The INFLATION CRISIS, And How To RESOLVE IT HENRY HAZLITT The Foundation for Economic Education Irvington-on-Hudson, New York 10533About the Author and Publisher Henry Hazlitt (1894-1993) began his distinguished career in 1913 at The Wall Street Journal. He went on to write for several newspapers, including The New York Evening Post, The New York Evening Mail, The New York Herald, and The Sum. In the early 1930s he was literary editor of The Nation, and succeeded H. L. Mencken as editor of the American Mercury in 1933. From 1934 to 1946 he served on the editorial staff of The New York Times. While at The Times, he wrote a series of courageous editorials opposing the trend toward radical intervention by all Jevels of government. From 1946 to 1966 he was the “Business Tides” columnist for Newszeek. Mr. Hazlitt will be remembered as an eloquent writer, an incisive economic thinker, and a tireless defender of freedom. His best known book was Economics in One Lesson, which has sold more than one million copies since its first publication in 1946. He wrote or edited seventeen other books, including The Failure of the “New Economics” (1959) and The Foundations of Morality (1964). He was a Founding Trustee of Fhe Foundation for Economic Education. The Foundation for Economic Education (FEE), established in 1946 by Leonard E, Read (1898-1983), is the oldest economic research organization dedicated to the preservation of individual freedom and the private property order. Its goal is to study the moral and intellectual foundation of a free society and share its knowledge with individuals everywhere. It avoids political controversies. FEE is a purely educational organization, publishing and sponsoring seminars and lectures devoted to the limited government, private property principles it espouses. In addition to books, its principal publication is the monthly journal, The Freeman. ISBN 1-57246-010-5 ©1995 The Foundation for Economic Education, Inc. Printed in U.S.A. Originally published by Arlington House, 1978 Library of Congress Cataloging in Publication Data Hazlitt, Henry, 1894-1993 ‘The inflation crisis, and how to resolve it Includes index. 1. Inflation (Finance) 2. Inflation (Finance)— United States 1. Title HG229.H34 332.41 78-5664Introduction In 1977, when Henry Hazlitt set about to write this volume and send it on its way, the U.S. dollar was losing purchasing power at a double-digit rate, gold was selling at $550 the ounce and rising, interest rates were soaring, and the world dollar standard was quaking and quivering in its Federal Reserve moorings. The ’70s were a decade of inflation worse than any other since the demise of the Continental dollaz. Economists the world over were laboring in the shadow of the most important economist of the century, John Maynard Keynes. In both economic theory and policy his work had an enormous impact on the leaders of virtually every capitalistic country. They parroted the Keynesian doctrines and, with zeal and zest, applied the precepts of planned capitalism, equalization of incomes, contracyclical spending, multiplier and accelerator, deficit financing, and so on. In the United States every economist, Keynesian disciple and critic alike, had to contend with the doctrines of Lord Keynes of Tilton, Eminent writers suchas Paul A. Samuelson, John Kenneth Galbraith, and Milton Friedman, set the stage for the economic discussion and pointed the way for the monetary authorities managing the system. Paul A. Samuelson, the Massachusetts Institute of Technology professor of economics, espoused what he called “the majority eclectic view of the so-called post-Keynesian neoclassical systems.” He placed central banking in the center of monetary policy, promoting optimal real economic growth. and price-level stability. Monetary policy “Jeans against the wind” of prevailing deficient or excessive aggregate demand spending. If business deteriorates and unemployment rises, the Federal Reserve System is supposed to expand money and credit. If spending threatens to become excessive, so that goods prices are rising and labor shortages appear, the Fed is supposed. to step on the brakes and reduce the stock of money. If managed properly by capable governors who are wisely selected and appointed by the President, the money system would thus function efficiently, achieving not only economic growth and full employment but also price stability. (Economics, 10th edition, 1976, p. 314) John Kenneth Galbraith, for many years Professor of Economics at Harvard and President of the American Economic Association, summarily rejected this “leaning-against-the-wind theory” of the post-Keynesians. Always suspicious of inexorable economic principles, he preferred political action to market adjustment, government mandate to individual freedom and choice. In his 1975 volume, Money, Whence li Cante and Where It Went