Our Forty Year Inflation; H. Hazlitt

nine or ten years old. They could hardly help doing so, because the official figures issued each month of wholesale and consumer prices are stated as a percentage of prices in 1967. Thus the consumer price index for June of 1976 was 170.l. That was 0.5 per cent higher than in the preceding month and 5.9 per cent higher than in June of the year before. This means that consumer prices were 70 per cent higher than in 1967, a shocking increase for a nine-year period. The annual increases in consumer prices ranged from 3.38 per cent between 1971 and 1972 to more than 11 per cent between 1973 and 1974. The overall tendency for the period was for an accelerating rate. The purchasing power of the dollar at the end of the 579 580 THE FREEMAN October Chart A '76'75'74'73'72'71'70 INDEX OF CONSUMER PRICES (1967=100) '69'68 160 I-----+---+---..------r------r----.---__+--~-____i 120 I-----+----+-----+-~~--+-----+100 liIIII!!!:==----L __--l-__-I--_--L. __--l.---;-_...L.-_---L __---L..-_-----J 1967 140 ~--+---+----+__-__+--__+_--+_--'-__+--_+_-____i 180 Table A Purchasing Power Money Stock Consumer of the Year (M2) Price Index Consumer Dollar 1967 100.0 100.0 100.0 1968 108.9 104.2 96.0 1969 116.2 109.8 91.1 1970 121.0 116.3 86.0 1971 135.0 121.2 82.5 1972 149.3 125.3 79.8 1973 163.6 133.1 75.1 1974 177.4 147.7 67.6 1975 191.0 161.2 62.0 1976 218.7e 173.ge 57.5e e Estimated from data through June.

1976 OUR FORTY-YEAR INFLATION 581 period was equivalent to only about 57 cents compared with just nine years before. Starting in 1933 But the inflation may be dated from as early as 1933. It was in March of that year that the United States went off the gold standard. And it was in January of 1934 that the new irredeemable dollar was devalued to 59.06 per cent of the weight in gold into which it had previously been convertible. By 1934, the average of wholesale prices had increased 14 per cent over 1933; and by 1937, 31 per cent. But consumer prices in 1933 were almost 25 per cent below those of 1929. Nearly everybody at the time wanted to see them restored toward that level. So it may be regarded as unfair to begin our inflationary count with that year. Yet even when we turn to a table beginning in 1940, we find that consumer prices as of 1976 are 314 per cent higher than then, and that the 1976 dollar has a purchasing power of only 24 cen ts com pared with the 1940 dol lar.

These results are presented herewith for each year in two tables and three charts. I am indebted to the American Institute for Economic Research at Great Bar rington, Massachusetts for compil ing the tables and drawing the charts at my request. The figures tell their own graphic story, but there are one or two details that deserve special notice. In the thirty-six-year period the nation's money stock has increased about thirteen times, yet consumer prices have increased only a little more than four times. Even in the last nine of those years the money stock increased 119 per cent and consumer prices only 74 per cent. This is not what the crude quantity theory of money would have pre dicted, but there are three broad explanations: Measurement Is Arbitrary First, measuring the increase in the stock of money and credit is to some extent an arbitrary procedure. Some monetary economists prefer to measure it in terms of what is called M-l. This is the amount of currency outside the banks plus demand deposits of commercial banks. The accompanying tables measure the money stock in terms of M-2, which is the amount of currency outside the banks plus both the demand and time deposits of commercial banks. M-1, in other words, measures merely the more active media of purchase, while M-2 includes some of the less active. I have used it because most individuals and corporations who hold time deposits tend to think of them as ready cash when they are considering what purchases they 582 THE FREEMAN Chart B October INDEX OF CONSUMER PRICES (1940=100) ~ ( J / V ~~ ~ / r / 500 400 300 200 100 1940 '45 '50 '55 '60 '65 '70 '75 '80 can afford to make in the immediate or near future. But in recent years time deposits have grown at a much faster rate than demand deposits.

So if one uses M-2 as one's measur ing stick, one gets a much faster rate of increase in the monetary stock than by using M-l. (The latter has increased only eight times since 1940.) Rising Productivity Second, one very importan t rea son why prices have not gone up as fast as the monetary stock is that both overall production and produc tion per capita have risen steadily almost year by year. With the con stant increase in capital invest ment-in the number, quality, and efficiency of machines - both overall productivity and productivity per worker have risen, which means that real costs of production have gone down. Delayed Reactions The third explanation has to do with subjective reactions to increases in the money stock. Sta1976 OUR FORTY-YEAR INFLATION Chart C 583 r\ PURCHASING POWER OF THE CONSUMER DOLLAR "(1940=100) ~ 1\ \ "'-'-~-...-.. ~ ~ '""~ \ 1\ 100 90 80 70 60 50 40 30 20 1940 '45 '50 '55 '60 '65 '70 '75 '80 tistical comparisons in numerous countries and inflations have shown that, when an inflation is in its early stages, or has been com paratively mild, prices tend not to rise as fast as the money stock is increased. The fundamental reason is that most p,eople regard the inflation as an accidental or unplan ned occurrence not likely to be continued or repeated. When an inflation is continued or acceler ated, however, this opinion can change, and change suddenly and dramatically. The resul t is that prices start to rise much faster than the stock of money is increased.

The great danger today is that what has been happening from 1939 to 1976-to prices as compared with the rate of money issue - may have given a false sense of security to our official monetary managers as well as to most commentators in the press. The enormous increase in the American money stock over the past thirty-five to forty years must be regarded as a potential time bomb. It is too late for continued compla cency.

584 THE FREEMAN October Table B Purchasing Power Money Stock Consumer of the Year (M2) Price Index Consumer Dollar 1940 100.0 100.0 100.0 1941 113.2 105.1 95.1 1942 128.9 116.4 85.9 1943 162.9 123.6 80.9 1944 193.5 125.6 79.6 1945 229.4 128.5 77.8 1946 251.3 139.3 71.7 1947 264.5 159.4 62.7 1948 268.3 171.7 58.2 1949 267.2 170.1 58.8 1950 273.2 171.7 58.2 1951 283.3 185.5 53.9 1952 298.7 189.5 52.7 1953 310.1 191.0 52.4 1954 321.0 191.8 52.1 1955 332.8 191.2 52.3 1956 338.6 194.1 51.5 1957 347.5 200.8 49.8 1958 364.3 206.4 48.5 1959 381.3 207.6 48.2 1960 385.1 211.3 47.3 1961 405.3 213.5 46.8 1962 428.7 216.0 46.3 1963 456.4 218.6 45.7 1964 485.0 221.5 45.1 1965 523.9 225.2 44.4 1966 564.6 231.8 43.1 1967 607.9 238.3 42.0 1968 662.2 248.4 40.3 1969 706.3 261.7 38.2 1970 735.4 277.3 36.1 1971 820.8 288.9 34.6 1972 907.4 298.6 33.5 1973 994.8 317.2 31.6 1974 1,078.5 352.5 28.4 1975 1,160.9 384.2 26.0 1976 1,329.2e 414.3e 24.1e e Estimated from data through June.