Start

An Inflation Primer

Melchior Palyi

AN INFLATION PRIMER INSTITUTE FOR PHILOSOPHICAL AND HISTORICAL STUDIES EDUCATIONAL SERIES Number 1 AN INFLATION PRIMER by Melchior Palyi T he Tyranny of a prince in an oli garchy is not so dangerous to the public welfare as the apathy of a citi zen in a democracy.- Montesquieu, Spirit of the Laws. HENRY REGNERY COMPANY CHICAGO 1962 © Copyright 1961 by IIenry Regnery Company Library of Congress card number 61-10743 Manufactured in the United States of America Second Printing 1962 The Institute for Philosophical and Historical Studies, Inc., 64 East Jackson Boulevard, Chicago 4, Illinois, is a non-profit corporation organized, among other purposes, to encourage and disseminate studies that are calculated to add to the understanding of philosophy, history, and related fields and their application to human endeavor. Books in the various Institute series are published in the interest of public information and debate. They represent the free expression of their authors and do not necessarily indicate the judgment and opinions of the Institute.

PREFACE Except for minor corrections and addi'tions, this study was completed in June, 1960, and delivered at the end of the following September. Publication having been delayed for over three months, the last chapter was rewritten to take cognizance of the "gold crisis" that has lately come to the fore. The idea to write a little book of this nature was suggested to the author nearly two years ago by the publisher, Mr. Henry Regnery. For many useful hints and observations, I am greatly obliged to Mr. Marion R. Baty, editor of the Economic Trend Line Studies (Chicago), and to Dr. Walter E. Spahr (New York). My sincere gratitude is due, especially, to Mr. Philip M. McKenna, Presi dent of the Kennametal, Inc., of Latrobe, Penn sylvania, for his inspiration and generous help. Chicago)January 17) 1961 MELCHIOR PALYI CONTENTS I. INFLATION'S SYNDROME ••....••..•••• 1 Galloping and Creeping Inflation .

"Legalized Robbery" Inflation Defined Creeping Inflation:-A Preview Where Does the Inflation Stand? II. THE Modus Operandi OF INFLATION ... 10 Productive Credit-Monetizing Real Purchasing Power Inflationary Monetization Liquidity-by Inflation The Central Engine of Inflation III. THE FOUNTAINHEADS OF INFLATION •..• 18 The Money-Printing Automat Managed Money-the One-Way Road Inflation by "Debt Management" IV. THE VICIOUS SPIRALS ••..•••••••••••••28 The Parable of the Horse and the Trough Cost-Push Inflation? Built-in Inflation v. RIDING ON THE INFLATION CREST ••.••••39 Spreading the Inflation The Fallacy of Built-in Stabilizers The Productivity Debate Labor Disincentives by Inflation Productivity and Capacity to Pay CONTENTS (continued) VI. THE CONSUMER (AND TAXPAYER) BE DAMNED .•.•.....••.•••••••••••48 Who Pays the Bill? The Pot Calls the Kettle Black Profit Inflation VII. THE "PHILOSOPHY" OF INFLATION •••••56 Opportunism Versus Principles "Mind Your Own Business"

Perpetual Prosperity without Tears The Rationale of the Cycle Progress or "Growth"? VIII. CREEPING INFLATION AND INTELLECTUAL HONE.STY •••••.•..••..•....••••.••71 How Much Is a Little? Cutting the Dog's Tail Piecemeal Power Versus Freedom Must We Follow the Kremlin? IX. CREEPING INFLATION'S BALANCE SHEET: THE LIABILITIES ...........•...••••• 84 Progress by Inflation The Liability Side Borrowing a Living Standard "People's Capitalism" x. THE BURDEN OF THE NATIONAL DEBT ••• 98 Is It a Burden on the Nation? The Economics of the Debt Fiscal Legerdemains Falsifying the Bank Balance Sheets CONTENTS (continued) XI. THE CURSE OF THE DEBT 110 The "Rationale" of Inflation Fictional Finance and Monetization Expanding on Overdraft Debt Liquidation Creeping Inflation's Suicide XII. THE DOLLAR ON THE SICK BED .••••••••119 "Good as Gold" The Sick Balance of Payments Dollars in Oversupply Can the Balance of Payments Be Redressed?

XIII. THE SAD PREDICAMENT OF THE FOOL'S PARADISE •••••••••••••••••••••••••128 Heading for Insolvency Erosion-How Much Longer? At the End of Creeping Inflation's Rope APPENDIX 0 •••0 ••••0 •••0 •••••0 0 •••135 BIBLIOGRAPHY ...••..•..•.••.••.•...••.•0 144 INDEX ••.•o •• 0 ••••0 .•• 0 •• 0" ••' ••••0 •••0 •••147 I INFLATION'S SYNDROME GALLOPING AND CREEPING INFLATION In the summer of 1923, the German inflation was rapidly heading toward the grand finale: total repudiation of the currency. As an instructor in a Berlin college, this writer drew a monthly salary that had been raised from an inflated 10,000 marks or so in early 1922 to 10,000,000 marks by July, 1923, and the whole amount was being paid twice a month; then, once every week; then once each day. The next step to meet the skyrocketing living costs was to pay us twice a day, in the morning and in the afternoon. Just after 5 P.M. one day in late August, 1923, I was walking down the staircase of the school, carrying the day's second haul of ten million marks (the day's first paid for a modest lunch), when the professor of physics overtook me. "Are you tak ing the streetcar?" he asked. "Yes," I said. "Let's hurry. The fare will be raised by 6 P.M. We may not be able to pay.it."

Galloping inflation threw the German economy into virtual chaos and demoralized large segments of the German people. Adolf Hitler was the ulti mate outcome. But at least it did not last long. 1 AN INFLATION PRIMER Presently, we are living almost a lifetime with creeping inflation that is supposed to go on indefi nitely-without accelerating. Admittedly, the gal loping kind is pernicious. Not so, we are being assured, the creeping type; the advantages of the latter far outweigh whatever unfavorable reper cussions there may be. Anyhow, we have (al legedly) no other choice but to continue what we have been doing for the last two decades or longer, and let the dollar's purchasing power slide further -at a leisurely rate. "LEGALIZED ROBBERY" According to the U.S. Bureau of Labor Statis tics, the index of (average) consumer prices has risen from 1939 to mid-1960 from 100 to 209-the purchasing power of the dollar declined from 100 to less than 48. This is what a former French pre mier, Paul Reynaud, called "legalized robbery."

Indeed, it is confiscation without compensation. The victims are deprived of their purchasing power. This is "robbery" on a national scale-a surreptitious levy on liquid income and wealth, raised in a haphazard fashion, with no regard for ability to pay, no respect for the rule of law, for equity and justice. It penalizes the saver, espe cially, and the honest producer, while the lucky operator and the political manipulator may reap unearned rewards. It is legalized, of course, the government itself being the culprit. 2 INFLATION'S SYNDROME Formal legalization does not confer justice by any economic or ethical standards. The free-enter prise system stands on the pillar of the inviola bility of contracts; this pillar is weakened as the value of money is impaired. "Legalized robbery" is a universal feature of counterfeit money, one created by government fiat. It is the product of deliberate, arbitrary meas ures, not of economic processes. It generates in the political arena, from which the effects spread to the market place. The powers that rule-over fiscal and central banking policies determine, in effect, whether there will be inflation, how much, and for how long.

INFLATION DEFINED To be sure, not every rise of prices qualifies as inflation. Sporadic oscillations should be disre garded. Nor is it of interest in our context if the rise has been brought about by an expansion of gold mining or gold imports. Price levels may rise under the purest gold standard, but to a limited extent only. Gold is a very scarce commodity; paper is not. "Gold-inflation," if any, is self-correct ing; paper inflation is limited only by the total collapse and repudiation of the currency. It is the inflation of the money volume-paper currency .. and bank deposits-that creates the fact and maintains the expectation of a disproportion between the total supply of goods for sale and the 3 AN INFLATION PRIMER total amount of purchasing power people have and are ready to use. Hence the definition; Money creation· is inflationary when the additional pur chasing power has no counterpart in goods and services people want to buy-when too much money chases too few goods.

In other words, inflation is a condition of the economy in which a rising volume of created money brings about rising production costs, higher prices, and increasing costs of living. Inflation tends to "feed on itself." The longer it lasts, the stronger the expectation that it will con tinue. People borrow, spend, and speculate more freely·than they otherwise would. The money cir culation is accelerated, the average dollar does ad ditional work, and prices are boosted additionally. CREEPING INFLATIONA· PREVIEW The purchasing power of the dollar is measured by a weighted index number of retail prices re lated to a base period. The measure is far from exact; it is merely an indication of the trend, or drift. And "drift"-upward-our living costs have, year after year since 1933, almost without inter ruption. At that, the consumer price index does not account for everything we buy. It is tailored to the household budget of the "average" worker who spends little on books, colleges, trav~l, hotels, and similar luxuries; the cost of personal services bought by the consumer is understated, too. And 4 INFLATION'S SYNDROME no price index can do justice to changes in the quality of goods we buy or to the price effect of trade-ins.

An idea of what inflation means is conveyed by the table. DETERIORATION OF FIXED-DoLLAR-VALUE ASSETS HELD BY INDIVIDUALS· %Depreciation of Purchasing Power of DollarYear 1940 . 1941. . 1942 . 1943 . 1944 . 1945 . 1946 . 1947 . 1948 . 1949 . 1950 . 1951. . 1952 .. 1953 .. 1954 . 1955 . 1956 . 1957 .. 1958 . 1959 . Total Assets (billions) $126.7 133.3 140.7 162.9 197.7 237.0 272.5 283.2 290.9 297.0 306.3 313.3 328.5 346.8 366.7 383.4 399.6 418.2 437.6 459.6 1.25 10.02 7.25 2.89 2.16 2.13 15.40 9.29 1.32 2.05 7.34 4.02 0.68 1.14 0.81 0.23 3.09 3.31 1.22 1.61 Loss of Purchasing Power of Assets (billions) S 1.6 13.4 10.2 4.7 4.3 5.0 41.9 26.3 3.8 6.1 22.5 12.6 2.2 4.0 3.0 0.9 12.4 13.8 5.4 7.4 Total loss $201.5 ·Compiled by American Institute for Economic Research, Great Barrington, Mass. The fixed-dollar-value assets include mortgages, bonds, bank deposits, savings accounts, the paid for insurance and social security -claims, etc. held by individuals. And these savings of individuals account for about 60 per cent of the annual capital 5 AN INFLATION PRIMER accumulation. In twenty years they lost a total of $201.5 billionl By that much, the debtors grew richer-or did they really? We shall see. This much is certain: the debts of consumers, businesses, farmers, and municipalities grow faster than the respective incomes. The financial position of all debtor categories is worsening year after year. The same holds for the biggest debtor, the national government. Its obligations and commitments have accumulated much faster than did the debt "relief" brought about by currency depreciation.

The average interest. charge on its outstanding debt instruments has risen in ten years from 2 per cent to over 3 per cent. Balancing the budget becomes increasingly difficult, and the Treasury has to dig ever deeper into the taxpayers' pockets. That brings us to a most significant aspect of this inflation of ours, different from those of the past. The Civil War, for example, was financed largely by inconvertible paper money-greenbacks. Taxes were negligible by present-day standards. Now, only a fraction of the governmental expenditures is covered by incurring new debt. By far the greater portion of the public revenue is raised by taxes which suck up more than 25 per cent of the national income. The tax burden falls largely on the lower-middle-income brackets and on busi ness. One consequence is the difficulty for the average citizen to protect his fortune against the inflation without resorting to hazardous and dubi6 INFLATION'S SYNDROME ous practices. What the government gives the speculator by windfall profits and the debtor by reductions in the real value of his debt, the gov ernment takes back by taxing away much of infla tion's dividends-and a great deal of the victimized savers' incomes. (Hence the fact that the propor ...

tion of income saved was lower in the 1950's than in the 1920's.) Another consequence of heavy taxation is the "c~eeping" character of the inflation process, a novel departure in the sad history of inconvertible paper money. Heavy taxation takes a great deal of zest out of the inflation. However, the operating cost of the government, the greatest buyer of goods and services, tends to rise faster than its revenues. In any case, the larger the deluge of paper money, the higher the taxes to forestall the "gallop" and to correct alleged or real inequities. The net result is that people pay more and more taxes in order to lose each time a fraction "only" of their incomes' purchasing power. Whether taxes are negligible or high, there is at least one similarity between the "gallop" and the "creep." The one produces trillionaires and quadrillionaires in untold numbers. The other causes millionaires to pop up from here and there -lucky speculators, happy tax-avoiders (evaders), and ruthless manipulators. The German trillion aires were literally wiped out when the currency was stabilized. As to the bulk of our new rich, it 7 AN INFLATION PRIMER will be interesting to watch where their millions of dollars will end up.

WHERE DOES THE INFLATION STAND? The inflation of the last twenty-odd years is a matter of record. But are we in danger of having more of the same? As this book goes to press, the highest monetary authorities, including the head of the International Monetary Fund, assure us that the inflation is over. (Have we not heard that before?) Vested interests in and out of Congress actually tell us that "deflation" is what we are up against. Of course, it all depends on what one means by such words as inflation and deflation. What matters is the present and prospective behavior of the cost of living. In the twelve months ending June 30, 1960, the cost of living went up again by about 2 per cent. Industry's labor costs keep rising even faster; at that, some of the recent wage boosts have not yet produced their induction effects on prices. Few experts doubt that the wage level is still directed upward, or that such develop ment would have no effect sooner or later on the cost of living. And the decisive indicator is the money supply, the number of dollars available for purchases. It has been rising year after year, boom or recession, at an average rate of 6 per cent or higher. The most imaginative statisticians do not figure on much more'than 2 per cent average annual increase in the physical volume of salable 8 INFLATION'S SYNDROME goods and services. The disproportion is patent, and this is responsible for the prospect of future 'price inflation.

Year 1929 . 1945 . 1955 . Money Supply * (billions) $ 55.8 150.8 216.6 Year 1957 . 1958 . 1959 ' . Money Supply (billions) $227.7 242.6 246.6 ·Cash in circulation plus net demand and savings deposits. 9 II THE "MODUS OPERANDI" OF INFLATION Money originates in one of two ways. One way is by depositing gold, the value of which is credited to the depositor on a bank account. However, the bulk of the nation's "purchasing power" stems from credit extended by banks,! be it by loaning funds or by purchasing securities (bonds). PRODUCTIVE CREDIT-MONETIZING REAL PURCHASING POWER As an illustration, let us take a simple case: A New Orleans merchant sells $100,000 worth of cotton to a mill in Manchester, England. The buyer, whose credit is guaranteed by an English bank, promises to pay as soon as the consignment arrives. The seller needs money right away and borrows from his local bank by discounting the bill signed by the buyer. His deposit account is credited with, say, $75,000. Presently, he may draw checks on the new deposit. Apparently, $75, 000 had been "created" by a stroke of the pen, as it were. Add all similar transactions occurring at about the same time, and a great deal of purchas10 THE "MODUS OPERANDI" OF INFLATION ing power is being put in circulation: Should that not cause a rise in prices?

Nothing of the sort will happen through this type of transaction~ The new credit does not generate inflationary expectations; it is of the self-liquidating kind; the backflow in 90 days is assured, and the deposit will ·be wiped out. Ac tually, as it is being granted, a maturing loan may be ·paid back~ The total money supply need not be affected at all, or for a very short time only~ Even if it is affected, the additional dollar balance is matched, value for value, by the actual sale of new products~ The credit is noninflationary be cause it has grown out of an honest-to-goodness . business transaction. The bank did not. really create purchasing power; the bales of.cotton sold were the real pur chasing power that was not available at once to the seller. What the bank did was monetize in advance a commercial claim-to provide tempo rarily the money that was forthcoming anyway, and not much later either.

Note that the debtor had been credited with only 75 per cent of the sale's value; he, or someone for him, had to put up the rest. Someone had to risk $25,000 to make the transaction creditworthy. That alone limits the expansion of the money vol ume for such deals. And the number of such deals is limited for other reasons. The debtor himself must be creditworthy; often, shipping documents 11 AN INFLATION PRIMER are required. The bank has to be convinced that a genuine, productive deal had been consum mated, .in which all concerned are beyond doubt, including the buyer on the other side or his banker who guarantees for him. These qualitative controls) exercised by the pru dent banker, mean an "invisible" quantitative restraint that is essential in maintaining a balance between the increase of loans (and deposits) and the growth of marketable output. INFLATIONARY MONETIZATION Now, suppose that the government borrows from the bank ona three-month treasury bill.

Superficially, no difference exists between the two cases; in fact, the government's credit is better than the merchant's credit. Buying "short treas uries" is a very convenient transaction, involving no problem of qualitative control. It does not take an experienced, "prudent" banker to do this sort of business. But there is a world of monetary dif ference. The government is supposed to repay the short-term loan out of tax revenues. If it did, in flation would not occur any more than in the case of a commercial loan. Unfortunately, this is not the case. The government is in debt at the banks and may stay in debt (unless the public buys the short-term debt certificates from the banks, which it does for temporary holding only). One-half the marketable national debt is bor12 THE "MODUS OPERANDI" OF INFLATION rowed from the banking system, including the federal reserve banks. The latter's bond portfolio has increased almost l20-fold in less than thirty years and is now (September, 1960) much larger than the gold reserve: nearly $27 billion the one, under $19 billion the other. Contrary to the ori ginal statutes that restricted its operations mainly to the rediscounting of short-te.rm commercial paper, the Federal Reserve System now carries vir tually no commercial paper at all. The central bank, the last resort of the credit system, is in all but name a holding company for public securities.

By far the greater part (six-sevenths) of the mass of public debt owed to the banking system is of more than one-year maturity, not "short" even in name. Short or long, the b9nds are being held by institutions which paid for them by creating spendable funds, with no counterpart in purchas able goods. The government acquires deposits, representing the monetization of sheer "paper," and uses them to pay its deficit. The purchasing power thus put in circulation stays there. It has to; it did not grow out of commercial transactions that would provide for the money's backflow. Nor has. it a counterpart in tax· revenues. Instead of liquidating its debt to the banks, the government keeps rolling it over and borrows additionally from time to time. And the money issued by the banks keeps turning around. Not one of every hundred dollars borrowed by the government13 AN INFLATION PRIMER whether it was used to stockpile unsalable farm products or to finance global give-away programs -has added anything to the nation's stock of pro ductive, self-regenerating capital.

Small wonder that prices have doubled-more than doubled, on the average-since 1939. If they did not rise more, it is chiefly because of the great progress achieved by business in reducing costs by technological and organizational economies. LIQUIDITY-BY INFLATION As a matter of bookkeeping, the Federal Re serve System is a part of our banking system. In essence, it is much more than just another bank. It is the central organ of the entire credit struc ture. The fundamental import of its function may be shown by reverting to our earlier illustration, the New Orleans bank that loaned money on a cotton transaction. On top of all the "inhibitions," or qualitative controls, that limit the individual bank's loaning propensity, there is one more that should be men tioned: the necessity for the banker to keep his house "liquid." This is his legal and moral duty, as one entrusted with the public's money. The deposits, even the savings, have to be paid out whenever the depositors draw checks or ask for cash. Obviously, if the bank is not to be closed, it must have enough cash resources available to fulfill such drains as may reasonably be expected.

14 THE "MODUS OPERANDI" OF INFLATION The law requires that the member banks keep a fraction of their liabilities deposited at a federal reserve bank as a primary reserve. Sheer prudence requires that another fraction should be kept in the form of assets that can be turned quickly into cash. These "quick assets" are the banker's sec ondary line of defense. In our system, as it has operated since 1933, this secondary liquidity con sists essentially of treasury obligations. The point is that th~ credit expansion of. com mercial banks is limited by liquidity considera tions. Since the law requires (on the average) 10 per cent of the bank's liabilities to be held in ','cash," and prudence requires at least another. 30 per cent to be readily available in the shape of "short treasuries," the bank's ability to create purchasing power is trimmed ~ccordingly. So far, so good. The rub is that these reserves are literally produced by the.Federal Reserve Sys tem. It has the power to do SO,2 and it makes ample use of this power. That is the difference between the rank and file of banks on the one hand·and the central bank on the other. Both create purchasing power, but the former would soon be stymied (except for gold inflow) if the latter did not pro vide the ultimate means of payment which keep the deposits convertible into cash and the banks from going broke. Thereby, the credit expansion, whether sound or not, is being kept going.

15 AN INFLATION PRIMER THE CENTRAL ENGINE OF INFLATION Technically, the Federal Reserve has three direct methods by which to provide the banks with "liquidity," enabling them to extend credit to the economy. It "rediscounts" (buys) such short-term commercial paper as the banks may offer, if they have any to offer. It makes "advances" to them, usually using government obligations as collateral. Or it buys federal securities, mostly of the short-term variety, in the open market, the proceeds being credited to the bank account of the dealer who sold the obligations. In any case, the banks acquire balances at a federal reserve bank and their worries over cash reserve require ments are over (for the time being) . In the process, the Reserve System accomplishes something else that goes far beyond its proper function and begets a nefarious inflationary drift. Indirectly, the Federal Reserve provides the mem ber banks with their "secondary" reserves as well.

It does so by creating a safe and secure market for public securities, U.S. Treasury bills, certificates, and notes, in particular. Within that one-year maturity range alone, there are some $70 billion available. (Another $115 billion in up to ten-year maturities are virtually supported, too.) Thereby, these securities become equivalent to cash. Their monetization by the banks and re-monetization by the Reserve System is the hard core of the process 16 THE "MODUS OPERANDI" OF INFLATION by which the currency.is being diluted-and the door opened for nefarious manipulations. Espe cially, the politicians' "freedom" to run the federal budget into deficits is greatly enhanced when nothing more serious seems to be at stake than throwing a few billions of additional "short treasuries" on the market. 1. "Banks" include commercial and mutual savings institu tions as well as the Federal Reserve System. The savings and loan associations are. savings banks, too, but in the statistics they do not appear among the banks.

