“Time-Deposit Inflation” is the title of Henry Hazlitt’s Newsweek column from August 11, 1958. Here Hazlitt makes a point that only the Austrian school makes, inflation is the increase in money proper and fiduciary media in an economy, while the manifestation of inflation is a rise in prices, consumer, real estate, asset. He notes that the confusion of the latter with the former masked the substantial inflation at the time of this column as well as during the 1920s. We have seen the same scenario over the past few years as central banks around the world have been working overtime pumping money into their economies.
‘The recent dramatic rise in the stock market has been
hailed by many as a sign that the recession is over. But
the rise has been quite disproportionate to the recovery
in business. The Dow-Jones industrial average rose
from 420 on Oct. 22 last year, and from 437 on Feb.
25 this year, to 505 on Aug. I, an overall increase of 20
The Federal Reserve index of industrial production,
on the other hand, which stood at 142 last October, was
only 130 in June of this year, a decline of about 8 percent.
Unemployment was estimated at 2.5 million last
October and is now estimated at about 5 million.
Well, it may be said, the stock market isn’t supposed
to reflect actual conditions at the moment, but
anticipated conditions; it is forecasting further recovery.
But perhaps what the stock market really is reflecting
is current credit inflation and the belief in a further
shrinkage in the dollar.
The continued existence of inflation is plain enough
not only from the rise in the stock market while unemployment
is substantial and the level of output is down,
but from the rise of both wholesale and retail prices
in the face of this lower activity. The dollar has lost
about 3 cents in purchasing power in the last twelve
months. And it has done this because government (and
Federal Reserve) policy has been increasing the number
Swollen Money Supply
There are many economists and statisticians who contend
that this has not occurred. The money supply, they
argue, consists of demand bank deposits and currency
outside of banks. The total of demand deposits, they
point out, was $104.8 billion at the end of May 1957
and only $105.8 billion at the end of May this year.
For the same period, currency outside of banks was
$27.9 billion in 1957 and $27.8 billion in 1958. So for
the twelve months the total money supply was almost
This picture alters, however, as soon as we take
account of time deposits. Between the end of May 1957
and the end of May this year, these increased by nearly
Here is where the expansion of bank credit—the
inflation—has taken place. Since the end of 1951,
demand deposits have increased only 8 percent and currency
outside of banks only 5 percent, but time deposits
have increased from $61.5 billion to $94.6 billion,
or 54 percent. It is common to think of time deposits
as “savings.” That is why their growth has been rather
complacently regarded. But another interpretation may
now be called for.
1958 and 1928
There is a striking parallel between the present situation
and that exactly 30 years ago. In June of 1928 Benjamin
M. Anderson analyzed the situation in two bulletins
for the Chase National Bank. “Since July of 1927,” he
wrote, “there has been an immense expansion of bank
credit flowing into the securities market. . . . The most
conspicuous effect of cheap money and bank expansion
has been in the speculative rise in the prices of securities
and real estate, but this rise has in itself had a very
marked effect upon the volume of consumer demand.”
He went on to show how the Federal Reserve authorities,
by lowering the rediscount rate and by other means,
had brought about an expansion of bank credit which
had taken the form primarily of increased time deposits.
In the seven years ending in April 1928, whereas the net
demand deposits of the reporting banks of the Federal
Reserve System had increased 34 percent, their time
deposits had increased 135 percent.
“The fact,” he continued, “that an immense expansion
of bank credit has taken place, unneeded by commerce
and industry, has made it inevitable that a high
percentage of this increase would take the form of time
deposits rather than demand deposits. . . . The greater
part of time deposits in great cities” are not true savings
deposits but “represent the temporarily idle funds
of business corporations. . . . Most of the growth of the
time deposits . . . is a product of bank expansion rather
than of savings.”
All this applies to the present situation. Bank credit
has expanded. Out-of-line wage rates have not been
adjusted. So we have a booming market with continued