Business Tides
We Impose Collectivism
January 3, 1949
The White Paper on the British Government’s four-year recovery program is significant not only for what it tells about that government’s policies but for what it tells about our own. The Marshall Plan was put forward as a plan to combat Communism by helping the world to return to free enterprise. By almost imperceptible stages this objective has been reversed. We now insist that no country can get financial aid from us unless it rejects free enterprise in favor of government planning and collectivist controls.
This startling transformation has come about not by anybody’s conscious plot. It has come about because the basic assumptions of those in charge of the EGA are unconsciously collectivist.
The British White Paper makes this clear. The “general framework” of its four-year plan, it points out, “was one prescribed by OEEC [Organization for European Economic Cooperation] for all its members.” Last August “each member country was invited [by the OEEC] to prepare a statement showing how it proposed to reach the objective” of restoring “a satisfactory level of economic activity.” In asking for this the OEEC was in effect asking for a government plan. In asking for a government plan it was in effect asking for the suppression of free markets and free enterprise.
For government planning means central control. Where you have central control you cannot at the same time have private or individual control. One excludes the other. If the government is going to say exactly how much steel, coal, oil, electricity, chemicals, and textiles are going to be produced in the next four years, then individual firms cannot make their own decisions on how much they are going to produce of these things. If the government is going to plan just how great imports and exports and the trade deficit are going to be four years from now (a palpable absurdity anyway), then these things are not going to be left to the play of market forces.
Suppose, in reply to our demand for its “program” for economic recovery in the next four years, one European government had had the courage and intelligence to reply simply: “Our program is to restore a free economy,” period. In all likelihood the EGA would have told that country that this was no program at all—that it was (in the fashionable patter of the moment) merely a proposal “to sit idly by and do nothing.”
Yet what is America’s four-year production plan? Unless something is just about to he sprung on us. “America.” unlike “England” and “France,” has no plan at all. True, General Motors, United States Steel, the firms making television sets, the wheat grower in Kansas, the drugstore owner on Main Street have their own individual plan. So do most consumers—the family planning to build a home, to buy a car or a washing machine. But an overall government plan displaces such individual plans. In Britain the industrialists are told who is going to be allowed how much to expand what. The consumers are told how much of what they will be allowed to buy. The workers are told where and at what they can work. These four-year plans are obviously inspired by Russia’s five-year plans, paying Communism the sincerest flattery of imitation. And they are now being imposed by us on the Marshall-Plan nations under the pretense that we are not “interfering” in their economies at all. But when our officials are asked to insist on the conditions that would really bring recovery, such as the restoration of free exchanges and free markets, they reply that this would constitute “interference.” They dare not recommend a free economy for Europe, but they insist on continued collectivist planning.
As a result, the official summary of the British White Paper contains not a single word about the real cause of the British and the general European trade deficit. That cause is exchange control. Europe will continue to be “short” of dollars just as long as Europeans are not permitted to pay the real market price for dollars. 
January 10, 1949
In this column of Feb. 2, 1948, I cited the rent-control situation in France as an example of the future we ourselves are heading for unless we begin quickly to work our way back to freedom. The Foundation for Economic Education at Irvington, N. Y., has now published a pamphlet by an eminent French writer, Bertrand de Jouvenel, explaining in detail the situation to which rent control in France has led. Here are his main facts:
A dollar a month will pay a wage earner’s rent in Paris. (All figures are stated in dollars at roughly 300 francs to the dollar.) Rent on the average makes up 1.4 percent of the French wage earner’s expenses. A month’s rent for a family of six costs no more than eleven packages of cigarettes. Even rents paid by important officials or executives are no more than $4 to $10 a month. Parisians spend on shows every month far more than they pay for three months’ rent.
This may seem desirable for tenants lucky enough to be in possession. Those in search of lodgings, however, cannot legally find them at any price. There are no vacancies. Deaths are the only opportunity. Tottering old people out to sun themselves in public gardens will be shadowed back to their flat by an eager young wife who will strike a bargain with the janitor to be warned first when the death occurs. Buying one’s way into an apartment costs anywhere from $500 to $1,500 a room.
As a result of these fantastically low rents no new lodgings are being built. Practically none have been built, in fact, for the last twelve years. Of the 84,000 buildings for habitation in Paris, 27 percent are more than 98 years old. Almost 90 percent were built before the first world war.
Even a very lenient officialdom estimates that there are about 16,000 buildings in such disrepair that there is nothing else to do but pull them down. A fifth of the Paris population does not even have running water in their lodgings. More than half the population must go out of their lodgings to find a lavatory. More than four-fifths of the population have no bath or shower. Disrepair constantly increases. Owners are not in a financial position to allow them to keep up their buildings, let alone improve them. Their expenses commonly exceed their income. In fact, while rents since 1914 have been at the outside multiplied less than seven times, taxes have been multiplied thirteen times and the cost of repairs has been multiplied from 120 to 150 times. “An outsider,” comments M. de Jouvenel, “may be tempted to think that only an incredible amount of folly can have led us to this. But it is not so. We got there by easy, almost unnoticed stages, slipping down the gentle slope of rent control.” A fantastically complicated new rent law went into effect the first of this year, but it is unlikely to change the basic situation.
New houses put up in France today are legally free from rent ceilings. Why aren’t they being built? There are two main reasons. New apartments would have to rent for prices representing from ten to thirteen times present rent ceilings, in order to repay the costs of construction and reward the capital invested. But it would be psychologically impossible to find customers at these rents, when it is still possible for them to double up (at great inconvenience, of course) at less than one tenth these figures.
Moreover, those who had been foolish enough to trust the government before the second world war by putting up new apartments exempted from the then-existing rent control now find these buildings also subject to rent ceilings. They are not allowed to get in terms of real income a tenth of what they got in 1939. Prospective housing investors have no assurance that they will not be fooled again.
In sum, such is now the spread between the legal and the economic price of lodgings in France that “even the most fervent advocates of freedom are scared at the prospect of a return to freedom. . . . Rent control is self-perpetuating and culminates in both the physical ruin of housing and the legal dispossession of the owners. . . . The havoc wrought here is not the work of the enemy but of our own measures.”
January 17, 1949
If there is anything any of us ever dreamed of having that Mr. Truman did not demand in his message to Congress it must have been an oversight. He called for more highways, more electric power, more reclamation, an increase of 87½ percent in minimum wages, “parity” income for farmers, more farm storage space, more rural electrification, more TVA’s, more irrigation, bigger social-security benefits, prepaid-medical insurance, more doctors, more hospitals, more nurses, more teachers, more schools, more low-rent public housing, more slum clearance, more farm housing, and also more foreign aid.
What is astonishing, given his premises, is that he stopped where he did. If we are regularly to make a present to millions of people of all or part of their housing and food, why not also their furniture and clothing, stoves and refrigerators, shoes and overcoats, books and musical instruments?
“The number of low-rent public housing units provided for in the legislation should be increased to 1,000,000 units in the next seven years,” declares Mr. Truman. But then he adds: “Even this number of units will not begin to meet our need for new housing.” If it won’t, why not increase it to the number that will? Isn’t it simply a matter of raising a figure in a law? And won’t the only opponents of this increase be the “selfish interests” and “the privileged few”?
And why increase the minimum wage only to a niggardly 75 cents an hour? Why not $1, $2, $5 an hour? Or why not simply pass a law that people must be paid enough to buy whatever they happen to need? Then we could skip all the rest of Mr. Truman’s giveaway program.
Once upon a time, when programs of this sort were proposed (though on a far less grandiose and imaginative scale), a few men of little faith used to inquire timidly where the money was coming from. Such questions are now laughingly waved aside with the simple answer that we will put more taxes on the big corporations or on the rich, or with the still simpler answer that the government can print the money.
We cannot, in fact, understand what the catch is in all such glittering handout programs unless we pass beyond the monetary veil to the underlying realities. And the chief underlying reality is that we cannot distribute more than we produce. Total production, even American production, is limited. Even Mr. Truman pointed out correctly that “our production is still not large enough to satisfy our demands.” Now it is private enterprise, not government, that produces. The government cannot give anything to A without first or ultimately taking it from B. And this is the elementary truth that Mr. Truman’s supersonic New Dealism blandly ignores.
Mr. Truman asks, for example, for “prompt Federal financial aid to the states.” The Federal government, of course, has nothing to give to the states that it doesn’t first of all take from the people of the states. Mr. Truman insists on artificial price supports for farm products. This means that city workers will be forced to pay higher prices for their food. He insists on higher minimum wages. This means higher production costs. It means that workers will be forced to pay higher prices for industrial products. It means eventual unemployment.
Mr. Truman does not see that all his demands compete with each other. We cannot have more of everything unless we produce more of everything. Other things being equal, we can have more hospitals only at the cost of fewer highways, or more foreign aid only at the cost of fewer farm houses.
The government can pile benefits on A only by taking them from B. In doing this it will further undermine the production incentives of both A and B. For A will get something without working for it and B will have more taken from him no matter how hard he works.
Mr. Truman’s program, in short, will mean not more for all of us but less for all of us.
January 24, 1949
In the fourth year of peace, the President proposes to spend some $42,000,000,000. This is equal to the amount spent in the entire five peacetime years from 1935 to 1939 inclusive. And few people ventured to describe those Roosevelt spending years as models of economy at the time.
For national-defense spending alone, not counting foreign aid, Mr. Truman wants nearly $16,000, 000.000. This is more than was spent in the entire eighteen-year period from 1922 through 1939. And during nearly half of those years we faced an aggressive Japan and an ever more menacing Germany.
Such comparisons cannot be dismissed with the easy assertion that things cost more now. The Federal budget is a constantly mounting percentage even of our inflated national income.
The real comparisons are even graver. For when the operations of social-security trust funds are included, as they should be (because they involve compulsory tax payments). the proposed annual expenditures are not $42,000,000,000 but $46,000,000,000. Nor does the President’s budget include any allowance for military lend-lease, though he nevertheless declares that he expects “later to request funds” for this.
Apologists for this budget are already falling back on the familiar technique of trying to silence its critics by asking rhetorically: “Where would you cut?” Behind this taunt is the implicit assumption that the burden of proof is on those who wish to economize. The burden of proof, on the contrary, must be placed for each item squarely on the shoulders of those who demand the expenditures. And it is not enough for them to prove, even if they could do so, that everything that these expenditures will buy is “needed.” They must prove that the citizens of the country need each of these things even more than they need the things for which they would spend their own money if it were not taken away from them in taxes.
It is precisely this that Mr. Truman’s economic philosophy overlooks. He wants the government to meet this “need” and that “need.” He tacitly assumes that everything the government pays out is a net addition toward meeting these “needs.” It is nothing of the kind. It is merely a substitution. At best it meets one need only at the cost of making it impossible to meet some other need. The government has not a dollar to hand to A that it does not take from B, or perhaps from A himself. Mr. Truman assumes that A must be protected against his own improvidence and that B must be compelled to use part or most of his earnings to support A’s family instead of his own.
When Mr. Truman demands all sorts of government giveaway programs, and proposes to meet the added expense mainly by even higher taxes on corporations, he is in effect saying that our need for these giveaways is far greater than our need to improve our industrial plant, equipment, and tools to increase workers productivity, real wages, and the future production of the country.
It is not surprising that his program is riddled with internal contradictions. He wants, for example, to impose still heavier taxes on the steel companies. This will still further reduce their incentive for reinvestment in plant and leave them even less funds for such reinvestment. Then he declares that the need for more steel is so imperative that the government itself must build the plants that the steel companies are discouraged or prevented from building.
He regularly insists that the Federal budget must be balanced to avoid inflation. But he wants to do this not by smaller but by larger expenditures, which can be balanced only by still greater taxation. He can balance such a Federal budget only by an unprecedented peacetime drain on the budgets of all the rest of us. By destroying incentives and preventing capital accumulation, he will reduce the volume of production to be shared among everybody.
January 31, 1949
The three bulky documents that President Truman dropped on the new Congress—the annual message, the budget, and the economic report—all preached the same philosophy and made substantially the same recommendations. But of them all the economic report perhaps most clearly revealed the out-and-out statist philosophy that the President has now adopted. In it, as in his other messages, he continued to give lip service to “our system of private enterprise.” But every recommendation he made (except, say, those for the renewal of the reciprocal-trade agreements and the repeal of the oleomargarine tax) revealed complete lack of trust in the ability of that system to provide a balanced, orderly, and expanding production.
Our future, he said, must not be left to “chance”—by which he meant that it must not be left to free enterprise. No favorable outcome, he continued, will be realized “automatically”—by which he meant that it will not be realized by the self-adjusting processes of free markets. Far from recognizing the role of speculation in reducing price fluctuations, he blamed it for the fluctuations that have taken place. Throughout he demanded “positive” and “affirmative” action—which turned out to mean continuous government intervention in the economic process at every stage and at every point.
Mr. Truman assumed, in brief, not only that bureaucrats know better than the market what the general level of prices ought to be, but that they know better than the market what the relative price of one commodity should be to that of another, what the relative production of each commodity (e.g., steel) ought to be, exactly how high wages, interest, and profits ought to be, and what the proportion ought to be of consumer expenditures to investment expenditures. Last year industry, deducting inadequate depreciation charges, and at the peak of an inflation, reported an average profit of about 5 cents on every dollar of sales. Yet Mr. Truman does not hesitate to say that these profits “are in excess of the levels needed to furnish incentives and equity funds for industrial expansion,” What are the grounds for this ipse dixit? The extreme difficulty in recent years of raising new equity capital through the sale of common stock is surely not one of them.
But perhaps what is most disturbing of all in the President’s economic report is his refusal to deal seriously with the problem of inflation, or to recognize that it is primarily the government’s own policies that have been responsible for inflation. On the contrary, he not only defends but insists upon the continuance of the most inflationary policy now being followed—the monetization of the public debt through government bond pegging. This inflationary course is actually praised as a “contribution to the stability of the economy.”
The present situation underlines one of the fallacies behind the long-held New Deal theory of a “compensated economy.” The apostles of this theory insisted that it was the function of government to stabilize the national economy by spending heavily in times of depression and economizing or paying off debt in times of inflation. But even if the “compensated-economy” theory were not confused economically, it is completely unrealistic politically. For it fails to recognize that while nearly every government in power will seize upon any excuse to inflate in times of depression, it will almost never have the courage to deflate, or even to stop inflating, in the midst of an inflationary boom. No officeholder wants to assume responsibility for bringing a boom to a halt. Mr. Truman and his economic advisers today, while paying lip service to the idea of fighting inflation, constantly muddy the waters by pretending that there is an equal danger of deflation. So they advocate, at the top of the present boom, an unparalleled peacetime inflationary spending program.
The “compensated economy,” in practice, turns out to be not merely an uncompensated but a discompensated economy, in which the government itself does most to load the scales still further on the inflationary side.
February 7, 1949
Administration forces are all set to drive through an amendment to the Fair Labor Standards Act boosting the national minimum wage from 40 cents an hour to 75. They have even provided for a further administrative boost of the legal minimum to $1 an hour in selected industries.
They are now convinced that they can cure any economic deficiency whatever simply by forbidding it. Wages stand today in this country at the highest levels they have ever reached anywhere on the globe or in the entire history of mankind. But we are about to pass a law to compel them to be higher. Few have the courage to question this proposal. Who wants to be accused of favoring poverty and low wages?
Yet the question to be asked of this proposal is not how good are the intentions of its sponsors, but what will be its effect? Its first effect will be a boost in costs of production all along the line. It will mean an overnight increase in the minimum wage of no less than 87½ percent, and in industries where the $1 minimum is ordered, of no less than 150 percent. Nor will this increase be confined to the part of the labor force now getting less than the new minimums. For other workers will demand the maintenance of their existing differentials. The result must be upward pressure on all wage rates.
One of two results must follow. Marginal firms will find that they cannot afford the higher costs. They will be forced to drop their marginal workers or go out of business entirely. In that case the main result will be shrinking production and growing unemployment. Or the government will resort to still further monetary inflation, in order to enable industry to pay the higher wage rates. In that case the higher money wages will be offset by price increases and will therefore be illusory.
The new minimum-wage proposal ignores the existence and function of geographic wage differentials. It will act as a protective tariff for Northern industry against Southern. It will encourage the concentration of industry by driving it from the South to the North and from the small towns to the big cities.
Yet the Administration is set to force these changes through Congress without adequate study or debate. It seems too much even to hope that in doing so it will repeal the Walsh-Healey Act (which is simply a duplicate minimum-wage law with different standards) or that it will repeal the biggest joker in the existing wage-hour law. This joker is the provision that the employer must pay a 50 percent penalty rate for all hours above 40 a week, no matter what his regular rate of pay.
Under this provision a law ostensibly passed to apply only to marginal workers and their employers controls in practice the wages of nearly all the workers of the country. Out of this provision have sprung all the disruptive portal-to-portal and overtime-on-overtime rulings. The provision penalizes most the employers who are already paying most. It rewards most the workers who are already best off. Under it the employer who pays his workers 40 cents an hour need pay only 20 cents additional for overtime. But the employer who pays his workers $1.90 an hour must pay 95 cents an hour additional for overtime.
The cure for this absurdity would be simple. Those who insist on boosting the regular minimum-wage rate to 75 cents an hour could at least agree to fix the overtime minimum wage rate above 40 hours at $1.12½ an hour. Then both workers and employers would be free to negotiate higher regular or higher overtime wages by individual or collective bargaining.
But it is visionary to expect that the Federal bureaucracy would now agree to reduce the scope of its meddling at any point or consent to throw fewer monkey wrenches into our economic machinery. For every employer must be kept in constant fear of the Federal officeholders, no matter what he pays, and every worker must be made to feel that his welfare is dependent upon governmental favor.
February 14, 1949
Few speeches of Mr. Truman’s have revealed as much confusion of thought as his plea before the National Planning Association for a planned economy. He began by making a distinction, which he did not clarify, between a “planned” economy and a “controlled” economy. He implied that a “controlled” economy was totalitarian but a “planned” economy was democratic and free. The distinction is, in fact, purely verbal and semantic. Fundamentally government planning and government control are two words for the same thing. If anything, “control” implies less government in the economy than “planning.”
“I have been interested in planning,” said Mr. Truman, “all my life . . . ever since I was old enough to understand what the word meant. You know that we plan our day’s work. We plan the houses in which we are going to live. . . . But when we talk about planning the things we want to do economically we are charged with being Communists and fellow travelers.”
The italics are mine. They call attention to the fact, of which Mr. Truman seems blissfully unaware, that the “we” in his last sentence is a radically different “we” from that in his preceding sentences. When he says that “we” plan our day’s work or our houses, he means that each of us plans his own day’s work or his own house. When he talks about planning the things “we” want to do economically he means the things that the government wants to do—the things that he wants to do.
In making a false distinction Mr. Truman misses the real and vital one. The distinction is not at all between what we want to do “economically” and what we want to do in other ways. To plan your own day’s work or your own house is to plan economically. Nor is the real distinction one between planning and not planning—though it is this confusion that the government planners have chiefly exploited. The real question involved is whose planning.
Who is to plan and for whom? Is each of us to be allowed to plan his own day’s work? Or are bureaucrats to plan it for him? Is each of 2,000,000 large and small business managers to decide what product he is going to make, and how much of it, and how? Or is the government (in the person, say, of Secretary Sawyer) going to tell each of them what to make, and how much of it, and in what way, and at what price? Is each of 6,000,000 farm operators to decide what he shall plant and how much? Or is Secretary Brannan going to tell him? Is each worker going to be allowed to work where be pleases? Or will Secretary Tobin direct labor? Is each consumer going to buy what he wants? Or only what some bureaucrat thinks is good for him?
