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Inflation as a Policy

Tags U.S. HistoryMonetary TheoryMoney and Banking


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. The chief spokesman of this group is Prof. Sumner H. Slichter of Harvard.

Slichter’s testimony and writings overflow with fallacies. I confine myself here to three: (1) That a “creeping” inflation of 2 percent a year would do more good than harm. (2) That it is possible for the government to plan a “creeping” inflation of 2 percent a year (or of any other fixed rate). (3) That inflation is necessary to attain “full employment” and “economic growth.”

I long ago pointed out (Newsweek, Sept. 23, 1957), as did others, that even if the government could control an inflation to a rate of “only” 2 percent a year, it would mean an erosion of the purchasing power of the dollar by about one-half in each generation. This cannot 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 percent a year.

It Can’t Be Planned

The moment a planned “creeping” inflation is announced or generally expected in advance, it must accelerate into a gallop. Even Slichter now recognizes that, if lenders expect a 2 or 4 percent 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. But he still fails to see that all businesses will be forced to offer a correspondingly increased gross rate of return to attract new investment, even new equity capital. He still fails to see that 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. He still fails to see that peculators and ordinary buyers will try to anticipate any planned price rise—and thereby inevitably accelerate it beyond the planned percentage. He still fails to see that inflation forces everybody to be a gambler.
The burden of Slichter’s argument now is 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 simply 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. 

Coordination Needed

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 assumes that there is no way to restrain excessive union demands except by “breaking up” unions. It never occurs to him that we need merely repeal the special immunities and privileges conferred on union leaders since 1932, especially in the Norris-LaGuardia 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 come into play.
Slichter argues that labor unions are much the most important cause of present-day inflation, yet contends at the same time that a general wage increase is just the right medicine for the economy right now! His delusion is that we can inflate ourselves out of the inflation. 

[Originally printed in Newsweek on April 6, 1959. 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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