Fighting Fire with Gasoline

February 5, 1951

How preposterous can the situation get? The Administration starts the inflationary fire, fights it by pouring on more gasoline, and then talks as if it were completely mysterious in origin. Or it hints that the fire was started by business, by the “speculators,” the “hoarders,” the “profiteers,” or by the buying public. And it acts on this assumption when it insists on the completely false remedy of price control, which puts the economy in a straitjacket of prohibitions, allocations, rationing, licenses, and subsidies, unbalances and disrupts production, creating artificial shortages. All this is called total mobilization.

Take the Secretary of the Treasury, John W. Snyder. He is personally a mild-mannered, quiet, unassuming, amiable, loyal, and honorable man who thinks of himself as a conservative. He would be shocked beyond measure to learn that he is more responsible than any other single man for the existing inflation in this country and the almost universal fear of further inflation. And he has earned this No. 1 position not only by his past record but by his extraordinary announcement on Jan. 18 that the long-term rate for marketable Federal securities must be held to 2½ percent. He might just as well have announced outright that he is determined to have more inflation.

Mr. Snyder’s attitude stems, of course, not from any desire for inflation, but from a tragic lack of understanding of economic cause and effect. Inflation, always and everywhere, has one basic cause—an increase in the supply of money and bank credit. At the end of 1939, demand deposits and currency outside of banks totaled $36,000,000,000. At the end of May of 1950 this total had reached $109,000,000,000. At the end of December of 1950 it had reached $117,000,000,000. This is not merely the cause of inflation; this is the inflation. The increase in commodity prices is merely a consequence.

And the principal cause in turn of this increase in money and bank credit has been the artificially low interest rates maintained by the Treasury.

This cheap money policy has not merely swollen the volume of private borrowing; it could be maintained—in connection with the policy of pegging government bonds above par—only by encouraging the member banks to load up with government bonds and by forcing the Federal Reserve Banks to buy as many of those bonds as is necessary to maintain the predetermined rate. They bought these bonds by creating deposits or printing money.

All this is now an old story among monetary economists and bankers. But Mr. Snyder has never understood it. He can see the problem only from the immediate short-run interest of the Treasury—to pay as low an interest rate as possible. “Any increase in the 2½ percent rate,” he says “would seriously upset the existing security markets.”

Any increase in prevailing interest rates would of course mean a lower price for present outstanding bonds. But Mr. Snyder refuses to see that the only alternative to accepting this comparatively mild consequence is an uncontrollable inflation. In the face of overwhelming economic opinion and evidence to the contrary, Mr. Snyder persists in declaring that a cheap money policy and inflation have nothing to do with each other.

If Mr. Snyder stood alone in this appalling blindness the situation would not be so grave. But he is supported in Administration circles by a conspiracy of silence. Within the Federal Reserve System there is some real understanding of the situation; but—with a few honorable exceptions like Allan Sproul, president of the Federal Reserve Bank of New York—there is precious little courage. Mr. Snyder’s statement clearly implies that Chairman McCabe of the Federal Reserve Board acquiesces in the policy of maintaining the inflationary 2½ percent interest rate. In lieu of any genuinely effective overall action, the board on Jan. 16 announced the token gesture of increasing required stock margins from 50 to 75 percent. Meanwhile, an ominously growing bureau prepares to “cure” inflation with the colossal hoax of price control.