It ith Complementalo the fee Reprinted from THE COMMERCIAL AND FINANCIAL CHRONICLE Thursday, December 27, 1945 Interest Rates and Inflation By DR. L. ALBERT HAHN Dr. Hahn Points Out That the Old Device of Trying to Check Infla- tion and Deflation by Raising or Lowering Interest Rates Through Central Bank Operations Has Been Abandoned and Is Being Re- placed by a Confused System of Government Diagnosis and Control. Holds That Common Belief in the Necessity of Low Interest Rates Is Not Valid, That Higher Interest Rates Are Not Coincident With Unemployment, and That Purely Fiscal Reasons Should Never Determine Economic Policy. Charges That Government Is Attack- ing Results, Not Causes of Inflation, Which Will Lead to a Tem- porary Boom Followed by a Depression. Wherever Government eco- nomic policy, business policy of an also as the logical consequence individual firm, or the future of the monetary business cycle trends of stock or commodity mar- theories prevailing at that time. kets are dis- The theorists, and especially the cussed the followers of the eminent Swedish topic of infla- economist, Knut Wicksell, were tion plays a of the opinion that in order to major role. stabilize the price level, one had Generally only to regulate the quantity of speaking in- money; and, that this, in turn, flation is con- could and should be achieved by sidered dan- making the supply of credits from gerously im- the money issuing authorities minent. more expensive. Today, the recommendation or A Forgotten the mere mentioning of a restric- Device tive discount and interest policy If inflation as a means of checking inflation, had been appears to the overwhelming feared 10 majority of economists as well as years ago, the businessmen in this country as raising of in- almost ludicrous. This shows the terest rates extent to which ideas on this sub- Photo: H. N. Rubien would have Dr. L. Albert Hahn ject have changed and traditional been sug- views been replaced by what in suggested as the simplest and the opinion of this author must be most natural means of defense. called a general confusion of Raising of discount rates-the minds. interest rates applied by central banks-recommended itself as the Uncertainty of Diagnosis classical and traditional policy of This confusion begins even at central banking developed for an earlier stage when the exis- more than a century. It appeared tence of inflation is questioned.