Business Tides
Why Return to Gold?
January 4, 1954
Forty years ago practically every economist of repute supported the gold standard. Most of the merits of that standard were clearly recognized. It was, for one thing, international. When the currency unit of nearly every major country was defined as a specified weight of gold (previous to 1934 the American dollar, for example, was defined as 23.22 grains of fine gold) every such currency unit bore a fixed relation to every other currency unit of the same kind. It was convertible at that fixed ratio, on demand, to any amount, and by anybody who held it, into any other gold currency unit. The result was in effect an international currency system. Gold was the international medium of exchange.
This international gold standard was the chief safeguard against tampering with the currency on the part of politicians and bureaucrats. It was the chief safeguard against domestic inflation. When credit inflation did occur, it produced a quick sequence of results. Domestic prices rose. This encouraged imports and discouraged exports. The balance of trade shifted “against” the inflating country. Gold started to flow out. This caused a contraction of the bank credit based on the gold, and brought the inflation to a halt.
Usually, in fact, the chain of consequences was shorter, quicker, and more direct. As soon as foreign bankers and exchange dealers even suspected the existence of inflation in a given country, the exchange rate for that country’s currency fell “below the gold point.” Gold started to flow out. Then the central-bank managers of the country that was losing gold raised the discount rate. The effect was not merely to halt credit expansion at home, but to draw funds from abroad from lenders who wanted to take advantage of the higher short-term interest rates. The gold flow was stopped or reversed.
Thus so long as the gold standard was resolutely maintained, a whole set of related benefits ensued. Domestic currency tampering and anything more than a relatively moderate inflation were impossible. As gold convertibility had to be maintained at all times, confidence had to be maintained not only through every year but every day. Unsound monetary and economic policies, or even serious proposals of unsound policies, were immediately reflected in exchange rates and in gold movements. Unsound policies or proposals had to be quickly moderated or abandoned.
Because there was a fixed and dependable exchange ratio as well as free convertibility between one currency unit and another, international trade, lending, and investment were undertaken freely and with confidence. And, finally, the international gold standard established (apart from differences caused by shipping costs and tariffs) uniform world prices for transportable commodities—wheat, coffee, sugar, cotton, wool, lead, copper, silver, etc.
It has become fashionable to say that in a major crisis, such as war, the gold standard “breaks down.” But except to the extent that the citizens of a country fear invasion, conquest, and physical seizure of their gold by the enemy, this is an untrue description of what happens. It is not that the gold standard “breaks down,” but that it is deliberately abandoned or destroyed. What the citizens of a country really fear in such crises is inflation by their own monetary managers, or seizure of their gold by their own bureaucrats. This inflation or seizure is not “inevitable” in wartime; it is the result of policy.
In short, it is precisely the merits of the international gold standard which the world’s money managers and bureaucrats decry. They do not want to be prevented from inflating whenever they see fit to inflate. They do not want their domestic economy and prices to be tied into the world economy and world prices. They want to be free to manipulate their own domestic price level. They want to pursue purely nationalistic policies (at the expense or imagined expense of other countries), and their pretenses to “internationalism” are a pious fraud. 
January 11, 1954
Nothing has more clearly demonstrated the need for the gold standard than its abandonment. Since that occurred, in Britain in 1931 and here in 1933, the world has been plunged, both in wartime and in peacetime, into a sea of paper money and unending inflation.
While the inflation everywhere has been blamed on “the war,” it has occurred in nations that were never involved in the war (throughout Latin America, for example), and it has continued to rage since the war ended. As an indirect index of this, wholesale prices have increased in this country 60 percent since 1945; in Britain 92 percent; in France 600 percent. And everywhere this result has been due primarily to the increase in the paper-money supply.
The monetary managers are fond of telling us that they have substituted “responsible monetary management” for the gold standard. But there is no historic record of responsible paper-money management. Here and there it is possible to point to brief periods of a “stabilization” of paper money. But such periods have always been precarious and short-lived. The record taken as a whole is one of hyperinflation, devaluation, and monetary chaos. And as for any integrity in paper-money management, we need merely recall the record of Sir Stafford Cripps, who, in the two-year period preceding his devaluation of the pound sterling on Sept. 18, 1949, publicly denied any such possibility no fewer than a dozen times. (The record was cited in this column in Newsweek, Nov. 21, 1949.)
This is what happens under monetary management without the discipline of the gold standard. The gold standard not only helps to insure good policy and good faith; its own continuance or resumption requires good policy and good faith. The gold standard is not important as an isolated gadget but only as an integral part of the 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 above all refuse to connive in inflation—in the overexpansion of money or credit.
So if, as it should, the government decides to return to a full gold standard, its first step must be to bring inflation to a halt. Without this preliminary or accompanying step any attempted return to gold would be certain to collapse. And once again the gold standard itself, rather than the inflation, would probably be discredited in the popular mind.
How, then, does one halt inflation? The economist Ludwig von Mises has maintained that no increase whatever should be allowed in the quantity of money and bank credit that is not 100 percent covered by deposits paid in by the public. While this is basically the result that should be aimed at, it would be politically more acceptable, I think, if this result were brought about by means in accordance with our own best practices and past traditions. I therefore suggest that the halting of inflation should be achieved by these four means:
1—Start balancing the budget.
2—Stop using the banking system to buy and peg government bonds at fixed rates. In fact, the total volume of government securities held by the country’s banking system should not be increased.
3—Insist that the Federal Reserve Banks impose discount rates that would penalize borrowing by member banks rather than make it profitable. This means that the rediscount rate should be kept above the rate to prime borrowing customers at the great city banks.
4—Restore the legal reserve requirements of the Federal Reserve Banks to 40 percent from their present “war emergency” reserve requirement of only 25 percent. There is no more effective way in which Congress could register its own opposition to further inflation—if it really is opposed to further inflation.
January 18, 1954
Granted that it is desirable, and even imperative, to return to a full gold standard, by what methods should we return? And at precisely what dollar-gold ratio—i.e., at what “price for gold”? These difficult problems have split into dissident groups even the minority of economists who are actively urging a return to a gold standard.
One group, for example, contends that we can and should return to a full gold standard immediately, and at the present price of $35 an ounce. It bases this contention on the arguments that we are already on a limited gold standard at that rate (foreign central banks, at least, are permitted to buy gold from us and sell it to us at $35 an ounce); that we should not suspend this limited gold standard even as a transitional step for a few months; that in the interests of good faith and stability there should be no “further tampering” with this rate; and that at this rate we would in fact have a large enough gold reserve to maintain full convertibility against present outstanding paper currency and deposit liabilities.
These arguments, however, rest on debatable assumptions. Some superficial comparisons, it is true, seem to support them. At the beginning of 1933, the United States money supply (time and demand bank deposits plus currency outside of banks) was $44,854,000,000, and the country’s gold holdings (measured at the old rate of $20.67 an ounce) were $4,237,000,000, or only 9.4 percent of the country’s money supply. Today our outstanding money supply is $205,400,000,000, and our gold holdings against it (measured at the current rate of $35 an ounce) are $22,100,000,000, or 10.7 percent.
Thus our gold reserve situation appears on the surface to be as good as that in 1933. But do such comparisons really prove anything? Let us remember, first, that we were thrown off gold in 1933. (Or, more accurately, we had the choice of going off gold, which we did, or suffering still further deflation.) The run on gold in 1933, before payments were suspended, means that the gold reserves were not in fact sufficient, in relation to other conditions, to maintain confidence.
These comparisons overlook, moreover, that prior to 1933 the United States held a much smaller percentage of the world gold supply than it holds today. In December 1926, the United States held only 45 percent of the world’s monetary gold supply (excluding Russia); in December 1933 it held only 33.6 percent. Today it holds 60.8 percent. If the United States alone returned to gold it could conceivably continue to hold this abnormal percentage for a certain time. But if other countries followed suit within a few years (which would be both desirable and probable), they would presumably attract their previous proportion of the world’s gold. If our own supply were forced back to, say, 40 percent, our reserves would be drawn from the present $22,100,000,000 to only $14,600,000,000. This would leave us with gold reserves against present liabilities of only about 7 percent.
But the real error of those who think we could safely return to a full gold standard at a rate of only $35 an ounce lies in the assumption that there is some fixed “normal” percentage of gold reserves to outstanding money liabilities that is entirely safe under all conditions. This, in fact, is not true of any gold reserve of less than 100 percent. In periods when public confidence exists in the determination of the monetary managers to maintain the gold standard, as well as in the prudence and wisdom of their policy, gold convertibility may be maintained with a surprisingly low reserve. But when confidence in the wisdom, prudence, and good faith of the monetary managers has been shaken, a gold reserve far above “normal” will be required to maintain convertibility. And today confidence in the wisdom, prudence, and good faith of the world’s monetary managers has been all but destroyed. It may take years of wisdom, prudence, and good faith to restore it. Until that is done, any effort to resume a full gold standard at $35 an ounce might precipitate a violent deflation.
January 25, 1954
If we grant that there is a great potential danger in trying to return immediately to a full gold standard at $35 an ounce, by what steps are we to return? And how are we to determine the dollar-gold ratio—which would decide the new “price of gold”—at which the return should be made? It is a sound general principle that unless there are the strongest reasons for change, the dollar-gold ratio, once fixed, ought not to be tampered with. This rule certainly applied to the pre-1933 rate of $20.67 an ounce, because that was a real rate, at which anybody was entitled to demand gold, and got it. But the $35 rate, fixed by Roosevelt-Morgenthau whim in 1934, is not a rate at which real convertibility has existed. It is only foreign central banks, not American citizens, that are permitted to buy gold from our Federal Reserve Banks at $35 an ounce, and even they are allowed to do this only under certain conditions. For example, they are not supposed to buy from us at $35 an ounce in order to resell it at a profit in the open market. The present $35-an-ounce gold standard is a window-dressing standard, a mere gold-plated standard, a sham gold standard. We have been able to maintain it only because most other nations in the last twenty years have been inflating even more than we have. There is no reason for treating the $35 figure as sacrosanct.
The new dollar-gold ratio that we should aim at is one at which gold convertibility can be permanently maintained, and that will not be in itself either inflationary or deflationary—that will neither, in other words, bring about a rise or a fall in prices.
There are some economists who contend on unconvincing evidence that $35 an ounce is that rate. Others profess to have some mathematical formula for arriving at such a rate, and on this basis confidently advocate $70 an ounce or some other figure. Their diverse results in themselves invite suspicion. Values and prices are not set by mathematical calculations, but by supply and demand operating through free markets.
And because of the enormous inflation in the twenty years since we departed from a real gold standard, and the enormous shock to confidence that inflations, devaluations, and repudiations have produced, we must test the state of confidence in a temporary free market for gold—a market that will also give us a guide to a new dollar-gold ratio that we can hold.
This time schedule of gold resumption is set forward chiefly for purposes of illustration:
1—The Administration will immediately announce its intention to return to a full gold standard by a series of steps dated in advance. The Federal Reserve Banks and the Treasury will temporarily suspend all sales or purchases of gold, merely holding on to what they have. Simultaneously with this step, a free market in gold will be permitted.
2—After watching this market, and meanwhile preventing any further inflation, the government, some time before June 30, 1955, will announce the dollar-gold ratio at which convertibility will take place.
3—On and after July 1, 1955, foreign central banks will be permitted to convert dollar holdings into gold bullion, and vice versa, at the new ratio. The free market will continue to be permitted.
4—On Jan. 1, 1956, the country will return to a full gold-bullion standard. Conversion of dollars into gold bars, or vice versa, will be open to all holders without discrimination.
5—On Jan. 1, 1957, the country will return to a full gold-coin standard, by minting gold coins and permitting free conversion.
A full gold-coin standard is desirable because a gold-bullion standard is merely a rich man’s standard. A relatively poor man should be just as able to protect himself against inflation, to the extent of his dollar holdings, as a rich man. The reason for returning to a full gold-coin standard in several stages is to prevent too sudden a drain on gold reserves before confidence has been re-established. A program like the foregoing would provide a faster schedule.
February 1, 1954
There is cause for gratification in more than one feature of President Eisenhower’s budget for the fiscal year ending June 30, 1955. Here at last is real progress toward a reduction in spending.
