Man Vs The Welfare State - 3 PDF

Man vs.
The Welfare State

MAN
VS.
THE
WELFARE
STATE
HENRY HAZLITT
ARLINGTON HOUSE NEW ROCHELLE, N.Y.

THIRD PRINTING, JUNE I97O
Copyright 1969 by Arlington House, New Rochelle, New York.

All rights reserved. No portion of this book may be reproduced without
written permission from the publisher, except by a reviewer who may
quote brief passages in connection with a review.
Library of Congress Catalog Card Number 72-93457
SBN 87000-066-7
MANUFACTURED IN THE UNITED STATES OF AMERICA
Preface
THIS BOOK GREW OUT OF A PAMPHLET THAT APPEARED IN
August, 1968, called Life and Death of the Welfare State.
The greater part of the material in it is new, but several
chapters have appeared in advance of this publication in
The Freeman (a monthly published by the Foundation for
Economic Education at Irvington-on-Hudson, New York),
parts of several chapters appeared in my syndicated news-
paper column for the Los Angeles Times Syndicate, and
Chapter 16 was published as a pamphlet in Europe in
English, French, and German editions by INFRA (The
International Freedom Academy). I am grateful to the
publishers concerned for permission to republish this ma-
terial here.
HENRY HAZLITT
Wilton, Conn.
August, ig6g
Contents
PREFACE V
1. Instant Utopia 1
2. Salvation Through Government Spending 4
3. "We Owe It To Ourselves" 10
4. Consequences of Dollar Debasement 15
5. The High Cost of Wage Hikes 23
6. Price Controls 29
7. More on Price Controls 34
8. Who Protects the Consumer? 48
9. Famines Are Government-Made 54
10. Runaway Relief and Social Insecurity 57
11. Income Without Work 62
12. Fallacies of the Negative Income Tax 84
13. Can We Guarantee Jobs? 101
14. Soaking the Rich 104
15. Soaking the Corporations 109
16. Government Planning vs. Economic Growth 115
viii CONTENTS
17. Government As Prosperity-Maker 137

18. Uruguay: Welfare State Gone Wild 140
19. Inflation Is Worldwide 150
20. The Case for the Gold Standard 153
21. The Fallacy of Foreign Aid 165
22. Government Unlimited 180
23. From Spencer's 1884 to Orwell's IQ84 185
24. The Task Confronting Libertarians 199
25. What We Can Do About It 215
INDEX 221
Man vs. The Welfare State
CHAPTER 1
Instant Utopia
IN AMERICA TODAY MOST OF THE OLDER GENERA-

tionand many of the youngstand appalled at the
nihilism of the self-styled Now Generation and its de-
mands for unattainable reforms, or merely for the sheer
destruction of whatever is established.
But the cynicism, nihilism, and revolt of "youth," and
even of some of its parents, are the result of a common
cause. In the last generation politicians and govern-
ments have been promising the voters that they could
not only bring perpetual full employment, prosperity,
and "economic growth," but solve the age-old problem
of poverty overnight. And the end result is not merely
that accomplishment has fallen far short of promises,
but that the attempt to fulfill the promises has brought
2 MAN VS. THE WELFARE STATE
an enormous increase in government spending, an

enormous increase in the burden of taxes, chronic defi-
cits, chronic inflation, and a constant loss in the buying
power of the people's earnings and savings. "Social
Security" has brought an ominous increase in social in-
security.
Another result of the promise of instant utopia has
been a gigantic growth of governmental powerof in-
terference in the details of everybody's business and
everybody's life. As this power has increased, it has also
become concentrated in fewer and fewer hands. In
America the towns and villages have steadily lost power
to the States, the States to the Federal Government, and
Congress to the President.
One mark of the welfare state everywhere has been
the gathering of power into the hands of one man. This
is no mere unfortunate coincidence; it has been inevita-
ble. Thirty-six years ago the eminent Swedish econo-
mist Gustav Cassel explained in a prophetic lecture
how "planned economy," long enough continued, must
lead to despotism:
The leadership of the State in economic affairs which advo-

cates of Planned Economy want to establish is, as we have
seen, necessarily connected with a bewildering mass of gov-
ernment interferences of a steadily cumulative nature. The
arbitrariness, the mistakes and the inevitable contradictions
of such policy will, as daily experience shows, only
strengthen the demand for a more rational coordination of
the different measures and, therefore, for unified leadership.
For this reason Planned Economy will always develop into
Dictatorship.
The succeeding chapters of this book explain in de-

tail the ideology and methods behind the present infla-
tion and aggrandizement of State power, the conditions
Instant Utopia 3
to which it has led and, finally, the solutions we must

apply if this sinister threatnot only to the economic
future of the American people but to the future of civili-
zation itselfis to be averted.
CHAPTER 2
Salvation Through
Government Spending
IN THE EARLY NINETEEN THIRTIES, IN THE DEPTH OF

the Great Depression, the theory became fashionable
that the cause of all depressions was Lack of Purchasing
Power. The people just did not have enough money,
and because of unwarranted pessimism they were
refusing to spend enough even of what they had. The
solution was therefore simple: at such a time the gov-
ernment should boldly increase its own spending,
"prime the pump," and "get things moving again."
Naive advocates of this theory assumed that more
government spending was the whole answer. The more
sophisticated advocates saw that the increased spend-
ing would not give people more purchasing power if
the government kept the budget balanced and took it
Salvation Through Government Spending 5
all away again in higher taxes. The thing to do was to

spend more without taxing more. The trick, in other
words, was deliberately to unbalance the budgetto
run a deficit.
Most of the champions of deficitsincluding the
eminent John Maynard Keynes himself, the theory's
chief architectat least publicly professed to believe
that the required deficit could be financed by selling
bonds directly to the public, to be paid for out of sav-
ings. But again, the more sophisticated deficiteers must
have seen that a man who buys a $1,000 bond out of his
savings surrenders that much purchasing power for the
life of the bond. In short, he loses just as much buying
power as the government gains. On net balance, no new
buying power has been created.
How, then, can the government "create" new pur-
chasing power? It can do so only if it does not increase
taxes at all, but "sells" its bonds to the banking system,
and if the banks "pay" for them by creating deposit
credits on their books in favor of the government. This
leads to an increase in "the money supply"that is, an
increase either in the amount of currency or of demand
bank deposits.
If the government's new bonds are sold directly to
member banks, there tends to be a dollar-for-dollar in-
crease in the money supply compared with the amount
of new bonds. But if the government's securities get
into the hands of the Federal Reserve Banks, they are
used to create what is called "high-powered" money.
This can lead to the creation of about $6 of new money
for every dollar of new government securities.
It is not easy to give a satisfactory but short explana-
tion of the reason for this to readers without any previ-
ous knowledge of monetary theory. When member
banks "buy" government bonds and "pay" for them by
creating a deposit credit on their books against which
the government can draw, they are adding to the na-

tion's supply of purchasing media. They are creating
money out of government promises, and some would
say they are creating money out of thin air.
Now if a member bank that has bought such govern-
ment bonds sells them to its regional Federal Reserve
Bank, it can ask that Reserve bank to credit the pro-
ceeds to the member bank's reserves with that Reserve
bank. But if the member bank is a "city bank," it is
required to keep a reserve with the Federal Reserve
Bank of only l6 per cent against its net demand
deposits. This means that the member bank is entitled
to lend, and so create demand deposits for, about six
times the amount of its reserves with the Federal Re-
serve Bank. That is why money created directly or in-
directly by the Federal Reserve Banks is called
"high-powered" money.
Thus new "purchasing power" is brought into being.
Thus people have more money to buy more goods, cre-
ate more jobs, stimulate more output, and restore pros-
perity.
At least so it seems for the moment. But soon there are
other consequences.
If there have been heavy unemployment and much
"idle capacity," the new monetary purchasing power in
the system, by increasing the demand for commodities,
may indeed lead to an increase in production, and
hence to an increase in employment. This has been
hailed as the great Keynesian contribution to economic
theory and policy. But there are fatal flaws in it.
Unless there were some serious lack of coordination
among prices, costs, and wages, mass unemployment
would not exist in thefirstplace. When it does exist, the
only appropriate cure is individual adjustment of
prices, costs, and wages to each otherthe return of
coordination. But this can be brought about automati-
cally only if the competitive forces of the market are

given free play.
The reason the Keynesian medicine can workun-
der special conditions and for short periodsis that by
increasing monetary demand and prices it may in-
crease both sales and profit margins, and so restore pro-
duction and employment. Yet this could be done even
more effectivelyand without the poisonous side-
effects and after-effectsby restoring freedom of com-
petition and individual coordination of prices and
wages.
The Keynesians think in terms of aggregates. Their
remedy is to increase the total money supply, and
thereby to bring the price "level" sufficiently above the
wage "level" to restore or maintain profit margins and
so keep the wheels of industry spinning at full speed.
This remedy is defective in two respects. It tacitly
assumes that there is a uniform discrepancy between
prices and wages and a uniform percentage of "idle
capacity" throughout industry. Neither is true. If "in-
dustry" is estimated to be operating at 80 per cent of
capacity, we must remember that this figure is at best
an average. It may cover a situation in which, say, indus-
try A is operating at only 60 per cent, industry B at 63
per cent, and so on up to industry M at 97 per cent and
industry N at 100 per cent. If we try to expand the
money supply enough to return industries A and B to
full capacity, we may completely "overheat" industries
M and N and produce serious productive distortions
and bottlenecks.
What is more, an increase in the stock of money,
contrary to Keynesian theory, will begin to force an
irregular increase in prices long before "full capacity"
has been reached and the "slack" taken upif only for
the reason that the "slack" is never unifrom throughout
industry. In a very short time, also, with the increase in
prices and the increase in the demand for labor, wages

will start climbing too. Then, if the previous trouble was
that most wages were already too high in relation to
most prices, there will again be discoordination be-
tween wages and prices; and the Keynesian prescrip-
tion will call for still further doses of government
spending, deficits, and new money.
So the Keynesian medicine must lead to chronic defi-
cits and chronic inflating of the money supply. This is
precisely what we have had. It is no accident that we
have just run eight annual deficits in succession, and
that we have had 32 deficits in the last 38 years. It is no
accident that the U. S. money supply (currency plus
demand deposits) has been increased more than five-
foldfrom $36 billion at the end of 1939 to $199 billion
in September, 1969. And so it is no accident that, in
spite of a tremendous increase in industrial production
in this thirty-year period, consumer prices have in-
creased (to June, 1969) by 164 per cent.
Today the Federal Government is spending in a sin-
gle year 26g times as much as in the fiscal year before
the outbreak of World War I. The recent increase in
annual spending is being attributed by government
spokesmen to the cost of the war in Vietnam. Yet
though in 1970 scheduled national defense expendi-
tures are $35.6 billion greater than in i960, total expen-
ditures are $103.1 billion greater. This means that
non-defense expenditures alone have increased $67.5
billion in the same period. It is not the war, but the
determination to impose the welfare state, that has led
to this incredible squandering.
A central fallacy of Keynesianism, as of all inflation-
ary nostrums, is that they chronically confuse "income"
in terms of paper money with real income in goods and
services. It is possible to increase paper-money income
to any amount by debasing the currency. But real in-
come can only be increased by working harder or more

efficiently, saving more, investing more, and producing
more.
So let us not be too impressed by politicians who
constantly cite the increase in dollar incomes, in dollar
"gross national product," to show that we never had it
so good. In Italy today, as a result of past inflations, it
takes 624 lire to buy an American dollar. So anyone in
Italy with an annual income or even total property
worth more than $1,600 American dollars is already a
millionaire in his own currency.
CHAPTER 3
"We Owe It To Ourselves"
AT THE OUTBREAK OF WORLD WAR I, THE NATIONAL

debt amounted to only $1.2 billion. At the end of 1919
it had swelled because of that war to $25.5 billion. But
there was a national sense of responsibility about it.
Prudent policies were followed. Successive Republican
administrations reduced it at a rate of nearly $1 billion
a year, so that at the end of 1930 it was down to $16.2
billion.
But then, well before we got into World War II, wel-
fare spending started to soar. There was no effort to
balance the budget; the cult of deficits prevailed. At the
end offiscalyear 1941,fivemonths before Pearl Harbor,
the public debt was at the then record level of $55.5
billion. We ended the war with a public debt of $260
"We Owe It To Ourselves" 11
billion, but this time there was no important reduction,

except almost by accident in 1948 and 1951. Chronic
deficits have now brought it up to $363 billion.
It is amusing to recall the rationalizations that accom-
panied each succeeding deficit. At first each presiden-
tial message would solemnly estimate a surplus for the
next fiscal year, which always turned out to be a deficit
before the year was over. Next, the budget was always
to be balanced sometime in the next couple of years
but, of course, not now.
Then a new doctrine began to be put forward. It set
up a straw-man: the conservative who allegedly insisted
that the budget must be balanced every year, come hell
or high water. Ah no, this new doctrine replied; the
budget need be balanced only over a period. But the
high priests of the new doctrine never got around to
specifying just how long the period should be, or just
when it would be safe to begin to show a surplus again.
They showed no ardor for sticking to the arithmetic
even of their own proposals. If, as in the eight years 1961
through 1968, there was an uninterrupted average ad-
ministrative deficit of $8 billion a year, shouldn't there
be an average surplus of $8 billion a year for the next
eight years?
The argument for a budget balanced "over a period"
has, in fact, been quietly dropped. In its place is the
argument that the budget should never be balanced
when there is less than full employment, or even when
there threatens to be less than full employment. And
this again has become in fact an argument for a per-
petual deficit. For though President Johnson's eco-
nomic advisers called for and got a tax increase (but
never called for a spending cut), no one dreamed of
suggesting a surplus, or even a balanced budget. In
presenting his budget for the fiscal year 1968, for exam-
ple, President Johnson planned a deficit of $4.3 billion
in the cash budget and of $8.1 billion in the orthodox

administrative budget. (The actual administrative defi-
cit turned out to be $25.4 billion.) "To seek a lower
deficit or a surplus" for 1968, he warned, "would be
unwarranted and self-defeating" because it would "de-
press economic activity."
The implication of this whole philosophy is that it is
dangerous even to balance the budget, and that so far
from trying to pay off or even reduce the national debt,
we should permit a perpetual increase.
Let us look at what this has already meant for annual
interest payments alone. They have doubled in the last
ten yearsfrom $8.3 billion in i960 to $16 billion in
1970. Thus interest payments alone are every year
greater than the entire amount it took to run the gov-
ernment in 1941, and more than five times as much as
was required to run the government in 1929.
In 1932 Candidate Franklin Roosevelt was alarmed
because the national debt had increased by $3 billion
in the preceding two years. But for a generation the size
and growth of the national debt have been lightly dis-
missed with the argument that "we owe it to ourselves."
This was presented in the Nineteen Thirties as a bril-
liant discovery of the "new" economics; but the argu-
ment is so old that it was familiar to the great British
philosopher David Hume, who answered it in a brilliant
essay in 1740: "The practice of contracting debt will
almost infallibly be abused in every government . . ,
We have indeed been told that the public is no weaker
upon account of its debts, since they are mostly due
among ourselves." But Hume then went on to point out
that the creditors who received the interest on the debt
were by no means the same people as the taxpayers
who had to pay it, and that practically no one paid and
received exactly the same amount. The tax burden fell
mainly upon the active workers and producers, and
"We Owe It To Ourselves" 13
hampered production. "If all our present taxes be mort-

gaged," he asked, "must we not invent new ones? And
may not this matter be carried to a length that is ruinous
and destructive?"
"I must confess," he also wrote in the course of his
essay, "that there is a strange supineness, from long
custom, creeped into all ranks of men, with regard to
public debts," so that hardly anyone dared to hope that
substantial progress would ever be made in paying
them off. We find plenty of evidence of this compla-
cency today. Academic economists even vie with each
other in trying to prove that the situation is after all very
good.
A favorite argument of the last few years is that "the
nation is growing faster than its debt." This is "proved"
statistically. In the table below, for example, I merely
bring up to mid-1969 some comparisons presented (in
billions of dollars) by one academician in 1964:
i945 W69
National debt $260 $359
Gross National Product $212 $925
Debt as burden on GNP 123% 39%
So we might advance triumphantly to the conclusion

that the national debt, when viewed as a burden on a
year's production, has been cut by two-thirds since
1945!
T h e conclusion would be technically correct, but
complacency would be unjustified. The reason the na-
tional debt is less of a burden is that, through inflation,
the purchasing power of the dollar has b e e n steadily
reduced. It has been reduced 65 per cent since 1933

and more than 50 per cent since 1945. Let us state this
another way. By failing to balance its budget, by bor-
rowing, by monetizing the debt, by printing more dol-
lars, by steadily diluting the dollar's purchasing power,
the government has in effect repudiated 65 cents of
every dollar it borrowed in 1933 and 50 cents of every
dollar it borrowed in 1945.
To put it bluntly, the government's creditors have
been swindled.
Adam Smith, writing in 1776, was perfectly familiar
with this method of disguised repudiation. "When na-
tional debts have once been accumulated to a certain
degree," he wrote, "there is scarce, I believe, a single
instance of their having been fairly and completely
paid." But governments usually covered "the disgrace
of a real bankruptcy" by the "juggling trick" of "a pre-
tended payment" in depreciated money.
So the relationship that seems to give some present-
day writers so much satisfactionthat the national
debt, in dollar terms, has been falling in relation to the
gross national product in dollar termsis simply the
outcome of the steady depreciation of the dollar. The
more inflation we have, and the more the purchasing
power of the dollar is depreciated, the more the na-
tional debt will "fall" in relation to the GNP, because
the GNP, measured in soaring prices, will rise in rela-
tion to the dollar debt.
Do we have any serious intention of ever paying off
our national debt in dollars of at least present purchas-
ing power? If so, isn't it about time we begin to balance
the budget and make an honest start?
CHAPTER 4
Consequences of Dollar
Debasement
L E T US BEGIN BY RECALLING TWO COMPARISONS

already mentioned. From the end of 1939 to the end of
1968 the United States' stock of money (hand-to-hand
currency plus demand bank deposits) has been in-
creased more than fivefoldfrom $36 billion to $193
billion. In the same thirty-year period (in spite of a huge
increase in industrial production), prices of goods and
services increased by an average of 164^,per cent.
This debasement of the dollar resulted in a succession
of problems, including a chronic "deficit" in the Ameri-
can balance of payments.
The "balance-of-payments problem" has arisen not
merely because of our domestic inflation but because of
the combination of this with the so-called "gold ex-
change" standard and the world monetary system set

up at Bretton Woods in 1944. Under that system each
government undertook to keep its own currency unit
within 1 per cent of parity in either direction by buying
or selling that currency against other currencies in the
foreign exchange market. In addition, the United States
Government undertook to make the dollar the world's
"reserve currency" and anchor currency by guarantee-
ing to keep it convertible at all times (for foreign central
banks, but not for its own citizens) into gold at the fixed
price of $35 an ounce.
Though only central banks, and neither American
nor foreign private citizens, have the right to ask for this
conversion, keeping the dollar convertible into gold at
thisfixedprice has proved increasingly embarrassing to
our monetary authorities, especially since 1957. During
the last decade we have been sending or spending
abroad for various purposesto pay for imports, for
foreign aid, and for the support of our armed forces in
Europe and in Vietnambillions of more dollars each
year than we have been getting back in payment for our
exports and earnings on our capital invested abroad.
This excess of outgoing dollars is called the "deficit"
in our balance of payments. From the end of 1957 to the
end of 1967 this deficit ran at an average of $2.8 billion
a year. At the end of 1968 the cumulative total was in
the neighborhood of $30 billion. In early 1969 the defi-
cit on a "liquidity" basis was running at an annual rate
of $6.8 billion.
As a result, our monetary gold stock had fallen from
$22.8 billion at the end of 1957 to only $10.4 billion in
July, 1969. Against these reduced gold reserves the
United States had liquid liabilities to foreign official
institutions of $10.8 billion, plus short-term liabilities to
private foreigners of $22.6 billiona total of nearly $34
billion.
Consequences Of Dollar Debasement 17
In much discussion our dollar liabilities to private

foreigners are not counted as a potential demand on our
gold reserves because private banks, firms, and in-
dividuals cannot directly demand gold for their dollars.
But under the International Monetary Fund agree-
ments they can always indirectly sell their dollars at par
to their respective central banks.
In sum, against United States gold reserves of only
about $10 billion there are more than three times as
many potential foreign dollar claims for gold.
As our gold has drained out, and as foreign dollar
claims against it have mounted, the blame has been put
on this "deficit" in our balance of payments. But instead
of dealing with the main cause of this deficitdomestic
inflationour governmental authorities have allowed
the inflation to go on, and have even increased it, while
trying to stop the symptom. They have treated the defi-
cit in the balance of payments as itself the problem, and
have adopted desperate measures to try to halt it by
direct controls.
Their first major control, imposed in 1964, was a pen-
alty tax on purchases by Americans of foreign securi-
ties. To make such foreign investments the culprit
responsible for a balance-of-payments deficit was not
only arbitrary but implausible on its face. In the five
years 1958 to 1962 the aggregate net outflow of $16.6
billion for new foreign investment was offset by $15.4
billion of income from previous investment. Even the
Secretary of the Treasury, who had asked for the pen-
alty tax, conceded: "In the long run the outflow of
American capital to foreign countries is more than bal-
anced by the inflow of income earned on that capital."
He urged the tax, in fact, "only as a temporary meas-
ure to meet our problem pending more fundamental
solutions." Of course the more fundamental solutions
were never adopted, so not only was the "temporary"
security tax renewed, but on January 1,1968, the Presi-

dent added mandatory controls on direct investments
by American corporations abroad.
The implication of these measures is that our private
foreign investment has been one of the chief causes of
the deficit in our balance of payments. This is clearly
untrue. It is Federal spending, through foreign aid and
military outlays, that has been in deficit. In recent years
the private sector as a whole, as a result of export sur-
pluses and income on private investments abroad, has
continued to generate a payments surplus.
In 1967 our total new foreign investmentsincluding
bank loans, purchases of foreign securities, and direct
investments in factories and sales facilitiesamounted
to $5.6 billion. But the income from these and earlier
private investments came to $6.2 billion.
At best, then, all these foreign investment restrictions
and prohibitions are shortsighted. Any reduction we
make in new foreign investment today means a corre-
sponding reduction in investment income tomorrow.
If the Federal Government, instead of picking for-
eign investment as the culprit chiefly responsible for
our balance-of-payments deficit, had put punitive
tariffs on the further import of foreign luxuriesliquors,
wines, perfumes, jewelry, furs, and automobilesits ac-
tion would still have been a mistake, but much less
damaging to our future economic strength. These tight
curbs on direct foreign investments by American cor-
porations must severely hamper their ability to com-
pete successfully with other international corporations
in Europe and the rest of the world.
The President's own Economic Report of 1967
pointed out that: "U. S. investment abroad generates
not only a flow of investment income but also additional
U. S. exports. From a balance-of-payments point of view
this is an additional dividend." The U. S. Department of
Commerce found, in fact, that in 1964 $6.3 billion, or 25

per cent of our total exports in that year, went to affili-
ates of American companies overseas.
It is hardly too much to say that direct foreign invest-
ments, with the exports and income to which they give
rise, are the greatest single source of long-range
strength in our balance-of-payments position.
Still worse, from the standpoint of their direct restric-
tion on personal liberty, were the Johnson Administra-
tion's proposals (fortunately not enacted) to have
Congress impose practically prohibitive penalty taxes
on Americans travelling abroad.
The whole effort to eliminate our balance-of-pay-
ments deficit by direct controls over arbitrarily selected
individual items is doomed to failure. Such controls may
succeed in changing the relative amounts of different
items, but cannot change the end result. At best we can
make our immediate balance of payments look better at
the expense of our future balance. We cannot unilater-
ally cut down our purchases or travel or investments
abroad without also cutting down our sales abroad and
our investment income from abroad. In his Economic
Report of 1968, President Johnson himself conceded
that "by provoking retaliation" we may "reduce our
receipts by as much as or more than our payments."
The whole so-called "balance-of-payments problem"
would never have arisen except under the arbitrarily
contrived International Monetary Fund gold-exchange
system set up at Bretton Woods in 1944. It could not
exist if the United States and other countries were on
a pure "floating" paper standard with rates fluctuating
daily in a free market, because under such a system the
fluctuations would themselves set in motion the self-
correcting forces to prevent unwanted deficits or sur-
pluses from arising. Nor could the balance-of-payments
problem exist if the United States and other leading
countries were on a full gold standard. A "deficit" in the

balance of payments would then lead to an immediate
outflow of gold. This in turn would lead to immediately
higher interest rates and a contraction of currency and
credit in the "deficit" country, and the opposite results
in the "surplus" countries, and so bring the so-called
deficit to a halt.
Under the Bretton Woods system and the "gold ex-
change" standard, however, no self-correction of this
sort is allowed to take place. When we "lose" paper
dollars abroad we simply print more at home to take
their place. And when Europe gains these dollars they
find their way into the central banks, where they
become additional "reserves" against which the Euro-
pean governments issue still more of their own cur-
rency. Thus further inflation, in both the "deficit" and
the "surplus" country, seems to take place automati-
cally.
In the IMF system there are no freely fluctuating
market rates for individual currencies to reveal and cor-
rect international imbalances. Market rates are not al-
lowed to fluctuate by more than 1 per cent above or
below parity. At that point each government is obli-
gated to buy or sell its own or foreign currencies to
prevent any further departure from parity.
These currency-pegging operations are supple-
mented by the so-called gold-exchange standard. This
arrangement, which goes back to international agree-
ments in 1921 and 1922, permits central banks to count
not only their gold but their holdings of dollars (and of
British pounds) as part of their reserves. The arrange-
ment was adopted in the belief that there was a "short-
age of gold" and a "shortage of international liquidity."
As a result the world's monetary "reserves" today con-
sist of about $42 billion in gold plus about $28 billion of
"reserve currencies," of which more than $15 billion are
American dollars. As credit and other currencies are

issued against these reserve currencies, the reserves
themselves are inflated.
The real reason the American monetary authorities
fear a continued "deficit" in the balance of payments
is that they have given the central banks of other coun-
tries the right to demand gold for their dollars at $35 an
ounce. They have seen more than half our gold reserves
flow out in the last twelve years, and they are fearful of
losing any more.
They long ago persuaded the Federal Government to
prohibit American citizens from holding or asking for
gold. In the last few years they have resorted to increas-
ingly desperate expedients. Where possible, they have
brought political pressure on foreign central banks to
keep them from asking for gold for their dollars. Early
in 1968 they stopped feeding out gold to hold down the
price in private markets in London, Paris, and Zurich.
They now try to maintain an inherently unstable two-
price system, with official monetary gold at $35 an
ounce and non-monetary gold free to sell at whatever
price supply and demand fix.
Early in 1968 the Administration also got Congress to
abolish the remaining gold-reserve requirement of 25
per cent against Federal Reserve notes, on the plea that
this was necessary to reassure foreign central banks by
making all remaining United States gold holdings avail-
able to them. But what this action really did was to
remove the last legal limitation on the amount of paper
money that the Federal Reserve system may issue.
Finally, the American government has pressed for
the creation by the International Monetary Fund of
"special drawing rights" (SDR's), or "paper gold," to
"supplement" dollars as international reserves. The
only thing this purposely complicated scheme can do is
to adulterate reserves still further and make it possible
for nations to issue still more paper money against these

paper SDR's, which are declared with a straight face to
be just as good as gold if not better.
All these schemes are unsound, and in the end all of
them will prove futile. The truth is that no solution of
the monetary problem, national or international, will be
possible until inflation is stopped, and that it will not be
stopped as long as we have the welfare state.
CHAPTER 5
The High Cost of Wage Hikes
IT OUGHT TO BE OBVIOUS THAT MINIMUM WAGE

laws hurt most the very people they are designed to
"protect." When a law exists that no one is to be paid
less than $64 for a 40-hour week, then no one whose
services are not worth $64 a week to an employer will
be employed at all. We cannot make a man worth a
given amount by making it illegal for anyone to offer
him less. We merely deprive him of the right to earn the
amount that his abilities and opportunities would per-
mit him to earn, while we deprive the community of the
moderate services he is capable of rendering. In brief,
for a low wage we substitute unemployment.
Yet we initiated the folly of a Federal minimum wage
law 30 years ago, and we have been compounding that
folly ever since. The first Labor Standards Act of 1938

fixed a minimum wage of 25 cents an hour. This was
raised to 30 cents in 1939, 40 cents in 1945, 75 cents in
January, 1950, $1.00 in March, 1956, $1.15 in September,
1961, $1.25 in September, 1963, $1.40 in February, 1967,
and $1.60 in February, 1968.
In 1938 the average hourly wage in manufacturing
industries was 62 cents an hour. In January, 1968, it was
$2.64 an hour. But our legislators, not content with this
general rise in wages due to more and better tools and
natural economic forces, have decided to keep raising
the legal minimum wage even faster than the fast-rising
market average. Thus the statutory minimum was only
29 per cent of average hourly earnings in manufactur-
ing just before the increase in 1950, but 40 per cent
before the increase of the minimum in 1956,43 per cent
before the increase in 1961, 47 per cent before the in-
crease in 1963, and 54 per cent before the increase in
1968. The consequence of this is that the legal minimum
wage was pushed up 114 per cent between early 1956
and 1968, though average hourly earnings in manufac-
turing rose only 55 per cent. Meanwhile, the Federal
minimum wage has become effective over a far greater
range.
The net result of all this has been to force up the wage
rates of unskilled labor much more than those of skilled
labor. A result of this, in turn, has been that though an
increasing shortage has developed in skilled labor, the
proportion of unemployed among the unskilled, among
teen-agers, females and non-whites has been growing.
The outstanding victim has been the Negro, and par-
ticularly the Negro teen-ager. In 1952, the unemploy-
ment rate among white teen-agers and non-white
teen-agers was the same9 per cent. But year by year,
as the minimum wage has been jacked higher and
higher, a disparity has grown and increased. In Febru-
The High Cost Of Wage Hikes 25
ary of 1968, the unemployment rate among white teen-

agers was 11.6 per cent, but among non-white teen-
agers it had soared to 26.6 per cent.
In addition to the direct harm done by the minimum
wage in creating unemployment among the unskilled,
it must bear at least part of the blame for the recent riots
in the citieswhere the unemployed are concentrated.
The statistical evidence showing that the minimum
wage has caused unemployment among Negroes and
the unskilled is extensive. It is gratifying to report that
some of the country's outstanding academic economists
Professors Yale Brozen, Arthur Burns, Milton Fried-
man, Gottfried Haberler, James Tobin, to mention a few
have gathered this evidence and presented a conclu-
sive case against a statutory minimum wage. Yet succes-
sive Administrations and Congresses have persistently
refused to accept their logic or to face the glaring facts.
There are other labor laws, antedating the minimum
wage, that have had even worse consequences. In the
early Nineteen Thirties the theory grew up that wages
were too low and workers were exploited because there
were not enough unions and those that existed had too
little bargaining power. The proposed remedy for this
was to create more and stronger unions, and the way to
do that was to forbid employers to discriminate against
union workers in hiring, in promoting, or in granting
wage increases. Therefore, in 1935 Congress passed the
Wagner Act, which gave unions the right to "bargain
collectively through representatives of their own
choosing" and prohibited employers from engaging in
a whole list of "unfair labor practices."
The Wagner Act was completely one-sided, hypo-
critical, and self-contradictory. On the one hand, it pre-
tended to be two-sided by making it an unfair labor
practice "by discrimination in regard to hire or tenure
of employment or any term or condition of employment
to encourage or discourage membership in any labor

organization." But immediately following this was a
provision declaring that "nothing in this act . . . shall
preclude an employer from making an agreement with
a labor organization. . . to require as a condition of em-
ployment membership therein." In brief, the law pro-
hibited an employer from discriminating against union
members, but permitted and encouraged (and often in
fact compelled) him to discriminate against non-union
members.
The Wagner Act proved so viciously one-sided in
practice that in 1947 Congress amended it in the Taft-
Hartley Act. But the Taft-Hartley Act, contrary to
popular impression, changed little of substance. And
the National Labor Relations Board has successfully ig-
nored or circumvented the provisions that did.
The factual situation today is that the compulsory
union shop can be forced on employers and workers in
the majority of the states. If a union makes an exorbitant
demand, the employer cannot simply refuse to meet it.
He is compelled by the Taft-Hartley Act to keep "bar-
gaining" with that union and no one else. If he an-
nounces that he will regard strikers as having quit their
jobs, and will carry on his business by hiring workers to
replace them, his plant will be surrounded by pickets to
intimidate anyone who thinks of passing through. And
because of the legal roadblocks set up by the Norris-
LaGuardia Act of 1932, he will probably be unable to
get injunctive relief in the courts, even from crippling
vandalism and violence.
The "right to strike" is interpreted today not merely
as the right to quit work, but the "right" forcibly to
prevent others from taking the jobs that the strikers
have voluntarily vacated. The Taft-Hartley Act, amend-
ing the Wagner Act, specifically provided that "to bar-
gain collectively . . . does not compel either party to
The High Cost Of Wage Hikes 27
agree to a proposal or require the making of a conces-

sion." But the employer is in fact compelled to make
concessions. He is compelled to make them because
unions today enjoy a special license to keep a plant
closed by intimidatory mass picketing until their de-
mands are met. If an employer does somehow succeed
in keeping his plant open, and peaceably replacing
strikers to carry on his business, the Labor Board is
likely to come along years later, as it has done time and
time again, and rule that by finally ceasing to "bargain"
with the original union that struck he violated the Taft-
Hartley Act and must therefore re-employ the original
strikers, with retroactive pay to cover the period of
their unemployment.
Yet this factual situation is ignored by practically ev-
erybody as if it did not exist. When a particularly outra-
geous or disruptive strike halts vital services, and a few
congressmen begin to demand compulsory arbitration,
they are told that the government should not intervene
but allow the processes of "free collective bargaining"
to continue.
It is true that compulsory arbitration is not the solu-
tion. But it is not true that the "collective bargaining"
taking place is "free." The government is in fact inter-
vening every day through its one-sided laws. It is al-
ready a participant on the side of the striking union. It
is granting special immunities to the union to use intimi-
dation and violence. It is putting special compulsions on
the employer to yield to the demands of the union, or
to grant costly concessions, for fear of the even more
costly or perhaps mortal penalties if he breaks off
negotiations with the union members on strike and de-
cides to employ replacements.
By the Norris-LaGuardia Act of 1932, by the Wagner
Act of 1935 and the Taft-Hartley amendments of 1947,
by loaded decisions pouring out daily from the National
Labor Relations Board, and by the failure of local au-

thorities to provide adequate police protection to em-
ployers and workers trying peaceably to carry on a
struck business, we are daily forcing up wage rates to
points that threaten to bring the economy to a halt,
unless more money is printed so that demand, prices,
and profit-margins can keep pace.
For thirty years we have been in an unending race
between the printing press and the demands of the
labor unions. Instead of showing any signs of slowing to
a halt, the race is becoming more determined and more
desperate on both sides.
CHAPTER 6
Price Controls
W H E N T H E WELFARE STATE SPENDS RECKLESSLY,

runs chronic deficits, expands credit, and prints more
money, prices begin to soar. Invariably the government
blames business, especially Big Business, and hints
darkly at price controls.
But being a self-styled "liberal" government, it be-
gins by suggesting only "voluntary" controls. It draws
up "guidelines." Prices of course continue to rise, be-
cause the government is printing more money, thereby
reducing the value of the currency unit.
The government's next step is to select as its special
target some big corporation (or industry consisting
mainly of big corporations) and demand that it roll back
some price increase it has just announced. The big cor-
poration is selected for attack, of course, because it is

easy to arouse popular prejudice against it. It can either
be denounced as a monopoly or accused of "adminis-
tering" prices.
The favorite scapegoat in the United States for the
last twenty years or more has been the steel industry.
Though the total value of the steel produced yearly in
this country amounts to only 2 per cent of the gross
national product, the government, whenever it attacks
steel prices, contends that steel enters into a multitude
of products, that a steel price increase is "pyramided"
throughout industry, and so sets off a chain reaction of
inflation. This argument will not bear serious analysis,
but that has never prevented its repeated use.
One minor irony is that though the government pub-
lishes a monthly index of consumer prices, and a
monthly index of wholesale prices, and that though the
former is a weighted average of some 400 selected
prices and the latter a weighted average of some 2,000
prices, the monthly government report never tells the
reader just how many of these prices rose and how
many fell in the month reported. It is true that it some-
times gives partial enumerations. Thus, in its report on
wholesale prices for March, 1968, it tells us: "Prices
were higher for 110 of the 225 industrial product classes;
there was no change for 85 and declines occurred for
30." But if it told us that of the 2,000 individual prices
it records of all items, about 1,000, say, went up in a
given month, 740 were unchanged and 260 declined,
the public would instantly see the absurdity as well as
the injustice of the government's selecting one price
rise among 1,000 price rises, or even a price rise in one
industry out of price rises in 110 industries, for special
denunciation and attack.
A rise of nearly all prices, or of most prices out of tens
of thousands, indicates the operation of a common
cause. That cause is the monetary policies of the gov-
Price Controls 31
ernment itself. Prices do not rise today because busi-

nessmen have suddenly become greedier than they
were yesterday. We may assume that sellers operating
either under competition or monopoly were already
charging as much as they could successfully get. The
problem is to explain why they can charge more today
than they did yesterday, or more this year than last
year. If nearly all can charge more, this means that some
general condition has changed.
Government price control attempts to ignore this
change. That is why government price control always
works harm. Attempts to hold down or roll back prices,
when they do not merely lead to black markets and
quality deterioration, must reduce and disrupt produc-
tion and distort the balance and structure of produc-
tion. (Artificially depressed prices, of course, also
stimulate demand for the items subject to them.)
When the price of one item, say some necessity such
as bread or milk, is held below the price that supply and
demand would set in a free market, it reduces the com-
parative profit margin in making that product and soon
creates a shortage of that product. This is exactly the
opposite result from the one the government price-
fixers had in mind. If, in the effort to cure this, the
government tries to hold down the prices of the labor,
raw materials, and other factors that go into producing
the price-controlled product, the price control must be
extended in ever-widening circles, until the govern-
ment finds itself trying to fix the price of everything.
As there are probably at least 10 million separate
prices in the American economy, and as this implies
something on the order of 50 trillion cross-relationships
among prices, the government sets itself a fantastically
impossible task. But this does not mean it cannot do
immense harm to the economy when it nevertheless
undertakes this task.
It is ironic that even a "labor" government, once it
undertakes price controls to try to prevent the conse-

quences of its own monetary inflation, is finally forced
to face the fact that it cannot do this unless it is also
prepared to control and hold down wages. This is what
happened in England. But a government's wage-con-
trol orders are enormously harder to enforce than its
price-control orders. If the wage control is real and
rigid, the unions simply defy it; so it finally becomes
riddled with loopholes and exceptions, which cause the
price control either to do increasing damage to produc-
tion or to break down.
A special case of price control is the attempt to hold
down interest rates, either on loans to business or on
home mortgages. At the beginning this looks easier than
other forms of price control. It merely seems necessary
to issue more money to increase the supply of loanable
funds. But when interest rates are reduced in this way,
two consequences follow. The lower interest encour-
ages more borrowing, which tends to raise the rate
again. And the increased amount of money and credit
starts pushing up prices and wages. This forces busi-
nessmen to borrow still more, if they want to continue
to buy even the same volume of inventories and employ
even the same number of workers as before, to do the
same volume of business.
And if, as a result of the increased volume of money
and credit, prices have risen, say, 5 per cent in the last
twelve months and are expected to rise 6 per cent in
the next twelve months, lenders begin to realize that
when they get 6 per cent nominal interest on their
money they are in reality getting no interest at all.
This is one reason why interest rates in the United
States in 1968 and 1969 soared to record high levels. It
is precisely the government effort to hold them down
that forced them up. This is just one more illustration of
how government controls eventually bring about pre-
cisely the opposite effects of those intended.
Price Controls 33
Arthur M. Okun, the last chairman of President John-

son's Council of Economic Advisers, ignoring the fact
that unions cannot successfully raise wages or business-
men prices unless monetary inflation permits it, called
on business and labor to practice "voluntary restraint"
and stop raising prices and wages. But if employers and
workers did exercise 'Voluntary restraint," and deliber-
ately charged less or asked less than they could get in
a free competitive market, they would in fact be doing
the community a disservice.
The demand and supply of each of thousands of dif-
ferent commodities and services are changing every
day. When an increase in the money supply does not
falsify the result, the goods and services in most de-
mand rise in price while those in least demand fall. So
the profit margin in supplying the goods in greater de-
mand increases while that in supplying the goods in less
demand falls. This causes more to be produced of the
goods in more demand and relatively less to be pro-
duced of the goods in less demand. Thus the tens of
thousands of different goods and services produced in
the nation tend constantly to be produced in the chang-
ing proportions in which they are most wanted.
Prices are indispensable signals to producers and
consumers. They must tell the truth about supply and
demand. "Voluntary restraints"and still more, gov-
ernment "guidelines"falsify the signals and disorgan-
ize and unbalance production.
Monetary inflation is a dreadful thing. But what does
immensely more harm than the inflation itself is the
attempt to conceal or suppress its consequences
through price and wage controls.
CHAPTER 7
More on Price Controls
THE WELFARE STATE CAN ARISE AND PERSIST ONLY

by cultivating and living on a set of economic delusions
in the minds of the voters.
As we saw at the beginning of the last chapter, the
policies of the welfare state follow a typical time se-
quence. First the welfare state promises special subsi-
dies or other benefits to this or that pressure group. This
increases its expenditures. But it cannot or dare not
boost taxes enough to meet these increased expendi-
tures fully. So it runs a deficit, and pays for it by printing
more irredeemable paper money. This lowers the value
of the currency unit by causing more money to be of-
fered for the same supply of goods. The result is a price
rise. The next step of the inflating government is to
More On Price Controls 35
blame the price rise on sellers, on Big Business, on

