Concerning Inflation

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by Garet Garrett

NO ONE WOULD be so absurd as to propose that you might restore a nation’s prosperity by changing its weights and measures. Suppose the Government should say, on behalf of the wheat farmer, to increase his income, “Hereafter the half bushel shall be the legal full bushel”; and on behalf of the cotton grower who sells his product by the pound, “Hereafter eight ounces shall be the legal pound”; and on behalf of industry, “Hereafter eighteen inches shall be the legal yard and every other weight and measure is halved”; and on behalf of labor to increase wages, “Hereafter thirty minutes shall constitute the hour.” What would happen? Prices per bushel, per pound, per yard, wages per hour, and so on, would immediately fall until relations were again as they were before, nobody by that result could be made either rich or poor, and the economic state of the nation would be the same as it was….

Except, first, that all who were so lucky as to have made contracts beforehand to deliver wheat at a certain price per bushel, or cotton at a certain price per pound, or cloth at a certain price per yard, by being able to tender half a bushel for a full bushel, half a pound for a full pound, or half a yard for a full yard, would profit at the expense of those who were obliged by the decree to receive everything in half measure for full price, and thus wealth would be transferred in an arbitrary political manner from buyer to seller; but this could happen only once.

Come now to the universal measure, the one wherein the dissimilarities of all physical weights and measures – bushels, yards, pounds, gallons and feet – are reduced to a single expression for purposes of exchange – come, that is, to money – and somewhat less than half our total common sense is at any moment ready to depart from us, and it happens that once in a generation that even more of it is dangerously is dangerously on the verge.

If a senator should propose a law to increase everybody’s income and so restore prosperity by halving all weights and measures, it would be understood that he was not serious. But they may hold themselves out to be champions of the oppressed, fighting for a new deliverance, who propose to change the money measure by decree, saying, “Hereafter fifty cents shall be equal to one hundred, half a dollar shall be a legal dollar,’ in order that everybody may have twice as many dollars and so be able to buy, consume and enjoy twice as much.

Wherein there is any difference between halving every physical kind of weight and measure and halving the value of money measure it is only that the delusion comes upside down. In the first case, which we know to be preposterous, prices fall until all relations are again as they were. In the second case, the money measure being halved, prices rise. Every seller receives more money and, correspondingly, every buyer pays more money, until presently all relations are restored and by this magic the economic state of a nation is not changed at all, except again…..

First, that all who are so lucky as to owe money are immediately benefitted at the expense of those to whom money is due, the creditor being obliged by law to receive as payment in full the exact number of dollars that he loaned, notwithstanding the fact that the value of the dollar has been halved by decree. Thus there is an arbitrary transfer of wealth from creditor to debtor by political fiat, which can happen once, and…..

Second, that with the value of money, the money standard itself, subject to change by political decree, there is chaos in the world of credit and capital, no obligation or contract has a definite meaning, all borrowing and lending must be loaded with a charge for hazard, and this charge may be ruinous to civilized business.

With that strange kind of panic running in Germany and merchants barring their doors against people clamoring to exchange marks for goods of any kind on any terms, a professor became suddenly aware of what the uproar was about, rushed hatless to his bank and drew out his whole fortune. He then stood in the street with a quarter of a million paper marks in his hand, trying to think what he should do with them. He must spend them, and quickly. He understood that. Minute by minute their value was less. But what should he buy? His bewildered glance fell on a saddler’s window. The sight of a saddle hanging there started in his mind the reminiscence of a boyhood wish, which had been to ride; and with that he ran to the saddler’s shop. Then again, as if it were a dream, he stood in the street with a saddle in his arms, and that incongruous object represented his own and his wife’s inheritance and all their years of thrift and self-denial together for the security of a high-born academic family.

Do you remember the gold certificate? That was the yellow-paper money in multiples of the ten-dollar denomination that used to turn up among the green bills in your pocketbook. It was a very special kind of paper money, redeemable by the United States Treasury in gold. On the face of it, you read: “This certifies that there have been deposited in the Treasury of the Treasury of the United States of America ten dollars in gold coin payable to the bearer on demand.” It might be for twenty, one hundred, one thousand. This, you see, was simply a receipt for actual gold dollars, like a receipt for so many bushels of wheat; and as the law stipulated that a gold dollar should be of a certain weight and fineness, the holder of one of these certificates was the actual owner of a specific amount of gold. The certificate was his absolute title to it.

It was the finest, safest, most beautiful paper money in the world. Wherever you went in the whole world, it was accepted as actual gold, and was much preferred over the actual gold because it was so much easier to carry. Here the faith was, first, that the gold itself was in the United States Treasury, dollar for dollar, according to the receipt; second, that the American gold dollar would never in any way be debased; and, third, that the United States Treasury always and without question honor the receipt. No one could imaging a time when the United States Treasury would refuse to honor its own receipt for actual gold intrusted to its keeping.

