The American Scene; Inflated Dollar

Good morning, Mr. Jules Anger for the American Scene. Our subject this morning is inflation, a term that has passed from the textbook and the classroom to the front pages of our newspapers. Inflation has become a vital issue in political campaigns. Today we discover that it's one of the determinants in the steel strike. The Gallup poll is just to determine that inflation is possibly the second most important issue on the American mind. Certainly this requires amplification in a great variety of ways. And I guess this morning to talk with us about inflation are two Dr. Barrel Sprinkle, who is the chief economist of the Harris Bank here in Chicago and professor Harry Henning, who is professor of economics and the Department of Business and Economics at the University of Chicago. Forgive me, the Illinois Institute of Technology. I wonder gentlemen, this morning if we might start simply by my throwing it fairly open, what particularly does inflation mean for us as an issue today. We hear so much about it and yet for so many of

us it's a can phrase or a bugaboo phrase. It's one which is very frightening and rather hazy. I wonder could you make the issues perhaps a little clearer for Dr. Sprint? Well most economists and I believe Lehman would define inflation as a rise in the general price level. This means that if it goes up a little we've had a little inflation. If it goes up a lot we've had a lot of inflation. One of the real difficulties and the minds of many people the day I believe is a confusion between a rise in the cost of living and a rise in the standard of living. We have probably had some inflation in recent years but it's been quite mild. Most of the increases in our personal budgets has been due to the fact that we're living better. We have better homes, better food, better clothing, more children, better schools and so forth. Some would say the problem is not so much the high cost of living as it is

the cost of high living. Well that's not all to get that clear to me. I'd like to go back to a phrase you use at the very beginning, an increase in price level. You mean simply the prices get higher and that's correct. This is inflation. This is inflation in the meaningful sense of the term. Now perhaps Dr. Henning would care to add something to that. I think I'd agree with that. All we really mean by inflation is that there's been a general rise in prices. That is to say the value of your dollar has gone down. Your buy less with a dollar because prices in general have gone up. That's all we mean by inflation but as Dr. Sprinkle pointed out really two things have been happening in the last two decades and over a longer period than that for that matter. We've been having inflation which is to say a fall in the value of the dollar but let's not get too hysterical about that. We've been having something else too. We've been having in spite of the inflation a rising standard of living.

This is just another way of saying that while prices have gone up that is to say the value of your dollar has gone down. People in general have a lot more dollars. That is wages and other incomes in general have been going up at a faster rate than the prices of consumers goods. So while I agree with what you said in your introductory remarks that we have a real problem here I'm not sure that it's something that we need to get too hysterical about but the plain and simple truth is in the last two decades or so we've had no disaster associated with inflation. We've been having rising prices a fall in the value of the dollar but associated with that we've been having the real thing the thing we really want namely a rising standard of living. Put some perspective on how much inflation we have had. We have probably two measures that are most widely used. One is the so -called consumers price index sometimes referred to as the cost of living and the other the wholesale price index.

Since 1952 we have suffered an average annual rate of rise in the consumer price index but about 1 .3 percent a year wholesale prices have gone up about eight tenths of 1 percent. That's too much we would prefer stability but it's fairly good compared to many periods in our history for example we had a lot of inflation from the end of the war in 1945 until 1952. During that period the consumer price index rose about 5 percent a year. The wholesale price index was up almost eight percent a year. Over the last half century we find that consumer prices on average have risen about three percent a year whereas wholesale prices have risen about two and a quarter percent a year. So whether we make either a short range or a long range comparison we have done a fairly good job in

holding prices stable in recent years. If the fact that prices have not been stable has not affected the rise in standard of living which you say is what we want. Why do we even want stability? Why should this even be meaningful? Why stability? Well there is at least one good reason for wanting stability in the price level. Inflation in my opinion is a very inequitable means of redistributing wealth. Certain people get hurt in inflation including teachers and others on fixed incomes whereas other types of individuals that have variable incomes tend to gain. I think it's extremely unfair to penalize the pensioners those in their old age and others unable to benefit from rising incomes with inflation. Secondly there is no evidence that I have seen and there have been several studies made on this that it's necessary to have inflation to get economic growth.

