Economic Insights

FEDERAL RESERVE BANK OF DALLAS VOLUME 1, NUMBER 1

national goals, such as maxi- faded, our determination has Rediscovering the mum output and employment waned. We have stopped growth. Since many of the thinking of sound money as advantages of price stability honest money. Value of Honest Money are self-evident, I am some- When our government is- what perplexed as to why the sues money, we have a right constituency for it seems so to expect that money to be Bob McTeer weak among the business worth tomorrow what it is to- President and Chief Executive Officer community and the public. day. If that is too high a stan- Federal Reserve Bank of Dallas One gets the impression that dard, shouldn’t we at least most people are content with try? We have a right to expect It seems you can hardly 3-percent inflation, even that what we save for our pick up a paper or turn on the though the rule of 72 says that children’s education or for news these days without see- prices will double every 24 their inheritance will hold its ing something about all the years with 3-percent inflation. value. If you think about it, efforts on Capitol Hill to rede- It is true that 3-percent government-issued money is fine the way Congress and the inflation is good by the stan- a contract with the people. We have stopped president carry out their fiscal dards of the 1970s, and even Inflation is taxation without responsibilities. The balanced the 1980s, but it’s not so good representation. thinking of sound budget amendment. A line- by earlier standards. Recall People wiser and more ar- item veto. Legislation to limit that President Nixon declared ticulate than I have given elo- money as honest unfunded federal mandates. a national emergency and im- quent voice to my thoughts When you stop and think posed price and wage controls about money. One was the money. When our about it, you have to wonder in 1971 when inflation had Rev. Robert Sirico, president how things got so bad in the climbed to the dangerous level of the for the government issues first place. of 4 percent. Study of Religion and , Traditionally, Americans For much of our history, who addressed a group of money, we have a have expected prudence in sound money was imposed business leaders during a lun- government spending. The externally by our commitment cheon at the Dallas Fed. He right to expect that government and public took to gold convertibility, directly spoke of the concept of hon- it for granted that budgets or indirectly. Going off the est money as it is founded in money to be worth should be balanced, except, gold standard in the early the Bible. perhaps, in major emergencies 1970s may have been the The other person who tomorrow what it is or extraordinary circum- smart thing to do under the stated the case for honest stances, such as war or depres- circumstances; it may even money so eloquently was the today. If you think sion. But once Keynes con- have been the only alternative late Henry Wallich, former vinced us that the budget was at the time. I must admit, college professor, columnist about it, government- a legitimate policy tool to be however, that our experience and member of the Federal manipulated to fine-tune the with price stability since then Reserve Board of Governors. issued money is a economy, the moral commit- has not been as good as it was He did so in a commencement ment to a balanced budget before. address 17 years ago. I find it contract with the withered away. I would argue One problem with our somewhat comforting that his that much the same thing has national commitment to sound remarks still ring true today. people. Inflation is happened to our resolve money probably is the In this first issue of Eco- against inflation. progress we have made on nomic Insights, I am sharing taxation without The advantages of price inflation since the 1970s. With the honest money messages stability, or a stable value of that experience fresh in our of Father Sirico and Henry representation. the dollar, are many and var- minds, we willingly under- Wallich. I’d enjoy hearing ied. Price stability is a worthy went wrenching adjustments what you think. Please write goal in itself, and it also offers in the early 1980s to break the me at the address on the back, the best financial environment back of inflation. As progress or fax me your thoughts at for achieving other important was made and our memories (214) 922-5268. ª Yet the case is much the tions. That reduces the range same when we are dealing of possible bargains and the Honest with monetary values. level of economic activity. The moral issues posed Fewer jobs and less output by inflation go beyond what I in the private sector are the Money consider deceit. Inflation is a results. means by which the strong Inflation also undermines can more effectively exploit the honesty of our public poli- the weak. The strategically cies. It allows the politician to The following is an edited positioned and well-organized make promises that cannot be excerpt from Henry C. Wallich’s can gain at the expense of the met in real terms because, as commencement address delivered unorganized and the aged. the government overspends to the Fordham Graduate School of In the eyes of economists trying to keep those promises, Business on June 28, 1978. and of government, inflation the value of the benefits it becomes a means of exploit- delivers shrinks. ing labor’s money illusion, its Finally, inflation becomes At this time, you are pre- supposed failure to anticipate a means of promoting changes sumably looking at your fu- inflation correctly. The device in our economic, social and ture role in the world in the through which this mecha- political institutions that cir- Inflation introduces broadest possible sense, in- nism operates is the well- cumvents the democratic pro- cluding a moral sense. Today, known