What You Should Know About Inflation

Gardiner C. Means, an economist who invented the term “administered prices” in the ’30s, came up in 1957 with the theory that the current inflation is an “administered” inflation. The solution, he thought, would be for the President to call a conference of business and labor leaders and get an agreement from them to “hold the line” for a year or two on wages and prices.

But his theory of causation was and is false. His proposed remedy was not needed, and is not needed now. It would not work, but would greatly aggravate the very evil it is supposed to cure.

Past inflations, he agrees, have been “monetary” inflations—the result of an increased money supply bidding for the available supply of goods and services. This is correct. And it applies to every inflation, including the present one (i.e., 1939 to i960 to?).

This can be shown by any set of long-term comparisons. At the end of 1939, the total supply of money and bank credit (total bank deposits plus currency outside of banks) was $64.7 billion. In March of 1957 it was $221.5 billion, an increase of 246 per cent. In 1939 wholesale prices were at an index number of 50.1; in 1957 they were at a level of 117.4, an increase of 136 per cent. The chief reason why wholesale prices did not go up even more in this period is that there was also a great increase in production. The increase in the money supply is a sufficient explanation of the present inflation. We do not have a “new kind” of inflation, and we do not need new explanations.

Neither logic nor statistical comparisons give any support to the “administered price” theory of inflation. If sellers can administer prices to any level they choose, why weren’t prices as high in 1957, or in 1955, or 1949, or 1939, or 1914, as they are today? Why have prices all been raised now? What has prevented them from going still higher?

Certain prices, it is true, are administered (within narrow limits) at levels different from those that a perfectly fluid competition would bring about. The outstanding directly administered prices are those administered by government. This includes all public-utility rates and railroad rates. But these are administered down rather than up. Farm prices have of course been supported by government above free-market levels. Farm products in 1957 had risen 150 per cent since 1939, whereas industrial products had risen only 116 per cent.

By far the most important administered price is the price of labor. Money wage rates have been administered upward by powerful industrywide labor unions. Since 1939 hourly wages in manufacturing industries had increased in 1957 by 229 per cent.

As a cure for all this, Means in 1957 would have had the President call a conference of business and labor leaders at which he would “get agreement from them to hold the line” on prices and wages. Now such agreements would be extremely harmful if they were uniformly adhered to. They would not allow for the relative changes in particular prices and wages necessary to adjust output to changes in supply and demand.

All hold-the-line legislation or voluntary agreements in the past have broken down under political pressures, chiefly in favor of wage increases. The Means plan left-handedly recognized this. His proposed agreements would have allowed “small” wage increases to take account of increases in productivity, and increases “where a major disparity in particular wage rates required correction.” Anyone who remembers our World War II experience must know that such loopholes would be exploited to the point where the hold-the-line agreements would become a farce. But even this would be better than their strict enforcement; for to try to hold a uniform line on prices and wages, particularly if the money and credit supply continued to be increased, would have a disastrous effect on production.

Schemes of the Means type are wholly unnecessary. All that is needed to stop the present inflation is a halt to the expansion of the money-and-credit supply and repeal of the legislation that creates monster unions and gives them a coercive wage-raising power that employers are impotent to resist.