The New Economic Policy --
Economic Madness

Oscar B. Johannsen

[Reprinted from The Gargoyle, October 1971]

The pressure was simply too great, particularly for a man wishing to be re-elected. So, the President, who is to be commended for having resisted the demands for a return to mercantilist policies for two and a half years, caved in on August 14th and adopted the course of what may be political wisdom, but is clearly economic madness.

Under the President's direction, the administration has made a complete turn-about from a more or less market oriented economy to a controlled one.

The main features of the New Economic Policy are (1) a 90-day freeze on wages, salaries, prices and rents; (2) a 10% surcharge on the_ value of dutiable goods imported into the United States; (3) the suspension temporarily of the convertibility of paper dollars into gold; (4) the reinstatement of the investment tax credit to stimulate business spending for machinery and equipment; (5) the repeal of the 7% excise tax on automobiles; (6) the increase in the personal income tax exemptions from $650 to $750 on Jan. 1st 1972.

Some of these measures require the approval of Congress. While there will be a lot of politiking, at the present time, it appears likely that the proposals will be approved substantially in the form requested by the President.

Since taxation is a sophisticated form of robbery, it goes almost without saying that any reduction in taxes is all to the good. Thus, the investment tax credit, as well as the repeal of the excise tax and the increase in the personal income tax exemptions are moves in the right direction.

That is all that can be said in favor of the President's program. The balance of it is so unwise that it more than offsets the sound measures, and with plenty to spare.

The most horrendous part of the program is the wage-price-rent freeze. This amounts to the substitution of the infalliable marketplace by highly falliable planners. More exactly it constitutes the substitution of democracy by dictatorship. The marketplace is the arena in which true democracy exists for there everyone votes by buying and votes against by not buying, regardless of age, race, religion or political affiliation. At one fell swoop the President has overthrown true democracy in favor of dictatorship, and all in the name of democracy.

All kinds of rationalizations are offered to excuse the President, e.g., the freeze is temporary; drifting was bad; something had to be done; etc., etc. Such excuses may salve the consciences of many who know better, but the fact remains that the people's freedom has been abridged on the implied assumption that the market was not doing its job properly so that the planners had to step in to correct the situation.

But the planners are only making a mess for no matter how wise they may be an no matter how sophisticated the tools at their disposal, they cannot possibly do the job that the marketplace does. it is analogous to substituting the automatic reflex actions of the human body by the direct, planned controls of the individual. If such occurred, a person would probably be dead in 24 hours. If nothing else, he might forget to keep the heart beating.

The problems which have already arisen are but a token of many to come, New York City made a contract this summer with some bus companies to transport handicapped children to school at a price higher than last year because increased costs sustained by the bus companies made it, imperative. The freeze prevents the City from paying the increase, but the companies will go bankrupt if they operate at the old price, which means no transportation for the children.

The freeze has been imposed without any consideration of what is the cause for rising prices. It is assumed that inflation is rising prices. To put a freeze on, means in effect to put a ceiling over prices. It is similar to putting a ceiling on a thermometer to prevent a patient's temperature from rising. Actually, inflation is the increase in the quantity of paper money with no goods back of this paper. It is an act of counterfeiting. And who is the counterfeiter? It is the government for it has a monopoly on the issuance of money.

If the government wants to stop prices from rising all it has to do is to stop this flood of paper money. It is as tho the money-supply is a pond, and this paper-money a river flowing into the pond. As more flows in, the pond's level rises. This rise constitutes the rising prices. Stop the flow of paper money into the money-pond and the level will stablize.

Will the government do this? Not on your life. Why not? Because to do so would cause a great depression. Because of our unjust system of land tenure, poverty and unemployment get worse daily. To try to alleviate these problems, the government institutes all kinds of palliatives as the production of war materiel, welfare programs and monetary tinkering. If any of these programs are stopped, unemployment increases. The Nixon Administration tried to slow down the inflation river by getting the Federal Reserve System to slow down the increase in paper money. But this led to marginal businesses going bankrupt and increased unemployment. The Penn-Central bankruptcy was the signal to reverse the course, in June 1970. Since that time the river of paper money has been flowing into the money-pond at an increasingly greater rate, and it is still going on although the government says it has declared a war on inflation.