Anyone who thinks these questions are not real need look no farther than England, where the government decides (partly on American ECA insistence) how much of each product is to be produced in the next three or four years: what its citizens are permitted to import, and from what country; what prices they are permitted to ask or pay for domestic products or for foreign currencies; where and at what workers may take jobs and how much of what consumers are permitted to buy. That is what is meant by this euphemism “planning.” It is a simple denial of free markets, of free enterprise, of economic freedom.
All this was most compactly stated by the British economist Lionel Robbins in his book The Great Depression, published fifteen years ago; “Socialism is a term which is not universally popular. But ‘planning’—ah! magic word—who would not plan? . . . But if it were to be true to its name, it could not acknowledge the substance of ownership, the right of individual disposal of the actual instruments of production. For ‘planning’ involves central control. And central control excludes the right of individual disposal. Nothing but intellectual confusion can result from a failure to realize that Planning and Socialism are fundamentally the same. Now the leaders of opinion want planning.”
February 21, 1949
Governor Dewey’s Lincoln Day speech in Washington underlined one major reason why he was twice defeated for the Presidency. It is his lack of a coherent political and economic philosophy, his lack of great convictions on great issues. Many voters complained during the campaign that they did not know where Dewey stood. As the campaign wore on, their perplexity turned to misgiving. He started as a sure winner. By the second of October he had defeated the prospects of a Republican Congress, and by the second of November he had defeated even himself.
Now that he has spoken again, it is harder than ever to tell where he stands. He begins by asserting that “the Republican Party is split wide open.” (Such an announcement, on the part of the “titular head,” is certainly the way to split it wide open or to widen any split.) He goes on to picture the party as consisting on one side of extremists against all “progress” and on the other side of extremists “who seem to embrace the entire New Deal and want to go far beyond it.... Both courses are fatal to our party.” What he fails to see is that the most fatal course of all is precisely the sort of “middle road” he recommends—one in which the Republicans accept the basic premises of the New Deal but allow themselves to be outbid in their application.
Surely he should have learned this from the last campaign. He accepted the principle of farm price supports. This prevented him from pointing out that farm price supports raise the cost of food for city workers. So he lost potential votes in the cities and even votes of the farmers themselves. For his belated and halfhearted acceptance of the “parity” nonsense made them suspect that he and the Republicans would offer them less of the taxpayer’s money than Mr. Truman. Can the Republicans hope to win if they endorse the principle of Federal minimum-wage laws but offer only 65 cents an hour instead of 75 or only 75 instead of $1? Can they hope to win if they come out belatedly for building private housing at public expense but offer only 500,000 units instead of Mr. Truman’s 1,000,000? Why so little of a wonderful thing? In the first half of his speech Mr. Dewey seems to be for social security without reservation. In the second half he expresses concern about “a system where everything man gets from cradle to grave is doled out to him by a ruling clique.” But he does not tell us on what principle he decides how much social security is very, very good and how much more makes it sinister and bad. He does not tell us how, once we embark upon compulsory social security, we can prevent politicians of all parties from outbidding each other till the system has become a crushing burden. Does Mr. Dewey know that in France the cost to the employer of social benefits in 1947 was placed at some 36 percent over and above the wages in the metal industries and some 47 percent in the electrical industries?
In the admirable second half of his speech Mr. Dewey points out that our free system produces more than all the rest of the world together of steel, automobiles, and telephones. He properly ridicules “a little nationalizing” as “like putting just one drop of strychnine in a glass of perfectly good milk.” But his speech as a whole, like the 1948 Republican platform that he praises, is a tissue of self-contradictions (see this column, Newsweek, July 5, 1948).
Mr. Dewey wants to eat his cake and have it too. He wants a planned economy and a free one. He wants to face both ways. He is trying both to accept and reject the New Deal. His program, in six words, is: “Me too—but not as much.” Such a program could only lead to a third disastrous defeat.
The choice before the world today is nothing less than the choice between private enterprise and collectivist planning, between capitalism and socialism, between economic freedom and totalitarian serfdom. We must make up our minds. There is no right amount of strychnine in the milk.
February 28, 1949
From the beginning the basic aims of the Marshall Plan have been vague and confused. If anyone pointed to the economic misconceptions behind it, he was told that its aims were primarily political. If he called attention to its political inadequacies, he was told that the plan was primarily economic. Trying to pin down its purposes has been like trying to nail a custard pie against a wall.
Politically the Marshall Plan was an irrelevant way of dealing with the problem that the proposed Atlantic pact would face up to directly. Unfortunately, just at the time when our military assurances to Western Europe, as the President has insisted, should be strong and unmistakable, our leading senators wish to make them weak and ambiguous.
Probably the most influential economic argument for the Marshall Plan a year and a half ago was the plea that Europe was starving. A typical cartoon showed an emaciated woman in rags, labeled “Europe,” begging for a crust of bread while a pompous, overfed windbag, labeled “Congress.” callously debated the matter. While the picture of European starvation was overdrawn and its causes misconceived, the wheat-crop failure in France, for example, was real enough. But now that European crops are good, American crops the greatest in history, and world prices are plunging downward, Administration spokesmen run in all directions at once. They urge us to send more food to a Europe that needs it less, in order to keep up American farm prices. Or they demand “emergency” expansion of storage facilities—when stocks of grain are already at record levels—in order to enable American farmers to withhold still more food from a world that these officials themselves insist is short of food.
It is frequently declared that the purpose of the Marshall Plan is to “raise European living standards.” But it has never been made clear to what level they ought to be raised. Is it conceived to be America’s duty to restore each European country’s living standard to that country’s prewar standard? Why? And what of countries in which industrial-production indexes already exceed the prewar figure—for example, Great Britain, Ireland, the Netherlands, Norway, Sweden, and Denmark? Why must we continue to pour in free help?
Or suppose (what is in fact true) that there are wide prewar and present discrepancies between the average per capita incomes in different European countries. Should we try to equalize the averages and bring the poorer countries up to the richer—perhaps with help from the richer? The National Industrial Conference Board has made a valiant effort to determine the average per capita 1947 national incomes of the ERP beneficiaries. Some results: Greece, $117; Austria, $302; Netherlands, $392; Norway, $448; Belgium, $608; France, $661; Great Britain, $723; Denmark, $730; Sweden, $848.
It is clear that if the primary purpose were to eliminate poverty and to equalize living standards, the distribution of ERP help would be vastly different from what it is. For example, with reciprocal-aid provisions of the ERP, France gets 27.4 percent of the total, Britain 20.5 percent, and Belgium less than 1 percent, though the Belgium per capita income is already below that of France or Britain.
What the ERP has in fact been trying to do is to pay for each country’s foreign-trade deficit. Yet the size of its foreign-trade deficit is unrelated to a country’s living standard or total production. A table of comparison might astonish Congress. The truth is that each country’s trade deficit is today brought about mainly by a coercive exchange control combined with a false currency value. But successive Administration witnesses urging a continuation of the Marshall Plan have either treated this cause as negligible or ignored it altogether.
As a nation we have been pouring billions of dollars into Europe and are planning to pour in still more billions, without seriously stopping to ask ourselves just what it is that we are trying to do.
March 7, 1949
Suppose our government were to halt all its foreign lending programs and turn them back once more to private investors. We can imagine the following conversation between a government official from Ruritania and an American investment banker.
RURITANIAN OFFICIAL: As your government has stopped its giveaway program, we are forced to come to you private bankers. But of course there just aren’t enough private funds for world revival.
AMERICAN BANKER: Why not? Our government never gave you anything that it didn’t first take from private funds in taxes. Sufficient private funds certainly exist.
RO: But your investors show no desire to put them into Europe.
AB: For excellent reasons. Putting aside the Russian menace, which isn’t your fault, your governments have systematically destroyed confidence.
RO: What assurances would restore it?
AB: I’ve made up a list. In view of the past record of your government, I’m afraid it would now have to pledge itself: (1) Not to seize or nationalize the American investors’ capital or the private firms in which it was invested. (2) Not to impose crushing taxation. (3) Against price fixing, wage-increase decrees, or profit controls that would imperil our investment. (4) To impartial enforcement of contracts. (5) Against barriers to the removal of our private funds. (6) To remove exchange controls. (7) To make your currency freely convertible at its free market value. (8) To halt internal inflation by balancing your budget and stopping further expansion of money and credit.
RO: You needn’t go on. Our government will never consent to such policy reversals.
AB: Very well. Then American investors will not be interested in risking their capital in your country.
RO: This is economic imperialism! You are trying to dictate to our government! You wish to infringe the sovereignty of Ruritania! We are determined to have socialism! You are interfering in our internal affairs.
AB: Listen, who came to whom for a loan? We’re not forcing you to do anything. You can have all the socialism you want. Only you can’t expect to find American investors eager to subsidize and prolong it at their expense.
RO: This is ideological prejudice.
AB: Private investors do have a prejudice in favor of government policies that seem likely to insure production, the safety of their principal, and a sufficient profit.
RO: Ah, that’s it! Private profit! It’s insistence on that that holds up world recovery.
AB: On the contrary, it is the constant search for profit that maximizes and balances production. Profit is, in fact, the best indicator we have of how much production has actually taken place. If a firm in Ruritania manufactures something at a loss, it means that the value of the labor and raw materials put into making the product is greater than the value of the product itself. That isn’t production but sheer waste of labor and materials.
RO: Are you contending that repayable private loans help world recovery more than non-repayable government gifts?
AB: Precisely. Take another look at that list of reforms. You will find that they are not only necessary to attract foreign private capital to your country but to the revival of your domestic investment. They would probably encourage your own terrified capital to come out of hiding to such an extent as to make you soon independent of foreign capital altogether. Such assurances are essential.
RO: Why didn’t your government officials insist on these assurances?
AB: It wasn’t their money. Besides, it would have created dangerous friction between governments. But we private bankers can safely suggest them, because we are after all only middlemen telling you what conditions are necessary to make Ruritanian securities attractive to private American investors.
RO: I appreciate your friendly advice. Perhaps after all.
March 14, 1949
We are all set to prolong rent control for at least another fifteen months. At the end of that period we will no doubt prolong it again. For the Administration means to extend rent control “until the supply of housing has caught up with the demand.” But every student of elementary economics knows that supply and demand are meaningless terms except in relation to a price. It is precisely prices, in fact, that bring supply and demand to a balance. As long as construction, repair, and service costs remain around 1949 levels, while we try to hold rents at prewar levels, supply never can catch up with demand. It is rent control itself that keeps supply from catching up with demand. It perpetuates the very problem it pretends to solve.
With the general cost of living 71 percent above the 1935–39 level, with furniture 96 percent above, clothing 96 percent above, food 105 percent above, and estimates of construction costs ranging from 80 to 145 percent above, our legislators insist on holding rents down to only 20 percent above. With weekly factory wages 144 percent above the 1935–39 level, the average worker pays for rent a far smaller percentage of his income than he ever did before the war or before the imposition of rent control.
In this column of Jan. 10 I discussed the pamphlet by Bertrand de Jouvenel on the appalling consequences of rent control in France. The British situation differs only in degree. The London Economist of Jan. 8 points out that where it was once considered normal for an English family to spend 20 percent of its income in rent, the proportion under rent control has dropped to the neighborhood of 10 to 12 percent. This decline, comments that journal, “is strange to find in combination with a severe shortage of housing—unless, indeed [as may be much truer than most people imagine] the low relative level of rents is a large part of the cause of the housing shortage.”
I have been receiving recently a number of letters from worried property owners. One that comes from a widow in Evansville, Ind., is typical:
“The majority of landlords are not wealthy people.... But today a landlord is apparently a despised citizen, classed with gangsters and criminals, all because he happens to have a house, for which he has worked and saved, and which somebody else now wants to occupy at his expense—namely, the tenant. The law gives it to him, because there are more tenants than landlords and that means more votes.... Tighe E. Woods claims that if rents were decontrolled they would go up 55 percent. Perhaps; perhaps not. Ten years ago I could get a room papered for $6; now it would cost me $20. What percentage of increase is that? . . . Naturally tenants want the law continued. If Congress were to pass a law to force grocers to give me groceries at half price I might endorse it myself. . . .”
If rent control is ever terminated, it will be because people come to recognize that under it old housing rapidly deteriorates and new housing finally ceases to be built. No new private apartments are put up in France today, for example, because they would have to rent at ten to thirteen times present rent ceilings in order to repay the costs of construction. Even in our own country there is already increasing pressure for solving the problem by public-housing schemes—that is, by forcing the taxpayers to subsidize each other as tenants.
To get us out of this government-created crisis I can only renew the type of compromise suggestions I made in this column of Feb. 2, 1948. Permit landlords now to raise rents each month, say, by 2 percent of the percentage that other items in the cost of living have increased since 1935–39. It would then still take 50 months, or more than four years, for the permitted increase in rents to equal the average rise in other items. At the end of that time decontrol could be automatic. Such a program would restore the incentive to maintain and build private rental housing at the same time as it got us tenants back to economic realities without too much of a jolt.
March 21, 1949
Tablets, said to be 200 years older than the Babylonian Code of Hammurabi, have just been translated which show that the ancient kingdom of Eshnunna had wage control and price control. The news ought not to have come as a surprise. For the code of Hammurabi itself (unearthed in 1902), which was promulgated earlier than 2000 B.C., fixed prices, wages, interest rates, and fees. This makes price control at least about 4,000 years old.
The real economic discovery of civilization was the free market. It was Adam Smith, in The Wealth of Nations, published in 1776, who more clearly than any other mind up to his time glimpsed the marvels of the free market. In the first flush of his discovery he compared the system of free prices and free profits and losses to “an invisible hand” that led men pursuing their own interest to promote the welfare of the whole nation more effectively than when they deliberately tried to promote it.
It was in 1776 also that Gibbon, in The Decline and Fall of the Roman Empire, wrote: “When the luxurious citizens of Antioch complained of the high price of poultry and fish . . . the emperor [Julian] ventured on a very dangerous and doubtful step, of fixing, by legal authority, the value of corn. He enacted that, in a time of scarcity, it should be sold at a price which had seldom been known in the most plentiful years. . . . The consequences might have been foreseen, and were soon felt... The proprietors of land or of corn withheld from the city the accustomed supply; and the small quantities that appeared in the market were secretly sold at an advanced and illegal price.”
Sixty years prior to Julian’s venture, Emperor Diocletian, in A.D. 301, had issued a famous edict fixing prices and wages. The punishment for exceeding the prices fixed was death or deportation. “The edict was well-intended but abortive,” comments the Encyclopedia Britannica. “The actual effect was disastrous.”
Let our history skip now to 1793, when the leaders of the French Revolution, in a desperate effort to offset the consequences of their own reckless overissue of paper money, passed a law imposing price ceilings. It was in some respects more reasonable than our own OPA. It allowed prices to be one-third higher than in 1790; it permitted the addition of a 5 percent profit for the wholesaler and 10 percent for the retailer. But as Andrew D. White wrote in 1876: “The first result of the Maximum [price law] was that every means was taken to evade the fixed price imposed, and the farmers brought in as little produce as they possibly could. This increased the scarcity, and the people of the large cities were put on an allowance. Tickets were issued authorizing the bearer to obtain at the official prices a certain amount of bread or sugar or soap or wood or coal to cover immediate necessities.”
But even with this early rationing system the law “could not be enforced.” Shopkeepers “could not sell such goods without ruin. The result was that very many went out of business and the remainder forced buyers to pay enormous charges under the very natural excuse that the seller risked his life in trading at all. That this excuse was valid is easily seen by the daily lists of those condemned to the guillotine, in which not infrequently figure the names of men charged with violating the Maximum [price] laws.” Within a little more than a year the law had to be repealed.
The moral of our little history is familiar. It is that “those who cannot remember the past are condemned to repeat it.” For this is what our “modern” governments do today all over the world. Ironically, it is those who now wish to return to this ancient totalitarian device who are fondest of calling themselves “progressives.” They are also fond of saying that those who believe in economic liberty “are living in the nineteenth century.” These controlists have yet to learn that they themselves are still living, as the discoveries in Babylonia attest, in the nineteenth century—B.C.!
March 28, 1949
The Marshall Plan has now become sacrosanct and apparently impervious to argument or facts. Even when a high official of the British Government blurts out in an official speech that Britain has now achieved complete recovery, he raises only a few eyebrows in Congress, and these are promptly lowered by the hasty assurance of other officials that the first one spoke out of turn. Yet Undersecretary Mayhew’s statement is confirmed by the official indexes of Great Britain, and for that matter of Ireland, the Netherlands, Norway, Sweden, and Denmark, which show that industrial production in all these countries is now above the prewar level.
When this is pointed out, the reply is: “True; but our country still has an unfavorable balance of trade; and of course it is the American taxpayer’s duty to pay for it. And he may as well know that we intend to go on buying more than we sell even beyond 1952.”
In brief, in spite of the fact that these countries are now producing more than they produced before the war, they announce that they will continue to live beyond their means. They will continue to consume more than they produce. They will continue to buy more than they expect to pay for. They present figures showing what their foreign-trade deficit is going to be in future years. They talk as if a foreign-trade deficit were something foreordained, some malign fate, instead of something that they bring about by their own policies.
It is not merely the former European belligerents but our Latin American neighbors, and in fact nearly all the former neutrals, who now complain of a “dollar shortage.” The primary cause of these chronic foreign-trade deficits and dollar shortages is not mysterious. It is exchange control. Every government that imposes exchange control contends that it is forced to do so by the dollar shortage. The truth is the reverse. It is the exchange control itself that causes and perpetuates the dollar shortage.
It is needless to spell out here all over again just how and why it does this. I have explained the reasons in my book Will Dollars Save the World? in 1947 and in numerous Newsweek columns since. They have been pointed out in the last few years by such economists as John Jewkes in England, Wilhelm Röpke in Switzerland, Trygve Hoff in Norway, and Gottfried Haberler and Walter Sulzbach here, to mention only a few. But so far as the ECA is concerned, they might just as well never have written.
Perhaps an analogy would help. The 1947 per capita income of Mississippi was lower than that of Great Britain, Denmark, Sweden, or France. Yet Washington did not start rushing millions of dollars into Mississippi either to “halt Communism” there or to enable Mississippians to buy more goods from New York. But if Mississippi’s state government suddenly decreed that 50 cents in Mississippi was worth $1 in New York; if it ordered its exporters to turn over all their dollars from sales to New York to the state government and accept only 50 cents apiece for them; and if Mississippi’s government then allotted the proceeds to its importers to enable them to buy every dollar’s worth of goods from New York at a cost to the importer of only 50 cents—then everybody in Mississippi would want to import from New York and nobody in Mississippi would be crazy enough to export to New York. Mississippi would immediately have an unfavorable balance of trade and an appalling shortage of New York dollars.
If Congress is determined to go ahead with the ECA—as apparently it is—then it ought at least to insist on one minimum condition. This is the abolition of exchange control. Such a condition would not only save American taxpayers billions of dollars; it would do more than any other single measure to restore free enterprise in Europe and bring real world recovery. Exchange control is not only a totalitarian device in itself (inspired by Hitler’s Schacht); it is the keystone of present European controlism, nationalism, and socialism.
April 4, 1949
The purpose of the Atlantic Pact is twofold. It is to strengthen the democracies of Europe to maintain their integrity and independence. And it is to give the clearest possible warning to Stalin of the consequences of any threat on his part to that integrity and independence. The Atlantic Pact is not merely the strongest single measure to assure the world’s peace today; it is perhaps our only hope of peace.
The pact can achieve its purpose only if its pledges are unmistakable. For the clearer we make these pledges, the less likely we are ever to be called upon to meet them. The weaker and more ambiguous the pledges, the more liable we are to tempt the Kremlin to gamble on our indecision. In short, a weak and ambiguous commitment on our part would actually be more dangerous than a firm and unequivocal one.
