Do Wage Hikes Cause Inflation? W. C. Mullendore

[848 ] usually until they are out of control. It is the old story of Pandora's Box. Those who for one reason or another-to finance a war of defense, to save the world, to rescue a country from a depression, to maintain full employment those who for any reason release the forces of inflation, lose control of them and become their victims along with all others within the human situations affected thereby. The pressure behind an inflation is human appetite and human desire to gain access to the market where the good things of life may be had in abundance, if·only you have enough money. The undeniable fact that goods and services can be acquired in exchange for the medium of exchange leads to the popular. and Widespread delu sion that the medium of exchange itself is wealth. This idea can be rationalized even by brilliant financial minds, as it was by one of the clever and brilliant minds of the eighteenth century-old John Law, who in 1705 first coined the phrase, ""To create money is to create wealth."

The Basis of Trade Our economic system is an exchange system. Its basic and most fundamental law is that those who would re ceive and remove goods and services from the market must first bring goods and services of equal value to the market. Only thus can the dynamic balance of the market be safeguarded and maintained. And upon the mainte nance of that dynamic balance depends the continued existence of the freedom of exchange-i.e., the free mar ket or free enterprise system. And the most effective and [349 ] quickest way to destroy the freedom of a people is to destroy their free market system. Lenin knew that and predicted that communism would destroy capitalism by forcing or inducing inflation. Inflation is a process whereby access to the free mar ket and the goods and services therein is gained, not by bringing goods and services of value to the market but by bringing only a government purchase order-that is, money or a government check (or someone else's check) on a bank deposit which originated in an inHa tionarycreation of credit. Production and sale of goods or services does not precede this demand upon the mar ket; and when demand originates not out of production but in a credit transaction or with a government order or fiat, that is inflation.

Production creates its own demand. That is why we cannot outproduce an inflation. To try to do so is as foolish as trying to outrun onel's shadow. Wage-Inflation Now about "wage-inflation.l" We must all agree with those who point out that, with the aid of powers and with the aid of exemptions from laws which apply to all other citizens, the organizations called labor unions exert an all but irresistible pressure for increase of wages. It is also indisputable that wages are the principal cost of production, and hence, that the constant increase of the wage level must result in the constant, if not uniform, increase of the price level. [350 ] Furthermore, the Fair Labor Standards Act, the Walsh-Healy Act, the Wagner and Taft-Hartley Acts, and other federal and state laws fix the floor under wages and give monopoly power to labor unions. The Norris LaGuardia Act and other laws and court decisions ex empt labor unions from the laws against conspiracy and restraint of trade and the use of violence and fraud.

Such legislation has built these institutions and organi zations into positions where they exert mighty and irre sistible power which threatens the dynamic balance of our society. I am one of those who agree most heartily that this is an evil and monstrous power which should never have been created and must be curbed if we are to avoid irreparable damage to our country and its free institutions. However, I still maintain that the rise of wages is not inflation. Pressure Groups Labor unions are one of the pressure groups which soon discover that when the gold standard is abandoned, the power to increase the money supply is in the hands of governmental agents and agencies. That immediately suggests using political pressure in lieu of production of additional wealth as a means of increasing the money supply. This leads to such laws as the Employment Act of 1946, which has been interpreted as ordering and requiring that the government must use all of its powers, including its power to add to the money supply, when[351 ] ever these powers are deemed necessary to the mainte nance of full employment and prosperity.

Other pressure groups form. The farmers demand parity. Mining groups demand stockpiling of their prod uct in order to maintain prices. Business groups demand help for their particular branch, such as construction, housing, and the like. Groups representing the infirm, the aged, and those suffering all of the physical ills of man kind tend to form into pressure groups and demand the use of the powers of government to help them. So the pressure groups are always active in a period of inflation in bringing pressure to bear upon those who have the power to inflate. But my point is that we are watching the wrong "rathole" in trying to stop inflation watching the effects rather than the source and the cause. The source and the cause are to be found at the seat of the power to add to the money supply, and it is that power which must be removed-not curbed just a little, but absolutely curbed if we are to stop inflation.

Curbing Labor~8 Power Now if the issue before us today were the question, "Should the labor unions have their power curbed?" certainly I would agree; yes, they should. But the issue before us is, cCAre wage raises the cause of the inflation, and can we stop inflation by attacking and trying to prevent further wage raises?" To that my answer is no. Wage raises are one of the inevitable symptoms of infla tion; and inflation as a cause of wage raises is an irre[352 ] sistible force. The way, therefore, to curb the disease of rising costs and rising prices which result from inflation is to remove the cause of inflation and to take away the power to inflate. Of course, if you define inflation as rising prices, you are inevitably led to the conclusion that rising costs are the principal cause of rising-prices; and the principal cost of production and distribution of goods and services is wages. It is also demonstrably true that when labor unions have as much power as they have at the present time, they can force the increase in wages not only to keep up with, but also to keep ahead of the increase in prices. But that is a far different thing than the conclu sion that the principal cause of inflation is the increase in wages.

l353 j ENTER INTO LIFE WHEN I got through Vermont Academy, college, and law school, I played a good deal of chess while waiting for clients who were bold enough to let me practice law on them! Chess, as some of you know, is the most difficult of all games. The combinations and permutations on the chessboard run into the octillions and no man ever has, or ever will, completely master it. Chess "masters" are relative only to other players. Nevertheless, they are remarkable men. One of several I got to know was Emmanuel Lasker of Berlin, Germany, who had been the world champion for 24 years. He was not a mental freak. He had a Ph.D. in mathematics and wrote a profound book on philosophy. In addition, he was a kind and gentle man-then in his 60's. We got him to come to my home town of South Bend to put on an exhibition match with some 30 local players. At supper that night, we asked this grand master why he had given so much of his life to chess.