When Alexander Solzhenitsyn declared in his Harvard
commencement address that neither diplomacy nor military strength could
abolish the danger posed by the Soviet Union, and that only a
reinvigoration of moral and spiritual character would be effective in
the struggle with Communism, he caused quite a commotion. To his
critique of the West as weak and cowardly came a barrage of
denunciations, from such varied sources as Mrs. Rosalynn Carter and The
New York Times. The Times editors called him "obsessed" and summarized
their view in this way:
At bottom, it is the argument between religious
Enthusiasts, sure of their relationship to the Divine Will, and the men
of the Enlightenment, trusting in the rationality of humankind.
Indeed, the editors of the Times had gone to the root
of the issue. For Solzhenitsyn is a religious believer, sure that the
Divine Will has revealed certain moral absolutes through the
Judeo-Christian tradition, and convinced that they are being eroded-and
that in the process our society is crumbling.
Though Solzhenitsyn's remarks were directed primarily
at U. S. foreign policy and the international conflict with Communism,
they have profound implications for domestic issues, including the
economic. The failings he pointed out-worship of material wellbeing, the
placing of human "rights" over human obligations, the loss of personal
responsibility, and the willingness to sacrifice for the common good-all
are intimately connected with our economic problems, and particularly
with the phenomenon known as inflation.
From the viewpoint of economics per se, inflation is
readily defined: it is the governmental increase in the quantity of
money and credit-an increase which has in this century far exceeded the
growth in the production of goods and services. But what are the
ultimate reasons why the government increases the money supply in this
way? It is the contention of this essay that these reasons are directly
related to the moral and spiritual failings which Solzhenitsyn discerns
in the American people.
One of the great economists of our time who would have
been sympathetic with that view is Wilhelm Roepke, a man with some
kinship to Solzhenitsyn, both in his courage and beliefs. In his book, A
Humane Economy, Roepke said of our age of inflation:
... it is the acute stage of a chronic pathological
process fed by forces which are now permanently operative, and as such,
it is not susceptible to any quick or lasting cure. The inflation of our
time is intimately connected with some of its most obdurate ideas,
forces, postulates, and institutions and can be overcome only by
influencing these profound causes and conditions. It is not just a
disorder of the monetary system which can be left to financial experts
to redress, it is a moral disease, a disorder of society. This
inflation, too, belongs to the things which can be understood and
remedied only in the area beyond supply and demand.
A Spiritual Illness
Believing with Roepke that inflation is not just a
disorder of the monetary system but a moral disease and ultimately a
spiritual illness, we will seek here to examine this fundamental
problem-to analyze the psychology of inflation. Psychology is used here
in the classical sense, that of Plato and Aristotle, to mean the
understanding of the order of the soul. And if, as Plato said, society
is "man writ large," then inflation will only be properly understood and
possible solutions arrived at through a knowledge of man's moral and
spiritual disorders which cause him to constantly increase the quantity
of money, and thus decrease its value.
The term "psychology of inflation" is usually connected
with the attitudes of anticipation that cause workers to fight for wage
increases large enough to cope with future increases in the cost of
living, that cause management to set prices high enough to maintain
profits despite increases in future costs-as well as those attitudes
that cause consumers to buy more or less than they ordinarily would
because of their expectations about what is happening, and what will
happen, to the value of their money. But this approach to the psychology
of inflation assumes a long and continuous period of inflation that will
go on indefinitely in the future; it is based on inflation as a "given."
Our concern here is with the non-economic causes of inflation, and in
particular the moral problems that prompt government to increase the
quantity of money.
Some observers emphasize the moral problem of greedy
citizens who clamor for more government services but are unwilling to
pay higher taxes. Others point an accusing finger at selfish workers who
want higher wages without increasing production. Still others indict
unprincipled politicians who try to win elections by appearing to give
the people more benefits without charging them more. To some
commentators the moral problem centers around the hubris of intellectual
planners who believe themselves capable of manipulating the money supply
better than the "invisible hand" of the market place.
One thing is certain: inflation is the economy's
reaction to a whole range of questionable human desires and actions
which place such a strain upon the economy's resources that its money is
debased. As Roepke put it:
If any man should continually sin against all the rules
of reasonable living, some organ of his body will slowly but surely
suffer from the accumulation of his mistakes; the economy, too, has a
very sensitive organ of this kind. The organ is money; it softens and
yields, and its softening is what we call inflation, a dilatation of
money, as it were, a managerial disease of the economy.
It is the "sin against all the rules of reasonable
living" that is, at bottom, the cause of inflation.
The Welfare State
That inflation is closely related to the emergence of
the welfare state in the middle decades of this century seems almost
self-evident. From the Presidency of Franklin Roosevelt and the time of
the Depression (which resulted, incidentally, in large part from the
Federal Reserve's gross mismanagement of the money supply) government
has expanded enormously into the realm of 11 social welfare" with such
programs as Social Security, welfare payments, unemployment insurance,
Medicare and Veterans' payments. Though the Federal budget has
mushroomed, taxes have not gone up enough to fully compensate and the
result has been repeated deficit budgets. To fill the gap between what
is taken in and what is paid out the federal government has created fiat
money-through the printing press and credit expansion -which is
inflation.
