Inflation's syndrome

Galloping and creeping inflation

In the summer of 1923, the German inflation was rapidly heading toward the grand finale: total repudiation of the currency. As an instructor in a Berlin college, this writer drew a monthly salary that had been raised from an inflated 10,000 marks or so in early 1922 to 10,000,000 marks by July, 1923, and the whole amount was being paid twice a month; then, once every week; then once each day.

The next step to meet the skyrocketing living costs was to pay us twice a day, in the morning and in the afternoon. Just after 5 P.M. one day in late August, 1923, I was walking down the staircase of the school, carrying the day's second haul of ten million marks (the day's first paid for a modest lunch), when the professor of physics overtook me. "Are you taking the streetcar?" he asked. "Yes," I said. "Let's hurry. The fare will be raised by 6 P.M. We may not be able to pay it."

Galloping inflation threw the German economy into virtual chaos and demoralized large segments of the German people. Adolf Hitler was the ultimate outcome. But at least it did not last long.

An inflation primer

Presently, we are living almost a lifetime with creeping inflation that is supposed to go on indefinitely-without accelerating. Admittedly, the galloping kind is pernicious. Not so, we are being assured, the creeping type; the advantages of the latter far outweigh whatever unfavorable repercussions there may be. Anyhow, we have (allegedly) no other choice but to continue what we have been doing for the last two decades or longer, and let the dollar's purchasing power slide further at a leisurely rate.

Legalized robbery

According to the U.S. Bureau of Labor Statistics, the index of (average) consumer prices has risen from 1939 to mid-1960 from 100 to 209- the purchasing power of the dollar declined from 100 to less than 48. This is what a former French premier, Paul Reynaud, called "legalized robbery." Indeed, it is confiscation without compensation. The victims are deprived of their purchasing power.

This is "robbery" on a national scale-a surreptitious levy on liquid income and wealth, raised in a haphazard fashion, with no regard for ability to pay, no respect for the rule of law, for equity and justice. It penalizes the saver, especially, and the honest producer, while the lucky operator and the political manipulator may reap unearned rewards. It is legalized, of course, the government itself being the culprit.

Inflation's syndrome

Formal legalization does not confer justice by any economic or ethical standards. The free-enterprise system stands on the pillar of the inviolability of contracts; this pillar is weakened as the value of money is impaired.

Legalized robbery is a universal feature of counterfeit money, one created by government fiat. It is the product of deliberate, arbitrary measures, not of economic processes. It generates in the political arena, from which the effects spread to the market place. The powers that rule- over fiscal and central banking policies determine, in effect, whether there will be inflation, how much, and for how long.

Inflation defined

To be sure, not every rise of prices qualifies as inflation. Sporadic oscillations should be disregarded. Nor is it of interest in our context if the rise has been brought about by an expansion of gold mining or gold imports. Price levels may rise under the purest gold standard, but to a limited extent only.

Gold is a very scarce commodity; paper is not. "Gold-inflation," if any, is self-correcting; paper inflation is limited only by the total collapse and repudiation of the currency. It is the inflation of the money volume-paper currency.. and bank deposits-that creates the fact and maintains the expectation of a disproportion between the total supply of goods for sale and the total amount of purchasing power people have and are ready to use.

Hence the definition; Money creation is inflationary when the additional purchasing power has no counterpart in goods and services people want to buy-when too much money chases too few goods. In other words, inflation is a condition of the economy in which a rising volume of created money brings about rising production costs, higher prices, and increasing costs of living.

Inflation tends to "feed on itself." The longer it lasts, the stronger the expectation that it will continue. People borrow, spend, and speculate more freely than they otherwise would. The money circulation is accelerated, the average dollar does additional work, and prices are boosted additionally.

Creeping inflation a preview

The purchasing power of the dollar is measured by a weighted index number of retail prices related to a base period. The measure is far from exact; it is merely an indication of the trend, or drift. And "drift"-upward-our living costs have, year after year since 1933, almost without interruption. At that, the consumer price index does not account for everything we buy. It is tailored to the household budget of the "average" worker who spends little on books, colleges, travel, hotels, and similar luxuries; the cost of personal services bought by the consumer is understated, too.

And no price index can do justice to changes in the quality of goods we buy or to the price effect of trade ins. An idea of what inflation means is conveyed by the table.

