Comments on Inflation
AUGUST 01, 1960 by HENRY HAZLITT
This article consists of two of Mr. Hazlitt’s columns from Newsweek, the first part from the issue of May 2 and the second from the issue of
In this spapce nearly ten years ago (Newsweek, September 17, 1951) I ran a chart comparing the increase in the cost of living, in wholesale commodity prices, and in the amount of bank deposits and currency, from the end of 1939 to the middle of 1951.This chart was incidental to pointing out that the rise in living costs and prices was the result of the increase in the supply of money and credit, and not of a "shortage of goods" or a so-called "cost push."
We are now in a position to compare the same three items over a full twenty years, from the end of 1939 to the end of 1959. The accompanying chart gives us a panoramic view of the inflation during that period. It shows that, while consumer prices increased 113 per cent between the end of 1939 and 1959, wholesale prices increased 136 per cent in the same period and the total supply of bank deposits and currency increased 270 per cent.
If we are to adopt the proper measures, the only effective measures, to halt inflation and prevent its resumption, we must clearly recognize that its basic cause is the increase in the supply of money.
Two rival theories still persist. One is that inflation and rising prices are caused by a "shortage of goods." The figures refute this on their face. The official index of industrial production was 177 per cent higher in 1959 than in 1939; in other words, the rate of production of goods was almost three times as great. It was in spite of this enormous increase in productivity that wholesale prices increased 136 per cent—i.e., more than doubled—during the period.
In other words, the increase in the money supply would have caused an even greater rise in prices if it had not been offset by an increase in the supply of goods. While the production of goods almost tripled, the supply of money and bank credit almost quadrupled.
Money vs. "Cost Push"
The other rival theory is that inflation and the rise of prices are caused by higher wage demands—by a "cost push." But this theory reverses cause and effect. "Costs" are prices. An increase in wages above marginal productivity, if it were not preceded, accompanied, or quickly followed by an increase in the supply of money, would not cause inflation; it would merely cause unemployment. It is not true, as so often assumed, that a wage increase in a given firm or industry can be simply "added on to the price." Without an increased money supply, prices cannot be raised without reducing demand and sales, and hence production and employment. We can stop the "cost push" if we halt the increase in the money supply and repeal the labor laws that confer irresponsible private powers on union leaders.
Newsweek, May 2, 1960
Part II: Inflation and Morality
Last summer (Newsweek, July 27, 1959) my colleague, Raymond Moley, wrote a column called "Inflation, a Moral Issue." This ought to be the leading issue in the election.
Inflation never affects everybody simultaneously and equally. It begins at a specific point, with a specific group. When the government puts more money into circulation, it may do so by paying defense contractors, or by increasing subsidies to farmers or social-security benefits to special groups. The incomes of those who receive this money go up first. They begin to buy at the old prices. But their additional buying forces up prices. Those whose money incomes have not been raised are forced to pay higher prices than before; the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, their own money-incomes may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they never fully make up the loss they suffered from the inflation.
Inflation, in brief, essentially involves a redistribution of real incomes. Those who benefit by it do so, and must do so, at the expense of others. The total losses through inflation offset the total gains. This creates class or group divisions. The victims of inflation resent the profiteers from inflation. Even the moderate gainers from inflation envy the bigger gainers. There is general recognition that the new distribution of income and wealth that goes on during an inflation is not the result of merit, effort, or productiveness but of luck, speculation, or political favoritism. It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.
Speculation vs. Work
An inflation tends to demoralize those who gain by it as well as those who lose by it. They become used to "unearned increment." They want to hold on to their relative gains. Those who have made money from speculation prefer to continue this way of making money to the former method of working for it. I remember once, early in 1929, a conversation between two friends, both of whom held prominent posts as book reviewers but both of whom were heavily in the stock market. They were exchanging stories about their profits. "Today your salary," they agreed, "is just a tip." People do not like to work full time just for a tip. The trend in an inflation is toward less work and production, more speculation and gambling.
The profiteers from inflation tend to spend freely, frivolously, and ostentatiously. This increases popular resentment. The incentive for ordinary saving, in the form of savings-bank accounts, insurance, bonds, or other fixed-income obligations, tends to disappear. The spectacle of quick and easy returns increases temptation to corruption and crime.
"A Juggling Trick"
It is not merely that inflation breeds the gambling spirit and corruption and dishonesty in a nation. Inflation is itself an immoral act on the part of government. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped the coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. For notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.
This was recognized in 1776 by Adam Smith in The Wealth of Nations. Though I have quoted the passage before, it bears repeating: "When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid." There is either "an avowed bankruptcy" or "a pretended payment."
The pretended payment was inflation. The U.S. government today is paying off in 47-cent dollars the debts it contracted in 1940. Adam Smith went on: "The honor of a State is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious."
Newsweek, May 16, 1960