Our Forty-Year Inflation

Henry Hazlitt, noted economist, author, editor, reviewer and columnist, is well known to readers of the New York Times, Newsweek, The Freeman, Barron’s, Human Events and many others. Best known of his books are Economics in One Lesson, The Failure of the "New Economics," The Foundations of Morality, and What You Should Know About Inflation.

A casual reader of the newspapers and of our weekly periodicals might be excused for getting the impression that our American inflation is something that suddenly broke out in the last two or three years. Indeed, most of the editors of these periodicals seem themselves to have that impression. When told that our inflation has been going on for some forty years, their response is usually one of incredulity.

A large number of them do recognize that our inflation is at least nine or ten years old. They could hardly help doing so, because the official figures issued each month of wholesale and consumer prices are stated as a percentage of prices in 1967. Thus the consumer price index for June of 1976 was 170.1. That was 0.5 per cent higher than in the preceding month and 5.9 per cent higher than in June of the year before. This means that consumer prices were 70 per cent higher than in 1967, a shocking increase for a nine-year period. The annual increases in consumer prices ranged from 3.38 per cent between 1971 and 1972 to more than 11 per cent between 1973 and 1974. The overall tendency for the period was for an accelerating rate. The purchasing power of the dollar at the end of the period was equivalent to only about 57 cents compared with just nine years before.

Starting in 1933

But the inflation may be dated from as early as 1933. It was in March of that year that the United States went off the gold standard. And it was in January of 1934 that the new irredeemable dollar was devalued to 59.06 per cent of the weight in gold into which it had previously been convertible. By 1934, the average of wholesale prices had increased 14 per cent over 1933; and by 1937, 31 per cent.

But consumer prices in 1933 were almost 25 per cent below those of 1929. Nearly everybody at the time wanted to see them restored toward that level. So it may be regarded as unfair to begin our inflationary count with that year. Yet even when we turn to a table beginning in 1940, we find that consumer prices as of 1976 are 314 per cent higher than then, and that the 1976 dollar has a purchasing power of only 24 cents compared with the 1940 dollar.

These results are presented herewith for each year in two tables and three charts. I am indebted to the American Institute for Economic Research at Great Barrington, Massachusetts for compiling the tables and drawing the charts at my request.

The figures tell their own graphic story, but there are one or two details that deserve special notice. In the thirty-six-year period the nation’s money stock has increased about thirteen times, yet consumer prices have increased only a little more than four times. Even in the last nine of those years the money stock increased 119 per cent and consumer prices only 74 per cent. This is not what the crude quantity theory of money would have predicted, but there are three broad explanations:

Measurement Is Arbitrary

First, measuring the increase in the stock of money and credit is to some extent an arbitrary procedure. Some monetary economists prefer to measure it in terms of what is called M-1. This is the amount of currency outside the banks plus demand deposits of commercial banks. The accompanying tables measure the money stock in terms of M-2, which is the amount of currency outside the banks plus both the demand and time deposits of commercial banks. M-1, in other words, measures merely the more active media of purchase, while M-2 includes some of the less active. I have used it because most individuals and corporations who hold time deposits tend to think of them as ready cash when they are considering what purchases they can afford to make in the immediate or near future. But in recent years time deposits have grown at a much faster rate than demand deposits. So if one uses M-2 as one’s measuring stick, one gets a much faster rate of increase in the monetary stock than by using M-1. (The latter has increased only eight times since 1940.)

Rising Productivity

Second, one very important reason why prices have not gone up as fast as the monetary stock is that both overall production and production per capita have risen steadily almost year by year. With the constant increase in capital investment—in the number, quality, and efficiency of machines—both overall productivity and productivity per worker have risen, which means that real costs of production have gone down.

Delayed Reactions

The third explanation has to do with subjective reactions to increases in the money stock. Statistical comparisons in numerous countries and inflations have shown that, when an inflation is in its early stages, or has been comparatively mild, prices tend not to rise as fast as the money stock is increased. The fundamental reason is that most people regard the inflation as an accidental or unplanned occurrence not likely to be continued or repeated. When an inflation is continued or accelerated, however, this opinion can change, and change suddenly and dramatically. The result is that prices start to rise much faster than the stock of money is increased. The great danger today is that what has been happening from 1939 to 1976—to prices as compared with the rate of money issue—may have given a false sense of security to our official monetary managers as well as to most commentators in the press. The enormous increase in the American money stock over the past thirty-five to forty years must be regarded as a potential time bomb. It is too late for continued complacency.  

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