Congress has approved another in the seemingly endless series of proposed broadenings and liberalizations of the federal Social Security program. Meanwhile, millions of recipients of fixed incomes, including the aged, disabled, widowed and orphaned, continue to feel the effects of the heavy tax burden and the rise in the cost of living, which have slashed the purchasing power of lifetimes of savings.
Not only Social Security but also most of the other sweeping changes in the relations between people and their governments during the past generation have been adopted in the name of “social responsibility.” Governments have been called upon to assume the “social responsibility” of regulating economic life and protecting or indemnifying individuals against a wide range of hazards. How many of these safeguards properly lie within the field of social rather than individual responsibility is debatable, and whether governmental compulsion is the best means of dealing with them is even more so. What is certain is that the “social” responsibility cannot be met without a higher sense of financial responsibility than most peoples have shown in the recent past, or are showing today.
More specifically, uncontrollable budgets, excessive tax burdens, inflationary monetary policies, and currency depreciation make a mockery of any plan for economic security or “social justice.” Is this financial irresponsibility a passing phase, or is it an inevitable consequence of the attempt by governments, in response to popular demand, to assume a degree of “social responsibility” beyond their practical capacity to bear?
Deflation or Devaluation?
The most important single step. toward financial irresponsibility, was taken when the people of the world rejected the discipline of sound money and accepted the concept of “managed” currency. The importance of the step did not lie so much in changes in the terms and conditions of specie redemption as in the fact that devaluation replaced deflation as the preferred method of correcting financial maladjustments.
As far as the purchasing power of currencies was concerned, the abandonment of the gold standard was a cause of financial irresponsibility primarily in a passive or permissive sense. It might be theoretically possible, by means of appropriate budgetary, monetary and other policies, to hold prices as stable, for a time at least, under an irredeemable currency as under the gold standard. Some statistical measure of the general price level, for example, might be substituted for gold as a standard of value. But this, even if practically possible, would merely be substituting one form of economic discipline for another. There would still be a fixed norm, and deflation, rather than devaluation, would still be the final corrective.
As long as people insisted upon stable money, even at the cost of the rigors of occasional deflation, they had relatively stable money. When they refused to submit to the discipline of deflation for the sake of stable money, the fixed norm was gone, and currency values were set free to drift with the political winds, which almost always blow in the direction of inflation. Whatever may be said for the theoretical advantages of “managed” currencies, experience indicates that in practice, and over the long term, they are depreciating currencies, especially in an age of governmental “social responsibility” as that phrase is understood today.
“Full Employment Commitment”
Against this background of anchorless currencies, what particular forms of “social responsibility” are operating in a positive way to undermine the purchasing power of money? Certainly one of the most powerful is the political pressure for continuous “full employment.” Governments and central banks are expected to maintain economic conditions in which all persons desiring to work shall always be able to find jobs at “fair” wages. The only instruments of major importance with which governments and monetary authorities can endeavor to meet this requirement are inflationary. The principal ones are intentional budgetary deficits, artificially low interest rates, and central-bank operations and regulations tending to swell the supply of loanable funds.
All these measures have the effect of increasing the amount of money and bank deposits without a corresponding increase in the quantity of goods and services to be bought. In addition, artificially low interest rates tend to discourage saving and encourage borrowing for investment in new industrial facilities. Thus the balance between money on the one hand and goods and services on the other is disturbed, and prices rise. Unless commensurate price changes are occurring in other countries at the same time, the rise in domestic prices makes it more difficult to export and easier to import, and the balance of international payments is upset. Eventually it becomes necessary to restore balance by devaluing the currency, and this expedient must be used rather promptly if the country concerned is largely dependent upon foreign trade. The alternative correction, price deflation, is obviously ruled out by the “full-employment commitment,” since deflation usually occasions some unemployment.
Other “Social Programs”
Both the pressure on national budgets and the disequilibrium between saving and investment are intensified by the various “social services” which present-day governments are expected to supply. The cost of these services is so great that the tax burden grows very oppressive, and the demand for tax relief becomes almost irresistible. Deficit financing offers the easy way out, and this tends to develop into a national habit. At the same time, the heavy taxation of individuals in the higher income brackets to provide “free” services to those less favorably situated involves a large-scale redistribution of income. To some extent, taxes are paid with money that would otherwise be saved, whereas almost all the money distributed by government for “social services” is spent. Thus saving is further reduced, while borrowing, both by government and by private business for capital expansion, is stimulated.
