Business Tides
The Uncalculated Risk
January 5, 1948
It has become fashionable to say that while the Marshall Plan does not guarantee European recovery or a peaceful victory over Communism it would be cheap even at $17,000,000,000 if it did bring these results. We are told that we are asked to take no more than a “calculated risk”—a gamble for tremendous stakes in which the odds are heavily in our favor. This argument, however, begs the central question. It takes it for granted that the European Recovery Program, in the form now proposed by the President, could do only good and no harm.
Yet Europe’s economic crisis today is only partly the result of war destruction or of bad weather. It has been brought on mainly by Europe’s own economic policies, which have destroyed the free-market mechanism and its incentives. Nearly everyone seems to assume that if this self-imposed crisis deepens, or if controls intensify shortages, Europe will turn in desperation to still more drastic controls and even to Communism. The Marshall Plan, it is thought, will prevent this by making the situation better.
It never seems to occur to those who hold this view that a deepening of this self-imposed crisis could lead to a demand in Europe, not for Communism but for a return to economic freedom. Yet there are already encouraging signs of this. Italy has restored relative freedom of foreign exchange. France has dropped some important controls. Former Premier Daladier recently declared in debate that inflation cannot be overcome in France as long as a managed economy prevails. In Britain the public faith in the managed economy has been visibly slipping. Is there not a real risk that the funds and goods supplied by the Marshall Plan, by making the situation more tolerable than it otherwise would be, could delay or prevent a return in Europe to free markets and free enterprise? Will the Marshall Plan be in fact so framed and administered as to save socialistic Europe from Communism? Or will it be so framed and administered as to save Europe from capitalism?
At present, certainly, these questions cannot be answered with confidence. In his message to Congress on the Marshall Plan President Truman admitted that our proposed $17,000,000,000 of help to sixteen European nations would constitute only some 5 percent of their total national production. Yet he declared the “two purposes” of our help to Europe to be “to lift the standard of living in Europe closer to a decent level, and at the same time to enlarge European capacity for production.” Would a 5 percent difference in its standard of living decide socialistic Europe to return to capitalism instead of driving on to Communism? “To enlarge European capacity for production” is to supply Europe with capital goods. To the extent that we do this we must necessarily defer our own capital expansion. Are we going to do it while Europe continues to follow the policies that systematically throttle its own capital production and investment—price fixing and profit control which discourage the output of capital goods and plant expansion; drastic income taxes that dry up the sources of capital accumulation; threatened socialization and seizures that discourage or prevent private investment?
Yet in the President’s message there was not one serious word of criticism of the economic policies now being followed by European governments. There was not one hint that these policies have been in any way responsible for the present European crisis. Nothing was said of the effect of overvalued currencies in discouraging exports. European promises for the future were taken as the equivalent of accomplished facts. Mr. Truman warned Americans against the consequences of providing “only halfhearted and halfway help.” He said nothing of the consequences of half-hearted and halfway self-help in Europe. Yet on the President’s own estimate what Europe does to increase its own production will be at least twenty times as important as the American contribution.
It is clear that the risks of the Marshall Plan, in the form in which it has been presented to Congress, have not yet been soberly calculated. 
January 12, 1948
It may come as a shock to many people to realize that socialism and Communism as we know them today—the Marxist brand—are now officially a hundred years old. For it was in January 1848 that the manuscript of the Communist Manifesto—by far the most influential single document of the cause—was written by Marx and Engels.
In the century since its publication it has proved its viability as a masterpiece of pamphleteering and propaganda. From its opening sentence: “A specter is haunting Europe—the specter of Communism,” to its famous conclusion: “Proletarians have nothing to lose but their chains. They have a world to win, Workers of all lands, unite!”, the Manifesto has a startlingly “modern” ring. Yet it is hard to say whether this contemporaneousness is primarily a tribute to the polemical genius of Marx or a reminder of the intellectual poverty and docility of his epigones. For not only the declared Socialists and Communists, the conscious disciples of Marx, but thousands of people who think of themselves simply as “progressives” and “advanced” original thinkers, and who have never read Marx at first hand, parrot his phrases and have adopted some of his anti-capitalist theories. Many a magazine editor could have saved good money in the last two decades by running excerpts from the Manifesto instead of buying articles which were little more than paraphrases of such excerpts.
It is all here—the “class struggles” and “class antagonisms” (with “classes” never clearly defined); the “need for ever-expanding markets” and for “the conquest of new markets” (which Russian Communists still think is one of the main motives behind the Marshall Plan); the “concentrated ownership in the hands of the few” (“proved” mainly by constant reiteration); the “epidemics of overproduction” (still the most popular theory of crises among our “progressives”); the workers who are “slaves of the bourgeois class”—and all the rest.
There is even the preposterous theory that capital accumulation, the use of machinery, increases “the burden of labor” and “forces wages down almost everywhere.” Does this sound too absurd for present belief? Then listen to its echo in the second annual report just published by the President’s Council of Economic Advisers: “The accumulations of capital over the years have in fact involved deprivations of the rank-and-file worker.” No doubt this explains why in the United States, where the accumulation of capital and the use of machinery have reached their highest levels, wages and economic welfare are notoriously the lowest in the world.
The Manifesto is not only belied by the facts of today but contains inherent theoretical self-contradictions. Though the marginal-utility champions were undermining the classical value theory in Marx’s own lifetime, he never extricated himself from the Ricardian cost-of-production doctrine. And to the end of his life he never reconciled his hysterical incitements to revolution with his fatalistic theory that the victory of the proletariat was “inevitable” anyway.
In the Manifesto Marx frankly demanded “despotic inroads upon the rights of property” and “despotic interference with bourgeois methods of production” by measures which he regarded as necessary to pave the way for revolution. In his list of ten such measures he placed second “a vigorously graduated income tax.” Surely his ghost must gloat as it reads the American and British income-tax schedules of today.
Marx had a genius for destruction. He knew that capitalism could not long survive a system of confiscatory taxes which dry up incentives and the sources of private capital accumulation and investment. Like his disciple Lenin—who declared that the best way to destroy the capitalist system was to debauch the currency—he probably would have seen that the undermining effects of the present “vigorously graduated” income tax are merely being concealed for the moment by the effects of monetary inflation. In the end, he knew, this “despotic inroad upon the rights of property” must do its destructive revolutionary work.
January 19, 1948
President Truman’s annual message to Congress was primarily a campaign document. It seems to have been written chiefly in fear of losing extreme leftist votes to Henry Wallace. The basic philosophy it embodies is unmistakable. It is the philosophy of the welfare state, the doctrine of salvation through bureaucracy. Free enterprise, free markets, and free prices are no longer to be trusted to stimulate and guide production and consumption. Everything is to be in charge of omniscient and omnipotent bureaucrats.
Everyone is promised economic security, regardless of what he contributes to production. We are to have bigger job insurance, bigger old-age benefits, bigger survivors’ benefits, bigger education. The government is to subsidize our medical care and our housing. It is also to reclaim land, replant forests, build more TVA’s. On top of this, it is to spend in fifteen months on European aid alone as much as it used to spend in the same period before the war for all its purposes combined.
Mr. Truman, by some miracle, is at the same time for “economy.” “Government expenditures have been and must continue to be held to the lowest safe levels.” But the proposals he makes would immeasurably increase even present expenditures. And the Federal government is already spending in one year as much as it took it five years to spend just before the war. Of course all this money is to be taken in taxes only from “the rich.”
What Mr. Truman forgets is that the entire wealth and welfare of the country depends upon production. The total amount of the national product is far more important to the average family than any possible redistribution of it. Yet Mr. Truman’s schemes and taxes would undermine, discourage, and disrupt production. It would destroy incentives. The producers would not be permitted to enjoy the fruits of their production, and others would be handed the fruits whether they produced anything or not.
Mr. Truman’s speech is a tissue of self-contradictions. He is for “free enterprise” and “free competition,” but demands price fixing. He wants to “continue price supports for major farm commodities.” But he declares that the price of food is too high and that it must be reduced by government edict. While prices are to be held down, costs of production are to be forced up. The minimum wage is to be increased from 40 to 75 cents an hour. This would be a wage boost of 87½ percent. All workers above the minimum would of course insist on the maintenance of their existing differentials. Production costs and prices would be forced up enormously, and this might cause heavy unemployment even in spite of monetary inflation. If we can raise wages just by passing a law, and do it without such harmful consequences, why not $1 an hour or $2 an hour? Why stop anywhere?
We must enlarge our industrial capacity, continues Mr. Truman: “At least $50,000,000,000 should be invested by industry to improve and expand our productive facilities over the next few years.” But such funds could only be provided out of past profits and would only be invested if there were an inviting prospect of future profits. Yet Mr. Truman is shocked by existing profits, even though, as a percentage of the national income (especially when proper allowance is made for depreciation and inventory replacement) corporate profits today are not at all abnormally high. Mr. Truman wishes to increase taxes precisely where the increase would do most damage to production—on the corporations that are the very means of the workers’ livelihood. He would do this in order to free some 10,000,000 voters in an election year from all income taxes, and to create the short-lived illusion that present enormous government expenditures can be paid for only by a minority, by “the rich,” by “somebody else.”
Candidate Truman’s program is demagogy run riot. It is a blueprint for disruption. He asks this country to imitate slavishly all the disastrous economic policies that have brought Europe to its present critical state, and he wants us to call this process American “leadership.”
January 26, 1948
Henry Hazlitt and Ernest K. Lindley
LINDLEY: U. S. DOLLARS NOW OR AMERICAN LIVES LATER
No discussion of the Marshall program should lose sight of the central question: Is Western Europe to survive as a community of free nations?
Western Europe is the world’s second greatest workshop. Its 270,000,000 people have ways of life and ideals similar to ours. Most of them (Germany is the most important temporary exception) live under freely elected governments, all of which are at present non-Communist. Several of these nations are, moreover, the hearts of commonwealth and colonial systems embracing large parts of the earth.
The crumbling of Western Europe would be catastrophic for us. Without our support, Germany, Italy, and Greece almost certainly would go Communist quickly. In some of the other Continental nations, the first turn might be to the right—not to the free enterprise right, but of necessity to more or less totalitarian regimes. These could not stand in the long run, however, without our support, military as well as economic: The British position would be worsened immeasurably, at great added cost to us.
In two-and-one-half years since the war, Western Europe has made substantial recovery. Production in Britain, France, and seven other Marshall-Plan nations is up to or above prewar. Why, then, is further aid from the United States needed?
Before the war, Europe paid for one-fourth of all its imports by income from shipping, foreign investments, and other invisible exports. It got dollars also from the sale of colonial products to the United States. These sources of income have not yet been fully restored; parts of them are gone forever.
Some of Europe’s imports and production since the war have had to be used to repair war damage, a job which is far from complete. The population of Western Europe is 25,000,000 above prewar. There are other factors, but these, plus the lag in Germany, are enough to explain why, in spite of substantial recovery, Western Europe generally has not yet achieved either a tolerable standard of living for its people or the capacity to make its own way.
A critical juncture has now been reached. Without further aid from us, Europe will slide back, instead of going forward, simply because it is not yet able to pay for all the food, fuel, and raw materials it must import to keep its plant going, and for the fertilizer and equipment it must have to restore and enlarge its production.
The Marshall Plan is designed to enable Western Europe to push on to the point where it is once again self-supporting. The American contribution is calculated to provide only the indispensable margin of outside aid. This is not large in relation to the resources either of Europe or the United States. The first year, which should be the most expensive, will cost less than we spent in three weeks of war. It does not impose a new or increased strain on our economy. The rate of export called for is below that of last spring. And it is estimated that, even with the full Marshall program, our total excess of exports over imports will be smaller in 1948 than in 1947.
We will have to do without some food, fertilizer, and other things that we could use, but we will have more left, over all, for ourselves than ever before. The assertion that we can’t stand this relatively small call on our resources is preposterous. The burden is small compared with the war, with the huge outlays for defense that will be imperative if Europe crumbles, not to mention another war.
To get the maximum benefit from this program—indeed to give it a fair chance to succeed—we must give the European partners assurance that we intend to see it through. This can best be done, I think, by authorizing the administrative machinery for at least four years. An adequate initial appropriation is also essential. A niggardly sum would not generate the economic and political forces necessary to full recovery. The European partners must, of course, be required to live up to their pledges to put their internal finances in order, to lower artificial trade barriers, etc.
If we do not extend to Western Europe the relatively small amount of help it must have for the next few years if it is to survive as a community of free peoples, we will pay an infinitely greater price later—a price which almost certainly will have to be reckoned not only in goods and dollars, but in American lives.
HAZLITT’S REBUTTAL:
Whether Western Europe survives as a community of free nations (which Lindley rightly considers the “central question”) will depend chiefly upon two things: first, the economic and political policies followed by the nations of Western Europe; and second, the diplomatic and military policies followed both by them and by our own government in relation to Russia.
In this situation the Marshall Plan becomes secondary and almost an irrelevance. Yet it is being used by the Administration as a substitute for the hard diplomatic decisions that will finally have to be made. We are now challenged by Russia diplomatically and militarily on three chief fronts: China, Greece, and Berlin. If we are to prevent further catastrophes, our diplomatic policy on all three must be firm and unmistakable. It is in fact uncertain and ambiguous. The pleasant illusion that we can buy off the Russian nightmare merely by turning a few billions more of the American taxpayers’ dollars over to socialistic European governments cannot much longer be maintained.
We cannot even buy European recovery with it, any more than we bought British recovery with our $3,750,000,000 loan to Great Britain, because Europe is not following the policies that can bring about such recovery. Our postwar loans and grants so far have largely gone into subsidizing and prolonging price control, exchange control, and socialism that directly hinder European recovery. There is no guarantee that the continuance of our largess under the Marshall Plan will not make this situation worse.
Lindley stresses the loss of Europe’s invisible exports. The total net loss in Britain’s income from foreign investments, shipping, and other invisible items since the war (disregarding its foreign occupation costs) has been about £118,000,000. Those who are impressed by the calculation that the Marshall Plan would cost us less than 3 percent of our own national income, might remind themselves that Britain’s loss in invisible exports as compared with 1938 is only 1½ percent of its 1946 national income. For those who are impressed by percentages this is hardly a substantial lowering of its standard of living.
HAZUTT:WE CANNOT BUY OFF THE RUSSIAN NIGHTMARE
My misgivings about the Marshall Plan are not based on “isolationist” but on international premises. The proponents of the plan are right, as I have previously pointed out in this column, in believing that there is an economic crisis in Europe. They are right in realizing that our own economic and political future will be deeply affected by the fate of Europe. They are right in urging that we should do anything we can that promises to increase Europe’s welfare without imperiling our own.
But the all-or-nothing advocates of the Marshall Plan harbor serious misconceptions both of major economic facts and of major economic principles. They overestimate both the shortages of Europe and the resources of the United States. In his testimony before the Senate Foreign Relations Committee, to cite a single example, Secretary Marshall made the astonishing statement that the war “destroyed livestock herds” in Europe. Yet volume two of the report of the sixteen nations, published by the Department of State, shows that cattle on the hoof in those nations is in excess of 64,000,000, as compared with an average of less than 62,700,000 in the four years before the war.
The all-or-nothing advocates of the Marshall Plan, on the other hand, greatly overestimate American food resources. Before the war this country produced less than 9 percent of the world’s food supply. Even today it produces only 12 percent, or about one-eighth. Most of us have forgotten that before the war we were on net balance a food importing country. We think, for example, of the wheat we sold abroad; we forget that we bought from abroad several times as much sugar. From 1936 to 1940, we exported an average of $294,000,000 of foodstuffs a year: we imported an average of $665,000,000 worth.
Another misconception of the all-or-nothing Marshall Planners arises out of invalid comparisons with the national-income figures. From the President down, they have belittled the huge burden of the Marshall Plan by declaring that “it will cost less than 3 percent of our national income during the life of the program.” Passing over the question of how reliable our national income estimates really are, such a comparison is meaningless. In 1939 the value of our entire wheat and cotton crops added together was less than l½ percent of the then national income. The entire annual coal output of this country, bituminous and anthracite, is valued at less than ½ of 1 percent of the national income. But if this coal output were suddenly to stop, or if it were all shipped to Europe, we would not retain the other 99½ percent of our national income. The greater part of American industry would simply come to a halt.
Our economy is a closely interdependent living organism. If a man loses his right hand or his left lung you do not console him by measuring the loss merely as a percentage of his total weight. Shylock’s little joke was that his single pound of flesh was to be taken “nearest the heart.”
Our exports under the Marshall Plan must be measured, not in terms of abstract percentages, but in terms of where they impinge and on what they will do to our entire economy. We are not shipping out 2 or 3 percent of our wheat crop, but 40 percent. Such shipments have sent wheat prices and food prices skyrocketing, have boosted everyone’s cost of living, and have already put great distortions and strains on our internal economic relationships. It is time we heard the last of this belittling and meaningless 3 percent figure.
I must return, finally, to the general point I have made repeatedly both in previous columns and in my book Will Dollars Save the World? The Marshall Plan is based on the mistaken belief that the present economic troubles of Europe are chiefly the result of war destruction.
But the truth is that Europe’s economic crisis today is chiefly the result of its own postwar collectivist and inflationary policies. So long as its governments continue these policies, no aid that America could grant would be adequate to bring recovery. But if Europe returns to free markets and sound money, a dramatic revival could take place even without any further government financial aid from us, except food till the next crop comes in.
LINDLEY’S REBUTTAL:
The patient is recovering from compound fractures of all limbs, concussion, and double pneumonia, in an under-heated room and on an inadequate diet. Hazlitt’s diagnosis is: boils and incomplete mastication. He rebukes the patient and prescribes: no more food until you have proved that you have learned how to chew it thoroughly. The result of this “cure” can only be death.
There is general agreement about some of the financial and economic steps that should be taken in Western Europe. The most important are pledged or inherent in the Marshall Plan. But even if Hazlitt’s advice were followed to the last tittle, it would be fantasy to suppose that Western Europe could become self-supporting without a further infusion of working capital. I have cited some of the important reasons. There are many others, including Russian control of Eastern Europe and Communist activities within Western Europe.
To support his thesis that we cannot afford ERP, Hazlitt takes as an example food, especially wheat. There is no intention of continuing the wheat exports at this year’s exceptionally high level, occasioned by the worst crop weather Western Europe has had in decades. Wheat exports scheduled under ERP are much smaller—300,000,000 bushels at the highest, as against the 500,000,000 in this crop year.
Overall food exports projected under ERP are lower in recent years. And, literally, they do not include for Europe a single pound of edible flesh, except horse meat.
In this space I can touch on only one more point. Hazlitt appears to feel no basic difference between Communists and Socialists. Even if the latter are wrongheaded in their economics, they are on our side in the critical struggle to save Europe as a community of free peoples. They stand as a bulwark against Soviet Communist ambitions. That is why Cominform assails Attlee, Bevin, Blum, and others so ferociously as enemies of the working class, just as it assails others who support the Marshall Plan but not those who, like Hazlitt, are against it.
February 2, 1947
The politicians insist that this country needs most of all new and better rental housing. To encourage this, they penalize and punish most of all precisely the people who have supplied us with the rental housing we already have. Rents are today only 15 percent above the 1935–39 level, though clothing is 90 percent above and food 103 percent above. All items together average 65 percent above. Compared with the increase of 15 percent in rents, average weekly wages of factory workers have increased 127 percent. In short, the average worker’s rent is a smaller percentage of his income than ever before. Yet President Truman recently called the rent rise an “intolerable strain” on family budgets. And if Washington seems agreed upon any one thing, it is that rent control must be extended unimpaired.
The defense offered for rent control is that the supply of housing is “inelastic,” and that higher rents, except those permitted on new housing, do nothing to encourage the construction of new housing. (Though we were once insane enough to put rent ceilings even on housing not yet built.) This defense overlooks the fact that compulsory low rents on old housing do two things. They encourage wasteful use of space by tenants already in possession, and so intensify the housing shortage for people unlucky enough to be caught outside. And they remove both the incentives and the funds to improve old houses or even to keep them in repair.
The classic illustration of these consequences today is in France. France has now had rent control for 33 years. Tenants in France now pay from 5 percent down to as little as 1 percent of their annual incomes for rent. The result is that houses in France are in a wretched state of disrepair and decay, inside and out. And their condition steadily grows worse. It is true that newly built houses are not subject to rent control. But builders no longer trust the government not to change its mind about that after the houses are up.
Moreover, though rents in France average only five times as high as in 1914, building costs are 65 times as high. New buildings, therefore, would have to rent for something like ten times the rent of old buildings. A public habituated to ridiculously low rents would resent this as an outrage. So the new houses are not built.
The longer rent control is retained, the greater its problems become; and the greater the problem of ever getting rid of it. How can we keep ourselves from going the way of France?
