Business Tides
Why Spending Grows
January 2, 1956
The present proposals for still larger farm subsidies at the expense of the taxpayers are one more example of how Federal spending programs, no matter how huge or how harmful, tend to grow even greater.
The more than $7 billion worth of farm surpluses already piled up in warehouses and old ships are the direct result of the 90 percent of “parity” price-support program. This piling up of surpluses, with its drain on the Treasury, continues even under the “flexible” price-support program. Yet the Democrats are pressing for a return to 90 percent support, and the Administration feels driven to suggest still greater farm expenditures. On top of present price supports, it now proposes to recommend a “soil bank” plan. Under this, in the first year, the taxpayers would be called upon to hand out some $450 million more to induce farmers to put part of their acreage in soil-building grasses rather than in price-supported crops.
As the need for farm relief has grown less, farm relief itself has grown greater. In 1934, realized gross farm income was only $8.5 billion; in 1944, it had jumped to $24.4 billion; in 1955, it was about $32 billion. Yet over the same period government farm subsidies have steadily mounted.
A similar growth may be traced in unemployment insurance, old-age assistance, and other social-security programs. In 1949 Edna Lonigan wrote a study for the American Enterprise Association of Washington, D.C., in which she showed not only how welfare programs had been steadily expanded but how the concept of what constitutes “need” had been steadily raised. Such a study, brought down to date, would show the same expansion going on in the last six years. A similar secular trend can be traced in the various veterans’ programs.
Another dramatic illustration is the expansion of Federal grants-in-aid to the states and localities. More than 50 different grants-in-aid have been enacted so far. Roger A. Freeman, in his study of Federal aid to education that I referred to last week, tells us that these grants-in-aid have soared from $3 million at the turn of the twentieth century to more than $3 billion in 1955.
Another outstanding example is aid to housing. The various mortgage-guarantee programs and subsidies for public housing were originally enacted on the argument that they were needed to compensate for an abnormally low volume of private building. But these programs continue even during the greatest housing boom and the greatest general boom in our history.
In some respects the strangest of all examples is the foreign-aid program. Our government has now poured out more than $50 billion in foreign aid since the end of the second world war. All the arguments for the institution of the Marshall Plan in 1947 have now evaporated. The aid was to last only four years. But under constant changes of name and reasons in continues in heavy volume.
What causes this constant rise in expenditures for the benefit of special groups? Why are the forces acting in the opposite direction so weak? The general principle at work was once summed up by Elihu Root, a senator and onetime Secretary of State. “Minorities punish,” he said, “and majorities will not protect.”
That this should be so in the realm of public expenditure is not mysterious. To the beneficiaries of Federal aid (which include the bureaucracy hired to direct it) it makes a direct and substantial difference whether or not they get it. The tax burden, on the other hand, is spread over the whole nation, and no taxpayer can be sure precisely how much a given spending program costs him personally. Therefore the steady flow of organized propaganda is all on the side of continuing that spending program, while the arguments put forward against it are scattered, and much more abstract and disinterested. They seldom carry a threat to the political life of any congressman.
A cure for this ominous trend would not be simple. But one part of it would surely be to adopt a really responsible budget system. 
January 9, 1956
“Cromwell was about to ravage all Christendom; the royal family was undone, and his own forever established, save for a little grain of sand which formed in his ureter. Rome herself was trembling under him; but this small piece of gravel having formed there, he is dead, his family cast down, all is peaceful, and the king is restored.”
Perhaps nothing in literature more concisely and effectively illustrates the way in which apparently tiny causes can have tremendous effects than these two sentences from the great seventeenth-century mathematician and philosopher, Pascal. The world had another telling illustration of the hazards of forecasting in the year just passed. When President Eisenhower’s heart faltered on Sept. 24, the whole economic outlook seemed to change overnight. On the Monday after that week end, the stock market opened with the most violent drop since the panicky days of 1929, later to recover with the President’s own recovery. Not one of those who had forecast business and market conditions at the beginning of 1955 had thought to condition his forecast upon the health of a single man.
Yet as the year turned out, the forecasters for 1955 went wrong for the strange reason that they were not optimistic enough. An article in the National Industrial Conference Board’s December Business Record, with the witty title “What Went Right?” points out that “the consensus of forecasts for 1955 was certainly far wide of the mark.” The forecasts were only moderately optimistic. In general they guessed that 1955 might be the “second best” year in our business history—better than 1954, but not as good as 1953.
When the forecasts were made, nothing in the statistical sky seemed to hint anything better than this. “While consumer demand had held up very well indeed during 1954, there was no very good evidence that it was about to advance into a wholly new range of spending.” The assignment of cause and effect can be questioned, but the Conference Board article thinks it is “reasonably clear that, in 1955, personal consumption and related magnitudes of personal saving and personal debt were the dynamic and driving forces behind business. . . . Of all the records set during the year, the most impressive are the 7.5 million level of new car sales, and the $5 billion—$6 billion increase in installment debt outstanding. No other figures so clearly distinguish the year from all others. If the forecasters had known them a year ago, they would have needed little else to get on target.” In other words, if the forecasters had known what was going to happen, they would have known what was going to happen.
If the consensus of the forecasts could go wrong for 1955, it can just as easily go wrong for 1956—and not necessarily in the same direction. It is the weakness of most forecasters to assume that conditions are going to continue as they already are—or, rather, to assume that they are going to change in the same direction and at the same rate as in the immediate past. In more technical language, the unconscious tendency of most forecasters is to “extrapolate” the recent business curve.
Let us study the present forecasts therefore, with appropriate caution. All of us must base our decisions on some guess regarding the probable future. But we should do well to keep in mind that business forecasting can never be a science. The future does not depend on any set of past or present statistics, or any extrapolation of them, but on a million future developments which no one can foresee. The best forecast can be based only upon apparent probabilities; but “probabilities” can be falsified by events.
As the Conference Board’s article concludes. “It is not easy to say what the lesson of 1955 should be. Should the performance of consumption in 1955, which was extraordinary by the standard of all preceding years, be counted on for 1956? . . . Or does the boom in personal spending in 1955 presage . . . a steep return toward an historical ‘normal’? . . . The answers to these questions are very much the answers to 1956.”
January 16, 1956
The request of the Administration for an appropriation of almost $5 billion for foreign aid, as compared with $2.7 billion for the current fiscal year, is so ill-advised and unjustified that all I can do here is to list some major objections to it, and leave further elaboration to a later time.
1—Secretary Dulles’s defense of this request is that the actual rate of foreign-aid spending will increase from $4.2 billion in the current fiscal year to “only” $4.4 billion in the fiscal year beginning next July 1. His defense of an 80 percent increase in the appropriation is that it is necessary to keep foreign aid flowing, to keep the “pipeline” filled up. Yet even without this addition to its foreign-aid reserves, the Administration will have a $7 billion carry-over of foreign aid appropriations at the end of this fiscal year.
Moreover, the Administration’s present line is a complete reversal of its previous attitude on budgetary carryovers. At a press conference on April 30, 1953, President Eisenhower said: “No more glaring illustration of the lack of balance between the military logic and the economic logic could possibly be found than the situation that existed when we took office. On the one hand, we found our Allies deploring our unfulfilled defense promises. On the other hand, we found that there was a total carry-over of $81 billion in appropriated funds, largely committed, for which cash must be provided from revenues in future fiscal years, over and above the normal cost of government. It’s just as if the late Administration had gone to the store and ordered $81 billion of goods, which we’ve got to pay for as they’re delivered.”
If Mr. Eisenhower was right in 1953, he is wrong now. A larger appropriation now means that the taxpayers must spend that much more, whether in the next fiscal year or later. Only by rejecting the present demand can Congress hope to control even future foreign aid, not to speak of bringing it to a long-overdue termination. The suggestion of a pledge to continue foreign spending for ten more years is an unwarranted attempt to tie the hands of future Congresses.
2—We have already spent $50 billion of the taxpayers’ money in foreign aid since the end of the second world war. Propagandists for this aid boldly give it entire credit for the postwar European recovery that has taken place. But it could just as plausibly be argued that this recovery would have been faster without it. Certainly it has subsidized and prolonged foreign exchange controls and socialism.
3—As the old excuses for foreign aid run out, our bureaucrats invent new ones. The present somewhat hysterical clamor for it rests on the tacit assumption that allies can be bought if we only raise our price. We are told we must outbid Russian offers of foreign aid. Yet even Secretary Dulles admitted that we ought not “to put ourselves in a position where the Soviets, by just making paper offers, can require us to make real offers to top them. That would mean that the Soviets would be spending nothing except a piece of paper but would require us to spend a great deal of money.” Yet this is precisely what we are doing, for example, in offering American taxpayers’ money to help Egypt build a grandiose dam.
4—The tacit assumption behind nearly all our so-called foreign “economic aid” has been statist or socialistic. It assumes that a nation prospers by handouts, rather than by attracting private investments through encouragement of free enterprise.
5—Even our so-called “military aid” rests on the dubious economic assumption that other countries can not afford to pay for their own defense, and that American taxpayers must assume that burden.
6—The foreign-aid program is merely one more symptom of budget irresponsibility. The Administration is not only asking more for foreign aid, but more for agriculture, more for highways, Federal aid for local schools, and so on. It wants to give other nations more than $4 billion a year, though we groan under onerous taxes, we haven’t yet balanced our own budget and are already $280 billion in debt.
January 23, 1956
President Eisenhower’s State of the Union message calls in substance for the continuance and expansion of the measures and principles of the New Deal-Fair Deal. It asks for increased spending on foreign aid, farm aid, and on a vast highway system; for more housing subsidies, bigger social security, new Federal spending on local schools, “distressed areas,” flood insurance, and health reinsurance. Everybody is remembered but the taxpayer who is to pay the bill.
Most of the estimated 46 or more legislative measures for which the President calls are not only unnecessary, but would do more harm than good. Yet one of the most urgent steps that the new session of Congress ought to take was not even mentioned in the President’s message. This is a measure or set of measures: (1) To relieve the present tremendous burden of work and responsibility on the Presidential office; (2) to allow a President, in case of disability, to delegate whatever powers he thinks necessary to the Vice President, and to terminate this voluntary delegation of power at will; and (3) to provide for the delegation or transfer of Presidential power whenever a President can no longer “discharge the powers and duties” of his office, but is either unable (as was Garfield) or unwilling (as was Wilson) to acknowledge his own inability.
1—The need of reducing the tremendous burdens on the Presidency is acknowledged on all sides. Former President Herbert Hoover, in a recent television interview, made the interesting suggestion that “what we need is a new Administrative Vice President to be selected by the President and assigned such duties as he may wish.” The essence of this suggestion is sound, but there may be wide differences of opinion about details. It would certainly be confusing to have two men with the title of Vice President, one elected as such, and the other an appointed official. It would be perhaps more practicable to permit the President (by written authorization) to distribute much of his present detail work among his existing Cabinet officials, and in addition to permit the appointment (with Senate approval) of a new member of the Cabinet, a Secretary General to whom the President could delegate such other enumerated duties or powers as he thought wise.
Mr. Hoover pointed out that there are now 64 agencies of government that report directly to the President. He thinks that something like 35 or 40 of them could be placed, with the authority of law, under the “Administrative Vice President” he suggests. It would seem even more practical, to the present writer, to abolish some of these 64 agencies of government. The tremendous burdens and responsibilities put upon the President are caused primarily by the fact that our government itself has grown too big. It attempts to meddle in too much. It attempts to formulate and enforce more policies than can be encompassed by the mind of any one man. When this happens, the government is bound to fall into disorder and confusion.
2—As I have already suggested (Newsweek, Oct. 17, 1955), it would seem to come well within the Constitution for Congress by legislation to allow the President, in case of his temporary disability, to delegate as much of his powers and duties as he sees fit to the Vice President, and also to withdraw this delegation when his disability ends.
3—The most difficult problem is that of deciding who should determine Presidential “inability” in the event of a President himself being unable or unwilling to do so. One course which has been suggested is that Congress prescribe by law that the officials named in the Succession Act of 1947 should inquire into such a question when it arises, and either report its findings of fact to Congress, or itself make the decision.
Congress could of course take the first two measures listed above even if it could not agree on the more difficult third problem. But as already demonstrated in the Garfield and Wilson Administrations, Congress is taking a needless risk as long as it allows this important constitutional problem to remain clouded in doubt.
January 30, 1956
The President’s farm message is a strange document, full of contradictions. It opens with an unsparing criticism of the farm price-support program. “Mountainous surpluses overshadow everything else,” because “wartime production incentives were too long continued. . . . Were it not for the government’s bulging stocks, farmers would be getting far more for their product today. . . . Both at home and abroad markets have been lost. Foreign farm production has been increased. American exports have declined. Foreign products have been attracted to our shores. . . . Our farmers have had to submit to drastic acreage controls. . . . Even these controls have been self-defeating.”
The logical conclusion from all this would be to stop government farm price support as soon as feasible. Instead, the President attributes all these evils to the Democratic price-support program at 90 percent of “parity.” He assumes the evils will end under Republican “flexible” price support at 75 to 90 percent of parity. No doubt, at slightly lower artificial price props surpluses may pile up at a less appalling rate than otherwise; but they will pile up. “We must stop encouraging the production of surpluses,” says Mr. Eisenhower; and then endorses a plan which must continue to encourage them.
He realizes this; for he immediately proposes another plan to offset this encouragement. This is a “soil bank,” designed to take at least 40 million of the country’s 350 million acres of crop land out of production. These would be planted to trees or grass. Participating farmers would be forbidden even to graze cattle on any land put in the “acreage reserve.”
In other words, under the price-support program, the farmer is given a subsidy to encourage him to produce surpluses, while under the soil-bank program he would get another subsidy to discourage production of surpluses. He would be offered one handout to increase production and then another handout if he agreed not to take advantage of the first one.
This “solution” is full of question marks. The sheer administrative problem of enforcement of this soil-bank program would be enormous. In one part of the message the President admits that acreage controls are almost worthless. “In 1955, on an acreage allotment calculated to yield 10 million bales of cotton, nearly 15 million were harvested.” In short, production per acre can be increased amazingly—given an artificial price incentive. Therefore, beginning with the crop of 1957, the President suggests quantity allotments for cotton instead of acreage control. But acreage control would also be worthless for other crops as long as their prices are government-supported. The whole plan would lead toward complete regimentation of farming, with each farmer told exactly how many pounds or bushels of every crop he could sell, based on his “historic” production.
The President’s message piles up so many subsidies, handouts, and administrative headaches that it is impossible even to list them here. But he does suggest that Congress “consider placing a dollar limit on the size of price-support loans to any one individual or farming unit. . . . Price-support loans of tremendous size have occasionally occurred.” He doesn’t mention figures, but the records show that payments of more than a million dollars have been made to individual farms for growing cotton that nobody wanted to buy. This is surely carrying “relief” to the “needy farmer” pretty far.
Yet while putting a limit on the size of the price-support check to any one farm may mitigate this scandal, it only underlines the absurdity of the whole price-support program. Something like 85 percent of our total farm output comes from the big, efficient farms that are the main beneficiaries of the program. To continue price support mainly to the small producers would be to subsidize and encourage much costly and inefficient at the expense of efficient production.
But hoped-for political advantage is likely to play a much greater role in any new farm program than probable economic consequences.
February 6, 1956
President Eisenhower has abandoned a philosophy of economy to embrace a philosophy of spending.
The evidence of this reversal lies in his budget message for fiscal 1957—in the overall spending estimates, the detailed spending programs, and in pronouncements in the message itself. In the fiscal year 1953 the government spent $74.3 billion. In fiscal 1954 it spent $67.8 billion; and in fiscal 1955, $64.5. The budget which the President submitted a year ago, for the current fiscal year to end on June 30, estimated spending at $62.4 billion. Now the trend has been reversed. Mr. Eisenhower estimates that in the current fiscal year the government will actually spend $64.3 billion, an increase of nearly $2 billion above his estimate a year ago. In the new fiscal year, to begin on July 1, expenditures are estimated at $65.9 billion.
Less than $1 billion of this increase for fiscal 1957 can be blamed on the increase in military expenditures. Practically every other major category of spending is higher—foreign aid, veterans’ benefits, labor and welfare, farm subsidies, housing subsidies, general governmental expenses. And the new spending programs suggested are too numerous to list here. In order to obtain a substantial surplus in the 1957 budget, or to permit of a substantial tax reduction, it would not have been necessary to find new economies, but merely to refrain from any new spending above that originally contemplated for fiscal 1956.
The reversal in the President’s spending philosophy is apparent in the message itself. “A significant increase in revenues is currently anticipated,” the President declares, “as the result of our present unprecedented prosperity. In the achievement of this prosperity, the historic $7.4 billion tax reduction and reform program of 1954 . . . and the confidence born of prudent fiscal and credit management have been strong energizing factors.” But later on in the message he declares: “Budget revenues now permit us to undertake some new and expanded programs for enhancing opportunities for human well-being and economic growth.” This second passage seems to justify more spending mainly on the ground that the government will have more money to spend. It assumes that the way to prosperity and well-being is not to economize and cut taxes, as assumed in the first passage, but to keep up taxes and add new spending programs. It deserts the philosophy of providing incentives for the philosophy of the handout.
The President’s estimate of a balanced budget for 1957, moreover, is not convincing. I have printed tables several times in this column to show the persistent discrepancy between estimates and realities in the budgets of the Roosevelt and Truman Administrations. Mr. Eisenhower’s record is no better. He originally estimated a deficit for fiscal 1955 of $2.9 billion; it turned out to be $4.2 billion. For fiscal 1956 he estimated that budget receipts would be $60 billion and expenditures $62.4 billion. He now estimates expenditures in fiscal 1956 at $64.3 billion, or nearly $2 billion higher; but the situation is saved because estimated receipts are miraculously $4.5 billion higher.
Now these receipts have come because 1955 turned out to be the year of the greatest prosperity and greatest national income on record. Yet instead of considering this perhaps an abnormally high income, continuance of which it might be imprudent to count on, the President actually assumes that 1956 will be an even more prosperous year than 1955, and that revenues will be $1.8 billion higher. He gets this result in part through the dubious assumption that Congress will approve a $350 million postal-rate increase at this session, although it refused to do so last year. And he makes his fiscal 1957 budget “balance,” also, by providing no funds whatever for the new Federal highway program he is recommending. If his slim and precarious surplus for the fiscal year 1957 is actually to be realized, this whole series of doubtful assumptions must turn out to be right. The country desperately needs a responsible budget system.
February 13, 1956
Like his Budget Message, President Eisenhower’s Economic Report seems to preach two mutually contradictory philosophies at the same time. It pays lip-service to government economy and free enterprise, and ends with scores of recommendations for increased spending and more governmental controls.
It is perhaps forgivable, especially in an election year, that the Administration should congratulate itself on the astonishing economic record of 1955, and imply that the result came about because, as Franklin Roosevelt once boasted, “we planned it that way.” “Full employment, rising incomes, and a stable dollar have been cherished goals of our society. The practical attainment of these ideals during 1955 was the year’s great economic achievement.”
But what caused this result? The report begins, modestly enough, by admitting that “lasting prosperity of the nation depends far more on what individuals do for themselves than on what the Federal government does or can do for them.” It adds: “Today we believe as strongly in economic progress through free and competitive enterprise as our fathers did, and we resent as they did any unnecessary intrusion of government into private affairs.” Then a qualification is added which, as it turns out, practically nullifies this statement. “But we have also come to believe that progress need not proceed as irregularly as in the past, and that the Federal government has the capacity to moderate economic fluctuations without becoming a dominant factor in our economy.”
Under the multitude of measures the report proposes, however, the Federal government would obviously become the dominant factor in our economy. For the President and his economic advisers are now apparently convinced that “wise and timely actions by the government” and “soundly conceived and well-timed governmental policies” can smooth everything out, give us exactly the right rate of growth, and “prevent a minor contraction from turning into a spiraling depression.” In order to do this, it seems that some 53 new laws or policies on the part of the Federal government would be required. Most of these would greatly increase Federal powers. They imply interventions in the private economy at a thousand points, and a constant stream of government subsidies and handouts.
Moreover, even the specific governmental policies proposed contradict each other. This is most clearly brought out in the recommendations for credit controls. The Federal government should be empowered to set “minimum down payments and maximum maturities on installment credit,” because “installment credit sometimes accentuates swings in the buying of automobiles, furniture, television sets, and other consumer durables, thereby exposing the rest of the economy to the hazards of widened fluctuations.”
But the same government that fears the too-rapid growth of installment credit, even when financed by private lenders at their own risk, has promoted an enormous housing boom by itself guaranteeing mortgages on shoestring margins that make the installment-credit terms on automobiles or television sets look like the acme of conservatism. It has forced Americans who want to invest in American corporations to pay down 70 percent of the purchase price, while it uses the taxpayers’ resources to encourage other Americans to buy houses for 7, 5, 2, or 0 percent of the purchase price.