Insofar as the aim of continuous “full employment” is achieved, it aggravates the upward pressure on prices exerted by the constant demands of powerful labor unions for wage increases exceeding the rise in the productivity of industry. It is agreed by almost all businessmen and by some union leaders that wage increases which raise costs of production defeat their own purpose by forcing workers to pay correspondingly more for the product. Yet in practice it has been found impossible to hold union demands within the limits that would be indicated by the rise in productivity. Thus organized labor, which has attained its present position of power with aid and encouragement furnished by government in the endeavor to fulfill its “social responsibility,” has become one of the most potent instruments of inflation.
Another major group for whose supposed benefit government has been called upon to exert and broaden its powers in the name of “social responsibility” is agriculture. Agrarian programs have taken different forms in different countries. In the United States, the government has attempted to enforce “fair” prices for farm products, the criterion of “fairness” being a set of price relationships that existed more than forty years ago. This unrealistic endeavor has resulted in the production and accumulation of a volume of surplus products that has cost billions of dollars of the taxpayers’ money, has finally depressed farm prices and farm income despite the governmental price supports, has forced the government to resort to the fantastic expedient of paying farmers for not producing, and has created a problem of surplus disposal that has embroiled the country’s relations with some of its neighbors.
Some present-day governments and central banks, including our own, have made valiant efforts to adhere to the principles of financial responsibility and stable money. The purpose of this discussion is not to criticize these governments, or even contemporary governments in general. It is merely to point out that the world has been swept by a philosophy of “social responsibility” which is self-defeating insofar as it ignores or contravenes the rules of financial responsibility. As long as this philosophy prevails, no government can totally refuse to conform with it.
The strange combination of “social responsibility” and financial irresponsibility can be seen on the international as well as the national scale. It is probably fair to say that most of the international “co-operation” since World War II has been calculated to make it unnecessary, or less urgently necessary, for nations to put their financial houses in order. This has been conspicuously true of the aid extended by the United States to foreign countries under the Marshall Plan and its successors. Such aid has enabled recipient nations to fill the gaps in their balances of international payments, thus avoiding or delaying the hard alternative of deflation or devaluation, and permitting inflation to run on. Institutions like the International Monetary Fund and the European Payments Union have somewhat the same effect. True, these institutions have rules designed to force debtor nations to correct the causes of their indebtedness. Yet their operations unquestionably tend to cushion the effects of unhealthy financial conditions and practices, and to that extent weaken the incentives to rectify them.
Governments, especially those of newly independent and economically “underdeveloped” countries, have been under pressure to assume the “social responsibility” of promoting rapid industrialization. In many cases, this policy seems to be inspired by nationalistic feeling rather than strictly economic motives and potentials. Almost without exception, such countries complain of acute shortages of capital, which is simply another way of saying that their relatively unproductive economies cannot create savings fast enough to provide for industrialization on the desired scale.
Yet the “social responsibility” of these highly nationalistic governments prevents them from admitting foreign capital on terms of sufficient freedom to make investment attractive. In their efforts to escape from this dilemma, such governments tend to protect and subsidize their struggling industries and to resort to inflationary practices in the apparent belief that a shortage of capital is a shortage of money rather than of goods.
These and many other projects undertaken in the name of “social responsibility” are not only failing to achieve their purpose but are generating worse evils than they aim to alleviate, either because public opinion forces governments to violate the time-tested rules of financial responsibility or because the projects themselves are in basic conflict with those rules. Government officials, from the heads of state down, reflect this political pressure when they extol “human budgets” as more important than “treasury budgets,” as if there were a contradiction or even a distinction between the two.
Such false distinctions are symptomatic of the confused thinking that is carrying most countries, with varying speeds, down the inflationary path. It seems to have been forgotten that financial responsibility is the beginning of real social responsibility. 
From The Guaranty Survey, August 1956, Albert C. Wilcox. Editor.