Stopping Inflation
By OSCAR R. 110BSON
pR ICES, as everyone knows, are going up hand over fist. Almost every day increases in some article or other of personal or household consumption are reported. In the last two or three weeks price-rises in—to take a more or less random selection—tea, carpets, cotton fabrics, underwear, elec- tric irons, newspapers, motor cars have been announced. What the ordinary man or woman wants to know about this great and disturbing movement of values is, first, what caused it and, secondly, how far it is going to go. In this article I am proposing to have a shot at -answering these two questions, of which, of course, the first is much easier than the second. The obvious answer to the question of what caused the rise in prices is "Korea." and that answer is most of the truth but not quite the whole of it.
It was certainly the Communist aggression in Korea which touched off the feverish competition amongst Governments and private traders for the basic raw materials—copper, zinc, tin, tungsten and other metals, wool, cotton and other textile fibres, rubber, shellac, sulphur and so on—which are needed for the munitions of war or the equipment of fighting men. Neverthe- less, but for the presence of three other conditions, the rise in commodity prices would not have been anything like as sensa- tional as it was. The first point is that American industry was already booming and prices were already rising sharply when Korea began. The second is that the American Government's stockpiling of rubber, tin, wool and other commodities was con- tinued according to plan in entire disregard of its effect on prices in the existing state of thc markets. In the conditions prevailing this obstinate adherence to stockpiling programmes was a most unintelligent proceeding ; it has now allast been checked—but he damage has been done. The third, and ultimately perhaps most fundamental, condition favouring an unrestrained inflation of commodity prices was the monetary policy pursued by the United States Government and, though this is of much smaller importance, by the British and other Governments as well. In conditions of high boom and soaring prices the Governments have continued to behave as though deep depression and rapidly mounting unemployment still ruled, and as though cheap money was as appropriate as it was in the 'thirties. The United States Treasury, in particular, has, in effect, gone on with the Rooseveltian policy of priming the pump," even though the pump was pumping so hard that it was in danger of flying to pieces. It is one of the biggest pieces of monetary nonsense known to history—and even now one cannot be sure that it is finished.
A few weeks ago it seemed that the months-old battle between the Treasury and the Federal Reserve Board on monetary policy had ended in victory for the latter. It was announced that "complete agreement" had been reached between the two bodies • on an arrangement under which the F.R.B. would stop cashing in long-term 21-per-cent. Government bonds for the banks at par, thus enabling them to extend more and more credit to industry and the community at large. But hard on the heels of this announcement came another one to the effect that Mr. McCabe. Chairman of the Federal Reserve Board and protagonist of the "dearer money" school, had resigned and had been succeeded by Mr. McChesney Martin of the Treasury, well known as an "Administration man."
At present, therefore, we don't quite know where American monetary policy stands. Yet it is very important to know, for upon American monetary policy to a large extent depends the answer to my second question: "How far is the rise in prices destined to go? " So far—it is well to be clear on the point— I have been talking mainly about that small group of wholesale prices which relates to primary raw materials like those men- tioned above. The rise in this group of materials since the Korea trouble began averages anything from 30 to 80 per cent. accord- ing to the commodities you select, and in particular according to. whether or not you include grains, in which the rise has hitherto been comparatively small. Now the rise in these material prices has for the time being at least ended. It was brought to an end in February by the suspension of American stockpiling and by such psychological influences as the American price-freezing order and the organisation of the international commodity committees under the International Materials Conference.
Retail prices—shop prices—on the other hand have so far risen on the average very little—despite the publicity given to the rises that have taken place. The British official index of retail prices has in fact risen less than 4 per cent. since Korea and less than 6 per cent. since the devaluation of sterling in September, 1949. Admittedly the official index, reflecting as it does so largely subsidised foodstuffs and utility material, is not a fair measure of the costs which any family above the poorest has to meet. Even so, it is true that living costs have so far risen in very much smaller proportion than the wholesale prices we have been talking about. The reason for that is. of course, that the processes of production occupy an extended period. The wool in the suit you are buying today probably left the sheep's back some eighteen months ago—i.e., just about the time of sterling devaluation. The " lag " in the adjustment of retail to wholesale prices due to this cause is frequently underestimated.
