The Inflationist School. First, there is a small group which holds that a slow or "creeping" inflation has positive virtues in facilitating the kind of cost-price adjustments that promote continuous full employment. A number of economists have espoused the view that annual rises of 2% or 3 % in the price index should be an accepted aim of public policy. This group may properly be called the Inflationist School.
The Defeatist School. A much larger group holds that price inflation is an evil, but less of an evil than the major alternatives of unemployment or direct economic controls. Inflation must be accepted, they say, as the price of sustained prosperity in a free economy. Professor Sumner H. Slichter of Harvard University put this view succinctly in the following words: In this imperfect world, we are often compelled to choose between evils and, if the choice is between enough unemployment to halt the rise in labor costs, direct controls of wages and prices, and creeping inflation, let us by all means have the creeping inflation. It is the least of the three evils.
People of this persuasion, who form a surprisingly large segment of the economics profession as well as of the public, may be classified as the Defeatist School.
The Stabilization School. A third group, apparently growing in numbers, holds that any general and persistent rise in prices, rapid or slow, is a great evil, to be averted by the most vigorous efforts. This group constitutes the Stabilization School. It is united in a resolve to hold the price line, but its members differ on the proper means to achieve this end.
Under What Conditions Can the United States Economy Have Price Stability Along with Full Employment and Economic Freedom? What the American people plainly want is sustained full employment and full production, without inflation, and in a free economy. It is my conviction that, difficult though it may be, this goal can be achieved. But it can only be achieved under these conditions: if the American people and the government have so profound a desire for a stable price level, based on a true understanding of the evils of inflation, that they will make price stability the primary objective of national economic policy.
If our economic policy is guided by a realistic definition of the "full employment" called for by the Employment Act of 1946.
If we avoid measures for dealing with inflation that are superficial, illusory, or inconsistent with a free-market economy.
If we have a clearly understood and generally accepted program of government stabilization actions, the main elements of which are highly flexible monetary and fiscal policies and rigorous enforcement of competition in all segments of economic life.
Let us take a quick look at what is involved in each of these necessary conditions.
Economic and Social Costs of Inflation. The difficulty in awakening people to the dangers of inflation is that its superficially agreeable feature, more money income to spend, is immediate and self-evident, while its heavy penalties, in economic and social costs, are subtle and profound. Yet we have only to look back on the past 17 years for evidence of inflation's damage.
It is a fact that the doubling of living costs since the outbreak of World War II has, in effect, laid a heavy tax on the real incomes of pensioners, annuitants, and others with rigid dollar incomes. Countless retired and disabled Americans have been pauperized, while the standards of living of school teachers, government clerks, and others unable to get their salaries raised rapidly, have been painfully squeezed. Since 1940 more human suffering has been caused in the United States by the doubling of consumer prices than by unemployment. In the face of this record, who will say that we need not be as much concerned about a stable dollar as about unemployment? Inflation transfers real wealth on a vast scale from those who hold dollar claims against society to those who owe dollars and own real things. This makes for a feeling of injustice and mistrust, and weakens the fabric of a democratic society. We may well recall the words of that old master of revolution, Nicholai Lenin: "He who would destroy a nation should first debauch its currency." Peoples like the Germans, who have lived through the ravages of a great inflation, will go to almost any lengths today to prevent its recurrence.