I. Inflation's Syndrome

Galloping inflation threw the German economy into virtual chaos and demoralized large segments of the German people. Adolf Hitler was the ulti mate outcome. But at least it did not last long. 1 AN INFLATION PRIMER Presently, we are living almost a lifetime with creeping inflation that is supposed to go on indefi nitely-without accelerating. Admittedly, the gal loping kind is pernicious. Not so, we are being assured, the creeping type; the advantages of the latter far outweigh whatever unfavorable reper cussions there may be. Anyhow, we have (al legedly) no other choice but to continue what we have been doing for the last two decades or longer, and let the dollar's purchasing power slide further -at a leisurely rate. "LEGALIZED ROBBERY" According to the U.S. Bureau of Labor Statis tics, the index of (average) consumer prices has risen from 1939 to mid-1960 from 100 to 209-the purchasing power of the dollar declined from 100 to less than 48. This is what a former French pre mier, Paul Reynaud, called "legalized robbery."

Indeed, it is confiscation without compensation. The victims are deprived of their purchasing power. This is "robbery" on a national scale-a surreptitious levy on liquid income and wealth, raised in a haphazard fashion, with no regard for ability to pay, no respect for the rule of law, for equity and justice. It penalizes the saver, espe cially, and the honest producer, while the lucky operator and the political manipulator may reap unearned rewards. It is legalized, of course, the government itself being the culprit. 2 INFLATION'S SYNDROME Formal legalization does not confer justice by any economic or ethical standards. The free-enter prise system stands on the pillar of the inviola bility of contracts; this pillar is weakened as the value of money is impaired. "Legalized robbery" is a universal feature of counterfeit money, one created by government fiat. It is the product of deliberate, arbitrary meas ures, not of economic processes. It generates in the political arena, from which the effects spread to the market place. The powers that rule-over fiscal and central banking policies determine, in effect, whether there will be inflation, how much, and for how long.

INFLATION DEFINED To be sure, not every rise of prices qualifies as inflation. Sporadic oscillations should be disre garded. Nor is it of interest in our context if the rise has been brought about by an expansion of gold mining or gold imports. Price levels may rise under the purest gold standard, but to a limited extent only. Gold is a very scarce commodity; paper is not. "Gold-inflation," if any, is self-correct ing; paper inflation is limited only by the total collapse and repudiation of the currency. It is the inflation of the money volume-paper currency .. and bank deposits-that creates the fact and maintains the expectation of a disproportion between the total supply of goods for sale and the 3 AN INFLATION PRIMER total amount of purchasing power people have and are ready to use. Hence the definition; Money creation· is inflationary when the additional pur chasing power has no counterpart in goods and services people want to buy-when too much money chases too few goods.

In other words, inflation is a condition of the economy in which a rising volume of created money brings about rising production costs, higher prices, and increasing costs of living. Inflation tends to "feed on itself." The longer it lasts, the stronger the expectation that it will con tinue. People borrow, spend, and speculate more freely·than they otherwise would. The money cir culation is accelerated, the average dollar does ad ditional work, and prices are boosted additionally. CREEPING INFLATIONA· PREVIEW The purchasing power of the dollar is measured by a weighted index number of retail prices re lated to a base period. The measure is far from exact; it is merely an indication of the trend, or drift. And "drift"-upward-our living costs have, year after year since 1933, almost without inter ruption. At that, the consumer price index does not account for everything we buy. It is tailored to the household budget of the "average" worker who spends little on books, colleges, trav~l, hotels, and similar luxuries; the cost of personal services bought by the consumer is understated, too. And 4 INFLATION'S SYNDROME no price index can do justice to changes in the quality of goods we buy or to the price effect of trade-ins.

An idea of what inflation means is conveyed by the table. DETERIORATION OF FIXED-DoLLAR-VALUE ASSETS HELD BY INDIVIDUALS· %Depreciation of Purchasing Power of DollarYear 1940 . 1941. . 1942 . 1943 . 1944 . 1945 . 1946 . 1947 . 1948 . 1949 . 1950 . 1951. . 1952 .. 1953 .. 1954 . 1955 . 1956 . 1957 .. 1958 . 1959 . Total Assets (billions) $126.7 133.3 140.7 162.9 197.7 237.0 272.5 283.2 290.9 297.0 306.3 313.3 328.5 346.8 366.7 383.4 399.6 418.2 437.6 459.6 1.25 10.02 7.25 2.89 2.16 2.13 15.40 9.29 1.32 2.05 7.34 4.02 0.68 1.14 0.81 0.23 3.09 3.31 1.22 1.61 Loss of Purchasing Power of Assets (billions) S 1.6 13.4 10.2 4.7 4.3 5.0 41.9 26.3 3.8 6.1 22.5 12.6 2.2 4.0 3.0 0.9 12.4 13.8 5.4 7.4 Total loss $201.5 ·Compiled by American Institute for Economic Research, Great Barrington, Mass. The fixed-dollar-value assets include mortgages, bonds, bank deposits, savings accounts, the paid for insurance and social security -claims, etc. held by individuals. And these savings of individuals account for about 60 per cent of the annual capital 5 AN INFLATION PRIMER accumulation. In twenty years they lost a total of $201.5 billionl By that much, the debtors grew richer-or did they really? We shall see. This much is certain: the debts of consumers, businesses, farmers, and municipalities grow faster than the respective incomes. The financial position of all debtor categories is worsening year after year. The same holds for the biggest debtor, the national government. Its obligations and commitments have accumulated much faster than did the debt "relief" brought about by currency depreciation.