This is a political problem. Congress is now certain to extend rent controls. When it does it should at least provide that on and after March 1 any state in the union, or even any home-ruled town or city, will be permitted to take over rent control from the Federal government at its own request. That would relieve Congress from a frightful future headache. More importantly, for those to whom such things still matter, it is the only constitutional thing to do. There is not in the American Constitution a single clause that could possibly be interpreted to give the Federal government the right to regulate rents in peacetime. If rents are not essentially local, nothing on earth is local. Houses and apartments don’t wander across state lines.
To discourage individual states and cities from keeping rent control indefinitely, as in France, Congress might provide or recommend that any community taking over rent control should taper it off in not more than five years under some such formula as this: In 1949 it should allow rents to be raised at least 20 percent as much above the 1941 level as all other items on the official consumers’ price index had gone up as of Sept. 15 of this year; in 1950 it should allow rents to go up 40 percent as much as other items; in 1951, 60 percent as much; in 1952, 80 percent as much, and in 1953 just as much, with a termination of rent control thereafter.
This, of course, for five years would be obviously unfair to landlords as compared with other producers or sellers, but not as unfair as retention of the present system. And it would get us back to free rents at least eventually, on a definite schedule, and with a minimum jolt to tenants.
February 9, 1948
On Jan, 25, the French Government slashed the official value of the franc from 119 to the dollar to 214. At least the same time it also permitted the establishment of a free market in the franc in terms of the American dollar.
This step brought consternation to British Government circles and to the International Monetary Fund. For it will expose not only the weakness of the pound, but the unworkability of the whole system of world exchange control that the fund was set up to maintain.
The fund declared that it did not object to the devaluation of the franc to a more “realistic” rate, but that it did object to “a discriminatory multiple currency practice.” It admitted, however, that it had “serious reservations regarding a system involving fluctuating rates.” This was equivalent to saying that it doesn’t like a free market.
The fund is based on a false concept of what constitutes “stability.” The only real stability for exchange rates is one that rests on confidence. This was provided by the old world gold standard. When each currency unit was convertible into a fixed quantity of gold, the value of each currency unit could be expressed as a fixed ratio of every other. When the world gold standard was abandoned, nothing was left but pieces of engraved paper within each country, which necessarily bore an uncertain and constantly fluctuating relationship to the value of the other pieces of paper. The fund was set up to maintain the colossal fiction that each currency is worth, in terms of other currencies, what the government that prints it says it is worth. Instead of real stability resting on confidence, the fund and its members have tried to substitute the fiction of stability resting on coercion. The governments fix the values of their currencies by fiat: and then call out the police to put anybody in jail who dares to express through his purchases and sales a different opinion.
Of course mere paper currencies, constantly fluctuating in the market, are far from an ideal system of foreign exchange. But a free fluctuating market is at least incomparably better than the mere fiction of stability maintained by the police power. A free market adjusts supply and demand. It daily tells the world what different currencies are really worth. It would end the so-called dollar scarcity. It would end inconvertibility, and with it the present hocus-pocus about “hard” currency areas and “soft” currency areas. It would restore the balance of imports and exports. It would restore multilateral world trade. The British could get dollars by selling to France or China, for example, just as easily as by selling direct to us. And only free markets could guide governments in finding the level on which they could finally stabilize their currencies on a solid gold basis.
British officials are dismayed by the French action because it exposes the pretenses of the pound. The pound isn’t worth $4. This is the bitter truth that the British Government has so far refused to face. The present fictitious value for the pound is not merely exposed but imperiled by the French free market.
How will the British be able, without French help, to prevent Americans from buying francs, say, at 340 to the dollar, and then exchanging the francs at the new official rate of 864 to the pound, thus buying pounds for the equivalent of $2.54?
America ought to be the last country to want to continue the present system of exchange control and overvalued currencies. It is we who have been asked to foot the bill. It is we who are financing—and are asked to continue to finance under the Marshall Plan—the chronic deficit in European trade which these overvalued currencies bring about.
The French action is the first major crack in the present world system of exchange control. This system is the keystone of the present controlled and dictated economies. France will soon find that it must either retreat to strict exchange control and economic totalitarianism, or push on farther toward a free economy. Its decision may be crucial for the world.
February 16, 1948
Last week’s break in commodity prices was not mysterious. The key was wheat. In recent weeks the prospects of the world’s wheat crops, at home and in Europe, had been steadily brightening, and the crops being harvested in the Argentine and in Australia had proved greater than expected. The good news was reflected in prices belatedly, because the world had formed the habit of thinking only in terms of shortages.
Nor was it mysterious that the break, when it came, should have been violent. So was the rise. When March wheat sold at $3.15 a bushel in Chicago in mid-January, that price compared with only $2.06 a year before. Even last week’s break brought the price down only to $2.56. The demand for wheat has always been highly inelastic. Gregory King in the seventeenth century estimated from records that a deficiency in the wheat harvest of one, two, three, four, and five tenths would raise the price three, eight, sixteen, 28 and 45 tenths respectively. Just as a world shortage (combined with our foreign-aid policy) brought a disproportionate rise in price, so the prospect of alleviation of the shortage brought a substantial fall.
For physical, financial, and psychological reasons, the break in wheat precipitated the break in other farm commodities, and even in stocks and metals. Wheat can substitute for corn as a feed. Meat is extremely sensitive to the price of feedstuffs. The meat industry, moreover, had been having its own troubles.
Retail sales had been falling off. Stocks in storage had mounted from 554,000,000 pounds a year ago to 857,000,000 on Jan. 1 last. This was brought about in large part by the Administration’s predictions of a still greater meat shortage and still higher meat prices, used to bolster its demand for rationing powers. The moment a Senate subcommittee turned down the meat-rationing proposal, wholesalers started to unload. This was one more example of the way in which government controls, or threats of them, have exactly the opposite result from the one the planners are trying to bring about.
On the very day when prices were sensationally collapsing all around him, President Truman was lecturing the White House reporters, with the help of charts, on the dangers of further “really alarming” price rises. Just as he and his planners were fearing “deflation” two years ago, he now chose to get really alarmed about inflation in the midst of the greatest postwar price decline. To add to this record of spectacular mistiming, he predicted a possible “crash.” In such a situation particularly this was reckless and irresponsible.
That the general price decline will in any way parallel the great collapse of 1920 seems quite unlikely. The fact that money and bank credit have more than tripled since the start of the war should alone prevent any such consequence. Rightly handled, the fall in the price of foods could prove wholesome. It could restore a more normal relationship to other prices. It could reduce the pressure for a third round of wage increases. It could bury the foolish proposal for a return to price fixing.
The real danger at this time, in fact, is not a continued precipitous general fall in prices. It is rather that Washington may now feel falsely assured that the inflationary threat is definitely passed, and that the politicians may once again return to their always more congenial theme that they really need to protect us from “deflation.” Even before last week’s break the political situation had become demoralized. Republicans and Democrats were competing with each other in adopting policies that could only mean further inflation. The Administration had brought in a budget of $40,000,000,000; it was proposing more than $9,000,000,000 for foreign aid alone; it was determined to keep down interest rates by supporting government bonds. Congress, on its side, was shoveling out still bigger grants to veterans while proposing to cut taxes $6,500,000,000. Most of these things were being done with a bad conscience. The danger of the price fall is that it may be made the occasion for rationalizing such reckless inflationary measures as a patriotic “anti-deflation” policy.
February 23, 1948
Nothing could be more disheartening than Secretary Marshall’s defense even at this late day of the continued dismantling of German industrial plants. Mr. Marshall himself declared only a few months ago that the restoration of Germany, “the heart of Europe’s economic life.” was essential to European recovery. The New York Times points out that of the 918 plants scheduled for dismantling, including those of the French zone, nearly 600 are in no sense war plants, but include facilities for urgently needed farm machinery, tractors, mining machinery, and locomotives. The Dutch Government has vigorously opposed the dismantling of German plants which can be used to produce peacetime goods. The Harriman Committee declared that the situation in Western Germany, “the most disorganized area in Western Europe,” called for “radical reforms of the policies which the United States has been sponsoring.” The Herter subcommittee of the House has asked that we suspend wholesale dismantling of German industry. In his report to President Truman last March, former President Hoover declared that “the removal and destruction of plants (except direct arms plants) should stop. . . . We can keep Germany in its economic chains, but it will also keep Europe in rags.”
At best the continued dismantling and “transfer” of German plants require scarce labor and bring to an absolute halt, for the months or years that the process requires, the production of which the dismantled factories were capable. And this production is never in fact restored. Industrial machines and plants cannot be casually torn from their foundations and shipped around a continent like so many trailers. They are parts of a much greater integrated whole, vitally tied to each other, to localities, to markets, to sources of raw materials and means of transportation, and manned by trained and specialized local labor and management.
It is senseless to defend this preposterous policy of dismantling by an appeal to the Potsdam Agreement, which Russia has repeatedly violated. Even under that agreement, in fact, all dismantlings and removals were to be completed by Feb. 2 of this year. It is even more senseless to argue that we must continue this idiocy because Britain and France insist on it. It is we, we in America, who are paying the bill. It is we who are pouring hundreds of millions a year into Germany and are scheduled to pour in billions of dollars more to make up for the destruction that we ourselves help to carry on. It is we who are being asked to pour $17,000,000,000 more of the American taxpayer’s money into Europe, largely to make up for the consequences of this destruction not merely to Germany but to the whole European Continent of which it is an inseparable economic part.
The very least we should require of the British and French Governments in return for our help is to abandon their shortsighted insistence on this policy of destruction. We cannot reestablish a solvent and productive Europe without a solvent and productive Germany. We must put revival before reparations. And in any case we will get most reparations out of the income from current German production. Let us take a reasonable percentage of the golden eggs instead of stupidly ripping the insides out of what was once the most productive goose in Europe.
It is not only in Germany that we are shoveling out the American taxpayer’s money for recovery with one hand and imposing economic strangulation with the other. That is merely our most fantastic inconsistency. We are also paying for recovery in France at the same time as the French Government itself is trying to bring about what it calls “a controlled slump.” With what is left of our loan, with the resources of the International [Monetary] Fund, and with additional billions of proposed Marshall dollars, we are helping the British to maintain an artificial level for the pound and an exchange control which systematically strangle multilateral trade, free enterprise, and world recovery. American resources are not merely being thrown away. They are being used to throttle production.
March 1, 1948
In this column of Jan. 12, concerning the 100th anniversary of the Communist Manifesto, incidental attention was called to the striking similarity between the theory in that document that capital accumulation, the use of machinery, increases “the burden of labor” and “forces wages down almost everywhere,” and this sentence from the second annual report of the President’s Council of Economic Advisers: “The accumulations of capital over the years have in fact involved deprivations of the rank-and-file worker.”
It ought not to be necessary at this late day to point out why this Marxist doctrine is nonsensical. It is not the worker, but the capitalist, who is deprived of that much current consumption when the latter puts aside savings to invest them. And the effect of this investment, as illustrated above all in America, has been enormously to increase the quantity and improve the quality of the tools at the disposal of the worker, enormously to increase his productivity, and hence enormously to increase his wages and the goods available for all of us as consumers.
The real question we have to ask ourselves is how such an unadulterated Marxist doctrine got into the report of the Economic Advisers. This was no accidental sentence. It was part of a report which reveals throughout an underlying distrust of precisely that “free competitive enterprise” system which the council was specifically created by law to “foster and promote.”
Neither is the slurring reference in the report to “the so-called free market” accidental. Neither is the doctrine—also Marxist in origin—that the “cream” of American industrial production has “in large measure gone to the relatively few”; that the rest have been “subsisting on skim milk”; that “the small number of the well-to-do will not be able to absorb the possible output of consumers’ goods; nor can they go on indefinitely accumulating ownership of the surplus above their consumption needs and investing it in ever-enlarging plant for future expansion of goods for some restricted part of the population.” This is blandly written in an official document in the United States of 1948 which has achieved the greatest mass market in human history for food, clothing, automobiles, radios, refrigerators, and a thousand luxuries and refinements that a king could not have dreamed of owning a century ago.
This annual report of the Economic Advisers must be read in connection with the recent Economic Report of the President, which under the law the advisers “assist and advise” him in preparing. In neither is there any serious grappling with the central economic problem that now confronts the country—inflation. The word, of course, appears often enough. But nowhere is there any frank admission that the dominant cause of inflation has been the tripling of the nation’s money supply—its currency and bank credit—since the outbreak of the war. The references to inflation are self-contradictory. “The nature of the inflation from which we are suffering,” says the President at one point, “arises in part from the total excess of buying power over the available supply of goods.” But a few pages farther on he demands “enough buying power to absorb the output,” and declares: “For balanced expansion, our economy requires a larger flow of income to consumers.” In other words, more inflation.
Throughout both reports the blame for almost everything that has gone wrong or could go wrong is by implication put on the American businessman. “I strongly urged businessmen,” writes Mr. Truman, “to bring prices into line.... Business should reduce prices wherever possible.” And so on. Yet he does not complain that farm prices are too high though the official statistics show that farm prices had risen in the week his report was issued 208 percent above 1939, whereas manufactured products were up only 96 percent.
The Council of Economic Advisers has dissipated whatever reputation for detachment or objectivity it may once have enjoyed. It now apparently regards its function as no better than that of providing, at the taxpayer’s expense, a “scientific” veneer for Candidate Truman’s campaign arguments.
March 8, 1948
Whenever it is shown that, unless Europe abandons inflation and collectivism, the Marshall Plan is unlikely to bring the economic revival that its supporters expect of it, one of them is sure to reply that it is not to be judged primarily as an economic but as a political plan. Politics is somewhat outside of this column’s province. Yet it has always seemed to me that it is precisely as a political program that the Marshall Plan most obviously falls short. It seems to rest on the pleasant illusion that if we pour enough of the American taxpayer’s money into Europe we need never make the hard diplomatic decisions, or take the unequivocal and unyielding stand, that might otherwise seem the only reply to relentless Russian aggression. It helps to support the fatal assumption that dollars can buy anything, including liberty, democracy, and peace.
Surely the fate of Czechoslovakia and Finland ought to destroy these iridescent illusions forever. It has been officially estimated that the funds we are asked to contribute under the Marshall Plan would be equivalent to 3 to 5 percent of the national production of the sixteen recipient nations. Suppose that the plan had already been in operation, that Czechoslovakia had been a beneficiary under it, and that its living standards had been raised 3 to 5 percent, or even 10 to 20 percent, above the levels that they actually reached. Does anyone seriously think that the present tragedy would have been averted? In fact, as The New York Times has pointed out: “It is an ironic sidelight on postwar history that Russia’s latest prize was put on its feet by nearly a quarter of a billion dollars advanced by the United States.” The theory that Communism takes over poverty-stricken countries, but is powerless elsewhere, no more explains the fate of Czechoslovakia than it does the Wallace vote in the Bronx.
Is it not clear at last that far sterner means than “economic aid” are needed to combat world Communism? At the very least, the fate of Czechoslovakia ought to expose forever the futility of trying to appease Stalin, of “trusting” him, or trying to “do business” with him. Yet we continue to pour goods into one end of Austria while Stalin pulls them out of the other. We are still anxiously trying to get his worthless signature to still more worthless agreements.
As for the purely economic aspects of the Marshall Plan, it is becoming increasingly evident that Europe’s need is less than has been represented. While its need for foodstuffs is still serious, its new crops, expected to be far superior to last year’s, will be harvested five or six months from now. As for most other needs, The New York Times published a dispatch from Geneva on Feb. 2 which declared: “In every case, experts [of the United Nations Economic Commission] have found that the European shortages—both over all and country by country—were much less than the governments alleged and less than expected a few months ago.... It has been known for a long time that several, some think most, countries in Europe now have a greater total of goods and services available for consumption and investment purposes than before the war.”
Another warning comes from Roy Harrod, an economist at Oxford and author of a recent volume called “Are These Hardships Necessary?” In The London Banker for December he writes: “There is a fallacy which has taken root in Europe which may be very dangerous precisely because it has a strong appeal for Americans. This is that large-scale capital reconstruction is necessary for the revival of the economies.... We must seek to disillusion the Americans of the idea that Europe cannot survive unless she embarks upon a large-scale capital modernization program. This is likely to waste American assistance and intensify all the specific difficulties which arise from the inflationary pressure throughout Europe. It will defer recovery in the vital matters of currency reform, the restoration of circulating capital, and the revival of productive effort.”
March 15, 1948
The strength of the Marshall Plan is its strength as a symbol. It is a token of America’s generosity and good intentions, of our concern for the future of Europe, of our desire to halt the spread of Russian Communist aggression. The weakness of the Marshall Plan is that it is not in fact the appropriate means for securing its intended aims.
Now that the political realities are at last becoming obvious to all, it is clear that further disasters can be halted only by a union of Western Europe. Probably most Americans now favor this. But we still fail to recognize that such a union can be effective only with our own participation and unequivocal military guarantees.
Our present attitude toward collective security illustrates our national habit of smugly prescribing for others medicine that we do not dream of taking ourselves. Another illustration is our attitude toward customs unions. We praise Benelux. We urge other free nations of Europe to form such unions. But never at any time do we seriously suggest that we ourselves join such a union.
Yet we should seriously consider joining a customs union, if only for the educational value of such an idea. From the moment we considered doing this ourselves, we would have a better understanding of the obstacles and hesitations in Europe. At home a hundred vested interests would rise in protest. And their protests could not be lightly dismissed, even if we considered the matter solely from the standpoint of the general welfare.
For under the cover of tariff protection there has grown up in this country a specific structure of production, a certain relationship of the size of each industry to every other. A customs union would mean an eventual increase in efficiency, production, and consumer welfare. But it would also mean a substantial alteration of our own structure of production, with attendant heartaches and tragedies for particular producers and workers. If we wished to soften the shock and minimize the costs of transition, the customs union could not be put into full effect except by gradual stages.
Clearly, also, the wider we attempted to make such a union, the greater would be its difficulties. The problem would be difficult enough if we proposed a union with Canada alone. It would be much more complicated if we attempted also to include Great Britain or the whole British Commonwealth. It might seem insuperable if we tried to bring in Europe or Latin America.
But all this is no reason for not making a start. For the benefits to efficiency and trade, enormous as these were, would be perhaps the least of the benefits of a customs union. They would be exceeded by the value of the economic and political by-products. A customs union would be impossible without many other reforms. It could not work unless the currencies of the member countries were freely convertible into each other in any amounts at fixed rates; and this in practice would mean that these countries must be on a free gold standard. It would not work if any member government imposed price control, or if one imposed different prices from another, or if prices in one nation differed from those in another except by costs of transportation.
This means in practice that the member countries would either have to form a complete political union or that they would have to permit free markets. And this would mean that no member government could impose the present fashionable strangling network of price controls, rationing, allocations, exchange control, blocked currencies, bilateralism, prohibitions on capital export, import and export licensing, crushing and confiscatory taxation, constant threats of government expropriation, and all the rest. For the moment one member government adopted any part of this network, the customs union would either break down or become in fact a pretense and a fraud. A customs union is the most important single step that could be taken, apart from a military alliance, to bring that federation of free nations which is the only alternative to disaster.
March 22, 1948
If the Republicans and Democrats in Congress were not mainly engaged in trying to outmaneuver each other for votes, and if they understood the real economic situation that confronts them, they would be debating an entirely different measure from the present tax bill. They would try to apply the ax first of all not to taxes but to expenditures. If they concluded that overall spending could not in fact be substantially cut, they would not be planning an inflationary slash in taxes of $4,800,000,000 to $6,500,000,000.
But they might be considering, not how many voters could be exempted completely from income taxes in order to support a short-lived illusion that the present enormous tax burden can be borne by a minority, but how far excessive tax rates on high incomes should be reduced to restore incentives to production and investment. For the funds that the present income-tax structure takes are precisely those that would have gone principally into investment—that is, into improved machines and new factories to provide that increased labor productivity which is the only permanent and continuous means of increasing wages. An even more important effect of taking so much of the taxpayer’s earnings, in fact, has been to diminish or remove the incentives to bring such earnings into existence.
About a year ago in this column (April 7, 1947) I presented a table, based on income-tax returns, which brought out some striking facts. In the period between the three years 1926–28 and the year 1942, our total national income increased 58 percent. But total incomes over $300,000 fell in that period by 77 percent. If individual incomes in each group had risen by the same percentage as the national income, total incomes over $300,000 would have risen by a much greater percentage (because all incomes previously above $190,000 would in 1942 have been counted among incomes over $300,000). Yet even if the aggregate of such $300,000 incomes had simply risen in proportion to the whole national income, the total of such incomes in 1942 would have been seven times greater than it actually was.
The top rate applicable to incomes over $300,000 in 1926–28 was 25 percent. The top rate in 1942 was 88 percent. We are justified in assuming that the main cause of the shrinkage in incomes over $300,000 was precisely this increase in the top rates. If the upper income brackets had continued to be taxed at only 25 percent, and if these incomes had increased in the aggregate no more than the national average, the yield to the Treasury would have been about 50 percent greater than it actually was at a tax rate of 88 percent.
