Flight From Inflation
Google
WWW Search inspiredconstitution.org

Chapter 1: Storm Winds of Inflation

We have sown the wind and must reap the whirlwind, which will scatter dollars like autumn leaves across the countryside.

      The mariner, on the approach of threatening clouds, does not take measures to abate the coming storm. He accepts it as beyond his control and takes steps to minimize the stress upon his craft. If we would be realists, we must accept the inflationary storm as inevitable and set our sails to ride it out.

      All attempts at political control over the economy, such as rationing and price and wage controls, are but attacks upon the storm, attempts to flatten the waves of a troubled sea. They undertake to suspend the operation of the law of supply and demand. If they succeed in smoothing the waves in one place, the waves multiply elsewhere. In so doing, therefore, such attempts render a disservice instead of relief. Exchange, which is the transfer of goods and services and upon the facility of which the economy depends, is distorted to a much greater degree than otherwise it would have been. It is these artificial impediments to the working out of natural laws that make the experience of passing through inflation so trying and perilous.

      Inflation, running its natural course, impairs and ultimately destroys the unit of account. It does not, of itself, destroy wealth. It merely shifts it. In general, this shift is from the creditor class to the debtor class, since debts are wiped out. To be sure, inflation hampers exchange, and whatever hampers exchange impedes production. There is no escaping lowered standards of living. But if we manage properly, we can pass through inflation experiencing neither the destruction of existing property, on the one hand, nor paralysis of business on the other.

      What is it that causes business destabilization and ultimately paralysis in an inflationary movement? It is the confusion resulting from applying one name to the unit of account in all stages of its decline in power. At the outset of the inflationary price rise, there may be a change of only one per cent a month in the power of the monetary unit, but as the movement accelerates, there may be a change of this much per day and even more. To call all of these successive units, with their varying powers, by the name dollar, obviously frustrates exchange.

      As the successive changes in the power of the unit accelerate, sellers must reduce the time allowed between billing date and payment date. If they do not, they risk losing their profit from sales because of the decline in the power of the monetary unit. The actual loss suffered during a recent period from this unseen cause is shown in Table 1. This trend toward reducing the credit period ultimately destroys credit altogether and forces business to a cash basis. Under normal business practices, prompt payment entitles the buyer to a discount, and thus there is an inducement for him to pay within the discount period. Inflation reverses this; the longer the buyer delays payment, the smaller the ultimate payment by reason of the decline in the power of the unit. Thus the prompt payer penalizes himself, and the inducement is for him to defer payment. It is readily apparent that business cannot operate on this upside-down basis. The alternative of resorting to a cash basis, on the other hand, would be so awkward in a highly commercialized nation such as the United States as to amount to practical paralysis. Before such an impasse is reached, of course, the holders of longer-term contracts such as mortgages will have had their claims decimated, if not wiped out.

      Imagine how business would be impeded if words like pound, foot, or gallon were continually changing their meanings. To undertake to conduct exchange transactions with a changing unit of account is, if anything, worse.


TABLE 1

LOSSES SUSTAINED IN BILLING
BY REASON OF DOLLAR SHRINKAGE

Based Upon Bureau of Labor Index of Wholesale
Prices on Date Nearest to First of Month

