Repressed Inflation

September 6, 1948

In Kyklos, a quarterly published in Bern, Switzerland, the European economist Wilhelm Röpke in 1947 diagnosed the central economic disease of Europe as “repressed inflation.” The truth of this diagnosis has become increasingly clear. The disease it describes prevails today not only in Europe but in Asia, Africa, and Latin America. It has been imposed on postwar Germany and Japan with the energetic cooperation of our American administrators. It is the disease which President Truman would unwittingly impose on the United States itself. We should do well, therefore, to study the nature, origins, symptoms, prognosis, and cure of this malady.

Repressed inflation begins, like open inflation, by printing too much money in relation to goods. This may be caused by a war, by an occupation, by a cheap-money or a so-called “full-employment” policy, or by some combination of these. Under an open inflation the effect of too much money would be a general increase of incomes, prices, costs, and foreign exchanges. The government wishes to avoid these soaring internal prices and foreign exchanges, but it refuses to abandon the inflationary fiscal and monetary policies that cause them.

Therefore it forbids the excess of monetary demand to result in increased prices, costs, and exchange rates. For free markets it tries to substitute a system of ceiling prices combined with rationing, allocations, import prohibitions, and exchange control—in short, a network of coercions, all under the euphemistic name of planning.

Every economic transaction becomes politicized. Even money no longer has any definite value except when combined with ration coupons or some discriminatory license. An open inflation, it is true, causes crying injustices and leads to unbalanced production. But a repressed inflation is even worse. It adds stagnation to unbalanced production and unjust distribution.

Under repressed inflation the budget usually remains unbalanced. Low interest rates are arbitrarily maintained. These encourage excessive borrowing and further monetization of the public debt. To counter its own inflation the government is constantly compelled to increase its counterpressure or repression.

The whole system of compulsory values becomes constantly more fictitious. Unbalanced production, chaos, and stagnation assume more alarming proportions. The population reacts by mounting discontent, distrust, disobedience, and bewilderment. The government is finally left with no choice but to admit its defeat or to resort to complete totalitarianism. The bureaucrats argue that they must keep their coercive controls until production has increased enough to relieve the pressure of inflation and to enable them to dismantle the control machinery. They think they can close the gap between money and goods by increased production. But they fail to recognize that it is exactly their repressive controls that are stifling production. They refuse either to mop up the previous surplus of money that has caused the inflation or to balance their budget and discontinue their cheap-money policies. So the gap between goods and money tends to become greater rather than less.

Most of the advocates of repressed inflation still talk as if their country were a besieged fortress where a given amount of goods had to be distributed equally. They cling to the melancholy ideal of a “poorhouse socialism.” They overlook the fact that their real problem is to increase production. And they adopt precisely the measures that prevent this. Their policies finally force the emergence of black markets.

Economically (though not politically) the cure for repressed inflation is simple. It is, on one side, to mop up surplus money, to balance the budget, and to halt the further expansion of money and bank credit. On the other side, it is to throw out price and exchange controls and to let prices and production be determined by free markets and free competition. This is the only way to get maximum balanced production of goods consumers want.