Who Makes Inflation?

February 8, 1960

The President’s annual Economic Report has come a long way since the days of Leon Keyserling. It is lucid, readable, informative, and conservative in tone. It pays more than lip service to the need for a balanced budget and to the merits of “a free society, free political institutions, and a free economy.” It rightly insists that “we grow only by investing more and producing more, not simply by spending more.” Many of its specific recommendations—such as the removal of the 4¼ percent interest-rate ceiling on new long-term Federal bonds—are urgently necessary.

The report is also able to point out that though inflation continued in 1959, the rate of inflation decreased. The money supply (as measured by demand deposits plus currency) grew by only one-half of 1 percent in 1959, compared with 4 percent during 1958. The consumer price index rose from 123.7 at the end of 1958 to only 125.6 at the end of 1959. The wholesale price index actually fell during the year from 119.2 to 118.8.

Yet the latest Economic Report leaves one with the same doubts as have its predecessors concerning the wisdom of the Employment Act of 1946. That act declares (though with elaborate bows to “free competitive enterprise”) that “it is the continuing policy and responsibility of the Federal government . . . to promote maximum employment, production, and purchasing power.”

DOUBTS ON 1946 LAW

It has not been proved that the act has done any particular good. Thus, though the present report boasts of the great advances made in employment, income, and output in the fourteen years since the passage of the Employment Act, it also concedes that “the annual increase of 3.2 percent in total national output” in this period “is roughly equivalent to the long-term average reached in our previous history.”

But the act, by its emphasis on maximum employment and “purchasing power,” and its silence concerning prices, has given added stimulus to inflation. It is not mere coincidence that since 1946, when the act was passed, the money supply has increased 32 percent and consumer prices have risen 50 percent. This inflation has made the miracle of “economic growth” seem much greater than it is. We boast of our gross national product of 1959 of $479 billion; but if this had been calculated at the 1939 price level, it would have been only $205 billion—not half as impressive.

Moreover, by holding that employment, production, and purchasing power are the “responsibility” of the Federal government, the Employment Act of 1946 has provided an excuse for hundreds of “programs,” handouts, and interventions, and a steady expansion of Federal control. Is it really the province of government to increase employment, output, and purchasing power? Or is not its chief business, rather, to keep out of the way?

RESPONSIBILITY

Its true function is to maintain peace, order, and justice; to protect life and property; to refrain from burdensome and inequitable taxation; to remove the punitive laws and deterrents that previous governments have imposed. Its function is to permit and preserve a sound currency. When it fails to do this, it must bear sole responsibility for the failure.

If it properly fulfills its own responsibilities, it will not need to lecture the people to take “appropriate private actions, especially with respect to profits and wages.” If it did not grant labor unions special monopoly privileges, the power of intimidation and of paralyzing the economy, it would not need to declare piously and futilely that unions should not “threaten to paralyze our entire economy.” And it need not declare that “price reductions warranted by especially rapid productivity gains must be a normal and frequent feature of our economy.” If the government itself will refrain from monetary inflation, these price reductions are precisely what will occur. A fair field for competition will bring down production costs and prices with them.

The greatest profits will go to those who either bring down production costs the most, or improve products the fastest. The free market can settle these relationships better than the most learned government economists.