The Federal Reserve authorities, bluntly, have not had the courage to exercise a sufficiently firm control over the total volume of bank credit. They have kept down interest rates below the levels to which they would otherwise have gone. It is this that has encouraged and made possible the huge growth in consumer credit. It is futile economically, and dangerous politically, to give governmental authorities the right to increase the total supply of credit to make it cheaper and easier, and then to ration the oversupply by stepping in to say who shall and shall not have credit and on what terms. This substitutes bureaucratic judgment and favoritism for the judgment of the market place.
February 20, 1956
H.L. Mencken, who died on Jan. 29, was the outstanding American literary critic of his generation, its most influential stylist, its most prominent iconoclast, the chief scourge of the genteel tradition, and a great liberating force.
I devote this column to him in the hope of correcting a persistent misunderstanding about his economic and political ideas. The typical view, reflected in most of the obituaries, is that Mencken began as an archrebel and idol smasher; but that when the New Deal came along, he could not keep abreast of its “progressivism” and its “new ideas”; so the procession passed him by, exposing him as a mere “conservative.”
Those who hold this view have never understood either the real nature of the New Deal, or the real philosophy of Mencken. That philosophy never changed. Mencken was first and foremost a libertarian. That explains his unceasing warfare against censorship and prohibition, and most of his assaults on “democracy”—insofar as that word was used to imply the right of a majority to suppress or persecute a nonconformist minority.
I can speak about his views with a certain confidence, not only because I devoured all his work as it came out, but because of close personal experience. When Mencken nominated me in 1933 to succeed him as editor of The American Mercury, he thought I understood his philosophy and he mine well enough to assure his readers that in the magazine’s “basic aims and principles there will be little change.”
In his political and economic opinions Mencken was from the beginning, to repeat, neither “radical” nor “conservative,” but libertarian. He championed the freedom and dignity of the individual. Therefore he always considered Socialism preposterous. He had never known a Socialist, he was fond of saying, who wasn’t crazy on other subjects as well. One of his very earliest books, Men vs. the Man, published in 1910, was a debate against a Socialist. His famous blast against “this Prof. Dr. Thorstein B. Veblen, head Great Thinker to the parlor radicals, Socrates of the intellectual Greenwich Village, chief star [at least transiently] of the American Atheneums,” appeared, it is important to recall, in 1919, in the very first series of the Prejudices, and at the beginning of the great Mencken vogue.
Veblen remained the darling of the American intellectual left-wingers for at least twenty years longer. When the New Deal was at the height of its power and prestige, it was fashionable to say that Mencken had “missed” Veblen because he could not make him out. Now that the once exorbitant reputation of Veblen is itself rapidly fading, it is perhaps permissible to point out that whatever was sound in his celebrated The Theory of the Leisure Class had already been said, in a few brief paragraphs, by Aristotle; and that Veblen’s attacks on “the price system” came from a man who had not the remotest understanding of that system, or of the role it plays in stimulating, directing, allocating, and balancing production.
Mencken was not a technical economist. He did not possess the specialized intellectual implements necessary to dissect all the Veblenian fallacies. His own essay, in fact, was published a couple of years before Veblen’s “The Engineers and the Price System.” But Mencken had an almost unerring sense of smell. He could usually detect pretentiousness and nonsense at the first whiff. True, his essay begins with an attack primarily upon the professor’s “incredibly obscure and malodorous style.” But when he got to his ideas he excoriated them irreparably, and concluded: “From end to end you will find the same tedious torturing of plain facts, the same relentless piling up of thin and over-labored theory, the same flatulent bombast, the same intellectual strabismus.”
In short, Mencken recognized from the start that Veblen’s ideas were “simply Socialism and water.” He prized human liberty too highly to be carried away by the growing academic mania for collectivism. Like Herbert Spencer, he sensed that “all Socialism involves slavery.” He brought in the minority report.
February 27, 1956
Recent actions and proposals of the Eisenhower Administration with respect to big business are disturbingly like those of the New and Fair Deals. Once more mere bigness is being treated as a crime in itself.
Stanley N. Barnes, Assistant Attorney General in charge of the Department of Justice Antitrust Division, hinted, in a speech on Feb. 8, at the possibility that antitrust action would be taken against the country’s major automobile manufacturers, because the three biggest producers now turn out almost 95.5 percent of the cars. Yet the United States has achieved by far the greatest industrial productivity that the world has ever known. And if one industry stands out above all others as the wonder and envy of other nations, it is our automobile industry. Nowhere is there keener competition in price, quality, and output. The intense competition between companies, in fact, forces competition nearly as keen within companies. The Oldsmobile competes for the consumer’s favor and dollars with the Buick, the Chrysler with the Imperial, the Ford with the Mercury.
But, alas, this intense competition does not fit the Justice Department’s preconceived numerical notions of what competition ought to look like. If there were twenty automobile companies, each doing forever just 5 percent of the business, the department would apparently be satisfied. What alarms it is that a few companies should achieve the goal of competition by being more successful than their rivals and attracting a higher percentage of consumer buying.
Even more disturbing evidence that there is something basically wrong with the Administration’s new attitude toward big business was the announcement by Attorney General Brownell on Jan. 24 of a “consent decree” under which the American Telephone & Telegraph Co. was compelled, among other things, to license 8,600 existing patents to all applicants without royalties. But what is the consistency or sense in granting patents by act of Congress, and then forbidding companies, by bureaucratic decree, to take advantage of such patents? Will the big companies continue to spend as much on research when they know they will be forced to give away what they discover? In the long run, will “consent” decrees of this sort advance scientific and technological progress—or retard it?
A final touch of “antitrust” absurdity is found in the consent decree announced on Feb. 6 forcing the Hilton Hotels Corp. to dispose of two of its 27 hotels within “a reasonable time.” It must sell, for example either the New Yorker or the Roosevelt in New York, so that it will have only four hotels in that city under one management instead of five. Just what will this accomplish? How does the Department of Justice know that in a city containing 400 to 500 hotels, the ownership of just five of them by a single management constitutes a threat of monopoly, but the ownership of four does not? Does the common ownership of five hotels reduce the number of rooms available? Does it make “monopoly pricing” possible? Incidentally, are local hotels in interstate commerce?
Not the least curious thing about this sudden preelection ardor against “monopoly” is that it utterly ignores the most serious monopoly of all—that of industrywide unions. These unions, in the railroad, automobile, steel, or coal industries, can at any time paralyze the economy of the whole nation until their demands are met. Yet instead of showing concern, the government deliberately builds up their power by making it illegal for an employer not to “bargain” with them.
Our antimonopoly laws need thorough revision. They should be clear, general, and, as far as possible, equal and certain in their application. Such vague formulas as “undue concentration of economic power” can mean anything an individual bureaucrat or judge wants them to mean. In the present nebulous and contradictory state of our antimonopoly laws, we are bound to suffer from government by bureaucratic caprice and discrimination. The legal and political consequences of this can be as serious as the economic consequences.
March 5, 1956
Secretary Humphrey showed political courage as well as excellent sense when he refused to endorse the suggestion in the President’s Economic Report for restoration of the government’s power to regulate the terms of consumer installment credit.
The Secretary also gave the right reasons why such stand-by powers would be inadvisable. They would put too much discretion in the hands of whoever was to administer them: “You take a great responsibility on yourself when you tell 160 million people what they can afford to buy.” Chairman Martin of the Federal Reserve Board also pointed out that: “Selective controls of this nature are at best supplements and not substitutes for the general overall credit and monetary instruments.”
The most eminent advocate of the imposition of stand-by controls on installment credit is Allan Sproul, president of the Federal Reserve Bank of New York. In a speech on Dec. 29 he declared: “I do believe that there is a temptation to abuse consumer credit in boom times, that it can thus become a serious source of instability in our economy, and that we would not jeopardize our general freedom from direct controls by giving the Federal Reserve System permanent authority to regulate consumer credit.”
But Sproul’s argument indirectly admits that he wishes this power in order to avoid a sufficiently firm control over general interest rates and the total volume of credit: “If there has grown up a form of credit extension which . . . is introducing a dangerous element of instability in our economy, and if it is difficult to reach this credit area by general credit measures without adversely affecting any of the less avid users of credit is there not a case for a selective credit control?” What Sproul is saying in effect is that a handful of government monetary managers should be given the power to discriminate among borrowers; to say which are “legitimate” and which not; to say just who should have credit and on what terms. No government body should have such power. It becomes an implement for political favoritism.
President Eisenhower declared in a press conference on Feb. 8 that if the government were granted stand-by powers over consumer credit they would not be abused. But the record shows that the “selective” powers over credit which already exist have already been abused. Our Federal Reserve authorities complain of “inflationary pressures.” Yet they keep the official discount rate down to only 2½ percent. (Compare this with Great Britain, which has just been forced to raise its discount rate to 5½ percent.) And they have allowed and encouraged a $12 billion increase in the total volume of money and bank credit since the beginning of 1954.
The government authorities discriminate against purchase of corporate securities by compelling a minimum down payment of 70 percent. They discriminate in favor of purchase of houses by pledging the taxpayers’ money to allow such purchases for a down payment of only 7 percent or perhaps only 2 percent. A Congressional subcommittee has recently raised a storm about even these tiny down payments. It has asked for a return to the conditions under which a veteran could buy a $10,000 house without putting up even the $200 cash now required. The belief that government agencies are above the political pressures which lead to such discriminations among borrowers has been disproved everywhere.
In sum, if general interest rates are allowed to rise to their appropriate level, and if there is a sufficiently firm rein on the total quantity of credit, “selective” credit controls are unnecessary. But if there is not a sufficiently firm rein on the total quantity of money and credit, “selective” controls are largely futile. If a man has $2,500 cash, for example, but can buy a $10,000 house for only $500 down, then he can also buy a $2,000 car with his “own” cash, whereas if he had to pay down his $2,500 for the house he couldn’t buy a car even on pretty loose credit terms. This elementary principle of the shifting or substitution of credit seems to have been overlooked by the champions of “selective” credit controls.
March 12, 1956
President Eisenhower’s veto of the natural-gas bill was confused, irrelevant, and a political blunder. It cannot be defended logically, constitutionally, or economically.
Most of this is clear from the text of the veto message itself. The President declares that “legislation conforming to the basic objectives” of the bill “is needed because the type of regulation of producers of natural gas which is required under present law will discourage individual initiative and incentive to explore for and develop new sources of supply. In the long run this will limit supplies of gas, which is contrary not only to the national interest but especially to the interest of consumers.” That accurately sums up the economic need for the bill.
In addition the President might have asked whether the Federal government has any business regulating the price of a commodity before it enters interstate commerce, and whether the Supreme Court, in its 5-to-3 decision of June 7, 1954, did not usurp legislative functions and flout the plain intent of Congress itself. Congress specifically exempted from the provisions of the Natural Gas Act of 1938 “the production or gathering of natural gas.”
But the President deliberately set aside the merits of the case, and the interests of more than 20 million consumers, in order to punish the “highly questionable activities” of a few “private persons, apparently representing only a very small segment of a great and vital industry.”
The only proper procedure was to decide each question—the question of natural-gas regulation, and the question of improper influence on Congress—on its own merits. That is what the Senate majority tried to do. By the President’s own admission, he is punishing some 8,000 natural-gas producers and more than 20 million consumers, continuing a practice that is more dubious constitutionally, and supporting an indefensible Supreme Court decision, all because one gas producer had acted improperly and stupidly in trying (unsuccessfully) to influence one or two votes in Congress.
The President’s veto message, unfortunately, did more than this. His veto was based on “efforts I deem to be so arrogant and so much in defiance of acceptable standards of propriety as to risk creating doubt among the American people concerning the integrity of governmental processes.” But it was the President’s veto message itself that did most to cast doubt on “the integrity of governmental processes.” For the Senate voted after the facts in the Case affair had been publicly aired—by the Senate itself. The vote was not along party lines. Thirty-one Republicans voted for the bill and fourteen against it. Twenty-two Democrats voted for it and 24 against it. By implication the veto message threw doubt on the motives of the majority that voted for the bill—though there was also a powerful lobby against the bill.
The economic and constitutional case in favor of the bill is overwhelming. There is no argument against the Federal regulation of some 110 interstate pipeline companies, and local regulation of some 1,200 public-utility gas companies; but under the present Supreme Court decision the Federal government is regulating some 8,000 intensely competitive producers who take a great risk every time they dig an exploratory well. (Over a period of years producers are estimated to have drilled an average of eight exploratory “dry holes” for each successful one.)
It is estimated, moreover, that 90 percent of the gas bill paid by the ultimate consumer goes to the pipeline company and the local public utility to cover the cost of transmission and distribution. In other words, even if the producer gave his gas away, absolutely free, the average household consumer could cut his gas bill only about 10 percent.
Finally, if gas prices can be regulated by the Federal government at the individual well, it is certainly as logical for it to regulate petroleum prices locally—not to speak of coal, farm products, automobiles, or anything that eventually finds its way into interstate commerce.
March 19, 1956
It is still too early to say precisely what effect the willingness of Mr. Eisenhower to run for a second term will have on the future of business.
We cannot judge too much from recent mercurial reactions of the stock market. At the moment the most probable outlook is for a race between Mr. Eisenhower and Stevenson. But it is far from certain that the outcome will be the same as four years ago. Mr. Eisenhower’s personality and policies are better known to the voters now than they were then. The impression left by his personal earnestness, candor, dignity, sense of duty, and absence of malice is perhaps even more favorable now than in 1952. But his reputation as an efficient administrator, or as a statesman with a firm grasp of political and economic principles, has considerably diminished. And any turn for the worse before November in either the domestic or the foreign situation will hurt his chances.
He started off well. He promised a drastic reduction of governmental expenditures, and a balanced budget. He ended a stalemated war in Korea. He removed price controls. But in the last year—and especially since his heart attack—his program has turned more and more into a mere extension of the political and economic policies of the New Deal. Details of the drift toward “ever-expanding Federal power and paternalism” were summarized in this column of Aug. 22 last. Recent developments have emphasized present New Deal tendencies in foreign aid, farm aid, housing aid, loose fiscal policy, big spending, and money and credit expansion to sustain an inflationary boom.
The net result of these recent policies and tendencies has been to alienate the conservative Republican vote, which constituted a large and perhaps determining factor in the election of 1952. In recent months, moreover, Mr. Eisenhower and his aides have made several grave political blunders. The two most important were Secretary Dulles’s inept “brink of war” interview, and Mr. Eisenhower’s illogical veto of the natural-gas bill in a message which cast doubt upon the integrity of the votes of the very senators who thought they were supporting him.
As a result of all this, it is extremely doubtful that the Republicans can win a majority in the forthcoming Congress. It is even far from certain that Mr. Eisenhower can win the election against Adlai Stevenson. For even if neither side were to say another word about it, Mr. Eisenhower’s heart attack is bound to be an important issue in the campaign. The voters are certain to weigh much more heavily than they usually do the possibility that the Vice Presidential candidate may become the President. Stevenson, on his side, is a very articulate, astute, and ruthless campaigner, adroit in making mountains even out of molehills. It would be the height of folly for the Republicans to ignore Senator Knowland’s warning that in the forthcoming election “not a thing can be taken for granted.”
Mr. Eisenhower, again, is repeating and magnifying the very blunder that defeated Governor Dewey in 1948. This is the blunder of presenting to the electorate a halfhearted copy of the New Deal, on the theory that this will capture the “middle of the road” voters, and that the regular orthodox Republicans have “no place else to go.” These voters, however, did and do have one place not to go—and that is to the polls. They refrained from doing so in the millions in 1948. That is what defeated Dewey.
In sum, in a race today between Eisenhower and Stevenson, the voters would be presented, so far as policy is concerned, only with a choice between the original New Dealer and their Johnny-come-lately imitators. Those voters who look with concern upon the steady growth of centralized government, of paternalism, of big spending, of subsidies for every pressure group, of continued inflation, and the steady erosion of states’ rights, will have no candidate who reflects their views—except in the improbable event of the formation of a third party of conservatives drawn from both the Republican and Democratic ranks.
March 26, 1956
Any farm legislation likely to emerge from the present Congress gives no promise of solving the farm problem. Its most probable result will be to make the problem much worse.
The Administration won a victory when the Senate voted to retain flexible price supports of 75 to 90 percent on most “basic” commodities, and defeated the effort to restore rigid 90 percent supports. But the Administration paid an excessive price for this “flexibility” by offering all sorts of concessions and new subsidies in order to win it. And it suffered a stunning setback in the discriminatory “two-price” vote for wheat.
In his farm message of Jan. 9 President Eisenhower correctly pointed out that “mountainous surpluses overshadow everything else. . . . Were it not for the government’s bulging stocks, farmers would be getting far more for their product today. . . . Even [acreage] controls have been self-defeating.” He therefore proposed that, in addition to continuing to offer a subsidy to the farmer to overproduce, the government should try to offset this by offering him still another (“soil bank”) subsidy for not producing. “I do not propose this program,” he said, “as a device to empty government warehouses so that they may be filled again. There is, therefore, a basic corollary to the acreage reserve program: In future years we must avoid, as a plague, farm programs that would encourage the building up of new price-depressing surpluses.”
There is every reason to suppose, however, that the new price-support legislation would continue to encourage the building up of price-depressing surpluses and would keep the government warehouses filled. It seems likely to prolong the burden on the country’s food consumers and taxpayers, lead toward increased regimentation of farming, and create further ill will by threatening the price stability of foreign-grown farm products. In brief, this country would be better off without these proposed changes in farm legislation.
There is only one certain way to stop the building up of demoralizing surpluses. This is to halt the price supports that encourage the production of such surpluses. If even “moderate” price supports are continued, they should in no case apply to any new crop as long as the government still holds a surplus of any past year’s crop. If the government were to support wheat (or any other crop) even at 76 percent of “parity,” for example, it should be free to resell its holdings in the open market at, say, 77 percent of parity (plus storage and handling costs). Whenever the 76 percent “floor” was reached, farmers would be automatically put on notice that no price supports would apply to any new plantings of wheat until the government had got rid of accumulated surpluses. The farmer would have to plant and dispose of any new crop entirely at his own price risk. This is the only type of price-support program that would not risk foreign resentment or the accumulation of mounting surpluses from year to year.
It is probable that only a drastic program could extricate farmers and the government from their present predicament. The surpluses of each crop could either be given away to the individual farm unit in proportion to its “historic” annual production, or sold to it at a price substantially below the world price. Each farmer could then make his own decision whether to resell his allotted share of the surplus immediately, or hold it for a rise at his own cost and risk. Any new market price so established would doubtless discourage new production for a year or so; but the farmer would be compensated financially by the share of the crop surplus either given to him, or sold to him, below world prices.
The farm problem has become so grave as a result of the high government price supports of the last seven years that nothing short of some such bold slashing of the Gordian knot could restore orderly, balanced production and free markets. But instead of arranging to terminate government price supports and surpluses, both parties have been competing with each other to pile up new subsidies.
April 2, 1956
The proposal that the U.S. Government and its agencies pour hundreds of millions of our taxpayers’ dollars into a grandiose dam in Egypt has at least one merit. It illustrates almost every bad principle involved in our foreign-aid program.
1—The High Dam at Aswan is to be more than 3 miles long, to cost $1.3 billion (at least half of Egypt’s estimated national income), and to take some fifteen years to build. Our proposed aid is called “economic”; but indirectly it is military aid. The less the Egyptian Government needs to lay out for its own dam, the more funds it will have left over for buying armaments. When the dam is completed it will no doubt supply power to create still more armaments.
2—This is one more plan for our government to subsidize foreign state socialism. The Aswan High Dam is doubtless inspired by the Dneprostroi dam and hydroelectric plant, the prewar pride of Soviet Russia, which also inspired our own TVA. The Dneprostroi dam was not justified by economic results. (See Boris Brutskus, Economic Planning in Soviet Russia, 1935.) State-directed “industrialization” programs are usually disguised militarization programs.
3—One of the originally declared objectives of the Marshall and other foreign-aid programs was to “combat Communism.” Yet this money and aid are to be given to a country that is buying arms from Communist countries and pursuing foreign policies that coincide with the purposes of those countries. One of the favorite arguments for our foreign aid is that it tends to halt Communism by providing foreign countries with higher living standards. This is a naïve belief. In the decade since the second world war there is no evidence that higher living standards, when achieved, have been accompanied by marked decline in Communist sentiment.
4—Our foreign-aid program, both directly and indirectly, tends to discourage and delay a return to the principles of free enterprise in foreign countries. We do not encourage free enterprise by subsidizing socialistic ventures. Moreover, when we so freely offer government-to-government loans or gifts we make it unnecessary for “underdeveloped” countries to undertake the reforms or give the assurances calculated to attract private capital, either native or foreign.
