Merchant's Appraisal of Inflation; H. McBain

A MERCHANT'S APPRAISAL OF INFLATION IT was midnight when my cab pulled up at the hotel. I had had the taxi since early morning. I opened my suit case and counted out 71,250 marks. This included a 5,000 mark tip for the driver. He was delighted and thanked me profusely. How could he know that the total cost to me for his cab, gasoline, and services for that 16-hour day was only 57 cents? Naturally, he could· think only in terms of his own money. To him it looked like a fortune for a day's work. The time was October 1922~the place Berlin. The value of the paper I had given him expressed in terms of prewar marks was about $14,0001 I spent three months in Berlin that year. Prices were rising with such rapidity that no merchant could open the doors of his establishment much before noon. He had to reprice each item every morning! One evening I took some German friends to the Adlon Mr. McBain retired in 1958 as Chairman and Chief Executive Officer of Marshall Field & Company. As a veteran merchant, a world trav eler, and a keen observer of economic affairs, he is well qualified to discuss inflation. This article first appeared in two installments in the Chicago Sunday Tribune 7 March 15 and 22, 1959.

162 A MERCHANT'S APPRAISAL OF INFLATION 163 Hotel for dinner. Despite my urging, they would order no meat. I explained that meat would cost me practically nothing. To them I seemed to be paying $900 for a sir loin steakl I lived through many months of German inflation and I learned a lot. The German people seemed unable to grasp the fact that the loss in the value of their money was bringing ruin. They thought only in terms of high prices ascending to astronomical new heights every morning. Years later, another time and place made an indelible impression upon me. I was having dinner with our Italian agent in Florence. The year was 1947. World War II had come and gone. Another country had been hit by disastrous inflation-though not of such proportions as the one in Germany during 1922-23. Tllis night in Italy our dinner check totaled 6,000 Italian lira. To my Italian guest, thinking in terms of his country's currency before the war, I was spending $1,250 on dinner for two! If in the not too distant future a similar situation develops in America, I am certain most of us will be deploring "high prices" rather than correctly blaming our rotting dollar for the disaster.

I asked this Italian agent what he had done to protect himself from the scars of inflation. He told me he had saved regularly 20 per cent of his earnings during· 40 years of business life. I asked him about life insurance. Yes, he had started a program many years ago and most of it was paid up. He told me of his expectation that his life insurance would enable him to retire in comfort.

164 HUGHSTON Me BAIN Now that retirement was close at hand, he said, there was no question of default; the life insurance companies were paying their claims in full, as promised, in Italian currency. But-and tears came to his eyes-instead of pro viding lifelong security for his wife and children, his entire insurance proceeds would now buy a. supply of food for only three weeks1 My I talian friend, like my German friends, could think only in terms of very high prices. I do not pretend to be an economist. But I do know something at firsthand about inflation. Personal experi ences such as these show how tragic its effects can be. Since my vivid experiences in Europe, I have studied the causes and effects of inflation with compelling interest. Perhaps the greatest story ever written on the subject is entitled Fiat Money Inflation in France: How It Came; What It Brought, and How It Ended. 1 It was written by Andrew D. White, the first president of Cornell Uni versity. Despite the fact that the French inflation de scribed by Dr. White occurred in the latter part of the eighteenth century, its closeness to our own situation today is startling.

The trouble started in 1789 when France found itself with a heavy debt and a serious deficit hecause of an unbalanced budget. There were grave doubts whether the French people would place any confidence in paper 1 A 1959 edition of Fiat Money Inflation in France with a fore word by Henry Hazlitt is published by the Foundation for Eco nomic Education, Irvington-on-Hudson, New York. 124 pages; $1.25 paper, $2.00 cloth.

