All Commentary
Saturday, October 1, 1960

A Reviewer’s Notebook – 1960/10


For years Henry Hazlitt, emulat­ing the Dutch boy of the fable, has been trying to plug the ever-widen­ing hole in the dike that has been holding back the waters of infla­tion. He has not only had to thrust a finger into the hole; he has, as is evident from his What You Should Know About Inflation (D. Van Nostrand, 151 pages, $3.50), felt compelled to get into the hole vir­tually up to his neck.

What You Should Know About Inflation is good, sober stuff, much of it as incontrovertible as New­ton‘s Law of Gravity. Mr. Hazlitt is strong on precise definitions, but when a definition won’t do by it­self he knows how to assemble sta­tistics in the best modern manner to show the relationships and operational characteristics which make a distinction pertinent.

Dogmatically, he maintains that inflation is due to one thing and one thing alone: it results from an undue expansion of the money supply (or, in modern usage, of paper and bank credit). The in­crease in the money supply is what causes a rise in prices and in wages as the extra cash in pockets and bank accounts provokes a spirited bidding for existing goods and services. The idea that inflation is a result of a “cost-push” is un­sound, for there can be no cost-push if the credit does not exist to support it. A rise in wages or in prices without an antecedent or supporting increase in the money supply would simply serve to cut off business and to provoke un­employment.

Mr. Hazlitt presents this as theory and as logic. But, lest the theory and logic be suspect, he also includes an eye-opening table. In 1939 our money supply (floating cash and bank credit) amounted to $64.7 billion; in 1959 this figure had jumped to $251.6 billion—an increase of 289 per cent. During the same twenty-year period there was a wholesale price of 138 per cent. The reason why the price rise didn’t gallop out of sight was due to the ability of the American in­dustrialist and businessman to ex­pand production and to make tech­nological innovations. The rate of industrial production during the two decades of our inflation tripled as the money supply quadrupled. The difference between the rates of expansion is what accounts for the price rise.

Does Inflation Increase Production?

Mr. Hazlitt is quite aware that Professor Seymour Harris, among others, thinks the inflation caused the increase in production, and was therefore a cheap price to pay for a more fruitful economic system. Since it is statistically demonstrable that both the infla­tion and the increased productivity occurred within the same time span, there might be reason to think Harris has logic on his side. But some of Mr. Hazlitt’s tables would tend to dispute the point.

In 1944 the federal government fed $95 billion into the economy for purposes generally related to fighting the war. The inflation rep­resented by federal borrowing cer­tainly “caused” the war production. But in 1947, when the federal gov­ernment was spending only $39 bil­lion—a drop of $56 billion within three years—there was a substan­tial increase in employment, wages, and prices. Predictions that there would be eight million unemployed if the federal government stopped “supporting” the economy by spending at wartime levels simply failed to materialize. In the light of what has happened to produc­tion in periods of contraction in federal outlays, what becomes of the Seymour Harris theory that inflation is necessary to spur a lagging economy?

To make the question even more relevant, Mr. Hazlitt reminds us—in another statistical display—that the inflationary pump-prim­ing of the nineteen thirties failed utterly to mop up the huge pools of unemployment. One reason why “easy money” fails to bail out an economy is that businessmen, in times of inflation, have to borrow more money to sustain the same volume of business that they are doing already. The dollar figures attached to goods and services change, but the realities underly­ing the figures may not jump suf­ficiently to give the economy the needed spur.

Some Fallacies Exploded

Having established the broad outlines of his primer, Mr. Hazlitt turns to some specific fallacies of inflationary thinkers. First, there is the theory, advocated by J. Ken­neth Galbraith, that the cost-push troubles of an inflationary period should be attacked by “selective” price fixing in industries like steel and automobiles. But Mr. Hazlitt observes that selective price and wage controls add to shortages of the very things whose production the government wishes to encour­age. Profit margins in controlled sectors lag behind the margins in uncontrolled “luxury” production. The result is a distortion of invest­ment. To get things in hand again, the government is forced to extend its areas of control—and we are on our way to a more or less total­ly managed economy.

Well, why not? Again Mr. Haz­litt has the appropriate answer: In an economy in which there are some 9 million different prices, and some 40 trillion interrelationships of prices, total management would lead to fearful messes. Nobody knows enough to set 9 million dif­ferent prices, or even a small pro­portion thereof. And even if it were possible to “administer” the totality of an economy with eco­nomic wisdom, the price in compul­sion would lead to a serious de­terioration in the moral character of the citizens.

Another specific fallacy which Mr. Hazlitt attacks is the theory, set forth on frequent occasions by the late Sumner Slichter of Har­vard, that a little bit of inflation is all right. Professor Slichter talked in terms of a controlled 2 or 3 per cent price expansion dur­ing a given year. But Mr. Hazlitt notes that a promised 3 per cent rise would cause such spirited bid­ding for goods and services that the inflation would soon outpace the intentions of the controllers. Labor unions would add 3 per cent to the demands they already had in mind; industrialists, racing to beat the price rise, would over­stock on inventories.

In other words, if you wish suc­cessfully to inflate by a small de­gree, you must hide your intention—i.e., you must lie to the people. Thus Sir Stafford Cripps denied at least a dozen times in 1948 and 1949 that England intended to de­value the pound. He had to do this to forestall “sure thing” gambling in the pound. When the British government finally set a price for the pound, it made Sir Stafford a twelve-times liar. But Sir Staf­ford had only done what any states­man bent on “controlling” the price level must do.