In other words, the extremely high income-tax rates are self-defeating. Few people realize how drastically revenues from the high incomes have shrunken. Today the combined normal and surtax rate (after the 5 percent reduction) is 50 percent on all net income between $18,000 and $20,000. Suppose the combined rate stopped at this level, instead of mounting progressively on higher income brackets to a maximum of 86½ percent. What would be the effect on total revenues? Calculations furnished to me by the Tax Foundation indicate that the loss of revenue—if incomes above $18,000 remained unaffected—would be about $1,095,000,000 for the fiscal year 1948–49. This would be less than 5 percent of total individual income-tax revenues and less than 2½ percent of total budget receipts.
Obviously, however, incomes above $18,000 would not remain unaffected by such a drastic cut in top-bracket rates. Such incomes would expand far beyond what they otherwise would be. Treasury revenues would actually be higher with a top rate of 50 percent than with a top rate of 86½ percent.
But far more important than the effect on Treasury revenues would be the effect on national welfare. The national income would be higher not because the high incomes themselves would be larger; but mainly because the lower rates would both permit and encourage high investment. It is this investment that would raise national production and real wages. In our efforts to soak the present rich we have been soaking the future poor.
March 29, 1948
The February increase in steel prices was badly timed and ineptly handled. But the most disturbing result was the nature and violence of the political reaction.
What had happened? A price rise of about 10 percent had been put into effect on less than 10 percent of the total output. The result was an average composite increase in steel prices of about 1 percent. Yet this increase touched off a deluge of denunciations and investigations.
The report of the Department of Commerce to the President helps to set the matter in its true perspective. The composite index of quoted prices for finished steel, it points out, has risen about 40 percent above the level of 1939. As compared with this, average hourly earnings of steelworkers in the same period increased 80 percent. The cost of the steel scrap that the companies must buy increased 150 percent. The cost of coking coal went up 136 percent. Where the wholesale price of steel mill products had risen in February by 43 percent above the level of 1939, all commodities at wholesale had risen 108 percent. Farm products alone, even after their break from January, had risen 179 percent.
The report points out that the rate of return on stockholders’ investment in leading steel companies declined in 1947 from that of 1929 while that of all manufacturing corporations increased. “The rate of return on sales for the primary iron and steel producers was lower in 1947 than in the ’20s generally and was only one-half of the 1929 ratio. It was also somewhat below the years 1937, 1940, and 1941.” Moreover: “The retained earnings of the steel producers have been below the amount necessary to cover their net plant and equipment expenditures.”
The Council of Economic Advisers, on the other hand, seems determined to make the steel industry a scapegoat. As a result its report is full of inconsistencies and non sequiturs. It admits the industry’s “moderation in price making,” but blames it for adding to “inflationary pressures.” It admits that “our rate of economic growth will suffer if the steel industry does not find it possible or profitable to improve and expand with the rest of the economy.” But the effort to modernize and expand the steel industry, it fears, would increase inflation; therefore, one gathers, the industry shouldn’t modernize or expand now and shouldn’t be allowed to earn enough now to modernize and expand later.
“It is futile,” the council continues, “for the steel industry to issue a call for restraint in the matter of wage negotiations at the same time that it is itself raising prices.” This seems a tip-off to the steel unions that the council would regard them as justified in asking for a further wage increase, particularly as it neglects to reiterate that even when we include the recent 1½ percent steel price rise, steel wages have already risen since 1939 twice as much as steel prices.
The political reaction to the steel price rise represents, with a few honorable exceptions, the triumph of demagogy over objective analysis. Though wages and wheat have risen far more than steel, politicians still talk up wages and wheat while denouncing the steel industry for an awkward effort to catch up. Higher wages and higher farm income are treated as virtuous and welcome, but higher profits as a disaster and a sin. There is little recognition of the function of profits both as an incentive to production and a source of capital expansion. Industrial prices are discussed as if businessmen fixed them arbitrarily, depending upon how much they felt like restraining their greed. Inflation is blamed on private industry. The report of the Economic Advisers does not even mention the basic cause of inflation, which is the tripling of the money supply since the outbreak of war and the government’s continued cheap-money policy.
The council distrusts the free market. It wants a return of price control—on the assumption, no doubt, that if the economic system were put completely in the hands of the bureaucrats everything would be as perfect here as it is in England.
April 5, 1948
Demands for a third round of wage increases are based on the argument that the rise in living costs has outstripped the rise in wages. Official figures show, on the contrary, that between 1939 and February of this year average hourly earnings of manufacturing workers increased 104 percent, and average weekly earnings 119 percent, while the cost of living went up only 69 percent. Only by selecting as a base of comparison June 1946, when the relationship of wages to the cost-of-living index was most favorable, can the union leaders show a slightly greater rise in living costs than in wages. And we must remember even here that the cost-of-living index under price control was largely fictional. It made no adequate allowance for black markets, unobtainable goods, and deterioration in quality.
It is, moreover, precisely the labor unions already best off that now take the lead in demanding further gains. Average weekly earnings in 25 manufacturing industries in December were $52.74. But in the iron and steel industry they were $58.20; in meat packing, $61.57; in the printing trades, $63.57; in the automobile industry, $65.47; in anthracite mining, $67.42, and in bituminous-coal mining, $75.22. Incidentally, weekly wages in the soft-coal fields were 211 percent above their 1939 level.
Such comparisons call attention to the fallacy of lump thinking about wages. That fallacy is made graphically clear in a study of the “Behavior of Wages” just completed by Jules Backman and M.R. Gainsbrugh for the National Industrial Conference Board. This study reveals not only that it is undesirable to try to impose blanket wage increases on the American economy, but that, contrary to common belief, we have never actually had such uniform increases, even in the recent past. It is widely believed that the first round of postwar wage increases was a uniform advance of 18½ cents an hour. A survey of 153 industries, however, in the period from September 1945 to February 1947, shows advances ranging from only 5 cents an hour in some industries to 30 cents in others. Out of 15,800,000 workers, only 3,700,000, in fact, were in industries which received average increases ranging between 17.5 cents and 20 cents an hour. Some 6,000,000 workers received less and some 6,000,000 received more.
From 1929 to 1939, to cite another illustration, 25 manufacturing industries show an average increase of 22 percent in hourly earnings. But the average rise was different in every one of these 25 industries, ranging from 3.6 percent in the lowest to 37.1 percent in the highest. The diversity is similar no matter what period we take.
We must remember, finally, that the wage-increase figure for each industry is itself an average. It conceals the diversity of increases among individual firms in that industry. The average increase in each firm, again, conceals the diversity among individual wage increases.
Today efforts are being made everywhere to impose an arbitrary uniformity on wages. All such efforts impede the functioning of a free economy. When a union imposes uniform wages within a single firm, regardless of differences between individual workers in merit, skill and output, it reduces or destroys individual incentives to improvement and production. When industrywide unions impose uniform national wage scales they retard or prevent the growth of industry in the South and in small towns. When government seeks to impose a national uniform increase in wages, it destroys the free market mechanism of fluid adjustment of prices, wages, and synchronized production. It prevents expanding industries from attracting workers by offering relatively higher wages while it forces violent adjustments on less profitable industries.
An attempt to impose a blanket third round of wage increases now would bring further distortions in our economy. Unless it were offset by still more monetary inflation it would mean dangerously excessive production costs which would either wipe out profit margins or force up individual prices to levels that would contract demand. In either case the result would be unemployment.
April 12, 1948
In spite of the persistent smear campaign against the Taft-Hartley Act, experience has shown it to be incomparably superior to the Wagner Act that it supplanted. Strikes have been fewer, most union demands more moderate, and union leaders less highhanded. The improvement is so great that it takes the appearance of some new crisis, like the walkout in the coal fields, to remind us how defective our labor legislation still remains. Yet the way toward labor peace is not through more laws and more government coercions, but through more freedom.
The Taft-Hartley Act is after all only an amendment to the Wagner Act. It retains what was centrally unsound in the original law. It keeps nearly all the Wagner Act’s legal compulsions on employers, but tries to balance them by equivalent legal compulsions on unions. When this fails to bring the results desired, sponsors of the Taft-Hartley Act can only think of additional compulsions. Thus Congressman Hartley himself wants to make violence in labor strikes a Federal offense. It would be difficult to imagine a worse remedy. It is clearly unconstitutional. It would usurp the police functions of the states and cities.
It is clear, on the other hand, that the continued arrogance of John L. Lewis, his continued power, which he seems eager to demonstrate afresh each year, to bring the country’s industry to a slowdown or a halt by merely knitting his bushy brows, is not a power that he possesses in spite of existing Federal law but because of it. John L. Lewis is a Frankenstein monster blown up to his present size by Federal protection. He was not always so big. The Lewis coal strikes of 1927 and 1932 collapsed completely. The result of Lewis’s recklessness in those years was to leave his mine union shattered and prostrate—until he and it were put back on their feet, first by the NRA and then by the Wagner Act of 1935.
The mighty monopolistic weapon which the Wagner-Taft-Hartley Act has placed in the hands of the Lewises, Murrays, Reuthers, and Petrillos is the legal compulsion on the employer to recognize and bargain with huge industrywide unions no matter how contemptuous their conduct or fantastic their demands. All that is needed is to withdraw this compulsion. This would not illegalize industrywide or nationwide unions. Such unions would then occupy the same status under the law that foremen’s unions now occupy under the Taft-Hartley Act. They could continue to exist, but the employer would not be legally compelled to recognize or bargain with them. Section 9 (b) of the existing law provides that the labor board “shall decide in each case whether... the [employee] unit appropriate for the purposes of collective bargaining shall be the employer unit, craft unit, plant unit, or subdivision thereof.” The mere removal of the two words “craft unit” would not illegalize such units; it would merely take from the board its power to force employers to recognize and bargain with such industrywide units.
Two other changes in the law are necessary. One would remove the legal requirement on the employer to continue to recognize or bargain with a union that resorted to mass picketing, threats, and violence. The Federal authorities should make no effort to stop these. That should be left wholly to the local police. But at least the Federal government should remove the implied sanction it now gives to such tactics when it continues to make it obligatory on an employer to bargain with unions that resort to them.
Finally, the compulsion should be removed from the Wagner-Taft-Hartley law which in effect prevents employers from discharging strikers. The Federal government should not illegalize strikes; but neither should it encourage them by removing the risks involved.
If these coercions on employers were modified or removed, the Taft-Hartley Act could also modify or remove the ill-advised coercions it has imposed on unions—in connection, for example with political expenditures and 80-day waiting periods. In spite of the present Federal injunction against John L. Lewis, it is doubtful whether most of these coercions can be enforced.
April 19, 1948
Two days after the Marshall Plan was safely enacted the Economic Commission for Europe released “the most complete and thorough study” on European recovery. This report, according to a Geneva dispatch to The New York Times, “contains the facts and analyses that Congress wanted before acting on ERP but could not get because they did not exist. It contains powerful ammunition for those who believe that many of the troubles of Western Europe are due to the pursuit by governments of domestic policies encouraging a continuation of the dollar shortage . . . rather than industrial weakness or even losses and changes due to war.”
The report shows that total commodities available for home use in Europe as a whole, excluding Germany, had reached 96 percent of the prewar level on a per capita basis by 1947. Six European countries had more goods per capita than in 1938. All this did not prevent the cartoonists who were supporting the Marshall Plan here from invariably picturing present-day Europe as a starving old woman in rags, waiting to be rescued from death while pompous congressmen had the callousness to debate the problem.
“With the exception of Britain’s, every [European] country’s foreign balance of payments has been moving steadily away from equilibrium largely as a result, the survey finds, of continuous inflationary pressure combined with artificially overvalued exchange rates.” Even the exception of Great Britain here hardly seems to harmonize with the recent statement of The London Economist that the British economy “is now using up its last reserves.”
Yet what are the British doing—or being allowed to do—to help themselves? In Sir Stafford Cripps’s budget message we have part of the answer. It is a new graduated tax upon the portion of a man’s income derived from investments. For example, a man with an income of £50,000, all derived from investments (whether in real estate, stocks, or even government securities), would pay a special tax of £24,000 in addition to his ordinary income tax of £45,000—making a total tax of £69,000 or £19,000 more than his total income.
Such a tax will destroy capital values and further disorganize British production. It will not only prevent saving and investment but force dissaving and disinvestment. In the long run this must reduce productivity and real wages. It seems highly unlikely that the amount of American capital which we can contribute under the Marshall Plan will be enough to offset the amount of home private capital that the British Government is destroying.
Meanwhile, even if Britain’s production should recover in spite of everything its government is doing to prevent it, this would not necessarily solve the immediate crisis, which consists in the gap in its international balance of payments. The British bureaucracy can see this problem, as it can see every other economic problem, only in collectivist terms. It has completely forgotten that individual consumers and producers, acting in accordance with free market forces, automatically solved in the past the kind of problems its own policies are now creating. It thinks bureaucrats must set “targets” for the output, import, and export of everything.
The British trade deficit is certain to be chronic as long as the government maintains exchange control with an overvalued pound. The mere attempt to offset the distortions which such exchange control brings about must lead to increasing regimentation of the rest of British economic life. Under exchange control a free economy is impossible. The only solution is to let the pound be freely bought and sold at the prices established in a free market. But this is the one solution which the Socialist doctrinaires now in control of the British economy are determined never to permit. Meanwhile our government has virtually committed itself to support this Schachtian device for four years, and to drain American capitalism for funds for British zealots to use in destroying capitalism and production in Britain.
April 26, 1948
Marriner Eccles, making his exit as spokesman for the Federal Reserve Board, recommended to the Joint Committee on the Economic Report an increase in reserve requirements for Federal Reserve member banks and the extension of reserve requirements even to nonmember banks. Senator Taft, the committee chairman, told reporters that added authority of this sort was not likely at this session of Congress.
Inaction on this subject, however, would be a mistake not only from the national standpoint, but even from the standpoint of Republican prospects in November. Unless the Republican majority in Congress itself frames and passes a positive anti-inflation program, its criticisms of President Truman’s policies will seem very unconvincing by election day if inflation resumes its progress in the next six months.
This does not mean that such a program should take the precise form that Mr. Eccles recommends. His particular recommendations are too vulnerable. But he is right on his central point, which is that inflation is primarily a consequence of money and credit expansion. A Congressional anti-inflation program should include four main provisions:
1—It should at least authorize the Federal Reserve Board, if it does not direct it, to restore the former legal requirements for 35 and 40 percent reserves in the Federal Reserve Banks instead of the present 25 percent reserve requirement.
2—It should authorize the Federal Reserve Board, as Mr. Eccles suggests, to increase the reserve ratios of member banks. Present maximum legal reserve requirements are 26 percent for member banks in New York and Chicago, 20 percent in other reserve city banks, and 14 percent in so-called country banks. Mr. Eccles suggests that these be raised to about 35, 30, and 25 percent respectively. But if something like this is authorized, Congress should stipulate that the board cannot order any increase in member-bank reserve ratios until it has first restored the previous Federal Reserve Bank ratios. Only such a provision can halt the continuous efforts of Federal Reserve officials to restrict the lending powers of the member banks at the same time as they increase the far more inflationary lending powers of the Federal Reserve System itself.
3—A comprehensive program should terminate some inflationary measures still on the books. It should repeal the Thomas greenback amendment. It should repeal sections 8 and 9 of the Gold Reserve Act of 1934, which gave the Secretary of the Treasury the power, with the approval of the President, to purchase and sell gold “at such rates and upon such terms and conditions as he may deem most advantageous to the public interest.” It might tidy up our present hodgepodge currency system by repealing the Silver Purchase Act of 1934, and by providing for the prompt retirement of Federal Reserve Bank notes and the gradual retirement of national bank notes and United States greenbacks.
4—Most important of all, an anti-inflation measure should contain a general declaration of policy on the part of Congress. This should direct the Federal Reserve Board to follow policies designed to bring a halt to any further inflationary expansion of money and bank credit. The board should be instructed to do this with care, to avoid precipitating any sudden or severe contraction of credit that could have serious deflationary consequences.
Only by such a comprehensive measure (combined with sounder expenditure and tax policies) can Congress prevent the present inflation from going farther. Only by such a measure can it take the offensive in the battle against inflation and center public attention on the fact that it is, above all, government fiscal and credit policy that creates inflation. Otherwise President Truman will continue inflationary monetary policies while declaring, as in his speech to the American Society of Newspaper Editors, that the only cure for inflation is to give him power to fix prices.
May 3, 1948
Last week, suggesting a positive anti-inflation program, I referred to President Truman’s April 17 speech before the American Society of Newspaper Editors in Washington. This speech so gravely misconceives the causes of inflation and the remedies for it as to call for some line-by-line comment.
“I cannot sit by silently while inflation continues to creep up on the American people.” It is precisely the fiscal and credit policies his own Administration has followed that have caused the inflation he wishes to combat.
“I have repeatedly urged businessmen to exercise voluntary restraint in setting prices.” Once more the effort to blame business. High prices are the consequence of inflation, not the cause.
“By last fall, it had become clear that we could not place our main reliance on voluntary methods”. The totalitarian touch: lack of faith in freedom; government coercion as the sovereign cure. Secretary of Agriculture Anderson assured the House Banking Committee on Dec. 3 that without price controls meat might reach “fantastic prices” by April or May. Meat prices on the hoof are now lower than when his prediction was made.
“The total demand for goods is still outrunning production.” Why, with production at record levels? Because “demand” means monetary demand. Whose policies have been responsible for the added money and bank credit?
“Some key prices have been increased, unwisely and unnecessarily. The outstanding case was, of course, the increase in some important steel prices.” A discredited myth. The February increase (averaging about 1 percent) left steel prices—as the report of the President’s Department of Commerce showed—43 percent above the 1939 level, compared with an increase of 80 percent in hourly steel wages, of 108 percent in all wholesale commodities, and of 179 percent in farm products. Last week’s price cuts by United States Steel virtually wiped out its earlier price increases.
“In addition to these price increases, inflation has been encouraged by some unnecessary interruptions to production. The outstanding example, of course, was the work stoppage in the coal industry.” Mr. Truman neglects to add that he was all in favor of the Wagner Act, which gave John L. Lewis power to stop the coal industry; and that he denounced and vetoed the Taft-Hartley amendments, which enabled the government to get production going again.
“Another new factor making for inflation is the bill recently enacted by the Congress reducing government revenues by $5,000,000,000.” A valid point. But Mr. Truman neglected to remind his listeners that he himself favored a tax-reduction bill more cynically political than the one passed over his veto.
[Both foreign aid and increased national defense] “can add to inflation.” Correct.
“The anti-inflation program I recommended to the Congress last November should be enacted at once. . . . It includes measures to reduce the excessive amounts of money and credit which are lifting prices.” It includes no measure to stop the government’s cheap money policy that feeds inflation: no measure to restore the former legal reserve ratio of the Federal Reserve Banks, or to repeal old inflationary legislation.
“It includes measures to deal directly with specific high prices . . . designed to hold prices down while keeping production up.” Holding prices down by coercion and ukase has proved to be the surest of all ways of holding down production. “Selective” price fixing reduces most of the production of precisely the goods that are most wanted.
It is disheartening that the President has learned nothing not only from our own postwar experience in price fixing, but from the appalling consequences of existing price control in Europe. The most important thing America can do today is to continue to demonstrate to the world the enormous production possible through free prices and free enterprise. We must not cripple ourselves by imitating the very controls that have forced Europe to turn to us for help.
May 10, 1948
Nobody can for a moment doubt that it is far from the intention of the leading democratic countries to consider as a permanent arrangement the exchange control which, contrary to the fundamental character of their peacetime economy, they have introduced today. To do so in peacetime would in fact carry their political and economic life irresistibly down the slippery slope of collectivist authoritarian totalitarianism.
These words were written in wartime, in 1942, by the European economist Wilhelm Röpke, in his book International Economic Disintegration. His faith in the strength of the liberal tradition proved in this respect sadly misplaced. Surely the British, for example, must believe that they are getting something very substantial in return for the coercion of both producers and consumers, and the sacrifices of economic freedom, that exchange control involves. Are the supposed gains in fact delusive?
At the official rate of $4.03, the pound today is overvalued. This was shown by the quick collapse of sterling convertibility (at $4.03) last summer. Convertibility will continue to be a one-way street as long as British bureaucracy insists that sterling must be bought and sold above the value that the importers, exporters, bankers, and traders of the world in fact attach to it. Wherever in the world black or free markets appear they show rates for pound notes in the neighborhood of $2.60 and for the transferable sterling in the neighborhood of $3.25.
