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Hazlitt, 1946: Inflation, Deflation, Confusion

Tags U.S. EconomyU.S. HistoryInterventionism


In the last two years left-wingers have been fond of referring to private enterprise as a “boom-bust” economy; OPA officials have contended that only price fixing can prevent a repetition of the 1920–21 boom and collapse, and British statesmen have insisted that their new “democratic socialism” will work beautifully if only mercurial America doesn’t crack again and drag the rest of the world down with it. Small wonder that so many people now ask each other whether the recent slump in the stock market does not at last foreshadow this longpredicted business setback.

The question is not easy to answer, because the American economy has now become the football of political policies and counterpolicies that are not inherent in it but essentially external. These conflicting political policies are on the one hand those tending to create inflation, and on the other those tending to bring about disruption.

The inflationary forces are obvious, and until now have been controlling. Their primary causes are government deficit financing and other political policies that increase the volume of money and credit. Past inflationary forces are roughly measured by the increase in the national debt to $265,000,000,000 and of money and credit to more than three times the prewar volume. Potential future inflation is indicated by a still unbalanced budget in prospect (in spite of a balance in the first quarter of the current fiscal year), and by a policy of artificially low interest rates that promotes further increases in credit and further monetization of the public debt. As long as inflation raises prices faster than costs it stimulates business expansion, new ventures, and employment. 

Against this, however, are equally powerful forces of disruption. The chief of them is price control, administered in a spirit hostile to profits and business. This has distorted relationships among profit margins and disrupted and unbalanced production. Builders find themselves with bricks and no doors, glass, or bathtubs. Automobiles wait on assembly lines for bumpers or batteries.

The profit squeeze from the top meets another from the bottom. Endless strikes, interrupting output, are followed by endless wage increases. To encourage or compel such wage increases the Administration ignores elementary property rights, seizes coal mines, and signs wage-boosting contracts itself. These wage increases must ultimately either raise costs to the point where many firms can no longer operate, or force up prices to levels that will cut off buying. In either case they will slow down production and force unemployment. Add to all this a basic hostility to business on the part of Washington agencies which is reflected in countless harassments.

Which of these two sets of forces will dominate the next six to twelve months—the inflationary or the depressive? That is impossible to say until we know the complexion of the next Congress and the main decisions that key political figures—President Truman, Secretaries Snyder, Byrnes, and Anderson, Paul Porter, Wilson Wyatt, Marriner Eccles, and members of the PDB, ICC, OWMR, NLRB and CPA—are going to make. The decisions of such men are incomparably more important today in determining the future course of business than the merely derivative decisions made by private businessmen.

One thing we could not have simultaneously is both “inflation” and “deflation,” for we could not have simultaneously both an expansion and contraction of the money supply. But we could have a frustrated inflation. We could have simultaneously, as experience in Europe has already proved, both inflation and industrial disruption, inflation and unemployment, inflation and stagnation.

The real danger we face in the next six to twelve months is that if the present combination of political policies brings about this result, Administration officials, instead of removing the throttling controls that cause it, may decide that the real trouble has been insufficient inflation, and may embark upon the disastrous policy of further increasing and debasing the money and credit supply. Our greatest enemy today, in short, is the economic illiteracy and confusion on the part of those who insist on “planning,” “stabilizing,” and straitjacketing the economy and who have the political power to do it.

[Originally printed in Newsweek on October 14th, 1946 as "Inflation, Deflation, Confusion." Available in Business Tides: The Newsweek Era of Henry Hazlitt]


Henry Hazlitt

Henry Hazlitt (1894–1993) was a well-known journalist who wrote on economic affairs for the New York Times, the Wall Street Journal, and Newsweek, among many other publications. He is perhaps best known as the author of the classic, Economics in One Lesson (1946).

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