Mr. Fertig, syndicated newspaper columnist on economic affairs, is author of the book, Prosperity Through Freedom ( Regnery, 1961), available from the Foundation for Economic Education, Irvington, N. Y. $3.95.
"A depression will undoubtedly take place beginning in 1967," declared the speaker, a staunch libertarian who has ably defended the freedom philosophy in public forums. "This is it," he asserted. "This nation has engaged in an inflationary spree and now we must pay the piper. A crushing liquidation of debt will take place — a depression."
I had known this distinguished gentleman for several decades. He had made similar statements on many occasions during the past decade. It occurred to me that a public figure could not continue to make predictions of immediate economic disaster which do not materialize — and still retain some vestige of public confidence in his statements. This is especially true of a writer who must state his opinions each week to a large audience of newspaper or magazine readers. The record he makes cannot be erased. There it is in black and white, to be pointed at in the future. The ancients understood this problem, for it is written in the Book of Job, "Oh… that mine adversary had written a book"!
The premise of my friend, the speaker, is undoubtedly correct. We have had monetary inflation. As a result we have seen the steady upward march of prices. Inflation distorts markets, causes malinvestments, and has many other serious effects on the economy. Inflation robs millions of poor people in favor of others who are fortunate enough to protect themselves. This has been going on in the United States for many years, in varying degree.
But although the speaker’s premise (that this country has had monetary inflation) is correct, is his conclusion right? Can one logically predict the coming of a crushing depression — soon? That is the first question to be raised.
There is a second, corollary question which believers in the free-market economy must answer. If the prediction of immediate depression is wrong, precisely what is the consequence of continued inflation? For surely it cannot be maintained with any degree of consistency that inflation is bad, but that inflation has no serious consequences.
Giving a correct answer to the above question is vital to every advocate of the freedom philosophy who influences public opinion in any way. Libertarians are always subject to violent attack by modern liberals who eagerly seize upon any excuse to discredit leaders of the freedom movement. Nothing pleases them more than to point the accusing finger and say, "They are prophets of doom. Their predictions are worthless." Unfortunately, some of these accusations are made to sound plausible because there are leaders of the freedom movement who persist in making predictions which turn out to be wrong. Above all, exponents of the freedom philosophy should not appear to have a vested interest in the coming of depression.
In my opinion it is wrong to predict a shattering, economic depression in the immediate future. First of all, forecasting the economic future is not a science. It is really an art. There are too many unknown factors for predictions of the future to be scientific — including the psychology of a hundred million adults, the expectations and actions of millions of businessmen, and political forces which cannot be gauged. So a forecast is really a guess, even though it may be the guess of an informed observer.
Many other guesses about the immediate future — instead of the coming of a depression — could have just as much validity as that of the extremely pessimistic depression forecast. As a matter of fact, if I were to hazard a guess, I would say that the chances are strongly against depression beginning this coming year. I shall shortly offer some facts and ideas to support this guess.
Inflation Destroys Freedom
The danger of continued inflation — and there is a grave danger — lies in a totally different direction. The danger is not that the price of bread, of milk, of shoes, of clothing, and of everything else will plummet downward over a period of many years. What will go down is not the paper-dollar price of things. What will go down is the freedom of the individual. Inflation as a way of life leads to the loss of freedom.
That is the lesson of history. Inflation leads in the direction of dictatorship. It means reversion to some of the terrors of a by-gone age. It leads to the loss of the most precious possession which man has gained over the centuries — the right to choose freely and to live like a free man.
If this deduction is logical, shouldn’t the defenders of the freedom philosophy concentrate on explaining the dangers of inflation in these terms rather than by forecasting an unpredictable depression?