"profiteers." The step after that is to put legal ceilings
on prices, or to order them to be rolled back, to "protect
the consumer."
If the public is convinced, on the other hand, that it
is the government's fiscal and monetary policies, and
not the greed of producers and sellers, that are forcing
up prices, and if the public realizes further that govern-
ment price control only compounds the evils brought
about by monetary inflation, and if the public recog-
nizes that price control in the long run cannot help but
must hurt the great body of consumers, then the chief
political prop of the welfare state will collapse.
It is of the first importance, therefore, even if this
necessitates some repetition, to consider the case
against price controls in more detail and at much
greater length than we did in the brief survey in the last
chapter.
Prices in a free market are determined by supply and
demand. If the relative demand for a product increases,
consumers will be willing to pay more for it. Their com-
petitive bids will both oblige them individually to pay
more for it and enable producers to get more for it. This
will raise the profit margins of the producers of that
product. This, in turn, will tend to attract more firms
into the manufacture of that product, and induce exist-
ing firms to invest more capital into making it. The
increased production will tend to reduce the price of
the product again, and to reduce the profit margin in
making it. The increased investment in new manufac-
turing equipment may lower the cost of production. Or
particularly if we are concerned with some extractive
industry such as petroleum, gold, silver, or copperthe
increased demand and output may raise the cost of
production. In any case, the price will have a definite
effect on demand, output, and cost of production, just
as these in turn will affect price. All fourdemand,

supply, cost, and priceare interrelated. A change in
one will bring changes in the others.
Connexity of Prices
Just as the demand, supply, cost, and price of any

single commodity are all interrelated, so are the prices
of all commodities related to each other. These relation-
ships are both direct and indirect. Copper mines may
yield silver as a by-product. This is connectedness, or
connexity, of production. If the price of copper goes too
high, consumers may substitute aluminum for many
uses. This is a connexity of substitution. Dacron and
cotton are both used in drip-dry shirts; this is a
connexity of consumption.
In addition to these relatively direct connections
among prices, there is an inescapable interconnected-
ness, or interconnexity, of all prices. One general factor
of productionlaborcan be diverted, in the short run
or in the long run, directly or indirectly, from one line
into any other line. If one commodity goes up in price,
and consumers are unwilling or unable to substitute
another, they will be forced to consume a little less of
something else. All products are in competition for the
consumer's dollar; and a change in any one price will
affect an indefinite number of other prices.
No single price, therefore, can be considered an iso-
lated object in itself. It is interrelated with all other
prices. It is precisely through these interrelationships
that society is able to solve the immensely difficult and
always changing problem of how to allocate production
among thousands of different commodities and services
so that each may be supplied as nearly as possible in
relation to the comparative urgency of the need or
desire for it.
As the eminent economist Ludwig von Mises has

demonstrated, only the capitalist system, with private
property, a sound currency, free markets, and freedom
from price controls, can solve this great problem of
"economic calculation."
Because the desire and need for, and the supply and
cost of, every individual commodity or service are con-
stantly changing, prices and price relationships are
constantly changing. They are changing yearly,
monthly, weekly, daily, hourly. People who think that
prices normally rest at some fixed point, or can be easily
held to some "right" level, could profitably spend an
hour watching the ticker tape of the stock market, or
reading the daily report in the newspapers of what
happened yesterday in the foreign exchange market,
and in the markets for coffee, cocoa, sugar, wheat, corn,
rice, and eggs; cotton, hides, wool, and rubber; copper,
silver, lead, and zinc. They will find that none of these
prices ever stands still. This is why the constant at-
tempts of governments to lower, raise, or freeze a par-
ticular price, or to freeze the interrelationship of wages
and prices just where it was on a given date ("holding
the line") are bound to be disruptive wherever they are
not futile.
Efforts to Boost Prices
Let us begin by considering governmental efforts to

keep prices up, or to raise them. Governments most
frequently try to do this for commodities that constitute
a principal item of export from their countries. Thus
Japan once did it for silk and the British Empire for
natural rubber; Brazil has done it and still periodically
does it for coffee; and the United States has done it and
still does it for cotton and wheat. The theory is that
raising the price of these export commodities can only
do good and no harm domestically because it will raise

the incomes of domestic producers and do it almost
wholly at the expense of the foreign consumers.
All of these schemes follow a typical course. It is soon
discovered that the price of the commodity cannot be
raised unless the supply is first reduced. This may lead
in the beginning to the imposition of acreage restric-
tions. But the higher price gives an incentive to produc-
ers to increase their average yield per acre by planting
the supported product only on their most productive
acres, and by more intensive employment of fertilizers,
irrigation, and labor. When the government discovers
that this is happening, it turns to imposing absolute
quantitative controls on each producer. This is usually
based on each producer's previous production over a
series of years. The result of this quota system is to keep
out all new competition; to lock all existing producers
into their previous relative position, and therefore to
keep production costs high by removing the chief
mechanisms and incentives for reducing such costs.
The necessary readjustments are prevented from tak-
ing place.
Meanwhile, however, market forces are still function-
ing in foreign countries. Foreigners object to paying the
higher price. They cut down their purchases of the
valorized commodity from the valorizing country, and
search for other sources of supply. The higher price
gives an incentive to other countries to start producing
the valorized commodity. Thus, the British rubber
scheme led Dutch producers to increase rubber pro-
duction in Dutch dependencies. This not only lowered
rubber prices, but caused the British to lose perma-
nently their previous monopolistic position. In addition,
the British scheme aroused resentment in the United
States, the chief consumer, and stimulated the eventu-
ally successful development of synthetic rubber. In the
same way, without going into detail, Brazil's coffee
schemes and America's cotton schemes gave both a

political and a price incentive to other countries to initi-
ate or increase production of coffee and cotton, and
both Brazil and the United States lost their previous
monopolistic positions.
Meanwhile, at home, all these schemes require the
setting up of an elaborate system of controls and an
elaborate bureaucracy to formulate and enforce them.
These have to be elaborate, because each individual
producer must be controlled. An illustration of what
happens may be found in the United States Depart-
ment of Agriculture. In 1929, before most of the crop
control schemes came into being, there were 24,000
persons employed in the Department of Agriculture.
Today there are 120,000. These enormous bureaucra-
cies, of course, always have a vested interest in finding
reasons why the controls they were hired to enforce
should be continued and expanded. And of course
these controls restrict the individual's liberty and set
precedents for still further restrictions.
None of these consequences seems to discourage
government efforts to boost prices of certain products
above what would otherwise be their competitive mar-
ket level. We still have international coffee agreements
and international wheat agreements. A particular irony
is that the United States was among the sponsors in
organizing the international coffee agreement, though
its people are the chief consumers of coffee and there-
fore the most immediate victims of the agreement.
Another irony is that the United States imposes import
quotas on sugar, which necessarily discriminate in favor
of some sugar-exporting nations and therefore against
others. These quotas force all American consumers to
pay higher prices for sugar in order that a tiny minority
of American sugar cane producers can get higher
prices.
I need not point out that these attempts to "stabilize"
or raise prices of primary agricultural products politi-

calize every price and production decision and create
friction among nations.
Holding Prices Down
Now let us turn to governmental efforts to lower

prices or at least to keep them from rising. These efforts
occur repeatedly in most nations, not only in wartime,
but in any time of inflation. The typical process is some-
thing like this: The government, for whatever reason,
follows policies that increase the quantity of money and
credit. This inevitably starts pushing up prices. But
higher prices are not popular with consumers. There-
fore the government promises that it will "hold the
line" against further price increases.
Let us say it begins with bread and milk and other
necessities. The first thing that happens, assuming that
the government can enforce its decrees, is that the
profit margin in producing necessities falls, or is elimi-
nated, for marginal producers, while the profit margin
in producing luxuries is unchanged or goes higher. As
we saw in the previous chapter, this reduces and dis-
courages the production of the controlled necessities
and relatively encourages the increased production of
luxuries. But this is exactly the opposite result from
what the price controllers had in mind. If the govern-
ment then tries to prevent this discouragement to the
production of the controlled commodities by keeping
down the cost of the raw materials, labor and other
factors of production that go into those commodities, it
must start controlling prices and wages in ever-widen-
ing circles until it isfinallytrying to control the price of
everything.
But if it tries to do this thoroughly and consistently,
it will find itself trying to control literally millions of

prices and trillions of price cross-relationships. It will be
fixing rigid allocations and quotas for each producer
and for each consumer. Of course these controls will
have to extend in detail to both importers and export-
ers.
Price Control Distorts Production
If a government continues to create more currency

with one hand while rigidly holding down prices with
the other, it will do immense harm. And let us note also
that even if the government is not inflating the cur-
rency, but tries to hold either absolute or relative prices
just where they were, or has instituted an "income
policy" or "wage policy" drafted in accordance with
some mechanical formula, it will do increasingly serious
harm. For in a free market, even when the so-called
price "level" is not changing, all prices are constantly
changing in relation to each other. They are responding
to changes in costs of production, of supply, and of
demand for each commodity or service.
And these price changes, both absolute and relative,
are in the overwhelming main both necessary and
desirable. For they are drawing capital, labor, and other
resources out of the production of goods and services
that are less wanted and into the production of goods
and services that are more wanted. They are adjusting
the balance of production to the unceasing changes in
demand. They are producing thousands of goods and
services in the relative amounts in which they are so-
cially wanted. These relative amounts are changing ev-
ery day. Therefore the market adjustments and price
and wage incentives that lead to these adjustments
must be changing every day.
Price control always reduces, unbalances, distorts,

and discoordinates production. Price control becomes
progressively harmful with the passage of time. Even a
fixed price or price relationship that may be "right" or
"reasonable" on the day it is set can become increas-
ingly unreasonable or unworkable.
What governments never realize is that, so far as any
individual commodity is concerned, the cure for high
prices is high prices. High prices lead to economy in
consumption and stimulate and increase production.
Both of these results increase supply and tend to bring
prices down again.
Excessive Fears of Monopoly
Very well, someone may say; so government price

control in many cases is harmful. But so far you have
been talking as if the market were governed by perfect
competition. But what of monopolistic markets? What
of markets in which prices are controlled or fixed by
huge corporations? Must not the government intervene
here, if only to enforce competition or to bring about
the price that real competition would bring if it ex-
isted?
The fears of most economists concerning the evils of
"monopoly" have been unwarranted and certainly
excessive. In the first place, it is very difficult to frame
a satisfactory definition of economic monopoly. If there
is only a single drug store, barber shop, or grocery in a
small isolated town (and this is a typical situation), this
store may be said to be enjoying a monopoly in that
town. Again, everybody may be said to enjoy a
monopoly of his own particular qualities or talents.
Yehudi Menuhin has a monopoly of Menuhin's violin
playing; Picasso of producing Picasso paintings; Eliza-
beth Taylor of her particular beauty and sex appeal;

and so for lesser qualities and talents in every line.
On the other hand, nearly all economic monopolies
are limited by the possibility of substitution. If copper
piping is priced too high, consumers can substitute iron
or plastics; if beef is too high, consumers can substitute
lamb; if the original girl of your dreams rejects you, you
can always marry somebody else. Thus, nearly every
person, producer, or seller may enjoy a quasi monopoly
within certain inner limits, but very few sellers are able
to exploit that monopoly beyond certain outer limits.
There has been a growing literature within recent years
deploring the absence of perfect competition; there
could have been equal emphasis on the absence of per-
fect monopoly. In real life competition is never perfect,
but neither is monopoly.
Unable to find many examples of perfect monopoly,
some economists have frightened themselves in recent
years by conjuring up the specter of "oligopoly," the
competition of the few. But they have come to their
alarming conclusions only by inserting in their own
hypotheses all sorts of imaginary secret agreements or
tacit understandings between large producing units,
and deducing what the results could be.
Now the mere number of competitors in a particular
industry may have very little to do with the existence
of effective competition. If General Electric and West-
inghouse effectively compete, if General Motors and
Ford and Chrysler effectively compete, if the Chase
Manhattan and the First National City Bank of New
York effectively compete, and so on (and no person who
has had direct experience with these great companies
can doubt that they dominantly do), then the result for
consumers, not only in price but in quality of product
or service, is not only as good as that which would be
brought about by atomistic competition but much bet-
ter, because consumers have the advantage of large-

scale economies, and of large-scale research and deve-
lopment that small companies could not afford.
A Strange Numbers Game
The oligopoly theorists have had a baneful influence

on the American antitrust division and on court deci-
sions. The prosecutors and the courts have recently
been playing a strange numbers game. In 1965, for ex-
ample, a Federal district court held that a merger that
had taken place between two New York City banks
four years previously had been illegal, and must now be
dissolved. The combined bank was not the largest in the
city, but only the third largest; the merger had in fact
enabled the bank to compete more effectively with its
two larger competitors; its combined assets were still
only one-eighth of those represented by all the banks
of the city; and the merger itself had reduced the num-
ber of separate banks in New York from 71 to 70. (I
should add that in the four years since the merger the
number of branch bank offices in New York City has
increased from 645 to 698.) The court agreed with the
bank's lawyers that "the general public and small busi-
ness have benefited" from bank mergers in the city.
Nevertheless, the court continued, "practices harmless
in themselves, or even those conferring benefits upon
the community, cannot be tolerated when they tend to
create a monopoly; those which restrict competition
are unlawful no matter how beneficent they may be."
It is a strange thing, incidentally, that though politi-
cians and the courts think it necessary to forbid an
existing merger in order to increase the number of
banks in a city from 70 to 71, they have no such insist-
ence on big numbers in competition when it comes to
political parties. The dominant American theory is that

just two political parties are enough to give the Ameri-
can voter a real choice; that when there are more than
these it merely causes confusion, and the people are not
really served. There is much truth in this political the-
ory as applied in the economic realm. If they are really
competing, only two firms in an industry are enough to
create effective competition.
Monopolistic Pricing
The real problem is not whether or not there is

"monopoly" in a market, but whether there is monopo-
listic pricing. A monopoly price can arise when the
responsiveness of demand is such that the monopolist
can obtain a higher net income by selling a smaller
quantity of his product at a higher price than by selling
a larger quantity at a lower price. It is assumed that in
this way the monopolist can realize a higher price than
would have prevailed under "pure competition."
The theory that there can be such a thing as a
monopoly price, higher than a competitive price would
have been, is certainly valid. The real question is, how
useful is this theory either to the supposed monopolist
in deciding his price policies or to the legislator,
prosecutor, or court in framing antimonopoly policies?
The monopolist, to be able to exploit his position, must
know what the "demand curve" is for his product. He
does not know; he can only guess; he must try to find
out by trial and error. And it is not merely the unemo-
tional price response of the consumers that the
monopolist must keep in mind; it is what the effect of
his pricing policies will probably be in gaining the good
will or arousing the resentment of the consumer. More
importantly, the monopolist must consider the effect of
his pricing policies in either encouraging or discourag-

ing the entrance of competitors into the field. He may
actually decide that his wisest policy in the long run
would be to fix a price no higher than he thinks pure
competition would set.
In any case, in the absence of competition, no one
knows what the "competitive" price would be if it ex-
isted. Therefore, no one knows exactly how much
higher an existing "monopoly" price is than a "com-
petitive" price would be, and no one can be sure
whether it is higher at all!
Yet antitrust policy, in the United States, at least,
assumes that the courts can know how much an alleged
monopoly or "conspiracy" price is above the competi-
tive price that might have been. For when there is an
alleged conspiracy to fix prices, purchasers are en-
couraged to sue to recover three times the amount they
were allegedly forced to "overpay."
Refrain from Price Fixing
Our analysis leads us to the conclusion that govern-

ments should refrain, wherever possible, from trying to
fix either maximum or minimum prices for anything.
Where they have nationalized any servicethe post
office or the railroads, the telephone or electric power
they will of course have to establish pricing policies.
And where they have granted monopolistic franchises
for subways, railroads, telephone or power compa-
niesthey will of course have to consider what price
restrictions they will impose.
As to antimonopoly policy, whatever the present con-
dition may be in other countries, in the United States
this policy shows hardly a trace of consistency. It is
uncertain, discriminatory, retroactive, capricious, and
shot through with contradictions. No company today,

even a moderate-sized company, can know when it will
be held to have violated the antitrust laws, or why. It all
depends on the economic bias of a particular public
prosecutor, court, or judge.
There is immense hypocrisy about the subject. Politi-
cians make eloquent speeches against "monopoly."
Then they will impose tariffs and import quotas in-
tended to protect monopoly and keep out competition;
they will grant monopolistic franchises to bus compa-
nies or telephone companies; they will approve
monopolistic patents and copyrights; they will try to
control agricultural production to permit monopolistic
farm prices. Above all, they will not only permit but
impose labor monopolies on employers, and legally
compel employers to "bargain" with these monopolies;
and they will even allow these monopolies to impose
their conditions by physical intimidation and coercion.
I suspect that the intellectual situation and the politi-
cal climate in this respect are not much different in
other countries. To work our way out of the existing
legal chaos is, of course, a task for jurists as well as for
economists. I have one modest suggestion: We can get
a great deal of help from the old common law, which
forbids fraud, misrepresentation, and all physical in-
timidation and coercion. "The end of the law," as John
Locke reminded us in the seventeenth century, "is not
to abolish or restrain, but to preserve and enlarge free-
dom." And so we can say today that in the economic
realm the aim of the law should be not to constrict, but
to maximize price freedom and market freedom.
CHAPTER 8
Who Protects the Consumer?
CONSUMERS ARE SOMETIMES ASKED TO PAY TOO

much for goods. This has been true since the beginning
of time. Their great protection against overcharging has
been competition. The intelligent shopper can com-
pare price and quality, and go to the merchant who
offers the best goods at the cheapest price.
Consumers are sometimes cheated. This also has
been true since the beginning of time. They have some-
times been the victims of deceptive practices; they
have been sold shoddy goods, or defective goods, or
goods that have been misrepresented. Again, their
greatest protection has always been competition. They
can cease to buy from the dishonest merchant. In addi-
tion, when the amount involved is large enough, they
Who Protects The Consumer? 49
have been able under general laws against dishonest

practices to resort to the law or to take a case to court.
But in recent years, particularly in the Kennedy and
Johnson Administrations, an ominous network of legis-
lation has grown up which attempts to regulate quality
and quantity in the minutest detail in one industry or
trade after another.
An idea of the scope of this can be gathered from a
single message to Congress by President Johnson on
February 17, 1967. Here are some of his requests:
I recommend the Truth-in-Lending Act of 1967. . . .
I recommend the Interstate Land Sales Full Disclosure Act
of 1967. . . .
I recommend the Welfare and Pension Protection Act of
1967
I recommend the Medical Device Safety Act of 1967
I recommend the Clinical Laboratories Improvement Act
of 1967. . . .
I recommend the Wholesome Meat Act of 1967. . . .
I recommend the Fire Safety Act of 1967. . . .
I recommend the Natural Gas Pipeline Safety Act of
1967
He also recommended that Congress give "careful

consideration to the [346-page] report and recommen-
dations of the Securities and Exchange Commission"
on the detailed control of mutual funds, and that it
enact new controls of the electric power industry as
soon as a report by the Federal Power Commission was
completed.
All this in one message. All this to be rushed through
in 1967.
Furthermore, this message came when the most de-
tailed regulation of special industries had already been
enacted. On March 15, 1962, President Kennedy had
sent a similar special message to Congress with similar
recommendations. One result was that Congress that

year passed a far more stringent drug-control law.
Previously the government had power only to prevent
the marketing of unsafe drugs. A new drug could be
marketed if the government took no action within 60
days after an application was filed. The new law re-
versed this, and gave a bureaucrat power to hold up
approval of a drug indefinitely until the manufacturer
could prove to the bureaucrat's satisfaction that the
drug was not only safe but "effective." This could give
the bureaucrat life-or-death power over a company or
its products. It is a very dubious legal principle that
allows any bureaucrat to keep off the market something
that, even though harmless, is in his opinion "ineffec-
tive," and that in addition puts the burden of proof of
effectiveness on the producer. The new drug law has
discouraged research and slowed down the introduc-
tion of new life-extending drugs.
Before President Johnson's 1967 message on con-
sumer protection, an automobile safety law had been
passed, as well as a food labelling and packaging law.
Presumably the designs of future cars will not be spec-
ified by engineers, but by lawyers and congressmen,
who will also take increasing control over labelling.
There is one very nasty by-product of this itch for
more and more Federal control of business. The con-
gressmen and bureaucrats who favor it begin by an
enormous propaganda campaign against the industry or
trade that they want to control. Thus, in order to get
through the Wholesome Meat Act, government officials
charged that unsafe and filthy meat was being sold al-
most everywhere. Then in order to get through a poul-
try-control bill, Miss Betty Furness, President Johnson's
consumer adviser, stated: "There's not a place in the U.
S.. . . where you can order a chicken sandwich with the
confidence you are not endangering your health." Ear-
Her in 1968, in a sweeping indictment, she had charged

that every merchant was "after your back teeth."
A Senate committee recently held hearings to decide
whether the automobile repair industry, with its tens of
thousands of local garages and repairmen, ought not to
be brought under direct Federal control. The commit-
tee credulously listened to witnesses who told it that
the chances are 99 to 1 that work ordered will not be
done properly, if it is done at all. The implication was
left that the industry is made up mainly of incompe-
tents and crooks.
Just how detailed were some of the new regulations
that President Johnson was urging in his 1967 message
can be judged from its passages on the control of medi-
cal devices. Government bureaucrats were to prescribe
"standards" for "bone pins, catheters, X-ray equipment
and diathermy machines." Bureaucrats were to say
what kinds of nails and screws were to be used for bone
repair, and what kinds of artificial eyes were to be per-
mitted.
All this is an ominous reminder of medieval despot-
ism. One thinks of the law of Henry VIII, which made
it a penal offense to sell any pins but such as were
"double-headed, and their head soldered fast to the
shank, and well smoothed; and the shank well shaven;
and the point well and round-filed and sharpened."
The pervading assumption of the Kennedy and John-
son Administrations was that any and all problems
could be solved if only we piled up enough new laws
and restrictions. Yet it may be doubted that consumers
are going to be helped much by defaming and harassing
producers.
The consumer has one great protection against in-
competent producers or dishonest sellers. This is his
own intelligence and his own decisions. His views are
heard every day in his purchases and refusals to pur-
chase. With every penny that he spends, the individual

consumer is casting his vote for this product and against
that. He does not need to sign petitions or march in
picket lines. If he patronizes a product, the firm that
makes it prospers and grows; if he stops buying a prod-
uct, the firm that makes it goes out of business. The
consumer is the boss. The producers must please him or
die.
But this is another way of saying that the great pro-
tection of the consumer is the competition among pro-
ducers for his patronage. This is another way of saying,
as even President Johnson admitted in his consumer
protection message, that: "Most of these problems are
resolved in the free competitive market through the
energies of private enterprise. It is remarkable how well
the free enterprise system does its job." This was excel-
lent lip service, but Mr. Johnson's detailed recommen-
dations were based on the opposite assumption.
A thousand examples could be cited of the miracu-
lous effect of free market competition in serving the
consumer. I will content myself with onethe food in-
dustry.
The original packaging bill before the 89th Congress
not only sought to protect the consumer against fraudu-
lent or deceptive labelling and packaging, but it sought
to standardize sizes, shapes and proportions of pack-
ages and net weights and quantities. Industry witnesses
showed by numerous examples, however, how this
would have discouraged innovation and restricted con-
sumer choice. "If there are 8,000 different items in the
average supermarket today as compared with 2,000
some years ago," testified Arthur E. Larkin, Jr., presi-
dent of the General Foods Corporation, "it's because
the consumer wants it that way. . . . No one of those
8,000 items will continue to be produced and occupy
shelf space if the customers don't take it off the shelf
and put it in their shopping bags. . . . Each product

must win its right to survival. Each must be sold in
sufficient quantity to be profitable."
In other words, once more, the way to protect the
consumer is not to impede and harass, but to encourage
the producer.
CHAPTER 9
Famines Are
Government-Made
FOR THE LAST FEW YEARS AN INFLUENTIAL GROUP OF

social reformers has been energetically propagating a
dangerous myth. This is that the accelerating pace of
population growth is overtaking the rate at which the
world can produce food, and that disastrous famines are
almost inevitable unless the growth of population can
be throttled.
In October, 1966, a study by Prof. Karl Brandt, one of
the world's great agricultural authorities, retired direc-
tor of Stanford University's Food Research Institute
and a former member of the President's Council of
Economic Advisers, exploded this myth. But his anal-
ysis did not receive anything like the attention it de-
served.
Famines Are Government-Made 55
Governments' first priorities, Brandt declared, should

not be to effect "planned parenthood crash programs,"
but to adopt policies that give farmers the freedom and
incentive to expand food production.
Brandt has no quarrel with "planned parenthood by
voluntary individual decision." But it would necessarily
take years before even successful government birth
control propaganda could appreciably affect the total
size of the population. Moreover, the emphasis on birth
control to counteract famine diverts attention from the
enormous potential increase in food production that has
now been made technically possible.
Science and technology have now developed over-
abundant sources of energy, which have opened the
gates to replace human and animal power by mechani-
cal power in food production.
The most crucial of all fertilizers, nitrogen, has now
been made potentially abundant everywhere in the
world at declining costs. One ton of pure nitrogen can
yield from 15 to 20 tons of grain equivalent. Technology
has developed new methods of irrigation, highly effec-
tive weed killers and pesticides, better means of storing
and preserving perishables.
Why, then, has the world still been having famines?
Brandt replies that in the last generation most of these
famines have been primarily government-made. He
cites the collectivist policies in Soviet Russia that ini-
tially resulted in the starvation of five million people
and have continued to prevent any proper expansion of
food output there for nearly forty years. Similar and
worse policies have cost uncounted millions of lives in
Red China.
Famine has been produced by similar policies in
India. In its socialist mania for "industrialization," the
Indian government has squeezed the major part of the
capital for that industrialization out of farm income. It
has arbitrarily set high prices for all manufactured

goods and low prices for food and other farm products.
On top of this crushing discouragement to food pro-
duction, mismanagement and neglect have led to a
situation in which mice, rats, birds, and locusts are per-
mitted to devour India's homegrown food faster than
American Food for Peace can be shipped in at very
high expense.
On top of all this, some 200 million government-
protected sacred cows are allowed to roam around eat-
ing food while people are dying of hunger.
Our government has not insisted on any adequate
conditions in return for our enormous gifts of food to
India. So, Brandt concluded, our generosity has been
contributing unwittingly to the prospect of real famine
there, while weakening the United States dollar:
Such gifts allow the Indian government further leeway to

continue ill-advised policies which suffocate the initiative of
their farmers. The magnitude of food deficits these policies
continue to create is so enormous that with all charity and
foreign aid, we and the other industrial nations cannot possi-
bly compensate for them.
CHAPTER 10
Runaway Relief and

Social Insecurity
IN THE UNITED STATES, FEDERAL PROGRAMS TO RE-

lieve poverty and unemployment first went into effect
on a large scale in the Great Depression. The argument
was that they were needed only during the emergency.
Since then the nation has enjoyed a return of prosper-
ity, an enormous growth in national income, a fall of
unemployment to record low levels, and a sharp decline
(by any consistent definition) in the number and pro-
portion of the poor. Yet relief, unemployment insur-
ance, Social Security, and scores of other welfare
programs have expanded at an accelerative rate.
In a 1935 message to Congress, President Franklin D.
Roosevelt declared: "The Federal Government must
and shall quit this business of relief . . . . Continued
dependence upon relief induces a spiritual and moral

disintegration, fundamentally destructive to the na-
tional fiber."
The contention then made was that, if unemploy-
ment and old-age insurance programs were put into
effect, poverty and distress would be relieved by con-
tributory programs that did not destroy the incentives
and self-respect of the recipients, and that relief could
gradually be tapered off to negligible levels.
Let us look first at what has happened to Social
Security itself. Since the original act of 1935 there have
been constant additions and expansions of benefits. As
early as 1939, both the benefit and tax provisions of the
basic act were overhauled. The 1939 package added
survivors' benefits.
In 1950, coverage was broadened substantially to in-
clude about 90 per cent of the employed labor force.
(Initially it had been only about 60 per cent.) The length
of working time required to qualify for coverage was
sharply reduced.
In 1954 and 1956 there were further liberalizations of
coverage. Disability benefits were added. The 1956
amendment dropped the minimum retirement age re-
quired for women from 65 to 62.
In 1958, benefits for dependents of disabled workers
were added. In 1961 the retirement age for men was also
reduced to 62, though with a lower level of benefits
than was payable at 65.
The 1965 legislation added Medicare for some 20 mil-
lion Americans over 65. It made a host of other expen-
sive changes. To the traditional Social Security program
it added a 7 per cent across-the-board increase in cash
benefits to retired workers.
In addition to other changes, the scale of benefits was
increased in 1952, 1954, 1958, and 1965.
The 1967 Social Security amendments increased pay-
Runaway Relief And Social Insecurity 59
ments to the 24 million beneficiaries by an average of

13 per cent, raised minimum benefits 25 per cent, in-
creased benefits to non-insured persons over 72, and
also increased survivor and disability insurance ben-
efits.
The original Social Security payroll tax was 1 per cent
of wages up to $3,000, to be paid both by workers and
employers. The combined rate of tax is now 9.6 per cent
of wages up to $7,800.
But nobody can seriously expect even these greatly
increased payroll taxes to pay for the liabilities that the
government has already undertaken. W. Rulon William-
son, the actuary for the Social Security Board from 1936
to 1947, estimated even before the latest increases that
it would take $150 billion more just to take care of those
who were already on the benefit rolls, and that it would
probably take at least $1 trillion to take care of the
families of those who are already paying Social Security
taxes, but have not yet retired. That estimate doesn't
cover Medicare.
What, meanwhile, has happened to the relief pro-
grams that unemployment insurance and Social
Security were designed to make unnecessary?
In 1937, the first full year in which the initial Federal
public assistance programs were in operation, $316 mil-
lion was paid out to relief clients under the federally
aided programs. In i960 the comparable total had in-
creased more than tenfold, to $3.3 billion.
Though the Federal contribution has been mounting
steadily during the years, the burden borne by the
States and localities has been mounting at an almost
equal rate. The amount of public aid alone paid out by
the States and localities increased from $624 million in
1935 to $3 billion in 1966. The total of all social welfare
expenditures borne by the States and localities alone
has grown from $3.3 billion in 1935 to $40.8 billion in
1966, and for 1968 was probably about $46 billion.

The Federal budget lists the total cost of "Federal
Aid to the Poor" in i960 at $9.5 billion. For 1969 the cost
is listed at $27.7 billion, nearly three times as much.
These figures include the cost of aid to education,
work and training, health, cash benefit payments, and
other social welfare services. In the 1969 fiscal year, the
Federal Government placed the number of persons on
direct relief at 8.8 million. This was an increase of 60 per
cent compared with the number twelve years before,
though the rate of unemployment is lower than it was
then.
The Federal Government estimated that there are
still about 29 million "poor" by official definition
( a family of four with an annual income under $3,335).
Not only do the individual programs to "assist" them
become more costly year by year, but new programs are
constantly being added, though they overlap and dupli-
cate each other. Upward of 70 agencies have been
counted operating some 300 programs for uplifting peo-
ple.
A detailed account of the waste and scandals that
have accompanied these proliferating programs can be
found in Shirley Scheibla's recent book, Poverty Is
Where the Money Is*
In addition to specific antipoverty programs, the
Federal Government's total welfare outlaysincluding
agricultural subsidies, housing and community develop-
ment, health, labor and welfare, education, and veter-
ans' benefitscome to a staggering total for the single
1969 fiscal year of more than $68 billion.
Even so we have not finished yet. We must add the
$46 billion annual welfare cost that falls on the States
and localities, making a grand total of more than $114
billion.
*New Rochelle, N.Y.: Arlington House, 1968.

