Friday, April 19, 2013


Chapter One, 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 impedimenta 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.

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.

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.

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.

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. (The erosion of the dollar as of 1978 exceeds 85 per cent, based on Bureau of Labor statistics. -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.

(TABLE FROM BETWEEN PAGES 4 AND 7 IN ORIGINAL BOOK BELONGS HERE; however, I (Cal S.) decided not to reproduce this table as it is merely a set of international exchange rates from 1951. In the original book, this table folds out to five pages and lists about 145 countries currency exchange rate against the United States Dollar. The source quoted is Manufacturers’ Trust Company.)

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:

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 arise 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.


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.

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