VII. The "Philosophy" of Inflation

tradition, do we condemn the apparent historical trend accepted by a majority of progressive na tions? If ethics is a mere matter of anthropology or psy choanalysis, who is to proclaim immutable laws of economics? Must we revert to the laissez faire ("leave us alone") doctrine that is as obsolete-the self-styled modernist may continue-as are the gold standard and the "anarchistic" competition of the nineteenth century? (To collectivists, com petition is always anarchistic or monopolistic.) In the collectivist gibberish: A dynamic world will not submit to a rule that has inhibited man56 THE "PHILOSOPHY" OF INFLATION. kind from seeking to "maximize the welfare of the many rather than the profits of the few." The gold standard in particular is the object of resentment and ridicule because of its "discipline" -the limit it sets on tinkering with the currency and arbi trarily manipulating the credit volume.

As a matter of fact, the apology for inflation is not so new or so undogmatic as it pretends to be. Nor is it generally accepted in some backward countries. Also, the alleged historical law of per petual inflation is subject to change on short notice. 1 So is the inflationary philosophy itself, despite its scientific pretensions. Indeed, the fashionable (statist and inflationary) economics is a reversion to the pre-nineteenth-cen tury vintage, only more dogmatic and far more emotion loaded. A favorite device is to ridicule the opponents of inflation by charging them with being laissez faire believers. This implies, very ex plicitly, that the only alternative to permanent or recurrent inflation is to stop economic growth, ac cept massive unemployment, and let the unem ployed starve· on the streets. If we do not keep inflating, cost what it may, we shall lose the cold war or go bolshevist is the proverbial last word of the dyed-in-the-wool inflationist.

"MIND YOUR OWN BUSINESS" In historical perspective, laissez faire was a re action to centuries-long bureaucratic meddling, to 57 AN INFLATION PRIMER the multitude of oppressive laws and regulations, and to the crushing monopolies of guilds and other privileged groups. All of this was enforced or at least tolerated by the state. Hence, the reac tion: "Mr. Government, mind your own busi ness." But what is the government's business in relation to the economy and, especially, to money? None whatsoever-beyond defense and internal order-is the literal interpretation of economic freedom. Such is not our concept of freedom. We would not let the unemployed starve even if "eco nomic rationality" would require it, which it does not. It is rational to permit wage rates to fall in order to overcome a depression by adjusting costs to declining prices; starving the unemployed in the intervening period, which may last many months, is quite another thing. Few of us would agree that the labor of children in early British factories and of women in the mines was justified because it speeded up capital accumulation out of high profits, or that "interventions" such as the eight-hour day, free grammar schools, and the graduated income tax smack of bolshevism. Nor is the rule of the free market an obstacle to welfare spending by the authorities-the local ones, prefer ably-provided the spending does not impair com petition, financial stability, or the incentives to work, is not a pretext for servicing pressure groups, and is not fraught with corruption.

A prime misunderstanding should be cleared 58 THE "PHILOSOPHY" OF INFLATION up at once. \Ve must distinguish the institutional guidance of the economic process from its collec tivist control. Objecting to the normal function of a central bank, which is to check an excessive How of bank credit (illiquidity!), is typical of the pedants' confusion. By the sa:me token, control of the traffic by a policeman might be objected to as an abridgment of human rights. Restraining monopolists is another interference with "free dom" that in reality preserves freedom. The naive leave-us-alone idea enjoyed a meas ure of popularity in the nineteenth century and gave the period an undeserved black eye. At tempts in France and Britain tosuppress the labor unions were instrumental in begetting the socialist movement. The theory of Marx that capitalism destroys itself was based on the totally false as sumption, spread by the same laissez faire school, that labor as a group has virtually no chance of improving its lot. Capitalism might have destroyed itself had not worldly wisdom prevailed over the dogmatic misinterpretation of the perfectly sound doctrine: that the price mechanism of the free market brings about the most productive alloca tion of resources, the lowest possible prices, re muneration according to services rendered, and optimal (best) satisfaction of the consumer at his free choice. A by-product of free competition is low profit margins. Inflation, "the most deadly of all economic diseases," is a royal road to the burial 59 AN INFLATION PRIMER of these functions and ultimately of economic free..

