Is not a slowly rising price level bound soon to become a galloping inflation? If people expect prices to rise, will they not prefer to own goods rather than cash, bank deposits, mortgages, or bonds? As more and more people attempt to shift from money and fixed dollar assets into goods, will not the price level increase faster than before, and will not this faster rise stimulate still more people to buy goods, real estate, and stocks? Hence is not even a creeping rise in prices dangerous? It is true that all extreme inflations started out as slow and creeping ones, but it is not true that a slow advance in prices easily becomes a rapid rise. One reason is that the prospect of a general increase in prices does not mean that the price of any particular article will rise. Hence the expectation of a general advance may not be effective in getting people to buy specific goods. A second reason is that styles are constantly changing and goods are constantly being improved. Each of these conditions limits buying in advance of needs. A third reason is that the purchases by enterprises and individuals are restricted at all times by uncertainties concerning the size of their future incomes. Finally, and most important, both business concerns and individuals are limited in buying by the size of their present incomes. Enterprises and individuals may go into debt in order to spend more than their incomes, but willingness to incur debt is limited, and the increase in indebtedness can be controlled by proper credit policies. Hence, with reasonably strict credit policies, the rate at which prices rise can be controlled.
These remarks make plain that when I point out that the goal of stable prices conflicts with other desirable goals and that the country has problems which can best be solved by permitting a slow rise in prices, I am not opposing all efforts to control inflation. Indeed, the more successfully the country checks recessions, the more willing it must be to keep the rise of prices during booms to the minimum required by rising labor costs. Hence successful fights against recessions increase the need for strict credit policies during booms. Today the federal government is pursuing an inexcusably lax policy toward the danger of inflation. Just as the expanding defense program is about to raise the outlays of the government substantially above its income, the government has terminated the controls on installment credit and relaxed the controls on real-estate credit.
Although a slowly rising price level will cause substantial injustice, the magnitude of the injustice should not be exaggerated. People will be able to protect the purchasing power of most of their savings by investing in real estate and stocks, and by keeping their savings banks accounts to a minimum. Mutual funds offer the small saver a way of diversifying his investment in stocks. The cost of life insurance and pensions will, of course, be considerably increased because, if prices rise, people will need more insurance and larger pensions. More than offsetting these injustices, however, will be the avoidance of the unemployment that is necessary in order to keep prices stable. The net advantage to the country of a slowly-rising price level over a stable one is the greater amount of employment, and hence the greater amount of production and the higher standard of consumption, that are made possible by a slowly advancing price level.