Business Tides
A World Super-Bank?
January 2, 1961
As the gold-and-dollar problem increases, and no one in authority wants to take the agonizing corrective steps, everyone tries hopefully to find some painless and easy way out. This accounts for the sudden popularity of two proposals. One is to abandon even the legal 25 percent gold reserve requirement in our Federal Reserve System. The other is the proposal of Robert Triffin of Yale to set up a world super-bank.
The first proposal, already put forward by a few American bankers, has now been blandly endorsed by no less a figure than Per Jacobsson, the managing director of the International Monetary Fund. I have already devoted several articles to trying to show what is wrong with it. It would destroy the last meaningful restraint on credit expansion. Against its paper liabilities our banking system would be required to hold nothing but paper reserves. There would be no further brake on inflation except the arbitrary discretion of our monetary managers. And these would have politicians and labor leaders constantly breathing down their necks demanding more inflation to maintain “full employment.”
KEYNES PLAN REVIVED
The Triffin plan would turn the International Monetary Fund (IMF) into an international central bank for national central banks. These central banks would be required to keep on deposit at the IMF a minimum of 20 percent of their total reserves of gold and foreign currencies. Against these reserves the IMF could make loans and create deposits, or conduct “open market operations”—in other words, manufacture more money or more “reserves” against which more money could be issued.
In broad outline, this is a revival of the Clearing Union scheme originally proposed by Lord Keynes at Bretton Woods. The Keynes plan was rejected on the sound argument that it would have led to continuous world inflation. Triffin tries to meet this by proposing that his world super-bank should not be allowed to inflate at a rate of more than 3 to 5 percent a year. He does not say what assurance we have that most member governments would not vote, as soon as they got into difficulties, for a much faster rate.
Another objection to the Keynes plan was that it would have meant a surrender of national sovereignty to an international institution. To keep its currency at parity with the world central bank’s, every nation regardless of its internal economic or political situation, would have had to inflate as fast as, but no faster than, all the rest. Triffin would apparently meet this by allowing considerable monetary “independence” to each nation. They could of course have all they want of this now, with no international central bank at all. But if they had this “independence” with a world central bank, then the countries that inflated the most would be exploiting the countries that inflated less.
WHO GETS WHAT?
This calls attention to the central fallacy of the world central bank scheme. It would be a bank in which the U.S. would make the lion’s share of the deposits while the “underdeveloped” countries would get the lion’s share of the loans. This would mean more foreign aid, though disguised. Even under the IMF, as Triffin admits, the U.S. has been practically “the sole net lender.”
In a world super-bank, there would be endless disputes concerning the distribution of the newly created fiat money among the member nations. These conflicts would probably lead to the breakdown of the whole scheme.
The reason proposals like this are now being seriously discussed is that no one likes to face the alternatives. An embargo on the outflow of gold, or a unilateral devaluation of the dollar, in the sense of a marking up of the dollar-price of gold, would be regarded as a breach of faith by the central banks that hold reserves in dollars. The mere discussion of such plans would precipitate massive anticipatory speculation and a crisis.
An indispensable part of any real cure would be a complete halt to our inflation. As prevailing opinion thinks that inflation is necessary to maintain employment, nobody likes to face this. That is why we listen to siren voices assuring us that the cure for the evils of past national inflation is more world inflation. 
January 9, 1961
The new Administration is already laying plans for a program of Federal medical care for the aged, tied to the social-security program, for Federal aid to education, a Federal housing program, a rise in Federal minimum-wage standards, and “redevelopment” of “economically depressed areas.” All these proposals mean more Federal intervention, more concentration of power, more spending, more taxing, more paternalism, more statism.
Yet all this was determined by the thinnest of margins—a plurality of 112,801 in a total vote of 68,832,670. Kennedy’s percentage of the major party vote was 50.1 to Nixon’s 49.9. Of the total vote for President, Kennedy received a minority: 49.7 percent to Nixon’s 49.6.
But in the American system, the winner by no matter how hairline-thin a margin, takes all. If we had a Cabinet system, as in Britain, everything would depend on the margin in the legislature. The government might have to resign if the vote on a single important bill went against it. This would make it cautious. But the Kennedy Administration will be able to introduce or push any legislation with comparative impunity. On this basis the prospect is that conservative Republicans and Democrats, though they may succeed in modifying some extreme measures, will merely fight a slow defensive retreat.
CONSERVATIVE SHOWING
There are, however, two other elements in the outlook. One is the climate of opinion. The other is a hard economic reality.
Let us begin with the first. In spite of the Kennedy victory, the overall election evidence indicates that public opinion is actually more conservative now than it was two years ago. That half the electorate voted against Kennedy, in spite of Nixon’s failure to speak out on major issues or to present his case effectively, shows how widespread the conservative feeling is.
Such a conclusion cannot, of course, established beyond dispute. Sixty-nine million voters cast their votes for 69 million different mixtures of reasons. But an analysis supplied to me by Adm. Ben Moreell, chairman of the board of trustees of Americans for Constitutional Action, raises an impressive presumption.
The ACA has compiled an index by which it rates congressmen and senators according to their degrees of conservatism or radicalism. Their ratings are based on seven criteria: For sound money and against inflation; for economy and against waste; for the private market and against government interference; for local self-government and against centralization; for private ownership and against government ownership; for individual liberty and against coercion; and for national security. On this basis they found that with a few notable exceptions Republicans are far more conservative than Democrats. For example, in the House, those with ratings between 80 and 100 percent will include 91 Republicans and no Democrats; those with ratings between 0 and 9 percent will include 57 Democrats and no Republicans.
ACA ANALYSIS
The election results showed that 24 New Deal Democrats with very low ACA ratings were defeated in the House by Republicans whose records indicate that they are far more conservative. Two conservative Republicans were defeated, a net gain of 22 for conservatism.
The unions threatened to purge everyone who voted for the Landrum-Griffin Act. Actual result: Of 229 members of the House who voted for passage, only four were defeated; of 201 who voted against passage, 22 were defeated.
Five New Deal Democratic governors—Loveless of Iowa, Freeman of Minnesota, Docking of Kansas, Furcolo of Massachusetts, and Herseth of South Dakota—were replaced by more conservative Republicans. The Republicans gained control of ten State Legislatures and lost two, a net gain of eight.
So much for the temper of the electorate. In addition, the effort to push through a huge paternalistic spending program will now find itself up against a hard (or should one call it soft?) economic reality: The loss of gold, the weakness of the dollar.
January 16, 1961
It was in the early 1960s, writes the Chinese historian Hi-Ho-Hum,1 that the United States “demonetized” gold, with consequences that astonished the advocates of the plan.
In 1958, 1959, and 1960, continues Hi-Ho-Hum, the United States suffered a heavy loss of gold. The monetary authorities became worried. But an article in The London Economist of Dec. 24, 1960, suggested what seemed an easy way out of their difficulties. The article was in the form of a fable, set in an imaginary future. But its proposals were made in earnest, and so were its predictions of the economic consequences of adopting them.
What the article advocated, in short, was that the American Federal Reserve authorities put an embargo on gold, and discontinue either buying or selling it at $35 an ounce or any other figure. The International Monetary Fund was to take over this obligation for six months longer, but announced that at the end of that time gold would be demonetized entirely. It would become “just a commodity.”
WHAT WENT WRONG
The Economist predicted that everybody would rush to get rid of his gold at $35 an ounce while there was time; and that gold would finally fall to $2.50 an ounce.
In disparaging gold (adds the historian in a footnote) the Economist talked as if it were being wonderfully clever and original. It forgot that sixteen years earlier, Keynes had denounced gold as “a barbarous relic”; that Bryan in 1896 railed against “crucifying mankind upon a cross of gold”; and that Sir Thomas More, in 1516, suggested the proper use of gold was for prisoners’ chains and chamber pots.
The American and IMF authorities, continues Hi-Ho-Hum, adopted the Economist’s proposals with alacrity and even ecstasy. But the consequences, as we in 2072 now know, were the exact opposite of those the Economist had expected. No central banker, or private hoarder, was foolish enough to turn in his gold for 35 paper dollars an ounce. When the IMF tried to continue buying and selling gold at that figure, after the Federal Reserve Banks had stopped, it was drained of all its gold in three days. Gold, instead of falling in price, rose on the world’s free markets to $45 an ounce on the first day, soared to $64 in a few weeks, and then settled between $55 and $60.
There was one regrettable side effect. Emergency psychiatric wards were opened in Washington and London hospitals to take care of monetary managers and Economist editors who had advocated the step and predicted that gold would fall to $2.50 an ounce. They were suffering from shock.
HI-HO-HUM GOES ON
Yet a little thought, taken in time, might have saved them. They themselves had recommended that gold be treated just like any other commodity. The American Government took this literally. It ceased to make it a criminal offense to hold, own, or buy gold. Removing this prohibition enormously increased the demand for gold on the part of the people. Further, the gold was now being bought with, and priced in, paper dollars of unknown future value. People rightly interpreted the demonetization of gold as a mere first step to an acceleration of fiat money inflation everywhere. They sought to spend their paper dollars while the dollars still had any value.
Moreover, the “demonetization” of gold, paradoxically, led to resumption of its use as money, something not widely seen since 1914. New long-term contracts, debts, and bonds were made payable in ounces of gold, at the insistence of lenders who did not trust the future value of paper currency units. Exporters everywhere increasingly refused to sell except in terms of gold. Stores priced goods both in paper money and in grains of gold. Gold coins, privately minted and stamped with their weights, came into circulation.
After ten years, concludes Hi-Ho-Hum, the world’s governments finally recognized that for the wrong reasons they had stumbled on the right thing. They were forced, in order to give them any value, to make their paper currencies convertible into gold again.
2One of the most learned writers of the 21st century, frequently quoted by the late Simeon Strunsky.
January 23, 1961
Once more we have had an interregnum (of two and a half months) between the election of one President and the retirement of a predecessor of the opposite party. Once more needless risks were taken, uncertainty created, urgent decisions postponed, and serious harm done by the long delay in actual transfer of office and power.
The Communists did not miss their opportunity to exploit this interregnum. Castro launched on more seizures, charges, insults, and humiliations. When Mr. Eisenhower at last took the only step possible in breaking off relations, Mr. Kennedy disassociated himself from it on the excuse that he did not know the facts. There was even Democratic criticism of Mr. Eisenhower for “limiting the freedom of action” of the new Administration—though any decision or action whatever by the outgoing Administration in any field would necessarily do that.
Then Khrushchev sent a New Year’s message, not to the legal President but to the President-elect, expressing hope that relations between the U.S. and Soviet Russia would “develop in the new year on a new and reasonable basis”—in other words, that we would make more retreats and concessions. Nothing was said in reply to disabuse him of this hope.
PREMATURE BUDGET
Communist aggression in Laos was greatly stepped up in tempo. In reply, the Eisenhower Administration could do little promptly or decisively because it had only a few weeks more in office.
By foolish law, and not by any constitutional requirement, Mr. Eisenhower had to deliver, within a few weeks of his leaving office, a new State of the Union Message, and a budget for a fiscal year that does not begin until next July 1—a year during which he will not be in office a single day and for which he cannot reasonably be expected to assume responsibility. It is improbable that Congress or the new Administration will pay the slightest attention to this budget. Its premature presentation not only puts needless work on the outgoing Administration but serves the mischievous purpose of seeming to relieve the incoming Administration of full fiscal responsibility for that year.
In Britain the budget for a new fiscal year does not have to be presented to Parliament until a few weeks after that fiscal year has already begun. Our budget law ought to be amended right now either to relieve an outgoing President of this senseless duty, or to change the fiscal year, or to postpone the required date of the annual Budget Message.
DANGER TO THE DOLLAR
But perhaps the most serious damage of the interregnum just ended has been in the monetary field. On Nov. 28 President Eisenhower served notice that he was “determined to take whatever decisions are necessary . . . to protect the integrity of the dollar.” From an Administration with only seven weeks to live, this pledge was practically meaningless. The attempt, wise or unwise, to negotiate with Germany on troop support was doomed to fail. What the world wanted to know was what the new President would do. But Mr. Kennedy was silent. He refused to repeat his pre-election pledge (of Oct. 30) not to “devalue the dollar from its present rate.”
His excuse for his silence and disassociation was substantially the same as Roosevelt’s to Hoover 28 years ago: “It would be unwise for me to accept an apparent joint responsibility with you when, as a matter of constitutional fact, I would be wholly lacking in an attendant authority.” Yet all during the interregnum period Mr. Kennedy was receiving and publishing “task force” reports recommending immense increased spending and deficit-creating measures. All these were undermining confidence in the dollar and increasing the run on gold.
The risks and evils of the interregnum period could be removed by a simple amendment of the Presidential Succession Act permitting any outgoing and incoming President to agree, if both wished it, to an earlier transfer of office and power than Jan. 20. This earlier date could be set in each case in accordance with circumstances and mutual convenience. Responsibility would then no longer be blurred, decisions no longer paralyzed.
January 30, 1961
When this country went off gold in 1933 its bonds and currency contained the most solemn pledges that they would be redeemed in gold on demand, at their face value in dollars, at the rate of $20.67 an ounce. This pledge was dishonored. Holders who asked for the gold they assumed was theirs were denounced as enemies of the country. They were ordered to turn over all their holdings of gold to the government. Further possession of the metal was made a criminal offense.
But in this act of bad faith there was one oversight. The government had neglected to make it a crime for American citizens to buy or own gold abroad. Discovering this 28 years later, the Eisenhower Administration, though it had only one week to go, could not wait for the Kennedy Administration to assume office before plugging the awful loophole.
Let us pass over such trivial questions as the abridgment of personal liberty or private property rights. Will the new prohibition accomplish its ostensible aim of “protecting the integrity of the dollar” and halting or reducing the outflow of gold? Obviously it will do nothing to bring gold back. The amount of gold Americans hold abroad is not known. Estimates range from a top of $1 billion to less than $50 million—trivial sums against a world monetary gold stock of more than $40 billion or even our shrunken holdings as of Jan. 11 (the lowest since 1939) of $17.6 billion.
FLOW-BACK UNLIKELY
But there is no reason to suppose that any substantial part of this American-held gold will flow back. Putting aside probable evasions of the new ruling, even the Americans who comply are unlikely to sell their foreign- held gold for dollars. They bought the gold precisely because they did not trust dollars. Therefore they will in all likelihood sell it for foreign currencies or invest- ments—anything but dollars. Moreover, as they have until June 1 to sell, and cannot get less than $35 a ounce for it, they may hold until then against possible dollar devaluation in the meantime.
True, the new regulation may prevent Americans from buying more gold abroad. But it will probably tempt foreigners to buy more gold at $35 an ounce while they still have the chance. These foreigners, as pointed out by S.J. Rundt, a consultant on international business, include residents of Germany, Switzerland, Lebanon, Argentina, Belgium, Canada, Costa Rica, Ecuador, Jordan, Kuwait, Panama, Paraguay, Peru, Saudi Arabia, Uruguay, and Yemen. These people, unlike those in the Land of Liberty, are allowed to own, buy, or sell gold in any form.
REDUCING CONFIDENCE
In brief, the Eisenhower Administration’s expiring act will further reduce confidence in the dollar. It will lead foreigners to conclude that our currency situation must be more desperate than they had supposed. Otherwise, why would a government with only one more week in office feel that action could not wait that long? They will also assume that this new prohibition is a prelude to further restrictions on the convertibility or transferability of the dollar, or on the movement of American capital.
The new prohibition attacks symptoms and neglects causes. It blames the “speculators.” It blames the people who have lost confidence in the dollar instead of re-examining or correcting the policies that have caused them to lose confidence.
What the United States faces today is only derivatively a “balance of payments” crisis; it is primarily a crisis of inflation. If for a moment we neglect the goods and dollars that we deliberately give away in foreign aid, payments always balance—for the simple reason that people insist on being paid for what they sell. If, in return for the goods they sell to us, foreigners buy gold instead of other goods, it is because they think gold is the better bargain. They will think this as long as our commodity prices, as a result of domestic inflation, are too high as compared with the price at which we sell gold.
The real and only permanent cure for the gold outflow and the “deficit” in our balance of payments would be to halt our inflation. But this is the one course that nobody in office is seriously discussing.
February 6, 1961
President Kennedy’s assurance that “the dollar must be protected, the dollar can be protected in its present value” is gratifying as far as it goes, but will require courageous measures to make it effective.
The first thing we must do is to make the correct diagnosis of the disease. The prevailing diagnosis is not correct. What we are primarily suffering from is not a “balance of payments” crisis but an inflation crisis. Confidence in the dollar has not fallen because of a “deficit” in the balance of payments, but there is a “deficit” in the balance of payments because of our inflation. The cure, therefore, is not to try to tinker directly with the balance of payments but to halt the inflation. If we do this, the balance of payments will correct itself.
What would we have to do to halt the inflation?
1—We would have to raise short-term interest rates. Last June and August, the Federal Reserve did exactly the opposite of what was required when it lowered the discount rate from 4 to 3 percent. The direct effect was to cause short-term balances to go abroad for higher interest rates. The indirect effect was to cause loss of confidence in our determination to defend the dollar. We have encouraged monetary inflation to go on so uninterruptedly for 27 years that perhaps the only way we could convince the world we meant to halt inflation now would be temporarily to forbid any further increase in the total loans and investments of the banks.
2—We would have to balance the budget, convincingly and dramatically, not by another burdensome and strangling increase in tax rates but by slashing nondefense expenditures—particularly such items as foreign aid, farm price supports, public roads and housing—and by halting further increases in welfare and social-security commitments. In brief, we must do exactly the opposite of what all the Kennedy task forces have recommended. It may be sobering to recall that of our enormous Eisenhower-planned budget expenditures of $101.8 billion for the fiscal year 1962, $54.4 billion, or more than half, are for nondefense items.
3—Finally, we would have to repeal all Federal labor legislation which compels men to join unions, compels employers to bargain exclusively with specified unions, permits mass picketing or labor violence—in other words, makes it next to impossible for employers to resist unreasonable, uneconomic, and inflationary wage demands.
Merely to list these essentials shows how tremendously difficult is the political problem of getting the only real economic solution accepted. The politicians wish to take precisely the opposite measures. The assumption behind all the task-force reports is that the correct solution of the dollar problem is more inflation, not less; that the way to cure unemployment is not to restrain or correct excessive wage rates but to increase government spending, to lower interest rates, to increase the supply of paper dollars still further, to raise prices-in short, to inflate and inflate.
TRANSITIONAL STEP
In this unhealthy ideological climate, in which the real solution is so unlikely to be adopted (at least at present), one must face the question of the least harmful alternative. In fact, one must face the question of what must be done even if, after an inflation of 27 years, the real solution is now belatedly adopted. There are writers who believe that even today we could establish a full gold standard at $35 an ounce. The result of any such attempt, however, would be to drain the Federal Reserve System of gold in a few weeks, and force an intolerable deflation.
Probably the least harmful transitional measure, pending re-establishment of a full international gold standard, would be for our government to stop buying or selling gold, permit a free gold market, and compensate foreign banks for any loss of value of their present dollar reserves in terms of their own currencies. Whatever drawbacks such a course may have, they seem less than those of the alternatives being seriously considered. The real danger foreshadowed by the Allan Sproul staff report is that we will plunge into still more inflation and attempt to “repress” its consequences by exchange controls and price controls.
February 13, 1961
The President and his economic advisers seem to think that the integrity of the dollar can be defended chiefly by uttering the right phrases. So Mr. Kennedy “pledged” himself once more to take no action “to increase the dollar price of gold from $35 an ounce” or “to impose exchange controls” or “to distort the value of the dollar in any fashion.” And then he proposed a gigantic spending program that would unbalance the budget, accelerate inflation, and precipitate a crisis that would lead either to a complete drain of our free gold reserves or the very exchange controls or rise in the dollar price of gold against which he was pledged. It is as if a debtor, whose current liabilities already exceeded his quick assets, were to pledge himself to repay on demand 100 cents on the dollar and then go off on a spending spree.
What ails the dollar today is not a “deficit” in the balance of payments or the loss of gold. This is merely a consequence of our past and future-feared inflation. The dollar can be saved only by abstaining from further inflation. Mr. Kennedy’s cure is to step up the inflation.
His remedy is the result of a wrong diagnosis. This is not merely his personal diagnosis. It is that of all his advisers—of the Galbraiths, Samuelsons, Sprouls, the authors of practically all his task-force reports. It is, in fact, simply the Keynesian diagnosis that has bewitched the New Dealers of the last quarter century.
