We Have Asked for Inflation

May 7, 1951

The main reason we have inflation in this country today is that, by and large, we have asked for inflation.

It is amusing to hear politicians talk of inflation as if it were a visitation from without, in spite of our will, like a flood, a hurricane, an army of locusts, or the bubonic plague. The truth is that we could stop inflation, if we wanted to, overnight.

Not by price control, of course, which is an irrelevant and completely fraudulent remedy for inflation, favored by some groups precisely because it can never really be successful. The government can halt inflation by the simple process of ceasing to create inflation. All it has to do is to keep the budget balanced (as it is in the current fiscal year) and stop monetizing its existing debt by buying its own bonds through the Federal Reserve Banks. If it did this, interest rates would go up for the simple reason that they were no longer artificially held down. And higher interest rates would discourage the expansion of private credit.

These steps alone might prove to be enough. If they weren’t, then the Federal Reserve authorities could take the initiative in selling government securities, raising discount rates and raising legal reserve ratios. That’s all. The Federal Reserve authorities already have practically all the powers they need; what has been lacking is the will to use them.

Inflation is caused by an increase in the volume of money and bank credit in relation to the volume of goods. Halt this increase, and the fear of any future increase, and you halt inflation.

We hear predictions that if the Federal Reserve authorities used their existing powers to halt inflation all sorts of terrible things would happen. It is true that outstanding government securities, lacking an automatic buyer at an artificial price, would fall. But this problem could easily be taken care of by allowing long-term bonds to be converted into new bonds at a higher rate of interest. We also hear predictions that commodity prices would stop rising, and might even fall. But the people who complain of this are admitting that they prefer the certainty of more inflation to the risk of even a little deflation.

And this brings us to the heart of the problem. Ever since 1932 the world has been haunted by the specter of deflation. Rather than face up to even a touch of it, people have asked for greater and greater doses of inflation. Since the end of the second world war, whenever there has been even a slight sinking spell in prices, there has been a resumption or speeding up of inflation as the cure.

The farmers have demanded subsidies, support buying, “parity” prices. Industrialists have granted huge wage increases and then demanded inflation in order to pay them. Labor-union officials seem secretly to welcome continuous price advances because then they can demand, and get, a continuous series of wage increases—thus proving to the rank and file how necessary the union officials’ services are. Most of us still retain the delusion that under inflation we can gain more in our role as sellers and producers than we must lose in our role as buyers and consumers.

The pressure on the politicians to continue a policy of inflation is enormous. For the fetish of today is “full employment.” This can be achieved, for a time, by continuously adding to the supply of money and credit while holding down the consequent rise in prices and wages just enough to assure that demand is kept always a little in excess of supply. The scheme works only by a tremendous growth in state power and by progressively depriving the people of more and more economic liberty by imposing price and wage control, allocations, rationing, labor direction. In the end it breaks down anyway, by demoralization of the currency.

But it will clarify thought in the meanwhile if we recognize that we are getting into this policy of “repressed inflation” because this is the policy we have been asking for. When we seriously want a halt to inflation we can get it within 24 hours. True, any attempt to halt inflation brings the risk of some deflation. But to refuse that risk is to ask for more inflation.