An Opposing View

Tight Credit Too Late. Furthermore, even though credit was tightened, the monetary restraints were not made severe enough at an early enough stage to curb the boom in business plant and equipment buying which lay at the heart of the 1956 inflation. Chairman Martin correctly observed that the Federal Reserve Board probably erred on the side of credit ease. In times of inflationary pressure Federal Reserve policy must be restrictive enough to offset the increased velocity of use of money.

While the rise in quantity of money was held to 1% in 1956, velocity rose rapidly as businesses operated with smaller cash balances that they turned over more frequently.

Government Expenditures Too High. Finally, although taxes were maintained, federal government expenditures should have been held constant, or if possible cut back, particularly expenditures involving metals, machinery, and those construction materials for which private demand was most active. Instead, federal spending rose from an annual rate of $69.4 billion in the second half of 1955 to $72.8 billion in the second half of 1956, adding to inflationary pressures.

Analysis indicates that the executive branch of the federal government possesses discretionary powers to influence the rate of government spending and lending by several billion dollars a year. It should have used these powers vigorously to defer new projects and slow up projects already under way.

The nation's experience last year should teach us the need for much more flexible fiscal and monetary actions by the federal government than we have had in the past. The necessary flexibility will put additional burdens on federal officials and on commercial bankers who will have to live with fluctuating loan and investment portfolios; but these sacrifices are small to achieve our economic goal.

What Would Make a Sound Anti-inflationary Program for the Future? We have seen why the prevention of inflation will probably be the primary domestic economic problem of the United States in the years ahead. We have briefly examined the operation of our anti-inflationary weapons. It remains to set forth a five-point program, developing out of our analysis, for dealing with this problem.

Presidential Declaration. The President should declare that stabilization of the consumers' price index will be henceforth a primary aim of federal economic policy, and that anti-inflationary actions will be taken promptly whenever the cost of living begins to rise.

This stand would serve notice on businessmen and labor leaders of the government's firm intention to maintain a noninflationary environment for wage and price setting. It would elevate the goal of price stability—now implicit in the Employment Act—to an explicit position.

There need be no conflict between this goal and that of full employment, realistically defined, in a competitive economy with a flexible system of prices.

Federal Reserve Policy.

The Federal Reserve System should pursue as restrictive a monetary policy as is necessary to reduce aggregate demand for goods and services to proportions consistent with a stable consumers' price index. It should not relax monetary restraints during times of inflationary pressure because of alleged ineffectiveness or hardships.

Governmental Spending.

The President should adjust the rate of expenditure of the federal government flexibly, in such a way as to reinforce, rather than counteract, the monetary policy of the Federal Reserve System. The same discipline that a tight monetary policy imposes on consumers, businessmen, and municipal officers should be practiced by federal officials in determining the rate of government expenditure. When inflationary pressures appear, it is not sufficient that the federal budget be in balance or running a surplus. It is necessary at such times for the government to reduce spending and to generate a larger surplus.

Monetary and Credit Commission.

Congress should forthwith provide for a National Monetary and Credit Commission to examine the workings of the United States financial system and recommend changes that will improve the speed with which all parts of it respond to flexible monetary policies.

Extension of Competition.

Also, Congress and the President should extend the policy of competition throughout the economy and vigorously enforce the antitrust laws. We must root out monopoly and all noncompetitive practices wherever they appear if we are to have full employment with a dollar of stable value. It is time to consider extension of the antitrust laws to cover labor unions, cooperatives, and other exempted activities, so that the entire range of economic activity may be brought under the scrutiny of the courts. The price system should be freed of unnecessary rigidities, whether they are produced by legislation or by private monopoly.

Many doubt that an effective anti-inflation program is politically feasible. It is feasible if the majority of Americans clearly understand their deep interests in a stable price level, for then they will support the policies that will make for price stability. For more than a decade Americans have worked to solve the problem of chronic unemployment, and have made great headway in dealing with it.

This experience should give us confidence in our capacity to cope with the difficult problem of recurrent inflation. Considering how well we have controlled inflation in recent years—with comparatively little experience, in an economy having many rigidities and inflationary biases, and in an atmosphere of misunderstanding of fiscal and monetary controls—we can surely make a better record in the future.