Twelve Thoughts on Inflation
W. H. HUTT*
THE PRESENT WRITER’S interest in the phenomenon of
inflation goes back at least forty-five years. He was then an undergraduate at
the London School of Economics. The famous Edwin Cannan, at whose feet he was
studying, had taken the delightful gesture of suing the British Government
under the Profiteering Act for selling pound notes at above their gold value.
Cannan wanted to bring home to the public the extent to which inflation had
debased the pound sterling.
As a teacher of business administration during the
last thirty-eight years, the writer’s attention has been repeatedly forced back
to this question of the spasmodic, yet persistent, depreciation of money. How
can businessmen co-ordinate the private sector of the economy effectively when
the most important measuring-rod of all—the monetary unit—has been left with no
reliable, defined value? Units of length, volume, and weight have been
universally defined with meticulous care; but dollars, lire, francs, and pounds
have been allowed to change in every significant attribute over time. Hence,
the aim in this article is to record briefly the twelve most important
practical conclusions to which the thought of an academic lifetime on this
issue has led the author.
(1) Nearly all inflations have been intentional,
calculated actions of governments, however reluctant they may have been. No
monetary depreciation in history has ever occurred in which governments have
not purposely taken the steps needed to bring it about or, alternatively, have
not deliberately refrained from action which could rectify any inadvertently
caused inflationary tendencies. If monetary systems had rested solely on
private contracts to redeem credit instruments (according to some stipulated
standard) inflation could never have occurred.
(2) From time immemorial princes debased currencies.
To such an extent did this happen that almost invariably the emergence of
representative government in different parts of the world was followed by
legislation to remove the right of monarchs to reduce the metallic content of
moneys. But curiously, with the transfer of the kingly power to parliaments, no
similar constitutional limitations were imposed upon elected governments. There
have been suggestions in the United States, since the Second World War, that
the continued decline in the purchasing power of the dollar should be brought
to an end by incorporating the objective of a stable price index, by amendment,
into the Employment Act of 1946; but the leadership which could have forced
governments to take so difficult a step has thus far been lacking.
(3) When governments plan the programs which force up
the cost of living they are usually reluctant. If they (or their advisers)
could conceive of some means other than inflation for keeping their supporters
happy they would make use of them; but provided the public generally does not
predict the speed with which it is to occur, or its duration, inflation accords
governments an easy access to income—unauthorized by democratic process—with
which to purchase popularity, as well as an easy means—although a clumsy and
unjust means—of temporarily alleviating the most common causes of
disco-ordination in an economic system.
(4) Inflation can serve as a sort of palliative or
anaesthetic which deadens the pain of a serious economic disease, namely,
disco-ordination due to different categories of prices coming to be wrongly
related to one another. Various types of restraint on competition permit wage
rates and prices to be fixed too high to permit the full flow of output to be
purchased from uninflated income, or too high in relation to price
expectations. When one kind of labor or its product is priced too high, the
sources of demand for non-competing labor and products are reduced; and if
prices generally are rigid downwards, a cumulative decline in activity is set
in motion. In the absence of inflation, therefore, the symptoms of the
disco-ordination so caused are unemployment and depression.
Eventually the recipients of wages as a whole and the
farmers as a whole receive no more for their services. Their persistent
striving to squeeze more for themselves out of the common pool is
self-frustrating because the prices of the things which they have to buy are
equally forced up by the process; but elected labor union officials can often
retain their jobs only if they can show that they have raised wage rates year
by year; and organized farmers habitually think it right that they should be
paid a little more each year for their products. Hence in this inflationary
age, wage rates and primary product prices tend to be raised, again and again,
above what the public could afford in the absence of concurrent inflation; and
so it seems as if the whole fatuous process has to be kept going.
(5) When the prosperity achieved by inflationary means
happens to be accompanied by thrift, economic growth will occur, although in a
less productive form than non-inflationary growth; and the easily won and
largely illusory development tempo then gives rise to a confusion of growth
with rising prices, a confusion which politicians (not surprisingly) encourage.
But growth is purely a matter of thrift. Rising prices are not a condition for
growth. On the contrary, there are good reasons for regarding inflation as, on
balance, a discouragement of growth. In countless ways, rising prices tend to
induce consumption. In particular, the “money illusion” all too easily causes
insufficient provision to be made for depreciation and the maintenance of “real
capital” intact.
(6) The result of trying continuously to co-ordinate
by inflation is that the basic causes of the disorder so crudely rectified are
never tackled. For this reason, inflation is a more insidious and virulent
manifestation of the disease of disco-ordination than unemployment and
recession; for the latter, being more painful, create incentives for
fundamental reform.