The average interest. charge on its outstanding debt instruments has risen in ten years from 2 per cent to over 3 per cent. Balancing the budget becomes increasingly difficult, and the Treasury has to dig ever deeper into the taxpayers' pockets. That brings us to a most significant aspect of this inflation of ours, different from those of the past. The Civil War, for example, was financed largely by inconvertible paper money-greenbacks. Taxes were negligible by present-day standards. Now, only a fraction of the governmental expenditures is covered by incurring new debt. By far the greater portion of the public revenue is raised by taxes which suck up more than 25 per cent of the national income. The tax burden falls largely on the lower-middle-income brackets and on busi ness. One consequence is the difficulty for the average citizen to protect his fortune against the inflation without resorting to hazardous and dubi6 INFLATION'S SYNDROME ous practices. What the government gives the speculator by windfall profits and the debtor by reductions in the real value of his debt, the gov ernment takes back by taxing away much of infla tion's dividends-and a great deal of the victimized savers' incomes. (Hence the fact that the propor ...

tion of income saved was lower in the 1950's than in the 1920's.) Another consequence of heavy taxation is the "c~eeping" character of the inflation process, a novel departure in the sad history of inconvertible paper money. Heavy taxation takes a great deal of zest out of the inflation. However, the operating cost of the government, the greatest buyer of goods and services, tends to rise faster than its revenues. In any case, the larger the deluge of paper money, the higher the taxes to forestall the "gallop" and to correct alleged or real inequities. The net result is that people pay more and more taxes in order to lose each time a fraction "only" of their incomes' purchasing power. Whether taxes are negligible or high, there is at least one similarity between the "gallop" and the "creep." The one produces trillionaires and quadrillionaires in untold numbers. The other causes millionaires to pop up from here and there -lucky speculators, happy tax-avoiders (evaders), and ruthless manipulators. The German trillion aires were literally wiped out when the currency was stabilized. As to the bulk of our new rich, it 7 AN INFLATION PRIMER will be interesting to watch where their millions of dollars will end up.

WHERE DOES THE INFLATION STAND? The inflation of the last twenty-odd years is a matter of record. But are we in danger of having more of the same? As this book goes to press, the highest monetary authorities, including the head of the International Monetary Fund, assure us that the inflation is over. (Have we not heard that before?) Vested interests in and out of Congress actually tell us that "deflation" is what we are up against. Of course, it all depends on what one means by such words as inflation and deflation. What matters is the present and prospective behavior of the cost of living. In the twelve months ending June 30, 1960, the cost of living went up again by about 2 per cent. Industry's labor costs keep rising even faster; at that, some of the recent wage boosts have not yet produced their induction effects on prices. Few experts doubt that the wage level is still directed upward, or that such develop ment would have no effect sooner or later on the cost of living. And the decisive indicator is the money supply, the number of dollars available for purchases. It has been rising year after year, boom or recession, at an average rate of 6 per cent or higher. The most imaginative statisticians do not figure on much more'than 2 per cent average annual increase in the physical volume of salable 8 INFLATION'S SYNDROME goods and services. The disproportion is patent, and this is responsible for the prospect of future 'price inflation.

Year 1929 . 1945 . 1955 . Money Supply * (billions) $ 55.8 150.8 216.6 Year 1957 . 1958 . 1959 ' . Money Supply (billions) $227.7 242.6 246.6 ·Cash in circulation plus net demand and savings deposits. 9 II THE "MODUS OPERANDI" OF INFLATION Money originates in one of two ways. One way is by depositing gold, the value of which is credited to the depositor on a bank account. However, the bulk of the nation's "purchasing power" stems from credit extended by banks,! be it by loaning funds or by purchasing securities (bonds). PRODUCTIVE CREDIT-MONETIZING REAL PURCHASING POWER As an illustration, let us take a simple case: A New Orleans merchant sells $100,000 worth of cotton to a mill in Manchester, England. The buyer, whose credit is guaranteed by an English bank, promises to pay as soon as the consignment arrives. The seller needs money right away and borrows from his local bank by discounting the bill signed by the buyer. His deposit account is credited with, say, $75,000. Presently, he may draw checks on the new deposit. Apparently, $75, 000 had been "created" by a stroke of the pen, as it were. Add all similar transactions occurring at about the same time, and a great deal of purchas10 THE "MODUS OPERANDI" OF INFLATION ing power is being put in circulation: Should that not cause a rise in prices?