Paul A. London: Don’t listen to inflation hawks | Columnists
Berkshires workers, like the men who replaced some of our home’s siding during the summer of 2021, drive trucks long distances every day. They were already concerned about high gas and other prices last summer and inflation (8.3% at the time of this writing) is worse now.
Gasoline prices tell the story. They had been under $3 a gallon for six years through early 2021 and were only $2 a gallon during the worst of COVID in 2020 because people were driving less. Then they jumped to over $3 last summer as COVID subsided, and this year they’re well over $4. The culprits of inflation today are OPEC-encouraged energy prices and COVID-related bottlenecks that will eventually be resolved; the strong economic recovery and labor market; and the Ukrainian War.
The question for workers in the Berkshires and for policymakers in Washington is whether the country is better off with higher prices for a year or two or will we do better if the Federal Reserve raises interest rates and cools the building and building houses. The problem is that both are big employers in Berkshire County, and cooling them means less income for carpenters, lumberyards, hardware stores, quarries and the like here. Many policymakers and commentators apparently believe inflation is worse for workers than the unemployment that has so often resulted from efforts to combat it, but US history tells a much different story.
A double lesson in economics…
There are many unpleasant examples of what happens when political leaders slow growth to avoid inflation. Money during the Roaring Twenties was 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 could for the first time get credit for “buying on time.” Carpenters and plumbers borrowed to buy cars and speculate on stocks and property.
In 1928 and 1929, however, concerned about soaring stock prices, the Federal Reserve tightened the money supply and raised interest rates to cool speculation. Loans became harder to obtain and more expensive and eventually banks cut back on loans, forcing many businesses to lay off workers. The Federal Reserve and its branches could have bailed out the banks’ coffers and allowed them to continue lending. Indeed, the Fed was created in 1912 to be a source of loanable reserves. The Fed in 1929, however, failed to fill bank coffers, so lenders as well as borrowers collapsed and the Great Depression escalated.
President Herbert Hoover, his very wealthy Treasury Secretary Andrew Mellon, and Congress compounded the Fed’s mistakes largely because they shared the old belief that government spending would discourage private investment and be inflationary. Without Fed and Treasury support, prices fell 7% a year until 1933, so the country experienced deflation instead of the dreaded inflation – and 25% unemployment.
… and the story
The belief that inflation is the “way to hell,” however, goes back much further in American history than the Great Depression. President Andrew Jackson in the 1820s and 1830s was a proponent of “hard” gold coinage. He wanted to reduce the use of haphazardly created credit and paper money by state and local banks.
Alexander Hamilton, President Washington’s brilliant Treasury Secretary, had established the First Bank of the United States in 1791 to create confidence in the new nation’s finances and a modicum of responsible central oversight of bank lending, but its charter had expired. 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 land purchases to be paid for in gold, a long recession followed. This hurt ordinary people who used easy credit to buy land and improve 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 in “greenbacks” to help finance the war. A post-war boom in railroad building ended with the Financial Panic of 1873 which led agrarian, southern and western interests to urge the government to issue more greenbacks to revive the ‘expansion. This was opposed by hard-money proponents, who wanted to remove greenbacks from circulation.
This matchup continued a long battle between hard-money and soft-money advocates that, in a sense, never ended. Annual deflation of 1 or 2 percent from 1873 through 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 presidential candidate in 1896, lamented the impact of deflation on farmers and labor when he declared that ordinary Americans were crucified on “a cross of gold”.
The bottom line is this: Today’s concerns about inflation are familiar and old. Workers in Berkshire 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 slowing economy and unemployment organized by the Fed and advocates of tight money to fight inflation than from a inflation like the one we are currently facing.
Paul A. London, Ph.D., was Deputy Assistant Secretary of commerce for economics and statistics from 1993 to 1997. During the energy crisis of the 1970s, he served as economic adviser to the New England Congressional Caucus led by then-Speaker of the House Tip O’ Neill, and US Representative Silvio Conte of Pittsfield. He lives in Becket and Washington, D.C.