Runaway Relief And Social Insecurity 61
Yet nearly all the "reforms" that are being proposed,

even under the new Republican Administration, are
changes that would still further increase the Social
Security and direct relief burden, not reduce it.
One of these proposals, which may even be enacted
into law before this book appears, is that all welfare be
placed in the hands of the Federal Government, with
a uniform level of relief payments throughout the na-
tion. The practical effect of this would be to reduce the
present high relief payments in the big cities hardly at
all, but to increase enormously the relief paid in the
poorer States and in the country districts.
The relief recipients in the poorer States and country
districts would not only, because of their comparatively
much lower living costs, be much better off than the
relief recipients in the big cities, but their relief pay-
ments would be so much higher in comparison with the
local wage rates in their districts that hundreds of thou-
sands more would prefer going on relief to staying at
work.
As the relief system would probably be administered
by the city and county governments, while the Federal
taxpayers were footing the bill, all incentives to
economy and the elimination of malingerers and chisel-
ers from the relief rolls would fall to the vanishing point.
The country would slide easily toward guaranteed-
income plans, and the waste and corruption in relief
payments would make present waste and corruption
seem trivial in comparison.
CHAPTER 11
Income Without Work
A GROUP OF SOCIAL REFORMERS, IMPATIENT WITH

the present "rag bag" of measures to combat poverty,
proposes to wipe it out in a single swoop. The govern-
ment would simply guarantee to everybody, regardless
of whether or not he worked, could work, or was willing
to work, a minimum income. This guaranteed income
would be sufficient for his needs, "enough to enable
him to live with dignity."
The reformers estimate that the guaranteed income
ought to range somewhere between $3,000 and $6,000
a year for a family of four.
This is no longer merely the proposal of a few starry-
eyed private individuals. The National Commission on
Technology, Automation, and Economic Progress, es-
Income Without Work 63
tablished by Congress in 1964, brought in a 115-page

report to the President on February 4, 1966, recom-
mending guaranteed incomes for all. And in January of
1966, the President's Council of Economic Advisers in-
dicated approval of "uniformly determined payments
to families based only on the amount by which their
incomes fall short of minimum subsistence levels." This
plan, they declared, "could be administered on a uni-
versal basis for all the poor and would be the most
direct approach to reducing poverty."
Since then an increasing number of endorsements of
the guaranteed income proposal (sometimes under the
euphemisms of "income maintenance" or "negative in-
come tax") have come from private and official sources.
In June of 1968 a subcommittee of the Joint Economic
Committee of Congress held extensive hearings (which
ran in printed form to 720 pages) on "income mainte-
nance programs." Though a Gallup Poll published at
the time showed 58 per cent of those questioned were
opposed outright to a guaranteed income, and only 36
per cent were in favor, the overwhelming majority of
the witnesses called by the committee favored some
form of guaranteed income.
The plan is spelled out and argued in detail in a book
called The Guaranteed Income (1966), a symposium of
articles by ten contributors, edited by Robert Theo-
bald, who calls himself a "socio-economist." Mr. Theo-
bald has contributed three of the articles, including his
preface.
Of the following three paragraphs, Mr. Theobald
prints the first two entirely in italics:
This book proposes the establishment of new principles spe-

cifically designed to break the link between jobs and income.
Implementation of these principles must necessarily be car-
ried out by the government....
We will need to adopt the concept of an absolute constitu-

tional right to an income. This would guarantee to every
citizen of the United States, and to every person who has
resided within the United States for a period of five consecu-
tive years, the right to an income from the Federal Govern-
ment to enable him to live with dignity. No government
agency, judicial body, or other organization whatsoever
should have the power to suspend or limit any payments
assured by these guarantees . . . .
If the right to these incomes should be withdrawn under
any circumstances, government would have the power to
deprive the individual not only of the pursuit of happiness,
but also of liberty and even, in effect, of life itself. This abso-
lute right to a due-income would be essentially a new princi-
ple of jurisprudence.
The contributors to this volume have arrived at these

extraordinary conclusions not only because they share
a number of strange ideas of jurisprudence, of "rights,"
of government, and of the true meaning of liberty and
tyranny, but because they share a number of major eco-
nomic misconceptions.
Nearly all of them seem to share the belief, for exam-
ple, that the growth of automation and "cybernation"
is eliminating jobs so fast (or soon will be) that there just
won't be jobs for even the most industrious. "The con-
tinuing impact of technical change will make it impossi-
ble to provide jobs for all who seek them." The goal of
"jobs for all" is "no longer valid." And so on.
Ancient Fears of Automation
The fears of permanent unemployment as a result of

technological progress are as old as the Industrial Revo-
lution in the late eighteenth and early nineteenth cen-
turies. They have been constantly reiterated in the last
35 to 40 years and as often completely refuted. It is

sufficient to point out here that not only has the average
unemployment of slightly less than 5 per cent in the last
twenty years not been growing, and that two-thirds of
the jobless have usually remained so for periods of not
more than ten weeks, but that the total volume of em-
ployment in the United States has reached a new high
record in nearly every one of these years.
Even if it were true, as the authors of the guaranteed
income proposal contend, that the American free en-
terprise system will soon become so productive that
more than anybody really wants can be produced in
half the time it takes now, why would that mean the
disappearance of jobs? And how could that justify half
the population's, say, being forced to work forty hours
a week to support the other half in complete idleness?
Why couldn't everybody work only in the mornings? Or
half in the mornings and the other half in the afternoons
at the same machines? Or why could not some people
come in on Mondays, others on Tuesdays, and so on? It
is difficult to understand the logic or the sense of fair-
ness of those who contend that as soon as there is less
to be done some people must be supported in idleness
by all the rest.
"An Absolute Right"
But that is precisely the contention of the advocates

of the guaranteed annual income. These handout in-
comes are to be given as "an absolute constitutional
right," and not to be withheld "under any circum-
stances" (Theobald's italics). This means that the recipi-
ents are to continue to get this income not only if they
absolutely refuse to seek or take a job, but if they gam-
ble the handout money away at the races or spend it on

prostitutes, pornography, whiskey, cigarettes, mari-
juana, heroin, or whatnot. They are to be given "suffi-
cient to live in dignity," and it is apparently to be no
business of the taxpayers if a recipient chooses
nonetheless to live without dignity, and to devote his
guaranteed leisure to gambling, dissipation, drunken-
ness, debauchery, dope addiction, or even a life of
crime. "No government agency, judicial body, or other
organization whatsoever should have the power to sus-
pend or limit any payments assured by these guaran-
tees." This is surely a "new principle of jurisprudence."
Unrealistic Cost Estimates
How much income do the guaranteed-income advo-

cates propose to guarantee? They differ regarding this,
but practically all of them think the government should
guarantee at least what they and government officials
call the "minimum maintenance level" or the "poverty-
income line." The Social Security Administration cal-
culated that the 1964 poverty-income line for non-farm
individuals was $1,540 a year. A non-farm family of four
was defined as poor if its money income was below
$3,130. The Council of Economic Advisers calculated
that by this standard 34 million, or 18 per cent, of our
190 million 1964 population were living in poverty. This
is in spite of the $40 billion total spent in welfare pay-
ments, of which it estimated that $20 billion (in the
fiscal year 1965) went to persons who were, or would
otherwise have been, below the poverty-income line.
The official "poverty-income line" is constantly ris-
ing, and in spite of the smaller number of persons offi-
cially estimated to be poor, Federal payments to them
have been rising even faster. According to President
Johnson's annual budget message of January 29, 1968,
"there remain about 29 million poor. In fiscal year 1969,
Federal outlays which aid persons below the poverty
line (for example, a family of four with an annual in-
come under $3,335) are estimated to total $27.7 billion.
This represents an increase of $3.1 billion over fiscal
year 1968 and $15.2 billion over 1963."
How much would a guaranteed-income program cost
the taxpayers? This would depend, of course, on how
big an income was being guaranteed. Many of the in-
come-guarantee advocates think that a guarantee
merely of the poverty-line income would be totally
inadequate. They appeal to other "minimum" budgets
put together by the Social Security Administration or
the Bureau of Labor Statistics, some of which run up to
nearly $6,000 for a family of four.
One of the contributors to the Theobald symposium
makes the following estimates of the cost to the taxpay-
ers of different guarantees:
For a "minimum maintenance" level of $3,000 a year:
total cost, $11 billion a year.
For an "economy" level of $4,000: $23 billion a year.
For a "modest-but-adequate" level of $5,000: $38 bil-
lion a year.
These figures are huge, yet they are clearly an under-
estimate. For the calculations take it for granted that
those who could get government checks to bring their
incomes to $3,000 or $5,000 a year, as an absolute guar-
antee, without conditions, would continue to go on
earning just as much as before. But, as even one of the
contributors to the Theobald symposium, William Vogt,
remarked: "Those who believe that men will want to
work whether they have to or not seem to have lived
sheltered lives."
Who Would Do the Work?
Vogt goes on to point out, with refreshing realism,

how hard it is even today, before any guaranteed in-
come, to get people to shine shoes, wash cars, cut brush,
mow lawns, act as porters at railroad or bus stations, or
do any number of other necessary jobs. "Millions of
service jobs are unfilled in the United States, and it is
obvious that men and women will often prefer to exist
on small welfare payments rather than take the jobs
If this situation exists before the guaranteed income is
made available, who is going to take care of services
when everyone can live without workingas a right?"
Who is, in fact, going to take the smelly jobs, or any
low-paid job, once the guaranteed income program is in
effect? Suppose, as a married man with two children,
your present income from some nasty and irregular
work is $2,500 a year. Comes the income guarantee, and
you get a check in the mail from the government for
$900. This is accompanied by a letter telling you that
you are entitled as a matter of unconditional right to the
poverty-line income of $3,400, and this $900 is for the
difference between that and your earned income of
$2,500. You are happyfor just a day. Then it occurs to
you that you are a fool to go on working at your nasty
job or series of odd jobs for $2,500 when you can stop
work entirely and get the full $3,400 from the govern-
ment.
So the government would, in fact, have to pay out a
tremendous sum. In addition, the program would create
idleness on a huge scale. To predict this result is not to
take a cynical view, but merely to recognize realities.
The beneficiaries of the guaranteed income would
merely be acting sensibly from their own point of view.
But the result would be that the more than one-seventh
of the population now judged to be below the poverty
line would stop producing even most of the necessary

goods and services it is producing now. The unpleasant
jobs would not get done. There would be less total pro-
duction, or total real income, to be shared by every-
body.
The Shifting "Poverty Line"
But so far we have been talking about the effect of the

guaranteed income on the recipients whose previous
incomes have been below the poverty line. What about
the other six-sevenths of the population, whose in-
comes have been above it? What would be the effect on
their incentives and actions?
Suppose a married man with two children found at
the end of a year that he had earned $3,500? And sup-
pose he found that his neighbor, with the same-sized
family, had simply watched television, hung around a
bar, or gone fishing during the year and had got a
guaranteed income from the government of $3,400?
Wouldn't the worker begin to think that he had been
something of a sap to work so hard for a mere $100 net,
and that it would be much better to lead a pleasantly
idle life for just that much less? And wouldn't the same
thing occur to all others whose earned incomes were
only slightly above the guarantee?
It is not easy to say how far above the guarantee any
man's income would have to be for this consideration
not to occur to him. But we would do well to remember
the following figures: The median or "middle" income
for all families in 1966 was $7,436. The median income
for "unrelated" individuals was $2,270. People with
these incomes or less, i.e., half the population, would be
near enough to the guarantee to wonder why they
weren't getting any of it.
Someone Must Pay
If "everybody should receive a guaranteed income as

a matter of right" (and the italics are Mr. Theobald's),
who is to pay him that income? The advocates of the
guaranteed income gloss over this problem. The money,
they tell us, will be paid by the "government" or by the
"State." "The State would acknowledge the duty to
maintain the individual."
The State is a shadowy entity that apparently gets its
money out of some fourth dimension. The truth is, of
course, that the government has nothing to give to any-
body that it doesn't first take from someone else. The
whole guaranteed-income proposal is a perfect modern
example of the shrewd observation of the French
economist, Bastiat, more than a century ago: "The State
is the great fiction by which everybody tries to live at
the expense of everybody else."
Rights vs. Obligations
None of the guaranteed-income advocates explicitly

recognizes that real "income" is not paper money that
can be printed at will, but goods and services, and that
somebody has to produce these goods and services by
hard work. The proposition of the guaranteed-income
advocates, in plain words, is that the people who work
must be taxed to support not only the people who can't
work but the people who won't work. The workers are
to be forced to give up part of the goods and services
they have created and turn them over to the people
who haven't created them or flatly refuse to create
them.
Once this proposition is stated bluntly, the spurious-
ness in all the rhetoric about "the absolute constitu-
tional 'right' to an income" becomes clear. A true legal
or moral right of one man always implies an obligation
on the part of others to do something or refrain from
doing something to ensure that right. If a creditor has
a right to a sum of money owed to him on a certain day,
the debtor has an obligation to pay it. If I have a right
to freedom of speech, to privacy, or to the ownership
of a house, everyone else has an obligation to respect it.
But when Paul claims a "right" to "an income sufficient
to live in dignity," whether he is willing to work for it
or not, what he is really claiming is a right to part of
somebody else's earned income. What Paul is asserting
is that Peter has a duty to earn more than he needs or
wants to live on so that the surplus may be seized from
him and turned over to Paul to live on.
What the guaranteed-income advocates are really
saying, behind all their high-sounding phrases and
humanitarian rhetoric, is something like this: "Look, we
find ourselves with this wonderful apparatus of coer-
cion, the government and its police forces. Why not use
it to force the workers to pay part of their earnings over
to the non-workers?"
Lack of Understanding
We can still believe in the sincerity and good inten-

tions of these people, but only by assuming an appalling
lack of understanding on their part of the most elemen-
tary economic principles. "This book," writes Robert
Theobald, "proposes the establishment of new princi-
ples specifically designed to break the link between
jobs and income." But we cannot break the link be-
tween jobs and income. True income is not money, but
the goods and services that money will buy. These
goods and services have to be produced. They can only
be produced by work, by jobs. We may, of course, break

the link between the job and the income of a particular
person, say Paul, by giving him an income whether he
consents to take a job or not. But we can do this only by
seizing part of the income of some other person, say
Peter, from his job. To believe we can break the link
between jobs and income is to believe we can break the
link between production and consumption. Goods have
to be produced by somebody before they can be con-
sumed by anybody.
Claimants to Be Trusted, Taxpayers to Be Examined
One reason for the agitation for an unconditionally

guaranteed income is the dislike of some social reform-
ers for the "means test." The means test is disliked on
two grounds: that it is "humiliating" or "degrading,"
and that it is administratively troublesome"a compre-
hensive examination of means and resources, applicant
by applicant." The guaranteed-income advocates think
they can do away with all this by using the "simple"
mechanism of having everybody fill out an income tax
blank, whereupon the government would send a check
to everybody for the amount that his income, so re-
ported, fell below the government's set "poverty-line"
minimum.
The belief that this income tax mechanism would be
administratively simple is a delusion. Before the intro-
duction of the withholding mechanism, before the re-
porting requirements for payments made to individuals
in excess of $6oo in any year, and the still more recent
requirements for the reporting of even the smallest in-
terest and dividend payments, the income tax was in
large part a self-imposed tax. The government de-
pended heavily on the taxpayer's conscientiousness
and honesty. To a substantial extent it still does.
The government can check the honesty of individual
returns only by a random or arbitrary sampling process.
It is altogether probable that more evasion and cheat-
ing go on in the low income tax returns than in the high
onesnot because the big-income earners are more
honest, but simply because their chances of being ex-
amined and caught are higher. The amount of conceal-
ment and falsification that would be practiced by
persons trying to get as high a guaranteed income as
possible would probably be enormous. To minimize the
swindling the government would have to resort to the
same case-by-case and applicant-by-applicant process
as it does to administer current relief, unemployment
insurance, and Social Security programs.
Is a means test for relief necessarily any more hu-
miliating than the ordeal that the taxpayer must go
through when his income tax is being examinedwhen
every question he is asked and record he is required to
provide implies that he is a potential crook? If the reply
is that this inquisition is necessary to protect the gov-
ernment from fraud, then the same reply is valid as
applied to applicants for relief or a guaranteed income.
It would be a strange double standard to insist that
those who were being forced to pay the guaranteed
income to others should be subject to an investigation
from which those who applied for the guaranteed in-
come would be exempt.
In short, to prevent the worst scandals and injustices,
even by the standards of the guaranteed income's advo-
cates, some test of need would be inescapable. If we
fixed things so that there was no loss of dignity or self-
respect whatever in being idle and taking a handout,
then there would be no gain in dignity or self-respect
in working and earning one's own living. It goes with-
out saying that any need test or means test should be
administered without any unnecessary infringement of

the privacy or dignity of the person or family con-
cerned, but such a test would still have to be at least as
careful and thorough as a typical income tax examina-
tion.
Comparison with the income tax may also remind us
of some of the real complications that the guaranteed-
income and "negative-income-tax" proposals gloss
over. Some of these complications were almost acciden-
tally brought out by Dr. Joseph A. Pechman, director of
economic studies for the Brookings Institution, in his
testimony of June 13, 1968, before a subcommittee of
the Congressional Joint Economic Committee. It is im-
portant to keep in mind that Dr. Pechman was testify-
ing in favor of the guaranteed income, but was
earnestly considering some of the "anomalous situa-
tions" that might arise under it.
"For example," he pointed out, "an individual own-
ing $100,000 worth of IBM stock receives cash divi-
dends of less than $1,000 annually." Should such a
person, if this were his only income, receive, say a $2,-
400 a year annual handout to bring his family's income
up to the $3,400 poverty-line level? Even Dr. Pechman
was inclined to think not. But he did apparently think
that an individual who received only $1,000 from not
more than $25,000 worth of bonds or stock (or other
assets of the same market worth) should get this supple-
mentary income.
Most of us, I think, would question this judgment.
Among the dissenters, I am confident, would be the
man who had received only $1,000, but entirely in
wages, and the man who had received $3,401 during the
year, also entirely in wagesneither of them with any
capital assets to speak of, and certainly not a nest egg
of $25,000.
But this is only one of a score of major difficulties
raised by the simplistic proposal for a guaranteed in-
come. The income tax mechanism would be irrelevant
to the real problem with which the guaranteed-income
advocates profess to be concerned. For the applicants
would presumably be reporting last year's income,
which would have no necessary relation to their pres-
ent need. An applicant's income in the previous year or
other previous period might be much higher or much
lower than it is today. The process would not meet
present emergencies, such as illness or temporary loss
of employment. The guaranteed-income payment
might either come too late or prove unneeded or exces-
sive.
When such difficulties are pointed out to them, the
guaranteed-income champions quickly improvise
amendments. Revised income estimates for the current
year might be made quarterly, say. But to meet the cash
needs of the officially designated poor, the govern-
ment's payments would have to be made monthly or
even weekly, and in the month or week in which the
actual need existed, not later. The guaranteed-incomers
have now started to talk of monthly revisions of income
estimates, of payments of arrears, of reimbursements to
the government for overpayments, etc. Putting aside
the question of how realistic it is to talk of getting 30
million poor to return overpayments made to them, we
have only to think of the administrative nightmare of
payment adjustments, examinations, verifications, and
so on, of this "simple" income tax plan.
The Insistence on Cash
A word needs to be said at this point, also, about the

insistence of the guaranteed-income advocates that the
government make its relief payments in cash. They rest
this insistence on a spurious libertarian argument. The

only trouble with the poor, they smilingly argue, is lack
of money. We should therefore give them this money,
and not attempt to dictate how and on what they should
spend it (let alone give them relief in kind), because we
should not interfere with their liberty to spend their
government cash but "let them make their own mis-
takes."
The trouble with this argument is that it is precisely
because so many of the poor have shown an incapacity
for knowing how to spend as well as how to earn money
that they suffer as many of the pangs of poverty as they
do. Cash is the very last thing to be given to a compul-
sive gambler, a drunkard, or a drug addict. As soon as
he has gambled the money away, or spent it on whiskey
or heroin, is the government to telegraph him more?
But if it doesn't, how is it to see that he and his family
get proper nourishment, or that he has enough left over
for the rent, or that his family are decently dressed, or
that his children are properly educated? This is the
kind of central problem that must arise if all the poor
are to be indiscriminately handed cash incomes, not
only regardless of whether they are willing to work or
not, but of whether or not they show any responsibility
or common sense in what they spend the money on.
I recently found an encouraging sign that a turn of
thought may be coming on this subject, at least in Eng-
land, and that some people may begin to recognize that
our forefathers' policies with regard to relief were not
the result merely of blindness and cruelty. In its leading
editorial of September 7,1968, the London Daily Tele-
graph wrote:
The trouble is that if the poorest are too well cared for by
cash handouts from the State they may never have any incen-
tive to get their feet on the next rung of the economic ladder.
So why not give them, say, food, fuel, and clothes for their
children in kind rather than everything in cash? There would
then be the assurance that the help was being properly di-
rected. And if the recipients were not well pleased with such
paternalism, they would have the incentive to work instead.
Some such radical rethinking is long overdue.
Let me add that the argument that we must respect

the liberty of the poor by giving them handouts solely
in cash is spurious from still another standpoint. It over-
looks the liberties of the industrious and prudent peo-
ple from whom money is being either withheld or
seized, in order to pay the cash handouts. It makes no
sense to preserve the "liberty" of the irresponsible at
the expense of the liberty of the responsible.
Old Subsidies Never Die
One of the main selling arguments of the guaranteed-

income advocates is that its net cost to the taxpayers
would not be as great as might appear at first sight
because it would be a substitute for the present
"mosaic" or "rag bag" of measures designed to meet
the same goalSocial Security, unemployment com-
pensation, Medicare, direct relief, free school lunches,
food stamp plans, farm subsidies, housing subsidies,
rent subsidies, and all the rest.
Neither the record of the past nor a knowledge of
political realities supports such an expectation. One of
the main selling arguments in the middle Nineteen
Thirties, first for unemployment insurance and later for
Social Security, was that these programs would take the
place of and eliminate the need for the various relief
programs and payments then in existence. But in the
last thirty years these programs have continued to grow
year by year with only minor interruptions.
Let me remind the reader of some of the comparisons
of welfare expenditures in the preceding chapter. In
spite of the Federal Social Security program, the

amount of public aid alone paid out by the States and
localities has grown from $3.3 billion in 1935 to about
$46 billion in 1968. The Federal Government estimated
the number of people on direct relief in the fiscal year
1969 at 8.8 million, or 60 per cent more than the number
twelve years ago. "Federal Aid to the Poor" tripled in
nine years from $9.5 billion in i960 to $27.7 billion in
fiscal 1969. And when we throw in Social Security and
all the rest, the total annual welfare costs that fall on the
Federal Government, States and localities combined
come to the staggering total forfiscal1969 of more than
$114 billion.
So we may expect not only that the guaranteed in-
come would be thrown on top of all existing welfare
payments (we can expect a tremendous outcry, plus
demonstrations and riots, against discontinuing any of
them), but that demands would arise for constant en-
largement of the guaranteed amount. If the average
payment were merely the difference between an as-
sumed "poverty-line" income of, say, $3,400 and what
the family had earned itself, all heads of families earn-
ing less than $3,400 would either quit work or threaten
to do so unless they were given the full $3,400, and
allowed to "keep" whatever they earned themselves.
And once this demand was granted (in an effort to avoid
the wholesale idleness and pauperization that would
otherwise occur), the people whose earnings were just
above the government minimum, or less than twice as
much, would point out how unjustly they were being
treated. And the only "logical" and "fair" stopping
place, it would be argued, would be to give everybody
the full minimum of $3,400 no matter how much he was
earning or getting from other sources.
Anyone who thinks such a prediction far-fetched
need merely recall how we got into the present system
of paying everybody over 72 Social Security benefits
regardless of his current earnings from other sources,
and paying benefits to every retired person over 65
regardless of the size of his unearned income from other
sources. By the same logic, the British government pays
comprehensive unemployment, sickness, maternity,
widowhood, funeral and other benefits, and retirement
pensions, regardless of need or the size of the recip-
ient's income. The demand for universal "childrens'
allowances" or "family allowances" is also based on this
logic.
Incentive Undermined
I should like to return here to the question of incen-

tives. I have already pointed out how the guaranteed-
income plan, if adopted in the form that its advocates
propose, would lead to wholesale idleness and pauperi-
zation among nearly all those earning less than the
minimum guarantee, and among many earning just a
little more. But in addition to the erosion of the incen-
tive to work, there would be just as serious an erosion
of the incentive to save. The main reason most people
save is to meet possible but unforeseeable contingen-
cies, such as illness, accidents, or the loss of a job. If
everyone were guaranteed a minimum cash income by
the government, this main incentive for saving would
disappear. The important habit of saving might disap-
pear with it.
The more affluent minority, it is true, also save toward
a retirement income in old age or for supplementary
income in their working years. But with the prevalence
of a guaranteed-income system, this type of saving also
would be profoundly discouraged. This would be cer-
tain to mean a reduction in both the nation's capital
accumulation and the investment in more and new and

better tools, plants and equipment upon which all of us
depend for increased national productivity, increased
real wages, more lucrative employment, and economic
progress in general. We might even enter an era of net
capital consumption. In other words, the long-term
effect of a guaranteed-income plan would be to in-
crease poverty, not to reduce it.
It is important to point out that to be concerned with
the destructive effects of a guaranteed-income program
on the incentives of people to work and save, is not to
pass a wholesale moral judgment on the present poor.
We must avoid on the one hand the sweeping assump-
tion, sometimes made by conservatives, that the poor
have no one to blame for their poverty but themselves,
and yet resist on the other hand the frequent sweeping
"liberal" assumption that all the poor or jobless are poor
or jobless "through no fault of their own." The only
realistic presumption is that some people are poor or
jobless through no fault of their own, that some are poor
or jobless entirely through fault of their own, but that
the great majority are poor or jobless through various
complicated mixtures of misfortune and personal mis-
takes or shortcomings.
These mixtures differ in each case, ranging from
those in which misfortune predominates to those in
which personal shortcomings predominate. If we must
simplify, we come back to the old Victorian distinction
between the "deserving" and the "undeserving" poor.
People today are justifiably reluctant to state the dis-
tinction in moral terms. Nevertheless, the distinction
between those who are trying to cure their poverty by
their own efforts, and those who are not, is vital for any
workable solution of the problem of poverty. The cen-
tral vice is that they ignore this distinction. The result
of all the guaranteed-income and "negative income
tax" schemes is that these schemes would destroy in-
centives on a wholesale scale, and therefore have the
opposite of their intended effect.
It is not merely the effect of guaranteed-income
proposals in undermining the incentives of those earn-
ing less than the guarantee that we need to be con-
cerned about, but the effect of such proposals in
undermining the incentives of those much further up in
the income scale. For they would not only be deprived
of the benefits that they saw millions of others getting.
It is they who would be expected to pay these benefits,
through the imposition upon them of far more burden-
some income taxes than they were already paying. If
these taxes were steeply progressive in proportion to
income, as is probable, they would discourage long
hours and unusual effort.
It is difficult to make any precise estimate of the
effect of a given income tax rate in discouraging or
reducing work and production. Different individuals
will, of course, be differently affected. The activities of
a man whose whole income comes in the form of a
single salary from a single job will be differently
affected than those of a surgeon, a doctor, a writer, an
actor, an architect, or anyone whose income varies with
the number of assignments he is willing to undertake or
clients he is willing to serve.
What we do know is that the higher income tax rates,
contrary to popular belief, just don't raise revenue. In
the 1969 fiscal year, individual income taxes were es-
timated to be raising $81 billion (out of total revenues
of $136 billion). Yet the tax rates in excess of 50 per cent
have been bringing in less than $400 million a year
less than 1 per cent of total income tax revenues and not
enough to run even the present government for a full
day. (In other words, if all the personal income tax rates
above 50 per cent were reduced to that level, the loss
in revenue would be less than about $400 million.) If

these rates above 50 per cent were raised further, it is
more probable that they would raise less revenue than
more. Therefore, it is the income tax rates on the lower
and middle incomes that would have to be raised most,
for the simple reason that 80 per cent of the personal
income of the country is earned by people with less
than $20,000 gross incomes.
Poverty for All
It is certain that high income tax rates discourage and

reduce the earning of income, and therefore the total
production of wealth, to some extent. Suppose, for illus-
tration, we begin with the extreme proposal that we
equalize everybody's income by taxing away all income
in excess of the average in order to pay it over to those
with incomes below the average. (The guaranteed-
income proposal isn't too far away from that!)
Let us say that the present per capita average yearly
income in the United States is about $3,000. Then ev-
erybody who was getting less than that (and would get
just that whether he worked or not) would, of course, as
with the guaranteed-income proposal, not need to work
productively at all. And no one who was earning more
than $3,000 would find it worth while to continue to
earn the excess, because it would be seized from him in
any case. More, it would soon occur to him that it wasn't
worthwhile earning even the $3,000, for it would be
given to him in any case; and his income would be the
same, whether he worked or not. So if everybody acted
under an income equalization program merely in the
way that seemed most rational in his own interest con-
sidered in isolation, none of us would work and all of us
would starve. We might each get $3,000 cash (if some-
one could be found to continue to run the printing

machines just for the fun of it), but there would be
nothing to buy with it.
A less extreme equalization program would, of
course, have less extreme results. If only 90 per cent of
all incomes over $3,000 were seized and people could
keep 10 cents of every "excess" dollar they earned,
there would of course still be a tiny incentive to earn a
little more. And if everyone could keep 25 cents out of
every dollar he earned above the $3,000, the incentive
would be slightly higher.
But every tax or expropriation must reduce incen-
tives to a certain extent. The effect of the guaranteed-
income proposal would be practically to wipe out
incentives for those earning (or even wanting) no more
than the guarantee, and greatly to reduce incentives for
all those earning or capable of earning more than the
guarantee. Therefore the guaranteed income would
reduce effort and earning and production. It would vio-
lently reduce the national income (measured in real
terms). And it would reduce the standard of living for
the taxpaying five-sixths of the population. The govern-
ment might be able to pay out the specified amount of
guaranteed dollar "income" but the purchasing power
of the dollars would appallingly shrink.
CHAPTER 12
Fallacies of the Negative

Income Tax
RECOGNIZING THE CALAMITOUS EROSION O F INCEN-

tives that would be brought about by a straight guaran-
teed-income plan, other reformers have advocated
what they call a "negative income tax." This proposal
was put forward by the prominent economist, Professor
Milton Friedman, of the University of Chicago, in his
book Capitalism and Freedom, which appeared in 1962.
The system he proposed would be administered along
with the current income tax system.
Suppose that the poverty-line income were set at $3,-
000 per "consumer unit" (families or individuals), and
suppose that the negative income tax (which is really a
subsidy), were a flat rate of 50 per cent. Then every
"consumer unit" (this is the statisticians' technical
Fallacies Of The Negative Income Tax 85
term) whose income fell below $3,000 would be paid a

subsidy of, say, 50 per cent of the difference. If its
earned income were $2,000, for example, it would re-
ceive $500; if its earned income were $1,000 it would
receive $1,000; if its earned income were zero it would
receive $1,500.
Professor Friedman freely concedes that his
proposal, "like any other measure to relieve poverty...
reduces the incentives of those helped to help them-
selves." But he argues that "it does not eliminate that
incentive entirely, as a system of supplementing in-
comes up to some fixed minimum would. An extra dollar
earned always means more money available for ex-
penditure."
It is true that a "negative income tax"* (which is a
misleading name for a tapered-off guaranteed income)
would not have quite as destructive an effect on incen-
tives as would a straight guaranteed income. In fact,
some thirty years ago I put forward a similar proposal
myself. This appeared in an article in The Annalist (a
weekly then published by the New York Times) of Janu-
ary 4, 1939. I suggested what I called a "tapering sub-
sidy," a relief payment that would be reduced by only
$1 for every $2 the relief recipient earned by himself.
But I abandoned the proposal when I realized that it
leads straight into a dilemma, which is precisely the
dilemma of the negative income tax: Either it is al-
together inadequate at the lower end of the scale of
self-earnings, or it is unjustifiably excessive at the
higher end. Either it must pay only half an adequate
income (by its own definition of "adequate") to a family
that earns no income, or it must pay nearly twice an
adequate income to a family that already earns an al-
most adequate income.
Trick names of this sort corrupt the language and confuse thought. It
would hardly clarify matters to call a handout a "negative deprivation" or
having your pocket picked "receiving a negative gift."
The problem that the NIT (negative income tax)

evades or glosses over is the problem of the individual
or family with zero income. If an individual were given
only $300 (the figure suggested in Professor Friedman's
original proposal in 1962), nobody would regard this as
nearly adequateparticularly if, as Professor Friedman
also proposed, NIT were made a complete substitute
for all other forms of relief and welfare. If the NIT
payment for a family of zero income is set at $1,700, no
advocate of the guaranteed income would regard it as
adequate to live on in "decency and dignity." So if the
NIT were ever adopted, the political pressure would be
irrestible to make it provide the minimum "poverty-
line" income of $3,400 even to families with zero
earned income.
The basic subsidy would therefore be as great as
under the straight guaranteed income. But if the basic
subsidy under NIT to a family with zero income were
$3>4> then under the NIT 50 per cent "incentive"
formula that family would continue to get some govern-
ment subsidy until its annual income reached $6,800.
But this is higher than the median family income for the
whole country in 1963 ($6,637). In brief, this would be
fantastically expensive.
In addition, it would raise serious problems of equity.
When the subsidized family was earning $6,798 income
it would still be getting a $1 subsidy. When it earned
$6,802 would it fall off the gravy train entirely, and have
to wait until its income fell below $3,400 before it could
get on again? And what about the family that had been
earning $3,402 all along, and had never got on the gravy
train?
The arithmetical dilemma of the NIT has received so
little attention from its advocates that I hope I may be
forgiven another illustration to show the paradoxical
way in which it would work out.
An orthodox relief program would pay the jobless

head of a family, say, $60 a week. If he then started to
earn something, he would be paid simply the difference
between that amount and $60. Under the NIT principle
a man who was earning nothing would also receive a
relief payment of $60 a week. But if he then earned $30
a week on his own he would still get a $45 payment
(reduced by only $1 for every $2 earnings), bringing his
total income to $75 a week. If he was later able to earn
the full $60 for himself he would still be getting a relief
payment of $30 a week, bringing his total income to
$90. In fact, even if he succeeded in bringing his total
self-earnings to $118 a week he would still be getting $1
a week in relief payment.
He would then be almost twice as well off economi-
cally as he would if he had always earned enoughsay,
$61 a weeknot to get on the relief rolls in the first
place. This would be clearly inequitable to those who
had never got on relief. The incentive to get on relief,
and certainly to stay on relief, would be enormously
greater under NIT than under the present system.
If we tried to escape this result by using the NIT
formula only in parttaking the man off relief, say, as
soon as he was himself earning $60 a weekwe would
get an even more absurd result. When he was earning
$58 a week under NIT, he would still be getting $31 a
week from the government, making his total income
$89. But if he then made the mistake of earning only $2
more he would end up with a net loss of $29 a week. So
the negative income tax would create a tremendous
positive incentive to get and stay on relief permanently.
The NIT scheme could avoid this preposterous result
by paying a man with zero income only, say, $30 a
week, or only half as much as its own proponents as-
sume that he needs to live on.
Some readers may think that the dilemma of the NIT
scheme can somehow be escaped by changing the per-

centage by which the relief payment or income supple-
ment is reduced as self-earnings increase. But any
change from 50 per cent one way or the other merely
reduces one horn of the dilemma by making the other
more formidable. If we reduce the government supple-
ment by 75 cents for every dollar of self-earnings, we
correspondingly reduce or destroy the incentive for
such self-earnings. If we reduce the government sup-
plement by only 25 cents for every dollar of self-earn-
ings, we increase the recipient's incentive to work and
earn, but at the cost of a still more expensive program
for the government, and we increase the recipient's
positive incentive to stay on relief because of the vio-
lent drop in his income if he ever got off. If we make the
scheme more complicated by, say, reducing the relief
payment or supplementary income by only 25 cents for
every dollar of the recipient's first $10 of weekly self-
earnings, 50 cents for every dollar of his second $10 of
self-earnings, and 75 cents for every dollar of his third
$10 of self-earnings, or some similar scheme, we merely
pile up an administrative nightmare without solving the
basic dilemma. The unpalatable truth seems to be that
whenever we try to "increase incentives" by reducing
a relief payment by less than a dollar for every addi-
tional dollar of self-earnings, we solve an immediate
problem at the cost of building up a bigger problem for
the future.
In addition to the special dilemma it presents, the
NIT retains the fatal defects of the straight guaranteed
income. By neglecting the careful applicant-by-appli-
cant investigation of needs and resources made by the
ordinary relief system, it would open the government to
massive fraud, chiseling, and swindling. And it would
also, like the guaranteed income, force the taxpayers to
support a man regardless of whether or not he was
making any sincere effort to support himself. The gov-

ernment is bound to get into insoluble difficulties if it
starts to give money away to "the poor" not only with-
out making sure that they are poor but without bother
ing tofindout the reasons why any particular individual
or family is poor.
How Much Would It Cost?
How much would a guaranteed-income or NIT pro-

gram cost? I have already pointed out that proponents
have put out calculations as high as $38 billion a year,
but we may be confident that their cost figures are
systematically underestimated, even for the early years.
And if once the main principle of either proposal were
accepted, the minimum subsidy or guarantee de-
manded would be bound constantly to increase. Any-
one who doubts this need merely consult the history of
unemployment insurance and Social Security benefits
since those plans were initiated in the Nineteen Thir-
ties. (They too were going to replace straight relief,
which, however, continues to grow at an alarming
pace.)
Is there any assurance that a guaranteed-income or
NIT plan would not also grow as rapidly? Present indi-
cations are that it might grow even faster. It is signifi-
cant, as I have pointed out previously, that when
Professor Milton Friedman first proposed his NIT plan
in 1962, in his Capitalism and Freedom, he was suggest-
ing that an individual with zero income receive a sub-
sidy of the modest amount of $300. Now he is talking
mainly in terms of a family of four and suggests that
such a family, with no other income, should receive a
basic amount from the government of $1,500. But al-
ready there is a prominent competitive scheme (pub-
lished by the Brookings Institution, and written by Dr.

