CHAPTER VII DOES INFLATION SUBVERT THE “X” FACTOR?

Probably, this question could in no way be answered better than by the evidence of experience. Andrew Dickinson White, late President and Professor of History of Cornell University, wrote a small volume, “Fiat Money Inflation in France.”[1] It merits reading by every American with the welfare of his country at heart.

Some idea of inflation’s effects can be gleaned from the following selected lines taken from this amazing record, last revised in 1912:

“Early in the year 1789 the French Nation found itself in deep financial embarrassment: there was a heavy debt and a serious deficit.”

“. . . statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self-denial, and thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; . . .”

“. . . There was a general search for some short road to prosperity. . .”

“. . . They had then learned how easy it is to issue it; (irredeemable paper currency) how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class a nation can harbor—more injurious, indeed, than professional criminals whom the law recognizes and can throttle: how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.”

“. . . Oratory prevailed over science and experience. . .”

“. . . Mirabeau. He was the popular idol—the great orator—hardly six months before—had spoken of paper money as ‘A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium.’ But he yielded to the pressure:—partly, doubtless, from a love of immediate rather than remote applause, . . .”

“. . . His (Goury, who favored more assignats) demagogy bloomed forth magnificently.”

“. . . Singular, the man (Brillat-Savarin, who opposed more assignats) who so fearlessly stood against this tide of unreason, has left to the world simply a reputation as the most brilliant cook that ever existed!”

“. . . doubling the quantity of money or substitutes for money in a nation simply increases prices, disturbs values, alarms capital, diminishes legitimate enterprise, and so decreases the demand both for products and for labor; that the only persons to be helped by it are the rich who have large debts to pay.”

“. . . it began to be especially noted that men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large.”

“. . . Comic and, at the same time, pathetic, were evidences of the widespread idea that if only a goodly number of people engaged in trade were hanged, the par value of the assignats would be restored.”

“. . . Marat followed out his theory by asserting that death was the proper penalty for persons who thus hid their money.”

“. . . But what the bigotry of Louis XIV and the shiftlessness of Louis XV could not do in nearly a century, was accomplished by this tampering with the currency in a few months. One manufactory after another stopped.”

“. . . Commerce was dead; betting took its place.”

“. . . The Capitalist could put his surplus paper money into the government lands and await results; but the men who needed their money from day to day suffered the worst of the misery.”

“. . . The merchant was forced to add to his ordinary profit a sum sufficient to cover probable or possible fluctuations in value, and while prices of products thus went higher, the wages of labor, owing to the number of workmen who were thrown out of employment, went lower.”

“. . . Out of the speculating and gambling of the inflation grew luxury and, out of this, corruption. It grew as naturally as a fungus on a muck heap.”

“. . . Marat declared loudly that the people, by hanging shop-keepers and plundering stores, could easily remove the trouble.”

“. . . This very activity in business simply indicated the disease. It was simply legal robbery of the more enthusiastic and trusting by the more cold-hearted and keen. It was the ‘unloading’ of the assignats upon the mass of the people.”

This evidence should cause anyone to regard with alarm an increasing business activity accompanied by a mounting government debt. The suspicion that our revived business activity is too largely the indication of an inflationary disease, warrants an examination of this question. For certainly our present activity is accompanied by one of the largest government debt increases known to all history.

It is hardly necessary to detail the flagrant profligacy of government. Waste is in evidence on every hand. Projects, that have nothing whatever to do with economic necessity, are abundantly seen in every city, village and hamlet of the land. The theory of “spending ourselves rich” has political blessings and a wide popular acceptance. Groups and areas are organized to see which can best seduce money from a government that advocates financial seduction as an economic virtue.

An attempt in this thesis has been made to demonstrate that any waste, whether it be private or public, tends to destroy the possibility of more things for more people. Why is it then, that, as yet, all this waste has not resulted in few things for fewer people on a grander scale than now exists? Is it possible we have devised some magic formula that nullifies the penalizing action of natural economic law? That hope is too fantastic to find entertainment in the councils of serious men. Then, if that is not the case, it is obvious we have done something to forestall temporarily some inevitable and distressing results.

In principle, if not in amounts, we compare with France in 1789. We have a “heavy debt and a serious deficit.” France attempted a short road to prosperity by issuing assignats, notes against land. They used these assignats as a circulating medium. Momentary relief followed. We have likewise attempted a short road to prosperity but not in the form of assignats nor have we actually printed paper money.

