Inflation, economist and American Institute for Economic Research founder Edward C. Harwood believed, is a tricky kind of legalized theft.

The theft has persisted for generations. That’s because economist John Maynard Keynes, the most influential economist of our times, argued in favor of governments deliberately inflating. Harwood, in writings and in correspondence with Keynes, disagreed. He warned inflation devalues money and wrecks lives. People don’t start businesses or families because the value of their money declines.

A Money Mirage

Inflation, Harwood argued, is an economic mirage perpetrated though the central bank, the enabler of big government. It affects everyone. Those who thought they had enough to achieve a goal suffer sticker shock.

“Pensions dwindle, and lose their capacity to support life,” Harwood writes in “The Money Mirage.”

However, some benefit. They are those who profit from the constantly expanding welfare state. Many welfare/warfare programs could not have happened unless new money and debt were created by a federal government that today—by its accounting—officially owes some $21 trillion.

I say “officially” because I once wrote a story for the New York Post in which several economists said the true debt numbers had been miscounted. The government “is engaging in Enron accounting,” said Laurence Kotlikoff.

Nevertheless, some believe debt and inflation are good; that they prevent depressions. It is a system celebrated by many economists and politicians. That’s despite the often-sluggish growth rates and many recessions of the last 70 years as well as crashes in 1987, 2001 and 2008.

Playing with the Currency

Harwood, in his lifetime (1900-1980), warned about the problem of government money tinkering. The inflation swindle, he contended, requires citizens to accept debased paper money through legal tender laws. Harwood believed this was a part of “the swindle.” The latter was the Keynesian idea of using fiscal and monetary policies to “keep the boom going.” The latter was a phrase from Keynes’ book, “The General Theory.”

Policies advocated in this book inevitably led to the central bank inflating and Congresses and presidents of both parties constantly running up red ink.

Don’t Save—Spend Some More

The keep spending philosophy seeped into culture. Millions of Americans save or invest little or nothing, believing the state will provide for them. Result: Millions of elderly poor try to survive with only Social Security or some other government retirement program as their income.

Many Americans follow or advocate the inflationist policies of Keynes. Politicians use Keynes to justify welfare programs. These include many Democrats—who denigrate those worried about deficits— as well as some supply side Republicans, who push tax cuts. Many of the latter insist “deficits don’t matter.” Implicitly, these Republicans accept Keynes, even if they have never read him.

Cheap Money

Keynes wanted the central bank to create booms through scandalously low interest rates; a policy also called cheap money.

“Thus, the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last,” Keynes wrote.

Keynes’ “General Theory,” Harwood held, was one of the most important, if misguided, texts in economics.

“The right remedy for the trade cycle,” Keynes wrote, “is not to be found in abolishing booms and thus permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

However, Harwood warned in the 1970s that “every episode of prolonged inflation has fostered maladjustments such as those obvious in the United States during recent years.”

Harwood’s comments came when America was mired in stagflation. But Harwood fought an overwhelming intellectual tide.

In post-World War II America many political leaders and intellectuals directly or indirectly subscribed to Keynes’ cheap money ideas. Keynes said that those who worried about cheap money causing inflation had “an austere view.” The fear of inflation, Keynes wrote, “has no foundation at all apart from confusion of the mind.”

Still, by the 1970s, the bill was coming due for decades of Keynesian inflating. Twenty percent interest rates followed. These high interest rates wrecked industries depending on borrowed money. The latest round of inflating had begun just before a presidential election in 1972. President Nixon was convinced that the way to keep America out of recession was a new Fed chairman who would follow the president’s orders and inflate.

Harwood Vindicated

Arthur Burns was the man put into office as Fed chairman by Nixon with orders to create more money than the previous chairman, William McChesney Martin. Nixon blamed Martin for his narrow election defeat in 1960. He believed tight money policies tipped the election to Senator John Kennedy. This time he took no chances. Burns took office about a year before Nixon’s 1972 re-election campaign.

Nixon told Burns he expected the new chairman to keep interest rates low. Anyone who wants to find some documentation on this point is invited to see my “The Fed and Politics” One of Nixon’s aides’ brags that money supply would be ample because “we have Arthur Burns by the balls.”

Burns flooded the market with new money.

Economic disaster later ensued from the policy of cheap money sanctioned by Burns. President Richard Nixon was re-elected. Besides cheap money, Nixon also used the self-destructive wage and price controls. He also ended the last link to the gold standard and ran big deficits. This was the triumph of the big government policies advocated in “The General Theory.” Nixon said that he had “become a Keynesian in economics.”

It Looks Good, But It Isn’t

These inflationary policies produced a Potemkin Village. They seemed to produce prosperity initially but after the 1972 elections, the economy blew up.

Cheap money along with reckless government spending policies were a shipwreck for those who had invested in fixed rate investments before this period of high inflation—bonds or certificates of deposit. They found their investments, inflation adjusted, lost buying power. Those low yielding treasury bills that hadn’t kept up with high inflation rates became “certificates of guaranteed confiscation,” Harwood wrote.

By the end of Burns’ disastrous term at the Fed in 1978 the chairman was a broken man. He was not re-appointed by President James Carter. He all but admitted his failures.

In his last meeting with the press, Burns complained that inflation “robs millions of citizens who in their desire to be self-reliant have set aside funds for the education of their children or their own retirement, and it hits many of the poor and elderly especially hard.”

These were exactly Harwood’s sentiments.

Burns, in the same speech, said. “I don’t believe I exaggerate in saying that the ultimate consequence of inflation could well be a significant decline of the economic and political freedom for the American people.”

No, he wasn’t exaggerating. Over the past 40 years, the federal government has become a bigger part of our economy and our lives. Its monetary policies are essential to the continuance of the welfare/warfare state that rules our lives in so many ways.

Will We Learn?

Yet Harwood’s warnings of “inflation swindles” and objections to Keynes have been repeatedly ignored, but never quite forgotten. Still, most lawmakers and central bankers proved they were Bourbon kings. With the crash of 2008, they showed that they “learned nothing and forgot nothing.”


Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.