5—Another favorite argument for our foreign-aid program has been that it is needed to win “allies” Experience daily shows however, that our foreign aid often has precisely the opposite effect. The countries that are gracious enough to accept our handouts insist that there must be “no strings attached.” In plainer words, our money must be given to then unconditionally. In consequence, we have abandoned even the most essential conditions. Only a few days ago Secretary Dulles announced that “there is no connection what so ever” between giving U.S. economic aid and securing U.S. allies. He went on to point out that Pakistan had security arrangements with the U.S. but not India or Ceylon; yet all three are receiving U.S. aid. Our foreign aid advocates begin to remind us of Santayana’s definition of a fanatic—one who redoubles his efforts when he has forgotten his aim.
6—The Administration cites the Aswan-dam project as an illustration of why Congress must give at least moral if not legal assurances that our aid will be continued over a period up to ten years. But that project seems to illustrate precisely the opposite. If we commit ourselves to continued aid regardless of what policy the Egyptian Government follows, we lose whatever chance we might otherwise have of exercising any control for peace. Our one hope of retaining control would be to leave the Egyptian Government in constant doubt regarding the next year’s handout.
Not that even this policy is here recommended. We have already thrown away the tremendous sum of $50 billion in foreign aid since the end of the second world war. Judged by its originally declared objects, never has so much accomplished so little. It is sad to speculate on how much more we could have got for that $50 billion if we had been permitted to spend most of it at home!
April 9, 1956
Last week I cited here the proposed Aswan High Dam in Egypt as an embodiment of the most dubious principles involved in our foreign-aid program. A foretaste of the probable consequences of financing this program by American fiscal agencies is supplied by what has already happened to the Helmand Valley Irrigation Project in Afghanistan. The consequences of this were described by Peggy and Pierre Streit in The New York Times Sunday Magazine of March 18. This is the largest American-financed and constructed development in Asia. Conceived as a boon to the people of Afghanistan, it “has today placed a dangerous strain both on the Afghan economy and on the nation’s morale.”
The project was envisioned as providing a firm water supply, hydroelectric power, flood control, and land development. The U.S. Export-Import Bank dropped loans of $40 million into it. But we have found no Afghans trained to operate it. The Afghan Government has found its share of the cost “a bitter burden that seriously threatens the Afghan economy.” And there are many who think that the project “may have unwittingly and indirectly contributed to driving Afghanistan into Russian arms.”
The previous history of our foreign-aid programs all over the world, in fact, raises the most serious questions about President Eisenhower’s message asking for a total of $4.9 billion new foreign-aid appropriations for the new fiscal year:
1—“We cannot now falter in our quest for peace.” We cannot. But this begs the real question at issue, which is whether our foreign-aid programs actually contribute to security and peace. We should not confuse obvious goals with dubious means. The most dangerous aspect of the foreign-aid program is that it creates the illusion we are “doing something,” and diverts attention from the real measures that need to be taken. Do we solve every problem by giving away more of the American taxpayers’ money?
2—“We must continue to stimulate expansion of trade and investment of the free world.” Is a foreign give-away program the sound way to do it?
3—“We have . . . no purpose to change their [other people’s] chosen political, economic, or cultural patterns.” Yet unless most of the governments to which we are giving handouts change from socialistic to free-enterprise policies, our help is worse than useless in bringing permanent improvements in living standards.
4—Asiatic and other nations “are striving to create the standards of living under which their economies can develop.” A worthy goal. Any American who wishes to make a voluntary contribution to it is free to do so. But what is the ethical basis for the notion that our government bureaucrats must force our taxpayers to turn over their hard-earned money to relieve foreign taxpayers and to raise foreign living standards? Why must we have a guilty conscience because we produce more than foreign nations?
5—“Military grant assistance is still necessary in most countries to assist them in maintaining equipment and replacing materiel lost by attrition. . . . Military assistance in Latin America should be continued where needed in order to provide standardized equipment,” etc. Some nations are no doubt unable to manufacture their own arms. But why must U.S. taxpayers pay for the armament of other countries? Some areas, such as Korea and Formosa, undoubtedly need our help. But most countries honestly determined to resist Communist aggression can afford to pay for their own armament. If they can’t make it themselves, they can buy it from our government, at cost.
6—The President’s message mentioned that in the last two fiscal years there has been a “reduction in unexpended balances” for foreign aid of $2.5 to $3 billion. Yet as of Jan. 1 last there was still an unexpended foreign aid balance of $9 billion. Why didn’t the President’s message mention this amount also?
7—Is it either wise, or in accordance with the spirit of our Constitution, to ask one Congress to commit its successors to any long-term foreign aid program?
April 16, 1956
Many members of Congress are becoming increasingly skeptical about either the need or wisdom of further foreign “economic” aid. But most of them continue unhesitatingly to endorse further “military” aid. Is the difference very real?
The truth is that one kind of aid can easily act as a substitute for the other. When we relieve another nation of the need to pay for its own defense, we in effect give it just that much more funds to spend, say, on economic “welfare” schemes. Failure to recognize this substitutability of foreign aid has led to much mental confusion. “Military” aid is not in fact solely a military question. It is primarily an economic question. The chief question is not, How much defense does Ruritania need? but, Why can’t Ruritania afford to pay for its own defense? Why must that burden fall on the American taxpayer?
I present below a table showing the latest fiscal year’s armament expenditures of fifteen of our aid beneficiaries stated as a percentage of (1) their total central governmental expenditures and (2) of their gross national product. The record of these countries is compared with our own.
While such international comparisons cannot be precise, they are accurate enough to furnish much instruction. Comparing the overall dollar figures, for example, the United States alone is spending on national defense three times as much absolutely as these fifteen nations combined! (Some $39.7 billion against a total of $13.4 billion.) We are also spending much more relatively—10.2 percent of our gross national product against an average of 6.6 percent for these fifteen beneficiaries.
The United States, which is giving the defense aid, is spending some 62 percent of its total budget on defense, whereas these thirteen countries receiving aid (if we omit for the moment Formosa and Yugoslavia) are spending on the average only some 26 percent of their total central government budget on defense. This is another way of saying that while we in the United States can afford to spend only some 38 percent of our total budget on nondefense items, these thirteen beneficiaries of arms aid are spending some 74 percent of their total budgets on nondefense items.
DEFENSE EXPENDITURES
| Country | % of Total Expenditures | % of Gros National Product |
| Belgium-Luxembourg | 18.3 | 4.1 |
| China (Formosa) | 59.0 | 12.0 |
| Denmark | 20.4 | 3.3 |
| France | 27.6 | 7.3 |
| Germany | 23.9 | 4.1 |
| Greece | 33.2 | 6.5 |
| Italy | 22.0 | 4.1 |
| Japan | 12.0 | 2.0 |
| Netherlands | 22.6 | 6.0 |
| Norway | 26.8 | 4.5 |
| Portugal | 33.6 | 4.5 |
| Spain | 31.6 | 4.5 |
| Turkey | 35.2 | 5.7 |
| United Kingdom | 31.2 | 8.9 |
| Yugoslavia | 77.5 | 11.6 |
| United States | 61.7 | 10.2 |
This relationship can hardly be excused on the plea of poverty. Among the countries that are spending relatively most on defense are Greece, Turkey, and Formosa. (It is only fair to add that they are doing this partly because of our defense aid.) The outstanding exception of Yugoslavia is not reassuring. It is frankly a Communist country. We are unlikely to find it on our side when the chips are down.
Is it a good idea for us to rob our own defense, in order to pay for part of the defense of countries that are comparatively indifferent about their defense or do not take the Communist military threat very seriously? Instead of our contributing nearly $3 billion to these countries for their defense, why wouldn’t it be a good idea simply to suggest to most of them that they transfer part of the total of $36.1 billion they now spend on non-defense items to their present modest $13.4 billion for defense?
April 23, 1956
The new farm bill is a shameless monstrosity. During debate on it the “farm bloc” itself was torn into a dozen haggling special commodity blocs. Wheat-belt congressmen voted for a two-price system for their commodity, but not for corn or cotton. Southern congressmen voted for “parity” supports that discriminated in favor of cotton. And so on around the circle, in a sordid scramble for local votes. Neither party did anything to be proud of. But one thing at least was accomplished by this spectacle. It should stand as a classic illustration to the American people of what inevitably happens when class legislation is either asked for or tolerated; of what inevitably happens whenever the principle of the free market is abandoned for government “economic planning.”
The whole notion of government-enforced “parity” prices or income for “agriculture” is a pious fraud. No doubt when it was first proposed it had a certain superficial plausibility. If “agriculture” were not kept prosperous by government subsidy, how could “industry” prosper?
The weaknesses in this idea became evident the moment a serious effort was made to apply it. Why should one section of the population alone (about one eighth of it) get guaranteed prices not granted to every other section? If farmers perform an “essential” service, so do doctors and nurses and teachers, scientists, reporters, and plumbers. Where can one draw the line?
As a matter of fact, as soon as Congress got down to cases, the costliness and impracticability of granting “parity” even to “the farmers” were seen to be so great that discrimination immediately began even as between farmers themselves. Congress decided to guarantee “parity” only for half-a-dozen “basic” commodities. How peculiar the definition of “basic” was, can be seen when we list the so-called basic commodities and the percentage of the total cash receipts from agriculture that each of these commodities represented in 1954: Cotton, 8 percent; wheat, 6.6 percent; corn, 4.6 percent; tobacco, 3.8 percent; rice, 0.8 percent; peanuts, 0.4 percent; total, 24.2 percent.
Altogether, the so-called “basic” commodities account for less than a quarter of the total direct cash receipts of the nation’s farmers. On the other hand, cash receipts from livestock and their products constituted in 1954, 55.3 percent of the total. Cattle and calves alone accounted for 16.9 percent of the total, dairy products for 13.7 percent, poultry and poultry products for 10.6 percent, and hogs for 12.1 percent. But the producers of these latter products got no advantage from the price support of the “basic” commodities. On the contrary, this price support for the “basic” commodities increased the feed costs and the price-cost squeeze on the producers of livestock and livestock products.
The biggest joke in the “basic” commodity list is peanuts. They account for only four tenths of 1 percent of total farm cash receipts, as compared with twice as much from oats or barley or potatoes, or with six times as much from soybeans. Politics are fearful and wonderful.
All price-supported commodities together, in fact, account for only 45 percent of gross farm receipts. Support for one commodity producer, as we have just seen, increases the production costs of other farm-commodity producers. The government is forced to order acreage reductions on price-supported commodities to mitigate the surpluses that supports would otherwise create. In 1955, 28 million fewer acres were planted to wheat and cotton than in 1953. But as a result 23 million more acres were planted to oats, barley, soybeans, sorghum grain, and other sorghums. So the previous producers of all these latter crops were just as much injured by this diversion as the producers of the so-called basic crops were “helped.”
These are only a few random examples of the distortions of prices, production, and income that are inevitably brought about by governmenmental controls. Farmer Peter victimized to “aid” farmer Paul.
April 30, 1956
President Eisenhower showed political courage in vetoing the hodgepodge farm bill. He made an excellent analysis of its worst provisions and contradictions. And then, by administrative action, he canceled out half of his own courage and argument.
Mr. Eisenhower correctly pointed out the four main provisions that made the bill unacceptable: “(1) The return to a wartime rigid 90 percent of parity supports for the basic commodities; (2) dual parity for wheat, corn, cotton, and peanuts; (3) mandatory price supports for feed grains; (4) multiple-price plans for wheat and rice.” The effect of these provisions, he pointed out, would be to “increase the amount of government control and further add to our price-depressing surpluses.”
The provision for dual parity, for example, would result in a permanent double standard of parity for determining price supports. Four crops would receive preferential treatment out of 160 products for which parity prices are figured. And the bill “would hurt livestock farmers more than it would help them—although well over half of farm income is from livestock.”
The President rightly trained his main battery on the effort to go back to rigid wartime price supports at 90 percent of parity. The bill, he pointed out, would not help solve “the real problem—the surpluses which hang over the market and push down farm prices.” On the contrary, it would “set in motion forces designed to produce more of certain crops at a time when we need less of them.” It “would encourage even more surpluses; more surpluses which we cannot use . . . more surpluses which build up faster than we can dispose of them . . . more surpluses which would further depress farm prices in the market.”
But after having made this eloquent analysis, the President himself then announced that in 1956 “we” would set price supports on five of the basic crops—wheat, corn, cotton, rice, and peanuts—“at a level of at least 82½ percent of parity.” He named minimum support levels that would result in a national average of $2 a bushel for wheat and $1.50 a bushel for corn. He promised high price supports on cotton and peanuts, and increased price supports on manufacturing milk and butterfat. He has well over $400 million for that purpose, he declared.
Then he went on to ask for his soil-bank program, nevertheless, with payments that “could add up to as much as an additional $500 million” to farmers this crop year. The government is already holding the tremendous amount of $8.9 billion of unsalable farm commodities. This is in itself conclusive evidence that even the present “flexible” scales of 75 to 90 percent of “parity” is far too high. The prices announced by the President would in all probability force the surpluses still higher. Just how low price supports would have to be set now to make it possible to work off surpluses is hard to say. It is instructive to recall at this time that the Agricultural Adjustment Act of 1938 adopted price supports ranging from only 52 to 75 percent of “parity.” No one would have the courage to propose such moderate supports today. Yet even these price supports led to the accumulation of burdensome surpluses.
The proposed addition of a huge soil-bank subsidy even to prevent government price-support subsidies looks more like an election-year scheme than an economic solution. It would simply add a subsidy not to produce to the existing subsidies that encourage overproduction. Once we adopted such a soil-bank program we would probably never be able to get rid of it.
Nothing less seems likely to get us out of a hopeless farm mess today than the complete termination of the whole “parity” fraud. One step in doing this would probably have to be to give back the present farm surpluses in storage to the farmers who produced them, or to sell them back at less than it would cost farmers to produce more. The farm program today is a classic illustration of what inevitably happens when the principle of the free market is abandoned for government “economic planning.”
May 7, 1956
Keynesism—the philosophy of big government spending, deficit financing, and continuous inflation—today dominates the policy of nearly every government in the world. Yet developments in the last few years have destroyed its central prop.
The disciples of Keynes disagree among themselves about what the chief contribution of the master really was. Yet most of them would probably agree with his leading American disciple, Prof. Alvin H. Hansen, that “Keynes’s most notable contribution . . . was his consumption function.” In 1936 in his famous General Theory of Employment, Interest, and Money, Keynes declared that there is a “fundamental psychological law, upon which we are entitled to depend with great confidence . . . that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.” He went on to call this “law,” rather pretentiously, the consumption “function.” Keynes’s great “discovery,” in short, was that if we knew what national income was going to be we could tell from a curve or a mathematical formula what consumption was going to be.
Of course, from time immemorial it has been a truism that most families spend most of their income. Official statistics for the last eight years, for example, show that on the average in that period Americans spent about 93 percent of their annual income on personal consumption and save only about 7 percent of it. So if you knew what personal disposable income were going to be next year, it would be hard to make too great a percentage error in predicting what consumption expenditures were going to be. It would be much easier, however, to make a substantial percentage error in predicting what saving was going to be, because saving is comparatively such a small figure.
I append at the bottom of this article a table showing (in billions of dollars) the nation’s disposable personal income for the last twelve years, the amount of personal savings, and saving as a percentage of disposable income. Now Keynes’s great “law” is that consumption does not increase in proportion to income, and therefore savings increase proportionately more than income increases. The events of 1955 were in themselves a crushing contradiction of this “law”. Disposable income increased by $14.6 billion, but savings fell by $1.2 billion. The total percentage of saving to disposable income fell from 7.2 to 6.3. The same thing happened between 1953 and 1954. Disposable income went up, $4.4 billion, savings down, $1.5 billion. Out of the last eleven years, in sum, Keynes’s “law” worked in four and was reversed in seven.
| Year | Income | Savings | Savings as % of Income |
| 1944 | $146.8 | $36.9 | 25.2 |
| 1945 | 150.4 | 28.7 | 19.1 |
| 1946 | 159.2 | 12.6 | 7.9 |
| 1947 | 169.0 | 4.0 | 2.4 |
| 1948 | 187.6 | 10.0 | 5.3 |
| 1949 | 188.2 | 7.6 | 4.0 |
| 1950 | 206.1 | 12.1 | 5.9 |
| 1951 | 226.1 | 17.7 | 7.8 |
| 1952 | 236.7 | 18.4 | 7.8 |
| 1953 | 250.4 | 19.8 | 7.9 |
| 1954 | 254.8 | 18.3 | 7.2 |
| 1955 | 269.4 | 17.1 | 6.3 |
I may be accused of unfairness for including the enormous savings in 1944 and showing their decline in 1945, 1946, and 1947 in spite of substantial rises in disposable income in each year. It will be said that savings were heavy in 1944 and 1945 because they were war years and consumer goods were not available. Precisely. But this only underlines the fact that Keynes’s “law” is no law, and that the relationship of spending and saving does not depend solely on total income changes but on innumerable factors. Savings may depend less on what people earn today than on what they expect to earn tomorrow. Their spending this year may depend to a large extent on whether they expect the prices of the things they want to buy to be higher or lower next year. People may buy on impulse, or refrain from loss of confidence. In short, experience and statistics fail to support the main Keynesian tenet; and the Keynesian logic is a rope of sand.
May 14, 1956
In the issue of Jan. 30, Newsweek carried an amusing and instructive article on how far wrong the economic forecasters went at the end of 1954 in predicting what was going to happen in 1955. The moral was that forecasting is not a science.
This is completely true. This column, in fact, has gone farther, and has contended (see Newsweek, Jan. 9, 1956; Jan. 3, 1955; Nov. 22, 1948) that not only is economic forecasting not an exact science yet, but from the very nature of its subject can never be. Ludwig von Mises, in an excellent article in National Review of April 4 last, concisely explained why this is so. Economics, because it deals primarily with human choices, decisions, and actions, cannot be a “quantitative” science. Statistics have a limited value because they necessarily refer to the past only. Knowledge of the future can never be firmly assured by charts or curves “extrapolating” some recent trend. And it is merely of negative help to the speculator or businessman even to guess the future correctly unless his correct guess is shared only by a few. For in the economic field expectations concerning the future themselves help to determine that future.
Yet when all this has been said, all of us must forecast. For we are daily forced to act on some expectation regarding the future. Therefore, a recent carefully compiled and sensibly reasoned study of 76 pages, “Forecasting in Industry,” published by the National Industrial Conference Board, can be read with profit, as much for the negative as for the positive lessons that it has to teach.
As the study declares in a foreword: “Forecasting is a rudimentary and essential element of business. An appraisal of future prospects, whether based on study, judgment or hunch, is inherent to financial planning, appropriating capital, timing purchases, setting production and inventory levels, directing sales. . .”
The study then goes on to discuss the various methods of forecasting actually used in business. Among these are: (1) The “Jury of Executive Opinion Method.” This is merely a process of combining and averaging the views of top executives. It has its merits, though “in some companies the process amounts to little more than group guessing.” (2) The “Sales Force Composite Method.” This is more of a “grass roots” approach, but it also has its disadvantages, one of which is that salesmen often tend to be either too optimistic or too pessimistic according to immediate conditions. (3) Next we come to the use of various statistical methods, including correlation analysis, trend and cycle projections, and mathematical formulas. These have the advantage of being “measurable” and “objective,” and of “quantifying” their conclusions. But they are full of traps for the unskilled and unwary.
Take correlation. As the Conference Board’s study admits: “Good correlations occasionally result from coincidence rather than from logical cause and effect or from any direct relation between the two factors. . . . The great disadvantage of correlation analysis is the danger of relying too heavily upon the statistical method and a tendency when using it to neglect independent appraisal of future events.” But isn’t this a way of admitting that it isn’t so much statistics or mathematical relationships that enable us to forecast the economic future as sound prior reasoning that leads us to select the right statistics?
An instructive case in point is the American Radiator Co. It discovered years ago that there was “a good correlation between the F.W. Dodge figures on residential building contracts awarded and sales of its plumbing products.” It found that residential contracts led its sales by about four months. But, as homes always need plumbing, it was obviously common sense, and a prior knowledge of cause and effect, that led company officials to look for this correlation. To sum up, statistics may often be helpful, but may also be treacherous. They can never take the place of shrewd judgment, good sense—and a large measure of good luck.
And now that you know all the secrets, you too can forecast.
May 21, 1956
The steady shower of criticism that has beaten upon the Federal Reserve authorities since they increased prevailing discount rates to 2¾ percent in April reveals the strength and extent of the inflationary sentiment that has developed in this country.
The criticism has come both from within and outside the Administration. Treasury Secretary Humphrey and Dr. Arthur Burns, the President’s chief economic adviser, were reported to be opposed to the increase. Commerce Secretary Weeks and Labor Secretary Mitchell have publicly questioned its wisdom or necessity at this time. State and city officials complain that it will raise the cost of their borrowing. Builders and other businessmen are grumbling. And of course inflationists are raising cries of alarm.
President Eisenhower, however, in two press conferences, has stoutly maintained the political independence of the Federal Reserve authorities. It is good to have this independence reaffirmed. But it is perhaps even more important to point out that the decision in favor of monetary restraint is the right one, and the only safe one at the present time.