James Tobin of Yale, Dr. Joseph A. Pechman, the Brook-
ings Institution's director of economic studies, and Dr.
Peter M. Mieszkowski) that offers much more generous
subsidies. Once the scheme gets into practical politics,
we can expect the competitive bidding to get going in
earnest.
So knowing what we do of political pressures, and of
the past history of relief, "social insurance," and other
"antipoverty" measures, we are forced to conclude that
once the principle of either the NIT or the straight
guaranteed income were accepted, it would be made
an addition to and not a substitute for the present con-
glomeration of relief and "antipoverty" programs. And
even alone it would drastically reduce the productive
incentives of those earning less than the guaranteed
amount and seriously reduce the incentives of those
earning more, because of the oppressive taxation it
would necessarily involve. Its overall effect would be to
level real incomes down, not up.
Let us take a closer look at the problem of raising
taxation still further to pay for a guaranteed-income or
NIT program. It is obvious that we could not expect
such a program to be paid for merely by the very rich.
If we were to subsidize all family incomes below $3,400
(let alone $6,800), it would hardly be consistent to tax
them. Yet even before the income tax increase of 1968,
single persons with net incomes (after exemptions and
deductions) of $500 paid 14 per cent on such income, 15
per cent on the next $500, and so on, so that persons
with net incomes below $6,000 were taxed at rates up
to 22 per cent.
In 1965, moreover, taxpayers with adjusted gross in-
comes under $15,000 (who received more than three-
quarters of the total personal income there was to be
taxed) paid 61.5 per cent of the entire personal income
tax. Taxpayers with adjusted gross incomes under

$20,000 paid 70 per cent of the entire personal income
tax.
Why not collect the major part of the income tax,
someone may ask, from the really big incomes? Because
taxpayers with adjusted gross incomes above $50,000
received even before taxes only 5 per cent of the na-
tion's adjusted gross incomes.
So when advocates of the guaranteed income and
similar schemes insist self-righteously that "we can
afford" to pay for more and more of such schemes, they
ought to specify just who "we" are. They ought to ex-
plain to people who are earning their incomes the hard
way why they really don't need all that they bother to
earn for their own families, and tell them also just how
much more they can "afford" to have taken away from
them.
Neither a "negative income tax" nor a guaranteed-
income plan of the dimensions now being suggested
could possibly be put into effect with dollars of present
purchasing power.
The Poor Laws of England
Even at present our large and overlapping assortment

of relief and antipoverty measures is seriously reducing
incentives to the production that would otherwise be
possible. Our social reformers have been everywhere
overlooking the two-sided nature of the problem of re-
ducing poverty. The obstinate two-sided problem we
face is this: How can we mitigate the penalties of misfor-
tune and failure without undermining the incentives to
effort and success?
Our social reformerswho sometimes talk as if no
government ever did anything to relieve the plight of
the jobless and the poor until the New Deal came along
in 1933are constantly deploring the alleged indiffer-
ence, callousness, or niggardliness of our forefathers in
dealing with the poor. But wholly apart from private
charity, previous generations in their governmental
capacity were sharply aware of the problem of poverty
and made some effort to alleviate it almost as far back
as the records go. There were "poor laws" in England
even before the days of Queen Elizabeth. A statute of
1536 provided for the collection of voluntary funds for
the relief of those unable to work. Eleven years later the
City of London decided that these voluntary collec-
tions were insufficient, and imposed a compulsory tax
to support the poor. In 1572 a compulsory tax for this
purpose was imposed on a national scale.
But the problem soon proved a very serious one for
the people of that age. The upper class was very small
numerically and proportionately. The middle class itself
was always very close to what we would call the pov-
erty line. The workhouse and other conditions imposed
on those on relief seem very cruel to us today. But our
ancestors were in constant fear that if they increased
relief or relaxed the stern conditions for it they would
pauperize increasing numbers of the population and
create an insoluble problem.
At the beginning of the nineteenth century, indeed,
the cost of poor relief began to get out of hand. The total
cost of the poor law administration increased fourfold
in the thirty-two years between 1785 and 1817, and
reached a sixth of the total public expenditure. One
Buckinghamshire village reported in 1832 that its ex-
penditure on poor relief was eight times what it had
been in 1795, and more than the rental of the whole
parish had been in that year.
In face of statistics of this kind, England's Whig gov-
ernment decided to intervene. It appointed a royal
FalLcies Of The Negative Income Tax 93
commission, and in 1834 a new and more severe poor

law was passed in accordance with the commission's
recommendations.
The guiding principle of the new law was that poor
relief should be granted to able-bodied poor and their
dependents only in well-regulated workhouses under
conditions inferior to those of the humblest laborers
outside. This seemed harsh, but the commissioners had
argued that "every penny bestowed that tends to ren-
der the condition of the pauper more eligible than that
of the independent laborer is a bounty on indolence
and vice."*
tf the pendulum swung too far in the direction of
severity and niggardliness in the middle nineteenth
century, it may be swinging too far in the direction of
laxity and prodigality today. A sweeping subsidization
of idleness, such as is proposed by the guaranteed in-
come, would only weaken or destroy all incentive to
effort, not only on the part of those who were subsi-
dized and supported, but on the part of those who
would be forced to support them out of their own earn-
ings. There could be no faster way to impoverish the
nation.
Clearly the great problem today is how to keep relief
from getting out of hand. But how can we withhold
relief from those who would merely rest idly back on it
as a permanent way of life, and yet extend it to those
who would use it to get back on their feet and once
more become productive citizens? This is the baffling
problem that I cannot hope to deal with here in detail.
Our cities may find themselves compelled to return to
some of the safeguards of former days that they perhaps
too lightly abandonedcareful tests of needs and
means and resources; aid in kind rather than in cash to
make sure that the relief meets the particular needs it
*See "Poor Law," Encyclopedia Britannica, 1965.
was intended to meet, particularly of children; a resto-

ration of a residential requirement, to prevent people
from moving to a city just to get immediately on its
relief roll and to get more than in some other city; an
obligation to do some sort of useful work in return for
relief until a suitable private job can be found.
But there is a further way to hold down the relief
rolls, and outstanding liberals of former days did not
hesitate to recommend it. In 1914, A. V. Dicey, the emi-
nent British jurist, asked whether it is wise to allow
recipients of poor relief to retain the right to join in the
election of a member of Parliament. And John Stuart
Mill, writing in his Representative Government in 1861,
did not equivocate:
I regard it as required by first principles that the receipt

of parish relief should be a preemptory disqualification for
the franchise. He who cannot by his labor suffice for his own
support has no claim to the privilege of helping himself to the
money of others. By becoming dependent on the remaining
members of the community for actual subsistence, he abdi-
cates his claim to equal rights with them in other respects.
In fact, Mill went much further, and insisted that no

one should have the right to vote unless he paid direct
taxes:
It is also important that the assembly which votes the taxes,

either general or local, should be elected exclusively by those
who pay something towards the taxes imposed. Those who
pay no taxes, disposing by their votes of other people's
money, have every motive to be lavish and none to econo-
mize It amounts to allowing them to put their hands into
other people's pockets for any purpose which they think fit
to call a public one.
In the political climate of today, anyone proposing

that the right of franchise be suspended even for those
on relief and merely for the time they remained on
relief would be derided as having lost touch with politi-
cal realities. Yet as long as the great and growing army
now on various forms of relief and welfare programs
retain the right to vote for those who promise them still
more of other people's money, we may expect to see
relief and welfare programs grow to the point where
they eventually undermine the currency and bring on
national bankruptcy. The reader will not find it difficult
to think of countries where this has already happened.
The Cure Is Production
One of the worst features of all the plans for sharing

the wealth and equalizing or guaranteeing incomes is
that they lose sight of the conditions and institutions
that are necessary to create wealth and income in the
first place. They take for granted the existing size of the
economic pie; and in their impatient effort to see that
it is sliced more equally they overlook the forces that
have not only created the pie in the first place but have
been baking a larger one year by year. Economic prog-
ress and justice do not consist in superbly equalized
destitution, but in the constant creation of more and
more goods and services, of more and more wealth and
income to be shared.
The only real cure for poverty is production.
The way to maximize production is to maximize the
incentives to production. And the way to do that, as the
modern world has discovered, is through the system
known as capitalismthe system of private property,
free markets, and free enterprise. This system maxi-
mizes production because it allows a man freedom in
the choice of his occupation, freedom in his choice of

those with whom he associates and cooperates, and,
above all, freedom to earn and to keep the fruits of his
labor. In the capitalist system each of us, with whatever
exceptions, tends in the long run to get what he creates
or helps to create. When each of us recognizes that his
reward depends on his own efforts and output, and
tends to be proportionate to his output, then each has
the maximum incentive to increase his effort and out-
put.
Fight Poverty With Capitalism
Capitalism brought the Industrial Revolution, and

the enormous increase in productivity that this has
made possible. Capitalism has enormously raised the
economic level of the masses. It has wiped out whole
areas of poverty, and continues to wipe out more. The
so-called "pockets of poverty" constantly get smaller
and fewer.
The condition of poverty, moreover, is relative rather
than absolute. What we call poverty in the United
States would be regarded as affluence in most parts of
Africa, Asia, or Latin America. If an income sufficient to
enable a man "to live with dignity" ought to be "guar-
anteed" as a matter of "absolute right," why don't the
advocates of a guaranteed income insist that this right
be enforced first of all in the poor countries, such as
India and China, where the need is most widespread
and glaring? The reason is simply that even the better-
off groups in these nations have not produced enough
wealth and income to be expropriated and distributed
to others.
One of the guaranteed-income advocates, in a foot-
note, admits naively: "We must also recognize that we
still have no strategy for the elimination of poverty in
the underdeveloped countries." Of course they haven't.

The "strategy" would be the introduction of free enter-
prise, and of incentives to work, to save, to accumulate
capital, better tools and equipment, and to produce.
But would-be income guarantors ignore or despise
the capitalistic system that makes their dreams dreama-
ble and gives their redistribute-the-income proposals
whatever plausibility they have. The capitalist system
has made this country the most productive and richest
in the world. It has continued to achieve its miracles
even in the present generation, and to increase them
year by year. It has raised the average weekly factory
wage from less than $17 in 1933 to $130 in 1969. Even
after the rise in prices is allowed for, it has nearly tri-
pled our real per capita disposable incomefrom $893
in 1933 to $2,473 i n ! 9 6 8 ( in X 95 8 prices).
Allowed to continue to operate with even the relative
freedom that it has enjoyed in recent years, the capital-
ist system will continue to produce these miracles. It
will continue to make progress against poverty by a
general increase in income and wealth. But short-
sighted and impatient efforts to wipe out poverty by
severing the connection between effort and reward can
only lead to the growth of a totalitarian state, and de-
stroy the economic progress that this country has so
dearly bought.
Postscript
In his television talk of August 8, 1969, President

Nixon announced a giant step deeper into the quag-
mire of the Welfare State.
What he proposed was the form of the guaranteed
annual income known as the negative income tax, plus
a couple of additional gimmicks.
He put forward this radical proposal in the language
of conservatism. He said that the last third of a century

had "produced a bureaucratic monstrosity" and "left us
a legacy of entrenched programs." Then he proposed a
plan that can only make the bureaucratic monstrosity
more monstrous and create still bigger and more en-
trenched programs.
He talked about a welfare quagmire with increasing
caseloads and escalating costs. He expressed his alarm
that "in the past eight years, three million more people
have been added to the welfare rolls." And then he
proposed a program that would cost no less than $4
billion in the first year alone, and would more than
double the number of people eligible for public assist-
ancefrom a little under 10 million to more than 22
million.
What additional taxes would be necessary to pay this
extra $4 billion was not stated. The President contented
himself with the casual remark that the costs would not
begin until the fiscal year 1971, "when I expect the
funds to be available within the budget." So nobody
need worry, even though Congress is now proposing
tax reductions for that and later years.
Notwithstanding the tremendous differences in pre-
vailing incomes, wage levels and living-cost levels be-
tween city and country districts, or between New York
and Mississippi, a family of four with no outside income,
no matter what state it lives in, would receive under the
new plan a minimum Federal payment of $1,600 a year.
The states could supplement that amount. The same
family could earn as much as $60 a month, or $720 a
year, with no loss of benefits. Beyond that, aid would be
reduced 50 cents for each dollar earned until the fami-
ly's income reached $3,920.
There would be no "demeaning investigations." Ap-
plicants would simply make declarations of need and
begin receiving payments.
The great safeguard, which is supposed to keep the
nation from going into bankruptcy, is that the plan is to

encourageeven forcepeople to work. Every recipi-
ent deemed employable would have to accept a job
deemed suitable by the government or would have to
undergo training.
The long-term outlook for this program is about as
follows:
It is likely to be enacted more or less in the form
President Nixon has proposed, though perhaps a little
bigger. The Republicans in Congress will vote for it as
a matter of party regularity. The chief efforts of the
Democrats, who represent the party of ever-bigger
welfare handouts, will be devoted to trying to increase
the benefits and decrease the safeguards.
No sooner will the program have been enacted than
efforts will be made to enlarge it. We need merely look
at the history of unemployment insurance and of Social
Security, both of which were launched in the Thirties.
Both were originally enacted on the same argument as
the new guaranteed-income proposal: they would make
direct relief unnecessary and so displace it. But not only
has direct relief multiplied steadily, despite growing
prosperity, but unemployment insurance benefits have
constantly grown bigger and longer, and Social Security
benefits have been increased every one or two years
(especially election years) and the coverage constantly
widened.
So every year or two guaranteed income will grow.
First of all, it will be argued that a family of four cannot
be expected to live in decency and dignity on a mere
$1,600 a year. This is less than half of the present quasi-
official poverty-line income. So the basic subsidy will
gradually be pushed up to $3,200 or $3,500 a year,
which means that the top combination of earned in-
come and government benefit will move from $3,920 a
year to $7,720 or more.
Next, few people on relief will be declared to be
employable. Those who are will find very few jobs that
they deem "suitable." They may consent to take gov-
ernment-financed "training" programs, particularly if
they are paid $30 a month for consenting, but many of
them will merely go through the motions. In any case,
the government-administered programs will fall far
short of the kind of training in necessary skills provided
by the old-fashioned apprentice system in private in-
dustry. Most certain of all, the whole program of trying
to force people to work for their benefit payments will
be denounced as a sort of slavery. The work require-
ment will soon be quietly shelved.
The burden of taxation will steadily be increased to
pay for the rising benefits. The attempt will be made to
place the increased burden mainly on corporations and
the high individual incomes. This will further erode
incentives and discourage the production upon which
the welfare of all of us depends. Government expendi-
tures will continue to increase faster than the new tax
revenues, bringing a return to chronic deficits, mone-
tary inflation, and a further fall in the purchasing power
of people's insurance policies, pensions and savings
deposits.
It was not altogether auspicious that President Nix-
on's announcement of his new guaranteed-income
proposal was made on the evening of the same day that
France was forced to announce another devaluation of
the franc. Like policies, like results.
CHAPTER 13
Can We Guarantee Jobs?
W H E N A GALLUP POLL IN JUNE, 1968, ASKED PEOPLE

whether they favored a guaranteed income for every-
body, whether they were willing to work or not, only 36
per cent said yes and 58 per cent were opposed. When
the pollsters asked the same people whether the gov-
ernment ought to "guarantee enough work so that each
family that has an employable wage earner would be
guaranteed enough work each week to give him a wage
of about $60 a week or $3,200 a year," 78 per cent
answered yes. Only 18 per cent were opposed.
Yet the plausible notion that the government should
become the "employer of last resort" would prove as
unsound in practice as the guaranteed income without
any work attached.
The politicians in power could certainly not afford to

be accused of offering even harder jobs or worse condi-
tions than the poorest private employers. Therefore
they would have to supply easier jobs and much better
conditions, and would probably attract many workers
out of existing private marginal jobs into the govern-
ment-made jobs. For most of those whom the plan
would affect, the government would in fact become the
employer of first resort.
There is already a demand for workers for the jobs
that need to be done, and for which employers are
willing and able to pay the legal minimum wage. The
government would therefore either have to invent jobs
that do not need to be done, or at least are not worth
having done at the minimum wage.
The invented jobs, moreover, would have to be
where the jobless were. The government could not an-
nounce that there were plenty of guaranteed jobs in the
forests of Alaska for the slum dwellers of New York City
unless it also provided guaranteed transportation
for the workers, their families and their furniture, and
guaranteed their housing, supermarkets, schools and
other living conditions.
Under such a program it is obvious that most of the
made work would be pointless and useless, and most of
the made jobs needless and phony.
That is not the end. Suppose the workers with guar-
anteed jobs were incapable of learning to perform
them, or created far more spoilage than useable produc-
tion? Suppose they habitually showed up an hour or two
late, or took three hours for lunch, or came in only to
collect their pay, or ignored all instructions, or were
unruly, or committed acts of sabotage and vandalism, or
kicked the boss downstairs? Their jobs would be guar-
anteed, wouldn't they?
Anyone who thinks I am imagining problems need
Can We Guarantee Jobs? 103
merely read the details of the riot of 1,500 youngsters

outside New York's City Hall on July 10, 1968. They
were protesting cutbacks in the city's projected sum-
mer job program. I quote the account in the New York
Times:
Some of the youngsters (most of them teen-agers from the
city's white, Negro and Puerto Rican poverty areas) smashed
six automobiles parked outside City Hall, hurled rocks, bot-
tles and broken glass at the police and looted frankfurter
wagons and newsstands in the area. At the height of the
disturbance, bands of youngsters fanned out from City Hall
Park, smashed several windows in the nearby Woolworth
Building and knocked down and robbed a 50-year-old
woman.
These tactics were rewarded handsomely. The very

next day Mayor John Lindsay announced that the city
would appropriate $5 million for more summer jobs.
Before that he had repeatedly asserted that no city
money was available for such jobs.
All this doesn't mean that the problem of providing
more real jobs for the unskilled and for teen-agers is
insoluble. As some eminent economists have already
pointed out, the most important step would be to repeal
the existing Federal minimum wage law.
CHAPTER 14
Soaking the Rich
EVERYWHERE WE TURN TODAY WE FIND THE WEL-

fare statethe state that promises guaranteed jobs,
guaranteed incomes, the guaranteed life, security from
cradle to grave, the quick if not overnight elimination
of poverty. And the principal way in which it under-
takes to achieve these goals is to seize from those who
have and give to those who have not.
The main instrument it uses for this purpose is the
graduated income tax. In the United States this tax has
been imposed since 1913. In the beginning it seemed
innocent enough. The top rate was only 7 per cent. But
in 1925 the top rate had gone to 25 per cent; in 1935 to
63 per cent; in 1940 to 81 per cent; in 1945 to 94 per cent.
In the tax cut of 1964 the top rate was reduced to 70 per
Soaking The Rich 105
cent. With the 1968 surcharge it went up again to 77 per

cent.
In today's world these confiscatory rates are not ex-
ceptional. The First National City Bank of New York
recently compiled a table comparing the highest mar-
ginal income tax rates in fifteen countries. The rates
(after rounding out fractions) are: Italy 95 per cent,
United Kingdom 91, Canada 82, United States 77,
France 76, Japan 75, Netherlands 71, Austria 69, Aus-
tralia 68, Belgium 66, Sweden 65, West Germany 55,
Denmark 53, Norway 50, and Switzerland 8.
It would be misleading to assume that these top-rate
figures necessarily reflect the overall comparative tax
levels in these countries. Italy's 95 per cent rate applies
only to incomes above $800,000, whereas Norway's 50
per cent rate applies to all incomes above $13,000.
Though Sweden's top income tax rate is in the lower
half of the list, Sweden imposes the heaviest compara-
tive tax load in the world.
What the comparisons do show graphically is how
almost universal the soak-the-rich tax philosophy has
now become. An elaborate rationalization, on grounds
of "social justice" and "ability to pay," has been built
up for progressive tax rates since the beginning of this
century; but economists are at last beginning to recog-
nize that all arguments in support of progression can be
used to justify any degree of progression.
Certainly there is no evidence that the steeply
progressive rates have helped the poor. On the con-
trary, these confscatory rates clearly undermine incen-
tives, reduce production and capital accumulation, and
leave less to be shared by everybody.
The earliest sponsors of the progressive income tax
recognized this, but they had other aims in mind. In the
Communist Manifesto of 1848, Marx and Engels frankly
proposed "a heavy progressive or graduated income
tax" as an instrument by which "the proletariat will use

its political supremacy to wrest, by degrees, all capital
from the bourgeois, to centralize all instruments of pro-
duction in the hands of the State," and to make "des-
potic inroads on the right of property, and on the
conditions of bourgeois production."
Progressive rates of income taxation are not neces-
sary to raise great revenues. A simple calculation, based
on the Treasury's own figures for 1966, shows that, with
the same existing exemptions and deductions, a flat rate
of 19.6 per cent would have raised all the revenue raised
from the scale of rates ranging from 14 to 70 per cent.
On a similar calculation, if all the rates now above 50
per cent were reduced to that level, then (on the basis
of 1965 income tax returns) a maximum of $373 million
would be lost. This is not enough to run the govern-
ment, at present spending rates, for a single day. If all
incomes over $100,000 were taxed at a rate of 100 per
cent, the maximum revenue gain would be $200 mil-
lion.
For 1965,70 per cent of the total income tax was paid
by people with adjusted gross incomes under $20,000,
for the simple reason that these people constituted 97.5
per cent of all income tax payers, and that they collec-
tively reported more than 80 per cent of the country's
taxable income.
It is not only in the United States that the actual
revenue yield from the higher income tax rates is negli-
gible. In Great Britain, in the fiscal year 1964-65, total
government revenues were8,i57 million, the revenue
from the personal income tax3,o88 million, and the
revenue from the surtaxi84 million. In other words,
the revenue from all the surtax rates (ranging above the
standard rate of 41 per cent up to 96 per cent)
Soaking The Rich 107
yielded less than 6 per cent of all revenue from the

income tax, and barely more than 2 per cent of Britain's
total revenues.
In Sweden, in 1963, individuals paid first a local pro-
portional income tax averaging about 15 per cent; then
on the rest of their income, they paid progressive na-
tional taxes ranging from 10 to 65 per cent. A study
published by the Swedish Taxpayers' Association found
that the basic national income tax rate of 10 per cent
brought in about 70 per cent of the total national in-
come tax revenue; that if the maximum national rate
had stopped at 25 per cent, the tax would have brought
in 90 per cent of its then revenue; and that if the max-
imum rate had stopped at 45 per cent, the government
would have received 99 per cent of its actual revenue.
In short, the study found that the rates between 45 and
65 per cent brought in only 1 per cent of the total na-
tional income tax revenue.
The unavoidable conclusion is that the progressive
rates of income tax everywhere, and especially those
above 50 per cent, are imposed not to raise revenue, but
merely to satisfy vindictiveness and envy.
Yet perhaps the most serious evil of the progressive
income tax is that it produces the illusion in the over-
whelming majority of taxpayers that the "rich"mean-
ing the people in the brackets above themare really
paying for most of the benefits that the majority gets
from the government. This illusion is probably shared in
the United States even by single taxpayers with taxable
income just above $7,000, who are in fact paying more
than the 21 per cent average rate that yielded the fiscal
1969 revenue. This illusion leads them to accept com-
placently a burden of government expenditure and tax-
ation that they would not otherwise tolerate.
Though this aspect of progressive income taxation
receives practically no attention today, its menace was

recognized as early as 1899 by W. E. H. Lecky:
Highly graduated taxation realizes most completely the

supreme danger of democracy, creating a state of things in
which one class imposes on another burdens which it is not
asked to share, and impels the State into vast schemes of
extravagance, under the belief that the whole costs will be
thrown upon others.
CHAPTER 15
Soaking the Corporations
PERSONAL INCOME TAX RATES THAT RISE TO THE

level of 77 per cent obviously discourage incentives,
investment, and production. But no politician raises the
point for fear that he will be accused of defending the
rich. What is probably an even greater discouragement
to new investment and increased production is the
present marginal corporation income tax of 52.8 per
cent. Yet this gets even less criticism than high personal
income taxes. Nobody wants to defend the corpora-
tions. They are everybody's whipping boy. And yet
they are the key productive element on which the na-
tion's income, wealth and economic growth depend.
There was at least some awareness of this until recent
years. When the tax on corporation income was first
110 MAN vs. THE WELFARE STATE
imposed, in 1913, it was at the very cautious rate of 1 per

cent. This was also raised very cautiously. Even in
World War I the rate was lifted only to 12 per cent. It
never got above 15 per cent until 1937. In the midst of
World War II it was still only 40 per cent. It did not get
to 52 per cent until 1952.
Today such a rate is taken for granted. Yet the people
who approve of it, and who suggest maybe it could be
a little higher, are the very people who have been com-
plaining most loudly in recent years about the country's
disappointing rate of economic growth.
The steep rate of tax on corporate income gets so
little criticism because there is confusion of thought
concerning whom it falls on and what are its economic
effects. Is the whole tax "absorbed" by the corporation,
for instance, or is part or all of it "shifted"?
What happens is somewhat complicated. A corpora-
tion is a legalfiction.From an investment standpoint, it
consists of its present stockholders. When the tax on
corporations is raised above its preceding level, most of
the loss falls on existing stockholders in the form of a
capital lossand later of an income loss. If, to simplify,
we can imagine a situation in which a corporation were
wholly free from taxation, and then suddenly a 50 per
cent income tax (assumed to be permanent) were im-
posed on its future earnings, the price of its shares
would tend to fall in the stock market by 50 per cent.
The old shareholders would be forced to absorb the loss
in capital value and in future income. The new buyers,
however, able to buy the stock for half of its former
market price, would stand to get the prevailing "nor-
mal" return on their capital investment.
Even for the new buyers, however, this would apply
only to their original investment. When the corporation
management considered any new investment, any cor-
porate expansion, any addition to plant or equipment,
Soaking The Corporations 111
it would have to consider the tax. And this would apply,

of course, to anybody who thought of launching an en-
tirely new corporation.
The present average tax on all corporations is about
45 per cent. On successful corporations of any size,
however, the average rate is close to 52 per cent.
Broadly speaking, therefore, when anybody contem-
plates a new corporate investment, he will not make it
unless the investment promises to yield before taxes at
least twice as much as the net return he would consider
worthwhile. If, for example, he would not consider a
new investment worthwhile unless it promised a 10 per
cent average annual return on his capital outlay, then it
would have to promise a return of 20 per cent on that
outlay before taxes.
It is obvious that a corporation income tax in the
neighborhood of 50 per cent must drastically reduce
the incentive to new investment, and therefore to the
consequent increase in jobs, real wages, and economic
growth that the politicians are always calling for.
But what is at least as important as reducing the in-
centive to investment, the present corporate tax
reduces the funds available for investment. In 1968,
according to estimates of the Department of Com-
merce, United States corporations earned total profits
before taxes of $91.1 billion. Out of this their corporate
tax liability was $41.3 billion. This reduced their profits
after taxes to $49.8 billion. Out of this sum, in turn, $23.1
billion was paid out in dividends while $26.7 billion was
retained in undistributed profits.
This last figure represents the corporations' own rein-
vestment of their earnings in working capital, invento-
ries, improvements, new plants and equipment. If there
had been no corporate tax, and there had been the
same proportionate distribution of profits between divi-
dends and reinvestment, the amount of money rein-
vested would have been $50.5 billion instead of $26.7

billion89 per cent, or $23.8 billion, greater. A propor-
tional increase in dividends would have given stock-
holders about $20 billion more than they actually
received. If they reinvest only a fifth of what they re-
ceive in dividends, this would make an annual increase
in corporate investment in the neighborhood of $25
billion.
Of course certain deductions would have to be made
from this figure if we tried to calculate what would be
lost from investment by alternate taxes imposed to raise
the same revenue. But broadly speaking, the over-
whelming bulk of annual government expenditure goes
into current consumption rather than in building up the
capital formation, the economic strength and wealth-
and-income-producing capacity of the country.
A great deal of the complacency about our drastic
corporation tax stems from the idea that the tax is some-
how "shifted" to others. One common facile assump-
tion is that the corporations just pass the tax along by
raising their prices. How they can do this so easily is
never explained.
Nor is it prima facie plausible. Every television manu-
facturer, for instance, must keep his prices competitive
with other television manufacturers. Granted, they all
pay about the same percentage tax on their net profits.
Yet all of them must also keep their prices competitive
with those of foreign manufacturers. The same is true of
automobile companies and, in fact, of all American
companies that either have an export market or must
meet competition from imports.
A uniform sales or excise tax (if also imposed on im-
ports) can be passed along uniformly, but not a percent-
age tax on profits after expenses, because this
necessarily means a different tax rate per unit of output
Soaking The Corporations 113
on every producer. Its general tendency is to penalize

the low-cost efficient producer much more than the
high-cost inefficient producer.
There is one reason, however, why over a long period
a higher corporate income tax can be passed along in
a price rise. This is because the tax may eventually put
some manufacturers out of business, prevent others
from expanding, and certainly retard the expansion of
the rest. It will force those who stay in business to keep
decrepit and obsolete machinery much longer than oth-
erwise. It will retard or prevent reduction in costs. It
will reduce supply, raise production costs, and make
quality and variety poorer than they otherwise would
be. The consumers of the country will be more poorly
served.
The end result in this case, however, is not so much
that the corporate income tax is "shifted" as that an
additional burden is placed on the whole country. By
discouraging and retarding investment in new machin-
ery and plants, either by existing corporations or by the
formation of new corporations, the 52.8 per cent corpo-
ration income tax shields existing obsolescent capacity
from the competition of the new, more modern and
efficient plant and equipment that would otherwise
come into existence, or that would come into existence
much sooner.
By striking directly at new investment, the present
corporate income tax slows down economic growth
more directly and surely than does any other tax.
The only study I can at present think of that has
adequately explained the devastating effect of the high
corporate income tax on investment appeared in a pam-
phlet by Dr. George Terborgh for the Machinery and
Allied Products Institute of Washington in 1959. It left
no traceable influence on Congress or the Treasury.
The tax, by hurting business and investment, hurts

employment and slows down the increase in produc-
tivity and in real wages. In brief, in the long run it hurts
most of all the mass of the country's workers.
CHAPTER 16
Government Planning vs.

Economic Growth
W H E N WE DISCUSS "ECONOMIC PLANNING," WE MUST

be clear concerning what it is we are talking about. The
real question being raised is not: plan or no plan? but
whose plan?
Each of us, in his private capacity, is constantly plan-
ning for the future: what he will do the rest of today, the
rest of the week, or on the weekend; what he will do
this month or next year. Some of us are planning,
though in a more general way, ten or twenty years
ahead.
We are making these plans in our capacity both as
consumers and as producers. Employees are either
planning to stay where they are, or to shift from one job
to another, or from one company to another, or from
one city to another, or even from one career to another.

Entrepreneurs are either planning to stay in one loca-
tion or to move to another, to expand or contract their
operations, to stop making a product for which they
think demand is dying and to start making one for
which they think demand is going to grow.
Now the people who call themselves Economic Plan-
ners either ignore or by implication deny all this. They
talk as if the world of private enterprise, the free mar-
ket, supply, demand, and competition, were a world of
chaos and anarchy, in which nobody ever planned
ahead, but merely drifted or staggered along. I once
engaged in a television debate with an eminent Planner
in a high official position who implied that without his
forecasts and guidance American business would be
"flying blind." At best, the Planners imply, the world of
private enterprise is one in which everybody works or
plans at cross-purposes or makes his plans solely in his
"private" interest rather than in the "public" interest.
Now the Planner wants to substitute his own plan for
the plans of everybody else. At best, he wants the gov-
ernment to lay down a Master Plan to which everybody
else's plan must be subordinated.
Planning Means Compulsion
It is this aspect of Planning to which our attention

should be directed: Planning always involves compul-
sion. This may be disguised in various ways. The gov-
ernment Planners will, of course, try to persuade
people that the Master Plan has been drawn up for their
own good, and that the only persons who are going to
be coerced are those whose plans are "not in the public
interest."
The Planners will say, in the newly fashionable
Government Planning vs. Economic Growth 117
phraseology, that their plans are not "imperative," but

merely "indicative." They will make a great parade of
"democracy," freedom, cooperation, and noncompul-
sion by "consulting all groups""Labor," "Industry,"
the Government, even "Consumers' Representatives"
in drawing up the Master Plan and the specific
"goals" or "targets." Of course, if they could really suc-
ceed in giving everybody his proportionate weight and
voice and freedom of choice, if everybody were al-
lowed to pursue the plan of production or consumption
of specific goods and services that he had intended to
pursue or would have pursued anyway, then the whole
Plan would be useless and pointless, a complete waste
of energy and time. The Plan would be meaningful only
if it forced the production and consumption of different
things or different quantities of things than a free mar-
ket would have provided. In short, it would be mean-
ingful only insofar as it put compulsion on somebody
and forced some change in the pattern of production
and consumption.
There are two excuses for this coercion. One is that
the free market produces the wrong goods, and that
only government Planning and direction can assure the
production of the "right" ones. This is the thesis
popularized by J. K. Galbraith. The other excuse is that
the free market does not produce enough goods, and
that only government Planning can speed things up.
This is the thesis of the apostles of "economic growth."
The Galbraith Thesis
Let us take up the "Galbraith" thesis first. I put his

name in quotation marks because the thesis long ante-
dates his presentation of it. It is the basis of all the
Communist "Five-Year Plans," which are now aped by
a score of socialist nations. While these Plans may con-

sist in setting out some general overall percentage of
production increase, their characteristic feature is
rather a whole network of specific "targets" for specific
industries: there is to be a 25 per cent increase in steel
capacity, a 15 per cent increase in cement production,
a 12 per cent increase in butter and milk output, and so
forth.
There is always a strong bias in these Plans, espe-
cially in the Communist countries, in favor of heavy
industry, because it gives increased power to make war.
In all the Plans, moreover, even in non-Communist
countries, there is a strong bias in favor of industrializa-
tion, of heavy industry as against agriculture, in the
belief that this necessarily increases real income faster
and leads to greater national self-sufficiency. It is not an
accident that such countries are constantly running into
agricultural crises and food famines.
But the Plans also reflect either the implied or ex-
plicit moral judgments of the government Planners.
The latter seldom plan for an increased production of
cigarettes or whiskey or, in fact, of any so-called "lux-
ury" item. The standards are always grim and puritani-
cal. The word "austerity" makes a chronic appearance.
Consumers are told that they must"tighten their belts"
for a little longer. Sometimes, if the last Plan has not
been too unsuccessful, there is a little relaxation: con-
sumers can, perhaps, have a few more motor cars and
hospitals and playgrounds. But there is almost never
any provision for, say, more golf courses or even bowl-
ing alleys. In general, no form of expenditure is ap-
proved that cannot be universalized, or at least
"majoritized." And such so-called luxury expenditure is
discouraged, even in a so-called "indicative" Plan, by
not allowing access by promotors of such projects to
bank credit or to the capital markets. At some point
government coercion or compulsion comes into play.

