Built-In Inflation

May 28, 1956

In its last annual report the U.S. Steel Corp. described what has been going on in the United States in recent years (and for that matter in nearly every country in the world) under the illuminating phrase, “institutionalized inflation.”

The U.S. Steel report began by citing what appears to be a “permanent and alarming peacetime trend of cost and price inflation.” Its employee cost per employee hour, for example, between 1940 and 1955, showed an increase averaging 8 percent a year compounded. This, and an even greater percentage rise in other costs, has forced the steel industry to raise steel prices and “thereby pass on to buyers of steel part of the underlying cost of inflation.” Prices of steel-mill products, as a result, increased 119 percent between 1940 and 1955.

THE TWO BASIC ROOTS

The company then went on to describe the “two basic roots” of this “inflationary tendency”: “The first one is the institution of industrywide labor unions, headed by leaders who, with power to bring about industrywide strikes, seek always to outdo each other in elevating employment costs in their respective industries. The legislative and social framework within which they function compels them to compete in elevating this basic cost.

“The other root is the government’s ‘full employment’ policy under which the money supply must be inflated fast enough to accommodate the inflating employment cost, lest that mounting cost bring about its natural result of pricing some people out of their jobs, even though only temporarily. It takes ever more dollars to cover ever-rising costs and prices if industry’s full output is to be purchased. The money supply—people’s bank deposits subject to check plus their pocket currency—was in 1955, on a per capita basis, 2.7 times what it was in 1940. This is equivalent to 6.8 percent per annum compounded.

“The abuse of labor monopoly privilege and the monetary policy that transfers to the public in higher prices the penalty of that abuse appear to be the main elements of institutionalized inflation. It would be helpful in this regard if those responsible for determining wage costs and fiscal policies were constantly aware of the inflationary potentials of their decisions.”

This is an excellent compact description of what has been happening. But it is important to be clear concerning the precise chain of cause and effect, and not to confound the two. The direct cause of inflation is always an increase in the quantity (as well as a depreciation in the quality) of money and bank credit. This is almost wholly controllable by governmental policy. At the end of 1939 our total supply of bank deposits and currency outside of banks was $64.7 billion. At the end of 1952 it was $200.4 billion; at the end of 1953, $205.7 billion; at the end of 1954, $214.8 billion; and at the end of 1955, $220.2 billion.

This is the result of governmental inflation—a combination of continuous deficit spending with artificial low-interest rates which overstimulate private as well as public borrowing. If an individual labor union, or labor generally, were to force up its wage rate level beyond the equilibrium point, the result would not be further inflation, but unemployment. Yet the government does not dare to let this natural consequence of excessive wage rates take place. It constantly finances this wage increase by deficit spending and cheap money policies. Under the Taft-Hartley and other laws it builds up industrywide unions, legally forces employers to “bargain” with these monopolies, and makes resistance to continuous wage increases practically impossible.

POLITICAL PRESSURES

Thus we have wage inflation financed and made possible by monetary inflation. True, our Federal Reserve authorities are now trying to effect some measure of restraint. But practically all the bipartisan political pressures in Washington—wage boosting laws, huge new spending schemes for foreign aid, roads, schools, farm subsidies, social-security expansion, government-guaranteed mortgages, and government pressures for further strengthening of industrywide unions—are on the side of still more institutionalized inflation.