(7) The origin of the most serious disco-ordinations
of the modern economic system lies ultimately in the corrupting influence of a
tradition whereby governments have come to be regarded as beneficent
distributors of favors to the people, the people in turn rewarding governments
by keeping them in power. This tradition creates a situation in which
governments can intimidate minorities (unless the minorities happen to be able
to disturb the balance of political power). Business managements become
disheartened and obsequious; and because inflation seems to offer the only way
out, they acquire the habit of acquiescence in it. At the same time politically
powerful groups or institutions are given virtual carte blanche to pursue
purely sectionalist objectives. That is why the private use of coercive
power—the most obvious cause of disco-ordination in the pricing mechanism—has
come to be tolerated.
(8) The crucial task, yet the most difficult task, of
a truly planned regime is to secure co-ordination without inflation; and that
means, in the first place, protection of the community from such sectionalist
actions—particularly on the part of trade unions—as are calculated to reduce
the flow of wages and other forms of income and render its distribution less
equitable. A reduced flow of uninflated wages is always the consequence of any
forcing up of wage rates (and hence product prices) in certain sectors
otherwise than through free market pressures. If governments were aiming at (i)
the maximization of the wage-flow, and (ii) equality of opportunity as a
determinant of the distribution of wages, they would be ipso facto achieving
effective co-ordination, for both rising prices and unemployment would then be
simultaneously eliminated. But to achieve this result they would be forced to
take the initially unpopular step of enshrining the right of all, and
particularly of the poorer classes or races, to keep the price of their labor
at a minimum. For instance, if equality of opportunity, distributive justice,
and economic efficiency had been primary objectives in the United States, the
minimum wage laws, which have slowed down the industrial progress of Negroes in
the underdeveloped South, would never have been passed.
For identical reasons, governments would have to
prevent other forms of contrived scarcity. A good example is the price supports
which have become common where governments have been directly active in agricultural
marketing. When the prices of primary products and food are raised, people have
less uninflated income to spend on other things; and if the prices of these
other things are rigid, that must mean the unemployment of some of the
productive factors which manufacture them also. Dynamic forces cause cumulative
contraction.
(9) THE TECHNIQUE OF inflation demands that
governments and their agencies shall continuously deceive the public about the
fact, the speed, and the duration of inflation intended. Ministers of Finance
have here no option but to employ what has been called the “necessary untruth.”
Unless they do employ this technique, inflation will lead to costs rising as
rapidly as prices, or in advance of prices, thereby destroying the whole
purpose of inflation. Moreover, yields on fixed interest bonds will be forced
up and yields on equities forced down. As Professor Ludwig von Mises has
insisted:
These enthusiasts [for inflation] do not see that the
working of inflation is conditioned by the ignorance of the public and that
inflation ceases to work as soon as the many become aware of its effects upon
the monetary unit’s purchasing power....This ignorance of the public is the
indispensable basis of inflationary policy. . . . The main problem of an inflationary
policy is how to stop it before the masses have seen through their rulers’
artifices.1
The phrase “necessary untruth” was used in 1949 by the
Manchester Guardian2 in justifying the conduct of the British Chancellor of the
Exchequer, Sir Stafford Cripps, who, just before the British devaluation of
that year, and after it had been finally planned, had categorically denied on
no fewer than nine occasions that it was intended. The British Government had
secretly discussed the proposed step for some time, almost inevitably setting
into circulation rumors of what was contemplated. They had finally decided to
devalue, it seems, at least three weeks before they were ready to put their
decision into effect. They had to discuss it first with the United States,
Canada, and the International Monetary Fund. In the meantime it became
imperative to mislead the trustful for the benefit of the mistrustful.
It had for some time been governmental technique to
pretend, in order to dissuade rational reactions, that “suspensions” of
convertibility were merely temporary breaches of obligation. Thus, in 1931
there occured one of the most disturbing examples of the necessity to mislead
in order successfully to reduce the value of a nation’s currency: Dr.
Vissering, head of the Netherlands Bank, telephoned Mr. Montagu Norman,
Governor of the Bank of England. He inquired whether his bank would be
justified in retaining the sterling it was holding. Dr. Vissering received from
Norman an unqualified assurance that Britain would remain on the gold standard.
He believed what he was told. In consequence, his bank lost the whole of its
capital; for the very next day Britain abandoned gold. Through the same act.,
the Bank of France lost seven times its capital.3
Two years later, using the argument that he wanted “to
control inflation.” President Roosevelt persuaded Congress to give him
extraordinary discretionary powers in the monetary field. Then, in April of
that year, he decided to call in all privately owned gold “as a temporary
measure.” There was no suggestion that the real purpose was a forced
depreciation of the dollar in terms of gold, the issue of an enormous number of
notes, with open market operations by the Treasury and Federal Reserve System
to acquire government securities and hence perpetuate the depreciation.
