Inflation: Its Cause and Cure

Abstract

Despite widespread concern over inflation, prices have risen less since 1951 than in most past periods. The aver age annual rise in the price level has been about 1 per cent in the past eight years compared to 5 per cent to 8 per cent from 1946 to 1951 and 2.5 per cent to 3 per cent in the past half century. One of the major factors inciting inflation fears dur ing the past year was the mammoth size of the fiscal 1959 federal deficit. Prices remained stable during fiscal 1959 be cause slack in the economy permitted production increases to equal spending increases. Inflation is caused by excessive in creases in spending relative to the capacity of the economy to increase production. It is absolutely critical for the success of any program for the containment of inflation that management of the federal budget and monetary policy be designed to pro mote growth in total demands only so fast as the real economy grows. In particular, growth in the stock of money should be no faster, on average, than growth in production of goods and services. The Federal Reserve System has the power to con trol the stock of money and has used that power wisely since 1951. Budget policies have been less adequate. The informed citizen should urge support of flexible monetary and stabilizing budget policies.