A MERCHANT'S APPRAISAL OF INFLATION 165 money not exchangeable for gold but backed merely by government's promise to pay. Therefore, the government decided to confiscate all the church lands in France and to use them as security for paper moneys. The church real estate formed about one-third of the entire real property in France. It looked like a solid base for a great financial future. (It is now obvious that church lands were a poor backing for currency for the simple reason that no individual could ever obtain these lands or any portion of them in exchange for his money.) Against this base, paper money was issued. The new credit caused great joy; the treasury was. relieved; a por tion of the public debt was paid; creditors were encour aged; ordinary expenses were met. Six months later busi ness slumped again. Politics again prevailed. There was less argument than before against issuing more paper money. A few sound thinkers of that day explained that increasing the quantity of money and credit in any coun try must soon increase prices, disturb values, alarm capi tal, and decrease the demands for products and· labor.

A Vicious Cycle to the Guillotine Nevertheless, the vicious cycle had started; it was politically inexpedient to stop the subsequent issuance of more and more paper money. After each new issuance, business improved temporarily and prices advanced-but the value of all French moneys declined. By January 1793, about 3 billion francs had been is sued-all publicly and legally. Prices were constantly 166 HUGHSTON Me BAIN rising. Committees were formed to attack and stop infla tion. Orators endeavored to enlighten the people by giv ing every reason in the book for this disaster save the true one. The government blamed the ministry, the nobles, the hardhearted rich, the merchants, the shopkeepers. Today's convenient "whipping boy" -Big Business-was as yet unborn. In late 1793, the Law of the Maximum was passed and price ceilings were born. Controls were established on wages, selling prices, profits. The people were over joyed, but evasion, as always, quickly followed-then scarcities-then rationing. Manufacturers were crippled, agricul ture depressed, shopkeepers were ruined if they obeyed the law. Many shops closed-others were looted.

Some evaders were sent to the guillotine; others were hanged. (I'm grateful not to have been a merchant in those days!) At the end of 1795 more than fifty billion francs· had been issued. The purchasing power of this paper money (despite the enormous value of the lands pledged behind it) was practically nothing. On February 18, 1796-9 a.m.-in the presence of a great crowd in Paris, the machinery, plates, and paper used to make this "fiat money" were solemnly broken and burned. Once more, in our own times, the subject of inflation is making headlines every day. We are deluged with news paper stories, magazine articles, and speeches. Several intelligent articles on inflation have appeared in this newspaper. But it is true, nevertheless, that much of what A MERCHANT'S APPRAISAL OF INFLATION 167 we read and hear on the subject is complicated gibberish. In some cases I believe it is purposely so. History verifies the statement attributed to Lenin: "The surest way to overthrow an existing social order [government] is to debauch the currency."

Just what is inflation? "Inflate" means "expand." To me, "inflation" means inflating the money supply. It is just that simple. Stated another way, each dollar is a purchase order; that is, it is a claim on goods and services. It is the in creasing of these purchase orders-making more of them than is properly justified by the economy-that is true inflation. People are led to believe, erroneously, that "high prices are inflation.'" That is putting the cart before the horse. High prices are merely the effect of inflation. And quot ing Webster's dictionary: "Inflation always produces a rise in the price level, in accordance with the quantity theory of money." Our government has a complete monopoly of the "money factory." If you doubt this and care to test it, try manufacturing some money or government bonds your self! But you had better not: the government's control and monopoly is absolute. Only the government can be a "legal counterfeiter" in the sense of legally creating more money and bank credits. It follows logically that under such control the government, and only the govern ment, can prevent inflation.