The British bureaucrats believe that they cannot afford to allow a free market rate for the pound. It would, they say, increase the cost of imports. It would certainly do so in terms of pounds but not of dollars. And what they complain of is not a pound shortage but a dollar shortage. If the pound on a free market sold as low as $3, then a million bushels of wheat would cost British consumers, say, £800,000 instead of only £600,000 as at present. But it would still cost Britain, as before, only $2,400,000 of its dollar reserves.
The British bureaucrats argue, on the export side, that if they let the pound fall to its market level Britain would get less for its exports. This is an outright fallacy. What the British exporter gets (or in a free system would get) for his exports to our market, for example, is determined by the price he can get for them in dollars in America. In the long run this has nothing to do with the rate for the pound. If a British exporter sells 2,400,000 yards of cloth in New York at $1 a yard, he gets $2,400,000 for it. If this exporter in a free exchange market got only $3 instead of $4 for each pound, he would quickly compensate for this by an exactly proportionate increase in the number of pounds he got for the same volume of exports. Where he now, at $4, gets only £600,000 for his 2,400,000 yards of cloth, he would at $3 get £800,000 for it.
So keeping the pound coercively at $4 helps Britain not at all in solving its dollar problem. On the contrary, it is the very thing that creates the problem. For the relative cheapness with which British citizens can buy American imports in terms of their own currency unduly encourages imports. This encouragement must then be offset by discriminatory bureaucratic prohibitions against the import of specific articles.
The overvalued pound, on the other hand, discourages and reduces exports. It wipes out the price premium that the British manufacturer might otherwise have had as an incentive to export instead of selling at home. It either puts a price premium on domestic sales or compels him to overprice his exports (in terms of foreign currencies) and hence to lose potential sales in foreign markets and end up with fewer dollars.
When such consequences are pointed out, the British bureaucrats reply that as a matter of fact British manufacturers are today selling abroad all that they are physically able to produce for export. But they complain in the very next breath that their foreign-trade position is desperate. On closer inspection they will find that this is largely because, and not in spite of, exchange control.
May 17, 1948
For many years the Railway Labor Act of 1926 was popularly regarded as a model labor law. It had bought peace and prevented strikes. What the general public did not see was that this peace had been bought at an exorbitant price, not merely in open wage increases, but in government-sponsored growth of the most fantastic set of featherbed rules to be found anywhere.
Beginning seven years ago the elaborate machinery of mediation, arbitration, and “fact finding” in the act was repudiated by the very railway labor unions in whose interest it had been set up. First President Roosevelt and then President Truman conspired to undermine the prestige of that machinery and to render it useless.
The crucial precedent was established in 1941. The railway unions then rejected the pay-increase recommendations of President Roosevelt’s emergency factfinding board. In an editorial in The New York Times, the present writer posed the question: “If either the managements or the President under the threat of a strike grant the railway workers more than the President’s fact-finding board recommended, what will be the use of such boards in future?” President Roosevelt was at least aware of this dilemma and made a technical effort to escape it by referring the question to the board a second time. Ostensibly it was asked to reconsider its decision because of “new evidence,” but everyone knew that in reality the most important piece of new evidence was that the unions had rejected the first award of the board and had threatened to strike. As the present writer commented after the decision had been changed upward:
“Government boards have once more been put on notice that if they want to keep the appearance of prestige, they had better bring in the first time a decision that the union leaders are going to like. . . .
“This whole incident has proved once again that not only as against employers but as against governmental recommendations it is not a disadvantage for a union to threaten to strike, but an advantage. The railway unions were not penalized for threatening to hold up the national defense; they profited by that threat.”
The pattern was repeated with minor variations in 1943. This time, confronted with another strike threat, President Roosevelt did not even bother to resort to the fiction of “reconsideration” by the board. He simply by-passed and outbid all his own officials by personally granting the railway unions bigger increases than either his own emergency board or his own Stabilization Administrator had offered them. He thereby destroyed the authority of his own appointees and encouraged the unions to ignore them altogether in the future.
As a result of such government surrenders, the railway unions really began to feel their oats. In 1946 they not only rejected as a matter of course the decision of President Truman’s fact-finding board, but they even rejected the President’s personal offer of better terms. The final outcome of that episode was commonly described at the time as a “defeat” for the striking unions. But the union members themselves noticed that they were better off as a result of their strike and defiance than they would have been without it.
So here we are at the 1948 pattern. President Truman’s emergency board, after hearing evidence for 33 days, has recommended a wage increase of 15½ cents an hour. Three railway unions—the engineers, firemen, and switchmen—refused to accept this decision and voted to strike.
The only solution open to the President, if he wished to retain the Railway Labor Act, was to warn these unions that the government had no further concession to make; that if they struck railway management would be free to discharge them and to hire other permanent workers to take their place; and that essential trains would be kept running. The melodramatic, unnecessary, and dangerous device of government seizure, so often regarded as a “strong” action, has usually served in the past merely as a cloak for government surrender to union demands.
May 24, 1948
The principal cause of the present world economic crisis, with its chronic shortages of food, coal, steel, and dollars, has not been the physical destruction of the war, great as that was, but the worldwide mania for government economic controls. Striking confirmation of this in the realm of food appears in a forthcoming article by three agricultural economists (F.A. Pearson, W.I. Myers, and E.E. Vial) in the periodical Farm Economics published at Cornell University. The facts it presents speak for themselves:
The Argentine Government sells wheat for export at $5 or more a bushel in United States dollars. It pays the Argentine farmer the equivalent of $1.59 to $1.83 a bushel and pockets the difference. The Canadian farmer is allowed only $1.35 a bushel plus a “participation certificate” worth about 20 cents. The United States farmer gets a free market price of about $2.80 a bushel. (Prices cited are those prevailing when the article was written.)
What has been the consequence of these policies? In spite of the desperate world shortage of wheat, the 1947 acreage of wheat in Argentina was 22 percent below the 1935–39 level. In Canada the 1947 acreage of wheat was also 7 percent below prewar. Neither decrease can be blamed on the weather: in both countries the acreage for the two preceding years was also below the prewar level. In the United States, on the other hand, wheat acreage expanded as prices rose, and in 1947 was 29 percent above the prewar level. In brief, farmers in this hemisphere responded to price incentives or their absence rather than to verbal exhortations. The farmers obliged to take low wheat prices contracted their acreage; the farmers permitted high prices expanded it.
The article finds it “difficult to generalize about Europe with its divergent price policies, varying degrees of devastation, etc.” The only European country it specifically cites is bizonal Germany, in which the 1947 acreage of food grains was 20 percent below prewar level. I shall therefore add some supplementary material from other sources.
It is the official French doctrine that the disastrous shrinkage of the French wheat crop last year was caused solely by unprecedented frost and drought. Bad weather undoubtedly accounts for a great deal. But comparative statistics are instructive. Whereas in 1947 the French acreage harvested of the bread crops wheat and rye was 37 percent below average prewar levels, the acreage of the feed grains (barley, oats, corn, etc.) was only 14 percent below. It is hard to escape the suspicion that this contrast has something to do with the fact, pointed out by the French economist Jacques Rueff in the April issue of Foreign Affairs, that the official price of wheat in France is fixed relatively lower than that for other cereals, and that stricter measures are adopted to make the official price respected. In contrast to the government-controlled price of wheat in Canada, for example, the Winnipeg price of rye is free. On Dec. 30, 1947, rye was $4.05 a bushel, compared with the controlled wheat price of about $1.55. Result: The 1947 acreage of rye was 42 percent above the prewar level, while wheat acreage was 7 percent below.
Finally, as the economist Wilhelm Röpke writes from Switzerland in the April 29 issue of The Commercial and Financial Chronicle: In Germany “a lady’s hat may be freely sold at the equivalent of more than one ton of wheat. We can hardly expect the German farmer to sell his products forever at official prices which not only mean that he is practically giving them away, but also that he cannot go on producing them since he cannot buy with his paper money what he needs on his farm.”
In brief, the fantastic collectivist controls imposed by our own American bureaucracy in Germany have put a tremendous premium on not producing food. And in spite of its appalling results in bringing world food scarcity, President Truman insists on a restoration of price control here. That would complete the disaster.
May 31, 1948
The National Advisory Council, composed of Cabinet-level officials headed by Secretary Snyder, reminds Marshall-Plan countries that their exchange rates “will require adjustment.” Paul Hoffman, head of the ECA, thinks it “quite obvious that there should be more realistic rates of exchange.”
It is gratifying to have at last this official recognition of exchange realities, even though the NAC still fails to draw some of the most important logical conclusions from this recognition.
The British pound is the key example. It was pointed out in this column on May 10 how exchange control with an overvalued pound systematically encourages imports, discourages exports, and brings a chronic trade deficit, which the United States is then called upon to make up. If the pound were allowed to decline to its free-market value the result, it is true, would be a substantial increase in Britain’s internal price level. For in terms of pounds imports would cost more. And British consumers (in the absence of watertight allocations) would be forced to pay higher prices to hold their share of goods at home against the increased price in pounds obtainable for exports.
But the only way that Britain in the long run could avoid this result is by an internal deflation. This could be brought about by slashing government expenditures, particularly on capital projects and on food subsidies, by increasing the purchase tax, by abandoning the infra-low interest rate policy, and by warning British labor that it must keep its wage rates low enough to meet world competition at a $4 rate for sterling. One has merely to cite these conditions to recognize how improbable they are politically under the present Labor government.
The British Government, in short, has a choice of free foreign-exchange markets, of official devaluation, or of rigorous internal deflation: and it is unwilling to embrace any one. This “forces” it to impose direct import controls. But as the Canadian economist Donald B. Marsh points out, it has “a basic predilection for controls combined with a policy that, by deepening the crisis, makes the removal of controls unthinkable.” As he adds: “In a country as dependent as Great Britain on external trade, exchange control provides the ultimate in governmental control of private business. Whether exercised or not, the government’s power under exchange control is literally the power of life and death over firms and industries dependent upon imports.”
The British bureaucrats are convinced that the only cure for the trade deficit is a great overall increase in British production. All that is really needed, however, is a change in the internal structure of consumption and production sufficient to correct the trade balance. This task is not herculean. What is involved is a total annual trade deficit officially estimated at £250,000,000. This is less than 3 percent of Britain’s present national income. It could be corrected either by raising British production 3 percent (less than the actual increase of 1947 over 1946) or by lowering British consumption 3 percent.
But analysis shows that instead of devoting the resources released by the cessation of the war to export production, these have been chiefly reabsorbed by other activities. And it is government controls that have prevented readjustment. Only when free exchange rates and free prices are reestablished will imports and domestic output readjust themselves to the proportions necessary to cure the trade deficit.
As long as other currencies also remain overvalued and inconvertible, it is true, the British cannot correct their balance of payments by sales to “soft-currency areas.” But British and above all American leadership could get the leading countries of the world simultaneously to abandon the whole vicious Schachtian network of exchange control. It is fantastic for America to be draining its resources in order to subsidize and prolong a totalitarian device that disintegrates and strangles international trade, makes free enterprise impossible, retards European recovery, and intensifies and perpetuates the very “dollar shortage” that it pretends to cure.
June 7, 1948
The General Motors wage settlement last week transformed the country’s business outlook over night. It marked the formal opening of the third round. Unions everywhere will seize upon the precedent.
The GM settlement will be all the more influential because of a certain prima-facie reasonableness. In addition to providing an initial increase of 11 cents an hour (8 cents for a “cost-of-living adjustment” and 3 cents for an “annual improvement factor”), it provides for quarterly adjustments for further changes in the official government consumers’ price index and for an additional 3 cents an hour as an “annual improvement” factor.
On closer examination, however, the flexible features of the GM settlement are found to be virtually all one way. No matter how much cost of living should fall, the downward adjustment on that account cannot exceed 5 cents an hour. But there is no corresponding upward limit if the cost of living should rise. The “adjustment” has a floor but no ceiling. And the 3-cents-an-hour “annual improvement” increase is to be granted whether or not man-hour productivity is in fact increased correspondingly.
General Motors, the biggest industrial corporation in the country, can presumably afford this type of wage contract. But American industry in general can certainly not afford to begin with still another “cost-of-living” increase. Official statistics already show, in fact, that whereas the consumers’ price index has increased 69 percent compared with the 1935–39 level, average hourly industrial earnings have increased 115 percent. On this prewar base, therefore, the first “cost-of-living” adjustment, instead of being 8 cents an hour upward, would have to be an average of 27 cents an hour downward!
We must remember, again, that the consumers’ price index represents an average of many different prices. If companies whose products have risen in price much less than the average were nonetheless compelled to pay wage increases equal to the average, they would either be forced out of business or forced to raise prices. If the price index were thus forced up, this would of course in turn require still further upward cost-of-living wage adjustments. And the uniform application of the GM cost-of-living formula would also prevent the kind of constantly changing variations among different wage rates that are necessary to draw workers into growing industries and out of declining industries.
The same sort of consequences would follow any automatic, uniform “annual-improvement” wage increases. Owing to new machinery and methods, the productivity of the average American worker has in fact in recent times been increasing at the rate of 2 to 2½ percent a year. But here again it must be kept in mind that this is an average, both of many years and of many different industries. An investigation by the United States Bureau of Labor Statistics shows that the physical output per man-hour dropped in the boot and shoe industry from an index number of 113.2 in 1941 to 105.9 in 1944, in the cement industry from 108.3 in 1941 to 83.8 in 1944, and in nonferrous metal refining from 108 in 1940 to 95.9 in 1945. How can industries or firms in which man-hour productivity is actually declining afford to pay automatic “annual improvement” increases?
Finally, it must be remembered that this long-run average increase in labor productivity has not been automatic. Its continuance cannot be taken for granted. It has taken place in America because capital accumulation has been steadily raising man-hour productivity on the average by putting more or better tools into the hands of the workers. But this capital accumulation has been made possible by sufficiently high profits to enable corporations to plow new capital back into plant expansion. If corporate profit margins are reduced by taxation or excessive wage increases to where they are dangerously narrow, “annual improvement” increases, even on the average, will no longer be possible. Labor will then find itself moving into lower instead of higher living standards.
June 14, 1948
As pointed out in this column last week, any widespread application of the General Motors wage-settlement formula would put further strains on our economy. It would either force the creation of enough additional inflationary bank credit to meet higher payrolls and support higher prices, or it would result in unemployment.
A third round of wage increases being so harmful to the economy and to the long-run interests of labor itself, who started it? Other employers, big and small, privately blame General Motors for capitulating to the union demands. But the causation must be traced farther back. Who is it, or what is it, that made it almost inevitable from the start that employers would capitulate to a third round?
Part of the answer can be found in the White House. President Truman and his advisers always affect to deplore something they call “inflation.” But this always turns out to be primarily an objection to high industrial prices. They ignore the basic fiscal and monetary causes of inflation, for which they themselves are largely responsible, and the high prices of farm products that their own policies have helped to bring about. And they have never been willing to put wages in the same category as prices. Prices are to be held down, controlled, frozen, rolled back; but in wages it appears that there are always “inequities” still to be adjusted—of course never by lowering any wage, but always by raising the wages that are still “submarginal” or have not yet “caught up.”
Mr. Truman has again and again intervened to push up wage rates. He did so in late 1945 and early 1946 by imposing a thinly disguised form of unilateral compulsory arbitration when he appointed a “fact-finding” board that in effect ordered General Motors to pay an increase of 19½ cents an hour. Later, without even waiting for a report from his own fact-finding board, he rewarded Philip Murray for tying up the nation’s steel industry by recommending an increase of 18½ cents an hour in wages in that industry.
Then he set aside the 16-cent-an-hour increase for railway engineers and trainmen, recommended after a month’s study by his own fact-finding board, and awarded them 18½ cents. When John L. Lewis scorned even an 18½-cent-an-hour increase and struck, Mr. Truman stepped in, seized the coal mines, and made the government itself grant wage increases, royalty payments, and other benefits to Mr. Lewis’s union far in excess of Mr. Truman’s own previously announced “wage line.”
Mr. Truman is still not cured. On the very day that General Motors made public its latest wage boost, he again urged Congress to raise legal minimum wages from 40 to 75 cents an hour. This would be an increase of 87½ percent. And union insistence on maintenance of existing wage differentials would put further upward pressure on wages all along the line. Congress, however, must share responsibility for inflationary wages. For the Wagner Act, though improved by the Taft-Hartley amendments, is still retained in essence. It builds up and greatly strengthens industrywide unions. It compels employers to bargain with the leaders of those unions, no matter how extravagant their demands. If those unions resort to mass picketing, intimidation, or violence, the Wagner-Taft-Hartley act takes no cognizance of it. Yet the act abridges the employer’s right to discharge or replace strikers, to bargain with individuals or with other union representatives, or to exercise other previous rights of management.
The act, in brief, takes the risks out of strikes. The Administration and Congress endow great private organizations with the power at any time to bring the nation’s industry to a halt, and then express surprise and regret that these private organizations use this power not primarily for the public weal but for their own private ends. We set up a legal mechanism which makes employers virtually powerless to refuse increased wage demands, and then see no connection between this and the fact that strong unions then impose wage demands so great as to imperil the whole economy.
June 21, 1948
Candidate Truman, in the course of his barnstorming campaign for the Democratic nomination, adopted and elaborated one of the favorite clichés of the Wallace-ites and muddleheaded “liberals”:
“As far as the United States is concerned, the menace of Communism is not the activities of a few foreign agents or the political activities of a few isolated individuals. The menace of Communism lies primarily in those areas of American life where the promise of democracy remains unfulfilled.
“If some of our people are living in slum housing and nothing is done about it, that is an invitation to Communism. If some of our people are forced to work at substandard wages and nothing is done about it, that is an invitation to Communism. If some of our people are arbitrarily denied the right to vote or deprived of other basic rights and nothing is done about it, that is an invitation to Communism. . . . And finally, if high prices are depriving some of our people of the necessities of life and nothing is done about it, that is an invitation to Communism. . . . Let us adopt legislation that will provide our citizens with the homes they need.”
If it is bad economic conditions that are primarily responsible for the spread of the Communist ideology, how does it happen that this ideology has reached its highest influence in the United States precisely at a time when its people enjoy the highest standard of living ever reached by any nation in the history of mankind?
Let us compare living standards in America, which Mr. Truman still seems to find so deplorable, and living standards in Communist Russia. Has Mr. Truman ever read the report of the Department of Labor, showing that the average worker in Russia is about one-tenth as well off as the American worker in terms of what his wages will buy? Will we be inviting Communism until we produce a living standard here eleven times as high as Russia’s instead of only ten times as high?
No doubt our housing conditions are not all they might be. But shouldn’t someone tell Mr. Truman that in Moscow, even before the Nazi invasion, only one family in seventeen occupied more than a single room?
In America nearly three out of every four families has an automobile. Will we be inviting Communism until three out of every four families also has a yacht and an airplane?
As for political liberty, what sort of mentality is it that, because full political rights may in a few sections and cases be abridged here, prefers the sort of completely terrorized “elections” which were recently held in Czechoslovakia, and longs for the horrors of the Russian slave camps? Must everything be absolutely perfect here, must we produce a paradise on earth, to keep people from clamoring for the Communist hell?
Let us continue to improve economic conditions by all means. That, in fact, is what capitalism has been steadily doing for years, for generations. It has done it so well that its miraculous achievement is taken for granted, as if it were something that would occur automatically under any system. So Mr. Truman wants more houses, not through free enterprise, but through legislation and government subsidies. He wants higher wages, not through increased production, but through more coercion on employers. He wants to control inflation, not by reforming the government’s own monetary and fiscal policies, but by the power to dictate prices—though the choking of production by price control abroad is one of the main reasons why capitalist America now supports planned and socialized Europe.
The way to combat Communism is to teach our people, and especially our political leaders, how infinitely superior capitalism has already shown itself to be. Certainly we are never going to win the struggle with Communism if we begin by accepting its basic principles and deserting our own, if we abandon our faith in personal liberty and free enterprise to embrace the Communist faith in government planning and government ownership, in bureaucratic omniscience and complete domination by the state.
June 28, 1948
It is fortunate that the publishers have so promptly made available an American edition of the most forthright and powerful attack on government economic planning that has appeared in England since the publication of F. A. Hayek’s The Road to Serfdom. The new book is called Ordeal by Planning.
Its author is John Jewkes, professor of economics in the University of Manchester and a wartime member of the British bureaucracy. Ordeal by Planning should appeal to an even wider audience than The Road to Serfdom. While it lacks some of the philosophic penetration and depth of the Hayek book, it is much more explicit and concrete. Its style is lively, sparkling, and witty. It hits hard. It is difficult to see how any but the most fanatic government planners can fail to be shaken by it.
Mr. Jewkes assails central economic planning in all its aspects. He exposes the economic fallacies behind it; he ridicules its scientific pretensions; he points to its international, political, and moral dangers. He beautifully dissects planners as a species.