This disapproval and coercion may rest on several
grounds. Nearly all "austerity" programs stem from the
belief, not that the person who wants to make a "lux-
ury" expenditure cannot afford it, but that "the nation"
cannot afford it. This involves the assumption that, if I
set up a bowling alley or patronize one, I am somehow
depriving my fellow citizens of more necessary goods
or services. This would be true only on the assumption
that the proper thing to do is to tax my so-called surplus
income away from me and turn it over to others in the
form of money, goods, or services. But if I am allowed
to keep my "surplus" income, and am forbidden to
spend it on bowling alleys or on imported wine and
cheese, I will spend it on something else that is not
forbidden. Thus when the British austerity program
after World War II prevented an Englishman from con-
suming imported luxuries, on the ground that "the na-
tion" could not afford the "foreign exchange" or the
"unfavorable balance of payments," officials were
shocked to find that the money was being squandered
on football pools or dog races. And there is no reason to
suppose, in any case, that the "dollar shortage" or the
"unfavorable balance of payments" was helped in the
least. The austerity program, insofar as it was not en-
forced by higher income taxes, probably cut down po-
tential exports as much as it did potential imports; and
insofar as it was enforced by higher income taxes, it
discouraged exports by restricting and discouraging
production.
But we come now to the specific Galbraith thesis,
growing out of the age-long bureaucratic suspicion of
luxury spending, that consumers generally do not know
how to spend the income they have earned; that they
buy whatever advertisers tell them to buy; that consum-
ers are, in short, boobs and suckers, chronically wasting
their money on trivialities, if not on absolute trash. The

bulk of consumers also, if left to themselves, show atro-
cious taste, and crave cerise automobiles with ridicu-
lous tailfns.
The natural conclusion from all thisand Galbraith
does not hesitate to draw itis that consumers ought to
be deprived of freedom of choice, and that government
bureaucrats, full of wisdomof course, of a very un-
conventional wisdomshould make their consumptive
choices for them. The consumers should be supplied,
not with what they themselves want, but with what
bureaucrats of exquisite taste and culture think is good
for them. And the way to do this is to tax away from
people all the income they have been foolish enough to
earn above that required to meet their bare necessities,
and turn it over to the bureaucrats to be spent in ways
which the latter think would really do people the most
goodmore and better roads and parks and play-
grounds and schools and television programsall sup-
plied, of course, by government.
"Private" vs. "Public" Sector
And here Galbraith resorts to a neat semantic trick.

The goods and services for which people voluntarily
spend their own money make up, in his vocabulary, the
"private sector" of the economy, while the goods and
services supplied to them by the government, out of the
income it has seized from them in taxes, make up the
"public sector." Now the adjective "private" carries an
aura of the selfish and exclusive, the inward-looking,
whereas the adjective "public" carries an aura of the
democratic, the shared, the generous, the patriotic, the
outward-lookingin brief, the public-spirited. And as
the tendency of the expanding welfare state has been,
in fact, to take out of private hands and more and more

take into its own hands provision of the goods and ser-
vices that are considered to be most essential and most
edifyingroads and water supply, schools and hospi-
tals and scientific research, education, old-age insur-
ance and medical carethe tendency must be
increasingly to associate the word "public" with every-
thing that is really necessary and laudable, leaving the
"private sector" to be associated merely with the super-
fluities and capricious wants and vices that are left over
after everything that is really important has been taken
care of.
If the distinction between the two "sectors" were put
in more neutral termssay, the "private sector" versus
the "governmental sector"the scales would not be so
heavily weighted in favor of the latter. In fact, this more
neutral vocabulary would raise in the mind of the
hearer the question whether certain activities now as-
sumed by the modern welfare state do legitimately or
appropriately come within the governmental province.
For Galbraith's use of the word "sector," "private" or
"public," cleverly carries the implication that the pub-
lic "sector" is legitimately not only whatever the gov-
ernment has already taken over but a great deal besides.
Galbraith's whole point is that the "public sector" is
"starved" in favor of a "private sector" overstuffed with
superfluities and trash.
The true distinction, and the appropriate vocabulary,
however, would throw an entirely different light on the
matter. What Galbraith calls the "private sector" of the
economy is, in fact, the voluntary sector; and what he
calls the "public sector" is, in fact, the coercive sector.
The voluntary sector is made up of the goods and ser-
vices for which people voluntarily spend the money
they have earned. The coercive sector is made up of the
goods and services that are provided, regardless of the
wishes of the individual, out of the taxes that are seized

from him. And as this sector grows at the expense of the
voluntary sector, we come to the essence of the welfare
state. In this state nobody pays for the education of his
own children but everybody pays for the education of
everybody else's children. Nobody pays his own medi-
cal bills, but everybody pays everybody else's medical
bills. Nobody helps his elderly parents, but everybody
else's elderly parents. Nobody provides for the contin-
gency of his own unemployment, his own sickness, his
own old age, but everybody provides for the unemploy-
ment, sickness, or old age of everybody else. The wel-
fare state, as Bastiat put it with uncanny clairvoyance
more than a century ago, is the great fiction by which
everybody tries to live at the expense of everybody
else.
This is not only a fiction; it is bound to be a failure.
This is sure to be the outcome whenever effort is sepa-
rated from reward. When people who earn more than
the average have their "surplus," or the greater part of
it, seized from them in taxes, and when people who
earn less than the average have the deficiency, or the
greater part of it, turned over to them in handouts and
doles, the production of all must sharply decline; for the
energetic and able lose their incentive to produce more
than the average, and the slothful and unskilled lose
their incentive to improve their condition.
The Growth Planners
I have spent so much space in analyzing the fallacies

of the Galbraithian school of Economic Planners that I
have left myself little in which to analyze the fallacies
of the Growth Planners. Many of their fallacies are the
same; but there are some important differences.
The chief difference is that the Galbraithians believe

that a free market economy produces too much (though,
of course, they are the "wrong" goods), whereas the
Growthmen believe that a free market economy does
not produce nearly enough. I will postpone for the mo-
ment discussion of some of the statistical errors, gaps,
and fallacies in their arguments. Here I want to concen-
trate on their idea that some form of government direc-
tion or coercion can by some strange magic increase
production above the level that can be achieved when
everybody enjoys economic freedom.
It seems to me self-evident that when people are
free, production tends to be, if not maximized, at least
optimized. This is because, in a system of free markets
and private property, everybody's reward tends to
equal the value of his production. What he gets for his
production (and is allowed to keep) is in fact what it is
worth in the market. If he wants to double his income
in a single year, he is free to tryand may succeed if
he is able to double his contribution to production in a
single year. If he is content with the income he has
if he feels that he can only get more by excessive effort
or riskhe is under no pressure to increase his output.
In a free market everyone is free to maximize his satis-
factions, whether these consist in more leisure or in
more goods.
But along comes the Growth Planner. He finds by
statistics (whose trustworthiness and accuracy he never
doubts) that the economy has been growing, say, only
2.8 per cent a year. He concludes, in a flash of genius,
that a growth rate of 5 per cent a year would be faster.
How does he propose to achieve this?
There is among the Growth Planners a profound mys-
tical belief in the power of words. They declare that
they "are not satisfied" with a growth rate of a mere 2.8
per cent a year. And once having spoken, they act as if
half the job had already been done. If they did not
assume this, it would be impossible to explain the deep
earnestness with which they argue among themselves
whether the growth rate "ought" to be 4 or 5 or 6 per
cent. (The only thing they always agree on is that it
ought to be greater than whatever it actually is.) Having
decided on this magic overallfigure,they then proceed
either to set specific targets for specific goods (and here
they are at one with the Russian Five-Year Planners) or
to announce some general recipe for reaching the
overall rate.
But why do they assume that setting their magic tar-
get rate will increase the rate of production over the
existing one? And how is their growth rate supposed to
apply as far as the individual is concerned? Is the man
who is already making $50,000 a year to be coerced into
working for an income of $52,500 next year? Is the man
who is making only $5,000 a year to be forbidden to
make more than $5,250 next year? If not, what is gained
by making a specific "annual growth rate" a govern-
mental "target"? Why not just permit or encourage ev-
erybody to do his best, or make his own decision, and
let the average "growth" be whatever it turns out to be?
Statistical Fallacies
Now let us get back to some of the statistical errors

and fallacies that I mentioned a little while back.
One of them will be plain from what we have just
been discussing. This is the fallacy of speaking of a
"national" rate of growth. The ambiguity of this should
be evident. A gross rate of growth of national income '
may appear in the official statistics accompanied by an
increase in the population of the country. One can have
a growth in gross national product (GNP) accompanied
by a fall in per capita incomes. Even aside from this, it

should be obvious that an average increase in per capita
incomes in a country does not necessarily tell us much
regarding the fate of individuals. An average increase
in per capita incomes may mask a fall in the incomes of
some groups if this is more than offset by a rise in the
incomes of others. For example, if the rich got richer
and the poor got poorer, the average per capita figures
might still conceivably show a rise.
Again, there are several pitfalls in dealing with per-
centage figures. The smaller the base from which we
start, the less the absolute increase in the production of
anything has to be in order to show a very large per-
centage increase. To begin with an extreme example, if
only one family in a country has a bathtub, and the next
year fifty families get one, the rate of growth is 5,000
per cent. But once everybody in that country has a
bathtub, net growth may stop. This principle applies to
houses, automobiles, radios, television sets, and every-
thing else. From the day of his birth, a boy baby grows
in weight an average of 195 per cent in his first year. He
never even approaches this record thereafter.
It should not be surprising that there has been found
to be a long-run tendency for industrial growth rates to
slow down as the level of production in any country
gets higher. This results partly from the enlargement of
the base, and partly from a physical satiation point in
human needs.
Let us take the history of a specific economic product
television. Output of television sets in the United
States in 1946 was 7,000. In 1947 this output had risen
to 200,000, making a growth rate of 2,757 per cent. In
1948 the United States produced 975,000 setsmaking
a growth rate of only 387 per cent. In 1949 output rose
to 3,029,000 setsbut the growth rate was only 211 per
cent. In 1950 production jumped to 7,464,000 sets; but
the growth rate now was only 146 per cent. Though
output was accelerating enormously in absolute
amounts, percentage rates of growth were constantly
falling. And after 1950 the rate of growth of annual
output for a time stopped entirely. Yet the United States
continued to turn out between 6 million and 11 million
sets a yearand, of course, now has the highest total
number of sets working, old and new, in its history. As
of 1967, these were estimated to total 94.2 million. Yet
many other countries in the world must now be surpass-
ing the United States' rate of growth in this particular
product. The more backward the country, probably the
higher the present growth rate in production or pur-
chase of television sets.
Not Volume but Value
Suppose we turn now to some of the more basic gen-

eral problems raised in the compilation of total gross
national output figures. The first thing we have to
remember is that these are not and cannot be purely
objective figures. What we are measuring is not physical
volume or weight, but value. The statistician is forced
to resort to his own arbitrary values. Shall he include, for
example, in the national income figures the compensa-
tion of burglars, blackmailers, and drug peddlers? How
is he to draw the line between what are usually called
economic goods and such activities as washing, shav-
ing, and playing for amusement on the piano? Yet such
activities do not differ from the same activities carried
on for money as services to other peoplesuch as nurs-
ing, barbering, and giving concerts. The statistician is
forced to include only items that are dealt in on the
market.* But this excludes all do-it-yourself activities,
*See Simon Kuznets, National Income and Its Composition, lgig-ig38 (New
York: National Bureau of Economic Research, 1941), 2 vols.
which in total are probably enormous, and it excludes

all the products of the family economy, including all the
activities of housewives. So we get the paradox, for
example, that when a man marries his cook, the value
of her work disappears from the national income ac-
counts.
But there are further problems. How is the statistician
to treat government activities? Official figures practi-
cally always do include these in making up the national
income accounts. But there is no market test or gauge
of their value. Most people would admit that policemen,
firemen, and judges make a contribution to the national
income equivalent to the cost of their services. But how
about a host of bureaucrats whose activities might
merely redistribute income, or might actually restrain
and disrupt production through imposition or enforce-
ment of unwise regulations?
Again, how do we count government redistribution
of income through subsidized housing, farm price sup-
ports, Social Security pensions, doles to the unem-
ployed, subsidized medicine, etc.? Most government
statisticians count the income that is handed out to the
recipients without deducting from the gross national
product figures the income that is taxed away from
those who are forced to contribute.
To illustrate, let us take an elementary example. Sup-
pose, in a community of three persons, that two persons
have an annual income of $3,000 each and the third has
no income at all. The community income is $6,000. Now
suppose the government levies a tax of a third, or 33 1/3
per cent, on the two persons who have the $3,000 in-
come, and gives the $1,000 that it takes from each of
them to the third person. Then these two people have
left only an income of $2,000 to match the income of
$2,000 given, say, to the unemployed person. The
amount of total income in that community is the same
as it was before. The disposable income of each person

is $2,000; and their total income is $6,ooo. But many
government statisticians would still credit the first two
persons with their original earned income of $3,000
each. So that with their earnings of $6,000, plus the
$2,000 given to the unemployed person, the three of
them would now be credited with a total income of
$8,000an increase of 33 1/3 per cent. Thus redistribu-
tion of wealth and social welfare plans almost invariably
increase the gross national product estimate.
Measuring Leisure and Liberty
But now we come to still another problem in the

statistical measurement and comparison of national in-
come or gross national product figures. All these figures
measure national output multiplied by the monetary
value of that output. But they do not measure leisure or
the satisfactions of leisure. Yet these are primary con-
cerns in individual welfare. In the United States there
is, on the average, a forty-hour working week. A couple
of generations ago, there was a sixty- or seventy-hour
typical working week. Now a community that can turn
out its national product in an average week of forty
hours is obviously immensely better off in economic
satisfactions than another community of equal numbers
that turns out the same physical product but requires a
seventy-hour average working week to do it. I will not
elaborate upon this, but simply point out that it is only
one of the considerations that make any precise com-
parison of national incomes of different countries in-
valid.
Of course all economic planning, as we have already
seen, must necessarily involve compulsion and coercion
in other words, a loss of liberty on the part of the
citizens. This loss of liberty is a substantial cost, which

some of us would rank very high; but it is never counted
by the economic planners. Again, like the loss of leisure,
the loss of liberty is another factor that makes statistical
comparisons between, say, the GNP of the United
States and Soviet Russia misleading and invalid.
All economic planning by a government involves
problems of arbitrary allocation, arbitrary quotas for
thousands of commodities and services, allocations of
work, and allocations of income and consumption. And
among the most serious of these, though the Growth
Planners almost never mention it, are what we may call
intertemporal problems and allocations.* When the
Growth Planners decide that we must grow economi-
cally 5 or 6 per cent a year, or whatever rate, they are
arbitrarily deciding that we are entitled to consume
only a certain percentage of our income in any year,
and must save and invest the rest in order to have
greater production in the future. But is it always and
under all conditions desirable to sacrifice the present to
the future? Is it always desirable for the present genera-
tion to consume less so that people still unborn (whom
we do not even know) should consume more? I shall not
try to answer this question. I wish merely to point out
here that economic growth has a costthat the higher
we wish to make this rate of economic growth, the more
we must restrain and constrict consumption in the
present to make it possible. This cost is entirely ignored
by most of the Growth Planners.
Finally, we have to ask, what is it that is measured by
the gross national product figures? What is being mea-
sured is the marginal market value of thousands of
goods and services, in terms of money, multiplied by
*On these intertemporal problems, as well as comparisons of leisure and
liberty, see Israel Kirzner, "On the Premises of Growth Economics,"New
Individualist Review, Vol. 3, No. 1 (University of Chicago).
the total quantities of such goods and services. (Of

course any inflation of the currency will multiply this
figure correspondingly without adding an iota to the
economic satisfaction that anybody gets. I will come
back to this in a moment.) What I wish to point out here
is that if we increase the supply of anything (with the
money supply remaining constant), the marginal wdine
of that commodity, and hence its price, falls. So if there
is no inflation of the currency, an increase in production
leads to a fall in prices. And this fall in prices is likely
to be much greater proportionately than the increase in
production. It has been recognized for many years, for
example, that a larger wheat crop will ordinarily have
a smaller total dollar market value than a smaller crop.
This, in fact, is a basis of all crop restriction schemes.
But this merely illustrates a wider principle. It is not
"value-in-use," but scarcity, that determines "value-in-
exchange," or money price. Water is an indispensable
commodity that ordinarily commands no price at all. If
more and more things became plentiful (except dollars),
the national income, as measured in dollars, might be-
gin to fall. And if we could imagine a situation in which
everything we could wish for were in as adequate sup-
ply as air and water, we might have no (monetary) na-
tional income at all!
Inflation vs. Growth
Most of the advocates of economic growth through

government action in fact put their major faith in one
overall policyinflation.
This policy, however, is almost never recommended
under that name. The Growth Planners simply argue
(along Keynesian lines) that growth has been slow or
business stagnant because of an "insufficiency of aggre-
gate demand"; and they think this can be rectified by

more government spending. Some of these Planners are
candid enough openly to advocate government deficits.
For they recognize that if the increased government
spending is paid for out of increased taxation, then the
taxpayers lose exactly as much "purchasing power" as
the government gains. They also recognize that if the
increased government spending is financed by a bond
issue bought by individuals out of real savings, the
bondbuyers lose as much purchasing power for other
things as the government gains.
They recognize,finally,that if the government raises,
say, $10 billion in the investment market, this either
leaves just that much less funds available for investment
in private industry or pushes up interest rates. And high
interest rates, other things being equal, discourage busi-
ness expansion and investment.
So the only way to get the "increased purchasing
power" is to increase the money supply. If a country is
already frankly on a paper-money basis, it merely runs
the printing presses a little faster. If, like the United
States, it is on the semblance of a gold standard, it does
this through the central bank. The usual process is for
the bank to buy government securities in the open mar-
ket and "monetize" them.
But does the increase in money supply necessarily
promote economic growth? If there is already full em-
ployment and no substantial idle capacity, the new
money will simply lead to an increase in wages and
prices. If there is less than full employment, the new
money can, it is true, at least temporarily increase em-
ployment if it leads to an increased demand for prod-
ucts or to higher prices for products without also lead-
ing to correspondingly increased wage rates.
Those who propose the inflationary solution for
unemployment always forget to ask themselves what
has caused the unemployment. The long-run cause will

always be found to be some discoordination of prices
and wages. This can take many forms. Commonly wage
rates in some lines will be too high in relation to prices
or to the demand for particular products. But wage-
price coordination, in such cases, can be restored and
maintained if there are free-market wages and free-
market pricesflexiblein both directions. Inflation is not
necessary to restore such coordination. Moreover, any
price-wage adjustment brought about by inflation is
likely to be only temporary. For labor unions, finding
more demand for their services, or trying to "catch up"
with rising living costs, demand still higher wages, with
the result that the discoordination of wages and prices
may be brought about all over again, and the situation
can be cured once more only by a still further dose of
inflation.
As long as the government authorities encourage or
tolerate a system that makes it possible for unions con-
stantly to demand and secure uneconomic wage rates,
to which prices can be adjusted only by successive
doses of inflation, the authorities must encourage the
continuance and perpetuation of such discoordination.
This must retard economic growth.
Inflation Falsifies Calculation
Inflation is not only unnecessary for economic

growth. As long as it exists it is the enemy of economic
growth. It distorts and falsifies economic calculation. An
economy grows and functions at its maximum rate
when the relationship of prices and wages and profits,
and the whole balance of production among thousands
of different commodities and services are such as to
lead toward an equalization of profit margins because of
correct anticipations of the relationship of supply and

demand, of prices, production and costs.
But when inflation forces up prices, prices do not all
rise in the same proportion and at the same rate. It
becomes very difficult for business men to distinguish
between what is lasting and what is merely temporary,
or to know what the real demands of the consumers will
be or what the real costs of their own operations are.
Orthodox accounting practices will give misleading re-
sults. Depreciation and replacement allowances will be
inadequate. Profits will be overestimated and over-
stated. Businessmen everywhere will be deceived.
They will be using up their real capital when they think
they are increasing it. They will think they have profits
or capital gains when they really have losses.
A vital function of the free market is to penalize
inefficiency and misjudgment and to reward efficiency
and good judgment. By distorting economic calcula-
tions and creating illusory profits, inflation will destroy
this function. Because nearly everybody will seem to
prosper, there will be all sorts of maladjustments and
investments in the wrong lines. Honest work and sound
production will tend to give way to speculation and
gambling. There will be a deterioration in the quality
of goods and services and in the real standard of
living.
The price and wage rises brought about by inflation
will lead to public demands for price and wage controls.
The government will be only too receptive to such de-
mands because price and wage controls tacitly put the
blame for the inflation on those who are getting the
prices and wages rather than on the government's poli-
cies. But these price and wage controls will reduce,
distort, and disrupt production, and do far more harm
than even the inflation itself.
What is likely even before price control is the institu-
tion of some sort of exchange control, to prevent the

quotation of the home currency from falling in terms of
other currencies. But the effect of such an exchange
control, overvaluing the domestic currency, will be to
bring about a deficit in the balance of payments. It will
discourage exports, because they will be overpriced
compared with foreign goods. It will encourage im-
ports. The exchange authorities, to prevent this, will
institute a quota and licensing system. But this will dis-
rupt foreign trade.
I have yet to mention what many will consider the
most important reason of all why inflation must in the
long run retard rather than accelerate economic
growth. Its effect must be to discourage monetary sav-
ings, and to encourage personal spending on immediate
consumption. To this extent it must discourage and
reduce capital formation, the principal cause of eco-
nomic growth.
Of course inflation does temporarily stimulate invest-
ment in certain directions. When it is going on it makes
nearly every venture look profitable in monetary terms.
It therefore provides a strong incitement to reinvest-
ment of profits and to the purchase of equity shares
(though not of mortgages and bonds). But, as we have
already seen, inflation falsifies all the signals and con-
fuses and distorts economic calculation. What it tends
to stimulate isrz/investment.By directing investment
into the wrong channels it leads to great waste and must
retard properly balanced growth over the long run.
The long-run effect of inflation, in sum, can only be
to reduce and distort production and to retard eco-
nomic growth. Of course this effect can be concealed
from many people, perhaps a majority, for a long time.
For prices, wages, and incomes will all be constantly
going higher in monetary terms. The official gross na-
tional product figures will be constantly soaring. The
euphoria can temporarily lull all misgivings. But eventu-

ally the bitter moment of truth must arrive.
Summary
The way to get a maximum rate of "economic

growth"assuming this to be our aimis to give max-
imum encouragement to production, employment, sav-
ing, and investment. And the way to do this is to
maintain a free market and a sound currency. It is to
encourage profits, which must in turn encourage both
investment and employment. It is to refrain from op-
pressive taxation that siphons away the funds that
would otherwise be available for investment. It is to
allow free wage rates that permit and encourage full
employment. It is to allow free interest rates, which
would tend to maximize saving and investment.
The way to slow down the rate of economic growth
is, of course, precisely the opposite of this. It is to dis-
courage production, employment, saving and invest-
ment by incessant interventions, controls, threats, and
harassment. It is to frown upon profits, to declare that
they are excessive, to file constant antitrust suits, to
control prices by law or by threats, to levy confiscatory
taxes that discourage new investment and siphon off
the funds that make investment possible, to hold down
interest rates artificially to the point where real saving
is discouraged and malinvestment encouraged, to de-
prive employers of genuine freedom of bargaining, to
grant excessive immunities and privileges to labor un-
ions so that their demands are chronically excessive
and chronically threaten unemploymentand then to
try to offset all these policies by government spending,
deficits, and monetary inflation. But I have just de-
scribed precisely the policies that most of the fanatical
Growthmen advocate.
Their recipe for inducing growth always turns out to

be inflation. This does lead to the illusion of growth,
which is measured in their statistics in monetary terms.
What the Growthmen do not realize is that the magic
of inflation is always a short-run magic, and quickly
played out. It can work temporarily and under special
conditionswhen it causes prices to rise faster than
wages and so restores or expands profit margins. But
this can happen only in the early stages of an inflation
that is not expected to continue. And it can happen
even then only because of the temporary acquiescence
or passivity of the labor union leaders. The conse-
quences of this short-lived paradise are malinvestment,
waste, a wanton redistribution of wealth and income,
the growth of speculation and gambling, immorality
and corruption, disillusionment, social resentment, dis-
content, upheaval and riots, bankruptcy, increased gov-
ernmental controls, and eventual collapse. This year's
euphoria becomes next year's hangover. Sound long-
run growth is always retarded.
Ultimately we must fall back upon an a priori conclu-
sion, yet a conclusion that is confirmed by the whole
range of human experience: that when each of us is free
to work out his own economic destiny, within the
framework of the market economy, the institution of
private property, and the general rule of law, we will all
improve our economic condition much faster than
when we are ordered around by bureaucrats.
CHAPTER 17
Government As
Prosperity-Maker
IN A SPEECH IN DECEMBER, 1967, GILBERT W.

Fitzhugh, chairman of the board of the Metropolitan
Life Insurance Company, neatly stuck a pin in the pre-
tensions of "the new breed" of economists.
I shall risk ostracism [he said] by questioning the basic

premises of the thesis that government planners can fine-
tune the economy to such an extent as to assure steady
growth in employment and productivity . . . while at the
same time maintaining a sound dollar. These premises seem
to be:
1. Economists now have sufficiently accurate information to
predict whether the government should be pursuing expan-
sionary or restraining policies;
2. This informaton is available in time to be of practical use;

3. The fallible human beings who make the decisions for
the government based on these data will make the right
decision based on economics rather than politics; and
4. That these decisions will be made promptly at the right
time.
Does recent history give us confidence that any of these
four premises, much less all of them, will be met in this
practical world of ours? On the contrary, is there not some
reason to feel that government actions in recent years have
been more unstabilizing than stabilizing?
Mr. Fitzhugh's doubts were not only justified, but

understated.
One of the premises of the "new economists" is that
the government bureaucrats in charge of "keeping the
economy on an even keel" are not only capable of fore-
casting future business conditions (or forecasting what
they would be in the absence of timely governmental
intervention), but are capable of forecasting them con-
sistently better than private business. In fact, a chair-
man of the Council of Economic Advisers once
informed me that without him the American economy
would be "flying blind."
One of the elementary facts that the would-be eco-
nomic fine-tuners overlook is that most of the chief sta-
tistics on which they rely are not known until a month
or two after the conditions they record. Even the latest
statistics, in other words, only tell us what past condi-
tions were, not what present conditions are, much less
what they will be. And when some major economic
event occurslike the devaluation of the British pound
by 14 per cent in November, 1967our government
economists, like the rest of us, don't know about it until
after it happens.
The only way government bureaucrats know of keep-
ing prosperity going is to inflate some moreto in-
Government As Prosperity-Maker 139
crease the deficit or to pump more money into the sys-

tem.
They proudly claim credit for a good result. But when
the inflation begins to get out of hand, when the deficit
in the balance of payments mounts, when the integrity
of the dollar is threatened, they disclaim all responsibil-
ity. They explain that it is politically impossible to cut
back government spending and would precipitate a cri-
sis to stop expanding the supply of paper money. The
only remedy they suggest is to raise taxes still further to
pay for their own past extravagances.
They denounce the banks for raising interest rates.
They denounce business for raising prices and for in-
vesting abroad. In brief, they denounce private enter-
prise for the consequences of their own reckless
policies and demand still more governmental controls.
CHAPTER 18
Uruguay: Welfare State

Gone Wild
I F THERE WERE A NOBEL PRIZE FOR THE MOST Ex-

treme or worst example of the welfare state (and if the
outright Communist states of Russia and China were
made ineligible), which country has done most to earn
it?
The decision would be a hard one. Among the out-
standing candidates would be Britain, France, Sweden,
and India. But the British case, though the most famil-
iar, is certainly not the worst; it is the most discussed
and most deplored because of the former eminence of
Britain in the world.
The tragedy certainly reaches its greatest dimensions
in India, with much of its 500 million population always
on the verge of famine, and kept there by an incredible
Uruguay: Welfare State Gone Wild 141
mixture of economic controls, planning, welfarism and

socialism, imposed by its central and state governments.
We have already discussed a few of India's sins of com-
mission and omission in Chapter 9. However, India has
always been a poverty-stricken country, periodically
swept by drought or floods resulting in human misery
on a catastrophic scale, and it is often difficult to calcu-
late just how much worse off its governmental policies
have made it.
Perhaps the most dramatic example of a country
needlessly ruined by "welfare" policies is Uruguay.
Here is a country only about a third larger than the state
of Wisconsin, with a population of only about 2.8 mil-
lion. Yet that population is predominantly of European
origin, with a literacy rate estimated at 90 per cent. It
was once so distinguished for its high living standards
and good management that it was frequently referred
to as "the Switzerland of Latin America."
Uruguay adopted an elaborate state pension system
as early as 1919. But its major troubles seem to have
begun after March, 1952, when the office of president
was abolished, and Uruguay was governed by a nine-
man national council elected for a four-year term, six
members of which belonged to the majority party and
three to the leading minority party. All nine were given
equal power.
What is so discouraging about the example of Uru-
guay is not only that its welfare programs persisted, but
that they became more extreme in spite of the succes-
sive disasters to which they led. The story seems so
incredible that instead of telling it in my own words, I
prefer to present it as a series of snapshots taken by
different first-hand observers at intervals over the years.
The first snapshot I present is one taken by Karel
Norsky in the Manchester Guardian Weekly of July 12,
1956:
Uruguay today offers the sad spectacle of a sick Welfare

State. It is living in a Korean boomday dream. . . . No
politician comes out with the home truth that this country's
wide range of welfare services has to be paid for with funds
which have to be earned. Demagogy is used as a sedative.
The result is that the foreign payments deficit is increasing,
internal debt soaring, wage demands accumulating, prices
rising, and the Uruguayan peso rapidly depreciating. Nepo-
tism is rife. Now one in every three citizens in Montevideo,
which accounts for a third of the country's 3 million inhabi-
tants, is a public servant, draws a small salary, is supposed to
work half a day in a Government office, and more often than
not spends the rest of his time doing at least one other job
in a private enterprise. . . . Corruption is by no means
absent. . . .
The foreign payments deficit has been running at a
monthly rate of about 5 million pesos. The public servants are
asking for a substantial increase in salaries. The meat-packing
workers are on strike for higher pay and a "guaranteed"
amount of a daily ration of four pounds of meat well below
market price. . . .
No politician here can hope to get a majority by advocating
austerity, harder work, and the sacrifice of even some of the
Welfare State features.
I should like to pause here to underline this last para-

graph, for it illustrates what is perhaps the most omi-
nous aspect of the welfare state everywhere. This is that
once a subsidy, pension, or benefit payment is ex-
tended to any group, it is immediately regarded as a
"right." No matter what the crisis facing the budget or
the currency, it becomes "politically impossible" to dis-
continue or reduce it. We will find this repeatedly illus-
trated in Uruguay.
The next snapshot I present was taken by S. J. Rundt
& Associates of New York nearly seven years later, in
April, 1963:
In one of his first statements the new President of the

National Council admitted that Uruguay is practically bank-
rupt. . . . He made it pretty clear, however, that the coun-
try's welfare system of long standing will remain more or less
unchanged.
The "social laboratory of the Americas," Uruguay has
launched a legislative program which goes much further to-
ward the complete "welfare state" than any similar plan in
this hemisphere. . . . The government grants family allow-
ances based on the number of children; employees cannot be
dismissed without proper indemnification; both men and
women vote at the age of 18. . . .
An elaborate and all-encompassing state pension system
was introduced as early as 1919. Financed by payroll deduc-
tions of 14 to 17 per cent, which must be matched by employ-
ers, a pension is available to any Uruguayan at the age of 55
after 30 years of work, or at 60 after 10 years. At retirement,
the worker draws his highest salary, plus what has been
deducted for pensions. . . . Employees obtain free medical
service and are entitled to 20 days of annual vacation with
pay. The government takes care of expectant and nursing
mothers.
The overwhelming expenses of a super-welfare state
(where nearly one-fifth of the population is dependent on
government salaries) and the uncertain income from a
predominantly livestock and agricultural economy have left
their marks. Today, Uruguay is in severe financial and fiscal
stress. . . .
Inflation is rampant. . . . Local production has declined
sharply. Unemployment has risen. There are many severe
strikes. Income from tourism has fallen off markedly. . . .
So far as exchange controls and import restrictions are
concerned, Uruguay has tried them all. . . .
In an effort to prevent another buying spree in 1963, the
new Administration decreed an import ban for 90 days on a
wide array of goods considered non-essential. . . . All told,
the ban applies to about one-third of all Uruguayan importa-
tions. . . . The smuggling of goods, mainly from Brazil and
Argentina, has become one of the foremost headaches of

Montevideo planners. . . .
Capital flight during 1963 is estimated at between $40 mil-
lion and $50 million. . . .
The budget deficit in 1961 nearly doubled to 210 million
pesos. The situation turned from bad to worse in 1962 when
the Treasury recorded the largest deficit in 30 years. . . .
Press reports cite a redfigureof 807 million pesos. The Treas-
ury is said to owe by now nearly 700 million pesos to the
pension funds and roughly a billion pesos to Banco de la
Repblica. The salaries of public officials are at least one
month behind schedule. . . .
Labor costs in Uruguay, the Western Hemisphere's fore-
most welfare state, are high. The many contributions toward
various social benefitsretirement, family allotments, sick-
ness, maternity, accident, and unemployment insurance
vary from industry to industry, but the general average for
industry as a whole is at least 50 per cent of the payroll. In
some sectors, the percentage is much higher. . . .
Social unrest is rising. . . . Widespread and costly strikes
have become the order of the day. As a rule, they involve
demands for pay hikes, sometimes as high as 50 per cent.
Our third snapshot was taken by Sterling G. Slappey

in Nation's Business magazine four years later, in April,
1967:
MontevideoTwo hundred imported buses are rusting

away on an open dock while Uruguayan government bureau-
crats bicker with each other over payment of port charges.
The buses have not moved in nearly four years.
Scores of men listed under false female names receive
regular government handouts through Uruguay's socialized
hospitals. They are listed as "wet nurses."
At many government offices there are twice as many public
servants as there are desks and chairs. The trick is to get to
work early so you won't have to stand during the four to six
hour workday that Uruguayan bureaucrats enjoy.

