The Policy Is Inflation

July 5, 1954

The Eisenhower Administration’s monetary policy has now become clear. It is the same as that of the Democratic New Deal and Fair Deal administrations—inflation. Conclusive evidence was supplied on June 21 when the Federal Reserve Board cut by $1.5 billion the reserve requirements of member banks. This will permit those banks to increase their loans by a total estimated from $7.5 to $9 billion.

There is little doubt regarding the primary reason why this was done. The federal government is still running a deficit. It is expected to borrow something like $10 billion between now and December. Their increased borrowing power will enable the nation’s banks to buy the government’s new securities and to pay for them, in effect, by creating new paper money.

The lowered reserve requirements will also permit the banks to create and lend additional money to business. They will enable the government itself to borrow cheaper. By allowing business to borrow at very low rates it is presumed that they will encourage business and employment and incidentally make the November elections safer for the Republicans.

This latest move of the Federal Reserve Board does not stand in isolation. Just about a year ago, on June 24, the Eisenhower Administration, which until a few months before had been making serious efforts to halt inflation, took the drastic inflationary step of reducing the reserve requirements of member banks to release at that time about $1,156 million of reserves. This was done to give the nation’s banks about another $6 billion in lending power—in anticipation of Treasury needs of some $6 billion of “new money” in the following three months. Since then, most of the Administration’s moves have been in the inflationary direction.

How necessary was this June’s new shot of inflation? Was it needed to pull the country out of a serious slump? On the contrary, it came on the same day that The New York Times’s combined average of 50 stocks reached the highest level in 24 years. It came when the latest cost-of-living index reached a level of 115 percent of the 1947–49 average, higher than a year before and within 1 percent of the highest monthly average ever reached by the cost of living. It came a week or two after the Treasury sold 91-day bills at an average yield of 0.616 percent, the lowest in seven years.

This low borrowing rate was not, of course, the result of any higher standing on the part of our Federal government’s credit. That government is still running a deficit, bumping against its legal debt ceiling of $275 billion and trying to get Congress to lift the ceiling still farther. The low money rate is the result chiefly of an abundance of paper money and manufactured credit. As compared with $64.7 billion in 1939 (total bank deposits and currency outside of banks), the money supply had been more than tripled up to April of this year to $202.3 billion. This increase in the money supply is overwhelmingly the main reason for the rise in prices and living costs in the period.

How does it come about that a Republican administration, manned in the main by conservatives, and originally determined to halt the New Deal-Fair Deal inflationary policies, should end by continuing most of them? It is because the more politically powerful and belligerent section of public opinion, represented by CIO leaders, farm organization leaders, many business leaders and college professors, have become habituated to inflation and cannot tolerate its termination. Today, at the slightest sign of readjustment, we get the jitters and talk about another major depression.

We are all Keynesians now. We are all monetary inflationists. And everything would be fine if the Keynesian theory were really true that full production and employment could be uninterruptedly maintained, and no dangerous or debilitating consequences would follow, by the “correct” dose of monetary inflation at the slightest sign of a setback, and that all the orthodox and old-fashioned methods of readjustment were not only intolerable but quite unnecessary.