The fact that the Bank of France had been called upon
to falsify its balancesheet in 1925, in order to maintain confidence, had been
regarded as a shocking incident by those who understood what had happened.4 But
exactly the same kind of deception is inevitable if inflation is ever to be
continuously successful. A delightful euphemism is “creating a favorable
climate of opinion”!
Because a policy of creeping inflation must rely upon
persistent deception, its survival in the modern world is obvious evidence of
the corruption of government and of the disintegration of trustworthy relations
between governments.
In 1922, in negotiating a settlement with the American
Debt Funding Commission, Britain had confined herself, on the whole, merely to
asking that the rate of interest should be 3½% in accordance with her credit
standing. Professor B. M. Anderson, at that time economist to the Chase Bank,
commented: “The British were superb in this. They were proud, magnificently
proud. They asked little consideration.”5 Perhaps Britain was then the loser,
in material terms; but can we be indifferent to the moral deterioration which
has subsequently become evident, recorded in an era which demands “necessary untruth”?
(10) The disintegration of faith in money (ultimately,
of faith in government) has involved the peoples of the world in formidable
material costs. In the pre-1914 era, simply because no one ever doubted that
“banks of issue” would honor convertibility obligations, there were no balance
of payments difficulties, no hot money flights, no devaluation scares, no
complaints of world liquidity shortages, no restraints on international
settlements, no blocking of foreign balances, and no quantitative trade
restrictions for balance of payments purposes. In that co-ordinated era, even
such concepts (which the present disco-ordinated age treats as everyday
notions) would have been incomprehensible.
The enormous administrative costs of today’s
“controls” are obvious enough; but the losses due to the economic distortions
they cause—domestically and internationally—are incomparably heavier. World
disco-ordination is a product of the continuous misdirection of expectations
which the inflationary technique necessitates.
(11) THE ONLY WAY IN which the general public can
discourage inflation is to make it unprofitable. They can do this when they are
in a position to insist upon fixed income contracts being revised ahead of
instead of following the price increases at which official policy is aiming
(perhaps via “escalator clauses”), and refusing to accept the dishonest
assurance that their insistence can be a cause of inflation. A similar
discouragement is effected when investors learn to avoid fixed interest bonds,
except at very high yields to compensate for monetary depreciation.
(12) When more and more people begin to understand
what is happening, a government which wishes to persevere with inflation is
forced to take authoritarian action. It has to discourage or prevent those who
understand from using market institutions to escape the destruction of the real
value of their savings. In other words, when enlightenment spreads, for a
government to engineer rising prices successfully demands eventual resort to
price controls, rent controls, import controls, exchange controls, controls of
capital issues, “income policies,” and so forth. In the absence of inflation,
all controls of this kind (or extra-legal “persuasions” with the same object,
backed by arbitrary state power) have no purpose.
TO WHAT GENERAL conclusion are we led after
consideration of these twelve points? Is it not that the gradual drift of the
so-called “free world” towards a totalitarian concentration of power has had
its origin in the creeping inflation which, dating from the 1930’s, seems to
have been mainly inspired by Keynesian teachings? Through public acquiescence
in perpetually rising prices, we are threatened with an emergence of the sort
of social order which, less than three decades ago, the blood of countless
patriots was spilled to prevent.
In recording these thoughts, is the writer the victim
of a futile nostalgia—a naive longing for the nineteenth century era? Has not
inflation perhaps been an inevitable step towards a slow, inexorable transfer
of consumer freedom (and the entrepreneurial freedom which is its consequence)
to the state? Certainly there are those who, with a dogmatism of Marxian
stubborness, will argue that, once the institutions of representative
government had been conceded, politicians were bound, sooner or later, to
discover the potentialities of twentieth century techniques of persuasion and
propaganda; whilst that discovery could not fail to mean the ultimate passing
of authority to those most skilled, or most uninhibited, in controlling the
minds and purchasing the support of political majorities. If they are right,
the stereotype of the state as the donor of benefits was predestined to emerge;
recourse to inflation had necessarily to follow; and as the community began to
be more difficult to deceive, and started to use the remnants of the free
market economy to evade the burden of inflation, the urge to totalitarian
government became irresistible.
