Asking for More Inflation

May 25, 1953

In the issue of March 2, I wrote here: “We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.” The answer so far has not been reassuring.

Let’s begin with the budget. The burden of taxation is already as high as the American economy can possibly stand. Inflation can be halted only by a slash in the present fantastic level of Federal expenditures large enough to wipe out our chronic deficits. One would not suppose such a slash to be supremely difficult. The $73,700,000,000 that we are spending in the current fiscal year alone is more than Franklin D. Roosevelt spent in the full eight years of his first two terms. It is nearly $30,000,000,000 more than even Harry Truman spent in the fiscal year 1951, during the whole of which the war in Korea was in progress.

It was less than a year ago that Mr. Eisenhower himself ventured the opinion that the Federal budget could be cut as much as $40,000,000,000 in the next few years. But when he recently announced reductions that would still keep spending in the 1954 fiscal year at a level of $73,500,000,000 (according to the Stam estimates for Congress), there was a chorus of outcries that these economies would imperil the country.

Now it is always possible, even in a budget of these incredibly swollen overall dimensions, to “economize” in the wrong place, to cut down on the wrong thing—on long-range air power, let us say. But what is disheartening is that so few of the critics of specific cuts bother to suggest where the cuts might be made instead. Even on the present program, according to the Stam estimates, there will be a deficit in the current fiscal year of more than $7,000,000,000, and in the next fiscal year of nearly $6,000,000,000. But this is being treated as if it were a matter of no particular concern.

Even more ominous, so far as the outlook for a halt in inflation is concerned, is the attitude being taken both inside and outside Congress toward the efforts of our monetary authorities finally to end the inflationary spree that has wiped out more than half of the purchasing power of the dollar since 1939. Twenty Democrats in Congress, including their leader in the House, Sam Rayburn, and their whip, John W. McCormack, have sponsored a resolution calling on the Federal Reserve Board to start supporting government bonds again at par. If they really understand what they are asking for, they ought to say outright: “We want more inflation.”

Let us see what the course they demand would mean. At the moment of writing this, some of the government’s 2½ percent bond issues are selling around 91 or 92. How many billions of dollars worth of bonds the Federal Reserve Banks would have to buy to bring these up to 100—and keep them there—is anybody’s guess. The Reserve Banks would create deposit credits to “pay” for these bonds. These credits would then become the basis for several times as much new money and bank credit—in short, for inflation.

The action would increase not only the available supply of inflationary credit but the demand for it. In fact, to order the Federal Reserve Banks to buy all government 2½ percent bonds offered to them at par is only another way of ordering them to increase the money and credit supply enough to keep long-term interest rates down to 2½ percent. And such low interest rates, thus artificially produced, encourage more private borrowing. This is the main explanation for the increase in the supply of bank deposits and currency from $63,000,000,000 at the end of 1939 to $192,000,000,000 at the end of this January.

Yet people are shouting about “dear money” and “deflation” when the discount rate is 2 percent and when, as W. Randolph Burgess of the Treasury has pointed out, unemployment is at a minimum, the index of production made a new record high in the latest reported month, and personal income has reached a new high rate of $282,500,000,000 a year.