William McChesney Martin, Jr., the chairman of the Federal Reserve Board, has made an excellent defense of this decision. “We fight inflation,” he declares, “partly because it is the forerunner of deflation. . . . If I thought inflation would create jobs and prosperity, I might be for it. But I am convinced that, apart from transitory effects, the result of inflation is destruction of jobs and prosperity.”
It is also heartening to report that two of the largest banks in New York, the Guaranty Trust Co. and the First National City Bank, have made admirable defenses of the Reserve banks’ increase in interest rates in their May letters. The Guaranty Trust points out that much has been made of the fact that the latest advance carried the prevailing discount rate to the highest level in 23 years. But what most commentators do not mention, the Guaranty Survey goes on to point out, is that the present rates, viewed in a longer perspective, “are not high but low. Not until 1930 did any Federal Reserve discount rate go below 3 percent. . . . Only by comparison with conditions during and since the depression are current rates high. . . . A rise in money rates usually indicates an increasing utilization of available credit resources and a corresponding need for restraint. Under such conditions, a refusal to follow the market would amount to positive intervention on the side of easy money, overexpansion of credit, and inflation.”
Both the Guaranty and National City letters then go on to point out the numerous indices of present-day inflation. “Excessive borrowing, pressure at bottlenecks, rising wages and prices,” declares the National City, “are all evidence that people are trying to get more out of the economic organization than it can presently produce. This is the general situation, despite the soft spots, and it is the essence of the inflationary trend.”
In fact, the Keynesian game of “cheap money forever” shows signs of playing itself out. cheap money and inflation can work their apparent miracles only as long as creditors do not expect further inflation. As soon as they do expect it, they demand much higher interest rates to compensate for real capital losses. Higher interest rates are now worldwide. The Bank of England’s discount rate is now 5½ percent. The chief remedy required here at home is to restore confidence in the dollar.
The case for monetary restraint was summed up impressively in the President’s latest annual economic report: “Success in preventing depression depends in large part upon a willingness to avoid the excesses that can so easily develop during prosperity. . .. If credit on easy terms were available to everyone at a time when the economy is already working close to capacity, the consequence would be a scramble for limited resources and a cumulative bidding up of prices. . . . A government that sought to prolong prosperity by such devices would be taking a road that all too often has ended in disaster.”
May 28, 1956
In its last annual report the U.S. Steel Corp. described what has been going on in the United States in recent years (and for that matter in nearly every country in the world) under the illuminating phrase, “institutionalized inflation.”
The U.S. Steel report began by citing what appears to be a “permanent and alarming peacetime trend of cost and price inflation.” Its employee cost per employee hour, for example, between 1940 and 1955, showed an increase averaging 8 percent a year compounded. This, and an even greater percentage rise in other costs, has forced the steel industry to raise steel prices and “thereby pass on to buyers of steel part of the underlying cost of inflation.” Prices of steel-mill products, as a result, increased 119 percent between 1940 and 1955.
THE TWO BASIC ROOTS
The company then went on to describe the “two basic roots” of this “inflationary tendency”: “The first one is the institution of industrywide labor unions, headed by leaders who, with power to bring about industrywide strikes, seek always to outdo each other in elevating employment costs in their respective industries. The legislative and social framework within which they function compels them to compete in elevating this basic cost.
“The other root is the government’s ‘full employment’ policy under which the money supply must be inflated fast enough to accommodate the inflating employment cost, lest that mounting cost bring about its natural result of pricing some people out of their jobs, even though only temporarily. It takes ever more dollars to cover ever-rising costs and prices if industry’s full output is to be purchased. The money supply—people’s bank deposits subject to check plus their pocket currency—was in 1955, on a per capita basis, 2.7 times what it was in 1940. This is equivalent to 6.8 percent per annum compounded.
“The abuse of labor monopoly privilege and the monetary policy that transfers to the public in higher prices the penalty of that abuse appear to be the main elements of institutionalized inflation. It would be helpful in this regard if those responsible for determining wage costs and fiscal policies were constantly aware of the inflationary potentials of their decisions.”
This is an excellent compact description of what has been happening. But it is important to be clear concerning the precise chain of cause and effect, and not to confound the two. The direct cause of inflation is always an increase in the quantity (as well as a depreciation in the quality) of money and bank credit. This is almost wholly controllable by governmental policy. At the end of 1939 our total supply of bank deposits and currency outside of banks was $64.7 billion. At the end of 1952 it was $200.4 billion; at the end of 1953, $205.7 billion; at the end of 1954, $214.8 billion; and at the end of 1955, $220.2 billion.
This is the result of governmental inflation—a combination of continuous deficit spending with artificial low-interest rates which overstimulate private as well as public borrowing. If an individual labor union, or labor generally, were to force up its wage rate level beyond the equilibrium point, the result would not be further inflation, but unemployment. Yet the government does not dare to let this natural consequence of excessive wage rates take place. It constantly finances this wage increase by deficit spending and cheap money policies. Under the Taft-Hartley and other laws it builds up industrywide unions, legally forces employers to “bargain” with these monopolies, and makes resistance to continuous wage increases practically impossible.
POLITICAL PRESSURES
Thus we have wage inflation financed and made possible by monetary inflation. True, our Federal Reserve authorities are now trying to effect some measure of restraint. But practically all the bipartisan political pressures in Washington—wage boosting laws, huge new spending schemes for foreign aid, roads, schools, farm subsidies, social-security expansion, government-guaranteed mortgages, and government pressures for further strengthening of industrywide unions—are on the side of still more institutionalized inflation.
June 4, 1956
One of the most baffling developments of the last decade has been the persistence and growth in Washington of the mania for giving away billions of the American taxpayers’ money to foreign governments. The pressure for ever-greater farm aid, old-age assistance, grandiose road-building programs, home-mortgage guarantees, and a score of other such projects is not difficult to understand politically. The pressure groups who want and get this aid have votes. But foreigners don’t vote here. Why is the pressure for foreign aid in Washington so persistent?
Part of the answer, no doubt, lies in an established bureaucracy. Once a bureaucracy of hundreds or thousands of people is built up to exercise any function whatever, its tendency is to keep pushing for the continuance or expansion of that function, regardless of whether changed conditions may have made the original reasons for it no longer valid.
AID MEANS HIGH TAXES
This bureaucratic pressure is not in itself a complete answer to the puzzle. And certainly the answer is not that the amounts involved are negligible. We have already turned over to foreign governments since the end of the second world war the enormous sum of more than $50 billion. The government now wishes to spend $4.4 billion on foreign aid in the next fiscal year alone. It wishes Congress to appropriate $4.9 billion. At any time prior to the last fifteen years, this would have been thought a staggering sum. It represents four times the entire amount spent for our own national defense in the fiscal year 1939.
But perhaps it is more meaningful to make a comparison in terms of present taxes. It has been estimated that if the top progressive income-tax rate stopped at 50 percent (instead of going on to 91 percent as at present) the revenue loss would be only $1.2 billion. On various estimates, in fact, if progression above the basic rate of 20 percent were totally abolished, the annual revenue yield would be only $4.7 to $5.8 billion less than now. But this approximates what the government is asking for foreign aid alone in the next fiscal year. In any case, anyone who is now paying a top income-tax rate of more than 22 percent can consider that the excess all goes for foreign aid. It need hardly be pointed out that if the top rate stopped at 22 percent, the result would be to give an enormous impetus at home to incentive, saving and investment, production, and jobs.
As former hopes of the benefits from foreign aid have been successively disappointed, the rationalizations for its continuance keep constantly changing. They become increasingly rhetorical and vague. We are now being told by “experts” that we are placing too much emphasis on military instead of “economic” aid; that our foreign giveaway should be given away without conditions; and that we should not try to foster free enterprise abroad or even to win friends with our aid. If such arguments are accepted, it becomes difficult to see what excuse for foreign aid remains. As National Review has put it: “A government has no right to dispose of the property of its citizens, except as their prudent, responsible steward and in their palpable interest. A government has no obligation, moral or political, to give aid to other governments.” In fact, the only foreign aid Congress is justified in giving at the expense of the American taxpayers is military aid or aid with a definite quid pro quo.
FOR PRIVATE LOANS
The blunt truth is that the only “economic” foreign aid that is likely to be beneficial either to the receiver or the giver is that in the form of private trade or private loans and investments. If foreign governments could no longer get these easy handouts from our government, they would be forced to turn for capital to private sources, either at home or abroad. In that case they would be obliged to move toward free enterprise. They would have to give real assurances against socialization or expropriation. Such reforms are necessary in any case for any permanent or rapid economic development. The “underdeveloped” countries have remained underdeveloped chiefly because of their own hostility to the profit-seeking system.
June 11, 1956
The storm of criticism that has beaten upon the Federal Reserve authorities since they made a small increase in prevailing discount rates to 2¾ percent in April, and the indications that as a result those authorities are now planning to make money “easier,” raise some fundamental questions. One of them is whether constant new doses of easy money and inflation can really keep a “full employment” boom going indefinitely.
It is the present prevailing belief that they can. The most direct challenge to this popular belief from any official source has come from the chairman of the Federal Reserve Board himself, William McChesney Martin, Jr., in a statement quoted in this column of May 21: “We fight inflation partly because it is the forerunner of deflation. . . . If I thought inflation would create jobs and prosperity, I might be for it. But I am convinced that, apart from transitory effects, the result of inflation is the destruction of jobs and prosperity.”
PRICE-WAGE RACE
It is hard to get people to realize this today. Money-and-credit inflation has seemed to work its “full-employment” magic in the United States for the last fifteen years. Nevertheless, inflation can bring “full employment” only under special conditions, which are unlikely to prevail for more than a limited time.
The first of these special conditions is that prices must rise faster than wage costs in order to restore or increase profit margins. A second condition is that businessmen must be convinced that prices will continue to keep ahead of wage rates and other costs, otherwise business will not embark upon ambitious expansion plans. A third condition is that lenders, on their side, must be convinced that the inflation has come to an end. If they also believe that inflation will continue into the future, they will refuse to lend except at high rates that compensate for the expected depreciation of their money.
Whenever any one of these three major conditions ceases to exist, monetary inflation will cease to create “full employment.” Yet for these three conditions to exist, both workers and lenders must be the victims of what the economist Irving Fisher called the “money illusion.” The workers must fail to recognize that their real wage rates are going down (because prices are going up faster), and creditors must fail to recognize that they will lose real purchasing power as a result of their loans.
THE MONEY ILLUSION
An instructive table published in the May letter of the First National City Bank of New York showed that those who bought U.S. Savings Bonds at any time between 1935 and 1946, and held them for a ten-year period, suffered an actual loss from their investment. The interest received has not been enough to compensate for income-tax payable and the “inflation tax” levied in the form of a shrinkage in the buying power of the dollar. This condition continues. In the week ended, May 22 last, for example, wholesale commodity prices showed an average increase of more than 4 percent for the twelve-month period. This means that a businessman who lent out his money at 4 percent or less twelve months before got practically no real interest at all. When lenders come to expect any such annual rate of price increase in the future, they will insist on adding it as a “price premium” to what the rate of interest would otherwise be. That is why money rates tend to soar in the late stage of an inflation.
An inflation brings “full employment,” in short, only as long as prices are rising faster than wage or interest rates, or keeping ahead of them. As soon as wage costs start to race ahead of prices, as they now show signs of doing, then, whether or not there is more inflation, the result will inevitably be unemployment.
Inflation always brings about great strains and distortions in the economy. This is why Chairman Martin of the Federal Reserve Board is correct when he declares that the ultimate result of inflation is “destruction of jobs and prosperity.” The longer inflation is continued, the greater the correction that must ultimately be made. It is much better to permit a relatively mild adjustment now, than to force a more violent correction later.
June 18, 1956
The new farm law is primarily a political document. It will not solve our self-created farm problem. It will entangle the government more hopelessly than ever in farm controls. It will greatly increase the already heavy burden upon the taxpayer. True, the new law is better than the bill the President vetoed; but it threatens in the long run to do even more harm than the law it displaced.
Mr. Eisenhower’s own objections to the new measure when he signed it were enough to condemn it. He rightly deplored the “inflexible” requirement that the government must dispose of 5 million bales of its cotton surplus abroad at a price no higher than 25 or 26 cents a pound. This is not only much below the original government acquisition cost of 32 cents a pound or more; it is below the present domestic level of about 35 cents a pound, and below the 1956 support rate of 31 cents a pound.
TWO-PRICE SYSTEM
This disposal requirement threatens not only to get us into serious difficulties with other cotton-raising countries, but it means that foreign textile firms will be able to get their raw American cotton at much lower prices than our own textile firms will have to pay. This will place the American textile industry at a disadvantage both in the home and in the foreign market. If, as is being suggested, the government subsidizes the American textile exporter, it will mean that the taxpayers must subsidize the cotton manufacturer to offset their subsidy to the cotton grower! The new bill in effect sets up a two-price system for cotton without explicitly calling it that. It does explicitly call for a two-price plan for rice.
But Mr. Eisenhower thinks that the “advantages” of the new law “outweigh its harmful provisions” because “the heart of the bill is the soil bank.” This “will check current additions to our price-depressing, market-destroying surplus stocks of farm products.” It remains to be seen whether the soil bank will in fact do this.
If the soil bank had been made a complete substitute for a price-support program something might have been said in favor of it. But it is an addition to the price-support program. Price supports, in fact, are even being raised. This means that the government will first pay the farmer a subsidy to encourage him to increase his crop production, and then pay him still another subsidy to encourage him to decrease his crop production. In addition to getting price supports for what he raises, the farmer will be paid 90 cents a bushel for the corn he doesn’t raise, 15 cents a pound for the cotton he doesn’t raise, and $1.20 a bushel for the wheat he doesn’t raise.
CONTRADICTIONS
The soil bank, it is estimated, will pay farmers $1,250,000,000 a year above present subsidies for taking crop acreage out of production and putting it into cover crops or trees. An additional $500 million of funds will be authorized to remove perishable farm items from the market to prevent price declines. Once more, in sum, everything is to be solved at the expense of the general taxpayer.
The soil bank does have one advantage over the previous system. Up to now, when his acreage was restricted on one crop, the farmer usually planted this acreage to other crops on which there were no restrictions. As these substitute crops were usually feed grains, the result was a stimulus to livestock production, which helped to depress the prices of cattle and hogs. But this evil could have been cured simply by removing existing price supports and acreage restrictions. The government’s accumulated surpluses could have been got rid of, with greater advantage all-around, by offering them below world market prices to the American farmer himself in proportion to his previous production, leaving it to him to dispose of them at whatever profit he could obtain.
Now that we have the so-called soil bank, it is impossible to see politically how we will ever get rid of it. The present farm-control fiasco should stand as a classic illustration of how government economic “planning” leads to ever-wider and contradictory interventions in the vain hope of correcting the evil consequences of previous intervention.
June 25, 1956
We live in the Age of Inflation. It has become a fixed idea among governments that their paramount economic aim must be to maintain “full employment,” and that full employment can be maintained only by deficit financing, artificially cheap money, or direct recourse to the printing press.
Once under way, inflation sets in motion powerful special interests which demand its continuance. For it benefits some groups of the population at the expense of all the rest. Inflation is a tax-the cruelest and most wanton of all taxes. Under it, all creditors are systematically swindled.
CYNICAL DEFENSE
“He that would hang his dog,” says an old proverb, “gives out first that he is mad.” He that would swindle a creditor must first give him a bad name. The late Lord Keynes did this by calling him the “rentier.” He implied that the rentier was simply an idle plutocrat who lived on unearned interest at the expense of the struggling workers. In his General Theory (page 376) Keynes spoke of “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice.”
But who in the modern world are the creditors, the “rentiers”? They include, in addition to the holders of mortgages and corporate bonds, the thrifty, the small people who put their money in savings deposits or life-insurance policies, and all the owners of government bonds, who were induced to take these bonds for patriotic reasons. And who are the debtors who are being relieved of the allegedly dreadful burden of having to pay interest and repay capital in currency units of the same value as those they borrowed? They include the big corporations, the big holders of common stocks, and the speculators who have learned how and when to jump in and out and exploit the value of a depreciating currency.
I append a table compiled by Franz Pick for his forthcoming 1956 edition of Pick’s Currency Yearbook. This shows the depreciation of 53 currencies in the ten years from 1946 to 1955, as measured by each government’s own cost-of-living index. This table, it will be noted, shows that the U.S. dollar, the world’s monetary pivot, shrank 17 percent* in buying power over the past decade. The British pound sterling lost 35 percent; the French franc 66 percent. The currency units of Chile, Paraguay, Bolivia, and Korea had their purchasing power practically wiped out.
Some of the countries whose currencies suffered worst, such as Formosa and Korea, were struggling with special war or defense problems. But this was obviously not true in Chile, Paraguay, or Bolivia. The truth is that this shocking swindle by governments of their own citizens was brought about in most cases by deliberate monetary or credit inflation. And it was all done under the pious pretense that inflation is a sort of calamity visited on a country by malevolent outside forces, which the politicians and monetary managers profess to be incessantly combating.
CURRENCY UNITS
| Loss of purchasing power, 1946–55 Percent | |
| Portuguese | 0 |
| Dominican | 2 |
| Egyptian | 2 |
| Haitian | 3 |
| Indian | 10 |
| Pakistan | 10 |
| Ceylon | 11 |
| Lebanese | 16 |
| Belgian | 19 |
| Swiss | 19 |
| German | 22 |
| Honduran | 24 |
| Irish | 24 |
| Italian | 24 |
| Guatemalan | 25 |
| U.S.1 | 27 |
| Costa Rican | 27 |
| Danish | 27 |
| Ecuadorian | 27 |
| Canadian | 28 |
| Netherlands | 29 |
| Norwegian | 29 |
| Iranian | 30 |
| Venezuelan | 30 |
| S. African | 31 |
| Loss of purchasing power, 1946–55 Percent | |
| Spanish | 31 |
| Swedish | 31 |
| El Salvador | 32 |
| Turkish | 32 |
| Hong Kong | 33 |
| Thailand | 33 |
| Malayan | 34 |
| New Zealand | 34 |
| British | 35 |
| Colombian | 46 |
| Uruguayan | 46 |
| Iceland | 48 |
| Mexican | 48 |
| Nicaraguan | 49 |
| Australian | 50 |
| Finnish | 52 |
| Austrian | 54 |
| Peruvian | 59 |
| Brazilian | 60 |
| Greek | 61 |
| French | 66 |
| Japanese | 67 |
| Israel | 68 |
| Indonesian | 69 |
| New Taiwan | 85 |
| Chilean | 91 |
| Paraguayan | 91 |
| Bolivian | 95 |
| Korean | 99 |
[2This entry was originally published and ranked as 17, but was corrected to 27 in the article of July 23, 1956.—Ed.]
July 2, 1956
This year more than a million Americans will travel abroad, and probably spend about $2 billion doing so. Most of them will take only dollars with them, in the form of travelers’ checks, and buy their foreign currencies in each country as they need them. In this way they will needlessly waste hundreds of millions of dollars. Most foreign currencies can be bought right here before leaving, and at substantial reductions below the “official” parity rate.
The average American traveler either does not know that these bargains can be obtained here, or mistakenly believes that they represent a black-market transaction. He still does not realize the extent to which foreign-currency controls have been relaxed in recent years.
There are limits, of course, to what can legitimately be done. Great Britain, for example, still makes it illegal to bring more than £10 into that country. But France, Germany, Austria, Belgium, Ireland, India, and Italy impose no limit on the amount of their own currency that may be taken in by the traveler. Spain imposes the high limit of 10,000 pesetas.
POSSIBLE SAVINGS
To give an idea of some of the savings that might be effected at recent quotations, French francs at the official rate are 350 to the dollar; they can be bought here (legally) at 390 to the dollar. The official rate for Turkish lire is 2.80 to the dollar; they can be bought here ten for a dollar. At the moment of writing there is a terrific “bargain” in Bolivia’s boliviano. The official parity is 190 to the dollar; it can be bought here for 5,500 to the dollar. The foreign-exchange dealers in New York who specialize in these sales wonder why an American tourist will figure how to save a few dollars on his airplane tickets or luggage, or travel tourist-class rather than better, and then throw away $100 or $1,000 by failing to buy his foreign currencies here before he leaves.
Some banks sell foreign currencies, but such business is done in the main by foreign-currency dealers. Among the larger dealers are Perera Co., Deak & Co., William Holzman & Co., and Lionel Perera, Manfra & Brookes.
The huge discrepancy that has developed between “official” and market rates of foreign currencies is the result of foreign-exchange controls built up during and since the second world war. Foreign-exchange control is a totalitarian device. A government seizes from its own exporters part of the dollars (or other “hard” currencies) they would otherwise have earned, thus discouraging exports from that country. The government then encourages excessive imports into its own country by selling these seized foreign currencies at bargain prices. It thus creates an “unfavorable balance of trade”—and blames its own exporters and its own citizens for this result. Exchange control also enables a government to conceal from its own people the real extent of the depreciation of their currency.