Estimated expenditure for the fiscal year 1955 totals $65,600,000,000. This is $5,300,000,000, less than the estimate for the current fiscal year, $12,300,000,000 less than Truman had recommended for this fiscal year, and $8,400,000,000 less than was spent in the Truman-Eisenhower fiscal year 1953.
But if we go a little farther back the comparisons are less favorable. The proposed expenditure is just about the same as that in the fiscal year 1952. It is actually $21,600,000,000 higher than in the fiscal year 1951. And in both of those fiscal years Truman was President and the Korean war was going full tilt. Considerable further reductions are possible in expenditures in the fiscal year 1955.
Mr. Eisenhower estimates a deficit in 1955 of $2,900,000,000. This is lower than the $3,300,000,000 deficit expected in the current fiscal year or the actual deficit of $9,400,000,000 for fiscal 1953. But it is still a deficit. It will be the 22nd annual deficit in the last 25 years. And there is no excuse for it, above all at a time when our national income is running at the highest levels on record.
President Eisenhower has taken over one bad habit from his Democratic predecessors. He points out that because of the payment of social-security payroll taxes, not offset by equal benefit payments, there will be a balance in the “cash” budget in the fiscal year 1955. But this “cash” balance has significance only because it does not cause immediate inflation. It is not a substitute for a balance in the regular budget. The workers are told that they are paying employment taxes to build up a reserve for their own social security. When the government spends these taxes for other purposes as they come in, and slips farther backward in its debtor position, the reserve fund becomes fictitious.
The government could cut spending even further and wipe out this prospective deficit of $2,900,000,000. It might even be able to balance the budget after allowing the scheduled corporate-tax and excise-tax reductions to go through.
Where could the reductions in spending be made? No cuts need be made in the amounts proposed for our national defense. But in the $44,900,000,000 allotted to the whole “national security” program, there is an amount of $4,275,000,000 for arms aid to other countries. This is the highest amount ever proposed for this program. The argument for this expenditure is that the recipient countries cannot afford to pay for their own defense. I have pointed out in previous articles that for most of the beneficiary countries the case for relieving their own taxpayers from their own defense burden and putting it on the American taxpayer has never been proved, or even made very plausible.
In addition, we are planning to give away to other countries in economic and technical aid $1,125,000,000 more in 1955. The case for this will simply not stand realistic economic or political analysis. The whole prospective deficit of $2,900,000,000 could be saved out of the $5,400,000,000 foreign giveaway program alone.
Moreover, a period of great inflation, and one in which a further deficit is in prospect, is surely not the time to pile on additional spending for social security, housing, education, and health programs. Whatever the merits of such expanded programs may be, they should at least be postponed until they can be carried out within a balanced budget. President Eisenhower has himself stated that the test of expenditures should be “necessity rather than mere desirability.” And as he put it so well: “The objective will be to return to the people, to spend for themselves and in their own way, the largest possible share of the money that the government has been spending for them.” This objective should be followed now. This budget, already within 5 percent of balance, can be safely balanced by a little more pruning.
February 8, 1954
The report of the Randall Commission on Foreign Economic Policy runs to more than 100 single-spaced typewritten pages. It makes scores of detailed recommendations—on the so-called dollar problem, foreign aid, foreign investment, agricultural and raw-material policy, tariff and trade policy, East-West trade policy, merchant-marine policy, tourism, and currency convertibility. Overall judgment is difficult within any short space. I find much of its discussion of currency convertibility, foreign aid, and foreign investment, for example, disappointing; but the report makes so many contributions to clarity and common sense that it is more profitable to begin with these.
Particularly good are the sections on agricultural and raw-material policy and on tariff and trade policy. On the farm program, the report courageously points out that “inflexible price-support programs which hold domestic prices above world prices become price-fixing programs and result in accumulations of surpluses that would otherwise have moved into consumption here or abroad. To maintain such price-fixing programs it may become necessary for the U.S. to apply trade restrictions of various kinds, including import quotas, to keep down foreign importations. To move high-priced surpluses into export markets it may seem necessary to use export subsidies or dumping procedures that, if practiced with respect to imports into this country, would involve the application of our antidumping and countervailingduty laws. Price fixing, particularly with reference to commodities moving in international trade, is inherently incompatible with a pattern of private trade, free enterprise, and nondiscriminatory commerce among nations.”
The commission is highly critical of the existing International Wheat Agreement. It “does not believe that extensive resort to commodity agreements will solve the problem of price instability. . . . Such agreements introduce rigidities and restraints that impair the elasticity of economic adjustment and the freedom of individual initiative, which are fundamental to economic progress.” It also “finds the same objections to the proposals for unilateral buffer stock action by the U.S. to stabilize world prices of raw materials and foodstuffs.” The commission’s recommendations with regard to tariffs and trade deserve praise for more than one reason. They acknowledge the need of “moving toward greater freedom of trade.” But they recognize that complete “free trade is not possible under the conditions facing the United States today.” They acknowledge that “the United States employs impediments to trade, primarily through tariffs and in only limited fields through quotas.” But: “Other countries also employ these devices. Beyond this, they employ the quota procedure far beyond our use . . . and also employ exchange controls and many other devices not used here. . . . We fully recognize the dangers of using averages; yet it seems clear by any test that can be devised that the United States is no longer among the higher tariff countries of the world. Taken by and large, our trade restrictions are certainly no more of a cause of payment imbalances than the rigidities maintained by other nations.” It is high time this reply was made by an official body to the countries that have been self-righteously demanding a one-sided reduction of trade barriers by the U.S.
Finally, the report is to be praised because it recommends an immediate but gradual reduction of our trade barriers. The extension of the Trade Agreements Act for at least three years; authority to the President to reduce present tariff rates, in trade-agreement negotiations, by 5 percent a year during the next three years; to reduce tariff rates by not more than one half of rates in effect Jan. 1, 1945, on products being imported in negligible amounts; to reduce, over a three-year period, to 50 percent ad valorem, or its equivalent, any rate in excess of that ceiling—these are moderate objectives on which agreement should be possible if we are to arrive at any sensible solution of the foreign-trade problem at all.
February 15, 1954
When President Eisenhower at his press conference on Jan. 27 was invited to comment on statements by some observers that his program was an “extension of the New Deal,” he is said to have told the reporter “in a tone of steely indignation” to compare Mr. Truman’s budget with his own.
But such a comparison is not in itself convincing. It is true that Mr. Eisenhower’s proposed Federal expenditure for the fiscal year 1955 is $12.3 billions less than Mr. Truman recommended for this fiscal year; but it is not less than Mr. Truman actually spent in 1952, his last full fiscal year in office; and it is actually $21.6 billions higher than Mr. Truman spent in the fiscal year 1951. During both those fiscal years, incidentally, the Korean war was being fought.
Nor was Mr. Eisenhower’s second reply to the reporter’s question much more helpful. “When it comes down to dealing with the relationships between the human in this country and his government,” he said, “the people in this Administration believe in being what I think we would normally call liberal, and when we deal with the economic affairs of this country, we believe in being conservative.” I must confess that I do not know quite what this means, because I have always assumed that all economic affairs were human affairs, and that all economic welfare meant human welfare.
Yet Mr. Eisenhower could have convincingly drawn many sharp contrasts between his own policies and the policies of the New Deal. He removed the New Deal wage and price controls—an achievement of the first importance. In the early part of his Administration, he put at least a temporary halt to inflation. In the economic report that he transmitted to Congress on Jan. 28, he put a stress that the New Deal would never have done on fostering economic growth through economic freedom, in creating “an environment in which individual enterprise can work constructively to serve the ends of economic progress.”
If we wish another contrast, we can compare his statement: “It is well to recall the accumulated experience of generations which has taught us that no government can of itself create real and lasting prosperity,” with Mr. Truman’s first “basic economic principle,” announced in his own final economic report in January 1953, that: “Full employment must be a constant objective of policy.”
Some of us could wish, however, that these contrasts were more frequent and consistent. When it comes to concrete policies, the contrasts sometimes seem to be outnumbered by the similarities. We may point especially to the recommendations for additional spending for social security, housing, education, and health programs, as well as to the ambiguous attitude toward public spending. There is the constant intimation, throughout the economic report, that at the first real sign of a downturn the government would throw itself into pump-priming projects. Take this, for example: “The government will not hesitate to make greater use of monetary, debt management, and credit policy, including liberalized use of Federal insurance of private obligations, or to modify the tax structure, or to reduce taxes, or to expand on a large scale the construction of useful public works, or to take any other steps that may be necessary.” And at another point the President declares that his antirecession policies will not be allowed to “interfere any more than is necessary [my italics] with the fiscal objective of bringing down the scale of Federal expenditures, reducing taxes, and arriving at a budgetary balance.”
This seems to take over from the New and Fair Deals the essence of the Keynesian ideology—the belief in “compensatory spending,” the belief that any decline from a peak of inflationary prosperity can and should be offset and rectified by an increase in deficit spending—in brief, by further inflation. My belief is that this ideology is unsound and dangerous; but it is still not clear just to what extent Mr. Eisenhower holds it. As long as its ambiguities and vacillations continue, we will not be unjust in calling its present policies the Semi New Deal.
February 22, 1954
Others—The Wall Street Journal and economist Sumner Slichter, for example—have already pointed to the striking contrast between the attitude of some of our congressmen toward coffee prices on the one hand and butter prices on the other. But the contrast will bear further emphasis.
Some of our congressmen have been furiously indignant about the high price of coffee. As the gentleman from Iowa or New York orders another Martini at 75 cents a throw, he tells us what an outrage it is that his coffee at home now averages him about 3 cents a cup. The price of butter is also high; but in reply to this his only comment is that it isn’t high enough. Could it be that this strange contrast has anything to do with the fact that coffee growers don’t vote in his district, while dairy farmers do?
The chief reason for the recent rise in coffee prices has been a shortage in the supply. For the past seven years the world has been drinking more coffee than it has been producing. This has worked down the carryover. And in the last crop year drought and frost in Brazil killed millions of coffee trees. As people in the trade have pointed out, no Congressional investigation will increase the world’s supply of coffee by a single pound.
But the price of coffee, we are told by some of our Washington solons, has been pushed up by “speculation” and “manipulation.” In a free market economy, of course, speculation enters into the price of practically everything. And it usually confers a benefit on society by doing so. If speculators bid up the price of coffee, for example, because they correctly anticipate or recognize the existence of a shortage, they help to prevent the shortage from becoming as bad as it otherwise might. For the high price not only discourages wasteful consumption, but encourages increased production.
The chief reason why coffee is subject to comparatively violent fluctuations in price is not speculation (which actually tends to mitigate fluctuations) but a fact of nature. It takes about five years for a new coffee tree to start bearing in commercial amounts. After it does start bearing it usually continues to do so for ten to twenty years. So no matter what happens to the price, it normally takes a few years for supply to adjust itself. To force the price down artificially, however, would only further prolong the period of adjustment.
It may be that the Senatorial sleuths will find some real “manipulation” of the price of coffee. But suppose they do? Will it even begin to compare with the open manipulation by our own government of the price of butter? Not to speak of cheese, dried milk, wheat, cotton? Our government is running a gigantic butter cartel which is at this moment holding off the market 264 million pounds of butter in order to force American working families to pay more for it. From this comparison we may judge the hypocrisy of the Congressional outcries against the high price of coffee.
I do not mean to imply that Brazil has always been guiltless of any attempt to manipulate coffee prices. On the contrary, in its efforts to force up coffee prices, the Brazilian Government for years burned coffee or dumped it into the sea. During 1931 to 1934, for example, the government burned 27 million bags of coffee as locomotive fuel.
This was the same kind of beggar-my-neighbor policy that our own government is trying to follow today with our own farm exports. Instead of hypocritically denouncing the immorality of such policies when pursued by others, our congressmen and our own farmers might more profitably study their consequences. Insofar as Brazil’s coffee-burning had any effect in holding up prices, it merely encouraged Colombia and other Latin American countries to increase their own plantings. The result was that Brazil, which in the 1920s supplied two thirds of the outside world’s coffee, supplies less than half today.
So Brazil’s destruction of coffee in the end hurt the very producers it was intended to benefit. This is the real lesson for our farm price support pressure groups to ponder, as tons of butter turn rancid in storage while oleomargarine consumption grows.
March 1, 1954
One of the most serious hurdles in the path of a return to the gold standard is the wide disagreement, even among those who favor such a return, regarding the exact dollar-gold conversion rate at which that return should be made.
