Inflation and Liberty
NOVEMBER 01, 1977 by HANS SENNHOLZ
Dr. Sennholz heads the Department of Economics at Grove City College and is a noted writer and lecturer on monetary and economic affairs.
In the second half of the twentieth century the most vexing economic problem—the most intractable, unsolved, and foreboding problem—is that of inflation. It causes grievous distress to most countries of the world, and ravages societies, rich and poor, on both sides of the Iron Curtain. It is hardly surprising, therefore, that it has given occasion to countless books and articles, speeches, lectures and broadcasts. And yet, it is one of the great paradoxes of the age that it roars on with accelerating force, devouring not only economic income, wealth and security, but also tearing down, one by one, the economic, social and political pillars of free societies.
There is a broad measure of agreement among economists that "excessive" inflation brings about a collapse of the monetary system, that it consumes business capital, destroys the exchange order with its productive division of labor, and finally reduces economic life to primitive barter. Many even admit that too rapid a rate of inflation perpetrates a grievous fraud upon all savers, particularly the retired and pensioners, and that it impoverishes the middle classes. But their agreement is like that of alcoholics who generally admit that on occasion they imbibed too much. Like most alcoholics who discount the danger of growing addiction and cumulative effects on their physical and mental well-being, most economists demand small doses of monetary injections, which are said to refresh and stimulate the economic body. They speak of "flexibility" and "adjustability" of the money stock and favor, for one reason or another, its continuous expansion by monetary authorities.
In the Western democracies the popularity of the leading political parties vying for governmental power rests on their commitment to the welfare state, that is, economic redistribution and transfer by political force. They welcome the monetary theories of these economists, who in turn gladly accept the honors and favors of the transfer governments. The theories show the way for governments to engage in a new dimension of economic transfer that not only endows them with unprecedented economic powers, which in turn give rise to political power, but also weakens the political opposition pleading for limitations of government power and preservation of the private property order. The alliance between the economic profession and politics promising income and wealth through redistribution is sealing the fate of national currencies.
Economic and Political Effects
Monetary disorder is a mortal enemy of the private property order, and a serious threat to economic well-being and individual liberty. Its evil effects are felt in various ways:
1. It profoundly modifies the social order and breeds economic and political radicalism among its countless victims. It destroys the savingsof the middle classes and reduces the real earnings of wage earners who learn to distrust the price system. Realizing the inequity of distribution, most victims put their faith in strike action or government intervention.
2. Inflation causes maladjustments of production to consumer demand as prices adjust to inflation with unequal flexibility. Production that is deemed "essential" and therefore controllable by public authorities is hampered and restricted, while non-essential production tends to expand.
3. Governments are eager to apply coercion to mitigate the unpopular effects of their own inflation. With growing popular support they resort to such comprehensive measures as price, wage, and rent controls. They substitute public expenditure for shrinking private investment. They formulate "development plans" and create new bureaucracies for their implementation.
4. In its early stage of development the transfer policy was limited to a few cases of individual assistance. State aid meant to alleviate the plight of the needy who were unable to care for themselves. But inflation continuously enlarges the circle of the needy and therefore the scope of government functions. It is a self-perpetuating force that calls for more redistribution, which in turn invites more inflation. Wilhelm Röpke, the eminent German economist and primary architect of Germany’s miracle of revival after World War II, likened the process to that of "a revenue-pumping station, working day and night, with its tubes, valves, suction and pressure streams."’ Its pumps deliver a steady stream of benefits from two classes of victims, the more productive taxpayers and the inflation victims.
5. As politics encroaches ever more widely on economic and social life, the sphere of individual freedom and independence is constrained accordingly. Simultaneously, the sphere of international cooperation and integration is compressed by growing economic nationalism. All welfare state institutions are national in scope and domain: public assistance and relief, social security and unemployment benefits, tariff protection and quota restriction, government orders and subsidies. By their very nature social services are nationalized services that are designed to benefit residents only. The benefits are conferred by national governments to their constituents, which tends to confine the beneficiaries within their national boundaries. The victims of the redistribution process, on the other hand, may want to escape to friendlier shores, which government seeks to prevent through public law and compulsion.
6. In desperation about the Western drift toward economic catastrophe, many writers are longing for a strong political leader who will bring salvation. "Mankind is seeking—and waiting for—a leader," writes Jacques Rueff, the distinguished French economist, "who will display the courage and intelligence required to rescue us. If such a leader does not exist, or if political circumstances prevent him from emerging, man’s destruction is inevitable as that of a man falling from the roof of a skyscraper."2
Never Beyond Hope
These are words of despair about the future of man, sounding like the final warning of an inevitable catastrophe. One may hear the warning without necessarily sharing its extreme pessimism about the human condition. In the world of infinite power and possibility our comprehension is merely finite and our knowledge of things to come rather wanting. Considering the unforeseen events of this world, we are never beyond hope.
Sooner or later the advocates of price controls may realize that such controls constitute the very antithesis of economic freedom. Either the people are free to conduct their economic affairs as they see fit, or they are denied this freedom by regulations and controls. Price and wage controls are people controls.
Surely no serious student of economics would hope to fight inflation effectively with price and wage controls. The relationship between the two phenomena is about like that of a band-aid and a malignant tumor of the brain. Inflation is the cancerous multiplication of money by our monetary authorities in order to cover federal deficits or create new credits for the benefit of business. Governmental price and wage controls limit the people’s freedom to make economic exchanges in accordance with their choices and preferences; these controls do not in the least affect the ability of the authorities to multiply and depreciate the money.
