Budget Deficits and Inflation

The sharp rise in the rate of inflation in 1973, after two years of diminishing rates, was a great surprise to many. What was the primary cause? Many reasons have been advanced to explain this change, some of them logical, and some not. Most of the explanations are based, in one way or another, on the basic cause of inflation: too much money chasing too few goods. It is well known that the Federal Reserve has powerful tools to increase or decrease the amount of money in circulation, thus causing it to turn on or shut off the spigot that regulates the degree of inflation. The only trouble is that sometimes other factors are present that nullify these efforts. Thus, for instance, the unusually gigantic exports of farm products to Russia, Poland, China and other countries threw the efforts of the Fed higher than a kite. For many years it was difficult for this country to keep down farm production, and farm prices were too cheap. Suddenly shortages developed, caused by (1) poor crops all over the world, except in this country; and (2) greater buying power abroad because of the cheapness of the dollar caused by two devaluations. Undoubtedly this had great influence in the sharp, sudden rise, first of farm products and later of other goods, as other nations suddenly found themselves able to convert their own currency into more dollars, and at a time when inflation was rising abroad. But another explanation has been advanced by many knowledgeable economistsseemingly unknown to Congress and to the majority of the voting public-which puts the primary blame on federal budget deficits. This is quite logical since deficits greatly increase the amount of money in the hands of the public.