Blaming the Public

February 25, 1957

To all those who are so justifiably concerned about the dangers of further inflation, the most dismaying development of recent weeks was an announcement by Mr. Eisenhower (in his press conference of Feb. 6) that unless business and labor imposed on themselves certain unspecified self-restraints, the government would have “to move in more firmly with so-called controls of some kind, and when we begin to control prices and allocations and wages, and all the rest, then it is not the America we know.”

This statement, unfortunately, cannot be dismissed as a mere slip of the tongue. It was preceded by a distinct hint in the President’s State of the Union message that unless business and labor exercised “self-discipline” the government might be forced to return to price and wage controls.

FALSE REMEDY

It should not be necessary to point out at this late date that price and wage controls are a completely spurious “cure” for inflation. We need merely recall the words of Mr. Eisenhower himself, in his first State of the Union message on Feb. 2, 1953: “Direct controls, except those on credit, deal not with the real causes of inflation but only with its symptoms. . . . They have proved largely unsatisfactory or unworkable. They have not prevented inflation; they have not kept down the cost of living. . . . I am convinced that now—as well as in the long run—free and competitive prices will best serve the interests of all the people.”

The truth is that government policy alone—particularly fiscal and monetary policy—must bear practically the full responsibility for inflation. For the actions of private bankers, businessmen, and labor leaders that increase inflation are themselves encouraged by monetary policy.

The Eisenhower Administration is spending more “welfare” funds in more directions than any of its predecessors. It supports laws that continue to undermine the ability of private employers to resist union demands for excessive wage rates. It is artificially supporting farm prices. It is artificially stimulating an unprecedented housing boom. It has encouraged or permitted the country’s money and credit supply to increase by $23 billions since it came into office. For an Administration with this record to turn around and blame private business and labor for the inflationary result, and to start disrupting production with price and wage controls, would be the height of irony.

The remedy for inflation lies wholly in a change of governmental policy. And it lies not in giving still more discretionary, arbitrary, or dictatorial powers to government bureaucrats, or still more discretionary powers (more “techniques,” “tools,” or “weapons”) to our monetary managers but, on the contrary, in taking away some of their present discretionary powers and obliging them to abide by fixed and predictable rules.

It must be pointed out once more that a free competitive enterprise system cannot function effectively in the face of constant uncertainty concerning what the monetary managers are going to do—particularly when those managers may not even know themselves. The country is especially fortunate today to have at the head of the Federal Reserve Board a man who combines the rare understanding, integrity, and courage of Chairman William McC. Martin, Jr. But the political pressures put upon him are excessive. They could be substantially lessened, and the dangers of inflation similarly lessened, by changes in our monetary rules or laws.

RULES VS. DISCRETION

I suggest two: (1) Congress or the Federal Reserve Board could adopt a rule similar to that put into effect by the Bank of Canada last November, under which the discount rate is changed weekly so as to maintain a fixed margin of ¼ percent above the latest average tender rate for treasury bills. (2) The legally required gold certificate reserves of the Federal Reserve Banks could be restored approximately to the former requirement of 35 to 40 percent instead of the present “war emergency” requirement of only 25 percent adopted in 1945. Our controllers will not control inflation until they accept controls on themselves. Meanwhile they should stop scolding the American people.