Who Makes Inflation?

February 9, 1959

The Economic Report of the President reflects the same schizophrenic attitude toward spending vs. economy, inflation vs. dollar-integrity, as his Budget Message. At one point he declares: “An indispensable condition for achieving vigorous and continuing economic growth is firm confidence that the value of the dollar will be reasonably stable in the years ahead.” But most of the report endorses policies that would clearly undermine this confidence.

Describing governmental actions that helped “to bring about a prompt and sound recovery” he says: “Monetary and credit policies were employed vigorously to assure ample supplies of credit. Legislation was enacted to lengthen temporarily the period of entitlement to unemployment benefits. Numerous actions were taken to spur building activity. Steps were taken to accelerate Federal construction projects already under way and to speed up projects supported by Federal financial assistance. Activities under a number of Federal credit programs, in addition to those in the housing field, helped counter the recession. And the acceleration of defense procurement exerted an expansive effect.”

WHO PRINTS MONEY?

Every one of these policies was inflationary. All of them meant pouring new money and credit into the system, increasing the supply of dollars, reducing their individual purchasing power. In a later part of the report it is admitted that the Federal Reserve policies enabled the commercial banks “to add nearly $10 billion in loans and investments to their assets,” largely by “additions to their holdings of U.S. Government securities.” This in turn added $13.6 billion to the total money supply (including inflated time deposits), and helped to boost living costs.

Yet the President’s report blurs responsibility for inflation and tries to shift it onto consumers, business, and labor. The “individual consumer” is advised to “shop carefully for price and quality”—as if he couldn’t be depended upon to do that without urging. The government in effect is saying to consumers: “Here are $10 billion or more additional paper dollars; but don’t be reckless enough to spend them, because it will make you responsible for raising prices.” “Businessmen” are told they “must wage a ceaseless war against costs”—as if self-interest and self-preservation did not insure that. But nothing is said about Federal labor laws (including compulsory exclusive “bargaining”) which render the employer all but impotent in resisting excessive demands. And “leaders of labor unions” (after having been granted monopolistic bargaining powers by law) are urged not to ask as much as they can get under these conditions. This means that they would not last very long as labor leaders.

THE REAL CULPRIT

The President goes on to declare: “If the desired results cannot be achieved under our arrangements for determining wages and prices, the alternatives are either inflation, which would damage our economy and work hardships on millions of Americans, or controls, which are alien to our traditional way of life and which would be an obstacle to the nation’s economic growth and improvement.” What the President seems to be saying is that it is consumers, businessmen, and labor leaders who threaten to bring inflation by lack of “self-discipline and restraint,” and that they may “force” government controls. But the real culprit is government. Government must stop deficit spending, stop flooding the country with more paper dollars, and stop encouraging monopoly in the labor field while blaming “our free competitive economy” for rising wages and prices.

Perhaps the most important recommendation in the Economic Report is that Congress “amend the Employment Act of 1946 to make reasonable price stability an explicit goal of Federal economic policy, coordinate with the goals of maximum production, employment, and purchasing power now specified in that act.” Well, if the mischievous Employment Act of 1946 is to be retained, this amendment on net balance would probably make it less mischievous, because the act has been constantly interpreted as a directive to inflate. But an immensely better solution would be to repeal the act altogether.