dom itself. Unfortunately, the laissez faire (Manchester) school still has respectable adherents~ The dis service these persons unwittingly render to the cause of free enterprise and· sound money is a serious one. The more so, since the zealots of an obsolete Utopia outdo in their zeal the original. This is especially true in matters pertaining to monetary policy. The "classical" protagonist of undiluted eco nomic freedom considered the permanently fixed price of gold as a number-one pillar and an irrev ocable condition of the free market. Some of his promient (self-appointed) successors would extend "freedom" to the price of the monetary unit itself. The gold value of the dollar, they argue, should fluctuate until it finds its "natural level." Why not let the length of the yard and the weight of the ton vary too? There is probably no more effective tool with which to inflate the monetary base on which the credit structure rests than tinkering with the currency's gold content. The same holds for a once-and-forever devaluation of the dollar, even if its propagandists, the special interests in gold mining, pretend that this is the royal road to "stabilization. "

PERPETUAL PROSPERITY WITHOUT TEARS It IS deliberately misleading to pin the label 60 THE "PHILOSOPHY" OF INFLATION laissez faire on the opponents of inflation; it is just as unfair to call every vindicator of inflation a com munist, though inflation is a "bloodless" tech nique to revolutionize the economic system. The American devotee of progressive debt monetiza tion may be sincere in wishing to rescue us from flllegedly imminent depression. As a rule, he denies outright that he advocates rising prices and pooh-poohs the danger. Nay, he claims to be against both, inflation and "deflation"; he is for full employment, continued growth, and stable prices-by promoting inordinately rising wages, artificially low interest rates, and deficit spending. The money-counterfeiting propensity takes in numerable forms. Economic incantations may cover up the orators' objectives. Here is a sample of oratory, delivered by Senator Paul H. Douglas, leader of the pour-out-cheap-money wing of the 86th Congress (he was on the opposite side eight years earlier): "I believe that the American people desire that our economy meet three tests: providing maximum employ ment, an adequate rateo£ growth, and maintaining rela tive price stability and preventing both inflation and deflation." -Congressional Record) March 23, 1959, p.

4357. Note the vagueness of the terms "maximum," "adequate," and "relative." The London Econo mist} by no means a believer in laissez faire} com mented (August 29, 1959) in a typical English understatement: "Senator Douglas was once a 61 AN INFLATION PRIMER prominent economist, but the "life of politics has dulled his objectivity and diverted his attention." The object of inflationist wishful thinking is the centuries-old dream of perpetual prosperity at no social cost. Money-printing does the trick. But even dreams have their fashions. At one time, minting silver was to deliver mankind, meaning the indebted farmer, from "crucifixion on a cross of gold." The 1920's developed a refined tech nique to keep rolling a reckless speculative mania, the "eternal prosperity on a high plateau": con tinuous credit expansion, in complete disregard of liquidity requirements. Since the 1930's the "new economics" of the brilliant but whimsical J. M. Keynes has dominated the political scene and much of the academic teaching. One of his specious ideas was to monetize (inflate) in the depression and pump the money out (deflate) when full employment had been established. The underlying assumptions were two: that labor will not ask for higher wages even if prices rose (the unions are not interested in the cost of living, Keynes asserted), and that the 'inflationary process can be thrown in reverse gear whenever the money managers decide to do so (as if they were not only immaculately wise, but also omnipotent). But it is not possible, least of all in a relatively free economy, to create artificial employ ment by money administrations and not cause wage and price rises (in some sectors); and it is 62 THE "PHILOSOPHY" OF INFLATION most impolitic even to attempt to break a pros..

perity wave by deflating the money volume. Actually, although the depression faded out twenty years ago, we are still inflating! The defini tions of full employment and of unemployment are adjusted conveniently to the "needs" of the pressure groups or are replaced by some arbitrary rate of growth, measured by a fictitious statistical standard. The authorities all along the Potomac have joined the courthouse politicians in solemn assertions that they can and will pursue the mutually exclusive objectives of inflation-fed full employment and maximum production, with guaranteed price stability thrown into the bargain, thus talking from both sides of their mouths, like Arthur T. Hadley's Microwac, the electronic robot running for the presidency. THE RATIONALE OF THE CYCLE Monetary "reformers" of every denomination were fishing in the troubled waters of the Great Depression, and they are still at it. Whatever economic creed they profess, all assume allegedly incurable shortcomings of "capitalism." It is sup posed to be hopelessly exposed to recurrent mass unemployment, if not to perpetual stagnation.