     
PERCENT LOSS (OR GAIN) IF DEBTOR PAID IN
 
INDEX: 1926 = 100
  
BILLS DATED
30 DAYS
60 DAYS
90 DAYS
1946
May 4
109.9
May 1
-1.1
-2.6
-13.8
 
Jun 1
111.1
Jun 1
-1.4
-12.5
-15.5
 
Jun 29
112.7
Jul 1
-10.9
-13.8
-10.1
 
Aug 3
125.0
Aug 1
-2.6
+0.7
-7.8
 
Aug 31
128.2
Sep 1
+3.2
-4.4
-8.3
 
Sep 28
124.1
Oct 1
-8.6
-12.9
-12.9
 
Nov 2
134.8
Nov 1
-3.7
-3.7
-4.1
 
Nov 30
139.1
Dec 1
0.0
-0.9
-5.3
1947
Jan 4
139.1
Jan 1
-0.9
-5.3
 
 
Feb 1
140.3
Feb 1
-4.3
  
 
Mar 1
146.4
Mar 1
_______
_______
_______
   
AVERAGE
-3.0
-6.2
-8.5
The above illustrates the great hazard in doing business on credit during inflation. The extreme instability of the dollar in 1946 is shown by a range of 3.2 per cent net gain (by reason of a decline in the price level) on the thirty-day payment of September 1st bills receivable, to a loss (by reason of price rises) of 15.5 per cent on the ninety-day payments of June 1st bills receivable. The average for the whole period was a loss of 3.0 per cent on the thirty-day payments and 6.2 and 8.5 per cent respectively on the sixty and ninety-day payments.
Since business profits generally average only about five per cent on sales, it will be seen that "credit losses" alone, in the period reviewed, wiped out profits, to say nothing of losses sustained by shrinkage of capital and reserves.

Sources of Inflation

      There are in the world today 144 national political monetary units. This means that there are 144 springs of inflation through which governments of the world are undermining the monetary system. This present polyglot system is, moreover, an instrumentality of national isolation that permits governments to block the free flow of commerce.

      If there were free monetary exchange internationally, as there was before "money management" practices came into vogue, the 144 units would be subject to change. In the course of a year, there might occur thousands of changes. While free exchange would require great agility on the part of international traders, it would at least be realistic and permit trade to move freely except where limited by tariffs and embargos. Under the current managed-money practices, the various governments try to peg their units with respect to one another. This has a deadly effect on international trade and forces exchange to resort to the black market, so-called.

      This divisive system, which makes each nation's unit of account alien to all others and thereby impedes international trade and intercourse, may be observed in the tabulation of foreign exchange quotations reproduced in Table 2. Note the extraordinary confusion of tongues, the numerous dinars, pounds, rupees, and shillings, as well as the thirteen different dollars that range in value from the United States dollar to the Hong Kong dollar, which is equivalent to 17.5 United States cents.


