U.S. Economy-III, Inflation: Fact vs. Myth:
WOYTINSKY, W. S.
The U.S. Economy—III INFLATION: FACT vs. MYTH By W. S. Woytinsky This is the third in a series of four articles on the present condition of the United States' economy. W. S. Woytinsky, the...
...118 Luxemburg...
...To politicians, who are perhaps most responsible for the confusion surrounding the answer to this question, each rise in the price level—even a rise of 1 per cent a year—is inflation...
...In accordance with the law of the quantity theory of money, inflation always produces a rise in the price level...
...This is revealed by Table II, which shows the variations of the BLS consumer price index from 1913 to 1959...
...The problem of the aged is particularly important because it is likely that most, if not all, who have sustained material losses and hardships because of inflation, are in the upper age brackets...
...Sources: Historical Statistics of the United States, 1789-1945, U.S...
...To return to the pre-Depression level, which everyone seemed to agree was necessary, the price level had to rise by 33 per cent...
...Department ot Commerce, Bureau of the Census, p. 236...
...116 Finland...
...Thus, from the middle of 1913 to the middle of 1959, some 15 years were dominated by wars and their economic implications, while during the remaining 31 years the movement of prices was controlled mainly by internal economic factors...
...121 Japan...
...Prices tend to advance when business is good and to go down during a severe depression...
...Actually, loss of part of the dollar's purchasing power has been a result of historical events of a non-monetary nature...
...Woytinsky analyzes the oft-heard charge that the U.S...
...Similarly, depreciation of the currency unit does not affect the real value of the bulk of the income, products and wealth in a nation...
...The dollar is a unit of value, just as a mile is a unit of distance, and both may be measured by larger or smaller units...
...Second, all the major wars in this period have been accompanied by inflation—that is, by an artificial increase of the money in circulation and of credits, which resulted in a considerable rise in prices...
...113.5 1913...
...121 Belgium...
...116.2 1917........55.0 1927...
...Prices here have reflected the general trend that has prevailed on the world markets but have been rising more slowly than in other modern nations...
...Moreover, those who cry inflation tell the public that it is not a new phenomenon in the United States...
...In some countries (Argentina...
...3) liberalization and adjustment of the program of aid to the aging population...
...129 Western Germany . . . 114 New Zealand...
...62.9 1951.......111.0 .__ __ 1922........71.4 1932........58.4 1942........69.7 1952...
...A man who has kept his life savings in banknotes stacked in a cigar box throughout an inflation period, or has invested them in an annuity from a commercial insurance company, will find that his money has lost part of its value...
...120 United States...
...111 Sweden...
...This hectic movement of prices was closely related to World War I and its aftermath in this country and in the countries supplying it with raw materials and absorbing its exports...
...The contention that the U. S. dollar's shrinking purchasing power reflects the shrinking of incomes and other values is based on a misconception of the role of money in a modern economy...
...But a rise in prices may also be due to retardation of economic progress when the supply of goods and services lags behind the increased purchasing power that follows a substantially higher rate of normal growth...
...Next, the Korean campaign would have pushed it up to 124.5— the actual level of consumer prices in 1959...
...Since the middle of the 19th century, the United States has financed at least a part of its military expenditures by deficit spending, loans and other measures that increase the purchasing power in the hands of the population at a time when the amount of available goods was shrinking...
...Of course, it is a matter of record that prices were rising during a large part of this period...
...152 South Africa...
...134 Ireland...
...Table I. Cost of Living Index in Selected Countries, at the End of 1959 (1953 average = 100) Spain...
...The latter span includes three years of the Great Depression and 28 years in which the nation was traversing various stages of several economic cycles...
...No economist can see the ideal price level for the country, but assuming that the level prevailing from 1913 to 1929 was about normal, and discarding the possibility of rolling prices back after wars, the average rate of price rise in peacetime has not been excessive...
...Let us see what would have happened if there were only war and postwar dislocations and at all other times prices had remained completely stable...