For one spurious reason or another, the markets are (supposedly) incapable of restoring their own equilibrium or even of maintaining it. This is the fundamental concept of Marxism as well as of 63 AN INFLATION PRIMER Keynesianism. From there follows the call to col lectivize· the whole economy or at least the money and credit system. The difference is in degree rather than in substance. The radical departure and the so-called middle-of-the-road approach have in common the underlying economic philosophy: to substitute political fiat for the free functioning of markets and prices. The crucial question then is: Why does every boom bust? The answer of the inflationist is simple and easy. Prosperity comes to a halt when money is scarce and credit dear. Accordingly, ample and cheaper money is the cure. The additional funds, the unions claim, should preferably go into higher wages to be spent by the masses, not to be hoarded or used for conspicuous consumption as the "capitalists" (allegedly) would do.

But what causes the "money shortage"? It de notes a disequilibrium between supply and de mand. Creditors and debtors are overextended. The merchants may have overstocked, expecting higher prices and / or more sales. If they are dis appointed, must they be supported by credit shots in-the-arm? (Why not borrow the parity-price con cept of our bankrupt farm policy by setting up an "ever-normal" general store and donate the sur pluses to the backward countries? Moscow could never match that.) Inventory recessions are the necessary corrections of inventory booms. The latter would scarcely amount to 'much if the banks 64 THE "PHILOSOPHY" OF INFLATION used proper caution in financing the accumulation of goods on the shelves. Relaxing credit after the goods become unsalable would be a clear invita tion to the merchants to indulge in more of the same speculative stockpiling. What justification is there for profits if the losses are to be nationalized? Capitalism has no eco nomic or moral rationale if it is not what it should be: a system of risk-bearing, profit-earning and loss-taking enterprises. Indeed, profits (beyond managerial pay and interest on capital) are the re muneration for incurring the risk of losses.

Or, consider the investment cycles. When steel mills operate ~ell below capacity or when newly built homes find no buyers, one or both of the following events have occurred. Steel capacity had been expanded too far and the final product is overpriced; too many houses were built at too high cost. Under stable monetary conditions, the natural correction will set in; prices (and costs) will fall until they meet the consumer demand, and business recovery ensues. Not so, if inflation ary stimuli are applied. Construction may con tinue, customers or no customers. The "reces sion" is overcome, but costs and prices spiral and the excessive supply grows further, heading for a real slump. PROGRESS OR "GROWTH"? The downward s,vings of the (short) inventory 65 AN INFLATION PRIMER cycle and especially of the (much longer) invest ment cycle fulfill highly significant functions, best described as of sobering up effect. Parasitic firms that mushroom on the inflationary swing are elimi nated. Bank liquidity is improved. Overexpen sion of plants.and inventories is checked. Interest rates on fixed-value claims decline; the over valuation of shares gives way to a recovery of the bond market. Speculative ventures are trimmed; rational ·investment standards come into their right. Labor and managerial efficiency improve dramatically, with or without new equipment.

Costs per unit of output decline even without wage rate cuts. But, more often than not, high salaries are cut. Commodity prices, which have gone up on the expectation of continued inflation, soften, as do the unions' wage raise demands. For illustration, a few headlines chosen at ran dom from recent and very mild recessions·will do: "Businessmen bank on permanent gains from emergency cost cuts" (September 1958). "Fear of unemployment brings drop in loafing, job-hop ping, tardiness. Coffee breaks are shorter; work quality improves" (January, 1958). "Worker out put on the increase as joblessness grows, firms push to cut costs ... 20% gain in efficiency follows layoff. Absenteeism, 'quits' drop" (July, 1949). "Fighting slump by cutting costs," headlined the New York ])imes in February, 1958; and the Wall Street Journal: "Companies save where they 66 THE "PHILOSOPHY" OF INFLATION can during the business decline." While profits flow without much strain, it is only natural to neglect economies, to take it easy, to enjoy life and let the expense accounts run amok. When business turns down, output per worker that was sagging during the boom turns upward. Product quality and "service" to the customer improve spectacularly. These effects are by no means a matter of labor efforts alone. Of prime importance is enhanced managerial efficiency. The pressure of competitive imports spurred the textile mills' cost-cutting efforts: "On modest equipment spending they've achieved sharp improvements in productivity" (Wall Street ] ournal J May, 1960).

