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The American Principles Project is a 501(c)(3) organization dedicated to preserving and propagating the fundamental principles on which our country was founded - universal principles, embracing the notion that we are all, "created equal, endowed by our Creator with certain unalienable rights, and among these are life, liberty, and the pursuit of happiness."
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Through our efforts, we hope to return our nation to an understanding that governance via these timeless principles will only strengthen us as a country. Continue reading:
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APP Founder
Robert P. George, J.D., D.Phil., McCormick Professor of Jurisprudence at Princeton University, is one of America's foremost scholars in the fields of constitutional law, ethics, and political philosophy.
Dr. George has won numerous awards for his academic and civic work, including the Presidential Citizens Medal. He has served on the President's Council on Bioethics and as a presidential appointee to the United States Commission on Civil Rights. He is a former Judicial Fellow at the Supreme Court of the United States, where he received the Justice Tom C. Clark Award.
| Why Inflation Matters |
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| Written by Samuel Gregg |
| Tuesday, 07 July 2009 12:14 |
 The 1970s were not a happy time for America: foreign policy reversals, seemingly-endless upheaval on university campuses, the 1973 oil shock, the humiliation of the Carter years, not to mention the disgrace and resignation of a sitting President. Economically, the 1970s were a lost decade as the American economy was wracked by a most unholy trinity: recession, high unemployment, and rising inflation.Today the first two of these phenomena are making their presence more than amply felt. In June this year, for example, unemployment reached a 26 year high of 9.5%. More than one economist believes that it is only a matter of time before the third member of the 1970s trio – growing inflation – will be back to wreck havoc upon us. Put simply, inflation is, as the Austrian economist Ludwig von Mises wrote in his Theory of Money and Credit (1924), an increase in the quantity of money not matched by a corresponding increase in the need for money. At present, the American economy is being flooded with dollars, thanks to unprecedented deficit-spending by Congress and the Obama Administration, currently projected to be 13% of GDP this year. This has been exacerbated by the Federal Reserve’s present low-interest rate (easy money) policy. The basic rationale for such policies was offered by John Maynard Keynes in the 1930s: if governments increase the money-supply, they stimulate demand; increased demand eventually translates into increased employment. It’s the same mantra chanted by contemporary figures such the New York Times’ Paul Krugman when he recently urged an even bigger stimulus package (!). The recent injections of money into the American economy via stimulus packages and close-to-zero interest-rates means, as Arthur B. Laffer recently wrote in the Wall St Journal (06/11/09), that “The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10”. It is very difficult to believe that this is going to be matched by a parallel increase in the need for money. For one thing, many risk-adverse consumers are unlikely to return quickly to the high-spending habits of pre-September 2008 America. Second, the recession continues to diminish the American economy’s output and employment-levels. Both these factors will reduce the demand for money. Rapid increases in the money supply combined with decreases in the demand for money amounts to one thing: increasing inflation. There are of course ways to reduce inflation. If, for example, the Federal Reserve wants to drain excess credit from the economy by raising interest rates, it can do so. Whether the Fed will have the political will to embark on such a course is another matter. In early June, its Chairman, Ben Bernanke, spoke of the need for the Federal government to reduce the deficit. He also warned against the unsustainability of the government continuing to borrow to meet the costs of its various stimulus packages as well as the growing burden of Social Security and existing health-insurance programs (let alone the Administration’s proposed health-care reforms). Bernanke additionally insisted that the Fed would not “monetize” (i.e., simply print money) the Federal government’s debt. All this is well and good. The mere fact, however, that Bernanke had to say these things indicates that he was aware that significant numbers of people had began wondering out loud about the Fed’s anti-inflationary commitments. Moreover, seriously fighting inflation entails a willingness to tolerate increasing unemployment. This is the price of reducing the excessive amounts of money sloshing through an economy. It is also potential electoral poison for governments. If, for instance, the Fed starts raising interest-rates in order to counteract an inflation-rate that starts to creep up above, say, 2% towards the end of 2009, politicians facing reelection in November 2010 will start to become decidedly nervous. The mark of a truly independent central bank is its ability to withstand the inevitable political pressures to sacrifice long-term monetary stability to the whims of politicians whose fiscal horizons rarely extend beyond the next election. Such, however, has been the degree of intertwining between the Federal Reserve’s activities and the economic policies pursued by the Executive Branch in reaction to the financial crisis, that this independence had been called into question. Such is the present maze of the politics of inflation. But it’s also worth reminding ourselves why we should be so concerned about inflation. The reasons are not just economic. There are also moral and political dimensions. Between 1971 and 1977, the United States Consumer Price Index increased by 47%. This is sometimes called the “Great Inflation”. It doesn’t compare, of course, to the catastrophic inflation-levels that twice ravaged inter-war Germany. The economic consequences, however, are similar. When prices begin rising as a result of inflation, the people who experience the most immediate negative effects are those who are on fixed incomes or who live off accumulated savings. This includes those on pensions, such as the elderly, the poor, and the disabled. Their ability to maneuver in the face of inflation is more limited than those who are younger, healthier, and possess more disposable wealth. Another problem stemming from inflation is its facility to undermine the capacity of consumers and businesses to make sound economic decisions. Growing inflation corrodes consumers’ confidence in money’s long-term ability to reflect the real value of different goods and services over extended periods of time. It also undercuts the ability of businesses to discern whether their cost-increases are real, or whether they simply reflect inflationary pressures. All these elements contribute to an atmosphere of excessive economic uncertainty. This is hardly conducive to the risk-taking and entrepreneurship that is central to wealth-creation. Then there are the messages conveyed by inflation about what might be called a country’s inner health. Few would describe a country experiencing rapid and high inflation as typically embodying a stable and healthy political order. One need only remember the rapid depreciation of the Continental dollar issued by the Continental Congress during the American Revolutionary War or visit the economic disaster that is Robert Mugabe’s Zimbabwe today to realize how closely rampant inflation reflects the direness of a country’s political and economic circumstances. But also revealing is the attitude taken by governments towards addressing inflation. Those which commit themselves to removing inflationary pressures from the economy - fully knowing the risks of an electoral backlash from voters angry about higher unemployment – through raising interest-rates or running large budget-surpluses may be fairly said to be more committed to a country’s economic common good, than those which resort to methods such as price and wage controls (as did the Nixon Administration in the 1970s) or which simply engage in more deficit-spending. Such policies merely further undermine money’s ability to convey accurately the true state of the supply of and demand for goods and services expressed through the free price system. At an even deeper level, price and wage controls gradually undermine the economic liberty that is necessary (though not sufficient) for political freedom. A society in which the state sets the price for any number of goods and services is unquestionably less free than one in which most prices are primarily determined by the market as thousands of producers freely respond to the billions of free economic choices made by millions of consumers everyday. But don’t take my word for it. Listen to what the pre-General Theory Keynes wrote 90 years ago on the issue of inflation: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily . . . As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”Post-revolutionary America learnt the economic lessons conveyed by the Continental dollar’s uncontrollable inflation during the Revolutionary War. It was the primary reason that the Constitutional Convention wrote the gold and silver clause "A1Sec10" (Article 1, Section 10, Clause 1) into the United States Constitution to stop individual states from issuing bills of credit. Does anyone in Washington, D.C., remember this today?  Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty and his prize-winning The Commercial Society. |
| Last Updated on Tuesday, 07 July 2009 12:44 |
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