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Paul A. London: Don’t listen to the inflation hawks

FED POLICY

The headquarters of the Federal Reserve in Washington. Berkshire working people and those in other parts of rural America are naturally concerned about inflation, but Paul London argues they are likely to suffer much more from a slower economy and unemployment engineered by the Fed and tight money advocates to fight inflation than from an inflation like we are facing now.

Working people in the Berkshires like the men who replaced some siding on our house during summer 2021 drive trucks long distances every day. They were already concerned about high gasoline and other prices last summer and inflation (8.3 percent at this writing) is worse now.

Gasoline prices tell the story. They had been under $3 a gallon for six years until early 2021 and were only $2 a gallon during the worst of COVID in 2020 because people were driving less. Then they rose to more than $3 last summer as COVID eased, and this year they are well over $4. The inflation culprits today are OPEC-fostered energy prices and COVID-related bottlenecks that will eventually be resolved; the hot economic recovery and job market; and the Ukraine War.

The question for working people in the Berkshires and for policymakers in Washington is whether the country is better off with rising prices for a year or two or will we do better if the Federal Reserve raises interest rates and cools off home building and construction. The problem is that both are big employers in Berkshire County, and cooling them means less income for carpenters, lumberyards, hardware stores, quarries and others here. Many policymakers and commentators apparently believe that inflation is worse for working people than the unemployment that so often has resulted from efforts to fight it, but U.S. history tells a much different story.

A dual lesson in economics ...

There are many ugly examples of what happens when political leaders slow growth to avoid inflation. Money during the Roaring ‘20s had been easy and cheap as it was until the spring of last year.

The automobile, radio, Prohibition and other factors were changing society. Working-class consumers for the first time could get credit to “buy on time.” Carpenters and plumbers were borrowing to buy cars and speculate on stocks and property.

In 1928 and 1929, however, concerned about soaring stock market prices, the Federal Reserve tightened money supply and raised interest rates to cool speculation. Loans got harder to get and more expensive and eventually banks cut lending causing many businesses to lay off workers. The Federal Reserve and its branches could have refilled the banks’ coffers and allowed them to continue lending. Indeed, the Fed was created in 1912 to be a source of lendable reserves. The Fed in 1929, though, did not refill banks’ coffers, so lenders as well as borrowers collapsed, and the Great Depression spiraled downward.

President Herbert Hoover, his mega-rich Treasury Secretary Andrew Mellon and the Congress compounded the Fed’s mistakes largely because they shared the ancient conviction that government spending would discourage private investment and be inflationary. Absent Fed and Treasury support, prices fell 7 percent a year until 1933 so that the country got deflation instead of the feared inflation — and 25 percent unemployment.

... and history

The conviction that inflation is the “road to hell,” however, goes much farther back in American history than the Great Depression. President Andrew Jackson in the 1820s and ‘30s was a proponent of “hard” gold currency. He wanted to reduce the use of credit and paper money that was being created haphazardly by state and local banks.

Alexander Hamilton, President Washington’s brilliant Treasury secretary, had created the First Bank of the United States in 1791 to create confidence in the new nation’s finances and a modicum of responsible central supervision to bank lending, but its charter had lapsed in 1811. Less stable state and local bank financing became the norm for the next two decades. In the 1830s, after Jackson tightened money by requiring that land purchases be paid for in gold, a long recession followed. This hurt ordinary people who had been using easy credit to buy land and better themselves.

A similar thing happened two decades later. The federal government during the Civil War (1861-1865) ended the convertibility of paper money into gold and issued millions of dollars’ worth of “greenbacks” to help finance the war. A postwar boom in railroad construction ended with the financial panic of 1873 that led agrarian, southern and western interests to urge the government to issue more greenbacks to get expansion going again. This was opposed by hard-money advocates, who wanted to take greenbacks out of circulation.

This clash continued a long battle between hard and soft money advocates that in a sense has never ended. Annual deflation of 1 or 2 percent from 1873 into the 1890s hurt farmers and other borrowers who had to repay loans with money that was worth more than when they borrowed it. William Jennings Bryan, the Democratic candidate for president in 1896, was lamenting the impact of deflation on farmers and labor when he said that ordinary Americans were being crucified on “a cross of gold.”

The bottom line is this: Today’s concerns about inflation are familiar and ancient. Berkshire working people and those in other parts of rural America should recognize that inflation is not their worst economic enemy. They are naturally concerned about inflation, but they are likely to suffer much more from a slower economy and unemployment engineered by the Fed and tight money advocates to fight inflation than from an inflation like we are facing now.

Paul A. London, Ph.D., was deputy undersecretary of commerce for economics and statistics from 1993 to 1997. During the energy crisis in the 1970s, he was an economic adviser to the New England Congressional Caucus led by then-House Speaker Tip O’Neill and U.S. Rep Silvio Conte, of Pittsfield. He lives in Becket and Washington, D.C.

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