One must conclude that the burden of proof is on those who contend that competitive financial markets do not allocate the available supply of funds properly among competing borrowers. Although by no means perfect, a restrictive monetary policy has been reasonably equitable as well as efficient in its operation.
If desired, special consideration can be given to certain types of "socially desirable" borrowers, through such agencies as the Small Business Administration, Federal National Mortgage Association, or the proposed federal agency to purchase hard-to-market school district bonds.
To create such loopholes means, however, that the general monetary reins must be pulled in so much harder on other types of borrowers in order to achieve the same anti-inflationary effects. It is better to try to improve the workings of general monetary controls by following President Eisenhower's proposal of a National Monetary and Financial Cornmission to study the American financial system and recommend appropriate changes in it.
Stopping the Wage-Price Spiral. Many persons believe that restrictive monetary and fiscal policies, while able to prevent inflation arising from excessive demand for goods and services in general, are ineffective in preventing a rise in the price level resulting from higher wage costs.
Pointing to 1956 as an illustration, these people argue that wages (and fringe benefits) per hour are pushed up more rapidly than output per hour, so that higher unit cost is passed on in the form of higher price to the purchaser of the finished product. Because the price of a product becomes either an item of cost to another industry or an element in the cost of living of workers, the initial increase "triggers" subsequent increases, especially with the wide use of escalator clauses. Thus the "wage-cost spiral" begins.
The fact is, however, that a wage-cost spiral is not inevitable; it cannot go very far unless federal monetary and fiscal policies make valid the higher wage-costs and prices by making more money available to pay them. Without an increased supply of money, the situation will be as follows: Suppose labor and management negotiators make agreements that raise wage rates more than productivity; the prices of products will go up in consequence. But consumers' money incomes will not have risen proportionately, and they will not pay the higher prices. The result will be inventory
accumulation, production cutbacks, lower profits, and unemployment. Thus, inflationary wage adjustments always bring their own penalty and correction under an anti-inflationary economic policy.
If, on the other hand, business managers and labor leaders know that it is the firm policy of government to hold the price level stable, the situation will be like this: Realizing that a hard money policy will prevent a general passing on of cost increases in higher prices, managements will become much harder bargainers in wage negotiations. They will prefer to accept a strike rather than a wage settlement that requires them to raise prices in order to maintain normal profit margins. By the same token, labor leaders, expecting government action to keep the cost of living from rising, will be less inclined to press for wage increases that are not in line with improvements in productivity. Labor contracts made in this environment are far less likely to have inflationary consequences.
Full Employment With Price Stability During 1953-1955. The period of 1953-1955 is instructive to those who believe that Americans must be impaled on one or the other horn of a dilemma—inflation or unemployment. It embraced phases of booming business accompanied by overemployment during mid-1953 and again late in 1955, and an intervening phase of unemployment. Yet the average performance of the United States economy over the whole period reflected full employment with stable price levels and a satisfactory rate of growth in real production.
The ratio of unemployment, which had been subnormal for many months, began to rise late in 1953 and hovered between 5% and 6% from February through July 1954. After falling during the autumn of 1954, as business expansion resumed, the ratio rose above 5% only during January and February of 1955, and thereafter declined through the balance of 1955. Unemployment averaged 2.5% of the work force in 1953, 5% during 1954, 4% during 1955, and 3.8% for the whole period.