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You Cannot Trust Governments with Your Money

JULY 01, 1974 by HENRY HAZLITT

Mr. Hazlitt was a member of the editorial staff of the New York Times from 1934 to 1946, and the "Business Tides" columnist for Newsweek from 1946 to 1966. He is the author of 15 books, including Economics in One Lesson, The Failure of the New Economics, The Foundations of Morality, What You Should Know About Inflation and The Conquest of Poverty.

This article is reprinted by permission from the special 30th Anniversary issue of Human Events, April 27, 1974.

© 1974 by Human Events, Inc.

Something is happening today that has never happened before in human history. Every country is inflating. In each of them prices of practically everything have been rising every year.

This is another way of saying that the buying power of the currency of each of these countries has been falling every year. As each country has been inflating at a different rate, the buying power of its currency has been falling at a different rate.

According to a recent compilation by the First National City Bank of New York, in the 10 years from 1962 to 1972 the American dollar lost 28 per cent of its purchasing power, the German mark 27 per cent, the French franc 35 per cent, the British pound 38 per cent, the Japanese yen 43 per cent.

When we turn to what happened in some of the less-developed countries, the case is much worse. In the same 10-year period the Peruvian currency lost 60 per cent of its purchasing power, the Argentinian 90 per cent, the Brazilian 96 per cent.

If we carry the comparisons back 25 years instead of 10, the loss of purchasing power is even greater. In the 24 years between 1948 and 1972, the American dollar lost 43 per cent of its buying power. And this was one of the best records of any currency in the world. In the same period the currencies of Argentina, Brazil, Uruguay and Chile all lost more than 99 per cent of their buying power. In other words, they all bought considerably less than 1 per cent of what they bought in 1948.

If we carry our comparisons forward instead of back, we find no cause for rejoicing. In the period 1948 to 1972 the median rate of depreciation of 24 leading currencies was 4 per cent a year. In 1973 this median rate almost exactly doubled, to about 8 per cent. Consumer prices in the United States in the 12 months ending February rose 10 per cent, the first "double digit" inflation here since the Korean War 23 years ago.

Savings Depleted

I leave it to the reader to translate these figures into the deprivations and tragedies they have meant for millions of families throughout the world whose income has not yet begun to keep pace with these soaring prices.

Included in this total, of course, are the millions of the aged, the buying power of whose pensions and savings in many countries has been reduced to a vanishing point. Briefly and bluntly, practically every government in the world has been progressively swindling the majority of its own citizens.

What is more alarming is that a great section of the press and even many so-called economic experts are beginning to talk as if inflation were nobody’s fault, but some mysterious and perhaps incurable disease.

Time magazine, in a long cover-story on world inflation (April 8), compares it to "some medieval plague." It speaks of "the uncomfortable feeling that no one quite knows what to do about inflation." "The experts themselves," it goes on, "are not immune from this despair. In the U.S. John Dunlop, head of the Cost of Living Council, asserts: ‘I don’t believe it is clear that mankind today knows how to control inflation.’ "

Defeatist Attitude of Trying to Live with Inflation

One could cite much more "expert" opinion to the same effect. A few weeks ago Prof. Henry Wallich, the new appointee to the Federal Reserve Board, declared that inflation is very complex and has many causes, and therefore the measures to be taken are at best difficult. Even Prof. Milton Friedman, who in the past has written some excellent articles on inflation, now seems ready to throw in the sponge. He proposes in effect that if we can’t lick inflation, let’s join it.

On a recent trip, Prof. Friedman was impressed to find that Brazil has introduced escalating clauses into wage contracts, interest rate agreements, and so on, and yet has been able to reduce the inflation rate from about 30 per cent in 1967 to about 15 per cent now, and "without inhibiting rapid growth." So why shouldn’t we try the same thing?

I find it astonishing that the U.S. should be asked to take lessons in reducing inflation from a country whose average rate of currency depreciation over 24 years was 56 per cent a year, a country at a low stage of development, where the wage level is about one-eighth that in the U.S., and where the government is a military dictatorship.

A revolutionary innovation of this nature should hardly be based on an impressionistic snap judgment. Ronald A. Krieger, professor of economics at Goucher College, who has made a careful study of Brazil for the First National City Bank, is more than skeptical of the advantages of the plan. When Brazil introduced 100 per cent "indexing" in 1967, he says, the inflation rate began to fall much more slowly than it had before.

Putting aside debate about the exact details of what has happened in Brazil, the most likely effect of truly protecting everyone from inflation, if we could do it, would be to remove the pressure on the government to halt inflation or to slow it down. Certainly the first effect would be to accelerate inflation.

How Escalators Work

Let us take a hypothetical case. Suppose in a given year both prices and wages in Ruritania have gone up an average of 10 per cent. Assume for simplicity that the average wage rise was distributed about as follows: the wages of 5 per cent of the workers have gone up 1 per cent, the wages of the next 5 per cent segment have gone up 2 per cent, and so on up to the highest 5 per cent whose wages have gone up 20 per cent.

The over-all average rise is then about 10 per cent, but the wages of half the workers have only gone up an average of 5 per cent, while those of the upper half have gone up an average of 15 per cent. It is then decreed that the wages of the lower half shall all be raised to the over-all average rise of 10 per cent. But when this has been done the over-all average wage rise becomes 12.5 per cent. In order to make this increase payable, the money supply must be pumped up further. The same arithmetic applies to any other element of cost.

