You Cannat Trust Governments with Your Money; H. Hazlitt

HENRY HAZLITT You Cannot Trust Governments with Your Money SOMET'HING is happening today that has never happened before in human history. Every country is inflating. In each of them prices of practically everything have been rising every year. This is another way of saying that the buying power of the cur rency of each of these countries has .been falling every year. As each country has been inflating at a different rate, the buying power of its currency has been falling at a different rate. According to a recent compila tion by the First National City Mr. Hazlitt was a member of the editorial staff of the New York Times from 1934 to 1946, and the "Business Tides" columnist for News week from 1946 to 1966. He is the author of 15 books, including Economics in One Lesson, The Failure a/the New Economics, The Foun dations of Morality, What You Should Know About Inflation and The Conquest of Poverty.

This article is reprinted by permission from the special 30th Anniversary issue of Human Events, April 27, 1974. © 1974 by Human Events, Inc. Bank of New York, in the 10 years from 1962 to 1972 the American dollar lost 28 per cent of its pur chasing power, the German mark 27 per cent, the French franc 35 per cent, the British pound 38 per cent, the Japanese yen 43 per cent. Whe~ we turn to what happened in some of the less-developed countries, the case is much worse. In the same 10-year period the Peruvian currency lost 60·per cent of its purchasing power, the Ar gentinian 90 per cent, the Bra zilian 96 per cent. If we carry the comparisons back 25 years instead of 10, the loss of purchasing power is even greater. In the 24 years between 1948 and 1972, the American dol lar lost 43 per cent of its buying power. And this was one of the best records of any currency in the world. In the same period the 387 388 THE FREEMAN July currencies of Argentina, Brazil, Uruguay and Chile all lost more than 99 per cent of their buying power. In other words, they all bought considerably less than 1 per cent of what they bought in 1948.

If we carry our comparisons forward instead of back, we find no cause for rejoicing. In the pe riod 1948 to 1972 the median rate of depreciation of 24 leading cur rencies was 4 per cent a year. In 1973 this median rate almost ex actly doubled, to about 8 per cent. Consumer prices in the United States in the 12 months ending February rose 10 per cent, the first "double digit" inflation here since the Korean War 23 years ago. Savings Depleted I leave it to the reader to trans late these figures into the depri vations and tragedies they have meant for millions of families throughout the world whose in come has not yet begun to keep pace with these soaring prices. Included in this total, of course, are the millions of the aged, the buying power of whose pensions and savings in many countries has been reduced to a vanishing point. Briefly and bluntly, practically every government in the world has been progressively swindling the majority of its own citizens.

What is more alarming is that a great section of the press and even many so-called economic ex perts are beginning to talk as if inflation were nobody's fault, but some mysterious and perhaps in curable disease. Time magazine, in a long cover story on world inflation (April 8), compares it to "some medieval plague." It speaks of "the uncom fortable feeling that no one quite knows what to do about inflation." "The experts themselves," it goes on, "are not immune from this despair. In the U.S. John Dunlop, head of the Cost of Living Coun cil, asserts: 'I don't believe it is clear that mankind today knows how to control inflation.' " Defeatist Attitude of Trying to Live with Inflation One could cite much more "ex pert" opinion to the same effect. A few weeks ago Prof. Henry Wall ich, the new appointee to the Fed eral Reserve Board, declared that inflation is very complex and has many causes, and therefore the measures to be taken are at best difficult. Even Prof. Milton Fried man, who in the past has written some excellent articles on infla tion, now seems ready to throw in the sponge. He proposes in effect that if we can't lick inflation, let's join it.