TABLE 2

TABLE OF FOREIGN EXCHANGE QUOTATIONS
IN UNITED STATES DOLLARS PER UNIT

15 OCTOBER 1951*


CountryCurrencyConsisting of
Recent Quotations
AfghanistanAfghani100 Puls
$0.06
AlaskaU.S. Dollars100 Cents
1.00
Albania Lek 100 Quintar
0.02
Algeria Franc 100 Centimes
0.0029
Angola Angolar 100 Centavos
0.0350
Argentina† Peso 100 Centavos
0.0710
Australia Pound 20 Shillings—240 Pence
2.19
Austria** Schilling 100 Groschen
0.0475
Bahama Is. Pound 20 Shillings—100 Pence
2.815
Bahrain Is. Indian Rupee 16 Annas—192 Pies
0.2110
Barbados Dollar 100 Cents
0.5875
Bechuanaland English Pound 20 Shilling—240 Pence
2.805
Belgian Congo Franc 100 Centimes
0.0199
Belgium Franc 100 Centimes
0.0199
Bermuda Pound 20 Shillings—240 Pence
2.805
Bolivia* Boliviano 100 Centavos
0.0167
Brazil Cruzeiro 100 Centavos
0.0550
British East Africa Shlling 100 Cents
0.1405
KenyaShilling 100 Cents
0.1405
Tanganyika Shilling 100 Cents
0.1405
Uganda Shilling 100 Cents
0.1405
ZanzibarShilling 100 Cents
0.1405
British GuianaDollar 100 Cents
0.5875
British Honduras Dollar 100 Cents
0.70
British North Borneo Dollar 100 Cents
0.3290
British West Africa Pound 20 Shillings—240 Pence
2.835
Gold CoastPound 20 Shillings—240 Pence
2.835
NigeriaPound 20 Shillings—240 Pence
2.835
Bulgaria Lev 100 Stotinki
0.0035
Burma Rupee 16 Annas—192 Pies
0.2105
Canada Dollar 100 Cents
0.95
Cape Verde Is. Escudo 100 Centavos
0.0350
Cayman Is. Pound 20 Shillings—240 Pence
2.805
Ceylon Rupee 100 Cents
0.2105
Chile† Peso 100 Centavos
0.0115
China    
Colombia Peso 100 Centavos
0.40
Costa Rica* Colon 100 Cents
0.1790
Cuba Peso 100 Centavos
1.00
Curacao Guilder 100 Cents
0.5325
Cyprus Pound 180 Piasters—7200 Paras
2.81
Czechoslovakia Crown 100 Heilers
0.02
Denmark Krone 100 Ore
0.1450
Dominican Republic Peso 100 Centavos
1.00
Ecuador Sucre 100 Centavos
0.0665
Egypt Pound 100 Piasters—1000 Mill
2.8825
England Pound 20 Shillings—240 Pence
2.80
Eritrea Shilling 100 Cents
0.1405
Ethiopia Dollar 100 Cents
0.41
Fiji Is. Pound 20 shillings—240 Pence
2.525
Finland Mark 100 Pennis
0.0045
Formosa† Taiwan Dollar 100 Cents
0.0650
France Franc 100 Centimes
0.0029
French Equatorial Africa Franc 100 Centimes
0.0058
French Guiana Fracn 100 Centimes
0.0029
French Indo China Piaster 100 Cents
0.03
French West Africa Franc 100 Centimes
0.0058
Germany (Western)* Deutsche Mark 100 Pfennig
0.2381
Gibraltar English Pound 20 Shillings—240 Pence
2.81
Greece Drachma 100 Lepta
0.000066
Guadeloupe Franc 100 Centimes
0.0029
Guatemala Quetzal 100 Centavos
1.00
Haiti Gourde 100 Centimes
0.20
Hawaii U.S. Dollar 100 Cents
1.00
Honduras Lempira 100 Centavos
0.50
Hong Kong Dollar 100 Cents
0.1750
Hungary Forint 100 Filler
0.0861
Iceland Krona 100 Aurar
0.0614
India Rupee 16 Annas—192 Pies
0.2105
Indonesia* Rupiah 100 Cents
0.2640
Iran Rial 100 Dinars
0.03125
Iraq Dinar 1000 Fila
2.805
Ireland (Republic) Pound 20 shillings—240 Pence
2.805
Israel Pound 1000 Mils
2.81
Italy* Lira 100 Centesimi
0.0016
Jamaica Pound 20 shillings—240 Pence
2.1825
Japan Yen 100 Sen
0.0028
Jordan Dinar 1000 Mils
2.81
Korea Won 100 Cheun
Lebanon† Pound 100 Piasters
0.2740
Liberia Dollar 100 Cents
1.00
Liechtenstein Franc 100 Rappen
0.2293
Luxembourg Franc 100 Centimes
0.0199
Macao Pataca 100 Avos
0.21
Madagascar Franc 100 Centimes
0.0058
Malaya Dollar 100 Cents
0.3290
Malta Pound 20 Shillings—240 Pence
2.81
Martinique Franc 100 Centimes
0.0029
Mauritius Rupee 100 Cents
0.2103
Mexico Peso 100 Centavos
0.1157
Monaco Franc 100 Centimos
0.0029
Morocco (French) Franc 100 Centimes
0.0029
Mozambique Facudo 100 Centavos
0.0350
Netherlands Guilder 100 Cents
0.2630
New Caledonia Franc 100 Centimes
0.0160
New Guinea (Mandate) Pound 20 Shillings—240 Pence
2.19
New Zealand Pound 20 Shillings—240 Pence
2.80
Nicaragua* Cordoba 100 Centavos
0.20
Norway Krone 100 Ore
0.1405
Nyasaland Pound 20 Shillings—240 Pence
2.82
Oceania (French) Franc 100 Centimes
0.0160
Pakistan Rupee 16 Annas—192 Pies
0.3035
Panama Balboa 100 Centesimos
1.00
Paraguay* Guarani 100 Centimos
0.1666
Peru Sol 100 Centavos
0.0650
Philippine Is. Peso 100 Centavos
0.4990
Poland Zloty 100 Grosze
0.25
Portugal Escudo 100 Centavos
0.0350
Portuguese Guiana Escudo 100 Centavos
0.0350
Portuguese India Rupia 16 Tangas—192 Reis
0.2105
Puerto Rico U.S. Dollar 100 Cents
1.00
Reunion Is. Franc 100 Centimes
0.0058
Rhodesia, Northern Pound 20 Shillings—240 Pence
2.81
Rhodesia, Southern Pound 20 Shillings—240 Pence
2.81
Roumania Leu 100 Bani
0.0067
Salvador, El Colon 100 Centavos
0.40
Samoa (British) New Zea. Pound 20 Shillings—240 Pence
2.80
Sarawak Dollar 100 Cents
0.3290
Saudi Arabia Riyal 22 Qurush = 88 Halals
0.28
Seychelles Rupee 100 Cents
0.2105
Singapore Dollar 100 Cents
0.3275
Solomon Is. Pound 20 Shillings—240 Pence
2.80
Somaliland Protectorate Rupee 100 Cents
0.2135
South West Africa Pound 20 Shillings—240 Pence
2.80
Spain* Peseta 100 Centimos
0.0915
St. Thomas & Principe Escudo 100 Centavos
0.0350
Sudan Pound 100 Piasters—1000 Mill
2.89
Surinam guilder 100 Cents
0.5375
Sweden Krona 100 Ore
0.1935
Switzerland Franc 100 Centimes
0.2293
Syria* Pound 100 Piasters
0.2835
Thailand*Baht100 Satang
0.08
TibetRupeeApprox. 6 Trangkaz
0.2105
TimorPataca100 Avos
0.21
Tonga Is.Austral. Pound20 Shillings—240 Pence
2.19
TrinidadDollar100 Cents
0.5875
TunisiaFranc100 Centimes
0.0029
TurkeyPound100 Piasters = 4000 Paras
0.3575
Union of South AfricaPound20 Shillings—240 Pence
2.80
Union of Soviet Socialist RepublicsRuble100 Kopecks
0.25
Uruguay†Peso100 Centesimos
0.4175
VenezuelaBolivar100 Centimos
0.3010
Virgin Is. (U.S.) U.S. Dollar100 Cents
1.00
Yugoslavia Dinar100 Paras
0.02
* Official Rate.† Free rate.** Effective Commerial Rate  
* Source: Manufacturers' Trust Company