...Survey of Current Business, February 1960...
...Indeed, in a period of rising prices almost all forms of income—dividends, rents, wage rates, etc.—tend to adjust themselves to the new unit of measurement, the shrinking dollar...
...The Korean campaign in 1951 gave it an additional push of approximately 7-8 per cent...
...With that assumption, the price index would have risen from 42.4 in 1913 to 70.8 under the impact of World War I, a rise of 67 per cent...
...the second (NL, August 1-8) suggested various ways of accomplishing this...
...Probably, however, fewer persons than are commonly supposed rely exclusively on fixed incomes or have all their savings in cash or Government bonds...
...The third dislocation came under the impact of World War II and the subsequent adjustment of prices after the repeal of price controls...
...4) provisions to help meet the other major requirement for which family savings have been made, the greatly increased cost of medical care...
...A new, brief and comparatively mild wave of inflation developed in 1951 because of the Korean campaign...
...If such a rise were prorated over the 21 peacetime years following the Great Depression, the average increase would be 1.4 per cent a year...
...He completed this study shortly before his death in June...
...The first article (NL, July 18-25) pointed up the vital need for increasing the nation's rate of economic growth...
...102.2 1958 .. 123.5 1919........74.3 1929...
...Recent Price Trends in the United States and Abroad...
...73.3 1934...
...But not everyone realizes what "the large part" means in this case...
...is plagued by inflation...
...108 Switzerland...
...Sometimes a rise in prices is welcome, as after a severe depression that has been marked by price contraction...
...111 Norway...
...Disequilibrium between supply and demand resulted each time in a rise in prices that continued for some time after the war until a new equilibrium between current purchasing power and production was found...
...There are a few exceptions to this general rule, the most important among them being cash holdings and fixed incomes...
...When smaller units are used to measure the distance between two fixed points, more of them are needed, but this does not change the distance...
...42.4 1923...
...In the 1920s, prior to the second dislocation, prices fluctuated within a very narrow range (proving that the relative stability of prices does not necessarily evidence a sound development of the national economy...
...There is nothing new in the notion that the large part of the price advances between 1913 and 1959 was due to the wars...
...Crusaders against "inflation" may reject my reference to price movement abroad, declaring that the rise in U.S...
...Both definitions relate to disturbances in the supply of money and credit in relation to the needs of the economy for means of exchange...
...109 Austria...
...Statistical Abstract of the United States, various years...
...The public has been impressed by the statement that the dollar has lost two-thirds of the purchasing power it had in 1913...
...As a result of the war, the disorganization of the world market and an outburst of speculation, the price index skyrocketed from 43.7 in 1915 to 86 in 1920, then receded to 71.4 by 1922...
...73.1 1933........55.3 1943........74.0 1953.......117.4 1914 .. 43.1 1924...
...It was still discernible in 1952 and 1953 (see Table II) and disappeared in 1954...
...In recent years, the general trend of prices has been upward all over the world...
...Our dollar is a smaller unit of value than it was 46 or 15 years ago, but we have more dollars...
...Some economists have warned the public that if this trend continues for another half century the purchasing power of the dollar will be close to that of a 1913 dime...
...The index skyrocketed to 102.2 in 1948, an increase of 63 per cent...
...58.7 1945........76.9 1955........114.5 1916........45.7 1926...........75.8 1936...
...Justice demands that the nation which has emerged victorious and prosperous from the war feel a debt toward these people...
...NO DISCUSSION of the U.S...
...107 Source: United Nations, Monthly Bulletin of Statistics, February 1960...
...Some of the persons affected by inflation have used a part of their life savings to buy a house, and its values has risen with all other prices, while the mortgage has remained at the pre-inflation level...
...See page 12...
...Some people who are not terrorized by the thought that the purchasing power of the U.S...
...111 United Kingdom...
...in other countries prices have been advancing at a moderate rate...
...119 Portugal...
