Inflation Was the Trick

February 14, 1955

The present Council of Economic Advisers is a much more distinguished body than that in the later years of the Truman Administration. This fact is reflected in an annual Economic Report that is better reasoned, more carefully documented, more informative, lucid, balanced, and less flagrantly political than those to which we had become accustomed.

But after I have said all this, I am sorry to arrive at the same conclusion announced several times in this place over the last eight years—to wit, that a Council of Economic Advisers that makes public reports cannot be an independent, disinterested, and scientifically objective body but is forced to become an apologist for what the administration in power has done or has decided to do.

The reasons for this are inherent in the setup of the council. Appointed and removable by the President, and making public reports to the President, it can hardly criticize the economic policies that the administration has followed or recommend the opposite of what it knows the administration intends to do. Therefore the CEA’s latest report, as I remarked of those under the Truman Administration, still “consists mainly of giving ‘scientific’ and ‘economic’ reasons for what the President has done or wants to do for political reasons” (Newsweek, Jan. 28, 1952).

The new Economic Report, in fact, goes down the line for every economic recommendation of President Eisenhower, however dubious, in all his other messages. I could repeat about it verbatim, with complete truth, many of the things I wrote about President Truman’s older economic reports. For example: “The report was full of expressions of faith in a free economy. Yet one recommendation after another was based on the assumption that the economy would not in fact be stable without government intervention and control at a score of crucial points” (Newsweek, Jan. 27, 1947).

Now a government can continue for a long time to maintain the appearance of prosperity through monetary inflation. This is in fact the policy that the Federal government followed in 1954; and it is in fact the reason why it was able to turn the recession of late 1953 and early 1954 into a resumption of the boom.

This fact is not disputed; it is candidly acknowledged (but not of course under the nasty name of inflation) by the Eisenhower Administration itself. In his letter transmitting the Economic Report to Congress, the President declared: “Fiscal and monetary measures fostered an expectation of improving economic conditions and encouraged people to maintain a high rate of expenditure.” The council’s lengthy report is more explicit. It describes how the government increased the money supply by about $10 billion in 1954 by cheap money policies. The “Federal Reserve Banks lowered their rediscount rates. The reserves that member banks are required to hold in support of their deposits were reduced once again.” Then, “As a result, the loans and investments of commercial banks increased by about $10 billion during 1954 and the money supply increased further—especially in the second half of the year. Had it not been for the increased availability of credit and the easing of terms, the fast pace of . . . construction . . . would not have been attained,” etc.

And later (page 100), the CEA admits that: “More than half of the overall expansion in bank loans and investments was in holdings of U.S. Government securities. These increased by about $6 billion. . . . The increase of $2.6 billion in total loans clearly was not due to commercial and industrial loans. . . . These loans were still lower at the year end than they had been at the end of 1953. The increases in the total were in large part the result of increases in real-estate loans, in loans to brokers and dealers, and to others for purchasing and carrying securities, and to a minor degree in agricultural loans.” But after this admission of the way in which government policies stimulated a booming stock market, the CEA and the President deplore the “overemphasis of speculative activity!”