THE REAL SOLUTION
A few weeks ago Dr. Ludwig Erhard, West Germany’s Minister of Economics, once more spoke out against the consequences of this system. He declared that only three currencies in Western Europe—the West German mark, the Belgian franc, and the Swiss franc—are valued correctly in terms of the U.S. dollar. The rest are priced too high and ought to be “readjusted.” As a result of false official valuations the world no longer has a true international price system or free convertibility of currencies.
Although Dr. Erhard did not go this far, the real remedy is not another official “readjustment” of currency values; it is to follow the example of Canada, and let each currency be bought and sold at its daily market value. It would thus become fully convertible. It would then be up to each government to stabilize its currency, not by imposing coercions on its own citizens, but by taking the measures necessary to maintain confidence in its currency both at home and abroad. This would mean an end to deficit financing, to cheap-money policies, and to any further resort to the printing press. This is the first necessary transitional step. Ultimately, of course, there will be no lasting stability of domestic or international currency values until the world returns to the international gold standard.
Money and GoodsJuly 9, 1956
Among the popular ideas which make the inflation of our era so hard to combat is the belief that the supply of money ought to be constantly increased “in order to keep pace with the increase in the supply of goods.”
This idea, on analysis, turns out to be extremely foggy. How does one equate the supply of money with the supply of goods? How can we measure, for instance, the increase in the total supply of goods and services? By tonnages? Do we add a ton of gold watches to a ton of sand?
We can measure the total supply of goods and services, it is commonly assumed, by values. But all values are expressed in terms of money. If we assume that in any period the supply of goods and services remains unchanged, while the supply of money doubles, then the money value of these goods and services may approximately double. But if we find that the total monetary value of goods and services has doubled during a given period, how can we tell (except by a priori assumption) how much of this is due to an increase of production, and how much to an increase in the money supply? And as the money price (i.e., the “value”) of each good is constantly changing in relation to all the rest, how can we measure with exactness the increase of “physical production” in the aggregate?
‘EXPERTS’ DISAGREE
Yet there are economists who not only think that they can answer such questions, but that they can answer them with great precision. Dr. Sumner H. Slichter of Harvard has recommended a 2½ percent annual increase in the money supply in order to counterbalance the price-depressing, effect of an assumed annual 2½ percent increase in productivity. Dean Arthur Upgren of the Tuck School of Business Administration at Dartmouth wrote last year: “Businessmen, bankers, and economists estimate that the nation requires a money supply growth of 4 or 5 percent a year.” He arrived at this remarkable figure by adding “a 1½ percent a year population growth, a 2½ percent yearly gain in productivity, and a gain of 1 percent in the money supply needed to service the more specialized industries.” This looks like counting the same thing two or three times over. In any case, as Lawrence Fertig pointed out in an article in The New York World-Telegram (Oct. 24, 1955), there can be nothing scientific about calculations that vary as widely as this.
Yet a lot of people have come to believe sincerely that unless the supply of money can be increased “proportionately” to the supply of goods and services there will not only be a decline in prices, but that this will bring on “deflation” and depression. This idea will not stand analysis.
PROFIT MARGINS
If the quantity and quality of money remained fixed, and per capita industrial and agricultural productivity showed a constant tendency to rise, there would, it is true, be a tendency for money prices to fall. But it does not at all follow that this would bring about more net unemployment or a depression. For money prices would be falling because real (and money) costs of production were falling. Profit margins would not necessarily be threatened. Total demand would still be sufficient to buy total output at falling prices.
The incentive and guide to production is relative profit margins. Relative profit margins depend, not on the absolute level of prices, but on the relationship of different prices to each other and of costs of production (factor prices) to prices of finished goods. An outstanding example of prosperity with falling prices occurred between 1925 and 1929, when full industrial activity was maintained with an average drop in wholesale prices of more than 2 percent a year.
The idea that the supply of money must be constantly increased to keep pace with an increased supply of goods and services has led to absence of concern in the face of a constant increase in the money supply in the last six years. From the end of 1949 to the end of 1955 the supply of bank deposits and currency increased $47 billion, or 27 percent. And since the end of 1949 average wholesale prices have increased more than 15 percent, in spite of an increase in the industrial production index of 46 percent.
July 16, 1956
Once more an industrywide union has demonstrated that it can halt a great industry and cripple the nation’s economic life unless its demands are met. Once more union leaders have shown that they will not hesitate to abuse this enormous private economic power.
Was the position of the steelworkers so intolerable that their leaders had no choice? On the contrary, the steelworkers were receiving the highest pay they ever received in history. Speaking for the steel industry, Adm. Ben Moreell pointed out that the steelworker’s wages alone averaged more than $5,200 a year, and that his average hourly earnings were already 52 cents above those in all manufacturing industries.
On top of this, the steel industry offered its workers wage increases and other benefits which, it estimates, would have increased the companies’ employment costs by an average of more than 17 cents an hour in the first year and by a total of 65 cents an hour in the fifth year. According to Admiral Moreell, “the total offer was the largest single package ever advanced by the companies in the history of the steel industry.”
This offer was not only turned down cold by David J. McDonald, the $40,000-a-year president of the industrywide steel union, but treated with derision and contempt. It was “picayune.” “The titans of industry have labored,” as he so elegantly put it, “and brought forth a louse.”
EXCESSIVE POWER
Upon what meat do such union leaders feed that they have grown so arrogant and powerful? Up to the moment of writing, the Eisenhower Administration has kept “hands off” the present dispute. That is to say, it has neither threatened to seize the steel companies unless they capitulate, in emulation of Truman, nor has it sought an 80-day no-strike injunction under the Taft-Hartley Act. Yet the union leaders’ power has been in large part brought about by Federal interference under the routine operation of the Wagner-Taft-Hartley Act.
That act forces the employer to “bargain in good faith” with the representatives of a specified union no matter how unreasonable their demands. It is this law that has built up industrywide unions. Through interpretations by the National Labor Relations Board and by the courts, it even permits the strikers to use physical intimidation to prevent others from working. As the president of the steel union’s Local 1843 candidly put it: “The picket lines [around Jones & Laughlin] are being established to prevent anyone from going into the plant.” It has been years, in fact, since the steel companies have dared make any attempt to operate in the face of a strike.
STRIKES VS. WAGES
Labor law is now what it is because of the deep-seated popular fallacy that strikes and other coercive actions by nationwide unions can raise the general level of real wages. But a successful strike by the steelworkers will further raise the price to consumers of all products made with steel. It will thus reduce the real buying power of the wages of all other workers. Further gains by the unions already most powerful and best paid can only be at the expense of the great body of workers that are paid less. A higher price for steel may cause unemployment among steel and other workers. If an attempt is made by Federal officials to counter this by further expansion of money and credit, the result will be another round of inflation. The money-wage gains will be wiped out by further rotting of the dollar.
And what of the steelworkers themselves? Suppose they do gain a further increase, but only after a prolonged strike? The Westinghouse Electric strike, which lasted 156 days and was settled in March, may serve as an illustration. At the end the workers got increases ranging from 5 to 17 cents an hour. But The Wall Street Journal calculated at the time that even if the benefits claimed add up to as much as 20 cents an hour increase, it will take Westinghouse workers 250 full-time weeks, or nearly five years, to earn back the $100 million they lost in wages. They will be then just where they would have been if there had been no increase at all and no strike.
July 23, 1956
At the time they went on strike the steelworkers were already receiving the highest wages in history. They were averaging $103.25 a week in January compared with an average of $78.55 for workers in all manufacturing industries. As compared with 1940, whereas living costs had increased 91 percent, the steelworkers’ weekly earnings had increased 230 percent. On top of this the industry offered the union the “largest single package” of wage increases and fringe benefits it had ever proposed.
Yet the union leaders disdainfully turned the offer down, preferring, instead, the disruption and risks of a strike. One of the major reasons they gave for this course was that the steel industry was making large profits.
MOVING TOGETHER
Now it is true that the bookkeeping profits of the steel industry in 1955 were comparatively high. But it by no means follows that these profits were at the expense of wages. The historical record, both in the steel industry and in industry in general, shows: (1) Total wages paid are nearly always several times total net profits. (This means that the workers collectively have an even greater material stake in the security and prosperity of the corporations than the stockholders have.) (2) Overall profits and wages do not vary inversely, but rise and fall together. In the six years from 1950 through 1955, for example, total wages paid by the steel industry were almost exactly three times as great as its profits after taxes. In 1950, when the industry’s profits were only $767,000,000, it paid total wages of $1,786,000,000. In 1955, when its profits had risen to $1,098,000,000, it paid wages of $2,665,000,000.
Even more impressive evidence of the normal correspondence of wages and profits emerges when we select a longer range of years and compare total wage payments in the U.S. with total corporate profits (both before and after taxes). This does not, of course, show the comparison of total profits with total wages, because wages are paid by partnerships and individual employers as well as by corporations. But a comparison of corporate profits with total wages nonetheless does show clearly that when profits are high wages are high, and that when profits are lowest wages are lowest. The following figures are all in billions of dollars:
CORPORATE PROFITS
| Year | Before taxes | After taxes | Labor income |
| 1929 | $ 9.6 | $ 8.3 | $ 51.0 |
| 1931 | - .8 | -1.3 | 39.6 |
| 1932 | - 3.0 | -3.4 | 30.9 |
| 1939 | 6.4 | 5.0 | 46.6 |
| 1949 | 26.2 | 15.8 | 137.4 |
| 1950 | 40.0 | 22.1 | 150.3 |
| 1951 | 41.2 | 18.7 | 175.6 |
| Year | Before taxes | After taxes | Labor income |
| 1952 | 35.9 | 16.1 | 190.5 |
| 1953 | 38.3 | 17.0 | 204.6 |
| 1954 | 34.0 | 17.0 | 202.8 |
| 1955 | 43.8 | 21.8 | 215.5 |
It will be noticed that in the years when industry did worst (as in 1931 and 1932, when net profits were less than zero) labor did worst. When profits were at record high levels, so were wages.
There is nothing accidental about this. Employers take on most workers and pay highest wages when the outlook for profits is most promising. And it is out of past profits that they chiefly derive the capital to make those investments in new equipment and plant that increase the total national productivity out of which wages must be paid.
POSTWAR INFLATION
My article in the June 25 issue, “The Great Swindle,” presented a table compiled by Franz Pick showing the depreciation of 53 currencies in the ten-year period 1946–55. As the result of a typographical error occurring in Dr. Pick’s office, unfortunately, the depreciation of the U.S. dollar was shown as only 17 percent, instead of the real figure of 27 percent. This correction only emphasizes the extent to which all American creditors, and nearly all Americans whose annual income has gone up less than 37 percent (the extent of the official cost-of-living rise in the ten-year period) have been cheated by the postwar inflation. And this inflation has not been brought about by malign outside forces, but by Federal fiscal and monetary policies.
July 30, 1956
Two articles by Harry Schwartz (in The New York Times of June 25 and 26) are disturbing both in themselves and as a symptom of a recent trend of thought in this country. The burden of the articles is this: “An economic race whose outcome could decide the fate of the world is in progress. The leaders of international Communism expect to win the contest by beating capitalism at its own game—production.” Particularly because Schwartz is usually a careful and judicious writer on Russian affairs, these articles call for critical analysis.
On close examination most of Schwartz’s statements are seen to be qualified and guarded. (The italics in the following quotations are my own.) “The Communists expect to overtake and surpass the West industrially,” etc. “It does not seem easy to raise industrial labor productivity 50 percent and collective farm productivity 100 percent in a mere five years, as the Soviet regime plans.”
Yet the articles as a whole take the Communist plans and boasts very seriously. They are illustrated with solemn charts which compare U.S. actual production last year, not merely with the U.S.S.R. 1960 goal, but even with the “possible U.S.S.R. 1965 goal.” And Schwartz’s qualifying words are faint: “That this [Communist overall production] program will make progress seem difficult to challenge. But that it will succeed in all its aspects seems open to question.” Perhaps the understatement of the year.
PROPAGANDA FIGURES
The net effect of the Schwartz articles, in short, is to scare the unwary Western reader into thinking that the Communists will soon surpass the free-enterprise U.S. and the whole West in overall productivity by Communist “planned” production methods.
It should be made clear that what Schwartz is discussing is not purely military production. In this respect everyone must agree that the Communists present a real menace. Conquest and war, and heavy industry expansion and similar preparations for conquest and war, have from the first been their primary and almost their sole objective. With us, military production has been only one among a very wide number of objectives.
Schwartz relies chiefly on studies of the official Soviet statistics of production. But there is no reason for supposing any of these statistics to be correct. They are published primarily for propaganda purposes. Until very recently, they consisted mainly of boasted percentages of increase, with no absolute figures that anyone could check against. When two Soviet statistics cannot be reconciled, it necessarily follows that one of them must be wrong. But even when two or more Soviet statistics can be reconciled with each other, it does not in the least follow that both or all of them must be right. They may be merely a set of matching fictions.
Then there is something which never gets into these statistics—the quality of the product. Millions of shoddy or ill-fitting shoes can look just as good in the statistics as the same number of first-rate shoes that fit. Square-footage of housing constructed can mean anything from shabby and jerry-built tenements to luxury apartments.
SOVIET REALITIES
If we start talking not of “plans” and daydreams but of actualities, then one of the things to talk about, as compared with the marvelous actual record of American free enterprise, would be the dismal failure of Khrushchev’s virgin lands program last year. “Excluding the Ukraine” (I quote Schwartz himself in The Times of Dec. 18 last), “. . . the Soviet Government apparently got at least 4 million tons less grain from Soviet farms this year than in 1954.” Next, one might consider the recent Poznan riots, desperate acts precipitated by a shortage of food. We might then examine the appalling condition of Russian housing. Finally, we might consider an article in a Polish weekly (probably printed at the risk of life) complaining, according to a New York Times report of July 15, of “mass unemployment, huge land waste, and food and housing shortage throughout Poland.”
It is a strange procedure to compare American actualities with Communist “plans,” boasts, or daydreams for the future.
August 6, 1956
Last week I commented here upon two articles by Harry Schwartz in The New York Times of June 25 and 26 which, in spite of many qualifications, left the impression that Communism had a good chance of winning the “economic race . . . by beating capitalism at its own game—production.” I pointed out that the articles mainly relied upon Soviet official statistics, and that there was no reason for supposing these propaganda figures to be true.
A conviction in the West that Communist “planning” and production methods can beat free enterprise in overall production would have such disastrous consequences that it calls for further scrutiny. I must again make clear that I am not talking (nor was Schwartz) of production purely for war purposes, upon which the Communist world concentrates, but of total production, including production for consumer welfare.
FOOD AND HOUSING
That the recent riots in Poland were precipitated by an actual food shortage is now admitted even by Communist officials. Thus Edward Ochab, “regarded as Moscow’s principal representative in the Polish Communist Party,” confessed on July 20 last that Poland’s Six-Year Plan not only had failed to produce enough coal and food but also had fallen short by 50 percent of its goal to raise wages. He conceded that while the Polish Bureau of Statistics reported to the Central Committee that real wages had increased 27.6 percent during the Six-Year Plan, the committee’s own investigation showed that the increase was only 13 percent. There is no good reason for trusting even this “correction.”
Yet American officialdom today seems to regard Russian statistics with respect and even awe. On Oct.
10 last, Secretary Dulles declared that U.S. production, at about $400 billion, was “three times that of the Soviet Union.” A writer in the National Review estimated that Russian production was only about half that claim. After thumbing through some old clippings, I incline to think this lower estimate much nearer the truth.
A study released by the U.S. Labor Department on July 12, 1947, estimated that the standard of living of the average American, in terms of what his weekly wages would buy, was almost 1,000 percent higher than that of the average Russian worker. A detailed comparison of food costs by the department in 1951 showed that it took the average Russian worker 769 minutes to earn enough to buy the same “food basket” as the American worker could buy with 100 minutes’ work. In The Times of Oct. 24, 1950, an article by Harry Schwartz himself pointed out that “available data suggest that the typical Soviet housing pattern is still that of one family to a room”; that “the present crowding of housing in Moscow is appreciably worse than it was in 1939”; and that in Leningrad there was “an average of about twelve persons for each apartment.”
Alfred Kohlberg recently presented strong reasons for doubting Russian statistics even on steel production. If the figures on steel production should prove to be fictitious or inflated, the whole set of Russian claims of expansion even in the heavy industries would be thrown in doubt.
COSTLY ERRORS
And yet, rushing in on the basis of unestablished and highly improbable Russian boasts, a letter writer to The Times of July 8 last (a professor of economics!) triumphantly contended that the example of Soviet Russia disproved the Mises-Hayek thesis that a centralized tyranny cannot maximize or balance production because it can neither calculate comparative costs nor know consumers’ wants. In a country like Soviet Russia, “still short of everything it needs,” the letter writer argued blandly, “errors in planning are not fatal” because a wrong investment “is at worst premature and will soon be utilized.” Yet it is, of course, precisely a country “short of everything it needs” that can least afford errors. If it builds giant power dams and steel plants by diverting labor and capital from food production, a few million citizens may starve before the “wrong investment” is “utilized.” This is precisely the kind of thing that is still happening behind the Iron Curtain.
August 13, 1956
It may seem at first blush that no matter who lost by the steel strike, at least the workers immediately involved must have gained, because they won larger increases than they were offered. But let’s see. In May, before the strike, steelworkers’ earnings, according to official statistics, averaged $100.28 a week. Counting the five weeks of the strike itself, and the man-days lost just before and after (to bank and refire blast furnaces, etc.), the steelworkers lost an average of about six weeks, or an average of, say, $600 each under the old wage scale. But had the companies’ offer been accepted without a strike, the steelworkers would have earned in those six weeks more than $600 each.
TO MAKE UP THE LOSS
Now the companies offered the workers for the first year an average increase in basic wage rates of 7.3 cents an hour (not counting “fringe” benefits, etc.). The union won for the first year an average basic wage increase of 9.5 cents an hour—or 2.2 cents an hour better. Assuming approximately a 40-hour week for the eleven months to end next July 1, a steelworker will then have made up $41.80 of this loss. In the following year the union won an increase of 3.2 cents an hour above the companies’ offer. So he will then make up $64 more. In the third year, with an average hourly increase of 4.2 cents above the companies’ offer, he will make up $84 more.
At the end of the three-year contract, in sum, he will have made up, in basic wage rates, only about $190 of the $600 he lost in the strike. So at the end of his three-year contract, he will still be $410 worse off than he would have been if the companies’ offer had been accepted and there had been no strike.
Such a calculation is of course only approximate, necessarily involves assumptions about the future, and cannot be made indisputably precise. Many steelworkers, for example, had paid vacations of two or three weeks coming to them anyway. And there can be dispute concerning the impact of incentives and overtime on the exact amount of the loss. But it seems probable that even if the two complicated “full packages” are compared, including all fringe benefits, it will take more than five years for the individual worker to make up the losses he incurred during the strike.
If the workers directly involved in the strike did not gain, who did? Certainly not the companies. Their earnings will be cut by six weeks’ idleness and by future increased labor costs. The idea that the companies can pass the increased labor costs—or more—along to the public, simply by raising prices, overlooks the fact that higher prices tend to reduce sales and production. In the long run higher costs of production will slow up steel industry expansion and mean less employment of steelworkers.
The buying public, and workers outside the steel industry, will lose by the strike in more than one way. Projects were held up during and shortly after the strike through lack of steel. Workers were laid off. When steel is in full supply again, the buying public will have to pay higher prices for everything using steel. The real wages of other workers will be reduced because they must pay higher prices for what they buy. But as the steelworkers’ weekly earnings of more than $100 even before the strike were already more than $20 a week higher than the average weekly earnings of all manufacturing workers, the settlement will not make for less distortion, more balance, or more overall real purchasing power in the economy. It seems likely, on the contrary, to increase strain and imbalance, and to set off a new round of wage demands.
INFLATION RATCHET
In fact, the outcome of the steel wage settlement must either be less employment or more inflation than otherwise. The latter is more probable than the former, at least between now and Election Day. Inflation now works on a built-in ratchet principle. Existing Federal legislation creates industrywide unions and makes it all but impossible for employers to resist demands for higher wages. Then the government follows inflationary money and credit policies to make the higher wage-costs payable. This further increases prices, leads to further wage demands, and so ad infinitum.
August 20, 1956
There has recently appeared a 64-page pamphlet, by the European economist Wilhelm Röpke, called Economic Order and International Law. It is one of the most penetrating analyses that have yet appeared of the modern malady of false internationalism. Though it was a course of lectures before the Academy of International Law, it has been independently printed only for private circulation (A.W. Sijthoff, Leyden) and its contents deserve to be far more widely known.
Röpke’s thesis has so many facets and corollaries that it is difficult to summarize in any short space. He begins by pointing out that a central element in the Socialist movement of the last hundred years has been the idea of the international mission of Socialism. Yet Socialism in practice (or any other brand of collectivism-interventionism, “planning,” the Welfare State) has led to nationalism, economic isolationism, autarky—in brief, to international disintegration.