On a recent trip, Prof. Fried19'74 YOU CANNOT TRUST GOVERNMENTS WITH YOUR MONEY 389 man was impressed to find that Brazil has introduced escalating clauses into wage contracts, inter est rate agreements, and so on, and yet has been able to reduce the inflation rate· from about 30 per cent in 1967 to about 15 per cent now, and "without inhibiting rapid growth." So why shouldn't we try the same thing? I find it astonishing that the U.S. should be asked to take les sons in reducing inflation from a country whose average rate' of currency depreciation 'over 24 years was 56 per cent a year, a country at a low stage of develop ment, where the' wage level is about one-eighth that in the U.S., and where the government is a military dictatorship. A revolutionary innovation of this nature should hardly be based on an impressionistic snap j udg mente Ronald A. Krieger, profes sor of economics at Goucher Col lege, who has made a careful study of Brazil for the First National 'City Bank, is more than skeptical of the advantages of the plan.

When Brazil introduced 100 per cent "indexing" in 1967: he says, the inflation rate began to fall much more slowly than it had be fore. Putting aside debate about the exact details of what has happened in Brazil, the most likely effect of truly protecting everyone from inflation, if we could do it, would be to remove the pressure on the gov ernment to halt inflation or to slow it down. Certainly the first effect would be to accelerate in flation. How Escalators Work Let us take a hypothetical case. Suppose in a· given year both prices and wages in Ruritania have gone, up an average of 10 per cent. Assume for simplicity that the average wage rise was dis tributed about as follows: the wages of 5 per cent of the workers have gone up 1 per cent, the wages of the next 5 per cent segment have gone up· 2 per cent, and so on up to the highest 5 per cent whose wages have gone up 20 per cent.

The overall average rise is then about 10 per cent, but the wages of half the workers have only gone up· an average of 5 per cent, while those of the upper half have gone up an average of 15 per cent. It is then decreed that the wages of the lower half shall all be raised to the overall average rise of 10 per cent. But when this has been done the overall average wage rise be comes 12.5 per cent. In order to make this increase payable, the money supply must be pumped up further. The same arithmetic ap plies to any other element of cost. The U.S. already has such e'Sca lator p'rovisions to a certain ex390 THE FREEMAN July tent; but they are more to be de plored than applauded. They exist in some union contracts, in Social Security payments, in government pensions, and in food-stamp bene fits. Their effect in each case is to reduce the opposition to inflation. Still another result is to throw index numbers into politics. The U.S. Labor Department wants to increase the number of items in the Consumer Price Index, but union leaders are fighting a broad ened index because it "might tend to show less inflation than the present one," and hence mean smaller automatic wage increases under their contracts.

In brief, insofar as such an es calation scheme is applied, it must increase both the political and eco nomic pressure for inflation. If, for example, wages are to be forced up by a fixed percentage, which, howeve·r, can be easily passed on in increased prices, then employers no longer have either the power or the incentive to hold down costs, and workers lose the incentive to increase productivity. It is in fact impossible to apply such "indexing" universally. It cannot be applied to the money in people's pockets, or in their check ing or savings accounts, or retro actively to private pensions. The chief victims of inflation, the old and retired, will be more victim ized than ever. Coercive Economy The only way of trying to uni versalize the-system is by govern ment ukase, a coercive command economy compared to which ordi nary wage-and-price controls look almost like economic freedom. No true believer in the free market could seriously contemplate such a system. It could be prevented from disrupting production only by making sure that wages were con sistently raised less than prices a proposal which, once candidly stated, would be' unlikely to find acceptance in a democracy.

Finally, such a totalitarian scheme is altogether needless. There is no mystery whatever about how to halt an inflation. The cure is for the government to stop increasing the supply of mon ey. Period. The real problem is not that governments don't know how to stop inflation, but that they don't want to. Their ,excuse is every where the same. If they stop print ing money, they say, they will plunge their country into a reces sion or even a depression, and into an "unacceptable" degree of un employment. And we cannot say that they are wrong. For the level of prices and activity at any given moment is not determined by the existing supply of money, but by what speculators and businessmen ex1971" YOU CANNOT TRUST GOVERNMENTS WITH YOUR MONEY 391 pect it to be in the future. Their expectations are usually built up on the past rate of inflation or even its past rate of acceleration. And when these expectations are disappointed by a halt in the in crease of the money supply, or even a slowdown in the rate of in crease, there will be a fall in some prices and a fall in some branches of activity.