      In foreign exchange quotations, the United States dollar is taken each day as the index figure of 100. This convention allows no comparison between one day's figure and the next. Compared with its value in 1900, the United States dollar has been eroded by nearly 70 per cent. [Bureau of Labor statistics show a 94.6% erosion from 1913 to 2002, which is roughly 95% for the century.—Editors.] The entire field of 144 units, therefore, should show correspondingly more decline in that period than they do show in their daily quotations against the dollar. Thus the decline of the criterion unit, the United States dollar, obscures the actual depreciation of the other units and fails to show how far these units have approached worthlessness.

      The following units, for example, on the basis of their 1939 standings, have suffered actual losses as of June 1951, in the percentages shown here:

Switzerland
39.5
Columbia71.6
South Africa
41.6
Argentina73.4
Sweden
43.7
Spain73.4
Canada
45.4
Belgium74.8
U.S.A.
46.1
Mexico74.8
United Kingdom
48.5
Brazil76.3
Uruguay
49.9
Chile85.3
Australia
50.0
France94.6
Netherlands
61.5
Italy98.1
Egypt
68.1
Japan99.3
India
68.5
Greece99.9
Turkey
71.1
China99.9
Figures above are from International Monetary Fund Cost of Living Statistics

      Even these shrinkages are understated in most instances because of the various blocking devices and price controls. As of December 1951, there remained but three monetary units that were not restricted—the United States dollar, the Canadian dollar, and the Swiss franc. In other words, all of the quotations, save the three mentioned, are unrealistic because of restrictions on free exchange.

