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Why so much inflation? For one thing, in their preoccupation with economic growth, many countries are expanding their money and credit at inflationary rates. France's money supply is increasing by an annual average of 11%, Britain's by 15% and Switzerland's by 20%. The U.S. money stock this year is expanding by about 8%. But a deeper source of inflation is the psychology of great expectations, which is prompting ever greater wage demands by Europe's unions. After years of being satisfied with modest comforts, workers now aspire to much more, including new homes, cars and trips abroad. As a result, wages are rising much faster than productivity. Last year wages went up 11% in France, 12% in Germany and Britain. By contrast, in the price-controlled U.S., wages in manufacturing rose only 6%.
This situation benefits the U.S. by making its goods relatively less expensive than they used to be in world markets. Largely as a result of the lower inflation rate in the U.S., the value of the dollar in relation to European currencies has risen in recent weeks. Capital that left the U.S. in the last few years is flowing back. Still, the economies of the Western world are so closely intertwined that the U.S. will have reason to feel uneasy unless Europe soon slows down its dangerous inflation.