Two Kinds of Inflation
FEBRUARY 01, 1957 by HENRY HAZLITT
It is reassuring that the President has expressed concern about inflation. Unfortunately his remarks reveal the same misunderstandings that have led to the world-wide continuance of inflation.
He falsely distinguished between "two types" of inflation. "One is just cheapened money, deficit spending… and printing money… that naturally brings rising prices because the money itself is cheaper." This increase in money supply is the real cause of inflation.
But the President went on to describe what he thought was another type of inflation: "There are also the rising prices brought about by the efforts of all people to gain a bigger portion of the results of our great productivity. Finally you get to the point… where you cannot attract money, capital investment money, that will build the factories that give… 67 million people their jobs, because lying behind every job in
Too Many Dollars
It of course, highly encouraging that the President recognizes the need for industry to earn enough profits to make possible more capital investment. This constantly increases productivity and hence real wages. It is equally encouraging to find him urging unions to refrain from excessive wage demands.
The truth, however, is that there is only one real type of inflation and only one direct economic cause. That cause is an increase in the supply of money and credit. It is the oversupply and the cheapening of the monetary unit that raises prices.
This does not mean that wage rises brought about by union pressure are irrelevant. They are often links in the full chain of inflation causes, though they are neither necessary nor sufficient in themselves to bring inflation. If unions raise wage rates excessively, and there is no increase in the money supply to make the payment of these higher wages possible, the result will not be to bring inflation but simply to bring unemployment. The chain of causation is then: Higher wage rates —higher costs — higher prices —lower sales — lower employment.
Net unemployment can for a long time be averted or postponed, however, by a sufficient increase in the volume of credit. In this case the chain of causation is: Higher wage rates — increased borrowing from banks to meet larger payrolls — an increase of bank deposits as a result of this borrowing — consequent increase of the money-and credit supply leading to still higher prices — still further demands for wage increases, etc.
It is precisely here that the responsibility of government for the whole inflationary process becomes clear. If the government had the courage to stop the increase in the money-and-credit supply (chiefly by allowing interest rates to go up), then the only result of excessive wage rates would be unemployment, and the only cure for the unemployment would be to reduce these wage rates back to an equilibrium level.
But hardly any present-day government has the political courage to take this step. Worse, most governments, like our own, build up (through their own equivalents of the Taft-Hartley Act, the Norris-La Guardia Act, the Walsh-Healey Act, and the minimum-wage law) a situation that encourages excessive wage-rate demands and makes it next to impossible for employers to refuse them. That is why inflation today is world-wide.
Yet every government talks as if inflation were an epidemic beyond its own control. It piously asks labor, business, and consumers to exercise restraint — after it has itself removed the penalties for lack of restraint. As one candid "full employment" zealot confessed in The London Economist more than five years ago: "Inflation is nine-tenths of any practical full employment policy."
Such a Problem
What can you do against the lunatic who is more intelligent than yourself, who gives your arguments a fair hearing, and then simply persists in his lunacy?
GEORGE ORWELL, 1984