Unstable Paradise

September 12, 1955

The unparalleled boom we are now enjoying is not confined to this country, but largely shared by Europe. Recent dispatches from there have reported that virtually every major industrial region is operating under conditions of “full employment.”

This is no mere coincidence. When major countries operated under an international gold standard, and when trade among them was comparatively free, it was only natural that prosperity (or depression) in one area should spread to others. And though the world today is much less of an economic unit than it used to be, though each country tends to pursue its own paper-money policy and to erect all sorts of barriers to imports, this mutual influence still holds to some extent.

But what has mainly caused the widespread full employment of today is the political popularity of “full-employment policies” within every nation. These are also supported by the intellectual prestige of Keynesian doctrines. And in any case, who can argue against “full employment”?

Yet there is a fly in the ointment. Hurricane warnings trouble this paradise. What threatens to cause hurricanes is not the end-result sought. Full employment (when the phrase is appropriately defined) is both a desirable end in itself and a necessary means for the achievement of such wider ends as maximum production and maximum consumer welfare. The real trouble lies in the means being used to bring full employment about.

The most desirable way to bring about enduring “full employment” is to provide a stable currency, and to keep prices, wages, and interest rates free, competitive, and flexible, so that a workable dynamic relationship can be constantly maintained between one price and another, one wage and another, between prices and costs, prices and wages, payrolls and profits.

But this is not what the leading nations of the Western world are doing today. They have achieved their present full employment by monetary inflation—that is, by steadily increasing their supply of money and credit. The United States money supply (bank deposits plus currency outside of banks) increased from $204 billion in May a year ago to $213 billion in May of this year. In a roughly corresponding period, in leading European countries, we find a money increase in England from 5.32 to 5.43 billion pounds sterling; in Germany from 23.4 to 26.1 billion marks; in Italy from 3,523 to 3,956 billion lire; in Belgium from 180 to 190 billion francs, and in France from 4,664 to 5,312 billion francs.

A defense which will doubtless be offered in at least several cases is that this increased supply of money was not created by deficit financing but by an effort of the banks to “meet the legitimate demands of business.” This sort of defense overlooks the fact that both in America and in most European countries money rates have been kept artificially low through government policy. It is these low interest rates that have encouraged dubious borrowing and thereby increased the money and credit supply.

Inflation produces its alleged miracles by temporarily increasing volume of sales and profit margins. But the full employment that follows from this always produces union demands for increased wage rates. Once these increased wage rates are granted, they threaten foreign or domestic sales through increased prices, or threaten to wipe out profit margins. This is the fear that haunts European governments today. The Keynesian “cure” is to inflate the currency a little more, in order to restore profit margins and consumer purchasing power. This is the inflationary spiral, which may so easily get out of hand.

In brief, the blessings of full employment obtained through inflation are unstable and dangerous. The government that embarks upon such a policy is like a juggler forced to keep more and more china plates in the air and dreading a single miss. That is why interest rates are being raised everywhere, why there are fears of a new round of inflation, and why the world is now likely to see increasingly serious discussion of a return to more orthodox measures.