A Weekly Dose of Hazlitt: Ordering Inflation

Ordering Inflation” is the title of Henry Hazlitt’s Newsweek column from August 10, 1959. What is interesting here is that opposition by the fed and treasury to an inflationary bill advocated by congress. It is difficult to realize that there has been opposition to inflation by at least some factions of the ruling class.

The Democratic majority in Congress has been playing
transparent politics with the nation’s fiscal and monetary
system. The effect of the policies it advocates would
be to let loose a more dangerous inflation than any the
country has yet experienced.

On June 8 the President requested Congress
to eliminate the 4. percent legal limit on rates the
Treasury may pay on new issues of bonds with a maturity
of more than five years. As a result of the rise in
interest rates, the Treasury can no longer count on selling
long-term bonds below this rate.

After pondering a full month, the House Ways and
Means Committee, on July 8, instead of simply removing
a legislative ceiling that should never have been
there at all, gave the President, as a sort of favor, the
right, for not more than two years, to disregard the
interest-rate ceiling when he found higher rates necessary
“in the national interest.” The obvious political
intent of this was to try to make the President seem personally
responsible for paying any higher rate that market
conditions might make necessary. The Democrats
went even farther. An amendment to the proposed
authorization read:

Double-Speak

“It is the sense of Congress that the Federal Reserve,
while pursuing its primary mission of administering a
sound monetary policy, should to the maximum extent
consistent therewith utilize such means as will assist in
the economical and efficient management of the public
debt, and that the system, where practicable, should
bring about needed future monetary expansion by purchases
of U.S. securities of varying maturities.”

Here was a beautiful specimen of double-speak.
The Federal Reserve System was to bring about more
inflation by monetizing the public debt, short-term or
long-term, but to do this only to the “extent consistent”
with “sound monetary policy.” It was to give us inflation
and sound money at the same time.

When the Federal Reserve and the Treasury
objected to the inflationary implications of this, Sam
Rayburn, Speaker of the House, angrily declared that
the Federal Reserve authorities considered themselves
“immune to any direction or suggestion by the Congress,
let alone a simple expression of the sense of Congress.”

There are several issues involved here. The first is
whether the provisions of the measure approved by the
House Ways and Means Committee are inflationary.
To this there is only one answer: They certainly are.
They would put pressure on the Treasury to continue
with short-term rather than long-term financing. They
would put pressure on the Federal Reserve to expand
the currency by monetizing the debt. Both proposals,
it is obvious, would be inflationary.

Bad Refunding

True, our debt management record since the end of
World War II is not one of which successive Secretaries
of the Treasury can feel very proud. At practically any
time up to 1956 the Treasury could have funded the
debt in long-term bonds at 3 percent or less. It kept failing
to do so because short-term rates (largely as a result
of inflationary Federal Reserve policies) were lower still,
sometimes falling to 5/8 percent. The Treasury acted
as if this situation would last forever. It kept missing
opportunities because it assumed that short-term rates
would stay low or that long-term rates would go lower.
Now it must pay more than 4. percent for long-term
money. A few weeks ago it paid 4.7 percent for one year
money. But it must be said that the Treasury and
Federal Reserve authorities acted through the postwar
years with the inflationists in Congress constantly
breathing down their necks.

A final question has to do with the independence
of the Federal Reserve System. Certainly it should be
free from direct political interference, dictation, or pressure.
But a further question is whether any governmental
administrative body, no matter how set up, can be
granted wide discretionary power without excessive
political pressure being put upon it to inflate. What is
necessary is to reduce the range of administrative discretion,
to move in the direction of fixed, almost “automatic,”
rules. The most important step in that direction
would be a return to the gold standard.

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