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Comments on Inflation

Henry Hazlitt

This article consists of two of Mr. Hazlitt’s columns from Newsweek, the first part from the issue of May 2 and the second from the issue of May 16, 1960.

In this spapce nearly ten years ago (Newsweek, September 17, 1951) I ran a chart comparing the increase in the cost of living, in wholesale commodity prices, and in the amount of bank de­posits and currency, from the end of 1939 to the middle of 1951.This chart was incidental to pointing out that the rise in living costs and prices was the result of the increase in the supply of money and credit, and not of a "shortage of goods" or a so-called "cost push."

We are now in a position to compare the same three items over a full twenty years, from the end of 1939 to the end of 1959. The accompanying chart gives us a panoramic view of the inflation during that period. It shows that, while consumer prices increased 113 per cent between the end of 1939 and 1959, wholesale prices increased 136 per cent in the same period and the total supply of bank deposits and currency in­creased 270 per cent.

If we are to adopt the proper measures, the only effective meas­ures, to halt inflation and prevent its resumption, we must clearly recognize that its basic cause is the increase in the supply of money.

Two rival theories still persist. One is that inflation and rising prices are caused by a "shortage of goods." The figures refute this on their face. The official index of industrial production was 177 per cent higher in 1959 than in 1939; in other words, the rate of pro­duction of goods was almost three times as great. It was in spite of this enormous increase in produc­tivity that wholesale prices in­creased 136 per cent—i.e., more than doubled—during the period.

In other words, the increase in the money supply would have caused an even greater rise in prices if it had not been offset by an increase in the supply of goods. While the production of goods almost tripled, the supply of money and bank credit almost quadrupled.

Money vs. "Cost Push"

The other rival theory is that inflation and the rise of prices are caused by higher wage demands—by a "cost push." But this theory reverses cause and effect. "Costs" are prices. An increase in wages above marginal productivity, if it were not preceded, accompanied, or quickly followed by an increase in the supply of money, would not cause inflation; it would merely cause unemployment. It is not true, as so often assumed, that a wage increase in a given firm or industry can be simply "added on to the price." Without an increased money supply, prices cannot be raised without reducing demand and sales, and hence production and employment. We can stop the "cost push" if we halt the increase in the money supply and repeal the labor laws that confer irrespon­sible private powers on union leaders.

Newsweek, May 2, 1960

Part II: Inflation and Morality

Last summer (Newsweek, July 27, 1959) my colleague, Raymond Moley, wrote a column called "In­flation, a Moral Issue." This ought to be the leading issue in the elec­tion.

Inflation never affects every­body simultaneously and equally. It begins at a specific point, with a specific group. When the govern­ment puts more money into circu­lation, it may do so by paying de­fense contractors, or by increasing subsidies to farmers or social-security benefits to special groups. The incomes of those who receive this money go up first. They be­gin to buy at the old prices. But their additional buying forces up prices. Those whose money in­comes have not been raised are forced to pay higher prices than before; the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, their own money-incomes may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they never fully make up the loss they suffered from the inflation.

Inflation, in brief, essentially involves a redistribution of real incomes. Those who benefit by it do so, and must do so, at the ex­pense of others. The total losses through inflation offset the total gains. This creates class or group divisions. The victims of inflation resent the profiteers from infla­tion. Even the moderate gainers from inflation envy the bigger gainers. There is general recogni­tion that the new distribution of income and wealth that goes on during an inflation is not the re­sult of merit, effort, or productive­ness but of luck, speculation, or political favoritism. It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.

Speculation vs. Work

An inflation tends to demoralize those who gain by it as well as those who lose by it. They become used to "unearned increment." They want to hold on to their rela­tive gains. Those who have made money from speculation prefer to continue this way of making money to the former method of working for it. I remember once, early in 1929, a conversation be­tween two friends, both of whom held prominent posts as book re­viewers but both of whom were heavily in the stock market. They were exchanging stories about their profits. "Today your salary," they agreed, "is just a tip." People do not like to work full time just for a tip. The trend in an inflation is toward less work and produc­tion, more speculation and gam­bling.

The profiteers from inflation tend to spend freely, frivolously, and ostentatiously. This increases popular resentment. The incentive for ordinary saving, in the form of savings-bank accounts, insur­ance, bonds, or other fixed-income obligations, tends to disappear. The spectacle of quick and easy returns increases temptation to corruption and crime.

"A Juggling Trick"

It is not merely that inflation breeds the gambling spirit and corruption and dishonesty in a na­tion. Inflation is itself an immoral act on the part of government. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped the coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. For notwithstanding all the pious pretenses of governments that inflation is some evil visita­tion from without, inflation is practically always the result of de­liberate governmental policy.

This was recognized in 1776 by Adam Smith in The Wealth of Na­tions. Though I have quoted the passage before, it bears repeat­ing: "When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid." There is either "an avowed bank­ruptcy" or "a pretended payment."

The pretended payment was in­flation. The U.S. government today is paying off in 47-cent dollars the debts it contracted in 1940. Adam Smith went on: "The honor of a State is surely very poorly pro­vided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious."

Newsweek, May 16, 1960

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