This is but half the story. Any influence which promotes inflation—without which any substantial socialism is impossible—ipso facto promotes socialism. Inflation makes the extension of socialism possible by providing the financial chaos in which it flourishes. The fact is that socialism and inflation are simultaneously cause and effect; they feed on each other!
What is this financial chaos of inflation? It is an increase by dilution of the money supply. The process or act of diluting the medium of exchange is inflation. Brutally, but nonetheless accurately, inflation is legalized counterfeiting. Inflating the medium of exchange—other factors being equal—results in higher prices. But the rising price trend is not inflation; it is only one of the possible consequences of a dilution of the medium of exchange which lowers the purchasing value of the monetary unit.
Finding all the causes of any given effect is perhaps impossible. My ears are injured. The injury is an effect. What caused the injury? A deafening sound. What caused the sound? Vibrations. What caused the vibrations? Dynamite. What caused the dynamite to detonate? And so on. We find that cause underlies cause, ad infinitum.
Inflation, like the ear injury, is the effect of a sequence of causes which we have to examine in depth—and the deeper we go, the more obscure the causes. However, the first cause that underlies inflation—an effect—is plainly observable. Inasmuch as government has sole responsibility for our monetary system, we can easily see that government causes inflation.
But, looking to the second level, what causes government to dilute (inflate) the money supply? Again, the answer comes clear: Government meets its costs of operation by taxation. How else? Now, if the costs of government go beyond the point where direct tax levies will no longer produce an equivalent revenue, government will resort to an indirect tax: an inflation of the money supply. It has always been thus; politically, it cannot be otherwise. The new money created and spent by government reduces the value of each unit of money and credit outstanding.
Very well. What is the third underlying cause, that is, what causes the expenses of government to be so high that they cannot be met by direct tax levies? At this level, the cause is more obscure. It is quite clear that expensive socialistic schemes do not have their origin in popular demand but, instead, are initiated by bureaucrats; imagined plights of minorities are dramatically portrayed and a demand for redress “whipped up.”1 But, more to our point, there are small yet powerful groupings of the electorate—pressure groups—who effectively petition government (1) to get them out of their own messes or (2) to obtain benefits at someone else’s expense. At this depth there are causes galore.
Pressure Tactics of Labor Unions
There are two reasons for considering labor unions as an example of the way pressure groups cause inflation and, thus, promote socialism (or, I might add, cause socialism and, thus, promote inflation!) First, by using the labor union example, we can demonstrate how businessmen, clergymen, and others bring on these twin destroyers.
Second, we can show that the “wage-spiral,” coercively induced by unions, is not itself a cause of inflation. Understanding how such accusations are incorrectly leveled at labor unions will afford a better look at the inflation-socialism complex. Looking into labor union behavior is like looking into the mirror for millions of us. What we see is shocking!
It can be truthfully said that people bring on both socialism and inflation, but people do many other things besides. Thus, if we would stop inflation and thereby curb a major part of socialism, we should know which actions of people bring on inflation and which ones do not. In short, we need to know which one of the various labor union practices induces inflation. Otherwise, unions may be criticized on the wrong count while the critics innocently follow practices which bring on the very inflation they so stoutly deplore. We cannot hope to stop inflation until we gain some familiarity with its causes—and the real cause will elude us as long as we chase fictitious ones.
The labor union critics who blame inflation on the incessant, persistent, coercive drives of labor unions for higher and higher wages are on the wrong track. Such coercion is not to be condoned, but it is not a cause of inflation. To explain: Suppose your gardener issues an ultimatum: either you pay him $100 a day from now on, or else he will quit—in which case he would use force if necessary to keep any other gardener from taking the job which he threatens to vacate (the labor union tactic, in principle). You are right if you condemn this action, but you are wrong if you call it a cause of inflation. Why? Because no dilution of the money supply (inflation) is induced by either your acceptance or refusal of this demand. True, you may go broke if you accept, or he may become unemployed if you refuse, but that’s all the economics there is to it—nothing happens to the money supply. Nor is the economics of it altered one whit if a labor union induces a million gardeners to take similar action in unison. Inflation is not one of the results. Such action as this merely creates an economic mess which the labor unions hasten to cover up. They promote “full employment” programs (socialism) which, to the casual observer, seem to absolve the unions from having committed any uneconomic practices. It is these costly covering-up programs that bring on the inflation!