Phillips curve, the al- cess. Such changes could be an element of deceit I would like to talk to you leged trade-off between un- forced upon a reluctant nation about one aspect of your fu- employment and inflation. It because inflation may end up into most of our ture that has a moral dimen- is believed that labor will re- making the existing system in- sion, although it is technically spond to a seemingly large viable. One instance is the di- economic dealings. an economic problem. I mean wage offer that subsequently minishing ability of house- the breakdown in our stan- is eroded by inflation. If labor holds to provide privately for Everybody makes dards of measuring economic fails to notice the trick, it will their future. Personal savings, values, as a consequence of keep working for less than it insurance and pension funds contracts knowing inflation. really had demanded, and all become inadequate. Money Inflation introduces an el- employment will be higher. A set aside in any of these forms perfectly well that they ement of deceit into most of government pretending to for old age, for sickness, for our economic dealings. Every- serve a nation’s interest by, education could be wiped out will not be kept in body makes contracts know- say, misinforming the people by accelerating inflation. One ing perfectly well that they will about its military plans would may indeed ask whether it is terms of constant not be kept in terms of con- be harshly taken to task. not an essential attribute of a stant values. Everybody ex- Why should trading on the civilized society to be able to values. This condition pects the value of the dollar people’s money illusion be make that kind of provision to change over the period of regarded any differently? for the future. But that is not is hard to reconcile a contract. But any specific Meanwhile, planning the point I want to stress. allowance made for inflation ahead becomes more diffi- Rather, I want to emphasize with simple honesty. in such a contract is bound to cult for business. Investment that the increasing uncertainty be a speculation. The most lags because long-term com- in providing privately for the valuable part of the contract mitments involve risks that future pushes people who are may turn out to be the paper inflation makes incalculable. seeking security toward the it is written on. This condition The need to guard against government. is hard to reconcile with these unknowable risks By one route or another, simple honesty. compels each party to any inflation creates a vacuum in If our contracts were transaction, buyer and seller, the private sector into which made in terms of unpredict- employer and employee, the government moves. By ably shifting measures of lender and borrower, to in- making the performance of weight, time or space, as we troduce a risk premium into the economy inadequate, in- buy food, sell our labor or his pricing. Each must de- flation is likely to induce ex- acquire real estate, we would mand a little more or offer a panded government activity. probably regard that as little less than he would un- Of the three great dimensions cheating and as intolerable. der noninflationary condi- of our society—private rather than public ownership, deci- tions. The benefits of a tax cut, getting a little more employ- sion-making by the market of increased public spending, ment and output now at the rather than by central plan- are felt within a few weeks or expense of much more unem- ning and democracy rather quarters. The penalty in terms ployment and loss of output than authoritarianism—pri- of inflation may not come un- later. And we will get more Inflation is a vate ownership and market til after a couple of years or inflation all along the way, decision-making will then be even later. Inflation is the down to its ultimate conse- means by which the in retreat. No one can say how long-run consequence of quences. We need to make long, under such conditions, short-run expediencies. Life, the ending of inflation our strong can more a shift also in the third dimen- to be sure, is a succession of first priority. That must be sion, away from democracy short runs, but every moment our overall policy. effectively exploit and toward authoritarianism, is also the long run of some If inflation is a moral can be avoided. short-run expediency of long problem, we require a moral the weak. The What can be done? Be- ago. We are now experienc- solution—that is, a recognition fore we look for remedies, we ing the long-run conse- that public policies have led strategically must examine the causes. In- quences of the short-run to serious inequities affecting flation is like cancer—many policies of the past. These people in different and un- positioned and well- substances are carcinogenic, consequences are as unac- equal ways and a commitment and many activities generate ceptable as rain on week- to new policies that will cor- organized can gain inflation. The sources of in- ends and just as easy to rect the cumulative distortions flation can be diagnosed at change. If we continue to and contribute to desired eco- at the expense of the several levels. The familiar de- meet current problems with nomic progress. Nothing will bate about the sources of vio- new short-run devices, the stop inflation overnight, and unorganized and lence provides an analogy. Do bill will keep mounting. in the short run, the gains will guns kill people? Do people We will not defeat infla- always seem dearly won. But the aged. kill people? Does society kill tion if we always take the without such a long-run ap- people? Some assert that short view. We will then al- proach, the damage will money, and nothing but ways find that the cost of fight- mount and the ultimate costs money, causes inflation—the ing inflation is too high, the will escalate. “guns kill people” proposition. short-run loss of output and ª Some assert that the en- employment too great. We Henry C. Wallich served as a tire gamut of government shall find ourselves ignoring member of the Federal Reserve policies, from deficit spend- inflation, in the hope that it Board of Governors from 1974 to ing to protectionism, to mini- will somehow not grow 1986. For a copy of the complete mum wage to farm price sup- worse. That is pure self- text of his commencement address, ports, to environmental and deception. Cancer ignored please write to the Federal Reserve safety regulations, causes does not become stationary, Bank of Dallas, Public Affairs Dept., inflation—the “people kill and neither does inflation. In- 2200 N. Pearl St., Dallas, Texas, people” proposition. Some flation ignored accelerates. 