Return to Inflation

July 13, 1953

The Eisenhower Administration started out bravely to halt inflation. It refused at first to resume Federal Reserve support of government securities. It tried to get away from the inflationary policy of financing Treasury deficits by short-term notes, certificates, and bills sold to the banks. It resolved to start financing itself with long-term bonds, even though it had to pay 3¼ percent. But as soon as interest rates, as an expected consequence, became a little tighter, a chorus of complaints came from Congressmen, labor officials, bankers whose old bond holdings were dropping in value, and business firms which had to pay more for borrowing. The Administration took fright. In mid-May, the Federal Reserve System began purchasing Treasury bills in the open market. By June 17, it had bought $525,000,000 of government securities.

Then on June 24 it took the most inflationary step of all. It reduced the reserve requirements of member banks. This action, it estimated, would release $1,156,000,000 of reserves, which in turn would give the country’s banks another $5,780,000,000 or so in lending power. All this was frankly done in anticipation of Treasury needs of some $6,000,000,000 of “new money” in the next three months.

Between the end of 1939 and the end of April this year, the country’s supply of money and bank credit was increased from $64,700,000,000 to more than $195,000,000,000. This tripling of the money supply is the inflation that everybody talks about. It is the primary reason for the great increase in prices. Now the government wants to increase the money supply by $6,000,000,000 more. It is back in the business of printing fiat money for deficit financing.

It is being said in apology for the Federal Reserve action that the system could not help itself. The deficit at the end of the fiscal year just closed was $9,389,000,000, the largest in peacetime history. The deficit expected for the fiscal year just begun is $6,000,000,000 to $7,000,000,000.

As one commentator has shrewdly put the matter: “So long as the government runs a deficit the deficit will control the money managers and not the money managers the money.” Yet this is only partly true. The Treasury could conceivably finance the deficit by long-term bonds paid for out of real savings. But it just doesn’t want to pay the interest rate which this would involve.

The new Administration, moreover, cannot escape responsibility for the state of the budget. Mr. Eisenhower was in charge of spending for nearly six months of the fiscal year just closed. He will be in charge of spending for the entire fiscal year just begun. In spite of heavy spending commitments carried over from the Truman Administration, Mr. Eisenhower is not powerless. He could cut the budget in scores of places where he has not done so. There is no sound economic reason, but only political reasons, for the billions we are paying out for high support prices for farm commodities. There is no longer any impelling reason (if there ever was one) for giving billions of the taxpayers’ money away to foreign countries. Yet we are in fact planning to give some $6,500,000,000 away (or just about the amount of the expected inflationary deficit) in the present fiscal year. Several of his statements and actions, indeed (including his appeal to Congress for power to give away “surplus” food to foreign countries) indicate that Mr. Eisenhower has been infected by Mr. Truman’s foreign handout ideology.

In brief, on top of an inflation that the Democrats have been building up for twenty years, a Republican Administration is planning another heavy dose of inflation. This record demolishes the entire dream-theory that we can depend for salvation on something called “governmental contracyclical policy.” Governments know only how to inflate; they have no stomach for halting an inflation, and never try until it has gone so far that it cannot be stopped without threatening a crisis. The best contracyclical policy is to deprive governments of the power to inflate.