Inflation; J.A. Clark

As EVERY ENGINEER KNOWS, there is no point in trying to solve a problem until it is at least defined and its controlling factors are identified. To this correspondent, monetary inflation or simply infla tion, with which we are all fa miliar, is an example of a prob lem which seems to be very poorly defined and its causes not well described. If we are unclear as to the basic causes of inflation, there is little hope that any actions taken by the government, indus try, or labor will be of much help in curbing its erosive effect. Judg... ing from discussions in the public media, it appears that a great deal of confusion exists on this ques tion of such fundamental imProfessor Clark is Chairman of the Department of Mechanical Engineering at the University of Michigan in Ann Arbor. portance to our economy. Possibly this is one reason why so little progress has been made over the years in halting the sliding value of the dollar. There would be great benefit to everybody if the public had some clearer understanding of the causes of inflation.

The purpose of this' communica tion is not only to express a cer tain viewpoint but also to stimu late some serious inquiry and dis cussion of this subject. There is no substitute for clear thinking and a rational and objective search for cause and effect relationships on this question. The writer does not pretend to be trained in eco nomics but is experienced, as are most people, in some of its practi cal aspects. Without intending to oversim plify the problem, let it be stated 233 234 THE FREEMAN April that inflation results primarily and directly from an increase in the supply of money and credit and has no other basic cause. It often is said that an increase in prices and wages (a wage is itself actually a price, the price of hu man effort or labor) is inflation ary. Just how this is achieved has always been baffling to this ob server. Increases in prices and wages by themselves cannot in crease the supply of money or credit. Hence, one wonders on what basis their increase can be considered inflationary.

However, it is our general ex perience that "inflation" has al ways followed the various rounds of wage and price increases. Since it is the Federal government alone that has the exclusive right to print money and issue other types of money credit through the Federal banking system, one should suspect that it is the Fed eral government that is solely re sponsible for inflation. A Feedback Principle In a free-market system, in creases in prices or wages sim ply diminish the competitive edge which a product or service may enjoy. The consumer either de cides to pay the increased amount or, in competition with his other desires for products and services, he declines to pay. In the latter instance, a producer must cut his production, labor force, and prices until his product can again be come competitive in the market. Such a system has an automatic, built-in, and stable feedback loop operating on the critically impor tant signals from the market prices.

Unfortunately, today's market is not free in the sense of prices, wages, and money supply. Because of its unique monopoly on the is suance of money and money credit, the Federal government can and does interfere with the freedom of the market. This interference takes the form of upsetting the significance of the market sig nals - prices - by the printing of more money or granting of more credit than is really justified by the demands of the market. The natural consequence of this in creased supply of money and credit is a corresponding increase in prices accompanied or followed closely by an increase in wages. As a result, whatever gain was accrued or thought to have been accrued by a wage increase is only temporary and is soon wiped out by the price increases. This sets the stage for another similar cycle of inflationary actions. Another factor, similar in its effect, is the resort to the printing of money and issuance of credit to pay for the programs of the Fed1970 INFLATION 235 eral government. The massive welfare programs, agricultural subsidies, and military expendi tures are included in these.

One could argue that, so long as wages kept pace (or nearly so) with prices, money supply ques tions really make little difference, since by increasing the money supply. wages and prices are more or less kept in balance. This would probably be true, if we all con ducted our economic affairs on the basis of direct cash exchange for goods and services, something like Robinson Crusoe might have done, without any thought or planning for the future. However, that is not the way people live. Economic life consists of investments and financial con tracts, such as life insurance, mortgages, annuities, and the like, having a fixed dollar value which are usually started many years before they are paid out. In these instances it is clear that inflation has a disastrous effect on the real value at maturity. Consider what the real value a $5000 life insur ance policy taken out in 1940 has when cashed in 1970 in terms of the value of the money paid into it during the 30 years it was in force. Inflation has a similar effect on individuals living on fixed in comes, as is well known. This is perhaps the single greatest con cern for older and retired people.

Search for Scapegoats If the Federal government is the ultimate culprit in causing in flation the question is: Why does the government plead with the labor unions and industry to sta bilize prices and wages when in creases in these alone cannot cause inflation? The answer is partly political. If the government did not print more money and issue more credit, there would be insuf ficient funds to pay for the sum total of products and services at their increased prices. This would cause unemployment, it is argued, and probably undesirable and im mediate political consequences. Rather than waiting for appro priate market responses to price and wage increases, the Federal government unbalances the mar ket with a flood of new money. The consequence of this is a gen eral suffering by all, with the severest penalties being borne by those who are prudent, frugal, and thrifty and desire personal inde pendence. Thus, not only are there purely economic questions in volved here, but moral ones as well, since inflation discourages savings, investment, future plan ning, retards the spirit of careful husbandry of one's resources, and causes a loss in personal independ ence and self-reliance.

Accordingly, the thesis here is that inflation is really caused by 236 THE FREEMAN April the artificial production of money and credit by the Federal govern ment. Further, inflation will stop only when sufficient political cour age is generated to reduce the Federal financial obligation and to resist the temptation to economic expediency by simply printing more money and issuing more credit. Monetary inflation is a political disease which affects ev eryone adversely and is a direct result of government interference in the market place. The cure for this malady is increased freedom in the market, where voluntary and natural exchange is possible, and where all men are free to con duct any transaction so long as it is peaceful. I IDEAS ON LIBERTY Unlimited Power IF CONGRESS can apply money indefinitely to' the general welfare and are the sole and supreme judges of the general welfare, they may take the care of religion into their hands; they may estab lish teachers in every state, county and parish, and pay them out of the public treasury; they may take into their hands the education of children, establishing in like manner schools throughout the Union; they may undertake the regulation of all roads other than post roads. In short, everything from the high est object of state legislation down to the most minute objects of police, would be thrown under the power of Congress. For every object I have mentioned would admit the application of money, and might be called, if Congress pleased, provisions for the General Welfare.

HUGH WILLIAMSON of North Carolina, Member of the Constitutional Convention, 1787 The Age of Authoritarianism ROBERT K. NEWELL THE THEORY of authoritarian gov ernment dominates all modern po litical societies. The theory states that individuals - or even individ uals of like mind working volun tarily in concert - lack the scope of vision and means at their dis posal to identify accurately their own best interests and to pursue them through individual effort. Therefore, the argument contin ues, all governme~ts possess an intrinsic right to demand from those governed the authority nec essary to direct human effort and resources toward the accomplish ment of prescribed social goals. The widespread assumption is that governments by their very nature have the wisdom and pow er to achieve these goals. People from all corners of the earth have come to regard the loss of political freedom and introspective moral Mr. Newell operates a farm near Marcellus, Michigan.