Freeman

ARTICLE

The Cost of Living

OCTOBER 01, 1966 by PAUL L. POIROT

The high and rising cost of liv­ing is of such grave concern to so many people that further govern­ment action is being considered to alleviate the situation. Scarcely a day passes without some mayor or governor denouncing the latest ad­vance in the price of bread or milk or a city council or state legisla­ture launching an investigation of marketing practices, rental rates, commuter fares, or other com­plaints of consumers. But the problem obviously is national in scope, and increasingly the call is for Federal intervention and re­lief. Nor has Washington been hesitant in answering that call.

There is a long history of Fed­eral regulation and control of busi­ness practices through such offices as the Federal Trade Commission, Interstate Commerce Commission, Federal Communications Commis­sion, Federal Power Commission, Civil Aeronautics Board, Pure Food and Drug Administration, Department of Agriculture, De­partment of Health, Education, and Welfare, Department of Hous­ing and Urban Renewal, and many others. Congressmen and their committees are continuously probing for unethical business prac­tices that might prove detrimental to consumers. The President has a Committee on Consumer Inter­ests, and there is a National Com­mission on Food Marketing, among others.

With so much governmental ac­tivity for their protection, Ameri­can consumers might be expected to be grateful and let it go at that. But, not so. Housewives continue to complain about the soaring cost of living and their inability to make ends meet when meat is priced at more than a dollar a pound. Meanwhile, Department of Agriculture statistics show that “the farmer’s share of the con­sumer’s dollar” persists in its long downward trend, despite the bil­lions of Federal aid pumped an­nually into various compartments of the farm price support pro­gram. Since food processors, pack­agers, and distributors stand be­tween producers and consumers, they are bound to be prime sus­pects in this situation. And the government is determined to dis­cover and discourage all business practices that may be accountable for the high cost of living.

Under such intensive search and scrutiny, some sharp opera­tors and some unethical practices doubtless will be found. Even the most ardent advocates of com­petitive private enterprise would expect some participants to fool­ishly try to pursue their supposed self-interest to the detriment of others. But the Federal govern­ment never will find the real cul­prit behind rising living costs. In­deed, no power structure should be expected to recognize and cor­rect its own abuse of power. The Federal government probably can­not see, and certainly could never admit, that its own actions are causing the high prices consum­ers deplore. If such a situation is to be corrected, it must be done by individual citizens, one by one, as each comes to realize that govern-mental compulsion is not an effec­tive substitute for the market price system of bringing supply and demand into balance in the real world of scarce resources and insatiable human wants.

The Government as Consumer

In the market economy, the con­sumer is the ultimate decision-maker. His purchases determine what may be profitably produced and sold. The market, as such, is neutral; market prices may serve to guide but never to compel a consumer to choose one commod­ity or service above any other. Nor does the market distinguish among consumers or discriminate against one as compared to an­other. As far as the market is con­cerned, the government is just an­other consumer bidding for the available supplies of scarce goods and services.

The government, of course, would be expected to police the market to see that honesty pre­vails among buyers and sellers and that fraud and violence are curbed. A supplier’s package ought to con­tain what his label says it does. And a buyer’s money, or whatever he brings in exchange, ought not to be counterfeit. The apprehen­sion and punishment of counter­feiters presumably is a govern­mental duty.

In the customary market transaction, each party offers some­thing the other party wants. A buyer also is a seller, and vice versa. That a buyer offers money customarily signifies that he has earned it and saved it from a prior market transaction. Sellers accept money in faith that it may be used to purchase some other useful item in turn. But a counterfeiter creates money fraudulently without bringing any useful goods or serv­ices to the market. If he can pass the counterfeit money undetected, he withdraws from the market useful goods and services but leaves in the market an extra sup­ply of money. This means that more money is chasing fewer goods and services. The level of prices may be expected to rise in such a situation.

Fluctuations and Trends

Now, a crop failure or disaster of one kind or another may result in the temporary scarcity and higher prices of certain market­able items. Or, more or less sud­den changes in consumer pref­erences may cause some prices to fall, or perhaps to rise, for a time. Prices of individual items may be expected to fluctuate to re­flect changing supply and demand in an open market. But if the cost of living soars across the board for nearly all items, and continues to rise month after month and year after year, the great prob­ability is that a master money maker (inflater) has entered the market on a major scale. And this is precisely what has happened to the cost of living in the United States in our time.

So, it is important that counter­feiters be apprehended and kept out of the market; and this task ordinarily is delegated to govern­ment. But the rub is that the Fed­eral government itself can be and has been the great inflater, with­drawing scarce goods and services from the marketplace in exchange for irresponsible promises to pay.

This is not to say that all gov­ernment purchases are inflation­ary. To the extent that the govern­ment withdraws money from tax­payers or bond buyers who have earned it in the market, the gov­ernment has more money to spend, other buyers have less, and the total quantity of money in the market remains substantially the same as before the taxes were col­lected or the money borrowed from bondholders.

But the Federal government al­so obtains purchase orders on the market by issuing bonds and sell­ing them through the Federal Re­serve banking system, the banks in turn using those bonds as legal reserves and thereby adding enor­mously to the total supply of money in the market. And this deficit financing through a frac­tional reserve central banking system is the process by which the Federal government acts as the national inflater of the currency.

The prices of pork and beef and red meat generally are high in the United States today, not because farmers are deliberately withhold­ing supplies or packers taking extra margins or distributors and retailers gouging consumers, but because the government as the leading consumer has been buying not only meat but all kinds of other goods and services, withdrawing them from the market and pumping into the economy billions upon billions of fiat money which the market has no way of distinguishing from the dollars of its honest customers.

Fiat Money Inflation

Everything the Federal govern­ment spends in the so-called “pub­lic sector” — public housing and urban renewal, Federal aid to edu­cation, farm support programs, special privilege handouts to strik­ing unioneers, foreign aid, mili­tary expenditures, moon shots, and on ad infinitum — every dollar government spends in excess of what it currently collects from tax­payers and bondholders other than banks comprises fiat money the presence of which is reflected in the so-called “private sector,” showing in the family budget as high priced bread and meat and a rising cost of living.

When the government buys guns with fiat money, that money flows through the market and eventually into the hands of house­wives who use it to bid up the prices of butter and of other con­sumer goods that go to make up the cost of living.

If the housewives of Podunk want the price of food in local grocery stores to decline, then they’ll have to vote down Podunk’s proposed new Post Office, Podunk’s Federal Urban Renewal and Pub­lic Housing projects, Podunk’s share of Federal aid for education, and every other Washington prom­ise of something for nothing. The Federal government has nothing stored away from which these handouts may be painlessly plucked. They can only be handed out insofar as they are currently withdrawn from the market. And every such withdrawal by infla­tion — by consumers who put back nothing useful in return—is bound to show up in the rising price of bread and other necessities, in the higher cost of living.

ASSOCIATED ISSUE

October 1966

ABOUT

PAUL L. POIROT

Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.

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