The gold-standard supporters are divided into three main groups: (1) those who think we could safely return to a full gold standard at $35 an ounce; (2) those who urge return to a full gold standard at some specific higher price for gold (e.g., $70 an ounce) which they claim they already know to be the “correct” one; and (3) those who recommend that we permit a temporary free market in gold for the guidance it will provide in fixing a final dollar-gold conversion rate.
I have already discussed (Newsweek, Jan. 18) the main arguments of those who urge a return to gold at $35 an ounce, and what I consider to be some of the shortcomings of those arguments. Those who are urging that we set the price of gold at a higher figure, and who claim to know already what that figure should be, commonly base their conclusion on some comparison of price levels. For example, since 1932, the last full year in which we were on a real gold basis (at $20.67 an ounce), wholesale prices have increased 162 percent. On the argument that only a corresponding increase in the price of gold could prevent a fall in prices if we went back to a full gold standard, the new price of gold would have to be about $54. Again, the price of gold was set at $35 an ounce on Jan. 31, 1934. For the next seven years wholesale prices averaged only 47 percent of their present level. If we assume that $35 was the “right” price of gold in those seven years—1934–40—then the price of gold necessary to maintain the present wholesale price level might have to be about $75.
The dubious nature of the assumptions behind such calculations is clear. But the rate at which we return to a full gold standard is not a matter of indifference. Charles Rist, one of the world’s leading monetary economists, argued in a powerful article in Foreign Affairs in April 1934 that one of the major causes of the world crisis of 1929–33 was the attempt of leading countries, including the United States, to maintain or return to gold convertibility at their prewar rate for gold after having enormously multiplied their paper currency circulation.
The case of Great Britain is clear. It had gone off gold in the first world war. The pound had dropped from a gold parity of $4.86 to a low of $3.18 in February 1920, and had returned in late 1924 to approximately 10 percent below the gold parity. But wholesale prices in Britain in 1924 were still 70 percent above their prewar level. The British Government decided to resume the gold standard at the old par in 1925. The result was a steady fall in wholesale prices over the next seven years from an index number of 171.1 (1913 equals 100) in January 1925 to 99.2 in September 1931, the month in which England abandoned the gold standard. As the British all during this period were unwilling to make corresponding cuts in retail prices and wage rates, the result was falling exports, stagnation, and unemployment. And it was the gold standard itself, not the false rate (or the internal inflexibility of wages), that got the popular blame.
The British repeated this pattern in essence in the summer of 1947, when they tried to make the pound convertible into the dollar at the wholly unrealistic rate of $4.03. When that experiment broke down within a few weeks, the British once more blamed convertibility itself, and not the false rate, for the breakdown.
It is of the highest importance not only to our own economic future, but to the future of the world, that we do not repeat the British errors by trying to return to gold convertibility at an overvaluation of the paper dollar (which would mean an undervaluation of gold). A temporary free market in gold would give us more guidance regarding what the new conversion rate should be than either an adamant insistence on $35 an ounce or some dubious calculation based on a pure theory.
March 8, 1954
There are ominous signs that President Eisenhower’s budget is bursting apart at the seams, and that a demagogic scramble for votes will launch us into still more huge deficits and inflation.
Mr. Eisenhower’s 1955 budget was not sound in the first place. He planned a deficit of $2.9 billion, which would be the 22nd annual deficit in the last 25 years. Whereupon both Republicans and Democrats began to advocate still further tax cuts, especially in excises. And they even began to talk of his $65.6 billion budget as “pinchpenny.”
Then Mr. Eisenhower further weakened his own position by his remarks at a press conference on Feb. 17. He said that if employment did not pick up in March we would have a very definite warning that would call for a number of measures, and tax reduction might be one of the first to be considered. He added that the government wouldn’t hesitate one second to do everything to stop any real recession.
These remarks were disturbing for more than one reason. They attached a peculiar importance to the month of March that experience does not warrant. They placed an undue importance on unemployment statistics that are themselves largely a matter of guesswork. (The Commerce Department’s result was revised as much as 30 percent when it changed its sampling.) Unemployment statistics are also among the most laggard of business indexes.
But most disturbing of all was the implication that the President had accepted the heart of the Keynesian and New Deal philosophies, which throw all their emphasis on consumer spending and assume that the one sure way to avert depression and keep a boom whipped up forever is to unbalance the budget and resort to pump priming and more inflation.
Two days after the President’s press conference, Democratic Senator George, hitherto regarded as a rock of financial conservatism, started to anticipate and outbid Mr. Eisenhower by calling for an immediate increase of $200 in personal exemptions for all income-tax payers. And two days after that Democratic Senator Douglas threw whatever economic prestige he has left into endorsing the proposal. The first effect of this scheme would be, of course, to increase the deficit enormously. It has been calculated that an increase in the personal-income-tax exemptions from $600 to $800 would mean a loss of $4.6 billion in this year’s revenue. So even without any further increase in expenditures or additional tax reductions, this means that the prospective deficit, instead of being $2.9 billion, would be $7.5 billion. Unabashed by this, Senator George even proposed a further increase of the exemptions to $1,000 next year, which would mean a loss in revenues of $9.2 billion annually. And now it is generally assumed that the Republicans will be “forced” into raising the exemptions at least $100 annually. This would mean a revenue loss of $2.3 billion annually—or a deficit, other things being equal, of $5.2 billion. Such a procedure would be utterly irresponsible. The alleged economic reasoning behind it is a mere rationalization of political expediency. Naturally it appeals to politicians who want to make the popular gesture of cutting taxes without the unpopular action of cutting expenditures. This is naked inflationism, proposed by men who still pretend to be “fighting depression” though our national income in 1953 was the highest in our history.
President Eisenhower can successfully combat this demagogy, irresponsibility, and inflation only if he takes a solid stand on principle. He cannot hold the line if he merely tries to stick by his January budget. He cannot convincingly argue that a deficit of $2.9 billion is all right but a deficit of $5.2 billion is all wrong. He can succeed only if he stands on the firm economic and political principle that the budget must be fully balanced, and now. And then he can demand of any group in Congress that wants the fun of cutting taxes that it first of all cut expenditures by the same amount. The only alternative to this course is economic and political demoralization.
March 15, 1954
In this column of March 1, I pointed out what happened in Britain when it tried to go back to the gold standard at the old parity in 1925. But there are many who believe that our own resumption of gold payments on Jan. 1, 1879, at the prewar parity, after the paper-money inflation of the Civil War, was an unalloyed success. The fears of a gold drain, they argue, proved quite unfounded; on the very first day receipts of gold actually exceeded payments by $268,000. And they attribute the subsequent American recovery of 1879 largely or wholly to gold resumption.
A closer examination of the whole inflationary and deflationary period from 1862 to 1879, however, tells a different story. As soon as the government started issuing irredeemable “greenbacks” in 1862, gold went to a premium on the open market and commodity prices started to soar. In 1864 the greenbacks fell as low as 35 cents on the dollar in terms of gold. From 1860 to 1865 inclusive, though the average of European prices rose only 4 to 6 percent, average prices in the United States advanced no less than 116 percent.
But immediately after the end of the war American prices started downward. At first this was politically popular, because wages had not yet advanced as much as the cost of living. But after 1866 wages had more than caught up with prices. The continued fall in prices soon began to cause bankruptcies and unemployment. Finally came the panic of 1873 which, in the measured judgment of some economists, “left the country’s financial and commercial structure almost a ruin.” The causes of the panic were complex. But one of them was certainly the continued fall of commodity prices that accompanied the rise of the greenbacks toward parity. By 1873 the greenbacks were only about 15 percent below parity, and wholesale prices were down to about 30 percent above prewar levels.
The result of the panic of 1873 was greatly to increase inflationist sentiment. The Resumption Act was passed on Jan. 7, 1875, but by a repudiated lameduck Republican Congress that had nothing more to lose. Even more ironic, it was passed, the economist J. Laurence Laughlin tells us, “only under the delusion that it was an inflation measure,” because “on its face it looked like a bill to expand the national bank circulation.” Many commentators today think it was foolish and needless for the Resumption Act to put off the actual day of resumption to Jan. 1, 1879 four years after passage of the act. They forget, however, that time, skill, and determination were required to accumulate a gold reserve so impressive that gold would not be demanded when the day of resumption came. And they forget, too, that returning to gold at the original parity involved a still further decline (of about 30 percent) in American commodity prices to bring them into line with world gold prices. This decline took place between 1875 and 1879, and the whole period was one of liquidation. In 1878, for example, the record of insolvencies far exceeded even that of the panic year 1873. Many commentators today attribute the recovery that came in the second half of 1879 to the return to gold redemption. The facts do not support them. “With hardly an exception,” writes the economic historian, Alexander D. Noyes, “the country’s staple industries sank, during the early months of 1879, into complete stagnation.” What suddenly turned the tide was an unparalleled coincidence: Europe suffered the worst crop disaster in many years, whereas the American wheat crop reached a new high record. This meant high prices and crop exports unparalleled up to that time.
All this is not to argue that after the greenback inflation of the Civil War this country should have returned to gold at a lower parity for the dollar. It is simply to point out that we had to pay a heavy price for the course we actually took, even though our economy was far more flexible then than now, particularly as regards wage rates. We must take care that when we return to gold this time we do so at a rate that involves neither inflation nor serious deflation.
March 22, 1954
One of the great historic myths of our time is that labor was ruthlessly “exploited,” and wage increases practically unknown, until New Deal laws and a strong union movement forced employers to be “fair.”
Economists have long pointed out what is wrong with such a belief on theoretical grounds. In 1933 Rufus S. Tucker put together indexes which tended to show that since 1815 “real” wages in the United States (i.e., the purchasing power of money wages) had been rising at an average annual rate of 1 percent. But until rather recent times the available statistics have been scattered and uncertain. A few weeks ago Leo Wolman, professor of economics at Columbia University and a former member of the National Labor Board, presented before the American Statistical Association a study of wages since 1914 which brought out some remarkable results.
Dr. Wolman’s paper dealt with hourly wages in five industrial classifications—manufacturing, Class 1 railroads, building, anthracite and bituminous coal mining. He found that in the period from 1914 to 1953 both money and real hourly wages multiplied many times. Anthracite money wages increased more than nine times, the real wage rose 3.5 times. In manufacturing, money wages rose 7.5 times; real wages 2.8 times. In building, money wages increased less than sixfold, and real wages little more than doubled.
Even more striking is a comparison of money and real manufacturing wage rises in different periods:
Percent increase in |
||
Period |
Money Wages |
Real Wages |
| 1914-1920 | 155 | 25 |
| 1920-1929 | ...... | 19 |
| 1929-1940 | 16 | 42 |
| 1940-1953 | 156 | 34 |
These comparisons lead to several striking conclusions. In the whole period from 1914 to 1953, “real” wages (i.e., wages in terms of what they will buy, after allowance is made for changes in the cost of living) “showed marked improvement whether money wages were increasing much or little, or whether business conditions were good or bad, favorable or unfavorable to price increases, or whether unions were strong or weak.”
Another remarkable result emerges when we compare two separated periods of about the same length. In the fifteen-year period from 1914 to 1929, real hourly wages increased 48.5 percent. In the thirteen-year period from 1940 to 1953, real hourly wages increased 34 to 39 percent. In other words, there was a greater annual increase in real hourly wages in the earlier period, when union membership rose from 2.6 to only 3.6 million workers, than in the later period, during which union membership rose from 8.9 to 16.5 million workers.
There was, it is true, an extraordinary increase in real hourly wages, in the period from 1929 to 1940, of 42 percent, which would doubtless not have been as great except for the policies followed by the government and the unions. But it is significant that that period also showed the highest unemployment on record. And in the anthracite industry, which showed the greatest increase in wage rates of any of the five groups over the whole period, employment dropped from 170,000 in 1914 to 59,500 in 1952. From this preliminary statistical study Dr. Wolman’s own conclusions are cautious. But the figures tend to confirm certain conclusions that many economists have long held through previous evidence and analysis:
1—There is little reason to suppose that over the long run, and considering the whole body of labor, unions have brought about much if any of the increase in real wages that has historically taken place.
2—Wherever a union in a single industry has been able to force up wages beyond the level that competition would have brought about, the rise has been mainly at the expense of the real wages of other workers, by raising their living costs.
