How to Halt Inflation

December 29, 1958

Senator Johnson, the Majority Leader, wants Congress to investigate inflation. “We have no clear-cut idea,” he says, “of what is causing inflation and what should be done to prevent it.”

This is a disheartening comment. Inflation has been progressing in this country for a quarter of a century. Though there may be difference of opinion about details, there is no longer any excuse for ignorance of its main direct cause and cure. The direct cause of inflation is the continuous increase in the supply of money and credit. Most of this is in turn caused by a chronic budget deficit. The cause of the present inflationary fears is precisely the “liberal” spending policies that Senator Johnson and his Democratic majority will be pushing for in the new Congress. The cure would be to abandon these policies.

Though the action of security prices since last summer has been flashing a warning signal for all to see, this warning is being smugly ignored in Washington. Officials offer assurances for the immediate future. But it is the long-range considerations that are causing uneasiness. These have been admirably summarized by the Guaranty Trust Co. of New York in its December survey:

THE LONG-TERM VIEW

“In connection with the Federal budget, for example, misgivings do not arise merely from this year’s prospective deficit of $12 billion . . . serious as that is. They arise from the fact that this deficit is symptomatic of a rising tide of expenditure over which no one seems to have any real control. The situation has been developing for a generation and, far from showing signs of correcting itself, appears to be going from bad to worse. Economy drives by the Administration and Congress tend more and more to end in futility. There are too many continuing ‘programs’ that involve commitments for years in advance—the defense program, the highway program, the housing program, the social-security program, the farm program, the foreign-aid program, veterans’ programs, and all the rest.

“Each of these programs, of course, has its own pressure group or groups and its own army of bureaucrats whose jobs depend upon it—and most of whom, no doubt, sincerely believe that, however desirable governmental economy may be as a general principle, their own program is so worthy that it should not only be continued but expanded. The combined result of these programs is a swelling volume of expenditure which, despite tax rates rising to almost confiscatory levels, has produced deficits in 23 of the last 28 fiscal years.

“Yet nowhere in government is there serious talk of abandoning any major spending program. The most that anyone hopes for, apparently, is to retard the rate of growth and oppose the addition of still other programs. This is becoming increasingly difficult as state and local governments call upon Washington for aid. . . .

“It is not the fear of the 1959 deficit, unfortunate as this is, that basically causes distrust of the dollar. It is the growing fear of deficit financing as a ‘way of life’.”

REMEDIES

What can be done about inflation and the growing fear of inflation? We might put detailed remedies under four heads:

1—Futile as it sometimes seems, those who (like Budget Director Stans, Secretary Benson, Senator Byrd, editors, writers, private organizations like the Tax Foundation, and chambers of commerce) have been pointing out in detail where budget economies should be made, must keep up their insistence on specific savings.

2—We are unlikely to get reform until we have a really responsible executive budget. This means that the President must be given at least as much control over (and responsibility for) the Federal budget as, say, the governor of New York has over his state’s budget. (For details, see this column, Nov. 23, 1953.)

3—We must recognize the fallacies in the Keynesian ideology, dominant for 25 years, which regards inflation as necessary for full employment and economic growth.

4—We must take the kind of measures spelled out here last week to curb excessive union-leader power and restore confidence in the dollar.