...The peacetime pattern of the economy was established by 1948 and prices were stabilized at a point 63 per cent above the prewar level (as compared with the jump of 67 per cent after World War I, which had required much less effort from the nation...
...Reduction in the volume of the medium of exchange, resulting in the fall of prices...
...Indeed, the consumer price index (average for 1947-49=100) of the Bureau of Labor Statistics (BLS) was 124.6 in 1959 as compared to 42.4 in 1913, which suggests that the 1959 dollar was the equivalent of 34 cents in 1913...
...Aftermath of Wartime Inflations...
...124 Italy...
...less than in the Scandinavian countries and the Netherlands...
...57.2 1944........75.2 1954.........114.8 1915............43.7 1925...
...But this use of both terms deviates from their true meanings in economic science and, in fact, in Webster's: "Inflation...
...By 1923 the price index had settled at 73.1, about 67 per cent above the prewar level, and this new mark became the starting point for further fluctuations...
...The index was 73.6 in 1928 and 73.5 in 1929, almost precisely the same as in 1924...
...110 Australia...
...Similarly, savings accumulated during World War II in inflated dollars, even after the depreciation of the dollar, represent a much higher value than the saver would have had without the wartime inflationary boom...
...Deflation...
...But whatever one thinks of this depreciation, one must realize that inflation has been a part of war economy...
...Indeed, if an innocent American should be scared by the talk about inflation and seek a safer currency than the U.S...
...The most obvious manifestation of these factors is, of course, the upward or downward movement of prices...
...One may use the terms "inflationary" and '"deflationary" in a broader sense, however, in referring to factors that may eventually contribute to the development of inflation or deflation...
...The position of the United States among other nations, with respect to the rise of prices, is shown in Table I. The countries are listed according to their 1959 cost of living index...
...As far as the recent trend in prices is concerned, the talk about creeping inflation in the United States is not supported by the facts...
...The conclusion is clear: Our present cost of living index is fluctuating very close to the level it would have reached under the influence of three wars and related economic dislocations if there had been absolutely no other change in prices...
...The point is, however, that the peacetime price advances during some 28 years, not counting the periods of war and postwar dislocation, only offset the drop in prices during the Great Depression (from 73.5 in 1929 to 55.3 in 1933...
...Although the annual index numbers in Table II represent price fluctuations in a slightly rounded form, they show clearly that a gradual rise of prices (by not more than 2 per cent a year) was interrupted during the 1913-59 period by three major dislocations: Prices were inching up in 1913-15, before the economic impact of World War I reached the shores of America and set off the first dislocation...
...58.3 1946........83.4 1956...
...This does not mean, however, that an upward trend in prices is necessarily evil...
...It has been common practice in all modern nations to finance part of war expenditures by extraordinary fiscal measures and to let inflation take care of the deficit...
...similarly, each decline in the price level is deflation...
...By 1933, as a result of the Great Depression, it had fallen to 55.3...
...Minor variations in the prices of different commodities are characteristic of a market economy...
...There are other times when a rise in prices may endanger the position of a country on the world market...
...In the past six years, consumer prices have risen less in this country than in the United Kingdom, Australia, New Zealand and other sterling countries...
...Inflation, they say, has been gradually eroding our economy during the past half century and the situation is now so serious that fighting further inflation and restoring sound currency must become paramount requisites of national policy...
...Inflation is the easiest method of meeting the cost of a major war...
...reduction of the outstanding volume of purchasing power...
...This analysis straightens out the records, but it does not explain away the fact that prices trebled between 1913 and 1959, and doubled between 1941 and 1959...
...Consumer Price Index in the United States, 1913-1959* (Average 1947-49 = 100) Year Index Year Index Year Index Year Index Year Index _ _ 1921........76.6 1931 ........65.0 1941...
...Table II...
...However, their presentation of the increase in prices as a continuous process—perennial inflation—is misleading...
...121 Canada...
