During the three years, both the consumers' and wholesale price indexes remained practically unchanged. Meanwhile, real gross national production rose on the average nearly 3% a year. While months of real unemployment alternated with months of full and overemployment, the average performance of the United States economy was excellent. The period shows that, with wise federal management, it is possible to prevent inflation while maintaining prosperity in a free economy. To say that this record might have been better is not to deny that it was quite good.
Some contend that price levels were not really stable during 1953– 1955 because the indexes averaged out declines in farm and food prices with increases in other prices, especially prices of rubber, metal products, and machinery. They say that there was concealed inflation—because the indexes would have risen but for the decline in farm and food prices. The answer to this contention is that stability in individual prices or in particular groups of prices is neither to be expected nor to be sought.
In fact, divergent price movements within a stable average are necessary in order to move productive resources out of employments in which supply is excessive into employments in which supply is deficient. Agricultural production during 1953-1955 was manifestly redundant, as mounting surpluses show; and farm prices fell. The rise in rubber, metal, and machinery prices was necessary in order to attract more labor and capital into the production of these items, which were in high demand. In the future, the output of rubber and metal products and machinery may exceed demand; if so, these prices will then decline relatively to farm and food prices.
Imperfect as it is, an inclusive index of all consumer prices is the only correct gauge of inflation, which by definition is a general rise in prices.
Preventable Inflation in 1956. The encouraging experience of 1953– 1955 leads us to ask what went wrong during 1956.
Some economists believe that there was really little if any current inflationary pressure upon prices during 1956, and that federal policies were sufficiently restrictive. They point to the fact that some part of the 3% rise in the consumers' price index was due to better products rather than higher prices of the same products, as when the index was altered in 1956 to include prices of automobiles having automatic transmissions as standard equipment.
Also, some part of the rise was a delayed effect of inflationary pressures built up during World War II or the Korean War, as when warimposed rent controls were removed in 1956 in a number of communities. The rest of the rise, they argue, was small enough to be considered
a "random" fluctuation.
While this reasoning has some validity, it does not justify a conclusion that inflationary pressures were absent in 1956. A 3% rise in living costs during one year would not be alarming if followed by a period of stability or recession. When accompanied, however, by a 5% rise in the index of wholesale prices, the indication is that inflationary pressure was building up during 1956, portending some further rise in the general level of retail prices during 1957.
Was this inflation inevitable? The preceding analysis suggests that proper actions could have prevented much of the general price rise of 1956. While it is easy to have 20/20 vision in retrospect, our experience in administering a full employment policy is comparatively short. By reviewing it we can learn from past mistakes.
Policy Unclear. First, the federal administration did not make known, and the public did not understand, a resolve to make a stable consumers' price index the primary object of public policy. Inflationary wage and price adjustments were not discouraged. Such a public pronouncement by the President would have served notice on all private groups that their price and wage decisions would have to survive in a noninflationary economy, or else suffer the penalties of reduced profits and of unemployment. It would have been much different in purpose and effect from exhortations to businessmen and labor leaders to hold down wages and prices as a matter of "voluntary restraint" or "selfdiscipline." To ask management and labor not to raise wages and prices when their markets are booming is, in effect, to ask them to behave noncompetitively in a competitive society. It is to ask them to sacrifice the interests of their members and stockholders, whether or not other groups in society are also making sacrifices. The history of the Truman Administration teaches the futility of exhortation when unaccompanied by a clear declaration by the government of an anti-inflationary policy that the public believes will be implemented without fail.