It is significant that in all the rhetoric about our government’s valiant effort to "fight" inflation, no word is ever spoken about the deficits the federal government is suffering. In fact, we are promised more federal spending and sizable tax cuts, which should boost the deficit by many more billions. Surely, this deficit could conceivably be covered through Treasury borrowing of the people’s savings. But such financing would squeeze the life out of the capital markets, raise interest rates to lofty levels, and depress all economic activity. This is why a huge deficit can only be financed through the creation of more money, i.e., by inflation.
Controls Raise Costs
Price and wage controls tend to raise business costs. As the ultimate decisions are made in Washington, business becomes more bureaucratic. It needs to seek permission for price and wage changes, file detailed reports, and face government controllers and auditors. Business decisions are inevitably delayed as government agents ponder about their final approval.
Wherever the controls cause shortages or merely slow deliveries business becomes less efficient, which raises production costs. Moreover, labor tends to become less productive as a result of material shortages. Workers feel cheated and betrayed by the controls as wage contracts are superseded by wage decrees and reinterpreted by control officials. The controls breed dissatisfaction and conflict.
But in spite of all labor complaints, the price controls must be expected to be more severe than the wage controls. After all, the controllers who are politicians or their appointees cannot afford to antagonize millions of workers on whose political votes the chances for re-election depend. On the other hand, a tough stand toward business may be rather popular and therefore rewarding politically. Especially if the controllers are Republicans who are suspect anyway of being pro-business, they cannot afford to be lenient, but must be expected to be very strict in controlling prices. Stable prices and rising costs make production unprofitable and thus precipitate economic stagnation and depression.
Price controls lead to all-round controls. When the economy begins to reveal the disruptions and distortions—the shortages and stagnations engendered by the controls—the government is unlikely to plead guilty for having inflicted such evils on its people. It has never done so in the past, and future administrations cannot be expected to act differently. Instead, they will find new culprits to blame and new tasks to perform in order to alleviate the evils of prior intervention. When economic output is lagging government will resort to more financial stimuli, such as easy money and deficit spending. Whenunemployment rises it will embark upon more public works and full-employment measures. When shortages make their appearance it will introduce rationing, allocations, and priorities. When people begin to ignore the price controls and seek relief on black markets it will prosecute them with growing severity. In all phases of economic life the government will assume command.
Such an ominous trend may be of little concern to a society that has lost its genuine love of and deep regard for individual freedom. A nation eager to be led cannot be frightened by the prospects of a command order. But it may hesitate to pursue the road to all-round controls if the awesome price is known that must be paid for such an order.
We are enjoying the highest standard of living on earth. With an average income of more than $6000 per head of the population per year, we excel all others by wide margins. Even our "underprivileged" black minority with an average income of more than $4500 per year lives better by far than the vast majority of Europeans, not to mention the Africans, Asians, or South Americans. Any disruption of our economic system can have but one effect on our level of living: to reduce it substantially.
Indeed, to disrupt or depress a highly developed division of labor and exchange economy, such as ours, must have dire consequences. You can reduce the speed of a donkey cart without much loss of distance traveled, but if you slow the forward thrust of a jet plane you’ll lose many miles in a matter of minutes. When the American economy slows down and our standard of living falls substantially, the psychological and sociological effects could be disastrous. In the demoralizing atmosphere of the transfer state, millions of Americans have grown accustomed to free government services and benefits. They are demanding the maximum of welfare from the community, giving little or nothing in return. Labor unions are making insatiable wage demands for a minimum of productive contribution. How will the American people take to depression and deterioration with shrinking wages and benefits?
The reaction may be militant and violent. Guided by doctrines of conflict and convinced of their inalienable rights to government care and egalitarian redistribution, they may insist on their rights. After all, our transfer politicians, parties, and intellectuals have for 40 years convinced them of the social justice of their claims. Are these now to be abrogated in the face of economic adversity? Moreover, their collective organizations wield the necessary political power to extract their due share from the body politic. But if this body should fail to yield the expected benefits, will the millions of beneficiaries peacefully suffer the welfare cuts? Will the labor unions peacefully consent to wage cuts? If they do not, our redistributive society may be torn asunder by civil conflict and strife. Business establishments may be looted, our cities burned, and law and order may give way to violent disorder. Since the first redistributive measure, several decades ago, this has been the ultimate destination of the redistributive state.
Finally, economic and social deterioration of such major magnitude strengthens the call for law and order. When society can no longer cooperate voluntarily and peacefully, the raw power of the state will be used to enforce some measure of cooperation. Vast emergency power will be thrust on the President who is expected to restore civil order. For this grim task the most ruthless politician is likely to rise to the top, surrounded by the most ruthless advisers and lieutenants. They will eagerly crush all dissent and bring peace to the society so bent on strife and self-destruction. They’ll bring the peace that is totally negative to individual enterprise and personal freedom.
The Uses of Adversity
This scenario of things to come is merely one of many engendered by thought and reflection. There are others that come to mind, and many more which we cannot comprehend. We are forever blind to the future, but always living for it. Let us, therefore, make the best use of the present, with courage and dedication, and fulfill our parts. Henry Wadsworth Longfellow’s words, written one hundred years ago, ring forever true:
Look not mournfully to the past—It comes not back again;
Wisely improve the present—It is thine;
Go forth to meet the shadowy future
Without fear, and a manly heart.
Even in evil we can discern the rays of light and hope, for man may gradually come to see, in suffering and misery, the error of his ways. We know of no greater economic folly than the combination of inflation and price controls, in which many Americans have placed their ultimate trust. And yet, we are ever hopeful that, in the end, reason will prevail over error and ignorance.
—FOOTNOTES—1Welfare, Freedom and Inflation, Pall Mall Press Ltd., London, 1957, pp. 38-39.ment seeks to prevent through public law and compulsion.
2The Age of Inflation, Gateway Editions, Henry Regnery Co., Chicago, Ill., 1964, p. xiii.