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John G. Wright

Inflation and the Arms Program


From Fourth International, Vol.14 No.2, March-April 1953, pp.39-43. [1*]
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The Consumer Price Index for May 1953 shows that living costs have remained near the all-time post-Korea peak. This appears incomprehensible in the face of the declines in wholesale prices and many commodities. The capitalist press gives all sorts of explanations, except the true ones, for the continued high prices. The favorite dodge is to blame it on high wages. High profits are, of course, never mentioned in this connection.

Above all, the capitalist apologists refrain from mentioning the major factor which is fueling the continuing inflation. This is the arms program of American imperialism with the government deficit spending it entails; and the accompanying credit inflation without which this arms program could not have been financed. This aspect of our economy has yet to receive the attention it deserves, although it is pregnant with grave disorders and dangers.

There is a relation between .high prices and credit inflation, which happens to be a special process whereby the dollar is being depreciated. Let us explain.

It is not hard to grasp how debasement of currency leads to rising prices. A government resorts directly to the printing press and, say, doubles or triples the currency in circulation. The new currency emissions, thrown into the market, cause prices to double or treble. However, there has been no striking rise in US circulating currency. Since Korea there has been less than a 10% increase, from $27.7 billion in 1950 to $29.2 billion in 1951; and the money in circulation since that time has remained relatively stable.

It is not so easy to grasp how an inflationary process can occur and the dollar tend to be depreciated without a notable expansion of paper currency. That is because it is not commonly known that paper currency is only part of the money supply in this country; and by no means the biggest part. As a matter of fact, paper currency is used for comparatively small transactions.

As every banker knows, by far the greater bulk of payments is made through the deposit and check system. This system is colossal. Less than one year after Korea, in 1951, annual check payments for the first time passed the two-trillion mark and have since remained at this record level! This single fact suffices to show that bank deposits and checks constitute the principal circulating money in this country.

Let us look a little closer at what actually takes place in the banking system, this nerve center of the entire capitalist system. Bank deposits against which checks may be drawn are of two distinct types. First, there are the normal deposits of capitalists and other individuals from every layer of the population. When bankers advance loans against such deposits they activate otherwise idle capital or make available to the capitalists, through loans, the money income of all the classes. Through such loans bankers do not significantly increase the existing money supply, but simply set it in motion, utilize it more fully and efficiently.

Second, there is an entirely different type of deposit. These are made by bankers’ loans, based exclusively on an expansion of bank credit. In such cases the banks actually throw new money into the existing supply. These are credit-dollars, as distinguished from legal tender. The original borrower issues checks against this banker’s loan. His checks are then deposited in other banks by the respective recipients who likewise draw against these deposits. A circuit of a special type thus arises. It may be set down as a kind of law that every general increase of bank loans results in a general increase of bank deposits, and by this token increases the total money supply.

Periodically the capitalist press trumpets to the world another jump in bank deposits. It is hailed as another sign of how strong the US economy is. In reality, as we shall presently see, it is symptomatic of the entire inflationary process.

Paper Money and Credit Money

The question naturally arises: Why doesn’t this new money exert the same pressure on purchasing power as would emissions of paper currency? The explanation is that paper currency circulates in a different way from credit-dollars. New paper emissions flow directly into the market; credit-dollars, on the contrary, circulate primarily among the capitalists themselves. The channels into which credit-dollars flow depend on the decisions of the capitalists. The bankers exercise a measure of control. But the final destination of these funds is determined by where the most profit is to be gained.

If the commodity markets offer lush prospects for gain, billions flow in that direction, as happened in the period immediately after Korea. If the prospects are not so bright in these markets, the funds flow elsewhere. The bulk of them has, in fact, gone to finance the arms program, meet the annual government deficits, maintain huge inventories, feed the state, local and private debts. The inflationary effects of credit expansion thus take place indirectly, and in a masked way.

The last time the American people had experience with credit inflation was during the fabulous Twenties. This credit inflation took place on the basis of influx of gold into the US. Each time a bank added one dollar in gold reserves, it was able to extend some $13 of new credit. These credit-dollars did not flow at the time into commodity markets but primarily into stock-market speculation and real-estate promotions. Behind the 1929 Wall Street crash was the doubling of loans to brokers and dealers—from $3.2 billion (on Oct. 5, 1927) to $6.8 billion (on Oct. 2, 1929). When the banks, spurred by economic realities and the need for self-preservation, instead of extending further loans, started calling their loans in, the speculative bubble burst, bringing the whole economy down with it.

