Is Inflation a Blessing?

August 25, 1952

Sumner H. Slichter is professor of economics at Harvard and enjoys in some circles a reputation as a first-rate economist and even as an eminent “conservative.” He has done some instructive work; but when he writes on the subject of money and inflation, as he has taken to doing frequently of late, the result is deplorable. His article in the August issue of Harper’s, “How Bad Is Inflation?” is an epitome of all the shopworn fallacies that have been put forward as apologies for inflation in the last two centuries.

He begins by dismissing the conclusions on inflation by the American Assembly, a group of distinguished economists, as “uncritical and almost hysterical.” The assembly concluded that “inflation is a continuous and serious threat to the stability of the American economy and to the security of the entire Western world.” This judgment was not hysterical, but restrained.

It is Slichter who is appallingly uncritical. He not only thinks that it is easy for a government to plan and control “a slow rise in prices”; he actually believes that an “extreme” inflation “is not easily started.” It would be interesting to learn what his definition is of an “extreme” inflation, and what his concept is of difficulty. Germany inflated until its mark fell to one-trillionth of its previous value. Nationalist China recently inflated until the yuan reached 425,000,000 to the dollar. In Great Britain prices are three times as high as they were before the second world war; in the Argentine (with no “war” excuse) prices are five to eight times as high; in France, more than 25 times as high; in Italy, more than 50 times as high. None of these countries found it at all difficult to get its inflation going, but most of them are finding it politically impossible to stop.

Slichter’s argument throughout is based on assumptions that are neither proved nor warranted. One of these is that a rising price level is necessary for prosperity. This is refuted by a wealth of historical experience. The great American boom from 1925 to 1929, for example, occurred in spite of a falling price level. And Slichter does not seem to know that depressions are caused chiefly by the collapse of previous inflations.

Nor does Slichter seem to understand how inflation temporarily works its magic. It does so only as long as prices run ahead of costs (mainly wages). Then the prospective restoration or increase of profit margins may lead to an increase in production and employment. But the jig is up once labor gets on to the game, and wages and other costs begin to rise faster than prices. The apostles of permanent inflation (“continuous slow” inflation) are those who believe that labor can be permanently fooled.

Slichter does not explain in his article by exactly what process a “slow” permanent rise in prices—say 2 or 3 percent a year—could be produced. He does not understand why no nation has yet succeeded in keeping an inflation, once started, under control. He forgets that you can’t afford to tell people in advance that you are planning to cheat them. A government can’t plan a “gradual” increase in prices, because if people know that prices will be 3 percent higher, say, next year, they will bid prices up that much right away. If creditors know that the purchasing power of the money they are asked to lend today is going to depreciate 3 percent within a year, they will add 3 percent to whatever interest rate they would otherwise demand; so that instead of lending at 5 percent, say, they will ask 8.

Most fantastic of all, Slichter advocates a continuous inflation to combat Communism. I refer him to the late Lord Keynes, who wrote a generation ago: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. Lenin was certainly right. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Amen. And Slichter, alas, is not that one man.