ANATOMY OF AN INFLATION

[Music] so [Applause] [Music] [Applause] [Music] [Applause] [Music] this film is presented as a public service by the people's natural gas company in the good land of lumia fertile and green was a great and gigantic production machine that the lumians worked at for 200 years building out at the bottom then tears upon tears of engines and widgets and motors and boilers extensions and gear wheels engagers and coilers and the awesome machine mounted up to the sky no other machine ever mounted so high for the lumians working by day and by night thought the things it produced were a loomy delight and in order to buy them the lumians stopped at the lumion paymasters pay money shop where they got their lusandas the lumian money and ran to the lumian store milk and honey there from hundreds of pipes the production machine dispensed millions of things from sublime to obscene and the price of each thing in bright new lasagnas was worked out by the number of each thing demanded and all costs that went into making each thing like materials labor and new investing now we ask you to look at what happened one time when the gross national product was involved in a climb for the lumians had once and they thought they could make the production machine produce all they could take they worked faster and harder and pulled in their brothers and even some sisters some ants and some mothers wheels spun and stacks bubbled there was all the enjoyment the fruits of a land that was at full employment and they all grabbed their payments in lumion money and ran to get their share of more milk and honey they pushed and they shoved in and out of the door whether money or things they were still wanting more now the clamor for more couldn't do any good the production machine produced all that it could it got so frenetic that for some strong demanders the prices went up in lumi and lucenda and then the demanders with things going up were demanding more money to sweeten the cup we want things they shouted and it's taking more money we need it and now and it's not very funny or as fast as they'd run to the heart of the store those prices kept climbing and still they said more more money to buy the same number of things so each thing cost more and the prices took wings flapping higher and higher and wages did too and the lumians boiled in a terrible stew the confusion was rampant and this is the sleeper the lusanda was just getting cheaper and cheaper and this stupid and reckless and wrong situation that can change and distort the whole shape of a nation is the thing that economists call an inflation [Music] the thing about inflation or the threat of inflation is that it distorts the economy it doesn't necessarily mean a loss in product and income as a whole it's a sad truth that for every loser there's a winner one economist said inflation divides the people into sharpies and suckers there's a premium on beating the game borrowers can pay back debts and cheapening dollars lenders try to protect themselves by raising interest rates or they stop lending school bonds state and municipal bonds even at high interest rates soon find no takers money shrinks too fast savers become frustrated because they end up with less money and constant dollars than they put in old people and pensioners on fixed incomes take a licking their dollars buy less and less with prices going up imports from non-inflating countries pour into the market the money to pay for them goes out of the united states and the balance of payments can become horrendous and as if increase of appetite grows by what it feeds on prices and wages leap frog each other to stay ahead of the dismal game whether you beat it or not it makes almost everyone feel that he's being short changed even cheated it's disturbing disruptive divisive if and when the brakes are applied prices and wages may be stubborn and inflexible still climbing even while a slowdown can multiply itself and spread recession like a brush fire from tight money to investment contraction to unemployment with its vast quashing of demand and the penalties of social unrest and waste of resources a long time alternating prosperity and recession were accepted as a way of life that was called the business cycle to halt it became the great cause of post-world war ii economics the council of economic advisors was formed an economist moved from class and consulting room up close to the centers of power the tools were taxes expenditures money let's go back to lumiere for a moment now actually the lumian people themselves are not the last of the big spenders their government too is a consumer on a large scale it's purchasing agents by defense material office supplies air traffic centers all the things a government should supply its total spending is about 30 percent of the gross national product since the government is such a big spender what and how it spends meaning what its budget is has an enormous effect on the economy to pay its bills the government collects taxes taking a share of the looseness before they can get to the marketplace now if the government taxes more than it spends the result is a surplus since it is taking this money out of the income stream spending fewer loose sanders than it's removing there is less overall demand for things from the production machine and production slows down on the other hand if the government's taxes are less than the budget it is putting in more than it's taking out thus raising demand and stimulating the economy the government realized that it had a great device here for smoothing out the ups and downs of the business cycle a budget policy that had automatic stabilizers built in it works like this you set the federal budget in a way that would give a moderate surplus if and when the economy is at high employment really humming now look what happens if the economy overheats under a progressive tax system many more tax dollars are being taken out of the income stream this tends to cut down on total demand and cool things off a bit like a safety valve on the other hand if things slow down too much people will be making less money and the government will get less taxes but in this case the government is spending more than it takes out spending at a deficit which tends to push total demand up thus stimulating the economy and avoiding a recession now that is how the use of taxes in the budget which is to say fiscal policy can be designed by government to stabilize the whole system those stabilizers are automatic but they're not always enough an automatic pilot does not take a plane through a storm or handle heavy traffic or emergencies tax rates and budgets can be and are changed to suit the situation [Music] that sometimes becomes a political problem [Music] another way to guide a complicated economy is to manage the availability of money money is more than meets the eye it is the cash in circulation of course it's also the amount of demand deposits in the banks in checking accounts sometimes even savings and bonds it is whatever can be spent when a bank gets a new deposit of let's say a thousand dollars it has to keep about a sixth of that deposit on reserve with the federal reserve bank that's the law it doesn't need to hold at all there's enough money to work with going in and out every day it can lend or invest the rest when the money atlanta invested is deposited in another bank that bank does the same thing it puts one-sixth in the federal reserve and lends or invests the rest it's a matter of arithmetic to show that a one thousand dollar deposit in a bank can create about five or six thousand dollars of spendable money down the line now the fed the federal reserve watching reserve accounts and transactions on the computer also looks at the whole economic 177. it can control the money supply mostly by open market operations if the amount of money in general circulation is too big for what's actually going on inflationary if you will because with all that money around consumers will be bidding up prices