The driving force behind the present-day credit inflation, particularly since Korea, is the need to finance the militarization program, and “service” the astronomic federal debt. The banks are not the only ones participating in this inflationary process. The US Treasury plays a leading role.

Side by side with the paper money it issues regularly, the Treasury also issues another type of money, credit-money, or credit-dollars. Like the ordinary paper currency these credit-dollars also come rolling off the printing presses in the shape of Treasury notes, bills, bonds, certificates of indebtedness and the like.

New emissions take place each time the government confronts, as it annually does, a deficit budget and must therefore borrow. And each time new billions of credit-dollars are added to the money supply. This fiscal year, for example, “the government expected to wind up ... about $8.5 billion ‘in the red’.” (Associated Press dispatch from Washington, June 27, 1953.) Four days later, on July 1, the deficit was announced as $9.3 billion. [2*] This is about $3 billion more “in the red” than the Eisenhower administration originally expected. The administration likewise refrained from informing the public that this whopping deficit is actually illegal, because it brings the total federal debt above the statutory limit. (According to Federal Reserve figures the US debt in January and February of this year passed the $267 billion mark; new borrowings of $9.3 billion would top the legal limit of $275 billion.) Workers ought to learn that when the government peddles war bonds, it is actually selling them credit-money. Each time a worker buys a war bond, credit-money is converted into ringing coin—by the US Treasury, that is. Every capitalist agency and spokesman tells the workers it is a sound buy. Is it? On the record, the claim is a dubious one. Purchasers of wartime bonds who cashed them in the post-war period received depreciated dollars in return, losing heavily in the transaction. Why? Because in addition to sound credit-money there happens to be such a thing as inflated credit-money, which tends to depreciate with each new emission. This tendency is beginning to shape up quite clearly.

Are There Limits to Volume of Credit?

What are the limits beyond which emissions of credit-money become dangerous? Under the rule of the monopolists, no one is permitted to know. The authorities in power consult some financial wizards who take a deep breath and make a guess. One such guess of $275 billion originally fixed the statutory limit of the US federal debt. Under certain conditions, this may work out fine. Under different conditions, not so fine. It is a fact that even before the Eisenhower administration found itself compelled to borrow beyond the legal $275 billion limit, the value of US credit-dollars already started skidding.

One sign of this is that the government has found it necessary to offer its bonds, notes, certificates, etc., at cheaper rates, that is, it must offer higher interest rates now.

The rate of depreciation is still relatively gradual. But it is already significant. At the start of 1946 the average annual interest charge on the national debt was below two percent (1.97%). By the end of October 1951 it rose to 2.31%. By May 1952 the US Treasury was paying rates of up to 2.75%. The National City Bank of NY estimated at the time that “the actual cost of money raised on the [May 1952 Treasury] transaction may approach 3.5%.” In its recent new bond issue the Treasury hiked the interest rate to 3.25%. It is safe to conclude that the carrying charges on the national debt are heading for the estimate of 3.5% made in June 1952 by the National City Bank.

These decimal points may seem unimportant. But they gain considerably in meaning if, it is borne in mind that each percentage point, every 1%, today represents an annual carrying charge of $2.75 billion on the federal debt, already past its statutory limit, and heading higher.

What is more, as the government pays higher rates; all interest rates go up. Higher rates must be paid on state, local and private indebtedness. These higher carrying charges for federal, state and local debts; for business and farm loans; for plant and home mortgages; for credit and instalment buying and other types of loans, can come only out of the annual national income, already staggering under the intolerable load, of expense for the arms program. An increased portion of national income must thus be diverted annually merely to cover interest on debts, past, present and projected. This, too, becomes a new factor tending to push up prices and bite into living standards.

National Debt and Inflation

The capitalist ruling circles are not unaware that the federal debt is a major factor feeding the inflationary process. To cite only one instance, there is the report of The American Assembly which met at Columbia University in May 1952 under Eisenhower’s personal auspices. This eminent body concluded unanimously “that the large outstanding public debt is a powerful inflationary force.” The bigger it grows, the more powerful it becomes. And it has been growing!