...But since prices may change for a great variety of reasons (e.g., unusual weather conditions, practices of monopolistic or semi-monopolistic concerns), it is wrong to label every rise in prices as inflation and every fall as deflation...
...Bolivia, Brazil, Chile, South Korea, Turkey, Uruguay) the cost of living more than doubled from 1953 to the end of 1959, and this obviously was due to disorganization of the national currency...
...59.9 1950........102.8 — — *Data in bold type covers war years and postwar adjustments, characterized by hectic fluctuations, and the years of the Great Depression...
...The same holds true for money deposited in savings bank accounts, or invested in Government savings bonds...
...Disproportionate and relatively sharp and sudden increase in the quantity of money and credit, or both, relative to the amount of exchange business...
...Among the 21 nations listed in this table, the United States ranks 18th...
...73.6 1938 ............60.3 1948...
...The logical answer to this situation would be: (1) adjustment of commercial insurance benefits prepaid in heavy pre-inflation or prewar dollars...
...2) closer adjustment of Government pensions to the new cost of living...
...114 Netherlands...
...An annual rise of 1 per cent in the price level is harmless when real national income is growing at a rate of 4.5-5 per cent, but the same rate may cause serious concern if economic growth has slowed to 2.5 per cent...
...economy would be complete without some consideration of that widely misunderstood economic phenomenon, inflation...
...The definition of inflation fits the universally known economic dislocations in the United States during the Civil War and both world wars, the disorganization of the currency in Germany, Austria and France after World War I, and the economic troubles in many Latin American countries...
...150-57...
...Each change in prices means a gain for some operators and a loss for others, and most experts agree that excessive fluctuations discourage economic stability and growth...
...101.8 1959 .. .. 124.6 1920........86.0 1930........71.6 1940...
...W. S. Woytinsky, the author of numerous economic works and a frequent contributor to these pages, served for many years with the Government before becoming research director of the Twentieth Century Fund and professor of economics at Johns Hopkins University...
...Let's look at the facts without using misleading terms, keeping in mind that we are discussing upward and downward movements in the general level of prices that affect the purchasing power of the currency unit, say of the U.S...
...Nevertheless, there is no doubt that wartime inflation and its aftermath have caused undeserved hardship to some people...
...115 Iceland...
...currency are none the less dangerous because other countries suffer even more acutely from the same economic disease...
...There was no trace of inflation in this country in 1948-50, after the demobilization of our armed forces...
...There is no evidence that the United States could have used any substantially different pattern of war financing with better results...
...75.2 1935...
...Since that year it has been the aftermath of previous inflations that has remained a problem...
...The adjustment period after World War II has been comparatively short...
...TWO HARD FACTS must be kept in mind: First, there has been no peacetime inflation in the United States, in the precise meaning of the term, in the past 50 years...
...dollar has shrunk by two-thirds since 1913 are seriously concerned about the fact that their dollars have lost half their value in the past 16 years...
...In this way the Government would pay its moral obligation to those citizens who suffered undue economic hardship because of the war and its aftermath...
...73.5 1939 ............59.4 1949...
...dollar...
...What is inflation...
...After this dislocation prices rose gradually as recovery progressed, a point or two a year, until the index reached 62.9 in 1941, still 10 points under the pre-Depression peak...
...dollar, his choice would be small...
...Here Dr...
...This, in fact, has been the actual average rate of corrective "inflation" in the United States...
...The definition of deflation fits the classical collapses of credit and the monetary system that tumbled prices in the United States and Germany in 1930-33...
...It would have remained at that level until the 1940s, when World War II would have raised it another 63 per cent to 115.4...
...But the question of price change can never be separated from the general state of the economy...
...61.4 1947........95.5 1957 .. 120.2 1918........64.5 1928...
...prices and the depreciation of U.S...
...74.4 1937...
...less than in Belgium, West Germany and Japan...
...They claim that their objective is to forestall such a catastrophe and save what is still left of the old sound dollar...
Vol. 43 • August 1960 • No. 32
