We All Want Inflation

by JOHN HARRIMAN

1

THE reason we have not been able to check inflation in this country is that we do not want to check it. We do not, of course, admit this. On the contrary, we speak most piously and fervently of the need for maintaining a sound dollar. But this is only lip service. Actually almost everyone enjoys the illusion of prosperity which inflation always creates in its early stages. The country wants inflation today, and any economic policy which would really stop our slowly rising wage and price level would incur the strongest sort of opposition from the various groups of vested interests.

The business executive, though he speaks darkly of the way things are going, cannot help feeling that he is actually in clover. He can sell even thing he can produce, and at as high a price as the elastic controls of government will let him. Profits are still at near-record levels; or if by any chance earnings are off somewhat from last year, the blame can always be laid on the Administration’s high tax policies.

To be sure, the executive may have occasional flashes of clarity when questions rather frightening in their implications rise to haunt him. What about his depreciation policy? He has, of course, been setting money aside with which to replace his plant and equipment when this becomes necessary. But the turret lathes which ten years ago cost $10,000 today would cost $20,000; and if prices continue to rise, even today’s high price may seem cheap a few years hence. The factory which he carries on his books at $1,000,000 may cost twice or even thrice that when the time comes for him to rebuild.

The reserves for depreciation he has been setting aside have been based upon what his plant and machine tools cost him, not upon their selling price today or in an uncertain future. Thus, when these capital assets do have to be replaced, there may not be enough money in his company’s treasury to pay for the replacements.

Again, the executive may have moments of qualm when he casts an eye over his list prices since the outbreak of war in Korea. As an executive he will of course know that his company is extremely vulnerable to any decline in either its volume of sales or the price of its product - in other words, that what his accountants call his “break even” point is too high. Inflated costs have left his company in a position where even a relatively mild industrial recession would present serious difficulties.

Usually, however, such momentary doubts can be banished. If profits continue high and money remains easy, he will be able to get his new plant and equipment somehow. Suppose he is vulnerable to a decline in volume. Will not the cold or semi-hot war assure enough inflation to keep demand always a step ahead of supply, at least for the predictable future? Granted that his operations depend on maintaining high prices. Can anyone actually imagine any extensive price-softening in the economy with the government about to spend the huge sum of $54,000,000,000 a year on armaments?

The worker today is equally bemused by the illusion of prosperity caused by the gyrations of the inflationary spiral. He does not worry too much when he has to pay two cents for a penny postcard or ten cents for a phone call. When he opens his pay envelope he finds more dollars in it than he did a year ago. This seems good. He does not care that these added dollars represent an added production cost to industry.

To be sure, the worker by now realizes that these added costs will inevitably be passed on to him as a consumer in the form of higher prices. And he is sufficiently educated economically to grasp the fact that in this event the extra dollars in his pay envelope will net him nothing. But this is a truth of economics, remote and theoretical when measured against the solid fact of dollars in hand. Besides, he is willing to gamble. Who is to say that if he insists on his added dollars now, something will not somehow intrude before prices react as they inevitably must? Perhaps strict price controls will finally be applied. Or perhaps the whole price structure will fall of its own weight. Furthermore, if outright war should actually come, it will do him no harm to have sneaked in a last wage rise or two before strict controls are clamped on the entire economy.

To the farmer, of course, inflation comes as pure delight. In effect it seems to make two dollars grow where only one grew before. Where formerly the farmer had to raise 500 bushels of wheat to pay the interest on his mortgage, he now has to raise only 300 bushels. Yet the yield of land remains the same. Hence inflation acts to scale down his debt, and at the same time to increase his cash income.

Measured against such a double gain, the added dollars the farmer must spend for feed, fertilizer, and other expenses, including the cost of what he must buy for his family, do not seem to him much of a burden. Nor in truth are they. The wellintrenched farmer is perhaps the only individual in modern society set to weather almost any inflationary storm; and on the basis of pure self-interest the opposition of the powerful farm groups to any and all price control is entirely logical.

The farmer is secure with his promise of price support for his product. He is buttressed by that mystical figure called “parity,” which assures him that the level of this price support will rise along with any increase in the cost of living. And therefore he sits back, a vociferous defender of “free markets,” and a dragging anchor against any effective effort to control the inflation of the nation’s economy.

There are, admittedly, exceptions which only go to prove the rule that almost everybody today finds at least the illusion of personal gain in the cheapening of the dollar. People living on annuities, the proceeds of life insurance, and the interest on savings are justifiably bitter as they face hardship where but a few years ago they had the prospect of ease. Recipients of pensions are feeling actual want. Schoolteachers, librarians, civil servants, college professors, and many in the white-collar, professional class are being cruelly pinched as rising living costs press upon lagging incomes.

