Built-In Inflation

July 29, 1957

There are so many confusions of thought today concerning the causes and cure of inflation that in calling attention to one error one must temporarily ignore another. One is liable, as a result, to be accused of having fallen into the error one has ignored. This is particularly true in any discussion of the respective roles that wage increases and monetary policy play in inflation.

In answer to the pure “cost push” theorists, I have pointed out that expansion of the money supply is both the necessary and the sufficient cause of inflation; and that without an increase in the money supply, an increase in wage rates would lead merely to unemployment. But while this generalization is essential to a correct theoretical understanding of what is now going on, it was never intended to be, and is certainly not, a comprehensive factual description of what is now going on. For if to the economic forces considered in isolation, we add political and institutional forces, we get a total picture of the present inflation in which wage increases play a crucial role.

POLITICAL PRESSURE

And they play this role because of governmental policy. Governmental policy in this respect has done two main things: (1) Through special legal privileges and immunities, it has built up the power of unions and union bargaining to a point where employers can no longer resist excessive wage demands. (2) When these demands have been granted, excessive pressure is put on the governmental monetary managers to create the money and credit necessary to sustain the wage increase (and consequent price increases) without unemployment. Thus wage, price, and money-and-credit increases act on a ratchet or endless-chain principle to keep the inflation going.

And the “cost push” theorists are right in this—that the political pressure for inflation today comes from the desire to keep “full employment,” to encourage constant wage increases, and to make both possible by low interest rates and credit expansion.

When the Federal Reserve lets interest rates up to the point to which excessive demand tends to pull them, when it seriously tries to keep money and credit from further expansion, it is denounced for a “tight money” policy. It is accused of discouraging home-building, “small business,” or what not. When the steel industry raises prices to meet the higher costs necessitated by excessive wage advances forced upon it, senators denounce the price rise as inflationary, but are silent about the wage rise that caused it. The President pleads for “restraint” on the part of business and labor, forgetting the elaborate legal framework which has made union leaders all-powerful and left employers impotent to resist wage-increase demands.

REAPPRAISAL NEEDED

We do indeed have a built-in inflation. And it is built in by governmental policy. Among its foundation stones are the Norris-LaGuardia Act, the Walsh-Healey Act, the Fair Labor Standards Act. the Wagner-Taft-Hartley Act (and the mass of NLRB and court decisions), and the Employment Act of 1946. Under these laws the government has not merely encouraged but in effect forced the creation of industrywide unions with irresponsible private power to force continuous wage increases.

If the world were under a real international gold standard, with the natural penalties that this sets on excessive money-and-credit expansion, the result of these wage increases would be unemployment. But under nationally managed paper currencies the national managers everywhere are denounced for trying to sit on the lid.

There is no economic problem whatever to stopping inflation. It could be stopped overnight. But this would involve not only courage in the monetary field, but an “agonizing reappraisal” of the labor policy of the last 25 years that neither the Republicans nor the Democrats, as a party, have the courage to make. It is not merely that they do not have the courage to act. They do not have the courage to face the truth about the Frankenstein monster of uncurbed union power that they themselves have built.