What are the root moral and spiritual causes that have
been responsible for the tremendous growth of the welfare state-a
government virtually obliged to spend more than it takes in?
As various scholars have pointed out, since the time of
the Renaissance men have exhibited an increasing confidence in their
ability to control nature and society, to produce endless progress, and
to equalize economic well-being. The philosophers of the Enlightenment
preached the great power of man and his rationality as a kind of ersatz
religion in place of the Judeo-Christian heritage, and with the advent
of modern technology it actually ally seemed as if man could create a
heaven on earth.
At the same time, as the Industrial Revolution created
a more complex economy, people could no longer observe many basic
economic phenomena with their own eyes. Modern man has become
increasingly cut off from a knowledge of scarcity because of the great
prosperity he has enjoyed; living in a complex urban society he has lost
sight of the relationship between production and consumption, effort and
reward. Promoters of the welfare state have even led him to believe that
government was a creator of wealth, and could bestow it on the
deserving-if they insisted on getting their due.
Simultaneously, there has been a great decline in
ethical instruction and character training in this century-especially in
our schools. What Richard Weaver termed the "spoiled child psychology"
has emerged. In his powerful little book, Ideas Have Consequences,
Weaver spoke of modern man as a spoiled child.
The scientists have given him the impression that there
is nothing he cannot know, and false propagandists have told him that
there is nothing he cannot have. Since the prime object of the latter is
to appease, he has received concessions at enough points to think that
he may obtain what he wishes through complaints and demands. This is but
another phase of the rule of desire.
Having been cut off from his religious faith, or having
forgotten its moral implications as they apply to his responsibilities
as a citizen, modern man has little or nothing to act as a curb on his
appetite. In the past half century government has acted as man's
benefactor in the name of compassion and humanitarianism, assuring men
that their appetites are legitimate and that government can gratify
them. In reality, however, government has nothing to give some but what
it takes from others.
The relatively recent character changes which have
caused the growth of the welfare state, and in turn, which have been
encouraged by it, have been noted in studies made by the scholarly
research firm of Yankelovich, Skelly and White. As a result of
interviewing hundreds of thousands of Americans over the past 30 years,
these researchers have discovered three basic changes in modern
attitudes which have taken place in a single generation: a loss of
autonomy (dependency), focus on self (personalized morality), and the
psychology of entitlement (parentalism).
The Consumer View
For centuries it was each man's goal to become
self-sufficient and self-supporting-that is, for himself and his family.
Knowing that if he did not work he would die, his efforts were
vigorously directed toward production. Modern man, deluded that
abundance is automatic-a fact of life-and driven by his unchecked
appetite, is no longer concerned with his role as producer. In fact,
attitude research concerning the contemporary American's economic
perceptions shows that he views himself almost entirely as a consumer.
Thus we have a citizen whose self-image focuses on his activities in
getting and using money and goods, and who is no longer guided or
disciplined by objective moral standards. Understandably, he feels
himself entitled to the money and services that Big Brother concedes and
even gladly offers him. And powerseeking politicians, eager to get
elected, are correspondingly happy to promise the citizen these
things-even if it means creating a socialist system with deficit budgets
financed by inflation.
Inevitably the inflation gets out of hand and the
intervening politician has no answer but controls. Weaver comments:
What happens finally is that socialism, whose goal is
materialism, meets the condition by turning authoritarian; that is to
say, it is willing to institute control by dictation in order ... not to
disappoint the consumptive soul.
In the end, then, freedom is lost. The passions of the
consumptive soul will, as Burke said, forge his fetters.
Another major cause of inflation is institutional
interventions by government and labor unions in setting wage rates,
combined with a government policy of "full employment."
Through legislating an arbitrary minimum
wage-deliberately higher than free market rates government disemploys
the least qualified job seekers, those unable to produce enough to
justify that wage. Labor unions, because they have been granted
monopolistic and coercive privileges by government, can force wages
higher still, and in turn, oblige companies to raise their prices to
levels which consumers will not pay. This would create widespread
unemployment if government did not intervene by further increasing the
quantity of money-to put more dollars in consumers' pockets, and thus
enable them to buy the overpriced goods. The astute labor union leader
realizes that this governmental action in effect lowers the wage
increases he has gained, and so he in turn puts pressure for another
round of wage raises. Under the Full Employment Act government is
virtually obliged to further increase the money supply-since politicians
find that "jawboning" fails to hold down wages (or prices) and they are
unwilling to repeal the labor legislation that prevents the market from
determining wage rates.
