A Merchants Appraisal of Inflation
JUNE 01, 1959 by HUGHSTON M. MCBAIN
Mr. McBain retired in 1958 as Chairman and Chief Executive Officer of Marshall Field & Company. As a veteran merchant, a world traveler, and a keen observer of economic affairs, he is well qualified to discuss inflation. This article first appeared in two installments in the
It was when my cab pulled up at the hotel. I had had the taxi since early morning. I opened my suitcase and counted out 71,250 marks. This included a 5,000 mark tip for the driver. He was delighted and thanked me profusely. How could he know that the total cost to me for his cab, gasoline, and services for that 16-hour day was only 57 cents? Naturally, he could think only in terms of his own money. To him it looked like a fortune for a day’s work. The time was October 1922—the place
I spent three months in
One evening I took some German friends to the Adlon Hotel for dinner. Despite my urging, they would order no meat. I explained that meat would cost me practically nothing. To them I seemed to be paying $900 for a sirloin steak!
I lived through many months of German inflation—and I learned a lot. The German people seemed unable to grasp the fact that the loss in the value of their money was bringing ruin. They thought only in terms of high prices ascending to astronomical new heights every morning.
Years later, another time and place made an indelible impression upon me. I was having dinner with our Italian agent in Florence. The year was 1947. World War II had come and gone. Another country had been hit by disastrous inflation—though not of such proportions as the one in Germany during 1922-23. This night in Italy our dinner check totaled 6,000 Italian lira. To my Italian guest, thinking in terms of his country’s currency before the war, I was spending $1,250 on dinner for two! If in the not too distant future a similar situation develops in
I asked this Italian agent what he had done to protect himself from the scars of inflation. He told me he had saved regularly 20 per cent of his earnings during 40 years of business life. I asked him about life insurance. Yes, he had started a program many years ago and most of it was paid up. He told me of his expectation that his life insurance would enable him to retire in comfort. Now that retirement was close at hand, he said, there was no question of default; the life insurance companies were paying their claims in full, as promised, in Italian currency. But—and tears came to his eyes—instead of providing life long security for his wife and children, his entire insurance proceeds would now buy a supply of food for only three weeks!
My Italian friend, like my German friends, could think only in terms of very high prices.
I do not pretend to be an economist. But I do know something at first hand about inflation. Personal experiences such as these show how tragic its effects can be. Since my vivid experiences in
Perhaps the greatest story ever written on the subject is entitled Fiat Money Inflation in
The trouble started in 1789 when
A Vicious Cycle
Against this base, paper money was issued. The new credit caused great joy; the treasury was relieved; a portion of the public debt was paid; creditors were encouraged; ordinary expenses were met. Six months later business slumped again. Politics again prevailed. There was less argument than before against issuing more paper money. A few sound thinkers of that day explained that increasing the quantity of money and credit in any country must soon increase prices, disturb values, alarm capital, and decrease the demands for products and labor.
Nevertheless, the vicious cycle had started; it was politically inexpedient to stop the subsequent issuance of more and more paper money. After each new issuance, business improved temporarily and prices advanced—but the value of all French moneys declined.
Leads to the Guillotine
By January 1793, about 3 billion francs had been issued—all publicly and legally. Prices were constantly rising. Committees were formed to attack and stop inflation. Orators endeavored to enlighten the people by giving every reason in the book for this disaster save the true one. The government blamed the ministry, the nobles, the hardhearted rich, the merchants, the shopkeepers. Today’s convenient "whipping boy"—Big Business—was as yet unborn.
In late 1793, the Law of the Maximum was passed—and price ceilings were born. Controls were established on wages, selling prices, profits. The people were overjoyed, but evasion, as always, quickly followed—then scarcities—then rationing. Manufacturers were crippled, agriculture depressed, shopkeepers were ruined if they obeyed the law. Many shops closed—others were looted. Some evaders were sent to the guillotine; others were hanged. (I’m grateful not to have been a merchant in those days!)
At the end of 1795 more than fifty billion francs had been issued. The purchasing power of this paper money (despite the enormous value of the lands pledged behind it) was practically nothing.
Once more, in our own times, the subject of inflation is making headlines every day. We are deluged with newspaper stories, magazine articles, and speeches. Several intelligent articles on inflation have appeared in this newspaper. But it is true, nevertheless, that much of what we read and hear on the subject is complicated gibberish. In some cases I believe it is purposely so. History verifies the statement attributed to Lenin: "The surest way to overthrow an existing social order [government] is to debauch the currency."
High Prices, an Effect
Just what is inflation? "Inflate" means "expand."
To me, "inflation" means inflating the money supply. It is just that simple.
Stated another way, each dollar is a purchase order; that is, it is a claim on goods and services. It is the increasing of these purchase orders—making more of them than is properly justified by the economy—that is true inflation.