The Senate, therefore, should not only ratify the pact promptly, so that the masters of Russia will not be tempted to exploit any interval of indecision, but whatever uncertainties are left by the language of the pact itself should be removed by the declarations of senators, by interpretations of the pact by the President and the State Department, and even (though this is constitutionally supererogatory) by a strong resolution of endorsement on the part of the House.
These political steps will clear the way for reconsideration of the economic phases of our foreign policy. The strange assumption has grown up in this country that the extent of our “international cooperation” is something to be measured primarily by the number of dollars we are willing to give away. It is taken for granted that our participation in the Atlantic Pact must necessarily cost us at least a couple of billions more on top of the $5,580,000,000 already asked for continuance of the ERP. If it were really necessary for us to contribute a couple of billions to help rearm Europe, these funds could easily be taken out of this $5,580,000,000 for “recovery.”
Not only is there no need for us to pay for European rearmament, however, but with our participation in the Atlantic Pact the last excuse for the continuance of the ERP in its present form has disappeared. The economic arguments for the ERP, as I have tried to point out in previous articles (e.g., Newsweek, Feb. 28) are hopelessly confused. Now the political raison d’être of the Marshall Plan has disappeared. For politically the Atlantic Pact does directly what the Marshall Plan did only symbolically.
The European democracies have in fact the resources to rearm themselves. And if they lack determination to do this, any monetary contribution we make to their rearmament will be worse than futile. For there is no way in which we can insure that either the money or the equipment we contribute will actually result in a net increase of European armament by that amount.
It will do no good, in other words, to earmark our contributions to make sure that they are used for rearmament. Suppose, for example, that Ruritania decides that it is essential to provide x millions of dollars for defense. It will spend this amount by taking it out of other potential expenditures, whether we make any contribution or not. But if American instead of Ruritanian taxpayers contribute this x million dollars, there is no assurance that Ruritania will spend our x million dollars in addition to the amount of money it would have spent for defense anyway.
It is far more probable that our contribution would simply release Ruritanian resources for spending in other directions. Ruritania, freed from necessity for military spending, has just that much more available for bigger social security schemes, bigger food subsidies, bigger nationalization deficits, or whatnot.
This simple economic principle of substitution has been ignored in all the proposals for American rearmament of Europe as well as in the “special accounts” and similar futile efforts of the ECA to check the use in Europe of our specific ERP dollars.
April 11, 1949
In his inaugural address President Truman announced what has now become the famous “fourth point”—“a bold new program” for “underdeveloped areas,” a program to “foster capital investment in areas needing development,” to “greatly increase the industrial activity in other nations,” and to “raise substantially their standards of living.”
No sooner was this announced than the brains of Washington bureaucrats began to bubble with grandiose schemes for giving away still more of the American taxpayer’s money to foreign lands. Our government representative put the idea before the Economic and Social Council of the United Nations, which adopted a resolution approving it. Now the ECA has set up a “colonial development division.” And Deputy Administrator Bruce says that this new division is intended to carry out “point four.”
Before we go farther with this idea it may be instructive to look into its origin. I do not know who sold the idea to Mr. Truman. But at least the record shows clearly where the idea came from in the first place. The following quotations are from a book published in 1944:
“America can underwrite a gigantic program of the industrialization of Africa, to be launched immediately. . . . It must initiate a general and steady rise in the standard of life of the African peoples. . . .
“Closely related socially, economically, and politically with Africa are the Near Eastern countries of Arabia, Iraq, Iran, Syria, Lebanon, Palestine, and Trans-Jordan. . . . Here also a broad regional program of economic development is called for. . . .
“What is clearly demanded by the situation is that the United States take the lead in proposing a common program of economic development of the Latin American countries. . . . For Latin America [such a program] opens the door for an immense leap ahead in progress. . . .
“For the United States especially it contributes a large part of the answer to that all-important question as to whether we shall be able to keep our national economy in operation. . . .
“The government can do it, if ‘free enterprise’ fails to meet the challenge and bogs down on the job.
“Our government can create a series of giant industrial development corporations, each in partnership with some other government or group of governments, and set them to work upon large-scale plans of railroad and highway building, agricultural and industrial development, and all-round modernization in all the devastated and undeveloped areas of the world. America has the skilled technicians capable of producing the plans for such projects, sufficient to get them under way, within a six-month period of time after a decision is made. . . .
“On a world scale the combined projects could be self-liquidating in the period of a generation. They would become the best investments the American capitalist class had ever made in its whole history.”
The book in which this proposal appeared five years ago was Teheran: Our Path in War and Peace (International Publishers). And the name of the author was Earl Browder, then still officially head of the American branch of the Communist Party (temporarily calling itself the Communist Political Association).
We need not point out here everything that is wrong with this proposal on political and economic grounds. We need not point out, for example, that every million dollars of capital we send abroad sets back our own capital development by just that much. And this at a time when President Truman himself insists that “at least $50,000,000,000 should be invested by industry to improve and expand our [own] productive facilities over the next few years,” and when he complains that our own steel, oil, and electrical industries are not being expanded fast enough to suit him.
It is enough to point out for the moment that the idea for the “bold new program” comes straight out of the book of the then head of the Communist Party in this country.
April 18, 1949
The harsh realities of the new British budget were anticipated by the London Economist. As that weekly pointed out in its issue of March 19:
“The price of government in Great Britain today is 40 percent of the total of all incomes. . . . This is the hideous prospect that faces the British people. Even though every item of government expenditure is approved in detail... any such rate of taxation, if continued for long, will be disastrous to the national economy. . . . A state that taxes away 40 percent of all incomes, and much more of the incomes of the successful and the energetic, is killing the motive power that keeps it alive. . . .
“If taxation remains at 40 percent, it will be impossible for the community to generate enough savings to maintain its capital. . . . The long continuance of taxation of anything like 40 percent of the national income will ruin the country. It will not do so spectacularly in any one year or the next—there might be more hope if it would. . . .
“The lamentable thing is that it is very difficult, to the point of impossibility, to see how we can escape from the vise in which we are caught. . . . It is still official policy that the food subsidies—or most of them—are temporary, but it requires a sanguine temperament to believe that any government will ever dare actually to take them off. . . . There will have to be outright repeal of one or more major social schemes. Which is it to be? Education? The health service? Unemployment insurance? Old-age pensions? Housing subsidies? The whole face of British politics would have to suffer a complete change before any one of these became possible. It is a lamentable truth, but an inescapable one, that the British democracy would rather ruin itself than give up any one of its major spending projects. . . . Unless the price of government is reduced, the British economy will gradually strangle itself.”
All of which was confirmed by Sir Stafford Cripps in his budget speech. “How then are we going to get along with all this load of expense on our backs? By producing more.” But he neglected to point out that the tax load itself erodes the incentives and capital that increase production.
The amount of our own national income being taken by our Federal and local governments is about 25 percent. Some may think this moderate compared with the more clearly ruinous British 40 percent; but it is in fact dangerously excessive. The British, at least, still have part of their capital deficiency made up for them by our ERP. There will be no one to do that for us.
Yet not a day passes without a new government spending scheme being put forward in Washington, or in the states and cities. President Truman will soon propose a new multi-billion-dollar national health program. We are being asked to throw still more billions into Europe for armament. Our Secretary of Agriculture wants a new and more extensive type of multibillion-dollar farm subsidy. The public housing advocates are vociferous. The education lobby demands $10,000,000,000 in the next ten years for new school buildings.
All of these people talk as if the funds they were demanding were created by the government out of thin air, or could be taken out of some mysterious but inexhaustible idle reserve somewhere. They haven’t yet learned arithmetic. They still refuse to recognize that every dollar appropriated for them or their schemes leaves just one less dollar to the family who has earned it to spend for its own food or housing or clothing, or save for education or travel.
Our government spending zealots have not yet learned that the American tax burden is already excessive. The additional funds they think can most easily be seized for taxes are precisely the most basic and most vital funds of all. They are the funds that would otherwise go into investment—into improving and increasing the tools and equipment in the hands of the workers, increasing their individual productivity, their real wages, and the national production on which all social progress depends.
April 25, 1949
Secretary Charles F. Brannan’s new farm subsidy scheme at least admits what the Administration has hitherto denied—that the present farm price support program raises the cost of food to consumers. Inadvertently it also betrays the completely one-sided operation of the present program. The present “parity” was based on the contention that the 1909–14 relationship of farm to nonfarm prices (one of the most favorable to farm prices in our entire history) was the “normal” and “fair” one. But last year, Mr. Brannan concedes, “farmers received 160 percent of the theoretical parity income.” This is only another way of saying that industrial income or prices last year were 37½ percent below “parity.” But no farm lobbyist demanded relief for industry or even urged farmers to turn back subsidies to the government. Farm “relief” marched on.
Secretary Brannan now wants to change the system not because it pays farmers too much but because he thinks it doesn’t begin to pay them enough. He is worried about the “historical gap” between farm and nonfarm income. Even last year “the average net income of farm people from all sources was only $909 per capita .. . compared with the non-farm average of $1,569.” This difference is “indefensible.” Farmers must have the same “standards of living afforded persons in other gainful occupation.”
Now if farmers must be supplied with cash from the Treasury to bring their standards of living up to those in other gainful occupations, then in consistency why shouldn’t those in every occupation be paid enough to have the same standard of living as those in every other? Why not cash subsidies to close the gap between average wages in work-shirt factories of $26 a week and average wages in oil refineries of $77 a week? Or to close the gap between the farmer with the lowest income and the farmer with the highest? Or to close the gap between the $15,000 salaries of Cabinet officials and the $1,400 average per capita income? Why not, in consistency, demand equality of everybody’s income with everybody else’s, regardless of his contribution to production?
Brannan outbids all previous subsidizers. He would let supply and demand determine the market prices of farm products, and then he would pay the farmers, in cash, the difference between these market prices and a “fair,” or Brannan, price. For example: “If it is necessary to get milk down to the area of 15 cents a quart at retail, in order to have maximum consumption, and use production payments to assure farmers of fair returns, I think both farmers and consumers will want to do it.” But why not reduce the price to 10 cents a quart? Or give it away free?
Apparently no proposal is now too preposterous or too insulting to the electorate’s intelligence for the Administration to put forward. Brannan proposes high prices for producers and low prices for consumers. And his presentation never once mentions the Forgotten Man, the taxpayer, who is expected to pay the difference.
Brannan blandly talks as if the Treasury cash turned over to the farmer would be a net addition to the purchasing power for industrial goods. A schoolboy could tell him that it would be a mere transfer. The taxpayer would be deprived of exactly as much purchasing power as the farmer gained. But Brannan apparently relies on everyone’s keeping the delusion that the taxpayer will turn out to be some other fellow. Naturally he did not give any estimate of the cost of his program. It is in fact impossible to estimate the cost without knowing in advance exactly what future conditions are going to be.
Brannan’s scheme is a glaring illustration of what happens once we reject free markets, destroy the connection between income received and value produced, and accept the premises of the pressure-group welfare state.
May 2, 1949
The Taft-Hartley Act is essentially nothing more than an amended Wagner Act. Like that act, it in effect turns the government itself into a union-organizing agency. It is no accident that under the Taft-Hartley Act union membership has been at peak levels and that wage rates have gone up faster either than living costs or man-hour productivity.
Like the Wagner Act, the Taft-Hartley Act abridges management’s freedom to manage. It compels the employer to “bargain collectively” with a particular union leader, no matter how unreasonable his demands may be. This requirement to “bargain” has never been precisely defined. In spite of specific limiting clauses introduced by the Taft-Hartley Act, and specific denials by the Labor Board, this phrase has been in practice interpreted to mean the making of concessions. For if the employer, in response to union demands, simply says “No,” or simply proposes, say, in response to a demand for a wage increase of 15 percent, a wage reduction of 15 percent, and then sits tight, how can he be said to be bargaining “in good faith”?
More importantly, if he cannot reach an agreement with the particular leader of the union certified by the NLRB, there is no one else with whom he is legally permitted to reach an agreement. What would we expect the result to be if a manufacturer were legally permitted to bargain with only one supplier of a raw material, and were legally forbidden to negotiate with any other supplier if he could not reach a workable agreement with that one?
It is this exclusive bargaining provision, common to the Wagner and the Taft-Hartley Acts, and to the Administration and Wood bills, that has built up the tremendous economic and political power of the Lewises and Murrays, the Greens and Petrillos. These men have been turned into huge legally certified monopolists. They have been made, in effect, legal arms of the Government in their negotiations with management.
Instead of reexamining the dubious economic and legal principle behind this provision, the authors of the Taft-Hartley Act retained it, and then tried to limit and offset its most obviously harmful effects. The Wagner Act enormously increased the power and use of the strike weapon. For it took most of the risks out of strikes and deprived the employer of most of his previous economic power to combat strikes. The authors of the Taft-Hartley Act sought to offset this by putting in the hands of the government some of the anti-strike powers that had been stricken from the hands of the employer. And they sought to “balance” some of the coercions on the employer by corresponding coercions on the unions. For example, they made it “an unfair labor practice” for a union as well as an employer “to refuse to bargain collectively.”
But the moment an effort was made to put any limits whatever on the power of union officials, these officials, who had not only acquiesced in but demanded the one-sided government coercions on employers, denounced the two-sided provisions as a “slave labor” law. Therefore the present servile Administration bill, while continuing to impose upon employers a compulsory duty to bargain collectively with unions, would once more exempt unions from any corresponding obligation. “In short,” as the House minority report correctly sums it up, the Administration bill “would have the effect of encouraging, fostering, and nurturing uncontrolled union monopolies in the U.S., and of conferring upon union officials unbridled and unconfined monopolistic power.”
But that the Administration bill is so much worse than the Taft-Hartley Act does not mean that even the latter is good. By retaining the Wagner Act basic principles, it has in fact encouraged and made it possible for unions to impose excessive wage and other demands. These have already led to unemployment in some lines and threaten to bring it in others. There is little prospect that pending legislation will change this situation.
May 9, 1949
We are now being told that our prosperity has been kept going in the last few years by our huge government spending, particularly on armaments and foreign aid. Any decline in this spending, we are now warned, would bring a recession. We are told, in fact, that if further signs of recession develop the Government must spend still more to keep the boom whipped up.
This doctrine is completely false. Assuming a balanced budget, an increase in government spending does not on net balance stimulate business activity at all. For every dollar that the government spends, the tax-payers have been deprived of a dollar to spend. All that a heavy government spending program can do is to divert spending from one channel into another. If we give Europeans more money to buy American goods, we have just that much less money left to buy our own goods. If we spend more for armament, we have just that much less left for television sets, refrigerators, or food. Even the Nazis knew they were choosing between guns and butter.
A huge government spending program with a balanced budget not only fails to stimulate economic activity but greatly reduces economic welfare. A $15,300,000,000 armament program, regardless of its military justification, leaves us just that much less resources to build new housing or to increase or improve our tools of production for civilian goods. Whether or not our new $5,000,000,000 ERP donation is now needed in Europe, it must obviously force us either to reduce our own consumption or to retard our own capital development by that amount. We cannot give our cake away and eat it too.
The more sophisticated advocates of a “compensated economy” recognize that huge government expenditures do not in themselves create prosperity. They put their emphasis on the amount of monetary purchasing power that government spending adds. This, they point out, is determined by the excess of government expenditures over tax collections. Put more bluntly, the prosperity would be brought about by government deficits. It is not the total size of the government expenditures but the size of the deficits that “adds to purchasing power.”
But when the compensated-economy doctrine is clearly stated in this form it has implications that its proponents have never clearly recognized. The official estimate of government receipts for the 1950 fiscal year is $41,000,000,000. Suppose it were decided that what was necessary to keep the boom whirling was a deficit of $5,000,000,000. This could, of course, be achieved by spending $46,000,000,000 (Mr. Truman has already put forward more than enough schemes to do that easily). But the inflationary deficit could be achieved just as well by holding expenditures to $41,000,000,000 and reducing taxes to $36,000,000,000. Or even by reducing expenditures to $36,000,000,000 and reducing taxes to $31,000,000,000. We could cut expenditures indefinitely, in other words, and still get our added inflation, provided only that we cut taxes still more.
Moreover, taxes could be either reduced or restored quicker than expenditures could be increased or halted. Increased expenditures create determined vested interests and tend to become permanent. Higher taxes to support higher spending destroy incentives and production. Lower taxes increase incentives and production. In short, if we wish to embark upon deficit financing again to keep our inflationary boom going, doing it through tax reductions is more flexible, more effective, and less dangerous than doing it through higher government spending.
But all this merely emphasizes the bankruptcy of the whole compensated-economy doctrine. Increased government expenditures balanced by increased taxes do not keep a boom going at all. Only deficits, financed by the creation of more money and bank credit, could do that. But this would mean merely a resumption of monetary inflation. It could prolong the boom only at the eventual cost of a bigger bust.
May 16, 1949
The right to strike is commonly defended as if it were identical with the right of the individual to quit work. To limit the right to strike, it is therefore asserted, is to impose economic “slavery.”
But just as there are qualifications (as reflected in our libel and obscenity laws) even to the right of free speech, so there are qualifications even to the right to quit work individually. A surgeon who quit in the middle of an operation, a railroad engineer who left his train and passengers at a deserted place, or a ship captain who left a sinking ship before the passengers or crew, would be held guilty of criminal neglect of duty.
Moreover, the attempt to treat the right to strike as identical with the right of the individual to give up his job must be set down as either confused or hypocritical. It is not merely that in a strike the workers quit simultaneously and collusively. The difference goes much deeper. For the strikers are not in fact giving up their jobs. On the contrary, they want to keep those very jobs—on better terms. They insist, in fact, that they have property rights in these jobs. They often resort to intimidation, coercion, and violence in order to prevent others from taking the jobs that they themselves have voluntarily abandoned.
So when most union leaders insist on the unbridled right to strike, they are insisting not merely on the right of union members to quit work but on their right to prevent others from taking the jobs they have vacated. They assert the right to prevent others from working. It is a merit of the Taft-Hartley Act that it at least partly and indirectly takes cognizance of this. It makes it (section 8b) “an unfair labor practice for a labor organization or its agents to restrain or coerce employees in the exercise of the rights guaranteed in section 7.”
In the case of the Smith Cabinet Manufacturing Co. the Labor Board found, for example, that the following conduct of the United Furniture Workers of America, Local 309, CIO, constituted such restraint and coercion: “(1) the carrying of sticks by the pickets on the picket line; (2) the open piling of bricks for use by the pickets; (3) the blocking of plant entrance by railroad ties, automobiles, raised gutter plates, and tacks; (4) the threat of violence to the nonstriking employees over the loudspeaker . . . (7) the warning given nonstriking employees that ‘when we get in with the union you old fellows won’t have a job’; (8) the placing of pickets in such a manner as to prevent nonstriking employees from performing their work; (9) the goon-squad mass assaults upon various nonstriking employees . . . (12) the barring from the plant of Superintendent Simpson and Foreman McKinney by force and intimidation ...” And so on.
Mr. Truman would have been on strong ground, economically and legally, if he had asked simply for the repeal of the Taft-Hartley Act, period. But he tried to force a return, with the Lesinski bill, to the intolerable conditions under the one-sided Wagner Act in which the Labor Board was not authorized to take cognizance of the kind of outrages just outlined, though it compelled the employer to recognize and “bargain” with unions that practiced such outrages.
If a Federal labor relations act, therefore, is to be retained, not only must it keep the substance of Taft-Hartley section 8b but one of the most important additions would be an explicit declaration that mass picketing is prima facie evidence of intimidation and that any union resorting to it would forfeit the privilege of using the facilities of the Labor Board.