The already cited Associated Press dispatch, which reported the highest post-war deficit for the fiscal year ending June 30, 1953, also reported an officially “estimated $5.6 billion deficit” for next year “if President Eisenhower’s tax program is approved by Congress ...” If Congress does not approve, the deficit will be bigger.

The size of yearly deficits is not the only problem facing Washington. The volume of maturing issues poses likewise the problem of refunding the debt. From May of last year, for a period of 11 months, the Treasury had the financial headache of refunding notes and bonds amounting to 46.3 billion dollars. This year the refunding headache is proportionately bigger. As of June 15, 1953 and for the next 12 months there will mature Treasury bonds, certificates of indebtedness, bills and notes to the amount of $75,507,996,000. They are as follows:

The Treasury’s Refunding Headache This Year



(in millions of $)

June 15, 1953

1953 2% bonds


June 18

Discount bills


June 19

Tax anticipation bills


June 25

Discount bills


July 1

1.4% sav. notes Ser. D



Ser. E sav. bonds



Ser. F sav. bonds



Ser. G sav. bonds


July 2

Discount bills


July 9

        "        "


July 16

        "        "


July 23

        "        "


July 30

        "        "


Aug. 6

        "        "


Aug. 13

        "        "


Aug. 15

2% ctfs. of ind.


Aug. 20

Discount bills


Aug. 27

        "        "


Sept. 3

        "        "


Sept. 10

        "        "


Sept. 15

2% bonds


Sept. 18

Tax anticipation bills


Dec. 1

1-21/8 Treas. notes


Jan. 1, 1954

1.4% sav. notes Ser. D



Ser. E sav. bonds



Ser. G sav. bonds



Ser. F sav. bonds


Feb. 15

2¼% ctfs. of ind.


Mar. 15

13/8% Treas. notes


May 1

Ser. A sav. notes


June 1

25/8% ctfs. of ind.





If to this total of $75.5 billion we add the $9.3 billion needed in cash to cover this year’s deficit, the grand total of $84.8 billion must be raised by June 1, 1954. No small undertaking even for the American imperialist colossus. When so many billions are needed, it is imperative to resort to the banks.

Here we come to the part that the monopolist bankers play in the credit inflation. And their role is the key one, overshadowing the Treasury’s emissions of new credit-money.

The Government and the Banks

The government borrows from the banks. It is a bookkeeping transaction in essence. The banks simply open a deposit for the government on their books, receiving in return government IOU’s. But the pay-off is that these IOU’s are not then simply filed away as promises to pay at some future date. On the contrary, they fall into a special category. They constitute legal RESERVES for the banks. And against this “government collateral” the banks are empowered to issue further loans.

This is a high-handed practice even for the field of high finance, and we don’t ask the reader to take our word for it. We yield the floor to an authority on the subject, Senator Douglas of Illinois, and let him explain these operations in detail:

“Most of us who have not had the time to go into the subject suppose that the banker later lends to other people the money that we deposit in his bank ... But it is not true of commercial banking or the banking system as a whole. The real fact, which is so little understood even among bankers, is that the banking system creates money. It does not do it by having printing presses in the windows of hanks where we can see the $1, $5 and $10 bills turned out by the bale, but banks as a group do it just as effectively by making their loans to borrowers, for when they make these loans they credit the borrower with a deposit account against which the person or company which has borrowed can write checks. Indeed, nearly all the business in this Nation is carried on through bank checks, and the deposits in our banks constitute the overwhelming bulk of our money supply.” (Congressional Record, Feb. 22, 1951, page 1520.)

In the foregoing words, the Senator has given a pretty accurate description of the process of credit inflation and the role banks play in it. The banks, however, do not “create” new money as Douglas devoutly claims. The history of capitalism is replete with similar acts of creation. For example, it used to be the practice among dairymen to “create” milk by diluting the produce of cows with tap water, chalk and other adulterants. It is a rare banker who doesn’t know better than Douglas just what is involved in the process of “creating” new money. Even the NY Times’ editors know better. In a moment of candor, on June 4, 1953, they declared:

“The crude way is simply to turn on the printing presses and manufacture currency. The modern, refined way is to borrow through the banks. Both in the end come down to the same thing ...”

And for a change, they tell the unvarnished truth.

Inflation by Law

Now listen to the Senator expound the basis on which this inflationary process is permitted, by law, to take place.