People are led to believe, erroneously, that "high prices are inflation." That is putting the cart before the horse. High prices are merely the effect of inflation. And quoting Webster’s dictionary: "Inflation always produces a rise in the price level, in accordance with the quantity theory of money."
Through the Banking System
Our government has a complete monopoly of the "money factory." If you doubt this and care to test it, try manufacturing some money or government bonds yourself! But you had better not: the government’s control and monopoly is absolute. Only the government can be a "legal counterfeiter" in the sense of legally creating more money and bank credits. It follows logically that under such control the government, and only the government, can prevent inflation.
How does the government inflate our currency? There are several successful methods, the oldest of which are no longer in favor. They would be too easily detected by the better educated citizens of this generation. In the ancient great days of
Many centuries later, governments resorted to a much easier method made possible by the advent of the printing press. They simply printed more paper money, thus increasing the government’s income much more conveniently than by raising taxes. In our own generation many examples come to mind of the money printing press route—
The Quantity of Money Increases
With its complete monopoly, no matter what method our federal government elects to use to increase the available supply of money and credit, the all-important fact is that it is the government, and only the government, that has the power to cause true inflation.
The following table quickly shows the total amounts of usable money available in the
1939—64.7 billion dollars
1948—172.7 “ ″
1956—226.4 “ ″
It is quite obvious that neither the increase in our population nor the increase in productivity has grown anywhere nearly as fast as the money and credit supply. It is also true, however, that if there had not been some considerable increases in our population and in our productivity, the value of our currency would have decreased much more severely than the approximate 50 per cent drop in the last 20 years.
And People Demand More
Many of our confused ideas concerning inflation stem from oft-quoted statements that labor unions and business cause inflation; the former by gaining higher wages for employees, the latter by increasing selling prices. Since high prices are not inflation; since inflation only relates to money and bank credits; and since only government controls the quantity of both, it is obvious that neither unions nor business can cause inflation.
However—and this is fundamental—when wages are arbitrarily forced above the market level that would have reflected the existing relationship between the supply of labor and the demand for it, we have the starting point of a vicious cycle:
1. Wages increase.
2. Prices increase.
3. Products lose competitive position in world trade.
4. Unemployment results.
5. Pressure on government to make more money available tends to become irresistible.
6. Government gives in to political pressure.
7. The government creates more money.
8. The value of our money drops—and we have inflation.
In emphasizing the government’s complete responsibility for causing inflation, I do not intend to imply that unions and business are blameless—quite the contrary. When a union or a business or an individual is responsible for raising wages and/or prices faster than the market allows, they are fanning the flames of inflation. They are creating the very conditions that eventually bring such powerful political pressures on government that it will surrender its responsibility to keep our currency good.
People spark inflation. Demands made by "people" for federal funds (no matter what group name they use), when excessive and beyond reasonable limits, cause a breakdown in the normal laws of supply and demand. Such demands lead to property destruction, unemployment, and eventually irresistible pressures on government to extend its power beyond its competence.
Business tends to put the whole blame on labor unions because of their demands for higher and higher wages. But is business—and other so-called moderate groups—blameless? I doubt it. When "great conservative leaders" representing chambers of commerce, churches, slum clearance projects, agricultural "security" groups, hospital building programs, foreign aid devotees, and countless others all demand that their pet projects be included on the "federal gravy train," I believe they are just as guilty as the unions.
Individuals Can Resist
In all these areas—people—you and I—are responsible. The next time I am asked to lend my name and support to any project which aims to pressurize government for more federal funds I am sure my answer will be an emphatic "No!" The federal government is already committed to spend far more than it can properly afford.
The recent appointment of a cabinet committee headed by Vice-President Richard Nixon to draft plans for combating inflation is encouraging. It will have no difficulty in ascertaining the facts. The announced intention "to strive to build a better public understanding of the problem of inflation" is all important. I hope the committee follows through.
Other governments in other years have lacked the courage to reveal the truth about the real cause of inflation. They have lacked the courage to explain that all inflation is bad—no matter how small or creeping it may be. Once started and not checked, I firmly believe that inflation always leads to disaster—and it always takes the greatest toll from those who can least afford it.
‘A new edition of Fiat Money Inflation in.
How To Kill Trade
Andrew Dickson White, Fiat Money Inflation in
Long before the close of 1791 no one knew whether a piece of paper money representing a hundred livres would, a month later, have a purchasing power of ninety or eighty or sixty livres. The result was that capitalists feared to embark their means in business.
This state of things, too, while it bore heavily upon the moneyed classes, was still more ruinous to those in moderate and, most of all, to those in straitened circumstances. With the masses of the people, the purchase of every article of supply became a speculation—a speculation in which the professional speculator had an immense advantage over the ordinary buyer. Says the most brilliant of apologists for French revolutionary statesmanship, "Commerce was dead; betting took its place."