In fact, widespread misapprehensions notwith standing, depressions are times of accelerated progress. As F. C. Mills, an outstanding statis tician, has pointed out, the average increase of per man productivity in American industry (ratio of physical output to man-hour input) was 2 percent annually over the first half of this century; but two depression periods of an accelerated increase stood out-19l8-24 and 1932-41. 2 Actually, during the Great Depression between 1933 and 1935, manu facturing output per man-hour rose 11 per cent, in spite of much product quality improvement, the U.S. Department of Labor reports. Yet, Growth with a capital G is the inflationist battle cry. Without continuous inflation of the money volume and of prices, growth is supposed 67 AN INFLATION PRIMER to stop, stagnation to set in. However, growth manship promotes not progress, but just the oppo site. Again, Dr. Mills' figures speak for themselves: Periods of "growth" were characterized by "re tardation" in the rate of productivity's increase.

The records of the nineteenth century support the same thesis. "During that remarkable period of economic growth from 1873 to 1893, when mate rial wealth increased by about 140%, prices de creased more than 40%."3 In fact, an artificially stimulated, rapid "growth" may be accompanied by a high level of unemployment. In 1937, under inflationary stimuli, the industrial production in dex hit the 1929 record-with eight million unem ployed roaming the streets. It is futile to ignore the sufferings and waste caused by the depression (as is done by a school of self-styled libertarians of the laissez faire variety). Equally futile is it to ignore the fact that every depression is the outgrowth of the preceding boom. Had the "recovery" maintained its natural path of balanced growth., it could have lasted in definitely. Monetary stability., combined with sound fiscal and banking practices, is the prime condition of economic progress. It is the exag geration and unbalancing of the process-over expansions, physical and financial, leading to overemployment and other bottlenecks-that carry the penalty of a crash. 4 Exactly this state is what inflation brings about by obstructing 68 THE "PHILOSOPHY" OF INFLATION sound entrepreneurial and investment judgments and whetting the political appetites.

The incessant clamor of the inflationist is that the gross national product (estimated total spend ing) must GROW every ,rear at a fixed rate, be it 3 per cent, 4 per cent, or 5 per cent, the num ber varying according to his whim. There must be no letdown in the number game, no interrup tion, and it makes no difference on what we spend. The GNP never rises as it did in World Wars I and II; in the single year 1943 it jumped as much as 15 per cent, "thanks" to all the spending on military hardware. (Actually, in 1939 Keynes offered the British the flippant consolation that the destruction caused by the war would be to their benefit, creating employment and income thereafter.) But no cars and no homes were pro duced and shortages were the order of the day. There was ample statistical growth" but very little economic progress. The former is a matter of more money outpour; the latter, of real wealth creation.

Could it be that the ghost of the oldest of eco nomic fallacies haunts the ivory towers of the academy, confusing money and real wealth, the lubricant and the source of energy? Or is it merely a case of economic myopia, the inability to see the consequences of monetary tympany beyond the immediate ebullience it evokes? In any event, the gross falsehood of the growth-at-any-price 69 AN INFLATION PRIMER philosophy makes one suspect there must be ul terior motives behind. it. There are, indeed, as we shall see. I. In the past, periods of rising and falling prices alternated. The British retail price index of basic consumer goods fell by 51 per cent between 1813 and 1893; by 59 per cent between 1920 and 1932. E. H. Phelps Brown and Sheila V. Hopkins, "Seven Centuries of the Prices of Consumables, Compared with Builders' Wage-rates," Economica~ Vol. XXIII, No. 92. 2. F. C. Mills, "The Role of Productivity in Economic Growth," American Economic Review~ May, 1952.

3. R. T. Patterson, in Commercial and Financial Chronicle, August 20, 1959. 4. About overindebtedness, typical of every rash of specu lative mania, see subsequent chapters. 70 VIII CREEPING INFLATION AND INTELLECTUAL HONESTY HOW MUCH IS A LITTLE? Just how much inflation is a little inflation? This is the first question to which the proponents of creeping inflation must give an unequivocal answer as a matter of intellectual honesty. Their answers vary within a wide range. Professor Jacob Viner of Princeton University, and one of Roosevelt's brain trust, pontificated: I shall begin to get scared, myself, if the rate at which prices rise on the average exceeds 10 per cent per annum. A one per cent increase per month, continuing over a period of months, in the wholesale price index, if not justification for hysteria is perhaps justification for alarm; if not for alarm, then certainly for grave concern. Commerce, April, 1941.