The Inflation Crisis, and How to Resolve It

8

The Cure for Inflation

The cure for inflation, like most cures, consists chiefly in removal of the cause. The cause of price inflation is the increase of money and credit. The cure is to stop increasing money and credit. The cure for inflation, in brief, is to stop inflating. It is as simple as that.

Although simple in principle, this cure often involves complex and disagreeable decisions on detail. Let us begin with the federal budget. It is next to impossible to avoid inflation with a continuing heavy deficit. That deficit is almost certain to be financed by inflationary means—i.e., by directly or indirectly printing more money. Huge government expenditures are not in themselves inflationary—provided they are made wholly out of tax receipts, or out of borrowing paid for wholly out of real savings. But the difficulties in either of these methods of payment, once expenditures have passed a certain point, are so great that there is almost inevitably a resort to the printing press.

Moreover, although huge expenditures wholly met out of huge taxes are not necessarily inflationary, they inevitably reduce and disrupt production, and undermine any free enterprise system. The remedy for huge governmental expenditures is therefore not equally huge taxes, but a halt to reckless spending.

On the monetary side, the Treasury and the Federal Reserve System must stop creating artificially cheap money; that is, they must stop arbitrarily holding down interest rates. The Federal Reserve must not return to the former policy of buying at par the government’s own bonds. When interest rates are held artifically low, they encourage an increase in borrowing. This leads to an increase in the money and credit supply. The process works both ways—for it is necessary to increase the money and credit supply in order to keep interest rates artificially low. That is why a “cheap money” policy and a government-bond-support policy are simply two ways of describing the same thing. When the Federal Reserve banks buy government notes or bonds in the open market, they pay for them, directly or indirectly, by creating money. This is what is known as “monetizing” the public debt. Inflation goes on as long as this goes on.

The world will never work itself, and keep itself, out of the present inflationary era until it returns to a full gold standard. The classical gold standard provided a practically automatic check on excessive internal credit expansion. That is why the bureaucrats abandoned it. In addition to being a safeguard against inflation, it was the only system that ever provided the world with the equivalent of an international currency.

The first question to be asked today is not how can we stop inflation, but do we really want to? For one of the effects of inflation is to bring about a redistribution of wealth and income. In its early stages (until it reaches the point where it grossly distorts and undermines production itself) it benefits some groups at the expense of others. The first groups acquire a vested interest in maintaining inflation. Too many of us continue under the delusion that we can beat the game—that we can increase our own incomes faster than our living costs. So there is a great deal of hypocrisy in the outcry against inflation. Many of us are shouting in effect: “Hold down everybody’s price and income except my own.”

Governments are the worst offenders in this hypocrisy. At the same time as they profess to be “fighting inflation” they follow a so-called full-employment policy. As one advocate of inflation once put it in the London Economist: “Inflation is nine-tenths of any full employment policy.”

What he forgot to add is that inflation must always end in a crisis and a slump, and that worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of a free market.

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

But it is never inevitable. We can always stop it overnight, if we have the sincere will to do so.