Deterioration of fixed-dollar-value assets held by individuals

Year Total Assets (billions) $ %Depreciation of Purchasing Year Power of Dollar Loss of Purchasing Power of Assets (billions) $
1940 126.7 1.25 1.6
1941 133.3 10.2 13.4
1942 140.7 7.25 10.2
1943 162.9 2.89 4.7
1944 197.7 2.16 4.3
1945 237 2.13 5
1946 272.5 15.4 41.9
1947 283.2 9.29 26.3
1948 290.9 1.32 3.8
1949 297 2.05 6.1
1950 306.3 7.34 22.5
1951 313.3 4.02 12.6
1952 328.5 0.68 2.2
1953 346.8 1.14 4
1954 366.7 0.81 3
1955 383.4 0.23 0.9
1956 399.6 3.09 12.4
1957 418.2 3.31 13.8
1958 437.6 1.22 5.4
1959 459.6 1.61 7.4
      Total loss $201.5

The fixed-dollar-value assets include mortgages, bonds, bank deposits, savings accounts, the paid for insurance and social security claims, etc. held by individuals. And these savings of individuals account for about 60 per cent of the annual capital accumulation. In twenty years they lost a total of $201.5 billionl By that much, the debtors grew richer-or did they really? We shall see. This much is certain: the debts of consumers, businesses, farmers, and municipalities grow faster than the respective incomes.

The financial position of all debtor categories is worsening year after year. The same holds for the biggest debtor, the national government. Its obligations and commitments have accumulated much faster than did the debt "relief" brought about by currency depreciation.

The average interest. charge on its outstanding debt instruments has risen in ten years from 2 per cent to over 3 per cent. Balancing the budget becomes increasingly difficult, and the Treasury has to dig ever deeper into the taxpayers' pockets.

That brings us to a most significant aspect of this inflation of ours, different from those of the past. The Civil War, for example, was financed largely by inconvertible paper money-greenbacks. Taxes were negligible by present-day standards.

Now, only a fraction of the governmental expenditures is covered by incurring new debt. By far the greater portion of the public revenue is raised by taxes which suck up more than 25 per cent of the national income.

The tax burden falls largely on the lower-middle-income brackets and on business. One consequence is the difficulty for the average citizen to protect his fortune against the inflation without resorting to hazardous and dubious practices. What the government gives the speculator by windfall profits and the debtor by reductions in the real value of his debt, the government takes back by taxing away much of inflation's dividends and a great deal of the victimized savers' incomes. (Hence the fact that the proportion of income saved was lower in the 1950's than in the 1920's.)

Another consequence of heavy taxation is the creeping character of the inflation process, a novel departure in the sad history of inconvertible paper money. Heavy taxation takes a great deal of zest out of the inflation. However, the operating cost of the government, the greatest buyer of goods and services, tends to rise faster than its revenues. In any case, the larger the deluge of paper money, the higher the taxes to forestall the "gallop" and to correct alleged or real inequities. The net result is that people pay more and more taxes in order to lose each time a fraction "only" of their incomes purchasing power.

Whether taxes are negligible or high, there is at least one similarity between the "gallop" and the "creep." The one produces trillionaires and quadrillionaires in untold numbers. The other causes millionaires to pop up from here and there -lucky speculators, happy tax-avoiders (evaders), and ruthless manipulators. The German trillionaires were literally wiped out when the currency was stabilized. As to the bulk of our new rich, it will be interesting to watch where their millions of dollars will end up.

Where does the inflation stand

The inflation of the last twenty-odd years is a matter of record. But are we in danger of having more of the same? As this book goes to press, the highest monetary authorities, including the head of the International Monetary Fund, assure us that the inflation is over. (Have we not heard that before?) Vested interests in and out of Congress actually tell us that "deflation" is what we are up against. Of course, it all depends on what one means by such words as inflation and deflation.

What matters is the present and prospective behavior of the cost of living. In the twelve months ending June 30, 1960, the cost of living went up again by about 2 per cent. Industry's labor costs keep rising even faster; at that, some of the recent wage boosts have not yet produced their induction effects on prices.

Few experts doubt that the wage level is still directed upward, or that such development would have no effect sooner or later on the cost of living. And the decisive indicator is the money supply, the number of dollars available for purchases. It has been rising year after year, boom or recession, at an average rate of 6 per cent or higher. The most imaginative statisticians do not figure on much more than 2 per cent average annual increase in the physical volume of salable goods and services.

The disproportion is patent, and this is responsible for the prospect of future price inflation.

Yea Money Supply (billions) $
1929 55.8
1945 150.8
1955 216.6
1957 227.7
1958 242.6
1959 246.6

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