Defense, Controls, and Inflation.pdf - The Ludwig von Mises Institute

10 Defense, Controls, and InflationThe possible effectiveness of monetary policy in controllinginflation was not systematically explored. It seems probable thatthe critics of the monetary approach were not urging that itwould not work at some "price" but rather that the consequencesof very high interest rates would not be acceptable.Will monetary control be ineffective because it will requireprohibitively high interest rates?-The advocates of monetarycontrol believed that a great increase in interest rates would notfollow from reliance on monetary measures to prevent inflation.The critics believed that there was at least a very strong presumptionthat large increases in interest rates would result.Advocates of Inonetary control seemed not to be concernedwith high interest rates. In any event, they were willing to statetheir case, for purposes of analysis, as though high rates couldbe expected.It was argued that the sharp increase in interest rates wouldbe a pronounced deterrent to investment, but the advocates ofmonetary control contended that this was not a disadvantage.They held, in fact, that this would actually be in line with thegoals of those who were proposing direct controls to reduceprivate investment. In so far as high interest would equallydeter investment in the defense sector where the investmentwas desired, the relative profitability of defense investment ina free market would be adequate to attract the investmentneeded at the higher rates.Another objection was that high interest rates on governmentsecurities would mean a revaluation of these securities. in themarket and, further, that this effect would be pervasive, causinga readjustment not only of government securities but of allcapital assets. There appeared to be rather widespread fear ofthe consequences ofa sudden and sharp change in capital valuesthroughout the economy because of possible individualhardship raising equity consideration and because of concernfor the embarrassment that might be caused banks and insurancecompanies by substantial shrinkage of asset values.Those who" rejected the monetary approach because of thehighinterest rates which might follow did not regard the dangerof inflation as the lesser evil. Their position, rather, was that