3—Wherever unions have for a time succeeded in raising the general average of wages above their “equilibrium” point, they have done so only by creating unemployment.
March 29, 1954
Elsewhere in this issue Raymond Moley deals with the political implications of the Democrats’ attack on the Administration tax program. I shall confine myself here to their proposals for raising personal-income-tax exemptions.
President Eisenhower, in his courageous and statesmanlike TV talk, had no difficulty in exposing the transparently demagogic character of these proposals. Even a $100 increase in the personal-income-tax exemptions would mean 4 million fewer taxable returns than the present total of about 47 million, and a loss of $2.4 billion in annual revenues. A $200 increase in the exemption, as proposed by Senator George, would mean a loss of 7.6 million such returns, and a loss of $4.5 billion in annual revenues.
Let us pass over for a moment what this would mean in terms of deficits and inflation, and concentrate on its demagogic implications. Even the present personal-income tax has become a class tax, particularly so far as rate progression is concerned. The Democratic proposals would make it more of a class tax than ever. To relieve 4 to 8 million more people of the necessity of paying an income tax is to relieve that many voters of any concern about governmental extravagance and to foster in them the illusion that “the other fellow” is paying the bill.
If taxes are to be reduced any further at this time, the real place where the reduction ought to begin is precisely where no one in public life has had the courage to suggest—from the top. Personal-income-tax rates for this calendar year run up to 91 percent. Yet if the government were willing to lose as much as $2.5 billion revenues a year in some other way than by increasing exemptions by $100, it could eliminate all tax progression beyond the rate of 34 percent (which now applies to net income brackets between $8,000 and $10,000) and lose no more than that.
The present steeply progressive income-tax rates are a reflection chiefly of envy and vindictiveness. They represent a desire to punish success rather than to maximize government revenue. The workers of this country are being cruelly deceived when they are led to think that “the rich” are paying most of the taxes because of these confiscatory rates. Of the $31 billion that the personal-income tax yields, only about $1 billion comes from the rates above 50 percent. Only $3 billion, or one tenth, comes from the rates above 30 percent. In fact, if there were no tax progression at all, and the income tax never rose higher than the 20 percent rate that now applies only to the net-income tax brackets below $2,000, the total maximum revenue loss would amount to less than $5.4 billion.
It is a safe presumption, indeed, that the upper-bracket income-tax rates are already far above the rates of maximum return. If the rates were cut to a maximum of 50 percent, the income tax would within a few years (if not, indeed, even in the first year) yield more revenue from net incomes above $18,000, not less.
But the worst harm done by these rates is not that they reduce government revenue, serious as this is. The worst harm is that they discourage the most productive people from producing and earning what they would otherwise produce and earn. They deprive the nation of this production and of the new enterprises that would otherwise be launched. These confiscatory rates siphon off the cream of the very funds that would otherwise go into new investment—the new investment that not only creates new jobs but in the past has created the marvelous machines, factories, and technological advances that have multiplied the productivity and wages of the American worker beyond those of the workers of any other country or any other period in history.
It is hard for most of us to put aside our envy when the question is raised of lowering the tax rate on some income bracket higher than our own. But it is all of us who are losing income by these confiscatory rates. And therefore never send to know for whom the high-tax bell tolls; it tolls for thee.
April 5, 1954
The present drive to raise the income-tax exemptions and relieve millions of voters from the obligation to pay any income tax whatever is merely the latest illustration of how easily the progressive income tax can be turned into a demagogic weapon and a political football.
In the light of the ideological history of the tax this development should not be too surprising. In the Communist Manifesto of 1848, “a heavy progressive or graduated income tax” is listed as the second point of a ten-point program that Marx and Engels demanded in order to make “despotic inroads on the rights of property” and as “unavoidable as a means of entirely revolutionizing the mode of production.” In the course of time “bourgeois” economists came to recommend such a tax in increasing numbers. But the excesses to which it has been carried (and which would have delighted Marx) have recently begun to produce a revulsion of feeling and thinking on the part of some economists who have had the courage to speak out.
A few years ago, for example, Harley L. Lutz of Princeton, arguing for a proportional income tax, contended that there was no logical stopping place to the progressive principle, based on the current specious form of the “ability to pay” theory, short of “complete equalization of incomes by confiscation of all incomes in excess of the lowest amount received by anyone.” And more recently two University of Chicago lawyers, Walter J. Blum and Harry Kalven, Jr. (in The Uneasy Case for Progressive Taxation, University of Chicago Press), and the economist F.A. Hayek, have subjected the progressive-income-tax principle to searching criticism.
Let’s try to set down some of the main objections:
1—It is a dubious moral principle, an abuse of democracy, and an invasion of minority rights, for a majority to impose on a minority a higher tax rate than it accepts for itself.
2—The legal requirement of time-and-a-half wage rates for overtime is based on the assumption that progressive incentives are necessary to get people to work longer and that progressive rewards are justified as the workload increases. But the present income tax is based on precisely the opposite principle of decreasing rewards for increasing work. Take, for hypothetical illustration, a top-level surgeon who averages $500 an operation and might take on 240 paid operations a year. This would bring his income before taxes to $120,000. For his first operation in January he would get and keep $500. Going into February he would only be earning net (after income tax) $310 per operation. Along about June he would be getting (net) only $140 an operation. And when he got into November he would be turning over $445 of every $500 fee to the government and getting only $55 for himself. Under the present income tax the same principle applies, if less dramatically, to the incomes of all of us. The more hours we work, the less we get paid per hour.
3—Under this system people are penalized in direct proportion to their productiveness. Inevitably this tends to kill incentives to production and reduces the total national income and living standards.
4—The progressive income tax skims off precisely the funds most likely to go into new investment—into building the new tools and equipment that increase the productivity of the country and lift the living standards of the workers. It slows down the rate of economic progress.
5—And lastly, these confiscatory rates do not even raise revenue. They destroy the sources of revenue. The great illusion of the present age is that through these confiscatory rates we have been able to throw the burden of huge government spending on to the very rich. But analysis shows that only 8 percent of the personal income tax is paid by those making more than $100,000 a year, and only 16 percent is paid by those making more than $50,000 a year. Looking at the matter from the other end, 74 percent of the income tax is paid by people earning less than $25,000 a year, and 59 percent of it is paid by people earning less than $10,000 a year.
April 12, 1954
Much in the President’s recommendations on foreign economic policy is thoroughly sound and should receive the full support of Congress.
This applies to his plea for a three-year extension of the trade-agreements act which would authorize him to reduce present tariff rates, in trade-agreement negotiations, by 5 percent a year during the next three years; to reduce tariff rates by not more than one half of rates in effect Jan. 1, 1945, on products not being imported or being imported in negligible amounts; and to reduce, over a three-year period, to 50 percent ad valorem, or its equivalent, any rate in excess of that ceiling.
These are moderate objectives. They are the recommendations of the Randall commission. One of the assurances to which European exporters are surely entitled is that if they plan to sell in the American market, and can successfully do so, we will not suddenly start to increase the barriers against them. Legislation permitting further tariff reductions will help to give this assurance.
For the same reason Congress should accept Mr. Eisenhower’s proposal exempting from provisions of the so-called Buy America acts bidders from nations that treat our bidders on an equal basis with their own.
Another welcome statement in Mr. Eisenhower’s message is that “economic aid cannot be continued indefinitely. . . . [Such aid] on a grant basis should be terminated as soon as possible . . . [and] to the maximum extent appropriate should be in the form of loans.” It is unfortunate that the President did not see fit to apply this principle to military aid also. The contention of European governments that they cannot afford to pay for their own armament programs will not stand serious analysis.
Unfortunately, other parts of the President’s foreign economic program are not as sound as his proposals for lowering tariff barriers and reducing the dimensions and cost of the giveaway program. He approves, for example, the Randall commission’s recommendations “that the United States withhold reductions in tariffs on products made by workers receiving wages which are substandard in the exporting country.” This proposal is wholly objectionable. The question of what wages are “substandard” by another country’s standards is a matter of arbitrary opinion. We could not determine the facts about wages in a foreign country unless we insisted that our own snoopers be allowed to enter it and investigate. The proposal would breed backdoor efforts to keep protectionism under the pretense of deep concern for the welfare of the workers whose products we discriminated against.
The President also asks for excessive discriminations in favor of foreign investment. Such discriminations would have the effect of increasing the tax burdens on domestic investment. It is one thing to argue that there should be no discrimination against foreign trade and investment. It is quite another thing to argue that investment in foreign countries is better for us than investment in our own. This is untrue. And rather than expand, at the taxpayers’ expense, government guarantees of bad private foreign loans, no further guarantees should be offered.
The Export-Import Bank should not finance foreign-development projects. It is more than doubtful, in fact, that it should continue to exist. And there is certainly no reason why our government should grant still more loans to foreign governments to make their currencies convertible when they could achieve that end simply by ceasing to forbid convertibility.
Mr. Eisenhower declares that the foreign economic policy he presents is an interrelated whole in which each part “requires the other.” But even if we pass over his failure to ask for repeal of import quotas, several of his leading recommendations are quite inconsistent with each other. Lower and simpler tariffs make for greater freedom and trade. More and bigger giveaway programs make for inflation or heavier tax burdens at home and more statism everywhere. The President should not imperil what is sound in his program by tying it to what is dubious.
April 19, 1954
On April 6, Finance Minister Abbott presented the new annual budget for Canada, for the fiscal year which began on April 1, and Chancellor Butler presented the new annual budget for Britain, for the fiscal year which began on the same date. To an American what is most noteworthy about each of these budgets is the simple fact that it is balanced.
In contrast, our own Federal budget is officially expected to show a deficit for the current fiscal year, which ends on June 30, of $3.3 billion. For the new fiscal year to begin on July 1 it carries an estimated deficit of $2.9 billion. Both deficits are expected in actuality to be even higher.
The explanation of our own budget deficits, compared with the budget balance of our two principal friends and allies, is threefold. The first part of the explanation is that Canada and Britain both have budget systems for which responsibility can be definitely fixed, whereas the United States does not. The British Parliament, for example, approves the government’s budget, including both proposed expenditures and proposed taxes, as a unified whole. And once the budget has been approved, Parliament abides by a wholesome rule under which it cannot make any appropriation for which the government has not asked.
No such rule prevails here. The budget presented annually by the President is nothing more than a compilation of estimates and recommendations which Congress is free to accept or reject or ignore, and which it never in fact adopts as an integrated whole. Congress can appropriate more money than the President asks for. It can make tax reductions that he has not asked for. The President has no power to veto individual items in appropriation bills. So one explanation of the Canadian and British budget balance as compared with our chronic deficits is that they have a more responsible budget system.
But this is only part of the explanation. It is one of the paradoxes of the present situation that America, which has a budget deficit, is contributing defense aid to Britain, which has a balanced budget. This becomes less of a paradox when one recalls that it is partly because we are granting defense aid to other countries that we have a budget deficit, and it is partly because Britain gets defense aid from us that its budget is balanced.
A third point is this. American military expenditures are not only much higher than Canadian or British military expenditures in absolute terms, as we might expect, but such expenditures also constitute a much higher percentage of our total budget. Canada’s defense expenditures will constitute about 43 percent of its total budget; Britain’s about 36 percent; and ours about 68 percent. What percentage is “right” is largely a matter of opinion, to which only iffy answers are possible. But it is a pretty safe assumption that most of our Federal expenditures today, and above all the grand total, are larger than they need to be, particularly in relation to what we get for them. This at least is the conclusion at which the Committee on Federal Tax Policy, a private group under the leadership of former Under Secretary of the Treasury Roswell Magill, has just arrived after a most careful study. Scrutinizing proposed expenditures by major items, the committee finds that a total of at least $8 billion could be cut from Federal budget obligations for the fiscal year 1955 without even touching defense items. And only a cut of these dimensions, it thinks, will solve our fiscal problem:
“If we accept the principle that a balanced budget is a desirable end and that tax reduction is essential to the continuation of a healthy economy, the only alternative is to reduce expenditures. . . .
“The fundamental trouble with the Federal tax system is that we are trying to raise too much money with it. Any tax system for collecting revenues of the order of $70 billion is bound to be burdensome, inequitable, and a deterrent to investment, production, and economic progress. Such high taxes tend to defeat their own end by destroying the base on which they rest.”