There have been periods in our history when we've had a great deal of inflation when we had some economic growth other periods when we had economic growth without inflation. There is no consistent relation so that if we can have higher standards of living and stable prices as I believe is possible then that should be our objective. I think another way of emphasizing that is to say that we've been remarkably successful with reference to this problem of stability of prices. It seems to me we've been remarkably successful since 1951 or 1952. The inflation that sprinkled spoke about comes to something that you say 1 .3 % a year. That's a very high degree of success even for the American economy. If it should continue that way and answer to your question if inflation over the year should be limited to that average I would say that in the future we'd be doing very very well. I would hope that we do better. I would hope that it isn't even

1%. I would hope that we wouldn't have creeping inflation but I would be very very happy to settle for what we've had in the last few years. Wouldn't you? Yes particularly if you recognize that our indices are clearly biased upward. They show more inflation than we have actually suffered. Unfortunately we don't know how much they're biased. There are several reasons for this bias that one most important one is that under present techniques it's impossible to adequately adjust for improvements in the quality of goods. Let me give a simple example. Suppose automobile tires suddenly will run twice as many miles as before. At the same time the price of an automobile tire goes up 50%. If we reflect the 50 % rise in price in the index but don't adjust for the fact that it goes twice as far today

we will show inflation when actually the cost per mile has declined. There are many cases in our consumer goods, in our clothing, even in our food. Work quality has improved substantially and it has not been reflected in the index. Let me say it this way. If the bias is as much as one half to one percent a year and it doesn't stretch my imagination to believe this is possible then I would argue we have suffered no inflation on average in the past eight years. We've done very well. I think we're both an agreement on that. Why worry about this problem? Why worry? I think we have some feeling of anxiety because we have no assurance that this sort of thing is going to last. We may have inflation in the near future. As a matter of fact there are many people. There are some professional economists of high -standing who have in a fact advocated it. True what they advocated is not the extreme

fantastic inflation that some people have in mind. They really advocated something like what they call creeping inflation meaning an inflation let's say that's restricted to something like 3 % a year and they have advocated mainly although perhaps I shouldn't go into this into too great detail. They've advocated it mainly because they have felt that this moderate inflation or what they call a moderate inflation might be a strong factor contributing to full employment. So with their advocacy of it with various pressure groups, labor organizations and other pressure groups seeking sometimes monopolistic returns with such pressures operating in the system it may well turn out that in the near future. We will I don't make this as a prediction I don't really know but it's quite possible that in the near future we'll be faced with something like an average of 3 % or more. Even that perhaps would not be an

unmitigated disaster but perhaps you want to come in on that. Well the real difficulty I believe you would agree is that if we as a matter of public policy attempt to achieve a 3 % rise in the price level and it becomes public information that this is the objective you and I would be very foolish to sit still and refuse to make adjustments to get out of money into goods. This very action of course would result in even greater inflation so that clearly in my mind are basic objective public policy wise should be stable prices. I would like to add one other reason why we should worry about this problem it is a real problem. There is in my opinion one unique difference between price trends since World War II and price trends in earlier periods in our history. In the past when we suffered substantial inflation such as the one that occurred during the Civil War again during World

War I following those periods we had declining prices for several years frequently. Does this mean depression? Well yes frequently it did mean depression. Depression in the sense that it led to or was accompanied by widespread unemployment cut back in production. Since the war we have not lost the price rise that occurred at and shortly after that period. Prices have tended to have a bias upward in other words they will go up in inflationary periods but they do not later go down. There is I believe one important reason why they have not gone down this time and that in my opinion is primarily due to public policies in the monetary area and in the budget area which attempt to avoid protracted depressions. In the past prices have gone down only in protracted depressions. We have avoided protracted depressions in the postwar and I

hope we will continue doing so. This means of course that we should be particularly careful in boom periods to prevent prices from going up because we are not likely to reduce them later. Well if we have the tools to do this Dr. Henning, yet you say we nevertheless should fear the possibility of a real recession. We have the tools and let me defer that for a moment but parenthetically let me observe that the fact that you have tools does not mean you are always going to use them. I would like to come back to a very central point here that we have only partially answered and that is why worry. Suppose we do have what some people call creeping inflation. We will sprinkle point it out that creeping inflation may conceivably turn into something much worse than a creep. It may turn into a trotter gallop but even apart from that an objection, a serious objection to creeping inflation over and above what sprinkle pointed out is not simply that it depreciates the value of the dollar