Such a provision would be far sounder than all the present dubious efforts to illegalize strikes as such. We must never lose sight of the vital difference between the real right to quit work peaceably and the spurious right forcibly to prevent others from working. From time immemorial most union leaders have tried to tie the two together in the same package, and to practice the second in the name of the first.
But the right to work is as sacred as the right to quit work, and no less in need of protection.
May 23, 1949
In a series of five articles in Newsweek running from Jan. 10 through Feb. 7 Raymond Moley called attention to the “colossal failure” of our Presidential budget system. In line with the recommendations of the Hoover report, he suggested reforms of the Bureau of the Budget and the General Accounting Office to make these the real watchdogs they were originally intended to be when they were set up in 1921.
The budget reforms suggested by Moley seem to me to represent a minimum program. Even if they were adopted I fear that we would still be far from a really responsible budget. These reforms would help the President to watch and control the spending of his executive agencies. They would help Congress to watch and control the spending of the President. But who would watch and control the spending of Congress? And who would prevent the President, the House, and the Senate from trying to outbid each other in a three-sided competition to reach into the Treasury to spend the people’s money to curry favor with special group interests?
This problem has been with us since the birth of the nation. But it has now acquired unparalleled dimensions and gravity. For three years Congress has failed so ignominiously to abide by the self-imposed legislative budget requirements of its own Reorganization Act of 1946 that it is preparing to abandon them. And with shocking irresponsibility the House seems to be about to vote still another handout to veterans that would cost $9,000,000,000 at a “rough estimate.” This would be casually thrown on top of the most staggering peacetime expenditures ever made by this or any other government in the history of the world.
There can be no fiscal responsibility at Washington as long as Congress exercises the power to make appropriations not even asked for by the President. The British Parliament can make no expenditure that “the government” does not request. One result of this wholesome rule is that the Chancellor of the Exchequer is forced to present a responsible budget. When it accepts that budget, Parliament in effect authorizes all the proposed expenditures and proposed taxes at a single stroke. It is shown the budgetary situation as a whole. It acts simultaneously on both sides of it. Our own Federal “budget,” by comparison, is a meaningless bit of window dressing. Congress neither accepts nor rejects it. It plays by ear, making its real decisions on numberless individual and unrelated appropriation bills as it goes along. Appropriations and taxes are left to different committees not responsible to each other.
This chaos will never really be cured until the House and Senate themselves ask for a self-denying constitutional amendment under which, say, the House could not make any appropriation not requested by the President and the Senate could not increase any appropriation above that made by the House. Only this could end our three-sided spending competition. The House would still be free to cut the expenditures proposed by the President. The Senate would still be free to reduce the appropriations of the House. Unable to raise, they would at last exercise their power to reduce. As Henry Jones Ford pointed out: “There is no propensity of human nature more marked than jealousy of opportunities that one does not share.”
Historically, “the power of the purse” in the hands of the people’s representatives meant the power to withhold the purse from the sovereign executive. The House and Senate can never be expected properly to exercise the vital function of guardians of the public Treasury as long as they themselves are allowed to put their hands in the Treasury.
It may seem unrealistic to assume that either the House or Senate would ever approve such a self-denying amendment. Many may therefore dismiss this proposal as either academic or impossible. But until such a reform is made, we will continue to pay the enormous and perhaps finally unbearable costs of a budget out of control.
May 30, 1949
The commitment we have made to defend the integrity of Western Europe has been forced upon us by the Russian threat. It is a grave and tremendous commitment. In return for it, our negotiators had both the right and duty to ask heavy quid pro quos. Instead, they assumed that they had to promise monetary and military aid in addition in order to bribe Western European governments to accept the tremendous pledge from us for which they have been begging ever since 1914!
If Western Europe has a will to defend itself, it will have little trouble in finding the means. The $1,130,000,000 grant that we have promised them for the first year is after all only 3 percent of the present total governmental expenditures of the Atlantic Pact nations. They can easily make that up by cutting less essential things out of their swollen governmental budgets.
On the other hand, as I pointed out in a Newsweek article of April 4, there is no way in which we can insure that either the money or the equipment we contribute would actually result in a net increase of European armament by that amount. To the extent that we free European governments from the necessity for military spending, we release just that much more of their resources for bigger social-security schemes, bigger food subsidies, bigger nationalization deficits, or whatnot.
It is now being argued that we can solve this dilemma by insisting that each beneficiary European government spend on armaments in the next fiscal year, say, at least as much as we contribute, in addition to the amount it has already been spending in the current fiscal year. But it is dubious policy to try to force any country to spend more on defense than it thinks it ought to spend. This could easily give rise to the unwholesome belief in that country that it was spending large sums on defense, not for its own self-preservation but as a favor to us. It might also tend to encourage bookkeeping fictions under which government expenditures were charged to the military budget that did not in fact belong under that budget.
If our Administration is nonetheless determined to go ahead with its $1,130,000,000 military-aid program, then Congress, instead of adding this to the already dangerous burden upon our taxpayers, should take it out either of our proposed military budget of $15,300,000,000 or of the $5,430,000,000 authorized for the ERP.
Consider the military budget first. For a single year it already equals the military expenditures for the entire nineteen years from 1922 through 1940. Must our military budget now be larger still? Does it make any sense to assume that our military expenditures with the Atlantic Pact must be actually higher than without the Atlantic Pact? Even if we do not assume that the Atlantic Pact in effect adds the existing military expenditures of Western Europe to our own, can we not assume that if we transfer a billion dollars of our defense expenditures to Europe, it at least removes the necessity of spending that billion dollars here?
Finally, if the Administration refuses to take this $1,130,000,000 out of the home military budget, Congress could take the whole amount out of the $5,430,000,000 authorized for the ERP. It could simply authorize the beneficiary European governments to use up to this amount of their ERP funds for buying armament from us instead of other things. As it is, we are about to throw most of this $5,430,000,000 away anyhow.
We are turning it over to European governments to meet a trade deficit that they themselves have brought about by exchange control with overvalued currencies. Our ERP funds, in short, are being used in the main to subsidize and prolong a vicious totalitarian device that strait-jackets economies, retards recovery, and makes impossible the free multilateral flow of world trade.
The further burden on our budget involved in the proposed European armament-aid program is without logic or excuse.
June 6, 1948
The International Wheat Agreement, now before the Senate, is briefly described by Secretary Brannan as “a multilateral four-year contract in which each of the five exporting nations [principally Canada, the United States, and Australia] agrees to sell a stated quantity of wheat at $1.80 a bushel if requested to do so by the importing countries. . . . Each of the 36 importing countries, in turn, agrees to buy a stated quantity of wheat at the floor price if requested to do so by the exporting countries. The floor begins at $1.50 and drops 10 cents a year to $1.20 the fourth year.”
The purposes of the agreement, in its own words, are “to assure supplies of wheat to importing countries and markets for wheat to exporting countries at equitable and stable prices.”
Now if world market prices throughout the four-year period never dropped below the floor or rose above the ceiling prices, then the agreement would do no harm. But in that case it would also be quite unnecessary. If the market price of wheat during the four years, however, falls below the agreement’s floor price, the taxpayers of the importing countries will be forced to take an unnecessary loss. If, on the other hand, the world market price of wheat rises substantially above $1.80 a bushel, the farmers or taxpayers of the exporting countries must take an unnecessary loss. Both sides can’t win. Either the exporting or the importing nations are deceiving themselves about the benefits of this agreement. Either the exporting or the importing nations will later regret their bargain, and some of them may try to wiggle through the escape clauses.
The specious argument that the agreement will “stabilize” wheat is precisely the same argument that was put forward in favor of the ill-fated Japanese silk and British rubber restrictions and our own cotton schemes. What the bureaucrats always overlook is that a forced stability in prices brings instability in production and discrepancies between supply and demand. It is precisely free markets and free prices that signal the existence and relative gravity of shortages and surpluses and that bring continuous self-adjustment. Abnormally high prices stimulate more production and bring economies in consumption. Abnormally low prices encourage more consumption and discourage the production of surpluses.
In this way the relative production of thousands of commodities and services is synchronized and balanced. When this free movement of prices is prevented or bypassed by government action, productive adjustments are also prevented or postponed. They must be all the more violent when they are finally and inevitably made.
To sell the wheat agreement here, a great bribe has been held out to our farmers. Listen to Secretary Brannan: “In years of ample supply the price of wheat to the U.S. farmer will largely be governed by domestic price-support policies. In years of short supply, nothing in the agreement will operate to impede the free movement of domestic prices above the price-support level.” So domestically the farmer wins both ways, heads or tails, either at the expense of the taxpayer or at the expense of the consumer.
But the wheat agreement, in addition, “will require a subsidy whenever U.S. prices for wheat are over the maximum prices.” So it doesn’t concern the farmer at all if the maximum agreement price of $1.80 turns out to be below the market. It is the American taxpayer who will be required to dig in his pocket for the difference.
The International Wheat Agreement represents just one more typical mesh in the net of spurious “internationalism” that is being woven by the bureaucrats of the world around their own nationals. What they offer is not the real internationalism of free trade and free markets. It is something ominously different. It is international controls, international statism, government-to-government bulk sales, state buying and selling—in brief, a flattering imitation of the very economic devices of the Iron Curtain countries that they profess to deplore.
June 13, 1949
Suppose a relative who keeps a pleasure car comes to you and tells you that he hasn’t enough money to feed his family. You suggest that he sell the car. He replies that the car is essential for his morale and to keep his family from going communistic. He adds that it is not for you to interfere in his private affairs or tell him what his family can have or not have. He assures you, however, that the particular dollars you contribute will go only for his family’s food.
Such an assurance will satisfy you only if you are an idiot. In that case you will merely insist that he deposit all the money you give him in a special bank account, that the checks he draws against this shall be only for his family’s food, and that he send you a regular accounting to prove this.
But if you have a grain of common sense left, you will know that all this is meaningless make-believe. You will know that you are in fact paying for his pleasure car and his other extravagances. You will know that when you pay for his family’s food, he doesn’t have to use his own income for this and can therefore spend it on luxuries. You will know that it is pointless to make him keep this segregated account, that you are in fact adding to his total spending income, and that what his family spends on luxuries is in effect the money you have contributed.
But if you are an official of the ECA or of the State Department, in charge of giving away other people’s money, you won’t know any of these things. You will solemnly set up special earmarked accounts, checks, “counterpart funds,” and other such pointless paraphernalia. And if anyone points to the appalling deficits in nationalized industries that are being paid for by the socialistic governments that you are helping to support, you will bring out your little account books to prove that it isn’t our funds that they are spending for this, because our funds are used only to buy food or machinery or other austerely necessary things.
I have already pointed out several times in this column that there is no way in which we can insure that either the money or the equipment we contribute under an arms aid program would actually result in a net increase of European armament by that amount. For to the extent that we free European governments from the necessity for military spending, we release just that much more of their own resources for such things as bigger social-security schemes or bigger nationalization deficits.
Now this principle of substitution also works the other way round. Our officials forget that we are already helping to rearm Europe with our ERP funds. For to the extent that we have supplied European governments with other things, we have freed just that amount of their own money and resources for armament.
The Administration argues that the $5,000,000,000 or so it is asking for the next year under the ERP will go exclusively for “recovery” and the $1,130,000,000 exclusively for military aid. It thinks so because it will earmark each fund for this specific purpose. The real effect would be that instead of contributing roughly $5,000,000,000 in the next year to European government expenditures of all kinds, we would contribute $6,130,000,000 toward those expenditures. For as long as European governments control their own spending, the funds we contribute go in fact, if not in form, into a common spending pool.
But whenever Congress, vaguely sensing this, tries to make even the most timid economies, the ECA officials rush in to say that the whole European “recovery” program is being imperiled, that the amounts have been carefully figured, and that you can’t rescue a boy from a 15-foot well by throwing him only a 10-foot rope. As the amounts asked for are in fact completely arbitrary, as they are in fact calculated on the basis of a trade deficit that is itself being brought about by exchange control, overvalued currencies, and other wholly unsound European policies, this facile analogy is without substance.
June 20, 1949
In a recent speech General Clay warned the American people that the struggle between collectivism and democracy would continue “for years to come.” We can hope to win this struggle between collectivism and individualism, between socialism (and/or Communism) and capitalism, between totalitarianism and freedom, only if we frankly recognize its existence. The struggle will go on, in fact, until one system succumbs.
Our own befuddled “liberals” and wishful thinkers are loath to believe this. They are fond of saying that there is no reason why Communism and capitalism cannot live peaceably together in the same world. This is because they know nothing of the real nature of Communism and Communists. The Communists are committed to a war on capitalism until they have totally destroyed it everywhere.
This is the reason for the cold war that the masters of Russia have been relentlessly waging against us. And, with minor setbacks, they have been winning that war in the last five or six years because they knew it was being fought and we did not. That is why our leaders threw away at Yalta and Teheran and Potsdam the fruits of a military victory won at unparalleled cost of blood and treasure. That is why, through inaction, confusion, or actual cooperation, our leaders helped Stalin to dominate, subdue, and communize Poland, the Baltics, the Balkans, Czechoslovakia, and China and didn’t even secure for themselves a tenable foothold in Berlin.
What we still do not recognize is that even if the cold war should break out into a shooting war our main weapon, if we hoped not only to win but to have our victory mean anything for the happiness and peace of mankind, would not be the atom bomb but ideas. This ideological war would cost incomparably less in dollars than any military war. But it would have to be above all informed and intelligent. Who would fight it? Who knows how to fight it? Certainly not the present Administration. Whether Mr. Truman realizes it or not, he is today fighting at every turn, not for free enterprise, but for controlism, for statism, for socialism, for policies that must undermine, sabotage, and in the end destroy free enterprise. We can pay money for a Voice of America program. But can we get it to say the right things? Our officials pay lip service to free enterprise. But when they become specific, they praise above all such things as our social-security program, our farm subsidies, our housing subsidies, our TVA’s. All these are collectivist. Incidentally they are all dependent on free enterprise. They are supported by the taxes drawn from the profits and incomes created by free enterprise. They are all, in short, parasitic on free enterprise. But it is these parasitic devices that our officials praise, while they ignore or apologize for the private enterprise that supports them.
It is not surprising that the Russians are not converted to capitalism when our own propagandists praise the collectivist elements in our economy rather than the free-enterprise elements. The astounding idea has arisen in the Western world that the way to fight Communism is to embrace socialism—that is to say, to move at least halfway to Communism.
The Communists themselves have a clearer view. William Z. Foster, in recently laying down the latest line for the American Communist Party, declared: “What will its [American capitalism’s] power of resistance to socialism be when, as may be likely, the vast bulk of the rest of the world has ‘gone socialist’? . . . It may well turn out that it will be far easier for the American working class, in the midst of an overwhelmingly socialist world, to establish socialism in this country than now appears to be the case.”
In short, we cannot win the ideological war for free enterprise unless we have a genuine faith in free enterprise, unless we have a real understanding of how it works, and of why Marxist socialism and Communism are fallacious. To grope bewilderedly for a “middle road”—which is to assume that Communism must be at least half right—is to take the certain path to defeat and surrender.
June 27, 1949
I am indebted to Betty Knowles Hunt for sending me a column she contributed to The New Hampshire Morning Union quoting from Governor Bradford’s own history of the Plymouth Bay Colony over which he presided. It is a story that deserves to be far better known, particularly in an age that has acquired a mania for socialism and Communism, regards them as peculiarly “progressive” and entirely new, and is sure that they represent “the wave of the future.”
Most of us have forgotten that when the Pilgrim Fathers landed on the shores of Massachusetts they established a Communist system. Out of their common product and storehouse they set up a system of rationing, though it came to “but a quarter of a pound of bread a day to each person.” Even when harvest came, “it arose to but a little.” A vicious circle seemed to set in. The people complained that they were too weak from want of food to tend the crops as they should. Deeply religious though they were, they took to stealing from each other, “So as it well appeared,” writes Governor Bradford, “that famine must still insue the next year allso, if not some way prevented.”
So the colonists, he continues, “begane to thinke how they might raise as much corne as they could, and obtaine a beter crope than they had done, that they might not still thus languish in miserie, At length [in 1623] after much debate of things, the Gov. (with the advise of the cheefest amongest them) gave way that they should set corne every man for his owne perticuler, and in that regard trust to them selves. . . . And so assigned to every family a parcell of land . . .
“This had very good success; for it made all hands very industrious, so as much more corne was planted than other waise would have bene by any means the Gov. or any other could use, and saved him a great deall of trouble, and gave farr better contente.
“The women now wente willingly into the feild, and tooke their litle-ons with them to set corne, which before would aledg weakness, and inabilitie; whom to have compelled would have bene thought great tiranie and oppression.
“The experience that was had in this commone course and condition, tried sundrie years, and that amongst godly and sober men, may well evince the vanitie of that conceite of Platos and other ancients, applauded by some of later times;—that the taking away of propertie, and bringing in communitie into a comone wealth, would make them happy and florishing; as if they were wiser than God. For this comunitie (so farr as it was) was found to breed much confusion and discontent, and retard much imployment that would have been to their benefite and comforte.
“For the yong-men that were most able and fitte for labour and service did repine that they should spend their time and streingth to worke for other mens wives and children, with out any recompense. The strong, or man of parts, had no more in devission of victails and cloaths, than he that was weake and not able to doe a quarter the other could; this was thought injuestice. . ..
“And for men’s wives to be commanded to doe servise for other men, as dressing their meate, washing their cloaths, etc., they deemd it a kind of slaverie, neither could many husbands well brooke it. . . .
“By this time harvest was come, and instead of famine, now God gave them plentie, and the face of things was changed, to the rejoysing of the harts of many, for which they blessed God. And the effect of their particuler [private] planting was well seene, for all had, one way and other, pretty well to bring the year aboute, and some of the abler sorte and more industrious had to spare, and sell to others, so as any generall wante or famine hath not been amongest them since to this day.”
The moral is too obvious to need elaboration.
July 4, 1949
Especially since its espousal in 1936 by John Maynard Keynes in his book The General Theory of Employment, Interest and Money, the doctrine of the “compensated economy” through government spending has played an ominous role. It has become a formidable weapon in the hands of the spenders and the statists. These are in fact the same people. For wherever you find a man who wants more government power, you find a man who urges more government spending. And wherever you find a man who urges more government spending, you also find a man who believes in more government power.
In view of the dangerous “antirecession” spending schemes now being put forward, it is worth repeating the point made in this column of May 9, that even if it were true that an inflationary budget deficit acted as a business stimulant, then producing that deficit through tax reduction would be at once more flexible, more effective, and less dangerous than producing it through higher government spending. Schemes for higher government spending always involve delays and lags both in getting them started and in getting them ended. Before new public-housing projects can be started, for example, there must be elaborate drawing up of plans and blueprints, selection of sites, condemnation proceedings or buying up of land, etc,
Once any government spending project has been started, moreover, it tends to become self-perpetuating. Let us suppose that the desired level of full activity and full employment has been achieved by government spending, so that any further government spending would simply bring price inflation. Nevertheless, the government just can’t abandon a bridge half-suspended or a housing project at the halfway stage, without the roofs on. These projects must be finished, regardless of the economic effect of finishing them.
But the situation is usually far more serious than this. All those who have been employed on these projects, and above all the officials who have been put in charge of their direction and who have been handed more imposing jobs than they ever held before, will fight tooth and nail, night and day, for the retention of these jobs, offices, powers, and earnings. They will lay down a constant barrage of official propaganda calculated to drown out all disinterested criticism.
All these added government expenditures, ostensibly undertaken to give a transient spurt to business activity, then become permanent. The proportion of government to private jobs steadily increases. This is the history of European socialism and of present disorganized European budgets. It will also be our own history if we embark on still more reckless government spending now on the excuse of countering the existing recession.