AN AS-IF WORLD MONEY
Röpke contrasts this international disintegration, brought about by the interventionist, collectivist, and inflationary policies followed by most governments today, with the “universalist-liberal” solution approached in the nineteenth century—and largely retained, for that matter, up to about twenty years ago. Nations did not surrender their sovereignty to some international super-state. They did not set up endless intergovernmental bodies like the United Nations, with its maze of sub-agencies, or the International Monetary Fund, or the European Payments Union, or the Schuman Plan. But they did adhere to a far more real international order, a sort of As-If World State, with an As-If World Money.
International law respected private property. The natural resources of the world were owned and developed by private persons, or by corporations in which anybody, whatever his nationality, could buy shares in the world’s stock exchanges. International trade was obstructed only by tariffs. It was not ripped into shreds by exchange control, blocked currencies, devaluations, bilateralism, import quotas, export subsidies, balance of payments deficits, and “dollar shortages.”
But the great achievement of traditional liberalism in the nineteenth century was the creation of a de facto world currency, the international gold standard. The gold standard meant that governments and central banks, in their money and credit policies, were subjected to a severe common discipline which prevented anyone from stepping out of line and upsetting international equilibrium.
DISCIPLINE OF GOLD
This discipline was economic rather than political. Any disobedience to the rules was promptly followed by consequences which every government found it to its own interest to avoid. Governments were continuously compelled to coordinate their money, credit, and fiscal policies in such a way that the resulting monetary unity of the world was not very different from a genuine de jure international currency system.
The politicians destroyed this system, and now treat it as utopian. But it is their proposed substitutes that are really impracticable and utopian. Professor Röpke analyzes the fallacies behind the notion of European economic “integration” through a collectivist super-state. He shows how advocacy of this utopian ideal has drawn attention away from the first real step in any reform, which is a return to free convertibility of currencies. This presupposes the abolition of exchange control. He dissects the failure of the International Monetary Fund, and particularly of the European Payments Union, which compels its creditor members (and ultimately the American taxpayer) to subsidize the monetary and fiscal follies of the debtor countries, and which sets up, at best, a closed currency block discriminating particularly against the dollar area. He points to the arbitrariness and tensions inherent in the Schuman plan.
Röpke proves, in short, that collectivist planning on the national scale must find its counterpart in national autarky, and that real international economic cooperation is possible only with free markets, free competition, and a freely working price mechanism.
August 27, 1956
How did the West manage to get itself into the position where it can be blackmailed or robbed by any petty pirate, and hardly dares defend its own property or treaty rights?
It was not always so. Compared with our own era of war and constant dread of war, the nineteenth century (or from 1815 to 1914) was an era of international peace, disturbed, apart from our Civil War, only by a few short conflicts. There was no United Nations, but there was real respect for international law. And one of the cornerstones of international law was the acknowledged right of each country to protect the lives, liberties, and property of its citizens, wherever they were. If any little despot or robber chief defied the treaty rights of, say, Great Britain or the United States, an ultimatum went out, or the Marines landed. Such action is now in disrepute, but no effective substitute has been found. It protected citizens in the peaceful possession of their property abroad as well as at home.
MEXICO AND IRAN
This state of affairs began to disintegrate during the first world war. Even in the interwar period the great powers rashly set precedents which undermined the foreign property rights of their own citizens. When on March 18, 1938, President Cardenas of Mexico seized the British and American oil properties there, Mexican orators and newspapers told their people that President Roosevelt had approved the seizure. His public protest, in any case, was gentle, belated, and perfunctory. Two weeks later, he publicly said he was pleased that Mexico was willing to pay compensation, but he hoped the American companies would limit their claims to the amount of their actual investment. This was putting pressure, not on the Mexican Government to pay the going market value of the properties, but on the American owners to accept less. The American owners, in fact, in the end got less than $30 million for properties valued at $120 million.
On May 7, 1943, after Bolivia had defaulted on a private American loan, President Roosevelt actually apologized to the then Bolivian President on the ground that an interest rate of 8 percent was too high anyway, and that “of course” Bolivia was unable to pay either interest or principal. This informed every foreign country that the American Government would not protect the foreign investments of its citizens from seizure or repudiation unless it decided (retroactively) that it approved the terms.
In World War II, the “democratic” victors even put pressure on neutral countries to seize the private property of citizens of the conquered nations. Then came an astonishing performance after Mossadegh had seized the Anglo-Iranian oil properties. President Truman wrote to him on July 9, 1951: “You know of our sympathetic interest in this country in Iran’s desire to control its natural resources. . . . We were happy to see that the British Government has on its part accepted the principle of nationalization.” This in effect supported Mossadegh’s contention that a government is entitled to sell a concession, invite foreign capital in, then repudiate its contract and seize the capital.
The worldwide spread of Socialism and disregard of private property was ominously revealed on Dec. 11, 1952, when 31 members of a United Nations committee approved a proposal, the U.S. alone dissenting, permitting any member nation to expropriate natural resources without compensation. A majority of the U.N. General Assembly itself accepted the resolution in a modified and vaguer form on Dec. 21, 1952.
DILEMMA OF SUEZ
Now another little dictator has seized the Suez Canal, and the injured governments, instead of standing flatly against the violation of property rights or even the flagrant treaty violation, talk of referring the question to an ineffective United Nations, or having a friendly conference with the thief, or drawing up a new treaty for him to violate.
If investors in foreign countries have no assurance against expropriation, then private investment abroad will cease. The worst sufferers, in the long run, must be the very “underdeveloped” countries that insist on the right of arbitrary seizure.
September 3, 1956
Is the Democratic platform really meant to be taken seriously? It is shrill, intemperate, long-winded, repetitious; a compound of abuse, half-truths, untruths, and glaring self-contradictions. It is a bid to buy the votes of every conceivable pressure group. It promises utter recklessness in spending the taxpayers’ money. If its framers had deliberately tried to write a parody of a political platform they could hardly have done better. The greatest danger of a Stevenson victory is not that he might repudiate his platform’s pledges, but that he might try to keep them.
Nothing is too bad for the platform framers to say about the Republican Administration. It seems that practically every measure it took has already proved “disastrous.” The Democrats alone, one gathers, know how to conduct foreign affairs. They alone “wrote humanity upon the statute books.” Republicans represent only “special privilege”—“government by the few, and for the few.” It is startling to discover in fact, that the American people “are now ruled by a government which they did not elect and to which they have not given their consent.” Who cast the 34 million votes for President Eisenhower becomes a baffling mystery.
PROSPERITY ‘MYTH’
It appears, also, that our present prosperity is no prosperity at all, but just another Republican myth. Our national income is at the highest figure on record. But one learns from the Democratic platform that the Republican Administration has “crippled and stunted” our economic growth. Wages are not only at the highest average level on record, but have raced far ahead of living costs. Yet we are informed by the Democratic platform that “wages lag.” And for some inscrutable reason (a will to political suicide?) there is a “Republican crusade against full prosperity.”
At any rate, present prosperity can’t compete with Democratic promises. Instead of the present picayune but record annual rate of $408 billion of gross national product, the Democratic platform promises “a $500 billion national economy in real terms”; an “increase of 20 percent or better in the average standard of living,” and an even bigger increase, through “special emphasis,” to families now making less than $2,000 a year. The platform promises. But space forbids even the barest list of its promises.
The platform is riddled with self-contradictions. It pledges “a truly balanced Federal budget.” How? By promising increased expenditures in a hundred directions to benefit every imaginable group. The platform repeatedly denounces the Republicans for “false economy” on national defense and for “political considerations of budget balancing.” All this would imply a huge increase in taxes to pay the higher expenditures. Instead, the platform promises “tax relief”—in particular by increasing the personal tax exemption of $600 “to a minimum of at least $800.” This alone would mean a loss of $4.5 billion in tax revenues.
MORE CONTRADICTIONS
But balancing the budget by simultaneously boosting expenditures and slashing taxes is no trick at all for the Democratic platform makers. They pledge themselves to “expand world trade” and “to support vigorously the Hull reciprocal-trade program.” And they propose to do this by preventing “serious economic injury” to anybody by any tariff cut and by continuing quotas on agricultural imports. They endorse the Marshall Plan and more economic assistance both to Israel and the Arab States. But they also tell us that “the time has come for a realistic reappraisal of the American foreign-aid program.” So every man must decide for himself whether the platform is for more foreign aid or for less.
The platform endorses states’ rights. But it insists that the Taft-Hartley Act must be repealed because it permits state “right to work” laws. The platform denounces corporate monopolies but is completely silent about industrywide labor monopolies. It deplores the fact that “American farmers have gone deeper and deeper into debt.” It proposes to cure this by providing “an increased reservoir of farm credit”—in other words, by encouraging them to get deeper into debt. And so on and on.
As for the Republican platform—but that is another column.
September 10, 1956
Last week I remarked in this place that the Democratic platform was intemperate, repetitious, full of half-truths, untruths, and self-contradictions. By comparison, at least, the Republican platform has several merits. It is just as repetitious; it is also full of half-truths and misleading implications; but its tone is much more temperate, its program is less fantastic, and it pays at least lip service to the ideal of limited Federal intervention and limited governmental power:
“We hold that the major world issue today is whether government shall be the servant or the master of men. . . . We hold that the strict division of powers and the primary responsibility of state and local governments must be maintained, and that the centralization of powers in the national government leads to expansion of the mastery of our lives. . . . We are unalterably opposed to unwarranted growth of centralized Federal power.”
But when the platform gets down to details, these words are as if they had never been written. The main record of the Eisenhower Administration, and even most of the present Republican boasts and promises, run directly counter to them.
SELF-CONTRADICTIONS
“We pledge . . . further reductions in government spending. . . .” This is followed by promises of continued or increased spending in uncountable directions. The foreign giveaway program is to be continued. “Small business” is to get loans too unsound for private lenders or investors to make with their own money. More Federal funds are to be spent on more local schools, more subsidized local housing, expanded social security, health reinsurance, flood insurance, more aid to veterans, a grandiose public-roads system. Farmers, in addition to their previous price supports, are to get “soil bank” subsidies, crop insurance, drought and flood insurance, “supplemental credit.” Whenever “producers of perishable farm products” produce “temporary market surpluses,” the government is to buy up the surplus with the taxpayers’ money and give it away. This promise, for some strange reason, is not extended to dealers stuck with a surplus of last year’s automobiles or television sets or perishable novels. For further farm relief, the Republicans promise to “expand” the school-milk and school-lunch program. All of this is obviously inconsistent with protestations of unalterable opposition to “unwarranted growth of centralized Federal power.”
It is obviously also incompatible with the announced fiscal aims of the Eisenhower Administration. You cannot reduce government spending while you increase it. You cannot at the same time have more spending, “further reductions in taxes,” and “continued balancing of the budget.” The Republican platform even pledges, in the face of this program, “gradual reduction of the national debt.” Under President Eisenhower, in fact, the national debt has risen by $7.7 billion—not to mention what has happened to the government’s contingent liabilities.
CONTINUED INFLATION
Nor is the fiscal record or program consistent with the platform’s announced aim “to maintain the purchasing power of a sound dollar.” The Eisenhower Administration, until recently, has been favored with good luck in this respect. But wholesale prices are now 3 percent higher than a year ago, while the consumer price index has hit its highest level on record. Behind this lies a steady expansion in the supply of money. The nation’s bank deposits and currency increased an average of $6.9 billion a year in the last four Truman years—and an average of $6.9 billion a year in the first three Eisenhower years!
Mr. Eisenhower has come sincerely to believe that the maintenance of “full employment” is primarily a Federal responsibility, that the way to achieve this goal has been discovered, and that it consists mainly in imitating and expanding most of the inflationary welfare-state policies of the New and Fair Deals. But this presents a grave dilemma to those voters who are convinced that the real future of America lies in the preservation of individual initiative, self-reliance, and freedom, and who watch with growing concern what Mr. Eisenhower himself has called “the growth of a swollen, bureaucratic, monster government in Washington.”
September 17, 1956
The Voice of America has recently been pointing out that capitalism in the United States today is a “people’s capitalism.” Even in the special sense that millions of Americans now share in the direct ownership of industry, and many more millions in its indirect ownership, the phrase is amply justified.
The major facts were summarized in Newsweek, July 30. This country now has some 10 million direct share owners in business. Nearly 70 million Americans hold savings accounts and 115 million, life-insurance policies.
The new campaign of the U.S. Information Agency, judging from the angry reaction it has provoked from Soviet sources, must be effective. A “people’s capitalism” takes over their own favorite adjective (without falling into the childish tautology of a “people’s democracy”), and boldly defends what the Communists have always vilified as their real archenemy, capitalism.
VARGA’S ARGUMENTS
The Soviet leaders have now called on their top economist, Eugene Varga, to step in and lead the fight against American capitalism. This year he has written two articles in a weekly journal called the New Times, published in ten different languages. As these articles total more than 5,000 words, it is impossible here to deal in detail with his tortured statistics and arguments. Insofar as his arguments are capable of any summary, they reduce themselves to two: (1) It isn’t true that ownership of American industry is widely spread. (2) But if it is true, what of it?
In the first part of this argument he collides hopelessly with solid facts. In the second part he trips over his own contradictions. It is particularly unwise of him to argue that: “[Private American stock] ownership is of course illusory; the workers have absolutely no influence on the operation of the corporation as a whole or of its individual plants, including those at which they themselves are employed.” Such an argument is dangerously likely to call the Russian workers’ attention to the completely illusory character of their own supposed “people’s” ownership of the factories in which they work, and to the lack of influence they exercise, as workers or individuals, on the overall Soviet production plan or on the conditions of their own employment.
“But even if a worker does own some shares,” continues Varga, “can he be considered a capitalist? Of course not. Dividends are a negligible quantity in the budget of any worker, however highly paid.” In fact, he might have continued, dividends are not only a small percentage of the workers’ income, but of the whole nation’s income—precisely because wages bulk so large. Out of total U.S. personal income of $306 billion in 1955, only $11 billion was in the form of dividends, while $217 billion came in the form of wages and salaries.
It is at this point especially that Varga gets snarled in his own Marxian dialectics. He considers it outrageous that the salaries of half a dozen U.S. corporation executives should range from $213,000 to $686,000 a year. But as an undeviating Marxist he would have to argue that even so these executives must be underpaid, because they are after all hired hands, and the corporation owners must be withholding for their own profit the “surplus value” that the salaried officials produce. And as Varga does in fact insist on the long-discredited Marxist fallacy of “surplus value,” he should never forget that his logic compels him to regard a television star getting $500,000 a year as being “exploited,” and the owner of a barbershop with one hired assistant as being an “exploiter.”
MAXIMIZING INCENTIVE
But wholly apart from the preposterousness of Marxist theory, I hope the Voice of America will extend its argument to show not merely that present-day American capitalism is a “people’s capitalism,” but that all capitalism (in the sense of a really free, competitive private enterprise society) has always been a “people’s capitalism.” It tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what their coordinating function creates. And by doing so it maximizes the incentives to production and increases individual freedom as it multiplies the total wealth to be shared.
September 24, 1956
The extent of the national pressure for continued inflation was demonstrated by the reaction in political, business, labor, academic, and journalistic circles to the general rise of the discount rate of the Federal Reserve Banks to 3 percent. The most vociferous reaction was that of Democratic orators, already expressed in the Democratic platform, that this “hard-money policy” was just part of “the Republican crusade against full prosperity for all.”
But this time there were new objections. (1) The higher money rates were not only denounced, as on previous occasions, as “deflationary”; they were also criticized (often by the same people) as (2) ineffective, and (3) actually inflationary.
While even the first and second objections are of course incompatible with each other, either could be justified in principle, depending on the real state of the facts. If a 3 percent discount should prove in itself high enough to lead to an actual contraction of the total volume of bank credit outstanding, it would be deflationary. If such a rate were at least high enough to halt any further expansion in bank credit, it would halt inflation. This, in fact, is precisely the usual purpose in raising the discount rate. If a 3 percent discount rate does not prove high enough to discourage further expansion of bank borrowing, it will of course be ineffective.
HIGH ENOUGH?
At the moment it does not seem probable that a 3 percent discount rate will in itself prove sufficient to halt the present inflation. True, it is the highest rate since 1933; but prior to 1930, 3 percent was the lowest discount rate. The rate went as high as 7 percent in the boom of 1920 and to 6 percent in 1929.
Two current fallacies, however, must be rejected. One is the idea, put forward by a prominent Wall Street house, that: “High taxes make interest rates relatively unimportant to businessmen. The government pays a little more than half the interest charge, so that a 6 percent rate really costs the businessman only 3 percent,” etc. It is not true that the government “pays” half the interest charge, as any businessman whose project does not yield a net profit soon discovers. The government merely permits a corporation to deduct full interest payments before seizing 52 percent of what the company has left as net profit. Higher money rates will still discourage marginal borrowers.
A much more dangerous fallacy is the belief that higher money rates are actually inflationary. One of the country’s leading newspapers, in its news story on the Aug. 24 discount rise, “reported” matter-of-factly: “It will take time for today’s action to be reflected in retail prices. . . . However, the high cost of working capital . . . is bound to be reflected, even if slightly, in the ultimate prices paid by the consumer.”
A DANGEROUS FALLACY
This contention that a rise in short-term interest rates is actually inflationary is disquietingly familiar. I remember encountering it three years ago in an interview with the head of the central bank of a leading European country that had already been, and has since been, ravaged by inflation. The fallacy (1) greatly overestimates the percentage that interest payments on bank loans constitute of the average business firm’s total production costs; (2) falsely assumes that a rise in such costs can be passed along to consumers in higher prices, regardless of what happens to consumers’ monetary purchasing power or willingness to buy; and (3) most importantly, overlooks the fact that higher interest rates themselves reduce the volume of business borrowing compared with what it would otherwise be. They therefore tend to halt the expansion of money-and-credit supply, and consequently to halt the rise of commodity prices.
The present rationalizations of cheap money are another symptom of how deep-seated inflationary sentiment has become. They also illustrate the theme, so well developed in the August Survey of the Guaranty Trust Co. of New York, of how the growth of the doctrine that government must assume “social responsibility” for maintaining continuous “full employment” has in fact led to the growth of fiscal and monetary irresponsibility.
October 1, 1956
In The Road to Serfdom, published in 1944, Friedrich A. Hayek made an analysis, profound and prophetic, of the drift toward a statist or totalitarian ideology even in the Western world. “Although,” he wrote, “we had been warned by some of the greatest political thinkers of the nineteenth century, by de Tocqueville and Lord Acton, that socialism means slavery, we have steadily moved in the direction of socialism. . . . We are rapidly abandoning not the views merely of Cobden and Bright, of Adam Smith and Hume, or even of Locke and Milton, but one of the salient characteristics of Western civilization as it has grown from the foundations laid by Christianity and the Greeks and Romans. Not merely nineteenth- and eighteenth-century liberalism, but the basic individualism inherited by us from Erasmus and Montaigne, from Cicero and Tacitus, Pericles and Thucydides, is progressively relinquished.”
SPREAD OF SOCIALISM
Since that book appeared the totalitarian regimes in Germany and Italy, and even in the Argentine, have been overthrown. But the totalitarian regime in Russia has enormously increased its dominion and power. The newly “liberated” countries of China, India (and generally in the Near East, Far East, and Africa) are ruled either by socialists or outright Communists. In Europe and in America the socialist ideology has on net balance gained. It is true that the Labour Party is out of power in Britain and that a Republican regime now rules in Washington. But the Conservatives in Britain have not dared to repeal most of Labour’s socialist and welfare-state planning, while here the Eisenhower Administration has not only retained but expanded most of the New Deal measures.
Now this drift of mass opinion is not the result, as it is the fashion to think, of new knowledge or great new discoveries in the realm of economics or politics. It is a revival of immemorial fallacies, a turning back of the clock to the mercantilistic theories refuted by Adam Smith, to the inflation and price-fixing of the France of 1789, or toward the totalitarian socialism of the Incas. This drift of opinion has come, in brief, because most of the so-called leaders of thought in the world today have not the remotest idea of the richness and range of the literature of freedom.
In an effort to bring this literature together, and to guide readers through this great treasury of thought and knowledge, I recently published a bibliography called The Free Man’s Library (Van Nostrand). I ended up with a collection of more than 550 books, devoting to each from half a dozen lines to a page of description, synopsis, or comment. But because the prospect of reading or even choosing among 550 books may be discouraging or bewildering, I gave in an introduction, and present in a modified form here, a list of the “ten best” classics on freedom, another list of the “ten best” contemporary works, and a suggested “introductory reading course.”
THE ANTIDOTE
In chronological order the list of “classics” is: Milton’s Areopagitica; Locke’s Second Treatise on Government; Hume’s Essays Moral, Political, and Literary; Adam Smith’s Wealth of Nations; selections from Edmund Burke; Bastiat’s Economic Sophisms; de Tocqueville’s Democracy in America; Mill’s essay “On Liberty”; Herbert Spencer’s The Man vs. the State; and Lord Acton’s Essays on Freedom and Power.
