Would Peace Be a Disaster?

April 20, 1953

I predicted in this place last week that fears of peace in Korea would lead to “increasing pressure on the Eisenhower Administration to resume inflation in one form or another.” Typical of the comment already appearing is a dispatch in The New York Times of April 8 from James Reston.

“The Soviet ‘peace offensive’,” it begins, “has had at least one good influence [in Washington]. It has alerted the government planners whose job it is . . . to make provision for the day when defense spending will not assure full employment. . . . For seven years the Russians have tried to scare us into isolation and inflation; now, as the experts here see it, one of their objectives seems to be to smile us into disarmament, deflation, unemployment, and depression. . . . Labor union leaders . . . already have started appealing to the President to plan at once for the day when the vast government orders for munitions will drop off. . . . The observers think that . . . the Soviet hierarchy is trying to bring the United States up against the major problem of keeping its people employed when it shifts to a modified peace economy.”

Notice how the dispatch rolls “disarmament, deflation, unemployment, and depression” all into one package, implying that the first necessarily involves the last. Notice the implied labor-union-leader plea to maintain the present fantastic rate of government spending at all hazards.

It was only a few months ago that the Russian Communists were accused of threatening war mainly to force us to spend ourselves into inflation and bankruptcy. Now they are accused of threatening peace to force us to economize ourselves into unemployment and depression. A regular technique seems to have developed among our would-be planners, official and unofficial. If they want to get us to do something, they immediately charge that the Russian Communists are trying to force us to do the opposite.

“In the Soviet mind,” The Times dispatch continues, “the capitalist world cannot close the gap between its production and consumption without vast expenditures for war.” Whether or not this is the Soviet theory, it is certainly the theory of most of our home-grown planners. They might admit, perhaps, that we don’t need vast expenditures for war. But we certainly, in their opinion, need vast government expenditures for something if we are to “close the gap between production and consumption.”

As this column has often pointed out, this theory is pure Keynesian nonsense. It is astounding that it could have survived the experience immediately after Japan surrendered in August 1945, when a sweeping cancellation of war contracts was followed by even higher employment in the spring of 1946. How often must it be pointed out that if the government spends, say, $10,000,000,000 a year less on defense, the taxpayers have $10,000,000,000 more of their own money to spend on themselves?

What the planners and “experts” in The Times dispatch are really arguing for is the continuance of monetary inflation. Indeed, a school is now developing that openly embraces Perpetual Inflation. Listen to Prof. Seymour Harris of Harvard. Perhaps the present Administration’s monetary authorities, he writes in a letter to The New York Times of April 5, “will tell us where, in the absence of bank purchases [of government bonds], the money is to come from which will be required over the next 25 years on the conservative assumption that real income would rise by 100 percent and prices by only 50 percent. . . . For when the banks buy, additional deposits are created.”

In other words, Harris insists that even if production of commodities doubles, their prices ought to be raised by at least 50 percent. This result could only be brought about, of course, by an enormous further inflation (of some 200 percent) in the money supply.

With such doctrines on the loose, the Administration is going to find it extremely difficult to hold to a course of economic, fiscal, and monetary sanity.