8. Inflation and Government Controls

CHAPTER

EIGHT

Inflation and Government Controls

Human cooperation can be organized according to two different models. One is the model of absolute rule by one ruler only, the socialist model—everything is organized under the leadership of a leader, der Führer. The term is not very much used in the Anglo-Saxon language because people did not think of it as a system that can really work. But in the countries in which socialism prevails the term, der Führer, the leader, is very well known. In those countries everything depends upon this autocratic regime; everybody has to obey the orders issued from one central authority. People who like the system call it “order;” people who don’t like it call it “slavery.”

This system in which people must obey the orders issued from a central authority is very well known to anybody who has served in an army. For the army, it is the only possible system. If one criticizes the centralized system, we must not forget that it is suitable only for a special purpose, for the special end which it can attain.

The characteristic of the market is that government does not issue orders that the people must obey; it does not control prices; prices and wages are determined by demand and supply on the market. This system is the system that brought about the constitutions and all those commodities and services which together can be called modern civilized life. The opposite of the market is the abolition of the market and its substitution by the socialist or communist state. That means planning, central planning, where everything is determined by decrees and orders of the government.

Government officials cannot ignore public opinion; they cannot ignore the ideas and practices of the people. The government is never in a position to make any laws it wants. It cannot afford to take into consideration only the views of the people who are running the government. So laws tend to follow accepted practices and theories. And that is true in the field of money too. With respect to money, government must accept and acknowledge the money that has evolved out of the actions and ideas of individuals.

Let us take the following political situation. The government wants to spend more than it has spent up to yesterday, but it doesn’t have the money. And it doesn’t want to tax more, or for political reasons it simply cannot tax more. Nor can it borrow the money, because from their point of view conditions for borrowing appear unsatisfactory. The government wants to spend more and doesn’t want to tax the people. The government wants to appear as Santa Claus, which is a very agreeable situation, a more popular situation than that of a tax collector. Therefore, the government does not tax the people to get the money for its new expenditure; it inflates; it prints the money. The important point to remember regarding inflation is that, while the money in circulation is increased, other things remain unchanged. This inflation is very cheap, you know; it is a very cheap procedure. What happens then? Prices go up. The government, of course, wants a way out, a solution, so it is apt to try price-fixing. The government fails to recognize the fact that if the public really obeys its price-fixing orders, sellers will sell their entire supply of commodities to regular customers at the former or fixed prices with the result that those into whose pockets the additional money goes will find nothing to buy.

I want to give a typical example of how government price controls work. In the First World War and again in the Second, the German government and the English, among others, embarked upon inflation as a means of financing the war. The addition of new money to that already in circulation brought about an up-trend in prices which the government did not like. The government wanted business as usual. But it was obviously not business as usual. Therefore, the German government, as well as others, resorted to price controls.

Now, if prices are fixed below what they would have been in the unhampered market, high cost producers are bound to suffer losses. The government starts, let us say, by fixing the price of milk. As a result, the higher-cost producers cease bringing milk to the market and convert their milk into other end products, butter, for example. Thus, the quantity of milk on the market not only does not increase, but actually decreases, precisely the opposite of what the government wanted. The government wanted milk to be more readily available to the average family, but the quantity of milk decreases. When the government approaches the producers for an explanation, their answer is that they would have suffered losses in producing milk because of the price they had to pay, let us say for fodder, and, therefore, they turned their milk production into butter for which there was no fixed maximum price. The government then price-fixes fodder. And then the same story is repeated with fodder. Thus, the government continues step-by-step until it reaches what the Germans in the First World War referred to as the “Hindenburg Plan,” a complete socialization of everything.

The German government broke down at the end of the War. But several years later the Brüning government reinstated price controls which Hitler carried to their final conclusion. Price controls transformed private ownership and private production into a system of complete government control of everything. German communism, national socialism, under Hitler did not legally expropriate the owners of the means of production, but every economic step was determined by government. There were still entrepreneurs, although the name “entrepreneurs” was eliminated; they were called “shop managers.” They were at the head of business organizations, but they had to comply completely and exactly with the government orders. They had to buy raw materials at prices set by government, sell to other firms at prices determined by government, and employ workers assigned to them by government.

There is no third economic system which makes it possible on the one hand to have a free market and on the other hand to avoid socialism or communism. Interference with the market inevitably brings about effects which, from the point of view of the interfering authorities, are even worse than the state of affairs they wanted to alter. In order to make the system work the authorities go farther step-by-step until they bring about a situation under which the initiative of everybody else is destroyed, and everything depends on the authorities, upon the leadership of government.

The reason we do not have price controls here today is because of the experiences in other countries. Again and again the government repeats that we need to control prices. Yet it does not tell the cigarette manufacturers that it is forbidden for them to raise the price of a pack by one cent. Instead the government tries to talk with the cigarette manufacturers and with the representatives of a thousand other firms so as to pressure them. While the government has not as yet embarked on price control it hasn’t really done anything to prevent the present system from operating in a way it does not like. As a matter of fact, quite the contrary. It has built inflation into our present system—inflation even in the popularly-accepted meaning in which the government uses the term, that is higher prices.

We see, therefore, that the problem of money is much more than only the problem of the organization of the market. The market is today fighting for its independence and existence. The government tries to interfere with the market and we are now just one day, one year, nobody knows how far away from what is called control of prices. And that means the abolition of the market.