Inflation; D. Fyfe

No monetary crisis can be cate gorized as a curious thing. Insta bility in a monetary unit, or sys tem, may not be well understood by the world's masses; but today Mr. Fyfe is a financial consultant in Atlanta, Georgia. the effects are felt everywhere, here and overseas. Monetary crises affect people directly; a devalua tion anywhere temporarily re structures relative values in goods traded between nations. Within the country devaluing, the very act wipes out and marks down the value of savings and investments on a broad front. Devaluation is little more than the governmental declaration of partial bankruptcy. By fraud, through inflation, the point is reached where govern ment formally requires niJ.ore of its inflated currency units for an ounce of gold, raising the prices for all imported goods. In the United States the fall of the dollar, by devaluation, fol lowed a direct line of annual Fed eral deficits, the scattering of bil lions of dollars overseas, and are 8ulting inflation between 1945 and 1973 which destroyed 57 per cent of the dollar's purchasing power.

In the 23 years prior to 1969 alone, foreign aid expenditures totaled 138 billion dollars - paid for 327 328 THE FREEMAN largely through inflation. By the late 60's, foreigners held some 70 billion of our rapidly depreciating dollars overseas; and, seeing the dollar's value skidding, they ac celerated their run, with our own cash, into United States gold re serves. So we stopped redemption of gold for dollars, but not till half the gold was gone. Now, only $11 billion in gold remains at our "of ficial" devalued price of $42.22 per ounce. When we stopped selling gold for dollars, there was only one course of action left to the holder of dollars abroad: come back in and buy us out. This they did either on the United States stock exchanges or, directly, by setting up their own companies on our soil. We have made all this a little more expensive to do by devaluing. Still, the number of dollars held out against us beyond our shores is staggering. For a failing cur rency , Washington's only answer was devaluation. There is never, of course, any serious talk there about stopping inflation - the real cause of our recent dollar crises.

Cutting the "fie with Gold Our monetary crisis has its roots in a decision of some 40 years ago to cut the ties with gold. At that point, the ultimate end of silver redeemability in our cur rency, and the legislative actions removing all legal ratios of circu lating currency to gold reserves could easily have been predicted When our currency was no longe: directly convertible by a citizel into gold, the bars were down government was free to inflate a will, and has done so ever since The 1933 dollar is worth about 3( cents as of 1973, and the declinl goes on. The recent dollar debacle wa: not the result of any interaction: between wages and prices as caus ative elements in inflation; wage: and prices rise in response to gov ernment deficits and Federal Re serve System expansion of mone~ and credit and are symptoms 0: the disease, but not the causes Some economists link the dollal crises to faith in the free marke"

as a substitute for a "managed' solution. But there has not been ~ free market money for years, an( the so-called "managed" solutionf have brought us to the curren1 sorry state of muddlement an( monetary chaos. Then, graspin~ at straws, some blame a lack oj advance planning in economic ac tivity to insure predictable rela tionships among world currencies Planning cannot accomplish this Elimination of inflation as a roo' cause would in itself impart thl basic stability required to ins urI workable international currenc~ relationships, particularly if cur 1974 INFLATION: HARBINGER OF' MONETARY UPHEAVAL 329 rencies were tied to something of value, like gold and silver. Somewhere along the line the perspective became tilted. Noted economists advocate more controls - control of the divergency of wage/price behavior internation ally, control of the so-called, but nonexistent, wage/price inflation.

To further confuse issues, the in consistency of control policies from nation to nation has been cited as clouding the situation in world monetary affairs. The implications are clear: more controls, plus more uniform appli cation as a solution. This is mere ly to be blind to the results of long years of political control and dis tortion to currencies and econom ies in the so-called "free" world. The controls, and let us acknowl edge the vast quantity imposed within the United States, have brought us to the present stage of near monetary collapse. At this point we are being assured, by some, that more of the same will solve the modern monetary dilem ma. What is needed is no controls, before the economic structure col lapses or "blows out" from the weight of the load. The United States economy has survived a lot of dead weight and meddling with the under lying currency system that supports us all. But the econ omy has never had the invincible strength to survive long-term rnonetary depreciation through in flation, in spite of its productive ga.ins. Today, as a result, values are "out of whack" for goods and services - and, ultimately, hard economic reality will restructure those values.