not simply that it might hurt pensioners as you pointed out. It might have, and teachers, although teachers, I do better these days I understand. I spurn the category of pensioners with reference to teachers and by the way and again parenthetically, I am not all together sure that if you looked into the statistical data carefully that you would find that teacher salaries in general have lag behind prices. My guess would be that within the last ten years they have advanced faster than prices so that their real income has gone up. I hate to say this, I hate to admit it and some of my colleagues from now on will stop talking to me but that is a side point. Let me come back to what I regard as a central issue. One of the real dangers of inflation in my humble opinion is that will encourage pressure groups to demand monopolistic returns and in an economy in which prices are rising and businessmen are selling higher prices. These various pressure groups will have a more powerful argument. Could you be a little more specific pressure group? I would call a pressure group

for example farmers who are demanding insofar as they are demanding agricultural controls which is to say monopolistic returns. I would define unions as pressure groups insofar as if they're asking and getting wage rates that are substantially above what free market rates would be. Now in an economy in which prices are rising you are so to speak furnishing an argument to these pressure groups. You're playing into their hands, you're strengthening them. Why would that worry me? It would worry me because as you strengthen these various pressure groups then they can contribute further to this inflation which in the first place strengthen them. In other words perhaps I might say as regards pressure groups that I am distressed about them not so much because they cause inflation in the first

instance. Maybe I'm concerned about them because inflation will cause the pressure groups. Labor organizations may not at the present time be excessive in their demands except in particular instances but it seems to me that given inflation then after that inflation they may become excessive in their demands and contribute to further much further extent than we have them now and for reasons which I can't go into completely if you have any faith at all in a free enterprise system you will be distressed at the growth of these monopolistic pressure groups. Would you go along with that? I certainly would. I would like to add one other set of pressures that I think the American public should be concerned with. I believe Dr. Henning and I would both agree that the one most important measure

that should be taken at the public policy level in order to prevent inflation is to prevent substantial increases in the money supply relative to production. We had to make a simple statement that would be the one best statement. This means that we must have a flexible money policy by a federal reserve system which prevents substantial increases in spending power. What is the pressure group that will be directed at the points that I'm getting to now? During the past year the federal reserve has come under substantial criticism by various members of Congress frequently by those who do not like to see their ability to spend money limited by their inability to borrow money to put it differently. If the federal reserve was to make it possible for all of us to borrow as much as we would like to borrow and spend as much as we would like to spend at times such as now when we're near full employment. We wouldn't increase our standard of living in production. Prices would go up. Therefore it's

important that the federal reserve stand firm and avoid substantial increases in the money supply. I say the American public should be concerned about this because ultimately Congress is responsive to public pleas. I think we found that out very well in the last session of Congress. We as a people concerned about preventing inflation should give support to the federal reserve system and its objective of preventing substantial increases in the money supply. I'm really at a very terrible disadvantage here. How can I argue with somebody who agrees with me? But I think our broad fundamental positions are like although we may differ in some specific details. I'd like to make a supplementary observation. What I think we're both saying is that inflation in the future will not become a serious problem that we will be close to stability of prices if we exercise effective control as you point

it out over the supply of money. I don't think there's going to be any extreme inflation of any at all. Any sustained inflation simply because of what I spoke about a while ago, simply because of pressure groups. In order for inflation to take place and sustain itself, there simply must be an expansion in either the supply of money or at least the velocity of the spending of that money. And I think for our immediate purposes, we can emphasize a supply of money. If in other words, Congress behaves itself. That is to say, if it permits the federal reserve board to behave itself and while that's monetary, there are certain fiscal matters that I can't bring in at the moment. That's a distinction. I don't understand. Well, I may come to it in just a moment. If in general, Congress does not put the wrong kind of pressure on the federal reserve system so that its monetary policy will become too loose,

then we won't pump too much money into the system. Now, that's stating it very crudely and in a very elementary fashion, but I think you'd agree that's what it comes down to. There isn't as many people suppose a fixed supply of money. The supply of money is variable. It can be increased or decreased through the federal reserve system. Congress must not exert the wrong kind of pressure on the federal reserve system, permitting it to pump more money into the system. If we pump too much money into the system, then the value of money will become cheaper. That is to say, prices in general will rise. The solution here, the key to the problem is intelligent cooperative behavior between Congress, the Treasury, and the Federal Reserve Board. Agencies which in general play an important role in determining this significant thing that I've been talking about, the supply of money.