Gold Standard—Gold Morality

To protect the people against the fraudulent expropriations caused by inflation, Mr. Hazlitt would like to see a return to the gold stand­ard, which used to act as an auto­matic check against the vote-buy­ing proclivities of politicians. Much of Mr. Hazlitt’s discussion of ways and means of resuming specie payments for paper money is tech­nical. But the best part of it is moral; indeed, the argument sug­gests that if one is to have a gold standard, one must have a gold morality to go with it. To maintain a gold standard even for the short run requires, first of all, that the conversion rate be set at the natu­ral market level. But to keep it go­ing in relative perpetuity demands congruous policies of a fundamen­tally moral nature. The government must cease to regard the people’s income as its own to be dribbled back to groups in conformance with political pressures. It must return to budgets that remain reasonably in balance. There must be lower taxes, less governmental competi­tion with the exercise of private voluntary social power, and an end to the use of the banking sys­tem to buy and peg U.S. bonds at a fixed rate. The legal reserve re­quirements of banks must be in­creased from 25 per cent to, say, 40 per cent, to make inflationary bor­rowing impossible, arid the Federal Reserve must not use the redis­count rate to promote an artificial easy money atmosphere. All of this would necessarily depend on a re­vival of integrity that would make any individual or group ashamed of “gimme” raids on the federal treasury.

Given present standards of pub­lic morality, it is difficult to believe that we are likely to return to the gold standard in the forseeable future. But that does not mean that Mr. Hazlitt is wrong in either his economics or his morality.

A Short History of Money by George Winder

(London: Newman Neame Ltd. and the In­stitute of Economic Affairs. 188 pp. 15 shillings.)

Reviewed by W. H. Peterson

To thalate Irving Fisher of Yale it was for great numbers of the people an “illusion.” To Bon Franklin of Poor Richard’s Alma­nac it was “time.” And to St. Paul its love was “the root of all evil.”

“It” is money, which most of us work hard to come by. Money—intimate, necessary, ubiquitous, yet so little understood, even, per­mit me to say, by bankers and economists. Consult the textbooks on the subject, for example, and you’ll find the term somewhat cir­cuitously defined usually in terms of functions. Money, we’re told, is a medium of exchange, a standard of value, a store of value, and a standard for deferred payments. Money is, in other words, what money does. Consult the textbooks on inflation and the circumlocution gets even more roundabout.

But—hang it all—what is money? What is inflation? What forces create money? What forces—in terms of inflation—destroy money? Is it true that banks can manufacture money out of thin air? If so, how? And, from the long-run viewpoint of society, how good is bank money? Can inflation be controlled? Better, can inflation be stopped?

Some very intelligent answers can be found in this brief work on money by George Winder, an Eng­lish economist and associate of London‘s Institute of Economic Affairs. Mr. Winder’s approach is refreshingly straightforward, sound, and not evasive or esoteric. His grasp of the subject is thor­ough. His knowledge of history is impressive.

This is not to say the Winder book is on a par with Walter Bage­hot’s Lombard Street (1873) or Ludwig von Mises’ The Theory of Money and Credit (1912). It is pos­sible to quibble with some of Mr. Winder’s discussions—for ex­ample, with his discussion of the quantity theory of money. Still, for what Mr. Winder sets out to do, his book is a contribution, and I hope an American publisher will bring out an edition here.

When Mr. Winder sets out to describe the role of money in our society, by way of illustration, he succeeds admirably. He sees that ours is a money economy. Money is the lifeblood of our complicated system of exchanges. It makes buying and selling possible. It per­mits division of labor while bind­ing society together. It fosters in­ternational trade.

Yet money is a two-edged sword. While it can create, it also can destroy. Inflation is money gone wrong, a once-healthy tissue turned, at its worst, into a fester­ing cancer. And it is to Mr. Winder’s credit that he shows how deposit money—i.e. bank credit—especially when hooked to government deficit finance, becomes an enormous engine of inflation. The author scores again when he shows how inflation contributes to the business cycle, exaggerating prof it margins and producing warpages between prices and costs. Perhaps the most significant item of cost is wages. Mr. Winder says rigid and excessive wage rates lead to unemployment. This unem­ployment, in turn, induces govern­ments to wash out the effects of uneconomical wage rates with in­flation. This is not infrequently done under the Keynesian aegis of “spending ourselves into prosper­ity.”

The author takes to task those who say that deficit finance and consequent inflation is inevitable in financing war. Nonsense, says Mr. Winder: There is no reason why a government should not fight a war without inflation. Even Na­poleon managed to carry out his vast military adventures without resorting to the printing press. His money was gold, and he stuck to it. To be sure, this called for very steep taxation. But it can be done.

Sound money is the basis of a sound civilization, says George Winder. Or as Graham Hutton quotes Keynes (the saner Keynes of 1919) in the foreword:

“There is no subtler, nor surer, means of overturning the existingbasis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diag­nose.”

The Movement of World Revolution by Christopher Dawson.

(Sheed & Ward, New York. 179 pp. $3.00)

Reviewed by E. A. O.

Dawson has explored our Euro­pean heritage in a dozen or so vol­umes. Here, he issues a call to action: “Return to the tradition on which Europe was founded and set about the immense task of the restoration of Christian culture.” For although Asiatic and African nations may be led by anti-West­erners, this leadership undermines the traditional Oriental cultures in favor of Western innovations. What emerges is a cosmopolitan society which is Western, at least in its devotion to such items as science, technology, mass educa­tion, and mass democracy. The real threat to the West, therefore, is not external; it is the threat of in­ternal disintegration. This will continue until our culture regains contact with the two great tradi­tions, Christianity and humanism, which shaped it during the cen­turies between the fall of Rome and the dawn of the modern pe­riod. 


  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.