As one specific case, he cites the British coal and power crisis of February 1947—“the classic example of a planning crisis.” In the preceding October the Minister of Fuel and Power himself had said with an irony that backfired: “Everybody knows that there is going to be a serious crisis in the coal industry—except the Minister of Fuel and Power.” When the crisis arrived, “a government pledged to planning and economic stability was compelled to order, at a moment’s notice, the closing down of about two-thirds of British industry.”
“No country,” Mr. Jewkes points out, “has ever suffered from a more sudden or catastrophic economic seizure. . . . The price system brings about gradual and continuous readjustment in a changing economic world; the central planning technique means that, from time to time, the economic system must be kicked downstairs.”
“I believe,” he continues, “that the recent melancholy decline of Great Britain is largely of our own making. . . . At the root of our troubles lies the fallacy that the best way of ordering economic affairs is to place the responsibility for all crucial decisions in the hands of the state.” He lists the fateful errors made in foreign economic policy, the mistake of exchange control, the false alibis, the effort to put the blame on America. “Export planning,” he concludes, “reduces exports.”
But though he shows again and again how planning leads toward national impoverishment, his most powerful indictment of it rests on its destruction of freedom: “When Sir Stafford Cripps declared in the House of Commons on Feb. 28, 1946, that no country in the world has yet succeeded in carrying through a planned economy without compulsion of labor, he might, with equal truth, have gone much further and admitted that no planned economy has yet operated without suppressing free speech, destroying representative government, robbing the consumer of free choice, and virtually abolishing private property. This is no accident.... It is due to the logical incompatibility of a planned economy and freedom for the individual.”
This book has so many merits and presents its case with such cumulative force that I regret to have to mention one serious flaw. Mr. Jewkes surprisingly accepts the Keynesian theory that “mass unemployment is due to a deficiency of demand for goods and services,” and that when it threatens, the state must intervene “either to spend more money itself or to put its citizens in the way of spending more.”
This superficial doctrine is merely one of the countless disguises of the immemorial gospel of inflation. It is government planning in the field of money and credit: and its application in practice must inevitably involve the same sort of slapdash economic guesswork and shabby political abuse that Mr. Jewkes so brilliantly exposes in government planning in other fields. Rejection of the Keynesian fallacies is essential to the preservation of free enterprise.
July 5, 1948
The typical party platform is thrown together in a few hours by people who have little to do with carrying it out. It must compromise conflicting views within the party. It must lose nobody’s vote. It must find verbal formulas that can mean all things to all men.
From this standpoint the 1948 Republican platform is a triumph of draftsmanship. It promises “elimination of waste” and of “unnecessary bureaus.” It pledges “healthy” Federal finances, “stimulation of production,” and a “sound” currency. Such planks can be opposed only by those who believe in waste, who want bureaus they admit to be unnecessary, who are eager to discourage production, and who favor unhealthy Federal finances and an unsound currency.
The platform endorses irreconcilable economic policies. It favors our “competitive system.” But far from wishing to leave farm prices to this competitive system, it thinks they should be “supported on a just basis.” The platform favors “progressive reduction of the cost of government.” But it demands an increase of social security and veterans’ benefits “to a more realistic level.”
The platform promises to “assist other peace-loving nations to restore their economic independence”; but “only within the prudent limits of our own economic welfare.”
Everyone must decide for himself just how many billions this means. The platform promises to “support the system of reciprocal trade and encourage international commerce,” while, however, “at all times safeguarding our own industry and agriculture.” Everyone must decide for himself whether this means lower tariffs or higher tariffs. The platform thinks “housing can best be supplied and financed by private enterprise; but government can and should encourage the building of better homes at less cost.” Everyone must decide for himself whether the Republican Party is for or against large-scale government-subsidized housing.
We should not be too surprised to find in one of the major party platforms four years from now some such plank as this: “We favor a sound and prudent Communism, consistent with our free-enterprise system and traditional American liberties, and imposing only such reasonable and democratic controls as are necessary to make a wise and conservative Communist dictatorship fully effective.”
The platform favors “equal pay for equal work, regardless of sex.” Why not also regardless of race, color, religion, age, looks, or geographical location? Who is to decide whether or not the work of any two or more persons is in fact “equal”? A law to carry out this plank would in practice be merely one more abridgement of management’s right to manage.
One could discourse at length about the things that are not in the platform. It pledges “an attack upon the basic causes of inflation,” but does not clearly point out that the basic cause is the increase in the volume of money and bank credit. It says nothing whatever about the government’s cheap-money policy or about legal reserve ratios. It pledges “a sound currency,” but is silent about what constitutes soundness. It does not mention a return to a real gold standard. It is silent about the coercions and distortions of exchange control.
It says nothing about the European price fixing, planning, and Socialism that create the world shortages which the American taxpayer is called upon to make up. It does not even say clearly that it is against a return to price fixing here, or that it believes in free markets and free enterprise.
But there are worse things than silence or ambiguity. Platforms are seldom anything but an embarrassment anyway, particularly when they get specific. They force the candidate into either an insincere lip service to every plank or an open repudiation.
It is hard to say which is worse—to make the right pledge and break it, or to make the wrong pledge and keep it—to violate outright, say, the 1932 Democratic platform pledges of “a saving of not less than 25 percent in the cost of Federal government” and “a Federal budget annually balanced,” or, as with the Labor Party in England today, to drive grimly ahead with more nationalization, in spite of demonstrated damage to the country, in the name of a party promise.
July 12, 1948
Perhaps the chief danger of the Marshall Plan is that it deflects public attention from the real political and economic problems that confront the world, while providing the illusion that something is being done to meet those problems. The crack within the Communist bloc is immensely encouraging, but the real question remains whether Washington will know how to make use of it. A continuation of our ambiguous postwar foreign policy, constantly wavering between firmness and appeasement, plainly cannot succeed. Whenever and wherever we appease him or give way to him, Stalin assumes—indeed the people behind the Iron Curtain and the people of Western Europe themselves assume—that we must be afraid of him. Every unrebuked insult or successful aggression can only encourage him to further insults and aggressions. His immediate aim has recently been to drive us out of Berlin; but his broader aim is to show the world who is master.
It follows from this that the true American warmongers are the appeasers, the Wallaces who think that they can buy peace by still more dangerous and humiliating concessions than those we have already made. The only possible way to assure peace, on the contrary, is by unyielding firmness before Stalin has been tempted to the ultimate reckless act.
What this means on the political side is clear. Against a great land power like Russia we could not possibly act on the European Continent alone. We could act only as an ally of Western Europe democracies resolved to defend their economic and political freedom. And we can secure such an alliance against Russian aggression only by willingness to give unequivocal military guarantees. We must be willing to guarantee the nations of the Western European union against any invasion of their territory or political integrity that they themselves are prepared to resist. If any one of the European governments is too timid to accept our guarantee or to defend the integrity of its own country, then the sooner we find that out the better. It is folly to pour billions of American dollars into any country that is not clearly determined even to defend itself.
From the political side the central defect of the Marshall Plan is that it is not the implementation of a real foreign policy but an attempted substitute for a foreign policy. It originally appealed to many of its supporters because it looked like an effective measure for halting Communist expansion “short of war.” It was an attempt to buy European friendship with dollars. Such good effects as it had lay chiefly in its announcement. It was a way of saying to Western Europe: “We are with you.” But it was a needlessly expensive way; and in the long run it will prove an ineffective way.
For the Marshall Plan misconceives the economic disease from which Europe is suffering and misconceives the cure, which is not American dollars but internal reform. Except in Holland, and to some extent in Italy, there are few signs in Western Europe that economic reforms along the right lines are taking place. Promises of reform we have received in exchange for ERP are vague and rhetorical; and we appear satisfied with rhetoric rather than performance.
Virtually everything continues—the government planning, the allocations, rationing, price fixing, exchange control, overvalued currencies, and expanding socialism—that tends to make chronic the European shortages and trade deficits we are trying to cure. A French observer, Bertrand de Jouvenel, points out in the British magazine Time and Tide that “the largest drain on the French Treasury” and “the chief remaining source of inflation” is the deficit in the state-owned industries, which has been swelling day by day. It is this socialist deficit that American capitalism has now undertaken to finance. It is not surprising that European recovery does not take place.
Military aid, in return for a dependable united European front, would be a rational American foreign policy. But we are turning over billions of dollars to Europe in return for something so indefinite that no one seems quite to know what it is.
July 19, 1948
The Marshall Plan is now in operation; and one of the chief misgivings of its critics is already being realized. This is that America would pour money into Europe without getting in return reforms that would really bring European recovery.
Nothing in the agreements concluded between the ECA and participating countries promises any real change from the ruinous postwar economic policies that these countries have been following. The British Government agrees, for example (and there are only minor differences in the French and other agreements), to “use its best endeavors” to make “efficient and practical use of all the resources available to it”; to think up “practicable projects for increased production of coal, steel, transportation facilities and food; to stabilize its currency, establish or maintain a valid rate of exchange, balance its governmental budget, create or maintain internal financial stability, and generally restore or maintain confidence in its monetary system; and to cooperate with other participating countries in facilitating and stimulating an increasing interchange of goods and services.”
Most of these promises are so vague as to be practically meaningless. They refer to ends, not means. Of course every government wants to use its resources efficiently: Of course it wants economic recovery, increased production, and a stable currency. It does not need to be bribed to want any of these things. The real question is: Has it been following or will it follow the policies likely to bring them?
In the opinion of the British authorities themselves, nothing in the agreement they have signed will require them to change their present collectivist course. As the London financial correspondent of The New York Times cabled: “Britain is, in fact, already doing its utmost to achieve these objectives. . . . On the question of early revision of the exchange value of the pound sterling, there is nothing in the agreement to suggest that this is at all likely or is at all necessary.”
So that’s that. Yet the simple truth is that European exchange control and overvalued currencies have not only brought about a chronic European trade deficit, which the American taxpayer is subsidizing, but have jammed up international trade and made such trade all but impossible even within Europe.
A recent Associated Press dispatch from London opened with the statement: “Trade in Western Europe is on the decline because most of the countries are too poor to buy from each other.” This is nonsense. The people within each of these countries are obviously not too poor to buy from each other. Countries that have things to sell to each other can obviously exchange them with each other. But when they set up a nightmarish system of bilateral quotas and import licenses for every transaction; when they insist on a pegged value for their own currencies far above what any free market will pay (or, to put it another way, when they forbid their own citizens to pay for American dollars the value that a free market would place on such dollars); when, in short, they make their currencies in fact inconvertible and prevent their citizens from buying other countries’ goods, then they must inevitably expect exactly the kind of breakdown of international trade that they have got.
The ECA agreements, with their vague rhetorical promises, will do nothing to halt the socialism, inflation, price control, exchange control, and government planning that are everywhere choking production and trade. Even the requirement for balanced budgets is rendered meaningless by exempting “deficits over a short period”—the length of which is nowhere specified. As for the interpretation of these pledges, is Britain helping to “maintain confidence” in its own money when it prohibits anyone from bringing more than £5 of it back into the country?
The Marshall Plan was put forward to aid participating nations “through their own individual and concerted efforts.” It is in fact a costly relief program that is not getting in return the only reforms that would make a real and lasting recovery possible.
July 26, 1948
The ideal that emerges from the Democratic platform is the complete paternalistic state. Less and less are the people to do anything for themselves. More and more are the bureaucrats to do everything for them—insure their health, federalize their education, build their homes, boost their wages, raise the prices at which they sell and lower the prices at which they buy. Everybody is expected to owe everything to the officeholders in Washington. Everybody is expected to forget that the officeholders can give nothing to B and C and D unless they have first taken it from A. A is the taxpayer, the forgotten man. The effect of confiscatory taxation on his incentives and on the national production is ignored. Spend and spend, tax and tax, and—elect and elect?
The sheer effrontery of some of the economic planks in the Democratic platform makes them read like intentional humor. “The Republican 80th Congress is directly responsible for the existing and ever-increasing cost of living.” Why? Because it refused to give Mr. Truman power to dictate prices. Mr. Truman thinks that the cause of inflation is the absence of price control. Nowhere in the Democratic platform are the real causes of inflation so much as whispered. Nothing is
said about the threefold increase since 1939, brought about by Democratic fiscal and monetary policies, in the volume of money and credit. No connection is pointed out between all the foodstuffs being shipped abroad under the Marshall Plan and the consequent rise of food prices here.
The platform, in fact, demands still higher Federal spending on everything—social security, education, housing, veterans, public works, TVA’s, school lunches. Though the American taxpayers stagger under the greatest absolute peacetime burden of expenditures that the taxpayers of this or any nation have ever been asked to bear, they are calmly informed that their expenditures are still “inadequate.”
Affecting to deplore high prices on one hand, the platform boasts of them on the other. It is stuffed with figures on the increase of wage income, farm income, business and professional income. It never once seems to have occurred to those who inserted these figures that they are simply high prices looked at from the other side. If the Republican Congress is responsible for the high prices that consumers pay, then it should also get credit for the high prices that producers receive. They are precisely the same prices. But the Democrats blame the first on the Republicans and grab credit for the second themselves.
Indeed, they want to boost prices and costs still higher. They insist on jacking up minimum wages from 40 to 75 cents an hour—an increase of 87½ percent. This would, of course, push up wages all along the line, for skilled workers would insist on the maintenance of existing differentials. Pushing up costs further would push up prices further.
The platform insists on still more direct ways of increasing prices. Though in one section it complains that food is becoming too expensive for the average wage earner “and the prospects are more frightening each day,” it demands at another point “a permanent system of flexible price supports for agricultural products”—to make the prospect still more frightening. If a permanent system of price supports for agricultural commodities, why not a permanent system of price supports for all commodities? Why the discrimination? Could a shabby and unprincipled scramble for votes have anything to do with the matter? Yet while demanding that the prices of unionists and farmers be pushed up by law, and that the prices of nearly everybody else be pushed down by law, the platform blandly declares itself in favor of “free enterprise” and opposed to any “arbitrary and discriminatory restrictions.”
On labor relations the platform is even more inconsistent, if that is possible. It demands “the repeal of the Taft-Hartley Act.” This is a direct repudiation of the party’s own Congressional record. Only 81 Democrats in Congress voted against the Taft-Hartley law, while 120 voted for its enactment. In fact, 126 Democrats in Congress voted to override the Truman veto, compared with only 93 who voted to sustain it. What a plank for that record!
August 2, 1948
It is one of the supreme ironies of the political situation that not only President Truman but many editorial writers, and even a number of Republicans themselves believe that he has put responsibility for inflation squarely in the Republican lap unless they give him price-fixing powers. Nothing could more clearly reveal the appalling confusion of thought in the country concerning the real nature, causes, and cure of inflation.
The truth is that Mr. Truman and his government have been following a reckless inflationary policy. The Democratic platform insists on an even more reckless inflationary policy. The Republicans do share responsibility for inflation, but chiefly because they have done so little to stop him. The special session on which he has insisted gives them the opportunity to make up for past negligence.
In this column of April 26 I suggested the form that a Congressional anti-inflation program might take. I pointed out then that “inaction on this subject would be a mistake not only from the national standpoint, but even from the standpoint of Republican prospects in November. Unless the Republican majority in Congress itself frames and passes a positive anti-inflation program,” I continued, “its criticisms of President Truman’s policies will seem very unconvincing by election day if inflation resumes its progress in the next six months.”
The four-point program that I suggested is, in summary: (1) Congress should authorize or direct the Federal Reserve Board to restore the former legal requirements of 35 and 40 percent reserves in the Federal Reserve Banks instead of the present 25 percent reserve requirement. (2) It might authorize the Federal Reserve Board to increase the reserve ratios of member banks, but only after the board had first restored the Reserve Bank ratios.(3) It should terminate inflationary monetary measures still on the books. (4) It should make a general declaration of policy directing the Federal Reserve Board to stop further inflationary expansion of money and bank credit. “Only by such a comprehensive measure (combined with sounder expenditure and tax policies),” I concluded in the April 26 column, “can Congress prevent the present inflation from going farther. Only by such a measure can it take the offensive in the battle against inflation and center public attention on the fact that it is, above all, government fiscal and credit policy that creates inflation. Otherwise President Truman will continue inflationary monetary policies while declaring, as in his speech to the American Society of Newspaper Editors, that the only cure for inflation is to give him power to fix prices.”
As Mr. Truman has followed precisely this course and as inflation has resumed its progress, something must be said about the new demands for rationing and price-fixing, particularly with regard to meat. Nothing could be more illogical or hypocritical than these demands in view of all the other government policies that are being followed. The price of meat is inescapably linked to the price of feedstuffs. When we ship feedstuffs abroad in great quantities, when we put high government support prices under them, we inevitably increase the price of meat. Rationing and price fixing are not merely irrelevant but fraudulent cures. They intensify the evil they seek to remedy. If we legally push down the price of meat, while bolstering up the price of feedstuffs, we remove the incentives for feeding and growing meat and so still further reduce the meat supply.
In following inflationary policies and then demanding price-fixing powers to stop inflation, Mr. Truman is like a man who throws a child into the water and then tears off his coat and proclaims himself to be the ideal and only possible rescuer. The one sensible reply that Congress can make is to order the culprit to arrest himself. If Congress passes a program that goes to the heart of the monetary cause, it will put Mr. Truman on the spot. If he vetoes the bill the phony nature of his demand for an end to inflation would be exposed and if he accepts it inflation could really be stopped.
August 9, 1948
More than any other single man, President Truman is responsible for the inflation that has developed here since the end of the war. Yet no one seems more blissfully unaware of this fact than Mr. Truman himself. Let us look at his new eight-point “anti-inflation” program:
1—An excess-profits tax “to provide a Treasury surplus” and “a brake on inflation.” This cannot be taken seriously as a revenue-raising measure. Corporation taxes are already dangerously excessive. They are preventing the accumulation and investment of new capital essential for increasing national output and real wages. An excess-profits tax would reduce and unbalance production and increase inflation.
2—Consumer credit controls. Mr. Truman wants the government itself to extend more inflationary credit to build and buy houses, but wants to curb private credit to buy refrigerators to put in the houses.
3—More authority to the Federal Reserve Board to “regulate inflationary bank credit.” The board keeps demanding new powers while refusing to use those it already has. It wants power to raise legal reserve ratios of member banks. It should first be granted the power—for which it has not asked—to restore the former legal reserve ratios of the Federal Reserve Banks themselves. Reserve-bank credit is far more inflationary than member-bank credit.
4—Power to “regulate speculation on the commodity exchanges.” Speculation smoothes out price fluctuations and continuously adjusts demand to supply. Speculators do not do this perfectly, because no one can perfectly foresee the future; but they do it incomparably better than could politically motivated politicians.
5—“Allocation and inventory control of scarce commodities.” Free markets can do this far better than any government. Government allocation breeds political favoritism and corruption.
6—“Strengthening” of rent controls. Rent controls have intensified the housing shortage by encouraging existing tenants to use space wastefully, and by discouraging repairs, improvements, and new construction.
7—“Stand-by” powers to ration products “in short supply.” To the extent that rationing really does cut down demand and lower prices, it also lowers production of the rationed product. It intensifies the very shortage it is designed to counter.
8—Price control for scarce commodities. This is the very thing that makes them scarcer, by lowering the relative profit margin in producing them. Mr. Truman would approve “non-inflationary wage increases”—a wonderful phrase. Mr. Truman is sure in advance that many wage increases can be “absorbed within the price ceilings.” This means that he would boost wages further at the expense of profit margins and give officeholders life-and-death powers to determine the profits of every industry and firm. The totalitarian nature of price fixing should be clear.
Mr. Truman does think that the government should have power “to limit wage adjustments which would force a break in the price ceiling.” But he would even break price ceilings “to correct [wage] inequities.” This lip service to wage control should deceive no one who remembers our experience before Congress took price-fixing powers away from Mr. Truman.
After this eight-point “anti-inflation” program, Mr. Truman recommends every inflationary measure in the book. He wants an inflationary minimum-wage increase, which would raise production costs throughout the economy. He wants more Federal expenditures for housing projects, education, electricity, and a further boost in Federal salaries. Not once does he stop to announce or even to express any interest in how much these new inflationary expenditures would raise our already fantastically inflated Federal budget. He never mentions the budget deficit predicted even before these demands by his own Secretary of the Treasury. It is deficits that make inflation.
The cure for the evils of inflation, he thinks, is more inflation.
August 16, 1948
This title over a recent article in the London Economist raised for a fleeting instant the hope that that distinguished journal had at last recognized the elementary truth that the [so-called] world “dollar shortage” will continue just as long as governments refuse to permit their citizens to pay the world market price for dollars. But, alas, the article merely embraced every hoary mercantilist fallacy from Colbert to Keynes.
The Economist believes, for example, that the spectacular successes of the free market in the nineteenth century occurred “only because there was in the world a natural equilibrium.” This is nonsense. Equilibrium between supply and demand, between exports and imports, is brought about not by nature but by prices—by free prices in free markets.