“Still greater obscurity,” complained the Senator, “surrounds the subject of bank reserves and the relation of reserves to the creation of deposit [read: credit] money ... It is important, however, to know that the main source of the banking system’s ability to extend credit and thereby create money comes from these reserves. Banks acquire their reserves in two ways:

“Either by borrowing from the Federal Reserve against commercial paper or paper collateraled by government bonds or through the purchase of government securities by the Federal Reserve in the open market—whether these securities are sold by the banks themselves or by non-bank sellers. For various reasons, borrowing by member banks from Federal Reserve banks on commercial paper is not very important now, although that was thought to be the original purpose of the Federal Reserve System, and in recent years the rediscount of member bank paper by the Federal Reserve banks has never amounted to more than a few hundred million dollars at one time. Reserves within the Federal Reserve System today are, therefore, overwhelmingly created—indeed, about 99-percent created—by Federal Reserve purchases of government securities in the open market.

“Now, we come to a vital point: Upon each dollar of the reserves of the member banks of the Reserve System, the banks can make approximately $6 of loans, and hence can create that amount of credit.” (Same source, pp.1520-1521.)

These statements were made on the Senate floor more than five years ago. No banking authority challenged them then, or since. If not “99 percent,” then assuredly the overwhelming bulk of US banking reserves consists of government IOU’s which, in turn, to use the Senator’s terminology, become “the main source” of the banking system’s “ability to create money from these reserves.” In other words, the Treasury issues credit-money; the banks monetize it, and then on the basis of this same credit-money they issue still more credit-money, at the rate of up to six-to-one.

For the banks it’s a veritable gold mine. They collect interest and fees for every dollar loaned to the government; and, then on top of it, they are enabled to collect interest and fees for six times as many dollars. Small wonder that the banks prefer to surround with “obscurity” the subject of reserves.

Credit Money Since Korea

How much credit-money have the bankers thrown into the money supply since Korea? With documents and figures in hand, Sen. Douglas proved that by early 1951 not less than $10 billion were extended by banks to speculators in the commodity markets.

“It may be said also,” added the Senator, “that a recent Federal Reserve survey shows that three-fifths of the expansion of business loans [since Korea] went to commodity dealers and to processors, with loans to cotton dealers predominating.” (Same source, p.1519.)

These billions used for the 1950-51 speculative orgy are only a part of the total volume of credit-money made available by the banks. Other billions, by the score, have gone to finance the sharp increases in state and local indebtedness and, generally, for business, farm and personal loans. As a result the entire debt structure, public and private, is already top-heavy.

The Institute of Life Insurance is a high authority on statistics relating to the growth of public and private debt. In February of last year this Institute reported that “for the six-year period ended with 1951, personal debts showed a record climb of over 55 billions.” That’s not the total private debt, only the increase over a six-year period. In the single year of 1951 personal debts rose by $8 billion. The American “island of prosperity” was obviously proving quite expensive and, as of two years ago, was carrying a rather heavy mortgage. According to the same report, individual holdings of liquid assets increased by only about $23 billion while “the people as a whole expanded their debts more than twice as fast as their cash assets since the end of World War II.”

On June 22 of this year the Institute of Life Insurance issued an even more somber report. The gross public and private debt jumped about “40 billion in 1952 to a record high of roughly $640 billion,” and “it still is going up all along the line.” The biggest expansion has taken place in private debt. Business and individuals combined more than doubled their borrowings since 1945, their indebtedness rising from $155 billion in 1945 “to an estimated $330 billion at the end of last year (1952).”

More than half of this increase of $175 billion was accounted for by borrowings of private individuals, whose debts have risen from $55½ billion in 1945 “to about $137 billion at the end of last year,” or by $81½ billion in a seven-year interval. This is an average annual rise of $11½ billion. The Institute said “home mortgage debt and consumer credit were the major factors in this increase,” and, in fact, “led the debt increase in the rate of expansion in the period.” Needless to say, the banks have financed all this.

Increase in Tax Burden

This total debt is more than double the national income. No other capitalist system has witnessed anything approximating such a staggering debt load. In one of his flights of demagogy Truman, during his tenure in the White House, predicted an “average income” of $4,000 yearly for every American family. This “prediction” has been realized in reverse under Eisenhower. The existing volume of debt amounts to $4,000 for every woman, man and child in the United States. Assuming an average interest of 3½%, it means a load of $560 a year for an average family of four, merely to cover the carrying charges on this debt.

