Freeman

ARTICLE

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 America is an investment of… $15,000 to $17,000. That money has got to be accumulated… If you raise prices… too rapidly in one area, say the labor area, then prices go up, and finally you get to a point where you simply can’t keep things in order." He ended by expressing confidence that there would develop "business and labor leadership that is sufficiently wise and farseeing to help solve this problem and keep it within bounds."

 

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.

 

Who’s Responsible?

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.

Newsweek, December 3, 1956.

 

***

 

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

 

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February 1957

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