Scapegoats Sought There are other common errors in addition to that of trying to lay blame for inflation on the wage/price spiral. Convenient scapegoats are found, often la beled as "other divergent factors"; fixed rates of conversion, and cur rency conversion rates which were tied to the dollar. This continues to ignore the underlying result of inflation at home and overseas, the lack of convertibility in the dollar to anything of value, and failure to keep our currency tied to some commodity with high market val ue: gold or silver. Balance of payments deficits seem to be recognized by most economists as a major item in currency crises, which indeed they are. Erroneously, however, both the export of private capital and goods and military expenditures take the blame. This distortion is crucial. The private sector of United States trade has been high ly productive in creating its own surplus. The problem of back breaking deficits has arisen only 330 THE FREEMAN June after the addition of military and foreign aid costs to the trade equa tion. When these foreign aid and military expenses are added to domestic social programs, the total load cannot be met by direct tax ation; inflation has been the literal evil alternative. And the plight of the dollar worsens. By 1974, some sources estimate the Euro-dollar holdings have risen to $100 bil lion. We can only envision a long, continued siege of foreign buy-out in our own land - the exact reverse flow, dollarwise, of what took place immediately following World War II. As the old saying goes, "It comes back to haunt us."

Another weak solution offered, and now in use, was the scuttling of fixed rates of exchange-letting rates "float." But a floating cur rency, by itself, is just as vulner able to crisis when destroyed by inflation as any "fixed rate" cur rency. Until the last several years, the world had fixed rates. Yet, in flationary crises took their appro priate toll, making mockery of rates which were mythical. Surely the most foolish of times in the past few years must have been when the United States declared the dollar to be worth $35, then $38, to the ounce of gold while the free market in gold stood at twice that level. This kind of wishful thinking continues today with the Treasury gold level at $42.22 per ounce while the free market in gold is wen over the $100 per ounce mark and continues to move upwards. Inflation Must End The economic instability caused by floating currency values will not be resolved until inflation i~ mastered. International currenc} fluctuations will not be brough1 under control until inflation h halted. Currency speculation, or all levels, will subside only wher inflation is ended worldwide. In flation will stop only when gov· ernments limit expenditures t< within reasonable levels of taxa tion. Currently, most industria Western countries take betweel 35 per cent and 45 per cent 0: personal income' in taxes, an( even then cannot run a balance( budget at the national level.

One of the most damned, leas understood aspects of. currenc; crises is that of speculation in anl against various monetary unih Speculation is cast as both a vi] lain and a cause. Overlooked is th fact that speculation is a legiti mate function and a stabilizin, force in worldwide money ma1 terse If a government refuses t protect or stabilize the value of it own currency, why shouldn't tb speculator guarantee a level, at price, in order to impart that sb bility to future business transal 1974 INFLATION: HARBINGER Oli' MONETARY UPHEAVAL 331 tions? And why deny business and trade the right to speculate for their own needs relative to future money dealings? Economists who decry specula tion overlook, .conveniently, the fact that currencies rise and fall in relative value to one another because of governmental sponsor ship of inflation. Eliminate infla tion, and currency speculations will abate. Sadly, when some gov ernments prove unable to master their own currency, not only do banks and businesses move to spec ulate against falling monetary units, but other nations holding the falling unit jump in to liqui date any weakening position.

We hear it said that gainers in monetary crises are the interna tional money speculators who thrive on and create the crises. Gainers there are in speculative movements and crises, but it is not true that speculators and their actions create a monetary crisis. The monetary crisis is the child of inflation, born out of govern mental muddling and national banking mismanagement of cur rency and credi t. The seeds of crisis and destruction are sown in government's initial decision to remove value from the monetary unit. When gold and silver back ing and convertibility are repudi ated by government, money ceases to be a commodity in which citizens can have faith. At that point the inflation begins, the crises are foreordained, and speculators ulti :mately will ply their trade. Foremost economists of the day indicate' that the solutions to in ternational currency problems lie in national policies. How true. But 'which policies? Floating currency rates versus fixed rates have noth ing to do with the problem or solu tion. Again, either a fixed or float ing currency may be destroyed by ,governmental inflation. Neither iCan government policies in price and wage controls, union legisla tion, capital flow control, or in ereasing of tax levels be effective in the foray. Existing taxation leve1s are today taking over 43 per Icent of personal income in the 'United States. Taxes on personal incomes and corporations are squeezing out all conventional sources of capital funding for the business community. The question is : Where will the investment Jmoney come from when earning levels are insufficient to provide?

