Inflation Must Have a Stop

April 13, 1953

In recent weeks there have been signs of a recession. Wholesale prices, of course, have been sliding since they reached a peak of 116.5 in February-March 1951. By March 10 the price of steers dropped nearly 30 percent from the beginning of this year. Though the Office of Price Stabilization removed the last price ceilings on March 17, the decontrol has had no important effect on the average level of wholesale prices. The official index, in fact, dropped slightly to 110 in the week ended March 24. At the end of March, the Dow-Jones spot commodity price index stood at 168; a year previous it was 192. Chrysler announced automobile price cuts on March 25. On March 30 the stock market suffered the worst break since Oct. 22, 1951.

The stock-market break was generally attributed to the latest Korean peace overtures. Now if we take these seriously, they might adversely affect the price of securities in two ways. Some corporations are heavily dependent on direct war orders. If these declined, they might not find it easy to replace them. A drop in defense spending, moreover, could mean an end to inflation. Commodity and stock prices based on the assumption of continued monetary inflation would fall.

It would be absurd, however, to rush from this to the conclusion that a truce in Korea, or a lessening of the threat of a third world war, would be bad for our economy in general. Such a conclusion assumes that the best thing for business, employment, and the well-being of consumers would be the continued wasteful production of arms and ammunition.

This is merely a special case of the ridiculous reasoning which assumes that prosperity depends on the volume of government spending. What this reasoning overlooks is that the less the government must spend on armament or anything else the more it can reduce taxes. Then people can spend more of their own money for the things they want rather than have it seized by the government to be spent on the things it wants.

“War prosperity” is produced not by the volume of defense spending but by the inflationary method of financing it. It is produced, in other words, by an increase in the supply of money and bank credit. As the present inflationary boom shows signs of slackening off (which it did long before the latest Korean truce overtures) there will be increasing pressure on the Eisenhower Administration to resume inflation in one form or another. The increased pressure for more and higher farm price supports is a mere foretaste.

Willingness to accept some adjustment and recession now will be a test of the sincerity of all those who have been affecting to deplore inflation. More important, it will be a test of their understanding. It is true that the present inflationary boom could be kept going for a time by further doses of inflation. But to inject these now would be to build up for an inevitable crisis and collapse.

In an article in the Feb. 19 issue of The Commercial and Financial Chronicle, the economist L. Albert Hahn drew a striking parallel between the present inflation as it has developed since the autumn of 1949, and a previous “second postwar boom”—from 1921 to 1929. Both booms, he pointed out, rested on money and credit inflation. Between the end of 1948 and today total loans and investments of the commercial banks have been increased from $114,000,000,000 to $140,000,000,000. This compares with a rise from about $38,000,000,000 in 1921 to $50,000,000,000 in 1929.

Wholesale prices in the present period have increased (even after their recent decline) by roughly 12 percent. Wholesale prices between 1921 and 1929 actually showed a slight decline, in spite of monetary inflation. This led to the false belief that there was no inflation; and warning signals were ignored. Hahn argues that a monetary and credit inflation without a price rise (“inflation without inflation”) can be as dangerous as any other. To prevent a future depression, he advises, we must put “brakes on the [present] boom before it enters its excessive phase.”