2. The sole legal limitation of that power is a 25 per cent gold (certificate) reserve requirement against the Federal Re serve System's own notes and deposits. But at this writing, it still might go to the length of some $28 billion of new legal money before reaching that limit-which the Congress then might lower again, as it did in 1945. 17 III THE FOUNTAINHEADS OF INFLATION THE MONEY-PRINTING AUTOMAT The Federal Reserve System is wrapped in for bidding technicalities and regulations. Yet the principles of its operation are so simple as to be within easy reach of the average person who wishes to understand them. Neither the Federal Reserve System (and its organ, the Open Market Committee) nor the twelve reserve banks are banks in the common sense of the word, as mentioned before. Profit is not their objective; most of the money they earn goes to the Treasury. They take no deposits from an ·individual or .an ordinary business firm, ·and give very few of them loans. Together, they con stitute the central bank of the nation, dealing chiefly with the member banks; with the U.S.

Treasury; with the governments or central banks of foreign countries, and, for the purchase and sale of federal obligations, with selected security dealers. With this position as a central bank goes the monopoly of issuing legal tender-bank notes. The federal reserve banks have the privilege of 18 THE FOUNTAINHEADS OF INFLATION makingthe money with which to pay for their own liabilities. The liabilities are created by the mem ber bank borrowing on a treasury bill or similar security and drawing out a dollar note or a dollar balance, as it chooses. The note goes into circula tion; the balance becomes the reserve. on which the member bank "pyramids" its own deposit liabilities. (The nonmembers use as their reserves mostly balances held at member institutions.) The process is further simplified if the Federal Reserve, instead of w~iting for the member banks to ask for money, pr6ceeds on its own by buying treasury paper on the open market in order to ease the money market and to lower the interest rates.

Or conversely, it may sell treasury obligations to tighten the market and to "up" the rates. All of which is as it should be. But the portfolio of the Reserve System is bulging with treasury securities in lieu of commercial paper. Treasury securities are the documentary evidence of federal deficits, past and present. Their bulk stems from the last war. The Treasury does not have to run fresh deficits every year (as it did in the fiscal year 1958-59 to the tune of a peacetime record $12.4 billion). Of its shortest term marketable debt, maturing within one year, $53 billion were at this writing in commercial banks, savings institutions, and other private portfolios. Theoretically, at least $53 billion worth of short paper could still be turned into legal tender! Nothing of the sort 19 AN INFLATION PRIMER would be possible if the central bank would stick to its function, as was originally intended, and monetize only credit instruments which represent genuinely commercial, productive transactions of the self-liquidating type.

No inflation of runaway dimensions is to be expected (as yet); but the monetization of the public debt does not have to go anywhere near the theoretical limit in order to permit a fresh out break of price boosts. Assuming an average re serve ratio of one to six, the monetization of $1 billion permits an additional credit expansion of $6 billion, or so. And the flood can rise even with out further debt monetization by the central bank, which has additional powers available to make or to break the inflation-by changing the member banks' reserve requirements. MANAGED MONEY-THE ONE-WAY ROAD The member banks, to repeat, must cover their MEMBER BANK RESERVE REQUIREMENTS Percentage of Percentage Net Demand Deposits * of Time (Savings) Central Reserve Deposits, All reserve city Country Member city banks t banks banks Banks Maximum ...... 26 20 14 6 Minimum ....... 13 10 7 3 Actual, Aug. 1, 1960 ... 18.0 16.5 11 5 -Demand deposits minus cash items in process of collection and demand balances due from domestic banks.

t New York and Chicago. 20 THE FOUNTAINHEADS OF INFLATION deposits by holding a fraction of.them in balances at their respective reserve banks. But what frac tion? This, the pertinent question, is answered in the accompanying table. Note the broad range of discretionary power in the hands of the managers (who may be under the thumbs of the politicians). Within the broad legal limits, they can cut the reserve requirements or raise them. This is called an "elastic currency." In June, 1954, to overcome a mild recession (and to strengthen Mr. Eisenhower's chances come No vember), the Board of Governors lowered the banks' reserve requirements, boosting their lend ing capacity by a hefty $9 billion. This helped to bring about an unprecedented borrowing boom, but the bank reserves were not restored to their previous levels. The performance of the Board was repeated on the eve of the next presidential election: by September, 1960, the member banks' lending capacity was boosted by another $3.6 bil lion.

This sort of elasticity pervades the whole mone tary system. Under the gold standard the mini mum gold reserve against the central banks' liabilities was permanently fixed. It used to be mandatory for the Federal Reserve to hold gold equal to at least 40 per cent of its outstanding notes and 35 per cent of its deposit liabilities. The rule has been relaxed to permit an over-all 25 per cent minimum and could be relaxed further at the 21 AN INFLATION PRIMER whim of Congress. The legal ceiling over the public debt was to be raised in a national emer gencyonly. Since 1954 it has been raised four times in less than six years. No more monetary inhibi tions! ·Floors may be lowered and ceilings raised on short notice. The power of reducing the legal' reserve re quirements is dynamite, one would think. The Congress thinks otherwise. With the blessing of the Federal Reserve authorities, it has cut the re quirements for the big banks in New York and Chicago to the level of the reserve city banks, as of 1962. Also, it permitted the banks to count the surplus cash in their tills as part of their legal reserves. This alone adds another 0.5 per cent to the big banks' potential and an estimated 3 per cent to that of the ~mall ones. To clinch it all, the political heat is put on the Federal Reserve Board to abandon the "bills only" policy-it should buy long-term bonds as weIll And the Treasury pleads for the right to sell more than the permissible $5 billion bonds direct to the central bank-to push them down its throat, as it were.

INFLATION BY "DEBT MANAGEMENT" On paper, the Reserve System has virtually every power to maintain monetary discipline and to stem the. inflation. It is under no legal obliga tion to grant credits to the member banks, still less to buy government bonds. It could skim off 22 THE FOUNTAINHEADS OF INFLATION the liquidity of the money market and force inter est rates upward. The mere refusal to grant credit to the banks in proportion to the expansion of their loans may spell the end of an ominous infla tionary boom. The March, 1951, gentlemen's agreem.ent between the Treasury and the Federal Reserve Board liberated the latter from the self assumed wartime obligation to monetize the national debt, or to hold interest rates down. Ever since, our central bank has been pursuing, sup posedly, a "flexible" policy: it commonly adjusts its discount rate-the fee it charges on its loans to the market rather than forces a rate on the market. In principle, interest rates may rise or fall without interference. In actual practice, they are not permitted to rise, nor bond prices to fall, to a level that would curb the inflation for any ap preciable length of time. The debt monetization continues, rain or shine, with interruptions few and far between.

The 1951 agreement between the Treasury and the Federal Reserve authorities woul~ have made possible a truly "flexible" policy, had the former lived up to its implicit part of the deal. There should have been no more deficits in the budget; in any case, no major deficit. The Treasury should also have proceeded to convert a substantial slice of its short-term debt into longer maturities. It did nothing of the sort; instead, the volume of short maturities has been increasing practically 23 AN INFLATION PRIMER year after year, despite the fact that there were ample occasions-recessions-when low interest rates obtained on the capital market and conver sion operations would have been perfectly feasible. There is the crux of the situation. Every stabili zation attempt undertaken by the Federal Reserve authorities is, despite their good intentions, sty mied from the outset. They are stymied for the simple reason that the Reserve System is "a crea ture of Congress" that can set down the law. In any case, the central bank cannot let the credit of the overindebted national administration go to pot, which is what would happen if the "printing press" would cease to support a prodigal Treasury.

This is called Treasury-Federal- Reserve-co-opera tion-in-managing-the-national-debt. What is being managed is a progressive inflation, imposed by the Congress. The heads of the Reserve System have no choice but to serve the fiscal interest, or resign. The latter they rarely do voluntarily. In stead, they. rationalize the inflationary policies forced upon them into a policy of maintaining an "orderly market" for federal securities and guaran teeing general "stability." "Price stability, with full employment and continued growth" is the slogan to which the monetary authorities pay un relenting lip service. How that is accomplished is illustrated by a recent statement by Mr. William McChesney Martin, Jr., Chairman of the Board of Governors, 24 THE FOUNTAINHEADS OF INFLATION before the Joint Economic Committee of Con gress. He took pride in the many devices by which the national currency had been <j.ilutedin the first nine months after the onset of the 1957-58 reces SIon: From late Fall 1957 through April 1958, there were four reductions in Federal Reserve Bank discount rates~ from 3Y2 per cent to 1% per cent. Through continuing open market operations from late Fall of 1957 to early last Summer, the Reserve System supplied the commercial banks with some $2 billion of reserve funds. Through three successive reserve requirement reductions in late Winter and early Spring of last year, the system released for the use of member banks about $1.5 billion of their req uired reserves.

The total amount of reserve funds supplied by the sys tem to commercial banks over the nine months, Novem ber 1957--.July1958, was enough to enable member banks to reduce their discounts at the Reserve Banks from $800 million to about $100 million, to offset sales of gold to foreign countries amounting to about $1.5 billion, and to finance a commercial bank credit expansion of almost $8 billion. Monetary expansion from February through July stimulated by this Federal Reserve action was at an exceptionally rapid rate-at an annual rate of 13 per cent for all deposits ..... (Italics supplied.) T~e peacetime record 13 per cent annual rate of·bank-deposit expansion coincided with a 16 per cent ($14 billion) deficit in the national budget. It was followed by a 12 per cent decline of our gold stock. Since mid-1958, the Federal Reserve has taken some easy steps to drain the "water" from under the boom, raising security margin requirements 25 AN INFLATION PRIMER from 60 to 90 per cent, reducing somewhat the credit it extends, and upping the discount rate gradually to 4 per cent. But just previously, the volume of its outstanding credits-the monetary base on which the inflation is built-had been in creased by $2.2 billion in 14 months. That helped to enlarge the money volume (cash in circulation and bank deposits) by $14 billion and to rekindle the inflationary boom.

By 1960, not only did the bill purchasing re start, but the discount rate was reduced again to 3 per cent, at a time when the European central banks were raising their rates. Also, the security margin requirements were lowered from 90 to 70 per cent and the reserve requirements of the (overlent) member banks cut by $605 million,1 as mentioned before. The Federal Reserve System's freedom of action is limited for a further reason: it has to contend with the fact that the national government is a large-scale operator on the capital market. Its borrowing, debt rolling-over, and converting operations impede time and again the policy of the central bank. Moreover, the Administration is in the business of lending money and guaran teeing credits. In 1958, the total of loans extended and underwritten amounted to $43 billion. When one arm of the government tries to restrain reck less borrowing by raising the cost and the other arm promotes such borrowing by providing cheap 26 THE FOUNTAINHEADS OF INFLATION funds, the result is irresponsibility and sheer con fusion.

1. The loans-to-demand deposits ratio of the big New York banks stood in August, 1960, at 86 per cent, just four per centage points below the 1929 high! 27 IV THE VICIOUS SPIRALS THE PARABLE OF THE HORSE AND THE TROUGH The Congress votes expenditures without reve- , nues to cover them. The Administration finances the deficit by issuing IOU's that are the equivalent of cash. The banks convert many of them into active purchasing power and draw from the Fed eral Reserve System the cash balances for legal reserves. This house of paper rests on the central bank's readiness, voluntary or otherwise, to mone tize the IOU's which represent no productive ef fort, no salable goods, no gold, not even tax reve nues-in effect, nothing but promises, not to pay but to be renewed, with more of the same to come. Come they do, be it out of the Treasury's fresh deficits and the exchange of new "shorts" (bills, certificates, and notes) for longer bonds, coming to maturity, or out of the accumulated portfolios of the public. In th~ ten months to the end of April, 1959, the bulky volume of outstanding marketable short-term treasury paper grew by no less than $23.6 billion, all but $0.2 billion avail able for monetization by the Reserve System.

A continued process of this sort is bound to bring about a trend of rising prices unless the 28 THE VICIOUS SPIRALS excess money vanishes into hoarding (which it is not likely to do). Yet it was many years before the public showed signs of awakening to the inflation threat and to the role the money element plays in it. Even now, a variety of arguments is being offered to evade the money problem by blaming the rise of prices on symptoms of the inflation rather than on the underlying cause. Some economists still deny that rising prices have any thing to do with the quantity of money thrown on the market. They argue that the funds accumu late in the banks, which do not rush to make loans just because they have the money on hand. There must be a legitimate demand growing out of real production to induce the banks to lend. It is one thing, they say, to lead the horse to water-quite another thing to make it drink.

One wonders whether the expert who argues this way has ever taken a horse to the trough. If he did, just how lorg did it take before the horse developed a "legitimate" thirst? The parable does not do jus~ice to the horse, which never drink~ more water than it currently needs. But men plan by future prospects, real or imaginary. A heretofore submarginal demand for a bank loan beco$.es creditworthy when future earning prospects brighten-as they may in the light of a sustained flow of purchasing power in the channels of tr4de. It may take time, but an excessive money supply cannot fail to increase the 29 AN INFLATION PRIMER demand for goods and services except in a depres sion, when it is used to liquidate an excessive vol ume of private debt. COST-PUSH INFLATION? When prices rise, few people take the trouble to look up the statistical data about debt monetiza tion and bank-credit expansion. Still fewer seem to be aware of the causal relationships. What they do see is a sequence that has become virtually fixed: wages jump first, commodity prices limp behind ·them. Hourly wage rates fell slightly be tween 1929 and 1933, whereas the price level took a 40 per cent beating. But pretty soon both started to rise, wages leading the procession.

Then, during World War II, prices were "frozen" by controls, but pay rates could not be restrained. As the controls were scrapped toward the end of 1945, inflation· took, within two years, a 30 per cent toll of the dollar's purchasing power in retail trade, paralleling simultaneous wage boosts. Ever since, price movements have lagged behind wage increases, as summarized in the fol lowing table. Notice at once in the table that the data do not include fringe benefits paid by employers. These may amount to as much as 20 per cent of the wage bills, and they too keep mounting. Of course, costs may have a decisive influence on prices, and labor is the number-one ingredient 30 THE VICIOUS SPIRALS of costs. If labor's remuneration goes up faster than its productivity, prices tend to follow, calling in turn for compensation by higher wages, and a vicious cost-price spiral gets under way. But why do wages rise? There are two stock answers in (political) circulation. According to the one, pre sented largely by union spokesmen, labor merely claims its share in the rising profits which business MAJOR PRICE MOVEMENTS AND FACTORY WAGES SINCE WORLD WAR II(Indexes: 1947-49 =100) Wholesale Prices Average Consumer Industrial Hourly Prices All com-commodi- Earnings modities ties (Mfg.) Postwar inflation January 1946 ..... 77.8 69.6 72.1 $1.003 January 1948 ..... 101.3 104.5 102.0 $1.302 Per cent change ... +30.2 +50.2 +41.5 +29.9 "Relative stability"

January 1948 ..... 101.3 104.5 102.0 $1.302 June 1950 ........ 101.8 100.2 102.2 $1.453 Per cent change ... +0.5 -4.1 +0.2 +11.6 Korean inflation June 1950 ........ 101.8 100.2 102.2 $1.453 June 1951. ....... 110.8 115.1 116.2 $1.599 Per cent change .. +8.8 +14.9 +13.7 +10.0 "Relative stability" June 1951 ........ 110.8 115.1 116.2 $1.59 June 1955 ........ 114.4 110.3 115.6 $1.87 Per cent change ... +3.3 -4.2 -0.5 +17.6 Creeping price rises June 1955 ........ 114.4 110.3 115.6 $1.87 June 1958 ........ 123.7 119.1 125.3 $2.12 Per cent change ... +8.1 +8.0 +8.4 +13.4 -Source: U.S. Department of Commerce, Bureau of Labor Statistics. draws by the upward "administration" of prices and by the ever rising "productivity" of the work31 AN INFLATION PRIMER ers. According to another school of thought, the trade-unions enjoy monopoly power and use it ruthlessly. This supposedly causes the price infla tion, which then provokes fresh credit demand, to be· supported by debt monetization. We start on this second theory.

The large unions (and some of the small ones) do have a monopolistic position, though not be cause of the right to organize and to bargain on an industry-wide scale. Whether there is one union covering the entire steel industry or twenty five organizations in as many districts or plants makes little difference in bargaining power. How can one forbid unions to co-operate, either in re questing identical pay boosts or in going on strike simultaneously? Where, indeed, should the geo graphic or professional lines be drawn to dis tinguish the monopolistic from the legitimate kind of union without being arbitrary and depriving the workers of their fundamental right to organize and to protect their legitimate interests? Industrial conflicts are as old as the modern in dustrial system. Wages went up during booms before there was collective bargaining by unions. What has distinguished the American labor market since the New Deal legislation of the 1930's is the loss by the worker of his right to choose the men to represent him, or to bargain for himself. Once a union is recognized by the National Labor Board as the bargaining agency, the member is, 32 THE VICIOUS SPIRALS in effect, coerced into accepting a leadership that may be in the hands of racketeers. In a majority of states even the "right to work" can be denied the employee who refuses to join a union and to pay dues. Hence, a monopolistic position is achieved, strengthened by resort to the intimida tion of nonconforming members, use of strike breakers, violence, and mass picketing, extortion from employers, unfair secondary boycotts, and corrupt and criminal practices. By their methods of restraining trade, the unions violate written and unwritten rules of the free market. Referring to two of the most powerful unions, a Senate com mittee's (minority) report stated in early 1960: "Corruption, misappropriation of funds, bribery, extortion and collusion with the underworld has existed in the V.A.W. as in the Teamsters .... "

The unions, it seems, are above the law. And the law, or its administration, actually protects them~ 1 Yet the monopoly power of the unions is not the decisive force that drives labor costs in the strato spheric direction. Just how high could the general level of wages-not just in individual industries go in the face of consumer resistance to higher prices, if people's pocketbooks were not replen ished again and again by.freshmoneyshots-in-the arm? Patently, the magic circle of higher wages, higher prices, still higher wages, and so on, would break at the ultimate hurdle, the consumer's ability to pay. The trouble is that the total of in33 AN INFLATION PRIMER comes is being artificially maintained and ex panded. If consumer incomes falter, the govern ment steps in by disbursing funds or guarantees for public works, public housing, road building, farm subsidies, commodity stockpiling, foreign aid, mortgage credits, social security, and many other welfare objectives. The open and concealed subsidies, handouts, and "contracyclical" financial contraptions come out of the government's credit and the taxpayers' pockets, supplemented and sup ported by debt monetization, thus setting bank credit on the expansion road. That does it: Rising labor costs are not the ultimate cause of the inflationary drift. They are a prime transmis sion line that connects the money inflation with the price inflation. The cause lies deeper, in the political arena where the unions' ultimate re sponsibility enters. The unions are the prime moving and lobbying force behind the official spending and money-manipulating policies which result in over-full employment and labor shortage.

When the demand is strong and the supply short, the price tends to go up. That is what the nation's strongest pressure group puts over with an un canny ability to sublimate its own unenlightened interest-the union officials', not the workers', in terest-into national eminence. It· uses ruthlessly the vote-commanding power of a superorganiza tion, plus the influence provided by the multi million dollars of members' dues at the bosses' 34 THE VICIOUS SPIRALS free disposal. The worker's interest is lower prod uct prices, steady employment at good pay, more savings to finance more work opportunities, all of which is negated in the long run by union policies. To be sure, there are other pressure groups groups of organized business and farm; veterans; bureaucrats; special interests in construction, mining, shipping, and shipbuilding; exporters, mortgage lenders, educationalists, and a host of other lobbies--..that pull the inflationary strings for the benefit of their respective niches in the welfare stafe (while preaching the gospel of free enter prise). A "liberal" intelligentsia contributes its share in confounding a confused public. (Some literati still judge industrial capitalism in the light of the bygone sweatshops or of monopolies predat ing the Sherman and Clayton acts.) But organized labor delivers the strongest, most vocal, and most aggressive lobbying force on the inflationary side.

BUILT-IN INFLATION Inflation is being brought about by the com bined efforts of pressure groups in and out of the Congress. Such groups are largely responsible for current budget deficits as well as for inducing the central bank to monetize debt and to sustain an excessive flow of purchasing power-at a cumula tive rate averaging 6 per cent or more, double or treble the rate at which the real output of the na tion is growing. 35 AN INFLATION PRIMER Unions or no unions, boom or recession, wage costs are bound to rise when the growing money supply appears on the market place as an artificial ly boosted demand for labor's services. Employers' resistance to union claims is stymied in an eco nomic climate saturated with the expectation that the money tokens are readily forthcoming-if the consumer will not pay, the government will. Higher pay (often for less work) and more fringe benefits in one industry with rising labor pro ductivity spreads to others in which no progress in efficiency obtains. And every rise in costs that helps to force prices upward becomes embedded in the price structure by way of comtractural escala tors~ automatically adjusting wage rates to each fractional increase of the cost-of-living index. Nor is that the only vicious circle set in motion by the ceaseless or recurrent process of debt monetiza tion.

A most significant effect of the wage-price infla tion is the temporary incentive for new (mal-) in vestments in plant and equipment. Business is "pushed" into labor-saving devices in order to economize on labor costs, and it is being "pulled" into false capacity expansion by the growing de mand for products, a consequence of higher money incomes and of a deceptive prosperity. As prices climb and the inflationary mentality spreads, a further motive becomes operative: the urge to hedge on the inflation. The cumulative effect 36 THE VICIOUS SPIRALS would be a runaway inflation, if the process were not interrupted every third year or so by a reces sion, with each interruption sharper and more painful than the last. An overheated economy burns its bearings, as it were, by running up against labor and capital shortages and losing its flexibility, while overexpansion boomerangs in declining profits.

