Looking for Scapegoats

January 13, 1964

For 30 years, with minor intermissions, our government has been following a policy of monetary inflation. The cost of living has more than doubled. Since the end of 1939, the money supply (demand deposits and currency outside banks) has been more than quadrupled—from $36 billion to $152 billion.

Since the end of 1957, the government has been worrying about a “deficit” in the balance of payments. Measured from that date, this deficit has reached a total of nearly $19 billion—an annual rate of more than $3 billion.

During this period government policy has increased the active money supply from $136 billion to $152 billion, or nearly 12 percent. It has increased total money supply (including time deposits) from $193 billion to $261 billion, or 35 percent. During this period, also, it has granted more than $24 billion, or $4 billion a year, in foreign aid. It has failed to cover this amount in its annual budgets, which have run a cumulative deficit in the period of more than $30 billion, or some $5 billion a year. And during this period, finally, our monetary authorities have by deliberate policy been holding down both short-term and long-term interest rates “to encourage employment and economic growth.”

BLAMING CITIZENS

In brief, the deficit in the balance of payments about which the government professes to be so worried has been brought about by its own policies. It has been annually giving more money and goods away to foreign countries than the amount of this deficit. By inflating, it has raised prices and costs in this country and made us less competitive in foreign trade. By holding down interest rates, it has made it less attractive for foreigners to lend or invest their money here at the same time as it has encouraged Americans to invest their dollars abroad to get a comparatively better return.

But the government refuses to acknowledge that this has been the result of its own policies. So it is looking for scapegoats. It puts the blame on its own citizens. It blames American investors. It is demanding an almost prohibitive penalty tax on the purchase of foreign securities. Nothing could be more absurd, because American investors, unlike the government, are not giving their money away to foreigners. They are buying assets for it. They are earning a return on it. In fact, in the five years 1958 to 1962 the aggregate net outflow of $16.6 billion for new foreign investment was offset by $15.4 billion of income from previous investment. And in 1962 alone such income amounted to $3.8 billion compared with a net outflow for new investments of $3.3 billion.

MERCANTILISM

If an American investor who buys foreign assets is “hurting our balance of payments,” isn’t an American tourist who buys consumer goods abroad hurting it still more? “Indeed he is,” replies the government, “and that is why we have reduced the duty-free tourist allowance to $100.” But why doesn’t it also put a maximum limit on what each tourist can spend in travel, or even prohibit our citizens from traveling abroad at all? It is the logical next step. But what logic would there be in stopping even there? What about American purchases of German cars, of Japanese cameras, of Irish linen, of English tableware, of Scotch whisky, of French perfumes, of Brazilian coffee, of foreign anything? Why not put a prohibitive tariff on all of these things, and solve our “balance-of-payments problem” once for all?

But, someone may say: “This is mercantilism. This is madness. It would be, moreover, completely futile, because our exports depend upon our imports. It is only through selling to us that foreigners can get the dollars to buy from us. If we cut down our imports we must in the long run cut down our exports by the same amount.” Precisely so. And in the same way we must cut down our exports by as much as we cut down our foreign investments.

The government’s proposed remedy is not only immediately harmful but in the long run futile. But it will not adopt the only solution, which is to halt its own inflation.