I
Inflation
Inflation (overexpansion of the money supply) is at the bottom of every major problem that confronts our country and the free world.
Its process will be described in later chapters.
Its nature and effects have been presented in a brief but comprehensive summary by the American Institute for Economic Research. Their report, verbatim, follows in full.
Report of the American Institute of Economic Research
"When it comes to rising prices, it seems to most people that there is no end in sight. Americans are upset and many are even angry about this, and they have a right to be, because the ever-rising cost of food and clothing robs them of their savings, cheats them of those vacations and necessary extras that they thought they had been working for."
Thus spoke President Nixon to the American people on the afternoon of Friday, October 17, 1969. How refreshing is frankness from a politician. "Robs" and "cheats" are not silly euphemisms but blunt characterization of what has happened and still is happening. We prefer the name "embezzled" for those consequences of inflating that involve the transfer of real wealth from those who have earned and saved to the beneficiaries of the subtle process. However, this is a minor difference in terminology. What are the facts? [p. 2]
In the years from 1929 to 1933, nearly 40 percent (about 9,000) of the banks failed in the United States. The losses to depositors totaled about $1.3 billion. Loud were the lamentations and allegedly devastating were the consequences.
Since World War II, nearly $500 billion of real wealth has been "embezzled" from American citizens as continued inflating has "robbed" (to use Mr. Nixon's term) them of a substantial portion of their accumulated savings, including the cash values of their life insurance. If one were to include the loss in the buying power of the face value of life insurance policies, the loss would be nearly doubled.
In 1969 alone, more than $70 billion will be embezzled as the dollar continues to lose its buying power. Again the amount would be far greater, nearly twice as much, if one included the loss in buying power of the face value of life insurance policies rather than only the accumulated cash values.
Losses in three decades of nearly 400 times the losses attributable to bank failures during the Great Depression, and losses in the current year 50 times the 1929 losses surely are ample justification for President Nixon's comments. We believe that the facts are far worse than he has indicated. Not merely ". . . vacations and those necessary extras ..." have been lost. The truth is that millions of retired individuals have been "cheated" (Mr. Nixon's word) of so much that the government recently has reported the great majority are living in poverty. Moreover, for by far the most of the 40,000,000 families who have nearly $2 trillion of savings (including life insurance policies), poverty is what they can expect for themselves and for their dependents whom they have tried to protect if the trends of recent years continue for a few more decades. Even "vacations and those necessary extras" can be sacrificed without unbearable discomfort, but the inflating causing the losses mentioned is destroying the foundation of orderly society.
The president then asked the rhetorical question: "Now, why does everything cost so much?" He answered, "To put it bluntly, the frequent failure to balance the budget over the past five years has been the primary cause for unbalancing the family budgets of [p. 3] millions of Americans." This is only part of the story, and the smaller part at that. The whole situation is revealed in our chart, Sources of Purchasing Media, which shows that prolonged inflating of the nation's purchasing media or "money supply" has resulted from monetizing not only part of the federal deficits but also a large amount of private debt. Unsound operation of the nation's money-credit system, not federal budget deficits, as such, provide the underlying answer to the president's question.
Most encouraging to economists is Mr. Nixon's assertion, "We're not going to run away from treating basic causes to start treating symptoms alone. In other words, we are not considering wage and price controls." Economists, many of them anyway, well know from the historical record that such controls cannot be made effective even by applying the most drastic penalties.
What does the president propose to do? He said that budget deficits will be avoided and that the central banking system will be supported ". . .in its policy of keeping money hard to borrow. When too much money is borrowed, this money is simply used to bid prices up higher."
The president's assertion quoted above may give the erroneous impression that borrowing, as such, is the problem. However, prices have risen because the commercial banking system has created and loaned to borrowers purchasing media in excess of that needed to represent things offered in the markets. The Federal Reserve Board and banks recently have been reducing but not stopping creation of more inflationary purchasing media. If this course of action is continued, that is, if the process of inflating the nation's purchasing media (creating excess money supply) is retarded, the rise in prices, which is what Mr. Nixon and many others label "inflation," probably will be retarded but will not stop.