Indeed, many a small businessman looks on with tight lips as the investment of a lifetime begins to crumble. In some cases, a small business cannot pass higher costs on to the consumer, as most large corporations are doing. Publishing and certain specialized textile operations are examples of the sort of business which finds itself caught between an inelastic selling price and costs it cannot control.

But these groups are a minority. They are unorganized and their protests are not heard in the thunder of our powerful pressure groups.

Even the housewife, the nation’s primary consumer, has shown only a fragmentary inclination to revolt at the prices she encounters at her corner grocery or supermarket. Some have protested; more have not, because of the fact that the husband is bringing home more money than he has over brought home before. In the latter case what the housewife does is to ask for a larger housekeepin allowance.

2

IT is now about sixteen months since Bernard Baruch urged on Congress his proposal for a total freeze of the economy, a “still par, no more moving,” until we could determine the extent of fiscal strain to be imposed by Korea and the need to rearm in an economy already tight at the seams.

Even as Mr. Baruch testified before a Congressional committee, the organized pressure groups were drawing their lines and girding for the battle. And these groups have since succeeded in blocking every attempt to bring the economy under control.

It is not that these groups do not understand the danger. It is that they are individually unwilling to make the sacrifices necessary to meet it. Each is anxious that inflation be checked, provided that others do the checking. Each admits the need for some sacrifice— to be made, however, by someone else. Each individually is quite content with the illusion of prosperity, and by no means anxious to be awakened from the fiscal dream of perpetual good times floated upon a spate of spending for arms and incorporated into a concept of a sort of perpetual economic Eden.

Influential business organizations like the National Association of Manufacturers and the Chamber of Commerce are mightily against inflation. Sound money, they recognize, is essential to the preservation of capitalism and the democratic way of life. But somehow it seems to them that the best way to preserve sound money is through means that will not curtail the freedom or injure the profit levels of their membership. Freeze wages? Yes, perhaps. Freeze prices? Certainly not! Stricter credit controls? Maybe. Higher taxes? Again certainly not, if we are not to ease the American free enterprise system into the long gloom of the socialist night.

Today organized labor is about to move the economy into still another round of wage increases, the seventh since the war. Yet the economists of labor are of course fully cognizant of the fact that in the long run this wage rise cannot result in an advantage for the workers they represent. Nevertheless, the leaders of labor will insist on the increase. They are prisoners now of what has gone before, the leap-frog game of the wage-price spiral; and this is their turn to leap. Like their counterparts in the organizations of business, the leaders of labor are alarmed at the prospect of a weakening dollar. But they differ as to the means of checking this weakening. Freeze wages? Certainly not! That would be inequitable. Freeze prices? Of course! That would not seem unfair. Stricter credit controls? Not if such measures would curtail the ability of their membership to purchase goods on installment credit. Higher taxes? Only on the upper brackets.

Behind these more prominent groups stand others ready to step forward if by any chance the main contenders agree on some anti-inflation measure which in turn might adversely affect them.

At one time industry and labor seemed willing to agree on curtailment of installment and mortgage credit. But at once the builders arose in wrath at the prospect of the American people going homeless if it were made too difficult to buy a new house. Dealers denounced the stricter installment regulations as unnecessary, and designed to effect their individual ruin; and certain labor unions chimed in for fear of a drop in employment. The result, of course, was that the credit regulations were relaxed.

Even those groups which might be thought to have a vested interest in sound money cannot escape the feeling that there is another, not entirely unfortunate, side to the inflation coin. Insurance companies, while they have had much to say on the danger of inflation, are of course subtly aware that t he cheapening of the dollar is by no means entirely an evil for them. After all, their contracts with their policyholders are payable in dollars, not in real wealth, and inflation will not interfere with the fulfillment of those contracts. If the dollar goes down, people will have to buy more insurance in order to maintain the same protection as before. This results in more policy sales. And selling policies is the primary job of insurance executives.

Savings banks are naturally deeply aware of the tragic effect of inflation on the life savings of individuals. Yet inflation also means that a great many people have dollar incomes larger than they have ever had before. A certain number of these people will be in a position to save, perhaps for the first, time in their lives. And the edge is taken off the protests of bankers against our present fiscal policy by the mounting deposits their institutions are receiving.

This is not to say that such groups are not sincere when they speak out against inflation. It is only to call attention to the fact that these groups, like others, are benefiting from the early stages of inflation. This prevents their really picking up a cudgel and fighting for sound money. It is apt to reduce their opposition to rhetoric, and their best intentions become drowned in a sea of words.

Indeed, this is true nowhere as much as in government circles, where two voices speak today on inflation. One of these voices of government warns that a continued decline of the dollar will weaken, and may eventually destroy, our entire economic system. But in government there is a second voice, which speaks of the increased tax revenues accruing as the result of our inflationary prosperity. And sometimes this second voice is deliberately cynical, as when politicians take credit for the full employment and high national income of the moment.

