A Weekly Dose of Hazlitt: The Policy Is Inflation

The Policy Is Inflation” is the title of Henry Hazlitt’s Newsweek column from July 5, 1954. For some reason that myth that the 1950s was a golden age of restrained government spending and low inflation persists. Reading Hazlitt’s columns from those times clearly demonstrate that budget deficits financed via inflation have plagued the US economy for decades. It was not a policy that suddenly occurred in the mid 1960s. Unfortunately, the US economy is still hampered by such a policy.

The Eisenhower Administration’s monetary policy
has now become clear. It is the same as that of the
Democratic New Deal and Fair Deal administrations—
inflation. Conclusive evidence was supplied on June 21
when the Federal Reserve Board cut by $1.5 billion the
reserve requirements of member banks. This will permit
those banks to increase their loans by a total estimated
from $7.5 to $9 billion.

There is little doubt regarding the primary reason
why this was done. The federal government is still running
a deficit. It is expected to borrow something like
$10 billion between now and December. Their increased
borrowing power will enable the nation’s banks to buy
the government’s new securities and to pay for them, in
effect, by creating new paper money.

The lowered reserve requirements will also permit
the banks to create and lend additional money to business.
They will enable the government itself to borrow
cheaper. By allowing business to borrow at very low
rates it is presumed that they will encourage business
and employment and incidentally make the November
elections safer for the Republicans.

This latest move of the Federal Reserve Board does
not stand in isolation. Just about a year ago, on June
24, the Eisenhower Administration, which until a few
months before had been making serious efforts to halt
inflation, took the drastic inflationary step of reducing
the reserve requirements of member banks to release
at that time about $1,156 million of reserves. This was
done to give the nation’s banks about another $6 billion
in lending power—in anticipation of Treasury needs
of some $6 billion of “new money” in the following
three months. Since then, most of the Administration’s
moves have been in the inflationary direction.

How necessary was this June’s new shot of inflation?
Was it needed to pull the country out of a serious
slump? On the contrary, it came on the same day that
The New York Times’s combined average of 50 stocks
reached the highest level in 24 years. It came when the
latest cost-of-living index reached a level of 115 percent
of the 1947–49 average, higher than a year before and
within 1 percent of the highest monthly average ever
reached by the cost of living. It came a week or two
after the Treasury sold 91-day bills at an average yield
of 0.616 percent, the lowest in seven years.

This low borrowing rate was not, of course, the
result of any higher standing on the part of our Federal
government’s credit. That government is still running
a deficit, bumping against its legal debt ceiling of $275
billion and trying to get Congress to lift the ceiling still
farther. The low money rate is the result chiefly of an
abundance of paper money and manufactured credit.
As compared with $64.7 billion in 1939 (total bank
deposits and currency outside of banks), the money supply
had been more than tripled up to April of this year
to $202.3 billion. This increase in the money supply is
overwhelmingly the main reason for the rise in prices
and living costs in the period.

How does it come about that a Republican administration,
manned in the main by conservatives, and
originally determined to halt the New Deal-Fair Deal
inflationary policies, should end by continuing most of
them? It is because the more politically powerful and
belligerent section of public opinion, represented by
CIO leaders, farm organization leaders, many business
leaders and college professors, have become habituated
to inflation and cannot tolerate its termination. Today,
at the slightest sign of readjustment, we get the jitters
and talk about another major depression.

We are all Keynesians now. We are all monetary
inflationists. And everything would be fine if the
Keynesian theory were really true that full production
and employment could be uninterruptedly maintained,
and no dangerous or debilitating consequences would
follow, by the “correct” dose of monetary inflation at the
slightest sign of a setback, and that all the orthodox and
old-fashioned methods of readjustment were not only
intolerable but quite unnecessary.

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