Dishonest About Inflation

Mr. Barger is a corporate public relations executive and writer in Toledo, Ohio.

Most of the opinion polls tell us that inflation is the public’s Number One worry. We shouldn’t need the pollsters to tell us that. We can listen to the complaints in the lines at the supermarkets, read the head­lines in newspapers, or hear the pronouncements of business leaders and political candidates. Inflation is a terrible cancer that must be brought under control, we are con­stantly warned, or we face a bleak future and perhaps an economic di­saster.

But what causes inflation? Many economists and savants tell us that inflation is a very complex problem with neither a single cause nor a single solution. Few economists would dare deny that arbitrary gov­ernment expansion of money and credit produces inflation. Yet, there seems to be a universal desire to bring in other alleged causes: the greed of unions and businessmen, government regulations, rising oil prices, and even such matters as lowered American productivity and reduced capital investment.

What is behind all this confusion about inflation? It grows out of the same character defect that causes inflation in the first place. That character defect is dishonesty, and it has seduced a whole nation. But events may eventually force us to accept inflation as a dishonest human action that can be avoided if people have the will and the under­standing to do so. Nor is inflation a complex problem when one is pre­pared to see it as a moral issue rather than simply as political or social phenomena.

A steel company executive named Enders M. Voorhees pointed to the moral problem of inflation in a 1950 speech entitled, "Wanted—De­pendable Dollars." Even then, corporate financial officers in Mr. Voorhees’ position were discovering that inflation distorted business calculations and made future business planning a nightmare. In the same speech, he unashamedly showed a preference for the terms "dependa­ble dollars" or "honest money" rather than such terms as "sound money" or "gold standard." He had harsh words for "printing-press money," i.e., money created by gov­ernment manipulations. But why were we beguiled by "printing press" money and why were we un­able to stop inflation? Mr. Voorhees concluded, "In the end we may dis­cover that it is our own deficiency in moral stamina that is to blame, and that the printing-press operators are merely reflecting our own at­titudes." (emphasis added)1

Mr. Voorhees was politely saying that character defects get in the way of efforts to stop inflation. He could have gone on to say that dishonest money is produced by dishonest peo­ple who are trapped by greed, fear, and weakness. This would be a very strong statement, but the facts bear it out. Inflation begins with an ex­pansion of the money supply which immediately produces benefits for certain people while causing losses for others. In general, people on fixed incomes and holders of bonds, loans, and savings accounts are cheated, while borrowers, property owners, and inflation-wise specu­lators show gains.

Lying and Cheating

Lying and bland promises are an essential part of the inflation pro­gram. The public is constantly told that inflation will be brought under control, for it is important that most of the victims be unaware of what is going on. Still, a student of inflation is finally forced to believe that the public wants to go on believing in the inflation game. The old saying, "You can’t cheat an honest man," may have some relevance to the way we are cheating and being cheated by inflation.

It would be unfair to say that the current generation of Americans is less honest than earlier generations that somehow were able to maintain an "honest" or "dependable" dollar. And for that matter, it would even be unfair to say that Americans are more dishonest, say, than the Ger­mans or Swiss who have been able to maintain the strength of their cur­rencies. Our problem, as Americans, is that we have been practicing a selective dishonesty. While often in­sisting on rigorous honesty in other matters, we have accepted the dis­honest practices that produce infla­tion. Then we have gone further in this deceit and have attributed the shrinkage of the dollar’s buying power to conditions that are really the effects of inflating. This tends to deflect attention from the actions that dilute the market value of money and ought to be stopped.

Needed: An Acceptable Definition

One of our most disturbing prob­lems is that professional economists do not agree in their definitions of inflation. One of the most widely accepted definitions of inflation is that it is a rising general level of prices.² Another popular definition of inflation is "too much money chasing too few goods." Actually, more honest and precise than either of these definitions would be an ex­planation of the actions that cause prices to rise generally or bring "too much money" into existence.

The public should understand that a widespread drought may re­sult in temporarily higher prices for food, relative to prices of other things. But that is not the same as a government action that arbitrarily produces more paper money and credit and results in a persisting general increase in prices.

Why do professional economists employ such deceptive and mislead­ing definitions of a condition that could prove to be a terminal illness for our way of life? One reason for this dishonesty is that the need to maintain "sound" or "honest" money was badly ridiculed and discredited in the early 1930s and since then has never been defended except by a few economists. There is also some­thing about inflation that promotes demands for centralized government control, which many economists ad­vocate. Finally, the Keynesian def­icit spending programs endorsed by many economists make inflation unavoidable.

Yet another argument against "honest money" is that it is a return to the gold standard, which had its severe critics and was often looked upon as a means of keeping money scarce and concentrating power in the hands of eastern bankers. Actu­ally, honest money could take sev­eral forms and could be backed by metals and commodities other than gold. It is even possible to conceive of a privately-issued currency with­out any specific backing other than the assets of the bank or company which offers it. A gold standard will soon collapse if it is seen as a hin­drance to progress rather than a way of protecting the public.

Effects Seen As Causes

In the general dishonesty about inflation, most experts make the error of blaming inflation on condi­tions that are really the effects of expanding the money supply. Busi­ness leaders like to focus on "cost-push" inflation, for example, with unions as the villains. According to this argument, monopolistic unions are able to impose increased costs on business which must eventually be passed through as price increases. If unions would only be less greedy, cost-push inflation could be kept under control.