There is but one reason for our present prosperity — the huge armament program which is causing our economy to behave like a pressure cooker beginning to leak at the seams.

As James F. Byrnes has said, the only way to stop inflation is to stop it. Inevitably there will be inequities in the process and some people will be hurt. But such inequities as are unavoidable during the period of adjustment can be ironed out later and specific hurt can be repaired. As long as we move only in a direction which will tread on no one’s toes, we shall actually not be moving at all; we shall only be making gestures. This, of course, is precisely what we are doing.

3

BEHIND the economic illusion of the moment, the dangers are gathering. Behind the selfishly inspired rhetoric, the valid facts remain. The full impact of our defense program has yet to be felt. Congress has appropriated huge sums for defense, but as yet the actual expenditure for the hardware of war has been relatively modest. In total, $146,700,000,000 has been made available for our armament program. Of this sum, however, only $.35,500,000,000 has been actually spent, and only $84,000,000,000 obligated under contract. In other words, contracts amounting to $62,700,000,000 remain to be let out of present appropriations and $111,200,000,000 remains to be spent. Obviously until now we have been only skirmishing. By the middle of next year the issue will have been really joined.

At that time we shall have close to 4,000,000 men in uniform. These young men would under normal circumstances be producing goods. They will not be producing goods by midyear, however; instead they will be consuming, and this at a greater rate than they would in civilian life.

By midyear the military will be siphoning off some $4,000,000,000 in goods and services each month from the civilian economy, one fifth of our gross national product. Proportionately greater inroads will be made on scarce raw materials, such as copper, aluminum, zinc, cobalt, tungsten, lead, and steel. Indeed, in many of these vital raw materials we face a long-term world shortage. For sixty years before World War II the increase in manufacturing and the production of industrial raw materials moved upwards at almost exactly the same rate. Then came the enormous consumption of World War II. Today we are faced with the frightening fact that whereas manufacturing has increased by six times since the turn of the century, raw material production has increased by only four times.

The $50,000,000,000 in industrial raw materials which the free world will produce this year will not suffice for the expansion in manufacturing production which the hopeful see as our fiscal salvation. It has been estimated that a 25 per cent increase is needed. This would entail an investment, in large part abroad, of approximately $25,000,000,000, say mining and metallurgical experts. Nothing even approaching such an investment is in sight today.

At the same time that we face these shortages, the federal budget will once again be showing heavy stretches of red ink. This will of course act to increase the money supply at precisely the moment when wage increases are putting more dollars than ever in people’s hands. The result is a foregone conclusion: a steady rise in the price level, as dollars increase in volume but decrease in value.

Until now we have been in the early stage of inflation, and on the whole we have found it pleasant. Money has been plentiful. No one has had to go without work. But the secondary stage of inflation is quite a different matter. Then it is that the added dollars in the pay envelopes evaporate before they are spent. Then it is that the profits evaporate, or become meaningless bookkeeping figures, as rising replacement costs dissipate depreciation reserves and industry is forced to operate in financial confusion. And then it is that the people, disillusioned at the loss of savings and cynical about economic process, turn to political means to satisfy their wants and assure their security. That, of course, is what happened in Germany after World War I and produced Hitler. And that is what is happening to a lesser degree in the rest of Europe today.

No one, of course, understands this tragic result of inflation better than do the Marxists. It was Lenin who said that the most effective way to destroy capitalism was by inflation of the currency, which is a process bringing ruin to the middle class.

Perhaps inflation in this country could not reach the same degree as in Europe, at least for the foreseeable future. Nevertheless, we are in danger of our own peculiar form of fiscal damnation: small business forced to the wall; schools, colleges, and other institutions stripped of endowments; dissipation of the savings of everyone who has had the prudence to lay aside a few dollars; and a final high, wide, and handsome boom followed by economic collapse.

We have had two big blasts of inflation in the past eighteen months: one brought on by the invasion of Korea, another by the intervention of the Chinese Communists. Today the third fiscal typhoon is forming. Slowly the pressures of the inflationary spiral are circulating just beneath the surface of our economy. Bank loans as of this writing are up in one week by $175,000,000, the seventh successive week in which they have risen. The federal budget is out of balance, showing a deficit of $4,100,000,000 for a two-month period; the total deficit will probably run close to $0,000,000,000 for the present fiscal year. In the past month defense loans have risen by $1,000,000,000. The money supply in that last year has increased by at least $1,000,000,000. Twenty per cent of all steel going to the fabricating industries is on the gray market, selling at higher than the mill listed price.

What if the Soviet Union suddenly decides to launch another adventure like Korea in some other part of the world? We are sitting on economic dynamite, and unless we accept high taxes and tight controls on prices and wages, the fuse is in the Politburo’s hand.