It is rather common for government workers to retire on
full pay at 45. It is equally common to collect on one retire-
ment while holding a second job or to hold a job while col-
lecting unemployment compensation. These are a few of the
facts of life in Uruguaya nation gone wild over the welfare
state. . . .
Between 40 and 45 per cent of the 2.6 million people in this
once affluent land are now dependent on the government
for their total income. These include youthful "pensioners"
who have no great problem getting themselves fired or
declared redundant, thereby qualifying for large retirement
benefits. . . .
At any given moment eight to ten strikes are going on, in
a nation which until fifteen years ago called itself "the Swit-
zerland of Latin America" because its people were so indus-
trious, busy and neat. Montevideo is now one of the world's
filthiest cities outside the Orient. The people have so little
pride left they litter their streets with paper and dump their
nastiest garbage on the curb.. . .
Besides controlling meat and wool production and supply-
ing meat to Montevideo, the government also entirely oper-
ates:
Fishing; seal catching; alcohol production; life and acci-
dent insurance; the PTTpost office, telephone and tele-
graph; petroleum and kerosene industry; airlines; railroads;
tug boats; gambling casinos; lotteries; theaters; most hospi-
tals; television and radio channels; three official banks; the
largest transit company. . . .
In 1950 the Uruguayan peso, South America's most solid
coin, was worth 50 cents. During a six-day period last Febru-
ary, the value of the peso slumped from 72 to the $1 to 77.
Cost of living went up 88 per cent in 1965. During 1966 the
increase was something like 40 to 50 per cent.
To keep pace the government has increased its spending,
ground out more paper money and lavishly passed out huge
pay raisessome as high as 60 per cent a year. . . .
One fiscal expert diagnoses Uruguay's troubles as "English
sickness" which, he says, means trying to get as much as
possible out of the community while contributing as little as

possible towards it.
Until President Gestido took over, Uruguay had been ruled
for fifteen years by a nine-member council in a collegiate
system of government. It was idealistic, unworkable and
rather silly from the start. It quickly fragmented, making the
government a coalition of seven different groups. Every year
a different member of the council took over as president, or
council chief.
The collegiate system was a Tammany Hall patronage-type
of group. Instead of each party watching the opposition, all
took care of their friends and got their cousins government
sinecures.
The western world has rarely seen such patronage, nepo-
tism, favoritism.
The return to a presidential system brought hopes

that Uruguay's extreme welfarism could now be miti-
gated. But here is our fourth snapshot, taken by C. L.
Sulzberger for the New York Times of October 11,1967:
MontevideoContemporary England or Scandinavia

might well take a long southwesterly look at Uruguay while
murmuring: "There but for the grace of God go I." For Uru-
guay is the welfare state gone wild, and this fact, at last
acknowledged by the government, brought about today's
political crisis and the declaration of a state of emergency.
This is the only country in the Western Hemisphere where
the kind of democratic socialism practiced in Norway, Labor
Britain or New Zealand has been attempted. Alas, thanks to
warped conceptions and biased application, the entire social
and economic structure has been set askew. Here charity
begins at home. One out of three adults receives some kind
of pension. Forty per cent of the labor force is employed
by the state. Political parties compete to expand a ridicu-
lously swollen bureaucracy which only works a thirty-hour
week. . . .
The cost of living has multiplied 32 times in the past
decade. Gross national production has actually declined 9

per cent and this year will take a nose dive. . . .
Instead of having one President, like the Swiss they
elected a committee and, not being Swiss, the Uruguayans
saw to it the committee couldn't run the country. The result
was a system of self-paralysis. . . .
Anyone can retire on full salary after thirty years on the
job, but with full salary worth one thirty-second of its worth
ten years ago, the pension isn't very helpful. To compound
the confusion, trade unions make a habit of striking. Right
now the bank employes refuse to handle government checks
so neither wage-earners nor pension-receivers get paid
This was a needless tragedy. Uruguay has proportionately
more literacy and more doctors than the United States. It is
underpopulated and has a well-developed middle class
Uruguay should serve as a warning to other welfare states.
Our fifth snapshot was taken by S. J. Rundt & Associ-

ates on August 6, 1968:
The mess continues . . . and seems to perpetuate itself....

The government is getting tougher and Uruguayans more
obstreperous. The powerful and sharply leftist, Communist-
led 400,000 member CNT (National Workers Convention) is
on and off 24-hour work stoppages in protest against the lid
clamped on pay boosts by the price, wage and dividend
freeze decreed on June 28. . . . The currently severe six-
month drought has brought a gloomy brownout, after a 50 per
cent reduction in electric power use was decreed. . . . The
near-darkness helps sporadic anti-government rioting and
terrorist activities. A leading pro-government radio transmit-
ter was destroyed by bombs. . . . Last year there were 500
strikes; the dismal record will surely be broken in 1968
Of a population of around 2.6 million, the number of gain-
fully active Uruguayans is at the most 900,000. Pensioners
number in excess of 300,000. Months ago the unemployed
came to 250,000, or almost 28 per cent of the work force, and
the figure must now be higher. . . .
The government closed at least three supermarkets and

many stores for having upped prices, as well as such institu-
tions as private hospitals that had violated the wage-price
freeze decree. But despite rigid press censorship and
Draconian anti-riot and anti-strike ukases, threatening pun-
ishment by military tribunals, calm fails to return.
Our sixth and final snapshot of a continuing crisis is

from a New York Times dispatch of January 21, 1969:
Striking Government employes rioted in downtown Mon-

tevideo today, smashing windows, setting up flaming bar-
ricades and sending tourists fleeing in panic. The police
reported that one person had been killed and 32 injured.
The demonstrators acted in groups of 30 to 50, racing
through a 30-block area, snarling traffic with their barricades,
and attacking buses and automobiles. The police fought back
with tear gas, high-pressure water hoses and clubs. ...
The striking civil servants were demanding payment of
monthly salary bonuses of $24, which they say is two months
overdue.
These six snapshots, taken at different intervals over

a period of thirteen years, involve considerable repeti-
tion; but the repetition is part of the point. The obvious
reforms were never made.
Here are a few salient statistics to show what was
happening between the snapshots:
In 1965 consumer prices increased 88 per cent over
those in the preceding year. In 1966 they increased 49
per cent over 1965. In 1967 they increased 136 per cent
over 1966. By August, 1968, they had increased 61 per
cent over 1967.
The average annual commercial rate of interest was
36 per cent in 1965. In 1966,1967, and August, 1968, it
ranged between 32 and 50 per cent.
The volume of money increased from 2,924 million
pesos in 1961 to 10,509 in 1965,13,458 in 1966, 30,163 in

1967, and 40,738 million pesos in August, 1968.
In 1961 there were 11 pesos to the American dollar. In
1965 there were 60; in 1966 there were 70; in early 1967
there were 86; at the end of 1967 there were 200, and
in April, 1968, there were 250.
Uruguay's warning to the United States, and to the
world, is that governmental welfarism, with its ever-
increasing army of pensioners and other beneficiaries,
is fatally easy to launch and fatally easy to extend, but
almost impossible to bring to a haltand quite impossi-
ble politically to reverse, no matter how obvious and
catastrophic its consequences become. It leads to runa-
way inflation, to state bankruptcy, to political disorder
and disintegration, and finally to repressive dictator-
ship. Yet no country ever seems to learn from the exam-
ple of another.
CHAPTER 19
Inflation Is Worldwide
THE EPIDEMIC OF INFLATION IS NOT MERELY AMERI-

can but worldwide. And in most countries it is growing
more virulent.
The First National City Bank of New York keeps
score annually. Its table published in August, 1968,
shows the currency depreciation in 45 countries, in
1967 and over the preceding 10 years, as measured by
cost-of-living indices.
The table shows that in every one of the 45 countries
the purchasing power of the monetary unit declined in
the 10-year period 1957-67, and that the rate of decline
in the value of money in 1967 exceeded the 10-year
average in 27 of those countries. The median rate of
depreciation in the 45 countries in 1967 was 3.8 per
Inflation Is Worldwide 151
cent, compared with a median rate of 3.3 per cent a
year for the decade as a whole.
The buying power of the United States dollar suf-
fered a rate of shrinkage of 2.7 per cent in 1967, com-
pared with an average rate of 1.7 per cent a year over
the past decade. (The dollar's purchasing power shrank
by 4.0 per cent during 1968.)
At the end of 1967 the United States dollar bought
only 84 per cent as much as it bought 10 years before.
On the same 10-year basis of comparison Canada's cur-
rency bought only 82 per cent as much, Belgium's 80,
West Germany's 79, Switzerland's 76, the United King-
dom's 75, Holland's 73, Italy's 71, Sweden's 69, Japan's
66, France's 62, India's 54, Spain's 50, Vietnam's 31,
Chile's 11, Argentina's 6, and Brazil's only 2 per cent as
much.
The three countries with the worst records were
Latin American countries; but so, remarkably, were the
three countries with the best records. These were
Guatemala, whose currency in 1967 still bought 99 per
cent as much as it did 10 years before; El Salvador,
whose currency bought 94 per cent as much; and
Venezuela, whose currency bought 88 per cent as
much.
This contrast shows that the extent of inflation has
nothing to do with the wealth or resources of a country.
It is certainly not the result of a "scarcity of goods." It
is true that Argentina and Brazil are not outstandingly
rich countries, but the nations that suffered from infla-
tion least, Guatemala and El Salvador, are among the
poorest in the world.
The truth is that inflation is always the result of gov-
ernmental policy. It is a consequence of printing too
much money.
If the Citibank's table had compared not only the
extent of the fall in buying power of each of the 45
countries' currencies, but also the respective increases

in the amount of money issued by each country, this
fact would have been made clear. Digging these com-
parisons out myself from the monthly publication of the
International Monetary Fund, International Monetary
Statistics, I find that in Guatemala, for example, the
supply of currency was increased from 120 million quet-
zales in 1957 to 157 million in 1967, a rise of only 31 per
cent. In Brazil, by contrast, the supply of money was
increased from 291 million new cruzeiros in 1957 to
19,593 million in 1967, a rise of 6,633 P e r cent. This is
sufficient explanation of the fact that the Guatemalan
currency lost only 1 per cent of its purchasing power in
the 10-year period while the Brazilian currency lost 98
per cent of its former purchasing power. Similar com-
parisons could be made for the other countries.
The governments that have done most to expand
their issuance of money have done so, or have "had" to
do so, because they plunged into welfare schemes and
socialistic programs that brought on enormous chronic
budget deficits.
In their rush to bring perpetual prosperity and to
"end poverty" in their own lands they have eroded the
value of their own people's savings and left millions of
their most hard-working and thrifty citizens facing the
specter of poverty.
CHAPTER 20
The Case for the Gold Standard
IN FEBRUARY OF 1965 PRESIDENT DE GAULLE OF

France startled the financial world by calling for a re-
turn to an international gold standard. American and
British monetary managers replied that he was asking
for the restoration of a world lost forever. But some
eminent economists strongly endorsed his proposal.
They argued that only a return to national currencies
directly convertible into gold could bring an end to the
chronic monetary inflation of the last twenty years in
nearly every country in the world.
What is the gold standard? How did it come about?
When and why was it abandoned? And why is there
now in many quarters a strong demand for its restora-
tion? We can best understand the answers to these
questions by a glance into history.
In primitive societies exchange was conducted by

barter. But as labor and production became more di-
vided and specialized, a man found it hard to find some-
one who happened to have just what he wanted and
happened to want just what he had. So people tried to
exchange their goods first for some article that nearly
everybody wanted, so that they could exchange this
article in turn for the exact things they happened to
want.
This common commodity became a medium of ex-
changemoney.
All sorts of things have been used in human history
as such a common medium of exchangecattle,
tobacco, precious stones, the precious metals, particu-
larly silver and gold. Finally gold became dominant, the
"standard" money.
Gold had tremendous advantages. It could be fash-
ioned into beautiful ornaments and jewelry. Because it
was both beautiful and scarce, gold combined very high
value with comparatively little weight and bulk; it could
therefore he easily held and stored. Gold "kept" indefi-
nitely; it did not spoil or rust; it was not only durable but
practically indestructible. Gold could be hammered or
stamped into almost any shape or precisely divided into
any desired size or unit of weight. There were chemical
and other tests that could establish whether it was
genuine. And as it could be stamped into coins of a
precise weight, the values of all other goods could be
exactly expressed in units of gold. It therefore became
not only the medium of exchange but the "standard of
value." Records show that gold was being used as a form
of money as long ago as 3,000 B.C. Gold coins were
struck as early as 800 or 700 B.C.
One of gold's very advantages, however, also pre-
sented a problem. Its high value compared with its
weight and bulk increased the risks of its being stolen.
The Case For The Gold Standard 155
In the sixteenth and even into the nineteenth century

(as one will find from the plays of Ben Jonson and Mo-
lire and the novels of George Eliot and Balzac) some
people kept almost their entire fortunes in gold in their
own houses. But most people came more and more into
the habit of leaving their gold for safekeeping in the
vaults of goldsmiths. The goldsmiths gave them a re-
ceipt for it.
The Origin of Banks
Then came a development that probably no one had

originally foreseen. The people who had left their gold
in a goldsmith's vault found, when they wanted to make
a purchase or pay a debt, that they did not have to go
to the vaults themselves for their gold. They could sim-
ply issue an order to the goldsmith to pay over the gold
to the person from whom they had purchased some-
thing. This second man might find in turn that he did
not want the actual gold; he was content to leave it for
safekeeping at the goldsmith's, and in turn issue orders
to the goldsmith to pay specified amounts of gold to still
a third person. And so on.
This was the origin of banks, and of both bank notes
and checks. If the receipts were made out by the gold-
smith or banker himself, for round sums payable to
bearer, they were bank notes. If they were orders to
pay made out by the legal owners of the gold them-
selves, for varying specified amounts to be paid to par-
ticular persons, they were checks. In either case,
though the ownership of the gold constantly changed
and the bank notes circulated, the gold itself almost
never left the vault!
When the goldsmiths and banks made the discovery
that their customers rarely demanded the actual gold,
they came to feel that it was safe to issue more notes

promising to pay gold than the actual amount of gold
they had on hand. They counted on the high unlike-
lihood that everybody would demand his gold at
once.
This practice seemed safe and even prudent for
another reason. An honest bank did not simply issue
more notes, more IOU's, than the amount of actual gold
it had in its vaults. It would make loans to borrowers
secured by salable assets of the borrowers. The bank
notes issued in excess of the gold held by the bank were
also secured by these assets. An honest bank's assets
therefore continued to remain at least equal to its liabili-
ties.
There was one catch. The bank's liabilities, which
were in gold, were all payable on demand, without
prior notice. But its assets, consisting mainly of its loans
to customers, were most of them payable only on some
date in the future. The bank might be "solvent" (in the
sense that the value of its assets equaled the value of its
liabilities) but it would be at least partly "illiquid." If all
its depositors demanded their gold at once, it could not
possibly pay them all.
Yet such a situation might not develop in a lifetime.
So in nearly every country the banks went on expand-
ing their credit until the amount of bank-note and de-
mand-deposit liabilities (that is, the amount of
"money") was several times the amount of gold held in
the banks' vaults.
The Fractional Reserve
In the United States in mid-1969 there were $19 of

Federal Reserve notes and demand-deposit liabilities
i.e., $19 of moneyfor every $1 of gold.
Up until 1929, this situationa gold standard with

only a "fractional" gold reservewas accepted as
sound by the great body of monetary economists, and
even as the best system attainable. There were two
things about it, however, that were commonly over-
looked. First, if there was, say, four, five, or ten times as
much note and deposit "money" in circulation as the
amount of gold against which this money had been
issued, it meant that prices were far higher as a result
of this more abundant money, perhaps four, five, or ten
times higher, than if there had been no more money
than the amount of gold. And business was built upon,
and had become dependent upon, this amount of
money and this level of wages and prices.
Now if, in this situation, some big bank or company
failed, or the prices of stocks tumbled, or some other
event precipitated a collapse of confidence, prices of
commodities might begin to fall; more failures would be
touched off; banks would refuse to renew loans; they
would start calling old loans; goods would be dumped
on the market. As the amount of loans was contracted,
the amount of bank notes and deposits against them
would also shrink. In short, the supply of money itself
would begin to fall. This would touch off a still further
decline of prices and buying and a further decline of
confidence.
That is the story of every major depression. It is the
story of the Great Depression from 1929 to 1933.
From Boom to Slump
What happened in 1929 and after, some economists

argue, is that the gold standard "collapsed." They say
we should never go back to it or depend upon it again.
But other economists argue that it was not the gold
standard that "collapsed" but unsound political and

economic policies that destroyed it. Excessive expan-
sion of credit, they say, is bound to lead in the end to
a violent contraction of credit. A boom stimulated by
easy credit and cheap money must be followed by a
crisis and a slump.
In 1944, however, at a conference in Bretton Woods,
New Hampshire, the official representatives of 44 na-
tions decidedmainly under the influence of John
Maynard Keynes of Great Britain and Harry Dexter
White of the United Statesto set up a new interna-
tional currency system in which the central banks of the
leading countries would cooperate with each other and
coordinate their currency systems through an Interna-
tional Monetary Fund. They would all deposit "quotas"
in the Fund, only one-quarter of which need be in gold,
and the rest in their own currencies. They would all be
entitled to draw on this Fund quickly for credits and
other currencies.
The United States alone explicitly undertook to keep
its currency convertible at all times into gold. This privi-
lege of converting their dollars was not given to its own
citizens, who were forbidden to hold gold (except in
the form of jewelry or teethfillings);the privilege was
given only to foreign central banks and official interna-
tional institutions. Our government pledged itself to
convert these foreign holdings of dollars into gold on
demand at the fixed rate of $35 an ounce. Two-way
convertibility at this rate meant that a dollar was the
equivalent of one thirty-fifth of an ounce of gold.
The other currencies were not tied to gold in this
direct way. They were simply tied to the dollar by the
commitment of the various countries not to let their
currencies fluctuate (in terms of the dollar) by more
than 1 per cent either way from their adopted par val-
ues. The other countries could hold and count dollars as
part of their reserves on the same basis as if dollars were

gold.
The IMF Promotes Inflation
The system has not worked well. There is no evi-

dence that it has "shortened the duration and lessened
the degree of disequilibrium in the international bal-
ances of payments of members," which was one of its
six principal declared purposes. It has not maintained
a stable value and purchasing power of the currencies
of individual members. This vital need was not even a
declared purpose.
In fact, under it inflation and depreciation of curren-
cies have been rampant. Of the 48 or so national mem-
bers of the Fund in 1949, practically all except the
United States devalued their currencies (i.e., reduced
their value) that year, following devaluation of the Brit-
ish pound from $4.03 to $2.80. Of the 111 present mem-
bers of the Fund, the great majority have either
formally devalued since they joined, or allowed their
currencies to fall in value since then as compared with
the dollar.
The dollar itself, since 1944, has lost 50 per cent of its
purchasing power. In just the ten years ending in 1967
(as we saw in the last chapter) the German mark lost 21
per cent of its purchasing power, the British pound 25
per cent, the Italian lira 29 per cent, the French franc
38 per cent, and leading South American currencies
from 94 to 98 per cent.
In addition, the two "key" currencies, the currencies
that can be used as reserves by other countriesthe
British pound sterling and the dollarhave been
plagued by special problems. The pound was devalued
from $4.03 to $2.80 in 1949 and from $2.80 to $2.40 in
1967, and yet has had to be repeatedly rescued by huge

loans from the United States, from the Fund, and from
a consortium of countries.
Balance of Payments
The United States has been harassed since the end of

1957 by a serious and apparently chronic "deficit in the
balance of payments." This is the name given to the
excess in the amount of dollars going abroad (for foreign
aid, for investments, for tourist expenditures, for im-
ports, and for other payments) over the amount of dol-
lars coming in (in payment for our exports to foreign
countries, etc.). This deficit in the balance of payments
has been running since the er i of 1957 at a rate of more
than $2.8 billion a year. At the end of 1968, the total
deficit in our balance of payments came to some $30
billion.
This had led, among other things, to a fall in the
amount of gold holdings of the United States from $22.9
billion at the end of 1957 to $10.4 billion in mid-1969.
Other changes have taken place. As a result of the
chronic deficit in the balance of payments, foreigners
have short-term claims on the United States of $37.8
billion. And $13.4 billion of these are held by foreign
central banks and international organizations that have
a direct legal right to demand gold for them. The re-
maining $24.4 billion are an indirect claim on our gold.
This is why officials and economists not only in the
United States but all over the Western world are now
discussing a world monetary reform. Most of them are
putting forward proposals to increase "reserves" and to
increase "liquidity." They argue that there isn't enough
"liquidity"that is, that there isn't enough money and
credit, or soon won't beto conduct the constantly
growing volume of world trade. Most of them tell us that

the gold standard is outmoded. In any case, they say,
there isn't enough gold in the world to serve as the basis
for national currencies and international settlements.
The Minority View
But the advocates of a return to a full gold standard,

who though now in a minority include some of the
world's most distinguished economists, are not im-
pressed by these arguments for still further monetary
expansion. They say these are merely arguments for still
further inflation. And they contend that this further
monetary expansion or inflation, apart from its positive
dangers, would be a futile means even of achieving the
ends that the expansionists themselves have in mind.
Suppose, say the gold-standard advocates, we were
to double the amount of money now in the world. We
could not, in the long run, conduct any greater volume
of business and trade than we could before. For the
result of increasing the amount of money would be
merely to increase correspondingly the wages and
prices at which business and trade were conducted. In
other words, the result of doubling the supply of money,
other things remaining unchanged, would be roughly to
cut in half the purchasing power of the currency unit.
The process would be as ridiculous as it would be futile.
This is the sad lesson that inflating countries soon or late
learn to their sorrow.
The Great Merit of Gold
The detractors of gold complain that it is difficult and

costly to increase the supply of the metal, and that this
depends upon the "accidents" of discovery of new
mines or the invention of better processes of extraction.

But the advocates of a gold standard argue that this is
precisely gold's great merit. The supply of gold is gov-
erned by nature; it is not, like the supply of paper
money, subject merely to the schemes of demagogues
or the whims of politicians. Nobody ever thinks he has
quite enough money. Once the idea is accepted that
money is something whose supply is determined simply
by the printing press, it becomes impossible for the
politicians in power to resist the constant demands for
further inflation. Gold may not be a theoretically per-
fect basis for money; but it has the merit of making the
money supply, and therefore the value of the monetary
unit, independent of governmental manipulation and
political pressure.
And this is a tremendous merit. When a country is not
on a gold standard, when its citizens are not even per-
mitted to own gold, when they are told that irredeema-
ble paper money is just as good, when they are
compelled to accept payment in such paper of debts or
pensions that are owed to them, when what they have
put aside, for retirement or old age, in savings banks or
insurance policies, consists of this irredeemable paper
money, then they are left without protection as the
issue of this paper money is increased and the purchas-
ing power of each unit falls; then they can be com-
pletely impoverished by the political decisions of the
"monetary managers."
I have just said that the dollar itself, "the best cur-
rency in the world," has lost 50 per cent of its purchas-
ing power of 24 years ago. This means that a man who
retired with $10,000 of savings in 1944 now finds that
that capital will buy only half as much as it did then.
But Americans, so far, have been the very lucky ones.
The situation is much worse in England, and still worse
in France. In some South American countries practi-
cally the whole value of people's savings94 to 98

cents in every dollarhas been wiped out in the last
ten years.
Not a Managed Money
The tremendous merit of gold is, if we want to put it

that way, a negative one: It is not a managed paper
money that can ruin everyone who is legally forced to
accept it or who puts his confidence in it. The technical
criticisms of the gold standard become utterly trivial
when compared with this single merit. The experience
of the last twenty years in practically every country
proves that the monetary managers are the pawns of
the politicians, and cannot be trusted.
Many people, including economists who ought to
know better, talk as if the world had already abandoned
the gold standard. They are mistaken. The world's cur-
rencies are still tied to gold, though in a loose, indirect,
and precarious way. Other currencies are tied to the
American dollar, and convertible into it, at definite
"official" rates (unfortunately subject to sudden
change) through the International Monetary Fund. And
the dollar is still, though in an increasingly nominal
way, convertible into gold at $35 an ounce.
Indeed, the American problem today, and the world
problem today, is precisely how to maintain this limited
convertibility of the dollar (and hence indirectly of
other currencies) into a fixed quantity of gold.
The $35 Question
The crucial question that the world has now to an-

swer is this: As the present system and present policies
are rapidly becoming untenable, shall the world's cur-
rencies abandon all links to gold, and leave the supply

of each nation's money to be determined by political
management, or shall the world's leading currencies
return to a gold standardthat is, shall each leading
currency be made once again fully convertible into gold
on demand at a fixed rate?
Whatever may have been the shortcomings of the old
gold standard, as it operated in the nineteenth and the
early twentieth century, it gave the world, in fact, an
international money. When all leading currencies were
directly convertible into a fixed amount of gold on de-
mand, they were of course at all times convertible into
each other at the equivalent fixed cross rates. Business-
men in every country could have confidence in the
currencies of other countries. In final settlement, gold
was the one universally acceptable currency every-
where. It is still the one universally acceptable com-
modity to those who are still legally allowed to get it.
Instead of ignoring or deploring or combating this
fact, the world's governments might start building on it
once more.
CHAPTER 21
The Fallacy of Foreign Aid
T H E ADVOCATES O F FOREIGN AID BELIEVE THAT I T

helps not only the country that gets it but the country
that gives it. They believe, therefore, that it promotes
worldwide "economic growth." They are mistaken in
these assumptions.
I should make clear at the beginning that when I
refer here to foreign aid I mean government-to-govern-
ment aid. Still more specifically, I mean government-to-
government "economic" aid. I am not considering here
intergovernmental military aid extended either in war-
time or peacetime. The justification of military aid will
depend, in each case, only partly on economic consid-
erations, and mainly on a complex set of political and
military factors.
It ought to be clear, to begin with, that foreign aid

retards the economic growth and the capital develop-
ment of the country that grants it. If it is fully paid for
out of taxes at the time it is granted, it puts an additional
tax burden on industry and reduces incentives at the
same time that it takes funds that would otherwise have
gone into new domestic investment. If it is not fully
paid for, but financed out of budget deficits, it brings all
the evils of inflation. It leads to rising prices and costs.
It leads to deficits in the balance of payments, to a loss
of gold, and to loss of confidence in the soundness of the
currency unit. In either case foreign aid must set back
the donor country's capital development.
All the consequences just described have occurred in
the United States. In the 23 years ending June 30,1968,
American foreign aidgrants, loans, and interest
reached the stupendous total of $171 billion. As the pub-
lic debt increased from $259 billion at the end of fiscal
*945 t o $359 billion in 1968, this means that $100 billion
of this foreign aid was in effect paid for by borrowing
and by inflating the currency, and $71 billion by added
taxation. Without the foreign aid handouts we could
have avoided both the inflation and the added taxation.
We could have avoided both the cumulative deficit of
$30 billion in the balance of payments and the loss of
$10 billion gold in those years. Today, American "liber-
als" are talking about all the billions we ought or will
need to spend to extend and improve our roads and
highways, to improve and increase our housing and to
rehabilitate our blighted cities, to combat air pollution
and water pollution, to bring more water to the cities
and to turn salt water into fresh. The $171 billion that
went into foreign aid would have covered practically all
the improvements in this direction that most of these
"liberals" are demanding.
The Fallacy Of Foreign A id 167
The Pump-Priming Argument

We sometimes hear it said by American advocates of
foreign aid (and we very frequently hear it said by
many of the foreign recipients of our aid, and alwayshy
the Communists) that the United States has got great
economic advantages out of its foreign aid program. We
desperately need "outlets" and "new markets" for our
"surplus." We must give part of our goods away, or give
foreigners the dollars with which to buy them, to keep
our factories going and to maintain full employment.
This program was even necessary, according to the
Communists, to "postpone the inevitable collapse" of
capitalism.
It should not be necessary to point out that this whole
argument is unmitigated nonsense. If it were true that
we could create prosperity and full employment by
making goods to give away, then we would not have to
give them to foreign countries. We could accomplish
the same result by making the goods to dump into the
sea. Or, far better, our government could give the
money or the goods to our own poor.
It ought to be clear even to the feeblest intelligence
that nobody can get rich by giving his goods away or
making more goods to give away. What seems to con-
fuse some otherwise clearheaded people when this
proposition is applied to a nation rather than an in-
dividual is that it is possible for particular firms and
persons within the nation to profit by such a transaction
at the expense of the rest. The firms, for example, that
are engaged in making the exported foreign aid com-
modities are paid for them by the aid-receiving country
or by the United States Government. But the latter gets
the money, in turn, from the American taxpayers. The
taxpayers are poorer by the amount taken. If they had
been allowed to keep it, they would have used it them-
selves to buy the goods they wanted. True, these would

not have been precisely the same goods as those that
were made and exported through the foreign aid pro-
gram. But they would have supplied just as much em-
ployment. And Americans, rather than foreigners,
would have got what was made by this employment.
Buying Friends
"Yes," it may be conceded, "all of this may be true;

but let us not look at the matter so selfishly, or at least
not so nearsightedly. Think of the great blessings that
we have brought to the aid-receiving countries, and
think of the long-run political and other intangible
gains to the United States. We have prevented the aid-
receiving countries from going Communist, and the
continuance of our aid is necessary to continue to keep
them from going Communist. We have made the recipi-
ent countries our grateful allies and friends, and the
continuance of our foreign aid is necessary to continue
to keep them our grateful allies and friends."
First, let us look at these alleged intangible gains to
the United States. We are here admittedly in the realm
of opinion, in the realm of might-have-beens and
might-be's, where proof either way is hardly possible.
But there is no convincing evidence that any of our
aid-recipients that have not gone Communist would
have done so if they had not got our economic aid.
Communist Party membership in aid-receiving France
and Italy did not fall off; in fact it has shown a tendency
to increase in both countries with increasing prosperity.
And Cuba, the one country in the Western Hemisphere
that has gone Communist, did so in 1959 in spite of
having shared freely in our foreign aid in the preceding
twelve years. Cuba had been favored by us, in fact,
The Fallacy Of Foreign Aid 169
beyond all other countries in sugar import quotas and

other indirect forms of economic help.
As for gaining grateful allies or even friends, there is
no evidence that our $11 billion of lend-lease to Russia
in World War II endeared us to the Russian leaders; that
our aid to Poland, Yugoslavia, Indonesia, and Egypt
turned Gomulka, Tito, Sukarno, or Nasser into depend-
able allies; that it has made France, or India, Mexico,
Chile, Laos, Cambodia, Bolivia, Peru, Ghana, Panama,
Algeria, and scores of other nations that have got our
aid, into our grateful friends.
On the other hand, there is good reason to suspect
that our aid has often had the opposite effect. Countries
have found that whenever they look as if they are in
danger of going Communist they get more American
aid. This veiled threat becomes a recognized way of
extorting more aid. And the leaders of governments
getting our aid find it necessary to insult and denounce
the United States to prove to their own followers that
they are "independent" and not the "puppets" of
"American imperialism." It is nearly always the United
States embassies and information offices that periodi-
cally get rocks thrown through their windows, not the
embassies of countries that have never given a cent.
Humanitarian Motives
"Still," it may be (and is) objected, "to mention any

of these things is to take a shortsighted and selfish point
of view. We should give foreign aid for purely
humanitarian reasons. This will enable the poor nations
to conquer their poverty, which they cannot do without
our help. And when they have done so, we will have the
reward of the charitable deed itself. Whether the
recipients are grateful to us or not, our generosity will
redound in the long run to our own self-interest. A

world half rich and half poor is an unsafe world; it
breeds envy, hatred, and war. A fully prosperous world
is a world of peace and good will. Rich nations are
obviously better customers than poor nations. As the
underdeveloped nations develop, American foreign
trade and prosperity must also increase."
The final part of this argument is beyond dispute. It
is to America's long-run interest that all other countries
should be rich and productive, good customers, and
good sources of supply. What is wrong with the argu-
ment is the assumption that government-to-govern-
ment aid is the way to bring about this desired
consummation.
The quickest and surest way to production, prosper-
ity, and economic growth is through private enterprise.
The best way for governments to encourage private
enterprise is to establish justice, to enforce contracts, to
insure domestic peace and tranquility, to protect pri-
vate property, and to secure the blessings of liberty,
including economic libertywhich means to stop put-
ting obstacles in the way of private enterprise. If every
man is free to earn and to keep the fruits of his labor,
his incentives to work and to save, to invent and invest,
to launch new ventures, to try to build a better mouse-
trap than his neighbor, will be maximized. The effort of
each will bring the prosperity of all.
Under such a system more and more citizens will
acquire the capital to lend and invest, and will have the
maximum inducement to lend and invest at home. Very
quickly more and more foreigners will also notice the
investment opportunities in (let us call it) Libertania,
and their money will come in to speed its development.
They will place their funds where they promise to earn
the highest returns consonant with safety. This means
that the funds will go, if the investments are wisely
chosen, where they are most productive. They will go

where they will produce the goods and services most
wanted by productive Libertanians or by foreigners. In
the latter case they will produce the maximum exports,
or "foreign exchange," either to pay off the investment
or to pay for the import of the foreign goods most
needed.
The surest way for a poor nation to stay poor, on the
other hand, is to harass, hobble, and straitjacket private
enterprise or to discourage or destroy it by subsidized
government competition, oppressive taxation, or out-
right expropriation.
Socialism versus Capitalism
Now government-to-government aid rests on social-

istic assumptions and promotes socialism and stagna-
tion, whereas private foreign investment rests on
capitalistic assumptions and promotes private enter-
prise and maximum economic growth.
The egalitarian and socialistic assumptions underly-
ing government-to-government aid are clear. Its main
assumption is that the quickest way to "social" justice
and progress is to take from the rich and give to the
poor, to seize from Peter and give to Paul. The donor
government seizes the aid money from its supposedly
overrich taxpayers; it gives it to the receiving nation on
the assumption that the latter "needs" the moneynot
on the assumption that it will make the most productive
use of the money.
From the very beginning government-to-govern-
ment aid has been on the horns of this dilemma. If on
the one hand it is made without conditions, the funds
are squandered and dissipated and fail to accomplish
their purpose. But if the donor government attempts to
impose conditions, its attempt is immediately resented.