MORE INFLATION
To these people the greatest economic disaster that can befall a nation is unemployment. But it never for a moment crosses their minds that this unemployment may be the result of excessive wage rates or excessive labor costs that endanger or wipe out profit margins, that raise prices in the domestic market to a level that reduces demand, or costs to a level where we can no longer meet foreign competition. Never do their remedies for unemployment contemplate the slightest downward adjustment in any wage rate, no matter how out of line it may be. On the contrary, they insist on labor-relations laws and minimum-wage laws calculated to push money wage rates still higher.
And then they proposed to make these high wage rates payable by further inflation, which is to raise prices and “increase purchasing power.” This purchasing power is always to be increased by increased government spending, by bigger government deficits. And though they are always demanding “faster economic growth,” their concern for increased purchasing power or increased incentives for job-creating investment, for enlargement or improvement of our productive plant, is at best secondary. Their primary demand is increased purchasing power for consumption. “The fairest and most effective step the Federal government can take to help fight the recession [the words are from the Samuelson report] would be to expand unemployment compensation benefits. Such expenditures go to those who need them and will spend the money promptly.”
BUILT-IN UNSTABILIZER
So item No. 1 on the economic agenda is to increase and prolong these benefits—to “provide unemployment benefits of at least one-half of the employee’s earnings,” and to “extend the term of benefits to a minimum of 26 weeks in all states, supplemented by an additional thirteen weeks during periods of high national unemployment.”
But will bigger and longer unemployment benefits tend to reduce unemployment—or to increase and prolong it? May not this so-called “built-in stabilizer” be in fact a built-in unstabilizer? When we make bigger and longer payments to the unemployed we reduce the spur on the individual to seek a job promptly and the pressure on union leaders to accept more workable wage rates. We increase the rigidity of wage rates in the downward direction. In brief, we tend to increase and prolong unemployment as we increase and prolong the subsidies we pay for it.
Mr. Kennedy’s spending program will endanger the dollar still further. This is the most harmful thing he could do. It would not only undermine American prestige but disrupt international trade, confidence, and monetary stability.
February 20, 1961
Mr. Kennedy’s economic program raises so many questions simultaneously that it seems best to discuss some of them in a series of brief notes.
Campaign Document: The President’s economic message of Feb. 2 is a partisan document. It professes to be dealing with a crisis brought on by the apathy of his predecessor. “In the past seven [i.e., Eisenhower] years, our rate of growth has slowed down disturbingly.” Slowed down from what? In the eight Eisenhower years our gross national product grew, in real terms, by 23.7 percent, or about 3 percent a year. Over the preceding eight Truman years it grew 8.1 percent, or 1 percent a year.
The Growth Game: The fact that the American economy reached the highest production on record in 1960, at $503 billion, is treated not as an achievement but as a disgrace. This was nothing compared with what it ought to have done: “It was capable of producing at least $535 billion.” If it had done what it ought, then “$20 billion more personal income could have been earned. . . . Corporate profits could have been $5 billion higher” and everyone could have had a job. The growth slogans may be economic hocus-pocus, but they are a wonderful political device. No matter what the economy has done, it can always be argued that it ought to have done better, and that your own remedies would have done it.
Spending Cure-All: Mr. Kennedy’s own chief remedy is spending, spending in every direction, more and faster spending on agriculture, on housing, on highways, on “urban renewal,” on unemployment compensation, on depressed areas, on distribution of “surplus” food, on school lunches, on veterans, on defense contracts, on education, on flood control, on irrigation, on forests, on “long-range energy resource development,” and on a beefed-up and expanded social-security program.
No Budget at All: How much would all this increased spending come to? Mr. Kennedy does not say. His message not only fails to give any total, but even the cost of the chief individual items. He is content to say that “the programs I am now proposing will not by themselves unbalance the budget which was earlier submitted”—apparently for the reason that he expects a deficit anyway, so what difference can a few more billion make? We are to operate, apparently, with no budget at all.
To be sure: “This Administration is pledged to a Federal revenue system that balances the budget over the years of the economic cycle—yielding surpluses for debt retirement in times of high employment that more than offset the deficits which accompany—and indeed help overcome—low levels of economic activity in poor years.” The political advantage of this system is that no one can ever hold you to account, because no one knows when an “economic cycle” has begun or ended, or just where we are in it, or when employment is ever high enough to take the terrible risk of balancing or overbalancing the budget. We have already had 24 budget deficits in the last 30 years. The record will become even worse if we adopt the indeterminate “cyclical-balance” theory as official doctrine.
Social Security: The most reckless spending proposal of all is that increasing social-security commitments in all directions. The OASDI program has long cried for expert reappraisal and study. Its “unfunded liabilities” have been estimated by actuaries as already from $350 billion to $650 billion. The month-long strikes, riots and violence in Belgium, when the government proposed very moderate reductions in the social-security benefits which some groups had got used to, were an ominous warning to other nations of the political as well as economic dangers of overcommitment. Social-security benefits are easy to raise, enormously difficult to reduce.
Inflation: In brief, the Kennedy economic program accepts lock, stock, and barrel the Keynesian economic philosophy, which never sees the cure for unemployment in any adjustment of wages, prices, or costs, but only in more and more spending and inflation.
February 27, 1961
Once more, in his message to Congress on the balance of payments, the President pledged that: “The U.S. official dollar price of gold can and will be maintained at $35 an ounce. Exchange controls over trade and investment will not be invoked. . . . A return to protectionism is not a solution.” Once more the actual policies he proposed would make it impossible to keep all these pledges.
Solutions must deal with causes. The “deficit” in our balance of payments is not the basic cause of our gold and dollar problem. The basic cause is inflation. This includes both the inflation that has been built up for the last quarter century and the future inflation that is now feared. The “deficit” in our balance of payments is itself one of the consequences of this inflation. Yet ninetenths of the economic proposals that Mr. Kennedy has made in his first weeks of office would increase the inflation.
The assumption that the basic cause of our gold and dollar problem is the “deficit” in our balance of payments is a relic of seventeenth-century mercantilism. And most of the immediate measures that Mr. Kennedy proposed, seeking to eliminate this “deficit” directly, move in fact toward protectionism and exchange control.
RESTRICTIONISM
This is true, for example, of his proposal to reduce the duty-free allowance for returning travelers from $500 to $100. This might have been urged on the ground that the larger allowance discriminates in favor of people who can afford to travel; but it was actually urged on a “balance of payments” argument that would be just as good or bad for any other measure to restrict imports.
His other measures lead toward exchange controls and further restrictions on the freedom to trade and invest, to buy and sell, to lend and borrow. This applies to his endorsement of the prohibitions on Americans against buying or owning gold at home or abroad. It applies to his proposals for laws “to prevent the abuse of foreign ‘tax havens’ by American capital abroad as a means of tax avoidance”—leaving it to bureaucrats to decide just what is “legitimate” private investment abroad. It applies to his proposals to control and compartmentalize interest rates, discriminating in favor of foreign lenders, and keeping up short-term rates while pushing down long-term rates. Such schemes could not be made to work at all without exchange controls, government discrimination as between both borrowers and lenders, and detailed government intervention in the money market.
Finally, it is disturbing to have Mr. Kennedy decry as “speculation” every effort of Americans to protect themselves against further devaluation or debasement of the dollar. This view must lead to exchange control.
HALT THE INFLATION
Mr. Kennedy’s statistical pictures seems unduly optimistic. The fact is that against $17.4 billion of gold reserves we have short-term liabilities to foreigners of $20.9 billion. Nearly two-thirds of these are official holdings for which gold could be demanded; most of the rest could easily be turned into official holdings. Of our $17.4 billion gold reserves less than $6 billion are “free.” The remaining $11.4 billion are held as a required 25 percent reserve against Federal Reserve notes and deposits. Mr. Kennedy hints that we could abolish the reserve requirement. This would merely protect foreigners a little longer at the permanent expense of our own citizens. One can imagine what the effect of such an announcement would have been if Americans as well as foreigners were free to convert their dollars into gold.
The first and only cure of the dollar problem, and the so-called balance-of-payments problem, is to halt the inflation. Nearly all of Mr. Kennedy’s proposals would increase the inflation. He is right in saying that “our costs and prices must be kept low.” But one does not keep them low by increasing the minimum wage. To pour more inflationary funds into the economy, and raise money-wages and prices, will only encourage and discourage exports still further, and increase the “deficit” in the balance of payments. We cannot cure the evils of inflation with more inflation.
March 6, 1961
We are in a recession. Unemployment is alarmingly high. We must act. “I hope we can get action as soon as possible.”
Thus the Kennedy Administration. And what is this action we must take so precipitously? It is more government spending in all directions—on unemployment compensation, crop price supports, housing, highways, depressed areas, veterans, social security, Federal aid to education, and scores of other projects. It is lowering interest rates and increasing loans. It is, in a word, inflation.
Behind this proposed remedy is the same theory that has dominated the economic policy of most Western governments, especially our own, for the last quarter century. It is the theory made popular by union propaganda and the late Lord Keynes.
Keynes himself recognized that raising wage rates would only increase unemployment. He left-handedly conceded that unemployment might exist because real wage rates were already too high in comparison with prices and demand, so that the outlook for profits was too bleak to encourage full employment. But he argued that a direct lowering of money wage rates would be so strongly resisted by the unions as to politically impossible. Therefore the only way to lower wage rates to a workable level was to lower the value of money. The way to do this was to inflate, to print more money, and so to raise prices and monetary demand to a level at which full employment would be possible again.
WHY NOT FOREVER?
This is the process to which we have resorted again and again in the last 28 years. Economically, it has seemed to work. We have had continuous inflation, but we have also (at least since 1942) had fairly continuous employment. Politically, it has kept whatever Administration was in power from having to face up to the problem of how to halt constant union wage demands and increases that exceeded the gains in labor’s marginal productivity at the existing level of prices. We have floated ourselves out by ever new doses of inflation.
Well, why can’t we do it again? Why can’t we keep it up forever?
One reason it is especially dangerous to try it again now is that we have done it so much in the past that we have undermined international confidence in the dollar. Our labor costs of production on some items have been raised to a point that is pricing them out of the world market. American capital is being invested in new plants abroad rather than at home. Our existing inflation has already caused a deficit in our balance of payments. We have been losing gold at a dangerous rate. Further inflation will only intensify the problem.
DESPERATE RACE
And we can’t keep inflating forever because the process inevitably becomes accelerative. With every dose of monetary inflation and increase of prices, the unions make demands for still further wage increases to keep up with or get ahead of the latest price increase. Each round of wage increases leads to another dose of inflation to pay the new wage level. There is a perpetual and increasingly desperate race between the printing press and the union demands.
Yet the whole race is needless. What is necessary for full employment is the coordination of wages and prices, at whatever average level. If this coordination does not exist, if a new dose of inflation simply touches off a new round of wage hikes, then the inflation is futile, even as a short-term expedient.
What labor is chiefly suffering from today is too many victories. It is no mere coincidence that unemployment now is highest in lines in which wage rates are highest. As compared with average wages of $2.30 an hour in all manufacturing industries, wages in automobile plants are $2.87 an hour, in steel mills $3.02, in bituminous coal mines $3.27. But in the excited calls of the Kennedy Administration for “action,” there is complete silence regarding wage rates. They are treated as irrelevant.
Yet not quite. Among the proposed remedies for unemployment are higher and longer unemployment benefits and higher minimum wages to keep wage rates up or to force them still higher.
March 13, 1961
In his Feb. 6 message to Congress the President pledged that, “Exchange controls over trade and investment will not be invoked. . . . A return to protectionism is not a solution.” Within a few weeks he not only approved the equivalent of exchange controls over trade and investment, but new protectionist measures.
On the exchange-control side, he not only endorsed the prohibitions on Americans’ buying or owning gold at home or abroad, but he proposed discriminations against American and in favor of foreign lenders by offering the latter higher interest rates. He also proposed a scrutiny of American investment abroad to find what part of it was “legitimate.” All this foreshadows increasing government intervention and control of foreign lending and investment.
On the protectionist side, he has advocated a reduction from $500 to $100 of the amount of duty-free goods that American travelers can bring from abroad. This is made on the assumption that it will help the balance of trade by reducing imports. Then on Feb. 25 the President raised the tariff on foreign-made bicycles by 50 percent.
On the same day, the AFL-CIO, which is itself built on protectionist principles, but has hitherto given lip service to free trade, adopted a new formula which continued to pay lip service to free trade but, as one report summarized its conclusions, “with additional safeguards for domestic jobs and wage standards.”
FALSE ASSUMPTIONS
Individual unions announce their own protectionist policies. The Amalgamated Clothing Workers will boycott Japanese imports unless Japan puts a “voluntary” quota on shipments of men’s suits. The Chicago local of the International Brotherhood of Electrical Workers will refuse to handle any Japanese-made electronic parts after May 1.
Behind all these protectionist measures, official and unofficial, there is not only the desire to protect special interests (at the expense of consumers), but false assumptions concerning the cause and cure of the dollar crisis. The outflow of gold and dollars is generally attributed to a “deficit” in the balance of payments. (It is, in fact, just another name for the same thing.) From this it seems an easy step to the assumption that if we cannot induce foreigners to buy more American goods, we can cure the “deficit” by penalizing Americans for buying foreign goods.
This is the protectionist theory. It goes back to the mercantilism of the seventeenth century. What it overlooks is the essentially two-sided nature of all trade. In the long run we can buy only as much as we sell, and sell only as much as we buy. To the extent that we refuse to buy foreign goods, we deprive foreigners of the dollars with which to buy our goods. When we buy their goods, and “lose” dollars, foreigners in the long run have no way of using these dollars except by buying American goods, services, or investments with them.
GOLD AS A BARGAIN
It makes no difference how indirect these transactions are. If our troops spend dollars in Germany, the dollars do not disappear down a well. Even if the Germans use all the dollars to buy goods in Japan, the Japanese (or whoever) must eventually use the dollars to buy American goods. Trade (in the widest sense) must balance. Payments (except for foreign-aid programs) must balance.
But suppose foreigners only want to use their dollars to buy our gold? Then the question we should ask is why they prefer gold (at $35 an ounce) to other goods. They prefer it because it now seems a better bargain than other American goods. It is still at the same dollar price as it was 27 years ago, whereas other prices have more than doubled.
The first remedy is to halt the inflation that is pricing us out of the world market. But practically all Mr. Kennedy’s “must” measures would increase the inflation. His protectionist schemes will have at best a temporary effect. They will be futile in the long run. And none of the measures that would go to the heart of the matter—to reduce spending, to cut foreign giveaway programs, to balance the budget, to restore monetary discipline—are even being considered.
March 20, 1961
The sponsors of minimum-wage legislation assume that they can force the payment of higher wages to marginal workers simply by commanding such wages to be paid. They assume that these higher wages will not force any of the workers affected into unemployment. If this were so, if a higher minimum wage did nothing but good, there would be no reason for stopping anywhere.
The advocates of new minimum-wage legislation ask: If $1 or $1.15 an hour minimum wage is good, why not $1.25? But we may ask them in turn: If $1.25 an hour, why not $1.50? Or $2? Or $5? Or $10 an hour? Apparently even the most naïve proponents of a higher minimum wage dimly recognize that there is some point at which an increase in the minimum wage could do more harm than good. What is this point? And how do they themselves determine where it is?
If we are to judge by the record, their standard is that the legal minimum wage should be always a little bit higher than the existing minimum, whatever that happens to be. In 1938, when the average hourly wage paid in all manufacturing was about 62 cents an hour, Congress set a legal minimum of only 25 cents. In 1945, when the average factory wage had risen to $1.88 an hour, Congress [raised the] minimum to 40 cents. In 1949, when the average had risen to $1.40, Congress raised the minimum again to 75 cents. In 1955, when the average had risen to $1.88 an hour, Congress boosted the minimum to $1. Now that the average factory wage is about $2.30 an hour, the proposal is to raise the minimum to $1.15 in 1961 and to $1.25 in 1963.
ROAD TO INFLATION
Thus, as increased capital investment and new and better tools of production keep raising marginal labor productivity, and as the general level of wages is raised by competition of employers, the ideas of reformers as to what the minimum wage ought to be keep rising always a little ahead of actualities. Among the simple, this creates the optical illusion that it is the successive increases in the minimum-wage law that have pushed up the actual average of real wages. If that were really so, the most underdeveloped nation would have no problem. It could set wages wherever it wished, by passing a law.
No doubt minimum-wage laws have played a role in raising money wages. When unemployment has been brought about by higher minimum money wages (which tend to push up all other wages by persistence of existing differentials) increased political pressure has been built up for further monetary inflation to make the higher wages payable. Thus successive minimum-wage boosts have exercised continuous political pressure for more inflation.
FORCING UNEMPLOYMENT
Minimum-wage laws tend to hurt most precisely the workers they are ostensibly meant to help. They increase unemployment especially among low-paid workers. For the first thing that happens when a law is passed that no one shall be paid less than $1.25 an hour is that no one whose work is not deemed worth $1.25 an hour will be employed at all. You cannot make a man worth a given wage by making it illegal for anyone to offer him less. You merely deprive him of the right to earn the amount that his ability permits him to earn.
President George Meany of the AFL-CIO has said: “If an enterprise cannot survive except by paying wages of 75 cents or $1 an hour, I am perfectly willing for it to go out of business.” This could be reworded as follows: “If workers are only getting $1 an hour, I am perfectly willing to see them forced into total unemployment.” How does this make them better off? Meany forgets that low as are the wages in the enterprise he is willing to destroy, the workers in those enterprises have presumably found them to be the best among the alternatives open; otherwise they would have taken jobs elsewhere. Workers are not benefited by being forced into unemployment or onto relief. Nor are the taxpayers. Nor are the former customers of the enterprises forced to shut down. The nation is not benefited when its marginal production and industries are deliberately destroyed.
March 27, 1961
Since West Germany revalued the mark on March 4, there has been a great deal of discussion concerning the probable effect of the change on its export and import trade, on its internal price level, and on the dollar. But one aspect of the change has attracted less attention than it deserves. The value of the mark was changed from 4.20 to the dollar to four to the dollar. In other words, the mark has been so revalued as to make it very simple mentally to translate one currency into the other. This is a step nearer to an international money.
Monetary reformers have long dreamed of a uniform international money. They have seen this as not merely a benefit to travelers but as a means of simplifying and facilitating all international trade, and comparisons of prices and statistics. This aim inspired the Latin Monetary Union in 1865, which embraced France, Belgium, Switzerland, Italy, and later Greece. While each country kept its own name for its currency unit, they established a one-to-one exchange ratio. Later Spain, Serbia, Bulgaria, and Rumania adopted the same currency unit. Sweden, Norway, and Denmark formed a monetary union of their own.
FRENCH PLAN OF 1872
In 1872 a French Imperial Commission proposed a scheme by which the leading world currencies would establish very simple ratios between each other and the franc:
Then existing value |
Proposed value |
|
| Franc | 1 | 1 |
| Florin (Austrian, silver) | 2.47 | 2.5 |
| Dollar (American, gold) | 5.18 | 5 |
| Pound sterling | 25.22 | 25 |
Nothing came of the proposal. The first world war finally broke up both the Latin and Scandinavian monetary unions, because individual members resorted to inflation and exchange restrictions. But the breakup called attention to something that had been taken for granted. Most of the world had been on a common gold standard. And on that standard it was far closer to an international currency system than it has ever come since.
Let us see just how the full gold standard unified the currency systems of the world. When the currency unit of nearly every major country was defined as a specified weight of gold (previous to 1934 the American dollar, for example, was defined as 23.22 grains of pure gold), every such currency unit bore a fixed relation to every other currency unit of the same kind. It was convertible at that fixed ratio, on demand, to any amount and by anybody who held it, into any other gold currency unit. The result was in effect an international currency system. Gold was the medium of exchange.
THE GOLD STANDARD
The international gold standard enforced strict monetary discipline within each country. When one country began to inflate, its domestic prices rose, its imports increased, its exports fell, its balance of trade or payments became “unfavorable,” its currency unit in the world’s exchange markets dropped “below the gold point.” Gold started to flow out. To stop or reverse the gold flow, it had to stop inflating, and to allow its interest rates to rise. The international gold standard coordinated prices, interest rates, markets, demand, supply, trade, and production all over the world. It did not “break down.” It was abandoned precisely because politicians wanted to get rid of the discipline it enforced against domestic inflation and internal tampering with money.
The great present need is to restore and perfect this system. We should never go back to a relationship of incommensurable values, typified when the pound at par was $4.866,563. . . . This made calculations and conversions absurdly complicated. It often forced needless melting down of coins and recoining. While other currency units should today be aligned with the dollar, we on our side should offer to set a new gold weight for the dollar in terms of the metric system—say a gram or a round number of decigrams. Then every country would be responsible for maintaining its own currency at par—without constant rescue operations by an International Monetary Fund—by maintaining confidence, by refraining from reckless budget deficits and inflationary credit expansion. This would be a true internationalism.