even by economists and statisticians. But in the end, of course, the adjustment must take place. In the end retail prices must adjust themselves approximately to the level of wholesale prices. What sort of prospect does that hold out for the shopping price-list in, say, a year or eighteen months' time ? Well, of course, a good deal depends upon what happens to wholesale prices from now on. The best thing which could happen would be a good shake-out which would leave the final level a good deal lower than it is now, even though substantially above the pre-Korea level. Only concerted international monetary action —dearer money and tighter credit control—could be relied on to bring about such a result. That is why the attitude of the American Government on money is of such cardinal importance. Failing any drastic monetary action, material prices may never- theless fall back moderately, as indeed they are already showing signs of doing. The danger will be, however, if the international political strain continues, that such a reaction will be only temporary.
On the assumption, however, that there is such a reaction, say by 10 per cent. from the peak level, and that it is held, then we should have world basic prices establishing themselves at, say, about 20 per cent. above their pre-Korea level and about 30 per cent. above their level of January, 1950. On that basis I should think that the further consequential rise in sterling retail prices is not likely to be very much less than 20 per cent. by the end of 1952.
The process of adjustment of wages and other incomes to a new price-level so much higher is, in the light of past experience, likely to prove very troublesome. Nevertheless, let us avoid, if we can, becoming so obsessed with the difficulties of the task that we try, by all the shifts and stratagems we can think of, to dodge performing it. The danger is that, as in the war, we shall seek to suppress and darn back inflation instead of acknowledging it as an inescapable fact and acting accordingly. We know what the war-time policy of damming and suppression has led us to. We know what its instruments are: maximum prices, allocations, rationings, subsidies, the " cooking " of index numbers, and we know that together they spell frustration and inefficiency. It would be visionary to suppose that we can altogether avoid a recourse to these direct controls again, but if we want to last out the course of the "cold war" we must resort to them as sparingly as possible.
We must rely mainly on a strong fiscal and monetary control, allowing demand and supply and the price mechanism to work fairly freely within it. That means a genuinely balanced budget. That is to say, tax and other revenue must cover not only current outgoings but such portion of the national capital programme as is not covered by savings. But it also means a real drive for national economy. Without that it is not at all certain that the budget can be genuinely balanced in the sense indicated. There must be economy not only in current administrative expenditure on, for example, the health services, but in capital expenditure on, for example, houses. One essential way of bringing that about is to stop lending the local authorities money at absurdly low rates of interest. This is a standing encouragement to them to be wasteful in their expenditure. Measured against the exigencies of our economic situation, our housing policy has, without doubt, been extravagant. The scale of equipment of council houses, the inhibitions against building smaller houses and against building houses in terraces (what has been called the "semi-detached mentality" of officialdom) are evidence of that. In the public as in the private " sector " of the economy low rates of interest encourage wasteful and unnecessary capital projects. That is why dearer money is an essential part of the defence against inflation.
Another essential part, to my mind, is the scaling down and gradual elimination of the Exchequer cost-of-living subsidies. This is in flat contradiction to the views of the trades unions, whose only idea of how to deal with rising prices seems to be first to order them not to rise and secondly to demand more subsidies if they do. Subsidies, however, are a wasteful method of meeting the situation. It is not only that people tend to be extravagant with things they can get at artificially low prices getting essentials at artificially low prices enables many people to spend surplus income on things which the community cannot afford to let them have.
Of coursc, if the subsidies are reduced, the cost of living will lase even more than it otherwise would. This means that wages will tend to rise still more, and it will, no doubt, become neces- sary to spend more on assistance to pensioners and married couples with young families and other economically weak sections of the community. It would, however, I believe makci for national prosperity to reduce subsidies, even if a substantial proportion of the saving to the Exchequer had to be paid out simultaneously in such assistance—in subsidies to people instead of subsidies on things. Modern surgical practice. I understand. is to get patients on their legs again within a few days of their leaving the operating-table. What I am arguing for is an economic treatment in our present emergency in some sort analogous to that. Otherwise we risk the result which the surgeons seek to avoid—debilitating weakness which in the end may leave us bedridden.
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