What You Should Know About Inflation

As nearly everybody professes to be against inflation (even those who fervently advocate the very things that cause it), it was refreshing to read a writer like the late Sumner H. Slichter of Harvard, who frankly accepted inflation as a “necessary evil” and did not think we could prosper without it.

He was careful, it is true, to say that he was only in favor of “creeping” inflation, not galloping inflation, though he was often vague concerning the exact point where a creep became a canter. He was at times indiscreet enough to suggest that a price rise of 2 or 3 per cent a year would be about right. It has been pointed out, however, that even if we could control an inflation to a rate of 2 per cent a year it would mean an erosion of the purchasing power of the dollar by about one-half in each generation.

Even so, this would not accomplish Slichter’s announced purpose. He thought prices must go up this much in order to meet the unions’ annual wage demands. But the moment Slichter’s inflation scheme was openly put into effect, as I have already pointed out in Chapter 27, union leaders would simply add 2 per cent (or whatever the planned annual inflation was) on top of the demands they would have made anyway. In fact, lenders, investors, manufacturers, retailers, speculators would all mark up their demands or change their operations to beat the inflation, which would thereupon race to a crack-up. A declining currency must eventually obey the law of acceleration that applies to all falling bodies.

In the Harvard Business Review of September-October, 1957, Slichter not only continued to commend a creeping inflation, but reprimanded Neil H. Jacoby, a former member of the Council of Economic Advisers, and C. Canby Balderston, vice chairman of the Board of Governors of the Federal Reserve System, for being against inflation. Without going into a detailed analysis of all the confusions in Slichter’s article, it may be helpful to cite a few examples.

He declared that it was “incorrect” to believe that “creeping inflation is bound sooner or later to become galloping inflation,” because this had not happened in the preceding twenty-five years in the United States. Yet our cost of living had more than doubled in the preceding seventeen years, which was something more than a creep. Slichter might have taken a look at the French franc, which was then already at considerably less than one-hundredth of its 1914 purchasing power; or at the median loss of one-third of their value by 42 different currencies in the preceding nine years alone (as pointed out in Chapter 24).

Slichter seemed to me to take a somewhat callous attitude about the losses suffered in recent years by the thrifty. Of the millions of savings-bank depositors and holders of government bonds who had seen the purchasing power of their holdings shrink by a third or a half, he wrote coolly: “These people have paid the penalty for poor investment judgment.” Their poor judgment consisted, in brief, in trusting their country’s money and in answering their government’s appeal to buy war bonds.

Slichter’s proposals were based on his obsessive idea that constant creeping inflation was necessary to maintain full employment. This led him to misstate an argument of Jacoby’s as a “suggestion that prices be kept stable by permitting unemployment to fall below 4 per cent.” The truth is that full employment or its absence has no necessary connection whatever with inflation, but depends wholly upon the maintenance of fluid and functional interrelationships between wage rates and prices and profits. Slichter did not seem to understand the argument that unions cannot raise the real wages of the whole body of workers, and his attempted refutation missed the point.

Finally, in his efforts to minimize the harm done by inflation, Slichter failed to see that when employment is reasonably full, further inflation must hurt on net balance as many people as it helps, for the gains in dollar income resulting from inflation must be offset by the losses in dollar purchasing power.