The president also asserted, ". . . there's a secret weapon that we intend to use in the battle against rising prices. That secret weapon is the confidence of the American people." How useful will that "weapon" probably be?
In answering this question, we focus attention first on the concluding words of Mr. Nixon's message, which were ". . . together [p. 4] we are going to succeed in slowing down the rise in your cost of living." Note that no intention of stopping the rise in prices is indicated, and the possibility of reversing it, of returning to savers some of the buying power of which they have been "robbed" and "cheated" during past years, is not even discussed.
In judging the significance to listeners of this part of the president's message, one should remember that the nation has been divided as never before by the prolonged process of inflating with its inevitable consequences, "embezzling" from some for the benefit of others. One group includes the victims, the "sheep" who are being shorn, some 40,000,000 families who have substantial life insurance and savings as well as all the retired individuals and many whose wage increases lag far behind the rise in the cost of living. The other group includes the beneficiaries of inflating, the speculators in stocks and real estate, the portion of union labor able to demand and obtain wage increases that exceed the rise in living costs plus taxes, many but by no means all businessmen, and last but perhaps not least the professional politicians who have found in budget deficits and easily available inflationary purchasing media the means of staying in office by indirectly buying votes.
Possibly some of the victims of inflating will be consoled by the president's message. Not to be robbed as rapidly as they have been in the last year or two may be a comforting prospect for a portion of this group. But can the president count on restoring their "confidence" by such means? In effect, he has said, "We shall not let the beneficiaries of inflating rob you of so much in such a short time, but we intend to let the process continue. We intend only to slow it down." Will that restore confidence?
And the beneficiaries, how will they interpret the president's message? Presumably, they will congratulate each other that the embezzling is to continue. The president evidently finds that the "lambs" are being shorn too closely, taking their hides with the wool; and even sheep can get angry and recalcitrant. They may not vote right if the shearers do not somewhat lessen their takings. This message almost surely will tend to bolster the "confidence" of the beneficiaries of inflating. No longer need they fear [p. 5] that inflating actually will be stopped, much less reversed, by deflating. If the president means what he says, they can count on continuing to receive the "benefits" of the process that shifts to them the real wealth "embezzled" from savings and life insurance. Surely, their confidence will be increased, but is that what the president intended?
In the week before the president spoke, prices on the New York Stock Exchange rose frenziedly in the largest volume of trading for one week ever recorded. Our guess is that the president's message was known to some people who passed the word along well before the president spoke. If that is what occurred, the excited speculation may be proof that the beneficiaries of inflating will not lack confidence.
Thus the president's "secret weapon," the confidence of the American people, may prove to be a two-edged sword. One edge, the one that might have been used to gain support for the battle against more inflating, may be dulled as the victims of inflating reflect that not even the man who purports to be against rising prices intends to do more than slow down the rate of rise. The other edge, which will be used to kill the opposition to more inflating, may be sharpened by confirming the confidence in their opinions of those who are sure the dollar is doomed and intend to profit by it.
We assume that the president's intentions were good, that he sincerely believes inflating is morally wrong and destructive. How then can one account for what he has said? An answer to this question is desirable, because it may suggest what his future actions probably will be.
President Nixon has spent a lifetime as an attorney and as a politician. (We use the word politician only in the best sense with no invidious implications.) The goal of every wise attorney is to stay out of court, to serve his client best by finding an acceptable compromise solution for any legal problem. Professional politicians, the most successful of them, are honorable men skilled in the art of reconciling divergent views. Searching for a consensus that will not alienate too many voters is the proper work of politicians much of the time.
Mr. Nixon, we understand, is extremely able both as an attorney [p. 6] and as a, professional politician (again in the best sense of the word, we emphasize). What could be more natural than that his lifelong training and experience would incline him to believe that there must be a compromise solution for every, or practically every, problem.
This, we suggest, may account primarily for his choice of means for combating "inflation." Also involved may well be personal lack of familiarity with money' credit matters and poor advice from those on whom he has relied.
Unless we are mistaken, no compromise solution to the problem of inflating is available. We rest this assertion on moral grounds, not because economists are experts on moral problems generally, but because some economic problems involve a moral foundation, or, sometimes unfortunately, the lack of any.
