Inflation: what it means; William B. Boyd

INFLATION: what it tReans WILLIAM B. BOYD INFLATION is one of the most abused and misused words in the English language - a word that is on everyone's lips, yet a word which few bother to define. It has several meanings and most people - even professional economists use them interchangeably, some times within the same paragraph. How can we possibly discuss and reason about a thing whose mean ing has not been established? So our thinking is muddled, a Tower of Babel situation has developed, and in our confusion we are fum bling around trying to alleviate results, rather than trying to find and eliminate the cause. This is having a most injurious effect upon our society, undermining our economy, destroying our money, and threatening our liberty - a very serious situation. Mr. Boyd, a businessman in Fairfield, Connec ticut, also is interested in the Fairfield Country Day School where he recently presented these views on inflation to students of the 9th Grade.

80 So, it is my purpose to see what can be done to set us thinking straight about this matter, to bring some order out of the chaos. Specifically, I shall define inflation so that we'll know what we're talking about, show how it works and what it does, trace it back to its cause, and finally suggest a cure. This is a very ambitious un dertaking - maybe too ambitious - but worth trying if it sets you thinking. First, what is inflation? Its basic meaning is a swelling up, a blowing up, a puffing up, an in crease, an expansion. In its eco nomic sense the word is used with at least five different meanings: (1) Any increase at all in the supply of money (money in the broadest sense, which includes credit) . (2) An increase in the sup ply of money (again in the broadest sense) that outruns 1970 INFLATION: WHAT IT MEA~S 81 the increase in the supply of goods. (3) An increase in the aver age level of prices - that is, any wide or .general increase in prices.

(4) An increase in the prices of widely used goods - such as steel or lumber or oil or food stuffs. (5) Any boom or period of intense business activity or prosperi ty. The best of the lot, because it is precise enough not to cause confusion and still simple enough to be widely understood, is number ,2 - an increase in the supply of money that outruns the increase in the supply of goods. Empowering the Federal Government to Cause Inflation Now, using this definition, who or what organization can increase the supply of money? You know the answer: in our country the only organization allowed. to man ufacture money is the Federal government. Therefore,. the Fed eral government is the only. force that can cause inflation. If anyone else manufactures money, it is called counterfeiting. Counterfeit ing in principle is the same as in flation; but counterfeiting is il legal, and cannot be done on as grand a scale as inflation.

The effects of inflation are very bad. It causes a drop in the pur chasing power of our money which is another way of saying that it raises prices. But goods and services are not becoming more expensive; it is our money that is becoming cheaper. Now this process of pumping more money into circulation does not cause prices to rise evenly or all at the same time; inflation never affects everybody equally and simultaneously. If it did, its effects would cancel out. Inflation begins with some particular group. Say the government puts more money into circulation by paying defense contractors or by increas ing subsidies to farmers. The in comes of those who receive this money go up first. Those who begin to spend the money first buy at the old price levels. But their additional buying begins to force up prices. Those whose money in comes have not been raised are faced with paying higher prices than before, that is, the purchas ing power of their incomes has been reduced. Eventually, through the play of economic forces, the money-incomes of most of them may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they will never make up the loss they suffered from .inflation. Soa few people gain at the expense of all the .rest 82 THE FREEMAN February of us. The hardest hit are retired people and widows trying to live on the shrunken incomes from pensions, social security, or the interest on savings.

Furthermore, inflation reduces the value of ordinary savings, such as savings bank deposits, life in surance, and bonds. This reduces our incentive to save. "Spend now while your money will still buy something," becomes the mode. Thus, people are lured into ex travagance and speculation. Inflation deludes businessmen as to the amount of capital available and as to the demand for goods. The signals (prices) have been falsified and businessmen there fore miscalculate and make bad investments of scarce capital. These bad investments will later have to be liquidated. This is called a recession or a depression. Inflation upsets the relation ships of goods (prices) and serv ices (wages) to one another, set ting group against group, class against class. Those who have suf fered loss resent those who prof ited from inflation. Even the moderate gainers envy the bigger gainers. People see that the new distribution of income and wealth that goes on during inflation is not the result of merit, effort, or productiveness, but of luck, specu lation, or political favoritism.