Evidence is abundant in the United States as well as in every other country in the world that the sure consequence of inflation is loss of freedom. A man’s right to earn his living according to the rules of the free market is the most basic of all freedoms. But as soon as monetary inflation causes prices to rise, governments have a tendency to control people’s lives. For instance, this is what is happening in Britain today, where wage rises have become illegal for a period of time. To a limited extent it is happening in the United States, although here the Administration tries to enforce "guidelines," which are not spelled out in the law. They are "voluntary" — but everyone knows that they are real controls because they are backed by the coercive power of government agencies. In South America, where inflation has been rapid, wage increases are subject to strict government veto.
Control of prices asked by producers is much more effective than wage controls. Politically, price control is more appealing to any Administration than wage control because there are many more wage-earners than businessmen who vote.
Still more controls are possible, such as restrictions on travel in other countries or investment of one’s savings abroad. It is even possible that the mobility of labor will be enforced by government when the effects of monetary inflation make themselves fully evident. This means that some workers might be compelled to move to other cities where labor is scarce. The government might guarantee a man a living, but it need not guarantee where he will earn that living.
It should be remembered that when a government controls a man’s living, it practically controls his life. This being so, it is plain that the danger to individual freedom is not merely a vague concept. It is a very real danger which affects the everyday life of every citizen.
It is curious how the sequence of events leading to the loss of freedom through inflation is similar in practically every country in the world. First the government, through its central bank, creates conditions of easy bank credit. Also, over a period of years government spends more than it takes in, and the resulting Federal deficit is financed by creating more paper money in the banking system. This influx of new money and credit forces prices upward. Having tried to create "prosperity" by monetary inflation, and then finding that prices rise steeply, the government usually claims that it needs controls to curb the price increases which it has caused. It needs controls, it asserts, in order to curb the inflation which it created.
This has been the case in Great Britain. Monetary expansion created conditions whereby wage rates were pushed up at the rate of 9 per cent annually for several years. Prices increased 6 per cent annually. Productivity of industry showed no increase at all. Naturally enough, British goods became less competitive in foreign markets. British consumers used their money to buy foreign goods. So Britain’s exports fell, her imports increased, and she created tremendous deficits month by month in her payments to other nations.
Dictators Gain Power
In South America and the Near East there has been runaway inflation. Prices increased in some instances as much as 90 per cent a year. Wage increases chased prices upward. Gold and foreign exchange flowed out from their central banks, as in Brazil and Argentina, to other countries of the world. A social and economic crisis loomed. The result? In each case a dictator gained power. Leaders in these countries realized that only a dictator could enforce the measures necessary after the catastrophic results of a hyper-inflationary spree.
In the United States, as I have pointed out, we also have the beginning of controls. In addition to "voluntary" wage and price controls, there are restrictions on investments of corporations abroad and the loans made by American banks abroad. Soon, it has been hinted by Washington officials, there may be more "drastic" restrictions. There may be a curb on individuals traveling abroad, and even tighter control on the economic activities of individuals and corporations in foreign countries.
Furthermore, Washington has hinted that it will convert voluntary into legal wage and price controls, to be enforced whenever officials find it necessary. All these present and potential erosions of freedom have come about as a result of inflation created by government policy.
No need to prolong the record. The evidence is clear. Controls, and possibly dictatorship, follow inflation as day follows night. This is the kernel of truth which must be stressed by libertarians.
But now to treat the point about the coming of a depression in 1967. Frankly, I do not think it is reasonable to expect this. Let us define our terms.
Depression Defined, and Current Prospects
A depression, by definition, is a severe downturn in the business cycle which lasts more than two years. It would mean perhaps 10 to 15 million people unemployed, the index of production of factories and mines would fall by about a third. Commercial banks would try to become more liquid and call business and personal loans — the result being the liquidation of $30to $40 billion of bank deposits. Industrial activity in the United States would slowly grind to a halt.
The very statement of the effects of a deflationary spiral would suggest that no administration could survive it, and the country would be in danger of a social upheaval. Political pressures being what they are, we can assume that the administration in power would take steps to prevent such a. cataclysm if it could. It would move to stop the downward spiral and prevent the shattering experience of a deep depression providing it had any power to do so.