Well, but since March 6, 1933, it has been unlawful for an American citizen these certificates in his possession. By decree of the President, it is unlawful. And now, if you should go to the United States Treasury, saying, “Here is your receipt for gold; it is mine and I want it,” you would not get the gold that belongs to you by right of title; more than that, if your certificate should amount to more than one hundred dollars you would be subject to prosecution, fine and imprisonment merely for having that gold title in your hand.

The United States Treasury does not refuse to honor its receipt for gold because the gold is not there. The gold is there in the vault, just as the certificate says it is. It refuses to give you the gold because a law has been passed saying the President by decree may reduce the gold content of the dollar one-half. That is, by decree he may say, “Hereafter fifty cents shall be a dollar.” That is the devaluation we are talking about. The gold content of the dollar is reduced one-half, by law or by decree, then, perhaps, you may take your gold certificate to the Treasury and demand the gold dollars without fear of arrest or imprisonment, but if you get your dollars, to the exact number specified on the certificate, you will get only half as much gold. Your Government will keep the other half.

All the same, this was an unimaginable thing to happen, and it is a terrific blow to everybody’s faith in the integrity of money.

To move the inflation law authorizing the President to print three billions of fiat paper money and to halve the gold content of the dollar, several ideas were acting together. Almost the only idea was the one of necessity. There was no necessity for this country either to abandon the gold standard or to debase the currency. It is perhaps the only instance in modern times of a country doing it deliberately. England was obliged to do it. Here there was plenty of gold.

When the dollar had greatly fallen, one of the unexpected problems that awkwardly appeared was what to do with the new gold produced in this country. The America gold-mining industry is very important. Since it was illegal to possess gold, illegal to buy or sell it at a statutory price of $20.67 an ounce. But if he did this he lost money because he received $20.67 in paper dollars worth one-third less than gold. If he could sell his gold in Canada for Canadian dollars, or in London for pounds sterling, or in Paris for francs, then, by converting Canadian dollars, British pounds, or French francs back into American dollars on the international money market, he could realize at least ten dollars more per ounce than the United States mint would give him for it. But to export gold was forbidden. Therefore, it had to be smuggled out; there began to be sold in this country a bootleg market for gold.

Nevertheless, the problem somehow had to be solved; and it was solved in the most absurd way. The President, by decree, authorized the United States Treasury to receive the total output of American gold on commission, sell it on the open gold markets of other countries, and give the American gold miner the proceeds….. And thus it was that the United States Treasury, in the capacity of an agent, began to receive the total output of the American gold-mining industry and to sell it away in foreign countries for the account of the American citizens who had produced it, but who were not permitted to keep it or sell it at home….

Aside from any ethical considerations, the procedure, on its merits, was mad. But so are all procedures of inflation. If you ask why the Government itself does not buy the gold at its true value, paying the premium in paper dollars, the answer is that if it did, the illusion of rising values would be damaged in exactly the same way as by an open gold market.

People could no so easily continue to deceive themselves about what was happening. That values had been rising was an appearance only, produced by the fact that the value of paper money had been falling. But the Government thought it was more important to protect this appearance than to keep in this country the gold we mine out of our own ground.

The intermediate way is to speculate. A shrewd, imaginative minority will buy imperishable commodities, such as cotton, copper, tin and rubber, because these will rise in price as the value of money falls; others will buy unlimited dividend-paying shares, and some will go heavily into debt to buy equities of any kind, even real estate, with the idea that when money is very much cheaper they will pay off the debt and have the equities clear. It was in that way that a few men made prodigious fortunes in the German inflation. One who had been able, at the beginning of it, to borrow marks enough to buy the whole of Berlin might then, at the end of it, for as little as one thousand dollars in gold, have bought the same number of marks to pay off what he had borrowed and so have owned Berlin clear at a net cost of one thousand dollars.

In 1926-27-28, people had plenty of money, more than they ever had before; and they were prosperous, but not for that reason. They were not prosperous because they had plenty of money; they had plenty of money because they were prosperous. Proof is that at the very lowest of the depression there was actually more money of all kinds – more gold, silver and paper money – than in those years of high prosperity.

Every owner of a corporation bond is a creditor. Every owner of a government bond, a city or county bond, is a creditor. Every owner of shares in a building-and-loan association is a creditor. Every owner of a bank deposit is a creditor. Every owner of a life-insurance policy is a creditor. These will all be victims of inflation, and they are millions.

November 4, 1933

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