Is the Dollar Doomed?

April 21, 1958

Three events temporarily helped to slow down the panicky stampede in Washington to more inflation. The first was Bernard Baruch’s testimony before the Senate Finance Committee that “we must prevent further deterioration of the credit of the United States” and “reject all tax reduction and pump-priming proposals which require deficit financing.” The second was President Eisenhower’s warning the next day against hasty actions, including a major tax cut, to combat the slump: “You just are not going to get the economy . . . inspired and stimulated just by spending Federal money.” The third event was the Easter recess of Congress.

Unfortunately there are still serious factors on the other side. Baruch’s testimony was spoiled by his implied endorsement of price and wage controls. Within a few days of the time the President sounded his warning, he advocated an ill-considered increase in unemployment insurance, signed a $1.8 billion “emergency” housing bill, and abolished even the 2 percent down-payment requirement on mortgage loans guaranteed by the Veterans Administration. Congress rushed through several huge spending bills, including one to pump $1.8 billion in new Federal and state funds into highway construction, and the Federal Reserve Board proposed legislation to permit still further expansion of bank credit.

HALF ALREADY GONE

A warning of where such measures are likely to lead us, as well as an arresting summary of where they have already taken us, has just appeared in a study by Franz Pick: The United States Dollar: Requiem for a Dead Half (Pick Publishing Corp., N.Y.,30 pages, $25). “Whenever a currency loses more than half of its value in less than a generation,” he begins, “the unit is doomed. The United States dollar, in seventeen years . . . has declined to less than half of its 1940 buying power. This erosion cannot be halted.”

I hasten to say that I do not accept Pick’s defeatism concerning the American dollar. That defeatism seems to stem from a strange contradiction in his own economic philosophy. Though he is unsparingly sarcastic about the deceptions and consequences of inflation, he shares with the inflationists the belief that, “at a stable purchasing power of the dollar, the country cannot maintain full employment.” Neither theory nor history justifies this conclusion.

But Pick tellingly sums up what inflation has already done. It has debased the national debt. While that debt increased from a nominal dollar value of $49 billion in 1940 to $273 billion now, the purchasing power of this $273 billion debt, in 1940 terms, is only $133 billion. The government’s creditors, its bondholders, have been cheated out of billions in purchasing power.

GNP ILLUSIONS

One of the great illusions created by inflation concerns the growth of the national economy. Thus the gross national product (GNP) was estimated in 1940 at $101 billion and in 1957 at $433 billion. Here is an apparent growth of 330 percent. When the lowered purchasing power of the dollar is allowed for, this becomes a real increase of only 111 percent. When the increase in population is allowed for, this falls to a real per capita increase of only 61.2 percent. This, Pick tells us, means a per capita growth of gross national product in stable dollars “averaging not more than 3.6 percent per year.” Even Pick here understates his case. For if we figure, as we should, the average rate of increase from each year to the next, it falls to only 2.85 percent. Inflation has worked no miracles of real expansion.

I have said that Pick is wrong in contending that the erosion of the dollar cannot be halted. But no one familiar with the history of the last quarter century, or with the present Washington climate, will have the hardihood to argue that it will not be. The whole present clamor for increased spending on public works, major tax reductions, deficits, cheaper money, is a clamor for more inflation, for further deterioration of the national credit and further erosion of the dollar, in the desperate and delusive belief that this is the only alternative to recession and unemployment.