalue the pound or, through the IMF, try to get a world devaluation of currencies in terms of gold.
Finally, Wilson could stand by tight money, and stop the printing presses that have been turning out a glut of paper pounds. But this might lead to credit contraction and, particularly if the British unions continue with their usual demands, to a slump and unemployment. This violates all the policies that the Labor Party has been preaching for the last twenty years.
The problems of the dollar are different in urgency, but not in nature, from the problems of the pound. The fool’s paradise of budget deficits, cheap money, and printing-press currency cannot go on forever.
December 21, 1964
The crisis in the British pound, brought about basically because the Bank of England had been glutting the market with too many pounds, should have been a grim warning to our own government on the ultimate consequences of its similar policies with the dollar. Instead, Washington decided to embark on still more credit inflation.
Addressing the Business Council, President Johnson on Dec. 2 warned the nation’s 14,000 banks that in spite of the increase in the discount rate to 4 percent, he did not think “any general increase in the rates which banks charge their customers” was justified. Immediately one of the four banks that had announced a rise in their “prime” lending rate from 4½ to 4¾ percent canceled the increase.
The President’s warning was tantamount to an extralegal form of selective price control. By itself, it might have been ineffective. But it was accompanied by a still more extraordinary action on the part of the Federal Reserve authorities. In the same week they bought nearly $1.1 billion of Federal securities. In other words, they poured that amount of high-powered money into the commercial-banking system, and flooded the short-term loan market with funds.
POURING IN FUNDS
Let us look at a few comparisons. From the end of 1957 to the end of 1963, the Fed’s holdings of government securities rose from $24.2 billion to $33.6 billion. This meant that in those six years the Fed was buying government securities, and monetizing them, at a rate of $1.6 billion a year. This monetary inflation has been the major cause of the deficit in the U.S. balance of payments that began in 1958. But here was an increase in monetized security holdings of $1.1 billion in a single week.
This cannot be dismissed as a merely “seasonal” increase. It brought the Fed’s total holdings of government securities to $37.4 billion, an increase of $3.4 billion over the corresponding week of the year before. The Fed’s action directly contradicted the small increase in the discount rate.
The President’s interest-rate warning must tend to shake confidence. Like his steel-price warning, it was a sort of extralegal price-fixing. It was unnecessary, because the competition among 14,000 banks assures a free market rate. The course the President suggested, moreover, is the opposite of what now needs to be taken. He asked the bankers to “consider the long-term interest of the nation.” But it is precisely the long-term interest of the nation that now calls for tighter credit rather than easier credit, for a halt instead of an increase in new money-and-credit creation, in brief, for a halt in inflation. This is above all necessary to halt the deficit in our balance of payments, about which the President is so rightly concerned.
CRISIS TO CRISIS
Behind the President’s warning, behind the Fed’s debt-monetization, behind the crisis in the British pound, and leading to it, is the fashionable fallacy that constant easy money and constant credit expansion are necessary to prosperity and “economic growth.” But this international inflation game is leading the world from crisis to crisis. It led to the devaluation of the pound from $4.03 to $2.80, and the corresponding devaluation of nearly every other major currency, in 1949. It forced the U.S., with the help of a few European banks, to extend a billion-dollar line of credit to save the Italian lira last March. It forced leading nations first to extend $1 billion aid to save the British pound early in November and then $3 billion more credit a few weeks later to save it again.
How long can these melodramatic rescue operations, in increasing amounts, go on? And what makes them necessary? They are necessary because the world, having thrown away the discipline of the gold standard, has found nothing to take its place. Under the old gold standard, when a country found itself losing gold it quickly had to raise its interest rates and halt its credit expansion to stop the outflow. Now it appeals to other central banks to bail it out by swapping paper currencies and maintaining a synchronized world inflation. That house of cards must some day tumble.
December 28, 1964
On Oct. 30, 1963, the Federal Power Commission sent out to 114 natural-gas producers a mammoth questionnaire weighing an average of 10 pounds. The questionnaire contained some 428 data sheets calling for data going back to 1955. One company estimated that completion of the forms would require 17,000 man-hours and cost it $85,000 in salaries.
This incident is not exceptional. Almost everyone who files an income tax, particularly if his income does not all come from a single source, is obliged to become a part-time accountant, or to hire one.
Ten years ago (when the Federal government, as measured by expenditures, was only two-thirds as big as it is today) a task force of the Hoover commission studied both the volume of government paper work and the paper work that the government imposed upon private industry and the private citizen. The task force found that each year the Federal government handled 25 billion pieces of paper, not including pamphlets and books. The government employed more than 750,000 full-time workers to handle them and spent more than $4 billion yearly. (That sum would have paid the entire cost of the Federal government as late as 1932.)
Each year the bureaucracy made out 3 million purchase orders to buy supplies. Each year government bureaus wrote a billion letters, at a cost to the taxpayer of $1 each. Compared with 40 years before, each employee was writing about ten times as many letters. As the number of employees had increased sevenfold in that time, the total of government letters had increased 70 times.
DUMPED ON THE FLOOR
As to the burden of paper work laid by the government on private citizens, the task force found it impossible to estimate the total. But here are a few examples: there were 4,700 requirements by the Federal government on private industry to report statistical data. Before a utility company made an addition to an existing plant, no matter how small, it had to obtain a certificate from the Federal Power Commission to prove its original cost. The FPC’s request for such data covered 82 pages, and the utility company’s average report often ran to 1,000 pages with supporting schedules, took 7,500 man-hours, and cost more than $25,000 to prepare.
It was estimated that the 4 million small business concerns of the country spent at least 5 percent, and in some instances as high as 29 percent, of their time on government paper work. Often there was no time limit on how long business had to keep these records. Yet one bureaucrat reported that copies of the payrolls that the government had demanded were so little used that he dumped them in barrels on the bare floor of empty storage rooms.
So much for the situation as officially reported ten years ago. In spite of the recommendations of the Hoover commission, is the situation any better today? On net balance it is far worse. A Congressional subcommittee headed by Rep. Arnold Olsen has so far published 752 pages of testimony on the subject. I can refer only haphazardly to some of it.
ONE WORKER, 29 FORMS
Testifying on behalf of the National Association of Manufacturers, Dr. Lewis E. Lloyd estimated that many individual companies are filing reports to the government numbering in the hundreds of thousands each year. Their number and complexity constantly grow. “There can be little doubt that government-induced paper work has been an important factor in causing small-owner businesses to go out of business or sell out to larger firms.” Another major reporting burden recently placed on industry is the requirement to report to the government and the payee information on dividend and interest payments.
As for the small-business man, one example is the testimony of Stuart Finley of Falls Church, Va., who has to fill out a total of 29 Federal tax-reporting forms because he has one salaried employee.
In sum, the Olsen subcommittee report will show that there are about a billion Federal reports a year from the public (including business, industry, social security, internal revenue, etc.). This is over five for every man, woman, and child in the United States.