In the end, if it is kept up, inflation destroys our money and creates financial chaos in which our liberty is lost - that is, it brings oppressive government con trols of wages, prices, and the use of our property. Deficit Spending and Monetizing the Debt Well, you may ask, if the results of inflation are so bad, why does our government inflate? The men in government manufacture money to pay for the costs of their pro grams which run beyond what they dare collect from us in taxes. The terms for this operation are "deficit spending" and "monetizing the debt." What are these programs that are costing so much money? Here are some of them: putting a man on the moon, developing a super sonic transport plane (which would probably be used mainly by the jet set), paying for surplus farm products to keep their prices up, subsidizing our merchant ma rine in order that the shipowners can afford to pay the high wages demanded by the maritime unions, rebuilding cities, paying for peo ple to go to school and college, free medical care for the aged, slum clearance, relief, public housing, fighting socalled poverty, unem ployment compensation, social se curity, foreign aid, and,- most ex pensive of all-waging war.

1970 INFLATION: WHAT IT MEANS 83 Why doesn't government cut out or cut down on some of these pro grams? Each program is popular with some people, they now have a vested interest in it, and the politicians fear that if they cut programs they will lose votes. So, the cause of government de'ficit spending and the conse quent inflation is the pressure of various groups to get from gov ernment special favors and privi leges for themselves (this is un intelligent. selfishness) and the at tempts of other groups to solve the problems of the poor and the unfortunate by using the force of government (this is false phi lanthropy). Unintelligent selfish ness and false philanthropy are based on the theory that every thing can be accomplished through the use of force by the state and this use of force is justified by claiming that it is done by demo cratically-elected politicians for a noble end - "the public good" - or "the greatest good for the great est number."

The people in government want to stay in office. For this they need votes. So they want to be good guys and do everything for everybody. Since the end of World War II, they have been pursuing three goals which would seem to be mutually contradictory: (1) constantly rising wages, (2) full employment, and (3) stable prices. Incompatible Objectives It does not seem possible that all three of these could be achieved at the same time. If government tries. to have constantly rising wages (regardless of produc tivity), full employment is impos sible unless prices can be increased to cover the increased costs; but then more money must be pumped into the economy to enable con sumers to pay the higher prices. So, in reality, we would be giving up the goal of stable prices and engaging in a continuous inflation. On the other hand, the combina tion of constantly .rising wages and stable prices would soon. bring on unemployment, while the com bination of stable prices and full employment would mean the end of the constant annual "rounds"

of wage increases, regardless of productivity. But as matters are, union leaders would never stand for this. So government tries to achieve constantly rising wages and full employment by means of inflation and then tries to main tain stable prices by means of controls. This is like stepping on the accelerator and the brake pedal at the same time. And it always ends in disaster. Yet, there is a cure for inflation and a way in which the three goals of rising wages, stable prices, and high employment could be achieved, provided these goals 84 THE FREEMAN February are reasonably defined or· inter preted.·· This way is through the restoration of a sound currency and a genuinely free economy. This means that our money must be tied to gold and that our gov ernment must be strictly limited to its proper functions of secur ing our lives, liberty ,and property from violence and fraud and of administering justice in accord ance with an objective code of laws.

The chain of cause and effect, in which inflation and its conse quences are links, begins with the false ideas of statism: that all things are possible through the use of force by government. Since Like an Oak Tree ideas precede and determine ac tions, it is no use trying to change results far down the line without first entirely exploding the origi nal ideas from which all the other ideas and actions stem. Therefore, the cure for the ills we have been discussing must begin with the re futing and discarding of the ideas of government interventionism and the replacing of these with an understanding and acceptance of the sound ideas of freedom - the free market, private property, limited government philosophy. This requires that we sharpen our minds and discipline our thinking. For man's only weapon in the fight against error and for the truth is reason. , IDEAS ON LIBERTY As AN OAK gathers what it needs by means of its roots and branches, so must we gather what we need by means of our five senses - seeing, hearing, touching, smelling, and tasting. As we feed our bodies by means of physical food and drink, so must we feed our minds by means of knowledge and facts gathered by our senses.

Everything that we are, everything that we hear, everything that we smell, touch, or taste, makes us stronger or weaker mentally. By associating with people who are ambitious, indus trious, loyal, and neighborly, we become ambitious, industrious, loyal, and neighborly. As the dyer takes the color of the dye in which he works, so do we change and become like the persons with whom we associate. From the Curtis Courier of December 1969, edited by Thomas Dreier THE IN E HAND IN A RECENT U.S. History lecture, one of our professors made what seemed to be a scornful reference to Adam Smith's "invisible hand." His intention seemed to be to dis credit a 420-page treatise on econ omics by quoting one metaphor! The context in which this oft quoted metaphor appears in Smith's writing is his exposition of the theory that if each·· person pursues his own good, the good of society as. a whole will result.