The “ten best” contemporary works in alphabetical order, are: B.M Anderson’s Economics and the Public Welfare; Max Eastman’s Reflections on the Failure of Socialism; Hayek’s The Road to Serfdom, and, in addition, a book edited by him, Capitalism and the Historians; John Jewkes’s Ordeal by Planning; Ludwig von Mises’s Socialism: An Analysis and his Human Action; George Orwell’s Nineteen Eighty-Four; Lionel Robbins’s The Great Depression; and Wilhelm Röpke’s The Social Crisis of Our Time.
A good “introductory reading course” would be: Hayek’s Road to Serfdom; Mill’s essay “On Liberty”; Max Eastman’s Reflections on the Failure of Socialism, and, to cap it Mises’s Socialism: An Analysis.
October 8, 1956
In 1954, the Maine elections forecast the Democratic Congressional victory that followed. This year the Maine elections seem to forecast an even greater Democratic Congressional victory. They even throw doubt on the previous complacent assumption that “Ike is a shoo-in.”
Republican excuses are not convincing. President Eisenhower declared at a press conference that he did not regard the Maine results as marking a trend: “Maine had a very popular governor . . . and his majority was such that he helped every other person on the ticket.” But by the same reasoning the popularity of the President did not help the Republicans running for Congress.
1954 AND 1948
Mr. Eisenhower’s chosen advisers, in fact, give no sign that they understand the real lesson of the Maine elections, any more than they seem to have understood the real lesson of the Congressional defeat of 1954 or the Dewey defeat of 1948. Writing in Newsweek of Nov. 1, 1954, just prior to the Congressional elections of that year, I offered an interpretation of the probable result that may apply with even greater force today:
“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 61 million in 1952. Mr. 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.”
In the two years since the 1954 elections the Administration’s policies have swung more and more to the left. Even Adlai Stevenson, in accepting the Democratic nomination, admitted that: “After twenty years of incessant damnation of the New Deal [the Republicans] not only haven’t repealed it, but they have swallowed it, or at least most of it. . . . They have caught up with the New Deal at last.”
Mr. Eisenhower, in fact, seems to have been following the theory attributed to Sherman Adams—that if Republicans take over the New Deal they will take over former Democratic voters with it. The record to date suggests that such tactics tend only to alienate traditional Republicans without winning over New Deal Democrats, who put more trust in the originators of the program than in its imitators. Mr. Eisenhower’s popularity is personal, and in large part unrelated to his policies. For some it exists in spite of his policies. The slogan of his promoters has always been, significantly, “I like Ike,” not “I like Ike’s policies.”
NO COATTAILS
Other Republican candidates, it has been shown, cannot ride in on Ike’s coattails. There are no coattails on the Eisenhower jacket. It is not more energetic political campaigning that can save the Republicans from a Congressional defeat, but a highly improbable return before election to their traditional Republican philosophy.
The President’s advisers may think that Administration New Dealism is depriving the Democrats of issues, but its more important effect is to deprive the Republicans of zeal: Some of Stevenson’s recent demagogic and irresponsible proposals, however, may yet frighten enough voters back into the Eisenhower camp.
October 15, 1956
The supreme paradox of the present age is this. Capitalism—particularly in America, where it has reached its highest development—has brought to mankind the greatest liberty, the greatest security against violence, despotism, and expropriation, the greatest abundance, that it has ever known. To the common man it has brought the benefits of mass production and mass consumption, and amenities that, a century ago, were not even within the reach of kings. Yet this very capitalism is in our age daily denounced by the ruling clique in at least half the nations of the globe. More than half the world’s population has been taught to regard capitalism as the worst of all social evils. And within the “capitalistic” countries themselves, most of the “intellectuals” look upon a genuinely free capitalism with distrust. They never tire of satirizing and ridiculing either the system itself or the businessmen who are most successful under it. They advocate “reforms” ranging from more government intervention or “planning” at one end to outright Socialism or Communism at the other.
THE PARADOX
Why? Why, at the very moment when capitalism has brought the greatest material and scientific progress known to history should it be meeting with its greatest disparagement and opposition? This is the question Prof. Ludwig von Mises has set himself to answer in a short book called The Anti-Capitalist Mentality (Van Nostrand, $3.75).
His answer is that the opposition to capitalism finds its main source in the very benefits of capitalism. In a society based on caste and status, the individual could ascribe his adverse fate to conditions beyond his own control. He had no reason to be ashamed of a humble rank, because conditions made it impossible to rise above the class in which he was born. But under capitalism a man’s station in life depends largely upon his own qualities, enterprise, and actions or upon his own defects, errors, and failures. “The much talked about sternness of capitalism consists in the fact that it handles everybody according to his contribution to the well-being of his fellow men. The sway of the principle, to each according to his accomplishments, does not allow of any excuse for personal shortcomings.” And as nearly everybody can find someone who—with no better start—has succeeded better than himself, large numbers of us are tempted to blame the result on “the system,” and to imagine that we would have been or could still be much better off under some other system, such as Socialism.
ROLE OF ENVY
Mises applies this central thesis to the common man, to many white-collar workers, professors, scientists, novelists, journalists, playwrights, actors, and other “intellectuals.” Because his book is so uncompromising, it is bound to arouse strong dissent. Many readers will question whether the envy and frustration that Mises describes constitute a sufficient explanation of today’s anti-capitalist mentality. Others will declare that he overstates the role played by these motives as compared with sheer well-meaning confusion. Still others will contend that many of his statements are too sweeping and unqualified.
But Mises is much too good a logician not to recognize that the arguments against capitalism cannot be answered merely by an ad hominem retort that they spring from discreditable motives. In his great works, Human Action and Socialism, he has spelled out in full the real arguments for capitalism and against Socialism. And he restates them here in summary form:
“The characteristic feature of modern capitalism is mass production of goods destined for consumption by the masses. The result is a tendency towards a continuous improvement in the average standard of living, a progressing enrichment of the many. . . . On the market of a capitalistic society the common man is the sovereign consumer whose buying or abstention from buying ultimately determines what should be produced and in what quantity and quality. . . . The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way.”
October 22, 1956
It would profit us as a nation (including especially the Republican leaders) to study recent economic policies and political results in Britain. When the British Labor Party came into power in 1945, it launched upon a policy of Socialism, “planning,” inflation, and “full employment.” England stumbled from crisis to crisis. The Conservatives were voted back in 1951. They held on in the new elections of May 1955. But those voters who thought the Conservatives would dismantle the Socialism and halt the inflation of the Laborites were disappointed. The Conservatives did arrest the further progress of Socialism, dropped some price-fixing, freed a few markets, and allowed interest rates to go up enough to slow down the inflation. And then the new regime lost its nerve. It lacked the conviction and the courage even to attempt to denationalize the coal mines, the railroads, gas and electricity, telephone and telegraph service, or the Bank of England. It kept all the welfare state schemes. It still keeps rent control. And it hangs on like grim death to exchange control.
‘FULL EMPLOYMENT’
An illustration of the controllist ideology that now governs even the Conservative Party was given by the speech of Harold Macmillan, Britain’s Chancellor of the Exchequer, at a meeting of the International Monetary Fund on Sept. 26. The Chancellor pays lip service to the need of each member country “to follow sound internal policies.” But, he continues: “We must remember that governments today are pledged, and rightly pledged, to policies of full employment and a high level of economic activity. They cannot, therefore, push their fiscal and monetary policies to the point of outright deflation.” Translated into more candid terms, this means that governments today dare not halt their inflationary policies if such a halt threatens to bring even some temporary unemployment.
In the last twenty years, governments have demanded more and more direct controls over their national economies to try to suppress the undesirable results of their own inflationary “full employment” policies.
Chancellor Macmillan admits that he has already been driven “to supplement general monetary and fiscal policies with more discriminating measures, notably the control of hire purchase” (installment-buying). This is only a beginning. If he insists on the continuance of inflation and exchange control, he will find himself driven to additional direct controls. He is concerned because “increased personal spending competes for the same resources as are required for exports and for capital goods.” But if monetary inflation were boldly stopped, and the pound left to find its own level in a free market, this “problem” would disappear. The market would decide, infinitely better than any bureaucrat, how much of the national resources would go into consumption and how much into investment, how much into domestic production and how much into export.
POLITICAL RESULT
Even today Britain’s Chancellor still talks of “the world dollar shortage.” A decade ago an eminent British economist, Roy Harrod, rightly called this “one of the most absurd phrases ever coined.” Though British exchange control was slapped on overnight, as a “war emergency” measure, it still exists. And we find Harold Macmillan eleven years later, still talking timorously (and unconvincingly) about taking “such steps as we can from time to time to liberalize our arrangements for trade and payments.”
Economically, exchange control is not merely futile but pernicious. And where has all this timidity in dismantling Socialistic controls got the Conservitive Party politically? A hint was given in a by-election in Tonbridge on June 8 last, when the plurality of the Conservative over the Labour candidate dropped from 10,196 in the General Election of 1955 to 1,602. This drop of 8,594 was wholly the result not of any gain in the Labour vote, but of a drop of 9,000 in the Conservative vote. The abstentions were due, as one commentator put it, “to a protest against a Conservative government which has forgotten to be conservative.” There may be still time for our own Republican high command to profit from the lesson.
October 29, 1956
The public-opinion polls, various other political checkups, and the elections in Alaska, coming on top of those in Maine, all seem to forecast (1) that the total vote will be substantially less, at least in proportion to the number of eligible voters, than in 1952; (2) that Mr. Eisenhower will win, but by a narrower popular and electoral margin than last time; and (3) that the
Democrats will control Congress by an even more decisive margin than they do today.
This outlook could of course be changed between now and Election Day by some major blunder on either side or some other unexpected event. I present it not as my own, but as a composite forecast. My chief purpose here is to discuss the consequences of such an outcome.
These consequences would depend heavily not only on the election result itself, but on the dominant interpretation of that result. If it is the same interpretation as the one that has prevailed among New Dealers and among those advisers who seem until now to have most influenced Mr. Eisenhower, then it will be concluded that the Republicans were denied the control of Congress because they refused sufficiently to divest themselves of their traditional “ultraconservative,” “right wing,” or “reactionary” opinions, and that Mr. Eisenhower had been re-elected because he had moved sufficiently to the left to get into the middle of the road.
UNLEARNED LESSON
It is as likely as not that this will in fact be the prevailing interpretation. The Republicans have so far failed to learn the lesson of the Dewey defeat of 1948 or their Congressional defeat in 1954. The first part of this lesson is that you cannot win with a me-too policy. You cannot defeat the original New Dealers with Johnny-come-lately New Dealers. New Deal addicts prefer the stuff straight, not diluted with soda water. Mr. Eisenhower seems likely to survive by his sheer personal popularity. But his charm and amiability are personal and nontransferable, and most Republicans will probably find themselves under a heavy handicap.
The second part of the lesson is that wherever a Republican Administration does have the courage to substitute a more conservative policy for a New Deal policy, it must explain and defend its course at least as vigorously and tirelessly as its opponents attack it. And it must do this as it goes along. It cannot afford to leave the defense to a few speeches just before election.
It is possible, of course, that the Republicans who survive this time will see at last that their only hope is to rebuild a coherent conservative philosophy and record to stand on in the next election.
ECONOMIC OUTLOOK
But if the election result is the one that seems at the moment most probable—Mr. Eisenhower with a Democratic Congress—the immediate outlook for a conservative or responsible economic and monetary policy is not bright. It should hardly be necessary to point out again at this late date that the bulk of Mr. Eisenhower’s foreign and domestic policies are essentially continuations and extensions of New Deal policies. We need merely take, as typical examples, farm subsidies, the compulsory minimum wage law, social security, and inflation. The Republican Administration, like the Democrats, believes in farm price supports—only not quite as high. It believes, like the Democrats, in a Federal minimum wage—only not quite as high. It believes, like the Democrats, in expanding social-security benefits—only not quite as recklessly. It believes, like the Democrats, in inflation—only not quite as much. Almost nowhere is there any difference in principle, only in degree.
It is this situation that now causes so much soul-searching among conservative Republicans, and so much apathy on the part of the great body of voters. Whichever of the two major party candidates they vote for, the subsequent policy will probably be more governmental control over our lives, more intervention, spending, and inflation. But even differences of degree are important, and in the matter of inflation, very important. That is why most conservatives will end by voting for Mr. Eisenhower, but with less enthusiasm than four years ago.
November 5, 1956
“Americans are on a luxury-craving and luxury-buying binge unsurpassed perhaps by any other period in U.S. history.” So concludes The Wall Street Journal, in a story supported by some startling examples. Sales are soaring of more expensive clothing, furniture, foods, liquor, foreign tours, jewelry, furs, Cadillacs.
Some of the reasons are obvious: The highest employment, weekly wages, and national income on record. Personal income has been running at an annual rate of $325 billion, compared with $306 billion in 1955 and only $227 billion as recently as 1950. But this is not the whole story. Americans in nearly all income brackets are on a huge spending binge, not merely because of their present prosperity, but because they assume that their current high incomes will continue or even increase. People do not mind paying high prices for luxuries this year, if they believe prices may be even higher next year. Now the Democratic candidate for President has been telling his audiences that they are “deeper in debt” than ever before. As a statement of fact this is correct. Installment debt outstanding in July of this year was $29.1 billion, compared with $18.7 billion at the end of 1952, and $6.7 billion at the end of 1947. Total consumer debt shows similar comparisons. And mortgage debt outstanding on one- to four-family nonfarm houses at the end of last June totaled $94.2 billion compared with $58.5 billion at the end of 1952, and with only $18.6 billion at the end of 1945.
WHY ‘DEEPER IN DEBT’?
But the implication of Stevenson’s “You’re deeper in debt” is the exact opposite of what he supposes it to be. People are borrowing more (and getting more credit) precisely because they are so prosperous and so confident about the future.
In Newsweek of May 7, I called attention to the late Lord Keynes’s belief that there is a “fundamental psychological law, upon which we are entitled to depend with great confidence . . . that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.” Leading disciples regard this “consumption function” doctrine as “Keynes’s most notable contribution” to economics. I pointed out, by a comparison of official statistics of national income and savings over the preceding eleven years, that American consumers acted in accordance with Keynes’s “fundamental psychological law” in only four of those years, and actually reversed the law in seven of them.
KEYNES’S ‘LAW’
Keynes went on to contend that his “law” applied “especially . . . where we have short periods in view, as in the case of the so-called cyclical fluctuations of employment.” Yet it should now be obvious that this is especially where any such law does not meaningfully apply, and where the very reverse is apt to apply. In a depression, people still employed tend to contract their consumption-spending even more than their income has fallen, precisely because they become unsure of the continuance of their jobs and income and suspect that the prices of what they buy will be even lower next month or next year. During “full employment,” on the other hand, many people, as now, tend to increase their spending by an even greater percentage than the increase in their incomes, and even go heavily into debt to buy consumption goods, because they are confident (rightly or wrongly) of the continuance and further rise of their incomes. They assume that the inflationary boom will continue and that consumer-goods prices will be even higher next year. They are borrowing dollars that they expect to pay off in cheaper dollars.
Yet Stevenson deplores this borrowing on precisely the wrong grounds, regards it as a symptom of depression, and recommends still more inflation (more government spending and tax cutting) to combat it. The Democratic platform itself condemns Republican efforts to curb inflation by raising the cost of borrowing as “the first time bomb of the Republican crusade against full prosperity for all.”
If the American people vote for the Democratic candidate for President they will vote for a racing inflation leading to a crackup.
November 12, 1956
What is the meaning of the Eisenhower victory, and what, specifically, will be its consequences for American business?
It is not yet possible to answer these questions in simple or precise terms. In large part Mr. Eisenhower’s reelection is an endorsement of a personality. It is significant that the chief campaign slogan this year, as in 1952, was “I like Ike,” not “I like Ike’s policies.” In the four years since his first election, the President may have lost standing in the public mind as an administrator, but he has not lost stature as a man.
He has, indeed, even more deeply impressed the American people with his earnestness and integrity, his devotion to the national welfare, the national security, and world peace, and with his personal modesty and amiability. He has revealed in remarkable degree the Lincolnesque quality of “malice toward none, charity for all.” And this absence of malice has been especially felt by millions of voters who doubted that absence in Franklin D. Roosevelt or in Harry Truman. Mr. Eisenhower will go down in history as a magnanimous man, above personal spite or vindictiveness.
WHAT MANDATE?
Has the President been given a “mandate” by the American people? And if so, what is that mandate? This question is difficult to answer because the issues in the last campaign were so many and so mixed. We will be nearer to an answer when there has been time to analyze the make-up of the new Congress, not only as regards the exact number of Republicans and Democrats elected, but the exact division between conservatives and radicals, between advocates of centralized power and advocates of states rights, between economizers and super-spenders.
But what is at least indisputable with regard to the Presidential vote is that, insofar as the American people had a choice, they voted for conservatism as against an extension of radicalism, and for a stable dollar as against still more inflation. Stevenson and Kefauver, as the campaign wore on, made it increasingly clear that they favored more government spending and interference, more centralization of power and more socialistic measures in nearly every direction. The Democratic platform came out for income-tax cuts that alone would have reduced revenues by $4.5 billion. Such a combination of increased spending and huge tax cuts would in itself have meant more inflation. In addition, the Democratic platform had denounced the so-called “hard-money policy” as “a time bomb . . . against full prosperity.” This meant that a Democratic Administration would have reinstated a cheap-money policy which could only have led at this time to a very dangerous inflation.
AGAINST INFLATION
It is true that Mr. Eisenhower in the last four years has continued and even expanded many New Deal policies. But he has also refused to continue some important New Deal policies—notably further Federal socialization of electric power. The reckless proposals of Stevenson and Kefauver forced the President in the latter part of his campaign more and more to emphasize his own comparative conservatism.
It is quite possible, therefore, that Mr. Eisenhower’s policies in his new term will become more conservative. He will doubtless continue to respect the independence of the Federal Reserve Board, and will continue to view with concern any development that threatens further erosion of the value of the dollar.
This is the interpretation most likely to be put on the election results by most businessmen. If that assumption is correct, they will go ahead with their current plans. Business confidence, insofar as the election results play a part in it, should continue high in the immediate future.
But even if Mr. Eisenhower does not become more conservative than he has been in the last two years, the Republicans in the new Congress, if they wish their party and their record to be meaningful, will resist the pressures for further expansion of Federal powers, big spending, inflation, and increasing governmental control over our lives.
November 19, 1956
In Newsweek of July 30 and Aug. 6, I wrote two columns questioning the main assumptions of two articles by Harry Schwartz in The New York Times of June 25 and 26. The theme of these articles was that: “An economic race whose outcome could decide the fate of the world is in progress. The leaders of international Communism expect to win the contest by beating capitalism at its own game—production.”
It is of course important not to underestimate Soviet military power. But there is an equal danger of paralyzing resistance to Russian Communism by gross exaggeration of that power. Admiral Radford, chairman of the Joint Chiefs of Staff, has testified that “defense hysteria” has led to precisely such gross exaggerations.
Even Russian steel output, which gets first priority because of its military need, has not been too impressive. In a study for the National Bureau of Economic Research, published last May, G. Warren Nutter pointed out: “[Russian] output of steel ingots in 1913 . . . was the same as that which had been reached in the United States in 1890, 23 years earlier. In 1928, Soviet output lagged 36 years; in 1940, 35 years; and in 1954, 38 years. The recently announced Sixth Five-Year Plan would, if realized [my italics], reduce the lag behind United States steel production to nineteen years . . . [or only] four years smaller than in 1913.”
‘BREAD AND LIBERTY’
When we come to overall production, including civilian, the Communist claims of “beating capitalism” become ludicrous. I pointed out in my earlier articles that there was no good reason for supposing most Soviet statistics to be trustworthy. Reasons for doubting the Communist production boasts have now become overwhelming. For a time the Soviet leaders were able to cover their failures by plundering occupied countries. We can only guess how desperate the plight of the Hungarians must have become to drive them to their heroic revolt, and to their poignant twin demands for “Bread and Liberty.”
Meanwhile specific light has been thrown on production in Poland. On Oct. 16, the Warsaw newspaper Trybuna Ludu acknowledged that Communist Poland’s claims to industrial improvement in the Stalin era were mostly myths. “In industrial development,” this Communist Party organ admitted, “we are about ten years behind the chief European capitalist countries and about 30 to 40 years behind the United States.”
GOMULKA’S PROPOSAL
Then on Oct. 20, Gomulka, Poland’s Communist leader, made some jolting confessions before the Central Committee of the Polish Communist Party. The country, he said, faced a serious inflation. Collectivization of agriculture had been an expensive failure. Individual peasant farms yielded 16.7 percent more produce to the acre than collective farms, and 37.2 percent more to the acre than government-owned state farms. The failures of the collective farms, he continued, had been concealed. “The imbecility of agricultural policy . . . brought ruin to many an individual farmer.”
