Off to the Races

August 20, 1951

On Aug. 3 the Wage Stabilization Board made a recklessly inflationary decision. All wage earners within its jurisdiction are to be allowed to obtain cost-of-living escalator wage increases it “voluntarily” negotiated.

The board showed not the slightest awareness of the disastrous consequences of parallel decisions in Austria and Germany in the ’20s. “Those who have forgotten the past,” as Santayana has reminded us, “are condemned to repeat it.”

Anyone interested in the facts can find them in a book by the Italian economist Costantino Bresciani-Turroni, published in Italy in 1931 and in an English edition, under the title The Economics of Inflation, in 1937 (London: Allen and Unwin). “It was observed in Austria as well as in Germany,” writes Bresciani-Turroni, “that the inflation proceeded with quickened pace especially after the workers had obtained money wages which varied with the index number of the cost of living.” This is an understatement. The system of fixing wages on a cost-of-living index became general in the summer of 1923. The cost-of-living index number in Germany rose from 3,816 in May of 1923 to 7,650 in June, 37,651 in July, 586,045 in August, 15,000,000 in September. . . .

This consequence was not merely coincidental. As I wrote (Newsweek, June 7, 1948) when the General Motors wage settlement was first announced which established the “cost-of-living adjustment” as a precedent here: “We must remember that the consumers’ price index represents an average of many different prices. If companies whose products have risen in price much less than the average were nonetheless compelled to pay wage increases equal to the average, they would either be forced out of business or forced to raise prices. If the price index were thus forced up, this would of course in turn require still further upward cost-of-living wage adjustments.”

George W. Taylor, chairman of the Wage Stabilization Board, has tried to defend the new decision by saying: “If prices are stabilized there will be very little movement in wage rates under our cost-of-living resolution.” This has surface plausibility, but it is not true. If each particular wage is allowed to catch up with the existing average percentage rise in wages or in prices generally, then the average wage itself must go up.

This points to the fallacy in all the so-called “catchup” wage formulas. They force an increase in production costs of goods that have hitherto not had the average price rise; hence they lead to demands for price relief. They force firms to borrow more money at the banks to meet increased payrolls. This increases the money-and-credit supply. Increased money in the hands of workers bids for a reduced volume of civilian goods. The increases thus forced in the price of goods become in turn the cause under the escalator provision for still further increases in wages—and so ad infinitum.

The attempt is already being made to argue that this universalized escalator clause was made necessary in wages to compensate for the action of Congress in allowing price increases to meet increased costs under the Capehart amendment. This defense puts Capehart before the horse. Congress passed the amendment because it was convinced that wages were not going to be stabilized anyway. It felt that increased wage costs must therefore be permitted to come through in prices. Continuance of existing wage escalator clauses had already been sanctioned by Eric Johnston months before the Defense Production Act came up for renewal. Every realist recognized that this discrimination as between different labor groups could not and would not be long maintained.

But Congress made the wrong response. Instead of insisting on catch-up price-fixing to match catch-up wage-boosting, Congress should have allowed price- and wage-fixing powers to expire altogether, and concentrated on the only real cure of inflation, which was to pass laws designed to halt the further increase in money and credit.