It is called "interfering in the internal affairs" of the
recipient nation, which demands "aid without strings."
In the more than twenty expensive years that the
foreign aid program has been in effect, American offi-
cials have swung uncertainly from one horn of this
dilemma to the otherimposing conditions, dropping
them when criticized, silently watching the aid funds
being misused, then trying to impose conditions again.
But recently American officials seemed bent on follow-
ing the worst possible policythat of imposing condi-
tions, but exactly the wrong conditions.
In 1965 President Johnson announced that our future
foreign aid would go to those countries "willing not
only to talk about basic social change but who will act
immediately on these reforms." But what our aid offi-
cials appeared to have in mind by "basic social change"
was to ask of the countries that receive our grants, not
that they give guarantees of the security of property,
the integrity of their currencies, abstention from crip-
pling government controls, and encouragement to free
markets and free enterprise, but that they move in the
direction of government planning, the paternalistic
state, the redistribution of land, and other share-the-
wealth schemes.
Land Reform Measures
The so-called "land reform" that our government offi-

cials often demanded meant destroying existing large-
scale agricultural enterprises, dividing land into plots
too small for efficient or economic cultivation, turning
them over to untried managers, undermining the prin-
ciples of private property, and opening a Pandora's box
of still more radical demands.
Socialism and welfare programs lead to huge chronic

government deficits and runaway inflation. This is what
has happened in Latin America. In the ten years to the
end of 1968 the currency of the Argentine lost 93 per
cent of its purchasing power; the currency of Chile lost
89 per cent; of Brazil 98 per cent. The practical conse-
quence of this is the expropriation of wealth on a tre-
mendous scale.
Yet a United States senator, recently demanding
"land reform" and ignoring this history, made it a
charge against the rich in these aid-receiving nations
that they do not "invest in their own economies" but
place their funds abroad. What he failed to ask himself
is why the nationals of some of these countries have
been sending their funds abroad or putting them in
numbered accounts in Switzerland. In most cases, he
would have found that it was not only because no at-
tractive private investment opportunities were open to
them at home (because of burdensome controls, oppres-
sive taxes, or government competition), but because
they feared the wiping out of their savings by rapid
depreciation of their home currencies, or even the out-
right confiscation of their visible wealth.
The Benefits?
In the last 23 years foreign aid has made American

taxpayers $171 billion poorer, but it has not made the
recipients anything like that much richer. How much
good has it actually done them? The question is difficult
to answer in quantitative terms, because foreign aid has
often been a relatively minor factor out of the scores of
factors affecting their economies.
But the advocates of foreign aid have had no trouble
in giving glib and confident answers to the question.
Where, as in Western Europe and Japan, our aid has

been followed by dramatic recovery, the recovery has
been attributed wholly to the aid (though just as dra-
matic recoveries occurred in war-torn nations after
World War I when there was no aid program). But
where our aid has not been followed by recovery, or
where recipient nationsfindthemselves in even deeper
economic crises than they were before our aid began,
the aid advocates have simply said that obviously our
aid was not "adequate." This argument is being used
very widely today to urge us to plunge into an even
more colossal aid program.
A careful country-by-country study, however, shows
pretty clearly that in recent years wherever a country
(such as West Germany) has reformed its currency, kept
it sound, and adhered in the main to the principles of
free enterprise, it has enjoyed a miraculous recovery
and growth. But where a country (such as India) has
chosen government planning, has adopted grandiose
socialistic "five-year plans" arbitrarily directing pro-
duction into the wrong lines, has expanded its currency
but kept it for many years overvalued through ex-
change controls, and has put all sorts of restrictions and
harassments in the way of private enterprise and pri-
vate initiative, it has sunk into chronic crises or famine
in spite of billions of dollars in generous foreign aid.
As Charles B. Shuman, president of the American
Farm Bureau Federation, recently put it, the one com-
mon denominator in virtually all the hungry nations has
been "their devotion to a socialist political-economic
systema government-managed economy. The world
does not need to starve if the underdeveloped areas can
be induced to accept a market price system, the incen-
tive method of capital formationcompetitive capital-
ism."
Our conclusion is that government-to-government
The FalLcy Of Foreign Aid 175
foreign aid, as it exists at present, is a deterrent, not a

spur, to world economic prosperity, and even to the
economic progress of the underdeveloped recipients
themselves.
Wasteful Projects
This is true partly because of the very nature of for-

eign aid. By providing easy outside help without cost,
it often fails to encourage self-help and responsibility.
Moreover, government-to-government economic help
almost inevitably goes to government projects, which
frequently means socialized projects, such as grandiose
government steel mills or power dams.
It is true that there are many economic services, such
as streets and roads, water supply, harbors, and sanitary
measures, that are usually undertaken by governments
even in the most "capitalistic" countries, yet which
form an essential basis and part of the process and
structure of all production. Foreign as well as domestic
funds may legitimately go to governments for such pur-
poses. Yet intergovernmental aid is likely to channel a
disproportionate amount of funds even into such pro-
jects. If governments had to depend more on domestic
or foreign private investorsior these funds, less extrava-
gant projects of this nature would be embarked upon.
Private investors, for example, might lend more freely
for toll roads and bridges, and similar projects that
promised to be self-liquidating, than for those that
yielded no monetary return. As a result, the recipient
government's planners would make more effort to put
their roads and bridges where the prospective use and
traffic would prove heavy enough to justify the outlay.
In addition to the conditions in the very nature of
government-to-government aid that make it on net bal-
ance a deterrent rather than a spur to private enterprise

and higher production, there is the attitude of many
American aid officials, who insisted that under-
developed nations should not get more aid unless they
adopted "land reform," planning, and other socialistic
measuresthe very measures that tend to retard eco-
nomic recovery.
Conditions for Private Investment
If our aid program were now tapered off, and the

underdeveloped nations had to seek foreign private
capital for their more rapid development, the case
would be far different. Foreign private investors would
want to see quite different reforms. They would want
assurance (perhaps in some cases even guarantees)
against nationalization or expropriation, against gov-
ernment-owned competition, against discriminatory
laws, against price controls, against burdensome social
security legislation, against import license difficulties
on essential materials, against currency exchange re-
strictions, against oppressive taxes, and against a con-
stantly depreciating currency. They would probably
also want guarantees that they could always repatriate
their capital and profits.
Foreign private investors would not demand the ac-
tive cooperation or an enthusiastic welcome by the gov-
ernment of the host country, but this would certainly
influence their decision considerably. In fact, foreign
private investors, unless the would-be borrowers came
to them, would not demand any conditions at all. They
would place their funds where the deterrents and dis-
couragements were fewest and the opportunities most
inviting.
What the anti-capitalistic mentality seems incapable
of understanding is that the very steps necessary to

create the most attractive climate for foreign invest-
ment would also create the most attractive climate for
domestic investment. The nationals of an under-
developed country, instead of sending their money
abroad for better returns or sheer safekeeping, would
start investing it in enterprise at home. And this domes-
tic investment and reinvestment would begin to make
foreign investment less and less urgent.
It is unlikely that reforms in the direction of free
enterprise will be made by most socialistic and control-
minded countries as long as they can get intergovern-
mental aid without making these reforms. So a tapering
off or phasing out of the American aid program will
probably be necessary before a private foreign invest-
ment program is launched in sufficient volume.
A More Hopeful Alternative
I should like to renew here a suggestion for an interim

program which I put forward in National Review of
May 6,1961: that from now on out, economic foreign aid
be continued solely in the form of loans rather than
grants. These would be hard loans, repayable in dollars.
They would bear interest at the same rate that our own
government was obliged to pay for loans of equal
maturity. They would be repayable over not more than
2
5 to 30 years, like a mortgage. Like a mortgage, they
would preferably be repayable, principal and interest,
in equal monthly or quarterly installments, beginning
immediately after the loan was made.
Such loans would not be urged on any country. The
would-be borrowers would have to apply for them.
They would be entitled to borrow annually, say, any
amount up to the amount they had previously been
receiving from us in grants or combined loans and

grants.
All these requirements would be written into law by
Congress. Congress would also write into law the condi-
tions of eligibility for such loans. Among such condi-
tions might be the following: The borrowing gov-
ernment would have to refrain from any additional so-
cialization or nationalization of industry, or any further
expropriation or seizure of capital, domestic or foreign.
It would undertake to balance its budget, beginning,
say, in the first full fiscal year after receiving the loan.
It would undertake to halt inflation. The borrowing gov-
ernment, for example, might agree not to increase the
quantity of money by more than 5 per cent in any one
year, and not to force its central bank to buy or discount
any increased amount of the government's own securi-
ties. The borrowing government might be required to
dismantle any exchange controls. In brief, the borrow-
ing country and government would be obliged to move
toward the conditions that would be necessary to at-
tract private domestic or foreign capital.
Anticipated Consequences
My guess is that the mere requirement for repayment

of principal and interest, to begin immediately, would
in itself probably reduce applications for aid to about a
third of the amounts we now pay out. The other condi-
tions of eligibility would probably cut the applications
to a sixth or a tenth of these amounts. For the borrowing
governments would have to think twice about the ad-
visability of projects for which they would have to start
paying themselves. Projects would tend to be reduced
to those that were self-liquidating, i. e., demonstrably
economic.
The borrowing nations could not complain that we

were trying to interfere in or to dictate their domestic
economic policies. These would merely be the condi-
tions of eligibility for loans. The borrowing nations
would be neither forced nor urged to borrow from us.
The American administrators of the foreign loan pro-
gram would not be authorized either to dictate or
remove any conditions or to discriminate among bor-
rowers. In any case, their discretion should be very
narrowly circumscribed.
The benefits of such a program would be many and
obvious. It would immediately cut down drastically the
outflow of American funds in foreign aid. Most of the
aid that we granted through such loans would be repaid
with interest. We would not be courting foreign favor.
The would-be borrowers would have to come to us,
openly. We would cease, immediately, to subsidize and
expand foreign socialism.
I should make it clear that I am not proposing such
a program for its own sake, but as a purely transitional
measure to phase out our existing foreign-aid program
with the least possible disturbance, disruption, or re-
crimination. This scaled-down lending program might
run for, say, a maximum of three years. At the end of
that time it could easily be terminated. For meanwhile
the borrowing governments, and particularly private
enterprises in their respective countries, would have
created an attractive climate, and would have become
attractive media, for both domestic and foreign private
investment.
In such a revitalized capitalistic climate, the improve-
ment in world economic conditions might even become
spectacular.
CHAPTER 22
Government Unlimited
SINCE THE OUTBREAK OF WORLD WAR I IN 1914,

there has been an ominous growth in governmental
power and intervention not only in the United States
but practically all over the world. Woodrow Wilson
once declared: "The history of liberty is the history of
limitations of governmental power, not the increase of
it." This ought to be self-evident. The greater the area
of human conduct controlled by government, the
smaller the area left to the individual's own control. The
greater the government's power to forbid and restrict,
the smaller the individual's power to choose for himself.
The growth of governmental power may be mea-
sured in terms of dollars spent, bureaucrats employed,
or spheres of activity controlled.
Government Unlimited 181
In 1914 the Federal Government was spending only

$725 million a year; in fiscal 1970 it is spending $195
billion a year269 times as much.
In 1967 the number of Federal civilian employees
totaled 2,877,000; the number of State and local em-
ployees 8,898,000, bringing the number employed in all
government units up to 11,775,000.
In 1954 the Hoover Commission found that the Fed-
eral Government embraced no fewer than 2,133 differ-
ent functioning agencies, bureaus, departments, and
divisions/As Federal expenditures have more than dou-
bled since 1954, and the number of Federal employees
increased by 25 per cent, the present agency count may
now exceed 2,500.
This estimate would be warranted by the known pro-
liferation of Great Society agencies. One calculation, in
1967, counted more than 100 new Federal programs
enacted by Congress since 1955; but this count was soon
left far behind. In December, 1968, a departing White
House aide, Joseph A. Califano, Jr., described by the
New York Times as "President Johnson's man Friday in
nurturing the Great Society," said in an interview that
President-elect Richard M. Nixon would find that a
tenfold growth had occurred in government activities
since he left the government in January, 1961. "There
were about 45 domestic social programs when the Ei-
senhower Administration ended," said Mr. Califano.
"Now there are no less than 435."
Even this count had been exceeded earlier in 1968,
when Democratic Congressman William V. Roth, Jr.,
and his staff were able to identify 1,571 programs, in-
cluding 478 in the Department of Health, Education,
and Welfare alone, but concluded that "no one, any-
where, knows exactly how many Federal programs
there are." Even a prominent former interventionist
confessed himself appalled by the "fantastic labyrinth
of welfare programs" and the way in which the swift

growth of Federal power is diminishing the signifi-
cance of the individual citizen.
The growth of government power progressively
breeds the growth of still more government power. The
86,000 permanent employees in the Department of
Agriculture, to take but a single instance, all have a vital
full-time economic interest in proving that the particu-
lar subsidies and controls they were hired to formulate
and enforce should be continued and expanded. What
chance does the individual disinterested citizen have
even if he has time to master the facts about the agricul-
tural programsin arguing against this particular
bureaucratic army of 86,ooo?
The life of the citizen as worker, employer, enter-
priser, investor, or consumer is controlled by scores of
Federal agencies. Outstanding among them are the
Federal Trade Commission, the Securities and Ex-
change Commission, the Internal Revenue Service, the
Interstate Commerce Commission, the Food and Drug
Administration, the Federal Communications Commis-
sion, the National Labor Relations Board. All these
agencies issue rules and regulations, grant licenses, is-
sue cease-and-desist orders, award damages, and com-
pel individuals and corporations to do this or refrain
from that. They often combine the functions of legisla-
tors, prosecutors, judges, juries, administrators. Their
decisions are sometimes capricious, arbitrary, and
unauthorized even by existing law. Yet when they in-
flict injury on corporations or individuals, or deprive
them of constitutional liberties and legal rights, appeal
to the courts is often difficult, costly or impossible.
The steady expansion of governmental powers also
breeds nepotism and corruption in government and
helps those already in power to entrench themselves
to prolong or perpetuate their hold on power. A New
Government Unlimited 183
York Times survey of patronage in the city and State
(June 17, 1968) found that "patronage has vastly ex-
panded in the last several decades because of the tre-
mendous growth of government, spiraling government
spending, and the expansion of government's discre-
tionary powers to regulate, control and supervise pri-
vate industry."
Yet arbitrary government power is being multiplied
daily by the now practically unchallenged assumption
that wherever there is any problem of any kind to be
solved, government is the agency to step in and solve
it. Government lawmakers or officials either already
have or demand the power to tell us just how much oil
or sugar we may import, just how many acres we may
plant to what crops, just how foodstuffs should be
packed and labelled, just how steel and copper and
drugs should be priced, just what interest rates should
be charged and how they should be calculated, just how
automobiles should be made, just what kind of artificial
eyes should be permitted, just what one group of peo-
ple must do and another group must not do, just what
groups should be subsidized, and by how much, and just
which groups should be forced to subsidize them.
Should anybody be surprised that there has been an
appalling growth of crime, an outbreak of riots and a
breakdown of law enforcement? The more things a gov-
ernment undertakes to do, the fewer things it can do
competently. When the government tries to do every-
thing it must do everything badly.
The essential function of the State is to maintain
peace, justice, law, and order, and to protect the in-
dividual citizen against aggression, violence, theft, and
fraud. More than a century ago Herbert Spencer was
pointing out that "in assuming any office besides its
essential one, the State begins to lose the power of
fulfilling its essential one." As more and more functions
are assumed by the State, the truth of this becomes

more and more obvious.
This brings us back once again to the warning of the
Swedish economist, Gustav Cassel, more than 30 years
ago:
The leadership of the state in economic affairs, which ad-

vocates of Planned Economy want to establish, is . . . neces-
sarily connected with a bewildering mass of governmental
interferences of a steadily cumulative nature. The arbitrari-
ness, the mistakes, and the inevitable contradictions of such
a policy will, as daily experience shows, only strengthen the
demand for a more rational coordination of the different
measures and, therefore, for unified leadership. For this rea-
son Planned Economy will always tend to develop into Dic-
tatorship.
In more concrete terms, the process usually runs like

this: A hundred welfare programs, spending more and
more billions, lead to chronic budget deficits, which
lead to increase paper-money issues, which lead to
higher prices. The government then denounces the
sellers as "profiteers" and starts fixing ceilings on in-
dividual prices. Next it is led inevitably into the impos-
sible task of trying to fix all prices and wages, which
leads it to set up allocations and quotas of production
for each producer and rationing for each consumer, and
so to control of everybody's means of livelihood and
survival.
And as Alexander Hamilton once put it: "Power over
a man's subsistence is power over his will."
CHAPTER 23
From Spencer's 1884 to

Orwell's 1984
IN 1884, HERBERT SPENCER WROTE WHAT QUICKLY

became a celebrated book, The Man Versus The State.
The book is seldom referred to now, and gathers dust
on library shelvesif, in fact, it is still stocked by many
libraries. Spencer's political views are regarded by most
present-day writers, who bother to mention him at all,
as "extreme laissez faire," and hence "discredited."
But any openminded person who takes the trouble
today to read or re-read The Man Versus The State will
probably be startled by two things. The first is the un-
canny clairvoyance with which Spencer foresaw what
the future encroachments of the State were likely to be
on individual liberty, above all in the economic realm.
The second is the extent to which these encroachments
had already occurred in 1884, the year in which he was

writing.
The present generation has been brought up to be-
lieve that government concern for "social justice" and
for the plight of the needy was something that did not
even exist until the New Deal came along in 1933. The
ages prior to that have been pictured as periods when
no one "cared," when laissez faire was rampant, when
everybody who did not succeed in the cutthroat com-
petition that was euphemistically called free enterprise
but was simply a system of dog-eat-dog and the-devil-
take-the-hindmostwas allowed to starve. And if the
present generation thinks this is true even of the Nine-
teen Twenties, it is absolutely convinced that this was
so in the Eighteen Eighties, which it would probably
regard as the very peak of the prevalence of laissez
faire.
Yet the new reader's initial astonishment when he
starts Spencer's book may begin to wear off before he
is halfway through, because one cause for surprise ex-
plains the other. All that Spencer was doing was to
project or extrapolate the legislative tendencies exist-
ing in the Eighteen Eighties into the future. It was
because he was so clearsightedly appalled by these ten-
dencies that he recognized them so much more sharply
than his contemporaries, and saw so much more clearly
where they would lead if left unchecked.
Even in his Preface to The Man Versus The State he
pointed out how "increase of freedom in form" was
being followed by "decrease of freedom in fact. . . .
Regulations have been made in yearly growing numbers,

restraining the citizen in directions where his actions were
previously unchecked, and compelling actions which previ-
ously he might perform or not as he liked; and at the same
time heavier public burdens . . . have further restricted his
From Spencer's 1884 to Orwell's lg84 187
freedom, by lessening that portion of his earnings which he

can spend as he pleases, and augmenting the portion taken
from him to be spent as public agents please.
In his first chapter, "The New Toryism," Spencer

contends that "most of those who now pass as Liberals,
are Tories of a new type." The Liberals of his own day,
he points out, had already "lost sight of the truth that
in past times Liberalism habitually stood for individual
freedom versus State-coercion."
So the complete Anglo-American switch of refer-
ence, by which a "liberal" today has come to mean
primarily a State interventionist, had already begun in
1884. Already "plausible proposals" were being made
"that there should be organized a system of compulsory
insurance, by which men during their early lives shall
be forced to provide for the time when they will be
incapacitated." Here is already the seed of the Ameri-
can Social Security Act of 1935.
Spencer also pays his respects to the anti-libertarian
implications of an increasing tax burden. Those who
impose additional taxes are saying in effect: "Hitherto
you have been free to spend this portion of your earn-
ings in any way which pleased you; hereafter you shall
not be free to spend it, but we will spend it for the
general benefit."
Spencer next turns to the compulsions that unions
were even then imposing on their members, and asks:
"If men use their liberty in such a way as to surren-
der their liberty, are they thereafter any the less
slaves?"
In his second chapter, "The Coming Slavery," Spen-
cer calls attention to the existence of what he calls
"political momentum"the tendency of State inter-
ventions and similar political measures to increase and
accelerate in the direction in which they have already
been set going. Americans have become only too famil-

iar with this momentum in the last few years.
Spencer illustrates: "The blank form of an inquiry
daily made is'We have already done this; why should
we not do that?' " "The buying and working of tele-
graphs by the State" (which already operated them in
England when he wrote), he continued, "is made a
reason for urging that the State should buy and work
the railways." And he went on to quote the demands of
one group that the State should take possession of the
railways, "with or without compensation."
The British State did not buy and work the railways
until 65 years later, in 1948, but it did get around to it,
precisely as Spencer feared.
It is not only precedent that prompts the constant
spread of interventionist measures, Spencer points out,
but also the necessity which arises for supplementing in-

effective measures, and for dealing with the artificial evils
continually caused. Failure does not destroy faith in the agen-
cies employed, but merely suggests more stringent use of
such agencies or wider ramifications of them.
One illustration he gives is how "the evils produced

by compulsory charity are now proposed to be met by
compulsory insurance." Today, in America, one could
point to scores of examples (from measures to cure "the
deficit in the balance of payments" to the constant mul-
tiplication of measures to fight the government's "war
on poverty") of interventions mainly designed to
remove the artificial evils brought about by previous
interventions.
Everywhere, Spencer goes on, the tacit assumption is
that "government should step in whenever anything is
not going right. . . . The more numerous governmental
interventions become . . . the more loud and perpetual
the demands for interventions." Every additional relief

measure raises hopes of further ones:
The more numerous public instrumentalities become, the
more is there generated in citizens the notion that everything
is to be done for them, and nothing by them. Every genera-
tion is made less familiar with the attainment of desired ends
by individual actions or private agencies; until, eventually,
governmental agencies come to be thought of as the only
available agencies.
"All socialism," Spencer concludes, "involves slav-

ery. . . . That which fundamentally distinguishes the
slave is that he labors under coercion to satisfy an-
other's desires." The relation admits of many grada-
tions. Oppressive taxation is a form of slavery of the
individual to the community as a whole. "The essential
question isHow much is he compelled to labor for
other benefit than his own, and how much can he labor
for his own benefit?"
Even Spencer would probably have regarded with
incredulity a prediction that in less than two genera-
tions England would have rates of income tax rising
above 90 per cent, and that many an energetic and
ambitious man, in England and the United States,
would be forced to spend more than half his time and
labor working for the support of the community, and
allowed less than half his time and labor to provide for
his own family and himself.
Today's progressive income tax provides a quantita-
tive measurement of the relative extent of a man's eco-
nomic liberty and servitude.
Those who think that public housing is an entirely
new development will be startled to hear that the be-
ginnings of itas well as some of its harmful conse-
quenceswere already present in 1884:
Where municipal bodies turn house-builders [wrote Spen-

cer], they inevitably lower the values of houses otherwise
built, and check the supply of more.. . . The multiplication
of houses, and especially small houses, being increasingly
checked, there must come an increasing demand upon the
local authority to make up for the deficient supply.. . . And
then when in towns this process has gone so far as to make
the local authority the chief owner of houses, there will be a
good precedent for publicly providing houses for the rural
population, as proposed in the Radical program, and as urged
by the Democratic Federation [which insists on] the compul-
sory construction of healthy artisans' and agricultural labor-
ers' dwellings in proportion to the population.
One State intervention Spencer did not foresee was

the future imposition of rent controls, which make it
unprofitable for private persons to own, repair, or reno-
vate old rental housing or to put up new. The conse-
quences of rent control provoke the indignant charge
that "private enterprise is simply not doing the job" of
providing enough housing. The conclusion is that
therefore the government must step in and take over
that job.
What Spencer did expressly fear, in another field,
was that public education, providing gratis what pri-
vate schools had to charge for, would in time destroy
the private schools. But of course he did not foresee that
eventually the government would provide free tuition
even in tax-supported colleges and universities, thus
more and more threatening the continuance of private
colleges and universitiesand so tending more and
more to produce a uniform conformist education, with
college faculties ultimately dependent for their jobs on
the government, and so developing an economic inter-
est in professing and teaching a statist, pro-govern-
ment, and socialist ideology. The tendency of
government-supported education must be finally to
From Spencers 1884 to Orwell's lg84 191
achieve a government monopoly of education.

As the "liberal" readers of 1970 may be shocked to
learn that the recent State interventions that they re-
gard as the latest expressions of advanced and compas-
sionate thought were anticipated in 1884, so the statist
readers of Spencer's day must have been shocked to
learn from him how many of the latest State interven-
tions of 1884 were anticipated in Roman times and in
the Middle Ages. For Spencer reminded them, quoting
an historian, that in Gaul, during the decline of the
Roman Empire, "so numerous were the receivers in
comparison with the payers, and so enormous the
weight of taxation, that the laborer broke down, the
plains became deserts, and woods grew where the
plough had been."
Spencer reminded his readers also of the usury laws
under Louis XV in France, which raised the rate of
interest "from five to six when intending to reduce it to
four." He reminded them of the laws against "forestall-
ing" (buying up goods in advance for later resale), also
in early France. The effect of such laws was to prevent
anyone from buying "more than two bushels of wheat
at market," which prevented traders and dealers from
equalizing supplies over time, thereby intensifying
scarcities. He reminded his readers also of the measure
which, in 1315, to diminish the pressure of famine, pre-
scribed the prices of foods, but which was later re-
pealed after it had caused the entire disappearance of
various foods from the markets. He reminded them,
again, of the many endeavors to fix wages, beginning
with the Statute of Laborers under Edward III (1327-
77). And still again, of Statute 35 of Edward III, which
aimed to keep down the price of herring (but was soon
repealed because it raised the price). And yet again,
of the law of Edward III, under which innkeepers
at seaports were sworn to search their guests "to
prevent the exportation of money or plate."

This last example will remind Americans uneasily of
the present prohibition of private gold holdings and
gold export, and of the Johnson Administration's
proposal to put a punitive tax on foreign travel, as well
as the actual punitive tax that it did put on foreign
investment. Let us add the still existing prohibitions
even by allegedly advanced European nations against
taking more than a tiny amount of their local paper
currency out of the country!
I come to one last specific parallel between 1884 and
the present. This concerns slum clearance and urban
renewal. The British government of Spencer's day re-
sponded to the existence of wretched and over
crowded housing by enacting the Artisans' Dwellings
Acts. These gave to local authorities powers to pull
down bad houses and provide for the building of good
ones:
What have been the results? A summary of the operations

of the Metropolitan Board of Works, dated December 21,
1883, shows that up to last September it had, at a cost of a
million and a quarter to ratepayers, unhoused 21,000 persons
and provided houses for 12,000the remaining 9,000 to be
hereafter provided for, being, meanwhile, left houseless. This
is not all. . . . Those displaced. . .form a total of nearly 11,000
artificially made homeless, who have had to find corners for
themselves in miserable places that were already overflow-
ing.
Those who are interested in a thorough study of the

present-day parallel to this are referred to Professor
Martin Anderson's The Federal Bulldozer (Ml. I. T. Press,
1964; McGraw-Hill paperback, 1967). I quote just one
short paragraph from his findings:
The Federal urban renewal program has actually ag-

gravated the housing shortage for low-income groups. From
1950 to i960, 126,000 dwelling units, most of them low-rent
ones, were destroyed. This study estimates that the number
of new dwelling units constructed is less than one-fourth of
the number demolished, and that most of the new units are
high-rent ones. Contrast the net addition of millions of stand-
ard dwelling units to the housing supply by private enter-
prise with the minute construction effort of the Federal
urban renewal program. [P. 229]
There is an eloquent paragraph in Spencer's book

reminding his readers of the Eighties of what they did
not owe to the State:
It is not to the State that we owe the multitudinous useful

inventions from the spade to the telephone; it is not the State
which made possible extended navigation by a developed
astronomy; it was not the State which made the discoveries
in physics, chemistry, and the rest, which guide modern
manufacturers; it was not the State which devised the ma-
chinery for producing fabrics of every kind, for transferring
men and things from place to place, and for ministering in a
thousand ways to our comforts. The world-wide transactions
conducted in merchants' offices, the rush of traffic filling our
streets, the retail distributing system which brings every-
thing within easy reach and delivers the necessaries of life
daily at our doors, are not of governmental origin. All these
are results of the spontaneous activities of citizens, separate
or grouped.
Our present-day statists are busily trying to change

all this. They are seizing billions of additional dollars
from the taxpayers to turn them over for "scientific
research." By this compulsorily subsidized government
competition they are discouraging and draining away
the funds for private scientific research; and they
threaten to make research, in time, a government

monopoly. But whether this will result in more scientific
progress in the long run is doubtful. True, enormously
more money is being spent on "research," but it is be-
ing diverted in questionable directionsin military re-
search; in developing greater and greater super-bombs
and other weapons of mass destruction and mass an-
nihilation; in planning supersonic passenger airplanes
developed on the assumption that civilians must get to
their European or Caribbean vacation spots at 1,200 or
1,800 miles an hour, instead of a mere 600, no matter
how many eardrums or windows of groundlings are
shattered in the process; andfinally,in such Buck Rog-
ers stunts as landing men on the moon (however breath-
taking that achievement) or even on Mars. It is not what
scientists think is most important or urgent, but what
politicians decide will most impress and astound the
masses, that determines the direction of research.
It is fairly obvious that all this will involve enormous
waste; that government bureaucrats will be able to dic-
tate who gets the research funds and who doesn't, and
that this choice will depend either upon fixed arbitrary
qualifications like those determined by Civil Service
examinations (hardly the way to find the most original
minds), or upon the grantees keeping in the good graces
of the particular government appointee in charge of the
distribution of grants.
But our welfare statists seem determined to put us in
a position where we will be dependent on government
even for our future scientific and industrial progress
or in a position where they can at least plausibly argue
that we are so dependent.
Spencer next goes on to show that the kind of State
intervention he is deploring amounts not merely to an
abridgment but a basic rejection of private property: a
"confusion of ideas, caused by looking at one face only
of the transaction, may be traced throughout all the
legislation which forcibly takes the property of this man

for the purpose of giving gratis benefits to that man."
The tacit assumption underlying all these acts of redis-
tribution is that:
No man has any claim to his property, not even to that

which he has earned by the sweat of his brow, save by the
permission of the community; and that the community may
cancel the claim to any extent it thinksfit.No defense can be
made for this appropriation of A's possessions for the benefit
of B, save one which sets out with the postulate that society
as a whole has an absolute right over the possessions of each
member.
In the final chapter (just preceding a Postscript)

Spencer concluded: "The function of Liberalism in the
past was that of putting a limit to the powers of kings.
The function of true Liberalism in the future will be
that of putting a limit to the power of Parliaments."
In endorsing some of the arguments in Spencer's The

Man Versus the State, and in recognizing the penetra-
tion of many of his insights and the remarkable ac-
curacy of his predictions of the political future, we need
not necessarily subscribe to every position that he took.
The very title of Spencer's book was in one respect
unfortunate. To speak of "the man versus the state" is
to imply that the State, as such, is unnecessary and evil.
The State, of course, is absolutely indispensable to the
preservation of law and order, and the promotion of
peace and social cooperation. What is unnecessary and
evil, what abridges the liberty and threatens the true
welfare of the individual, is the State that has usurped
excessive powers and grown beyond its legitimate
functionsthe super-State, the socialist State, the
redistributive State, in brief, the ironically misnamed
"Welfare State."
Again, we need not accept Spencer's own "first prin-

ciple" (as laid down in his Social Statics in 1850) for
determining the function of law and the limits of the
State: "Every man has freedom to do all he wills, pro-
vided he infringes not the equal freedom of any other
man." Taken literally, this could be interpreted to mean
that a thug has the right to stand at a corner with a club
and beat over the head everybody who comes round it,
provided he acknowledges the right of any of his vic-
tims to do the same.
At least, Spencer's principle seems to permit any
amount of mutual annoyance except constraint. It is
entirely true, as Locke pointed out, that "the end of the
law is, not to abolish or restrain, but to preserve and
enlarge freedom." But the only short formula we can
use to describe the function of the law would be that it
should maximize liberty, order, and happiness by mini-
mizing constraint, violence, and harm. The detailed ap-
plication of any such simple formula presents many
difficulties and problems. We need not go into them
here, except to say that the Common Law, developed
from ancient custom and a hundred thousand decisions
of judges, has been solving these problems through the
ages, and that in our age jurists and economists have
been further refining these decisions.
But Spencer was certainly right in the main thrust of
his argument, which was essentially that of Adam Smith
and other classical liberals, that the two indispensable
functions of government are first, to protect the nation
against aggression from any other nation, and second,
to protect the individual citizen from the aggression,
injustice, or oppression of any other citizenand that
every extension of the functions of government beyond
these two primary duties should be scrutinized with
jealous vigilance.
Another issue on which we need not necessarily
agree with Spencer was his complete rejection of State

relief, based on an inflexible and doctrinaire applica-
tion of his doctrine of "survival of the fittest." He was
quite right in quoting approvingly from a report of the
old Poor Law Commissioners: "We find, on the one
hand, that there is scarcely one statute connected with
the administration of public relief which has produced
the effect designed by the legislature, and that the
majority of them have created new evils, and ag-
gravated those which they were intended to prevent."
This judgment could be obviously applied with even
greater force to the enormous proliferation, expansion,
and amendments of relief measures today.
Yet though the problem of the relief of poverty and
misfortune has not been solved, we cannot callously
deny that the problem exists. Nor can we leave its solu-
tion entirely to private charity. To cite an extreme ex-
ample, but unfortunately one of daily occurrence: If a
child is run over in the street or if two cars crash, there
ought to be the quickest possible provision for taking
and admitting the victim or victims immediately to a
hospital, if necessary, before there has been time to
determine whether or not they can afford to pay for
doctor or hospital service, and without depending on
the offer of some private good Samaritan, who may or
may not happen to be on the scene, to guarantee pay-
ment of the hospital bill. There should be governmental
provision to meet all such emergencies.
The great problem is, of course, how to provide such
emergency relief without allowing it to degenerate into
permanent relief; how to relieve the extreme distress of
those who are poor through little or no fault of their
own, without supporting in idleness those who are poor
mainly or entirely through fault of their own. To state
the problem in another way (as I have earlier done):
How can we mitigate the penalties of failure and mis-
fortune without undermining the incentives to effort

and success? In what precise cases and to what precise
extent is it the State's duty to play a role in the solution
of this problem? And what exactly should that role be?
Over three thousand years of history this problem has
never been satisfactorily solved by any government
anywhere. I do not pretend to know the precise solu-
tion. But the two-sidedness of the problem of relieving
suffering without destroying incentive must be frankly
recognized by both "conservatives" and "liberals," and
there is at least a gain in stating it candidly and clearly.
Yet whatever reservations or qualifications we may
have, we are deeply indebted to Herbert Spencer for
recognizing with a sharper eye than any of his contem-
poraries, and warning them against, "the coming slav-
ery" toward which the State of their own time was
drifting, and toward which we are more swiftly drifting
today.
It is more than a grim coincidence that Spencer was
warning of the coming slavery in 1884, and that George
Orwell, in our time, has predicted that the full consum-
mation of this slavery will be reached in 1984, exactly
one century later.
CHAPTER 24
The Task Confronting

Libertarians
FROM TIME TO TIME OVER THE LAST THIRTY YEARS,

after I have talked or written about some new restric-
tion on human liberty in the economic field, some new
attack on private enterprise, I have been asked in per-
son or received a letter asking, "What can / do"to
fight the inflationist or socialist trend? Other writers or
lecturers, I find, are often asked the same question.
The answer is seldom an easy one. For it depends on
the circumstances and ability of the questionerwho
may be a businessman, a housewife, a student, inform-
ed or not, intelligent or not, articulate or not. And the
answer must vary with these presumed circum-
stances.
The general answer is easier than the particular an-
swer. So here I want to write about the task now con-

fronting all libertarians considered collectively.
This task has become tremendous, and seems to grow
greater every day. A few nations that have already gone
completely Communist, like Soviet Russia and its satel-
lites, try, as a result of sad experience, to draw back a
little from complete centralization, and experiment
with one or two quasi-capitalist techniques; but the
world's prevailing driftin more than 100 out of the 111
or so nations and mini-nations that are now members of
the International Monetary Fundis in the direction of
increasing socialism and controls.
The task of the tiny minority that is trying to combat
this socialistic drift seems nearly hopeless. The war
must be fought on a thousand fronts, and the true liber-
tarians are grossly outnumbered on practically all these
fronts.
In a thousand fields the welfarists, statists, socialists,
and interventionists are daily driving for more restric-
tions on individual liberty; and the libertarians must
combat them. But few of us individually have the time,
energy, and special knowledge in more than a handful
of subjects to be able to do this.
One of our gravest problems is that we find ourselves
confronting the armies of bureaucrats who already con-
trol us, and who have a vested interest in keeping and
expanding the controls they were hired to enforce.
A Growing Bureaucracy
I pointed out in Chapter 22 that the Federal Govern-

ment now embraces some 2,500 different functioning
agencies, bureaus, departments, and divisions. Federal
full-time permanent civilian employees are estimated
to reach 2,693,508 as of June 30, 1970.
The Task Confronting Libertarians 201
And we know, to take a few specific examples, that

of these bureaucrats 16,800 administer the programs of
the Department of Housing and Urban Development,
106,700 the programs (including Social Security) of
the Department of Health, Education, and Welfare,
and 152,300 the programs of the Veterans Administra-
tion.
If we want to look at the rate at which parts of this
bureaucracy have been growing, let us refer again to
the Department of Agriculture. In 1929, before the
United States Government started crop controls and
price supports on an extensive scale, there were 24,000
employees in that Department. Today, counting part-
time workers, there are 120,000, five times as many, all
of them with a vital economic interestto wit, their
own jobsin proving that the particular controls they
were hired to formulate and enforce should be con-
tinued and expanded.
What chance does the individual businessman, the
occasional disinterested professor of economics, or
columnist, or editorial writer, have in arguing against
the policies and actions of this 120,000-man army, even
if he has had time to learn the detailed facts of a par-
ticular issue? His criticisms are either ignored or
drowned out in the organized counterstatements.
This is only one example out of scores. A few of us
may suspect that there is much unjustified or foolish
expenditure in the United States Social Security pro-
gram, or that the unfunded liabilities already under-
taken by the program (one authoritative estimate of
these exceeds a trillion dollars) may prove to be unpay-
able without a gross monetary inflation. A handful of us
may suspect that the whole principle of compulsory
government old age and survivor's insurance is open to
question. But there are some 100,000 full-time perma-
nent employees in the Department of Health, Educa-
tion, and Welfare to dismiss all such fears as foolish,

and to insist that we are still not doing nearly enough
for our older citizens, our sick, and our widows and
orphans.
And then there are the millions of those who are
already on the receiving end of these payments, who
have come to consider them as an earned right, who of
course find them inadequate, and who are outraged at
the slightest suggestion of a critical re-examination of
the subject. The political pressure for constant exten-
sion and increase of these benefits is almost irresistible.
And even if there weren't whole armies of govern-
ment economists, statisticians, and administrators to an-
swer him, the lone disinterested critic, who hopes to
have his criticism heard and respected by other dis-
interested and thoughtful people, finds himself
compelled to keep up with appalling mountains of
detail.
Too Many Cases to Follow
The National Labor Relations Board, for example,

hands down hundreds of decisions every year in pass-
ing on "unfair" labor practices. In the fiscal year 1967
it passed on 803 cases "contested as to the law and the
facts." Most of these decisions are strongly biased in
favor of the labor unions; many of them pervert the
intention of the Taft-Hartley Act that they ostensibly
enforce; and in some of them the Board arrogates to
itself powers that go far beyond those granted by the
Act. The texts of many of these decisions are very long
in their statement of facts or alleged facts and of the
Board's conclusions. How is the individual economist or
editor to keep abreast of the decisions and to comment
informedly and intelligently on those that involve an
important principle or public interest?

Or take again such major agencies as the Federal
Trade Commission, the Securities and Exchange Com-
mission, the Food and Drug Administration, the Fed-
eral Communications Commission. These agencies, as I
pointed out in Chapter 22, often combine the functions
of legislators, prosecutors, judges, juries, and adminis-
trators.
Yet how can the individual economist, student of
government, journalist, or anyone interested in defend-
ing or preserving liberty, hope to keep abreast of this
Niagara of decisions, regulations, and administrative
laws? He may sometimes consider himself lucky to be
able to master in many months the facts concerning one
of these decisions.
Professor Sylvester Petro of New York University has
written a full book on the Kohler strike and another full
book on the Kingsport strike, and the public lessons to
be learned from them. Professor Martin Anderson has
specialized in the follies of urban renewal programs.
But how many are there among those of us who call
ourselves libertarians who are willingor have the time
to do this specialized and microscopic but indispen-
sable research?
In July, 1967, the Federal Communications Commis-
sion handed down an extremely harmful decision or-
dering the American Telephone and Telegraph
Company to lower its interstate rateswhich were al-
ready 20 per cent lower than in 1940, though the gen-
eral price level since that time had gone up 163 per
cent. In order to write a single editorial or column on
this (and to feel confident he had his facts straight), a
conscientious journalist had to study, among other
material, the text of the decision. That decision con-
sisted of 114 single-spaced typewritten pages.
. . . and Schemes for Reform
We libertarians have our work cut out for us.