The point is that the people do not understand that inflation is this increase in paper money. They think it is rising prices. Therefore, the President's imposition of a freeze meets with approval for it appears that it will stop prices from rising. But how can a pond's level stop from rising if a river is constantly flowing into it with no outlet? It cannot and so the freeze will not work.

Therefore, after November 14th, something else will have to be devised. It will be some sort of control which will make the people believe that rising prices are being kept under control, or at least it is hoped the people will be so convinced. It may be a wage-price review board controlling the major industries and labor unions. Because next year is a Presidential election year, the controls will probably be as light as possible so as not to annoy too many people. (It's the old story, Everyone is in favor of controls over the other fellow, but not over himself.) The 'jawbone technique' may be adopted, i.e., bring vocal and publicity pressure on businessmen and labor not to raise their demands, or at least to moderate them. But after 1972, no matter who is elected, the danger is great that the controls will become increasingly severe. No one can say, but as long as economic common sense is not practiced, the tendency is to substitute dictatorial controls.

The 10% surcharge on imports is sold to the people as a bargaining weapon to force other nations to up-value their currencies and also to get them to remove many of their restrictions which make it difficult for Americans to sell goods in those countries. Japan is the nation at which this is particularly directed as it has practiced mercantilist controls for the benefit of certain of its industries.

Actually, however the surcharge probably was imposed to assuage those of our businessmen who have been crying for controls in order to cut down foreign competition. This surcharge is almost all political. It certainly does not make any economic sense. The administration claims it wants to stabilize or reduce prices. But this surcharge raises prices of foreign goods. Also, to the extent it encourages the consumer to buy domestic goods, it tends to force prices up domestically. Since the surcharge is so obviously a political move by the Administration to gain favor with certain business interests, it is doubtful if it will ever be removed, although as a sop to the public and foreign nations, it may be reduced.

The floating of the dollar is a thoroughly immoral move. The paper dollars are really IOUs of the government, i.e. promises to pay gold on demand. For the government to refuse to convert the paper dollars into gold is to refuse to pay off these IOUs. It is the same as though a debtor refused to pay his creditors his debts. By floating the dollar the government has stated that it will not redeem the paper dollars which foreign central banks have. Instead, it wants the foreign nations to up-value their currencies. Since the currencies of foreign nations are also IOUs, this is equivalent to asking them to redeem their IOUs at say $1.20 for each $1 in debt. But this is absurd. Whoever heard of a debtor who paid off his debt for a larger sum than the debt is? It is the creditor who usually must agree to take less when the debtor finds it impossible to pay off his debts 100%. But this is the absurd request that our government is making of foreign nations. Naturally, they resent it.

However, as our nation is so powerful -- we produce as much as the ten largest European countries outside of Russia -- the other countries feel they must meet us halfway. Thus, it now appears that the U.S. will devalue the dollar by possibly 5 or 10%, and the major countries, as West Germany and Japan, will up-value their currencies by maybe 5 or 10%.

But this is only a temporary solution. Until the U.S. and the other countries stop inflating their money supplies, there will be periodic crises. Eventually, the nations will have to go on what is known as the gold coin standard. But, this will probably not happen for many years, possibly only after a terrible way or a horrible inflation, wherein the people absolutely refuse to accept the paper money, such as occurred in the French Revolution.

Although it is doubtful that any nation knows it or not, fundamentally monetary manipulation is an attempt to solve the problems caused by the unjust system of land tenure practiced. As they do not know this, it is not surprising that nothing is solved when they tinker with money, and that instead matters get worse.

It is a sad fact, but whether the President knows it or not, in his speech on August 14th, he initiated an attack on the freedom of the individual, and the reversal of that attack will be a long, costly fight.