Creeping Inflationist

September 23, 1957

As nearly everybody professes to be against inflation (even those who fervently advocate the very things that cause it) it is refreshing to encounter a writer like Sumner H. Slichter of Harvard, who frankly wants inflation and doesn’t think we can get along without it.

He is careful, it is true, to say that he is only in favor of “creeping” inflation, not galloping inflation, though he is often vague concerning the exact point where a creep becomes a canter. He has been at times indiscreet enough to suggest that a price rise of 2 or 3 percent a year would be about right. This proposal has been thoroughly discredited. It has been pointed out that even if we could control an inflation to a rate of 2 percent a year it would mean an erosion of the purchasing power of the dollar by about one-half in each generation.

Even so, this would not accomplish Slichter’s announced purpose. He thinks prices must go up this much in order to meet the unions’ annual wage demands. But the moment Slichter’s inflation scheme was openly put into effect, union leaders would simply add 2 percent (or whatever the planned annual inflation was) on top of the demands they would have made anyway. In fact, lenders, investors, manufacturers, retailers, speculators would all mark up their demands or change their operations to beat the inflation, which would thereupon race to a crack-up. A declining currency must eventually obey the law of acceleration that applies to all falling bodies.

HOW FAST IS A CREEP?

But Slichter is irrepressible. In the September-October Harvard Business Review he not only continues to commend a creeping inflation, but reprimands Neil H. Jacoby, a former member of the Council of Economic Advisers, and C. Canby Balderston, vice chairman of the Board of Governors of the Federal Reserve System, for being against inflation. Space does not permit a detailed analysis of all the errors and confusions in Slichter’s article, but it may be helpful to cite a few examples.

He declares that it is “incorrect” to believe that “creeping inflation is bound sooner or later to become galloping inflation,” because this hasn’t happened in the last 25 years in the United States. Well, our cost of living has more than doubled in the last seventeen years. Pretty good for a creep. And Slichter might take a look at the French franc, which is at considerably less than one-hundredth of its 1914 purchasing power. Or at the median loss of one-third of their value by 56 different currencies in the last nine years alone (Newsweek, July 1).

Slichter is callous about the losses suffered in recent years by the thrifty. Of the millions of savings-bank depositors and holders of government bonds who have seen the purchasing power of their holdings shrink by a third or a half, he writes coolly: “These people have paid the penalty for poor investment judgment.” Their poor judgment consisted, in brief, in trusting their country’s money and in answering their government’s appeal to buy war bonds. Did Slichter warn against buying war bonds when they were being offered? Is he candid enough to warn everybody that it would be poor judgment to buy future bonds as long as “creeping” inflation continues?

WHAT A WINS, B LOSES

Slichter’s fixed idea is that constant creeping inflation is necessary to maintain full employment. This leads him to misstate an argument of Jacoby’s as a “suggestion that prices be kept stable by not permitting unemployment to fall below 4 percent.” The truth is that full employment or its absence has no necessary connection whatever with inflation, but depends wholly upon the maintenance of fluid and functional interrelationships between wage rates and prices. Slichter does not understand the argument that unions cannot raise the real wages of the whole body of workers, and his attempted refutation misses the point.

Finally, in his efforts to minimize the harm done by inflation, Slichter fails to see that when employment is as full as it is today, further inflation must hurt on net balance as many people as it helps, for the gains in dollar income resulting from inflation must be offset by the losses in dollar purchasing power.