April 26, 1954
Seven years ago (in Newsweek of April 7, 1947) I ran an article containing a couple of tables to show, first, how much was actually left at various income levels for the income-tax payer himself out of every extra dollar he earned and, secondly, what had happened to the tax rates on and the revenues from personal incomes over $300,000 between 1926–28 and 1942. It seems to me that it throws additional light on the nature and effects of our present income-tax structure to bring such comparisons up to date.
The new tables presented here were compiled for me by the Tax Foundation.
Here is a table showing how much a married man with two children and legal deductions amounting to 10 percent of his gross income is allowed to keep out of each additional dollar of income at various income levels:
| Gross Income | Taxpayer keeps out of each additional dollar |
| $2,000 | $1.10 |
| 4,000 | .80 |
| 8,000 | .78 |
| 16,000 | .70 |
| 32,000 | .57 |
| 64,000 | .38 |
| 128,000 | .25 |
| 350,000 | .10 |
It should perhaps be pointed out that the married man in the table is assumed to have taken advantage of the split-income provisions which have provided a very marked tax relief since they have been in effect. A table showing what is left for the single man in the same income brackets out of each additional dollar would present a very different picture. The unmarried taxpayer is allowed to keep less than half of every dollar he earns over $18,000 net.
Putting aside all questions of “fairness,” we have looked at the principal practical effect of such tax rates in previous articles. That effect is to soak up the principal sources of investment funds—the funds that would otherwise go into improved machines and new factories to increase productivity, jobs, and wages.
But a hardly less important effect is to diminish the incentives to bring such earnings into existence in the first place. This means not merely a loss to the taxpayer who does not trouble to earn the money. It means a loss to the wealth of the whole nation and a loss even to the Treasury itself. Let me begin by reprinting the table from my 1947 article. (The dollar figures stand for millions of dollars.)
| 1926–28 average |
1942 average |
|
| National income | $77,000 | $122,000 |
| Incomes over $300,000- | ||
| Total amount | $ 1,669 | $376 |
| Taxes paid | $281 | $292 |
| Top tax rate applicable | 25% | 88% |
| Number of returns | 2,276 | 654 |
Let’s recall what this meant. During the same period that the total personal incomes in the nation increased 58 percent, total incomes over $300,000 fell 77 percent. If the aggregate of such incomes had risen no more than proportionately to the whole national income, the total would have reached $2,637 million—seven times greater than it actually was. And if this income had been taxed at the same schedule as in 1926–28, with a top rate of only 25 percent, the yield to the Treasury would have been $444 million, or 50 percent greater than the actual yield from the greatly reduced income total taxed at a top rate of 88 percent.
Now let’s take comparisons (again in millions of dollars) since 1947:
| 1947 | 1950 | |
| National income | $191,000 | $226,706 |
| Incomes over $300,000- | ||
| Total amount | $575 | $1,165 |
| Taxes paid | $402 | $764 |
| Top tax rate applicable | 86% | 84% |
| Number of returns | 1,074 | 2,132 |
Though total personal incomes, to point to only one comparison, increased 148 percent between 1926–28 and 1947, incomes over $300,000 fell to about a third of their earlier total. Even if the aggregate of incomes over $300,000 had increased merely in proportion to the total of all incomes (though even per capita incomes increased 75 percent), it would have been more than seven times as great as it was. The most important reason for this fall was a top tax rate of 86 percent compared with a top tax rate of 25 percent. A sharp reduction in top tax rates below the present level of 91 percent would increase government revenues.
July 5, 1954
The Eisenhower Administration’s monetary policy has now become clear. It is the same as that of the Democratic New Deal and Fair Deal administrations—inflation. Conclusive evidence was supplied on June 21 when the Federal Reserve Board cut by $1.5 billion the reserve requirements of member banks. This will permit those banks to increase their loans by a total estimated from $7.5 to $9 billion.
There is little doubt regarding the primary reason why this was done. The federal government is still running a deficit. It is expected to borrow something like $10 billion between now and December. Their increased borrowing power will enable the nation’s banks to buy the government’s new securities and to pay for them, in effect, by creating new paper money.
The lowered reserve requirements will also permit the banks to create and lend additional money to business. They will enable the government itself to borrow cheaper. By allowing business to borrow at very low rates it is presumed that they will encourage business and employment and incidentally make the November elections safer for the Republicans.
This latest move of the Federal Reserve Board does not stand in isolation. Just about a year ago, on June 24, the Eisenhower Administration, which until a few months before had been making serious efforts to halt inflation, took the drastic inflationary step of reducing the reserve requirements of member banks to release at that time about $1,156 million of reserves. This was done to give the nation’s banks about another $6 billion in lending power—in anticipation of Treasury needs of some $6 billion of “new money” in the following three months. Since then, most of the Administration’s moves have been in the inflationary direction.
How necessary was this June’s new shot of inflation? Was it needed to pull the country out of a serious slump? On the contrary, it came on the same day that The New York Times’s combined average of 50 stocks reached the highest level in 24 years. It came when the latest cost-of-living index reached a level of 115 percent of the 1947–49 average, higher than a year before and within 1 percent of the highest monthly average ever reached by the cost of living. It came a week or two after the Treasury sold 91-day bills at an average yield of 0.616 percent, the lowest in seven years.
This low borrowing rate was not, of course, the result of any higher standing on the part of our Federal government’s credit. That government is still running a deficit, bumping against its legal debt ceiling of $275 billion and trying to get Congress to lift the ceiling still farther. The low money rate is the result chiefly of an abundance of paper money and manufactured credit. As compared with $64.7 billion in 1939 (total bank deposits and currency outside of banks), the money supply had been more than tripled up to April of this year to $202.3 billion. This increase in the money supply is overwhelmingly the main reason for the rise in prices and living costs in the period.
How does it come about that a Republican administration, manned in the main by conservatives, and originally determined to halt the New Deal-Fair Deal inflationary policies, should end by continuing most of them? It is because the more politically powerful and belligerent section of public opinion, represented by CIO leaders, farm organization leaders, many business leaders and college professors, have become habituated to inflation and cannot tolerate its termination. Today, at the slightest sign of readjustment, we get the jitters and talk about another major depression.
We are all Keynesians now. We are all monetary inflationists. And everything would be fine if the Keynesian theory were really true that full production and employment could be uninterruptedly maintained, and no dangerous or debilitating consequences would follow, by the “correct” dose of monetary inflation at the slightest sign of a setback, and that all the orthodox and old-fashioned methods of readjustment were not only intolerable but quite unnecessary.
July 12, 1954
For the last six or seven years a strange performance has been annually re-enacted in Washington. The Administration in power has decided that it is somehow America’s duty to provide handouts to an increasing number of nations all over the world. The Administration officials then tell Congress that the money is necessary to bring “world recovery”; “to avert world war three”; “to fight Communism,” and to get or keep allies. Most of these contentions have been pure rhetorical assertions. The simple truth is that no convincing economic case was ever put forward in favor of our far-flung economic program, and that Congress has never been given sufficient factual data on which to base an intelligent decision regarding the need and size of the military-aid program.
The so-called military-aid program, moreover, is merely another name for an economic-aid program. This is an elementary point, and yet it never seems to get any serious discussion or debate in Congress. The argument for “military aid” is at bottom an economic, not a military argument. The argument is not that Ruritania needs so-and-so-much defense, but that it cannot afford to pay for its own defense. More precisely, the argument is that while Ruritania needs y plus x millions for defense, it can only dig up y millions of its own, and it is up to us to supply x millions. Yet I have never seen a serious calculation put forward in detail for such a contention with regard to any particular nation, or the totality of aided nations.
If we supply Ruritania with x millions for defense, then Ruritania has more millions to spend than it would otherwise have. Unless we are sure that it spends x more millions on defense than it otherwise would have done (and we can never confidently answer this might-have-been) then it has that many millions more to spend, say, on deficits on its socialized industries, regardless of whether we earmark our funds for military uses.
The $3.5 billion that President Eisenhower asked for this year’s foreign-aid program is greater than the $2.9 billion deficit estimated for the fiscal year. If we could save this money we could balance the budget. The President pointed out that part of his proposed funds were for Europe, part for the Near East, Africa, and South Asia, part for the Far East and the Pacific, and part for Latin America. How did we ever get into the position where we thought it necessary to spend so much to support so many? And what, for example, are we now likely to get in return for the hundreds of millions we have poured into the war in Indo-China? Would not this money have been far better spent in building up our own defense program?
President Eisenhower this year recommended one good germ idea—that the new legislation should reserve for loans, rather than grants, not less than $100 million of the fiscal year 1955 funds. It would be much better, in fact, if nearly all the aid were offered in the form of loans. International loans are in themselves no more sound politically than international grants. But if we followed, say, something like the practice now followed in private mortgage loans, and offered these funds at, say, 3 percent or less, repayable, beginning immediately, in equal monthly installments over not more than the next twenty years, we could accomplish two substantial results. Having no large sums to repay at any one time, the foreign debtors could not start plausible complaints about the budget problem or the “transfer” problem. And there would probably be a surprising shrinkage in the size of funds requested from us.
Funds that a nation or an individual gets for nothing, whether for military defense or any other purpose, are seldom spent with much of an eye to economy and efficiency. Sums that have to be repaid are spent carefully, and only when the spender is convinced they are necessary. Most of the recipient nations can in fact afford to pay for their own defense. By such a shift from grants to loans, we would not only come far closer to getting our money’s worth, but far closer to bringing the whole foreign-handout system eventually to an end.
July 19, 1954
Two weeks ago I remarked here, hyperbolically, that we are all Keynesians now. But I could have said in sober truth that while most of those now controlling policy are inflationists, they are being pushed from behind by hyperinflationists.
A good example is the National Planning Association, a group of statist planners who manage to get their bizarre pronouncements on the front pages of leading newspapers. Their latest report declares that the country must step up its production of goods and services by “at least $25 billion” over the next twelve months to keep the economy healthy. Why, as long as they are merely tossing out figures, stop at a mere $25 billion? Apparently because they estimate that unemployment is still between 5 and 6 percent of the civilian labor force, that population and output per man-hour will grow, and that in the first quarter of this year the nation’s gross national product was at the annual rate of “only” $356 billion.
This pronouncement is so typical of current inflationist fallacies that it is worth a little analysis. The NPA firmly believes that what primarily caused the recent “recession” was a drop in defense spending, and therefore what can pull us out is a boost in defense spending. Such a judgment, however, finds no support in either economic theory or experience. In the fiscal year 1944 the Federal government spent $95 billion; in the fiscal year 1947 it spent $39 billion. Here was a drop in the annual Federal spending rate in this three-year period of $56 billion. Yet, far from there being a recession in this three-year period, there was a substantial increase in employment, wages, and prices.
Nor is there any reason to suppose even in theory that wages and employment should depend primarily on the volume of defense spending, or government spending for any other purpose. If the government spends $10 billion less on defense and reduces taxes by the same amount, then the taxpayers have as much more to spend as the government has less. The total volume of spending is unchanged. It would be a monstrous as well as a foolish doctrine that we must increase the volume of wasteful expenditure on armament, not for the sake of defense, but for the sake of “creating prosperity.”
So far as the inflationary effect is concerned, what counts is not the amount of defense spending or total government spending, but the size of the deficit, and even more directly, the amount of new money supply. Even the NPA statement at one point seems willing to settle for a deficit achieved through civilian public works or even a cut in taxes. It even recognizes at one point that private plant and equipment modernization might help to create employment. But it pays scant attention to the fact that only the continuing prospect of profits, and only the ability of the profit-earners to retain enough of these from the income-tax collector, can make possible that continued investment of new capital which is essential to put better and better tools in the hands of the workers and constantly to increase their real wages.
What is most characteristic of the whole NPA statement is that its proposed statist remedies for unemployment utterly ignore the effects of wage rates. No matter how much we are inflating, no matter how high the absolute level of national income or “purchasing power,” we can always bring about unemployment by pushing wage rates too high in relation to prices and sales. Yet in recent weeks, with the steel industry operating at only two thirds of capacity, the steel-workers’ unions fought for and got a new increase of wages which forced a further increase in steel prices of $3 a ton. This is not the way to assure full employment.
This points to the error in the Keynesian propensity to look only at such huge overall money aggregates as “national income” and “purchasing power.” Maintenance of employment depends on expectation of profits in each industry; this expectation depends on relationship of costs to prices which means relationship of prices to each other and wage rates to prices.