75201, or fax your request to the argue, finally, that it is social A long view is needed on Public Affairs Dept. at pressures, competition for inflation. It is a view very dif- (214) 922-5268. the national product, a revo- ferent from that of the politi- lution of aspirations, which cian, who is under enormous is at the root—the “society pressure to do quickly some- kills people” proposition. thing that looks good. Harold The first view holds the cen- Wilson said that in politics one tral bank primarily responsible week was a long time. More for inflation, the second the charitably, the pressure is un- government in general, the til the next election. If the third the people who elect people will not instruct their and instruct the government. elected representatives to do In addition, time prefer- the things that are needed to ence, the social discount rate, end inflation, if they turn them enters into the equation. In- out of office because the rem- flation usually is the final link edies take time and are tem- in a chain of well-meant ac- porarily painful, we will keep those weights ranked among ance of trade with Japan. the behaviors condemned Actually, all these scrip- Examining the from Above. Certainly, if it is tural references make an im- wrong for individuals to portant moral and economic deceitfully change the weights point. The long history of in- Moral Dimensions of and measures in their trans- flation reveals the tragic con- actions, it is also morally in- sequences of excessive money Monetary Policy cumbent upon other institu- creation. It can, literally, turn tions, especially government, a society upside down. It did to keep honest weights and in Germany, in the famous measures. hyperinflationary period of Allow me to provide a 1921–23. It did in this country The following excerpts are few examples. God told the in the late 1970s. It has in from the Rev. Robert A. Sirico’s Israelites that economic trans- innumerable developing luncheon address delivered at the actions should take place with countries. Control of the print- Federal Reserve Bank of Dallas honest weights. Leviticus ing presses is probably a first on February 25, 1994. 19:35–37, instructs, “You shall order condition to a solid do no wrong in judgment, in economy and stable social or- measure of weight, or capac- der. So much for the magic of Before the turn of this ity. You shall have just bal- credit expansion. century, an entire generation ances and just weights.” ª Certainly, if it is wrong of preachers and ministers This was long before the The Rev. Robert A. Sirico is founder concluded that a moral mon- followers of Keynes revealed and president of the Acton Institute for individuals to etary policy was an easy- to us the dangerous “liquidity for the Study of Religion and Liberty, money policy. “Give the trap” that might result from based in Grand Rapids, . deceitfully change the people more money and such “outdated” morals. credit,” was the cry of the Again, Proverbs 11:1 an- weights and measures populist ministers. “Down nounces that, “A deceitful bal- with gold, up with silver.” ance is an abomination before in their transactions, They mistakenly believed that the Lord: but a just weight is the Treasury’s printing press His will.” But, of course, this it is also morally was the key to earthly salvation. was before we discovered the Even as late as the 1940s, mysterious “magic” of debt incumbent upon other this ideology is evident in film. monetization. As much as I love the Christ- Proverbs 20:10 says, “Di- institutions, especially mas classic, “It’s a Wonderful verse weights and diverse Life,” a careful viewer can de- measures, both are abomi- government, to keep tect its social credit homiletics. nable before God.” Would that Even today, no matter Solomon had known about honest weights and which party holds the White the trade-off between inflation House, the Federal Reserve and employment, as revealed measures. consistently faces pressure to by the Phillips curve, now keep interest rates artificially back in vogue. low, buy more government It is true that Isaiah (1:22) debt and trade quick eco- warned that “faithless princes” nomic fixes for long-term capi- can turn silver “into dross.” Economic Insights tal accumulation. But that was before we knew is a publication of the Federal Reserve Bank Yet, it seems to me, hon- how much debtors can gain of Dallas. The views expressed are those of esty and morality weigh in on from paying back dollars that the authors and should not be attributed the side of the grand tradition are cheaper than those they to the Federal Reserve System. of sound and stable money. borrowed. Please address Holy Scripture speaks of I’ll grant that the proph- all correspondence to money in terms of weight, just ets Amos (8:5) and Micah Economic Insights as it was spoken of through- (6:10) condemned deceitful Public Affairs Department out history. In the list of com- balances when selling wares. But Federal Reserve Bank of Dallas mandments, tampering with neither knew much of the bal- P.O. Box 655906 Dallas, TX 75265-5906