      Further, the United States Government is bolstering other units by dollar loans and gifts, thus absorbing some of the deterioration of those units. How far this will go, and how much it will be reflected in the deterioration of the dollar, we can only speculate. It is possible that, due to the transfusion of its blood to other national units, the dollar may decline faster than other units. This may lead to a false sense of improvement on the part of the money managers of other nations, as they may find an easement in dollar exchange which they will credit to a rise in their unit rather than perceiving that it is due merely to an out-distancing decline of the dollar.

      Figure 1 takes the distortion out of the relativity picture in the three units, the dollar, the pound and the franc, by comparing their present status with their status in 1900.


Figure 1
Decline of the Dollar, Pound and Franc
From 1900 to 1950

The graph shows the purchasing powers of the United States dollar, the English pound and the French franc in 1900 (white bars) and how they have declined to 1950 (black bars) as compared with the 1900-dollar. The dollar has lost 67 per cent, the pound 87 per cent and the franc 96 per cent.
The pound would have shown even greater decline if the 1950 exchange rate had not been officially pegged. No black bar appears for the franc because the 1950 comparative rate, being less than one 1900 cent, is too small to illustrate.


The Approaching Storm

      Since all national moneys are but fractions or multiples of the dollar, it follows that each may go through inflation without disturbing the value of the dollar. But when the master unit goes through inflation or deflation, all other national units will automatically be disturbed, since they partly depend for their stability on central bank dollar reserves. Hence inflation of the dollar means international inflation, a new experience for the world.

      Monetary management, more properly called monetary maneuver, is now so universal that it is difficult to accurately observe this international inflationary effect. The very fact that all governments feel impelled to interfere with international ratios and exchange rates, however, shows the difficulties in which the political monetary system finds itself.

      The world has seen many national inflations end in the total extinction of their monetary units. But these have always involved minor or secondary units with isolated spheres of influence. The premier unit, and therewith the main structure of the monetary system, has never before been affected. Always the premier unit has remained the criterion of worth and stability, in terms of which accounting could be carried on and exchange not completely break down. Today, however, inflation is universal, attacking the stronger as well as the weaker units. The criterion unit itself now varies from day to day, and it is impossible to measure the variability of monetary units in terms of a variable. The monetary mariner no longer has a guide; for the North Star, the dollar, is moving. This is the first time in history that the world has witnessed global inflation, with the whole field of monetary units sliding into the sea.

      Whether we survive the storm that will attend this destruction of the political monetary system will depend upon how we respond to this danger. If we apply remedies designed to preserve the power of the monetary unit, the sails of exchange will be shredded by the gales of inflation. We will find ourselves adrift in a chaotic world for exchange is the device by which the ship of social order moves forward. If, on the other hand, we allow nature to take its course with the unit of account, adjusting matters to preserve the exchange system as required, we will be able to weather the storm and maintain civil and social order.

      The purpose of this book, then, is to propose a means of preserving the exchange system in the coming emergency. If, in the process, we find our way to a clearer understanding of political and economic realities, so much the better. If, still further, we discover a vehicle through which men can more effectively pursue their destiny of freedom and self-expression, then my hopes for this book will have been wholly justified.

      It is my belief that through the establishment of a nonpolitical monetary system, run by and for private enterprise in a free market, we can achieve all of these things. How such a system might be organized, the nature of the philosophical argument for the necessary separation of money and state, and the implications of a nonpolitical monetary system for the modern world, are subjects to be dealt with in the following chapters. First, however, let us inquire about the nature of money itself.


Previous pageNext Page

Contact us