With jerks and screeches, infl~tion progresses. Under the cloak of immunity from the penal code, from the la'"ws of corporation and monopoly regulation, even from the Constitution's provision for the individual's liberty to join ,or not to join private organizations, the unions proceed to drive the economy toward inflation. But there is a price to be paid. In the jingle of K. E. Boulding (1951): We all, or nearly all, consent If wages rise by ten per cent It puts a choice before the nation Of unemployment or inflation. The choice is not between depression and infla tion, as the advocates of 2-5 per cent annual price increases pretend. The choice is between mone tary stability on the one hand, and inflation with recurrent mass unemployment on the other. The fiscal and monetary "stabilizers" pre scribed by the (unwritten) code of inflation are in full operation. But the law of supply and demand asserts itself: 5 per cent of the (overpaid) labor force stays unemployed in the midst of super37 AN INFLATION PRIMER booms, "liberal" credits, and $135 billion total public expenditures a year.

1. The 1959 labor legislation somewhat moderates unions' power, though not essentially. The unions remain in control of the labor supply, under the cloak of the union shop, and they are practically exempted from prosecution even for crimi· nal action. They still can control labor efficiency under the protection of "work rules,H grievance procedures, etc. State and local authorities, often even the courts, favor unsavory union practices. 38 V RIDING ON THE INFLATION CREST SPREADING THE INFLATION Inflation is a monetary phenomenon pure and simple. There is no such thing as an inflation by "wage-push," or by "profit-push." Both are con sequences, not ultimate causes. It is not rocking the boat that makes the storm, but the rocking helps to sink the boat. The cause is the excessive volume of credit, sparked by the debt-monetization practices of the central bank under the self-assumed function, since 1938, of "maintaining an orderly market"

for government securities. No such function was originally intended or written into the statutes of the Federal Reserve System. It is a pretext and fancy name to cover up the reality, which is to per mit Washington to indulge in fiscal irresponsi bility. To eliminate the last shred of doubt about the ultimate and effective cause of inflation, consider the following. In April, 1959, the union of 1,250, 000 steel workers put up extravagant claims, esti mated as a billion dollar "package." Marriner S. Eccles, former chairman of the Federal Reserve 39 AN INFLATION PRIMER Board (and a one-time rabid New Dealer) com mented: "If all of the other workers of America more than 65 million-were to demand and re ceive these same benefits, it would add 52 billion dollars to the cost of goods produced. There would be nothing 'creeping' about the resulting infla tion." And that would not be the end of it; rising prices would call for further wage-cost increases, and so on.

The point is that an important wage boost tends to give the entire wage structure an upward impetus, and, unless the additional costs are some how offset, the price level will tend to rise, too.1 But where would a majority of entrepreneurs find the cash with which to pay? They could scarcely have the money tucked away to add 10 per cent or more to their labor costs. Nor would the con sumers want to deplete their savings or default on their taxes and debts. The enhanced wages could not be paid unless the banks came to the rescue of the public and the central bank to the rescue of the banks. Short of a substantial shot-in-the-arm, markets and prices would break and massive un employment develop. The history of inflation offers innumerable cases which show that the most elaborate and automatic spirals cease to operate as soon as the credit flow to feed them stops. The cost-push theory of inflation assumes that costs are the sole, or main, determining factor of prices, as if demand had nothing to do with it.

40 RIDING ON THE INFLATION CREST What about subsidized prices? Surely the unions are not to be blamed for the fact that in the country with the world'sgreatest surplus of farm output-and with official farm stockpiles worth some $10 billion-basic farm-commodity prices are up to 50 per cent higher than they are on the world markets. THE FALLACY OF BUILT-IN STABILIZERS The money-printing press is the source of the wage-push and of all other inflationary phe nomena, including the fake devices to protect the economy against a depression. Social Security benefits, guaranteed annual wages, long-term wage agreements, cartelized (minimum) prices, redeemable savings bonds, and so on, have been presented to the public as built-in stabilizers to provide cushions against.a depres sion. They.provide nothing of the sort. They are just some of many pretexts for inflating the cur rency. For example, the reserves of the Social Security program, built up by contributions of the "insured," consist of government bonds that would have to be sold-to the banks, presumably.

Guaranteed wages guarantee nothing; they merely imply that there will be sufficientcash flow forth coming to sustain them. There are, indeed, stabilizers that can stop the inflation. They are not built in by law or by policy; they are part and parcel of the free mar41 AN INFLATION PRIMER ket's automatism, and they are very effective, as shown by the recurrence of recessions which inter rupt the spiraling process of inflation. However, as soon as the cycle goes in reverse, a money out pour is let loose and the genuine stabilizers are swept away. THE PRODUCTIVITY DEBATE Coming back to the spiral: time and again the unions claim that their wage demands need not affect costs. All they are asking for is more money for more output, supported by statistics to show the rising "productivity" of labor. For good measure, the claim was confirmed by no less an authority than General Motors Corporation. The great automobile maker beat the gun by offering in 1952 an annual productivity wage escalator-a memorable case for big business cooperating with a big union at the expense of the public.

There was a byplay, too. GM agreed to the (compulsory!) union shop, selling its employees' freedom of choice down the union river. Output per man-hour or man-day has risen and keeps rising in many branches of manufacturing. But the productivity argument is a rationalization to surround labor's inflation-borne power of coer cion with a halo of economic (and ethical?) sanctity. The trouble is, in the first place, that wages rise in all industries, whether or not there is an improvement in efficiency. Barbers, beau42' RIDING ON THE INFLATION CREST ticians, florists, repair men, house painters, and morticians get wage boosts with no perceptible increase of output per man-hour. In fact, "serv ices" take a growing share in total employment and lead in the successive increases of the cost of living. 2 What is meant by labor productivity? The number of physical units produced per man-day or man-shift is a convenient statistical device to measure efficiency, but it has no more to say about labor's contribution to the productive process than has the ratio of energy units used (or of dollars of capital applied) to the volume of output. If it takes but one man to do the job of two, it is most likely because of technological or organizational progress brought about by fresh capital invest ment, new inventions, managerial skill, or better utilization of resources rather than by any effort of the workers who attempt to reap the benefits.

The very concept of labor productivity is open to question. In a plant, is it the average output of all workers or of the actual machine operators only that matters? For an industry as a whole, what does.average productivity mean in the face of vast differences' among· individual plants? Over a period of time, ratios between labor input and product output become irrelevant if qualitative product improvements occur or if the product changes altogether. Is physical productivity sig nificant, or productivity in terms of dollars? The 43 AN INFLATION PRIMER pitfalls are legion. Exact measurement is impos sible. LABOR DISINCENTIVES BY INFLATION The spurious remuneration of labor's "pro ductivity" is worlds apart from true incentive wages. By the latter, the enterpreneur pays for more or better work accomplishment. By the former, he buys peace for a while, often paying more money for less work. In the one case, there is a distinct relationship between work done and and payment received. In the other case, labor is frequently paid for someone else's accomplish ment. In the workers' eyes, the credit for their raise in income goes to the bargaining, if not extort ing, union that exploits the inflation-swelled de mand for the products, and little or no credit is given to the capitalist, manager, salesman, or engi neer who may be truly responsible for the en hanced productivity.

The outcome does not even provide durable peace between management and labor. Suffice it to mention that, between 1956 and 1958, wages in the basic steel industry went up 19 per cent while eutput per man-hour declined 7~ per cent; by mid-1959, the industry was hit by a nation-wide strike, the seventh in fourteen years. More is at stake than wage rates, more also than fringe benefits. (The latter rise at times faster than do even the wage bills.) More is at stake than 44 RIDING ON THE INFLATION CREST disputes and strikes. If costs per unit of output mount despite huge capital investments in ever more productive equipment, it is because of a further reason: the union-sponsored restrictive practices. Featherbedding, make-work, and simi lar devices, reminiscent of the medieval guild sys tem, reach extraordinary intensity under creeping inflation, spreading cost increases throughout the economy. They amount to providing-on the rail roads, especially-permanent jobs at full pay to men who work productively only part of the time or not at all. These practices (legalized by the courts1) frustrate technological progress, the ulti mate source of higher wages and lower pricesl Time and again, this erosion of productivity is accompanied by slowed-down labor effort, a high level of labor absenteeism, and an excessive rate of labor turnover, all typical by-products of over full employment.

PRODUCTIVITY AND CAPACITY TO PAY Wage boosts bear a very tenuous relationship, if any, to productivity. For the period from 1939 %Increase in %Increase in %Increase in Average per Hourly Earnings Hourly Earnings Man-Hour without Fringe plus Fringe Productivity __B_en_e_fit_s_ Benefits Basic steel industry. . . . . . 64 201 211 Railroads.. . . . . . 86 185~6 190 All manufacturing industries. . 48.8 214 * ·Complete data not available. In 1956, total fringe benefits paid by employers amounted to $12.2 billion. 45 AN INFLATION PRIMER to 1956, the following figures of the Bureau of Labor Statistics speak clearly. The union bosses are never at a loss for an an swer. Look at real wages-money wages corrected for changes in the dollar purchasing power they say, and you will find that labor productivity outpaced them. The fact is that when hourly pay rises at the annual rate of about 5.3 per cent and per man-hour productivity increases by 2.3 per cent, the result is a 2.9 per cent net annual increase of unit labor costs. That is what happened to American manufacturing over a sixteen-year period. This is called wage inflation; it ought to be called: inflation carried on the "wings" of the unions. The unions not only generate the infla tion through political action, but they also carry the virus and accelerate its spread. Since the 1930's generating, carrying, and accelerating the inflation seem to be their outstanding func tions in the whole industrial world. The tech nique is the same almost everywhere: the use of their inflation-borne, unchecked power to extort monopolistic results.

If labor's "productivity" does not justify claims for higher wages.and fringe benefits, then the in creased cost of living will do-increased since the last wage blowup that preceded the price rises. If that argument is too transparent, the unions still may fall back on "ability to pay," which means, in essence, that you have to pay me simply because 46 RIDING ON THE INFLATION CREST you have, or are supposed to have, enough money to give me what I want. What if profits decline? Why, of course, my wages have to be raised in any case. Heads I win, tails you lose. 1. Actually, wages do not rise in a uniform fashion, nor do prices. "Those who can raise prices most readily, or increase wages most effectively, or escalate themselves to a position of neutrality, get more and more of total income, while the un sheltered get less."-Federal Reserve Bank of New York, Monthly Review, June, 1959. 2. Between 1949 and June, 1958, the average "retail" price increase was 35.4 per cent for services and 15.9 per cent for merchandise.

47 VI THE CONSUMER (AND TAXPAYER) BE DAMNED WHO PAYS THE BILL? Who carries the cost of inflated wages and fringe benefits, of shorter hours, of two men doing one man's job, and so on? There are several possibili ties. The added cost may be offset by technological progress and labor-saving devices; it may be shifted on the consumer by higher prices or lower quality of goods, or on the taxpayer if the govern ment steps in with subsidies; or it may come out of profits. Inordinately rising unit labor costs cannot be offset indefinitely by economies in production and distribution. Some unions resist stricter work rules and new equipment. Labor-saving devices may not be available or may be too expensive, and the financing difficult. The incentive for their installation is lacking if the Inanagement realizes that any economies achieved are bound to call for fresh wage requests. The result may be fewer jobs and/or more intensive work requirements. Sooner or later, labor "pays" by what is called techno logical unemployment: higher wages for fewer workers.

If prices are raised, the cost of higher wages falls ultimately on the consumer. That includes the 48 THE CONSUMER (AND TAXPAYER) BE DAMNED workers and their families, of course. As the price inflation spreads, their dollar gains tend to evaporate. It may take some time when the infla tion is the creeping kind. When it accelerates, the gain rapidly turns, by all historic evidence, into a loss of. real income. It should be remembered, incidentally, that the process of inflating incomes is in itself expensive. Except in revolutionary situations, no country has ever lost as many labor days, either absolutely or percentagewise, due to strikes as has the United States in this post-World 'War II era. Strikes mean lost wages; the losses the employer suffers mean less demand for capital goods and less employment; shortages caused by strikes raise the cost of living; and the unions take a share of the worker's pocketbook, if not of his freedom.

Suppose the demand for the product is elastic, that is the consumer refuses to pay the higher price and the market shrinks. Anthracite is a textbook example; by extorting ever more wage dollars, Mr. John L. Lewis raised the unit costs so high that the consumer turned to substitute fuels. The industry is dying slowly but surely, and so are the jobs. Again, labor as a whole sooner or later pays the bill, partially or fully, for the wage increases. The employ~r may recoup the increased labor costs by drawing public subsidies. In that case, taxes rise. And who pays those, if not the people engaged in production? There is one way, to the 49 AN INFLATION PRIMER trade union way of thinking, to get "something for nothing": by taking the pay raise out of profits. That is the laborite (and self-styled liberal) battle cry: Let the capitalist pay. All arguments of the unions converge, openly or by innuendo and in sinuation, on the contention that as a matter of equity the "high" profits should be trimmed in favor of the workers. The idea seems to be always present in the back of certain minds that wages could be substantially higher, and without in flationary repercussions, if profits were lower monopoly profits, in particular.

THE POT CALLS THE KETTLE BLACK "Monopoly" is a nasty word. It connotes supply restriction in order to exploit the buyer. Under the Sherman and Clayton acts it has a legal, or rather illegal, status. The Department of Justice seems to be anxious to prosecute every case, real or alleged. (To do so is "good politics.") No one but an outright Communist charges American business in general with illegal conspiracy. How ever, economists have invented two novel terms which carry by innuendo the' same connotation. Big Business is supposed to enjoy "oligopoly" quasi-monopoly exercised by the few-or to "ad minister prices." Bigness somehow enables the largest firms of each industl\Y to co-operate in con trolling the respective markets. Proof is, sup posedly, that (1) in industries such as steel, auto50 THE CONSUMER (AND TAXPAYER) BE DAMNED mobiles, tobacco, and aluminum, two to four of the largest corporations control 50 per cent and more of the output; (2) they sell their wares at virtually identically fixed prices, following the "leader"; (3) prices are being "listed" or an nounced by the big suppliers.

In reality, there are no ingrained oligopolies or administered prices on the American scene, except where the government promotes them. The truth is that bigness per se provides IJ.O power in the price-making process; sharpest competition pre vails among "leaders." The truth is that without governmental protection scarcely any industrial monopoly could carryon clandestinely in the face of prosecution, consumer resistance, and compe tition by substitutes. In fact, it is the government that limits competition and fosters monopolies by high tariffs, price supports; stockpiling, military procurement, subsidized housing, .and many other policies. 1 The truth is, also, that "administered" list prices may represent either the outcome of compe tition or mere balloons ~o test the market forces.2 The truth is, finally-and this is economics on the (much neglected) undergraduate level-that price uniformity is an essential characteristic of the competitive market. Under free competition the price is set by the cheapest producer whose output is large enough to affect the supply; the others must follow the "leader," or lose out.

51 AN INFLATION PRIMER Monopoly power is the ability of the supplier to exact a price higher than that prevailing under competitive conditions. There is such power in operation, not subject to the antitrust la,vs and exempt from the provisions of the criminal codes as well. The big unions have it-often the small ones, too. They enjoy a monopoly power of a width, breadth, and intensity the like of which never before existed in the United States. They use it ruthlessly" without any concern about the consumer or even about the future employment of their own members. PROFIT INFLATION Wage increases need not raise prices, union spokesmen say, if profits were not excessive. What makes for "high" (pre-tax) profits, one may ask? The answer is, ironically, that the unions them selves are largely responsible. Time and again, the unions come out for public spending projects. They are most determined advocates of public housing and of credit (FHA) guarantees for private-dwelling construction.

Their political influence, in alliance with the "construction lobby" of the business interests in volved, goes a long way toward putting over what they advocate. This gives a great boost to the building industry-and more profits to the firms engaged in it. This is one example of many. The unions are 52 THE CONSUMER (AND TAXPAYER) BE DAMNED most vocal supporters of almost any special (profit) interest that can be promoted at the expense of the consumer or the taxpayer. Some union leaders outdo the exporter, whose pocketbook is directly affected, in enthusiasm for our interminable foreign-aid program. They are motivated, or so they claim, by humanitarian senti ment for their fellow man. But no bleeding hearts inhibit their simultaneous lobbying for higher tariffs and quotas, which hurt that same foreigner's exports, in order to secure employment at higher wages for the union members-and more profits for the employers.

One would expect organized labor to object to farm subsidies which are ~ real burden on both the living costs and the tax bills 'of the urban masses. (The number of organized farm hands is too small to be of any weight.) Futile expectation! Greedy pressure groups may fight each other; they are brothers under the political skin when it comes to the common enemy, the general public. There has been much comment on the lack of employer resistance against demands for wage 'raises. To a large extent, political pressures have been to blame. But often, much too often, a cynical sort of cooperation prevailed in labor.. management disputes. A standar~ bargaining argument is: Why do you, the employer, object to raising wages when 52 per cent of the added cost is deductible from the corporate income tax 53 AN INFLATION PRIMER and the remaining 48 per cent is easily shifted on the consumer's income? Let someone else worry about the fact that the Treasury's revenues may decline and its expenditures increase.

Above all, by promoting price inflation, the unions promote the dollar volume of sales; if the profit margin per unit of turnover remains the same, or does not fall too much, the gross return of business-in dollars of declining purchasing power-cannot go but upward. Actually, margins did drop in the last decade, but not enough to off set the effect of a growing volume of dollar sales. In any case, it is the inflation of the money supply that, by distending the demand for consumer and producer goods, creates the sellers' markets on which rising costs can be unloaded and profits maintained, or even increased. A sellers' market is a short way of saying that "too much money chases too few goods." In the course of a price inflation, situations are bound to arise in which groups of entrepreneurs and speculators reap extraordinary windfalls. Yet, considering the decline of the money's purchasing power and the progressive rate of personal income taxation, the average real return on shares of stocks lags far behind real remuneration for the average labor-hour. s Atthat, a large sector of busi ness itself does not even layaway enough reserves to provide for staying in business, still less to ex pand it. Insufficient reserves for the replacement 54 THE CONSUMER (AND TAXPAYER) BE DAMNED of plant and equipment (at inflated prices!) and for future capital needs is a devastating effect of the prolonged currency dilution. In other words, we consume a large fraction of the capital required to provide a rapidly growing population with the tools and facilities for its livelihood. (The cost is $20,900 per worker in the country's largest corpo rations, according to an analysis of balance sheets by the First National City Bank, New York.) Extraordinary (pre-tax) profits of the riskless kind, (lower-taxed) capital gains in particular, are sparked by the inflation. Capital gains remain largely on paper until either the estate levies or a depression wipes them out. Government orders on a cost-plus base often are another rich source of rewards for no-risk-taking, in violation of the free market's prime distributive rule. The consequent deterioration of business standards is a major con tributory factor to the degeneration of union prac tices. If profits can be earned without incurring risk, why not wages without doing work?

1. This has been well brought out by Walter Adams 'and Horace M. Gray in Monopoly in America (New York: The Macmillan Company, 1955). 2. Allegedly administered prices may be just as flexible, up and down, as others. "The price on steel bars got changed as frequently as those on men's suits, wrist watches, and baseball gloves," reported the First National City Bank, New York (May, 1959). 3. From 1948 to the end of 1958, wages and salaries (includ ing fringe benefits) paid by corporations increased from $90 billion to $158 billion. Corporate (after-tax) profits decreased from $20 billion to $18 billion a year. 55 VII THE "PHILOSOPHY" OF INFLATION OPPORTUNISM VERSUS PRINCIPLES The sophisticated reader, if he has followed us so far, may raise a quizzical question. Our reason ing was based on an unproved thesis, he may say. It was taken for granted that monetary stability is a categorical imperative of policy. But we have seen axioms fade out even in geometry. In the age of relativity and four-dimensional space, doubt has. evicted dogma, probability has replaced causality. (Did opportunism oust principle?) On what relevant grounds, other than an "antiquated"

tradition, do we condemn the apparent historical trend accepted by a majority of progressive na tions? If ethics is a mere matter of anthropology or psy choanalysis, who is to proclaim immutable laws of economics? Must we revert to the laissez faire ("leave us alone") doctrine that is as obsolete-the self-styled modernist may continue-as are the gold standard and the "anarchistic" competition of the nineteenth century? (To collectivists, com petition is always anarchistic or monopolistic.) In the collectivist gibberish: A dynamic world will not submit to a rule that has inhibited man56 THE "PHILOSOPHY" OF INFLATION. kind from seeking to "maximize the welfare of the many rather than the profits of the few." The gold standard in particular is the object of resentment and ridicule because of its "discipline" -the limit it sets on tinkering with the currency and arbi trarily manipulating the credit volume.

As a matter of fact, the apology for inflation is not so new or so undogmatic as it pretends to be. Nor is it generally accepted in some backward countries. Also, the alleged historical law of per petual inflation is subject to change on short notice. 1 So is the inflationary philosophy itself, despite its scientific pretensions. Indeed, the fashionable (statist and inflationary) economics is a reversion to the pre-nineteenth-cen tury vintage, only more dogmatic and far more emotion loaded. A favorite device is to ridicule the opponents of inflation by charging them with being laissez faire believers. This implies, very ex plicitly, that the only alternative to permanent or recurrent inflation is to stop economic growth, ac cept massive unemployment, and let the unem ployed starve· on the streets. If we do not keep inflating, cost what it may, we shall lose the cold war or go bolshevist is the proverbial last word of the dyed-in-the-wool inflationist.