April 3, 1961
Our foreign-aid program, now fourteen years old, is the product of sentimental confusions. Its basic assumptions are wrong politically, diplomatically, and above all economically. Yet just at the moment when our balance-of-payments crisis makes it most necessary to re-examine them, and to consider how we can most gracefully taper off the program, we are planning to expand it to “towering dimensions,” and to commit ourselves for years ahead.
Consider the dimensions the program has already assumed. Since the end of World War II the United States has spent the staggering sum of $90 billion in foreign aid—more than $60.4 billion of it for economic aid—to more than 70 nations.
In a book written in 1947, I pointed out that intergovernmental loans (they were first proposed as loans, not gifts) were on the horns of a dilemma. “If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called . . . ‘American imperialism’; or ‘interfering in the internal affairs of the borrowing nation.”
THE DILEMMA
This dilemma has never been acknowledged by the successive administrators of foreign aid. In practice, however, they have grabbed first one horn, then the other. Faced with waste, corruption, fantastically impracticable schemes, they tried to impose a few modest conditions. Faced with resentment of these conditions, they hastened to assure recipient governments that the aid would be given “without strings.”
Now, in the new Kennedy foreign-aid program, particularly as outlined in the March 13 speech to Latin American diplomats, we are to impose conditions again. But unless I gravely misinterpret that speech, they are to be precisely the wrong conditions. We are to give aid, not if the recipients will adopt the only principle that can make the aid effective—the principles of capitalism, free markets, private property, private enterprise—but if they will adopt grandiose statist or socialist programs:
“Each Latin nation must formulate long-range plans for its own development—plans which establish targets and priorities.” Was it by formulating long-range government plans and establishing governmental targets that the United States itself became the richest and most productive nation on earth? Or was it not, rather, by permitting free individuals each to make his own long-range plan or establish his own targets and priorities?
PRICE ‘STABILIZATION’
Mr. Kennedy seems to call for more of the very programs that have brought many Latin American countries to their present distress. “The United States is ready to cooperate in serious case-by-case examinations of commodity market problems. Frequent violent changes in commodity prices seriously injure the economies of many Latin nations. . . . Together we must find practical methods of bringing an end to this pattern.” It is precisely changes in prices that guide producers as to what to plant or make, and how much of it. It is precisely changes of prices in free markets that guide allocation of production among thousands of commodities, tending to optimum balanced production in the long run. It is precisely government attempts to “stabilize” such prices—Brazil’s with coffee, ours with our own farm commodities—that lead to waste, imbalance, unsalable “surpluses,” contrived scarcity, increased taxes, and final disillusion for the very producers being “aided.”
It is true that the President makes some points in the other direction. He wants Latin American nations to “insure monetary stability.” But it is precisely the “massive planning efforts” they have already made (of which he calls for more) that have led the great majority of them into appalling and inexcusable inflations. And our own present contemplated expansion and perpetuation of our foreign-aid program is one of the major threats to renewed inflation at home.
How long will it take us to learn that the most important thing we can do for world stability is to keep the dollar strong?
April 10, 1961
Near the beginning of his foreign-aid message to Congress of March 22, President Kennedy posed “a fundamental question: Is a foreign-aid program really necessary?” It is a question we ought to have asked ourselves a dozen years ago. Many of us will answer that continuance of a so-called economic (as opposed to military) aid program is not only unnecessary but harmful to the United States, and in the long run harmful to the recipient nations themselves.
The President’s own answer to his question is that “there is no escaping . . . our moral obligations . . . our economic obligations as the wealthiest people in a world of largely poor people.” But when did this obligation, historically, begin? When will we be able to consider it discharged? Has it any limits? What are they? Do we keep pouring out money until every country in the world is as rich as ourselves—or we as poor as the poorest? If we, by establishing a free economy, have made ourselves the richest nation in the world, shouldn’t we be proud of that achievement? Why should we have a guilt complex because others, with repressive systems, haven’t done as well?
The most specific sign of how the President measures the extent of our obligation is the proposal that each industrialized country provide annual aid to backward countries amounting to 1 percent of its gross national product. But this is a token figure, unrelated to the special “needs” of Chile or Chad. It may sound small, but it would mean more than $5 billion a year for the United States. That is greater than the $3.8 billion deficit in our balance of payments last year.
AID AND INFLATION
The President seems to take this problem lightly. He estimates that “not more than 20 percent of foreign economic-aid expenditures will affect our balance of payments” because 80 percent “will be spent directly” for our goods and services. But this overlooks that when we give away the dollars to buy part of our exports, we give away those exports. We cannot use the proceeds from those exports to buy our needed imports.
Our foreign-aid program, moreover, causes the budget deficit that causes the inflation that causes the deficit in the balance of payments. The President forecasts a budget deficit of $2.2 billion for the fiscal year 1961 and of $2.8 billion in 1962. But, other things unchanged, both deficits would be surpluses without the foreign-aid program.
Instead of “a series of one-year programs,” the President recommends “long-term development loans at low or no rates of interest” running for “as long as 50 years.” This proposal calls for careful scrutiny. Our own government is now paying more than 3½ percent a year for long-term borrowing at home. On every dollar borrowed now at that rate our taxpayers will have to pay $4.58 at compound interest over 50 years. To charge no interest on such loans would be equivalent to giving away four-fifths of the amount even if the principal were repaid at the end of the period.
SOCIALIZED SOCIALISM
But the most serious aspect of the new foreign-aid proposals is that the money is to be given or lent only if the recipient countries promise to “engage in long-range planning,” to “mobilize their own resources,” to set “targets,” to embark on “land reform” and “social justice.” This clearly means state planning. What we are offering to do is to subsidize other people’s socialism. We are insisting on more of the very planned economies that have brought a tangle of government controls and chronic inflations.
It is because this is what we have been doing in the past that the President is correct when he points out that “many of the nations we are helping are not much nearer sustained economic growth than they were when our aid operation began.” If we stopped our foreign economic-aid program these nations would have to turn to private investors. These investors would insist on the reforms really calculated to bring sustained economic growth. They would insist on assurances against seizures or stifling controls. The plan they would ask for is capitalism—the system of private property and free markets—to release the initiative and energies of millions of individuals everywhere.
April 17, 1961
The budget message that President Kennedy sent to Congress on March 25 was a baffling document. Here is both sample and summary: “This, then, is the revised budget—apart from defense additions—that I now present to the Congress: A budget that is in balance in terms of my pledge of Jan. 30. A budget that is likely to be in deficit unless economic conditions rapidly improve to meet the levels predicted in the Jan. 16 budget. A budget that would be in surplus if the economy were operating at or near its full potential.” How does one get a budget that is at the same time in balance, likely to be in deficit, and would be in surplus?
Mr. Kennedy’s pledge of Jan. 30 was that he would submit a program of expenditures that “will not of and by themselves unbalance the earlier [Eisenhower] budget.” He felt safe in making this pledge, it now becomes clear, because he expected a deficit even without new spending.
Mr. Eisenhower forecast a thin surplus of $79 million at the end of this fiscal year and a substantial one of $1.5 billion at the end of fiscal 1962. Whether or not he overestimated revenues and underestimated expenditures even on the basis of his own proposals, as Mr. Kennedy charges, Mr. Kennedy’s own proposals obviously add billions to the expenditure side of the budget. Hence his estimate that instead of a thin surplus there will be a $2.2 billion deficit in the current fiscal year, and instead of $1.5 billion a deficit of $2.8 billion in fiscal 1962. The expenditure estimate for fiscal 1962 is raised from Mr. Eisenhower’s $81.5 billion to $84.3 billion. The increase in requests for new obligational authority is even more striking. Mr. Eisenhower recommended $80.9 billion; Mr. Kennedy $86 billion.
COST OF NON-DEFENSE
“The point I wish to stress,” says Mr. Kennedy, “is that any budgetary unbalance at the close of fiscal 1962 will not be the result of any nondefense programs I have submitted.” This implies that it is defense spending that will cause a budgetary unbalance. Yet Mr. Kennedy’s defense spending proposals for 1962 are only $890 million higher than his predecessor’s; his non-defense spending proposals are $2.6 billion higher—almost equal to the total expected deficit.
Mr. Kennedy seems anxious to prove that whatever deficit occurs in 1962 will not be his fault. But in view of his own contention that a deficit in any one year isn’t important anyway—that the only thing that counts is that the budget be “in balance over the years of the business cycle”—this anxiety is hard to understand.
IRRESPONSIBLE SYSTEM
But the present budgetary chaos is not wholly the fault of Mr. Kennedy. It is even more the fault of our lack of any responsible budget system. “It is a legal absurdity [I quote my own Newsweek column for Jan. 26, 1953, on the Truman budget for fiscal 1954] that an outgoing President should be required to frame and present a budget for a year in which he will not be in office and for which he cannot and should not assume any responsibility.” The result is mainly to obscure the fiscal responsibility of a new President for his first year and a half in office. This absurdity is imposed by the Budget and Accounting Act of 1921. That act should be drastically amended, now. Each President should be made unmistakably responsible for his full period in office.
This is a minimum reform, but it is far from enough. There can be no executive responsibility for the budget until the President, like the governors of 43 states, has the power to veto individual items in appropriation bills. Even this would not be enough to give us a truly responsible budget. In New York, the governor’s annual budget must not only give estimated expenditures and revenues for the next fiscal year, but must be accompanied by bills containing all the proposed appropriations and any proposed new taxes. The legislature (I quote the state constitution) “may not alter an appropriation bill submitted by the governor except to strike out or reduce items therein.” Here is a guide for the Federal system. Congress will not be a resolute watchman of the public purse as long as it is permitted to put its own hands into the purse.
April 24, 1961
I have just received the English text of a speech delivered in Stockholm by the European economist L. Albert Hahn. It covers economic growth, saving, unemployment and inflation, and it applies with remarkable pertinency to our immediate problems.
On economic growth: “In every decade economists seem to be beset by some new panicky fear. In the ’30s it was the fear of secular stagnation through oversaving and lack of investment opportunities. Nowadays it is the fear of insufficient growth. This fear develops sometimes into a desire to foster growth at almost any price, and leads, in fact, to real growth fanaticism. Most people, of course, favor the growth of the national product; but only few seem to realize that in order to achieve a bigger national product people have to work harder, and to save more; the latter in order to increase the worker’s productivity by equipping him with more capital. The impression seems to prevail that an economy can, like Munchausen, pull itself by its own hair out of the mud of insufficient growth; in other words, that growth can be commanded at will. And the increase of the money supply is recommended as an appropriate means of such commanding. . . . [Yet] growth does not . . . depend on the amount of money in circulation, but on how much the people decide to work and save. It is, therefore, probable that the urge for growth will have inflationary effects.”
BIGGER MONEY SUPPLY
Defining inflation simply as an increase of money—bank notes plus demand deposits—Hahn points out that since 1939 the money supply in the U.S. has increased about fourfold while prices have about doubled. In the seven-year peacetime period from 1953 until today wholesale and consumer prices have risen by about 10 percent. What is alarming is not the extent of this depreciation, “but its happening during a period which included two recessions, 1953–54 and 1957–58. According to rule, prices should have declined again during the recessions; but they refused to do so. During the last of the two recessions they even continued to move up with the result that the next upswing started from an even higher price level.”
Suppose, now, looking at our own statistical picture a little more closely than Hahn does, we try to see why prices continued to rise. For one thing, the money supply continued to rise. Between the end of 1953 and 1954 it went up $3.7 billion; between the end of 1957 and 1958 it went up $5.3 billion. If we include time deposits, the increase in monetary media throughout the period has been uninterrupted and much larger.
HOURLY WAGE RATES
Now let us look at average hourly wage rates. Since the end of 1953 they have risen from $1.77 to $2.32—not 10 percent, like prices, but 30 percent. It is particularly instructive to notice that they went up from $2.29 in February 1960, to $2.32 in February this year. This happened in a recession, when unemployment rose from 3.9 million to 5.7 million.
Classical economists would agree that the increased wage rates increased the unemployment. By raising wages sufficiently high one can create any amount of unemployment. This is because wage-rate increases are cost increases. They destroy the profitableness of marginal enterprises and so reduce production. But under the sway of Keynesian doctrines, not only is it taboo to mention the wage level in connection with the extent of employment, but a discredited “purchasing power” theory creates political demands for boosting wage rates further. Hence the minimum-wage law agitation.
As nobody dares to suggest that our unemployment be corrected by a realistic wage-rate adjustment in the industries in which the main unemployment exists, Washington is seeking to cure it by another giant dose of spending and inflation, even though this must imperil the dollar.
And the economic and moral evils of that course (which I tried to point out myself last fall in a book called What You Should Know about Inflation) are explained with great cogency in an excellent little volume just published—An Inflation Primer, by Melchior Palyi (150 pages, Regnery, $4).
May 1, 1961
In spite of all the discrepancies in their story (see page 87), the Russians may finally prove that they shot a man into space on April 12 and brought him safely back. Yet we know that the Russian Communists lie on principle, and there was nothing in the crude propaganda with which they handled this case to remove any scientific doubts.
Gagarin’s statement to the press told nothing about weightlessness or how the earth looks from high up that was not already familiar to the American magazine or newspaper reader or could not have been supplied by any hack science-fiction writer. If the scientific content of his statement was thin, the political propaganda was so thick that it read like a travesty: “I should like to note especially that loving human care which is being shown in our Soviet Union toward the ordinary people from the Central Committee of the [Leninist Communist] party, the Soviet Government and our dear Nikita Sergeyevich Khrushchev.” There was one piece of real news in the statement—“the first airplane” was invented by the Russians.
But suppose the Russians finally straighten out their discrepancies and prove that in this case, at least, they were telling the truth? With millions of human beings in Russia living six to a room in slums and hovels, and millions in slave camps, should we applaud the diversion of billions of dollars (as David Lawrence has asked) for a spectacular propaganda stunt that does nothing to advance the conditions of life? “A dictatorship,” as President Kennedy pointed out, “enjoys advantages in this kind of competition over a short period, by its ability to mobilize its resources for a specific purpose.”
FIGURE JUGGLING
Hardly less remarkable than the Russians’ propaganda about the flight was the instant and unquestioning acceptance of their claim by our own officials. We have made a habit of accepting all the Russian claims on the general principle that it is safer to overestimate the strength of one’s enemy than to underestimate it. But we are in grave danger of downgrading our own system. We have long given credence to Russian economic statistics, for example, that even Khrushchev recently repudiated as “figure juggling.”
The eminent economist Colin Clark recently pointed out in testimony before a Senate subcommittee: “A statement which has now circulated so extensively that nobody ever questions it is the proposition that the real product of the Soviet Union is growing” at the rate of 6 percent per year . . . and that therefore it is mathematically inevitable that it must, within quite a few years, overtake and then surpass the real product of the United States. . . . Like so many other things which everybody knows,’ this supposed 6 percent per annum growth trend of the Soviet economy is an illusion.”
RUSSIAN OUTPUT MYTH
Over the whole period 1913–56 Dr. Clark pointed out, the long period rate of growth in Russia averaged only 1.2 percent per year. Even if we reckon Russian productivity trends from 1928 or from 1939 we get figures of only 1.7 or 1.6 percent per year. The United States, on the other hand, Dr. Clark figures, has ever since the 1890s, subject only to minor fluctuations, maintained a steady rate of growth of real product per man-hour of 2.3 percent per year.
When we drop tricky projections of percentage rates of growth into the future and turn to actual present achievement, there is no real comparison. Soviet farm efficiency, for example, is appallingly low. Russia uses one agricultural worker for every 10 sown acres, against one worker for every 60 sown acres in the United States. Crop failures and famines behind the Iron Curtain are recurrent, as illustrated today in Communist China.
The economic and other freedoms of the market economy—the capitalist system—are so precious for their own sake, that most of us would prefer it even if it were less productive materially than a Communist system. But it happens to be incomparably more productive. This is no accident. Private property, and the market system of rewards in proportion to marginal value produced, give incomparable incentives to production.
May 8, 1961
In his Budget Message of March 24, President Kennedy took over a doctrine that has been preached for the last 30 years by spenders and Keynesian economists and declared it to be official policy:
“Federal revenues and expenditures—the Federal budget—should, apart from any threat to national security, be in balance over the years of the business cycle—running a deficit in years of recession when revenues decline and the economy needs the stimulus of additional expenditures—and running a surplus in years of prosperity.”
A “cyclical” budget of this sort would be, in fact, an abandonment of all fiscal responsibility.
No one can predict the business cycle in advance. No one knows just when an upturn will begin, how fast or how far it will go, when it will reach its peak, when it will crack, how far it will drop. There are, of course, hundreds of statisticians and forecasters, in and out of the government, who offer to tell us or sell us this information. Some of them will make better guesses than others. But in the nature of things, at any given time only a minority of them can be right. As the European economist L. Albert Hahn recently summed up the case: “If the business cycle were predictable, there would be no cycle, as everybody would hedge against it.”
WHERE ARE WE?
No one even knows at any given time precisely where we are in a cycle. If we are in a recession, are we scraping bottom, or are we due to drop lower? If a recovery has started, will it peter out? Will it be mild? Will it be strong? If things are good, are we in a short-lived boom? Or has the country taken off on a higher rate of longtime economic growth?
Economists may, in the main, agree that a past business cycle ran so-and-so-many months or years. A present or a future business cycle, however, has no pre- determinable length and no known end. Consequently, at no point can anyone charge that an Administration has definitely failed to balance the budget even over the cyclical period. The Administration in power can always argue that things are so unsatisfactory that a continuation or increase of huge spending or deficits is necessary. No matter how high an existing boom, the Administration will always be able to point to “pockets of unemployment” here and there, or to some groups that have not done as well as others. It will still argue that this is no time to endanger everything, and bring on unemployment and deflation, by overbalancing the budget and paying off debt.
IRRESPONSIBLE PLAN
The cyclical budgeteers do not accept the logic of their own proposal. If, as they argue, it is unreasonable to expect a budget balance every year, because we cannot, say, foresee depressions and wars, then the corollary is that we should normally plan for a substantial annual surplus. If thumping deficits are necessary in the low years of the cycle, then equally thumping [surpluses] are required in the good years. But I have not heard any of those who advocated or helped bring on the $12.4 billion deficit in 1959 demanding a $12.4 billion surplus in 1962. They are urging or planning still more deficits.
So, to repeat, official adoption of the cyclical-budget doctrine would mean the complete abandonment of fiscal responsibility. No Administration could be held to account. It could always leave the balancing to its successors. Après nous le déluge!
Even without making it official, we have already had irresponsibility enough. We have had 25 budget deficits in the last 31 years.
The cyclical-budget doctrine, finally, not only promotes political irresponsibility; it is economically unsound. It got a massive tryout in the ten-year period 1931–40, and proved a massive failure. The average deficit in those ten years was 3.6 percent of the then gross national product (which would mean average annual deficits today of $18 billion). The consequence was average unemployment of 18.6 percent of the working force.
Perpetual full employment is not assured by perpetual inflation. Full employment is the result of a proper coordination of wages, costs, and prices. But this is something the Keynesians have not yet learned.
May 15, 1961
At noon on April 29, President Kennedy completed his first 100 days in the White House. During the election campaign, he announced that these would be “the crucial days” of a new Administration, and drew a parallel with the famous first 100 days of Franklin Roosevelt’s Presidency.
In view of the hairline margin of his victory, Mr. Kennedy has so far been astonishingly successful in getting his domestic program through. Of the sixteen measures called for in his “must” list of February, seven have already been enacted, and some action is under way on all but two. The President can surely not be accused of inactivity. During the period he sent no fewer than nineteen messages to Congress—an unparalleled record.
But is this a record of “success”? That depends on what the practical effect of these measures will be (or will be judged to be) at the election three and a half years from now.
The President’s Cuban venture was a disastrous failure. It was seen to be such a failure by practically everybody within 72 hours after it was launched. The consequences of economic policies are more difficult to judge. Their long-run effects are often quite different from their immediate effects. The innumerable factors always at work in the economic realm lead to wide differences of interpretation. Bad consequences of bad policies are often blamed on something else—especially by those who originally recommended the policies. But the longer a bad policy is continued the worse its consequences tend to become, and the more obvious becomes the connection between the consequences and the policy.
