Inflation for Beginners—IV

September 24, 1951

As long as we are plagued by false theories of what causes inflation, we will be plagued by false remedies. Those who ascribe inflation primarily to a “shortage of goods,” for example, are fond of saying that “the answer to inflation is production.” But this is at best a half-truth. It is impossible to bring prices down by increasing production if the money supply is being increased even faster.

The worst of all false remedies for inflation is price fixing and wage fixing. For if more money is put into circulation, while prices are held down, most people will be left with unused cash balances seeking goods. The final result, barring a like increase in production, must be higher prices.

There are broadly two kinds of price fixing—“selective” and “overall.” With selective price fixing the government tries to hold the prices merely of a few strategic war materials or a few necessaries of life. But then the profit margin in producing these things becomes lower than the profit margin in producing other things, including luxuries. So “selective” price fixing quickly brings about a shortage of the very things whose production the government is most eager to encourage. Then bureaucrats turn to the specious idea of an overall freeze. They talk of holding or returning to the prices and wages that existed on the day before war broke out in Korea. But the price level and infinitely complex price and wage interrelationships of that day were the result of the state of supply and demand on that day. And supply and demand seldom remain the same, even for the same commodity, for two days running, even without major changes in the money supply.

It has been moderately estimated that there are some 9,000,000 different prices in the United States. On this basis we begin with more than 40 trillion interrelationships of these prices. And a change in one price always has repercussions on a whole network of other prices. The prices and price relationships of June 24, 1950, were presumably those roughly calculated to encourage a maximum balanced production of peace time goods. They are obviously the wrong prices and price relationships to encourage the maximum production of war goods. Moreover, the price pattern of a given day always embodies many misjudgments and “inequities.” No single mind, and no bureaucracy, has wisdom and knowledge enough to correct these. Every time a bureaucrat tries to correct one price or wage maladjustment or “inequity” he creates a score of new ones. And there is no precise standard for measuring the economic “inequities” of a particular case that any two people seem able to agree on. Coercive price fixing would be an insoluble problem, in short, even if those in charge of it were the best-informed economists, statisticians, and businessmen in the country, and even if they acted with the most conscientious impartiality. But they are subjected in fact to tremendous pressure by the organized pressure groups. Those in power soon find that price and wage control is a tremendous weapon with which to curry political favor or to punish opposition. That is why “parity” formulas are applied to farm prices and escalator clauses to wage rates, while industrial prices and rents are penalized.

Another evil of price control is that, though it is always put into effect in the name of an alleged “emergency,” it creates powerful vested interests and habits of mind which prolong it or tend to make it permanent. Outstanding examples of this are rent control and exchange control. Price control is the major step toward a fully regimented or “planned” economy. It causes people to regard it as a matter of course that the government should intervene in every economic transaction.

But finally, and worst of all from the standpoint of inflation, price control diverts attention away from the only real cause of inflation—the increase in the quantity of money and credit. Hence it prolongs and intensifies the very inflation it was ostensibly designed to cure.