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Source link: http://archive.mises.org/2478/aaron-director-1901-2004/

Aaron Director, 1901-2004

September 14, 2004 by

Arron Director Dies at 102, Helped Fuse Economics and Law

{ 5 comments }

Jeffrey September 14, 2004 at 4:41 pm

Ludwig von Mises’s comments at a conference on inflation and war, White Sulphur Springs, West Virginia, April 5-8, 1951, sponsored by the University of Chicago Law School (organized by Walter Blum, Milton Friedman, Wilber Katz Edward Levi, W. Allen Wallis, and Aaron Director), reprinted in Defense, Controls, and Inflation: A Conference Sponsored by the University of Chicago Law School, Aaron Director ed., University of Chicago Press, 1952, pp. 107-110, 115-116, 331-334.

Mr. Von Mises: In dealing with the problems we have been invited to discuss at this meeting, it is first of all necessary to realize that fiscal policies have reached a turning point. In the last decades all nations looked upon the income and the wealth of the more prosperous citizens as upon an inexhaustible reserve which could be freely tapped. Whenever there was need for additional funds, one tried to collect them by raising the taxes to be paid by the upper-income brackets. There seemed to be enough money for any suggested expenditure because there seemed to be no harm in soaking the rich a bit more. As the votes of these rich do not count much in elections, the members of the legislative bodies were always ready to increase public spending at their expense. There is a French dictum: Les affaires, c’est l’argent des autres (“Business is other peoples’ money”). In these last sixty years political and fiscal affairs were virtually other peoples’ money. “Let the rich pay,” was the slogan.

Now this period of fiscal history has come to an end. With the exception of the United States and some of the British Dominions, what has been called the “ability to pay” of the wealthy citizens has been completely absorbed by taxes. No further funds of any significance can be collected from them. Henceforth all government spending will have to be financed by taxing the masses. The European nations concerned are not yet fully aware of this fact because they have found a substitute. They are getting Marshall Plan aid. The American taxpayer fills the gap.

In this country things have not yet gone as far as they have gone in other countries. It is still possible to raise an additional two or three or perhaps even four billion dollars by increasing corporation taxes, by excess profits taxes, and by rendering the personal income tax more progressive. But even four billion do!lars is only a fraction of what the Treasury needs under present conditions. Thus, too, in this country we are at the end of a period of fiscal policies. In this country also, the whole philosophy of public finance must undergo a revision. In considering the pros and cons of a suggested expenditure, the members of Congress will no longer be able to think, “Anyway, the rich have enough; let them pay,” for in the future the voters on whose ballot they depend will have to pay.

Inflation is certainly not a means to avoid or to postpone for more than a short time the necessity to resort to taxes to be levied also from other people than those belonging to the rich minority. If for the sake of argument we leave aside all the objections which are to be raised against any inflationary policy, we have to take into account the fact that inflation can never be more than a temporary makeshift. For inflation cannot be continued over a long period of time without defeating its fiscal purpose and ending in a complete debacle as was the case in this country with the Continental currency, in France with the mandats territoriaux, and in Germany with the mark in 1923.

What makes it possible for a government to increase its funds by inflation is the ignorance of the public. The people must ignore the fact that the government has chosen inflation as a fiscal system and plans to go on with inflation endlessly. It must ascribe the general rise in prices to other causes than to the policy of the government and must assume that prices will drop again In a not too distant future. If this opinion fades away, inflation comes to a catastrophic breakdown.

If the houswife who needs a new frying pan thinks: “Now prices are too high; I will postpone the purchase until they drop again,” inflation can still fulfill its fiscal purpose. As long as people share this view, they increase their cash holdings and bank balances, and a part of the additional money is absorbed by this increase. But then comes—sooner or later—a turning point. The housewife discovers that the government will go on inflating and that consequently prices will always rise more and more. Then she thinks: “I do not need a new frying pan today; I shall need one only next year; but I had better buy it now because next year the price will be much higher.” If this insight spreads, inflation is done for. Then all people rush to buy. Everybody is anxious to reduce his holding of cash because he does not want to be damaged by the drop in the monetary unit’s purchasing power. The phenomenon appears which in Europe was called “flight into real values.” The knell of the currency system involved sounds.

We have today in this country not yet reached this second and final stage of every protracted inflation. But if the authorities do not very soon abandon any further attempt to increase the amount of money in circulation and to expand credit, we shall one day come to the same unpleasant result.