SPENDING PROGRAM
Let us now look at some of the major Kennedy measures, both enacted and proposed. They include a higher minimum wage with broader coverage; aid to depressed areas; higher and longer unemployment benefits; aid to dependent children of the unemployed; increased social-security benefits; with a lowering of the eligibility age; medical care for the aged; large Federal school aid; expanded foreign aid; an omnibus farm bill with higher price supports; lower interest rates through government intervention; withholding of taxes on dividends and interest (though with some limited incentives for business investment), and a “cyclical” rather than an annual balance—beginning with a planned deficit.
Space does not permit an analysis here of any one of these proposals. But they add up, individually and collectively, to a huge spending program. And all this is on top of the tremendous annual spending program in excess of $100 billion (including social security) that had already been planned by President Eisenhower. This spending, and the deficits it would entail, are being taken very lightly. “Such a deficit [$2 billion],” now says Secretary of the Treasury Dillon, “is not a cause for alarm in times like these. . . . Another deficit is in prospect for fiscal ‘62, one of about $3 billion. This, too, will be entirely appropriate.”
INFLATION AHEAD
What this spending and these deficits mount up to, however, is inflation. This inflation may seem at the beginning to be beneficent. The upturn in business that has already started may continue. In spite of the measures that discourage employment by forcing up labor costs, there may even be further improvement in employment.
But what will happen when all this inflationary tinder catches fire, as it eventually will? What will happen if world confidence in the dollar is shaken again? What will happen if the run on gold is suddenly resumed? What will happen, in brief, if the inflation, now so devoutly prayed for in the Administration in the belief that it will restore employment, not only arrives but starts to get out of hand? For as other governments have learned to their bitter cost, this is the way of “planned” inflations.
The Kennedy program, as unfolded in the first 100 days, is a program of inflation and welfare-statism. During the past two decades, the wrecks of such programs have been scattered over Europe and Latin America for all to see. The true friends of Mr. Kennedy will warn him of these consequences now, while there is still time to reconsider his course.
May 22, 1961
If Congress, as the Administration now proposes, repeals the requirement for the Federal Reserve System to hold even a 25 percent gold reserve against its note and deposit liabilities, the United States will, in effect, drop the last vestige of a domestic gold standard.
The international gold standard, when it prevailed, was the chief safeguard against tampering with the currency on the part of politicians and bureaucrats. It was the chief safeguard against domestic inflation. It did not “break down”; it was mismanaged and abandoned; and precisely because the politicians in most countries wanted to inflate. The result has been monetary chaos. In its May letter the First National City Bank of New York prints a table covering 43 countries. It shows that the dollar has been losing more than 2 percent of its purchasing power every year since 1950; the British pound, 4 percent; the currencies of Brazil, Argentina, Paraguay, Chile, and Bolivia, from 14 to 37 percent a year. Even the American depreciation rate would mean the loss of half the value of the currency in 33 years.
Every major step we have taken since 1932 has been away from the discipline of the gold standard. For 30 years the Federal Reserve Banks had been required to keep gold reserves of 40 percent against their notes and of 35 percent against their deposits. In June 1945 the Reserve authorities, fearing the continuation of World War II, asked that the legal reserve ratio be reduced as an “emergency” measure to only 25 percent for both notes and deposits. Though the war went on only a couple of months more, the higher reserve requirement was never restored.
BLOW TO CONFIDENCE
Meanwhile, we have continued to expand our credit and paper-money supply. Our total of demand and time deposits and currency outside of banks has increased from $150 billion at the end of 1945 to $250 billion. As its expiring act, the Eisenhower Administration prohibited Americans from buying or owning gold even abroad. And now the Kennedy Administration asks that even the legal requirement for a 25 percent gold reserve be abandoned.
Whether the first effect of such a measure would be to increase or undermine confidence in the dollar abroad, to reduce or intensify the foreign drain on our gold, we would learn very shortly. But its long-run effect could only be to undermine confidence in the dollar still further, both at home and abroad. Some Americans may fear that foreigners would drain us of gold, leaving us with no gold backing for our dollars at all. Even if such fears prove to be exaggerated, the last legal obstacle to an indefinite expansion of the Federal Reserve’s note and deposit liabilities would be removed. Congress would be assumed to have given a green light to further inflation.
HALT THE INFLATION
Only under one condition would even a temporary suspension of the 25 percent gold-reserve requirement (already legally possible by simple vote of the Federal Reserve Board) be justified. This would be to accompany the suspension by the requirement that neither Federal Reserve Banks nor member banks would be permitted to expand their total net loans or investments by a single dollar until the reserve ratio was restored.
Even this would not be too much assurance against further inflation. The present reserve ratio is 38 percent. This would still permit a substantial credit expansion under the present 25 percent legal minimum.
The abandonment of the 25 percent gold-reserve requirement, in brief, is the very opposite of what should now be done. What is required is a statement by the Kennedy Administration, accompanied by appropriate action, that our inflation can and will be halted. But every major economic measure that the Administration has so far supported moves toward more inflation.
We seem to have come to a point where the least-harmful immediate steps would be to put a temporary embargo on gold export, and permit a free market in gold. Later we could try to fix a sustainable value for the dollar and return to the discipline of a full gold standard.
May 29, 1961
The “real issue” in the Western Hemisphere, according to Secretary of State Dean Rusk, is the battle against poverty. Foreign aid, he keeps repeating, must be concerned with “social” as well as “economic” objectives; it must not perpetuate the gap between the rich and the poor.
Is the battle against poverty the “real” issue? Is it the problem with which Americans think their Secretary of State should be primarily charged? Or isn’t that problem really the battle against Communist subversion and aggression?
The problem of poverty has existed from time immemorial. It is as old as man. Since the birth of capitalism—the Industrial Revolution—tremendous strides have been made toward its solution. But the problem of Communist subversion and aggression is peculiarly the problem of our time, our decade, of 1961. It is this that Americans are worried about. They are a generous people and would like to see other people better off. They have in fact done more in this direction than any other people in history. But the poverty in India, or the gap between the rich and the poor in Brazil, is not what keeps them awake nights.
Secretary Rusk seems to think that poverty is the primary cause of Communism, and that an increase in incomes would be the primary cure. Experience and statistics do not bear him out. In Italy and in a score of other countries, Communism is nearly always found to be higher in the richer industrial districts than in the poorer agricultural sections. Communism has been growing while world income has been growing. The Broadway and Hollywood Communists also spoil the Secretary’s thesis.
NOT BY GIVEAWAY
One of the things we have been told for years by the advocates of foreign aid is that the world cannot exist half rich and half poor. It has in fact so existed for centuries. Of course poor nations do not buy much from us nor sell much to us. But neither do they threaten us militarily. It is nations well-off enough to embark on huge armament programs, like Nazi Germany, prewar Japan, and Communist Russia, that can do that. The latter can also subsidize aggression against us in the poorer countries.
Of course it is always desirable to reduce poverty, where and to the extent that we can. But what is the method or system most likely to do that? It is precisely here that Secretary Rusk and the advocates of bigger and longer-term foreign aid are most wrong in their implications. For they assume that the way to cure foreign poverty is by government-to-government giveaway programs, by state projects, state spending, state planning. In a word, by socialism.
BRAZIL AND INDIA
This is made clear not only in their generalities but in their specific programs. A $2 billion “international financial rescue package” is being prepared for Brazil, with smaller packages to bolster the economies of Venezuela and Bolivia. But the difficulties of these countries are of their own making. They are the result of their inflationism, socialism, Brasilias and other grandiose state-planned projects. Now that they have run out of their own money, the U.S. is offering Latin American governments a $600 million “social development fund” for more of the same. Our planners are also planning to lend India $1 billion in the next two years to meet the foreign-exchange requirements of India’s third Five-Year Plan, and to help India build a nuclear power plant and a government steel mill. India having borrowed and spent itself to the brink of bankruptcy, it is considered our duty to forget all about our own balance-of-payments problem and rush to the rescue of Indian socialism.
If the Kennedy Administration is right in thinking that foreign poverty is the “real” problem, it has chosen precisely the wrong way to solve it. The problem of poverty cannot be solved by Communism, socialism, or state planning, but by capitalism—by the system of freedom of private property, private enterprise, and free markets. But few of our officials, despite occasional lip service, seem to have any real faith in the system that has made it possible for us to keep bailing out the socialist failures.
June 5, 1961
The Kennedy Administration’s proposal to eliminate the gold-reserve requirements for Federal Reserve Banks is extremely ill-advised and dangerous. It is fortunate that the opposition to it was so extensive as to cause Congress to postpone the scheduled hearings. We should utilize the breathing space to consider not only the objections to such a drastic measure but what positive steps we need to take in monetary reform.
The most important step is to halt the inflation. It is the almost uninterrupted inflation of the last quarter century that has created the whole gold and dollar problem. The inflation has been the primary cause of the “deficit” in our balance of payments. It has been the primary cause of our loss of gold, and of the threat of further loss. It is the inflation that has undermined confidence in the dollar. It is the inflation that has raised our prices and wages to a point where we are having increasing difficulty in competing in the world market.
To halt the inflation it is simply necessary to stop expanding the supply of money and credit. We must balance the budget. We must end the folly of foreign economic aid. We must cut Federal nondefense expenditures on scores of projects. We must stop all Federal Reserve or government efforts to push down interest rates. We may even have to freeze the total of bank loans and investments till we are sure the inflation is halted.
INFLATION VS. FIXITY
But the Administration today does not dream of taking even the mildest of these measures. It looks upon an unbalanced budget with complete complacency. It is expanding all the old spending programs and proposing scores of new ones. It is increasing the pace of inflation, and daily intensifying the very dollar problem it is trying to solve.
But—and this is the sad situation at which we have arrived—even if the Administration took every requisite measure to halt the inflation, it could not solve the immediate problem that confronts us. That problem is the result of 27 years of inflation combined with the maintenance of a fixed exchange rate for the dollar and the commitment to sell gold at $35 an ounce to any amount asked for by foreign central banks.
Our gold base has become too narrow in comparison with the vastly increased amount of notes and deposits created against it. Since 1934 our average domestic price level has more than doubled, but an ounce of gold can be obtained for the same price. Our increased money supply and price level encourages imports, discourages exports, and makes our gold the biggest price bargain the U.S offers the rest of the world. If we keep our $35 an ounce price, and allow foreigners to draw out as much gold as they want at that price, we stand to lose our entire gold supply. The only alternative would be a deflation so drastic that our people would find it intolerable.
IS $35 TENABLE?
This is what those who think we could keep gold convertibility at the present price, and even extend it to American citizens, fail to see. They refuse to face the fact that our inflation has already gone too far to make the $35 an ounce price any longer tenable—unless, of course, we turn the ostensible “convertibility” of our dollar into a meaningless fiction.
The least harmful thing we could do, therefore (reluctant as one is to make the suggestion), would be to put a temporary embargo on gold export. The next step would be to legalize a free exchange market and a free gold market. Special arrangements could be made to protect foreign central banks against loss (in terms of their own currencies) on their existing dollar claims on us. Then we could try to set a new gold value for the dollar that would be neither inflationary nor deflationary, and return to a full gold standard, with convertibility for Americans as well as foreigners.
Whatever objections there may be to such a course, it is infinitely preferable to any of the alternatives now being proposed, such as trying to maintain the present mock gold standard at $35 an ounce, or plunging into a new worldwide inflation through the Triffin plan or a money-printing IMF, or abandoning our own gold-reserve requirement.
June 12, 1961
The May 25 message of President Kennedy to Congress is a profoundly disheartening document. At a time when total planned Federal expenditures (including social security) are already in excess of $100 billion a year, when we are already anticipating serious deficits, when taxes on enterprise and investment are already so burdensome that they are reducing incentives and employment and slowing down economic growth, and when we have already piled up enough inflationary tinder to threaten a grave new inflation, Mr. Kennedy calls for bigger spending, bigger deficits, and more burdensome tax rates. His latest proposals increase the inflationary threat still further.
Since he came into office, Mr. Kennedy has put in requests for over $6.5 billion additional spending for the current fiscal year and the fiscal year to end June 30, 1962. A small part of this addition is for defense. But most of it is for new or expanded “welfare” programs, including increased foreign economic aid, increased social-security benefits, medical care for the aged, Federal aid to education, housing, and urban renewal, increased funds to farmers, to veterans, to unemployed workers.
EXPENSIVE STUNT
And now, on top of all, the President asks us to spend $7 billion to $9 billion over the next five years, and perhaps $40 billion over the next ten years, to land a man on the moon and get him back.
Why? So far as the scientific value is concerned, Dr. Vannevar Bush, head of the Office of Research and Development during World War II, some time ago characterized the man-in-space program as “a vastly over-rated stunt. . . . There is nothing a man can do in space that can’t be done better and more cheaply by instruments. Suppose it cost $1 billion to put a man on the moon. For the same money you could support 1,000 research projects for 40 years. We need more basic research in physics, chemistry, and biology. We need to finish the job of handling arthritis. We need to know more about the genetics of viruses. I believe we can spend money to better advantage on earth than by shooting it into space.”
If the scientific value of this stunt is minimal, compared with the cost and with the potentialities of alternative projects, what other purpose would justify it? Propaganda? Instead of trying to outdo the Russians with Buck Rogers marvels, it would be enormously cheaper and more effective to make more propaganda use than we have so far dreamed of making of the freedom and productivity achieved under our private-enterprise system—a freedom and all-around productivity with which no socialist or Communist system can compete at all.
SACRIFICE–FOR WHAT?
The President speaks of the need of making sacrifices. But sacrifices for the mere sake of sacrifice don’t make sense. We must sometimes give up what is good today to achieve a greater good tomorrow. Mr. Kennedy is asking us to sacrifice what is good to achieve something of much more questionable value. Monetary stability, the welfare of consumers, the incentive to earn more and produce more, are not minor goods. Before we give them up, we should take a hard look at what we are offered instead.
And we cannot get a quart out of a pint jug. Whatever resources are devoted to new purposes and new projects must be withdrawn from old purposes and old projects. There is no economic fourth dimension. Mr. Kennedy sometimes talks as if there were, and as if it were created by government spending. But whatever the government spends on new programs it must either take from old programs or take from Americans in increased taxes. This means that alleged new needs can be met more adequately only if old needs are met less adequately.
True economy means wisdom in spending. It means saving on what is less necessary or less urgent in order to devote limited resources to what is more necessary or more urgent. It means putting first things first, establishing priorities. When the American people are urged to make sacrifices in their living standards in order to shoot a man to the moon, it is time to ask what has happened to our national sense of proportion.
June 19, 1961
In the issue of June 5, I suggested that the least harmful solution of the dollar problem today would be to put a temporary embargo on gold export, to legalize a free exchange market and a free gold market, to guarantee foreign central banks against any long-run loss (in terms of their own currencies) on their existing dollar claims against us, and then, after setting a new gold value for the dollar that would be neither inflationary nor deflationary, to return to a full gold standard.
Whatever objections there may be to such a course, it is infinitely preferable to the alternatives. Four main courses are now being advocated by various groups: (1) The Administration plan to abandon our whole legal gold reserve requirement. (2) The proposal to keep our gold reserve requirement, and to make the dollar convertible at $35 an ounce, not only by foreign central banks, but by American citizens. (3) Devaluation of the dollar, with the retention of the present International Monetary Fund system. (4) The Triffin plan or some similar proposal to turn the IMF into a world central bank with power to create “reserves” (i.e., more paper money) for national central banks.
RESERVES AS A BRAKE
Every one of these courses is inadvisable and dangerous. But the Administration plan to abandon the legal gold reserve would do the quickest irreparable harm. I discussed this in Newsweek of May 22. Here I will content myself with an excerpt from the vigorous analysis by Prof. Walter E. Spahr of the Economists’ National Committee on Economic Policy:
“The common experience of nations with central banks lacking the protective device of reserve controls has been overexpansion of nongold money and credit, decline in the purchasing power of the currencies, and repeated devaluations. . . . Bank reserves are needed . . . to place restraints on the extension of notes and deposits. . . . Under present reserve requirements, the braking mechanism is in the form of a normal minimum requirement of 25 percent and a progressive tax on deficiencies below that percentage. . . . Without this protective device, foreign holders of nongold dollars could take all our reserves, and without penalty, leaving our money and banking system a hollow shell of irredeemable paper money the value of which could fall, quickly or slowly, to any depth. Our people and nation could be ruined as a consequence.”
FREE-MARKETIZATION
Unfortunately, however, our inflation, our increase in notes and deposits, and the increase in our price and wage level have all gone so far since 1934 or even since 1945 that it will soon no longer be possible to maintain real gold convertibility of the dollar at $35 an ounce, even for foreign central banks, let alone for American citizens. If we tried such a thing, the Federal Reserve System would quickly be drained of all its gold or we would have to impose a drastic deflation to prevent it. Either consequence would be intolerable. Those of us who have been fighting inflation for twenty years must be realistic enough to recognize that it has now gone too far to make real redemption at a rate of $35 an ounce any longer possible.
This does not mean, however, that it would be necessary or wise to devalue the dollar at some arbitrary rate (say at $70 an ounce) and go on with the present IMF mock-gold system. The rate so fixed might be inflationary. A new inflation would probably take off again from that point. The proposal for a “free-marketization” of gold, with the purpose of getting back eventually to a full gold standard, should not be confused with a new dollar devaluation.
The greatest danger at present, apart from the abandonment of our legal gold reserve, is the adoption of the Triffin plan or its equivalent. British publicists are pushing hard for this plan. Its appeal is that it looks like a simple and easy way of increasing world “reserves” (of IMF paper money) so that the bureaucrats of all countries could go right on with their inflation. If its sponsors could succeed in putting over such a plan, the gold standard would become the merest fiction, and the world would be launched on an inflationary binge without visible end.
June 26, 1961
When the foreign-aid program was first proposed by Secretary Marshall in 1947, its chief declared purpose was to repair the ravages of war in Europe and to promote a swift recovery. Later, the declared purpose was to raise living standards in the recipient countries. Later, a chief declared purpose was to halt the spread of Communism. Another announced purpose was to win allies or at least friends for the U.S. Another was to raise U.S. prestige. Another was to promote stable democratic government in the countries aided.
In the light of the fourteen-year record, these announced purposes now seem ironic. True, the European countries originally aided have recovered from the ravages of war. But history shows that countries always recover with surprising rapidity from the ravages of war. And the countries that we aided least, like Germany and Japan, made far more rapid recoveries than countries that we aided most. As for living standards, the only way to raise them is through increased formation of capital, seldom encouraged by governments of underdeveloped countries.
Communism has spread to an appalling extent since the foreign-aid program was launched. We have lost friends every year. Our prestige abroad has been falling at an accelerative rate. We have been powerless to promote stable democratic government even where our aid and intervention have been greatest. To recall what the foreign-aid program has not accomplished, it is enough to mention Laos, Cuba, Korea.
HARM UNFORESEEN
But the foreign-aid program has brought results that its sponsors failed to foresee. Even before the program started to promote socialism abroad by direct encouragement, as in India, it made its continuation possible by subsidizing governments that carried on socialistic projects. It has systematically bred unfriendliness to the United States. Every little “strong man” who receives aid from us is forced to show his own people, by snubbing or denouncing us, that he is not giving up his independence or the national pride in return for our aid. Since the end of World War II our foreign aid of all sorts has reached the fantastic total of $90 billion. A simple statistical comparison shows that it has been responsible for our whole net budget deficit since the program was launched, for the whole net increase in our national debt since then, and for an increased tax burden besides. It has been the chief fiscal cause of the inflation, of the unfavorable balance of payments, and of our loss of gold.
Yet the Kennedy Administration not only wishes to increase foreign aid substantially, but to avoid the necessity for annual Congressional approval by authority to borrow $7.3 billion for it over the next five years.
FOREIGN AID IN TROUBLE
In The New York Times, Cabell Phillips reports growing signs that the economic-aid program of nearly $3 billion for this year “will encounter greater difficulties with Congress than aid programs have met in many years.” He attributes this largely to “articulate and well- organized . . . lobbies working against the bill.” The only lobby he finds room to discuss is the Citizens Foreign Aid Committee, headed by Walter Harnischfeger, Brig. Gen. Bonner Fellers, and Clarence E. Manion, which consists of only 44 members and operates on a budget of around $50,000 a year. “There is not, on the other side,” declares Phillips, “a comparable lobby with the same singleness of purpose or the same resources to propagandize at the grass roots.” This statement astonishingly overlooks the government foreign-aid agencies themselves, with their thousands of employees and millions of the taxpayers’ own money to propagandize the full year round for the continuation and expansion of their activities and funds.
