What You Should Know About Inflation

In his classic little history of fiat money inflation in the French Revolution, Andrew D. White points out that the more evident the evil consequences of inflation became, the more rabid became the demands for still more inflation to cure them. Today, as inflation increases, apologists emerge to suggest that, after all, inflation may be a very good thing—or, if an evil, at least a necessary evil.

Until recently, the chief spokesman of this group was the late Prof. Sumner H. Slichter of Harvard. I should like to discuss here what I consider to be three of his chief wrong assumptions: (1) That a “creeping” inflation of 2 per cent a year would do more good than harm; (2) that it is possible for the government to plan a “creeping” inflation of 2 per cent a year (or of any other fixed rate); and (3) that inflation is necessary to attain “full employment” and “economic growth.”

We have already noticed, in Chapter 30, that even if the government could control an inflation to a rate of “only” 2 per cent a year, it would mean an erosion of the purchasing power of the dollar by about one-half in each generation. This could not fail to discourage thrift, to produce injustice, and to misdirect production. Actually inflation in the United States has been much faster. The cost of living has more than doubled in the last twenty years. This is at a compounded rate of about 4 per cent a year.

The moment a planned “creeping” inflation is announced or generally expected in advance, it must accelerate into a gallop. If lenders expect a 2 or 4 per cent rise of prices a year, they will insist that this be added to the interest rate otherwise paid to them to maintain the purchasing power of their investment. If borrowers also expect such a price rise, they will be willing to pay such a premium. All businesses, in fact, will be forced to offer a correspondingly increased gross rate of return to attract new investment, even new equity capital. If there is a planned price rise, union leaders will simply add the expected amount of that rise on top of whatever wage demands they would have made anyway. Speculators and ordinary buyers will try to anticipate any planned price rise—and thereby inevitably accelerate it beyond the planned percentage. Inflation forces everybody to be a gambler.

The burden of Slichter’s argument was that “a slow rise in the price level is an inescapable cost of the maximum rate of growth”—in other words, that inflation is a necessary cost of “full employment.” This is not true. What is necessary for maximum “growth” (i.e., optimum employment and maximum production) is a proper relationship or coordination of prices and wages. If some wage-rates get too high for this coordination, the result is unemployment. The cure is to correct the culpable wage-rates. To attempt to lift the whole level of prices by monetary inflation will simply create new maladjustments everywhere.

In brief, if a real coordination of wages and prices exists, inflation is unnecessary; and if coordination of wages and prices does not exist—if wages outrace prices and production—inflation is worse than futile.

Slichter assumed that there is no way to restrain excessive union demands except by “breaking up” unions. Yet we need merely repeal the special immunities and privileges conferred on union leaders since 1932, especially those in the Norris-La Guardia and Wagner-Taft-Hartley acts. If employers were not legally compelled to “bargain” with (in practice, to make concessions to) a specified union, no matter how unreasonable its demands; if employers were free to discharge strikers and peaceably to hire replacements, and if mass picketing and violence were really prohibited, the natural competitive checks on excessive wage demands would once more come into play.