When your Government continues to spend these unprecedented sums for munitions month by month and year by year, that money goes into the pocketbooks and bank accounts of the people of the United States. At the same time raw materials and many manufactured goods are necessarily taken away from civilian use, and machinery and factories are being converted to war production.
Franklin D. Roosevelt, April 28, 1942: Fireside Chat 21: On Sacrifice
You do not have to be a professor of mathematics or economics to see that if people with plenty of cash start bidding against each other for scarce goods, the price of them goes up.
Inflation is nothing new. Boomers remember wrestling with it in the 1960s, ’70s, and ’80s. Their parents lived through the Great Depression, when jobs were few, and into the war economy where too many workers chased too few goods.
FDR addressed the problem in his Fireside Chat quoted above, which was excerpted into a propaganda short, “Inflation” (MGM, 1942). In it, Edward Arnold (the greedy corrupt businessman in “Mr. Smith Goes to Washington”) plays the devil. He tempts the home front to splurge, hoard, and buy on the black market. That will destroy the U.S. economy and win the war for his friend Adolph.
If you want to know how the story comes out, you can still catch it on DirectTV. It expires on WatchTCM today. Here’s its listing on IMDB.
So what’s the answer?
FDR had a seven-point plan to fight inflation. Unfortunately, most of them just make things worse:
- First, we must, through heavier taxes, keep personal and corporate profits at a low reasonable rate.
- Second, we must fix ceilings on prices and rents.
- Third, we must stabilize wages.
- Fourth, we must stabilize farm prices.
- Fifth, we must put more billions into War Bonds.
- Sixth, we must ration all essential commodities, which are scarce.
- Seventh, we must discourage installment buying, and encourage paying off debts and mortgages.
Higher taxes, price controls, and rationing throw more uncertainty and obstacles into the markets. The seventh point is the secret: Cut off demand and encourage saving rather than spending. The Federal Reserve Bank sets higher interest rates as one way to make credit tighter and saving more desirable.
Unfortunately, in the marketplace it takes longer to slow demand than to create it.