Drought Fighting in a Flood

June 19, 1950

In his talk on June 6 President Truman made it clear that he is still fighting the 1932 depression. And he is fighting it by inflation. In the midst of the 1950 flood his main efforts are devoted to combating the 1932 drought. The rains are falling; the rivers overflow their banks; there is grave doubt that the flood can be controlled. But of all these dangers Mr. Truman is oblivious. “Remember that 1932 drought,” he says. And he orders his rainmakers to bring another monetary downpour.

Inflation works its apparent magic because it depreciates the value of the currency unit and hence raises prices. Rising prices usually mean higher profits. The prospect of these brings the feverish activity and “full employment” that are the boast of every inflating government.

Inflation can go on for a long time and to great lengths. We need not cite here the horrible modern examples of Germany, Greece, and China. But the French currency unit, for example, has depreciated to a hundredth of its 1914 value (which is as if the 1950 dollar had no more purchasing power than the 1914 cent), and the danger of further inflation in France is still not altogether past. In general, inflation will go as far as political forces push it. And inflation is still politically popular here.

Once a nation embarks upon a “full employment” policy through monetary inflation, it can only continue that course either by inflating at an accelerative rate, or by resorting, as Britain and nearly every country in Europe has resorted, to “repressed inflation” through government controls.

Today our government is resorting to monetary inflation to keep “full employment,” and is encouraging a the same time the chief counterforce to full employment—higher wage rates. Inflation brings its activity and employment by pushing prices ahead of costs. But if wage rates are forced up faster than prices, then marginal profits, and hence activity and full employment, are threatened. No matter how high prices are forced, if labor costs are forced up relatively still higher, they must bring unemployment.

From this standpoint, the new General Motors five-year labor contract is a disturbing sign. Whatever General Motors may be able to take on (as one of the strongest corporations in the world), our economy could not stand the general adoption of this settlement as a precedent. The pension provisions are a formidable boost to present labor costs. And no economy can guarantee in advance to pay every year a “productivity” wage increase of 4 cents an hour, because no one can be sure there will in fact be that much real increase in productivity. As for the cost-of-living escalator clause, I need merely quote Bresciani-Turroni’s 1931 book on the German inflation: “The inflation proceeded with quickened pace especially. . . after the workers had obtained money wages which varied with the index number of the cost of living.”

We seem about to witness a new race between prices and labor costs. The amount of employment or unemployment will depend on which phase gets started first, and when.

Commenting on my article (Newsweek, June 5) on the Schuman plan for a European coal and steel pool, an American economist of European background writes from Paris:

“The whole press here seems to have lost its head. One reads only the crudest sentimental nonsense.... Such a pool would certainly create a common interest between German and French industrialists. It would yield them huge profits, because it would not charge competitive prices but prices based on the highest costs. In case of war every country would again manage its own plants anyway.

“The truth is that the greatest cartel in the world is being created. The funniest thing about it is that it is happening under the noses of hundreds of Americans busy fighting such comparatively minor trusts as the I.G.... It seems that a ‘bold’—and vague and sentimental—slogan works better in our world than logic.”