Adjust—Or Inflate

March 17, 1958

To those of us who lived through the Great Depression, there is a curious familiarity about the schemes put forward to get us out of the present slump. On June 12, 1931, for example, the Chase National Bank of New York published a pamphlet by its economist, the late Benjamin M. Anderson, called “Equilibrium Creates Purchasing Power.” Anderson there drew a contrast between two opposing schools of thought. The school to which he adhered found the cause of the slump in “a disturbance of economic equilibrium.” The other found its causes in “deficiencies of purchasing power.”

The purchasing-power school was inflationist. It advocated “cheap-money policies,” farm price supports, and heavy spending on “public works.” It argued that “reductions in wages are on no account to be permitted.” “The general picture which the purchasing-power school presents is that of production running ahead of buying power.” As against this, Anderson advocated the restoration of equilibrium, mainly through adjustments of free and flexible prices and wages. He called for the restoration of a proper balance among the various types of production, among prices, and particularly between prices and costs of production, including wages, so that profits would be possible and stimulate enterprise.

PRICES AND COSTS

“When goods are produced in proper proportions,” he wrote, “they clear the markets of one another. . . . Production itself gives rise to the income which supports consumption. Production and consumption expand together. The 120 millions of people in the United States consume vastly more than the 400 millions in China, because they produce vastly more. . . . The problem is merely one of keeping the different kinds of production in proper proportion. This is accomplished under the capitalist system by the movement of prices and costs. Labor and capital tend to get out of lines where return is low and to move over into lines where return is better. The smooth working of this system calls for flexible prices, competitively worked out, which tell the truth regarding underlying supply and demand conditions.”

Anderson went on to point out that the purchasing-power theory was not working. “We have had extremely cheap money for over a year.” Inflexibility of industrial wage rates, while prices were falling, had led to increased unemployment. “Real” industrial wage rates between June 1929 and March 1931 had risen 11 percent, indirectly helping to force down “real” farm wages 17 percent.

But, as we know, the purchasing-power school—the inflationist school—won out. We had cheap money, inflexible or rising wage rates, and heavy government deficits for the next ten years. As a result, we also had mass unemployment for the next ten years—until the Second World War finally bailed us out.

TRIUMPH OF KEYNES

Today the chief ideological change is that there can hardly be said to be two schools of thought. Practically everyone in Washington seems to agree that we can easily float ourselves out of the slump through more inflation. We need merely give ourselves a sufficiently big dose—of increased spending, or tax reduction, or anything else that will produce a whopping deficit. The new Bible is Keynes’s General Theory, which denies Say’s Law and ignores any need for specific wage and price adjustments. The Administration disagrees with the Democratic inflationists only about the question of timing. It hopes everything will cure itself in the next few months. If it doesn’t, it promises to take “positive government action”—today’s euphemism for more inflation.

Meanwhile, neither political party calls attention to the fact that as factory wage rates have risen, unemployment has increased and payrolls have fallen. Neither party asks whether even massive inflation can restore employment as long as powerful unions have escalator contracts under which wage rates soar faster than living costs, preventing restoration of profit margins or lowering of prices. The only remedy proposed is bigger and longer unemployment compensation to help strong unions preserve upward-spiraling wage rates.