But there is no way in which this consequence can be avoided. It can be postponed, of course, but only by building up to a far great er ultinnate disaster. And the decision to plunge ahead acceleratively is the one that politicians everywhere have decided to take. Apres nous, le deluge. But let's leave the deluge to our successors. Let's prolong our own tenure in office as long as we can, by keeping this thing go ing. Let's express our heartfelt sympathy with the victims, of course, but profess our inability to do anything about it. The nnistake is not to stop infla tion, but to have started it in the first place. The politicians (and, alas, the, majority of the rest of us) have kept it going because of the false theory that nnonetary in flation is necessary to secure and maintain full ennploynnent. What we have not realized is that once we embark· upon this course, the inflation must be· accelerated exponentially in order to haye the same stimulating effect. The infla tion must always exceed expecta tions, whatever they are.

The ultimate result can only be a smash-up. Full employment can only be maintained by a proper coordina tion, brought about by free mar kets, between prices and wages. This means between specific prices and specific wage rates. We have prevented this by wage laws and labor laws which force individual employers to. pay excessive wage rates. Then we try to cure the damage we have done by the mass remedy of chronic inflation. To repeat: There is no problem at aU about how to stop an infla tion. The government must merely stop adding to the money supply. The real problem is not econom ic but political. It is how to get the government to stop. There are few if any cases on record of a government for very long refrain ing from the issuance of more currency when it was not under the necessity of making that cur rency convertible into gold. (Or silver, or at least something else that cannot be increased by gov ernment fiat.) Therefore the pres ent writer has been among those who have believed that inflation will never. be permanently stopped without a return to the full gold standard.

392 THE FREEMAN July But in view of political devel opments of recent yea.rs, above all of the cancerous growth in prac tically every country of the levia than Welfare State, even gold standard advocates a.re now forced to ask themselves: Will even this be enough? Suppose we could succeed in having the gold standard re stored? How long, given present ideologies, would the government keep it? England a.bandoned the gold standard in 1914, and a.gain in 1931. The U.S. abandoned it in the Civil War, again in 1933, and still aga.in, even though we had it in a very diluted form, in 1971. Governments everywhere have now broken faith too often. It may be a long, long time before people again have confidence in any of their monetary pledges whatever. Right to Own Gold But the situation is not hope less. There is one small reform that could do a grea.t deal to re store monetary confidence· and or der. This would be simply for gov ernments (and specifically our own) to .restore to their own citi zens the right to hold gold, to buy and sell gold, and to make con tracts in gold.

Such a simple reform - the mere removal of a 40-year-old prohibi tion - would accomplish several things at a stroke. It would provide a medium by which our citi zens could protect themselves to some extent a.gainst the further ravages of inflation. If private citizens had the right to make contracts in gold, gold would then become a de facto money, in both domestic and in ternational trade, whether le·gally "monetized" or not. It would not necessarily follow that gold itself would be used in every such trans action. Contracts might merely provide that a due date payment could be made in paper dollars or in any other currency, but in terms of the market price for gold on the day of settlement. Such a private currency would be an enormously better protec tion against inflation than any set of arbitrary indexes or escalator clauses. It would be a. step toward freedom, instead of still more gov ernment coercion.

It would have still another ad vantage. As inflation continued, the various paper currencies would go to a greater and greater dis count against the new private gold currency. This would daily empha size· that continually rising paper money prices were not the result of greater and greater greed on the part of sellers and producers, but merely of the increasing worthlessness of the money. That might be the real beginning of reform. ~ V.ORVALWATTS 393 394 THE FREEMAN July FORTUNATELY, Americans seldom think and act from day to day as they often vote at election time. The votes are sufficiently serious in their effects. Cast in great num bers, again and again, they give political power to would-be Robin Hoods and Dragon Slayers who denounce businessmen, especially successful, "big" businessmen, as "princes of privilege," indifferent to the welfare of their fellow men and interested only in quick, per sonal gains, no matter how ob tained.