If a tiny organization like the Citizens Foreign Aid Committee, with a Multigraph machine, can have real success in bucking this full-time bureaucratic lobby, it must be incredibly “articulate and well-organized.” Yet with all due admiration, its success may, perhaps, be attributed to an additional factor. It may just be that congressmen recognize that what the committee is saying is true.
July 3, 1961
How does it come about that not only the present Administration, but some of our private bankers, now think it would solve our monetary problems to abolish any legal requirement to hold a gold reserve?
For a full answer we need to go back to the origin of banking and of fractional reserves. The original goldsmiths, or banks, kept gold for safe-keeping and loaned it out at interest. But depositors or borrowers seldom drew out the entire amount to which they were entitled. They merely signed drafts or checks ordering the bank to pay over specific amounts to third parties. These third parties in turn were often content to leave their gold on deposit and draw checks only as they needed to make payments.
Thus bank deposits subject to check came into being. And the volume of this bank-deposit money was much greater than the gold “base” into which it was all nominally convertible on demand. The system worked as long as everybody accepted the deposit credits as being “as good as gold” itself. The system, in brief, rested on confidence—confidence that it would never be abused, and that individual banks would be at all times not only solvent but liquid.
INVERTED PYRAMID
Then governments stepped in, and based national currency systems on the fractional reserve principle. They developed further “economies” in the use of gold. In other words, they developed a system by which a still bigger inverted pyramid of bank notes and bank credit could be based on the available supply of gold. This was the central bank. The central bank was authorized to issue its own bank notes (which were made legal tender) against its gold stock. It could “centralize reserves” by ordering “member” banks to leave gold or cash reserves permanently on deposit with it. It could make loans to these member banks which they, in turn, could count as “reserves” against which they could issue still more deposit money.
In the United States, in 1932 and 1933, the confidence of holders of Federal Reserve notes that they would be able to convert into gold at any time they wanted collapsed. They rushed to convert. Their distrust proved justified. Gold redemption was suspended. The government did not blame its own monetary policies. It denounced the people who had lost confidence and had demanded gold. It devalued the dollar, thus breaking faith with everybody who had relied on its most solemn pledge. It not only terminated the right of its own citizens to demand gold for their notes; it made it a crime for them to buy or own gold no matter where they got or held it.
WATER IN THE MILK
But the government wanted to maintain the new parity for the dollar in terms of other currencies, so it allowed foreign governments and central banks, and them alone, to demand gold. Our official monetary authorities found that by following this restricted convertibility they could build up a still bigger inverted pyramid of credit on their existing gold supply. But now that they have built the inverted pyramid and the wage-price level so high that even foreign central banks have begun to lose confidence, the Administration and a few bankers now ask: Why have any gold reserve at all? Isn’t the whole thing an economic waste, an outworn superstition, a “barbaric relic”? Why can’t we leave it to “able and responsible men” to regulate our money supply, which will consist purely of engraved slips of paper?
What this demonstrates is that once you begin diluting the money supply, the pressure grows for more and more dilution. The milkman who has been caught watering the milk then tries to convince his customers that they are better off with plain water. As the connection between the gold basis and the currency outstanding against it becomes increasingly remote, tenuous, and purely symbolic if not fictional, people begin to ask why it cannot be abolished altogether. The answer is that when the unit of money represents no real tangible value, but a scrap of paper whose supply is determined by the mere discretion or caprice of the politicians in power, history shows that the inevitable end result is monetary instability and uncontrolled inflation.
July 10, 1961
A quarter of a century ago, in the first Franklin Roosevelt Administration, Federal labor law took a wrong turn. It was based on the theory that the chief reason there were strikes and labor dissensions was that unions were too weak and lacked “bargaining power.” The Wagner Act in effect put the government into the union-organizing business. It made it compulsory for employers to recognize any union, certified by a government board as comprising a majority of the employees of an “appropriate” group, as the exclusive bargaining agent for all employees in that group. A company was forced to “bargain collectively” with the representatives of this group—and with no one else.
The act thus rested on a legal principle never countenanced in any other field. While it was cloaked with the phrase “free collective bargaining,” it was in fact a denial of the freedom to bargain. It took away from the employer the right to choose the persons with whom he bargained. It took away from any individual worker the right to bargain for himself, and from any minority union the right to bargain for its own members.
RESORT TO VIOLENCE
If the same principle were extended, a company management could be compelled to “recognize” and to “bargain with” only one particular supplier of raw materials. No matter how bad the material offered, no matter how unreasonable the price asked, no matter if the supplier insulted and denounced him, he would have to continue “negotiating” and “bargaining with” that supplier. He could not simply break off and ask for competitive bids from other suppliers, lest he be haled before a Federal board and condemned and penalized for an “unfair practice.”
But the legal situation of labor-management relations is much worse than this. For the unions enjoy de facto the right to throw mass picket lines around any plant or in front of any dock or ship and intimidate any other workers from applying for the jobs the strikers have deserted. Worse than this, they can often with impunity resort to flagrant vandalism and physical violence. Those interested in typical details should read The Kohler Strike by Sylvester Petro.
Yet for 25 years no one in power has seriously re-examined the premises of the Wagner Act. The Taft-Hartley Act amended the Wagner Act in minor respects, but it kept its principal compulsions on the employer and its principal immunities for labor unions. The Norris-LaGuardia Act, since 1932, has in effect denied the employer injunctive relief from intimidation and violence. The Supreme Court, with its doctrine of “preemption,” has further discouraged action by the local authorities to prevent strike violence. And each time a new nationwide strike has broken out, paralyzing essential production or transport, the Administration in power has talked and acted as if there were perfect freedom of bargaining on both sides and no intimidation at work.
ONE-SIDED DURESS
In the maritime strike, Secretary Goldberg, ignoring the picketing and violence at the piers and oil refineries, requested all parties to “talk,” to “resume direct negotiations”—just as if one party, the employers, were not in effect acting under duress. He has declared that the Taft-Hartley Act does not give the President “a sufficient arsenal of weapons to deal with a problem of this character.”
Someone, I hope, will at last suggest that the trouble is the opposite of this—that the Federal government has intervened too much in labor disputes, and in the wrong way; that if the employer had the clearly recognized legal right to discharge strikers and to replace them; if intimidatory mass picketing were forbidden, and the laws against violence enforced; if the freedom to bargain were restored to the employer and to the individual worker, there would be an astonishing drop in the number of irresponsible strikes called, and unions would greatly moderate the unreasonable demands that present labor law now encourages them to make. The government would not have to ask for dubious 80-day Taft-Hartley strike injunctions, which politicalize every strike settlement, and must finally lead to the desperate expedient of compulsory arbitration.
July 17, 1961
At the end of June there was a minor “gold rush” in Europe. Some dispatches attributed the increase in demand for gold to a series of articles published in British and Continental newspapers by Jacques Rueff, the French economist and financier. Rueff argued that unless the present international monetary system was changed, the world was heading for another crash of the proportions of that of 1929.
He has also put this argument forward in the July issue of Fortune. A great peril, he contends, hangs over the economy of the West. “The instability in our monetary system is such that a minor international incident or . . . disturbance could set off a worldwide disaster.” The measures suggested for dealing with this peril fail to go to the roots of what is wrong. “The nature of the disease is apparent in this fact: During the decade 1951–60, while the U.S. was piling up balance-of-payments deficits totaling $18.1 billion, some $13 billion accumulated in foreign hands in the form of sight deposits or short-term investments in the United States money markets. This $13 billion constitutes a claim on the U.S. gold reserve that could be called at any time—with catastrophic consequences.”
A ‘PRODIGIOUS ERROR’
“This came about because, in the countries that were creditors to the U.S., the central banks were content to accept dollars in settlement instead of demanding payment in gold. . . . Paradoxically, the danger we are in was brought about not because the U.S. lost gold, but because it lost so little gold. During the decade U.S. gold reserves fell by only $5.3 billion. If the U.S. had settled its balance-of-payments deficits entirely in gold, its reserves would have dropped—all other things being equal—by $18.1 billion, and today they would amount to a mere $4.7 billion. By all the evidence, such an unthinkable drop in reserves would not have been tolerated. Action would have been taken much earlier to stop the deficits.”
Rueff concludes that “the American balance-of-payments deficits were allowed to persist for the last ten years only because the U.S. was not really required to settle its debts abroad.” This situation “is the product of a prodigious collective error.”
This error, in Rueff’s opinion, was the passage at the International Economic Conference in Genoa, back in 1922 (eleven years before the U.S. went off the gold standard), of Resolution 9, which recommended adoption of an international convention embodying “some means of economizing the use of gold by maintaining reserves in the form of foreign balances.” This brought into existence the “gold exchange standard,” under which central banks consider themselves authorized to create money not only against gold or government bonds, but also against any foreign currency considered as good as gold.
CREDIT PYRAMID
Under this system, the U.S. has enjoyed a “deficit without tears.” Foreign countries could leave their dollars on deposit with us, thus enabling us to continue building credit on them, while they built their own inverted pyramid of credit on them. It is this “double pyramid of credit” that is in danger of toppling.
What is the remedy? Rueff rightly points out that it is certainly not the Triffin plan, which would give the International Monetary Fund the power to issue its own international money and increase the world inflation. He quite properly insists, also, that we must eventually “liquidate the unstable and dangerously vulnerable situation resulting from the duplication of the credit structure, built on the gold reserves of those currencies with key currencies.”
It is when he gets to this point that Rueff’s otherwise brilliant discussion becomes unsatisfactory. He is right when he insists that we must halt both the U.S. and the world inflation. But we cannot tolerate an American or a world deflation either. This would almost certainly be the consequence of any attempt, however gradual, to “pay off in gold [presumably at $35 an ounce] all the dollar assets held by central banks outside the U.S.” First of all (preferably through a transitional free market in gold) we must get back to a tenable gold rate for today’s depreciated dollar.
July 24, 1961
If you want a quick reputation as a brilliant economist, the formula is simple. Just put forward “new” reasons for still more government intervention, more government spending, and more inflation.
This was the secret of the enormous success of Lord Keynes. The theories of J.K. Galbraith have superseded those of Keynes because where Keynes advocated more government spending and controls only periodically, to combat mass unemployment, Galbraith advocates them as permanent and uninterrupted policies.
Galbraith wants to siphon more and more purchasing power out of the “private sector” of the economy and into the “public sector.” Individuals who earn their own incomes, he argues, only spend them in trivial and foolish ways. Let the politicians seize more and more of the individual’s income and spend it as their own infinite wisdom dictates.
Alvin H. Hansen, the former Harvard economist, has now solemnized this theory with a new name—“the dual economy.” He agrees that private spending must be supplemented by massive Federal spending. The “private sector” and the “public sector,” he argues, support each other by mutual “exchange” just as do manufacturing and agriculture. Each sector “contributes to the total flow of real income and each takes its share out of the income stream either by charging a price or by collecting a tax.” Hansen can see no essential difference between voluntarily paying a price for something one wants and being forced to pay a tax for something one may not want nor even get.
THAT ‘PUBLIC SECTOR’
In the summer issue of the New Individualist Review, Murray N. Rothbard subjects this concept of the “public sector” to realistic dissection. He points to its “hidden assumptions: That the national product is something like a pie, consisting of several ‘sectors,’ and that these sectors, public and private alike, are added to make the product of the economy as a whole. In this way, the assumption is smuggled into the analysis that the public and private sectors are equally productive, equally important, and on an equal footing altogether.”
But Rothbard goes on to point out the profound differences. Government acquires its revenues by coercion and not by voluntary payment. “Production” has a dubious meaning unless it means the production of things consumers demand and willingly buy. “In the private sector, a firm’s productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government’s ‘productivity’ is measured . . . by how much it spends!”
ADD OR SUBTRACT?
The truth, contends Rothbard, is that far from adding to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. It directs production not toward but away from the needs of individual consumers. In brief, the public sector is “anti-productive; it subtracts from, rather than adds to, the private sector of the economy.”
(I should like to add my own note that, while it may be reasonable to assume that certain necessary governmental services, like police and fire protection, add to national production, there is no possible way of determining how much they add. Of course schemes like foreign aid and subsidizing farmers to reduce output clearly reduce our national output and income.)
Rothbard also pays his respects to Galbraith’s argument that private wants are all artificially induced by business advertising which automatically “creates” the wants it supposedly serves. If this were so, Rothbard points out, there would be no need whatever for the almost frantic concentration of business on “market research”—no reason to fear that one might make a product that people would not buy. As Rothbard remarks in conclusion, Galbraith is curiously silent on the enormous amount of propaganda by government.
Yet the Keynes-Galbraith-Hansen myth of the “dual economy,” with its two chief “sectors,” has become the new rationalization for a program of reckless and irresponsible spending that must inevitably lead us toward an inflationary crisis.
July 31, 1961
The Kennedy Administration, according to Newsweek (July 11) and The Wall Street Journal, plans to ask Congress for deep new Federal intervention in labor-management disputes, including the following powers:
1—Power to set up labor-dispute inquiry boards with “a lot more muscle” than those currently authorized by the Taft-Hartley law. They would be empowered to recommend settlement terms, not just find “facts.” They could jump in at Presidential direction before a strike occurs.
2—Power to seize key industries, putting them under government management when deemed necessary to stop or avoid crippling strikes.
3—Power for the President to force strikers back to work by decreeing a “cooling-off” period without the present necessity of going to court and convincing a judge that a national emergency requires issuing an injunction.
These powers would amount to compulsory arbitration. They would in effect enable the government to fix wages. In the long run they would carry us into a completely controlled economy. A President could handpick boards to bring in the kind of decision he wanted. Settlement of every major strike would be thrown into politics. Few Presidents could resist the temptation to press for the settlement that seemed to yield the maximum political profit at the moment.
YIELDING TO DEMANDS
This would mean substantially yielding to the unions’ demands. As in the past, this would be disguised from the unsophisticated because the unions would always demand more than they actually expected to get. Anybody inclined to doubt this yielding has merely to notice what has happened even under the “weak” and “conservative” Taft-Hartley injunctions as they stand. The 1959 steel strike was finally settled (through the intervention of Vice President Nixon) only by a grossly inflationary wage increase. Settlements would be even worse if the government had still greater coercive powers.
The new powers would not reduce the number of strikes or strike threats, but immensely increase them. Whenever one of the compulsory arbitration boards “recommended” a settlement (which, as experience with the railroads proves, would be binding on the employers but not necessarily on the unions), 100 unions would contend that they were entitled to an equal wage increase or benefit, an equal “pattern.” The government would soon be setting wages all around the circle.
PENALIZE THE VICTIM?
The new powers would be almost certainly abused. Seizure of the companies would not penalize the strikers but the struck-against. During any tenure as operator, the government would be in a position to grant increased wages and other benefits which corporate managers could not easily rescind when they regained control. Truman tried to set a pattern like this when he seized—illegally—the steel companies in 1952.
With the Railway Labor Act of 1926, the Norris- LaGuardia Act of 1932, the Wagner Act of 1935, and the Taft-Hartley Act of 1947, Congress has tried to cure the evils brought on by government intervention in labor-management disputes by still more intervention. For a generation, the government has asked and Congress granted more and more “powers”—a larger and larger “arsenal of weapons,” as Mr. Kennedy and Secretary Goldberg call it. The situation has grown steadily worse.
And almost no one has dared to ask for the one clear remedy—the simple restoration of freedom. Not freedom for “collective” bargaining only but freedom for all bargaining—freedom for a minority union to bargain for its own members, freedom for any individual worker to bargain for himself, legal freedom for the employer to bargain with anyone, to hire, discharge, or replace whom he pleases. Plus protection for individual workers and employers against violence and coercion, or intimidation by mass picket lines.
In brief, the solution most likely to provide maximum labor peace, maximum wages, and maximum employment would be to repeal all Federal “labor-relations” laws and restore freedom of choice for the individual.
August 7, 1961
In his Budget Message of January 1960, President Eisenhower estimated there would be a surplus of $4.2 billion in the fiscal year 1961. In January of this year he slashed his estimate to a thin surplus of only $79 million. On March 25 President Kennedy estimated that instead of a thin surplus there would be a $2.2. billion deficit in the fiscal year to end on June 30. When the final returns came in, the deficit turned out to be $3.9 billion.
In January, President Eisenhower estimated a surplus of $1.5 billion for the fiscal year 1962. In March Mr. Kennedy said that, instead, there would be a deficit of $2.8 billion. Then the official estimate was raised to a deficit of $3.7 billion. It is now raised again to more than $5 billion.
These figures are in themselves evidence of fiscal irresponsibility. Our political leaders and Treasury experts seem unable to make a reasonably accurate estimate of a fiscal year’s result even a couple of months before its end, let alone a year in advance. Recently the forecasts have been systematically wrong in the same direction—overestimating revenues and underestimating expenditures. Congress and the country have been faced with increased expenditure estimates almost every few weeks.
‘APPROPRIATE’ DEFICIT
Even more disquieting than this budgetary slovenliness is Washington’s indifference toward it—as if it were not very important whether forecasts were wide of the mark or not. This goes back to the growing acceptance in official circles of the belief that a budget balance is not important. Last March Mr. Kennedy said it really didn’t matter whether the budget was balanced each year. All that was necessary was a “balance over the years of the business cycle.”
The implication was that a budget deficit would in itself bring the full employment that would bring the tax revenues that would eventually bring balance. Even a couple of months ago Secretary of the Treasury Dillon was saying: “Such a deficit [$2 billion for 1961] is not a cause for alarm in times like these. . . . Another deficit is in prospect for fiscal ‘62, one of about $3 billion. This, too, will be entirely appropriate.” In fact, the fashionable idea is that deficits are actually necessary for “creating demand,” for “full employment,” and for “growth.”
URGENT TAX REFORMS
There is not room here to go over again all the fallacies and confusions in this view. But it may be worth pointing out that if a budget deficit were desirable, then the most desirable kind would be not one achieved by increasing government expenditures but by cutting taxes. Most of the deficit zealots want increased government expenditures to give increased “consumer purchasing power.” They overlook that what is enormously more important for economic growth and increased real wages and productivity is increased savings and investment, and that the way to get this is to mitigate the onerous taxes that now reduce incentive and production.
The most urgent reforms are more adequate tax write-offs for depreciation of plant and equipment, less drastic corporation income taxes, a revision of capital- gains taxes, and abolition of confiscatory progressive income-tax rates above 50 percent. Such reforms, in fact, would probably yield more rather than less revenues, and would give enormous stimulation to national output.
Instead of discussing this, Administration officials are now talking of an actual increase in taxes. This increase is said to be necessary to pay for the costs of defending Berlin. In view of the billions of dollars that the Administration has been asking and mainly getting for foreign aid, farm aid, social security, highways, and housing, it would be disingenuous to blame a tax increase on added Berlin costs. A boost in tax rates above present levels, moreover, might actually reduce tax revenues. It would certainly discourage investment and production.
The road back to fiscal sanity lies in recognizing that though budgets must be balanced, the health and growth of the economy demand that the balance be achieved by cutting both excessive expenditures and excessive tax burdens.
August 14, 1961
It was not only right but imperative that President Kennedy give Khrushchev clear warning that we mean to defend Berlin at all costs. It was perhaps just as essential to show we were not bluffing by ordering an immediate build-up of our defenses. But the broader economic program outlined by Mr. Kennedy was unnecessary. It is more likely in the long run to thwart our national purposes than to help them.
The President told Congress that in order to improve our posture with regard to the defense of Berlin we need to spend $3.5 billion more in this fiscal year. This is a total increase in the defense budget of $6 billion since January. Suppose we accept the need for this $6 billion. Why was it not asked for in May, when Mr. Kennedy requested only $2.5 billion additional? The objective situation has not visibly changed. Khrushchev was threatening Berlin in May. We already knew then that he would threaten Berlin again and probably half a dozen other places. The new request gives an air of improvisation to the May request. It raises the question whether the present request may not also be improvised. Is Mr. Kennedy going to ask for new billions every time Khrushchev makes a new threat? That would give Khrushchev a cheap and easy way to lure us into spending ourselves into a runaway inflation or crushing taxation.
SWOLLEN EXPENDITURES
The President’s new requests raise his total defense budget to $47.5 billion. Whenever any serious investigation has been made of military spending—by the Hoover commission or a Congressional committee—it has turned up huge waste and duplication. It is discouraging that Mr. Kennedy’s reviews of the military budget have suggested no offsetting economies of any importance.
