Inflation without Tears?

April 27, 1953

A book just published, Money, Men and Machines, by Waddill Catchings and Charles F. Roos (Duell, Sloan & Pearce-Little, Brown, $2.50), attempts to supply a new answer to the problem of how to avoid both “inflation” and “deflation” and still keep continuous full employment.

Catchings is chiefly known as co-author with William T. Foster of Money (1923) and Profits (1925). Roos was director of research for the NRA and is now president of the Econometric Institute in New York. Their book is short, lucid, handsomely printed, and extremely readable. It contains, among other merits, a well-reasoned argument for economic freedom and an excellent description of the workings of what the authors call the “price-and-profit mechanism” in our system of private competitive enterprise.

But the answer that the book offers to the problems of “monetary management” is vague and disappointing. The authors are opposed both to the orthodox solutions of the past and practices of the present. They accuse the Federal Reserve Banks of “mismanagement of our money supply” in 1929, in 1937, and in 1948–49. They don’t like what they call the Reserve Board’s “zigzag methods of monetary manipulation,” by which they mean the lowering and raising (especially the raising) of discount rates.

They speak constantly of the dangers of a “dear-money policy” but never define “dear” money. “Throughout much of 1951 and 1952,” they write (p. 109), “the Federal Reserve System pursued a dear-money policy. The result was that the long-term interest rate rose by more than 10 percent, and the short-term rate by more than 50 percent.” These increases, calculated in this way, sound startling. But the authors neglect to tell us that even after this “dear-money” policy the average interest rate on four-to-six months’ prime commercial paper in 1952 was only 2.33 percent, and on three- month Treasury bills only 1.76 percent. On the best-grade corporate bonds the average yield in 1952 was 2.96 percent—as compared with an average yield of 5.07 percent, for example, in the ten years from 1920 to 1929 inclusive. If the short- and long-term interest rates of 1952 represented “dear” money, it would be interesting to know what the authors’ idea is of really cheap money.

Their own proposals, as I have said, are vague. The Federal Reserve Board is to be “directed to provide a supply of money that is adequate but not excessive.” This is not a solution, but merely a statement of the problem, which is precisely how to determine what money supply is “adequate” and what is “excessive.” “It is only necessary for Congress to declare that the purpose of managing money is to provide the people with the amount they need to produce according to their ability and desire.” This is just as nebulous.

Catchings and Roos don’t like the international gold standard: It “sacrificed domestic prosperity for the stability of foreign exchange.” And instead of control of the money supply through changes in the discount rate, they prefer the clumsier method of changing reserve requirements. But they do not consider what the effect of this would be on interest rates, nor do they tell us whether they would try to change reserves or reserve requirements while forbidding consequent changes in interest rates.

In short, the reasoning of the authors, on their central proposal, is confused. By an “adequate” supply of money, they obviously don’t mean an unchanged supply. “To be adequate, our money must increase regularly from year to year.” The wage-price spiral, they correctly tell us in italics on page 90, exists “only because the Reserve Board allows the money supply to increase.” But on page 101 we learn that if a wage-price spiral does start, we must provide more money to sustain it.

The basic proposals of Money, Men and Machines would be inflationary in effect. If we intend to halt inflation, we must begin by allowing interest rates to rise. And eventually we must return to a real gold standard.