If, however, the government were to try to make its “compensation” by reducing taxes, taxes could be reduced immediately. Moreover, Congress could easily provide in advance automatic standards under which taxes could be restored again the moment the stimulation of a tax cut was no longer necessary.
Even Keynesians and other government spenders will probably admit that cutting the taxes of the lower-income groups will result in these groups spending more money on consumption goods. But they will argue that this will not be at all the effect of reducing corporate taxes or the taxes of higher-income groups. These groups, they will contend, instead of spending these “forgiven” taxes on consumption goods or investing them in expansion, will simply hoard the money.
But if there were any real prospect that these groups would hoard money instead of spending or investing it, wouldn’t it be a good idea to go on to ask why they would hoard? They would hoard either because existing price-cost relationships were making business unprofitable or because impending or existing governmental policies had undermined confidence in the future profitability of business.
July 11, 1949
A speech that Secretary George C. Marshall made at Harvard a couple of years ago will cost us some $17,000,000,000 before we are through. And Point Four, added as a final touch to President Truman’s inaugural address to give it a little oomph, will cost us billions still incalculable.
In this column of April 11 I called attention to the striking parallel between Point Four and the proposal five years ago by Earl Browder, then head of the American Communists. This similarity is not accidental. Whether or not the proposals of Point Four stem directly from Browder’s, they embody the same basic collectivist and statist assumptions.
There is nothing new in the belief that sound international investment promotes world production. The only thing “new” in the “bold new program” is the paternalistic assumption that this process of international investment must not be undertaken, as hitherto in modern times, by private investors at their own risk, to private borrowers who have proved their responsibility, but must be nursed, spoon-fed, furnished with crutches, and guided at every step by government.
Mr. Truman, following Earl Browder, assumes that it is our duty to raise the standards of living of the so-called “underdeveloped areas” all over the world. What he never mentions, and does not seem to realize, is that we can do this only by lowering our own standards of living, compared with what they would otherwise be. If our taxpayers are forced to contribute x millions of dollars for hydroelectric plants in Africa, they will obviously have that much less for more hydroelectric plants here. If we contribute x millions of dollars for a housing project in Uruguay, we will have just that much less left for housing, or any other equivalent, at home.
This simple principle that we cannot give our cake away and eat it too has been utterly ignored in the whole hullabaloo about Point Four. If the American people are being urged to undertake Point Four primarily for charitable and humanitarian reasons, then they ought to be told in all candor that this charity will make them poorer and not richer. It is misleading to pretend that Point Four is at once a great charity and a shrewd way of selling more goods.
Yet Mr. Truman talks constantly as if we would grow richer by giving our capital away. “Our experience shows that the volume of our foreign trade is far greater with highly developed countries than it is with countries having a low standard of living and inadequate industry. To increase the output and the national income of the less developed regions is to increase our own economic stability.” Now Tiffany’s has also made the amazing discovery that it sells more to the rich than to the poor. But it has not yet occurred to the managers of that firm that it would increase its profits either by giving the poor the money to buy its jewelry or by making bad loans to them.
Another fallacy in Mr. Truman’s message on Point Four is his assumption that investment in backward or “underdeveloped areas” must necessarily increase world production or wealth more than the same investment in advanced areas. On the contrary, advanced industrial countries can more often utilize still more capital far more productively and efficiently than backward countries can utilize it.
Under free markets investors put their money wherever they see the prospect of greatest safety and greatest profitability. When private investors who are risking their own money are free to make their own decisions, that capital is likely to be placed where it is most efficient and productive. But if government officials or technicians, who will not be risking their own money but somebody else’s, are going to decide just where our foreign investments ought to be placed, they cannot be expected to pay scrupulous attention either to the security or the relative profitability of the loans they advocate. On the contrary, if experience is any guide, their recommendations will be determined primarily by political considerations.
July 18, 1949
The basic assumptions of Point Four, like those of the Communist proposal by Earl Browder which it imitates, are collectivist and statist. This is evident throughout the text of Mr. Truman’s message. It allows a role for private capital, but it is the role of a junior partner. Point Four “will call upon private enterprise . . . as well as the government. . . . It will be necessary to utilize not only be resources of international agencies and the United States Government, but also the facilities and experience of private business,” etc.
Private enterprise, which has now learned to be grateful for any role in Mr. Truman’s great plans, is to be “encouraged.” How? By authorizing the Export-Import Bank to “guarantee United States private capital . . . against the risks peculiar to those [foreign] investments. . . . Some investments may require only a guarantee against the danger of inconvertibility, others may need protection against the danger of expropriation and other dangers as well.”
What is Mr. Truman here proposing? He is proposing that in order to induce American private investors to risk their funds abroad, we are to allow these private investors to keep the profits of their investments, but to force the American taxpayers to assume the losses. Such a proposition needs merely to be stated plainly to show that it would be preposterous and intolerable. The private investors and investment bankers who applaud this proposition are shortsighted beyond belief. It could only lead to the eventual nationalization of all foreign investment.
Such an arrangement, moreover, would not remove or in the least reduce the risks of foreign investment. It would merely transfer those risks from the investor to the taxpayer. Point Four exists on the assumption that government could do more to reduce such risks than private investors could. This is the exact reverse of the truth.
“We are negotiating agreements with other countries,” says Mr. Truman, “to protect the American investor from unwarranted or discriminatory treatment under the laws of the country in which he makes his investment.” If a foreign government is prepared to deal honestly and fairly with private investment, foreign or domestic, we do not need such an agreement. If it is not, it will in one way or another violate or wriggle out of the agreement.
And what will our government do then? We do not need to ask. The history of the EGA already tells us. It will be afraid to do practically anything at all. For the most timid and delicate hints on the part of our government representatives will be denounced as outrageous “pressure” on the borrowing government, as interference in its internal affairs, as an effort to halt its glorious socialist planning, to reimpose a discredited capitalism, and so on.
Private investors, lending at their own risk, have a more effective way of dealing with such matters. They do not dictate. They do not interfere. But as long as a foreign government levies confiscatory taxes, expropriates private property, socializes, nationalizes, imposes a strangling network of exchange and trade controls, or forbids its own nationals to repay their honest debts, private investors respectfully decline to make loans. They are not impressed by elaborate signed agreements to be honest, but only by an actual record of honesty.
It remains to be pointed out, finally, that our own government is itself heavily biased in favor of statism and socialism. Mr. Truman wants the Export-Import Bank to guarantee private capital against the risks of foreign lending. But the loans of that bank have been overwhelmingly government-to-government loans, or loans to government agencies, or loans with a government guarantee, and often for government projects directly competitive with private enterprise.
The Point Four program would inevitably drive the world farther into national socialism.
July 25, 1949
In his economic report of six months ago President Truman insisted on a further increase of taxes by $4,000,000,000 a year. Today he declares: “No major increase in taxes should be undertaken at this time.” In January he demanded stand-by price and wage controls, allocation of scarce materials, extension of bank-credit and installment-buying controls, and government construction of more steel capacity if private capital refused. The new report abandons these demands.
Mr. Truman’s dramatic reversals are an admission that he was wrong on many things in January. But they do not necessarily prove that he is right now. In January he thought quite rightly that a budget surplus was “essential to sound fiscal policy.” Today he thinks quite wrongly that “we cannot expect to achieve a budget surplus in a declining national economy.” This implies that the cure for every recession is a new dose of deficit financing.
I cannot join those, therefore, who regard the abandonment of the $4,000,000,000 tax demand as “reassuring.” It would really have been reassuring if accompanied by a proposal for at least an equal cut in Federal expenditures. So would the proposals for repealing the tax on the transport of goods and for liberalizing the carry-over of losses by corporations. But as they stand, these proposals are merely part of a program to give the American economy still another inflationary shot in the arm.
The President talks of his “anti-inflation program” of last January. This is an illusion. He never had an anti-inflation program. All he had was a program for more government controls to try to conceal the unpopular symptoms and consequences of monetary inflation. Even when Mr. Truman was “fighting inflation” by rhetoric, the government was conducting a highly inflationary bond-pegging program. As a corollary of this, it was following an inflationary cheap-money policy. The Federal Reserve authorities, though they wanted to control everyone else, fought tooth and nail the suggestion that Congress restore the reserve banks’ own reserve ratio to its former 40 percent instead of the “emergency” 25 percent. And even when Mr. Truman was ostensibly “fighting inflation,” he insisted on the biggest peacetime spending ever embarked upon by any nation in the history of the world.
But monetary inflation can keep a boom at its peak only if it goes on at an accelerative rate. There was a lull in our monetary inflation, and there then set in a “stabilization crisis,” though so far a mild one. And the only answer that Mr. Truman and his advisers can think of is another inflationary spree. Though Mr. Truman claims that we are “still operating at high levels of employment and production,” he nonetheless wants to embark on more deficit financing. Government economy is “out of the question.” “Nothing could represent greater economic folly,” in fact, than to cut government spending now.
Mr. Truman blandly tells us that a $42,000,000,000 annual budget, five times the peacetime budget even of the Roosevelt regime, is a “minimum.” He praises government extravagance: “The fact that public expenditures of Federal, state, and local governments are running at a rate of close to $60,000,000,000 a year is itself an element of great stability in the present situation.” Public expenditures of $120,000,000,000 one gathers, would provide twice as much stability.
The President and his advisers fail to recognize the elementary fact that the more the government spends the less the individual taxpayer has left to spend. Their public spending programs make no addition to real spending power. These programs can seem to work only as long as they create government deficits financed. by printing more money. This leads to the higher living costs that Mr. Truman and his advisers affect to deplore.
Mr. Truman’s midyear economic report reflects throughout a super-Keynesian, inflationist, controlist, and statist philosophy. And that is not “reassuring.”
August 1, 1949
President Truman has now been persuaded that the only way to cure even a mild recession is to start still another orgy of government spending and monetary inflation. “The fact,” he declares, “that public expenditures of Federal, state, and local governments are running at a rate of close to $60,000,000,000 a year is itself an element of great stability in the present situation.” The fact is that these fantastic expenditures are precisely the greatest element of instability in the present domestic situation. When the Federal government has a balanced budget, its expenditures obviously create no new purchasing power of any kind. Before it spends $40,000,000,000 a year, it must first of all take this amount from the nation’s taxpayers. When politically favored groups have $20,000,000,000 more to spend, the taxpayers who earned it have $20,000,000,000 less.
Not only does huge government spending fail to stimulate real purchasing power and production: it destroys them. For the drastic taxes inevitably penalize precisely the productive elements in the nation. Such taxes not only destroy the incentive to produce and invest; they destroy even the ability to invest by seizing the very funds available for investment.
The government can, of course, as Mr. Truman suggests, deliberately resume deficit financing. This could create more monetary purchasing power, but only by printing more money. Debauching the currency is the oldest and most discredited trick in the world. And this is all there is to the much-touted “Keynesian revolution” when you take its sophisticated clothes off.
False remedies always divert attention from real remedies. The present is no exception. When business becomes stagnant, when unemployment sets in, it is usually because disequilibrium and distortions have developed within the cost-price structure. Some goods have been forced up to price levels where consumers will no longer buy them in the former volume. Production therefore declines: workers are laid off. These high price levels are commonly the result of high costs, the most important of which are wages. Excessive wage levels must force unemployment.
It is typical of Mr. Truman’s spend-and-spend program that he wants to pour government money into the industries and sections where unemployment exists without even stopping to inquire how that unemployment came about. Instead of asking, for example, whether new private housing is being priced out of a full-volume market because of excessive wages and unproductive labor in the building trades, Mr. Truman simply demands that the taxpayers be forced to subsidize these unprecedented wages through public-housing subsidies.
When excessive wage costs in other lines are forcing slowdowns in those lines, Mr. Truman’s solution is to force up their labor costs still further. He wants to increase minimum wages overnight by 87½ percent. As workers above the minimum will insist on the maintenance of existing differentials, this would force up wages all along the line. And, finally, he has forced the steel companies to go before a “fact-finding” board which if it follows the precedents of all his previous boards, will recommend still another boost in wages. And this will set a new national pattern for a fourth round.
Monetary inflation gets its vaunted “full employment” results only as long as it keeps selling prices soaring far enough ahead of wages to increase or retain profit incentives. Its essential trick is to increase monetary wages while decreasing real wages. If the Truman Administration now launches on another monetary inflation, but tries to offset the resulting price rises by still faster boosts in wages, there is no telling where the seesaw race will eventually carry us.
There was no real economic crisis in this country until Mr. Truman insisted on policies that would present us with one. The chief thing we have to fear is his “cure” itself.
August 8, 1949
If we may judge from the history of the ECA, it is not likely that the economic side of the proposed Foreign Military Assistance Act will be intelligently or adequately considered. Yet in spite of its military and political aspects, the whole proposal rests on the essentially economic argument that the other nations in the Atlantic Pact are unable to pay for their own armament. And this contention is not supported either by common sense or by the facts.
Mr. Truman offers Congress the very fragmentary piece of information that eight out of the eleven nations in the Atlantic Pact now have total annual military expenditures equivalent to $5,500,000,000. “This,” he insists, “is the maximum amount they are able to spend” without self-injury. How does he know that? His own country alone is already spending nearly three times as much on armament as these eight nations combined—in other words, about as much as 22 such nations. Yet Mr. Truman still doesn’t consider this a maximum for us. On the contrary, he wants us in addition to take over part of the burden of the others.
If Congress will inquire, it will find that the total amount of $1,450, 000,000 we are supposed to contribute in the first year is equal to only about 4 percent of the total government expenditures of the other nations in the Atlantic Pact. It would not seem impossible for these other countries either to increase their total budgets by 4 percent—or, better, to take that amount out of their swollen nonmilitary expenditures. Their other government expenditures are, in fact, about four times as great as their military expenditures. And these sums are being spent, among other things, on expanded social-security programs, huge food subsidies, and above all on huge deficits in socialized industries.
Mr. Truman thinks other nations need part of these funds from us for “certain items essential for their defense which they are not equipped to provide for themselves.” This argument, though often used, has no merit.
They can buy these items from us and pay for them with other items. In short, they can pay for imports with exports—or rather they could do so if they had not deliberately unbalanced their economics and their foreign trade with their own exchange controls and overvalued currencies. Our own country does not produce for itself enough tin, natural rubber, or uranium; but it does not occur to us to use that as an excuse to demand these things as gifts from other countries.
As I have already pointed out in previous articles (April 4, May 30, and June 13), there is no way in which we can insure that either the money or the equipment we contribute under an arms-aid program would actually result in a net increase of European armament by that amount. For to the extent that we pay for the armament of European governments, we release just that much more of their own funds for other expenditures. The only way we could prevent this result would be to dictate every European government expenditure—a course which I, for one, would not recommend.
Looking at the matter the other way round, it should be equally obvious that our Marshall-Plan funds, though spent on other things, have freed just that much of Europe’s own funds for armament. Instead of throwing still further funds in the direction of Europe, therefore, Congress could merely authorize Atlantic Pact nations to use up to, say, $1,450,000,000 of their ECA credit for military expenditures.
The so-called military-aid program, in short, involves precisely the same broad economic issues as the Marshall Plan. We are weakening ourselves to give continuous and futile blood transfusions to Europe while Europe does nothing to stop its socialistic hemorrhage. Our own officials don’t dare to be specific about the European policies producing this hemorrhage. Their principle seems to be: “Europe’s economic policies are none of our affair; therefore we must pay for its deficits.”
August 15, 1949
The Administration’s diagnosis of this (and every other) recession and its suggested cure are based on an ultra-Keynesian ideology. Recessions or depressions, the Administration now implies (following Keynes, who was following Marx), are caused by a falling off or deficiency of consumer buying power, especially of worker buying power. Therefore the cure is simple. Have the government pump more buying power into the system: force up wage rates further, launch still more “public works,” spend the taxpayers’ money lavishly, run into deficits, expand credit, and print more money.
The government’s own official statistics now discredit its analysis and its remedies. What happened in the first half of this year? Did workers’ incomes drop? No, concedes Mr. Truman in his midyear economic report: “Real earnings generally were maintained.” Then did total consumer income drop? No, again: “Personal income of consumers after taxes decreased only about 1 percent from the level of the last half of 1948. Since consumers’ prices dropped 2 percent, real income did not change significantly.”
Did the government neglect to run into deficits? Still no. “Cash payments by the Federal government ran at a rate more than 20 percent higher than in the first half of 1948. . . . All governmental units combined showed a cash deficit in the first half of 1949 at a seasonably adjusted annual rate of $2,400,000,000, in contrast to a surplus at a rate of $12,100,000,000 in the corresponding period of 1948.”
Yet the government’s proposed remedies today are a still further boost in wages “to maintain the purchasing power of workers,” “positive actions . . . to enlarge consumer purchasing power,” bigger government spending, and bigger deficits. Cuts are to be made at only two points—prices and profits. “While price reductions are desirable,” says Mr. Truman, “they should not be attained at the expense of wage cutting.... Businessmen have a great opportunity to maintain production and sales volume by adjusting prices downward, even at the cost of temporarily reduced profits.”
The Administration, in short, has two distinct sets of economic principles—one for prices and the exact reverse for wages. It sees that excessive prices reduce volume of sales. But it refuses to admit that for precisely the same reasons excessive wage rates create unemployment. As the leading element in costs, excessive wage rates must either force up prices to the point where sales volume drops, or wipe out profit margins.
In the first three months of this year profits of manufacturing corporations after taxes averaged about 6 cents in every dollar of sales. Not a very fat margin to tamper with, even if it were uniform. But this 6 cent average concealed a variation between industries ranging from 10.3 cents in petroleum and coal products down to 2.2 cents in leather products. And it concealed, of course, far wider variations among particular firms.
When profits are reduced, therefore, even “temporarily,” it doesn’t mean that businessmen accept a narrower uniform profit margin. It means that the profits of the marginal firms are wiped out altogether. They turn into losses. Losses force shutdowns. It is this that creates unemployment. This unemployment means that the total income and purchasing power of the wage earners is not increased but drastically reduced by excessively high wage rates. The Administration’s wage-boosting policy can only intensify the very unemployment and recession that it is supposed to combat.
“The only ultimate source of sustained profits,” says the President, “is sustained employment and purchasing power.” This puts the cart before the horse. The truth the Administration has forgotten is that the only ultimate source of sustained employment and purchasing power is sustained profits. You do not achieve full employment by destroying the rewards and incentives of the very people who provide employment.
August 22, 1949
The best prices are the prices that enable the largest possible volume of goods to be produced and sold. The best wage rates are the highest wage rates under which full employment is possible. In some lines wage rates have already been forced above this level. That is largely why we now have an estimated unemployment of about 4,000,000.
But exactly at this time the Administration seems bent on forcing still more unemployment by forcing wage rates still higher. Its theory is that higher wage rates under no matter what circumstances increase the income of labor and increase prosperity by increasing labor’s “purchasing power.’” This belief is political in origin. No one holds it about other prices. There it is clearly recognized that excessive prices cause goods to remain unsold.
But in the same way excessive wage rates, which mean prohibitive production costs, force employers to drop workers or to shut down altogether. Those workers fortunate enough to be kept on may, it is true, individually get more income and purchasing power than before. But greater unemployment means that the body of workers as a whole has less income and purchasing power.
Present unemployment is a caution sign, a danger signal. But the Administration treats it as a signal to drive full speed ahead toward still higher wage rates. It is encouraging a fourth round. And Congress is in the process of boosting the Federal minimum wage from the present 40 cents an hour to 75. This would mean an overnight increase of 87½ percent. Indirectly this measure will boost wages all along the line; for workers above the minimum will insist on the maintenance of their existing differentials.
On top of this Secretary of Labor Tobin, ostensibly acting under the Walsh-Healey Act, is forcing wages in special regions and industries to levels undreamed of even by the supporters of the new minimum-wage bill. He recently fixed a minimum of $1.23 an hour, for example, in Northern steel mills working on government contracts.
