Is Inflation the Cure?

July 30, 1962

The chief economic problem of this country in the last generation has been inflation. This is reflected in 26 deficits in the last 32 years; in a growth of the national debt from $16 billion in 1930 to $298 billion today; in a fourfold expansion of the money supply—from total bank deposits and currency of $68 billion at the end of 1939 to $282 billion today; and in a fall in the purchasing power of the dollar to less than half of its 1939 level.

We cannot throw all this into the past tense. In the fiscal year just closed there was a deficit of $6.3 billion. When the Treasury announced the new depreciation schedules for business, it estimated that the changes would mean a tax cut of $1.5 billion in the first year. But Senator Byrd had already estimated a probable deficit in the current fiscal year of $6 billion. One more item: This year consumer prices have risen nearly every month to a new high level.

BALANCE OF PAYMENTS

The problem that has been worrying government authorities for more than four years has been the deficit in the country’s balance of payments. This amounted to $3.5 billion in 1958, to $3.7 billion in 1959, to $3.9 billion in 1960, and to $2.4 billion in 1961. So far this year, according to a recent statement of Treasury officials, the deficit has been running at a rate of “only” $1 billion to $1.5 billion a year. But this is no ground for complacency. For the deficit is cumulative. The latest figures mean that it has totaled $14 billion in the last four and a half years. This is reflected in a rise in short-term liabilities to foreigners to more than $23 billion, and in a constant fall in our gold reserves, now down to $16.3 billion, the lowest level in 33 years.

This deficit in the balance of payments is being treated by our officials as if it were the cause of our difficulties. It is in fact the consequence of our policies. The real evil is our inflation. This is the cause of the deficit in the balance of payments. For it raises our costs and prices to a point where we can compete less successfully with foreign producers. It makes this country less attractive to buy from and easier to sell to. In addition, our artificially low interest rates make it less profitable for foreigners to invest funds here and more profitable for Americans to invest funds abroad. Finally, gold at $35 an ounce (almost the only thing that hasn’t risen in price in 28 years) seems to many foreigners the biggest bargain we have to offer.

A SLASH IN SPENDING

The problem, to repeat, is inflation. Yet almost everybody has suddenly begun to talk as if the problem were not enough inflation. Almost everybody has begun to demand a tax cut. And most of those who demand the tax cut want it in order to make sure that we will have a thumping deficit in the current year. The deficit of $7 billion in the year just closed is being ignored; so is the prospect of a $6 billion deficit this year, even without a tax cut. Because of the political hazards of asking for a tax cut, the Administration is reported to be looking into the possibilities of speeding up Federal spending as an alternative.

The great fear is that the next deficit may not be big enough. The theory is that we need to pump more “purchasing power,” i.e., more money, into the economy. The theory, in brief, is that we need another dose of inflation.

The country, in other words, is still bewitched by the Keynesian fallacies, still enchanted with inflation. Do we (even though employment is at record levels) have more unemployment than we like? Then let nobody ask whether excessive wage rates in certain lines might be causing it. Let’s soak up all the unemployment by printing more money, by raising everybody’s cost of living. And let’s ignore the desperate need of maintaining confidence in the dollar.

The irony is that we do need a substantial tax cut to relieve the excessive burdens on and discouragements to production and investment. But accompanying that cut we need an even greater slash in government spending if we are to keep our economy sound and vigorous and free. But a major slash in our hysterical spending is something of which no one in politics now dares to speak.