Inflation for Growth?

November 27, 1961

As Lawrence Fertig points out in his new book, Prosperity through Freedom (Regnery, $3.95), there is only one way in which a nation can achieve economic growth. That is by capital accumulation—i.e., “by increased savings and by increased investment in the tools of production.” Yet it is precisely the people who most ostentatiously clamor for a speedup in our rate of economic growth who most persistently ignore this truth. They want to get economic growth through inflation. And as Fertig emphasizes not only by reasoning but also by citing the record of postwar Germany and the Rueff plan in France, sound, long-run growth is achieved not by encouraging inflation, but by bringing it to a halt.

The German experience throws a brilliant light on this. In 1951 the U.S. State Department sent a commission of American economists to West Germany to investigate and to make recommendations to that government on fiscal policy. The chairman of the commission was Prof. Alvin W. Hansen of Harvard. Prof. Walter W. Heller, now chairman of President Kennedy’s Council of Economic Advisers, joined the commission and is credited with having participated in writing the report. This report was long classified as a secret document. It was not declassified until April of this year.

GERMAN ‘MIRACLE’

Here are some of its recommendations: (1) That Germany had an “excessive concern for price stability,” and tended to “confuse wartime inflation with the normal operation of peacetime credit.” (2) That “a rate of interest high enough to stimulate any large volume of personal savings would seriously curtail investment.” (3) That to give special inducement to corporations to increase their investment in new plant and equipment by permitting fast depreciation allowances “was an expenditure of tax funds which would otherwise have been collected by the government.” (4) That “the nostalgic hopes . . . looking toward a revival, of the nineteenth-century role of a capital market are doomed to disappointment.”

Fortunately for Germany and the world, Ludwig Erhard, the German Economics Minister, rejected the recommendations in toto. He put a tight lid on any increase in the money supply. He refused to pursue a cheap-money policy. He encouraged saving by a high rate of interest. He permitted rapid depreciation on investment. He restored the capital market. He refused to impose a top income tax rate higher than 50 percent, balanced the budget, encouraged private enterprise, restored incentives. In his own words, he “abolished practically all control for allocation, prices, and wages” and “reintroduced the old rules of a free economy.”

GOVERNMENT’S ROLE

The result was “the miracle of German recovery,” a record unequaled in the same period in the entire Western world. Had the Hansen-Heller recommendations been adopted, Germany would have been plunged into another orgy of state planning and inflation. David McCord Wright, comparing the German record with the British record under Labor government, found that British prices under inflation (1948–56) increased 45 percent while German prices fell 5 percent. While real wages in Germany more than doubled, British workers got a bare 10 percent increase. Germany’s manufactured exports, with lower costs, rose from 7 percent of the world market to more than 15 percent. Its gold and dollar surplus soared, while that of the British declined.

Lawrence Fertig’s important and stimulating book covers not only the subject of economic growth but also the whole range of modern economic issues—wages and prices, profits and employment, monetary and fiscal policy, unions, inflation, foreign trade, capitalism, socialism, Communism. It is the people, as Fertig keeps insisting, and not governments, that produce wealth and increase “growth.” All that government can do is to keep the currency honest and strong, to keep markets competitive and free, to maintain law and order and security of life and property, to remove the restrictions it has itself imposed on trade and production—in brief to release the energies of a free people and then get out of the way.