We come now to the non-defense budget. The overwhelming bulk of discussion consistently forgets that this is tremendous. The total Federal spending budget, including social security, exceeds $100 billion. Non-defense expenditures exceed $50 billion, or more than half. Yet not only has Mr. Kennedy not suggested any offsetting economies in any of these, he has poured into Congress since he came into office some 50 messages, nearly all of which have called for more spending in some new direction. In this $50 billion of non-defense expenditures, covering every conceivable activity, from aiding “depressed areas” to landing a man on the moon, there are infinitely rich opportunities for economy. Probably $3.5 billion could profitably be cut out of either crop supports or foreign aid alone.
NO BALANCE TILL 1963
Yet the President looks with complacency upon a budget deficit of more than $5 billion in the current fiscal year (which still has nearly eleven months to run) on top of that of nearly $4 billion for the fiscal year just closed. Not until the fiscal year 1963 does he promise a budget “strictly in balance.” Even this balance, he hints, is to be achieved not by economies but by “an increase in taxes.” Thus the President would put even more burdens on the already overburdened taxpayer. He neither asks nor hints at any sacrifices whatever for the multitudinous pressure groups that are now parasitic on the taxpayer.
But the necessity for reducing both government expenditures and taxes does not rest primarily on the argument for equity or fairness. It rests on the far stronger argument that this reduction is essential for promoting, instead of retarding, increased capital accumulation, production, and economic growth. We need to abolish all personal income tax rates above 50 percent. These bring in barely enough revenue to support the government for a half a week. They are confiscatory and purely punitive. If the personal income tax rates above 50 percent were abandoned, the revenues of the government would probably increase; the country’s production would certainly increase.
There would also probably be more revenues and certainly greater national production and income if the double tax on corporate dividends were mitigated, if capital gains taxes were more realistic and less one-sided, and if more generous tax write-offs were allowed for depreciation and new investment.
August 21, 1961
The new 50,000-word Communist Manifesto is just one more missile in an uninterrupted war, blowing hot and cold, against the West. It is intended at least as much for U.S. consumption as for home consumption. And what it says has no necessary relation to what the Communist rulers seriously believe or intend.
It says, moreover, contradictory things. Some commentators attach great significance to Khrushchev’s abandonment of the dogma of the inevitability of war between Communism and capitalism. Yet this has the obvious propagandistic advantage of inducing us to relax our guard. Throughout the document, war is alternately threatened and disavowed. “The Communist Party of the Soviet Union . . . will continue to oppose all wars of conquest” (no mention of Tibet, Hungary, etc.) but “consider it their duty to support the sacred struggle of the oppressed peoples and their just anti-imperialist wars of liberation.” In plainer words, any wars that the Russian Communists want to start (e.g., over Berlin) will be “anti-imperialist wars of liberation.”
When Khrushchev says “We will bury you,” and then talks of “peaceful coexistence,” we in the West may regard it as double-speak. But for Khrushchev’s propaganda purposes there is no contradiction. The threats to bury us are intended to scare some of us into appeasing him; the peaceful coexistence slogans are intended to lull and lure the rest of us into appeasing him. The “peaceful coexistence” will be obtainable—as long as we surrender to his terms, on Berlin, a divided Germany, Laos, Cuba, until we have lost the will or power to resist. The new manifesto aims at sapping our moral resolution and our faith in our own cause and system.
HOMAGE TO PROFIT
The manifesto is for the most part a rehash of practically all the stale Marxist dogmas about the inevitable triumph of socialism and Communism and the equally inevitable disintegration and defeat of capitalism. As part of the double-speak, there are attacks on “dogmatism” but even stronger attacks on “revisionism.” Yet revisionism occasionally raises its ugly head. We are suddenly surprised to discover, for example, that: “Prices must, to a growing extent . . . insure . . . a certain profit for each normally operating enterprise.” In the older literature of Communism, “profit” was a dirty word; it existed under capitalism only because employers “exploited” the workers by “withholding” from them the full product of their labor. If profit is now normal and necessary even under Communism, why is it so reprehensible under capitalism?
Here are the pie-in-the-sky promises for 1980 which the manifesto makes: “The people’s standard of living and their cultural and technical standards will improve substantially; everyone will live in easy circumstances; all collective and state farms will become highly productive and profitable enterprises; the demand of the Soviet people for well-appointed housing will in the main be satisfied; hard physical work will disappear; the U.S.S.R. will become the country with the shortest working day.”
PROMISE VS. REALITY
People like Senator Fulbright take this sort of pipe dream in deadly earnest. He tells us that Russia can achieve these goals, that “the big question is the maturity of our response,” and that “we must also develop our economy.” Such people, bewitched by the phony statistics that Russia is constantly publishing, ignore the miserable conditions that still exist there after 44 years of Communist rule—slave-labor camps, people packed six to a room in huge slums with communal kitchens and bathrooms, women working like beasts of burden, lands ravaged by chronic crop shortages, and recurrent famine.
The Soviet economic achievement, except in the few things on which they have concentrated their resources and their efforts—armament, missiles, and spectacular space stunts—has been wretched. Though they are still far behind us (and even most countries of Europe), they are always going to pass us in the sweet by-and-by—this time twenty years from now, when the people who are making these extravagant promises will not be around to be held responsible for their non-fulfillment.
August 28, 1961
The Administration’s foreign-aid program disregards nearly every sound principle of constitutional balance, foreign policy, or economics.
Even if we were to grant that a foreign-aid program of the present dimensions is economically necessary or desirable, the request of the President for authority to borrow $8.8 billion from the Treasury over the next five years to finance long-term “development” loans violates sound democratic and constitutional procedure. Congress is asked to give up, to that extent, its essential annual control of Federal expenditures. It is asked, in other words, to vote a lack of confidence in its future self. It is asked to prevent itself from reconsidering the program next year on its merits, and deciding the question in accordance with its judgment of the situation as it exists at that time.
It is also asked, in effect, to limit the freedom of action of the next Congress. If the voters were to return a conservative or a Republican House to power in November 1962, for example, and the new members felt that part of their mandate was to cut down or halt foreign aid, they would be prevented from doing so by an unwarranted “moral commitment” made by the present Congress. This is a denial of democratic principle.
FIVE YEAR PLANS
The President’s request rests, in addition, on unsound economic assumptions. The Rusk-Dillon plea declared: “It will be necessary to free our development lending program from the difficulties of working under the uncertainties inherent in annual requests for funds.” Why can’t foreign governments operate under the same “uncertainties” as our own government departments do? The Administration’s argument apparently assumes that the key to prosperity and economic growth is not free enterprise, but government planning, as typified by the Five Year plans that India and other nations have aped from Russia.
President Kennedy and Secretary Dillon have promised huge sums to Latin American countries in our Alliance for Progress on condition that they institute “reforms.” These reforms are not in the direction of encouraging free enterprise, removing vexatious controls, safeguarding private property, reducing onerous taxation and government extravagance, balancing their budgets, and halting inflation. The money has been offered on the contrary, on the condition that the Latin American countries will undertake “national [i.e., governmental] planning,” “land reform,” and socialized housing—in brief, if they will move still further toward socialism and the welfare state. So-called “land reform” abroad has usually meant a grave infringement of private-property rights. It has more often resulted in a reduction rather than an increase of agricultural output.
WHAT PRICE COFFEE?
Secretary Dillon has promised the Latin American countries “at least $20 billion” in return for such socialistic measures. In addition, he has promised help in pushing up the price of coffee and tin, for example, against American consumers. He has not only endorsed export quotas of these products from Latin American producers, but recommended policing imports into the U.S. He ignores the collapse of all the old Brazilian coffee valorization plans and similar “stabilization” schemes, and the expensive fiasco of our own crop-support programs.
In brief, the Administration does not trust or understand the function of free prices and free markets in adjusting production to consumption and supply to demand. The whole folly of government price-control and production-control is to be launched on a new and international scale.
The result can only be to encourage and prolong all the unsound economic policies of South American governments, and to slow down rather than accelerate sound and continuous South American economic growth.
All this is apart from the economic harm that the foreign-aid program is now doing to the United States itself, in unbalancing our budget, threatening greater inflation and a still greater increase in the tax burden on productive enterprise, increasing the deficit in our balance of payments, and undermining the dollar just when it is most essential for our own stability and world stability to strengthen it.
September 4, 1961
Growing signs of hostility to business on the part of prominent members of the Kennedy Administration culminated in the indictment on Aug. 17 of three of the nation’s largest manufacturers of antibiotics and three of their top executives on criminal antitrust charges. The defendants were accused of maintaining unreasonably high and noncompetitive prices, and of monopolizing production and distribution of the drugs.
The legal guilt or innocence of the defendants must be determined by the courts. But something may be said about the curious ideas of the Administration concerning what constitutes “noncompetitive” pricing. Unless identical or equivalent products are offered at the same price, the overpriced product cannot be competitively sold. Yet the Federal government seems to regard such equality of pricing as a prima facie sign of conspiratorial price-fixing.
An even broader question is raised by the existing anti-monopoly laws themselves. Apart from the specific wisdom of some of these laws, it is the first requirement of the ideal of the Rule of Law that laws ought not to discriminate between groups or persons. Equality before the law means that whatever is permitted to A is permitted to B, and whatever is forbidden to A is forbidden to B.
DOUBLE STANDARD
But for the anti-monopoly laws there is a flagrant double standard. Labor unions are not only permitted to do what is forbidden to businessmen, but employers are compelled by Federal law to deal with these labor monopolies. Unions are in practice even allowed to enforce their demands by physical intimidation and violence, to prevent others from taking the jobs their members have voluntarily vacated. The country’s farmers for decades have not only been permitted to engage in monopolistic price-fixing; they had done so with government help, and even under government coercion. Not so long ago the coal industry was forced to fix minimum prices by Federal law. Before that all industry was forced to fix prices under the NRA code.
It would be hard to think of an industry that, in the last twenty years, has conferred a greater boon on the American people, and on humanity, than the American drug industry. It has made an enormous and unmatched contribution to relief from disease and pain, and to the prolongation of human life. Yet instead of winning praise and gratitude for this, it has only aroused the animosity of the politicians. Last week my colleague Raymond Moley discussed the extraordinarily one-sided investigation that the Kefauver Senate subcommittee has conducted for several years against the industry, with hearings published in 26 volumes comprising 16,505 pages. He also discusses this week some questions of prices and profits in the drug business. I should like to supplement this with some considerations that apply also to the role that profits play in business generally.
BENEFICIENT INDUSTRY
Ignoring the hundreds of thousands of lives that the American drug industry has prolonged or made more worth living, Senator Kefauver concentrates on the suspicion that the companies may have overpriced their drugs by excessive markups. The drug industry has replied that the average person spends no more of his health dollar, and a smaller portion of his income, for drugs today than he did in 1929.
It is true that the drug industry in recent years has made higher profit margins than most industries. This has been fortunate for the country. It has provided the funds for research to develop new and better drugs. It has led to the expansion of the industry. It has attracted more firms into it. The research has brought down some prices sensationally. The competition has also brought down prices. In a free system, the cure for high prices is high prices.
The political hostility to the drug business, the attempt to treat the heads of the big drug companies like common criminals, and put them in jail, because their pricing policies may not conform with the naïve preconceived ideas of politicians, must threaten the growth and potential usefulness of one of America’s most beneficient industries.
September 11, 1961
Two recent actions by the Administration emphasize the deep confusion that exists about the causes and cure of the “deficit” in our balance of payments. One was the announcement that the United States would shift from European to domestic producers for the coal and coke it needs to supply its forces in West Germany. The other was the reduction in the duty-free allowance of Americans returning from abroad from $500 worth of goods each to only $100 worth. Both actions were taken on the argument that they would improve the U.S. balance of payments.
The first thing that strikes one about these actions is the utter insignificance of the sums involved compared to the size of the problem. The deficit in the balance of payments has been running into billions a year. Our foreign aid, consisting mainly of gifts and soft loans, is more than $4 billion a year. The annual cost of the coal our forces use in West Germany is placed at $15 million. In the present fiscal year, 40 percent has already been contracted for in Europe, leaving about $9 million worth to be bought. So against the $4 billion we give away in foreign aid we “save” $9 million on coal, or roughly one-fourth of 1 percent. Put another way, we are to give in foreign aid 400 times as much as we “save” on the cost of coal. What we “save” in foreign exchange by cutting the duty-free allowance of American tourists is also insignificant.
BREEDING ILL WILL
Both actions are unwise from the standpoint of our foreign relations. The State Department is said to have opposed the decision to buy coal for our West German forces here because the German industry is also in economic difficulties. Our reduced tourist allowance will do great damage at special points—for example, at Curaçao, where Caribbean tourists stop largely for the “bargains.” We spend enormous sums to try to buy foreign friendship, and then offset them by petty “savings” that breed ill will.
These actions reveal above all a complete misunderstanding of the meaning and causes of a “deficit” in the balance of payments and the consequences of trying to cure it by reducing imports.
Let us consider first the differences between a real deficit in the balance of payments and a technical one. A real deficit is created by foreign aid—by goods (or dollars) that we give away for nothing tangible in return. A technical deficit in the balance of payments is the excess of gold and dollars that are transferred to foreigners on commercial account above those we get back. We may call this a technical deficit because the gold or money has not been lost; we have bought something in return for it.
IMPORTS AND EXPORTS
The point about a technical deficit is that, if a country avoids inflation or if it allows freedom of exchange rates, such a deficit will always tend to correct itself. The reason is simple. There is no advantage in foreigners’ holding on to that country’s currency forever. Eventually they must buy something with it—in that country. Given free prices and free currencies, changes in comparative prices or in exchange rates must in time correct payments deficits.
The present deficit in the American balance of payments has been brought about by unsound government policies over a long period. We have domestic inflation, reflected in costs, wages, and prices, making American goods high in price, and foreign goods comparatively attractive. We have a dollar overvalued in terms of gold, combined with arbitrary exchange rate fixity. Gold, which has not gone up in price in 25 years, is our biggest bargain for foreigners.
This situation cannot be corrected by discouraging imports. By the exact amount that we cut down our purchases from abroad, we ultimately cut down our sales abroad, by depriving foreigners of the dollar purchasing power to buy them. We compound our problem by paying up to 25 percent more for the coal we buy at home. Ironically, what we discourage is sales to us that enable foreigners to earn dollars to buy from us. We much prefer to give dollars away, while increasing the inflation that causes the payments deficit.
September 18, 1961
Between 1946 and 1954 the eminent French economist Charles Rist, who died in 1955, wrote a series of articles advocating a return to the international gold standard. He published these as a short book. Now Philip Cortney has performed a public service by translating this into English, under the title The Triumph of Gold (Philosophical Library, $4), and writing an introduction.
Rist’s central theme is that gold is the only metal capable of serving as a base for international commerce, because it is the only one that is asked for and accepted in payment in all countries, as bullion or in the form of money. It holds its value because of the rarity imposed on it by nature. It is precisely this rarity and this retention of value over time that makes it infinitely superior to paper money. The demand for it, as money, has existed since the beginning of history.
Rist devotes a great deal of his space to answering the specious arguments offered in defense of paper money. For many writers, he points out, contempt for gold is a new idea and praise of paper money an original thought. The history of ideas about money shows, on the contrary, that this is a very old conflict.
JOHN LAW
Rist’s book is beautifully lucid and readable. One of his most fascinating chapters is that in which he traces current arguments and even phrases denouncing gold and praising paper back to the Scottish adventurer John Law, who instituted a paper-money system in France and defended it in letters published in 1720.
Rist reminds us that Law suspended the convertibility of bank notes in order to issue larger quantities. In order to prevent the depreciation of the paper from being apparent in exchange for gold or silver, he forbade the possession of gold and silver by the public, “exactly as was done by President Roosevelt in 1933.” Law ordered searches in homes. He encouraged denunciations. He seized silver deposited with notaries and in savings banks and replaced it with paper money.
Rist believed that only by a return to a full international gold standard could the world get back to monetary stability and insure the continuance or resumption of a truly international economy. But he did not believe it would be possible to retain the gold value of the dollar at $35 an ounce. Any effort to do this, he was convinced, would precipitate an American and a world deflation that would have consequences equivalent to those of the depression of 1929.
$70 AN OUNCE?
He looked forward to action on the part of the United States, or a world conference, to revalue gold in terms of currencies and prevent such a deflation. “It will become indispensable not, as is currently said, to modify the price of gold in paper dollars, but, more correctly, to modify the price of the paper dollar in gold.”
Though he saw that the problem would involve difficulties, uncertainties, and chance, his opinion (in 1952), on the basis of the price rise and the currency increase that had taken place since 1940, was that the price of gold should be raised from $35 to $70 an ounce.
Philip Cortney, in an introduction that pleads eloquently and convincingly for a return to the gold standard, and dissects further arguments of the defenders of a managed paper money, also, and with more confidence than Rist, insists that “the price of gold will have to be raised to at least $70 an ounce.”
I find myself in agreement with Rist and Cortney on practically every point but the exact procedure for getting back to gold convertibility at a new valuation for the paper dollar. I am inclined to believe, though I am not sure, that a price of $70 an ounce might be strongly inflationary. A safer way to proceed, in any case, would be a temporary suspension of export of the government’s gold supply, accompanied by authorization of a free gold market. This would help the government in fixing a tenable new gold value for the dollar. What cannot go on is continued inflation and a continued adverse balance of payments accompanied by the right of foreign central banks to withdraw all the gold they want until our supply is exhausted.
September 25, 1961
TURIN—Economists and political scientists from eighteen nations met (Sept. 3 to 9) in this Italian city to discuss some of the world’s political and economic problems.
They are members of the Mont Pèlerin Society, named after the place where it first met in Switzerland fourteen years ago. The original meeting was attended by only 47 persons from little more than half a dozen countries—the U.S., Britain, France, Italy, Switzerland, Belgium, Holland, and Norway. Chiefly under the leadership of F.A. Hayek, author of The Road to Serfdom, who became the society’s first president, the group was united by a common belief in libertarian principles—in limited government, in free, private, competitive enterprise, in the lowering or abolition of the barriers to international trade, in the restoration of a world monetary order, in the restoration of a Rule of Law, internally and externally. They were against the network of price controls and exchange controls that then existed, against the drift into socialism, collectivism, national planning, and the welfare state, that seemed so irresistible in Europe and so fashionable in the U.S.
The group that met in 1947 felt isolated. Those especially who came from Continental Europe thought of themselves as “liberals,” and called themselves that; but their principles—of traditional liberalism—were regarded as reactionary, outmoded, and unreal by their socialist and welfare-statist colleagues in the academic world. For the great majority of those who met were university professors.
MEN OF INFLUENCE
In the following decade, however, the Mont Pelerin Society met with more success than its original members had dared to hope for. Its membership now exceeds 200, from more than twenty countries, including non- European countries such as Japan, India, Argentina, and Peru. And its membership, though still dominantly made up of professors and scholars, includes men who occupy or have occupied positions of great influence or power in their own countries—Sen. Luigi Einaudi, former President of Italy, Dr. Ludwig Erhard, Economics Minister of West Germany, Jacques Rueff, author of the Rueff economic program in France, Pedro Beltran, the Premier of Peru, to name a few.
The original members of the society have lived to see stifling economic controls, internal and external, lifted in a score of countries, currencies stabilized, inflations in many countries brought to a comparative halt, and a wide disenchantment with socialist panaceas. Some of the members have been influential in bringing about these reforms. But they have acted always as individuals. The society is in no sense a propaganda organization; it has no platform, program, or declared statement of principles. It meets purely for the exchange of ideas, and though it is pervaded by a libertarian philosophy and spirit, there are differences of opinion on details.
GLOBAL TOPICS
At the meeting the members discussed such topics as the relationship of democracy and liberalism, the responsibilities of the Western countries to the underdeveloped areas, the status of Communism, particularly in Italy, France, and South America, and the possibility of a return to an international monetary order.
Again, in the shadow of the Berlin crisis and the threats and actions of Khrushchev, many members expressed the deepest misgivings about the outlook for economic order and freedom. Yet there was a surprising area of agreement among the recommendations of individual speakers for national and international currency reform. What was remarkable was the almost unanimous conclusion that the only alternative to inflation and continued monetary chaos was a restoration of the international gold standard.
There was, to be sure, some dissent from this view. There was even more disagreement among individual speakers concerning the exact method of returning to a full gold standard and of adopting new currency unit values in terms of gold. But not a single speaker expressed satisfaction with the present International Monetary Fund system. Several, indeed, dismissed it as a pseudo-gold standard, a “gilded” standard with a built-in world inflationary bias.
October 2, 1961
ZURICH—Apart from reports of international conferences, Switzerland is less in the news than any other country of comparable importance. No revolutions, popular or palace, no upheavals, no government crises, no new five-year economic plans, no “austerity” programs, no inflation or deflation crises, no “dollar shortage,” no demands for aid. Unlike so many other countries, in short, Switzerland is not constantly being threatened with collapse and as constantly being saved.
