How to Beat Inflation

August 29, 1960

Between them, the present session of Congress and the Federal Reserve seem to be working toward cheaper money and more inflation.

From time to time I get letters from readers asking how they can protect themselves from the eroding effects of inflation on their savings. It is possible to answer this question in a way that is helpful to a particular individual; it is not possible to answer it in a way helpful to everyone. What is still not widely understood is that inflation can benefit one man only at the expense of another. The price of what you have to sell can go up more or faster than the average price of what you have to buy only if the price of what other people have to sell to you goes up less or slower than the price of what they have to buy from you. Roughly speaking, one-half of the population can gain from inflation only at the expense of the other half. The political appeal of inflation comes from fostering the illusion in the great majority of voters that they will somehow get the better of the swindle, and profit at the expense of a few unidentified victims.

The pressure groups for inflation do vaguely or explicitly understand this. An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.

HE WHO ACTS FIRST

It is true that an alert individual can do certain things to protect himself from the eroding effects of inflation on the value of his dollars but only if he acts both sooner and more wisely than the majority.

Even this used to be easier than it is today. In the German hyperinflation which culminated in 1923, a German could always buy American dollars, at the current rate in marks, as soon as his monthly, weekly, or daily income above current needs became available to him. But Americans today have no completely safe major foreign currency to turn to. They are prohibited by law from buying and holding gold at home. If they buy gold abroad, they face the risk that our government (following the domestic precedent of 1933) may force them to turn in their holdings at an arbitrary value in paper dollars.

They are left, then, in practice, with the choice of buying real estate, common stocks, cars, TV sets, paintings, Oriental rugs, jewelry—any equity or luxury that is not dollars or a fixed obligation payable in dollars. They are forced, in short, into extravagance and speculation.

MUTUAL FUNDS

An inexpert speculator may, of course, turn to investment trusts or mutual funds which diversify his investment for him and protect him to some extent against his own lack of expert knowledge. But always, the people who buy first, or at lower prices, can profit or protect themselves only at the expense of those who buy later or at the top.

It is impossible, in short, for everybody to protect himself against inflation. The early minority can do so only at the expense of the late-comers. And a scramble to get out of money and into things only intensifies the inflation, only increases and accelerates the rise of prices or the fall of the dollar.

This last result must follow whether individuals try to protect themselves against inflation by individual action or through such group devices as escalator wage clauses or escalator bond clauses. Such schemes accelerate inflation. Neither prices nor wages go up uniformly. Suppose some wages and prices have gone up 100 percent, and other wages and prices not at all. The average increase may be 50 percent. If cost-of-living escalator clauses are prevalent, and the wages or prices that have not gone up are raised 50 percent, the average wage or price level may be raised by that act itself to 75 percent. And so on.

There is only one solution only one sure hedge against inflation that can protect everybody: Don’t have the inflation. If you have it, halt it as soon as possible.