"MIND YOUR OWN BUSINESS" In historical perspective, laissez faire was a re action to centuries-long bureaucratic meddling, to 57 AN INFLATION PRIMER the multitude of oppressive laws and regulations, and to the crushing monopolies of guilds and other privileged groups. All of this was enforced or at least tolerated by the state. Hence, the reac tion: "Mr. Government, mind your own busi ness." But what is the government's business in relation to the economy and, especially, to money? None whatsoever-beyond defense and internal order-is the literal interpretation of economic freedom. Such is not our concept of freedom. We would not let the unemployed starve even if "eco nomic rationality" would require it, which it does not. It is rational to permit wage rates to fall in order to overcome a depression by adjusting costs to declining prices; starving the unemployed in the intervening period, which may last many months, is quite another thing. Few of us would agree that the labor of children in early British factories and of women in the mines was justified because it speeded up capital accumulation out of high profits, or that "interventions" such as the eight-hour day, free grammar schools, and the graduated income tax smack of bolshevism. Nor is the rule of the free market an obstacle to welfare spending by the authorities-the local ones, prefer ably-provided the spending does not impair com petition, financial stability, or the incentives to work, is not a pretext for servicing pressure groups, and is not fraught with corruption.

A prime misunderstanding should be cleared 58 THE "PHILOSOPHY" OF INFLATION up at once. \Ve must distinguish the institutional guidance of the economic process from its collec tivist control. Objecting to the normal function of a central bank, which is to check an excessive How of bank credit (illiquidity!), is typical of the pedants' confusion. By the sa:me token, control of the traffic by a policeman might be objected to as an abridgment of human rights. Restraining monopolists is another interference with "free dom" that in reality preserves freedom. The naive leave-us-alone idea enjoyed a meas ure of popularity in the nineteenth century and gave the period an undeserved black eye. At tempts in France and Britain tosuppress the labor unions were instrumental in begetting the socialist movement. The theory of Marx that capitalism destroys itself was based on the totally false as sumption, spread by the same laissez faire school, that labor as a group has virtually no chance of improving its lot. Capitalism might have destroyed itself had not worldly wisdom prevailed over the dogmatic misinterpretation of the perfectly sound doctrine: that the price mechanism of the free market brings about the most productive alloca tion of resources, the lowest possible prices, re muneration according to services rendered, and optimal (best) satisfaction of the consumer at his free choice. A by-product of free competition is low profit margins. Inflation, "the most deadly of all economic diseases," is a royal road to the burial 59 AN INFLATION PRIMER of these functions and ultimately of economic free..

dom itself. Unfortunately, the laissez faire (Manchester) school still has respectable adherents~ The dis service these persons unwittingly render to the cause of free enterprise and· sound money is a serious one. The more so, since the zealots of an obsolete Utopia outdo in their zeal the original. This is especially true in matters pertaining to monetary policy. The "classical" protagonist of undiluted eco nomic freedom considered the permanently fixed price of gold as a number-one pillar and an irrev ocable condition of the free market. Some of his promient (self-appointed) successors would extend "freedom" to the price of the monetary unit itself. The gold value of the dollar, they argue, should fluctuate until it finds its "natural level." Why not let the length of the yard and the weight of the ton vary too? There is probably no more effective tool with which to inflate the monetary base on which the credit structure rests than tinkering with the currency's gold content. The same holds for a once-and-forever devaluation of the dollar, even if its propagandists, the special interests in gold mining, pretend that this is the royal road to "stabilization. "

PERPETUAL PROSPERITY WITHOUT TEARS It IS deliberately misleading to pin the label 60 THE "PHILOSOPHY" OF INFLATION laissez faire on the opponents of inflation; it is just as unfair to call every vindicator of inflation a com munist, though inflation is a "bloodless" tech nique to revolutionize the economic system. The American devotee of progressive debt monetiza tion may be sincere in wishing to rescue us from flllegedly imminent depression. As a rule, he denies outright that he advocates rising prices and pooh-poohs the danger. Nay, he claims to be against both, inflation and "deflation"; he is for full employment, continued growth, and stable prices-by promoting inordinately rising wages, artificially low interest rates, and deficit spending. The money-counterfeiting propensity takes in numerable forms. Economic incantations may cover up the orators' objectives. Here is a sample of oratory, delivered by Senator Paul H. Douglas, leader of the pour-out-cheap-money wing of the 86th Congress (he was on the opposite side eight years earlier): "I believe that the American people desire that our economy meet three tests: providing maximum employ ment, an adequate rateo£ growth, and maintaining rela tive price stability and preventing both inflation and deflation." -Congressional Record) March 23, 1959, p.

4357. Note the vagueness of the terms "maximum," "adequate," and "relative." The London Econo mist} by no means a believer in laissez faire} com mented (August 29, 1959) in a typical English understatement: "Senator Douglas was once a 61 AN INFLATION PRIMER prominent economist, but the "life of politics has dulled his objectivity and diverted his attention." The object of inflationist wishful thinking is the centuries-old dream of perpetual prosperity at no social cost. Money-printing does the trick. But even dreams have their fashions. At one time, minting silver was to deliver mankind, meaning the indebted farmer, from "crucifixion on a cross of gold." The 1920's developed a refined tech nique to keep rolling a reckless speculative mania, the "eternal prosperity on a high plateau": con tinuous credit expansion, in complete disregard of liquidity requirements. Since the 1930's the "new economics" of the brilliant but whimsical J. M. Keynes has dominated the political scene and much of the academic teaching. One of his specious ideas was to monetize (inflate) in the depression and pump the money out (deflate) when full employment had been established. The underlying assumptions were two: that labor will not ask for higher wages even if prices rose (the unions are not interested in the cost of living, Keynes asserted), and that the 'inflationary process can be thrown in reverse gear whenever the money managers decide to do so (as if they were not only immaculately wise, but also omnipotent). But it is not possible, least of all in a relatively free economy, to create artificial employ ment by money administrations and not cause wage and price rises (in some sectors); and it is 62 THE "PHILOSOPHY" OF INFLATION most impolitic even to attempt to break a pros..

perity wave by deflating the money volume. Actually, although the depression faded out twenty years ago, we are still inflating! The defini tions of full employment and of unemployment are adjusted conveniently to the "needs" of the pressure groups or are replaced by some arbitrary rate of growth, measured by a fictitious statistical standard. The authorities all along the Potomac have joined the courthouse politicians in solemn assertions that they can and will pursue the mutually exclusive objectives of inflation-fed full employment and maximum production, with guaranteed price stability thrown into the bargain, thus talking from both sides of their mouths, like Arthur T. Hadley's Microwac, the electronic robot running for the presidency. THE RATIONALE OF THE CYCLE Monetary "reformers" of every denomination were fishing in the troubled waters of the Great Depression, and they are still at it. Whatever economic creed they profess, all assume allegedly incurable shortcomings of "capitalism." It is sup posed to be hopelessly exposed to recurrent mass unemployment, if not to perpetual stagnation.

For one spurious reason or another, the markets are (supposedly) incapable of restoring their own equilibrium or even of maintaining it. This is the fundamental concept of Marxism as well as of 63 AN INFLATION PRIMER Keynesianism. From there follows the call to col lectivize· the whole economy or at least the money and credit system. The difference is in degree rather than in substance. The radical departure and the so-called middle-of-the-road approach have in common the underlying economic philosophy: to substitute political fiat for the free functioning of markets and prices. The crucial question then is: Why does every boom bust? The answer of the inflationist is simple and easy. Prosperity comes to a halt when money is scarce and credit dear. Accordingly, ample and cheaper money is the cure. The additional funds, the unions claim, should preferably go into higher wages to be spent by the masses, not to be hoarded or used for conspicuous consumption as the "capitalists" (allegedly) would do.

But what causes the "money shortage"? It de notes a disequilibrium between supply and de mand. Creditors and debtors are overextended. The merchants may have overstocked, expecting higher prices and / or more sales. If they are dis appointed, must they be supported by credit shots in-the-arm? (Why not borrow the parity-price con cept of our bankrupt farm policy by setting up an "ever-normal" general store and donate the sur pluses to the backward countries? Moscow could never match that.) Inventory recessions are the necessary corrections of inventory booms. The latter would scarcely amount to 'much if the banks 64 THE "PHILOSOPHY" OF INFLATION used proper caution in financing the accumulation of goods on the shelves. Relaxing credit after the goods become unsalable would be a clear invita tion to the merchants to indulge in more of the same speculative stockpiling. What justification is there for profits if the losses are to be nationalized? Capitalism has no eco nomic or moral rationale if it is not what it should be: a system of risk-bearing, profit-earning and loss-taking enterprises. Indeed, profits (beyond managerial pay and interest on capital) are the re muneration for incurring the risk of losses.

Or, consider the investment cycles. When steel mills operate ~ell below capacity or when newly built homes find no buyers, one or both of the following events have occurred. Steel capacity had been expanded too far and the final product is overpriced; too many houses were built at too high cost. Under stable monetary conditions, the natural correction will set in; prices (and costs) will fall until they meet the consumer demand, and business recovery ensues. Not so, if inflation ary stimuli are applied. Construction may con tinue, customers or no customers. The "reces sion" is overcome, but costs and prices spiral and the excessive supply grows further, heading for a real slump. PROGRESS OR "GROWTH"? The downward s,vings of the (short) inventory 65 AN INFLATION PRIMER cycle and especially of the (much longer) invest ment cycle fulfill highly significant functions, best described as of sobering up effect. Parasitic firms that mushroom on the inflationary swing are elimi nated. Bank liquidity is improved. Overexpen sion of plants.and inventories is checked. Interest rates on fixed-value claims decline; the over valuation of shares gives way to a recovery of the bond market. Speculative ventures are trimmed; rational ·investment standards come into their right. Labor and managerial efficiency improve dramatically, with or without new equipment.

Costs per unit of output decline even without wage rate cuts. But, more often than not, high salaries are cut. Commodity prices, which have gone up on the expectation of continued inflation, soften, as do the unions' wage raise demands. For illustration, a few headlines chosen at ran dom from recent and very mild recessions·will do: "Businessmen bank on permanent gains from emergency cost cuts" (September 1958). "Fear of unemployment brings drop in loafing, job-hop ping, tardiness. Coffee breaks are shorter; work quality improves" (January, 1958). "Worker out put on the increase as joblessness grows, firms push to cut costs ... 20% gain in efficiency follows layoff. Absenteeism, 'quits' drop" (July, 1949). "Fighting slump by cutting costs," headlined the New York ])imes in February, 1958; and the Wall Street Journal: "Companies save where they 66 THE "PHILOSOPHY" OF INFLATION can during the business decline." While profits flow without much strain, it is only natural to neglect economies, to take it easy, to enjoy life and let the expense accounts run amok. When business turns down, output per worker that was sagging during the boom turns upward. Product quality and "service" to the customer improve spectacularly. These effects are by no means a matter of labor efforts alone. Of prime importance is enhanced managerial efficiency. The pressure of competitive imports spurred the textile mills' cost-cutting efforts: "On modest equipment spending they've achieved sharp improvements in productivity" (Wall Street ] ournal J May, 1960).

In fact, widespread misapprehensions notwith standing, depressions are times of accelerated progress. As F. C. Mills, an outstanding statis tician, has pointed out, the average increase of per man productivity in American industry (ratio of physical output to man-hour input) was 2 percent annually over the first half of this century; but two depression periods of an accelerated increase stood out-19l8-24 and 1932-41. 2 Actually, during the Great Depression between 1933 and 1935, manu facturing output per man-hour rose 11 per cent, in spite of much product quality improvement, the U.S. Department of Labor reports. Yet, Growth with a capital G is the inflationist battle cry. Without continuous inflation of the money volume and of prices, growth is supposed 67 AN INFLATION PRIMER to stop, stagnation to set in. However, growth manship promotes not progress, but just the oppo site. Again, Dr. Mills' figures speak for themselves: Periods of "growth" were characterized by "re tardation" in the rate of productivity's increase.

The records of the nineteenth century support the same thesis. "During that remarkable period of economic growth from 1873 to 1893, when mate rial wealth increased by about 140%, prices de creased more than 40%."3 In fact, an artificially stimulated, rapid "growth" may be accompanied by a high level of unemployment. In 1937, under inflationary stimuli, the industrial production in dex hit the 1929 record-with eight million unem ployed roaming the streets. It is futile to ignore the sufferings and waste caused by the depression (as is done by a school of self-styled libertarians of the laissez faire variety). Equally futile is it to ignore the fact that every depression is the outgrowth of the preceding boom. Had the "recovery" maintained its natural path of balanced growth., it could have lasted in definitely. Monetary stability., combined with sound fiscal and banking practices, is the prime condition of economic progress. It is the exag geration and unbalancing of the process-over expansions, physical and financial, leading to overemployment and other bottlenecks-that carry the penalty of a crash. 4 Exactly this state is what inflation brings about by obstructing 68 THE "PHILOSOPHY" OF INFLATION sound entrepreneurial and investment judgments and whetting the political appetites.

The incessant clamor of the inflationist is that the gross national product (estimated total spend ing) must GROW every ,rear at a fixed rate, be it 3 per cent, 4 per cent, or 5 per cent, the num ber varying according to his whim. There must be no letdown in the number game, no interrup tion, and it makes no difference on what we spend. The GNP never rises as it did in World Wars I and II; in the single year 1943 it jumped as much as 15 per cent, "thanks" to all the spending on military hardware. (Actually, in 1939 Keynes offered the British the flippant consolation that the destruction caused by the war would be to their benefit, creating employment and income thereafter.) But no cars and no homes were pro duced and shortages were the order of the day. There was ample statistical growth" but very little economic progress. The former is a matter of more money outpour; the latter, of real wealth creation.

Could it be that the ghost of the oldest of eco nomic fallacies haunts the ivory towers of the academy, confusing money and real wealth, the lubricant and the source of energy? Or is it merely a case of economic myopia, the inability to see the consequences of monetary tympany beyond the immediate ebullience it evokes? In any event, the gross falsehood of the growth-at-any-price 69 AN INFLATION PRIMER philosophy makes one suspect there must be ul terior motives behind. it. There are, indeed, as we shall see. I. In the past, periods of rising and falling prices alternated. The British retail price index of basic consumer goods fell by 51 per cent between 1813 and 1893; by 59 per cent between 1920 and 1932. E. H. Phelps Brown and Sheila V. Hopkins, "Seven Centuries of the Prices of Consumables, Compared with Builders' Wage-rates," Economica~ Vol. XXIII, No. 92. 2. F. C. Mills, "The Role of Productivity in Economic Growth," American Economic Review~ May, 1952.

3. R. T. Patterson, in Commercial and Financial Chronicle, August 20, 1959. 4. About overindebtedness, typical of every rash of specu lative mania, see subsequent chapters. 70 VIII CREEPING INFLATION AND INTELLECTUAL HONESTY HOW MUCH IS A LITTLE? Just how much inflation is a little inflation? This is the first question to which the proponents of creeping inflation must give an unequivocal answer as a matter of intellectual honesty. Their answers vary within a wide range. Professor Jacob Viner of Princeton University, and one of Roosevelt's brain trust, pontificated: I shall begin to get scared, myself, if the rate at which prices rise on the average exceeds 10 per cent per annum. A one per cent increase per month, continuing over a period of months, in the wholesale price index, if not justification for hysteria is perhaps justification for alarm; if not for alarm, then certainly for grave concern. Commerce, April, 1941.

One may wonder about the present state of mind of the eminent economist: scared, hysterical, alarmed, gravely concerned, or not concerned at all? But his wartime ruminations should not be taken too seriously. At that time, the upside down economics of J. M. Keynes reigned supreme, in particular the theory that the saver is the de structive villain in the drama of the business cycle, the spender the constructive benefactor. 71 • AN INFLATION PRIMER Since rising prices penalize the wicked saver and stimulate the brave spender, it was rather con servative to be "concerned" about such a trifle as a monthly rate of price inflation exceeding one per cent. Professor Paul A. Samuelson 1 of Massachusetts Institute of Technology, author of a widely used college textbook, in an early edition announced ex cathedra that 5 per cent is the desirable rate of annual depreciation of the dollar's purchasing power. He was down to 2 per cent per year in the 1958 edition, with no explanation for the change of heart. At this rate of progress of his own theory's depreciation, he may land-on the gold standard.

So far as the public is concerned, the late Har vard Professor SumnerH. Slichter was the prophet of creeping inflation. He seemed to mean a ·3-5 per cent annual rise of prices. The New York Times of April 27, 1959, took him to task for "strange discrepancies between the Professor's statistics and the conclusions that their author draws from them," intimating that, hav~ng built up a clientele by forecasting perpetual inflation, he had acquired a vested interest in his own fore casts. (He propagandized spending and debt monetizing policies that would have helped his forecasts to come true.) Slichter, in the Commer cial & Financial Chronicle of July 23, 1959, re acted with intellectual somersaults. Instead of 72 CREEPING INFLATIoN blaming the Federal Reserve for "creating unem ployment," as he did only a few months earlier, he became its defender, putting the blame on the pressure groups, meaning the farmers and vet erans. He still glorified the inflation that did marvels at the ,modest rate of 8 per cent in nine years. In other words, less than 1 per cent infla tion per annum is sufficient to maintain prosper ity, according to Slichter's last turn. We would not venture to divine the next turn. of his famulus at Harvard, Professor J. Kenneth Galbraith.

CUTTING THE DOG'S TAIL PIECEMEAL The answer to the first question, "How much i~ a little?" is anyone's guess, and the propagators of creeping inflation are not even bound by their own estimates, which have no scientific rationale whatsoever. The second question should be equallyembar rassing to the creeping inflationist. He posits some annual percentage rate of the moriey's future depreciation. Does he mean the same rate each year? That, of course, would be contrary to all experience. But a long-term average may be ar rived at by a practically infinite number of com binations of annual rates. The sameness of the arithmetical result is no proof of identical eco nomic meaning. Annual averages over a· decade may take us back to the ups and downs of the old-fashioned boom-and-bust cycle. 73 AN INFLATION PRIMER Slichter admitted the obvious, namely that periods of boom alternate with years or months of recession. But then his creeping inflation boils down to short cycles of over-and underemploy ment, with a long-term bias in favor of higher prices.

Our third question also implies a test of the inflationist's intellectual honesty. How long is the "perpetual" creeping supposed to go on? For a limited period? Indefinitely? Forever? The answer, if any, is vague, evasive, noncommittal. Yet, this is crucial. If there is a reasonable time limit, the "fun" is spoiled. If there is none, peo ple will notice sooner or later what they have to expect and will hedge against it by rushing to buy things before the money loses much of its purchasing power. Would that not turn the creeping inflation into the runaway or self-in flaming kind, a contingency to which our infla tionists are opposed tooth and nail? According to Dr. Slichter, there is no such danger. Experi ence shows (to his satisfaction) that people take a cleverly planned or dosed inflation in stride and scarcely notice it, like the proverbial dog that would not suffer if its tail were cut by small pieces only.

On what assumptions is this diagnosis of human behavior based? On the ability of economists and politicians to bamboozle an ignorant public? But the propagandists themselves, of all people, are 74 CREEPING INFLATION guilty of making people aware of the inflation. This is an extraordinary case of a forecaster whose forecast is doomed by his own efforts. If he con vinced many of us that perpetual inflation is in the cards, we would be anxious to act on that knowl edge-to buy, borrow, and speculate on further rising markets, spelling finis to the slow inflation. S~ichter might have had a better chance of being proved right if he had stopped tooting his prog nostications from the literary housetops. The unions understood that the dilution of the currency creates a redundancy of demand . . Supply cannot catch up at once. A prime limit ing factor is the relative shortage of qualified labor; on that, labor "bargaining" thrives. But ris ing wages unleash vicious spirals, which in turn upset the neat calculations of the planners. Small wonder that Slichter was growing increasingly critical about the unions. They were ruining his balderdash-by acting on his theory of slow in flation. Instead of recognizing the effect of his own mischievious and inconsistent propaganda, he cried out that the community should not "tolerate this topsy-turvy system of distribution"

by which "labor exploits capital, science, and en gineering. "2 The trouble with planned inflation, slow or otherwise, is that inflation cannot be planned. Planners (technocrats) think of running a social organism as a mechanical contraption. This is a 75 AN INFLATION PRIMER naive concept of the body economic-of human nature. By controlling the flow of fuel, one con trols the speed of the motor. By regulating the flow of spendable funds, the planners propose to control the flow of demand for consumer and capital goods, and this without serious interrup tions. However, the motor does not discount the future intake of fuel; men do anticipate the forth coming action of the monetary authorities if they know or think they know it in advance with rea sonable certainty. This is exactly what slow in flation brings about, once the pattern is definitely established in people's minds. POWER VERSUS FREEDOM In a free or relatively free economy inflation cannot be planned, but a planned economy can not operate without inflation. Even the almighty Soviets live under its constant pressure (inter rupted periodically by brutal deflationary meas ures). The same is true for the patronage state misnamed welfare state-in which maintaining the national budget and the credit system in a sound operating condition and conserving the in ternal as well as the external stability of the cur rency are secondary considerations, at best. Under the rule of the gold standard, the money supply is "disciplined." So is the budget, because the Treas ury's recourse to the printing press is restrained.

Then, too, the politicians' power to plan or to 76 CREEPING INFLATION manage the economy and to pour out patronage is restrained. (The law of corruption: corruption grows in geometric proportion to the volume of public expenditures.) Herein lies the crux of the whole monetary debate. In ultimate analysis, it boils down to the choice between a free) competi tive-market economy and a statist or collectivist system run by political fiat. Currency manipulation is not only a charac teristic of every collectivist society; it is the safest and surest way to collectivize every society. "The issue between individualism and collectivism, be tween internationalism and economic national ism, is settled when a country has decided what kind of monetary system it is going to have. If the government is free to manufacture and mani pulate money at will and arbitrarily, then we cease to have a free society."3 Openly or in disguise, the proponent of col lectivist policies starts from the assumption that the price mechanism fails to perform its essential functions. (See Chapter VII.) If he does not negate the free-enterprise system altogether, he is at any rate highly skeptical about its efficiency or desirability. That system deprives him of chances to exercise real power) power over pro duction and distribution. Hence, the claim that the government has to take over where business allegedly leaves off. Full employment (no-more77 AN INFLATION PRIMER depression) was one patent pretext written into the statutes, if only in vague wording, as the Em ployment Act of 1946. But contracyclical med..

dling turns out to be inflationary, so the next step is to add insult to injury by requesting that price stability should also be guaranteed-by the government. Lately, the public is deluged with the official and unofficial promotion of growth as the overriding value to justify more public spend ing, taxing, inflating, and meddling. The theories and techniques change, but the object is constant: to win many friends and in fluence many voters. Short of military victory, nothing serves the ambitious politician better than the appeal (in humanitarian lingo, of course) to the greed of groups with substantial weight at the polls. Crawling inflation is a very convenient avenue for the redistribution of incomes and wealth, a most effective subsidiary to discrim inatory taxation, political patronage, governmental meddling, and outright corruption. Even the tightrope act of "balancing" the economy between booms and recessions necessitates a host of incisive fiscal and monetary maneuvers. And should the inflation get out of hand, the collectivist stands ready with price, profit, and wage controls, allo cations, rationing, credit controls, foreign-ex change barbed wires, and nationalizations. The greater the calamity brought about by the infla tion, the broader the power he is likely to acquire 78 CREEPING INFLATION to combat the inflation· by "physical" (bureau cratic) methods of repression.