“The continental United States,” continues The Economist, “unlike the tiny British Isles, can produce all the food and most of the raw materials it needs. . . . America does not, as Britain did even in the days of its ascendancy, inevitably buy as much abroad as it sells there.... It seems overwhelmingly probable that the dollar shortage will last for a generation to come.”
One hardly knows where to take hold of anything so wrong. We are not economically self-contained. We depend on foreign sources for our sugar, coffee, tea, cocoa, wool, natural rubber, and other items too numerous to mention. And in any case we must inevitably buy as much abroad as we sell there, for the simple reason that the only alternative is to give our goods away. To “lend” foreign countries the dollars to “buy” our goods, and never to get repaid, is just a disguised way of giving. This is not lack of equilibrium, but lack of sense.
The “dollar shortage” of which Europe and the rest of the world today complain is not the result of some singular self-containment on the part of the United States. It is the result solely of overvalued currencies under exchange control. When a government overvalues its paper money and then calls out the police to prevent its own citizens from buying or selling their own or foreign money at the rates at which they want to buy and sell, it systematically strangles its foreign trade. Exchange control, overvalued currencies—and the whole system of import and export licenses, bilateralism, quotas, allocations, price controls, and government planning that goes with it—have finally jammed up practically everything but government subsidized trade, not only between Europe and the United States but even inside Europe itself.
And now—under government sponsorship, of course—we are about to teach British businessmen their business. On the theory that they wouldn’t do it for themselves, our government is going to prod them into becoming more efficient and giving us tougher competition for world markets. One defect of this plan is that it is entirely irrelevant to the problem we are trying to solve. That problem is the trade deficit. Even if we succeeded in increasing British production by our patronage, it would not cure the British trade deficit. On the contrary, with an overvalued pound, increasing British production would increases the British trade deficit, Britain would have to import more raw materials for its industries; and British consumers, with more income in pounds, would want to buy more British products as well as more food, tobacco, refrigerators, and automobiles from us, or whatever else their bureaucrats would let them have.
A correction of the British (or French or Dutch or Norwegian) trade balance could be forced practically overnight, however, by simply allowing exchange rates to find their own market levels. This would discourage imports and encourage exports; it would make all currencies automatically convertible in any amount desired; and the “dollar shortage,” in the sense in which the phrase is now used, would disappear. Any nation will have a trade deficit as long as it insists on overvaluing its currency. The world dollar shortage will last as long as world exchange control. And the American taxpayer will continue to foot the bill.
August 23, 1948
When we keep in mind the demagogic bombardment to which it was subjected by the President, the record of the special session of Congress was far better than might have been expected. Its virtues consisted chiefly in what it did not do. It ignored most of what would have been the disastrous program proposed by Mr. Truman.
It did pass a modified housing bill, not inflationary enough to satisfy Mr. Truman, of course, but nonetheless inflationary. Mr. Truman himself pointed out in his recent economic report that the present “volume of residential construction is already straining the capacities of the construction industry” and “competing with other primary national needs.” The further doses of government credit made available in the new housing law, therefore, are not likely to increase the volume of the nation’s new housing, but merely the cost of that housing.
The controls that Congress reimposed on consumer installment credit touch only the fringes of inflation. Many consumers will simply draw down their savings accounts or sell Series E bonds to make their purchases. To the extent that installment credit controls really are effective, they will simply shift buying away from durable products like automobiles, refrigerators, and furniture into more perishable goods. For installment credit does nothing in the long run to increase the total volume of consumer buying. The $50 a month that a family puts aside to meet installment payments cannot be spent on books, sundaes, cigarettes, or movies. Finally, one must point out once more the glaring inconsistency of liberalizing government mortgage credit for homes while tightening private credit for furnishings to put in the homes.
Nor did Congress accomplish anything important when it gave the Federal Reserve Board power to increase reserve requirements of member banks by 4 percentage points against demand deposits and 1½ percentage points against time deposits. For under present conditions the member banks can simply rediscount or sell their government securities to the Federal Reserve Banks, which stand ready to receive them at guaranteed minimum prices.
The one really important anti-inflation step that the House took was thrown out by the Senate. This was the provision restoring reserve ratios of the Federal Reserve Banks themselves to the legal requirements, which existed up to 1945, of 35 percent against deposits and 40 percent against notes, compared with the present “emergency” requirement of only 25 percent.
The mutually contradictory reasons which were put forward for rejecting this revealed the appalling confusion and hypocrisy that still exist in Washington regarding inflation. Some opponents dismissed it as “meaningless,” on the ground that Federal Reserve Bank reserves are already above 35 and 40 percent. These critics, in other words, believe that we shouldn’t lock the stable until after the horse has been stolen. It is precisely because reserve-bank ratios are still above 35 and 40 percent that we could safely restore the legal requirements now without monetary disturbance. The purpose would not be to roll back present inflation but to limit future inflation. The Secretary of the Treasury and the representatives of the Federal Reserve System who appeared before Congress realized this. They opposed the provision precisely on the ground that it would ultimately prevent the Federal Reserve Banks from continuing to inflate by supporting and monetizing government securities.
Congress should have forced the Federal Reserve authorities to put their own house in order before giving them more powers over member banks and installment credit. It should not only have restored the original reserve-bank reserve ratios, but required the reserve board to add at least one additional percentage point to the Federal Reserve Bank reserve ratios for every additional point that the board thought necessary to add to member-bank reserve ratios. But Congress merely gave the authorities more power to prevent others from inflating, while leaving them free to continue to inflate recklessly themselves.
August 30, 1948
On Aug. 9 the Treasury announced that interest rates on its one-year certificates would be raised to 1¼ percent from the then-existing rate of 1⅛. Three days later Federal Reserve Banks in nine of the twelve districts raised their rediscount rate from 1¼ to 1½ percent. These were belated moves.
Secretary Snyder described the government’s action as a “further anti-inflationary move.” This was overstating the case. No inflation on record has ever been stopped with a rediscount rate of 1½ percent or short-term rates to private borrowers running as low as 2 percent. It is only because we have become accustomed in late years to infinitesimal short-term interest rates of a fraction of 1 percent that rates of 1½ and 2 percent can be solemnly described as “anti-inflationary.”
The importance of the increase is purely symbolic and psychological. As Thomas B. McCabe, the new chairman of the Federal Reserve Board, put it: “Each increase in the rediscount rate repeats the warning that credit is in need of continued restraint.”
But what the Administration is at last doing in the realm of tightening interest rates is inconsistent with what it has been doing in the government bond market. In the year ending Aug. 18 the Federal Reserve Banks bought $6,690,000,000 additional government bonds. The effect of such purchases was described by Chairman McCabe in his recent testimony before the Senate Banking and Currency Committee:
“The result of these purchases of government securities by the Federal Reserve Banks is to supply additional reserve funds to banks. . . . These new reserves in turn provide the basis for an increase in bank credit that may be many times the amount of new reserves obtained. . . . The effect has been to increase significantly, and it may be dangerously, the money supply. . . . If the policy of maintaining the 2½-percent yield level on long-term Treasury bonds is continued . . . additional reserve funds would be made available to banks which, unless otherwise offset, could sustain a further very large inflationary expansion of bank credit. . . . Further credit expansion will add to the pressure for rising prices. Continued credit expansion will store up trouble for the future and make the inevitable adjustment more dangerous for the stability of the economy.”
When the support of government securities at present levels is admitted to be so dangerously inflationary, why is it continued? Why did the Federal Reserve authorities even oppose a restoration of the former Federal Reserve Bank reserve ratios of 35 and 40 percent, which would have put a future curb on such support? Chairman McCabe explains: “The system has made a public commitment to support the 2½-percent yield level on long-term government bonds for the foreseeable future.” Why did it make this commitment? Well, it is always politically embarrassing to have government bonds selling below par. More important, the banking system is loaded up with government bonds. Many fear that its very solvency would be threatened if these bonds were allowed to fall below a moderate discount in the market. There are various ways in which this problem might be dealt with. I hope to discuss them here in a later article. But I can reveal in advance that none of them is free from awkward aspects. This should not come as a surprise. If a reckless inflation could be stopped at any time in an easy and pleasant way, the case would not be so strong against embarking upon it in the first place.
One thing is certain. We can only make the termination more difficult and dangerous the longer we attempt to put it off. The Administration has a bear by the tail. It must either recklessly continue to support government bonds at an interest yield of 2½ percent, and make them the basis for bank reserves and further credit inflation, or it must halt this process by some method that is bound to have its unpleasant features. Competent and responsible fiscal and monetary managers would have seen this dilemma coming. They would not have embarked upon easy short-run policies with an attitude of “après nous le déluge.”
September 6, 1948
In Kyklos, a quarterly published in Bern, Switzerland, the European economist Wilhelm Röpke in 1947 diagnosed the central economic disease of Europe as “repressed inflation.” The truth of this diagnosis has become increasingly clear. The disease it describes prevails today not only in Europe but in Asia, Africa, and Latin America. It has been imposed on postwar Germany and Japan with the energetic cooperation of our American administrators. It is the disease which President Truman would unwittingly impose on the United States itself. We should do well, therefore, to study the nature, origins, symptoms, prognosis, and cure of this malady.
Repressed inflation begins, like open inflation, by printing too much money in relation to goods. This may be caused by a war, by an occupation, by a cheap-money or a so-called “full-employment” policy, or by some combination of these. Under an open inflation the effect of too much money would be a general increase of incomes, prices, costs, and foreign exchanges. The government wishes to avoid these soaring internal prices and foreign exchanges, but it refuses to abandon the inflationary fiscal and monetary policies that cause them.
Therefore it forbids the excess of monetary demand to result in increased prices, costs, and exchange rates. For free markets it tries to substitute a system of ceiling prices combined with rationing, allocations, import prohibitions, and exchange control—in short, a network of coercions, all under the euphemistic name of planning.
Every economic transaction becomes politicized. Even money no longer has any definite value except when combined with ration coupons or some discriminatory license. An open inflation, it is true, causes crying injustices and leads to unbalanced production. But a repressed inflation is even worse. It adds stagnation to unbalanced production and unjust distribution.
Under repressed inflation the budget usually remains unbalanced. Low interest rates are arbitrarily maintained. These encourage excessive borrowing and further monetization of the public debt. To counter its own inflation the government is constantly compelled to increase its counterpressure or repression.
The whole system of compulsory values becomes constantly more fictitious. Unbalanced production, chaos, and stagnation assume more alarming proportions. The population reacts by mounting discontent, distrust, disobedience, and bewilderment. The government is finally left with no choice but to admit its defeat or to resort to complete totalitarianism. The bureaucrats argue that they must keep their coercive controls until production has increased enough to relieve the pressure of inflation and to enable them to dismantle the control machinery. They think they can close the gap between money and goods by increased production. But they fail to recognize that it is exactly their repressive controls that are stifling production. They refuse either to mop up the previous surplus of money that has caused the inflation or to balance their budget and discontinue their cheap-money policies. So the gap between goods and money tends to become greater rather than less.
Most of the advocates of repressed inflation still talk as if their country were a besieged fortress where a given amount of goods had to be distributed equally. They cling to the melancholy ideal of a “poorhouse socialism.” They overlook the fact that their real problem is to increase production. And they adopt precisely the measures that prevent this. Their policies finally force the emergence of black markets.
Economically (though not politically) the cure for repressed inflation is simple. It is, on one side, to mop up surplus money, to balance the budget, and to halt the further expansion of money and bank credit. On the other side, it is to throw out price and exchange controls and to let prices and production be determined by free markets and free competition. This is the only way to get maximum balanced production of goods consumers want.
September 13, 1948
Does Stalin want war? This is not only the most fateful political question that confronts the world today, but the most fateful economic question. Economically, it overshadows inflation, for the extent of inflationary pressure will itself depend in large part on the issue of war or peace. War dictates the level of taxation and the whole structure of production. The recent diplomatic tension has been a major influence on our commodity and security markets, on business sentiment and business plans.
If it takes two to make a war, it also takes two to keep the peace. And whatever Stalin wants today, he does not primarily want peace. No one who sincerely yearns for peace would turn loose every organ of propaganda against us; would order a daily barrage of vilification; would daily trump up new accusations and new lies against us; would systematically sow suspicion and hatred against the Western democracies; would use his consulates and embassies abroad as propaganda centers and espionage nests against the countries that harbor them; would daily raise new issues, think up new insults, create new crises; would cut off rail access to Berlin, “buzz” our supplying planes, arrest our representatives—do everything, in short, calculated to provoke an incident that might touch off a war.
In 1946, at Fulton, Mo., Winston Churchill said he did not believe that the Soviet leaders wanted war: what they wanted were the fruits of war. But as the London weekly Time and Tide has put it, the Soviet leaders have since shown that “they are determined to have what they want by almost any means, and perhaps by any means.”
In the New Leader of July 24, David J. Dallin, the author of “Soviet Russia’s Foreign Policy,” declared that “the Kremlin no longer questions the conclusion that war is bound to come—if not tomorrow, then the day after.” Dallin interprets its present policy as an effort to create incidents or situations that will provoke us into shooting first, “so as to enable Moscow to place the guilt for the first shot squarely on Pennsylvania Avenue and Downing Street.”
But whether or not Stalin really wants a shooting war, he obviously means to continue his cold war. He will use every economic weapon. In the countries that he takes over, he will continue to confiscate savings, to destroy private initiative, to nationalize, collectivize, and regiment. And he will continue to thwart or sabotage every measure designed to restore or rebuild the world economy.
Fortunately, whatever Stalin’s intentions, our own proper counteraction is clear. It must be a policy of absolute firmness. Whether Stalin is bluffing or whether he really wants war, we have nothing to gain and everything to lose by continuing the course of feeble concession and appeasement we have followed for the last three years. Whenever we capitulate, we not only weaken our position, but we confirm Stalin’s opinion that we are already weak and afraid of him. We embolden him to new aggressions.
The chief reason we have been losing the cold war with Russia is that we have remained purely on the defensive. Paradoxical as it may seem to some, our one hope now of preventing a shooting war is to seize the offensive in the cold war that Stalin has been waging against us.
We must offer unequivocal military guarantees to the Western European union. We must support China in its fight against the Communists, economic chaos, and Soviet aggression. We must keep probing for Stalin’s weak spots. And we must embark upon a positive and relentless propaganda campaign of our own, not merely on political disputes but on the unworkability and slavery of Communism and on the freedom and productivity under capitalism.
The most serious obstacle to this program is that our present officeholders do not know how to present the case for capitalism. They have, in fact, no real understanding of it and no real faith in it. This is the real weakness of the West.
September 20, 1948
The “Christian Church,” concluded the original draft of a report to the World Council of Churches, “should reject the ideologies of both Communism and capitalism, and should seek to draw men away from the false assumption that these are the only alternatives.”
The implication of this sentence is that Communism and capitalism are about on a par as major evils. But the means of production must either be owned by private individuals, which is capitalism, or by the state, which is Communism or socialism. Dr. John C. Bennett, who drafted this plague-on-both-your-houses, has admitted that British “democratic socialism” comes closest to what he had in mind as the undisclosed Third Way, the “new creative solution.”
Now the belief that we can have socialism and still retain human liberty and avert state despotism has proved to be the great delusion of the present age. For when the state controls everyone’s means of livelihood, it inevitably uses this power to suppress freedom of speech. It is naive to suppose that the individual will in fact be free to criticize the rulers who can decide what job he will take or whether he can have a job at all.
The Stalins and Titos have in fact used such power not merely to suppress all criticism but to compel the most abject and nauseating flattery. But Communism is merely the name for what happens when socialism becomes complete, or nearly so. Liberty shrinks in direct proportion as socialism advances.
As a result of protests, the final version of the report to the World Council of Churches put the modifier “laissez-faire” in front of “capitalism”—but apparently only in the sentence I have quoted. It is difficult to measure the precise effect of this change. Much depends upon the interpretation of “laissez-faire.” It has long been used as little more than a term of abuse, synonymous with anarchy. Only the unregenerate and depraved are thought still to believe in it. When used by the classical economists, however, the phrase presupposed a framework of law and order, under which the state illegalized force, theft, fraud and the breaking of contractual promises, but otherwise permitted free markets and refrained from detailed economic restrictionism.
To reject “laissez-faire capitalism,” therefore, is by implication to reject free markets and presumably to endorse some sort of state “planning.” This euphemism for collectivist coercions and compulsions ought by now to have been sufficiently discredited by what is happening in England, France, and a score of other countries, where the collapse of state planning has led to increasing dependence on capitalist America, to chronic shortages, black markets, and moral cynicism.
A churchman remains within his spiritual province as long as he criticizes economic systems purely on ethical grounds. But he cannot competently do this unless he really understands the economic system he is presuming to judge. And this understanding requires more arduous study than the authors of the World Council of Churches report appear to have devoted to it.
What, for example, is “justice” in an economic system? Is it the equalization of rewards regardless of the contribution that anyone makes or fails to make to the social product? To many of us a system under which the talented and skilled and industrious received no more than the incompetent and shiftless and lazy, and which equalized rewards irrespective of effort, would be not only unjust but, what is worse, unproductive. Most of us, if we thought that were the only alternative, would prefer an enormously productive if not ideally just system to one which provided a perfectly “just” distribution of scarcity and poverty.
Fortunately, a free capitalism not only provides both more liberty and welfare than any other system, but more economic justice. Under it most of us, in spite of exceptions, get approximately the economic value that we ourselves contribute to the total social product. That is how the system provides incentives. Keep improving it, certainly; but don’t “reject” it.
September 27, 1948
The support of the government bond market by the Federal Reserve System, in order to hold the price at par, is today the principal inflationary factor in our economy. Chairman McCabe of the Federal Reserve Board virtually conceded this in his recent testimony before the Senate Banking and Currency Committee: “If the policy of maintaining the 2½ percent yield level on long-term Treasury bonds is continued . . . additional reserve funds would be made available to banks which . . . could sustain a further very large inflationary expansion of bank credit.”
Yet the policy has not only been continued since he spoke, but continued on an increased scale. The Treasury and the Federal Reserve authorities, in short, prefer to risk a reckless inflation to doing anything to halt or curb the present policy of pegging government bonds at par. Perpetual parity for the outstanding government long-term bonds has become sacrosanct and untouchable. It is a fetish to which all other economic aims are now subordinated.
Yet the reasons for this policy, when ventilated, turn out to be far from convincing. The most important of them is that, if the government bonds were left to a free market, they would fall to a discount that would threaten the solvency of our banking system. I shall postpone to a subsequent column discussion of the possible ways of preventing such a consequence. The fallacy in the argument that the government must hold down interest rates “to reduce the burden on the taxpayer” I have already pointed out in a previous column “Cheap Money Means Inflation” (Newsweek, Dec. 8, 1947).
But perhaps the greatest irony of the inflationary bond buying policy is that even its supposed direct beneficiary, the government bondholder himself, is not protected by it. On the contrary, he is a victim of it.
There is a widespread notion that the government “broke faith” with its bond buyers of the first world war because Liberty bonds were allowed to fall at one time to as low as 82 in the open market. Never again, said the second world war authorities, would so awful a thing happen. The new bonds would always be kept at par or better. So far they have been. And as a result the government bondholder of the second world war has suffered a much more real loss than the bond buyer of the first. When the Fourth Liberties fell to 82 in May of 1920, their owners were certainly not happy. For the cost of living had risen 26 percent from the day the bonds were issued in October 1918. When the bonds had fallen to 82, in other words, the purchasing power of the investor’s original dollars had fallen to 79 cents. For every dollar he had invested in the bonds the buyer then had a net purchasing power of only 65 cents. But this situation lasted for only a few months. It adversely affected merely the few who were forced to dispose of their bonds in that short period. Those who held on to them until they were redeemed in 1933 were not only paid off 100 cents on the dollar, but had the added advantage of a decline in living costs. For every dollar he had invested the buyer received in return (in addition to the interest in the meantime) a purchasing power of $1.28.
True, the present war bonds have been maintained on the market at par—in terms of dollars. But in order to keep the bonds at par the debt has been monetized, inflation has been increased, and the purchasing power of the dollar itself has been lowered. Though the war bonds issued in November 1942, for example, still sell around par, their purchasing power at par, in terms of living costs, is now only 69 percent of what it was when the bonds were bought.
The holder of these bonds, in other words, has not only suffered a decline of some 30 percent in the purchasing power of his bonds if he has to sell them now, but he is destined to suffer an even greater decline if an even higher price level prevails at the time of redemption. And an even higher price level surely will prevail if the present bond support policy is continued. So far as the interests of the bondholders are concerned, in short, the mere dollar “parity” maintained by present inflationary support policy is a delusion.
