Shadow-Boxing with Inflation

September 18, 1950

Neither Congress nor the Administration can take any legitimate pride in its economic or fiscal record since the outbreak of war in Korea.

Congress failed to provide for control of what most needs control. It provided controls that are not needed and can only create confusion or harm.

What is needed is the most stringent credit control. Without this, inflation is certain. With this alone inflation can be halted. Yet Congress provided only for the control of derivative credit, such as installment buying and real-estate mortgages. It did nothing to curb the expansion of the money supply or bank credit at the source.

When everyone in the Administration and in Congress professes to be “fighting inflation,” and when the average combined reserve ratio of the Federal Reserve Banks is still 54 percent, it is a scandal that the Federal Reserve authorities should be permitted to retain the “emergency” legal reserve ratio of only 25 percent adopted in 1945. The minimum ratio requirement should now be restored to at least the former levels of 35 percent against deposits and 40 percent against notes. And the Treasury must be prevented from continuing to float its securities by inflationary means. Until such measures of self-restraint are adopted by the government itself, all its other so-called “anti-inflation” measures or exhortations must be set down as hypocritical and futile.

At least lip service, it is true, has been paid in Congress and the Administration to a balanced Federal budget as a preventive against inflation. But apart from the protests of a small Congressional minority symbolized by Senator Byrd, virtually all the emphasis has been thrown on getting this balance by still more crushing taxation. When Congress directed the President to cut his proposed annual expenditures by about 1 percent, to be taken out of the nonmilitary budget, Mr. Truman called the requirement “arbitrary” and didn’t see how he could conform with it “without impairing essential government services”! It is only the taxpayer, apparently, who is to be told that he will just have to learn how to get along on less. The austerity is to be all his; political pork must not be touched.

The same government that is crying for more power to keep down prices is still using hundreds of millions of the taxpayers’ money to keep food and other farm prices high. And when every spare dollar and resource is needed for defense, we are still handing out billions to European bureaucrats to enable them to play with more civilian “welfare” schemes.

The Defense Production Act embodies the false economic theory that the way to combat monetary inflation is through blanket price control. Its idea of “total mobilization” is total government restraints. Price control at best is an effort to “combat” inflation by disregarding its causes and attacking merely its symptoms. The chief effect even of “impartial” price control is to cut production. But in addition the new measure is frankly discriminatory. Explicit protections are written in for farm prices and wages. If these are justified, why shouldn’t they apply equally to all prices? The President, for example, is explicitly directed not to fix any wage below that paid in the month prior to June 25. Why not the same restriction on his price-fixing powers for all prices?

In fixing prices or wages the President is authorized to “make such adjustment as he deems necessary to prevent or correct hardships or inequities.” This is the door through which every political pressure group will try to pound its way. Union leaders, of course, will argue that the whole wage level was “inequitable” as compared with the price level before June 25.

In spite of the Lustron loan and other RFC scandals, the new act authorizes $2,000,000,000 more—$600,000,000 of it under virtually uncontrolled Presidential discretion—for loans to private firms whose credit isn’t good enough to get loans from private investors or banks.

The best provision of the Defense Production Act is the expiration of at least part of it on June 30, 1951, This will give an early opportunity for sober reconsideration by the new Congress.