MUST WE FOLLOW THE KREMLIN? A word about the collectivist is appropriate. He is no Communist, oh no! Frequently, he claims to be a believer in economic freedom, with a bit of money management superimposed. But on some basic points his thinking happens to co incide with the Kremlin line. Growth at any price, his ultimate ideal, is straight out of the bolshevist horse's mouth. And (changing the metaphor) he rides that horse for all it is worth. Russia's propaganda about her progress-meas ured in imaginative price data-is being held up for boundless admiration. Never mind that the data are notoriously faked, or that the Soviets know little and care less about their own costs;4 they can always reduce living standards, in addi tion to wasting their own and their satellites' re sources. The sophomoric notion of a Russia that lacks the incentives and a rational price system, the touchstones of efficiency, overtaking us is be ing dangled as a· Damocles sword. (If she did, everyone, including ourselves, would be better off.) For years, she is supposed to be on the verge of flooding the world's export markets, although the dollar volume of her exports to non-Soviet countries never reaches that of Switzerland or 79 AN INFLATION PRIMER Sweden. Such irrational propaganda serves also to justify our foreign-aid outpour.

The Western ("democratic") collectivist and the Eastern (totalitarian) communist have more in common than either would care to admit. The common concept of monetary and credit manipu lation is but one expression of an ideology that is the very opposite of economic freedom-which means free choice by the consumer. On the free market, the consumer's vote reigns sovereign in determining what should be produced. His satis faction, the rise of his living standard, is the acid test of progress. To that, collectivists and com munists pay lip service; but their fetish, growth, is something else. Their emphasis is not on indi vidual consumer wants, but on collective "public" needs. As is well known, the Soviets give primacy to armaments and capital goods; the average con sumer gets a minimum of benefits, with very limited choice. A superbureaucracy does the choosing. That is very nearly the idea our statists are pursuing, with a difference in degree due to the difference in political climate.

As the pow.ers that be enlarge their grip over the nation's income and resources, they substi tute progressively their own judgments for con sumer choices. Inescapably, "welfare" turns into patronage. The volume of investment, instead of accommodating itself to available savings, is subject to inflationary expansion. 5 All this vastly 80 CREEPING INFLATION enlarges the radius of governmental and pressure group action, arbitrarily confounding, or revo lutionizing, the distribution of incomes and the pattern of industrial development. Whether the rationalization is to overcome the alleged inequities of capitalism and its inherent "stagnation," to create more employment, or to promote growth, the result is to shift the management from the hands .0£ entrepreneurs, who are responsible to the verdict of the market, into the arms of tech nocrats responsible to politicians, if at all. Even under the unrealistic assumption that the planners are incorruptible, mismanagement· is the outcome, unless they are superhuman and know better what is good for the consumer than he does himself and make no major errors in guessing the future of the markets.

Where the logic of collectivist yearning drifts is perfectly illustrated by its recent turn against the "affluent society," meaning the free choice by the consumer. Leaders of the "liberal" intelli gentsia have lately been producing best sellers purporting to show that we (and the British cousins) are living too high on the hog, badly neglecting the poor fellow, the government-who happens to absorb directly up to 30 per cent of the national income and who manages or distorts a great deal more by remote controls, especially by inflation. In the forefront of this neocollectivist move81 AN INFLATION PRIMER ment will be found outstanding "liberals" of the Keynes-Slichter school of inflationism: Harvard Professor J. Kenneth Galbraith, economist of the Democrats for Political Action (the brain trust of the Democratic Party's union-supported left wing), and his British counterpart, Richard Cross man, a spokesman of the Labor Party, or of its Left. This is not accidental. The inflationist in tent is, fundamentally, to stultify the autonomy of the market and to foster the growth of the government's power. Sooner or later, the power motive in the back of the inflationist mind breaks into the open. It may be through the curtain of tears shed for the hungry millions in the under developed countries (and their socialist planners), for whose benefit we are to be forced into involun tary AUSTERITY, a new catchword for the old idea of equalizing incomes (downward).

Creeping inflation and galloping socialism are ideologic brothers under the skin. They comple ment each other in the pursuit of unhappiness of more regulating. and spending authority for the government. "Eggheads" may be inflationists, but collectivists are no dreamers. They know what they want. Inflation, to them, is not self-purpose; it is one instrument among others to gain and hold power. When inflation ceases to make friends, nay, threatens with popular reaction against the collectivist trend, yesterday's easy-going inflation82 CREEPING INFLATION ist turns into tomorrow's stern moralist. 1. During the 1960 presidential campaign, he was a top economic advisor to the Democratic candidate. 2. Virtually in the same breath, Slichter paid tribute to the unions' excessive wage demands as an "independent cause of the [1959] recovery." 3. Philip Cortney, in The New York Times J December 10, 1949.

4. Even by their own inflated figures (their dairy output includes the milk consumed by the calves), the Soviets' rate of growth is declining: from an average annual 14.1 per cent in 1949-53 to 7.7 per cent in 1957-1959. By 1960 it was trailing far behind that year's 12 per cent industrial output growth in the European Common Market. Soviet statistics have been de flated lately by one of Russia's own top-level economists (New York Times, September 11, 1960). 5. "A myth of expansion [is] a way of attenuating, by public intervention, the sterilizing effect of inflation, of excessive tax ation, and of the erosion of savings."- Jacques Rueff, outstand ing French economist. 83 IX INFLATION'S BALANCE SHEET:' THE LIABILITIES PROGRESS BY INFLATION Statisticians compile data which add up to the much-revered figure called the national income. Planners plan by that figure, supposedly, setting targets for its growth. Many economists and many more politicians use it as the infallible yardstick of the nation's progress, wealth, and welfare, To the inflationists, the growth of the magic figure is the supreme objective of policy. It has been rising, indeed, an accomplishment they claim is made possible, if not actually created, by the brim ful money supply. Without that, there would be Stagnation, with a capital S.

Now, the national income is a somewhat less than reliible "aggregate." The data ... about the components entering into such aggregates as national income, volume of production, savings and investment, etc., are pure "guesstimates," subject to arbi trary manipulation. The methods to substitute what amounts to "very wild guesses" in the place of factual knowledge are known to the statisticians as "interpolating between benchmarks, extrapolating from benchmarks, blowing up sample data, using imputed weights, inserting trends, applying booster factors .... " According to out84 INFLATION'S BALANCE SHEET: THE LIABILITIES standing British statisticians, "The result (of forecasts based on national iFlcome statistics) looks about as scien tific as Alice's celebrated attempt to play croquet by hitting a live hedgehog with a flamingo."l For the sake of argument, let us accept the con cept, vague and hazy as it is, at face value. The gross national income's rate of progress since 1950 has been unusual, averaging some 5 per cent a year in dollars of depreciating purchasing power.

Translated into "real" income by eliminating the price-inflation factor, this means a rise of abou t 3.2 per cent annually, which is roughly the same average that obtained in the thirty-four-year pe riod 1880-1914, under stable money, through several booms, crises, and depressions. Did we need the stimuli of managed money, unbalanced budgets, creeping price inflation, huge arma ments, fantastic price props, a cornucopia of do mestic and foreign subsidies, and a multitude of I bureaucratic interventions-all of which involves a great deal of waste and corruption-to accom plish what we have done before without such shots-in-the-arm? That is not all. What matters is the per capita growth rather than the total growth. Per capita, given the rapid rise of population, the real na tional income rises by little more than 1 per cent a year. Even of this modest increase, a large portion produces no economIC values. About 85 AN INFLATION PRIMER one-fourth of the increase originates in ~ilitary expenditures, governmental stockpiles of unsal able commodities, "unproductive" services of bureaucrats, and the like. The true (per capita) growth of goods and services available for the satisfaction of the consumer or for additions to the nation's productive capacity may be three fourths of 1 per cent per annum, or less, far be low the comparable late nineteenth-century rec ord. In fact, it is well below the record of the period 1920-28, a period of stable prices and of a comparatively slow rate of population growth.

For illustration: in 1958, the average American family's income is supposed to have "risen" by $20, or one-third of 1 per cent, this before taxes. Such is the much-advertised growth of our na tional income, the asset side of creeping inflation's balance sheet. The liability side is being ignored, deliberately. THE LIABILITY SIDE There is a price to be paid for an artificially engineered growth. For one thing, with every 1 per cent increase of the national income, our debts, net after elimination of duplications, grow by 1.7 per cent. This they did in the 1920's, too. This "growth" is spectacular, indeed, as shown in the table on the facing page. Between 1950 and 1958, the net nonfederal debt of the American people has risen five times 86 INFLATION'S BALANCE SHEET: THE LIABILITIES faster than during the corresponding eight years of the lusty 1920's. True, in the current period the dollar's purchasing power has been cut se verely, while it was stable in the previous one.

Even if the figures are corrected accordingly, the rise in the current boom has been proceeding at a rate almost treble that in the previous great prosperity. Note that in the 1920's the net governmental debt remained stable; the federal government liquidated (repaid!) as ·much as the state and local authorities borrowed. ~n the 1950's, both went into the red. For everyone-dollar increase of the total net debt in the twenties, we added seven dollars in the fifties. "NET" DEBT OUTSTANDING (in Billions of Dollars) End of Governmental Private Year State and Cor-Indi- Total Federal * local porate vidual t 1921 ...... $ 23.1 $ 6.5 $ 57.0 $ 49.2 $135.8 1925 ...•.. 20.3 10.0 72.7 59.6 162.6 1929 ...... 16.5 13.2 88.9 72.3 190.9 1940 ...... 44.8 16.5 75.6 53.0 189.9 1946 . ~ .... 229.7 13.6 93.5 60.6 397.4 1950 ...... 218.7 20.7 142.1 109.2 490.7 1954 ...... 230.2 33.4 177.5 165.4 606.5 1958 ...... 232.7 50.9 255.7 240.4 779.7 1959 ...... 243.2 55.6 281.7 265.8 846.4 Change: 1921-29 ... - 6.6 + 6.4 + 31.9 + 23.1 + 55.1 1929-40 ... + 28.3 + 3.3 - 13.3 - 19.3 - 1.0 1940-59 ... +198.4 +39.1 +206.1 +212.8 +656.5 *The tTue federal debt is about $40 billion larger than the "net"

figure. See Chapter X. tlnc1udes noncorporate enterprises. 87 AN INFLATION PRIMER The major portion of the funds to finance the inflation of the personal debt-a credit expansion that fans the fire under the price level-stems from the banks and the savings associations. By the end of 1958 they carried, between them, over 60 per cent of the outstanding mortgage loans on one-to four-family homes. Directly and by in direction, the commercial banks also provide the bulk of installment credit (up to three years), this on top of a growing volume of business term loans (up to ten years!) and "slow" loans to busi ness, plus substantial holdings of medium-and long-term corporate and municipal bonds. The obvious hazards involved in overloaning them selves and in impairing the liquidity of the earn ing assets seem to be ignored by a new generation of bankers. This new generation does not re member the depression and is being sold, just like the fathers were thirty-odd years ago, on the idea that there never will be another.

BORROWING A LIVING STANDARD Presently, the most rapidly rising component of the credit structure is the "individual" debt of nonfarm households and unincorporated busi nesses. This debt grows a great deal faster than the personal disposable income after deduction of direct taxes, as shown in the next table. In 1959, the net addition to the outstanding personal debt alone (mortgages on one-to four88 INFLATION'S BALANCE SHEET: THE LIABILITIES family nonfarm residential buildings plus con sumer loans) was $19.4 billion, a record. Install ment credit ·is currently expanding at the annual rate .0£ $5.5 billion, or 9 per cent, also a record. As consumers, we are ~re-empting expected future income. Evidently, our per-"capita consumption could not improve even at the modest annual rate the statistics show if it were not bolstered by purchases on credit that will limit our future con sumption. But for the time being, such purchases permit a standard of living above the level of earnIngs.

How long this process of piling up debts in excess of incomes-and ahead of the rate at which liquid savings are built up-can continue,. no one knows. But no one in his right senses would dare to assert that it can go on indefinitely, or without serious interruption. Every minor interruption means a recession; a major one spells depression. Thus, instabiility is being built into a supposedly depression-proof economy. Disposable Net Individual Personal and Noncorporate End of Income Gain, Debt Gain, Year (billions) % (billions) % 1950 ........ $207.7 $108.9 1951 ........ 227.5 10 119.8 9 1952 ........ 238.7 5 135.6 12 1953 ........ 252.5 7 150.4 10 1954 ........ 256.9 2 165.4 9 1955 ........ 274.4 7 190.2 13 1956 ........ 292.9 6 207.5 8 1957 ........ 307.9 5 221.9 6 1958 ........ 316.5 3 239.7 7 1959 ........ 334.6 5 265.1 10 89 AN INFLATION PRIMER At that, the comparison of total disposable in come with the total of personal debt does not give the right picture. The one is accruing to the population as a whole; the other is owed by a section of the population only-surely not by mil lionaires. According to a recent Federal Reserve Board survey, 32 per cent of all "spending units"

(families) had no debt at all; of the indebted 68 per cent, two-fifths were obligated both ways, by consumer loans as well as by mortgages. The eco nomic visionaries who dream of eternal prosper ity, or of perpetual creeping inflation which is the same mirage, derive satisfaction from the fact that not all families are burdened with personal debts. In reality, this is very ominous. It means that, for a majority, the annual increase of the debt is outpacing the annual growth of disposable income. What will be the proportion, say, five or ten years hence, if the inflation "creeps" that long? The debt obsession, induced by the excessive money supply and nurtured by an inflationary psychology, produces paradoxical phenomena. In 1959, personal debt creation proceeded apace de spite the steel strike. After three months without visible income, the credit of the striking steel workers seemed better than ever. In Gary, the local businesses offered the steelworkers almost everything, from socks and pants to furniture and videos-at no down payment. Just take the goods 90 INFLATION'S BALANCE SHEET: THE LIABILITIES and sign a piece of paper; the paper was eligible as collateral for a bank loan. The disproportion between current production and current con sumption is highlighted by this example of un employed labor maintaining its spending habits in anticipation of a wage increase. But it would take decades for any increase to make up for the wages lost during the strike, let alone the install ments on the new debts, with 10 per cent annual interest charge in the "bargain."

Nothing wrong with buying homes on credit, with ever less down payments needed and ever more interest charged for stretched-out periods, the dreamers argue (in waking hours). The fam ilies merely pay for mortgages, plus upkeep and tax, what they would otherwise have paid for rent. Maybe so, in some cases, but for a majority, it takes an irresponsible optimism to ignore the pitfalls. Construction cost per dwelling unit tends to decrease with the number of dwellings under one roof, and so does the rent. Home ownership may be desirable for many reasons, but it can be a serious opstacle t the worker-owner's mobility and earning power or to his ability to adapt him self to changing co ditions. Again, the probl m is not so much the present size of the home-m rtgage debt; the problem is where do we go f am here? Can people afford, and how much lo ger can they afford, to mort gage themselves at he annual rate of $10 billion 91 AN INFLATION PRIMER to $15 billion far in advance of the growth of their incomes? What of the creditors, if anything should go wrong? Nothing to worry about, take the word of N. H. Jacoby, a former member of the President's Council of Economic Advisors: While home mortgage and consumer debt has quintupled since 1946, we must recall that family incomes, assets, and equities in homes have grown proportionately. Sixty per cent of American families live in homes they own, and half of these homes are free of mortgage debt. Moreover, nearly 40 per cent of all home mortgage loans are VA guaranteed or FHA-insured-55 billion of the 114 billion outstanding. With currently low default and delinquency ratios on mortgage debt, there appears to be no danger in this quarter. [Italics ours.]-Commercial and Financial Chronicle~ October 8, 1959.

There is "no danger" of future defaults because there are no defaults now, while the money is pouring out of the banking system and confidence (in coming inflation) is unshaken. Such irresist ible logic is typical of the economic tranquilizers produced by thinking in "aggregates." Of course, the "aggregate" volume of mortgages may never go in default, but the story may be different for those mortgages incurred at high cost in purchas ing speculatively overvalued properties. 2 As it is, banks and savings institutions rarely find the names of their home-mortgage debtors on the ledgers of. their savings accounts. The ultimate tranquilizer is: falling back on Uncle Sam. He insures or guarantees, as just 92 INFLATION'S BALANCE SHEET: THE LIABILITIES quoted, $55 billion of $144 billion outstanding home-mortgage loans. That still leaves $90 bil lion unprotected, even if the U.S. Treasury, hope lessly entangled in its debt problems, should be able to take care of additional billions worth of bonds with which to satisfy the mortgage creditors.

These additional bonds would be either thrown on an overloaded capital market or monetized by the banks. By that time, a "new" kind of creeping inflation may be under way, one accom panied by stagnation. Of course, the American economy has grown "larger" and richer in a generation's lifetime; it can take (swallow?) more ~ebts. But it has not grown three times larger; it did not even double in productive capacity. Still less can its further growth keep up with the accelerating growth of the debt. Needless to say, crises and panics do not require that all debtors go bankrupt. The bankruptcy of a modest fraction does it. At present, far more than a modest fraction of consumers is better than knee-deep in debts,S and going ever deeper. "Grow,th" of this kind surely may raise living standards now; just as surely, someone's living standards may have to suffer later. Indeed, auster ity-restraint in consumption-is what some in flationists advocate already.

Fortunately, the market forces, if permitted to operate, tend to bring about an automatic correc93 AN INFLATION PRIMER tion of the borrowing and spending excesses. The expansion of personal loans is a significant factor in tightening the banks' lending capacity and rais ing the interest rates. This puts a damper on the supply of credit, provided the Federal Reserve goes slowly with its anticyclical medicaments to rehabilitate the organized recklessness. Business corporations and local authorities con tribute their share to the debt inflation. Between 1930 and 1959, the short-term debt of nonfinancial corporations other than railroads has quadrupled, and their long-term debt has more than trebled. Probably some 15 per cent of the latter is due annually. Interest charges did not rise propor tionately, thanks to lower rates and to the tax deductibility feature; but the profit margin per sales dollar declined, too, in the 1950's, and the tax collector takes 52 per cent of the net. So, the debt burden of corporations) relative to their net (after taxes), has greatly increased and their expan sion potential has been curtailed, to say nothing of the impending threat of illiquidity.

That this process is not fraught with, very serious hazards can be believed only by those who have taken out a patent on eternal prosperity, a world in which debts are o,ved to one's own "pockeL" "PEOPLE'S CAPITALISM" Specious fruits grow on the tree of creeping 94 INFLATION'S BALANCE SHEET: THE LIABILITIES inflation. One of them is being hailed as "people's capitalism," meaning the fantastic proliferation of stockholders in and out of investment trusts. In vestment trusts play the market with billions of dollars, most of it put up by people who have no business risking their modest savings in ventures of which they know nothing. It is the lusty 1920's allover again, with the same ruthless techniques in exploiting ignorance and greed .and the same breed of "financiers" pocketing untold fortunes. The latter plead perfect innocence, of course. What's wrong with getting rich? Nothing, pro vided the deal is not unfairly "loaded" and the customer does not get hurt when the day of "reckoning" (in sensible price-earning ratios) arises. A chief source of the anticapitalistic senti ment of the 1930's, to which we owe the New Deal and the welfare state, was exactly the same "in nocent" practice. When millions of people lose their money on gambling, on which they were sold as if it were legitimate business, they turn against the whole system that supplied the gambling chances, and th~ money cranks have a heyday.

This is differ4nt from the 1920's, the salesmen of sloth assure U$. Then, people gambled on borI . rowed money; then the market fell, they were wiped out. NotI1ing of the sort is threatening now when all they m}ght lose in a crash (which never, never will happqn again) is their own savings (as if that w~uld bake them feel much better). 95 AN INFLATION PRIMER Margin requirements, reduced from 90 to 70 per cent, virtually prohibit speculative excesses. Look at the figures of brokers' loans: they are a mere fraction of what they were in 1929, compared with the dollar volume of stock-exchange transactions then and now. Moreover, the public cannot be deceived any more, thanks to strict controls by the Securities and Exchange Commission, several na tional and fifty state agencies, and the stock ex_changes themselves. Most of this belongs in the category of "eye wash." The authorities may check palpable fraud but have no power over intangible, possibly bona fide, mal-persuasion. A vast volume of shares, quoted on the over-the-counter market, are not even subject to margin requirements. As for the margin borrower, he gives written assurance to the banker that he is not using the credit for pur..

chasing or holding securities, but there is no con trol, no effective penalty on circumventing the law. And-debt subterfuges are being concocted. The worker at the bench and the farmer in the barn are being parleyed into signing up for ten years or longer on fixed-sum annual plans to purchase investment-trust certificates. They can cancel the plan, but the cost of doing so is prohibitive. In all but name, the buyer incurs a debt that is not regis tered in the statistics of debts. Easy money "eases" the moral fiber of society. 96 INFLATION'S BALANCE SHEET: THE LIABILITIES When government housekeeping is oblivious of the rules of economy, private households are strongly tempted to follow the same pattern. When acquiring wealth becomes a matter of gambling and politicking, as it does in the infla tion morass, real values are likely to suffer. Wit ness the proliferation of criminality, embezzle ment, and tax evasion, symptoms of the disease that has its prime roots in monetary and fiscal policies. The··drawn-out depreciation of the cur rency's purchasing power cannot fail to affect standards other than the monetary alone.