Dr. White, in one of the previous quotations, uses the words, “Doubling the quantity of money or the substitutes for money. . .” Perhaps that word “substitutes” offers the clue; we have embarked on a gigantic credit inflation rather than a money inflation!

When the Federal Government needs a billion dollars what is done? Does the secretary of the Treasury call on the office where currency is printed and say, “Print another billion in thousand dollar bills?” No. But in effect he does call another printing establishment and say, “Print another billion in bonds.”

The government prints bonds and on these bonds is our collective promise to pay a given amount at some future date. At the request of the government the banks buy these bonds but they do not pay for them with depositor’s money—not with our earnings and savings. A bookkeeping credit is entered in favor of the government against which the government is entitled to draw.

It is well to observe at this point that the government has acquired a loan with no cash considerations whatever. Merely a bookkeeping entry and the government has all the money it wants! Now, when you do a job for the government like building an American pyramid or engaging in a little boondoggle, the government gives you a check against the aforementioned bank credit—you deposit the check in your bank and draw against it for the purchase of goods and services. Merely a building up of checking accounts by printing bonds! The government thus has created out of its fiat some purchasing power which enters the marts of trade. There is thus an inflation of bank deposits, and therefore purchasing power to the extent of the transaction and the merry process goes on its frolicsome way.

Our present condition can fairly be likened to the individual who is without means, who because of past performances has good credit and who on this basis, acquires all the elements of wealth. He moves into a new home for which he does not pay, takes delivery of a Rolls Royce on credit, charges a large stock of fancy groceries and even hires some servants on the promise to settle later. He can revel in his position until his creditors start repossession proceedings. The same thing can be said about our federal government; namely, “This spending puts people to work.” Of course it does. But, to use the vernacular; who takes the rap, this spender or the laborers whom he employs and cannot pay? The laborer does and he always will unless the spending which employs his services is the result of the production of something useful. This individual’s day of reckoning will not be so far ahead—neither will ours unless we rapidly mend our ways.

In this simple analogy the wage earner suffers because he doesn’t get paid. Suffering because you don’t get paid is not a bit different than suffering because the money that pays you won’t buy anything! No matter what the financial trick is, so long as it is a trick to avoid the production and distribution of useful goods and services, that trick spells suffering to the wage earner. There is little comfort in applying different adjectives to destitution. Furthermore, it makes no difference if the sponsors of schemes think their schemes will work to wage-earner advantage. The fact that they won’t work makes the indictment against them just as conclusive.

History teaches and economic reasoning confirms that inflation, whether it be by assignats, printing press money or printing press bonds,[2] breaks down production and creates unemployment. We work ourselves into a frenzied emotion about the subversive activities of communism. Are we interested in merely the kind of poison we take or are we interested in not taking any poison? No foreign ism, no practice can be more subversive than inflation.

France was seven years in cracking under the devastating influence of the assignats. The French, however, had a gold standard or its equivalent, by which they could and did watch the decrease in value of the assignats. By what are we comparing the value of the dollar? By gold? No. By the monies of other nations? No, the important nations are devaluing their currencies somewhat together. Thus, the process here may be slower than in France. Not until enough people see through this subtle process will it break down. But if we maintain the policy of spending more than we take in, if deficits become a national habit, the blow must inevitably fall. Excessive spending, or in other words excessive waste, must be met by excessive taxation which immediately results in fewer things for fewer people or, if not by that, by currency or credit inflation which forestalls that operation but sooner or later must strike with all of its accumulated vigor and national disaster. There is nothing more subversive!

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[1] D. Appleton-Century Co., New York.

[2] Some people may quarrel with this comparison; it is accurate nevertheless. In the old days, government bonds were sold to thrift investors; what was built by the proceeds was built out of the people’s savings; there was therefore a limit beyond which government bonds could not be sold at a reasonable price.

In modern times such bonds are not really “sold” at all; they are turned over to banks in return for (artificial) bank-credit. Government then pays its bills by checks against that bank-credit. Those checks are then re-deposited in the banks by their recipients. So “dollars” are created by a combination of pen and printing press instead of by printing press alone. There is no limit to quantity in either case. The essential difference is only that the modern process does not frighten the people so much, since they do not understand it. (Of course, some small dribble of “baby bonds” is still sold to investors and such bonds are not, in the first instance, inflationary.)