Now it makes no sense from any standpoint to have two Federal minimum-wage laws, under one of which a minimum wage can be fixed 207½ percent higher than under the other. (This $1.23 rate would still be 64 percent higher even if a 75-cent general minimum were enacted.) Under what social or equalitarian theory does the government bestow such glaring favoritism on the workers of firms who happen to get government contracts and discriminate so grossly against the workers of firms that do not?
If it didn’t seem too much to hope for under the prevailing ideology, one might suggest that Congress could considerably mitigate the harm it is about to do with a 75-cent minimum wage law by inserting at least two major amendments. The first would completely repeal the needless and mischievous Walsh-Healey Act. The second would remove the joker in the present law under which employers are penalized 50 percent for overtime above 40 hours a week, no matter what regular wage rate they pay. Under this joker precisely those employers are penalized most who already pay most, and precisely those workers are rewarded most who already get most. It is this joker that has brought all workers, and not merely marginal workers, under Federal control. It has led to all the mischievous portal-to-portal and overtime-on-over-time rulings and decisions.
All this costly nonsense could be ended if Congress simply fixed the legal minimum overtime rate 50 percent higher than the legal minimum straight-time wage—instead of, as now, 50 percent higher than whatever straight-time rate a particular employer happens to pay. For example, if the new legal minimum straight-time rate is raised to 75 cents an hour, then the legal minimum overtime rate would be fixed at a flat $1.12½ an hour. Any wages above these minimums would be determined by free bargaining.
August 29, 1949
The Taft-Hartley Act specifically provides that “whenever, in the opinion of the President . . . a threatened or actual strike . . . will, if permitted to occur or continue, imperil the national health or safety, he may appoint a board of inquiry to inquire into the issues involved in the dispute and to make a written report to him within such time as he shall prescribe. Such report shall include a statement of the facts . . . but shall not contain any recommendations.” In the face of this explicit direction, President Truman insisted on appointing a board of inquiry that would make recommendations.
Naïve faith in the value of government “fact-finding” boards in wage disputes begins to dissolve as soon as we ask what facts there are to find. The facts of the past or present, regarding comparative living costs, wage rates, profits, and so on, are already known before any board is appointed.
Thus, according to already extant government statistics, we know that weekly wages in the steel industry averaged $63.14 in May, more than $10 above the general average for all manufacturing industries. We know that average hourly wages in steelworks in May were $1.63, about 26 cents higher than the average in all manufacturing industries. We know that weekly steel wages in May were 111 percent higher than the average for 1939 and the cost-of-living index only 70 percent higher, so that “real” weekly steel wages this May were 24 percent higher than the 1939 average. We know that steel prices in June had advanced only 72 percent over 1939, compared with a 100 percent rise for all commodities. We know that steel profits are fickle and that in 1948 they averaged after taxes about 7½ cents per dollar of sales.
These are past and present facts. They do not make a fourth-round steel wage increase seem imperative. But whether the steel industry can afford a still further wage increase depends not upon past but upon future facts. And these are precisely the facts that no government board can know.
It might guess, of course. On the basis of past performance, it might judge which guesses seem reasonable and which seem absurd. Robert R. Nathan guesses that the steel industry could break even when operating at only 33 percent of capacity under June 1949 conditions. Let’s see. In the second quarter of this year steel operations dropped to an average of 91 percent of capacity (and to 82 percent in June). Yet Jones & Laughlin’s profits, as compared with the first quarter, dropped 46 percent, Crucible’s dropped 86 percent, and Allegheny Ludlum’s dropped 99 percent. We can only conclude that on its face Nathan’s guess is preposterous.
But how can any government board know just how much any given wage increase will cut future profits in steel? Or precisely how it will affect individual companies? Or exactly how much it will force up steel prices? Or just how much any given increase in steel prices will reduce sales and output? Or just how much unemployment this reduction will cause in the steel and other industries? Or how much all this will affect the ability of the industry to maintain or expand its plant, or the future willingness of new investors to risk their funds in any expansion of steel capacity?
All these questions are asked on the assumption that such boards would act with complete economic objectivity and not, as in the past, merely to buy off a strike, or to hold the labor vote, or to pay a political debt.
“Fact finding” and “recommendations” by government boards are intended to bring such pressure on the parties to a labor dispute, particularly the employers, as to amount in effect to compulsory arbitration. This in turn is only another name for government wage fixing. If government boards know how to set steel wages, then they know how to set all wages and all prices; and we may as well embrace totalitarianism now, with our eyes open, as stumble into it half-blindly, while mumbling lip service to free enterprise.
September 5, 1949
The first need today of Britain and every other country that complains of a “dollar shortage” is the abolition of exchange control. This single step would put an end virtually overnight to the whole so-called “dollar crisis.”
Yet this crisis is being discussed today in an incredible atmosphere of unreality. The bureaucrats of the world can think of nothing but more “austerity” or more and bigger American handouts. Not a single one of them proposes to repeal the measure primarily responsible for the whole exchange nightmare—the exchange controls that they themselves have imposed in order to maintain a fictitious value for their own currencies.
The British socialists, for example, insist on maintaining at all costs the fiction that the pound sterling is worth $4.03. They have made it a crime for their own citizens to buy or sell sterling below this rate. They forbid their own consumers to buy the foreign goods (or even the British goods) they want, but only what the bureaucrats tell them they can have. They compel British manufacturers to set aside for export minimum percentages of their output. They police the “cross rates” between the pound and the dollar throughout the world. They have succeeded in persuading American bureaucrats to turn over billions of American taxpayers’ dollars to try to plug up the gap that exchange control creates. Yet the sterling crisis grows steadily worse. One triumph of semantic confusion the British bureaucrats can boast. They have succeeded in getting the world to call the pound crisis a “dollar crisis.”
Suppose the whole worldwide exchange-control mechanism were simply dismantled and the pound allowed to sell for what it would bring in free markets. It would fall, let us say, to around $3. The exporter of a British item that now sells in this market for $4 could then afford to sell it for $3. He would still get £1 for it, as before. If $4 prices the item out of the American market, $3 might price it back in again.
Or suppose that $4 were a competitive price here but that it cost the British manufacturer £1.11 to make the item. Then at $4 to the pound he could sell this item here only at a loss of £0.1, but at $3 to the pound he would get £1.33 for it and so would make a profit of £0.23. In short, a lower price for the pound in dollars would increase not only the incentive of American consumers to buy British goods here but the incentive and ability of British producers to sell them here.
British imports, it is true, would cost more—but in pounds, not in dollars. Higher prices in pounds would cause British consumers automatically to cut down on their purchases of foreign goods. They would no longer need coercive import quotas and prohibitions to make them “conserve dollars.”
Yet instead of merely returning to the system of free exchanges that prevailed immemorially and almost universally (outside of Stalinist Russia and Hitlerite Germany) until ten years ago, the bureaucrats of the world now hotly urge still more false remedies for this crisis of their own creation.
It is fashionable even for British Conservatives and American officials to say today, for example, that what Britain is suffering from is excessive production costs and that these must be brought down for Britain to “compete.” But this disregards the prohibitive price handicap now put on British exports by the fictitious $4 pound. And it also ignores the law of comparative costs, which one used to suppose that every economist since Ricardo understood. Under free-exchange rates high British production costs would be compensated by a lower quotation for the pound. For Britain to try to adjust its whole cost and price level to its spurious exchange rate would be (to borrow a simile from Wilhelm Röpke) like shoving a grand piano over to a misplaced stool instead of adjusting the stool to the piano.
It is correct to say that British collectivism and controls are responsible for Britain’s present crisis. But the keystone of this collectivism is exchange control. And that is why exchange control is the last thing that Sir Stafford Cripps is willing to surrender.
[2 Decimal-pound amounts were shown as shillings and pence in the original.—Ed.]
September 12, 1949
Exchange control is a totalitarian device adopted by Communist Russia and systematized by Nazi Germany. As a general practice it is less than ten years old. Yet it is now so much taken for granted that commentators on the sterling crisis ignore its existence. Those who insist that the main solution is for Britain to cut its production costs in order to compete abroad overlook the enormous price barrier to export caused by a fictitious value for the pound. They want to saw off the piano legs instead of adjusting the height of the stool.
A similar false solution, whose proponents likewise pride themselves on their “realism,” is that Britain must “increase its production.” But if official statistics are trustworthy, this is what it is already doing. Britain’s index of industrial production advanced from 101 in 1935–38 and 100 in 1946 to 121 in 1948 and 133 in May of this year. As contrasted with such gains, our dollar aid to Britain under the Marshall Plan in the last fiscal year was only about 2½ percent of the total British national income.
Why should Marshall-Plan aid of only £245,000,000 a year count for so much, and the officially estimated increase in Britain’s national income of £1,275,000,000 since 1947 count for so little? Britain’s trade-balance deficit (including “invisible” items) in 1947 was £630,000,000. Why hasn’t this been more than wiped out by the estimated annual increase since then of £1,425,000,000 in Britain’s gross national product?
Although it has escaped the British bureaucrats, the answer to this puzzle ought to be obvious. The increase in Britain’s production has not gone primarily into exports. On the contrary, in spite of the best bureaucratic intentions, it has gone almost entirely into increased home consumption. It has done this because distorted price incentives and price deterrents have directed consumption into imports, and production into domestic rather than export goods. And it is precisely exchange control that has brought about these perverted price incentives and price deterrents.
The answer is to abolish exchange control, and let the pound fall to its real market level. Yet so perverted has thought itself become on this subject that this simple restoration of freedom is being dismissed as a “trick solution.” The real trick solution has been exchange control with its effort to prop up the pound to the fictitious level of $4.03. That solution has failed disastrously.
The issue is further confused by the current use of the word “devaluation” in at least three different senses:
1—To mean a cut in the official rate of the pound below its present real market value and real purchasing power. I know of no responsible person who is seriously proposing this.
2—To mean that Britain would keep exchange control but lower the “official” rate of the pound to correspond with its supposed present “real value” in terms of other currencies. This would mean an immediate improvement. But it would be at best a temporary solution and would retain the evils of exchange control.
3—To mean the simple removal of exchange control. This would allow the pound (and every other currency) to seek its market level. Only this would show what the “real” value of each currency was. Only this would bring a constant balance of supply and demand, the end of “dollar shortage” or “hard” currency shortage, a restored balance of international payments, real convertibility of currencies, and restored multilateral trade.
“But,” it will be objected, “if we leave the quotations of currencies merely to the play of supply and demand, they will become unstable.” The answer is that they already are. Exchange control is merely a discredited effort to hide their instability. The world can never get back to real monetary stability until it returns to a real international gold standard.
But that’s another story. We must do first things first. Abolish exchange control.
September 19, 1949
There has just been published by the Yale University Press a book that is destined to become a landmark in the progress of economies. Its title is Human Action, and its author is Ludwig von Mises. It is the consummation of half a century of experience, study, and rigorous thought.
No living writer has a more thorough knowledge of the history and literature of economics than Mises, and yet no living writer has been to more pains to take no solution of any problem on faith, but to think out each solution, step by verified step, for himself. The result is a work of great originality written in a great tradition. Although it builds on what was sound in the classical economists and on the revolutionary revision of Menger, Böhm-Bawerk, Jevons, Clark, and Wicksteed, it extends beyond any previous work the logical unity and precision of modern economic analysis.
I know of no other work, in fact, which conveys to the reader so clear an insight into the intimate inter-connectedness of all economic phenomena. It makes us recognize why it is impossible to study or understand “collective bargaining” or “labor problems” in isolation; or to understand wages apart from prices or from interest rates or from profits and losses, or to understand any of these apart from all the rest, or the price of any one thing apart from the prices of other things.
It makes us see why those who specialize merely in “monetary economics” or “agricultural economics” or “labor economics” or “business forecasting” so often go astray.
So far is Mises’s approach from that of the specialist that he treats economics itself as merely part (though the hitherto best-elaborated part) of a more universal science, “praxeology,” or “the science of every kind of human action.” This is the key to his title and to his 889 comprehensive pages.
Mises is so concerned to lay foundations of his work with unassailable solidity that he devotes the first 142 pages to a discussion of “epistemological” problems alone. This is apt to discourage all but the most serious students of the subject. Yet there is nothing pretentious or pedantic in Mises’s writing. His sentences and vocabulary are as simple and clear as his profundity and closely woven logic will permit. Once his more abstract theoretical foundations have been laid his chapters are models of lucidity and vigor.
Outstanding among his many original contributions are his “circulation credit” theory of business cycles, which emphasizes the harm of cheap-money policies, and his demonstration that partial socialism is parasitic on capitalism and that a complete socialism would not even know how to solve the problem of economic calculation.
This book is in fact, as the publishers declare, the counterweight of Marx’s Das Kapital, of Lord Keynes’s General Theory, and of countless other books recommending socialization, collectivist planning, credit expansion, and similar panaceas. Mises recognizes inflationism under its most sophisticated disguises. He demonstrates repeatedly how statist interventions in the market economy bring about consequences which even from the standpoint of those who originally advocated the interventions, are worse than the state of affairs they were designed to improve.
Human Action is, in short, at once the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared. If any single book can turn the ideological tide that has been running in recent years so heavily toward statism, socialism, and totalitarianism, Human Action is that book. It should become the leading text of everyone who believes in freedom, in individualism, and in the ability of a free-market economy not only to outdistance any government planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.
September 26, 1949
The report of the President’s special Steel Industry Board was an adroit political document. For those who were content to bounce along the headlines, it carried a fine air of “impartiality.” It is not surprising that so many editorial writers hastened to acclaim the board for its “statesmanship.”
The board did, indeed, make some unexpected concessions to the industry’s case. It admitted that its profits were “volatile.” It pointed out a number of fallacies in the unions’ “productivity” and “purchasing power” arguments. It found that “there are no inequities of steelworkers at present which require redress through a general wage-rate increase.” And on the ground that “it seems desirable at this time to stabilize the level of wage rates,” it rejected the union’s demands for a straight wage increase.
But the board then immediately turned around and approved pension and insurance benefits which by its own admissions were equivalent to a wage increase of from 8 to 10 cents an hour. Just why it would be so bad for the steelworkers to get another pay boost in the form of a straightforward hourly increase, and just why it would be so good for them to be forced to take it only in the form of pension and insurance benefits, the report never made clear. Following a befuddled argument, it rejected a “general increase in rates of pay” for the puzzling reason that it is “just as likely to affect output and employment unfavorably as it is to affect them favorably.” One would suppose from this that if the chances were equal, the steelworkers should be entitled to the benefit of the doubt.
The real argument against a fourth round pay increase is, of course, that to force a further increase in production costs now would tend only to reduce output and employment. But this argument is just as strong against an insurance and pension boost equivalent to 8 to 10 cents an hour. It is, in fact, stronger. For the moment the companies could no longer supply every worker with at least a 2,000 hour work year, the hourly cost of the insurance-pension plan would mount even higher. This would raise breakeven points even more than a straight wage increase and would intensify the cost problem of the companies in a recession. And even more serious, insurance-pension plans, as the board admits, “once installed, become more or less permanent.” In fact, if experience with John L. Lewis is any guide, forced pension plans to which employees do not contribute—and it is precisely such a plan that the board wishes to impose—are worked up to ever more costly and extravagant levels.
It is impossible to call attention here to all the non sequiturs, inconsistencies, and self-contradictions with which the report is riddled. Some random examples will have to do.
The board turns down a straightforward wage increase on the implied (though never clearly stated) ground that it would force price increases. But when it insists that the companies must add the equivalent of 8 to 10 cents an hour to their payrolls for insurance-pension plans, it not only assumes that this would be no excuse for a steel price increase, but implies that it would somehow be followed by “higher profits.” And if these “do not result in benefit to the consumer in the form of lower prices, there would be justification for the union to renew its demand for increase of wage rates!” In other words, if one payroll boost doesn’t bring down steel prices, try, try, again.
The board finds that a “social obligation . . . rests upon industry to provide insurance against the economic hazards of modern industrial life,” but doesn’t tell us who is going to insure industry itself against the economic hazards of modern industrial life.
The strangest paragraphs in the report are those in which the board affects to deplore “the habit of turning to government” to settle labor disputes “instead of arguing it out in collective bargaining.” Now who on earth do you suppose appointed the board and forced the companies to go before it?
October 3, 1949
Within a single week 25 nations have deliberately slashed the values of their currencies. Nothing quite comparable with this has ever happened before in the history of the world.
This world monetary earthquake will carry many lessons. It ought to destroy forever the superstitious modern faith in the wisdom of governmental economic planners and monetary managers. This sudden and violent reversal proves that the monetary bureaucrats did not understand what they were doing in the preceding five years. Unfortunately it gives no good ground for supposing that they understand what they are doing now.
This column has been insisting for years, with perhaps tiresome reiteration, on the evil consequences of overvalued currencies. On Dec. 18, 1946, the International Monetary Fund contended that the trade deficits of European countries “would not be appreciably narrowed by changes in their currency parities.” I wrote in Newsweek of March 3, 1947: “It is precisely because their currencies are ridiculously overvalued that the imports of these countries are overencouraged and their export industries cannot get started.” In the issue of Sept. 8, 1947, as well as in my book Will Dollars Save the World? I wrote: “Nearly every currency in the world (with a few exceptions like the Swiss franc) is overvalued in terms of the dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity.”
Yet until Sept. 18 of this year the European bureaucrats continued to insist that their currencies were not overvalued and that even if they were this had nothing to do, or negligibly little to do, with their trade deficits and the “dollar shortage” that they continued to blame on America. And the tragedy was that former Secretary of State Marshall, the President, and Congress, completely misunderstanding the real situation, accepted this European theory and poured billions of the American taxpayers’ dollars into the hands of European governments to finance the trade deficits that they themselves were bringing about by their socialism and exchange controls with overvalued currencies.
In time the managers of the Monetary Fund learned half the lesson. They recognized that most European currencies were overvalued. They recognized that this overvaluation was a real factor in causing the so-called “dollar shortage” and unbalancing and choking world trade. But they proposed the wrong cure.
They did not ask for the simple abolition of exchange controls. (Their own organization in its very origin was tied up with the maintenance of exchange controls.) They proposed instead that official currency valuations be made “realistic.” But the only “realistic” currency valuation (as long as a currency is not made freely convertible into a definite weight of gold) is the valuation that a free market would place upon it. Free-market rates are the only rates that keep demand and supply constantly in balance. They are the only rates that permit full and free convertibility of paper currencies into each other at all times.
Sir Stafford Cripps fought to the last against the idea that the rate of the pound had anything to do with the deepening British crisis. Trying to look and talk as much like God as possible, he dismissed all such contentions with celestial disdain. But at the eleventh hour he underwent an intellectual conversion that was almost appallingly complete. We “must try and create conditions,” he said, “in which the sterling area is not prevented from earning the dollars we need. This change in the rate of exchange is one of those conditions and the most important one” (my italics). And on the theory that what’s worth doing is worth overdoing, he slashed the par value of the pound overnight from $4.03 to $2.80.
There are strong reasons (which space does not permit me to spell out at this time) for concluding that the new pound parity he adopted was well below what the real free-market level of widely usable sterling was or would have been on the day he made the change. What he did, in other words, was not merely to adjust the pound to its market value as of Sept. 18 but to make a real devaluation.
The first consequence was to let loose a world scramble for competitive devaluation far beyond anything witnessed in the ’30s. Most nations fixed new rates lower than their existing real price and cost levels called for. These countries, therefore, will now undergo still another epidemic of suppressed inflation. Their internal prices and living costs will start to soar. Unions will strike for higher wages. And if the past (or Sir Stafford’s Sept. 18 talk) is any guide, the governments will try to combat this by more internal price-fixing and rationing, continued or increased food subsidies, unbalanced budgets, and wage fixing.