Inflation, and the spirit which nourishes it and accepts it, is merely the monetary aspect of th<:t general decay of law and of respect for law. It requires np special astuteness to realize that the vanishing respect fot property is very inti mately related to the numbing of re~pect for the integrity of money and its value. In fact, laxity about property and laxity about money are very closely bound up to gether; in both cases what is firm, durable, earned, se cured, and designed for continuity gives place to what is fragile, fugitive, fleeting, unsure, and ephemeral. And that is not the kind of foundation on which the free society can long remain standing.-Professor Wilhelm Roepke, Geneva, Switzerland. 1. From this writer's book, Managed Money at the Cross roads (Notre Dame, Ind.: University of Notre Dame Press, 1958), pp. 136-7. 2. Too often, twenty-and thirty-year mortgages finance homes that may have to be rebuilt in fifteen years.

3. According to a 1960 Federal Reserve survey, "Close to 20% of all spending units were devoting 20% or more of their disposable income to installment payments." But a good deal of the "disposable" income is not disposable at all. 97 X THE BURDEN OF THE NATIONAL DEBT IS IT A BURDEN ON THE NATION? It is not, provided it is being held domestically, proclaimed President Franklin D. Roosevelt. "One pocket owes it to the other." (Debt owed to foreigners is considered as belonging in another chapter.) Since the public debt is no debt in the common meaning of the term, it need not be and virtually never has been repaid, according to the managed-money and creeping-inflation advocates. We should learn to live with the mammoth debt and accept the alleged necessity of its further growth. Let us go on accumulating budget deficits whenever "needed." Consider the size of the pile as irrelevant. As a Harvard professor announced it not long ago: it makes no difference whether the federal debt is $300 billion [nine zeros] or $300 trillion [twelve zeros]. Why, far from being a national liability in a meaningful sense, it might be considered as a wealth-creating asset. How could one enjoy all the "blessings" of currency ..

diluting if it were not for the debt and its recur rent monetization? How would we overcome de pressions (in the midst of booms), maintain full 98 THE BURDEN OF THE NATIONAL DEBT employment, and spend ourselves into ever greater richness? He who believes in inflation as a panacea for curing social ills, or even as a necessary evil, must justify the existence and growth of the overextended national debt. But the principle of "one pocket owes it to the other" applies to a communistic society only. When everything belongs to the state, all liabili ties are a matter of mere bookkeeping. Conversely, he who denies that the debt is more than a book keeping item, wittingly or unwittingly, negates the system of private property. Under that system, the "pockets" of creditors are distinctly separate from those of debtors. A gain of the one is no compenscftion for a loss to the other. Yet, the "two-pockets" principle asserts that, in contrast to private debts, servicing the public debt merely means a transfer of income from one group to the other. Real resources are not affected. "The fact that the government owes its citizens certain sums is not really a burden on the natIon as a whole," asserted The Economist (London) of November 21, 1959. That would be true if a 100 per cent tax were levied on income derived from federal securities. Of course, no one would buy the bonds, except the Federal Reserve that de livers to the Treasury practically all earnings on its huge portfolio.

Presently, the American taxpayer is burdened with $9 billion a year for interest on the $290 99 AN INFLATION PRIMER billion debt, nearly twelve cents of every dollar of federal revenue. Are we to believe that we would be no better off if federal taxes were 12 per cent lower, even though the bondholders would receive that much less? (Could they not have invested in other securities?) By the same token, no tax ever is a burden, provided the money taken from a domestic Peter is "transferred" to a domestic Paul, which is what usually happens. Note how neatly the argument for the public debt's alleged economic innocence fits into the not-so-innocent frame of mind of the demagogues who plead for wealth redistribution. Why not in dulge in such "transfers" by which the loss of one side is compensated, supposedly, by profits of the other? By promoting the something-for-nothing illusion, debt-making serves not only as the motor of inflation, but also as an intellectual vehicle of collectivism.

THE ECONOMICS OF THE DEBT The interest charge on the national debt is a strategic element in the federal budget. Without the $9 billion-minus $3 billion, maybe, allowing for the bondholder's income tax, etc.-among the "overhead" costs of government, the budget could be held in balance and the debt reduced by a notch, still leaving some funds available for tax cuts. The national debt burdens the economy in 100 THE BURDEN OF THE NATIONAL DEBT more than one way. New money the government borrows is taken out of the nation's "pool" of savings: $7 billion in 1958, $5 billion in !959. That much less is left to other borrowers-busi ness, consumers, local authorities, home builders. A shortage of capital is engendered and interest rates mount, raising production costs and living cost~ in addition to the government's own costs of operation. For another thing, what did the government do with the money? Little, i~ any, has been invested in a productive fashion. Wherever it went, almost none flows back. Its interest charges are not covered by forthcoming earnings, as in the case of reproductive (self-liquidating) investment. In stead, the charges have to be paid out of taxes, which are paid largely by lower-middle-class peo ple engaged in production, and a disincentive is fostered.

Some of the borrowing was necessary, to be sure. It is scarcely possible for current revenues to cover all war expenditures. But even during wars, the abandon with which the responsible politicians plunge into irresponsible borrowing-of the most dangerous short-term variety, preferably-is some thing to behold. What justification is there in this prosperous postwar era for not reducing the debt, nay, for raising it further? Of course, it is much easier to win support for public spending out of future generations' income 101 AN INFLATION PRIMER than at the living, and voting, taxpayers' expense. The latter resent higher taxation, especially when the burden is very heavy already, while the former cannot talk back. By recourse to borrowing, a singular hurdle to foolhardy projects (with popular appeal) is eliminated. And something else is elimi nated: the rational control over the use of the borrowed funds. As Adam Smith wrote nearly 200 years ago, speaking of the difference between private and public debt: A creditor of the public, considered merely as such, has no interest in the good condition of any particular por tion of land, or in the good management of any particular portion of capital stock. As a creditor of the public he has no knowledge of any such particular portion. He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him.

Budgetary controls are a highly unsatisfactory sub stitute for the lender's "inspection" of individual credit risks, least satisfactory on the postwar scene, when the Congress cannot even figure ou~t the exact state of fiscal commitments, or the govern ment its own operational condition. The federal budget is in a hopeless confusion, perpetuated by the demagogues' disposition to take credit for cur rent welfare spending and leave the debit to their successors. The sheer size of the American national debt should provide food for thought. Instead, it pro102 THE BURDEN OF THE NATIONAL DEBT vides the inflationists with a hollow argument. Why, the "bankers" were hollering about national bankruptcy if the debt should pass $50 billion. Now, we are close to $300 billion, and the shout ing has subsided. What matters is not the actual size of the debt but its proportion to the national income, ignoring the fact that the two rise to gether: IIlore debt means more paper income. If the debt rises faster, that is no problem either.

One simply declares that the new proportion is the right one. The richer the nation, the greater its ability to pay and the more it can borrow, a reason ing which at least recognizes that the debt is a burden. But it does not recognize the fact that in the process of accumulating the debt, prices had been inflated, the credit structure distorted, the savers shortchanged, the nation's financial stand ards corrupted, and the foundations of the free enterprise system impaired. Misgivings of sane minds were due to the foresight that unsavory practices would have to be used in "selling" a blown-up volume of obligations, with a chain re action of sickening repercussions to be expected. FISCAL LEGERDEMAINS Our national debt is equal to three-fifths of the annual gross national product, nearly double the public debts of all non-Soviet countries combined. How can the American capital market carry such a load of parasitical claims and still function? It 103 AN INFLATION PRIMER does so by a number of financial tricks and decep tive devices, all contrary to the 0perational rules of the free market, some even to the criteria of the criminal code.

Let us consider the distribution of the debt by major categories of holders, starting with the some $50 billion in the Treasury's trust funds, largely the social security, the railroad pension, and the veterans' life insurance accounts. These funds represent the excess of special payroll taxes over and above the amounts disbursed. The managers of an insurance or of a trust company would soon be out of. business if they invested in their own obligations the funds entrusted to them. But that is precisely what the government does. It diverts the earmarked revenues into general expenditures and puts its own IOU's in the respective accounts. It considers these well-Hplaced" obligations as owned by itself: the Treasury's one pocket owes it to the Treasury's other pocket. The sovereign cannot be put in his own penitentiary. In contrast, continental social-insurance systems, notably the German, are autonomous bodies that invest their reserves traditionally in bonds of private (regu lated) mortgage-credit institutions-rather than in government obligations.

The interest on these well-placed bonds is "paid" in more IOU's. What if outgoing pay ments should exceed the contributions? Why, that is simple; the rate of the levy will be raised, 104 THE BURDEN OF THE NATIONAL DEBT or more people will be· forced to t~ke the "insur ance." A more ingenious piece of financial leger demain is hard to irlvent. Quite logically, the bureaucrats figure that, since agencies of Uncle Sam hold the obligations of UntIe Sam, the two sides of his ledger cancel out. Accordingly, $40 odd billion are deducted from the "gross" national debt. The "net" debt is reduced by that amount, thus adding a statistical legerdemain to the finan cialone. In any case, one-sixth of the debt is no headache to the Treasury (for the time being). FALSIFYING THE BANK BALANCE SHEETS There are several more dumping places for fed eral securities, namely, agencies that have no other choice in investing their funds, though they are not organs of the Treasury. Number one is the central bank. The Federal Reserve holds some $27 billion which, by and large, have to be "rolled over" from one maturity date to the next, depriv ing the Reserve System of its freedom of ma neuvering. It buys bonds but scarcely ever sells a major amount .

.Another revealing case in point is the Federal Deposit Insurance Corporation. This agency sinks the "insurance" premiums paid by the banks into long-term government bonds, accumulating so far about $2~-billion worth, as a guaranty fund for some $140 billion of "insured" bank deposits. The FDIC itself brought out in its report for 1957 105 AN INFLATION PRIMER that, in effect, deposit insurance is relevant only in a bank crisis~in which case the FDIC would not be helpful at all. Its funds might be exhausted if a single one among the eight biggest banks would get into trouble, to say nothing of a widespread run. (The public's impression is that the deposits are guaranteed by the government, which is not the case.) On top of that, to cover even a small frac tion of the "insured" deposits, the FDIC would have to liquidate its own holdings and break the bond market. Not only is this a phony arrangement which misleads the public, but it also misleads the banks to reckless credit policies and to negligence in building up proper capital accounts for the protection of the deposits. The banks rely on the "insurance"-and on their own holdings of govern ment securities .

.That brings us to the some $65 billion of federal securities held by the banking fraternity, equal at the end of 1959 (on the books) to about 25 per cent of total deposits. Insurance companies and savings and loan associations were holding another $20 billion. The institutions are under no com pulsion to buy and are free to sell-legally. De facto" they have a limited choice only. They are cajoled (and bamboozled) into buying and retain ing these securities, mostly of longer than one-year maturity, in violation of economic common sense, business ethics, and governmental responsibility. A corporation publishing faked balance sheets 106 THE BURDEN OF THE NATIONAL DEBT would be barred from every stock exchange. It may face .criminal prosecution. The objective is to protect the investor against fraud. The same fraudulen t practice, however, is legalized so far as commercial and savings banks are concerned.

They can carry government bonds on their books at par value. A $1,000 bond may be quoted on the market at $800 or less; the balance sheet of your bank still may show it at $1,000. No need to write off such losses out of current' profits. The banks may even pay dividends-out of losses. The purpose of this perverted regulation, adopted by all federal and state supervisory agen cies and by the SEC, is to give those bonds a sacrosanct status, guaranteed against book losses. Thereby, they are promoted to absolutely safe and "liquid" investments. The bank examiners count the federal bonds, whatever their maturity and actual price, as prime liquid assets, just like cash. The more bonds in the portfolio, the more liquid is the bank, by the examiners' standards, and never mind the losses. (The more loans, the less liquid is the bank, and never mind the quality or the maturity of the loans!) Small wonder that the banks purchase risk loaded long-term federal obligations, thereby creating a market for them. (They are easily "persuaded" .to buy short-terms: the Treasury sweetens the deals by throwing deposits on tax and-loan-accounts into the bargain.) With rising 107 AN INFLATION PRIMER interest rates and declining values of medium-and long-term securities, as in 1958-59, the much too modest capital accounts, or reserves against losses, were impaired in most banks! In a number of banks, the entire capital and surplus had been lost.

In some, even a part of the deposits was wiped out. The public knows nothing about this sad situation. No newspaper dares to discuss it, or the preposterous methods of the government at the root of it. The "silence of the sea" covers them up. Those persons on the inside (and with insight) hope and pray that a recession will reduce the pressure on the capital market, raise bond prices, and wipe out the losses. Very likely it will; but what about the next cycle? For how long, or how many times, will the depositors and savers permit themselves to be fooled? Sooner or later every legerdemain, subtle as it may be, is exposed and backfires. As it is, the bond portfolios tend to "freeze in" time and again. By selling them, the banks dis close their losses, which would skyrocket if major amounts were liquidated. While the boom and high interest rates prevail, the "prime liquidity" turns into prime iI-liquidity-unless the bonds are monetized by, and the losses shifted to, the Federal Reserve. The central bank may, perhaps, be re lied on to resist the "telnptation" to absorb either or both temptations, but it could be overruled by the Congress.

108 THE BURDEN OF THE NATIONAL DEBT History may not teach anything (to those who do not wish to learn), but it certainly shO'\vs what happens to every public debt that has become burdensome. Sooner or later, it is liquidated. There are two kinds of illegitimate liquidation, in addition to the legitimate kind. State bankruptcy" the partial or total repudiation of capital or inter est, or both, is one technique, a favorite pastime of totalitarian states. The other kind consists in a gradual depreciation of the currency, wiping out the real value. (the burden!) of the obligations. This is what modern democracies, including ours, have been practicing for some time. 109 XI THE CURSE OF THE DEBT THE "RATIONALE" OF INFLATION Does it matter how large the national debt is? Not really, quoting a widely used college text book: "There is no sign that a high debt exhaus~s the credit of the government ... and since as a last resort 'it can borrow from itself,' there need be no fear on this accoun t."

When the national Treasury is unfathomably in the red, the nation turns color blind. It prefers to believe that red is black, or at least white, that liabilities, if not real assets, are "no burden." When this stage is reached, the doors of the fool's paradise open wide. Actually, the more indebted a nation is, the more immune it becomes from the fear of national bankruptcy. Once the principle that debts have to be repaid sooner or later is for gotten, all monetary inhibitions (which the dis cipline of the gold standard used to provide!) go with the political wind. The mileage of irrespon sibility may be gauged by the Democratic plat form of 1960 which promises additional expendi tures of $80 billi~n for "rights-of-man" items in the next five years, as well as a few billions for in creased military spending, all these on top of a 110 THE CURSE OF THE DEBT current budget of $81 billion. For parallels in fiscal cynicism one has to go back to the days of the Jacobin-controlled French revolutionary con vention.

A large debt necessitates money-printing and brings about price inflation. As it is, debt ~oneti zation virtually is forced on the government by the colossal volume of the debt. An attempt to collect, say, $100 billion savings for permanent invest ment in government bonds is out of the question. Interest rates would have to rise to prohibitive heights, and the flow of capital into mortgages, corporate and municipal bonds would have to b~ greatly reduced, if not stopped altogether. To avoid "excessive" interest rates and an excessive drain on the long-term funds, the Treasury is driven into the short-term money market. At this writing, $70-odd billion marketable obligations are maturing within one year. Another $48 billion nonmarketable bonds and $6 billion convertibles belong, in effect, in the same category, adding up to nearly one-half of the gross debt. Then, too, $73 billion marketables are due in one to five years, which is still a very short range.

To borrow short is very convenient-for finan cial charlatans. No problem of "placing" the bonds; most of the time, banks and others with excess cash can use three-to nine month treasury bills, one-year certificates, and similar instrumen talities. They are as good as cash and also yield a III AN INFLATION PRIMER return. They are equivalent to cash because the government never defaults (how could it when it may, in effect, print the money with which to pay -"borrow from itself"), and there is a safe and secure outlet for them in the central bank. The Federal Reserve is here to pick up the slack, if any, and to turn it into legal tender. To monetize this kind of debt is a political must. Otherwise, not only the Treasury's credit but the entire credit structure would be doomed. In final analysis, our credit system and our eco nomic "security" rest on the national debt. Three fifths of the Federal R~serve's assets consist of public securities. They also constitute most of the "cash" reserves of the corporations and savings and loan associations, and one-half to two-thirds of the banks' "liquidity." Virtually every cent of what we consider as prime liquid assets is either government paper or a claim on government paper.

FICTIONAL FINANCE AND MONETIZATION The implications of this imaginary liquidity are devastating, as demonstrated by the behavior of the average banker. He finds that 40 per cent or more of his assets are "prime liquid," either paper money or claims on paper money to be issued against government paper. The purchas ing power thus created has nothing to do with gold or silver or marketable goods or anything tangible, 112 THE CURSE OF THE DEBT present or future. But his bank exudes "liquidity," as at no other time before 1934. Within very broad limits, he can proceed to make loans in al most any iI-liquid fashion; legally and statistically, his situation remains comfortable and unassail able, provided he observes the customary rituals. It makes little difference how far the maturity of his business loans, mortgage loans and "other" loans is stretched; or how good the credit of the respective debtors is. He pours out installment credit by mortgaging the car and forgetting to check on the car's owner; he uses sight deposits to extend term loans (up to ten years) on oil-in-the ground without a thought to the future price of overproduced oil; he finances construction that will pay its way only if the inflation continues in definitely; he gives, and is encouraged to give, mortgage credit to young couples with or without secure jobs, at little or no down payment; and so on.

Financially, we live in a world of fiction, as we did in the 1920's. Then, a gigantic structure' of stock-market values provided the fictitious liquidity that oiled the wheels of a mythical pros perity. Now, a gigantic structure of artificial bond values generates the lubricant of an equally ficti tious prosperity-at mounting costs, prices and tensions-based on the inlplicit myth of the central bank's inexhaustible capacity to maintain, by debt monetization, the system's liquidity. 113 AN INFLATION PRIMER The direct monetary consequences are patent. Suppose the Federal Reserve would suddenly re fuse to buy, or to loan on, any more obligations of the national government (to say nothing of un loading an appreciable portion of its portfolio). The demand for those obligations could dry up overnight. Banks and financial institutions, busi ness corporations, and many individuals would find themselves in a highly uncomfortable condi tion. Instead of swimming in liquidity, actual or potential, they might be faced with far-reaching liquidations. A scramble for "cash" could develop into an old-fashioned money panic. At any rate, security and real estate values, based as they are on the assumuption of an indefinite credit flow, would be in for a severe beating.

But why should the Federal Reserve stop mone tizing "whenever needed" to maintain the fiction of ample liquidity? And if it were reluctant, what would stop the Congress from forcing the central bank's hand? We do not doubt that the Congress is almighty, so far as legislation is concerned. The question is, merely, whether economic forces can be outlegislated. As things stand now, debt mone tization by the Federal Reserve could not be re sumed on a major scale without giving a fresh impetus to the vicious wage-price spiral, impair ing the balance of payments, and sparking an out flow of gold. Unless we are ready to take another dollar devaluation on the chin, or to accept all114 THE CURSE OF THE DEBT round price, wage, and foreign-exchange control let alone the mass unemployment in the wake of a progressive inflation-the volume of Federal Re serve credit must be kept under control. And there is another Damocles sword hanging over the na tional economy, one that is being neglected, if not ignored, in the controversy about creeping infla tion.

EXPANDING ON OVERDRAFT Technically and psychologically, the inflated national debt is the pillar that holds up an over inflated and rapidly growing structure of non federal (municipal, corporate, and individual) debts. That paper edifice is growing faster than the money volume or people's net income or net savings; faster than productive investment or in dustrial output. Totaling an estimated $603.1 billion at the end of 1959, the net private-plus municipal debt is now three and one-half times~ what it was thirty years ago, when it collapsed by its own weight. But that ominous reminder does not tell the full story. What matters is the self accelerating growth of the non federal debt tower. The addition in 1959 (net, after repayments) amounted to $57.4 billion, the largest ever, $7 billion more than in the previous peak year of 1957 and practically equaling its own increase in eight years of the booming twenties!

Patently, the growth of private, corporate, and 115 AN INFLATION PRIMER municipal debts-leaving aside the federal debt finances our economic growth. It is equally patent that the one "growth" must not, and cannot, run far ahead of the other, for how could the debts be serviced and amortized, if not from the output of the investment which they financed? But the non federal debt zooms ahead of the GNP; at that, a large slice of the GNP consists of things (such as military hardware) and services (of bureaucrats, for example) which cost a lot but are not accept able in payment to creditors. Recourse on the national debt and its moneti zation is the built-in safeguard of the inflationist. Indeed, it is built into his mind. His is a mind equipped with statistics, dialectics, and wishful ness; it lacks nothing but foresight (and hind sight!). Living in a financial Eden, it ignores the serpent in the Garden. Its name is overexpansion. 1 DEBT LIQUIDATION With regard to nonfederal debts, unless the bor rowing is done, in effect, for wasteful consumption or sheer gambling, and some of it .surely is, the mone~ serves to enlarge production and productive facilities. Directly or by indirection, credits (debts) provide the means' of expanding the industrial capacity-from inventories and machines to build ings and plants-and an incentive to do so.

