What You Should Know About Inflation

In the midst not only of moderate but even of the wildest inflations, there are sudden breaks, slumps, or lulls. Whenever these occur, the inflationists declare that the inflation has ended and that we are now facing recession or deflation unless we immediately adopt their “stabilizing” measures. Such a slump occurred in the late months of 1957 and the early months of 1958. Though wholesale and consumer prices continued to rise, interest rates, industrial production, and employment declined. The proposed remedies started to pour in.

To those of us who had lived through the Great Depression, there was a curious familiarity about these schemes. On June 12, 1931, for example, the Chase National Bank of New York published a pamphlet by its economist, the late Benjamin M. Anderson, called “Equilibrium Creates Purchasing Power.” Anderson there drew a contrast between two opposing schools of thought. The school to which he adhered found the cause of the slump in “a disturbance of economic equilibrium.” The other found its causes in “deficiencies of purchasing power.”

The purchasing-power school was inflationist. It advocated “cheap-money policies,” farm price supports, and heavy spending on “public works.” It argued that “reductions in wages are on no account to be permitted.” “The general picture which the purchasing-power school presents is that of production running ahead of buying power.” As against this, Anderson advocated the restoration of equilibrium, mainly through adjustments of free and flexible prices and wages. He called for the restoration of a proper balance among the various types of production, among prices, and particularly between prices and costs of production, including wages, so that profits would be possible and the prospect of them would once more stimulate enterprise.

“When goods are produced in proper proportions,” he wrote, “they clear the markets of one another. . . . Production itself gives rise to the income which supports consumption. Production and consumption expand together. The 120 millions of people in the United States consume vastly more than the 400 millions in China, because they produce vastly more. . . . The problem is merely one of keeping the different kinds of production in proper proportion. This is accomplished under the capitalist system by the movement of prices and costs. Labor and capital tend to get out of lines where return is low and to move over into lines where return is better. The smooth working of this system calls for flexible prices, competitively worked out, which tell the truth regarding underlying supply and demand conditions.”

Anderson went on to point out that the purchasing-power theory was not working. “We have had extremely cheap money for over a year.” Inflexibility of industrial wage-rates, while prices were falling, had led to increased unemployment. “Real” industrial wage-rates between June 1929 and March 1931 had risen 11 per cent, indirectly helping to force down “real” farm wages 17 per cent.

However, as we know, the purchasing-power school—the inflationist school—won out. We had cheap money, inflexible or rising wage rates, and heavy government deficits for the next ten years. As a result, we also had mass unemployment for the next ten years—until World War II finally bailed us out.

Today the chief ideological change is that there can hardly be said to be two schools of thought. Practically everyone in Washington seems to agree that we can easily float ourselves out of slumps through more inflation. We need merely give ourselves a sufficiently big dose—of increased spending, or tax reduction, or anything else that will produce a whopping deficit. The new bible is Keynes’s “General Theory,” which denies Say’s Law and ignores any need for specific wage and price adjustments. In early 1958, the Republican Administration disagreed with the Democratic inflationists only about the question of timing. It hoped (justifiably, as it turned out) everything would cure itself in the next few months. If it didn’t, it promised to take “positive government action”—today’s euphemism for more inflation.

Meanwhile, neither political party called attention to the fact that as factory wage-rates had risen, unemployment had increased and payrolls had fallen. Neither party asks today whether even massive inflation can restore employment as long as powerful unions have escalator contracts under which wage-rates soar faster than living costs, preventing restoration of profit margins or lowering of prices. The only remedy proposed is bigger and longer unemployment compensation to help strong unions preserve upward-spiraling wage-rates.