Inflation Without Jobs

April 24, 1961

I have just received the English text of a speech delivered in Stockholm by the European economist L. Albert Hahn. It covers economic growth, saving, unemployment and inflation, and it applies with remarkable pertinency to our immediate problems.

On economic growth: “In every decade economists seem to be beset by some new panicky fear. In the ’30s it was the fear of secular stagnation through oversaving and lack of investment opportunities. Nowadays it is the fear of insufficient growth. This fear develops sometimes into a desire to foster growth at almost any price, and leads, in fact, to real growth fanaticism. Most people, of course, favor the growth of the national product; but only few seem to realize that in order to achieve a bigger national product people have to work harder, and to save more; the latter in order to increase the worker’s productivity by equipping him with more capital. The impression seems to prevail that an economy can, like Munchausen, pull itself by its own hair out of the mud of insufficient growth; in other words, that growth can be commanded at will. And the increase of the money supply is recommended as an appropriate means of such commanding. . . . [Yet] growth does not . . . depend on the amount of money in circulation, but on how much the people decide to work and save. It is, therefore, probable that the urge for growth will have inflationary effects.”

BIGGER MONEY SUPPLY

Defining inflation simply as an increase of money—bank notes plus demand deposits—Hahn points out that since 1939 the money supply in the U.S. has increased about fourfold while prices have about doubled. In the seven-year peacetime period from 1953 until today wholesale and consumer prices have risen by about 10 percent. What is alarming is not the extent of this depreciation, “but its happening during a period which included two recessions, 1953–54 and 1957–58. According to rule, prices should have declined again during the recessions; but they refused to do so. During the last of the two recessions they even continued to move up with the result that the next upswing started from an even higher price level.”

Suppose, now, looking at our own statistical picture a little more closely than Hahn does, we try to see why prices continued to rise. For one thing, the money supply continued to rise. Between the end of 1953 and 1954 it went up $3.7 billion; between the end of 1957 and 1958 it went up $5.3 billion. If we include time deposits, the increase in monetary media throughout the period has been uninterrupted and much larger.

HOURLY WAGE RATES

Now let us look at average hourly wage rates. Since the end of 1953 they have risen from $1.77 to $2.32—not 10 percent, like prices, but 30 percent. It is particularly instructive to notice that they went up from $2.29 in February 1960, to $2.32 in February this year. This happened in a recession, when unemployment rose from 3.9 million to 5.7 million.

Classical economists would agree that the increased wage rates increased the unemployment. By raising wages sufficiently high one can create any amount of unemployment. This is because wage-rate increases are cost increases. They destroy the profitableness of marginal enterprises and so reduce production. But under the sway of Keynesian doctrines, not only is it taboo to mention the wage level in connection with the extent of employment, but a discredited “purchasing power” theory creates political demands for boosting wage rates further. Hence the minimum-wage law agitation.

As nobody dares to suggest that our unemployment be corrected by a realistic wage-rate adjustment in the industries in which the main unemployment exists, Washington is seeking to cure it by another giant dose of spending and inflation, even though this must imperil the dollar.

And the economic and moral evils of that course (which I tried to point out myself last fall in a book called What You Should Know about Inflation) are explained with great cogency in an excellent little volume just published—An Inflation Primer, by Melchior Palyi (150 pages, Regnery, $4).