Cheap Money Means Inflation

December 8, 1947

The Administration valiantly continues its efforts to protect the American people against the consequences of the inflation that its own policies have brought about. While it lectures “businessmen, bankers, labor leaders, farmers, and consumers”—in short, all the rest of us—on what we should do by our own “voluntary efforts” to “hold prices down,” while it asks for still further powers to crack down on alleged “speculators” and “profiteers,” it blandly continues to feed the fires of inflation by its own acts. It can do this because most laymen do not understand the consequences.

For generations economists and bankers have recognized that artificially low interest rates—i.e., cheap money policies—are inflationary. The chain of causation is simple. Artificially low interest rates increase the demand for loans. Increased bank loans mean a corresponding increase in bank deposits. Increased bank deposits (against which checks are drawn) are just another name for an increase in the money supply. An increase in the volume of money is only another name for an increase in monetary purchasing power pushing up the prices of goods. A cheap money policy, in brief, is the keystone, the central support, of an inflationary policy.

This fact is too patent even to escape the attention of our monetary managers. They concede it in left-handed ways. Testifying on the President’s “anti-inflation” program before the House Banking Committee, Secretary Snyder declared: “To minimize bank credit expansion, restrictive measures have been applied to the money market by the Federal Reserve System and the Treasury. This has been reflected by a rise in interest rates.”

Here is an admission of the close causal connection between low interest rates and bank credit expansion, on the one hand, and between bank credit restriction and higher interest rates on the other. It is an admission that low interest rates are inflationary. Yet in reply to a question the Secretary declared that the Treasury did “definitely not” contemplate any policy that would cause a rise in the present infra-low interest rates. This is tantamount to saying that the Treasury definitely intends to continue this basic inflationary policy at the same time as it presses for ineffective and dangerous “anti-inflation” measures.

There are several reasons for this glaring self-contradiction. The Administration wants to eat its cake and have it too. It wants all the popular benefits of an inflationary boom with none of its unpopular embarrassments. Its most immediate fear is that higher interest rates would cause a decline in the price of government bonds. A fall in government bond prices would, of course, unless some special provision were made, adversely affect the banks of the country that are loaded up with these bonds.

There is not space here to discuss the possible ways of extricating ourselves from this dilemma. It is precisely because a cheap money policy creates such grave problems, indeed, that it ought not to have been recklessly embarked upon in the first place. To continue such a policy would merely intensify the danger and the later difficulty of arresting or reversing it.

In defending the continuance of an inflationary low interest policy, Secretary Snyder declares that “an increase of ½ of 1 percent in the average cost of carrying the public debt, for example, would mean an added burden of $1,250,000,000 a year on the taxpayer.” This is obviously a narrow and shortsighted way to look at the problem. Against this “saving” we must count the inflationary cost to the American people, both as taxpayers and as consumers, of a policy of not raising interest rates to curb inflation. This annual “saving” of $1,250,000,000 to the taxpayers in government bond interest could be far more than wiped out by a forced inflationary increase of $5,000,000,000 or more in all other government expenditures, including those for materials, wages, and salaries, or by a $20,000,000,000 increase or more (here it is impossible to set definite limits) to what American consumers would have to pay to keep the same standard of living that they have now.