Inflexible Wage Demands
Above and beyond these "institutional" interventions by
government and labor unions, there is still another artificial pressure
that tends to push wages above market rates: each person's exaggerated
idea of his own worth, combined with the pervasive notion that wages may
go up-but never go down. To many an American employee, the idea that his
wage might reasonably go down, even if he has become less productive or
market conditions affecting his employability have changed, is almost
unthinkable. To some extent this reveals unawareness of how the market
operates. It also indicates that people now have a viable alternative to
working: collecting unemployment insurance. And it suggests that the
concept of sacrifice and self-discipline in adjusting one's living
standard to the circumstances of life has largely been lost.
What produces this array of pressures-from minimum wage
legislation, monopolistic unions and unenlightened public opinion? A
combination of economic misconceptions, short-sighted workers, the
political power of unions, and a kind of maudlin sympathy on the part of
many bystanders who may not personally benefit from artificially high
wages but urge them out of a love for "humanity" in the abstract. And
all these pressures are permitted to operate because government
officials, under the influence of Keynesian ideas, hope to secretly
lower real wages through inflation to prevent widespread unemployment.
Another category of moral and psychological problems is
implicit in the philosophy and policy behind government manipulation of
the money supply modern day incarnation of the Renaissance conceit that
man, through his rational powers, can control nature, society and even
the economy, and that unless man steps in, everything will fall apart.
Adopting a policy of intervention, government planners have aimed at
"stimulating" the economy through fiscal expansion and have attempted a
"fine tuning" of the economy in the name of "economic balance."
Fine -Tuning the Economy
All this has been undertaken in the belief that the
market place, if left alone, is unable to bring stability and growth and
is susceptible to the "boom and bust" cycle. As if the economy were an
ill patient, whose body could not regulate itself, government's
"doctors" have sought to stimulate or heat up a "cold" economy by fiscal
expansion and cool down an "overheated" economy by fiscal contraction,
thus creating the boom and bust cycle for which capitalism is blamed.
The results have been uncontrolled double-digit inflation and recession.
The fine tuners have discovered that instead of "balance," they have
only that curious combination of stagnation and inflation known as
"stagflation."
Those who believe they can centrally plan and control
the economy have made us all victims of their vanity: they are, in
effect, setting themselves up as little gods over the economy-and the
population. They attempt to balance an economy which they have upset by
their interventions, and only manage to add further to the problem. As
F. A. Hayek has pointed out, market prices are uniquely capable of
assimilating all the millions of bits of information that allow business
to operate smoothly. The interventionists possess very limited
information and are essentially tinkering with an economy they know not
how to control or to improve. These policies betray an acute lack of
belief in true and enduring principles of economics-principles which
have the sanction of morality and common sense.
Though government directly intervened to stimulate the
economy, and Keynesian economists are responsible for giving
government's actions an appearance of intellectual sanction, both
business and organized labor must share some of the responsibility.
Union leaders will urge inflationary measures to keep their overpriced
members employed, and businessmen may join them because a stimulated
economy puts more dollars in consumers' pockets and can mean larger
sales and higher profits in the short term. Both the union and the
business leader suffer from unawareness or rejection of Henry Hazlitt's
basic lesson: an economic policy must be evaluated for its effects on
the whole population in the long term rather than on a limited sector in
the short term. This holds true for all those who clamor for special
interest legislation, welfare, and so on. The desire for immediate
gratification instead of looking to what is best for everyone over a
period of time has been a major cause of inflation-governmental increase
in the quantity of money and credit.
Redeemable in Gold
And it is here that the very question of the integrity
or inviolability of money comes in-and with it the question of the gold
standard. For centuries, even in the most turbulent times, money was
regarded as inviolable; the notion that money could be created by fiat
was put on the same level as forgery and fraud.
The gold standard has traditionally been the method by
which the value of money has been anchored to something more stable and
constant than the whims of governments. Making paper money redeemable in
gold disciplines the politician and obliges him to severely limit the
increase in the money supply. Our rejection of the gold standard, while
intellectually rationalized, was really a turning away from the
responsibilities and norms which this standard requires. Every society
has norms by which it must live if it is not to degenerate into mere
anarchy. Roepke concludes:
It is not enough that these should be laid down in
constitutions; they must be so firmly lodged in the hearts and minds of
men that they can withstand all onslaughts. One of the most important of
these norms is the inviolability of money. Today its very foundations
are shaken, and this is one of the gravest danger signals for our
society and state.
A return to the gold standard will only be feasible
when the enduring moral values affirmed by Solzhenitsyn and others live
in the hearts and minds of the American people.
Problems are comparatively easy to state-answers come a
lot harder. The first step toward overcoming the failings which
constitute the psychology of inflation is summed up by the Greek dictum:
"know thyself."
Am I guilty of any of the "sins" that contribute to
inflation? When Americans can ask and honestly answer that question, and
begin to correct their faults, they will have taken a step toward the
psychology of freedom and the morality of sound money.
At the time of the original publication, Mr. Wolfe was
a student at Hillsdale College in Michigan. This article constitutes
his award-winning entry in the 1978 "Ludwig von Mises Memorial Essay
Contest - The Political Economy of Inflation: Government and Money"
sponsored by the Intercollegiate Studies Institute.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
February, 1979, Vol. 29, No. 2.
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