The Price of Disinflation

March 2, 1953

We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.

President Eisenhower has shown great political courage in his own resolve to halt inflation. What is perhaps even rarer in our political life, he has shown a clear understanding of the steps that must be taken. He and his chief financial advisers also see these steps in their proper order. First we must cut expenditures enough to balance the budget. From then on we can cut both expenditures and taxes by the same amount. Meanwhile we must stop using the banks as a dumping ground for additional government securities, and stop holding down interest rates arbitrarily. In brief, we must stop inflating the money supply.

But this program is already meeting serious opposition. Even the Republicans in the House want to start cutting taxes right away, and talk about cutting expenditures later. (The House Appropriations Committee, however, at least made an excellent start by cutting the first spending bill before the new Congress from a requested $2,300,000,000 to only $904,000,000.)

Again, the new Secretary of Agriculture, Ezra Taft Benson, ventured to make some rarely sensible and courageous remarks about price-support policy, and a Democratic senator has already called for his dismissal. Though Mr. Eisenhower has promised to support farm prices at 90 percent of “parity” until December 1954, as required by present law, the opposition is already talking hysterically about the decline in farm prices and shouting that even the present inflationary support program is not enough.

But the opposition to a halt in inflation threatens to become even greater than this. Nearly all of us think we are against inflation, but most of us, on examination, are two-faced about it. We are deflationists in our role as consumers, but inflationists in our role as producers. We want to see the prices of what we buy go down, but the price of what we sell go up. City workers think food prices are too high; farmers think industrial wages are too high. Yet though beef and veal are still selling at retail at 193 percent above the 1935–39 level, as compared with only 91 percent above as the average for all items, many who presume to speak for the cattle raisers are already talking about the recent fall in beef prices as if it were an intolerable disaster. And though average weekly factory wages are 222 percent higher than in 1935–39, compared with an increase in living costs of only 91 percent, the American Federation of Labor recently called upon all its affiliated unions to press for still higher wage rates this year “as a necessary measure to head off a major depression in 1954 or 1955.” Another substantial boost in wage rates now, in fact, without a further expansion of the money supply to make the wage boost payable, would be precisely the way to bring on unemployment.

But the opposition to halting inflation will not come merely from farm and union leaders. To halt inflation may require a further rise in interest rates. This will be opposed by many business borrowers at the banks—precisely because it would discourage a further expansion of bank credit.

Just as inflation never means a uniform rise in all prices, so a halt to inflation would not mean a uniform “stabilization” of prices. On the contrary, the prices of some goods would be bound to fall; and the producers of these goods would start protesting. A halt in inflation would reveal, also, that the optimistic illusions which inflation breeds have resulted in the misdirection of investment into industries whose facilities have become relatively overexpanded. These industries would want inflation continued for their special benefit.

The Eisenhower Administration, in brief, must count the political cost of disinflation in advance, and be ready to pay it. And the rest of us must have the understanding to support it in that determination.