But th.e "leverage" in the financial setup of com munities, corporations, and family budgets gets 116 THE CURSE OF THE DEBT shorter and shorter, and we are heading for a devastating break of the dams which hold a per nicious liquidation from floodin~ the rampart of the economy. The crisis is unavoidable, as it was unavoidable in the past, when people awaken to the understanding that there are no real values, that is, earning power, back of the excessive capaci ties and malinvestments which their claims are supposed to represent. Economic growth may be, and has been, fostered for years by a turbulent expansion of private and corporate debts. When the latter burst at the seams, the government will not be able to step in to save the day and maintain the growth. It may have no untapped tax sources left, and it will have exhausted its debt resources-overdrawn on its own credit. What remains is recourse on the cen tral bank. By then, money printing may smooth the liquidation process, at best; at worst, it will bring about a run on the dollar. In either case, a period of economic stagnation is bound to be the reward for a prolonged process of capital erosion.

CREEPING INFLATION'S SUICIDE , Fortunately, there is salvation in prospect, nay, under way. The built-in automatism (a real one, not man-made) of the financial market place will terminate the reckless debt inflation. It does so by restraining the banks whose liquidity is impaired, with or without raising the interest rates. Rise they 117 AN INFLATION PRIMER must, if the superboom is rekindled, because the vastrcredit demand of the would-be debtors clashes with a growing reluctance of the capital owners and managers to invest in futility. Savings institu tions are compelled to buy ,fixed-interest assets; individual savers may be barnboozled by solemn and meaningless assertions of maintaining artifi cial full employment and stability under the freely spending welfare state. Advocates of the welfare state ignore elementary economics: that full em ployment of a durable nature can be arrived at only if prices and costs adjust themselves to the market. But the necessary adjustments are post poned, if not stymied, by the inflation of debts.

Creeping inflation is a costly and dangerous luxury which only an economy that is not loaded with debts as yet can afford. 1. For an early consideration of this menace, see R. P. Dlin's "Are We Building Too Much Capacity?" Harvard Business Review, November-December, 1955. 118 XII THE DOLLAR ON THE SICKBED "GOOD AS GOLD" The modern history of gold is rich in contro versies. "Gold shortage and global devaluation" was the battle cry of the money cranks in ·the late twenties. Then, in the thirties, an excessive gold inflow sparked freakish proposals in the opposite direction, varying from an import tax on gold to its total demonetization. These proposals were answered on Friday, May 3, 1940) as follows: For the excess of goods we shipped and for the dollar credits we granted we have taken gold in the last six years instead of promissory notes. The phrase "good as gold" still has real meaning in the world. I prefer the gold to pieces of foreign paper. I think most Americans agree with me.

The speaker was Mr. Morgenthau, FDR's Secretary of the Treasury. He would rank today as a right-wing Republican. His common-sense state ment came virtually at the historic moment when common sense and American monetary policy parted company. In 1940, the dollar was indeed "good as gold" again. Since then, as a nation, we take neither gold nor promissory notes for the ex cess of goods we ship; instead, we give the for eigners our own promissory notes (dollar balances) 119 AN INFLATION PRIMER as a sort of bonus; lately we "ship" out the gold, too. Nothing wrong with all that, indicated the Chairman of the Federal Reserve Board on Feb ruary 24, 1960) after the country had lost nearly $3~ billion of gold in two years. "Proper United States policy," he said, "could prevent any ... 'hypothetical dilemma' [due to our continuous balance of payments deficits] from arising." The dilemma to which the chairman was refer ring-the choice between losing our gold and re straining the inflationis far from hypothetical or easily preventable. Actually, we are up against an explosive problem posed by the relentless growth of short-term dollar claims in the hands of for eigners and the simultaneous erosion of the gold reserve that is the coverage of last resort of a rapidly growing money supply. The candle of the dollar is burning at both ends.

THE SICK BALANCE OF PAYMENTS The threat to the dollar is due to a persistent deficit in the country's international accounts. Our balance of trade with the outside world (mer chandise and services, including tourist traffic, transportation, return on investments) produces an export surplus every year. Yet, for the last decade our over-all balance of payments showed a deficit in every single year-more payments due than receipts coming in. Table A summarizes in the conventional fashion 120 THE DOLLAR ON THE SICK. BED Surplus or Deficit (-) $1.4 1.0 Unilateral Payments and Loans by U.S. Government & Privates (Net) $- 6.4 -10.6 - 6.7 - 7.0 - 6.0 - 6.2 - 6.7 - 7.3 - 6.7 - 6.3 - 8.6 - 8.9 - 8.4 - 8.4 TABLE A4t U.S. BALANCE OF PAYMENTS-WITHOUT GOLD AND FOREIGN CAPITAL MOVEMENTS (Billions of Dollars) Trade Balance: Surplus of Exports or Imports (-) of Goods & Services 1946..... . $ 7.8 1947...... 11.6 1948.... . . 6.7 1949...... 6.4 1950..... . 2.3 195L..... 5.2 1952...... 4.9 1953.... .. 4.7 1954...... 5.0 1955...... 4.4 1956.... . . 6.5 1957..... . 8.2 1958...... 4.6 1959 ..... 1.9 -0.6 -3.7 -1.0 -1.8 -2.6 -1.7 -1.9 -2.1 -0.7 -3.8 -6.5 ·Source, Tables A, B, and C: U.S. Department of Commerce, Sur vey of Current Business, July, 1954, and the June issues, 1955 to 1960.

the recent development of our international bal ance of payments, omitting the in-and-out move ments of gold and of foreign capital. (They may be considered the balancing items, as we shall see~) It shows that billions more than the excess we earn businesswise is either given away by the government or lent out and remitted privately, in unilateral payments. But private investments and remittances abroad absorb only a small part of our trade surplus. What brings about the huge defi ciency in the over-all balance is shown in Table B: the cornucopia of governmental handouts and military spending abroad.! 121 AN INFLATION PRIMER TABLE B SOURCES OF DE'FICIT ON U.S. FOREIGN ACCOUNTS (Billions of Dollars) Net U.S. Government U.S. Military Handouts Spending (Nonmilitary) Abroad (Net) Year 1950 . 1951 . 1952 . 1953.< . 1954 . 1955 . 1956 . 1957 . 1958 . 1959 . Total . S 3.7 3.3 2.5 2.2 1.8 2.3 2.5 2.7 2.8 3.6 27.4 S 0.6 1.3 2.0 2.5 2.5 2.8 3.0 3.2 3.4 3.1 24.4 Total S 4.3 4.6 4.5 4.7 4.3 5.1 5.5 5.9 6.2 6.7 51.8 DOLLARS IN OVERSUPPLY By the end of 1959, the United States had lost $5 billion gold; exactly $5.264 billion since August, 1947. Another $0.526 billion left our gold reserve in the first eight and one-half months of 1960.

A fraction of the annual deficiency is accounted for by unaccounted items: "errors and omissions." Another fraction is covered by the net inflow of foreign long-term investments. But the main off setting items are two: either we pay in interna tionally acceptable cash, which is gold; or the for eigners leave the money in the United States by acquiring bank balances and short-term treasury paper. What has actually happened is set out in Table C. Three of every four "excess" dollars our govern122 THE DOLLAR ON THE SICK BED $-3.7 -1.0 -1.8 -2.6 -1.7 -1.9 -2.1 -0.7 -3.8 -6.5 $3.6 1.0 1.7 2.5 1.7 1.9 2.1 0.7 4.0 6.6 t 0.5 0.5 0.2 t 0.5 0.6 0.8 0.4 0.8 $1.9 0.6 1.6 1.1 1.4 1.4 1.8 0.7 1.2 4.7 16.4 Gold Gain (-) or Loss * $1.7 -0.1 -0.4 1.2 0.3 t -0.3 -0.8 2.3 1.1 5.0 TABLE C U.S. BALANCE OF PAYMENTS DEFICIT AND OFFSETTING ITEMS (Billions of Dollars) Total Balance of Net Inflow Statistical Off-Payments of Foreign Errors and Setting Deficit Capital Omissions Items (from Table A)Year 1950 .

1951. . 1952 . 1953 . 1954 . 1955 . 1956 . 1957 . 1958 . 1959 . TotaL . ·Gold "gain" means import of gold; hence minus sign. tLess than 0.05. ment dissipates abroad return like homing pigeons as claims on our gold reserve. At latest count (end of June, 1960) foreign-owned bank balances and short-term treasury securities amounted to $20.34 billion, having doubled in ten years. That is not all. American liquid assets, including currency, owned by foreigners other than banks and public authorities, may now stand around $2.4 billion. (The official estimate was $2.676 billion for 1957 and $2.522 billion for 1958.) Also, $2.3 billion of U.S. government notes and bonds with "original" maturities of more than one year are held by banks abroad and could be liquidated on fairly, short notice. At this writing, the total of foreign-held liquid dollar assets is in the order of $25-odd billion (Table D).

123 AN INFLATION PRIMER TABLE n· End of Year 1949 . 1950 . 1957 . 1958 . 1959 . Mid-1960 . 9/14/60 . Foreign Liquid Assets t in U.S. (in millions) $ 9,757 11,715 18,593 19,597 23,723 25,175 not available U.S. Gold Reserve (in millions) $24,563 22,820 22,857 20,582 19,507 19,363 18,939 Ratio (%) of Foreign Claims to Gold 39.7 51.3 81.3 95.2 121.6 130.0 n.a. ·Sources: U.S. Department of Commerce, Survey of Current Busi ness, August, 1959, and June, 1960; Federal Reserve Bulletin, August, 1960. tlncluding U.S. government securities with original maturities of more than one year and estimated foreign nonbank holdings of American liquid assets. The outer world's dollar shortage (that was to last forever, remember?) turned into an over supply of dollars abroad. This is a unique situa tion: a country deliberately and systematically squanders its gold reserve and piles up a mountain of "hot-money" obligations of the most volatile sort, though it does not wish to impair the gold value of its currency. To make things worse, the Federal Reserve deliberately lowers its discount rates to foster domestic inflation-and the gold outflow.

CAN THE BALANCE OF PAYMENTS BE REDRESSED? The give-away programs are a built-in feature of our national policy. In the official theory, they are a must for the cold war. Why they have to total an annual $8 to $9 billion, rather than $5 billion 124 THE DOLLAR ON THE SICK BED or $11 billion, has never been explained. The standards, if any, by which the volume of this fan tastic subsidy (to the special interests in exports) is determined, are seemingly divorced from any con cern about the balance of payments, the gold stock, or the stability of the dollar. There is scant likelihood that o'ur balance of trade should improve greatly and in a lasting fashion. 'l"he huge surpluses of the early post.. 1945 era (Table A) are out of the question since Europe's and Japan's recovery. Their competitive prowess makes itself felt sharply along innumer able lines of merchandise. It is greatly strength ened by operations under American licenses and by the exodus of American firms in search of more profiitable climates. If our exports have risen this this year (1960) as against last, it is largely because of the coincidence of a domestic slowdown with a superboom abroad. However, unit cost differen tials still tend to broaden in our disfavor, due to the effect of (American-financed) technological progress abroad, combined with much lower wages there than on this side. Once the cyclical slowdown reaches Europe, as it well may, and non recurrent factors fade out,2 European exports will increase and their imports from the United States will decline.

Two-fifths of our exports consist of raw com modities and semimanufactured items, the ~eakest links in the world price structure. Foodstuff im125 AN INFLATION PRIMER ports are restrained everywhere; the unloading of farm surpluses (unless in exchange for payment in irredeemable currencies) is up against severe ob stacles. Most industrial staple prices are depressed; a moderate recession in Europe would bring them down further. There is no hope for an early re vival of our coal, petroleum, and metal exports which accounted for more than half the 1958-59 shrinkage in our total exports. As to economizing on imports, a severe domestic recession would do, ironically. Higher tariffs and restrictive quotas would not do; they run counter to the national policy of fostering interna tional trade and would boomerang in higher do mestic costs and fewer exports. At that, Washing ton nods to European "integration" movements, although their result is to discriminate against our exports.

In its embarrassment, the U.S. government pres sures the Allies, especially Germany, to "play the game" and chip in with credits to the under developed nations. This the Allies do, on a mod erate scale. What they contribute (mostly in their own "backyards") means an addition to, rather than a substitute for, our aid. The discussion about tying our aid directly to our exports has died down; it would not solve the problem any way. Shifting a major part of the cost of maintain ing u.s. garrisons in the host countries may dis courage their own armament efforts. 126 THE DOLLAR ON THE SICK BED Foreign governments may be persuaded to accelerate payments on their long-term debts to the United States. They are making advance pay ments. Evidently, the effect could only be minor. If feasible at all, an attempt to discourage foreign central banks from withdrawing gold would most certainly boomerang.

Theoretically, recourse could be taken to Amer ican investments abroad, at least on the "liquid" assets amounting to $5.6 billion (end of 1958); the government owns $2.14 billion. How much could be liquidated-risking an international panic-is open to question. Uncle Sam did borrow from the International Monetary Fund, but he will have to repay sooner or later. Such stratagems are helpful in a short-lived emergency only. That is not what weare up against. In fact, the dollar predicament is to continue indefinitely. Presently, foreigners could claim some 30 per cent more gold than we possess. How imminent is the menace that they might?-bearing in mind that international trade and finance, the domestic price structure, in fact the whole economic system) are intimately linked to gold and its present dollar price. 1. Military transfers under grants, consisting of weapons, etc., are not included among the unilateral payments, and they do not affect the balance of payments.

2. A temporary upsurge of European demand for cotton, aluminum, and airplanes, an.d the "upward adjustment" of our cotton and wheat subsidies, are primarily responsible for the rise of the "visible" trade balance by nearly $2 billion in the first half of 1960. Merchandise exports are likely to increase in a recession. 127 XIII THE SAD PREDICAMENT OF THE FOOL'S PARADISE HEADING FOR INSOLVENCY "We-you and I and our Government-must avoid the impulse to live only for today, plunder ing for our own ease and convenience, the precious resources of tomorrow. "We cannot mortgage the material assets of our grandchildren without risking the loss also of their potential and spiritual heritage. We want democ racy to survive for all generations to come, not to become the insolvent phantom of tomorrow." These were the memorable farewell words of President Eisenhower. Unfortunately, it took nearly eight years before his administration dis covered that the country is up against an impend ing balance-of-payment crisis. There is nothing "impending" about it any longer. It will not take eight months, possibly not even eight weeks, be fore the incoming Kennedy administration will have to take drastic steps-and, especially, to leave out some it was planning to take-in order to cope with that crisis.

As these lines go to press, the problem has reached the critical stage. We have lost in less 128 AN INFLATION PRIMER than three years over $5.2 billion of our gold re serve (closer to $6 billion, including the gold bor I rowed from the International Monetary Fund), more than $2 billion in the last four months to mid-January, 1961. Where are the surplus dollars coming from, to be turned into gold by redemption at the Federal Reserve Bank of New York or by purchasing gold on the London, Toronto, and other markets? Our balance of payments is "leaking" in several places, through which dollar claims are flowing out in excessive quantities: $3.3 billion in 1958, over $5 billion in 1959, an estimated $3.5 to $4 billion "only" in 1960. A temporary leak was created by the Federal Reserve System itself. Since early 1960. it has irresponsibly lowered and kept low the short-term money rates, thereby creating a broad-yield differ ential between foreign and domestic credit instru ments. The result was a great deal of American capital flow to London and Frankfurt. However, since the European central banks willy-nilly re duced their discount rates (in order to please the Americans), the differential has been cu~ to a point where it scarcely covers the costs involved in transferring short-term funds from these shores to the others.

Potentially far more important is a second leak: flight from the dollar. At home and abroad, peo pIe have come to suspect that the dollar will be 129 THE SAD PREDICA1VIENT OF THE FOOL'S PARADISE devalued. A rational reaction is, for the foreigner: to get rid of his dollars; for the American: to hedge by buying gold or gold certificates, possibly even on money borrowed abroad (on 97 per cent margin). But the total of such transactio~s has been, so far, the proverbial drop in the bucket. Mr. Eisenhower's order to liquidate gold holdings held abroad affects residents of this country only; it could scarcely be policed. 1 In any case, it amounts to fighting the smoke, rather than the fire that produces the smoke. The run on the dollar is not caused by the run on the dollar; it is caused by lack of trust in our willingness to defend the dollar, to overcome the persistent deficit in our balance of payments.

EROSION-HOW MUCH LONGER? That brings us to the decisive "holes" from which the deterioration of the payments balance and the consequent gold outflow stems. They are: directly, the lavishment of governmental expendi tures abroad, totaling between $8 billion and $9 billion a year; indirectly, the domestic cost-price inflation. The latter reduces the export prowess of American business, fosters the emigration of American plants, and generates excessive imports. If our private consumption is "conspicuous," as we are being told, it is because of unreasonable taxation and of inflation fears that induce reck less spending and purely speculative investing. As 130 AN INFLATION PRIMER to our ability to compete, we formerly led the world in technological progress. Where we are presently, after many years of spoon-fed "growth," was aptly summarized by the Wall Street Journal: Frequently shoddy workmanship. Crippling strikes for whimsical reasons. Disdain for the contract. The enormous economic toll of featherbedding which is rapidly turning this into a high-cost economy, as reflected in the inability of U.S. products to compete, as once they did, in world markets. Perhaps most important of all, the erosion of values once held high .

. . . if there is softness in America today it is not pri marily inferior education or "inadequate" public spend ing but this union and statist sponsored philosophy of indolence. The problem is more than economic, it is moral. For what we are witnessing on every side is not only the finan cial disintegration of governments. We are witnessing the collapse of individual responsibility. Reduced exports and high imports, on top of the "political" dollar flow, add up to an abund ance of dollar balances and claims in foreign hands. They are claims on gold, in the ratio of an ounce of gold of 9/ IOths fineness to each $35. How long can the creditors feel assured that their claims are really worth the gold if the pile of claims-over $27 billion already, with the gold re serve down to $17.5 billion-keeps rising at a daily rate of well over $10 million? Presently, the central banks of the industrial nations (Europe, -Canada, Japan) refrain, as a rUlle, from withdraw131 THE SAD PREDICAMENT OF THE FOOL'S PARADISE ing dollar funds they had accumulated on this side. But of the funds they acquire from here on, about 75 per cent is being converted into gold.

Naturally, they cannot indefinitely tie up in dollar balances their ultimate liquidity reserves while the dollar's convertibility is not assured. Their monetary sovereignty, the freedom to act with some degree of financial independence, is at stake. As it is, they cannot help but consider dollar re serves as a permanent "investment," of which no major fraction could be withdrawn without spark ing a panic on, and the collapse of, the dollar. Our problem, then, is to cut the cloth to the size of the figure-to hold the deliberate outpour of funds within the limits set by the surplus pro duced through current (commercial) transactions with the outer world. As to bolstering that com mercial surplus,. there is one effective way, one only: balance the budget and stop the monetiza tion of the national debt by the Federal Reserve System. AT THE END OF CREEPING INFLATION'S ROPE With their eyes riveted on the gross national product and similar "aggregate" concoctions, the addicts of managed money and creeping inflation ignore the "golden rule" of a free society. It is this: If you overstrain your financial system, you lose your gold. Gold, pooh-poohed by the pseudo liberals as a "barbaric relic," is the ultimate regu132 AN INFLATION PRIMER lator that keeps the economic world in balance.

Gold is the governor that restrains the credit apparatus from expanding wildly and the welfare states from running headlong into collectivism, if not into ruthless tyranny. The attraction and virtues of gold are that govern ments can't roll it off or create it with the stroke of a pen. It imposes some monetary discipline by affording a safe guard, a store of value which may escape looting, debase ment and other forms of spoliation. That is why the people of the East, with centuries of experience of rascality by rulers, bandits and other depre dators on human welfare, hoard a few pieces of gold against the days of pillage and spoliation. That is why the supposedly enlightened peoples of the West have to tie their money systems in some way to a real commodity, acquired by an expensive and ugly outlay of human toil. And it is precisely because governments in our time have grossly debauched the currency that they now hope to cover up the distortions by manipulating the price of gold. George Schwartz, "Really Cheap Money," The Sunday Times) London, November 13, 1960.

There is no escape from the rule of gold, except by taking national insolvency on the chin, which is what dollar devaluation means. Raising the dollar price of gold would be the signal to devalue all currencies-global inflation with all-round, semi totalitarian controls over international transac tions, domestic prices, profits, and wages. It would be the greatest irony of history, and an unparalleled tragedy for western civilization, if America, by exporting inflation) would force the 133 THE SAD PREDICAMENT OF THE FOOL'S PARADISE world back into the commercial and monetary chaos from which it has been slowly emerging wiping out the stabilization, for the sake of which the American taxpayer has spent a round $80 bil lion since World War II. At that point, inevitably rising prices would make illusory all (alleged) ad vantages resulting from a boost of the gold price and would call for more of the same fake medi cine. And it would mean a thorough defeat in the cold war, with the material, political, and prestige advantages accruing to the Soviets.

1. Little New Zealand, an island country, tries hard but does not succeed in stopping gamblers from transferring domestic funds with which to play in Australian lotteries, Irish sweep stakes, and British football pools. 134 APPENDIX MONEY SUPPLY AND INFLATION WHAT IS MONEY SUPPLY? The collectivist propensity to invent fresh argu ments in order to justify ever more inflation is something to behold. A latest sample is the com plaint that we are suffering from deflation: in the twelve-month period to the end of May, 1960, the money supply-meaning the sum of currency out side the banks and adjusted net demand deposits in the banks-has declined by $3 billion, or 2.5 per cent. So, let's hurry and print more money. The facts are, however, that during the current (alleged) decline of the money supply the net vol ume of outstanding debts rose by $50 billion or more, bank loans increased by $12 billion, or al most 10 per cent, and the consumer price index went up by 2 per cent.