In part this must be attributed to the character of the people. The passion for tidiness, order, and good management seems more widespread here than among any other people in the world. It is reflected not only in the cities and parks, but in a countryside so beautifully kept that it seems like one enormous golf course.
But at least as much credit must go to Switzerland’s form of government and the spirit in which it is carried on. It is first of all a federal government, like our own—or like what our government was originally, and largely remained, until the tremendous centralization of power in Washington following two world wars. Most of the governmental power is in the 22 cantons, as ours was originally in the States. And there is no final power even in the federal Parliament. If 30,000 citizens don’t like a law, they can force a referendum on it and the people can veto it. Such referendums may occur two or three times a year. The upper house is modeled on our Senate, with two members from each canton. The lower house is elected on the basis of population.
NO VETO
But the great blessing of Switzerland is that it has no “strong” man, no “indispensable” man, and cannot have under its constitution. The two houses of Parliament together elect a Federal Council, consisting of seven members, and one of these is elected President of the Confederation for a term of one year. He cannot succeed himself (except theoretically after the expiration of another year) and in practice the Presidency is rotated annually among the seven members of the council. The President has few powers, and cannot veto bills. The result is that not many outside of Switzerland even know the incumbent President’s name. (It happens at the moment to be Wahlen.)
So, while people everywhere wonder what would happen in France without de Gaulle, in Spain without Franco, in India without Nehru, and so on, no one worries what would happen in Switzerland without Wahlen. Everything, it is assumed, would continue to be stable, orderly, and predictable with or without him.
And Switzerland has managed very well. In the calendar year 1960 it had a budget surplus of 279 million francs. In 1959 the budget surplus was 163 million. This year another surplus is expected. The national debt has been reduced from 8.5 billion francs in 1945 to 6.2 billion today.
GOLD BASIS
For a number of years now, Switzerland has boasted “the hardest currency in the world.” It is on a real gold basis. Any citizen can turn in his francs for gold. The gold coverage—about 10.5 billion francs—is more than 150 percent of the 6.8 billion francs in circulation. Gold has come to Switzerland as a result of its hard-money policy, and the Swiss today deliberately “sterilize” part of their gold supply to prevent inflation. But little Switzerland is like an island threatened by the great tidal waves of international currency disturbances, and such disturbances anywhere—inflation in the U.S., the drop in the Canadian dollar, even the recent upward valuations of the Dutch and German currency units—worry Swiss economists and bankers.
The Swiss economy is bursting at the seams. Not only is there practically no unemployment, but Switzerland has had to import about 500,000 foreign workers, mainly Italian and Spanish. As the population of Switzerland is only 5.4 million, this foreign influx of workers is substantial.
One of Switzerland’s most important problems at the moment is the future of its foreign trade. It does not like the idea of joining the Common Market, which it regards as a political organization not compatible with Switzerland’s traditional neutrality (It is not a member either of the IMF or even the U.N.) But, if Britain joins, Switzerland’s hand may be forced.
October 9, 1961
Over the last twelve months I have on one or two occasions examined the economic ideas of J. Kenneth Galbraith, our present ambassador to India, as expounded in his book The Affluent Society. This examination seems justified by the great influence of his ideas not only in academic circles but in the Kennedy Administration. Galbraith’s ideas were the subject of discussion at a meeting of the Mont Pèlerin Society, an international group of economists, a year ago in Germany; but the full text of the discussion has only now become available in The Mont Pèlerin Quarterly dated April–July 1961. It provides an opportunity to examine his ideas afresh.
So many good points were made by several speakers that the task of selection is difficult. The main thesis of Galbraith’s book, as summed up by Prof. George J. Stigler, “is that we are now wealthy and that an economic theory and a viewpoint which are based upon general poverty and the need for efficient production are obsolete.” Galbraith’s message is also summed up by Prof. David McCord Wright as: “‘Escape from the thralldom of productive efficiency’—stick to the out-of-date method, don’t adjust, do less work.” The disastrous effects of such a program upon American capacity and world growth are obvious.
WE SILLY SPENDERS
Stigler points out that if we accept Galbraith’s thesis that people are essentially silly in spending their income, and fall for the blandishments of persuasive advertising by buying trifling or wholly nonsensical or harmful commodities, we are likely also to believe that people are stupid in other departments of life: “It is a very short step to say that not only are they incompetent in disposing of their money, but that they obviously are incompetent in disposing of their votes intelligently.”
George Schwartz points out that: “One of the greatest pleasures in life is to disapprove of the way the people next door spend their money. I bet that every woman in the world does not think much of the curtains chosen by the woman next door.” He adds that the Galbraith thesis is just a new twist to the anti-capitalist argument: “Admittedly the capitalist order can turn out the goods; admittedly it can provide a high degree of employment . . . . Now if you make all those admissions what have you got to sell? The Galbraith line is just a desperate turn to something new, to the argument: ‘All right, the goods are there, but they are the wrong goods’.”
‘DEPENDENCE EFFECT’
Prof. F.A. Hayek contends that the Galbraith argument really turns upon the “Dependence Effect” explained in Chapter XI of The Affluent Society. This argument starts from the assertion that a great part of the wants which are still unsatisfied in modern society are not wants that would be experienced spontaneously by the individual if left to himself, but are wants which are created by the process by which they are satisfied:
“It is then represented as self-evident that for this reason such wants cannot be urgent or important. This crucial conclusion appears to be a complete non sequitur, and it would seem that with it the whole argument of the book collapses.
“The first part of the argument is of course perfectly true: We would not desire any of the amenities of civilization—or even the most primitive culture—if we did not live in a society in which others provide them. The innate wants are probably confined to food, shelter, and sex. All the rest we learn to desire because we see others enjoying various things. To say that a desire is not important because it is not innate is to say that the whole cultural achievement of man is not important. . . . How complete a non sequitur Professor Galbraith’s conclusion represents is seen most clearly if we apply the argument to any product of the arts, be it music, painting, or literature.”
And Hayek, too, points out that the Galbraith thesis merely reverses the old socialist argument: “For over a hundred years we have been exhorted to embrace socialism because it would give us more goods. Since it has so lamentably failed to achieve this where it has been tried, we are now urged to adopt it because more goods after all are not important.”
October 16, 1961
LONDON—The main impression left by a month’s visit covering France, Italy, Switzerland, Austria, and the British Isles is that the political and economic problems of individual countries are today overshadowed by their common international problems. By this I do not mean only the threat of a third world war of unparalleled devastation, but immediate day-to-day problems. We are witnessing, for example, an almost simultaneous crisis in the international organizations that were set up in 1945 or later with a great flourish of trumpets, based on utopian hopes, emotional catchwords (like “one world”), and false political and economic assumptions.
The main crisis is in the main organization, the United Nations. This is not merely the result of the death of its Secretary-General, Dag Hammarskjöld, but of cumulative experience of the ineffectiveness of the U.N. in solving or averting any major dispute or crisis. Nearly five years ago, even before more than a score of tiny new Asian and African “nations” were created and admitted, Viscount Cherwell pointed out that in the Assembly, “the ultimate governing body of the U.N. . . . 5 percent of the world’s population can carry the day against the other 95 percent.” To rely on the U.N., he thought, was “to live in a fool’s paradise.” It is “nonsense,” he concluded, for nations to submit their “vital interests to a body so absurdly constituted.”
COMMON MARKET
The culminating result is the spectacle in the Congo of the United Nations resorting to military force to try to compel Katanga to get rid of its Western advisers and “unite” under a Communist-dominated confederation. This denial of the right of self-determination, elsewhere one of the great slogans of the U.N., has shocked a substantial section of British opinion. Many Britons are baffled by the apparently incurable determination of our government to abdicate its own moral responsibility and put its conscience in the hands of other nations.
The British are having their own troubles with one of the new international organizations, the Common Market. They are deeply divided on the wisdom of joining it. They fear that the political result may be to break up the Commonwealth. They are not sure whether the economic result will be to carry them in the direction of freer trade or of more protection. For if they would have to lower their tariffs against European industrial goods, they fear that the might have to raise them against agricultural products and raw material from the Commonwealth as well as other countries. If there were a true world will to freer trade, some point out, no such discriminatory organization as the Common Market would be needed. Each nation would simply reduce its own tariff barriers and accept the nondiscriminatory most favored-nation principle.
MONETARY FUND
One international organization certain to get more critical scrutiny than it has ever received before is the International Monetary Fund. The U.S. Government is trying to postpone the necessity for putting its monetary house in order by building up the reserves and lending capacity of the fund. But it is becoming clear to the world’s monetary economists that the fund, with its credits and “drawing rights,” has been a powerful contributory force in keeping world inflation going. There is ultimately no substitute for each nation’s responsibility to keep its own currency sound.
This responsibility devolves above all on the U.S. As Groseclose, Williams & Associates put it in a recent (July–August) Washington Letter: “With dollars and sterling (mainly dollars) as 45 percent of the backing of the free-world currencies, the importance of a sound dollar to the free world is plain. The maintenance of the value of the dollar thus becomes the most important task of the U.S. Government both at home and abroad.
Yet, ironically, we are undermining the value of the dollar by a huge domestic spending program, a huge “foreign-aid” program, cheap-money policies, and a prospective deficit this fiscal year of more than $6.5 billion. Where we could have helped other nations most by keeping ourselves strong, we are threatening world stability by weakening our own position.
October 23, 1961
In 1957 the Council of Economic Advisers suggested that the Census Bureau, with the cooperation of the National Bureau of Economic Research, a private statistical organization of high standing, “develop methods of appraising current business fluctuations in a monthly report that would take advantage of new findings about . . . economic processes over time, the availability of a great many economic time series, and large-scale electronic computers.”
As a result, Julius Shiskin took a leave of absence from his job as chief economic statistician at the Bureau of the Census to make a study for the NBER. The results now appear in a report entitled: “Signals of Recession and Recovery: An Experiment With Monthly Reporting.”
To estimate what Shiskin and his associates have accomplished, let us look first at the problem they were given to solve. As an aid in predicting the future of business, or even in ascertaining its present state, statisticians, private and governmental, have developed over the years an increasing number of statistical “series.” Shiskin estimates that in Economic Indicators, the Survey of Current Business, the Federal Reserve Bulletin, and magazines and newspapers, there are now well over 2,500 aggregate and component monthly or quarterly economic series. They cover an immense range of economic activity.
ROLE OF COMPUTERS
Obviously “this enrichment of the data available,” as Shiskin points out, “was not an unmitigated boon for the analyst. . . . It was beyond the resources of any individual . . . to carry out the calculations, such as seasonal adjustments, needed to make the series useful for current business cycle analysis.” Fortunately, “a major breakthrough came in the early 1950s, with the advent of the large-scale, general-purpose electronic computer.” A computer program can “adjust and summarize” statistics quickly, and give “early-warning signals” of business recessions and recoveries.
So Shiskin takes 65 economic indicators and presents elaborate tables showing their “behavior in past business cycles.” It will take time to assess the value of his result. They will begin to be tested on Oct. 23, when the Department of Commerce will initiate a new monthly report, showing how some 70 different “economic indicators” have acted during the preceding month. These will include at least 29 indicators that usually lead the business cycle, fourteen roughly coincident with it, an seven that have usually lagged behind. A few preliminary observation may be made:
1—Electronic computers are amazingly quick, but there is no scientific magic in them. They can give only the answers that are fed into them. If statisticians feed in the wrong kind of “adjustments,” weights or averages, computers will make the wrong kind.
2—Statistics, even statistics that “lead” the business cycle, such as stock prices or length of the average work week, are always the record of pastevents. As Ludwig von Mises has put it, statistics are history.
3—Even if we assume that the future is inevitably determined by the past, statistics give too partial a picture. They are mere abstractions and averages. They leave out, among other things, all the political decisions or events, domestic or foreign, that profoundly affect business.
4—Shiskin and his associates think better business indicators will help the government to fight depressions and keep business on an even keel. But free markets can do this better than anything else. Governments always seek perpetual boom.
5—It is not correct foresight itself that yields profits, but only better foresight than the majority.
6—Business predictions themselves affect the future they predict In fact, as Albert Hahn has pointed out, if the business cycle were predictable, there would be no cycle, as everybody would hedge against it.
Let us welcome the new statistical series. It should help us collectively, and no businessman can afford to be ignorant of the results. But those results can never be conclusive or completely “scientific.” The future will always be uncertain. The individual businessman, as always, will have to rely also on his knowledge of special situations and on his own hunches.
October 30, 1961
In a letter of Sept. 6, Mr. Kennedy warned the heads of twelve major steel companies that if they raised their prices to cover the further increase in steel wages on Oct. 1 they would be contributing to inflation. The President’s policy on this matter could have fateful consequences not only for the steel industry but the whole American economy. It is gratifying, therefore, to find the subject so ably analyzed in the current October monthly letter of the First National City Bank of New York.
The best factual reply to the President’s letter came from Roger M. Blough, chairman of United States Steel. Among Blough’s points:
1—“From 1940 through 1960 steel prices rose 174 percent, but the industry’s hourly employment costs rose 322 percent, or nearly twice as much. I use 1940 as a starting point rather than 1947 [as the President did] because during the war-affected years of 1940 through 1944 steel wages rose substantially as did the level of wholesale prices; but steel prices increased not at all. Any comparison of these trends which starts with postwar 1947 as a base therefore obscures rather than reveals the realities which the steel companies have had to face throughout this entire period of inflation.”
2—“Profits [as a percentage of sales] have only once in the past twenty years equaled the 8 percent level at which they stood in 1940 and have averaged only 6½ percent in the past five years, thus demonstrating clearly that steel price increases during this period have not fully covered the rapid rise in total steelmaking costs.”
3—“The industry’s profit rate is merely an aver- age—and averages can be dangerously misleading. Some companies will earn more than the average, while some may be suffering losses which they cannot sustain indefinitely. So it was in 1960 that among the 30 largest steel companies the profit rate as a percentage of sales ranged from a plus 9.3 percent to a loss of 5.2 percent.”
In addition to such factual points, Blough made some more general observations. He stressed one conclusion from a government report last year, prepared for the Department of Labor by Professor Livernash of Harvard University: “Obviously while price policy can be debated in the short run, in the long run all cost increases must be met. Steel has done no more than this.”
What alarms the City Bank is a broader issue than steel prices. Though the President’s letter was moderate in tone, behind it seemed to lie the threat of a general price control. A few weeks earlier Sen. Albert Gore had suggested that the Federal Trade Commission “could move to police the steel industry,” that the Department of Justice could perhaps break up the big steel companies, and “lastly, if all else fails, steel prices can be brought under utility-type regulations.”
REPRESSED INFLATION
“There are worse things,” comments the City Bank, “that could happen to this country than an increase in the price of steel. One of these is the destruction of the freedoms of the market place and the substitution of political price-fixing, beginning with steel and spreading perhaps throughout industry. If nothing else, our wartime experiences with price-setting bureaucracies, black markets, and deteriorations of quality should warn us against this course.”
From the end of World War II until a few years ago, the same government policy repeated itself depressingly in one European country after another, as it is repeating itself now with even greater violence among our South American neighbors. This is the policy of “repressed inflation.” It consists, on the one hand, in creating inflation through government encouragement of excessive wage increases, huge government spending and deficits, and cheap-money policies, and then throwing the blame on business and trying to prevent the inevitable price rise by price controls. The price-fixing does even more harm than the inflation itself. It misdirects, unbalances, and disrupts production, and breeds class hatreds by directing suspicion against businessmen and producers.
This is the direction in which we seem to be drifting. But with courage and clarity, there is still time to reverse our course.
November 6, 1961
Let me repeat so there will be no mistake: The President intends to submit to Congress next January a balanced budget for fiscal 1963.
Secretary of the Treasury
Douglas Dillon, Oct. 17.
This pledge is reassuring. Yet the record of the past makes it less reassuring than it could have been. In January President Eisenhower estimated a surplus for the fiscal year 1962 of $1.5 billion. In March Mr. Kennedy said that, instead, there would be a deficit of $2.8 billion. Then the official estimate was raised to a deficit of $3.7 billion. In July it was raised again to $5.3 billion. On Oct. 29, the Budget Bureau estimated the deficit would be $6.9 billion.
If the estimated budget deficit even for the current fiscal year is to be raised by another billion dollars or so every couple of months, what real assurance can we have that the President will present a balanced budget estimate next January and that, come June 30, 1963, such a balance will in fact be realized?
It is argued that the estimated budget deficit has had to be unexpectedly raised in recent months because of the Berlin crisis and the need to increase defense spending. But even if we accept every dollar of our military spending as absolutely necessary, most of our annual Federal expenditures—more than $50 billion, if we include social security—are for civilian purposes.
NON-DEFENSE BUDGET
This includes all the dubious billions spent on foreign aid or farm price supports. It includes all the new billions recommended in the 50 or so messages that President Kennedy has so far sent to Congress. When a prudent individual finds that he has to spend more on some unexpected emergency, such as illness in his family, he normally cuts down his spending on something else. But the Kennedy Administration, instead of reducing its civilian spending plans when faced with a bigger defense budget, keeps adding to them.
Making a scapegoat of defense spending has, in fact, become a shopworn device. On Jan. 4, 1940, President Roosevelt said: “For several years we have been compelled to strengthen our own national defense. This has created a very large portion of our Treasury deficits.”
If it is possible to balance the budget, why must we wait until fiscal year 1963? Why not try it in the current fiscal year, which still has eight months to run? Why can the budget never be balanced this year but only in some sweet by-and-by?
NEVER THIS YEAR
I raised this question in a Newsweek column (Nov. 2, 1953) and cited the sad record of three Administrations. Space permits only a few elliptic quotations:
Franklin D. Roosevelt: “I give you assurance that . . . within a year the income of the government will be sufficient to cover the expenditures of the government”—March 10, 1933. “We approach a balance of the national budget”—Jan. 3, 1936. “If [the national income] keeps on rising at the present rate, as I am confident it will, the receipts [of the government] . . . within a year or two, will be sufficient . . . to balance the annual budget”—Oct. 1, 1936. (The budget was never balanced in any of the twelve years that FDR was in office.)
Harry S. Truman: “The budget for the fiscal year 1949 . . . will balanced . . . and provide $4.8 billion which should be used to reduce the public debt”—Jan. 12, 1948. (There was actually a deficit of $1.8 billion.)
Dwight D. Eisenhower: “The first order of business is the elimination of the annual deficit”—Feb. 2, 1953. (There was a deficit for fiscal 1953, fiscal 1954, and fiscal 1955.)
In the last 31 years there have been 25 deficits. As I concluded my column of eight years ago: “Each President began with pious promises of a budget balance, but there were always reasons why this could be done only in some indefinite future and not now. Meanwhile, the national debt keeps mounting and the purchasing power of the dollar keeps shrinking and a Republican budget director is warning against ‘the disturbing effects on the economy’ of spending cuts that are ‘too abrupt’.” Isn’t this where we came in?
November 13, 1961
In addressing an international meeting of economists at Turin, Italy, last September, Karl Brandt, formerly a member of President Eisenhower’s Council of Economic Advisers, warned his listeners that:
“This task of undermining the self-assurance and good conscience of the public in the leading Western countries is the easiest part of the Soviet’s ideological warfare. . . . The weakening of the Western position is made relatively easy for the Soviets and their sympathizers by all those Western ex post anti-colonialists to whom the history of Western civilization is one chain of many centuries of crimes, exploitation, and brutality. . . .
“Nothing could better serve the cause of those who one day promise to bury us, another day threaten to wipe England and France off the map with twenty rockets, and do their utmost to destroy the prestige of the West than the masochistic and morose auditing of nothing but the errors and shortcomings of our history by so many academic professors in Western universities.”
ON WHOSE SIDE GOD?
A perfect example is a speech on Oct. 27 (i.e., in the week between Soviet Russia’s explosion of the 30-megaton thermonuclear bomb and its explosion of the 50-megaton bomb) by the Rev. Dr. John C. Bennett, Dean of the Faculty at the Union Theological Seminary:
“It is our temptation to assume that, because our opponents are atheists, God must be on our side and to overlook the extent to which Communism itself is a judgment upon the sins and failures of the middle-class world, upon the Christian world. The very atheism of Communism is a judgment upon the churches which for so long were unconcerned about the victims of the industrial revolution and early capitalism and which have usually been ornaments of the status quo, no matter how unjust it has been.”
There are two chief implications here. One is that God may be a Neutralist, or is belatedly punishing the present generation of the Western world for the sins committed by some of its ancestors nearly two centuries ago. I shall leave analysis of this argument to Dr. Bennett’s fellow theologians. But his second implication is economic. It is that the Industrial Revolution and early capitalism was a period in which economic conditions became more unjust and more miserable than in the periods preceding.
