Freeman

ARTICLE

Controlling Inflation by Controlling Government

JUNE 01, 1981 by DWIGHT R. LEE

Inflation has become such a chronic problem that many people now believe no one knows what causes it or how to eliminate it. In fact, the cause of inflation has been known for centuries, and it is very simple to eliminate. Inflation is a persistent increase in the prices of the products we buy and is always the result of the money supply increasing more rapidly than the output of these products. With a rapid increase in the money supply, inflation is inevitable. Without a rapid increase in the money supply, inflation is impossible. The federal government can eliminate inflation simply by bringing monetary growth under control.

But if this is true, why has not the government eliminated inflation long ago? Politicians have consistently told us that inflation is our major economic problem and have unveiled a series of plans for solving this problem. These plans all have one thing in common. They have not worked. Inflation has gotten worse, not better. We are left with the suspicion that the government has not been serious in its fight against inflation.

Additional support for this suspicion comes from the fact that creating more money, and therefore causing inflation, is a convenient way for the government to obtain more of the wealth that you and I produce. The way this wealth transfer occurs is in all important respects identical to the way an individual in a position to personally increase the money supply could increase his wealth at the expense of others.

 

An Easy Way to Make Money

Consider the situation in which you have the legal right to print money and put it into circulation by spending it. Every evening you can start up your printing press and run off stacks of 20s, 50s, 100s, and 1,000s for the next day’s purchases. The desire to maintain productive employment will vanish as your job provides only a pittance of what you can, in a few moments, make at home. Also, you will find that the demanding task of spending your money is a full-time job. Overnight you will have become enormously wealthy. But notice that the total wealth produced in the economy is not any larger than it was before. In fact it is slightly less since, having quit your job, you are producing less than before. So your increased wealth means a reduction in the wealth of others. The additional goods and services you are buying are not available for others to buy.

But even though you are making others worse off by creating money and spending it, you need not worry about being blamed for this. To the contrary, you will surely be sought after and held in high esteem as one, who is contributing to the wealth of the community. Your large expen ditures will be a very visible source of income for those selling you yachts, resort homes, jet planes, and lavish vacations. Those who are on the receiving end of your purchases will be encouraging you to increase, not reduce, the amount of money you print and spend. And with these people now having additional money, they will be able to spend more, thus providing more income for others. Because of you, everyone will have more money.

But it is because of this additional money that others are being made worse off. With the additional money being spent, but with no more products to spend it on, prices will increase. Even with more money the inflation will reduce the amount others can buy. Since you are buying more, others have to be buying less. But even though you are causing the inflation you can be confident that your victims will place the blame elsewhere. People will blame higher prices on those who are selling the higher priced products. It is ironic that it is those who are helping to hold down increasing prices by continuing to make products available who are most likely to be blamed for inflation.

Adding to the irony is that many of those you are impoverishing with inflation will urge you to increase your purchases; particularly your purchases from them. Your ability to increase the money in circulation will be seen as the way to compensate for higher prices. And you will probably be sympathetic with this “solution,” having noticed how much less a couple of billion dollars buys now in comparison with how much it would buy when you first started printing money. What could be more appropriate than increasing the amount of money you print each evening?

 

Can the Temptation Be Resisted?

How many of us, finding ourself with the ability to legally increase the money supply, would be able to restrain our desire for more? The opportunity to make ourself and our family wealthy, while being honored as a great benefactor of the community, would be a difficult one for most of us to resist. And if you or I could not resist such a temptation, can we expect more restraint from those in government? The answer is surely no. The only difference between you and me as individuals, and government, is that the federal government really is in a position to acquire wealth by expanding the money supply. It is clear that this is an opportunity the government has not been able to resist. Those who benefit from a growing government sector have pushed consistently and effectively for public policies that generate inflation and reduce our wealth. The problem is not that the government does not know how to eliminate inflation. The problem is that the government has not wanted to eliminate inflation.

We are currently witnessing an attempt to control the inflationary policies that have become the hallmark of Washington over the last several decades. This heroic effort deserves and needs our unflagging support. It is an effort which will be stoutly resisted by one politically influential interest group after another, each hoping to benefit from more inflationary government spending. They will argue that inflation requires that the federal government increase their price support program, increase their agency’s budget, increase aid to their city, increase welfare payments, etc. Each group will argue that the government spending they favor will provide benefits for all. In fact each expansion in government spending will add to inflationary pressure, transfer wealth to a few, and reduce the economy’s capacity to generate more wealth for us all.

But the natural tendency of government is to give in to the special interest groups. In fact the special interests are hard to distinguish from government interest. Those in government have found that the safest way to expand and perpetuate their power, control, and wealth is to provide concentrated benefits to politically organized groups while spreading most of the cost over us all with inflation. The only way to stop this destructive process is to restrain government.

The hope has been to vote for politicians who are sympathetic to the need for controlling government. In other words, vote for a government that will restrain itself. But as important as it is to elect responsible representatives at all levels of government, we cannot depend on this alone to do the job. Our elected representatives answer to the voters only periodically, but they are under constant pressure from entrenched special interests pushing for more government spending. When appealing for votes almost all politicians argue for limited government, but how many remain true to their campaign promises once the election is over? And we have almost no control over those in the bureaucracy, and the special interest groups with which the bureaucrats indentify.

 

Restraining Government

The time has long since arrived for us to re-establish effective constitutional limits on the scope of government activity. Our founding fathers knew that government could not be trusted to limit itself, and our Constitution is testimony to their profound insight. Unfortunately, the limits the Constitution imposed on government for over 100 years have, in recent decades, been severely eroded by judicial interpretations guided by the false notion that wide-ranging governmental discretion is a force for social good. Few are naive enough to believe that an individual, given the ability to confiscate the wealth of others, would be blind to personal advantage and trustworthy to use this ability to promote only the public interest. Yet the “sophisticated” view of many of our intellectual elite is that the collection of individuals who comprise government can be trusted with enormous, and unrestrained, power to promote the public interest.

Despite the wishful thinking that often passes as scholarship, there is a desperate need for the enforcement of clear constitutional limits on the federal government’s ability to create and spend money. Without such limits we can be sure that an undisciplined federal government will continue inflating the currency and expanding its wealth at the further expense of the productive sector of the economy. We may want to debate the form the restraint should take: a return to the gold standard, a balanced budget amendment, a limit on government spending, or some combination of these and other restraints. But only the most naive would argue that we can continue to trust the government to restrain itself.

ASSOCIATED ISSUE

June 1981

ABOUT

DWIGHT R. LEE

Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.

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