How does the government inflate our currency? There are several successful methods, the oldest of which are no 168 HUGHSTON Me BAIN longer in favor. They would be too easily detected by the better educated citizens of this generation. In the ancient great days of Rome and Athens, however, infla tion was accomplished by "clipping the coins." This was done by the government's taking the coins then in circu lation and reminting them so that they contained less gold or silver. The government then represented to the people that they had the same value as before. (Does any one value our paper dollar of today as equal to a gold one?) Printing Presses and Central Banks Many centuries later, governments resorted to a much easier method made possible by the advent of the print ing press. They simply printed more paper money, thus increasing the government's income much more con veniently than by raising taxes. In our own generation many examples come to mind of the money printing press route-Chile" Germany, France, Italy, Argentina, Greece, Brazil, and China, to name a few. Today, how ever, we practice a much more subtle scheme to accom plish the same ends. Our government prints bonds and sells them to commercial banks which pay for them by entering deposits (or credits) in the government's bank accounts. Of course, these deposits may be spent by the government (just as you or I may draw on our personal bank accounts).

With its complete monopoly, no matter what method our federal government elects to use to increase the availA :MERCHANT'S APPRAISAL OF INFLATION 169 able supply of money and credit, the all-important fact is that it is the government, and only the government, that has the power to cause true inflation. The following table quickly shows the total amounts of usable money available in the U. S. A. at year ends: 1939-64.7 billion dollars 1948-172.7 1956-226.4 It is quite obvious that neither the increase in our population nor the increase in productivity has grown anywhere nearly as fast as the money and credit supply. It is also true, however, that if there had not been some considerable increases in our population and in our pro ductivity, the value of our currency would have decreased much more severely than the approximate 50 per cent drop in the last 20 years. Many of our confused ideas concerning inflation stem from oft-quoted statements that labor unions and business cause inflation; the former by gaining higher wages for employees, the latter by increasing selling prices. Since high prices are not inflation; since inflation only relates to money and bank credits; and since only government controls the quantity of both, it is obvious that neither unions nor business can cause inflation.

However-and this is fundamental-when wages are arbitrarily forced above the market level that would have reflected the existing relationship between the sup ply of labor and the demand for it, we have the starting point of a vicious cycle: 170 HUGHSTON Me BAIN 1. Wages increase. 2. Prices increase. 3. Products lose competitive position in world trade. 4. Unemployment results. 5. Pressure on government to make more money available tends to become irresistible. 6. Government gives in to political pressure. 7. The government creates more money. 8. The value of our money drops-and we have inflation. In emphasizing the government's complete responsi bility for causing inflation, I do not intend to imply that unions and business are blameless-quite the contrary. When a union or a business or an individual is responsi ble for raising wages andjorprices faster than the market allows, they are fanning the flames of inflation. They are creating the very conditions that eventually bring such powerful political pressures on government that it will surrender its responsibility to keep our currency good.

People spark inflation. Demands made by "people" for federal funds (no matter what group name they use), when excessive and beyond reasonable limits, cause a breakdown in the normal laws of supply and demand. Such demands lead to property destruction, unemploy ment, and eventually irresistible pressures on govern ment to extend its power beyond its competence. Business tends to put the whole blame on labor unions because of their demands for higher and higher wages. But is business-and other so-called moderate groupsA MERCHANT'S APPRAISAL OF INFLATION 171 blameless? I doubt it. When "great conservative leaders" representing chambers of commerce, churches, slum clearance projects, agricultural "security" groups, hospi tal building programs, foreign aid devotees, and countless others all demand that their pet projects be included on the "federal gravy train," I believe they are just as guilty as the unions.

In all these areas-people-you and I-are responsible. The next time I am asked to lend my name and support to any project which aims to pressurize government for more federal funds I am sure my answer will be an em phatic "NoI" The federal government is already com mitted to spend far more than it can properly afford. The recent appointment of a cabinet committee headed by Vice-President Richard Nixon to draft plans for combating inflation is encouraging. It will have no difficulty in ascertaining the facts. The announced inten tion "to strive to build a better public understanding of the problem of inflation" is all important. I hope the commi ttee follows through. Other governments in other years have lacked the cour age to reveal the truth about the real cause of inflation. They have lacked the courage to explain that all infla tion is bad-no matter how small or creeping it may be.

Once started and not checked, I firmly believe that infla tion always leads to disaster-and it always takes the greatest toll from those who can least afford it.