Union leaders and their staff economists seize on the same argu­ment, usually with the twist that inflation is caused by unwarranted price increases, excessive profits, high executive salaries, and monopolistic or oligopolistic enter­prises. Both unions and manage­ment, in making such arguments, play directly into the hands of politi­cians who would like to institute wage-price controls. Despite the fact that wage-price controls are virtu­ally unworkable and result in a bu­reaucratic nightmare, the demand for them is kept alive by the persis­tent belief that unions cause infla­tion by raising wages or manage­ments cause the same condition by increasing prices.

Professional economists could per­form a great service by rooting out the fallacies in these beliefs. They could show, for example, that rais­ing either wages or prices without corresponding expansion of the money supply will result in un­employment; there is less demand for either labor or goods if wages and prices go up with no equivalent in­crease in available money. With no expansion in the money supply, workers who demand too much or businesses which raise prices above the market would merely lose out to competitors.

Blaming Government Regulations

Inflation commentators have re­cently discovered another culprit in producing inflation: the high costs of government regulation. This has been useful to managements pro­testing the costs of meeting factory emission regulations or of making government-required product changes. There are good reasons to oppose these regulations and to de­plore the costs of meeting them. It is false, however, to say that costly government regulations cause infla­tion.

The economic effect of a govern­ment regulation is exactly the same as a wage increase or any other cost, including higher oil prices. It is something that must be included in the prices of the goods or services being offered by the company. Taxes are in the same category. And if the firm’s customers will not accept the increased prices, the company either will go out of business or will divert its production to lines that can be marketed profitably.

But regulations in themselves do not cause inflation. They do cause higher prices of certain products. These higher prices are mistakenly called inflationary, when they really reflect higher costs. The customer who must pay these higher prices will make equivalent reductions in other purchases.

Is Low Productivity a Cause of Inflation?

Low productivity is still another suspect in causing the inflation mess. With lower-priced imports flooding the country, there is in­creased concern about conditions that adversely affect American pro­ductivity. One of these conditions is the high cost of wages and benefits which raises unit costs of American goods. There is also deepening con­cern about the decline in capital investments. It is alleged that our own plant capacity is becoming ob­solete and inefficient in comparison with the plants of foreign producers. Meanwhile, prices of most manufac­tured goods are going up. But with higher productivity, prices would tend to stabilize, or at least the in­creases would not be so large.

Here again, low productivity is blamed because it supposedly in­creases the unit costs of certain products. Productivity itself has nothing to do with causing inflation, nor can it stop the process. The best spur to productivity is the producer’s desire to capture a larger share of the market and to increase his over­all productivity. Few producers are likely to increase their efforts sim­ply to fight inflation.

But there is a very serious decep­tion in the effort to use higher pro­ductivity as an inflation-fighter. This deception comes from defining inflation as a general rise in prices. Theoretically, an annual increase of four per cent in the money supply would not result in a general price rise if there also was a four per cent improvement in productivity. Prices would probably remain at the same level.

This would not mean, however, that inflation had been stopped. It would only mean that its effects had been concealed. For, without an ar­bitrary expansion of the money sup­ply, the four per cent improvement in productivity would have gone to certain workers, owners, and cus­tomers, as wages, dividends, or lower prices. So increased productiv­ity only makes inflation less visible, and perhaps more acceptable politi­cally. But it is not the answer to inflation.

The End of Dishonesty

We can probably expect more dis­honesty about inflation until events force us to change our ways. There is reason to believe that the American people become very worried when inflation passes the double-digit level. While this does not lead to a complete understanding of the prob­lem, it does cast doubt on some of the glib explanations and solutions being offered. Unfortunately, the most recent surge in inflation was attributed to higher oil prices, when in reality the OPEC nations who raise their crude prices do so to pro­tect themselves from the continuous inflating of the American dollar.

Yet, honesty or truth about money must always have its day; even the inflationists know that. As Ludwig von Mises explained, inflation can­not go on endlessly. "If one does not stop in time the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency system collapses entirely. The monetary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero." Still, Mises believed that money and credit expansion could be stopped in time if people had only the will and the understanding to do so.3

Hans F. Sennholz, an economist who studied under Mises, has been less optimistic about the future of the dollar. In his view, two-digit inflation will be ended only by the advent of three-digit inflation. He also has suggested that American inflation may end in a frenzied, hys­terical spending debacle not unlike that which overtook Germany in 1923.

But whether the landing from dishonest money is soft or hard, Americans will some day become more honest about the causes and effects of inflation. We will become courageous enough to demand hon­est, or dependable, money.

And we should not be too hard on ourselves when we finally learn how we have been deceived about the nature of inflation. Mr. Voorhees, in his plea for dependable dollars, pointed out that it seems to be those people who have had bitter personal experience of living under bad cur­rencies who most appreciate good currencies and are willing to make some sacrifices to secure and main­tain them. He was probably refer­ring to the West Germans, whose bitter experiences of 1923 probably taught them the value of strong, honest, dependable money.

We have had no experience simi­lar to Germany’s runaway inflation of 1923. Let’s hope we don’t have to endure such a disaster, which some observers thought was a worse calamity for Germany than their losses of World War I. But adversity, if it cannot be avoided, can at least be put to good use. In the case of an inflationary collapse, it could teach us honesty. As Sennholz says, "Affliction is a school of virtue that may correct levity and interrupt the confidence of sinning. But how long and how often must man be afflicted before he learns the lesson?"4