What You Should Know About Inflation

Over the last quarter century the American government has displayed a peculiarly schizophrenic attitude toward spending vs. economy, inflation vs. dollar-integrity.

This has been frequently reflected in the annual Economic Report of the President. A good example is the Economic Report of President Eisenhower transmitted to Congress on January 20, 1959. “An indispensable condition for achieving vigorous and continuing economic growth,” he wrote, “is firm confidence that the value of the dollar will be reasonably stable in the years ahead.” But most of the report endorsed policies that tended to undermine this confidence.

Describing governmental actions that helped “to bring about a prompt and sound recovery” the President declared: “Monetary and credit policies were employed vigorously to assure ample supplies of credit. Legislation was enacted to lengthen temporarily the period of entitlement to unemployment benefits. Numerous actions were taken to spur building activity. Steps were taken to accelerate Federal construction projects already under way and to speed up projects supported by Federal financial assistance. Activities under a number of Federal credit programs, in addition to those in the housing field, helped counter the recession. And the acceleration of defense procurement . . . exerted an expansive effect.”

Every one of these policies was inflationary. All of them meant pouring new money and credit into the system, increasing the supply of dollars, reducing their individual purchasing power. In a later part of the report it was admitted that the Federal Reserve policies enabled the commercial banks “to add nearly $10 billion in loans and investments to their assets” in 1958, largely by “additions to their holdings of U.S. Government securities.” This in turn added $13.6 billion to the total money supply (including inflated time deposits), and helped to boost living costs.

Yet the President’s report blurred responsibility for inflation and tried to shift it on to consumers, business, and labor. The “individual consumer” was advised to “shop carefully for price and quality”—as if he couldn’t be depended upon to do that without urging. The government in effect was saying to consumers: “Here are $10 billion or more additional paper dollars; but don’t be reckless enough to spend them, because it will make you responsible for raising prices.” “Businessmen” were told they “must wage a ceaseless war against costs”—as if self-interest and self-preservation did not ensure that. But nothing was said about Federal labor laws (including compulsory exclusive “bargaining”) which rendered the employer all but impotent in resisting excessive demands. And “leaders of labor unions” (after having been granted monopolistic bargaining powers by law) were urged not to ask as much as they could get under these conditions. This meant that they would not last very long as labor leaders.

The President went on to declare: “If the desired results cannot be achieved under our arrangements for determining wages and prices, the alternatives are either inflation, which would damage our economy and work hardships on millions of Americans, or controls, which are alien to our traditional way of life and which would be an obstacle to the nation’s economic growth and improvement.” What the President seemed to be saying is that it was consumers, businessmen, and labor leaders who threatened to bring inflation by lack of “self-discipline and restraint,” and that they might “force” government controls.

But the real culprit was and is government. Government must stop deficit spending, stop flooding the country with more paper dollars, and stop encouraging monopoly in the labor field while blaming “our free competitive economy” for rising wages and prices.

Perhaps the most important recommendation in the Economic Report of January 1959 was that Congress “amend the Employment Act of 1946 to make reasonable price stability an explicit goal of Federal economic policy, coordinate with the goals of maximum production, employment, and purchasing power now specified in that act.” If the mischievous Employment Act of 1946 is to be retained, such an amendment on net balance would probably make it less mischievous, because the act has been constantly interpreted as a directive to inflate. But an immensely better solution would be to repeal the act altogether.