Squeeze Play

The President's pronouncement last Wednesday that the economy is "taking a breather" emphasized the failure of the government to stem the recent inflation while sustaining a reasonable rate of economic growth. In an attempt to stabilize the price level, the Administration has relied heavily on monetary controls. But the tight money policy of the Federal Reserve Board has been both unfair and ineffective.

In theory, a rise in the interest rate and decreased availability of credit for business expansion will decrease business investment and cut down on the multiplied power created without consumer goods to match.

Unfortunately, the current inflation would not appear to be correctable by such a monetary device; it is not simply the result of excess buying power or too much income competing for too few goods. There are indications that prices are being pushed up in competitive markets not by excess demand, but rather by rising wages, profits and incomes in less competitive industrial and service sectors of the economy.

Many large firms can often finance investment without recourse to the capital market by utilizing retained earnings, and so are not restricted by high interest rates. Similarly, firms in a sufficiently monopolistic market to have some control over their own prices can pass along increased capital cost to consumers. Firms in the competitive markets, however, find themselves unable to borrow at current rates or to find funds even if they can afford it. The discriminatory influence of the policy can be seen in relative amounts of recent investment: between the last quarter of 1954 and the second quarter of 1956, firms with assets over $100 million have increased their gross investment by 16.6 per cent, while the figure for firms with assets under one million dollars was only .7 per cent.

The results of the tight-money policy have been to discourage attempts to provide increased productivity in important sectors of the economy and to discourage the production of new housing facilities for an increasing population. Credit restraint enables large firms, and firms in non-competitive markets, to expand more easily than businesses in competitive markets. By encouraging, rather than discouraging, capital expansion, the Administration could insure more goods for which dollars of income compete, thus limiting inflationary tendencies. Increased real income, not decreased monetary income should be the goal. Special loan funds or accelerated amortization might be used to expand production by facilitating capital development in sectors of future importance to the economy. More basically, the government should consider actions necessary to halt "cost-push" inflation by a re-examination of our labor and anti-trust policies, so that competition can be restored to markets in which industry-wide wage increases are granted because price increases can follow at the employers' will. The Administration must reconsider its reliance on tight money as the major tool to fight inflation or jeopardize economic growth and equitable income distribution.