Parallel with the rise in the federal, state and local indebtedness a profound change has taken place in US tax structure. It, too, has been Europeanized at a break-neck pace. Taxes, federal, state and local in 1951, totalled $84 billion, talking roughly one dollar out of every three of the national income. Since then the tax burden has not decreased but increased. The Eisenhower administration, along with most state and local officials, is pressing for new taxes.

In any case, the existing taxes represent an unparalleled peacetime burden. Europeans are accustomed to it; to Americans it comes as a new experience. They obviously do not like it, nor its impact on their living standards.

There is a connection between taxes and the volume of public debt; taxes grow as the debt increases. But there is also a connection between taxes and prices. This is not commonly understood because the tie-in is largely a hidden one. But it is important nonetheless. In the general price structure, particularly that of food and other necessities, hidden taxes tend to constitute a steadily increasing proportion. For example, by 1952 there were 201 direct and hidden taxes on a gallon of gasoline; 189 taxes on a suit of clothes; 154 on a bar of soap; 53 on a loaf of bread, and so on. In many states the bulk of tax revenues comes from sales and excise taxes. In states like Ohio, Taft’s stamping ground, more than 75% of all Ohio tax revenues comes from this source.

The National Association of Manufacturers has pressed for years for a federal sales tax. They want it to yield as much as $20 billion a year. From all indications, the Eisenhower adminstration is pushing for “some form” of a general sales tax. Among its other more obvious features, such a tax would constitute a sharp inflationary measure, because it would automatically drive up all prices.

Deficit government spending, swollen debts, stiff taxes, cumulative depreciation of the credit-dollar—these are the direct consequences of the imperialist arms program. Ultimately these developments threaten to undermine the entire fiscal structure of the country.

The Institute of Life Insurance has appealed “for caution.” But what weight do such appeals have in the face of the hard fact that there is no way of financing the arms program except through further credit inflation.

The Eisenhower administration is unquestionably a “sound money” combination. The big bankers were among his foremost backers and they were the bitterest opponents of Truman’s “easy money” policies. They fought out in 1952 with the Truman administration, before Eisenhower’s victory, the issue of who would dictate the credit policies in the country, the bankers or the US Treasury. Truman capitulated to them. Interest rates were sharply hiked, presumably to “tighten up” the money supply. The Keynesian apostles of cheap and easy government-created credit, with Keyserling at the head, have been booted out of the President’s Economic Council. Eisenhower’s new chief economic adviser Dr. A.F. Burns is anti-Keynes and has warned against “unsound booms.”

But economic realities are proving stronger than wishes. Ironically enough, the big bankers, Eisenhower, his chief economic adviser, his Treasury staff and the rest of the crew find themselves compelled to follow the self-same policies as under Truman. The Federal Reserve has reduced the reserve requirements of member banks by approximately $1.1 billion. Paul Heffernan, financial writer of the NY Times, explained on June 28, that this “will increase the lending power of the banks by about $5.7 billion,” that is, pretty close to the six-to-one ratio.

The Eisenhower officials do not even bother to deny that thereby new, strong inflationary pressures will be generated. The administration has merely issued assurances that it “would try to manage its borrowing so as to minimize inflationary effects” (NY Times, June 27, 1953).

The only alternative to continued credit-inflation is to drastically cut back the militarization program. The US imperialists reject such a course, for they know it spells an economic crash. A disrupted fiscal system is “a calculated risk” they prefer to take at this stage.

Credit-inflation, already unparalleled in its proportions, has thus been given another boost. Hikes in steel prices provide a still further impetus to inflation. The mass of the people will have to pay for this by stiffer taxes, by a lower real “take home” pay, by new blows at their living standards. We are still in the initial stages of these extremely expensive transactions for the American people which all stem from the arms program, and the accompanying credit inflation.


Notes by ETOL

1*. This issue is of Fourth International is dated March-April 1953,but it is obvious from the contents of the issue, as well as of this article, that the actual publication date was considerably later since documents are referred to which were not published until later in the year and events are mentioned, e.g. the East German Workers’ Uprising of mid-June, which had not yet happened in March or April. This makes it difficult to place a more precise date on this document.

2*. In the printed version it says “million”, but from the context it is clear that this should be “billion”.

Last updated: 29.12.2005