We have not to choose between financing the increased government expenditure by collecting taxes and borrowing from the public, on the one hand, and financing it by inflation, on the other hand. Inflation can never be an instrument of a fiscal policy continued over a long period of time. Continued inflation inevitably leads to catastrophe.

Therefore, I think, we should not waste our time by discussing methods of price control. Price control cannot prevent the rise in prices if inflation is going on. Even capital punishment could not make price control work in the days of Emperor Diocletian and the French Revolution. Let us concentrate our efforts upon the problem of how to avoid inflation, not upon useless schemes of how to conceal its inexorable consequences.

* * * * *

Mr. Von Mises: I want to ask a question. What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. Great Britain does not punish gambling. This is not a loophole; it is a British law. The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax—he did not refer to the exemptions—implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country and its workers are not yet reduced to the status and the distress of their Russian colleagues.

I do not want to assert that our laws are perfect and do not require any amendment. Let us discuss this problem in detail and let us examine every instance according to its merits. But do not confuse the issue involved by resorting to the meaningless slogan “elimination of loopholes.”

* * * * *

Mr. Von Mises: What is needed in wartime is to divert production and consumption from peactime channels toward military goals. In order to achieve this, it is necessary to tax the citizens, to take away from them the money which they would otherwise spend for those things they must no longer buy and consume. At the breakfast table of every citizen sits in wartime an invisible guest, as it were, a G.I. who shares the meal. In the citizen’s garage stays not only the family car but besides—invisibly—a tank or a plane. The important fact is that this G.I. needs more in food, clothing, and other things than he used to consume as a civilian and that military equipment wears out H much quicker than civilian equipment. The costs of a modern war are enormous. The adequate method of providing the funds the government needs for the conduct of war is, of course, taxation. Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can for a limited time do the job. But it is the most expensive method of financing a war, it is socially disruptive and should be avoided.

There is no need to dwell upon the disastrous consequences of inflation. All people agree in this regard. But inflation is a very convenient makeshift for those in power. It is a handy means to divert the resentment of the people from the government. In the eyes of the masses, not the Administration, but big business, the “profiteers,” the merchants, appear responsible for the rise in prices and the ensuing necessity to restrict consumption.

Perhaps somebody will qualify what I am saying here as anti-democratic, reactionary, and economic royalism. But the truth is that inflation is a typically antidemocratic measure. It is a policy of governments which do not have the courage to tell the people honestly what the costs of their conduct of affairs are. A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably. But it is much more agreeable for a government to present only a part of the bill to the people and to resort for the rest of expenditures to inflation. What a triumph if they can say: “Everybody’s income is rising; everybody has now more money in his pocket; business is booming.”

Deficit spending is not a new invention. It was during the greater part of the nineteenth century the preferred fiscal method of precisely those governments which were not called democratic and progressive, of Austria, Italy, and Russia. Austria’s budget showed yearly a deficit from 1781 on until the late eighties of the nineteenth century when an orthodox professor of economics, Dunajewski, as minister of finance restored the budgetary equilibrium. There is no reason to be proud of deficit spending and to call it progress.

If one wants to collect more taxes, it will be necessary to burden more than was done hitherto the lower income brackets, the strata whose members consume the much greater part of the total amount consumed in this country. Up to now it was customary to tax predominantly the corporations and the individuals with higher incomes. But even the outright confiscation of these revenues would only cover a fraction of the additional funds the country needs today.

Some experts have declared that it is necessary to tax the people until it hurts. I disagree with these sadists. The purpose of taxation is not to hurt but to raise the money the country needs to rearm and to fight in Korea. It is a sad fact that the evolution of world affairs makes it necessary for the government to force people who used to buy nylon stockings and shirts to shift, as it were, to other Du Pont products, namely, munitions.

Kant in his book, Eternal Peace, suggested that government should be forbidden to finance wars by borrowing. He expected that the warlike spirit would dwindle if all countries would have to pay cash for their wars. However, no serious objection can be raised against borrowing from the public, from people who have saved and are prepared to invest in government bonds. But borrowing from the commercial banks is tantamount to printing additional bank notes and expanding the amount of deposits subject to check; it is inflation.

There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the non-expert to grasp the true state of affairs. “Inflation,” as this term was always used everywhere and especially also in this country, means increasing the quantity of money and bank notes in circulation and of bank deposits subject to check. But people today call inflation the phenomenon that is the inevitable consequence of inflation, that is, the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been up to now called “inflation.” It follows that nobody cares about inflation in the traditional sense of the term. We cannot talk about something that has no name, and we cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy which must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.