MARXIST HISTORY
Dr. Bennett no doubt came by this opinion innocently enough. Under the influence and example of Marx and Engels, it was the idea popularized by a whole school of nineteenth- and early-twentieth-century historians. But a sober review of the facts shows it to be false. The Industrial Revolution was a period of greatly accelerated economic progress. It was marked both by a great rise in wages and a dramatic increase in population. (England had 8.5 million inhabitants in 1770, 16 million in 1831.) By cheapening goods through mass factory production the Industrial Revolution first made possible consumption of such goods by the masses.
In the light of our present standards many of the conditions of early capitalism seem shockingly bad. But it was precisely the accelerative economic growth that capitalism, factory production, and free markets themselves made possible, which led to the infinitely improved working and living standards of today by which we so harshly judge early capitalism.
I should like to prescribe a short reading course for Dean Bennett: Human Action, by Ludwig von Mises, pages 613–619; Capitalism and the Historians, edited by F.A Hayek, and The Industrial Revolution, by T.S. Ashton.
What is most “amazing to contemplate” is not (as the Dean insists) “the utterly self-defeating character of the intransigent forms of conservative anti-Communism in this country,” but, I suggest, the utter defeatism of the intransigent anti-anti-Communists whose guilt complex keeps supplying propaganda material for the Russian Communists to use against us. It is time our self-styled intellectuals learned and called attention to the truly enormous and inspiring achievements of the West, made possible by its respect for private property and economic freedom.
November 20, 1961
I recently received a letter from a prominent Mexican. “The propaganda in Latin America in favor of socialistic measures,” he wrote, “goes on and on. The astounding part is that those who make it are not Russians but Americans. Last week it was the turn of your Under Secretary of State, Chester Bowles. In a speech delivered on Oct. 19 before the Mexican-North American Cultural Institute, besides agrarian reform and ‘a more just distribution of wealth which already exists’ [underlined in the official text], he came out in favor of high progressive income taxes and exchange controls. . . .
“What can we do to awaken the American people and to make them realize that their present leaders are delivering them into the hands of their enemies? Except for the French aristocracy in the eighteenth century, I do not believe history offers a comparable example of a social class collaborating in its own disappearance and destruction. If the United States preaches socialism, there is very little that we [Mexicans] can do here. All your millions will not only be wasted; they will speed the present trend to socialism and the ultimate takeover by Communists.”
URGING ‘REVOLUTION’
Thinking that perhaps my Mexican correspondent was unduly alarmed, I sent for the full text of the Bowles speech. In addition to the remarks he quoted I found:
Allusion to the United States as a “privileged society” and part of “the well-fed and comfortable minority of mankind.” Constant advocacy of a “continuing revolution,” “revolutionary change,” “the right of revolution.” True, these references were sometimes preceded by the adjective “peaceful.” But Latin Americans are not apt to interpret “revolution” in this purely metaphorical way.
Bowles advocated high corporation taxes and a steeply progressive income tax: “Such tax systems are needed to soak up idle profits.” He held up the U.S. practice as a shining example: “The corporation tax on annual business earnings above $25,000 is now set at 52 percent. On top of that is a tax on personal income [his italics] that rises rapidly as incomes rise to a top level of 90 percent.” Bowles backed this up with a direct quotation from the Punta del Este Declaration which calls for “tax laws which demand more from those who have most, punishing tax evasion severely, and redistributing the national income in order to benefit those who are most in need.” (My italics).
EXPROPRIATING LAND
Bowles demanded “land reform,” and supported this by a direct quotation from the Punta del Este Declaration condemning “unjust structures and systems of land tenure and use.” How this is likely to be interpreted in Latin America was illustrated by President Goulart of Brazil, as reported in The New York Times of Nov. 5: “He urged constitutional changes to permit agrarian and other reforms. At present the Constitution forbids any take-over of lands without compensation.” In other words, he wants to seize lands without compensation.
“I do not see,” added Bowles, “why my government or any other capital contributor should be asked for loans or grants to replace runaway indigenous capital that could be kept at home by” exchange controls and similar “curbs.” The private capital that has “run away” from Latin America has done so in fear of further galloping inflation or of direct confiscation. Bowles urges that it not be allowed to escape.
Of course the “reforms” recommended by Bowles would frighten off domestic saving and investment, disrupt and demoralize production, move toward socialism, totalitarianism, or chaos—and of course enormously increase the foreign aid burden that the American taxpayer will be asked to assume.
The real reforms are the precise opposite. What the retarded countries need most is political stability, internal peace and order, security of life and property, due process of law, economy, balanced budgets, a halt to inflation, and the maintenance of free markets. The policies that would do most to attract private investment from abroad are precisely those that would encourage saving and investment at home.
November 27, 1961
As Lawrence Fertig points out in his new book, Prosperity through Freedom (Regnery, $3.95), there is only one way in which a nation can achieve economic growth. That is by capital accumulation—i.e., “by increased savings and by increased investment in the tools of production.” Yet it is precisely the people who most ostentatiously clamor for a speedup in our rate of economic growth who most persistently ignore this truth. They want to get economic growth through inflation. And as Fertig emphasizes not only by reasoning but also by citing the record of postwar Germany and the Rueff plan in France, sound, long-run growth is achieved not by encouraging inflation, but by bringing it to a halt.
The German experience throws a brilliant light on this. In 1951 the U.S. State Department sent a commission of American economists to West Germany to investigate and to make recommendations to that government on fiscal policy. The chairman of the commission was Prof. Alvin W. Hansen of Harvard. Prof. Walter W. Heller, now chairman of President Kennedy’s Council of Economic Advisers, joined the commission and is credited with having participated in writing the report. This report was long classified as a secret document. It was not declassified until April of this year.
GERMAN ‘MIRACLE’
Here are some of its recommendations: (1) That Germany had an “excessive concern for price stability,” and tended to “confuse wartime inflation with the normal operation of peacetime credit.” (2) That “a rate of interest high enough to stimulate any large volume of personal savings would seriously curtail investment.” (3) That to give special inducement to corporations to increase their investment in new plant and equipment by permitting fast depreciation allowances “was an expenditure of tax funds which would otherwise have been collected by the government.” (4) That “the nostalgic hopes . . . looking toward a revival, of the nineteenth-century role of a capital market are doomed to disappointment.”
Fortunately for Germany and the world, Ludwig Erhard, the German Economics Minister, rejected the recommendations in toto. He put a tight lid on any increase in the money supply. He refused to pursue a cheap-money policy. He encouraged saving by a high rate of interest. He permitted rapid depreciation on investment. He restored the capital market. He refused to impose a top income tax rate higher than 50 percent, balanced the budget, encouraged private enterprise, restored incentives. In his own words, he “abolished practically all control for allocation, prices, and wages” and “reintroduced the old rules of a free economy.”
GOVERNMENT’S ROLE
The result was “the miracle of German recovery,” a record unequaled in the same period in the entire Western world. Had the Hansen-Heller recommendations been adopted, Germany would have been plunged into another orgy of state planning and inflation. David McCord Wright, comparing the German record with the British record under Labor government, found that British prices under inflation (1948–56) increased 45 percent while German prices fell 5 percent. While real wages in Germany more than doubled, British workers got a bare 10 percent increase. Germany’s manufactured exports, with lower costs, rose from 7 percent of the world market to more than 15 percent. Its gold and dollar surplus soared, while that of the British declined.
Lawrence Fertig’s important and stimulating book covers not only the subject of economic growth but also the whole range of modern economic issues—wages and prices, profits and employment, monetary and fiscal policy, unions, inflation, foreign trade, capitalism, socialism, Communism. It is the people, as Fertig keeps insisting, and not governments, that produce wealth and increase “growth.” All that government can do is to keep the currency honest and strong, to keep markets competitive and free, to maintain law and order and security of life and property, to remove the restrictions it has itself imposed on trade and production—in brief to release the energies of a free people and then get out of the way.
December 4, 1961
The world in the last few decades has not been on the gold standard, but on an American dollar standard. Under the International Monetary Fund system, most other countries have fixed official par values for their currencies in terms of the dollar. Relying on our promise and our ability to keep their dollar holdings convertible into gold at $35 an ounce, foreign central banks have based their own operations on the assumption that the dollar is “as good as gold.” They have used dollars, precisely as they have used gold itself, as part of the reserves on which their own internal credit structures and national currency units are based.
If anything should happen to the integrity of the dollar—if we should find ourselves obliged to pay out gold until our reserves were exhausted, or if, to avoid this, we should either suspend exports of gold or devalue the dollar, we would not only destroy the international status of the dollar and irreparably impair our own prestige, both political and economic, but also we would do immeasurable damage to world confidence. As Secretary Dillon has admitted: “The dollar, as the world’s basic reserve currency, is the very foundation of international trade and commerce.”
PLEDGES NOT ENOUGH
Yet, grave as this danger is today, it is being treated in Washington with levity. President Kennedy did, indeed, take the first necessary step when he gave assurance in his first month in office that “the dollar must be protected . . . in its present value” and went on to pledge more specifically that he would take no action “to increase the dollar price of gold from $35 an ounce” or “to impose exchange controls.” But the dollar cannot be defended merely by uttering the right phrases. These must be followed by actions and policies which will give the world assurance that such pledges can and will be kept.
The policies Mr. Kennedy has been following, far from giving such assurance, are calculated to give rise to the deepest misgivings. The President and his aides have dealt, at best, only with short-term expedients or surface symptoms. They have attempted to deal directly with the balance-of-payments problem by reducing the duty-free allowance of returning American travelers from $500 to $100 and by ordering our forces in West Germany to buy their coal from the U.S. Such measures are trivial; they do nothing to remedy the basic situation. To the extent that we discourage imports we discourage exports, by depriving foreign counties of that amount of dollar exchange with which to buy our goods.
HALT THE INFLATION
The Administration made efforts at Vienna in September to solve our alleged “balance-of-payments” problem by increasing the lending power of the IMF so that we could borrow more. But as M.W. Holtrop of the Nederlandsche Bank pointed out, there is no solution “in just feeding the excess reserves of the surplus countries back into the international circuit, so as to enable the deficit countries to continually finance their deficits. This would only create the perfect machine for perpetual inflation.” And as the First National City Bank of New York asks: “Would not massive drawings on the fund be interpreted as an admission that the United States could not settle its deficit by selling gold? Should a banker seek to negotiate borrowings from depositors?”
The blunt truth is that our balance-of-payments deficit is simply the consequence of our internal inflation. This raises our prices to discourage exports at the same time as it increases the dollars with which we buy imports. No matter what solution we ultimately adopt for our dollar problem, the first and indispensable step is to halt the inflation. This calls for remedies unpalatable in Washington, which continues to be hypnotized by the superstition that inflation is necessary for “a high rate of growth.” We can still prevent a deficit of $7 billion in the current fiscal year by starting immediately to slash into our fantastic $89 billion spending program. And we can signalize a halt in our cheap-money policy by a simple increase in our rediscount rate.
Or must Washington wait until after disaster has happened before it can be brought to reexamine its ideology?
December 11, 1961
In the socialist attacks on the capitalist system, profits are the chief villain. They are portrayed as monopolistic, unfair, excessive. They are commonly thought to be achieved either by adding to prices or by squeezing down wages. The profits of the few are pictured as the cause of the poverty of the masses.
The truth is the exact opposite. In a competitive economy the highest profit margins go to the firms that through efficiency are most successful in reducing costs of production. Thus constant striving for maximization of profit reduces prices by reducing costs. The prohibition of profit would return the world to poverty.
The social function of profit and loss is (1) to maximize incentives for production; (2) to balance production among thousands of different commodities and services so as to supply them in the proportions most wanted by consumers; (3) to stimulate incessant improvements in efficiency, to reduce costs and so prices; and (4) to put capital and the direction of production into the hands of those who have shown themselves best able to serve the consumers.
In a massive, thorough, and desperately needed book, Understanding Profits (Van Nostrand, $13.75), the late Claude Robinson argues the case for the profit-and-loss system and endeavors to catch up with age-old misconceptions and slanders. His book is especially strong on the statistical side. Its appendix contains a hundred pages of tables analyzing the profits over long periods not only of industries but of every big corporation.
WHO GETS WHAT?
Robinson is concerned particularly to show how the extent of profit is commonly exaggerated. Thus he points out that in the ten years 1949 through 1958 the average profit of all U.S. manufacturing corporations was only 3.9 percent on total sales and only 8.6 percent on investment (in spite of inflation during the period). The apparel trades and meat packers made a profit of less than 1 percent on sales during the ten-year period.
As to the division of corporation income between employees and owners, he shows that for the 22-year period 1938–1959 employees got 84 cents out of every dollar available for both groups, and the stockholders only 16 cents. This 16 cents was in turn divided into 7 cents reinvested in the business and 9 cents paid out in dividends. Thus, year by year, the workers in the corporations got more than five times as much as was available for the owners, and more than nine times as much as the latter actually received. High corporation income, in short, is no less important to the workers than to the owners.
When a book gives so much information, it seems ungrateful to complain that it does not give more. But I wish it contained one table comparing corporate profits, employment, and wages year by year since, say, 1929. This would have shown how profits, employment, and wages go up and down together.
CREATING ABUNDANCE
Part of the function of profits is to direct production into the right products—i.e., those most wanted by consumers. In the ten-year period 1950 through 1959 leading drug companies on the average made 10.9 percent profit on sales and 20.5 percent on investment. This compared with an average of only 5.8 percent on sales and 12.6 percent on investment for leading companies in manufacturing. Such a result will be deplored only by those who fail to recognize its consequences. In 1948 the drug industry spent $30 million on research; in 1959 it devoted $170 million to research. Result? Not only the discovery of a multitude of drugs that prolong life and relieve suffering and pain, but also a sensational drop in drug prices. Penicillin was sold at $100 for 100,000 units in 1943 and for 22 cents in 1956. Cortone was put on the market at $200 a gram in 1949, and had been cut to $2 by 1957.
The supreme folly is to believe that politicians “protect” the consumer when they set an arbitrary ceiling on prices or profits. It is precisely high profits that stimulate the maximum investment, competition, and research to increase the output and bring down the costs of the things most wanted. It is the quest for high profits that brings abundance and low prices.
December 18, 1961
The chief slogan of the self-styled liberals, once Full Employment, is now Economic Growth. Yet it is precisely the people who are most insistent on “a higher rate of economic growth” who exhibit the least understanding of how to achieve it. Nearly always they favor more inflation and more socialism—spending, deficits, controls, hostility to profits, punitive taxation—in brief, all the things that discourage true economic growth.
The central requirement for a continuous improvement in economic conditions is a continuous increase in the amount of real capital per head of the population—in other words, a constant increase and improvement in the plants, equipment, machines that increase productivity. Economic growth is the growth of capital formation. It is because the American economy puts more and better tools behind each worker that American wages and living standards are the highest in the world.
Yet growth in capital formation does not occur automatically. In recent decades it has been slowing down. This is the conclusion of a monumental study carried on since 1950 under the direction of Simon Kuznets for the National Bureau of Economic Research. His Capital in the American Economy: Its Formation and Financing is the seventh and final volume of the study.
DECLINE IN SAVINGS
Here are some of the significant findings. There is no support whatever for the thesis, so popular in the 1930s, that the American economy faces economic stagnation—that investment opportunities are drying up. On the contrary, the outlets for capital use have multiplied faster than the rate at which current product is saved. In the decades ahead “the supply of voluntary savings may not be adequate.”
Gross capital formation (which includes what corporations set aside for depreciation and replacement) has been comparatively constant over 85 years as a percentage of gross national product. It has declined from 22.6 percent (at constant prices) in 1869–88 to 17.6 percent in 1946–55. Corporations supply about two-thirds of gross capital formation.
Net capital formation, however, or the amount of new additions to the capital stock, has shown a distinct downward trend as a percentage of national income. For volumes in constant prices, the share declined from 14.6 percent in 1869–88, to 11.2 percent in 1909–28, and to 7.0 percent in 1946–55. For these additions to the capital stock, the relationship between corporate and personal contributions is reversed. Personal savings account for more than two-thirds of net capital formation.
Now if, as Dr. Kuznets declares, “capital formation is . . . our primary interest because it is essential to economic productivity and economic growth,” and if, “on a countrywide scale it represents the real savings of the nation,” we come to the problem of why real savings, as a percentage of income, have been declining.
ROLE OF HIGH TAXES
Here, I think, two factors can be emphasized—inflation and taxation. In periods of inflation, saving is discouraged because of the declining value of money. But a more constant factor is taxation. When the government takes 52 percent of corporate income, and taxes higher personal incomes at rates up to 91 percent, it soaks up and uses for current consumption or dissaving (particularly with deficit financing) precisely the funds otherwise most likely to go into saving and new investment.
If we really want a high rate of capital formation and economic growth, therefore, we will completely reform our Federal spending and tax program. We will allow rapid depreciation allowances, knowing that these encourage investment (and in the long run even higher government revenues). We will reduce the corporate tax rate and the extent of double taxation of corporate dividends. And we will slash progressive income-tax rates—especially the confiscatory rates above 50 percent.
If our primary aim is not to improve the productivity and real wages of labor, however, but to continue a purely vindictive policy of “soaking the rich,” we will hold fast to our present confiscatory tax rates.
December 25, 1961
So many strands have become twisted and tangled together in our discussion of foreign-trade policy that a first task is to unravel a few for separate consideration.
1—The President deserves the fullest support in his advocacy of greater freedom of trade. But we must be clear concerning precisely why freer trade is desirable. The chief reason is that free trade maximizes the economies and efficiencies of world production. When each country devotes itself to producing what it can produce better and cheaper than any other, world production and consumer satisfactions are maximized.
2—From the standpoint of each country, the only direct advantage of foreign trade consists in the imports. It is through these that a country obtains the things it either could not produce at all, or produce only at a greater cost than the cost of what it exports to pay for them. As John Stuart Mill insisted, it is what a country obtains from foreign trade, not what it parts with, that constitutes the real gain to it. At points in his speech to the NAM, Mr. Kennedy recognized this: “We need those imports to give our consumers a wide choice of goods at competitive prices.” But more often he talked as if the real gain were in greater exports. Thus when he quoted favorably the “British” (unfortunately also the Hitler) slogan “Export or Die,” he forgot its basic meaning. The meaning was that unless a manufacturing country exported enough to pay for its necessary imports of foodstuffs and raw materials, it would die.
3—In the long run, the number of “jobs” is irrelevant to the height of trade barriers. The real difference is that when trade barriers are high production is less efficient and real wages are lower. If lower trade barriers give more jobs in export industries, they may take away a corresponding number of jobs in industries hurt by imports. It is a sudden raising or lowering of tariffs that disrupts the balance of industries and creates unemployment. As changes either way are unsettling, they should be infrequent and gradual.
4—Sweeping and sudden tariff changes are therefore to be avoided. More study should be given to gradualism. Even if it is decided, for example, that an ad valorem duty of 60 percent on some import ought to be completely abolished, it might be better to reduce it by 1 percentage point a month over five years than with an ax. The worst way of making such an adjustment is by subsidies to home industry. These would breed discrimination, favoritism, and corruption, and tend to be self-perpetuating. They would nullify the very purpose of lower tariffs.
5—Today tariff levels are among the least rather than the most important barriers to international trade. One of the worst barriers is the import quota system, as on petroleum and sugar. Import quotas are discriminatory, arbitrary, inflexible, and an instrument of political favoritism. A first step should be to abolish them and substitute a non-discriminatory tariff, which would at least permit price and efficiency competition among individual importers and exporters.
6—If the Administration favors freer foreign trade, its policy must be consistent. It must abandon such efforts to discourage imports as the drastic reduction of duty-free tourists allowances. It must abandon its short-sighted discouragement of American foreign investment, or its attempt to force such investment into the areas where it thinks it should go rather than where investors want to put it. It must abandon its efforts to dump our agricultural “surpluses” (created by government policy) onto foreign markets. It must stop subsidizing raw cotton exports and penalizing the American textile industry.
7—Finally, it should halt the inflation which is making it increasingly difficult for American manufacturers to compete abroad. It must change the legal and political setup that encourages excessive wage rises. Mr. Kennedy, in his speech to the NAM, promised to “stress” the need for wage restraint in addressing the AFL-CIO, but merely expressed a “hope” that was dashed the next day by his Secretary of Labor’s insistence that there was “plenty of room” for further wage increases and that the Administration did not “propose in any way to restrict the ability of collective bargaining” to get them.