To those who are inclined, for such reasons, to
acquiesce in, or make terms with, the totalitarian trend, the “classical” type
of analysis, like that presented above, seems to have become irrelevant. What
the rulers of modern society now need, they feel, are formulae which assist
officialdom in maintaining a nice balance between plausibility or electoral
acceptability on the one hand and mitigation of the more obvious causes of
unrest on the other. It comes to be regarded as more important, therefore, for
economists to be experts in semantics than experts in explaining dispassionately
to students and the public the nature of the economic process. Indeed,
governments have no alternative but to choose economic advisors from those who
understand their basic problems, all of which center on the need for the
retention or winning of office. Accordingly it becomes the duty of the
universities to provide the required training. Useful economics, they will
insist, is “operational.” That is, it is a kind of economics which takes
politically decided objectives for granted, concentrates on the problems which
arise in seeking those objectives, and isolates the kinds of data (and types of
statistical analysis) which are of service in satisfying the politically
powerful and placating the politically weak.
Would inflationary policy (with its eventual
totalitarian outcome) have been inevitable, however, if the public had been
taught the above twelve truths (if they are truths) about inflation? Suppose
economists in the leading universities had maintained their political
independence and reiterated with unanimity the simple points we have stressed.
Would not the authority attaching to their teachings, together with the almost
self evident irrefutability of the propositions themselves (to men of affairs),
have forced the abandonment of inflation? And in renouncing the inflationary
remedy for disco-ordination, would not the state have been forced to re-assume
its traditional task of protecting the co-ordinative mechanism of the price
system from sabotage by sectionalist action? Would not suppression of the
private use of coercive power have permitted the social discipline of the free
market to bring different categories of prices into harmonious relationship
with one another, without inflationary validation?
But this was not to be. From the middle thirties—for
reasons which cannot be discussed here—Keynesian economists slowly got the
upper hand, not only in the counsels of governments but in most of the
universities. “Classical economics,” the product of more than a century of
disinterested, scientific thinking, was pushed aside as fundamentally wrong. It
was replaced by the more plausible doctrines of Keynes’ General
Theory—doctrines built on a number of obscurely enunciated propositions which,
because obscurity all too easily suggests profundity, greatly impressed the
layman—an influence which was magnified through the subsequent elaboration of
the propositions by mathematicians.
The fact that, since the war, every unique Keynesian
theory which clashes with classical economics seems to have been tacitly
abandoned, in the sense that it can no longer be rigorously defended, has
hardly discouraged the continued indoctrination of students of economics in the
new orthodoxy. Indeed, so strongly is a powerful Keynesian establishment now
entrenched within the universities, and so influential are the vested interests
it has built up, that even non-Keynesian economists have mostly felt themselves
forced to attempt to persevere with its concepts. The most widely used
textbooks remain Keynesian, and the young student of economics is seldom made
aware that ideas like those explained in this article can be seriously
entertained except by cranks. Yet the present writer is convinced that, if free
and fair competition between the Keynesian and “classical” notions had been
permitted, only the latter could have survived.
AS THINGS ARE, THE Keynesian thesis which—as one
apologist put it—“removed inhibitions against inflation,” still dominates
policy in Britain, in the United States, and, indeed, in most parts of the
world. Governments, relying on the fruits of a technological progress which
current policy has hampered but not prevented, will not easily renounce the
myth that they can foster the spending of a country into prosperity and growth
whilst they simultaneously “fight inflation.”
[* ] W. H. Hutt is Professor of Commerce and Dean of
the Faculty of Commerce at the University of Capetown, South Africa. Among his
published works are Keynesianism—Retrospect and Prospect, The Theory of
Collective Bargaining, and The Theory of Idle Resources.
[1 ] L. von Mises, The Theory of Money and Credit (New
Haven, Conn.: Yale University Press, 1953), pp. 418-19.
[2 ]September 21, 1949.
[3 ] B. M. Anderson, Economics and the Public Welfare
(New York: Van Nostrand, 1949), p. 246; also, W. A. Morton, British Finance,
1930-1940 (Madison, Wis.: University of Wisconsin Press, 1943), p. 46.
[4 ] B. M. Anderson, op. cit., pp. 154-56. Anderson
refers to the Commercial and Financial Chronicle (New York), April 11, 1925.
[5 ] B. M. Anderson, op. cit., p. 293.
[6 ] For the evidence supporting this assertion the
reader’s attention is directed to the present author’s Keynesianism—Retrospect
and Prospect (Chicago: Regnery, 1963), chap. xix, “The Retreat”; and his recent
article, “Keynesian Revisions,” South African Journal of Economics, XXXIII
(June 1965), 101-13, reprinted in the Rampart Journal, I (Winter 1965), 1-18.
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