What You Should Know About Inflation

Nothing has more clearly demonstrated the need for the gold standard than its abandonment. Since that occurred, in Britain in 1931 and in the United States in 1933, the world has been plunged, both in wartime and in peacetime, into a sea of paper money and unending inflation.

Although the inflation everywhere has been blamed on “the war,” it has occurred in nations that were never involved in the war (throughout Latin America, for example), and it has continued to rage since the war ended. As an indirect index of this, wholesale prices have increased in this country 73 per cent since 1945; in Britain 115 per cent; in France 810 per cent.1 And everywhere this result has been due primarily to the increase in the paper money supply.

The monetary managers are fond of telling us that they have substituted “responsible monetary management” for the gold standard. But there is no historic record of responsible paper-money management. Here and there it is possible to point to brief periods of “stabilization” of paper money. But such periods have always been precarious and short-lived. The record taken as a whole is one of hyperinflation, devaluation, and monetary chaos. And as for any integrity in paper-money management, we need merely recall the record of Sir Stafford Cripps, who, in the two-year period preceding his devaluation of the pound sterling on September 18, 1949, publicly denied any such possibility no fewer than a dozen times.

This is what happens under monetary management without the discipline of the gold standard. The gold standard not only helps to ensure good policy and good faith; its own continuance or resumption requires good policy and good faith. If I may repeat what I pointed out in Chapter 9: The gold standard is not important as an isolated gadget but only as an integral part of the whole economic system. Just as “managed” paper money goes with a statist and collectivist philosophy, with government “planning,” with a coercive economy in which the citizen is always at the mercy of bureaucratic caprice, so the gold standard is an integral part of a free-enterprise economy under which governments respect private property, economize in spending, balance their budgets, keep their promises, and above all refuse to connive in inflation—in the overexpansion of money or credit.

So if, as it should, the American government decides to return to a full gold standard, its first step must be to bring inflation to a halt. Without this preliminary or accompanying step any attempted return to gold would be certain to collapse. And once again the gold standard itself, rather than the inflation, would probably be discredited in the popular mind.

How, then, does one halt inflation? The economist Ludwig von Mises has maintained that no increase whatever should be allowed in the quantity of money and bank credit that is not 100 per cent covered by deposits paid in by the public. Although this is basically the result that should be aimed at, it would be politically more acceptable, I think, if this result were brought about by means in accordance with our own best practices and past traditions. I therefore suggest that the halting of inflation should be achieved by these four means:

1—Start balancing the budget.

2—Stop using the banking system either to buy and peg government bonds at fixed rates, or as a dumping ground for huge new issues of short-term government securities. (The peacetime rule, in fact, might be to permit no further net increase in the total volume of government securities held by the country’s banking system.)

3—Insist that the Federal Reserve Banks impose discount rates that would penalize borrowing by member banks rather than make it profitable. This means that the rediscount rate should be kept above the rate to prime borrowing customers at the great city banks.

4—Restore the legal reserve requirements of the Federal Reserve Banks (over a reasonable time period) to 40 per cent from their “war emergency” reserve level of only 25 per cent adopted in 1945 (or from whatever still lower gold reserve requirement exists at the time of the reform). There is no more effective way in which Congress could register its own opposition to further inflation.

2 Before the introduction of the “heavy franc,” at the beginning of 1960, at a valuation of 100 old francs.

• 1* Before the introduction of the “heavy franc,” at the beginning of 1960, at a valuation of 100 old francs.
• 2Although the inflation everywhere has been blamed on “the war,” it has occurred in nations that were never involved in the war (throughout Latin America, for example), and it has continued to rage since the war ended. As an indirect index of this, wholesale prices have increased in this country 73 per cent since 1945; in Britain 115 per cent; in France 810 per cent.* And everywhere this result has been due primarily to the increase in the paper money supply.