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Creeping Inflation One View - Economic Stabilization Problems

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CREEPING INFLATION ONE VIEW - ECONOMIC STABILIZATION PROBLEMS by Sumner H. Slichter "The recent decline in consumer spending," said a conference of distinguished Americans, "is only a lull in a continuing inflation that threatens the stability of the national economy and the security of the entire Western world." This view of inflation is typical of hundreds of statements that have been made during the past few years. It reflects the uncritical and almost hysterical fear that the thought of inflation arouses in a large part of the community. It also reflects failure to see some of the problems that confront the country and that can be solved best through a slow rise in prices.

It is, of course, true that extreme inflation is disastrous, and that many countries have experienced it during the past thirty years. The great inflation in Germany in the early twenties is the one that is best known in this country. Not only did the German inflation wipe out the savings of millions of people but it badly reduced the efficiency of the economy. When prices are doubling every few weeks or less, as they were doing in Germany, no one can afford to take time to plan his expenditures carefully. The lack of careful planning was especially wasteful in the case of outlays for machinery and buildings.

But the extreme sort of inflation experienced by Germany is not easily started, and it is not likely to occur here. To produce the German type of inflation there must be lack of faith in the capacity of the government to perform the ordinary job of governing. What is likely to happen in the United States is a slow rise in prices—a rise interrupted frequently by small or moderate recessions, but nevertheless a rise. Of course, even a small increase of 2 per cent or 3 per cent a year, though hardly enough to be noticed at any given moment, is sufficient to cause substantial injustice. For example, a rise of only 2 per cent a year will reduce the purchasing power of the dollar by 45 per cent in thirty years, so that the pension or life insurance that one started to buy in one's youth will have lost nearly half its purchasing power before one has reached the age of retirement.

The obvious injustices of even a slow long-term rise in prices lead many people to insist that such a rise must be prevented—that nothing but a stable price level will be satisfactory. At the risk of being called an

irresponsible and dangerous thinker, let me say that in the kind of economy possessed by the United States a slowly rising price level is actually preferable to a stable price level. The reason for this conclusion is that the maintenance of a stable price level would conflict with other important interests of the country. For example, the maintenance of a stable price level in the long run would require that the country considerably relax its efforts to keep business recessions as mild as possible. Furthermore, the maintenance of a stable price level would require the acceptance of chronic unemployment or drastic intervention by the government in the relations between employers and employees. Finally, the policies necessary to keep prices stable would severely handicap the United States in its efforts to contain communism by building up the economies of the free world.

The champions of a stable price level do not seem to be aware of the conflicts between the goal which they advocate and other desirable goals. Indeed, they are so impressed by the injustices caused by inflation that they fail to see that serious injustices would have to be imposed in order to keep the price level stable—injustices even greater than those which would accompany a slowly rising price level. Let us look more closely at the reasons for believing that a slowly rising price level is preferable to a stable one.

Suppose that the desire of the people of the United States to raise their standard of consumption were so strong that the demand for goods slightly exceeded the supply of goods. The productive capacity of industry would be fully used. Practically every man, woman, and child who wished to work would have a job, enterprises as a whole would not lack for customers, and there would be a strong incentive for industry to enlarge its capacity. Would this be a bad state of affairs? I do not believe that most people would regard it as bad. They like demand to be large enough to strain the productive capacity of industry and to provide jobs for all job seekers. And yet the situation that 1 have described would be inflationary. The excess of demand over supply would cause prices to creep upward.

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