The situation in industry was certainly no better. Productivity in the coal industry in 1955 was 12.4 percent under that of 1949, though Polish coal miners had been forced to work 93 million hours overtime. Some of the machines and installations Poland was forced to produce, he said, “[had] so far found no application in production and will not find any such application for years to come.” Two million persons were working at unneeded tasks, and still there was large-scale unemployment.
When Gomulka came to housing, he pointed out that in the six-year plan since 1950 Poland had built only about 40 percent of housing needed for mere replacement. And then the bombshell “The insufficient amount of building materials could be overcome by resorting to private enterprise.” (My italics.)
For the last decade Americans have been bombarded with the cliché that if they do not continue to pour their money into the “underdeveloped” countries those countries “will turn in desperation to Communism.” Now we see nations that were forced into Communism trying to turn in desperation to private enterprise.
November 26, 1956
In his fascinating four-volume anthology, The World of Mathematics (reviewed in Newsweek of Oct. 15), James R. Newman has chosen, as his two outstanding examples of the use of mathematics in economics, excerpts from the works of Cournot and Jevons. He has chosen wisely. These are the two outstanding pioneer works upon whose fundamental postulates practically all current mathematical economics is based. If these postulates are unsound, the whole towering structure of mathematical economics is built on sand.
Mathematical economics today enjoys immense academic prestige. Open at random almost any issue of, say, The American Economic Review, and your eye will probably fall on an unintelligible maze of algebraic symbols, differential equations, and diagrams and graphs full of crisscrossing curves. Open almost any “advanced” or even “elementary” college textbook on economics today and you will find the same thing, interspersed with contemptuous references to mere “literary” economists—i.e., economists who manage to get along without an ostentatious arsenal of x’s and y’s, ordinates and abscissa, big Deltas and little d’s.
FUNCTIONS AND CURVES
Then read Cournot and Jevons, and you will find that our contemporary mathematical economists tacitly accept the same underlying postulates, and have since added practically nothing but elaborations. Cournot, more than a century age (in 1838), was already writing such sentences as: “Let us admit therefore that the sales or the annual demand D is, for each article, a particular function F(p) of the price p of such article.” And he was also explaining how “a curve can be made to represent the function in question.”
Cournot’s work seemed so strange and abstruse that it languished in neglect for 40 years. It was not until 1871, when William Stanley Jevons once more applied mathematical methods in his Theory of Political Economy, that mathematical economics began to be taken up in earnest. Today it is a virulent epidemic.
It is precisely because Jevons was bolder (and rasher) in his claims than Cournot that it is easier to detect his unproved or invalid assumptions. The subject is far too basic and intricate to argue in this space, and I am compelled to fall back on citations from authorities. In 1875, the eminent British economist J.E. Cairnes, commenting on Jevons’s work, declared: “So far as I can see, economic truths are not discoverable through the instrumentality of mathematics. If this view be unsound, there is at hand an easy means of refutation—the production of an economic truth, not before known, which has been thus arrived at.”
‘A FIGURE OF SPEECH’
Cairnes’s challenge has remained unanswered. But as he was not himself distinguished as a mathematician, his objections have been disregarded. Yet Paul Painlevé, a mathematician of the first rank, in his introduction in 1909 to the French translation of Jevons’s work, denied the usefulness or legitimacy of mathematical methods in economics except in a quite “humble” and “occasional” role. He pointed out that “the assimilation of the laws of economic equilibrium to the principles of static mechanics” was no more than “a figure of speech.”
The most uncompromising and compact refutation of the postulates of mathematical economics has been made by Ludwig von Mises: “The subject matter of economics is not potatoes, shirts, or razor blades,” he points out, “but human action, which is directed by value judgments. A judgment of value does not measure, it grades. It does not say A equals B. It says: I prefer A to B. Only out of such choices does action come into being. Production and exchange do not result from equality of value, but from value difference. Therefore, in the field of human action, there is no unit of measurement and no measuring. Prices are not measured in money; they are expressed in money.”
Most mathematical economics, in short, rests on invalid assumptions. Businessmen make use of statistics, of course; but they pay no attention to the hypothetical equations and curves of the mathematical economists, who are playing with a false analogy and a wonderful toy that diverts their attention from real problems.
December 3, 1956
It is reassuring that the President has expressed concern about inflation. Unfortunately his remarks reveal the same misunderstandings that have led to the worldwide continuance of inflation.
He falsely distinguished between “two types” of inflation. “One is just cheapened money, deficit spending . . . and printing money . . . that naturally brings rising prices because the money itself is cheaper.” This increase in money supply is the real cause of inflation.
But the President went on to describe what he thought was another type of inflation: “There are also the rising prices brought about by the efforts of all people to gain a bigger portion of the results of our great productivity. Finally you get to the point . . . where you cannot attract money, capital investment money, that will build the factories that give . . . 67 million people their jobs, because lying behind every job in America is an investment of . . . $15,000 to $17,000. That money has got to be accumulated. . . . If you raise prices . . . too rapidly in one area, say the labor area, then prices go up, and finally you get to a point where you simply can’t keep things in order.” He ended by expressing confidence that there would develop “business and labor leadership that is sufficiently wise and farseeing to help solve this problem and keep it within bounds.”
TOO MANY DOLLARS
It is, of course, highly encouraging that the President recognizes the need for industry to earn enough profits to make possible more capital investment. This constantly increases productivity and hence real wages. It is equally encouraging to find him urging unions to refrain from excessive wage demands.
The truth, however, is that there is only one real type of inflation and only one direct economic cause. That cause is an increase in the supply of money and credit. It is the oversupply and the cheapening of the monetary unit that raises prices.
This does not mean that wage rises brought about by union pressure are irrelevant. They are often links in the full chain of inflation causes, though they are neither necessary nor sufficient in themselves to bring inflation. If unions raise wage rates excessively, and there is no increase in the money supply to make the payment of these higher wages possible, the result will not be to bring inflation but simply to bring unemployment. The chain of causation is then: Higher wage rates—higher costs—higher prices—lower sales—lower employment.
WHO’S RESPONSIBLE?
Net unemployment can for a long time be averted or postponed, however, by a sufficient increase in the volume of credit. In this case the chain of causation is: Higher wage rates—increased borrowing from banks to meet larger payrolls—an increase of bank deposits as a result of this borrowing—consequent increase of the money-and-credit supply leading to still higher prices—still further demands for wage increases, etc.
It is precisely here that the responsibility of government for the whole inflationary process becomes clear. If the government had the courage to stop the increase in the money-and-credit supply (chiefly by allowing interest rates to go up), then the only result of excessive wage rates would be unemployment, and the only cure for the unemployment would be to reduce these wage rates back to an equilibrium level.
But hardly any present-day government has the political courage to take this step. Worse, most governments, like our own, build up (through their own equivalents of the Taft-Hartley Act, the Norris-LaGuardia Act, the Walsh-Healey Act, and the minimum-wage law) a situation that encourages excessive wage-rate demands and makes it next to impossible for employers to refuse them. That is why inflation today is worldwide.
Yet every government talks as if inflation were an epidemic beyond its own control. It piously asks labor, business, and consumers to exercise restraint—after it has itself removed the penalties for lack of restraint. As one candid “full employment” zealot confessed in The London Economist more than five years ago: “Inflation is nine-tenths of any practical full employment policy.”
December 10, 1956
At least one aspect of the Middle East crisis, particularly as it affects the Suez Canal and the oil supplied to the West, falls within the province of a business column. This is the importance not only to the interests of the United States, but to world trade, world investment, and world peace, of maintaining respect for international law, particularly as it affects the security of private property.
The situation in this respect has become richly ironic. It was Nasser himself who on Nov. 21 pledged himself “to the strict observance of all the international law which now exists,” and even called for “the expansion of international law to meet the needs of the complex modern world.” Yet the clearest possible case of breach of international law is one nation’s unilateral violation of a treaty to which that nation has itself been a signatory.
The Egyptian Government was not only a party to the Convention of 1888, it renewed its determination to uphold that convention as recently as October 1954. And that convention provided “for the benefit of all the world that the international character of the canal would be perpetuated for all time, irrespective of the expiration [in 1968] of the concession of the Universal Suez Canal Co.” Nasser couldn’t even wait for 1968. He seized the canal on July 26, only six weeks after the last British troops (partly because of American pressure) left Egyptian soil.
CONDONING SEIZURES
What was even more remarkable in all this, however, was the failure of the United States and even England clearly to denounce the arbitrary seizure of an international agency and the private property of foreigners as a violation of international law.
As pointed out in this column of Aug. 27, the American Government in the last twenty years has piled up an amazing record of condoning other governments’ expropriations of foreign-owned private property (including that held by Americans). We in effect acquiesced in the seizure of the British and American oil properties by Mexico, and of the Anglo-Iranian oil properties by Iran. But the British were also prevented from taking any firm stand against the so-called “principle of nationalization” because of their government’s own home record in nationalizing coal mines, railroads, and communications.
It has remained for a few German writers to take the clearest stand on this issue. I have already (Newsweek, Aug. 20) referred to Wilhelm Röpke’s pamphlet on Economic Order and International Law. One German writer who has been particularly active in this field has been Hermann J. Abs, at Frankfurt-am-Main, financial adviser to Chancellor Adenauer, and head of a new organization called the Society to Promote the Protection of Foreign Investment. Abs recognizes how vitally important it is for world peace and world recovery to restore the protection that international law, until the last quarter century, afforded to private property. He declared in Cologne on March 27:
TO PROTECT INVESTMENT
“Without the guaranty that invested capital will remain the investor’s property, bear interest, and be repaid in due time, it will be impossible to mobilize sufficient private capital for foreign projects. It must not be forgotten that private capital both in Europe and the United States has sufficient opportunities to work profitably at home without having to assume the additional risks regularly connected with foreign investment. . . . What is the use of international rules of law, of property-protecting clauses in Western constitutions, national laws and numerous commercial treaties . . . if they are not unreservedly observed in practice?”
Abs went on to recommend “the conclusion of an international Magna Charta, by which if possible all countries in the free world engage to respect and protect rightfully acquired foreign property and other foreigners’ rights. By this Charta, the contracting parties should submit to sanctions determined by an international arbitration court in the case of proven violations of this fundamental government. Perhaps it might be suitable for the Magna Charta to embody general basic rules concerning the fair treatment of foreign investments.”
December 17, 1956
The possible consequences of the Middle East crisis now overshadow all other economic factors. Any discussion of the American business outlook that ignored this crisis would be fatuous. As long as the crisis lasts or grows, a world oil shortage, raw-material shortage, and shipping shortage will last or grow. And so will inflationary pressures.
We got into this crisis largely because our foreign “policy” since the second world war has been a mishmash of specious slogans, fallacious economic ideas, and pseudo-idealistic assumptions with no counterpart in reality. Among the pillars of this policy have been (1) the reiteration that every step we take must be “short of war”; (2) the program of giving away money and goods to foreign governments all over the globe almost regardless of their internal or external policies; and (3) an announced determination to “act” only through the United Nations.
The consequences of these policies are becoming appallingly clear. The gratuitous announcement by the President that he could not “conceive of military force being a good solution” to the Suez problem, and of Secretary Dulles that the U.S. did “not intend to shoot our way through” the Suez Canal, assured Nasser and the Russian leaders that they could commit any aggression or barbarity without fear of reprisal.
BLACKMAIL TO NASSER?
The foreign-aid program has violated every sound economic principle. It has drained America of more than $50 billion of resources. Abroad it has encouraged, subsidized, and prolonged every form of socialism, neutralism, and even anti-Americanism. The huge blackmail we offered to Nasser to help him build the grandiose Aswan Dam (which Egypt needed “as much as another pyramid”) is only one example of the fantastic lengths to which our foreign giveaway program has gone.
Finally, we come to the fetish we have made of the U.N. Here we have been like children bewitched by Tennyson’s vision of “the Parliament of Man, the Federation of the world.” We have acted as if such a dream could be realized merely by setting up machinery, erecting a plate-glass building, and calling the result the “United Nations.” The adjective has become a mockery.
What is no less ironic is that British and French statesmen (who spoke of our “saber rattling” and dangerous belligerency whenever Secretary Dulles used such phrases as “massive retaliation” or “brink of war”) are, now that they are faced with realities, appalled at their success in talking us into timorous appeasement and “action only through the United Nations.” British and French statesmen at last see with crystal clearness that to refer crucial problems to the U.N. is to evade responsibility and invite paralysis. As Anthony Eden has put it: “If we renounce the use of force when law cannot command order, then we are in fact undermining the rule of law. We are leaving the world open to the lawbreakers.”
‘EVERYONE OR NO ONE’
Supplementing this, Christian Pineau, the French Minister of Foreign Affairs, in a speech before the U.N. on Nov. 22, presented a devastating history of the paralysis of the U.N. “each time there has been opposition between the Soviet Union and the West.” Contrasting the U.N.’s intervention in Egypt with its military and moral impotence in Hungary, Pineau declared that if “the democracies alone must bow before the recommendations or the decisions” of the U.N., “the time would soon come when public opinion in those countries, would no longer agree to participation under such conditions. The U.N. must decide to impose its decisions on everyone, or resign itself to impose them on no one.” Its “very existence,” he warned, may be at stake.
Before irreparable harm has been done, let us hope that we in America will stop putting our conscience and decisions in the hands of other nations, and stop throwing away American principles and Western civilization by turning every critical problem over to the hazards of a vote by African, Asian, and Communist blocs.
Until we have steered our way out of the present world crisis, our economic outlook will remain obscure.
December 24, 1956
Suppose a friend stood by while a thug snatched your bankroll; then urged you to negotiate a compromise with the thief; next called a policeman only to restrain you after you had seized the thief to get your money back, and finally offered to share your losses himself if you would promise to stop threatening the thief. What would you think of your friend’s friendship—or of his mental balance? Yet this is pretty close to the policy we have followed with the French and British. A devastating analysis of our foreign political blunders by Hans J. Morgenthau, director of the University of Chicago Center for Study of American Foreign Policy, recently appeared in, oddly enough, The New Republic. “When we heard spokesmen for the government,” wrote Professor Morgenthau, “propound the legal and moral platitudes which passed for foreign policy in the interwar period, we thought this was the way in which the government tried to make the stark fact of foreign policy palatable to the people. . . . We were mistaken. These platitudes are the foreign policy of the United States.” He went on to point out how our “renunciation of force . . . actually increases the risk of atomic war”; and how the subordination of our national policies to the U.N. “makes it well-nigh certain that the enemies of the U.S. will make the terms of the [Middle East] settlement.”
FOREIGN AID FOREVER
Let us turn now to some of the economic consequences of this policy, particularly to the new foreign-aid offers that our government has been so freely making. Whether it was wise or necessary for the British Government to ask the U.S. to cancel $81.6 million and Canada to cancel $22.2 million of interest payments may be doubted. But as the request has been made, it would be unwise of us to refuse it. The enormously larger aid being proposed, however, raises graver problems. If we are to pay for Britain’s losses from Suez, why not those of France? Of all Western Europe? Of Israel? Even of Egypt? How and where and when do we stop?
It is reported that the Eisenhower Administration will ask for more than $4 billion additional foreign aid in the next fiscal year, and thinks “the key to future foreign-aid operations is a grant by Congress of authority to use funds flexibly and without too many strings.” It is reassuring, at least, to learn that Secretary Humphrey is skeptical about the value of another big foreign-aid program and that Senator Byrd is “opposed to any further continuation of foreign economic aid.” The more than $50 billion of aid we have granted since the end of the second world war was not only a gross waste, it actually went to subsidize and prolong harmful collectivist economic policies. There is no good reason why Congress should grant still further discretion to the executive branch in this direction. The discretion the executive branch already has on foreign aid has been used without wisdom. It is dangerous for Congress to keep delegating and abdicating more and more of its constitutional responsibilities and its control over the purse.
TO FREE THE POUND
The International Monetary Fund and the Export-Import Bank are both ill-advised institutions. Both give undue discretion to the executive branch. Both are political institutions which necessarily politicalize foreign trade and investment. Now the fund has authorized Britain to draw up to $1.3 billion against it. Britain may perhaps get, in addition, a $500 million to $600 million loan from the U.S. Export-Import Bank.
And these funds are to be used to subsidize the continuance of the thoroughly unsound policies of exchange control and artificial price support for the pound sterling. The so-called “dollar shortage” is caused by exchange control (i.e., by coercive overpricing of the pound and other currencies). The alternative is not another “devaluation” of the pound. It is to let the pound go free, like the Canadian dollar, and to support it, not by the police power, but by restoring confidence in the currency through sound policies. The only sound policies, as Canada has shown, are those calculated to attract both domestic and foreign private investment. The cure for the world’s economic ills is not more statism, but a return to free enterprise.
December 31, 1956
The economic future depends not only on the vagaries of nature, but on what two and a half billion people are going to think and do, individually and compositely. That future can therefore never be foreseen with certainty. But every businessman and worker is forced to base his producing and spending plans on some assumption regarding the future. Among the people best qualified to assess the business outlook are those who make a business of it. I have asked a group of prominent business forecasters to give me their estimates of the probabilities for 1957 or for the next six months. Here are the results:
Martin R. Gainsbrugh, National Industrial Conference Board: Business activity is still gaining momentum as the year ends. Four types of demand have pushed gross national product into higher ground each quarter: (1) consumer upgrading as well as rebudgeting, so that modest percentage increases in outlays for soft goods and services kept total consumption expenditures rising, in the face of a 10 percent decline in what was spent for the big-tag, durable goods, (2) a sharply accelerated rate of spending for plant and equipment by private industry, (3) further growth in the outlays of state and local units of government in response to ever-mounting population pressures, and (4) expanded markets for goods and services abroad. These should again contribute to expansion in 1957, excepting possibly private business investment. Our estimates of new capital appropriations prepared for Newsweek now show signs of decline. This may mean less capital spending six or nine months hence.
‘ANOTHER BEST YEAR’
The Conference Board Economic Forum’s collective view: Gross national product for 1957 may rise about 4 percent above the 1956 figure equally divided between price and volume. Rate of growth may decline in the second half, but a new offset may be emerging: Greater Federal spending directly for defense or economic aid or indirectly through resuming rapid tax amortization of new defense facilities, particularly steel.
Leo Cherne, Research Institute of America, New York: 1957 will be another best year ever—and yet, very different from those which have gone before. The momentum of current high spending assures continued gains during the early months of the new year. But the zip of the sharp pickup, evident especially during the last quarter of the current year, will be missing. By spring and summer the boom will begin to look somewhat wobbly, hesitation more prevalent than bubbling optimism. The long succession of tight-money moves will make itself felt. Their cumulative effect will be particularly noticeable in construction, inventory policy, and consumer purchases of new cars and other durables. The one unpredictable element which may color all expectations is the developing crisis in Soviet satellite nations and any repercussions which may flow from spreading unrest or Soviet military actions.
PRICES AND BUILDING
Charles F. Roos, Econometric Institute, New York: During the past year, industrial commodity prices have generally reflected an average 5 percent increase in hourly earnings, an average 3 percent increase in productivity or output per man-hour, and ½ of 1 percent decrease in average profit on sales before income taxes. Average hourly earnings will move up about 2 percent during the first half of 1957 and productivity about 2 percent. Because of increases in excess capacity, profits on sales are likely to decrease by about ½ of 1 percent. Hence prices are apt to be about ½ of 1 percent lower.
Roy Wenzlick & Co., St. Louis: Residential building in 1957 will be slightly under 1956, both in dollars and in number of units. In many communities the housing shortage has disappeared, and in all communities money is tighter and interest rates are higher. This will probably result in more than 900,000 new dwelling units for the year, but less than 1 million. The dollar value of new residential building will not be down by so large a percentage, as the buildings that go forward will average larger in size an better in quality. Total construction of all types will probably equal the dollar total in 1956.
- 1C.W. Anderson to John Denson, 10 May 1954, Folder “Correspondence re: 1954 Heart Attack,” Henry Hazlitt Papers, Foundation for Economic Education Archives.
- 2Loyal readers of Newsweek had reason for disquiet when the latest issue hit the stands on May 3, 1954. Those who managed to endure the details of the ongoing Army-McCarthy hearings or the deteriorating French position in Indochina sought solace, and more stimulating fare, by flipping through as usual to the business section. There, in a series of pieces over the past month, columnist Henry Hazlitt had offered his typically engaging analysis of contemporary economics, examining, in the context of the recent recession, how a more steeply progressive tax code might dampen both government revenues and business profits. Now, however, his “Business Tides” column—a staple of Newsweek’s back pages since 1946—was nowhere to be found. Weeks passed, spring gave way to summer, but the troubling void remained. Nervous letters began to flood editors’ in-boxes. “I would like to know what has become of Henry Hazlitt’s column in your magazine,” demanded the executive VP of one Midwestern industrial association, echoing scores of other concerned correspondents. “Frankly, it was the principal if not the only reason that I subscribed.” Such missive-writers shuddered to contemplate whether management had discontinued the column, silencing the most clarion voice for economic liberty in American popular media.