October 4, 1948
The present pegging of the government bond market by the Federal Reserve Banks, in order to hold the price up to par and keep the yield down to 2½ percent, is today the principal inflationary danger in our economy. The most important argument of those who insist on continuing this inflationary support policy is that if government bonds were left to a free market they would fall to a discount that would threaten the solvency of our banking system. Insofar as this fear has substance, there are several ways in which such a consequence could be prevented.
A substantial budget surplus and a continuous retirement of the public debt (at an average rate, certainly, of not less than $2,500,000,000 annually over the next decade) is at least an essential part of any solution of the government-bond problem. But it is far from the whole solution.
The economist Benjamin M. Anderson has proposed that the outstanding debt should be funded by offering private investors new long-term government bonds at rates of interest “that will really attract them.” To protect the banks in this change of policy, he suggests that banks holding long-term government bonds “be allowed to exchange them for new issues at the higher rates of interest, at a discount of, say, 2 percent as compared with cash subscribers, leaving them with some loss but not with losses that would ruin their depositors.” One drawback to this proposal is that the Treasury could not know in advance precisely what long-term rate of interest would be most economical and yet high enough to prevent the specter of a substantial discount on bank-held government bonds from arising all over again at a later time.
This difficulty is not insurmountable. One way of meeting it would be for the Treasury to offer to exchange outstanding long-term bonds for coupon bonds with a fluctuating rate of interest. Such bonds would provide, for example, that at the beginning of each six-month interest period the coupon rate would be changed to correspond (to, say, the nearest eighth of 1 percent) to the actual yield on the bonds at their market price at the end of the preceding six-month interest period. By this automatic device the new bonds could always be held very close to par. Their market value, in fact, ought not to fluctuate in a much wider range than those of six-month certificates.
On such a bond, it is true, the Treasury could not know in advance precisely what average interest rate it would have to pay over the following fiscal year. This uncertainty, however, would be no greater than that already attached to the Treasury’s short-term financing. And the risk that the government would be obliged to pay higher interest rates is a very minor evil compared with the further inflation that a continued effort to avoid paying higher interest would inevitably produce.
Such variable-coupon bonds, of course, would not be offered to raise new funds but only as a conversion privilege to holders of outstanding long-term bonds—only in exchange, say, for outstanding bonds with a maturity more than five years off. New orthodox fixed-interest long-term bonds could later be put out for non-bank investors at favorable opportunities, and the proceeds used to retire outstanding variable-coupon bonds. Neither the Federal Reserve Banks nor the member banks should be permitted to buy any more of the variable-coupon bonds or, in fact, any government security with a maturity longer than five years. And the Federal Reserve bond-pegging policy should, of course, be halted.
A detailed proposal for a fluctuating-coupon bond, I find, was put forward in early 1942 by a business analyst, W.W. Townsend. The object of his proposal at that time, however, was to enable the country’s banking system to absorb with safety the maximum volume of bonds to finance the war. The purpose of such a plan at present would be to make it clearly safe for the country’s banking system to stop buying outstanding bonds and to sell long-term government bonds as rapidly as nonbank investors could take them up.
October 11, 1948
At a few points the annual report of the International Monetary Fund touches reality. It declares that “the European countries must themselves place their economies on a self-sustaining basis.” It recognizes that government economic controls have at least “in certain instances . . . hampered production and weakened the incentive to work.” It points out that in most countries today “the most important consideration is the termination . . . of domestic inflation.” It concedes, finally, that in at least some—unspecified—countries “an adjustment of the exchange rate may sooner or later be necessary.”
But in spite of these assertions, the main argument of the 124-page report is thrown heavily on the side of retaining overvalued exchange rates, keeping exchange controls, prolonging all the internal controls that this necessitates, and even “temporarily” tightening and extending such controls. In brief, the report on net balance supports not the philosophy of freedom but the philosophy of collectivist planning. Its recommendations, which in the main contradict those just mentioned, would not hasten world recovery but retard or prevent it. They would drain the American economy farther in an effort to support the insupportable.
The chief reason for the chronic European trade deficits that we are trying desperately to make up by ECA grants is precisely the overvaluation of European currencies through exchange control. But though the Fund’s report admits that exchange-rate “adjustments” may be necessary “sooner or later,” it proceeds to offer all sorts of excuses for not making them now.
These excuses are often inconsistent. Thus on page 2 we are told that “by the end of 1947 nearly all the European countries had reached or exceeded their prewar outputs.” But on page 8 we learn that “the capacity of these countries to export has been severely reduced.” On page 23 we are told that “so long as an exchange rate does not hamper a country’s exports, there is little to be said in present world conditions for altering it.” Yet an excessive exchange rate must necessarily hamper a country’s exports by overpricing its goods in foreign markets.
The Fund’s standard ignores, moreover, the effect of an excessive exchange rate in unduly encouraging imports. Yet this consequence gets a sort of backdoor recognition on page 28, when the Fund declares: “Until the abnormal demand for imports can be checked by other means, some countries may have to use penalty rates of exchange for this purpose.” In other words, in order to defend an excessive exchange rate for exports, the Fund is forced to recommend a different exchange rate for imports. Yet it elsewhere professes to deplore precisely such “multiple currency practices.”
The Fund is alarmed by what it calls “premium prices” on gold. It wants an even more complete government suppression of private transactions in gold. Yet the real offense of gold “premium prices” is that they expose the fraudulence of existing official paper-money valuations.
The fact is that its basic premises drive the Fund to advocate not free enterprise but an international system of collectivist and coercive state “planning” as the only way to world recovery. On page 25 it declares flatly that “the fundamental conditions which would make possible the abandonment of trade and exchange restrictions are . . . entirely absent today in most of the world.”
The Fund complains about the inconvertibility of currencies, which has finally made it all but impossible for European countries to trade even with each other. But it never seems to occur to the authors of the report that inconvertibility is merely the inevitable consequences of preventing currencies from being bought and sold at their free-market rates. In a free market any currency could be converted at any amount into any other. In fact, it never occurs to the authors that the suppression of free markets—in currencies, exports, imports, investment, domestic prices, and domestic trade—is the main cause of the present world economic crisis.
October 18, 1948
Artificially low interest rates are a direct and major cause of inflation. I tried to point this out in a previous article, “Cheap Money Means Inflation” (Newsweek, Dec. 8, 1947). But the proposition is frequently denied by government monetary managers who want to maintain cheap money for political purposes. Not until the causation is so well and so widely understood that it can no longer be successfully disputed will inflation be halted abroad or at home.
The interest rate is a price like any other. Free prices balance the supply of and demand for commodities. Free interest rates balance the supply of and demand for loanable capital. When government edict holds a commodity below its free market price, an increased amount of that commodity is demanded. Exactly the same thing happens with credit. Artificially low interest rates increase both the number of borrowers and the amount that each of them wants to borrow.
People are confused by some experiences that seem on the surface to contradict this. They point out that interest rates can sometimes fall almost to nothing and still fail to stimulate borrowing, and can at other times rise very high before they discourage borrowing. But this is simply because the demand for loanable funds is largely a derived demand. It is a joint demand with other things. Interest rates are merely part of a composite cost of production.
The case is no different in principle from the demand for bricks. When all other costs are too high in relation to the price at which new houses can be sold, brickmakers might not increase their sales even if they offered their bricks for next to nothing. On the other hand, a 100 percent increase in price of bricks might mean, say, less than a 10 percent increase in the overall cost of building. So in good times a sharp rise in the price of bricks alone might not appreciably cut down the demand for housing or the derived demand for bricks.
But on the supply side there is a profound difference between credit and commodities. An excessively low price cuts down the supply of a commodity because it cuts profits and drives marginal producers out of business. But the creation of new credit has practically no cost of production. When a bank makes a new loan to a customer, it simply enters a deposit credit on its books for the amount. It creates new money with a stroke of the pen. Artificially low interest rates increase the demand for bank loans; increased bank loans mean increased bank deposits; increased deposits mean an increased volume of money; an increased volume of money means an increased monetary purchasing power pushing up the prices of goods. Cheap money means inflation.
Conversely, an accelerative increase in the creation of new credit and new money is necessary to keep interest rates down artificially.
This chain of causation is denied by our present monetary managers. Or rather, they admit its application to private credit, but not to government credit. They admit its application to the Federal Reserve member banks, but not to the Federal Reserve Banks themselves. Hence we have the preposterous situation in which the Federal Reserve authorities, in a “disinflationary” gesture, crack down on member-bank excess reserves under $1,000,000,000 (near a minimum working level), while the Federal Reserve Banks themselves hold government securities of more than $23,000,000,000. In the last year the Federal Reserve Banks have bought $8,800,000,000 of government bonds, of which $3,300,000,000 were bought in the last three months alone.
All this is the result of trying to hold down the interest yield on long-term government bonds to 2½ percent. As the Committee on Public Debt Policy declared in its final report last week: “Central banks and treasuries . . . cannot exercise controls over excessive credit expansion and at the same time keep money excessively cheap for government borrowing. When a Federal Reserve Bank buys government bonds to peg the price, Federal Reserve money flows out and increases the money supply. This is wholly inconsistent with the effort to fight inflation by reducing the money supply in other ways.”
October 25, 1948
Before the National Press Club in Washington on his recent visit, Sir Stafford Cripps, Britain’s Chancellor of the Exchequer, declared that the Labor government had “no idea whatever” of devaluing the pound sterling. He added that devaluation would “increase the price of our imports and decrease the price of exports, which is exactly the opposite of what we are trying to accomplish.” Later he explained that what he meant was that devaluation of the pound would swing the “terms of trade” still farther against Britain and require a larger volume of exports to pay for its imports.
Even if Sir Stafford’s theory of the exchanges were correct, his implied policy is hardly calculated to promote world revival. It treats an exchange rate not as something that reflects the real value of a currency, but as a weapon for exploiting other countries. The rate is to be manipulated so that the British can buy cheap and sell dear by forcing the rest of the world to sell cheap to and buy dear from Britain.
Sir Stafford’s theories, however, happen to be wrong. A nation cannot alter the terms of trade in its favor merely by manipulating its exchange rate.
Let us look at the matter first from the side of imports. If wheat is selling here at $2.16 a bushel, then a hundred bushels of wheat will cost the British $216. With the pound pegged at $4, they will cost the British buyer (ignoring subsidies) £54. If the pound fell to $3, the same wheat, it is true, would cost the British buyer £72. But it would not cost the British any more in dollars. And what Britain now complains of is not a pound shortage but a dollar shortage. The British Government can print all the pounds it wants. One of its troubles is that it has already printed too many.
Now let us look at the matter from the side of exports. The British sell cloth in our market, say, at $36 a bolt. At a $4 pound, the British exporter gets £9 for it. But if the pound fell to $3, the exporter would still be able to get $36 a bolt here. Therefore he would get £12 a bolt instead of £9. His sterling profits from export, and his incentive to export, would be that much greater.
Sir Stafford’s belief, therefore, that sterling devaluation would “increase the price of our imports and decrease the price of exports” is not true at all if we look at these prices in terms of dollars. And it is the supply of dollars about which the British bureaucrats are always complaining. If we look at these prices in terms of pounds, it is true that the price of Britain’s imports would be greater in pounds, but the exact opposite of the truth that it would get fewer pounds for its exports. On the contrary, it would get more.
It is the insistence of the British Government on keeping the pound above its free market value that is chiefly responsible for the chronic British trade deficit. An overvalued pound unduly encourages imports both of necessities and of luxuries. This forces the British bureaucrats to hold down imports by license, quota, and prohibition. And where the overvalued pound does not force British exporters to price themselves out of foreign markets, it makes the profit margin on their foreign sales so unattractive as compared with what they could get from domestic sales that the British Government has to order manufacturers to sell abroad, has to allocate goods for export, and has to forbid its own citizens from buying more British products than some arbitrary domestic allotment. Thus foreign trade is carried on by a series of compulsions on buyers and sellers, consumers and producers.
It is only Marshall-Plan aid that enables this system to keep going at all, by forcing the American taxpayer to pay for the trade deficit that the system creates. The European trade deficit could quickly be solved by free markets and free exchange rates, which would enormously stimulate exports at the same time as they would discourage imports. But most of the governments of Europe have no faith in free markets, do not understand their function, and will not permit them to operate. In addition, most European governments wish to conceal their inflations by holding down internal price levels by edict.
November 1, 1948
DALLAS—Inside the American boom Texas has a super-boom. Inside the Texas super-boom is the Houston super-duper-boom. It has been on for a long time. A town of less than 2,400 population in 1850, and 385,000 in 1940, Houston claims 495,000 today. Since 1939 the number of its manufacturing plants has almost doubled and its industrial employment has more than trebled. Such growth is no flash in the pan. It is Manifest Destiny.
There are many reasons for the incredible prosperity and industrial expansion of Texas. The chief one is oil. This one state produces more than 44 percent of the nation’s whole output of crude oil. It holds 55 percent of the nation’s entire proven oil reserves. In fact, the Texas oil rush of 1948 is reminiscent of the California gold rush of 1849. The state seems crowded with millionaires who were broke a few years ago and then struck oil. One hears of a dozen men worth more than $50,000,000 each, of half a dozen more worth more than $100,000,000 each.
But such estimates, true or false, give a distorted overall picture. There are more than 100,000 oil wells in Texas, and new ones are being drilled at a rate of 10,000 a year. But thousands of these turn out to be dry holes. As in a lottery, one is apt to hear only about the winners. One hears little about the huge misdirection and waste of capital and labor in the quests for oil that fail. Yet more than four out of every five of the wildcat wells drilled in Texas turn out to be dry. It is significant that the big companies are content to leave the gamble of exploration work largely to wildcatters and independents, and to buy the wells or fields after they have been proven.
But oil is only part of the Texas story. The state has a record cotton crop at high prices. It has been selling its cattle for record prices. It is the fastest growing center for chemical industries. It is a chief beneficiary of the decentralization of industry and of the new defense program. Everything seems to be working for Texas.
Politically the state is boiling. The Democrats are deeply and bitterly split. To the division between conservatives, States’ Righters, and New Dealers has been added the feud between the supporters of former Gov. Coke Stevenson and of Rep. Lyndon B. Johnson that arose from the Senatorial primary race. In the run-off Johnson ran ahead of Stevenson by only 87 votes out of a total of 988,295. The vote turned in from some of “the valley” counties was deeply suspicious. Stevenson supporters have charged fraudulent voting and counting. Johnson and his lieutenants have opposed investigation. Stevenson himself, on the issue of honest elections, has thrown his support to the Republican Senatorial candidate, Jack Porter.
Some political experts believe that the total vote in the Texas Senatorial race will be bigger than in the Presidential, and that Porter may run ahead of Dewey and Warren. Johnson, however, is expected to win. A serious question may then arise whether the Senate will seat him. If the new Senate majority is Republican, or even more if the Republicans need a majority of one to organize, then it is believed that Johnson’s right to a Senate seat will be challenged. So the Texas Senatorial imbroglio could have a decisive national consequence.
That Dewey can capture the Texas electoral vote is regarded by most observers as at best an outside possibility. The range of most guesses is that Truman will get between 50 and 60 percent of the popular vote, Dewey between 25 and 35 percent, Thurmond around 10 percent, and Wallace 3 to 5 percent. Even this, however, would be a remarkable Republican showing for Texas, and a still more remarkable anti-Democratic showing. For the first time on record prominent Texas newspapers, such as The Houston Chronicle, The Houston Post, and The Dallas News, have come out for the Republican ticket. Texas voters by the thousands are publicly and defiantly stripping off their life-long Democratic brass collars. One permanent result of the present revolt may be to make Texas a two-party state.
November 8, 1948
The democratic victory will have a crucial effect on the future freedom of the American economy. True, neither of the Presidential candidates supported what any of us would have called a free economy twenty years ago. And Governor Dewey, during the course of the campaign, supported farm parity prices, higher minimum wage rates and, by implication, government cheap money policies. But President Truman has gone farther. After the election of 1946 he steadily drifted in the direction of demanding further government controls, especially price fixing.
In trying to guess whether our future economy is likely to be “free” or not, it may help to clarify our ideas if we ask ourselves just how free our present economy actually is. All the rest of the world refers to us as a free economy, but, this is only a comparative term. If we assume, for purposes of definition (and not necessarily for endorsement), that a free economy would be one with no economic legislation except that embodied more or less in the common law against force, coercion, theft, fraud, and the enforcement of contracts, plus anti-monopoly legislation, we would find that we are already a remarkably controlled economy. We might divide present regulations and restrictions into three chief groups depending on the time of origin: (1) pre-New Deal regulations; (2) New Deal regulations; and (3) wartime controls.
Under pre-New Deal restrictions the main item would be the protective tariff. Others would be the ICC regulation of railroad rates; local regulation of public-utility rates; Federal Reserve and local banking requirements, and immigration restrictions.
Under the still retained New Deal regulations we would include: The Wagner Act (as modified by the Taft-Hartley amendment) which restricts the employer’s right to hire, fire, promote, demote, bargain individually or collectively (but under the Taft-Hartley Act puts some corresponding obligations on unions). The Norris-LaGuardia Act, which prevents the employer from getting court injunctions in strikes (though this was passed in 1932). The Wage-Hour Act, which prescribes a minimum wage of 40 cents an hour and 50 percent overtime above 40 hours, thus in effect controlling nearly all wage earners. The elaborate set of rules and regulations by the Securities and Exchange Commission for publicity, for offering securities, etc. The laws breaking up public-utility-holding companies. The creation of TVA’s with their government-subsidized competition with private utilities. The “parity” payments and postwar price floors for agriculture products, together with the government loans and storage that these require. The social insurance laws with their accompanying taxes and record-keeping obligations; unemployment insurance; old-age and survivor’s insurance; old-age and disability assistance, etc. The Robinson-Patman Act. Federal mortgage financing of housing.
Present controls which are in the main a holdover from the war include: Rent control. Steeply progressive income taxes; heavy corporation taxes; the development of the withholding tax. Export or import controls, requiring special licenses. Government-imposed stock speculation margin requirements; government grain-market regulations. Consumer installment-credit regulations. “Fair-employment-practice” acts in New York and other states, which prevent the employer from discriminating in employment on grounds of race, sex, color, religion, etc. Direct government purchase of grain for the foreign-aid program. The ECA itself. “Voluntary” allocations of scarce products. Artificial low-interest rates, and the government-bond-support program.
This rather haphazard inventory of the regulations already imposed shows how far we have come from the “free economy” of which we still boast. And certainly neither the arguments of Mr. Truman in the campaign nor its overall outcome are such as to encourage the hope that the tendency in the next four years will be toward a return to a free economy. On the contrary, the drive is toward more statism.
November 15, 1948
It is Jules Verne, I think, who somewhere tells the story about how the inhabitants of the earth agreed that on a given night and minute they would all raise a mighty shout in unison, in the hope that this terrific noise would be heard on the moon. When the appointed night and moment arrived, there was an unprecedented silence. Everybody, out of curiosity, had decided to keep still so that he might be the one listener to this historic marvel.
Something like that seems to have happened on Nov. 2. The complete unanimity of the polls and predictions made many voters regard the election as a preordained event that they personally could do nothing to determine. It was going to determine itself. So lukewarm supporters of Dewey stayed home, and others even gave President Truman, as the hopeless underdog, a token vote of sympathy for his plucky fight—only to be astounded, on Wednesday morning, at the collective result of what they had done.
Speaking more seriously—though I think there is at least some truth in the foregoing explanation—it was Dewey, not Mr. Truman, who was the real victim of the opinion polls. Dewey believed in them and based his whole campaign strategy upon them. He assumed that he already had a comfortable and even overwhelming lead, that the way to hold it was simply not to make any mistakes, and that the way not to make any mistakes was not to take any stand that would cost him any of his supporters. The result was that he repeated tediously high-sounding truisms about national unity and that he failed to debate the merits of a single major issue. He avoided all the little errors only by making the one tremendous error that defeated him.
Never in our history has a candidate been offered a more tempting profusion of crucial issues to debate. Never did a candidate throw them all away as disdainfully and systematically as did Dewey. He never troubled to explain to the voters just why the President’s Vinson appeasement gesture would have been so disastrous. He never hinted, except in the vaguest generalities, how he would halt inflation. On New Deal policies such as farm parity payments, social security, public housing, and Federal minimum wages he adopted a me-too attitude that many of his opponents thought was insincere and that many of his supporters hoped was insincere.
The outstanding example of his failure was the way he dealt with the Taft-Hartley Act. Here was a law passed by the overwhelming majority of Republicans in both Houses. The Republican Presidential candidate, therefore, was bound in the interest of his party to defend it. President Truman, moreover, was in an extremely vulnerable position on the act. A majority even of the Democrats in Congress had voted for it over his veto. None of his dreadful veto predictions about its consequences had been borne out by events. He had himself made use of its provisions repeatedly to combat major strikes.