October 11, 1954
Speaking before the joint meeting of the International Fund and International Bank on Sept. 25, R.A. Butler, British Chancellor of the Exchequer, declared that any real steps toward convertibility of the pound must depend on “more marked progress in the United States toward more liberal trade policies which would increase the dollar earning opportunities of the rest of the world. . . . We need time for the consideration of many intricate problems” before making the pound convertible.
These are extraordinary statements. So far as time is concerned, Britain has already had nine years since the end of the second world war. The pound is still inconvertible. And he was addressing his strictures to the nation that had made the British a heavy loan nearly nine years ago to make the pound convertible, and which both during the war and since then has poured billions of dollars of free grants into Britain to bolster its economy.
What Chancellor Butler’s remarks chiefly reveal is the psychopathic frame of mind to which continued controls finally bring a country. It is an economic scandal that so-called free, democratic nations still retain exchange control nine years after the end of the second world war. Exchange control is price fixing in currencies. It can be maintained only by forcing exporters to turn over the dollars they earn to the government and by undisguised discrimination against American goods through prohibitions and quotas. Such a system involves at least partial control by the bureaucracy of the internal economy. Directly and indirectly it dictates how British consumers shall spend their money and what British producers shall produce.
Now British officials have formed the habit of blaming their controls not on themselves but on us. Take the supposed requirement that America must reduce its tariff barriers even further to make a convertible pound possible. It is hard to see how British officials have the hardihood to lay down such a condition. Let us grant that our customs regulations are needlessly complicated and many of our tariff rates unjustifiably high. The truth is that they are as nothing compared with the barriers to trade that Britain (and, so far as that is concerned, all the countries that have exchange control) have set up. Even if we ignore the incomparably greater barrier of exchange control, the tariff comparison alone is already in our favor. The Tariff Commission recently calculated that the American tariff averaged about 5½ percent of the value of all our imports. On the same basis, it has been calculated, that the British tariff averaged more than 25 percent of the value of all British imports.
A few months ago Prof. Gottfried Haberler of Harvard published a carefully reasoned pamphlet, Currency Convertibility, explaining how and why British fears of the economic consequences of returning to convertibility are misplaced. (American Enterprise Association, Washington, $1.) But recent reports stress a new fear not mentioned in the Haberler pamphlet. This is based on the threat of the Labour Party, if it comes back into power, to reimpose exchange control. As a result of such threats, it is said, the Conservatives have postponed their plans for convertibility from next spring till a year or two later.
But so far from this threat being a reason for hesitation, it should be a reason for the Conservative government to permit convertibility now. New-found freedom once experienced is not easily surrendered. The more free the Conservatives make the British economy the more difficult the Labour Party will find it to return to power or to push the British people back into planning and controls. Since President Eisenhower took his bold action in eliminating price controls, for example, we do not find even Harry Truman calling for their restoration. Everything points to the wisdom of Britain’s returning to convertibility, at least at first, at a free and flexible rate rather than a fixed one. But such details are another story. The time to return to convertibility, in the interest of world economy, is now.
October 18, 1954
Last week I pointed out here that after nine years of exchange control, Britain has acquired a morbid fear of any return to currency freedom. Primarily this irrational dread was caused by the breakdown of the 1947 experiment in convertibility, followed by a complete misinterpretation of the causes of that breakdown. It came chiefly because Britain foolishly made a pound worth about $3 convertible into $4. The result was that everybody who had a pound was eager to get $4 for it, and nobody who had $4 wanted a pound for them. The conversion was all one way; England’s gold and dollar reserves drained out alarmingly. Conversion had to be stopped after a few weeks.
Now strangely, though there is in Britain great fear of a repetition of this consequence, when the British seriously talk of restoring convertibility at all, they usually talk of restoring the same kind of fixed-rate convertibility that collapsed in 1947. They talk of restoring convertibility at a rigid $2.80. But this would mean either putting the pound on a dollar-exchange basis (which would be neither flattering to British pride nor very wise), or it would mean an immediate return to a fixed external gold standard, which the British are supposed to view with horror. And if the real equilibrium rate for the pound turned out to be less than $2.80, it would mean an indefinite drain on British gold and dollar reserves.
Fortunately there is a sensible alternative. This is to restore convertibility (both of the pound and other currencies) at flexible rates, at free market rates, at what is now disparagingly called floating rates. This is what our neighbor Canada has so successfully done in the last few years. This, in fact, is what Britain itself did in the period from 1931 to 1938. When the conversion rate is a free market rate, reserves do not have to be enormous. Any one-way drain on them stops as soon as the rate for the domestic currency has fallen to the real equilibrium rate.
There has developed incredible confusion of thought about the implications of such free rates. We are told that they mean still another “devaluation.” The experience of Canada, whose dollar is actually at a premium with the American dollar, should be itself a sufficient refutation of this. Whether a currency rate falls or rises is in the long run for that nation’s own monetary managers to decide. If a freed pound began by falling 10 percent, say (in terms of dollars), then Britain’s imports would cost about 10 percent more in terms of dollars. This would raise average British living costs. But British exports would be purchasable for 10 percent less in terms of dollars. (Or some British exporters would be able to raise their sterling prices and make higher profits.) The tendency, in other words, would be to cut down imports, to increase exports, and to bring Britain a more “favorable” balance of trade.
If the British monetary managers did not wish the pound to fall 10 percent, they could restore its value in the free market by increasing confidence in it—chiefly by making pounds more scarce, which could be done in turn chiefly by boosting internal interest rates. With a free exchange market to guide them, the monetary managers would have the enormous advantage of knowing at all times how the outside world valued the pound and what stabilizing steps to take.
Britain has asked for all sorts of assurances from the United States before it consents to go back to convertibility. But the chief external assurance it needs is not from us, but from other European countries. It needs assurance that they too will go back to convertibility to relieve undue pressure on the pound. But this is exactly what Germany, Holland, and Belgium now seem eager to do.
Our own government should not prod Great Britain to return to convertibility. Such a return would be primarily to the advantage of Britain itself. But it is high time that we stopped subsidizing European exchange control as we have been doing for the last nine years by monetary handouts and encouragement of discrimination against American goods.
October 25, 1954
There has appeared this year in France a remarkable book, by the distinguished Swiss economist Prof. William E. Rappard, under the title A quoi tient la Supériorité économique des Etats-Unis? (What Is the Cause of the Economic Superiority of the United States? Librairie De Medicis. Paris. 212 pages).
What makes this book remarkable, coming as it does from a contemporary European economist, is not only the generosity with which it acknowledges and insists upon the economic superiority of the United States, but the still rarer generosity with which it attributes this superiority not merely to good luck—such as great natural resources or escape from the direct destruction of the two world wars (the usual European explanation)—but primarily to the character and the free economic institutions of the American people.
“The United States is today,” writes Professor Rappard, “by far the richest nation in the world because it is by far the greatest producer of wealth. And it is the greatest producer of wealth less because its territory has been generously endowed with natural resources than because it has succeeded in deriving from the labor of its people a much better material result than its competitors in the rest of the world.”
Professor Rappard establishes this thesis with admirable lucidity and logic. He takes nothing for granted, but starts out first of all to prove beyond dispute the superior productivity of the United States. He does this by national comparisons of income, and of the output and use of scores of commodities, notably petroleum and gasoline, coal and coke, iron and steel, electrical energy, automobiles, and telephones. He proceeds to show that there has been a consistent balance of trade in favor of the U.S. maintained over many years by loans and gifts to the rest of the world.
Next he views the problem historically, and shows by quotations from foreign observers—Adam Smith in 1776, de Tocqueville in 1831, Michel Chevalier in 1835, John Stuart Mill in 1848 and 1865, the Englishman Arthur Shadwell in 1906, and then by contemporary testimony from both American and European authorities, that the per capita production and income of the American worker has exceeded that of the European from our very beginning as a nation.
To some this proof may seem superfluous. But Professor Rappard, like a true scientist, is determined to establish his facts before he undertakes to explain them. In our higher productivity, therefore, Professor Rappard finds the primary cause of the economic superiority of the United States. He knows that the full explanation of this is complex. But he selects four main elements:
1—Mass production.
2—The application of science to production.
3—A passion for productivity.
4—The spirit of competition.
Professor Rappard places special emphasis on our internal “free market without equal on the face of the globe.” That the spirit of competition prevails far more in America than in Europe, he concludes, is beyond question. He documents this with liberal quotations from both European and American sources. He admits that there are a few American economists who deny that real competition prevails here. Though he makes what is broadly the correct answer to these, his answer could have been more conclusive had he known of and drawn upon such statistical studies as those of George Stigler and A.D.H. Kaplan.
I hope that Professor Rappard’s work can be translated into English and published here. This European sees our achievement in better perspective than most of us do ourselves. We Americans do not need to be reminded of our own economic achievement in order to be smug or boastful about it. But we do need to be reminded that this economic achievement has been the result above all of a free, dynamic, private, competitive economy. It can be preserved only by preserving this type of economy, and not by imitating the socialism, statism, and security-mindedness that have failed so dismally elsewhere.
November 1, 1954
On the basis of the returns from Maine and Alaska, and of their own opinion samplings, the political pundits have been forecasting a Democratic Congressional victory. What would be the probable economic consequences of such an outcome?
These would certainly depend in part upon the interpretation generally placed on the election results. Millions of voters will vote as they do for hundreds of different reasons. Yet among the political factors now at work we may select three that are outstanding:
1—The Eisenhower Administration may be punished as much for its merits as for its defects. This is always what is likely to happen when pressure groups have been encouraged to think that they have a right to be subsidized at the public expense. Many farmers, for example, have come to feel through long custom that they have this right. The President and his Secretary of Agriculture have courageously fought the continuance of fantastic support prices that have built up appalling surpluses, drained the taxpayers of billions, and raised the cost of food for city workers. The Administration’s own compromise proposals have been nearly as bad, but it may be rebuked at the polls even for its attempt to mitigate the evil.
In the last year and a half, again, the policy of the Eisenhower Administration has been inflationary. But it has not been recklessly inflationary enough to satisfy the Stevensons or the Reuthers, or to wipe out every pocket of unemployment everywhere no matter what its special cause. And for this restraint the Administration may again be punished.
2—One defect from which the present Administration suffers more than any within living memory is political amateurishness and inarticulateness. It just does not seem to know how to dramatize its achievements or defend itself against attacks. It is true that President Eisenhower has recently made a couple of speeches ably summarizing some of his major achievements. Foremost among these was stopping “the futile sacrifices in Korea.” Others were abolishing stifling controls, slashing taxes by $7.4 billions, cutting expenditures, getting the government out of some socialistic activities. Yet the President has continued and promised expansion of many New Deal programs.
3—It is this so-called middle-of-the-roadism, this semi-New Dealism, which will probably be the main cause of a Republican Congressional defeat if it occurs. It is amazing that President Eisenhower should exactly duplicate the incredible error that caused Governor Dewey to snatch defeat out of the very jaws of victory in 1948. Like Dewey, he has ignored the traditional Republican philosophy in order to go after the votes of the supposed moderate New Dealers—the so-called middle-of-the-roaders of both parties. Like Dewey, he has taken for granted the votes of the orthodox Republicans on the assumption that they cannot vote for New Deal Democrats and therefore “have nowhere else to go.” But Republican conservatives proved in 1948 as they seem only too likely to prove again in 1954—that they do have a place to go. That place is anywhere but to the polls. They can stay home, play golf, or take a walk.
This is precisely and demonstrably what they did in 1948. Only 49 million voters bothered to vote for a President in that year compared with 62 million in 1952. Truman won by default. He got the votes of only about 25 percent of the total eligible electorate. Mr. Eisenhower’s real problem today, like Dewey’s unrecognized problem in 1948, is not that the American public is hot for a return to Trumanism and New Dealism; the real problem is the indifference and apathy of conservative Republicans.
And the real danger is that a Republican Congressional defeat this year will be just as grossly misinterpreted as the Dewey defeat in 1948. It may be taken as a mandate for a resumption of New Deal spending, inflation, and paternalism of big government. The voters may collectively bring about a result that the majority of them do not individually foresee or intend.