A modern industrial society functions by means of a vast multitude of exchanges that involve promises too numerous even to attempt to catalogue. Every contract, expressed or implied, for present or future performance involves such a promise. The promises men live by make possible a modern industrial civilization.
The foundation for virtually all economic promises is sound money, and inflating destroys sound money. Long gone and all but forgotten are the basic promises of the nation's money-credit system, promises that even now are being removed from the new issues of paper currency. Inflating falsifies the promises men live by, and no nation, no civilization, can endure on a foundation of broken promises. The historical record is so clear as to be unmistakable.
For this reason, we conclude that President Nixon will not be successful in his less-than-wholehearted attempt to stop inflating. Slowing down inflating is not stopping it; much less is it reversing the trend and restoring some of the assets of which savers have been "robbed."
Both more knowledge about money-credit matters than Mr. Nixon or his advisers have as yet evidenced and intestinal fortitude on Mr. Nixon's part will be required. As to the latter qualification, [p. 7] we have no basis for judging and perhaps are not competent to judge. The answer will be revealed in his actions during the months and years ahead.
Supplementary Note
Repeatedly, readers of Institute publications have asked us: "Will inflating go on forever; will the depreciation of the dollar never end?"
If one judges by the historical record, the answer is that the only limit to the depreciation of any currency is the complete loss of its buying power. Inflating and consequent depreciation of a currency are not something new in the world. The process has occurred hundreds of times in the past several centuries and now is occurring in much of the world.
In all of recorded history to date, whenever loss of a currency's buying power has extended as far as it now has in the United States (nearly two-thirds), virtually all of that currency's buying power has been lost in at most a few more decades. Therefore, that the dollar will become worthless seems all too probable.
In our studies of the circumstances that have existed when currencies have depreciated, we find only one possibly significant difference today. For the first time in the history of the world, by far the most of the families in a nation have savings and life insurance in large amounts that are denominated in the nation's currency. Never before have the great majority of the citizens of any country been certain to lose so greatly by continued inflating and loss of the buying power of the currency.
Perhaps this difference in circumstances will affect the outcome. One can imagine that the "sheep who are being shorn" will act more like men, will demand that their legislators stop the inflating and restore a sound currency and sound commercial banking. However, any attempt to influence legislation is a responsibility of the citizen; it is not our responsibility in our role of scientific inquirers and reporters. Our job ends when we have reported what has happened and what probably will happen if various [p. 8] courses of action are followed in specified circumstances.
The Editorial Staff
—Economic Education Bulletin (Vol. 9, No. 8) Reprinted by permission of the American Institute for Economic Research
"Robbed" and "cheated" we are indeed; but President Nixon did not identify the robbers and the cheaters. Few ever do identify them, and those who do are never heeded.
Evidently those who understand inflation are too interested in its profits to consider consequences, while the uninformed majority never suspect.
By indiscriminately multiplying unearned money, inflation multiplies collusion, waste, pollution, and crime. It is as deadly to freedom as pollution is to life.
With tolerable life on earth now measured in decades by many scientists, it is no time to further pollute the environment by supersonic air travel, space exploration, and the like. Despite unqualified opposition to these programs, the writer takes nothing from the brave pioneers who venture into outer space with full knowledge that they might never return. He shared the world's anxiety for Hays, Lovell and Swigert in their difficulty with returning their moonship to earth, yet could not but speculate on the inconsistencies of the human psyche.
We had, at the time, tens of thousands facing comparable hazards—under less glorious circumstances—in the jungles and rice paddies of Vietnam. Aside from their loved ones, and a relatively small anti-war group, these were little more than economic pawns (how would their return affect the unemployment dilemma, the armament industry, my job?). Were anxieties realistically distributed, this war would have long since been terminated—if indeed it would have ever happened at all. [p. 9]
No war—certainly none of our own—ever solved anything. All they ever accomplish is to be springboards to more and bigger wars, more inflation, more concentration of wealth, and more debasement of humanity. If we must have war, let's all go; let's draft profits as well as human life.
Inflation during war belies our patriotic mouthings, and exposes our blind preference for profit over humanity. [p. 10]
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