.And at what interest cost on the borrowing? Devaluation Is a Curse The devaluation "solution" re lieves the pressure and penalizes the consumer by increasing the eosts of imported goods. But de valuation is a curse in itself. Gov ernment assumes this to be a cure 332 THE FREEMAN June to the crisis and then, feeling the pressure reduction, begins inflat ing again, usually at a higher rate than took place before devaluing. Thus, the stage is set for the next currency crisis and a future de valuation. With inflation rampant in the Western nations we may in deed see an era of competitive in ternational currency devaluations in response to repeated monetary crises - but only providing that the world somehow staggers on without major economic/monetary collapse. The international up heaval and its effects are increas ing as inflationary rates rise across the globe. The nonsense of the age is em bodied in the statement that today no monetary solution exists. We are told that we must look to co ordination of national economic policies for our salvation in the forming of stable, predictable ex change rates. But such coordina tion of policy is unlikely unless forced, and force is not a moral solution. Central banking mone tary gyrations and manipulation by government, resulting in infla tion, are at the root of the ap proaching catastrophe.

There is a monetary resolution now, just as there has been always. Any nation on earth can stand alone, relatively aloof from the wor ld of monetary crisis, by re turning to a monetary standard backed by and convertible into gold and silver - and by living within its means of direct taxation. It will always be this simple, though a price would have to be paid to re turn to this position. That price is the liquidation of inflated values. Sound Monetary Policy In reality, everything depends upon monetary solutions. As a fu tile response to crisis, the United States has called for a world mon etary system scrapping gold as a peg, with Special Drawing Rights based on "average value" of a cross section of currency values, the SDR to become the worldwide unit of financial accounting. This is a play at the creation of an in ternational monetary house of cards based on the false premise that gold is no longer a realistic standard of value. Valueless mon etary systems are predoomed to fail.

On our own national level we don't even need a predictable eco nomic policy. Rather we must have a fixed, predictable monetary pol icy which, by itself, will provide economic stability. Wage and price controls of either permanent or temporary nature will be, and are, self-destructive. Higher taxes will similarly destroy an economy by draining away capital availability in an inflation. Policies of public 1974 INFLATION: HARBINGER OF MONETARY UPHEAVAL 333 service employment to increase uti lization of the unemployed, anoth er proposed stabilizer, become merely one more element of insta bility and inflation; the public payrolls are now larger than we can afford to carry. Rather than monetary "re straint," this nation will find ulti mately there can be no stability without monetary restructuring on a basis of real value. Our house, monetarily, will be put in order for us if we choose not to do so vol untarily. Economic forces will at some point oblige the adjustment.

There is the possibility of the Fed eral Reserve System precipitating the collapse by turning off the money/credit flow; this would be a repeat performance of actions taken in the latter part of ·1928. Our inflation will have to end. No so-called "cosmetic" surface paint job - continued demonetiza tion of gold, patching up of Bret ton Woods machinery, or Special Dr.awing Rights - will lead to other than continued economic chaos worldwide. Restraints on capital movements, whether insti tuted against individuals, banks, or multinational corporations, will also serve only to tie world eco nomics and trade in knots. United States policy will be effective on the international scene only when our currency once again has "hard" value and we choose to exist, nationally, within our means. At that point the rest of the world could follow the lead or not, nation by nation, to its own liking. At least, under these con ditions, we would stand for some thing worthwhile in the interna tional limelight: financial stability and responsibility.

For what does this country stand now? Our government spon sors our own self-destruction through inflation. This is the era of planned expansion of money and credit through the Federal Reserve System to support mas sive Federal deficits. The resultant inflation is destructive of all social, moral, and spiritual values. His torically, no national sense of unity has ever withstood the corrosive and erosive effects of inflation. In the end, the national brickwork crumbles, the nation's social fabric is ripped and torn apart. If a country's currency has no fixed value, then for those citizens, neither does anything else in life. Prosperity and economic stability can be achieved in any country on earth through the exercise of strict monetary control and the establishment of a hard currency which is convertible into gold or silver. Less than this will only pro duce more of the same: national and international crises, monetary upheaval, economic chaos, and moral decline. {I ERNESTO E. BLANCO, P.E.