In this country, on the contrary, the tendency will be to drag down our price level somewhat by lowering the dollar price of imported commodities and forcing reductions in the dollar price of export commodities. This will increase our problems at a time when the unions are pressing for a wage increase in the camouflaged form of insurance-pension benefits.
It will be necessary to reexamine our whole foreign economic policy in the light of the new exchange rates. Marshall-Plan aid with overvalued European currencies was largely futile; Marshall-Plan aid with undervalued European currencies should be unnecessary. In fact, we may soon witness the reversal of the world flow of gold. For the first time since 1933 (if we omit the war years 1944 and 1945) gold may move away from, instead of toward, our shores.
But getting rid of overvalued currencies, even in the wrong way, is nonetheless a tremendous gain. The chief barrier that has held up a two-way flow of world trade in the last five years has at last been broken. The chief excuses for maintaining the strangling worldwide network of trade restrictions and controls have at last been destroyed. Were it not for the echoes of the atomic explosion in Russia, the outlook for world economic freedom would at last be brighter.
The best British comment I have read since the devaluation comes from The London Daily Express: “Let every foreign country pay what it thinks the pound is worth. . . . But the socialists will never consent to free the pound. It would mean abandonment of their system of controls. . . . If you set money free you set the people free.”
October 10, 1949
The report of the President’s steel-industry fact-finding board was a crazy quilt of self-contradictions.
The central self-contradiction consisted in rejecting another wage increase while accepting insurance and pension benefits that by the board’s own admission were the equivalent of an increase of 8 to 10 cents in hourly wage rates.
The arithmetic and logic of the case ought to be as plain as daylight. If at this time the steel companies can’t afford another wage increase, they can’t afford the added burden of an insurance and pension plan. If our economy as a whole can’t afford another round of wage increases, it can’t afford a new insurance-pension plan. If a wage increase would be “unstabilizing” now in the frank form of an increase in the hourly rate, it would be just as unstabilizing in the disguised form of an insurance-pension plan. If, on the other hand, the steel industry, or industry in general, can afford now to take on the added burden of an insurance-pension plan costing 10 cents an hour, it can just as well afford to take on a straight fourth-round wage increase of 10 cents an hour.
Why did the board’s decision fly in the face of such elementary arithmetic? For purely political reasons? Because it wanted to grant a fourth-round wage increase but didn’t want it to look like a fourth-round wage increase?
The board might have handed down one of two self-consistent decisions. It might have said to the union leaders: “The steel workers are at present earning an average of about $1.65 an hour. We find that the steel industry cannot afford any further pay increase. It would only result in a rise of prices and a decline of sales, output, and employment. But you believe in compulsory insurance and pensions. So do we. Therefore we recommend that wage rates in the steel industry be reduced to $1.55 cents an hour and that the companies set aside the 10-cent difference for a workers insurance and pension plan.”
If any such decision had been handed down, the union leaders would have yelled bloody murder. Yet it would have carried out the implied premises of the board. It would have carried out logically, also, the specious analogy drawn by the board and the union leaders between insurance and pension plans for workers and depreciation charges for machines. For companies do not pay out to stockholders the entire current earnings of machines; they withhold part of those earnings for depreciation and replacement.
Another self-consistent decision the board might have made is this: “The steel workers are now getting an average of $1.65 an hour. We find that the companies, without bringing on higher prices, disruption, or unemployment, could pay as high as the equivalent of $1.75 an hour. It is up to the members of your unions whether they want to take the 10-cent addition in the form of a straight hourly wage boost or of insurance and pension benefits. It certainly isn’t for us to force them to take it in one form rather than another.” If this had been the decision, would all the union members have chosen insurance and pension benefits?
Some companies have misconceived the central issue as one between contributory and noncontributory pension plans. They are right in believing that contributory plans, which are less subject to various abuses, are generally sounder than noncontributory. But this is a secondary issue.
The central issue now raised is this: Will the total cost burden placed on the steel and other industries by an insurance and pension plan, thrown on top of present wage rates, force up prices and so reduce sales, output, and employment?
The workers cannot in the long run get more than they produce. Whatever they get in insurance and pension benefits must in the long run be at the expense of their wage rates. In their new pension propaganda the union leaders may pull every stop in the emotional organ. But they cannot escape from arithmetic.
October 17, 1949
Let’s consider a few more self-contradictions in the President’s steel fact-finding board report.
On page 61 we learn: “As to old age and unemployment . . . the government itself has stepped in to provide a minimum of protection.” But two paragraphs later we are told: “No one seriously contends that those sums could have provided a minimum standard of living even back in 1935 when they were fixed.” So they provided a minimum and they didn’t.
Obviously those sums can’t provide a minimum standard today, the board continues, “with the cost of living some 70 percent higher than in 1935.” One might have expected the logical moral that so-called social-security schemes financed or accompanied by inflationary governmental policies are a cruel deception. No such moral is drawn.
Then the board turns angrily on the Federal government that created it. It appears that the existing pensions provided by that government are “un-American.” Further: “Even if the increases now being discussed in the Congress were enacted, they still would not materially increase the purchasing power of the workers’ pensions over the original purchasing power provided in 1935.” In other words, they would still be un-American.
Turn now to page 62: “So long as government does not provide the security at all, we believe that industry should. So long as government fails to provide an adequate amount, industry should take up the slack.” This lily seems too lovely to gild. For sixteen years the New Dealers have been telling us that if industry doesn’t live up to its “social responsibilities” government must do the job. Now they tell us that “no thoughtful citizen . . . can expect labor to wait patiently by until government makes up its mind.” So private industry must take over these “social responsibilities” if government won’t! This is statism biting its own tail.
Still on page 62: “Social insurance, at least in its minimal form, should be founded on a universal base for all workers in the United States.” The board talks of “the danger of unbalanced, overlapping, and competing programs.” It finds it a “cause of great concern” that “there is growing up haphazardly all over the country this large number of unequal and uncoordinated insurance funds, with little or no public control.” All this would lead logically to a recommendation that the existing universal, “nationwide, compulsory” government insurance plan should be made “American” and “adequate.” Instead, the board recommends still more unbalanced, overlapping, competing, haphazard, unequal, and uncoordinated private-insurance funds!
The government’s social-insurance system is based on worker contributions. The board ignores this. For 67 pages it insists that the sole cost of pensions and insurance must be paid by the employer. But on page 68, in its eagerness to argue that such employer funds would not be raided or abused, it slips into a fatal admission: “So long as the cost of the plan is integrated into the labor cost structure . . . the worker will know that he is in fact paying for his own insurance.” He must do so for the simple reason that he cannot in the long run be paid more than he earns. But then why deceive him? Why try to tell him in all the rest of the report that the burden of his insurance can in fact be shifted entirely on employers?
In this sudden emotional flim-flam about pensions little attention has been paid to the experience of Britain and France. The British cradle-to-grave social services are far more comprehensive, far more expensive, and provide a far greater percentage of the worker’s real income than our own. In France the cost to the employer of social benefits has now reached a basic amount of 29 percent over and above wages, with even higher costs for particular firms and industries. But this crippling burden is precisely one of the reasons why the total income of the British or French worker is so much smaller than the American’s.
One of the primary causes of the grave social insecurity of our time is this fetish called “social security.”
October 24, 1949
Let’s see just how we got into this. The President’s steel fact-finding board handed down a proposed settlement not only unsound in itself but riddled with inconsistencies. Its central self-contradiction was to deny a straight hourly wage increase on the ground that this “might well cause price dislocations”—and then insist on a pension-insurance plan costing 8 or 10 cents an hour which would have the same economic effects as such a wage increase.
Soon or late the present industrywide steel and coal strikes will be settled. But any terms now acceptable to the unions are almost certain to increase production costs and to put further strains on the economy. They will either result in unemployment or in more inflation to make the higher costs payable.
The trouble is not merely that the President’s board handed down a bad report, but that we cannot have government wage-fixing in this or any other disguise and still keep a free economic system.
Why was such a board appointed? In the fear that the industrywide steel union would otherwise bring the steel industry of the nation to a halt. And now that the steel industry and the soft-coal industry have both been brought to a halt by their respective industrywide unions, our whole economy is in danger of paralysis.
Let’s go back a little farther. How did we get into the position where there are industrywide unions? How did we get to the point where individual unions have become so powerful that they can paralyze the entire economic life of the country unless their terms are met?
We got there precisely because the government helped to put us there. We got there precisely because the Federal government itself, through the Norris-LaGuardia and Wagner Acts, and continuing with the Taft-Hartley Act, deliberately turned itself into a union organizing agency, built up industrywide unions, and encouraged strikes by taking practically all the risks out of strikes.
One reason why the employers must now deal with the Murrays and Reuthers and Petrillos and Lewises, no matter how unreasonable or disrupting the demands of the latter may be is that they are forced to deal with them under the law. We deliberately grant a handful of union leaders the power to paralyze the nation’s economic life, and then become surprised and indignant when they use the power.
As long as this legal grotesquery remains, we will have threats of economic paralysis until union leadership at last makes it impossible for a free system to operate at all.
The straightforward solution would be the complete repeal of the Taft-Hartley Act (including, of course, the Wagner Act which it amends) and the repeal or drastic revision of the Norris-LaGuardia Act.
But no amount of economic disruption now seems sufficient to convince Congress that its predecessors made serious mistakes in 1932 and 1935. From the standpoint of creating a workable economic system or of bringing about industrial peace, the Norris-LaGuardia and Wagner Acts were not great forward steps but great backward steps. Yet even the timid Taft-Hartley revisions in 1947 have been denounced by Mr. Truman.
In this atmosphere any real solution seems impossible. But a minimum reform, if a free economic system is to be allowed to function, would be an amendment removing the present legal compulsion on employers to recognize and “bargain” with industrywide unions. Such an amendment was in the original 1947 House bill, which was passed by an overwhelming majority. It failed in the Senate by a single vote, and only because of the fear of a Presidential veto. If Mr. Truman were to recommend such an amendment now, he could get it immediately. Until he does, the country will remain in the power of industrywide unions, of these Frankenstein monsters given a special license to paralyze the nation’s economic life if they don’t get exactly what their leaders want.
October 31, 1949
Serious signs are appearing that sterling devaluation is not going to have the good results for which Sir Stafford Cripps had hoped. And the chief reason for this is that he will not permit free markets to function.
His first mistake was “devaluation” itself. What was called for, as Winston Churchill has hinted, was not an arbitrary slash in the “official” value of the pound but a return to free exchange rates.
Under a system of free rates, with Britons and foreigners exchanging pounds against other currencies at the relative valuations that they mutually agreed upon, the only way in which a government could sustain the value of its currency would be by taking the measures necessary to win confidence in it. But Sir Stafford preferred to have the value of the pound fixed, not by the people who trade in it, but by himself; not by confidence, but by fiat, coercion, and command.
Even this mistake would not have been irremediable if he had been willing to allow the new rate to produce its natural economic consequences. But it is precisely these consequences that he seems determined to prevent. “Nothing,” he says, “—and I mean literally nothing—should be done to increase personal incomes arising out of profits, wages, or salaries.” And again: No one must “try and profiteer or improve [his] relative position compared to [his] fellow citizens.” Sir Stafford wishes to retain what the British Socialists are fond of calling “fair shares for all.”
Now it is in fact only by the relative changes in prices, profits, and wages brought about by the new price of the pound that labor and capital could be voluntarily diverted from domestic production into export production. British manufacturers will produce more for export and less for home consumption only if they see a better prospect for profits in the foreign than in the domestic market. Manufacturers can bid labor away from domestic to export production only if they are able to offer, and permitted to offer, higher wages for export than for home production. This is precisely what a free market under the new sterling rate would enable them to do. This is how a free market works.
Sir Stafford either does not understand this or finds it abhorrent. He prefers government price fixing and government wage fixing. And like most government planners, he thinks of prices en bloc and of wages en bloc. He will not permit the thousands of necessary relative adjustments to be brought about by the free play of prices, profits, and wages in the market, with their corresponding effect on relative deterrents and incentives. Therefore he is forced to try to substitute the incomparably clumsier and less effective method of exhortations and compulsions. He forbids free-market incentives and then tries to substitute the paternalistic statist incentive of taxpayers’ guarantees against exporters’ losses.
It is open to doubt whether Sir Stafford understands even the direct market mechanics of devaluation. The only illustration he offered in his radio speech announcing devaluation assumed that a British export’s price in pounds remained fixed and that the full adjustment to the new pound rate was made by a lower price in dollars. If this were general, the British exporter’s advantage would be very slight. He would get no more pounds from a given volume of sales than before, and exporters collectively would have to sell 44 percent more goods in volume for Britain to earn the same number of dollars. But where the exporter could sell for the same dollar price as before, he could get 44 percent more pounds for the same sales volume—no negligible incentive. In practice, in free markets, the final price adjustment for most exports (or imports) would tend to be made partly through higher sterling prices and partly through lower dollar prices.
In sum, though free exchange rates would be infinitely preferable to “devaluation,” neither free exchange rates nor devaluation can bring their desired results except within the framework of free markets and a free economy.
November 7, 1949
One of the strange perversions that have crept into our political life is the habit of praising Congress for the amount of legislation it has passed or denouncing it for “dawdling” when it passes little. One would think that the more new laws a Congress put on the books, the more things it meddled in, the more new restrictions and compulsions it put on the citizens, and the more it took from the taxpayers to hand to some special interest, the better.
President Truman called the 80th “the worst Congress ever” because he considered it a “do-nothing” Congress. He was wrong. The 80th Congress put no fewer than 1,363 new laws on the books. True, this was 263 less than the 79th; but it beat the 78th by 206. To catch up with the 80th, Mr. Truman’s more favored 81st will have to enact at least 526 laws more. In the nine-month session just closed it passed 837 bills.
Is it really possible for any President (who must approve or veto each of them) to decide within a few months on the individual merits of more than 800 separate bills? Is it possible for any congressman to do so—though he too is called upon to vote on all? And if no single human mind whatever is capable of judging the individual consequences of each of these hundreds of new laws, not to speak of their composite interaction, how can the net result be called intelligent, coherent, or responsible lawmaking?
So far from denouncing a do-nothing Congress, we might better pray for one. What the country needs is an undo-something Congress.
In trying to judge the record of the last session, we are compelled to center arbitrarily on a handful of items. On the credit side, Congress ratified the Atlantic Pact, extended the reciprocal-trade agreements, and adopted some of the Hoover recommendations for reorganizing the government. It commendably refused to throw out the Taft-Hartley Act in order to substitute something much worse, and it fortunately failed to plunge ahead with Point Four, or to enact a new grab-bag social-security program, or to rush through compulsory health insurance. On the debit side, the cumulative record was alarming. The session adopted a housing bill that was both collectivistic in concept and inflationary in effect. It boosted the legal minimum wage from 40 cents to at least 75 cents an hour. This must either create unemployment for the very people it is intended to benefit, or force further inflation to prevent such a result. The session adopted a “compromise” price-support bill for farm commodities which constituted the most openly cynical and recklessly expensive bid for the farm vote ever made. It provided for additional storage facilities to withhold more foodstuffs from the American public, create artificial scarcities, and force consumers to pay higher prices.
It authorized $5,600,000,000 more Marshall-Plan money without even requiring in return policies to promote freedom and recovery instead of collectivism and crises. It appropriated $1,314,000,000 for arms aid on the false assumption that the recipient governments couldn’t afford to pay for arms themselves. It spent more than $46,000,000,000 and headed toward another deficit of $5,000,000,000 to $10,000,000,000.
In brief, the last session of Congress drove the country still farther toward collectivism and inflation. It assumed that every domestic and foreign problem could be solved simply by seizing still more from the American taxpayer and handing it over to someone else. The mere fact that the last session refused to drive even faster into collectivism should not blind us to how far it actually went.
Yet this Congress, which was so busy thinking of how many better uses it could make of the taxpayer’s money than the taxpayer could, didn’t find time to do anything to curb the power of the industrywide unions that Congress itself has built up. The private power of a handful of union bosses to paralyze the nation’s entire economic life unless their demands are met seemed a matter too trivial for Congressional notice. It considered 700 other things more important.
November 14, 1949
It was inevitable from the start that when the steel and coal strikes were settled it would be essentially on the union leaders’ terms. There may have been some doubt as to the exact amount by which they would force up labor costs, but there was never any doubt that would force them up.
Government mediators might hail the capitulation of Bethlehem Steel as a triumph for “voluntary procedures.” But when an employer makes such concessions only after his plants have been closed down for a month by a strike, after a Presidential board has put the heat on him by “recommending” just such concessions, and when experience suggests the possibility of government seizure, it becomes hard for most of us to distinguish between such “voluntary” concessions and concessions made under duress.
As a result of the unrestrained power of industrywide unions a new national pattern is being established under which employers will feel virtually compelled to add about 10 cents an hour to their wage costs.
This victory is likely to be a Pyrrhic one for labor itself. On top of the new minimum-wage boost, it will probably either bring about unemployment or force a further monetary inflation to make the higher labor costs payable. And even if that result doesn’t come right now, we may be sure the national union leaders will keep repeating the pattern until it does.
The dangers of industrywide bargaining have been forcibly pointed out in a pamphlet by Prof. Leo Wolman of Columbia.3 They are now further emphasized in a book by Prof. Charles E. Lindblom of Yale4. It is Professor Lindblom’s startling thesis that “unionism is destroying the competitive price system.”
“The strike,” he points out, “paralyzes production, and it is dramatic. But the real labor problem is its aftermath. For if wage disputes call a halt to production temporarily, their settlement may disorganize it permanently. Unionism will destroy the price system by what it wins rather than by the struggle to win it. It sabotages the competitive order, not because the economy cannot weather the disturbance of work stoppages but because it cannot produce high output and employment at union-wage rates.”
What are we going to do about it? The first step is to get the public to recognize clearly the real nature of what is now happening. As Professor Wolman has summed it up, the industrywide unions “can today paralyze the economic life of the country or dictate the terms on which they refrain from doing so.” The next step is to stop appointing so-called “fact-finding” boards whose decisions are inevitably political and who impose something close to government wage fixing. And the next step is to take away from any union leader the arbitrary power to bring on the kind of nationwide crisis that creates a demand for direct government intervention.
The original Hartley bill, passed by the House in 1947 by a vote of 308 to 107, removed the compulsion on the employer to recognize and deal with industrywide unions. If a union leader represented the workers of one employer, for example, the Labor Board was not to certify him as eligible to represent the workers of any competing employer, unless each employer regularly employed less than 100 men and the competing plants were less than 50 miles apart. A similar provision failed in the Senate by only a single vote.
If Congress were now to pass such an amendment to the Wagner-Taft-Hartley act, it would not undo, of course, all the damage its bad legislation has done. But it would be an excellent beginning. If even this is not made, we cannot escape Professor Lindblom’s grim conclusion: “Union monopoly destroys the price system because it produces . . . waste, unemployment, inflation, or all combined . . . to a degree which the economy cannot survive.”
5 Industry-Wide Bargaining (63 pages, Foundation for Economic Education, Irvington, N. Y., 75 cents).
6 Unions and Capitalism (267 pages. Yale University Press, $3.75).
November 21, 1949
Before it has faded too far into the past, let’s look at the record.
When Sir Stafford Cripps announced the devaluation of the pound, Winston Churchill pointed out that Cripps had previously denied any such possibility no fewer than nine times. A United Press dispatch of Sept. 18 listed nine such occasions. A haphazard search on my own part has uncovered three more—on Sept. 22 and 28, 1948, and April 30 of this year. Incorporating these in the UP list, we get the following record of denials:
Jan. 26, 1948—“No alteration in the value of sterling is contemplated by the British Government following the devaluation of the franc.”
