Can We Prevent Inflation?


By NOEL SARGENT, Secretary, National Association of Manufacturers

Delivered over American Forum of the Air Program, April 27, 1941

Vital Speeches of the Day, Vol. VII, pp. 543-54

WE cannot discuss this question adequately unless we know what we mean by inflation. Disregarding extremely technical definitions, we can say that inflation exists when prices as a whole rise so much or so fast that the average family finds it can buy less than before with its income. Many times in the past inflation has been a continuing process of wages chasing prices and prices chasing production and distribution costs.

I take it for granted that we all want to prevent inflation if we can—or at least to minimize its effects—since one of the worst effects of inflation during the defense period would be to increase the economic problems of reconstruction when the defense period is over.

It is not true, however, to think that the danger of inflation has occurred simply because of the national defense program.

Inflationary trends have existed in this country during the past ten years. But this "potential" inflation has not become "effective," in the sense that it has caused a continuous rise of the general price level. Only a spark is needed, however, to ignite the already existing fuel of inflation.

There are today several factors which may set in motion the potential inflationary forces accumulated during the last ten years. If these inflationary forces, whether due to the method of governmental defense financing or to general wage increases or to other causes, once begin to take hold it will be difficult to keep them in check.

These are the steps which could be taken during the defense production period by industry and labor, with government cooperation where necessary, to either prevent inflation or to reduce its extent—

(1) Avoidance by government departments of competition with each other on a price basis. The War and Navy Departments are already cooperating in this effort.

(2) Avoidance of price increases not related to changes in production costs or to the necessity of earning a fair average profit.

(3) Any fixing of prices by government should be for single industries instead of for industry as a whole; should realistically recognize that if prices are controlled, costs including wages may also have to be controlled, if the price control is to be at all effective. Such price control should, moreover, be by a separate commission with prices fixed only after a hearing of interested parties.

(4) Wage rates, in general, should not be increased faster than warranted by increased productivity of labor or increases in the cost of living.

(5) Both industry and government should avoid accumulations of excessive inventories.

(6) If it is necessary to expand defense production by increasing working hours, such increase should not be subject to overtime pay, since this would raise the cost of production, and might contribute to an upward spiral of prices.

(7) Careful consideration should be given by those who sell goods on an installment basis to require larger down payments and decreasing the total time allowed for payment. This would tend to avoid excessive demand for such goods which in turn would tend to create higher prices for them. There was 44 per cent more installment credit outstanding at the end of 1940 than at the end of 1929.

(8) Congress should adopt the recommendations of the Federal Reserve Board for control of the volume of excess monetary reserves in banks.

(9) The defense program should be financed so far as possible without resort to credit expansion. This would involve reduced civil expenditures of government, as advocated by Secretary Morgenthau. It would involve increased taxes, coupled, however, with a removal of already existing injustices in the tax system. It would likewise involve encouragement for individuals to voluntarily purchase government bonds and savings stamps.

At the same time that it is considering the increased taxes proposed by Secretary Morgenthau, Congress should likewise consider his suggestions that non-defense expenditures should be reduced.

And while adding to the present tax load Congress should certainly remove existing injustices in our federal tax system. If it does not, it will magnify these injustices.

(10) Intelligent application of priorities to prevent non-defense users from bidding up prices without limit.

It is easy to have inflation. You can just let it occur. It is not so easy to prevent or cushion inflation. It will mean considerable effort, some hardship, some sacrifice, and some regimentation. Individually and as a nation we must decide whether we really want to prevent inflation, and if we do, then must go ahead without delaying any longer.

My personal belief is that because of the general inflation already established in our national economic system during the last ten years that we cannot entirely prevent inflation during a defense prosperity boom. I think we can and should use sound means to reduce the extent of inflation and cushion its effects. These means should not include extreme regimentation which would destroy the very liberties we are preparing ourselves to defend.