The U.S. already has such escalator provisions to a certain extent; but they are more to be deplored than applauded. They exist in some union contracts, in Social Security payments, in government pensions, and in food-stamp benefits. Their effect in each case is to reduce the opposition to inflation.

Still another result is to throw index numbers into politics. The U.S. Labor Department wants to increase the number of items in the Consumer Price Index, but union leaders are fighting a broadened index because it "might tend to show less inflation than the present one," and hence mean smaller automatic wage increases under their contracts.

In brief, insofar as such an escalation scheme is applied, it must increase both the political and economic pressure for inflation. If, for example, wages are to be forced up by a fixed percentage, which, however, can be easily passed on in increased prices, then employers no longer have either the power or the incentive to hold down costs, and workers lose the incentive to increase productivity.

It is in fact impossible to apply such "indexing" universally. It cannot be applied to the money in people’s pockets, or in their checking or savings accounts, or retroactively to private pensions. The chief victims of inflation, the old and retired, will be more victimized than ever.

Coercive Economy

The only way of trying to universalize the system is by government ukase, a coercive command economy compared to which ordinary wage-and-price controls look almost like economic freedom. No true believer in the free market could seriously contemplate such a system. It could be prevented from disrupting production only by making sure that wages were consistently raised less than prices —a proposal which, once candidly stated, would be unlikely to find acceptance in a democracy.

Finally, such a totalitarian scheme is altogether needless. There is no mystery whatever about how to halt an inflation. The cure is for the government to stop increasing the supply of money. Period.

The real problem is not that governments don’t know how to stop inflation, but that they don’t want to. Their excuse is everywhere the same. If they stop printing money, they say, they will plunge their country into a recession or even a depression, and into an "unacceptable" degree of unemployment.

And we cannot say that they are wrong. For the level of prices and activity at any given moment is not determined by the existing supply of money, but by what speculators and businessmen expect it to be in the future. Their expectations are usually built upon the past rate of inflation or even its past rate of acceleration. And when these expectations are disappointed by a halt in the increase of the money supply, or even a slowdown in the rate of increase, there will be a fall in some prices and a fall in some branches of activity.

But there is no way in which this consequence can be avoided. It can be postponed, of course, but only by building up to a far greater ultimate disaster.

And the decision to plunge ahead acceleratively is the one that politicians everywhere have decided to take. Après nous, le deluge. But let’s leave the deluge to our successors. Let’s prolong our own tenure in office as long as we can, by keeping this thing going. Let’s express our heartfelt sympathy with the victims, of course, but profess our inability to do anything about it.

The mistake is not to stop inflation, but to have started it in the first place. The politicians (and, alas, the majority of the rest of us) have kept it going because of the false theory that monetary inflation is necessary to secure and maintain full employment. What we have not realized is that once we embark upon this course, the inflation must be accelerated exponentially in order to have the same stimulating effect. The inflation must always exceed expectations, whatever they are.

The ultimate result can only be a smash-up.

Full employment can only be maintained by a proper coordination, brought about by free markets, between prices and wages. This means between specific prices and specific wage rates. We have prevented this by wage laws and labor laws which force individual employers to pay excessive wage rates. Then we try to cure the damage we have done by the mass remedy of chronic inflation.

To repeat: There is no problem at all about how to stop an inflation. The government must merely stop adding to the money supply.

The real problem is not economic but political. It is how to get the government to stop. There are few if any cases on record of a government for very long refraining from the issuance of more currency when it was not under the necessity of making that currency convertible into gold. (Or silver, or at least something else that cannot be increased by government fiat.) Therefore the present writer has been among those who have believed that inflation will never be permanently stopped without a return to the full gold standard.


But in view of political developments of recent years, above all of the cancerous growth in practically every country of the leviathan Welfare State, even gold-standard advocates are now forced to ask themselves: Will even this be enough?

Suppose we could succeed in having the gold standard restored? How long, given present ideologies, would the government keep it? England abandoned the gold standard in 1914, and again in 1931. The U.S. abandoned it in the Civil War, again in 1933, and still again, even though we had it in a very diluted form, in 1971. Governments everywhere have now broken faith too often. It may be a long, long time before people again have confidence in any of their monetary pledges whatever.

Right to Own Gold

But the situation is not hopeless. There is one small reform that could do a great deal to restore monetary confidence and order. This would be simply for governments (and specifically our own) to restore to their own citizens the right to hold gold, to buy and sell gold, and to make contracts in gold.

Such a simple reform—the mere removal of a 40-year-old prohibition — would accomplish several things at a stroke. It would pro-vide a medium by which our citizens could protect themselves to some extent against the further ravages of inflation.

If private citizens had the right to make contracts in gold, gold would then become a de facto money, in both domestic and international trade, whether legally "monetized" or not. It would not necessarily follow that gold itself would be used in every such transaction. Contracts might merely provide that a due date payment could be made in paper dollars or in any other currency, but in terms of the market price for gold on the day of settlement.

Such a private currency would be an enormously better protection against inflation than any set of arbitrary indexes or escalator clauses. It would be a step toward freedom, instead of still more government coercion.

It would have still another advantage. As inflation continued, the various paper currencies would go to a greater and greater discount against the new private gold currency. This would daily emphasize that continually rising paper-money prices were not the result of greater and greater greed on the part of sellers and producers, but merely of the increasing worthlessness of the money. That might be the real beginning of reform.  

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July 1974

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