March 4, 1948—A reported plan to devalue the pound is “complete nonsense.”
May 6,1948—“The government has no intention of embarking on a program to devalue the pound.”
Sept. 22, 1948—“There will be no devaluation of the pound sterling.”
Sept. 28, 1948—The government has “no idea whatever” of devaluing the pound sterling. 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.”
Oct. 5,1948—“Devaluation is neither advisable nor even possible in present conditions.”
Dec. 31, 1948—“No one need fear devaluation of our currency in any circumstances.”
April 30, 1949—“Sterling revaluation is neither necessary nor will it take place.”
June 28,1949—“There has been no pressure on me by America to devalue the pound.”
July 6, 1949—“The government has not the slightest intention of devaluing the pound.”
July 14, 1949—“No suggestion was made at the conference [with Snyder and Abbott] . . . that sterling be devalued. And that, I hope, is that.”
Sept. 6, 1949—“I will stick to the . . . statement I made [July 14] in the House of Commons.”
In brief, Sir Stafford emphatically denied at least a dozen times that he would do what he did. The excuse has been made for him that naturally he could not afford to admit any such intention in advance because no one would then have accepted sterling at $4.03. This “defense” amounts to saying that unless the government had lied it could not have successfully deceived the buyers of British goods and the holders of sterling.
For this is what “devaluation” means. It is a confession of bankruptcy. To announce that IOU’s hitherto guaranteed to be worth $4.03 are in fact worth only $2.80 is to tell your creditors that their old claims on you are now worth no more than 70 cents on the dollar.
When a private individual announces bankruptcy, he is thought to be disgraced. When a government does so, it acts as if it had brought off a brilliant coup. This is what our own government did in 1933 when it jauntily repudiated its promises to redeem its currency in gold. Here is how the London Bankers’ Magazine describes the recent devaluation of the pound by the British Government: “The political technique for dealing with these issues has worn thin. It consists of strenuous, even vicious repudiation beforehand of any notion of devaluation. It insists that the move would be ineffective and utters portentous warning about the dangers. When the unthinkable happens the public is slapped on the back and congratulated on the best piece of luck it has encountered for years.”
This is what governments have now been doing for a generation. It is the modern equivalent of medieval coin clipping. This is what “monetary management” really means. In practice it is merely a high-sounding euphemism for continuous currency debasement. It consists of constant lying in order to support constant swindling. Instead of automatic currencies based on gold people are forced to take managed currencies based on guile. Instead of precious metals they hold paper promises whose value falls with every bureaucratic whim. And they are suavely assured that only hopelessly antiquated minds dream of returning to truth and honesty and solvency and gold.
November 28, 1949
The question whether or not it is desirable to return to a real gold standard, and when, and under what conditions, and at what rate, and by precisely what steps, has become so complicated that in spite of its great importance I have hitherto refrained from taking it up in these columns.
Fortunately an excellent take-off point is now provided by the speech of W. Randolph Burgess of the National City Bank of New York, before the American Bankers Association. His position seems to me, with one or two reservations, the most sensible and balanced recently presented. I quote in part:
“Historically one of the best protections of the value of money against the inroads of political spending was the gold standard—the redemption of money in gold on demand. This put a check-rein on the politician. For inflationary spending led to the loss of gold either by exports or by withdrawals by individuals who distrusted government policies. This was a kind of automatic limit on credit expansion. . . .
“Of course the modern economic planners don’t like the gold standard just because it does put a limit on their powers. . . . I have great confidence that the world will return to the gold standard in some form because the people in so many countries have learned that they need protection from the excesses of their political leaders. . . .
“There is a group of people today asking for the restoration of the full gold standard immediately in the United States. Today we have a dollar that is convertible into gold for foreign governments and central banks; these people are asking for the same rights to hold gold for our own citizens. In principle I believe these people are right, though I think they are wrong in their timing, and overemphasize the immediate benefits. . . .
“If you try to force the pace by resuming gold payments before the foundations are laid through government policies on the budget, on credit, and on prices, the gold released may simply move out into hoards and become the tool of the speculator.
“Gold payments are only part of the building of sound money, and they are in a sense the capstone of the arch. ...”
The great virtue of this statement is not only that it recognizes the central importance of returning to a real gold standard but that it takes account also of the formidable difficulties that our past and present errors and sins have placed in the way.
For the gold standard is not important as an isolated gadget but only as an integral part of a whole economic system. Just as “managed” paper money goes with a statist and collectivist philosophy, with government “planning,” with a coercive economy in which the citizen is always at the mercy of bureaucratic caprice, so the gold standard is an integral part of a free-enterprise economy under which governments respect private property, economize in spending, balance their budgets, keep their promises, and refuse to connive in over-expansion of money or credit. Until our government is prepared to return to this system in its entirety and has given evidence of this intention by its deeds, it is pointless to try to force it to go on a real gold basis. For it would only be off again in a few months. And, as in the past, the gold standard itself, rather than the abuses that destroyed it, would get the popular blame.
Last week I recited the shabby record of Sir Stafford Cripps, not as a personal criticism but as an illustration of what typically, if not inevitably, happens under a “managed” paper-money system. For Sir Stafford is not the lowest type of politician likely to be entrusted to manage the people’s money; he is the highest type. To millions he had been the very symbol of political integrity and courage. “If gold ruste,” as Chaucer asked, “what shal iren do?”
Which reminds us that real gold doesn’t rust. As a currency basis it may lack one or two of the perfections that theorists dream of, but it weighs more and can be kept longer than a politician’s pledge.
December 5, 1949
Two years ago our government made the mistake of supposing that it could buy European recovery merely by pouring dollars into Europe and not even insisting in return on the minimum reforms needed to make recovery possible. Slowly, by the pressure of events, our ECA officials have themselves come to realize that lasting European recovery can come only from the efforts of Europe itself. They know we cannot continue to give new blood transfusions forever. The chronic European hemorrhage is brought about by the policies of European governments. It will stop only when those policies are abandoned.
As evidence that our government finally recognizes this, the speech of Paul G. Hoffman before the Council of Economic Cooperation on Oct. 31 was encouraging. But from asking too little, he now seems to be asking too much. Instead of insisting on the practicable, he seems to be demanding the Utopian.
No less than sixteen times in his address he called for the economic “integration” of Western Europe. But precisely what does “integration” mean? Hoffman left this vague—so vague that European officials can interpret it as meaning much or little. He implied, however, that it was very far-reaching. He set up the “single market of 150,000,000 consumers” in the United States as the model to be duplicated for the 270,000,000 consumers of Western Europe. A “single market” of this kind implies nothing less than the political federation or unification of Europe.
It is not surprising that European statesmen look on this proposal with serious misgivings. What would our own feelings be if we were suddenly asked to “integrate” our economy with those of Canada and Mexico—or with those of Western Europe?
The danger of the Hoffman proposal is that in asking for the visionary we will not even get the possible.
To halt its present trade deficit and cure its general economic sickness, it is not necessary for Europe to adopt an “integration” of a type and degree that it never knew before in its history, even when it was most stable and prosperous. It need merely return to the economic policies that it practiced as a matter of course through most of the nineteenth century and adhered to in large part even through the ’30s.
I would begin to sound Utopian myself if I were to suggest that Europe think now of going back to the international gold standard. The European record of recent years does not make such a course easy. But it is important to remember that when each European country made it the central object of its monetary policy to keep on the gold standard at the parity it had previously adopted, there was necessarily that “coordination of domestic financial policies” that Paul Hoffman now calls for. No country could stay on the gold standard if it embarked on an independent policy of inflation. As long as each country’s own currency unit was kept convertible into a fixed weight of gold, it was necessarily freely convertible also, at a fixed rate, into all other gold currencies.
The international gold standard was the greatest adventure in economic “integration” that the world has ever seen. Combined with free trade or even with moderate tariffs, it turned the world in effect into a single market.
It may be too much to expect a return to gold immediately. But it is not too much for American taxpayers to expect, in return for the dollars they are daily being forced to pour into Europe, insistence by our ECA officials on at least three minimum reforms: balanced budgets, the end of artificial cheap-money policies, and the abolition of exchange control. The first two reforms would halt the inflation that is undoing all our sacrifices for European stability. The third would allow a reasonable flow of trade, end the dollar shortage, and halt the trend to totalitarianism.
But it would be inconsistent and ridiculous for us to demand even these reforms as long as we ourselves are heading for a deficit of more than $5,000,000,000 and persisting in a recklessly inflationary cheap-money policy.
December 12, 1949
The recent speech of Allan Sproul, president of the Federal Reserve Bank of New York, before the American Bankers Association, was a startling revelation of official doctrine. It has already provoked some excellent answers—notably those of Joseph Stagg Lawrence in the Empire Trust letter and of Prof. Walter E. Spahr in The Commercial and Financial Chronicle of Nov, 10. I have space to make only a few random points.
“I perceive,” said Sproul, “no moral problem involved in this question of gold convertibility.” Let’s help him to perceive one. Prior to the year 1933 our government pledged itself to pay interest and principal on its bonds in gold of a specified weight and fineness. It also pledged the holder of every currency note that it would redeem that note on demand in gold of a specified weight and fineness. It violated its most solemn pledge. It deprived the rightful owners of their gold. And it made the possession of gold by anybody but the thief illegal.
And now we are all being slapped on the back and told how lucky we are at last to have a system at home of irredeemable paper. Sproul sings paeans in praise of paper. “We use a paper money,” he says, “which has the supreme attribute of general acceptability.” He neglects to add—at a constantly falling value. The purchasing power of a paper dollar, according to the Department of Commerce, is now only 52 cents, as measured by wholesale prices, in terms of the 1935–39 dollar.
Sproul resorts to flag waving. “The integrity of our money does not depend on domestic gold convertibility. It depends upon the great productive power of the American economy....” Those who recall the disastrous paper-money inflations of history must shiver at this argument. Listen to Andrew D. White’s report of speeches made in the French Assembly in 1791 to defend the paper assignats: “‘Fear nothing; your currency reposes upon a sound mortgage.’ Then followed a glorification of the patriotism of the French people, which, he asserted, would carry the nation through all its difficulties.”
The nub of Sproul’s defense of our internal irredeemability is that the bureaucrats must be trusted implicitly but that the people cannot be trusted at all. It appears that when you allow the people to redeem their money in gold they always want to do it at the wrong time—i.e., just when it is most embarrassing for the government to meet the demand; in other words, just when the government has connived in an inflationary expansion and issued more paper claims than it is able to honor.
“The principal argument for restoring the circulation of gold coin,” Sproul declares, “seems to be distrust of the money managers and of the fiscal policies of government.” He couldn’t have said it better. What he fails to see is that this mistrust has been richly earned. In addition to the shabby record of Sir Stafford Cripps, we need to remind ourselves that some 30 governments instantly followed the British example. They wiped out overnight, by simple ukase, part of the value of every paper currency unit in the hands of their own people.
Yet in the face of this almost universal record of currency debasement (not to bring up our own sorry record of currency inflation since 1933), Sproul can seriously speak of leaving everything to what he calls “competent and responsible men.” Said Sir Stafford Cripps, in explaining his devaluation record: “Even if we had then had some future intention of altering the rate of exchange, which in fact we had not, no responsible minister could possibly have done otherwise than deny such intention.” Here, then, is an authoritative definition. A “competent and responsible” monetary manager is one who not only lies to his people regarding the future of their currency but even considers it his duty to deceive them.
Sproul’s currency theory may be summed up thus: Put your faith in the monetary managers, who have always fooled you in the past.
December 19, 1949
A few weeks ago fourteen academic economists, several of whom might be expected to know better, came out in favor of “counter-cyclical fiscal action”—i.e., “surpluses in good times and deficits in bad.” I was forced to pass this by at the time because a worldwide monetary earthquake fell in the same week. But the admirable analysis of the “compensatory budget” theory in the December letter of the National City Bank provides a fresh occasion to take it up.
“Annual budget balancing,” declare the fourteen economists, “is both difficult in practice and unsound in principle.” That it is difficult in practice all history attests. So is any other virtue or worth-while goal. But “maintenance of the national credit by a Federal budget annually balanced” (to quote the pledge of the Democratic platform on which Franklin D. Roosevelt ran in 1932) is an incomparably sounder principle than the foggy alternative offered by the fourteen.
Even they put in a patronizing word for the annually balanced budget. “One great merit it does have: it provides a yardstick. . . . Every government program undertaken has to be paid for in a clear and unequivocal sense . . . This is a principle every citizen can understand.”
And dropping that principle has led and will lead in practice only to fiscal irresponsibility, inflationism, and eventual disaster.
An annually balanced budget has one enormous advantage. Everyone knows exactly how long a year is. Everyone knows on what day it begins and on what day it will end. But nobody knows how long a boom or depression is going to last while we are in it. Even hindsight can’t answer this question exactly. How do we know how far we are above or below normal unless we know what “normal” is? How do we know on just what day even a past depression stopped? Each set of statistics yields a different answer. Which set do we go by? How dependable are the statistics themselves?
The fourteen want to throw away the only real yardstick we have. The decision whether to plan for a surplus or a deficit, and exactly how big a deficit, would then be determined by somebody’s guess about the economic future. “We can, however, reasonably expect that the budget be formulated in the light of economic judgment available.” Whose judgment? Leon Keyserling’s, say? And suppose the economic forecasts of the Administration prove as bad in the future as in the past? Well, better luck next time.
The compensatory-budget theory subordinates or disregards the maladjustments in costs and prices that may be causing stagnation. It especially ignores the relationship of unemployment to excessive wage rates. It assumes that booms or depressions are the purely mechanical result of the volume of money available for spending. It overlooks what Albert Hahn has called the “compensating reactions to compensatory spending”—the chief of which is the destruction of business confidence.
But even if it had none of these economic weaknesses, the political consequences of the “compensatory” budget are alone decisive against it. The budget is to be balanced only when conditions are “normal,” and overbalanced only when they are positively booming. At such times the politicians are to increase taxes and reduce expenditures to bring the boom to a halt. This reversal would be politically unpopular and perhaps politically fatal.
Even at the height of an inflationary boom, therefore, the party in power could never be brought to admit that the boom was quite high enough to be halted. We have seen an example of this even within the last twelve months. So even in a year when we count our national income at the second dizziest height it has reached, we face a probable budget deficit of $5,000,000,000 to $8,000,000,000.
The compensatory-spending philosophers merely put into the hands of the inflationists and spendthrift politicians a theory that they can and will use to their own ends.
December 26, 1949
Some weeks ago the Norwegian weekly Farmand carried an editorial called “Why So Timid?” “One of the phenomena of the postwar period in Norway,” it declared, “is that business has shown no will to defend its interests against the encroachments of the government. . . . Norwegian businessmen with lamblike meekness and patience have let themselves be tricked, abused, and stepped upon. . . . It is up to the individuals to take the trouble of finding out whether Norwegian citizens still have protection under the courts and the Constitution.”
With a few changes in its illustrations, this editorial would apply with striking aptness here. Timidity before the encroachments of government power has, in fact, become worldwide.
We need not go into all the reasons here. One is the bribes to immediate self-interest, (jobs, benefit payments, defense contracts) that a government is able to offer particular groups or persons. Another is the dominance of a statist ideology. But most important of all is the fear of government retaliation. This is the chief cause of the paradox that the greater the tyranny of a government, the less complaint there is against it. In Russia today there is no internal complaint at all, but only frantic competition in flattery. We may lay it down as a political principle that the more power a government has already been permitted to seize, the easier it is for it to seize still further power. Businessmen and public-relations advisers rationalize their timidity in the phrase: “Don’t stick your neck out!”
All the more honor, therefore, to those writers and businessmen who do have the courage to stick their necks out. That is why it was gratifying to read, a few weeks ago, of the presentation of awards by the Freedoms Foundation at Valley Forge to writers and business firms who “spoke up for freedom” in 1949.
Two of the recipients are particularly well known to readers of Newsweek. One is my colleague, Raymond Moley, who received an award for his admirable column on “The Coils of Bureaucracy” (Dec. 13, 1948). The other is Warner & Swasey of Cleveland, whose advertisements in these pages over a period of years in defense of our free-enterprise system have been distinguished for their rare grasp of the virtues of that system and for the compact clarity with which they state those virtues. I wish I had space to refer to other award winners no less deserving.
Unfortunately, however, the majority of business firms seem to be under the illusion that they can sit back and enjoy a free ride while a small courageous minority bears virtually the full burden and expense of defending the private-enterprise system upon which the ultimate prosperity, independence, and existence of every private business firm depends. If this minority, however able, proves too small for the task, the rest will have no one to blame but themselves.
The awards of the Freedoms Foundation are wide-ranging. They cover editorials, magazine articles, radio programs, motion pictures, comic strips, speeches, sermons, and advertising campaigns. But for some strange reason they do not cover books, which usually have the longest life and influence of all. Let us hope that the Freedoms Foundation will add this category.
If it had existed this year, there would have been some outstanding candidates for awards. I have already reviewed on this page Human Action, by Ludwig von Mises (Newsweek, Sept. 19). I should like to add here Economics and the Public Welfare, by the late Benjamin M. Anderson, which is not only the outstanding financial and economic history of the United States for the period from 1913 to the present, but one of the most powerful expositions of the free-market economy and of the distortions caused by shortsighted government interventions. . . . But now there is space only to add the names of John T. Flynn’s The Road Ahead, Felix Morley’s The Power in the People, and F.A. Harper’s Liberty.
- 1“For Your Information,” Newsweek (12 July 1954), p. 1; Henry Hazlitt, Economics in One Lesson (New York: Three Rivers Press, 1988).
- 2Newsweek’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.
- 3Loyal 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.
- 4This extensive volume makes it possible and convenient for another generation to encounter “Business Tides” anew. The pages that follow reproduce every column Henry Hazlitt wrote for Newsweek throughout his twenty-year career. They offer both a testament to his diligence and insight, as well as a vantage to rediscover how free-market economic thought in the post-World War II era was transmitted and popularized, and why it endured. Even as recent histories of the American Right have transformed our perceptions of the United States after 1945, the significance of economics has only begun to attract the attention it deserves. The latest accounts emphasize that conservatives occupied a modern vanguard, not an atavistic fringe, in post-World War II politics. During an era of putative liberal “consensus,” their ideas appealed to great numbers of Americans, particularly among the middle class in rapidly developing regions like the Sunbelt. Historians have also come to view World War II less as a bright dividing line, and American conservative thought more as an evolving continuum stretching back to the 1930s. In the process, the focus has shifted from social and cultural issues, particularly with respect to race, to the more overtly economic concerns that generated resistance to the New Deal Order. Recent work has recognized that opposition to liberal economic policies arose not simply out of corporate self-interest or business intransigence, but also from principled libertarian objections voiced by theorists with a coherent critique of state power and an articulate defense of the free market.
- 5C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 6George Nash, The Conservative Intellectual Movement in America (Wilmington, Del.: ISI, 1998), Lisa McGerr, Suburban Warriors: The Origins of the New American Right (Princeton, N.J.: Princeton University Press, 2001); Donald Critchlow, Phyllis Schlafly and Grassroots Conservatism (Princeton, N.J.: Princeton University Press, 2005); Gregory T. Eow, “Fighting a New Deal: Intellectual Origins of the Reagan Revolution, 1932–1952,” Ph.D. Dissertation, Rice University, 2007; Kim Phillips Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: W.W. Norton, 2009); Juliet Williams, “The Road Less Traveled: Reconsidering the Political Writings of Friedrich von Hayek,” in Nelson Lichtenstein, ed., American Capitalism: Social Thought and Political Economy in the Twentieth Century (Philadelphia: University of Pennsylvania Press, 2006), pp. 213–27.