Most of all, whatever its shortcomings, the Taft-Hartley Act was and is immensely superior to the Wagner Act that it displaced. It is not an “anti-labor” law but a pro-labor law. It protects the interests of the rank-and-file union member against the labor bosses. Mr. Truman blasted this law from beginning to end of his campaign. And Governor Dewey defended it with obvious reluctance, in a few apologetic sentences, chiefly emphasizing that it could be improved. Small wonder he was defeated on it.
Everybody is trying to figure why the polls were wrong. My guess is that they were probably right, as of the time they were taken, but that a sufficient number of voters (which did not have to mean more than three or four in every hundred) changed their minds in the last few days to reverse the result. With all respect to Mr. Truman’s unflagging fight, this was mainly, I think, the final consequence of Dewey’s say-nothing campaign.
The net result is that we are drifting into further inflation and collectivist planning by political default.
November 22, 1948
From time to time readers of this column suggest that I should forecast the future of business—tell whether we are headed for a boom or a bust, and exactly when it will come, how high or deep it will go, and how long it will last. I have refrained from such crystal gazing. The fate of the political experts who predicted the certain election of Dewey will help to explain why.
The economic future, like the political future, will be determined by future human behavior and decisions. That is why it is uncertain. And in spite of the enormous and constantly growing literature on business cycles, business forecasting will never, any more than opinion polls, become an exact science.
The reasons for this ought to be clear. The future of business never depends on any single factor. It depends on a combination of countless factors. None of us is near enough to omniscience to keep track of them all and to give each its exact weight. The typical professional business forecaster tends to assume that he can make a chart of past price movements, past volume of sales, past wage payments, or whatnot, and somehow pull out of it automatically the answer to the future. We ought to have learned by this time that he can’t. All statistics, even the most recent, necessarily refer to past situations. It is true that the past and the present, when carefully studied, can throw great light on future probabilities. That is how we must study them. But they can never tell us future certainties.
The factors from the past or present that we select to study are arbitrarily selected. To know even completely the situation about inventories, say, a few weeks ago, was not to know that Mr. Truman, and not Dewey, was going to be our next President. And to know completely the state of inventories today is not to know what Mr. Truman is now going to do, what Phil Murray is now going to advise or demand, what Stalin’s next move will be, or what will happen in Britain, France, or China. Yet such countless developments all go to determine the future state of business.
In brief, a full knowledge even of all business statistics put together cannot give the full answer to the business future. For the future of business is today affected even more by what happens “outside” of business than by what happens “inside.”
There is one more reason why business forecasting is so hazardous. When astronomers calculate the orbit and appearance of a comet, their predictions do not influence the comet. In human affairs, on the other hand, predictions about the future influence that future and change that future. It may have been precisely because Dewey’s political victory was so generally taken for granted that he was defeated. For it led him to make a disastrously wrong type of campaign and it led his supporters to relax their efforts.
In business, a general belief that there will be a rise in prices tends to bring about that rise. If, on the other hand, the business community were to become convinced that prices would be stable until next February and then start to break, it would start to act on that assumption immediately. Therefore the expected break would come not in February but right away. For what each of us is seeking as an individual consumer, speculator, or producer is not primarily to be right about the future but to be right sooner than anybody else. That is how exceptional gains are made. But that is something that can only be achieved exceptionally and individually, and not collectively.
I do not mean to disparage all efforts at business forecasting. All of us, no matter what our occupations, are forced constantly to make guesses about the future, and to act on them. We must try to make them as well informed as possible. But we will save ourselves from some of the worst jolts if we frankly recognize that our guesses are only guesses, and that we cannot reduce the human future to a scientific certainty.
November 29, 1948
A few weeks ago, in Texas, I visited the stockyards at Fort Worth. A close-up view of a great cattle market like this throws a brilliant light on the function of free markets in our economy.
The market in meat is as competitive as a market can get. Cattle are raised on 80 percent of the farms of this country. This means some 4,500,000 separate producers. This fact alone shows how silly were the leftist charges of a “producers’ strike” when meat ceilings were reimposed in the summer of 1946. And as meat in its finished form is bought by practically all the consumers of the nation, the frequent headlines about “buyers’ strikes” are equally silly.
There is virtually no possibility of collusive price fixing at either end, nor any evidence of monopolistic pricing in the middle. In 1947 the Big Four meat packers averaged only 1½ cents profit on every dollar of sales. The buyers for the big packers not only have to bid against each other and against the smaller packers, but against thousands of ranchmen and feed-lot owners. For only about half of the thousands of cattle that are poured into Fort Worth every day from motor trucks and freight cars are destined to go immediately to the slaughterhouse. A large part are bought for other ranges, and still another part for pen feeding and fattening.
And it is here that prices, and above all the relationships of prices to each other, play a most significant role. For whether steers are slaughtered or bought for further feeding, and whether for range feeding or pen feeding, depends on the relationship of the price obtainable for steers as meat to range costs and the price of feed. It is the present relative prices of meat in the butcher shops to meat on the hoof, of hogs to corn, of corn to hay and wheat, of hay and corn to steers, of steers to calves, hogs, and sheep, of the price of each of these to their expected future prices, and to the expected future prices of all the others—it is this incredibly intricate maze of relationships which determines how much corn and wheat will be planted, how many hogs will be raised, how many steers will be slaughtered now, how many held for further feeding, whether on ranges or in pens, for just how long, to just what weights, and so on.
It is not merely that the prices of corn and hogs and wheat and hay and steers are all tied to each other. The intimate connexity of prices run through the whole economy. It is the relation of the prices of thousands of different commodities to each other that determines the relative amounts produced of each of these commodities.
It is not surprising, in view of these intricate interrelationships, that government price fixing always upsets the balance of production. The real surprise would come if it did anything else. It takes, for example, about 10 bushels of corn to produce 100 pounds of hogs. Normally, in a free market, the prices of corn and hogs oscillate around a ratio at which (because of other costs) about 12 bushels of corn would buy 100 pounds of live hogs. The OPA price fixers forgot even this simple two-commodity ratio. If, through price-fixing, pork is underpriced in relation to corn, or beef in relation to corn or grazing costs, a shortage of meat soon develops.
Yet free markets solve these and enormously more complicated problems of balance quasi-automatically through the price system. Small wonder that Friedrich A. Hayek, in his new book Individualism and Economic Order,1 declares that if the free-market mechanism had been the result of deliberate human invention, it “would have been acclaimed as one of the greatest triumphs of the human mind.”
That meat prices are actually not too high in relation to the enlarged monetary income of the country is clearly shown by the fact that the per capita consumption of meat in 1947 was 155 pounds, compared with an average of 126 pounds from 1935 to 1939.
2Individualism and Economic Order. By Friedrich A. Hayek (272 pages, University of Chicago Press, $5).
December 6, 1948
LIMA, PERU—“Let observation with extensive view, survey mankind from China to Peru.” So wrote Samuel Johnson in the eighteenth century, and his advice is still good today, especially to a student of the world currency chaos. In China he can see what happens when inflation runs wild and when it takes many millions of the monetary unit to buy as much as one American dollar. And in Peru he can see what happens when an attempt is made to prevent the effects of inflation not by stopping its cause—the increase of money and credit—but by the strangulating device of exchange control.
This is not to imply that there is anything unique about inflation and exchange control in Peru. What is most instructive about Peruvian inflation and exchange control is precisely its typicality.
In a small country like this—with a relatively simple economy almost wholly dependent on foreign trade, a country that must import or die and export or die—the effects of exchange control stand out in startling relief. It has been the subject of daily battles carried on in clamorous headlines between the two leading Lima newspapers. All over its front page, with charts, statistics, and letters from exporters, La Prensa demands the abolition of exchange control while El Comercio, supporting the importers, demands that “the dollar must be held at 6.50 soles.”
The Peruvian crisis is instructive above all for the light it throws on the so-called world dollar shortage. European beneficiaries of the Marshall Plan have convinced American officialdom that their dollar shortage is the result of the destruction and dislocation of the war. But Latin American experience serves to remind us that any nation can have a dollar shortage and that an overvalued currency supported by exchange control is the certain way to get it.
The official rate for the sol is 6.50 to the dollar. This official rate has been retained in spite of mounting internal inflation. In August this year the total money supply in Peru was about five times the supply in 1940. Yet the 1947 physical output of Peru was in most products below 1940. The result is reflected in a rise in living costs by this September to 379 percent of the 1934–36 level and in wholesale prices to 437 percent of that level.
Even these figures understate the rise. For since January this year government authorities have been calculating the index number on the basis of official price ceilings and not on actual prices prevailing in the free or black market. In the legal free market here the sol has been selling around fifteen to the dollar. Until this September, however, exporters, with the exception of exporters of gold bars, were required to turn over to the government all their dollar exchange receipts at the official 6.50. By a decree of Sept. 6 exporters were required to turn over to the government after export taxes only 65 percent of their dollar receipts at the 6.50 rate. They were allowed to keep “exchange certificates” for the remaining 35 percent which they could use for imports or sell in the open market for about fifteen soles to the dollar. Even with this partial relief exporters have been squeezed between mounting domestic costs and the requirement to sell most of their dollars to the government, in effect at 40 cents apiece.
The result has been inevitable. In spite of a record world price for most of Peru’s exports—consisting chiefly of cotton, sugar, petroleum, copper, lead, zinc, silver, and gold and record exports measured in soles, many of Peru’s chief exports have been declining in actual quantities. Because of this and the abnormal incentive given to imports by the overvalued sol (i.e., by the privilege of buying the dollar at 40 cents), Peru has managed in 1947 to achieve the first unfavorable balance of trade in its history.
Exchange control has intensified the very dollar shortage it was designed to cure. It has been dislocating and strangling Peruvian production. This is the background of the present agitation for return to a free-exchange system.
December 13, 1948
LIMA, PERU—Gen. Manuel A. Odria, the new President of Peru who took power by a military coup Oct. 29, is a short man. But he has dignity and poise and gives an impression of strength. In the course of an interview he granted me I was also struck by a quality one would hardly expect in a man who had just come to power by revolutionary means—caution. This was particularly evident in his reply to my question about his policy on exchange control.
There are two schools of thought in Peru, he answered. One is in favor of keeping controls and one is in favor of abolishing them. “The government,” he declared cryptically, “has chosen the path that is best for the economy.”
The new exchange decree of Dec. 4 is a half-hearted compromise between the Bustamante decree and free exchanges. It will allow the exporter to retain 55 instead of 35 percent of his dollar receipts in certificates that he can sell in the free market; but he must still turn over 45 (instead of the previous 65) percent of his dollar receipts to the government at the official rate of 6.50 soles. Whatever relief this brings will be more than offset by the new decree forcing employers to give workers a 30 percent share in profits.
Free prices, free interest rates, and free exchange rates are the traditional way of preserving or restoring the trade balance between nations. Exchange control with the overvalued Peruvian sol has reversed the normal price incentives. It has systematically discouraged exports and encouraged imports. To compel an exporter to surrender most of the dollars he earns for 6.50 soles apiece instead of allowing him to get the market rate of about 15 soles is a way of imposing a huge concealed tax on the exporter in addition to the very heavy open tax on exports from Peru.
In metal mines this huge double tax has prevented the working of marginal ores and halted exploration and development. It has been primarily responsible for a falling acreage and production of cotton, Peru’s greatest single source of dollars. On the other hand, when the market rate for the sol is about 15 to the dollar, a license to import at the 6.50 rate is a huge but disguised subsidy to the importer.
This totalitarian system gives the government life-and-death powers over individual concerns. When administered by modestly paid minor officials who have discretionary power to grant or withhold import licenses, or even to expedite or delay them, and when the decisions of such minor officials may make a difference of millions of soles to an individual business concern, the emergence of wholesale bribery and corruption becomes inevitable.
This corruption spreads through the business community. There has been a flourishing black market in import licenses. There has been a rapid growth in the practice of fraudulent or double invoicing.
Nor has exchange control in Peru helped the consumer. Only a totalitarian and completely effective system of price control straight up to the retail level could do this. As things are, with few exceptions the benefits of the 6.50 import rate go merely to increase the profit margin of the favored importer, wholesaler, or retailer—who bases his selling price not on the cost to him but on short local supply and inflated domestic monetary demand.
Not only in Peru but everywhere, exchange control with an overvalued currency is a concealed tax on exporters to pay a disguised subsidy to the importers. It rests on the assumption that the producer can with impunity be forced to subsidize the consumer; that the volume of exports is practically automatic regardless of the monetary incentives or discouragements to it, and that the amount of available foreign exchange is rigidly fixed regardless of government policies.
All these assumptions are false. Peruvian experience underlines their falsity. You cannot penalize the producer and exporter without drying up the very stream of foreign-exchange receipts upon which the importer and the consumer depend.
December 20, 1948
Over the last two years this column has constantly returned to the theme that the so-called world dollar shortage is a myth; that it is merely another name for the effort of most countries to live beyond their means; and that the alleged shortage results directly from the insistence of foreign countries on maintaining an excessive valuation for their currencies by the totalitarian device of exchange control. This was the burden of my columns of Aug. 18 and Sept. 22, 1947, of May 10 and Aug. 16, 1948, and those in the last two weeks from Peru.
Yet there is hardly a finance minister in the world who acknowledges this truth publicly. The International Monetary Fund admits it only in a timid, left-handed, and inconsistent way. Those in charge of our ECA do not even seem to know that they are using American dollars mainly to prolong and subsidize the very system of exchange control and the very overvaluations that impede world recovery and lead toward further chaos in world trade. And the professors of economic theory, from whom one might hope for intellectual leadership in these matters, pile up a thousand subtleties, qualifications, and distinctions and end by understanding everything, in fact, but the main point.
It is consoling, in all this, to find a few honorable exceptions. Here, Ludwig von Mises has always seen the matter clearly. So has Wilhelm Röpke in Switzerland. In October a year ago Roy Harrod of Oxford had the courage to declare in his pamphlet “Are These Hardships Necessary?” that the “dollar famine” is “one of the most absurd phrases ever coined,” and that: “This allegation of a world ‘dollar shortage’ is surely one of the most brazen pieces of collective effrontery that has ever been uttered.”
And now, by his contribution “Dollar Shortage?” to a symposium published by the Harvard University Press,3 we must add the name of Gottfried Haberler. Dr. Haberler is the author of “The Theory of International Trade.” He is an economist of world reputation and was appointed by the League of Nations to make a study of business cycles, first published in 1936.
Some readers may recall that in a column entitled “Dollar Shortage Forever” on Aug. 16, I tried to explain why the dollar-shortage theory of the distinguished London Economist was nonsense. I am happy to find this judgment confirmed by Dr. Haberler. He quotes this from The Economist of as long ago as Dec. 4, 1943:
“It may be, in fact, that the [dollar] problem . . . should be looked upon as the result of a set of economic circumstances never contemplated by the textbooks—namely, the existence of a country [the U. S.] which, all policy apart, needs so little from the rest of the world, while the rest of the world requires so much from it, that an equilibrium of accounts can be brought about by no means available to a free or even a tolerably free market.”
Dr. Haberler calls this doctrine “entirely fallacious.” “Evidently,” he continues, “even in the land of Adam Smith, Ricardo, Marshall, and Keynes it is necessary to point out again and again that trade is governed by comparative not by absolute cost!” The theory that the United States will out-compete and undersell the rest of the world all along the line, he observes, is “high praise for the productive power of capitalism and free enterprise. But the economics is unacceptable nonetheless!”
Regarding the failure of the shortlived sterling convertibility experiment in the summer of 1947, he points out that: “In a state of repressed inflation with a fancy exchange rate, convertibility could not work. . . . Far from disproving the classical theory of international trade, the failure of convertibility could have been deduced in advance from the most elementary principles of classical or even preclassical (Sir Thomas Gresham, 1519–1579) economics.”
4 Foreign Economic Policy for the United States. Edited by Seymour E. Harris (490 pages. $6).
December 27, 1948
Congressional leaders are planning a new boost in corporate taxes. They seem to be divided only concerning whether this should take the form of an increase in the regular corporate tax rate or an “excess-profits” tax. Few voices are being raised to point out that either type of increase now would retard future American production. Corporate taxes are already harmfully high. They represent a form of double income taxation that directly discourages venture capital and industrial growth.
In dollar terms, present corporation profits seem high. Labor leaders charge that the corporations are “gouging” the public. But all this is simply a consequence of monetary inflation. As Keynes pointed out 28 years ago (see my column “Lenin Was Right,” Sept. 22, 1947), when the currency unit is debased by governmental policy high corporate profits “are a consequence and not a cause of rising prices.”
Moreover, the profits resulting from inflation are in large part illusory. In my column of Oct. 25, 1947, I pointed out that they were being greatly exaggerated, because sufficient allowance was not made either for unreal inventory profits, for inadequate depreciation charges, or for the shrunken purchasing power of final net dollar profits even after these had been correctly calculated.
The illusory nature of the profits resulting from inflation is no sudden new discovery, even though only a few are just becoming aware of it in this country. It was clearly pointed out by the Austrian economist Carl Menger as early as 1892. But from the recent hearings before a Congressional committee we are indebted to two economists, Sumner H. Slichter of Harvard and William A. Paton of the University of Michigan, for powerful restatement of the point.
“During the last three years,” Professor Slichter calculates, “American corporations have overstated their profits by approximately $16,400,000,000. This is the amount by which the reported statements of profits exaggerate the amount of income available to pay dividends, to expand plant, to increase wages, or to reduce prices.” While reported profits for 1948 will be between $20,000,000,000 and $21,000,000,000, Slichter estimates that real profits will be only about $16,000,000,000.
These wide discrepancies between real and reported profits come from two principal inaccuracies. “One arises from the fact that most corporations still insist on counting a rise in the cost of replacing inventories as profits. The other is that more corporations count the rise in the cost of replacing plant and equipment as profits. It is obviously ridiculous to count a rise in costs as profits and yet most corporations do it, and pay stiff taxes on the amount so reported.”
Are profits “excessive”? “The answer to this question depends upon how fast the community wishes industry to expand. If profits are causing industry to expand faster than the community would like to have it expand, they are excessive. If profits fail to bring as rapid an expansion of productive capacity as the community would like to have, profits are inadequate.”
Not merely present but prospective profits, in short, must be great enough to “induce the investment of capital at the present cost of construction and at the present prices of equipment.” This inducement, so far as the American public is concerned, doesn’t seem to be very great. In 1946, 1947, and the first half of 1948 “less than one-tenth of all personal savings went into corporate securities.” New financing through issue of common stocks has only been a trickle for years. This situation, as Professor Paton comments, “does not suggest that now is the time to try to pick a little more meat from the stockholder’s bones.”
On the contrary, it suggests that by overreaching themselves now, both labor leaders and our taxing authorities will retard the capital investment upon which the country depends to provide new factories and tools, to increase future real wages, and to enlarge future government revenues.
- 1Loyal readers of Newsweek had reason for disquiet when the latest issue hit the stands on May 3, 1954. Those who managed to endure the details of the ongoing Army-McCarthy hearings or the deteriorating French position in Indochina sought solace, and more stimulating fare, by flipping through as usual to the business section. There, in a series of pieces over the past month, columnist Henry Hazlitt had offered his typically engaging analysis of contemporary economics, examining, in the context of the recent recession, how a more steeply progressive tax code might dampen both government revenues and business profits. Now, however, his “Business Tides” column—a staple of Newsweek’s back pages since 1946—was nowhere to be found. Weeks passed, spring gave way to summer, but the troubling void remained. Nervous letters began to flood editors’ in-boxes. “I would like to know what has become of Henry Hazlitt’s column in your magazine,” demanded the executive VP of one Midwestern industrial association, echoing scores of other concerned correspondents. “Frankly, it was the principal if not the only reason that I subscribed.” Such missive-writers shuddered to contemplate whether management had discontinued the column, silencing the most clarion voice for economic liberty in American popular media.
- 2C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 3“For Your Information,” Newsweek (12 July 1954), p. 1; Henry Hazlitt, Economics in One Lesson (New York: Three Rivers Press, 1988).
- 4Newsweek’s editors elicited a collective sigh of relief upon announcing the return of “Business Tides” on July 12, now that its sixty-year-old author had convalesced from an extended cardiac illness. They also took the opportunity to reintroduce Henry Hazlitt to his audience, describing him as a “genial, quick-moving, soft-spoken Philadelphian” whose forty-year career in journalism began at the Wall Street Journal and included distinguished editorial positions at the New York Evening Mail, New York Herald, New York Sun, Nation, American Mercury, and New York Times. An esteemed literary critic and financial reporter, Hazlitt had cemented his national reputation with a best-selling primer on free market economics, Economics in One Lesson, published the same year he started at Newsweek—where, eight years later, his columns remained “extremely popular with readers.” Hazlitt would remain a fixture at the magazine until 1966, his longevity as a regular columnist surpassed at his retirement only by Raymond Moley’s.
