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W. H. HUTT, Twelve Thoughts on Inflation - Ralph Raico, New Individualist Review 
New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).
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Twelve Thoughts on Inflation
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.
AN ORGANIZED depreciation of the monetary unit, however, may bring about some sort of reco-ordination of the price system, in spite of its injustice. Under favorable conditions, it can cause the prices realized for products to rise more rapidly than the costs of making them. This may render profitable the employment of some presently unutilized or under-utilized productive capacity. For instance, if costs such as wage rates have been fixed higher than the public can afford to pay for the full supply of labor, a slowing down of output, with unemployment, is threatened. Inflation can then raise prices in relation to costs and so keep the economy going. Similarly, if producer-dominated marketing commissions have forced up the prices of primary products (raw materials or food) so that the public begins to be unable to afford to buy all that is being produced, again inflation can, in a crude sort of way, rectify the position by validating the higher prices. But all this depends, of course, upon the public as a whole not expecting it.
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,6 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.