‘Administered’ Inflation

August 12, 1957

Gardiner C. Means, an economist who invented the term “administered prices” in the ’30s, has come up with the theory that the current inflation is an “administered” inflation. The solution, he thinks, would be for the President to call a conference of business and labor leaders, and get an agreement from them to “hold the line” for a year or two on wages and prices. But his theory of causation is false; and his proposed remedy is not needed, would not work, and would greatly aggravate the very evil it is supposed to cure.

Past inflations, he agrees, have been “monetary” inflations—the result of an increased money supply bidding for the available supply of goods and services. This is correct. And it applies to every inflation, including the present one.

This can be shown by any set of long-term comparisons. At the end of 1939, the total supply of money and bank credit (total bank deposits plus currency outside of banks) was $64.7 billion. In March of this year it was $221.5 billion, an increase of 246 percent. In 1939 wholesale prices were at an index number of 50.1; today they are at a level of 117.4, an increase of 136 percent. The chief reason why wholesale prices have not gone up even more in this period is that there has also been a great increase in production. The increase in the money supply is a sufficient explanation of the present inflation. We do not have a “new kind” of inflation, and we do not need new explanations.

ADMINISTERED BY WHOM?

Neither logic nor statistical comparisons give any support to the “administered price” theory of inflation. If sellers can administer prices to any level they choose, why weren’t prices as high in 1955, or 1949, or 1939, or 1914, as they are today? Why are prices all being raised now? What has prevented them from going still higher?

Certain prices, it is true, are administered (within narrow limits) at levels different from those that a perfectly fluid competition would bring about. The outstanding directly administered prices are those administered by government. This includes all public-utility rates and railroad rates. But these are administered down rather than up. Farm prices have of course been supported by government above free-market levels. Farm products have risen 150 percent since 1939, whereas industrial products have risen only 116 percent.

By far the most important administered price is the price of labor. Wage rates have been administered upward by powerful industrywide labor unions. Since 1939 hourly wages in manufacturing industries have increased by 229 percent.

FALSE CURE

As a cure for all this, Means would have the President call a conference of business and labor leaders at which he would “get agreement from them to hold the line” on prices and wages. Now such agreements would be extremely harmful if they were uniformly adhered to. They would not allow for the relative changes in particular prices and wages necessary to adjust output to changes in supply and demand.

But all hold-the-line legislation or voluntary agreements in the past have broken down under political pressures, chiefly in favor of wage increases. The Means plan left-handedly recognizes this. His proposed agreements would allow “small” wage increases to take account of increases in productivity, and increases “where a major disparity in particular wage rates required correction.” Anyone who remembers our second-world-war experience must know that such loopholes would be exploited to the point where the hold-the-line agreements would become a farce. But even this would be better than their strict enforcement. For to try to hold a uniform line on prices and wages, particularly if the money and credit supply continued to be increased, would have a disastrous effect on production.

And the scheme is wholly unnecessary. All that is needed to stop the present inflation is a halt to the expansion of money-and-credit supply and repeal of the legislation that creates monster unions and gives them a coercive wage-raising power that employers are impotent to resist.