Sham Fight against Inflation

September 4, 1950

While the Administration is demanding and getting fake weapons and needless powers to “fight” inflation, it is driving ahead with the very policies that produce inflation.

Inflation is directly caused by an increase or expected increase in the supply of money and credit in relation to the supply of goods—and (apart from deterioration also in the quality of money) by nothing else. All other so-called causes or “pressures” are at most only indirect.

One of the most important of these indirect causes is a governmental cheap money policy. Artificially low interest rates increase the demand for loans—particularly from marginal productive or marginal speculative ventures. This means the creation of more bank deposits—i.e., of more money bidding for goods—of more inflation. The Treasury insists on continuing precisely such a policy.

In the last decade the Federal Reserve System has been used primarily as a huge engine of inflation. The Federal Reserve authorities have been subservient to the Treasury. They have carried out its shortsighted interest-rate policies and allowed the banking system to be used as a dumping ground for government securities. This is the chief way in which the nation’s volume of money and credit has been more than tripled between 1939 and the present. This is the primary cause of the inflation of the last ten years.

But on Aug. 18 the Federal Reserve Board increased the discount rate of the Federal Reserve Bank from 1½ percent (a fantastically low rate in the face of inflationary danger) to 1¾ percent. This was a very cautious move indeed—but it was in the right direction. Its chief importance was symbolic. Yet the Treasury on the same day moved in precisely the opposite direction. It announced that it would offer $13,570,000,000 of thirteen-month notes at only 1¼ percent interest. And Secretary Snyder publicly reproved the Board’s anti-inflationary gesture. “A stable and confident situation in the market for government securities is our first line of defense on the financial front.” He added that we must “fulfill our responsibility to the millions of Federal security holders throughout the nation.”

But this merely meant that Mr. Snyder was putting low borrowing rates for the Treasury ahead of every other consideration—including the certainty that this policy must produce still more inflation. To maintain artificially low interest rates not only encourages general inflationary borrowing; it compels the banking system to support and load itself up with U.S. government securities issued at such rates. The Federal Reserve Banks now hold $18,577,000,000 of these, and the country’s commercial banks more than $66,000,000,000. The money and deposits created against these securities are the chief reason why present wholesale commodity prices are more than double those of 1939. The Federal Reserve Banks at that time held only $2,484,000,000 in government securities and the commercial banks held only $16,000,000,000.

Mr. Snyder’s belief that his bond-pegging and low-interest policies protect Federal security holders is the exact opposite of the truth. It is mainly because of these very policies that every dollar invested in Federal securities in 1941 has a purchasing power of only 61 cents now. This is a real depreciation of 37 percent.

Nothing can now prevent a serious inflation except a termination of the Federal Reserve and Treasury policies of the last decade. Interest rates must be allowed to rise. Government bond-pegging at present rates must be abandoned. The Treasury must sell its bonds to nonbank investors. The reserve requirements of the Federal Reserve Banks must be restored at least to the old 35–40 percent level, and preferably put even higher. And when the government has made these self-denying reforms, the reserve requirements of the commercial banks must be tightened.

If these measures are taken we will not need price controls against inflation. If they are not taken, price controls, as in the past, will be worse than futile. They are false anti-inflation weapons. They merely impede, unbalance, and disorganize production.