More Inflation Ahead?

March 30, 1959

Notwithstanding all the reassurances from Washington, the American public believes that inflation is here to stay. It has been saying this by its actions—most dramatically in the stock and bond markets. On March 13 the Dow-Jones industrial average reached 615, up 175 points from April 7 of last year. As one shrewd observer put it: “The stock market is in orbit. It has been thrust free of the gravitational pull of a declining bond market.” The Dow-Jones stocks have been selling at 21 times their $29 1958 earnings and at seventeen times even of a projected $36 for 1959 earnings. As of March 11, the average yield of 500 common stocks, as compiled by Standard Statistics, was only 3.23 percent, compared with an average yield of 4.20 percent for A-l bonds.

The rise of stocks and the decline of bonds have been twin results of an inflationary psychology. Momentary breaks do not necessarily herald a reversal of this longtime trend. Regardless of what stocks are at present yielding, holders believe that inflation will cause them to sell still higher in the future (if only in terms of a further depreciated dollar), and that they will receive, if not a good yield, at least a “capital gain.” For the same reason “safe” bonds even at a 4 percent yield do not interest investors when they expect the dollar face value of these bonds to decline in real purchasing power.

REASONS FOR FEAR

This spreading belief that inflation is here to stay, this resignation and adjustment to it, is premonitory. It helps to create or intensify the very consequences it fears. And it is not set at rest, but increased, by complacent assurances from congressmen that there is really nothing to it—just a baseless bugaboo. For the business and financial community merely draws the conclusion that Washington even now refuses to recognize the danger, or to take the steps necessary to avert it.

The business community judges the outlook not merely by what is said but by what is done. Here are reasons that lend substance to its fears:

1—After twenty years of inflation most congressmen still do not understand that the basic cause of inflation is the increase in money and credit. The active money supply has been expanded from $36 billion at the end of 1939 to $138 billion at the end of 1958—an increase of 283 percent.

2—With one rationalization after another, there have been 25 budget deficits in the last 29 years, during which the national debt has risen from $16 billion to $285 billion. The public believes that deficits are here to stay. Few persons believe that even the President’s proposed budget for 1960 would really balance at $77 billion. We are certain to have a dangerous deficit if the Congressional spenders have their way.

3—The Federal Reserve authorities showed reassuring courage when they raised the discount rate of four reserve banks from 2½ to 3 percent on March 6. But this also called attention to the lack of courage and wisdom they showed in dropping the discount rate from 3 percent to the inflationary level of 1¾ percent last year. In the last quarter-century the Federal Reserve Board has been under practically continuous pressure to keep inflating. Over the long run it has yielded to this pressure. When it acts with restraint and courage, as now, it is subjected to a political barrage. Typical is the statement of Senator Douglas (who knows better) that: “This action certainly seems extraordinary in view of the 4.7 million people who are fully unemployed and the equivalent of another 1 million who suffer from involuntary part-time employment.”

4—The chief reason for present unemployment, with inflation, is the excessive wage rates imposed on employers, particularly by industrywide unions such as those in automobiles and steel. These unions have been pricing their members out of the market. Yet as long as they keep automatic escalator clauses in their contracts, even more inflation is unlikely to float them into full employment.

5—The only way in which this process can be stopped is by modification or repeal of Federal labor laws passed since 1932 which make employers impotent to combat unreasonable demands. But Congress shows not the slightest interest in or stomach for such reform.