Inflation Must End

January 8, 1962

Those of us who, for the past fifteen years or more, have been warning against inflationary policies, have found ourselves doing it with little help on net balance from the academic community, particularly that part of it clustered around Cambridge, Mass. Such Harvard faculty names as Seymour Harris, Alvin Hansen, J.K. Galbraith, and the late Sumner Slichter have been associated, if not with direct advocacy of inflation, at least with advocacy of such inflationary policies as continuous credit expansion, cheap money, increased government spending, and unbalanced budgets.

Now, out of Harvard itself, comes a powerful voice that not only warns against inflation, but correctly analyzes its causes and courageously recommends its cures. Gottfried Haberler is not only a Harvard professor; he is a former president of the International Economic Association and will be president of the American Economic Association. Because of his prestige and the power of his argument, his 85-page pamphlet, Inflation: Its Causes and Cures (Revised and enlarged edition, American Enterprise Association, Washington, $1) may well mark a turn of at least the academic tide of thought on the subject.

PAYMENTS CRISIS

Because of the deterioration in the U.S. trade and payments position the tone of the revised edition is urgent:

“In view of the changed competitive position the U.S. can no longer afford even a ‘little’ inflation without losing gold. Moreover, disinflation or at least holding the pace of inflation below that of our principal competitors is the main prerequisite for a correction of the imbalance.

“Here is not the place to discuss other measures that could be taken to improve the balance—elimination of discrimination against dollar exports, larger contributions by Europe for mutual defense and for economic aid to underdeveloped countries, tied loans, and so on. The effect on the balance of payments of all these measures combined will probably be insufficient to eliminate the deficit and, at any rate, it could be easily wiped out by loose financial policies. The position of the U.S. as the world’s foremost banker and of the dollar as the world’s principal reserve currency greatly increases our responsibilities. At the same time, it excludes easy solutions which would be open to others. . . .

“The U.S. cannot tamper with the gold value of the dollar without committing a crass breach of the confidence of all those who have entrusted us with keeping their international reserves and without provoking an international financial crisis which would greatly weaken American leadership in the free world. . . .

“The conclusion is that, from now on not only considerations of international stability and sustained growth, but also the international position of the U.S. imperatively require that inflation be stopped.”

TO CURB WAGE DEMANDS

It is possible to cavil at a few aspects of Haberler’s study. But any shortcomings are far overbalanced by enormous merits. Several aspects of the American inflation in recent years get a more thorough analysis than they have received anywhere else. And Haberler is emphatic on the essentials: “Let us start from the basic fact that there is no record in the economic history of the whole world, anywhere or at any time, of a serious and prolonged inflation which has not been accompanied and made possible, if not directly caused by a large increase in the quantity of money.”

Finally, he recognizes the necessity of curbing excessive union wage demands if inflation is ever to be halted. And he points out that this can be done by legal reforms that in no way infringe liberties, but merely restore a more balanced power equilibrium between the parties in wage bargains, and eliminate violence and intimidation. More basic than legal reform would be a change in public opinion. “Aroused public opinion could force the government in its executive as well as in its legislative branch to pick up some courage, instead of maintaining a studious neutrality in wage bargaining, and issuing platitudinous appeals to everybody to behave, or outrightly capitulating to striking unions and bringing pressure on employers to capitulate.”