Do we want to stop it? Do we want to prevent inflation? We can do so. Will we do so? I don't know. I don't know. Oh, these mysterious congressmen who desire merely to spend, this isn't an abstract yearning. They're spending for other specific reasons. Defense, let's say. We have a defense budget which demands a great amount of money. Does this mean in effect curtail our spending? Well, there are two types of arguments that we can enter in on to in the budget. One is whether government is too big. And for this purpose, I'd prefer not to argue. My own preference is for smaller federal government. But the important thing so far as inflation is concerned is that we, on average, balance the budget. That we take in as many revenues in federal budget as they actually spend. Not in any one year. Not in any one year. That's why I said on average. Now, how have we done in the post -war years? I think it'll be shocking

to some of our audience to recognize that on a cash budget basis, since World War II, we have had $6 billion more surplus than deficit. In other words, Congress on average in the post -war period has done a pretty fair job of balancing the budget. Now, last year, fiscal 1959, we had a $13 .5 billion deficit. I would defend this, at least most of it, as highly desirable. It was one of the important factors that prevented the recession from turning into an all -out economic route, such as we had during the period 1929 to 33. The deficit did not give us inflation at that point. Primarily because we had substantial capacity for increasing production as spending rolls. Coming into the next year, that isn't true. It's extremely important that we have a balanced budget in this next calendar year. Yet, this

balanced budget is after all something which can be put off, as you yourself say. It's no single year in which this is to be achieved. How long can you put, can you put off this, this balance? Well, as to the timing, I think Dr. Henning and I are both agreed that we would prefer the deficits during periods of recession and the balances and if possible surpluses during periods of prosperity, such as I hope we're in. Now, what all this comes down to is that we would like to see our economic affairs conducted a certain way, this way, that the supply of money, which is critical in the economy, crucial, that the supply of money over the years should be increased, roughly speaking, at some rate proportionate to the increase in growth, economic growth of the country, that it should not in any significant way over the years exceed that economic growth. If, in other words, we don't increase the supply

of money arbitrarily and apart from economic growth, if we don't just pump money into the system, whether it's by deficits or any other way, exceeding this broad level of economic growth, if we control the money supply, I think we're going to do very well. We'll have difficulties now and then we may have some inflation over and above one percent. I don't know that we know enough about the economic system to say we can control it in two fine away. I don't think we're that ambitious. I think you're speaking of stability and I'm speaking of stability not because our hearts will break if for any one year it isn't absolutely stable, goes to two percent or even three percent. We're speaking of stability because we want to avoid the big swings. I think we know enough to avoid the big swings. I think you'd agree with me that maybe we don't know enough to avoid the little swings. I think we may have recessions in the future. Let me put it differently. I think it's all together certain or almost certain that we will have them and I'm not too distressed about them. They're not too

awful to anybody, my age, who can remember very vividly the real depression of the 1930s. Nowadays when we have a recession somebody's got to tell me we have a recession or I would hardly know compared that is to say to the 1930s. It comes down to an expression of your own relative economic position though. That's partly it. Partly it. For those that lose their jobs of course and there are some that lose jobs and recessions they consider that a very disassistable. Yes, I mean it is. It means to say that it isn't a disaster for them but when you look on the whole economic system it seems to me we know a lot more than we used to know the economic system is operating by and large much much better. It's a long long time since we had a serious depression and I don't think that either I or you would predict one in the offing. The important if I can make this one observation the important difference in policies can be dramatized by the fact that in the Great Depression Congress raised tax rates the Federal

Reserve permitted the money supply to decrease by a third. That contrasts with deficits in current recessions and easy money policies in current recessions. Those are the big reasons why we haven't had protracted. In other words we have learned the policy let's say a flexibility when you say control of the money supply you don't mean necessarily always tighten money but rather the adjusting of the money supply of the economic condition of the nation. It should depend on the condition the state of the economy. As Lehman we should be interested in easy money in recessions and low interest rates because that's what's necessary to get the economy started upward. I would agree with that. May I ask you then in the last minutes left to us whether we have these tools we have the know how could you predict will we have depressions anymore? Well I am not reluctant to answer that I don't see any depression in sight. Mr. and I are very unhappy to discover that I'm wrong. Depressions are outmoded provided

we follow the policies that we have been pursuing in recent years. Nonetheless we will undoubtedly from time to time have modest declines which we call recessions. Thank you very much Dr. Barrel Sprinkle of the Harris Bank. Dr. Hague of the Illinois Institute of Technology. Thank you. If our guests are right and I have every reason to have faith in them certainly the problem of inflation is one which we linger on the edge of. We are not suffering inflation now. However it's something that demands of us full attention certainly full awareness and a kind of intelligent interest. I'd like to say good morning for the American scene as Joel Zanger.