The American people finally know the truth about Watergate: it didn’t stop inflation. But there persists some honest confusion in Washington, if not elsewhere, as to the cause of high prices and how to combat them.
It seemed for a time that the culprit might be General Motors, the rumor being that prices of new models would rise by as much as $500. A bit later, New York subway fares were said to be the key: any increase over the prevailing 35 cents would be inflationary. Meanwhile, others allege that higher wages demanded by labor unions have been chiefly responsible for rising prices. And the Office of Communication of the U. S. Department of Agriculture explains that food prices really haven’t gone up, comparatively speaking. But if it seems that they have, it could be attributed to the fact that 1973 wasn’t a normal beef year, that hog and poultry producers lowered their production plans when costs rose; that worldwide drought and affluence drained American stocks of wheat, corn, soybeans and the like; and that more Americans are dining out instead of home cooking.
Ask any youngster at his lemonade stand why he doesn’t diversify, and he’ll promptly give you economics in one lesson: "Well, mister, it’s a lot more fun to make mud pies, but there’s just no market for them."
How come we grow up forgetting what every youngster knows instinctively? Would you believe that some two-fifths of the time and effort and scarce resources of we the adults of America are going into mud pies! Roughly 40 per cent of our factors of production are being diverted to purposes for which "there’s just no market."
So what have mud pies to do with inflation? The answer is: "Almost everything." But let’s take it step by step.
And our first step is to get off the back of General Motors, or at least off the very silly idea that the most efficient producers of the goods and services we want to buy are the ones who are causing high prices. It ought to be clear that the people who are not producing and selling cars are more likely the cause of high priced cars than are the largest and most efficient producers. By and large, most of the customers for cars are persons who at least think their time and property is better invested at something other than auto production. Are the customers then to be blamed for high priced cars?
Are Customers at Fault?
Well, don’t let the customers off scot-free. No one would be mad at a little old mud pie maker if he doubled his price. But if some customer willingly paid that price, who should be held responsible? If General Motors hikes its price $500 and finds no customers, does General Motors cause inflation?
There may be chapters in the history and performance of General Motors worthy of criticism. If so, let the critic document his case. But let us not believe that browbeating producers of the goods and services customers want is a reasonable way to combat inflation.
General Motors is not the culprit. And for the same reason, neither do the unionized laborers of America possess direct powers of inflation or deflation. The person who demands a wage higher than anyone is willing to pay may find himself unemployed, which is indeed depressing. But if there’s no market for his kind of mud pie, how can the result be inflationary?
Well, there is a way. If organized labor can marshall votes enough to badger Congress to appropriate the funds and create the new money needed to pay for another batch of mud pies (in this case, pay men who are out on strike) that, in effect, makes a market for an otherwise unwanted item; American citizens lose their right of refusal to buy mud pies. This governmental action withdraws scarce resources from the market place, just as if customers had willingly paid men to produce mud pies or to idle themselves on strike. So, to the extent that unions or any other political pressure groups are permitted to exercise the governmental power to force customers to buy unwanted mud pies (the process is to print new money to cover the subsidy), that is inflation.
Subsidies Upset the Market
As for subway fares, it is not the 35 cents paid by riders that is inflationary; it is the balance of the cost which is covered by subsidy, which is in turn translated through a Federal deficit into additional fiat money. It’s the added supply of fiat money that spells inflation, and the money is printed in order to withdraw from the market place goods or services customers demand if "someone else" pays for them.
The high prices housewives are willing to pay for beef, sugar, and other foods are not inflationary, nor is drought or blight in the corn belt inflationary. These things, of themselves, do not add to the supply of fiat money. But if the Federal government lends (gives) Russia dollars with which to draw foodstuffs from the market, the great likelihood is that those will be extra dollars printed; and that is inflationary. So are the new dollars printed to cover farm subsidy and school lunch and food stamp and other welfare programs.
If taxpayers were happy and willing to pay for mud pies, and if Congress resolutely abstained from all deficit spending and refused to authorize the printing of fiat money, the problem of inflation would be ended.
Ah, yes, but what would the poor people then do for money? Ask the young fellow at the lemonade stand, and he’ll tell you: all you have to do is earn it; offer a service or supply a good that customers want to buy. And what precisely would all these traders use for money? Why, anything they please. Whatever they think might best serve as a medium of exchange. Perhaps they’d choose gold, as free men customarily have chosen down through the ages whenever the choice was theirs.
To be sure, other commodities have also been used as money —cattle, wampum, cigarettes, gourds — some things that seem very strange to us. But the nearest thing to mud pies that men ever have tried as money are the little green scraps of paper redeemable in nothing.
If our lemonade salesman could get Congress to declare that mud pies are legal tender, he could do a land-office business. In addition to commandeering 40 per cent of the time and effort of adults, he could have all the youngsters "making money" too!