What You Should Know About Inflation

From time to time during the present inflation (let’s say between 1940 and 1964) violent disputes have broken out concerning who or what caused it. “Labor” and “management” blame each other.

Attacks on management have frequently come from Walter Reuther, head of the United Automobile Workers. In 1957, for example, Reuther contended that “exorbitant” profits, not wages, had been the villain promoting inflation. Otis Brubaker, research director of the steelworkers’ union, declared at the same time: “Wage increases have not caused a single price increase in twenty years.”

These charges provoked replies. In its letter of October 1957, the First National City Bank of New York pointed out: “Regardless of what year is taken as a base [from 1939 on] wages and total employment costs in the steel industry have far outstripped gains in productivity. Measuring from 1940, the gain in productivity of 56 per cent, while substantial, fell far short of increases in hourly earnings and total employment costs amounting to more than 200 per cent. The result . . . was an approximate doubling of unit labor costs with inevitable pressure for higher prices.”

A much wider study of the same problem was published by the National Association of Manufacturers in September of the same year. It found that the history of manufacturing since the end of World War II had been one of rising costs per unit of output—particularly labor costs and taxes. Compensation of employes rose 23 per cent per unit of output between 1948 and 1956. Corporate taxes rose 32 per cent on the same basis. But prices of manufactured goods rose only 10 per cent. The result was a reduction of 25 per cent in profit per unit of output between 1948 and 1956.

The decline in the profit margin of manufacturing industries was particularly striking when expressed as a percentage of sales. It dropped from 4.9 per cent in 1948 to 3.1 per cent in 1956. (By way of comparison, the figure for 1929 was 6.4 per cent; for 1937, 4.7 per cent; for 1940, 5.5 per cent.) Thus, concluded the NAM study, “between 1948 and 1956 profit margins as a per cent of sales have fallen from a level characteristic of prosperity years to a level characteristic of recession years.” Higher costs cannot automatically be recouped by higher market prices.

These statistical comparisons by the National City Bank and the NAM proved that the inflation was at least not the result of the “greed” of manufacturers for exorbitant profits, as Reuther contended. But they did not prove that “the conclusion is inescapable,” as the NAM study put it, “that the current inflationary push is due to the rising costs of labor and the continuing heavy tax burden.”

The rise in wages, it is true, as both studies pointed out, exceeded the rise in “productivity.” But the studies compared money wages to physical output. In any inflation, no matter how caused, money wages are practically certain to rise more than physical productivity. This is simply because both wages and prices rise in every inflation. It does not necessarily follow that the rise in prices has been caused by the rise in wages. Both may have risen from a common cause.

That common cause is not hard to find. Neither the wage rise nor the price rise since 1939 or 1948 would have been possible if it had not been fed by an increased money supply. The money-and-credit supply (total bank deposits plus currency) increased from $64.7 billion at the end of 1939, to $172.7 billion at the end of 1948, to $226.4 billion at the end of 1956, to $313.8 billion at the end of 1963. There would have been no inflation, in short, in the last ten or twenty years without the cooperation and connivance of the monetary authorities.

This does not mean, of course, that union pressure has had no responsibility for the result. Under present labor laws the government has not merely encouraged but in effect forced the creation of industrywide unions with power to impose continuous wage increases. Unless these excessive union powers are reduced, they must either lead to unemployment by forcing costs above prices, or create political pressure for still more monetary inflation.