In order to indicate further the dimensions of this
work, it is not merely the organized bureaucracy that
the libertarian has to answer; it is the individual private
zealots. A day never passes without some ardent re-
former or group of reformers suggesting some new gov-
ernment intervention, some new statist scheme to fill
some alleged "need" or relieve some alleged distress.
They accompany their scheme by elaborate statistics
that supposedly prove the need or the distress that they
want the taxpayers to relieve. So it comes about that the
reputed "experts" on relief, unemployment insurance,
Social Security, Medicare, subsidized housing, foreign
aid, and the like are precisely the people who are ad-
vocating more relief, unemployment insurance, Social
Security, Medicare, subsidized housing, foreign aid,
and all the rest.
Let us come to some of the lessons we must draw from
all this.
Specialists for the Defense
We libertarians cannot content ourselves merely with

repeating pious generalities about liberty, free enter-
prise, and limited government. To assert and repeat
these general principles is absolutely necessary, of
course, either as prologue or conclusion. But if we hope
to be individually or collectively effective, we must in-
dividually master a great deal of detailed knowledge,
and make ourselves specialists in one or two lines, so
that we can show how our libertarian principles apply
in special fields, and so that we can convincingly dis-
pute the proponents of statist schemes for public hous-
ing, farm subsidies, increased relief, bigger Social

Security benefits, bigger Medicare, guaranteed in-
comes, bigger government spending, bigger taxation,
especially more progressive income taxation, higher
tariffs or import quotas, restrictions or penalties on for-
eign investment and foreign travel, price controls,
wage controls, rent controls, interest rate controls, more
laws for so-called "consumer protection," and still
tighter regulations and restrictions on business every-
where.
This means, among other things, that libertarians
must form and maintain organizations not only to pro-
mote their broad principlesas do, for example, the
Foundation for Economic Education at Irvington-on-
Hudson, N. Y., the American Institute for Economic
Research at Great Barrington, Mass., and the American
Economic Foundation in New York Citybut to pro-
mote these principles in special fields. I am thinking, for
example, of such excellent existing specialized organi-
zations as the Citizens Foreign Aid Committee, the
Economists' National Committee on Monetary Policy,
the Tax Foundation, and so on.
We need not fear that too many of these specialized
organizations will be formed. The real danger is the
opposite. The private libertarian organizations in the
United States are probably outnumbered ten to one by
Communist, socialist, statist, and other left-wing organi-
zations that have shown themselves to be only too effec-
tive.
And I am sorry to report that almost none of the
old-line business associations that I am acquainted with
are as effective as they could be. It is not merely that
they have been timorous or silent where they should
have spoken out, or even that they have unwisely com-
promised. Recently, for fear of being called ultraconser-
vative or reactionary, they have been supporting
measures harmful to the very interests they were

formed to protect. Several of them, for example, came
out in favor of the Johnson Administration's tax increase
on corporations in 1968, because they were afraid to say
that that Administration ought rather to have slashed its
profligate welfare spending.
The sad fact is that today most of the heads of big
businesses in America have become so confused or in-
timidated that, so far from carrying the argument to the
enemy, they fail to defend themselves adequately even
when attacked. The pharmaceutical industry, subjected
since 1962 to a discriminatory law that applies question-
able and dangerous legal principles which the govern-
ment has not yet dared to apply in otherfields,has been
too timid to present its own case effectively. And the
automobile makers, attacked by a single zealot for turn-
ing out cars "unsafe at any speed," handled the matter
with an incredible combination of neglect and inepti-
tude that brought down on their heads legislation harm-
ful not only to the industry but to the driving public.
The Timidity of Businessmen
It is impossible to tell today where the anti-business

sentiment in Washington, plus the itch for more gov-
ernment control, is going to strike next. In 1967 Con-
gress allowed itself to be stampeded into a dubious
extension of Federal power over intrastate meat sales.
In 1968 it passed a "truth-in-lending" law, forcing lend-
ers to calculate and state interest rates the way Federal
bureaucrats want them calculated and stated. When, in
January, 1968, President Johnson suddenly announced
that he was prohibiting American business from making
further direct investments in Europe, and that he was
restricting them elsewhere, most newspapers and busi-
nessmen, instead of raising a storm of protest against

these unprecedented invasions of our liberties, de-
plored their "necessity" and hoped they would be only
"temporary."
The very existence of the business timidity that al-
lows these things to happen is evidence that govern-
ment controls and power are already excessive.
Why are the heads of big business in America so
timid? That is a long story, but I will suggest a few
reasons: (1) They may be entirely or largely dependent
on government war contracts. (2) They never know
when or on what grounds they will be held guilty of
violating the antitrust laws. (3) They never know when
or on what grounds the National Labor Relations Board
will hold them guilty of unfair labor practices. (4) They
never know when their personal income tax returns will
be hostilely examined, and they are certainly not confi-
dent that such an examination, and its findings, will be
entirely independent of whether they have been per-
sonally friendly or hostile to the Administration in
power.
It will be noticed that the governmental actions or
laws of which businessmen stand in fear are actions or
laws that leave a great deal to administrative discretion.
Discretionary administrative law should be reduced to
a minimum; it breeds bribery and corruption, and is
always potentially blackmail or blackjack law.
Schumpeter's Indictment
Libertarians are learning to their sorrow that big

businessmen cannot necessarily be relied upon to be
their allies in the battle against extension of govern-
mental encroachments. The reasons are many. Some-
times businessmen will advocate tariffs, import quotas,
subsidies, and restrictions of competition, because they

think, rightly or wrongly, that these government inter-
ventions will be in their personal interest, or in the
interest of their companies, and are not concerned
whether or not they may be at the expense of the gen-
eral public. More often, I think, businessmen advocate
these interventions because they are honestly con-
fused, because they just don't realize what the actual
consequences will be of the particular measures they
propose, or fail to perceive the cumulative debilitating
effects of growing restrictions on human liberty.
Perhaps most often of all, however, businessmen to-
day acquiesce in new government controls out of sheer
timidity.
A generation ago, in his pessimistic book, Capitalism,
Socialism and Democracy (1942), the late Joseph A.
Schumpeter maintained the thesis that "in the capital-
istic system there is a tendency toward self-destruc-
tion." And as one evidence of this he cited the
"cowardice" of big businessmen when facing direct
attack:
They talk and pleador hire people to do it for them; they

snatch at every chance of compromise; they are ever ready
to give in; they never put up a fight under the flag of their
own ideals and interestsin this country there was no real
resistance anywhere against the imposition of crushing finan-
cial burdens during the last decade or against labor legisla-
tion incompatible with the effective management of industry.
So much for the formidable problems facing dedi-

cated libertarians. They find it extremely difficult to
defend particular firms and industries from harassment
or persecution when those industries will not ade-
quately or competently defend themselves. Yet division
of labor is both possible and desirable in the defense of
liberty, as it is in other fields. And many, who have

neither the time nor the specialized knowledge to ana-
lyze particular industries or special complex problems,
can be nonetheless effective in the libertarian cause by
hammering incessantly on some single principle or
point until it is driven home.
Some Basic Principles
Is there any single principle or point on which liber-

tarians could most effectively concentrate? Let us look,
and we may end by finding not one but several.
One simple truth that could be endlessly reiterated,
and effectively applied to nine-tenths of the statist
proposals now being put forward or enacted in such
profusion, is that the government has nothing to give to
anybody that it doesn't first take from somebody else.
In other words, all its relief and subsidy schemes are
merely ways of robbing Peter to support Paul.
Thus, it can be pointed out (as we did in Chapter 16)
that the modern Welfare State is merely a complicated
arrangement by which nobody pays for the education
of his own children, but everybody pays for the educa-
tion of everybody else's children; by which nobody
pays his own medical bills, but everybody pays every-
body else's medical bills; by which nobody provides for
his own old-age security, but everybody pays for every-
body else's old-age security; and so on. As noted before,
Bastiat exposed the illusive character of all these wel-
fare schemes more than a century ago in his aphorism:
"The State is the greatfictionby which everybody tries
to live at the expense of everybody else."
Another way of showing what is wrong with all the
State handout schemes is to keep pointing out that you
can't get a quart out of a pint jug. Or, as the State
giveaway programs must all be paid for out of taxation,

with each new scheme proposed the libertarian can
ask, "Instead of whatP" Thus, if it is proposed to spend
another $i billion on putting more men on the moon or
developing a supersonic commercial plane, it may be
pointed out that this $i billon, taken in taxation, will
not then be able to meet a million personal needs or
wants of the millions of taxpayers from whom it is to be
taken.
Of course, some champions of ever-greater govern-
mental power and spending recognize this very well,
and like Professor J. K. Galbraith, for instance, they
invent the theory that the taxpayers, left to themselves,
spend the money they have earned very foolishly, on all
sorts of trivialities and rubbish, and that only the
bureaucrats, byfirstseizing it from them, will know how
to spend it wisely.
Knowing the Consequences
Another very important principle to which the liber-

tarian can constantly appeal is to ask the statists to con-
sider the secondary and long-run consequences of their
proposals as well as merely their intended direct and
immediate consequences. The statists will sometimes
admit quite freely, for example, that they have nothing
to give to anybody that they must not first take from
somebody else. They will admit that they must rob Pe-
ter to pay Paul. But their argument is that they are
seizing only from rich Peter to support poor Paul. As
President Johnson once put it quite frankly in a speech
on January 15, 1964: "We are going to try to take all of
the money that we think is unnecessarily being spent
and take it from the 'haves' and give it to the 'have nots'
that need it so much."
Those who have the habit of considering long-run

consequences will recognize that all these programs for
sharing the wealth and guaranteeing incomes must
reduce incentives at both ends of the economic scale.
They must reduce the incentives both of those who are
capable of earning a higher income, but find it taken
away from them, and those who are capable of earning
at least a moderate income, but find themselves sup-
plied with the necessities of life without working.
This vital consideration of incentives is almost sys-
tematically overlooked in the proposals of agitators for
more and bigger government welfare schemes. We
should all be concerned about the plight of the poor and
unfortunate. But the hard two-part question that any
plan for relieving poverty must answer is: How can we
mitigate the penalties of failure and misfortune without
undermining the incentives to effort and success? Most
of our would-be reformers and humanitarians simply
ignore the second half of this problem. And when those
of us who advocate freedom of enterprise are com-
pelled to reject one of these specious "antipoverty"
schemes after another on the ground that it will under-
mine these incentives and in the long run produce more
evil than good, we are accused by the demagogues and
the thoughtless of being "negative" and stony-hearted
obstructionists. But the libertarian must have the
strength not to be intimidated by this.
Finally, the libertarian who wishes to hammer in a
few general principles can repeatedly appeal to the
enormous advantages of liberty as compared with coer-
cion. But he, too, will have influence and perform his
duty properly only if he has arrived at his principles
through careful study and thought. "The common peo-
ple of England," once wrote Adam Smith, "are very
jealous of their liberty, but like the common people of
most other countries have never rightly understood in
what it consists." To arrive at the proper concept and

definition of liberty is difficult, not easy.*
Legal and Political Aspects
So far, I have written as if the libertarian's study,

thought, and argument need be confined solely to the
field of economics. But, of course, liberty cannot be
enlarged or preserved unless its necessity is understood
in many other fieldsand most notably in law and in
politics.
We have to ask, for example, whether liberty, eco-
nomic progress, and political stability can be preserved
if we continue to allow the people on reliefthe people
who are mainly or solely supported by the government
and who live at the expense of the taxpayersto exer-
cise the franchise. I have already pointed out, in Chap-
ter 11, that the great liberals of the nineteenth and early
twentieth centuries, including John Stuart Mill and A.
V. Dicey, expressed the most serious misgivings on this
point.
An Honest Currency and an End to Inflation
This brings me, finally, to one more single issue on

which all those libertarians who lack the time or back-
ground for specialized study can effectively concen-
trate. This is in demanding that the government
provide an honest currency, and that it stop inflating.
This issue has the inherent advantage that it can be
made clear and simple because fundamentally it is clear
and simple. All inflation is government-made. All infla-
tion is the result of increasing the quantity of money
and credit; and the cure is simply to halt the increase.
I strongly recommend The Constitution of Liberty, by F. A. Hayek
(University of Chicago Press, i960).
If libertarians lose on the inflation issue, they are

threatened with the loss of every other issue. If liber-
tarians could win the inflation issue, they could come
close to winning everything else. If they could succeed
in halting the increase in the quantity of money, it
would be because they could halt the chronic deficits
that force this increase. If they could halt these chronic
deficits, it would be because they had halted the rapid
increase in welfare spending and all the socialistic
schemes that are dependent on welfare spending. If
they could halt the constant increase in spending, they
could halt the constant increase in government power.
The devaluation of the British pound,firstin 1949 and
again in 1967, may as an offset have the longer effect of
helping the libertarian cause. It exposes the bankruptcy
of the Welfare State. It exposes the fragility and com-
plete undependability of the paper-gold international
monetary system under which the world has been op-
erating since 1944. There is hardly one of the hundred
or more currencies in the International Monetary Fund,
with the exception of the dollar, that has not been de-
valued at least once since the IMF opened its doors for
business. There is not a single currency unitand there
is no exception to this statementthat does not buy less
today than when the Fund started.
At the moment of writing this, the dollar, to which
practically every other currency is tied in the present
system, is in the gravest peril. If liberty is to be pre-
served, the world must eventually get back to a full gold
standard system in which each major country's cur-
rency unit must be convertible into gold on demand, by
anybody who holds it, without discrimination. I am
aware that some technical defects can be pointed out
in the gold standard, but it has one virtue that more
than outweighs them all. It is not, like paper money,
subject to the day-to-day whims of the politicians; it
cannot be printed or otherwise manipulated by the

politicians; it frees the individual holder from that form
of swindling or expropriation by the politicians; it is an
essential safeguard for the preservation, not only of the
value of the currency unit itself, but of human liberty.
Every libertarian should support it.
I have one last word. In whatever field he specializes,
or on whatever principle or issue he elects to take his
stand, the libertarian must take a stand. He cannot
afford to do or say nothing. I have only to remind him
of the eloquent call to battle on the final page of Ludwig
von Mises's great book, Socialism, written 35 years ago:
Everyone carries a part of society on his shoulders; no one

is relieved of his share of responsibility by others. And no one
can find a safe way out for himself if society is sweeping
toward destruction. Therefore everyone, in his own interests,
must thrust himself vigorously into the intellectual battle.
None can stand aside with unconcern; the interests of every-
one hang on the result. Whether he chooses or not, every man
is drawn into the great historical struggle, the decisive battle
into which our epoch has plunged us.
CHAPTER 25
What We Can Do About It
I F THE WELFARIST-SOCIALIST-INFLATIONIST TREND

of recent years continues in this country, the outlook is
dark. It is a prospect of mounting taxation, snowballing
expenditures, chronic deficits, a budget out of control,
an accelerating rate of inflation of the kind endemic in
Latin America (at least for the last generation), a col-
lapse of the dollar, increasing world currency chaos,
and more and more ruthless price, wage, and exchange
controls, leading toward a regimented economy and
dictatorship. And if this trend is interrupted tem-
porarily, it may be by riots, assassinations, and a break-
down of law and order.
But it is within our power not only to avert this night-
marish prospect, but to restore order, justice, constitu-
tionalism, limited government, economic and personal

liberty, internal peace, and stable prosperity and
growth.
The remedies we must apply are implicit in the evils
already described. We must halt and in most cases
reverse the "remedies" that have brought us to our
present predicament. In the last chapter we discussed
at length, but also in a rather random way, a few of the
true remedies which libertarians should support. But by
way of summing up, I should like to list here, even at the
cost of some repetition and overlap, just eight real cures
of our present political and economic disorders based
on the analysis in the preceding chapters.
1. We must start reducing the grossly extended pow-
ers of all levels of government, local, State, and Federal.
We must start decentralizing power, not only from the
Federal Government back to the States and localities,
but within each level of government, especially the
Federal. The powers of the American presidency have
grown beyond the ability of any human being to exer-
cise them responsibly and wisely.
The crying need today is not for more laws, but for
fewer. The world must be saved from its saviors. If the
friends of liberty and law could have only one slogan it
should be: Stop the remedies! Stop the remedies! Or
even shorter: Repeal! Repeal!
2. Stop the profligate spending. Stop the deficits. Re-
turn to balanced budgets as the norm rather than the
exception. Stop the constant increase in the national
debt. Stop the inflation.
3. To stop the inflation, the government must stop
expanding the issue of paper money and credit.
The International Monetary Fund ought to be dis-
mantled. The Articles of Agreement should at least be
amended to remove all provisions that oblige the strong
currencies to support the weakin other words, that
oblige the countries that manage theirfiscaland mone-
What We Can Do About It 217
tary affairs prudently to support those that mismanage
their monetary affairs altogether; that oblige the "sur-
plus" countries to support the "deficit" countries; that
permit debtor countries to put off payment in gold in-
definitely and compel other countries to become or re-
main their creditors. This means that the "special
drawing rights""paper gold"should never have
been permitted to come into existence.
The "gold-exchange" standard (more accurately, the
dollar-exchange standard) should be liquidated. This
means that the United States should stand ready to
redeem in gold on demand the present dollar-holdings
of foreign central banks, and that these banks should
by a self-denying agreement refuse to increase their
present holdings of dollars as part of their official "re-
serves," and provide for at least the gradual liquidation
of such holdings.
The United States Government should abandon all
exchange controls, all attempts to forbid, restrict, or
penalize foreign travel, or purchases of imports, or for-
eign investments. Certainly not least, the government
should repeal its 36-year-old prohibition on the pur-
chase, sale, or ownership of gold by its own citizens.
The United States should plan for eventual return to
a full gold standard. This will now probably have to be
by stages. What seems most likely at the moment of
writing is that we shall soon find ourselves off even the
token gold standard we are now on. We will be proba-
bly unable to set up a full gold standard except at a
much higher dollar-price for gold than the present $35
an ounce.
But it is too early to specify all the conditions of such
an eventual return to gold. All we can say now is, that
as long as the world's money continues on a fiat paper
basis, there will be monetary unreliability and unsettle-
ment, if not monetary chaos.
4. Repeal all minimum wage laws. Repeal the Norris-
LaGuardia Act of 1932. Repeal or drastically modify the

Wagner-Taft-Hartley Acts of 1935 and 1947. Stop com-
pelling employers by law to continue negotiating with
unions that are making unreasonable or exorbitant de-
mands. Allow struck employers to try to continue their
business peaceably with non-strikers or with replace-
ments for strikers. Forbid all intimidatory mass picket-
ing. Enforce existing common law or written statutes
against intimidation, vandalism and violence. Reduce
the Taft-Hartley Act to a simple prohibition of discrimi-
nation against either union or non-union workers. If the
unions refuse to accept this two-sided prohibition, re-
peal the law entirely.
5. Let the government refrain from all "guidelines"
for prices or wages, all controls of prices, wages, inter-
est rates or rents, and all threats of such controls.
6. Stop the continuous increase in the national bur-
den of Social Security, housing subsidies, farm subsi-
dies, and the rest of the proliferating "antipoverty"
programs.
Only three or four specific suggestions can be offered
here:
Several eminent economists (notably Professors
James Buchanan and Colin Campbell) have shown how
Social Security could be converted from its present am-
biguous but compulsory mixture of insurance and relief
to a voluntary insurance program.
Federal grants to the States and localities to pay for
relief and "antipoverty" programs should either be dis-
continued entirely or made only to the poorer half or
even the poorest fifth of the States. The latter plan
would take the political profit out of Federal grants-in-
aid.
There should of course be no attempt to seize the
earnings of those who work in order to provide "guar-
anteed incomes" to those who won't work.
What We Can Do About It 219
The army of relief and other subsidy recipients will
continue to grow, and the solvency of the government
will become increasingly untenable, as long as part of
the population can vote to force the other part to sup-
port it. Such eminent nineteenth and early twentieth
century liberals as John Stuart Mill and A. V. Dicey
agreed that the franchise should be withheld from the
recipient of poor relief as long as he remains on relief.
If the fear of offending or the temptation to propitiate
such voters could be removed, there would be a star-
tling improvement in the quality of candidates for
office. The whole tone of our public life would be raised.
7. The graduated personal income tax should be
abandoned in favor of a strictly proportional income
tax. The argument against the "progressive" tax rate
was conclusively stated as long ago as 1833 by the Scot-
tish economist J. R. McCulloch: "The moment you aban-
don the cardinal principle of exacting from all
individuals the same proportion of their income or of
their property, you are at sea without rudder or com-
pass, and there is no amount of injustice and folly you
may not commit."
It is also clear that no income tax rate above 50 per
cent should be permitted. It is prima facie confiscation
when a man is allowed to keep less than half of his
earnings for his own family.
We have already seen that the income tax rates above
50 per cent raise negligible revenue, and that even with
present profligate spending a flat income tax rate of 21
per cent would raise all the revenue now being raised
from the whole range of rates from 14 to 77 per cent.
8. The present appalling power and omnipresence
of government must be forced back within tolerable
limits. Traditional liberals since Adam Smith have
agreed on only two indispensable functions of govern-
ment: first, to protect the nation against aggression or
invasion from any other nation; and second, to protect

every member of the community from the aggression,
injustice, or oppression of any other member.
Some libertarians would add other functions: the
provision of sewage, water, and other health and safety
services in cities, the construction and maintenance of
streets and roads, and, for national governments, the
provision of a trustworthy monetary system, the setting
of standards of weights and measures, and the collec-
tion and publication of certain kinds of information.
But about the nature and precise limits of these other
governmental duties there is considerable disagree-
ment. What can be said with confidence is that every
extension of the functions and powers of the State
beyond its primary duty of maintaining peace and jus-
tice should be scrutinized with jealous vigilance. Pre-
cisely because the State has the monopoly of coercion
it can be allowed the monopoly only of coercion. Only
if the modern State can be held within a strictly limited
agenda of duties and powers can it be prevented from
regimenting, conquering, and ultimately devouring the
society which gave it birth.
The solution to our problems is not more paternalism,
laws, decrees, and controls, but the restoration of lib-
erty and free enterprise, the restoration of incentives,
to let loose the tremendous constructive energies of 200
million Americans.
Index
Agriculture, Department of, 39, Califano, Joseph A., Jr., 181
182, 201 Campbell, Professor Colin, 218
Aid, foreign. See Foreign aid Capitalism, 37, 95-96, 97, 170,
(economic) 171, 174, 175, 177, 179, 200
American Economic Foundation, Capitalism and Freedom, 84, 89
205 Capitalism, Socialism and Democ-
American Farm Bureau Federa- racy, 208
tion, 174 Cassel, Gustav, 2, 184
American Institute for Economic Chase Manhattan Bank, 43
Research, 205 Chicago, University of, 84
American Telephone and Tele- Chrysler Motors Corporation, 43
graph Company, 203 Citibank. See First National City
Anderson, Professor Martin, 192, Bank of New York
203 Citizens Foreign Aid Committee,
Annalist, The, 85 205
Antitrust laws, 47, 207 Clinical Laboratories Improve-
Artisans' Dwellings Acts, 192 ment Act of 1967, 49
Austerity programs, 118-120 Collective bargaining, 25, 27
Commerce, Department of, 18-
Automation, 64
19, 111
Common Law, 196, 218
Communism, 118, 168-169, 200,
Balance of payments, 15, 16, 17,
18-20, 21, 119, 139, 142, 205
Communist Manifesto, 105
159, 160, 166, 188 Competition, 42, 45, 46, 47, 48,
Balanced budget, 11-12, 14, 216 52, 112
Balzac, 155 Consumer price index, 30
Banking, 155-156 Consumers, protecting the, 35,
Bastiat (French economist), 70, 43-44, 48-53, 119-120
122, 209 Council of Economic Advisers,
Birth control, 55 President Johnson's, 33, 54,
Brandt, Professor Karl, 54-56 63, 66, 138
Bretton Woods, N. H., 16, 19, 20, Credit, 29, 32, 40, 156, 158, 160,
158 212, 216
Brookings Institution, 74, 90 Cybernation, 64
Brozen, Professor Yale, 25
Buchanan, Professor James, 218
Burns, Professor Arthur, 25 Daily Telegraph, London, 76
222 INDEX
Deficit financing, 5-9, 34 Food Research Institute, Stanford

de Gaulle, Charles, 153 University, 54
Depression. See Great Depression Ford Motor Co., 43
Dicey, A. V., 94, 212, 219 Foreign aid (economic), 165-
Drug control laws, 50 179, 204
Foreign investment, 176-177, 179
Foundation for Economic Educa-
Economic planning, 115-136, 137- tion, 205
139, 176 Franchise, restricted to taxpayers,
Economic Report of 1967, Presi- 212, 219
dent's, 18 Free market, 19, 31, 33, 35, 41,
Economic Report of 1968, Presi- 47, 52, 116, 117, 123, 132,
dent's, 19 133, 135, 136, 170-171, 172
Economists' National Committee Friedman, Professor Milton, 25,
on Monetary Policy, 205 84, 85, 86, 89
Edward III, 191 Furness, Betty, 50-51
Eisenhower, Dwight D., 181
Eliot, George, 155
Elizabeth I, 92 Galbraith, Professor J. K., 117,
Engels, Friedrich, 105 119-123, 210
Exchange controls, 134, 178, 217 Gallup Poll, 63, 101
General Electric Company, 43
General Foods Corporation, 52
General Motors Corporation, 43
Fallacies: in growth rate statistics, Gestido, President (Uruguay),
124-126; of GNP, 126-128 146
Famines, government-induced, 54-
56 GNP. See Gross national product
Federal Aid to the poor, 60, 78 Gold exchange standard, 15-16,
Federal Bulldozer, The, 192-193 20-21, 158-159, 217
Federal Communications Com- Gold standard, 20, 153-163, 213-
mission, 182, 203 214, 217
Federal Power Commission, 49 Government loans, 177-179
Federal Reserve Banks, 5, 6, 21, Government power and interven-
156 tion, 116-117, 128-129, 180-
Federal Trade Commission, 182, 184, 185-198, 200, 204-205,
203 206-208, 210, 216-220
Fire Safety Act of 1967, 49 Government spending, 2, 4-9, 18,
First National City Bank of New 100, 112, 180-181
York, 43, 105, 150 Great Depression, 4, 57, 157
Fitzhugh, Gilbert W., 137-138 Great Society, 181
Five-Year Plans, 117-118, 124, Gross national product, 9, 13, 14,
174 124, 126-128, 129, 134, 147
Food and Drug Administration, Growth Planners, 122-124, 129,
182, 203 130-131, 135-136
Food for Peace, 56 Growth-rate fallacies, 124-126
Food production, 54-56 Guaranteed Income, The, 63
INDEX 223
Guaranteed incomes, 62-64, 65- Interstate Land Sales Full Dis-

77, 78, 79, 80, 81, 82, 83, closure Act of 1967, 49
84, 85, 86, 88, 89, 90, 91, Investment: corporate income tax
93, 95, 96, 97, 99, 100, 101, a discouragement to, 109,
104, 205, 218 110-112, 113-114; in foreign
Guaranteed jobs, 101-103, 104 countries, 176-177, 179, 217;
inflation a stimulus to, 134;
optimum conditions for, 135
Haberler, Professor Gottfried, 25
Hamilton, Alexander, 184
Health, Education, and Welfare, Johnson, Lyndon B., 11, 18, 19,
Department of, 181, 201-202 33, 49, 50, 51, 52, 67, 172,
Henry VIII, 51 181, 192, 206, 210
Hoover Commission, 181 Joint Economic Committee, Con-
Housing and Urban Develop- gressional, 63, 74
ment, Department of, 201 Jonson, Ben, 155
Hume, David, 12-13
Kennedy, John F., 49, 51

IBM, 74 Keynes, John Maynard, 5, 6-8,
IMF. See International Monetary 130, 158
Fund Kingsport strike, 203
Incentive, 77, 79, 81-82, 83, 84, Kohler strike, 203
85, 86, 87, 88, 90, 91, 93,
95, 109, 135, 166, 198, 211,
220 Labor Standards Act of 1938, 24
Income tax: corporation, 109-114; Labor Statistics, Bureau of, 67
graduated, 104, 105-108, Labor unions, 25, 26, 27, 28, 32,
189, 219; rates in foreign 136, 187, 202, 218
countries, 105, 106, 107; re- Laissez faire, 185, 186
visions necessary, 219 Land reform, 172, 173, 176
Industrial Revolution, 64, 96 Larkin, Arthur E., Jr., 52
Inflation, 8-9, 13-14, 15, 17, 20, Lecky, W. E. H., 108
32, 33, 34, 35, 40, 83, 130- Libertarians, the task for, 199-
135, 136, 138-139, 143, 145, 214, 216-220
146, 148-149, 150-152, 159, Lindsay, John, 103
161, 162-163, 166, 173, 178, Locke, John, 47, 196
184, 212-213, 215, 216 Louis XV, 191
Internal Revenue Service, 182
International Monetary Fund, 17,
19, 20, 21, 152, 158, 159, McCulloch, J. R., 219
160, 163, 200, 213, 216 McGraw-Hill Book Company, 192
International Monetary Statistics, Machinery and Allied Products
152 Institute of Washington, 113
Interstate Commerce Commis- Man Versus The State, The 185,
sion, 182 186-192, 193, 195
224 INDEX
Manchester Guardian Weekly, Norsky, Karel, 141

141
Marx, Karl, 105
Master Plan, 116-117 Okun, Arthur, M., 33
Means test, for welfare programs, Oligopoly, 43, 44
72, 73-74 Orwell, George, 185, 198
Medical Device Safety Act of
1967, 49
Medicare, 58, 59, 77, 204, 205
Menuhin, Yehudi, 42 Parity, 20
Metropolitan Board of Works, 192 Patronage, growth of, 183
Metropolitan Life Insurance Pechman, Dr. Joseph A., 74, 90
Company, 137 Petro, Professor Sylvester, 203
Mieszkowski, Dr. Peter, M., 90 Picasso, Pablo, 42
Mill, John Stuart, 94, 212, 219 Planned Economy, 2, 184
Minimum wage laws, 23-24, 25, Planned parenthood, 55
103, 217 Poor Law Commissioners, 197
Mises, Ludwig von, 37, 214 Poverty Is Where the Money Is,
M.I.T. Press, 192 60
Moliere, 155 Price controls, 29-33, 35-42, 46-
Monopoly, 42, 43, 45-46, 47 47, 133, 184, 205, 218
Prices: connexity of, 36-37, 43;
determination of, 35-37, 41
National Commission on Technol- Production: corporation income
ogy, Automation, and Eco- tax a discouragement to,
nomic Progress, 62-63 109, 113, 114; cure for pov-
National debt, 10-14 erty, 95; incentives to, 95
National Labor Relations Board, Public education, 190-191
26, 27-28, 182, 202, 207 Puerto Ricans, 103
National Review, 177 Purchasing power, 4, 5, 6, 14,
National Workers Convention 29, 83, 131, 150, 151, 159,
(CNT; Uruguay), 147 162
Nations Business, 144
Natural Gas Pipeline Safety Act
of 1967, 49 Rent control, 190, 205, 218
Negative income tax, 74, 80-81, Representative Government, 94
84-91, 97-100 Roosevelt, Franklin D., 12, 57
Negroes, 24, 25, 103 Roth, William V., Jr., 181
New Deal, 92, 186 Rundt, S. J. & Associates, 142,
New York Times, 85, 103, 146,
147
148, 181, 182-183
New York University, 203
NIT. See Negative income tax
Nixon, President Richard M., 97- Savings, discouragement of, 79-
98, 99, 100, 181 80
Norris-LaGuardia Act, 26, 27, Scheibla, Shirley, 60
217-218 Schumpeter, Joseph A., 208
INDEX 225
Securities and Exchange Commis- Unemployment, 131-132, 147
sion, 49, 182, 203 Unemployment insurance, 99,
Shuman, Charles B., 174 204
Slappey, Sterling G., 144 Uruguay, example of welfare
Smith, Adam, 14, 196, 211, 219 state, 140-149
Social Security, 2, 57, 58-59, 61,
66, 67, 73, 77, 78, 79, 89,
99, 127, 201, 204, 205, 218 Veterans Administration, 201
Social Security Act (1935), 187 Vogt, William, 67-68
Social Security Board, 59
Social Statics, 196
Socialism, 171, 173, 174, 175, Wage increases, 23-28, 32, 33
176, 177, 179, 189, 199, Wagner Act, 25, 26, 27, 218
200, 205, 215 Welfare and Pension Protection
Socialism, 214 Act of 1967, 49
Special drawing rights (SDR's), Welfare programs, 57, 58-61, 62-
21-22 83, 84-91, 97-100, 128, 141,
Spencer, Herbert, 183, 185, 186- 143, 145, 146, 152, 173,
192, 193, 194-197, 198 181-182, 184, 201-202, 204,
Stanford University's Food Re- 205, 209-210, 211, 218;
search Institute, 54 British, 91-95
Sulzberger, C. L., 146 Welfare state, 2, 22, 29, 34, 35,
Swedish Taxpayers' Association, 97, 104, 120, 121, 122, 140,
107 142, 143, 145, 146, 147,
149, 195, 209, 213
Westinghouse Electric Corpora-
Taft-Hartley Act, 26-27, 202, 218 tion, 43
Tax Foundation, 205 White, Harry Dexter, 158
Taylor, Elizabeth, 42-43 Wholesome Meat Act of 1967,
Terborgh, Dr. George, 113 49, 50
Theobald, Robert, 63-64, 65, 67, Williamson, W. Rulon, 59
70, 71 Wilson, Woodrow, 180
Tobin, Professor James, 25, 90
Truth-in-Lending Act of 1967,
49, 206 <~ Yale University, 90

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Man vs.

The Welfare State

ARLINGTON HOUSE NEW ROCHELLE, N.Y.

Copyright 1969 by Arlington House, New Rochelle, New York.

Library of Congress Catalog Card Number 72-93457

17. Government As Prosperity-Maker 137

IN AMERICA TODAY MOST OF THE OLDER GENERA-

an enormous increase in government spending, an

The leadership of the State in economic affairs which advo-

The succeeding chapters of this book explain in de-

to which it has led and, finally, the solutions we must

IN THE EARLY NINETEEN THIRTIES, IN THE DEPTH OF

all away again in higher taxes. The thing to do was to

the government can draw, they are adding to the na-

cally only if the competitive forces of the market are

prices and the increase in the demand for labor, wages

come can only be increased by working harder or more

"We Owe It To Ourselves"

AT THE OUTBREAK OF WORLD WAR I, THE NATIONAL

billion, but this time there was no important reduction,

in the cash budget and of $8.1 billion in the orthodox

hampered production. "If all our present taxes be mort-

Gross National Product $212 $925

Debt as burden on GNP 123% 39%

So we might advance triumphantly to the conclusion

reduced. It has been reduced 65 per cent since 1933

L E T US BEGIN BY RECALLING TWO COMPARISONS

change" standard and the world monetary system set

In much discussion our dollar liabilities to private

security tax renewed, but on January 1,1968, the Presi-

Commerce found, in fact, that in 1964 $6.3 billion, or 25

countries were on a full gold standard. A "deficit" in the

American dollars. As credit and other currencies are

for nations to issue still more paper money against these

The High Cost of Wage Hikes

IT OUGHT TO BE OBVIOUS THAT MINIMUM WAGE

folly ever since. The first Labor Standards Act of 1938

ary of 1968, the unemployment rate among white teen-

to encourage or discourage membership in any labor

agree to a proposal or require the making of a conces-

Labor Relations Board, and by the failure of local au-

W H E N T H E WELFARE STATE SPENDS RECKLESSLY,

poration is selected for attack, of course, because it is

ernment itself. Prices do not rise today because busi-

undertakes price controls to try to prevent the conse-

Arthur M. Okun, the last chairman of President John-

More on Price Controls

THE WELFARE STATE CAN ARISE AND PERSIST ONLY

blame the price rise on sellers, on Big Business, on

as these in turn will affect price. All fourdemand,

Just as the demand, supply, cost, and price of any

As the eminent economist Ludwig von Mises has

Efforts to Boost Prices

Let us begin by considering governmental efforts to

do good and no harm domestically because it will raise

schemes and America's cotton schemes gave both a

or raise prices of primary agricultural products politi-

Holding Prices Down

Now let us turn to governmental efforts to lower