the fed will just stop buying or it sells some enormous quantity of government securities say a billion dollars worth what happens the buyers pay the fed through their banks and the fed takes the money from the bank's reserves now the reserves will be much lower than they should be banks have got to bring them up again by law to do that those banks now call in loans and sell bonds and securities they hold large sums are exchanged by teletype and order they tighten up on money they lend less interest rates go up and in the same way that money expands up to five or six times it now contracts if money is too tight the fed can do just the opposite buy securities october 29's for cash let me have that firm their money then goes into the banks and credit is expanded it lends money to banks too at some set discount rate this influences credit throughout the economy theoretically the country's money supply grows in relation to the growth of national product or should if all things were equal they rarely are to a certain extent the function of economics and government until the 60s was fire fighting an inflationary blaze of constitution and 21st raised taxes balanced the budget a little recession at 34th and 5th spend on public works lower tax collection after a fashion it worked four recessions between world war ii and 1960 did not destroy the country nor did the periods of prosperity get out of hand but at the beginning of the 60s our production machine was growing at a rate far less than our potential and unemployment in 1961 was close to seven percent the chairman of the council of economic advisors was walter heller our basic uh concern back there in 1961 that it was really a high time to reset our sites to focus on the gap between what we were producing and what we were capable of producing a gap of 50 billion dollars of production that was running to waste and to get the us economy moving again in president kennedy's terms called for measures that went against the grain of uh traditional us thinking it called in the middle of a period when you had a substantial deficit in the budget it called for stimulative measures even a tax cut well to most people it seemed as though a tax cut in the face of a budget deficit would worsen the situation you know orthodox thinking would have said well that'll plunge us into a deeper deficit but in fact of course a tax cut that would activate the economy that would stimulate production and incentives and increase demand and put people back to work would do just the opposite it would generate so much new activity and so much new income and profits that the additional revenues would actually balance the budget but it was pretty hard to convince president kennedy of this at first and i believe we didn't really convert him to the new economics until well into 1962. the myth persists that federal deficits create inflation and budget services prevent it what we need is not labels and cliches but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead business listened suspiciously it was probably no coincidence that the first enticement toward expansion was an investment tax credit the next step was much bigger the president asked congress for a general tax cut in january 1963 but the tax machinery on capitol hill grinds slowly carefully and dubiously this one didn't come until 1964. it worked by the spring of 1965 the gap between actual and potential was closing fast the federal reserve increased the money supply to accommodate the activity going with the flow even with the tax cut the expansion brought in high revenues and the federal budget went into surplus in the first half of 65. we were heading for the promised land peacetime full employment but amidst the general euphoria was one big word of caution inflation the economic managers felt they had the tools to hold it at bay excise tax cuts actually tended to lower the over-the-counter selling prices the heavy business investments and plants and equipment would add to the power of the production machine and raise output to match demand new manpower programs would they hoped helped to open up labor bottlenecks where a shortage of labor could bid up wages considerably [Music] foreign competition was strong and that would help keep a rain on prices then there was the use of the jawbone using wage and price guidelines and presidential pressure to coax business and labor to hold the line arthur oaken was then a member of the council of economic advisors well as of mid 1965 prices were creeping up moderately at a rate of about one and a half percent a year actually unit labor costs were still declining by any standard that i know there was no reason no cause for alarm about inflation the the big challenge as we saw it was could we manage a sustained high powered full employment economy could we find the right temperature of the economic boiler to generate a lot of steam and yet not overheat the boiler the record looked good the prospects were promising uh we couldn't be sure but we thought it was an exciting prospect a great challenge unfortunately we never got to realize that prospect and i think never even got a fair test of that challenge aggression never prevail the military escalation threw all the plans off the track defense purchases rose suddenly by three and a third billion dollars in the last half of 1965. a whopping chunks of new demand the boom had started how do you finance a war under these high pressure conditions cutting non-defense expenses isn't that easy and is it right to put the whole burden of war on the cities and the poor tightening up the money supply is like a direct tax on home building and investment is that the lowest priority or do you raise taxes to mop up purchasing power as it turned out the president did not ask for a general tax increase it was considered politically impossible and it may have been nobody likes a killjoy [Music] to make matters worse military outlays for 1967 were underestimated by a looming 10 billion dollars [Music] the first burst of price and wage pressure showed up in raw materials and services the rest followed soon enough at capacity production unit costs do go up and there's little risk but if you raise prices your competitors will pick up a share of your business they're already producing all they can what's more likely they'll raise prices too soon everyone everywhere gets on board lest conscience theft make cowards of us all the federal reserve people looked at the overheated gauges and put a squeeze on money and credit they loosened up again when housing starts plummeted and the capital investment boom subsided in early 67. the economist watched the indicators now ready to sound the alarm at the first signs of the jolly green giant reawakening the signs came military estimates were being marked up again money was looser and housing rebounded it was time to put fiscal policy on stream again with a solid general tax increase before another inflationary explosion well economist proposes congress disposes the answer was no as for public opinion on a tax increase i'd be completely opposed to such a measure of the time i'm unhappy about it flapping is bad for what paid tax now prevent inflation later sounds to most people like the old con game give me your money and i'll make you rich through 68 the economy was really moving congress finally passed the 10 surcharge the budget was chopped the new president exerted his efforts those who bet on inflation are going to lose their bet but sad to say prices and wages kept going up the fever was rife in the land and this stupid and reckless and wrong situation that can change and distort the whole shape of a nation is the thing that economists call an inflation [Music] informed debate must go on before the big questions remained [Music] what kind of nation do we want which way do we move how far and at what cost whatever else the issues are they are also economic and having to make tough choices is part of the price all of us pay for a free society [Music] so [Music] you