Look at the silly term “inflationary pressures.” There is no such thing. There is inflation or the absence of inflation. If there is no increase in the quantity of money and no credit expansion, the average height of prices and wages will by and large remain unchanged. But if the quantity of money and credit increases, prices and wages must rise whatever the government may decree. If there is no inflation, price control is superfluous. If there is inflation, price control is a sham, a hopeless venture. It is the government that makes our inflation—the policy of the Treasury and nothing else.

We have been told a lot about the necessity and the virtues of direct controls. We have learned that they preserve the individual’s liberty to choose the grocer he prefers. I do not want to examine what value has to be attached to direct controls from any metaphysical point of view. I want only to stress one fact: as a means to prevent and to fight inflation or its consequences direct controls are absolutely useless.

Jeffrey September 14, 2004 at 8:45 pm

And here is Aaron Director speaking at the same conference (at once bold and charming) (pp. 160-161):

MR. DIRECTOR: I will confine my remarks to the issue of price control, since Mr. Stein of the Committee for Economic Development will discuss the more difficult question of the proper role of allocation and priorities in facilitating the mobilization program. All I plan to do is to state the position that price control should not be used. I apologize for the dogmatic character of the statements I shall make. My excuse is that I find it very difficult to argue the position. This in turn may be due to the fact that the position is so much a part of the Chicago tradition that we have forgotten how to argue the issue. At Chicago the advantages of the market as a method of organizing economic affairs are valued too highly to be laid aside during so-called emergency periods.

I understand that recently this tradition has been spreading eastward. If that is so, it can perhaps be partly explained by the fact that one of the Chicago economists responsible for establishing this tradition has recently moved in that direction. I am told also, and this we shall be able to verify this morning, that many of the people who were responsible for administering price controls during the last war are very skeptical about its usefulness; and that only shows that there is a hard way of learning such things, by going to Washington, and an easy way of doing it, by staying at Chicago.

For some strange reason, it has become fashionable to believe that, while the market is a useful instrument in ordinary times, it is not a useful instrument when large and sudden changes have to be effected in the use of resources. This is like another fashionable view—that the market is a useful instrument for prosperous countries and not for poor countries. I contend that rich countries can afford the inefficiencies: of other methods and that it is precisely in times when important shifts in economic activity have to be made that the advantages of price changes as signals for the relative importance of goods and services, and as incentives, become decisive.

If a general rise in prices is prevented, it would ordinarily be agreed that changes in relative prices have a useful function to perform. Higher prices for some goods provide a signal of the increased importance attached to these goods, and at the same time they provide an incentive to increase the supply of these goods and an incentive to economize on the use of these goods. A rise in the prices of particular goods leads to the economizing of such goods everywhere, and I submit that it is unlikely that everywhere, if I may use the phrase, is known to any group of experts.

A rise in prices leads to the discovery and use of substitutes, and again I would submit that it is unlikely that all possible substitutes can be known by any particular group of experts. As the relative cost of goods changes and relative price changes are prevented, I suggest that no one will know what the new importance of particular goods is, neither the enterprises that usually do nor the experts in Washington.

I want to say next that I make no assumptions about monetary and fiscal policies. While these are, within limits, alternative to each other in preventing inflation, price control is not an alternative to either. At best, price control will not be decisive in determining the magnitude of the monetary base of inflation. Hence its main contribution is to repress inflation while the control is operative, and even this only if price control is general and fully effective. If the ultimate amount of inflation is generally the same regardless of price control, then it seems to me that there is no advantage in postponing it. To the extent, as was argued by some yesterday, inflation has some incentive advantages, we might just as well obtain these advantages during the period of mobilization. In any event, I contend that open inflation is better than repressed inflation, and it is better precisely because it permits changes in relative prices, which price control, used to stop inflation, must prevent.

When not justified as a method of preventing inflation, price control is justified on the ground that the market is not an equitable method for distributing a reduced supply of consumers goods. But the distribution of income does not change adversely for the lower-income groups. Consequently, the defense of price control in emergency periods must be based on the assumption that consumers are not the best judges of what is good for them—an assumption which is as valid for ordinary as for emergency periods.

The real inequity of inflation falls on fixed-income recipients, and these will suffer the consequences of inflation whether it takes place during the emergency period or is put off to a more “suitable” time. No one contends that absence of a system of distributing goods and services—which is what takes place with price control—automatically assures equity. Consequently, advocates of price control must go on to argue for a system of rationing. But an effective system of rationing makes price control superfluous.

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