November 8, 1954
Arthur F. Burns, now chairman of the Council of Economic Advisers, is one of the country’s outstanding statisticians. Yet there is in his implied economic philosophy much to cause misgivings. He has, it is true, several times criticized “Keynesian thinking” (see The Frontiers of Economic Knowledge, Princeton University Press). Yet in this very criticism he seems to me to accept the four principal assumptions, so far as practical policy is concerned, of Keynesian doctrine: (1) That “full employment” is the paramount economic goal; (2) that a private competitive economy, left to itself, tends to generate from mysterious inner forces a perpetual cycle of boom and bust; (3) that it is the “responsibility” of government—tacitly assumed to be wise, disinterested, and benevolent—to pursue “contracyclical” policies to eliminate or mitigate these otherwise inherent booms and slumps; and (4) that the basic contracyclical policy is deficit spending. Let us look at these assumptions more closely.
1—In “The Frontiers of Economic Knowledge,” Dr. Burns declares: “The principal practical problem of our own generation is the maintenance of employment, and it has now become—as it long should have been—the principal problem of economic theory. This transformation of economic theory is due in large part to the writings of John Maynard Keynes.” This surely sums up present fashionable doctrine. But is it true?
The principal practical economic problem of our own, as of proceeding generations, is the creation of the maximum material welfare for the great body of the people. This can be mainly achieved through maximizing the production and consumption of the right things (including leisure). Maintaining employment is, of course, one of the necessary means to this end. But to erect it into the “principal” end itself is a hopeless confusion. And as I wrote in Economics in One Lesson eight years ago: “Nothing is easier to achieve than full employment, once it is . . . taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved.” The slave labor camps in Russia today provide full employment.
2—Now in a speech in Detroit a couple of weeks ago—on Oct. 18—Dr. Burns made what seems to me another disturbing statement. “Since our system of free and competitive enterprise is on trial,” he said, “the government cannot stand aloof from the private economy but must be ready to take vigorous steps to help maintain a stable prosperity.” In the last two centuries the system of free and competitive enterprise has shown itself to be the most productive ever known to man. In what sense is it still “on trial”—except in the sense in which every human institution and every human being may be said to be on trial? Is it more on trial than socialism? Or state planning? Or Dr. Burns’s beloved “contracyclical policy”? The tacit assumptions in Dr. Burns’s statement are not only that a free and competitive private economy cannot be trusted to be reasonably stable, but that the government—i.e., the politicians in power—can be trusted to know and to do exactly what is needed to keep it stable. Both assumptions are debatable.
3—“Contracyclical policies” is a fancy and flattering phrase, but I cannot recall any example, historical or contemporary, of their consistently intelligent, disinterested, and successful application. On the contrary, the record of nearly every government in the world, in our time, is one of recurrent or continuous monetary inflation. It is to this monetary inflation that the apparent “successes” of full employment policies are due.
4—Dr. Burns seems at one with the Keynesians, in spite of his reservations, in regarding deficit financing as one of the chief “weapons” of “contracyclical policy.” But this modern superstition, if persisted in, must lead toward economic and political catastrophe. Largely as a result of its dominance, we have had budget deficits for 22 out of the last 25 years; and the end of the deficit orgy is not in sight.
November 15, 1954
The follies, scandals, and self-contradictions of government meddling in business become more apparent every day; yet Washington seems to learn nothing from them.
A recent dispatch in The New York Times, for example, tells us that “The Eisenhower Administration may soon decide whether to liberalize the lending policies of the Export-Import Bank to help maintain adequate world markets for United States industry in the face of growing competition.” Foreign competition is now described by some exporters as “fierce.” It has been “developing rapidly over the last two years in the wake of Europe’s dramatic recovery.” So a new scheme is being put forward for further “liberalization” of the Export-Import Bank’s lending policies. The last Congressional session already increased the bank’s lending authority by $500 million to a total of $5 billion.
The new proposal is particularly ironic when one recalls that it was the American taxpayers’ money in the first place which was used to subsidize Europe’s “dramatic recovery” and its present “fierce” competition. We not only poured into Europe billions of dollars of the American taxpayers’ money in order to subsidize the retooling and modernization of Europe’s factories (at the indirect expense of our own) but, also at the taxpayers’ expense, we sedulously taught our European competitors all we could about our “know-how.” Not content with that, we insisted on placing defense orders, paid for with American taxpayers’ money, with European factories. For example, as was brought out recently by a contract cancellation, our government gave one contract for a destroyer escort to an Italian firm dominated by Communist workers in a majority of seven to one.
Having given away the taxpayers’ money to build up European competition, Washington now proposes to use more of the taxpayers’ money to help individual American exporters meet this competition.
Now not only is there no sound reason for expanding the operations of the Export-Import Bank; there was no sound reason for setting up the bank in the first place. What the bank does is to extend to foreign buyers, to finance sales to them, loans that are so dubious that neither the American exporting firm itself, nor any private American bank, will itself assume the full risk. The bank is based on the inconsistent assumption that there are projects sound enough to risk the taxpayers’ money in, though not sound enough for any private lender to risk his own money in.
This was also the basic assumption of the old Reconstruction Finance Corp. That institution finally got so involved in bad loans, scandals, and corruption that it was terminated. But Congress then blandly proceeded to set up in its place the Small Business Administration for precisely the same purpose. The chief difference is that the new agency cannot lend more than $150,000 to any one firm. Just why the new SBA setup is supposed to involve less risk of political favoritism and scandal than the old RFC I don’t know. In fact, it was precisely the big individual bad loans made by the RFC—such as the $37 million to the Lustron Corp.—that made the front-page headlines which finally led to efforts at correction.
When government goes into the lending business a disproportionate number of loans are bound to be economically unsound. When private lenders risk their own money they examine with great care the profitability of the borrowing enterprise, the integrity of the borrower, and the chances of repayment. But when bureaucrats lend other people’s money these economic aspects are too apt to get a merely formal notice and to be subordinated to political considerations. The recent tremendous Federal Housing Administration scandals, which grew out of government loans in excess of what any private agency would have been willing to grant, are merely one more illustration of the same lesson. There are half a dozen other major examples of unsound government lending. The only real remedy is not for Congress to “set up more safeguards,” but to get the government out of the lending business.
November 22, 1954
The real danger of the Republican defeat on Nov. 2 lies not in the narrow Democratic majorities themselves, but in the dominant interpretation that may be put upon the election results. The danger is that not merely the New Deal Democrats, but the Administration Republicans themselves, may interpret the result as a repudiation of President Eisenhower’s more conservative policies and a public demand for return to New Dealism—to big government, big spending, inflation, and subservience to labor-union bosses.
Sober analysis, however, gives no support to this interpretation. Outstanding left-wingers, both Republican and Democratic, were certainly elected to the new Congress; but so were outstanding conservatives. And the Administration’s most successful holding operations, and even gains, were made in the farm belt. It is instructive to recall that in the early part of Mr. Eisenhower’s Administration it was the opposition of his Secretary of Agriculture, Ezra Taft Benson, to the continuation of high, rigid farm-price supports that was the principal target of the Democrats in Congress and the principal fear of the Republicans from the farm districts. It seemed politically impossible that the Republicans could come out for lower subsidies than the Democrats and still keep farm support. But Secretary Benson stuck to his guns; he explained and defended his program; and he received the outspoken support of the President. The result was that the Republicans’ principal electoral successes were achieved precisely where it was feared until a few months ago that they might fare worse.
An outstanding illustration is Iowa, heart of the farm belt, which elected a solid delegation of eight Republicans and no Democrats to the House, and which retired the Democratic Sen. Guy Gillette, a vigorous opponent of the Benson program, and elected a Republican, Thomas E. Martin, who defended the program. Many other remarkable Republican successes were achieved through the farm belt.
The unequivocal and courageous stand on farm policy, unfortunately, was an exception in the Eisenhower Administration. An example of quite another kind was set when Attorney General Brownell exposed the shocking record of the Truman Administration in the Harry Dexter White case, only to find his exposure virtually disowned by the President within a few days. The Administration has since blown hot and cold on the tremendous issue of Communist infiltration in the government. It has almost apologized at times for its record in removing subversives.
The Administration has been equally irresolute on the question of spending. True, it has made some substantial cuts. But it still runs huge deficits and continues indefensible spending of billions—for example, in continuing the New Deal foreign giveaway program.
Much the same may be said about labor policy. True, the Eisenhower Administration has not been shamelessly subservient to the union bosses, as was its predecessor. But though it has thereby earned the implacable opposition of the union bosses, it has failed to gain the compensating friends it needs because it has continued timorously to appease and curry favor with the union bosses rather than begin firmly to curb some of their abuses of power. Mr. Eisenhower does not yet seem to have clearly distinguished between the interest of the small-but-vocal clique of labor-union leaders, on the one hand, and the interest of the whole body of workers (which involves, of course, the freedom of the individual worker), on the other. Not until the Republican Party grasps this distinction clearly can it hope to regain the majority of the so-called “labor vote.”
The turnover in the control of Congress was accomplished by a net shift of only twenty out of a total of 435 seats in the House, and a net shift of only one seat in the Senate as compared with the situation in 1952. Surely this is no reason for any loss of nerve on the part of the Administration, or for the belief that it can gain anything by moving farther in the direction of New Dealism.
November 29, 1954
When Secretary Marshall proposed his grandiose foreign-aid plan more than seven years ago, even he suggested that it should cover no more than “the next three or four years.” Marshall-Plan administrators constantly assured Congress that it would not run beyond four years. But when the four years were up the foreign giveaway continued; it merely kept changing its name and declared purposes. In the fiscal year ended June 30 last, our total foreign-aid expenditures were still above $5 billion—an amount greater than the total expenditures of the Federal government for any of the years from 1921 to 1933 for all purposes put together.
Yet the air is full of ever-more proposals for ever-bigger giveaways of indefinite duration. It is now considered the duty of the American taxpayer to support the entire world.
On Nov. 8, for example, Japan’s Premier, Shigeru Yoshida, delivered a speech before the National Press Club in Washington in which he advocated a Marshall Plan to multiply tenfold—to about $4 billion—the amount that we should pour annually into Asia to “tip the scales against Communism.” And a few days after this speech—on Nov. 11—it was announced from Washington that the Eisenhower Administration had given its blessing to a proposed $100 million international corporation to help finance private industrial enterprises in the so-called underdeveloped countries.
These ever-new schemes for ever-bigger handouts seem to be proof against all sober analysis and against all our experience, however disappointing. The arguments of Premier Yoshida for his new Asian Marshall Plan are depressingly familiar. Asia, he tells us, is eager to “break with the misery and poverty of the past.” This aim, of course, deserves the sympathy of everyone in the Western world. Asia’s effort to raise its living standards, he goes on, “is hampered by a lack of capital.” But he does not stop to analyze what it is that has caused this lack of Asiatic capital, not only now, but for untold generations past. He simply leaps to the familiar conclusion that the problem can easily be solved if the American taxpayer is forced to supply that capital.
Yet he does, inadvertently, reveal the basic reason not only for the shortage of capital in Asia but for the shortage of capital wherever it exists. “The economic climate in the proud new nationalistic countries of [Southeast Asia] is not, at this crucial moment, the kind that encourages private investment.” It certainly is not. Nor, we might add, is the political climate, threatened as those countries are by Communist infiltration, subversion, or invasion. It does not follow, however, that the American government can afford to overlook what private investors cannot afford to overlook. It is folly to throw in money that might only fatten up a country for Communist conquest. And it is folly to lend money to borrowers who will not adhere to the conditions necessary to make that investment productive or repayable.
On the other hand, as soon as the would-be borrowing nations do learn and offer the conditions and assurances necessary to attract private capital, they will begin to get as much capital not only from American investors but even from their own investors as they can profitably absorb. We do not need a Point Four, for example, in order to coax private American capital into Canada.
As for the Eisenhower Administration’s new lending scheme, it is perhaps not as bad as more pure giveaway; but it is certainly not sound. It is bad enough for our government, through such institutions as the World Bank and the Export-Import Bank, to lend money to foreign governments for projects too dubious to attract private capital. But it is much worse for our government to put money into foreign private enterprise. Surely we should have learned enough of a lesson from the errors and scandals of the RFC loans to American enterprises, where we had enormously better facilities for continuous supervision and control, and for assuring repayment, than we could possibly have in any foreign country.
