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.
Losses Sustained in Billing
By Reason of Dollar Shrinkage
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 of Foreign Exchange Quotations
in United States Dollars Per Unit
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
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 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.
DECLINE OF THE DOLLAR,
POUND AND FRANC
FROM 1900 TO 1950
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
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.