Note that we are not discussing here a recession that would carry business down only 5 or 10 per cent. It is ridiculous to think that any government can prevent a cyclical downturn, called a recession. Governments are always late in realizing that the peak of an expansion has been reached and that a readjustment is already taking place. We are discussing a depression — a series of recessions which feed on themselves and carry a country down to the depths.
At this juncture in history I believe the Federal government has the power to prevent economic catastrophe, even though it cannot prevent a recession. Washington possesses vast powers and techniques of manipulation of the economy which it never had in the past. These would undoubtedly be used to the limit to prevent the nation going on the rocks.
One powerful economic weapon in the hands of the government is spending for the war in Vietnam. If war in Vietnam continues, or is expanded, it will make demands upon all the economic resources of the country. Depressions never occur in wartime among modern nations. If, on the other hand, there should be peace in Vietnam, Washington has blueprints for turning the Federal spending stream toward domestic uses. It has plans, if you will, for further inflation.
Will Controls Be Used by the Government?
The question in the minds of many is: "Can the government continue to use the weapon of inflation to prevent depression? Does it have the power to turn the depression around by monetary manipulation?" There are reasons for believing that at this particular time it can do so — providing it is willing to use totalitarian devices to control people’s actions.
This is an unhappy prospect. But it is a realistic appraisal of the situation.
It must be remembered that we no longer have an automatically functioning economy. To a great extent, especially in the monetary field, it is a managed economy. As a practical matter, we are no longer on the gold standard. When we inflate our currency, gold does not automatically flow out and cause the government to reverse its course. Instead, this government, like every other in the world today, tends to employ strict controls in order to avoid the market consequences of its inflationary actions.
Such controls can be effective in papering over deficiencies for a long, long time. In many countries dictators have proved that they can buy time by monetary and market controls. Hjalmar Schacht did it for Germany under Hitler for many years. To be sure, there has to be a day of reckoning. But the point is, that day can be postponed for years.
The theory has been advanced that our government may be powerless to prevent a depression because of international pressure on the dollar. Since no modern nation wants to lose all of its gold, they say, we would be forced to deflate. Here again, there is little doubt that the U.S. Government would embargo the shipment of gold in addition to placing controls on the outflow of dollars. In other words, in order to prevent a depression it would, so to speak, erect a Chinese wall around the U.S. All of this would be in violation of our stated principles and objectives, but there is little doubt that these measures would be taken.
The history of inflation is that it goes forward three steps and back one. We are now in process of retracing that one step. The fact that authorities in Washington did not wait for signs of runaway inflation, the fact that they moved (albeit slowly) toward curbing monetary expansion before prices began to rise at a steep rate — these are small pieces of evidence that the inflation can still be brought under some control. Thus, it would seem there is a good chance that the present "slowdown" — "leveling off" or "recession," call it what you will —need not necessarily turn into a deep depression.
Whether this conclusion is correct or not remains to be seen. Actually, it is not pertinent to my main argument. The main point is that whether a depression arrives now or ten years from now is unpredictable. What is predictable is that inflation undermines the moral foundations of the country because it robs some to enrich others. It undermines the economic foundations of the country, too. John Maynard Keynes said, "Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. Lenin was certainly right. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which one man in a ‘million is able to diagnose."
What is predictable, beyond doubt, is that inflation leads to more and more government controls and to less of the individual’s precious freedom. This is the nexus that must be stressed by advocates of the freedom philosophy — not the coming of a depression tomorrow or next year.
The solid foundations of liberty must rest upon individual character; which is also the only sure guaranty for social security and national progress. John Stuart Mill truly observes that "even despotism does not produce its worst effects so long as individuality exists under it; and whatever crushes individuality is despotism, by whatever name it be called."
SAMUEL SMILES, Self-Help (1869)