More Inflation Ahead?

December 18, 1950

The first response to the Korean debacle in Washington, in terms of domestic economic policies, was far from encouraging. It was the hasty passage in the House, by an overwhelming vote, of essentially the Administration’s form of the so-called “excess-profits tax.” The only merit of this tax (especially in the form in which it was passed) is that it carries a specious political label that few have courage to stand up against.

The tax itself will hurt, not help, war production. It will breed wastes and extravagances to offset the revenues it ostensibly raises. It will be inflationary compared with any of its alternatives. It will penalize new firms and industries compared with established ones. It will not impose taxes in accordance with present relative incomes but only in accordance with the relationship of these to past incomes. The principle is so bad that practically no one has seriously suggested that it be applied to personal incomes. Yet the income of corporations is merely the pooled income of individuals.

But there has been a note in the recent economic news from Washington that is even more ominous than this. It is the open abandonment of the Administration’s previously proclaimed (though never followed) pay-as-you-go tax policy for financing rearmament. Congressmen and Administration officials are now blandly saying that of course it will be impossible to finance war production on the scale now needed except by monetary inflation.

This argument rests ostensibly on the size of the sums now contemplated. The new military appropriation of $18,000,000,000 for which President Truman has asked would raise total military appropriations to $49,000,000,000 in the current fiscal year. There is talk of a total budget in the neighborhood of $75,000,000,000 in the 1952 fiscal year, and Secretary Snyder is already predicting a deficit in that year of $10,000,000,000 to $15,000,000,000.

The politicians who think that monetary inflation is now either “unavoidable” or preferable to its alternatives simply do not know what inflation is or what it does. Inflation is not a way of avoiding taxation; it is itself a form of taxation. It is tantamount to a huge sales tax on all commodities, with the rate as high on bread and milk as on jewelry and furs. It is equivalent to a flat unprogressive income tax, without exemptions, on rich and poor alike. It is a flat unprogressive capital levy on all savings accounts, life insurance, government bonds.

And yet those who are blandly proposing this are the very people who still fight tooth and nail against the merest suggestion of a more broadly based income tax, or of excise, sales or expenditure taxes, and who pretend that they want to tax only “the rich” or “the war profiteers.” They favor inflation because it disguises the realities (perhaps as much for them as for its other victims) under endless illusions.

Given a certain maximum production, the civilian population, the consumers, must be deprived of whatever production or consumption is diverted to the war effort. When this is done through honest and outright taxation, taxes take away the same amount of money from the consumer that they turn over to the government. When it is done through monetary inflation, the consumers’ real deprivation is not lessened in the slightest degree. Its incidence is merely far more haphazard and unfair. The average citizen’s nominally higher income is far more than offset by higher living costs. The government too is deceiving itself, for it must spend far more money for the same war preparedness.

In the long run, inflation only increases the real deprivation of the taxpayer. It draws attention away from the government’s failure to slash needless expenditures—which Senator Byrd has estimated at $10,000,000,000. It leads to a demand for price and wage controls, which cannot offset the inflation but merely abridge economic liberties while they reduce, distort, and disrupt production.

There is no magic in inflation except the magic of self-deception. It leads in the end to chaos and collapse.