December 6, 1954
Last week I pointed out the constant tendency of our foreign giveaway schemes to grow rather than to taper off. This tendency to expand is certainly not the result of any demonstrated efficacy in these schemes. Our billions of economic aid have not led Europe or Asia to abandon harmful governmental controls. On the contrary, they have subsidized the prolongation of such controls. There is no clear evidence, in spite of constant reiteration, that the postwar recovery of Europe has been any faster than it would have been without our aid. On the contrary, the most dramatic recovery has been made in West Germany, which was not receiving our aid. Instead of buying gratitude and dependable allies, our handouts have been accompanied by a steady loss of American prestige abroad.
And wherever our government-aid program has entered we have reduced the incentive to self-help. As long as foreign governments are assured of funds from the American Government, they will not bother to make the reforms necessary to attract private capital. Yet only these reforms can bring lasting prosperity.
Individual congressmen, certainly, are not unaware of these disappointing or harmful qualities of our foreign-aid program. But when the time comes for our foreign-aid agencies to ask Congress for a new annual appropriation, these agencies let loose a tidal wave of propaganda that overwhelms and drowns out the criticisms and misgivings of disinterested individuals. Within these agencies are hundreds of bureaucrats whose very jobs depend upon the continuance or enlargement of the foreign-aid program. Many of these bureaucrats become full-time propagandists for it. Moreover, often the officials appointed to direct the U.S. aid program abroad see themselves as fairy godmothers and forget that their easy benefactions are at the expense of the American taxpayer.
In addition, committees in Congress that have jurisdiction over foreign aid, the chairmen of which usually wish to carry out the Administration’s program, call as witnesses mainly the officials of the foreign-aid agencies themselves. The minority members of the committees, or those who have misgivings about the program, have no equal means of obtaining the factual information, or the analysis, to combat the government agency’s expansion arguments. A congressman is compelled to make decisions on a hundred different issues. He seldom has time to keep fully abreast even of the particular issues that he must follow as a committee member. And so Congressional decisions usually follow, by a sort of default, the recommendations of executive agencies that are clearly not disinterested.
Yet this situation could be remedied, at least in large part, if Congress were to appoint a committee of private citizens, outstanding authorities on the subject, whose sole function it would be to study the activities of the foreign-aid agencies and report to Congress their own appraisal of the annual recommendations for new appropriations and activities made by these agencies to Congress. Congress would then be assured of a systematic, authoritative, and relatively disinterested judgment of the foreign-aid agency’s proposals.
A committee of the type proposed would preferably be one whose members served without salary. But it should be authorized to employ one or two full-time salaried researchers and a modest secretarial staff. This private committee should be as far as possible nonpartisan. Such an objective could probably best be assured by allowing the majority and minority members of the appropriate Congressional committees to select the makeup of the private advisory committee in the same ratio as the committee balance within Congress itself.
In fact, if a similar private year-round “watchdog” committee were appointed by Congress to study the work and recommendations of, say, every Federal agency that spent more than $100 million a year, the effect would be to restrain the present alarming expansion of spending programs and to save the taxpayers billions of dollars a year.
December 13, 1954
On Nov. 25 the International Longshoremen’s Association negotiated a two-year contract with the New York Shipping Association. It gave the union a 17-cent hourly wage-welfare package increase—and a union shop. The implications of this settlement are worth some study.
The old ILA was found by the New York State Crime Commission to be dominated by gangsters. The American Federation of Labor expelled it and then tried to set up a new union in its place. The National Labor Relations Board, in accordance with the Taft-Hartley Act, held an election last May. The ILA polled 9,407 votes; the AFL, 9,144 votes. Though the outcome obviously indicated heavy dissatisfaction with the record of the old ILA, it had nevertheless retained a narrow majority. And therefore, once more under the provisions of the Taft-Hartley Act, the ILA became officially the exclusive bargaining agent for the longshoremen. The AFL union then had no status whatever.
And now that the ILA has secured a union-shop provision, all those dissenters who voted for the AFL must once more join the ILA in order to hold their jobs. As A.H. Raskin, labor reporter for The New York Times, puts it, though the record of the ILA has been one “characterized by shakedowns, sellouts, and betrayal of the union rank and file,” the AFL must now do everything it can “to persuade its members to go back into the ILA as an alternative to economic suicide.” And the union-shop status won by the ILA in the new agreement “will make it possible for corrupt forces to do far greater damage to the welfare of the port [of New York] than was possible in the past.”
Yet nobody in the Federal government has so far shown any recognition of the appalling legal implications of the whole New York waterfront episode. The present outcome was forced on the dissatisfied union members, as well as on the employers, by the Taft-Hartley Act.
We must never lose sight of the fact that the Taft-Hartley Act is merely an amendment to the Wagner Act and retains the latter’s central and most dubious provisions. It provides that any union able to secure a majority of votes from the workers in an “appropriate unit” (designated as such by the National Labor Relations Board) must be recognized and dealt with by an employer as the exclusive bargaining agent of all the workers in that unit. This provision does two strange things that the law does not dream of doing in any other field. It gives a private group a quasi-official status. It becomes illegal not to bargain with it. It becomes illegal to attempt to bargain with any other group. In brief, no matter how unreasonable or how intransigent the demands of this union, the employer is legally compelled to deal with it and nobody else. And by giving a mere majority exclusive bargaining powers it makes it almost impossible for any competing union to establish itself.
Again, though the Taft-Hartley Act begins by declaring it to be an “unfair labor practice” for an employer “by discrimination in regard to hire or tenure of employment, or any term or condition of employment, to encourage or discourage membership in any labor organization,” it ends, in complete contradiction to this, by authorizing the union shop, under which the employer is compelled to dismiss a man who does not belong to the union. The Taft-Hartley provisions in combination force racketeering unions on employers and make the individual worker powerless. He must join the union or commit “economic suicide.”
Finally, the Taft-Hartley Act and Supreme Court decisions have created a dangerous divorce and gap between a Federal decision-making power and a local policing power, and left a no man’s land in which union gangsterism can flourish. The New York police could have cleaned the gangster from the waterfront but never did. One of their excuses has been that jurisdiction over the ILA is in the hands of a Federal agency. Yet this Federal agency is legally blind to local gangsterism, and is not equipped to halt it even if it could take cognizance of it.
December 20, 1954
The mania for giving the American taxpayer’s money away to foreign countries has grown to such an extent that, with some honorable exceptions, there now seem to be only three schools of thought in Washington: Those who want to pour more of the money into Europe; those who want to pour more of it into Asia; and those who want to pour more into Latin America.
The arguments of some of these groups are less distinguished for cogency than for unintended humor. No one should miss the outburst of Congressman James G. Fulton at the recent inter-American conference in Brazil: “We are handing out billions to Europe and Asia and we are offering a mere pittance to our own family in Latin America.” How the Argentine, say, got to be part of “our own family” in some sense in which democratic Britain does not deserve the term, we need not pause to inquire. More significant is the use of the fact that we are “handing out billions to Europe and Asia” not as an argument for reducing these handouts but as an argument for handing out still more somewhere else. Apparently we must give every nation or area relatively as much as the one to which we have already given the most so that no one can feel slighted. In fact, it is precisely by taking this kind of argument seriously that we have already made postwar grants or loans to more than 60 different nations.
Nor should we overlook the recent speech here of the Prime Minister of Ceylon, who told us in effect that it was up to us to support an enormous giveaway program to Asia, but that we ought not to have the effrontery to ask for anything in return. “We want economic help in abundance,” remarked the Prime Minister. “We want financial aid without being tied in strings. . . . The nations of Asia . . . do not believe the first need is a defense pact against aggression. The first aid they need is economic aid.”
None of these extravagances, nor all our jolts and disillusions of the past, seem in the least to discourage the Administration advocates of more giveaway. Secretary of State Dulles and Harold E. Stassen, the director of the Foreign Operations Administration, are spearheading a proposed new program of economic aid to the underdeveloped countries of Asia in the hope of “winning their friendship.”
We need not go over again here all the reasons why this program is thoroughly unsound—politically, militarily, and economically. From the economic standpoint, handouts from the American Government to the backward countries of Asia cannot do anything substantial to raise the living standards of these countries. Those living standards will not be noticeably raised until the countries of Asia learn what is meant by free enterprise and make the thoroughgoing reforms that would be necessary to permit free enterprise to flourish. Experience has shown that handouts from the American Government merely delay such reforms. They lead the political rulers of Asia to think they can get all the money they want for their statist and socialist schemes without bothering to create the economic climate necessary to attract the economic climate necessary to attract private capital.
But while these huge handouts would not help the underdeveloped countries of Asia and Latin America, they are draining and weakening us. Our tax burden is already as high as the American economy can stand. There is hardly a man in Congress who does not concede this. The Democrats are talking, not of increasing taxes but of demanding even further reductions beyond those that the Eisenhower Administration has already made.
Yet even with our present spending program, the Federal treasury is expecting a deficit in the current fiscal year, which closes at the end of next June, of $4.7 billion. This deficit means a continuance of inflation, further undermining of the dollar, and a still higher mountain of debt. At the same time we are spending more than $5 billion in the current fiscal year on foreign aid. Anyone who can put these two figures together ought to be able to draw his own conclusion. This is the time to diminish or eliminate the foreign giveaway program, not to dream up grandiose new schemes.
December 27, 1954
On Dec. 7, speaking before the annual convention of the CIO in Los Angeles, President Eisenhower’s Secretary of Labor, James P. Mitchell, showed himself even more willing to subserve the wishes and increase the powers of union bosses than any of his New Deal predecessors had done.
Among other things, he attacked the “right to work” laws now in existence in seventeen states. Under these laws employers and unions cannot enter into contracts that make it compulsory for a worker to join a union as a condition of holding his job. Mitchell demanded that the states wipe such laws from their statute books. This speech apparently came as a complete surprise to the White House. Mr. Eisenhower declared at his press conference the next day that the Secretary of Labor had not necessarily represented the Administration’s views in any part of it. On the day after this comment, Walter P. Reuther, president of the CIO, called this a “repudiation” of Mitchell, and accused the President of perpetrating a “political fraud.” “The Secretary of Labor is not a member of the Cabinet,” he said.
I hope Reuther is right, and that the President will ask for Secretary Mitchell’s resignation. Nothing short of this can clear the air.
When the speech was first published, it looked as if the President, frightened by the election returns, had decided to swing far to the left on the labor issue in one more effort to woo the so-called labor vote. Reuther’s savage attack indicates how futile such appeasement of the union bosses would be even if the President supported the Mitchell program. For the Republicans to adopt that program would be such a reversal of policy that they would lose the voters’ respect, and with it lose far more votes than they could possibly gain.
From the standpoint of principle, the case for the Mitchell program is even worse. To compel a man to join a union as a condition of holding his job puts irresponsible power in the hands of union bosses and is a gross infringement on the individual’s right to work.
Two other major issues are raised by the Mitchell stand. The first is states’ rights. Recent Supreme Court decisions have taken the position that since Congress has chosen to exercise jurisdiction in the labor-management relations field, the Taft-Hartley law takes precedence in any conflict with state law, and any state law in conflict with the Taft-Hartley law is invalid. At the same time the court has been so fantastically stretching its definition of what constitutes “interstate commerce,” subject to Federal law, that it has all but annihilated the powers that the Founding Fathers thought they had reserved to the states in the Tenth Amendment. Unless there is a reversal of this trend, states’ rights will soon be wiped out without the submission of any constitutional amendment by Congress. The general acquiescence in the doctrine that Congress has the right to invalidate state labor laws that apply to what is dominantly or almost wholly commerce within a state shows how far this process has already gone.
Another major point once more raised by the Mitchell stand is the hypocritical and self-contradictory nature of the Wagner-Taft-Hartley act itself. As I pointed out here two weeks ago, that act begins by declaring it to be an “unfair labor practice” for an employer “by discrimination in regard to hire or tenure or employment, or any term or condition of employment, to encourage or discourage membership in any labor organization.” Yet it ends by authorizing the union shop, under which an employer is compelled to discharge a man who does not belong to the union.
This contradiction can be resolved only in one of two ways: (1) Congress can repeal the Wagner-Taft-Hartley act in its entirety, leaving employers and workers once more free to make their own bargaining arrangements; (2) if Congress wishes to intervene to forbid discrimination against union members, then in all consistency and honesty it should intervene to forbid discrimination against nonunion members. As it stands today, the law merely turns the Federal government into a union-organizing agency.