Just what is the money supply-supply of what? At stake is the definition of money, a bitterly fought issue for centuries. Monetary policies were built on arbitrary definitions, ranging from the ,eighteenth century doctrine (David Hume) that all credit instruments are money, even bonds and 135 MONEY SUPPLY AND INFLATIONshares of common stocks, to the dogma underlying the Peel's Bank Charter Act of 1844 that only gold coins and Bank .of England notes were to be counted. Presently, there is virtual agreement that the concept has to be broader than the latter definition and narrower than the former, stilileav ing a wide range of "freedom" for arbitrary choice. Of course, the choice of a definition depends on the functional purpose it is supposed to serve. What we want to know is the volume of all media of exchange, and of claims on the same, that are or may become effective demand for goods and serv ices. Accordingly, we have to include not only the "active" money in process of being turned over during a chosen period but also all other instru ments which might be used for payment, even if they are "idle" at the time.

ALL DEPOSITS ARE MONEY What, then, is the justification for using the figure of cash-plus-demand-deposits as the measure of the money supply, excluding the time and sav ings deposits--as it is customary in Europe? None whatsoever, unless it is sheer convenience. True, checking accounts have a higher "velocity of circu lation" than savings accounts. 1 But the latter do turn around; withdrawals amount to 60 per cent or more of incoming payments. Savings accounts are subject to a mere 30 days' notice provision, which is not being enforced; they serve also as a 136 AN INFLATION PRIMER base for "pyramiding" deposits. This is implicitly recognized by the law that prescribes mandatory minimum-liquidity reserves for all kinds of bank deposits, except those of the government, consider ing them as "idle" purchasing power. (The banks hold an equal amount of government securities against government deposits.) The Federal Reserve Bulletin's monthly tabula tion of the monetary and banking system's Con solidated Conditions includes under "deposits ad justed and currency" alIso-called time deposits (an improper designation). But savings and loan associations are omitted on the grounds, presum ably, that they are not banks in the legal termi nology. Yet/ their "savings capital" -that grows at an annual rate of $6 to $7 billion (I)-is no different in monetary character from savings deposits in banks, though not subject to statutory cash reserve requirements. Nor are these deposits turned over at a much lower rate. True, there is no legal obli gation to redeem them on demand. But they are being paid out, and the owners regard them as equivalent to cash.

In their own minds, money is what people consider as purchasing power., available at once or shortly. People's "liquidity" status and financial dispositions are not affected by juristic subtilities and technicalities. One kind of deposit is as good as another, provided it is promptly redeemable into legal tender at virtual face value and is ac137 MONEY SUPPLY AND INFLATION cepted in settling debts. The volume of total de mand for goods and services is not affected by the distribution of purchasing power among the di verse reservoirs into which that purchasing power is placed. As long as free transferability obtains from one reservoir to the other, the deposits can not differ in function or value. SAVINGS AND SEMANTICS For the decision to buy a home it is irrelevant whether the money needed for down payment is held in a bank, in a savings institution, or in a safe box. The "money supply" is available in any case.

A source of confusion is the identification of savings deposits with savings. The former are no more and no less "saved" than are the funds put on a checking account or the currency held in stock ings. In all three cases, someone is refraining from consumption (for the time being); in all three, the funds constitute actual purchasing power. And it makes no difference in this context how the pur chasing power is generated originally: dug out of a gold mine, "printed" by a governmental agency, or "created" by a bank loan. As a matter of fact, savings banks and associations do exactly what commercial banks do: they build a credit struc ture on fractional reserves. They do so even more "effectively" than the commercial banks, due to the higher reserve requirements for demand de posits. 138 AN INFLATION PRIMER The fact alone that for credit expansion the commercial· banks indiscriminately utilize all de posited funds, whether on demand or on savings accounts, should dispel the semantic confusion caused by the ambivalent use of the term "sav ings."

POTENTIAL MONEY But then, are all claims on stated sums of cur rency to be considered as parts of the money sup ply? Or where is the line to be drawn? As in most matters human, there is no cut-and-dried line of demarcation. There are numerous shades of tran sition from money to non-money. It all depends on the circumstances which determine the judg ment of the market place. Everything is money, to repeat, that is usable as such or is readily monetizable. That brings us to the "potential" money supply. The actual money supply, whether active or idle, consists of legal tender and its substitutes. But there are credit instruments which, though not directly usable to make payments, can be turned at all times and without loss of capital into active purchasing power. Bankers' acceptances, high-class commercial paper and "street loans" were used for this function at one time or another. Since 1934, treasury securities of not more than one-year lifetime (bills, notes, certificates) have taken over the function on an unprecedented scale.

139 MONEY SUPPLY AND INFLATION They are alternatives to cash, having ready market as interest-yielding near-demand deposits which cannot go in default-if only because the central bank is expected to monetize them, in ultimate resort. (This is implicit in its policy of maintain ing an "orderly market" for government obliga tions.) Thereby, they become equivalents of money and a temporary repository of major funds in the hands of the public. At the end of last May about $45.4 billion of short (up to one year) treasuries, or $21 billion more than five years earlier, was held by nonbank investors. They are primeliquid assets, in the market's opinion, just like bank balances, because they can be turned into cash on short notice. Liquidation before maturity may cause a loss if the interest rate has risen after the purchase; but the owners either do not contemplate such pre mature liquidation or expect to be compensated by the return they had earned in the meantime.

Funds are being shifted from deposits into short treasuries, and vice versa; in the process, the vol ume of demand deposits appears to undergo a de flation, or the opposite. Which is what happened recently. As customers depleted their accounts in order to buy federal short maturities, the "money supply" in terms of currency-plus-demand-deposit has contracted for the simple reason that the banks used the proceeds from the sale of treasury securi ties to reduce their debts at the federal reserve 140 AN INFLATION PRIMER banks. But of course, the total money volume actual and potential combined-was not affected. "LIQUIDITY" VERSUS MONEY SUPPLY The question at stake is not to find a definition suitable for the textbooks. The question is: to de termine the "dimension" relevant for monetary policy. As the (British) Radcliffe Report put it cogently: The immediate object of monetary action is to affect the level of total demand.

Monetary action works upon total demand by altering the liquidity position of financial institutions and of firms and people desiring to spend on real resources; the supply of money itself is not the critical factor. [Italics ours.] Committee on the Working of the monetary Sys tem Report) London, August, 1959, p. 135. The conventional money-supply notion is totally unsatisfactory, even misleading, as a quanti tative base for the understanding (forecasting?) of price-level trends and for the guidance of m~ne tary policy. In this country, as in Britain, the central bank's .attempts to check the inflation are to a large extent, if not altogether, frustrated by the unwieldy volume of overhanging "liquidity." A classiccase of the thoughtlessapplication of a conventional concept has been provided by the economists of the International Monetary Fund. In 1952, they announced with fanfares that the Western world's inflation troubles were over141 MONEY SUPPLY AND INFLATION prices have caught up with the inflated "money supply." They forgot all about the vast volume of monetizable public debt almost everywhere. The dismal record of that forecast did not inhibit Per Jacobsson, the IMF's managing director, to come out lately with the same wishful statement that "wartime inflation" has come to an end and price stability has returned to the free world.

This is not the first time that Mr. Jacobssonhas expressed such unwarranted optimism. As head of the Bank for International Settlements, he made the following statement in the 1954-55 Annual Report of that institution (p. 80): "It seems, in deed, very likely that, provided the world remains at peace, the inflationary phase of postwar eco nomic development has now come to an end." A more realistic application of the concept appears. in the August, 1960, Monthly Review of the Federal Reserve Bank of Atlanta. The comment (without reference to Mr. Jacobsson) is: "Has the economic environment changed so much that the money supply is no longer excessive as it was in most of the postwar period? He who would give a firm answer, to this question at this point would be foolhardy, indeed." 1. Actually, a large, but statistically unknown, portion of demand deposits is permanently inactive. Currency, too, is being "hoarded" in substantial volume. Yet the "idle pur chasing media" are generally counted as part of the active money supply. Compare the June, 1957, Special Bulletin of the American Institute for Economic Research, Great Barrington, Mass.

142 BIBLIOGRAPHY: A SELECTION Adams, Walter, and Gray, Horace M. Monopoly in America. New York: Macmillan Company, 1955. Backman 1 Jules.' Wage Determination-An Analysis of Wage Criteria. Princeton, N.J.: D. Van Nostrand Go., Inc., 1959. Bauer, Peter T., and Yamey, Basil S. The Economics of Under developed Countries. Chicago: University of Chicago Press, 1957'. Bell, J. W., and Spahr, W. E. (eds.). A Proper Monetary and Banking System for the United States. New York: Ronald Press Co., 1960. Briefs, G6tz. Unionism Reappraised. Washington, D.C.: Amer ican Enterprise Association, 1960. Brown, A. J. The Great Inflation 1939-1951. London: Oxford University Press, 1955. Chamberlin, Edward H. The Economic Analysis of Labor Union Power. Washington, D.C.: American Enterprise Association, 1958. Fisher, Robert Moore. Twenty Years of Public Housing. New York: Harper &Brothers, 1959. Harwood, E. C. Cause and Control of the Business Cycle. 5th ed. Great Barrington, Mass.: American Institute for Eco nomic Research, 1957.

Hazlitt, Henry. The Failure of the ~New Economics': An Analy sis of the Keynesian Fallacies. Princeton, N.J.: D. Van Nostrand Co., Inc., 1959. Kriz, Miroslav A. Gold in World Monetary Affairs Today. ("Essays in International Finance," No. 34.) Princeton, N.J.: Princeton University Press, 1959. Lester, R. A. As Unions Mature. Princeton, N.J.: Princeton UniversityPress, 1959. Lindblom, C. E. Unions and Capitalism. New Haven, Conn.: Yale University Press, 1949. McCaleb, W. F. How Much Is a $? San Antonio, Tex.: Naylor Co., 1959. Nussbaum, A. A History of the Dollar. New York: Columbia University Press, 1957. 143 Petro, Sylvester. Power Unlimited-The Corruption of Union Leadership. New York: Ronald Press Co., 1959. Poirot, Paul L. The Pension Idea. Irvington-on-Hudson, N.Y.: Foundation for Economic Education, Inc., 1950. Pound, Roscoe. Labor Unions and the Concept of Public Service. Washington, D.C.: American Enterprise Associa tion, 1959.

Ropke, Wilhelm. Humane Economy. Chicago: Henry Regnery Co., 1960. Schlesinger, James R. The Political .Economy of National Security. New York: Frederick A. Praeger, Inc., 1960. Spahr, Walter E. An Appraisal of the Monetary Policies of Our Federal Government~ 1933-1938. New York: Econo mists' National Committee on Monetary Policy, 1938. --. The Case for the Gold Standard. New York: Econo mists' National Committee on Monetary Policy, 1940. --. It's Your Money. New York: Economists' National Com mittee on Monetary Policy, 1946. Terborgh, George. Corporate Profits in the Decade 1947-1956. Washington, D.C.: Machinery and Allied Products Insti tute, 1957. Torff, Selwyn H. Collective Bargaining: Negotiations and Agreements. New York: McGraw-Hill Book Company, Inc., 1953. Velie, Lester. Labor U.S.A. New York: Harper & Brothers, 1959. White, Andrew D. Fiat Money Inflation in France. New York: Appleton Co., 1896.

Wiggins, James W., and Schoeck, Helmut. Foreign Aid Re examined. Washington, D.C.: Public Affairs Press, 1958. Winder, George. A Short History of Money. London: Newman Neame, Ltd., 1959. Wright, David M. The Creation of Purchasing Power. London: Cambridge ,University Press, 1942. 144 INDEX INDEX Adams, W., and Gray, H. M... 55 Administered prices .•..50-51, 55 "Aggregates" 132 American Institute for Economic Research .5,142,144 Anthracite 49 Anti -capitalistic sentiment, source of ......••••..... 80-82 Austerity •..•••••••••••..82, 93 Backman, Jules 144 Balance of payments. 120-127, 128 Balance of trade 120-21, 125-26 Bank examiners 107 Banking system 10, 106-8 Bank for International Settlements 142 Bank portfolios ..••...... 106-8 Bank reserves ......•• 14-15, 137 Bankruptcy (default) ..... 92-93, 109,133 Bauer, Peter, and Yamey, B. S.......•••••••144 Bell, J. W., and Spahr, Professor Walter E....•... 144 "Big" business 50-51 "Bills only" 22 Bolshevism 76-77,79-83,99 Boulding, K. E. . 37 Briefs, Professor Gotz 144 Brokers'loans .......•... 96, 139 Brown, Professor A. J•...•... 144 Brown, E. H. P., and Hopkins, S. V....•••••••••.70 Budget, unbalanced •..•..•..85 Budgetary controls .•••••••.102 Bureaucracy, bureaucratism .••••••80-81, 85 Business cycles, "rationale" of ...••.••..63-67 Business standards, deterioration of 55, 131 Capacity to pay .45-47 Capital flight 129-30 gains 55 Capitalism people's 94-97 rationale of ......••....... 65 shortcomings of ..... 63-64,81 Central banking (see also: Federal Reserve) inflation and freedom .... 59-60 Chamberlin, Professor Edward H. •..•..•.••....144 Clayton Act •..•••••.•••••...50 Cold war, defeat in ...•..•... 134 Collectivism ...•......... 56, 64, 77-82, 100, 135 Commercial and Financial Chronicle •.....••..•..70, 72 Competition ......•...... 59, 77 (see also: price mechanism; mon opoly) international ...•••••..125-26 Consumer debt 89-94 Consumption, "conspicuous" .•..••..64, 130 Contracyclical policies ... 34,41, 62-63 Corruption ...•..•.•..... 77-78 Cortney, Philip •..•••.•.....83 Cost of living ......•..•....... 8 cutting .......•••..•.•.66-67 of construction ..•••....... 91 Credit controls ...•.•.••.14-15, 95-96 creation of 10-17,20 expansion by government 26-27, 34 qualitative. 11-12, 14,64-65,102 Crossman, Richard .........• 82 Debts (see also: public debt; monetization; credit) burden of 6,94,98-109 business 94 debt management 22-27 income and 89-92, 97, 103 inflation of 87-88 liquidation of 116-17 mortgage .88-89,91-92,97,113 municipal .••......... 115-16 personal ...••..•.•..88-92, 97 Deficit finance 28 Deposit insurance .....•.. 105-6 Deposits, pyramiding of ... 137-39 Depreciation of purchasing power (see inflation) 147 INDEX (continued) Depressions ..•.. 37,63-68,89,93 Devaluation 60, 114, 129-30,133-34 Discount rate policy 129 Dollar "shortage" 124 Douglas, Senator Paul H.•..... 61 Eccles, Mariner S....•........ 39 Economic system 77 Economist, The (London) .. 61, 99 Eisenhower, President .. 128, 130 "EJastic currency" 21-22 Employment Act (1946) 78 Erosion of standards ...•.. 130-32 Escalators 36 ·'Eternal prosperity" ....•.... 94 Farm subsidies 34,41,53 Featherbedding 38,45, 131 Federal Reserve System .... 15-17, 18-27,39-40,94, 129, 132 freedom of 105 Financial disintegration 131 Fiscallegerdemains 103-5 First National City Bank (New York) 55 Fisher, Robert Moore 144 ·'F1exibility" 23 "Fools paradise" 128-34 Foreign aid 53, 121, 124-25, 130, 134 Freedom, meaning of 57-60 Fringe benefits 30,44, 45 Full employment 34,63, 77-78,98-99,118 Galbraith, Professor J.

Kenneth 73,82 Gambling (see speculation) General Motors 42 "Gold inflation" 3 Gold price (see devaluation) Gold dollar balances and .... 122-24 loss of .. 120, 123,128-29, 131-32 requirement 21 role of. 119, 122, 127, 132-33 standard 21,56-57,76 Gray, Horace M., and Adams, W 55 Greenbacks ............••.•.. 6 Grievance procedures 38 "Growth" balanced ....•............ 68 debts and 117 ideology of 57,81 rate of 83, 84-87 vs. progress 65-70,84-87,93 Hazlitt, Henry ......•...... 144 Hoarding ...........•.....• 142 Hopkins, S. V., and Brown, E. H. P 70 Home ownership 91,97 Housing, subsidized. 51, 52, 92-93 Hume, David 135 Illiquidity 59,88,108,113 Industrial conflicts 32-33, 44-45,49, 131 Inflation (see also: monetization; debts; money supply) anticapitalism and 95 built-in 35-38, 110 burden of 5-6,48-49 "cost-push" 30-36 creeping 1-2,4-8,71-83, 85,94-95,117-18,130,132-34 criminality and 33,97 debt management 20-27 definition of 2-3, 54 employer resistance and .. 53-54 "exported" 133-34 fixed return assets and 5 freedom and 59-60, 81-82 galloping 1-2,7,20 global 133-34 hedges 36 ideology of 98-100, 110-12 income and 2-6, 48-49, 78-79,81,86-87 "legalized robbery" 2-3,5-6 "modus operandi" 10-17, 28,34,36 overexpansion and 66, 68-69,88 perpetual 57 psychology 95, 97 source of ............•. 18-27, 28-29,33-34, 141 148 INDEX (continued) speculation and 7-8,95-97 taxation and 6-7, 48 Inflationists 56-57, 61-64, 69, 78-82,84,116,118,135 Instability, built in 89 Intelligentsia, "liberal" 35 Interest rates, ..... 93,94,99-100 International Monetary Fund 127, 129, 141-42 Inventory cycles ....•... 64, 65-66 Investment cycles 65-66 Investment trusts ..•.••...95-96 Jacobsson, Per 142 Jacoby, Professor N. H 92 Kennedy administration 128 Keynes, John Maynard. 62, 71, 82 K.eynesians 64 Kriz, Miroslav A•........... 144 Labor costs 30-35,48-49 disincentives .44-45 incentives 44 legislation ..•...••••.•....38 monopoly 32-35 shortage 34 Labour Party ......•........ 82 Laissez-faire 56-61, 68 Laws, economic ....•.•..•... 56 Legal tender 18 Lester, Professor R. A 144 Lewis, John L. . 49 Liberals, self-styled .49,81-82 Lindblom, Professor C. E 144 Liquidation of debts 109 Liquidity 14-15,66, 107-8, 141-42 fictitious 113 "Listed" prices 51 Lobbies (see pressure groups) Malinvestments 36 Managed money 20-22,77 Margin requirements 96 Martin, Chajrman W.

MGChesney 24-25, 120 Marx, Karl (Marxism) 63 Military spending abroad ......•..••.•. 121, 126 Mills, F. C 67-68,70 Minimum prices ...•........ 41 Mobility ............•..•... 91 Monetary discipline 22-23 Monetary expansion 25-26, 185 Monetary velocity 136 Monetization, inflationary .12-17, 35,93,98-99,111-16, 132,139-40 Money active 136, 139 definition of ..•..•.... 135-37 idle 136-37 potential 139-41 "Money shortage" 64 Money supply 8-9, 35, 135-42 Monopolies 50-52,55,58 (see labor) Morgenthau, Secretary of Treasury 119 National income (product) ....•.... 84-5, 88-90 New Deal 95 New York Times ••••........ 66 New Zealand 134 Oligopoly 50-51 Open Market Committee 18 Ope~ Market operations 19-20, 25 Overexpansion (see inflation) Overloaning 27, 88 Over-the-counter market 96 Paper money (see managed money) Patronage 77-78,80 Patronage State 76 Patterson, R. T 70 Peel's Bank Charter Act 135 Perpetual prosperity 60-63 Petro, Professor Sylvester 145 "Philosophy" of inflation .. 56-70 Planning 81,84 Pound, Dean Roscoe 145 Power vs. freedom 64,76-82 Pressure groups (lobbies) 33-35,52,81 Price level ...•..••.30-31,47,70 149 INDEX (continued) stability 61-63 Price mechanism .. .41-42,51,55, 59,77,80-81, 93-94, 117 Price supports 51 Procurement, military 51 Productivity .. 31-32,42-47,66-67 Profit inflation 7-8,49-55 Protectionism ...•.... 51,53,126 Public debt burden of 98-109, 110-12 ceiling over .........•..... 22 economic effects of 100-3 inflation and ...•... 28-29, 100 "roll over" of 105 "wealth creation" by .••.98-99 Radcliffe Report ...•....• ~ . 141 Rationality, economic ....•.. 58 Recessions ..............•... 37 Reserve requirements for banks ........••.•.. 20-22 Reynaud, Paul 2 "Right to work" 33, 42 . Risk-bearing and profits 65 Roepke, Professor Wilhelm 97, 145 Roosevelt, President F. D 98 Rueff, Jacques 83 Samuelson, Professor Paul A., : 72 Savings bonds ........•........... 41 deposits 138 erosion of 5-6, 54-55 institutions .17,88, 106,137-40 Schlesinger, Professor James R 145 Schwartz, George (London) .. 133 Securities and Exchange Commission .. 96, 107 Sherman Act 50 Slichter, Professor S. H 82 Smith, Adam 102 Social se<;urity ...•..... 41,104-5 Spahr, Professor Walter E., and Bell, J. W 145 Speculators .7,66,95-96,130,134 Spirals, wage-price 28-38 "Stabilizers" 41 Stockpiling 51 Strikes (see industrial conflicts) Subsidies ..•.34,41,48-49,51,85 Sweden .....•............... 79 Switzerland ...•............. 79 Tax avoidance (evasion) 7 Tax burden 6-7, 49-50 Teamsters Union 33 Terborgh, George 145 Trade unions ... 32-33,39-41,46, 49-50,52-55,75 Treasury-Federal Reserve cooperation .... 23-25 Unemployment 37 technological .48 Union shop .42 United Automobile Workers 33 Velie, Professor Lester 145 Viner, Professor Jacob 71 Wage claims, justification of .45-47 Wage structure .47 Wages (see labor costs; inflation; productivity) guaranteed Al Wall Street Journal Al War finance 6 Welfare State (welfarism) 76,95, 118 White, Andrew D 145 Work rules (see featherbedding) Wright, Professor David McCord 145 Yamey, B. S.,and Bauer, Peter •••••••••••••144 150