All Commentary
Saturday, June 1, 1974

Inflation: Harbinger of Monetary Upheaval

Mr. Fyfe is a financial consultant in Atlanta, Georgia.

International monetary crises over the past quarter of a century, culminating in 1971 and 1973 United States dollar devaluations, not only have become fixed features of the financial scene, but seeming national curses as well, defying solution. It is incorrect, however, to offer the general public the misguided notion that these crises take place without reason or warning. Monetary crises have known causes; they are the results of economic cause and effect, as sure in terms of results as any other natural laws men acknowledge and respect. Economic history is filled with crises — currencies, and as a result economies, rising and falling over thousands of years from clearly understood, predictable causes.

No monetary crisis can be categorized as a curious thing. Instability in a monetary unit, or system, may not be well understood by the world’s masses; but today the effects are felt everywhere, here and overseas. Monetary crises affect people directly; a devaluation anywhere temporarily restructures relative values in goods traded between nations. Within the country devaluing, the very act wipes out and marks down the value of savings and investments on a broad front. Devaluation is little more than the governmental declaration of partial bankruptcy. By fraud, through inflation, the point is reached where government formally requires more of its inflated currency units for an ounce of gold, raising the prices for all imported goods.

In the United States the fall of the dollar, by devaluation, followed a direct line of annual Federal deficits, the scattering of billions of dollars overseas, and a resulting inflation between 1945 and 19’73 which destroyed 57 per cent of the dollar’s purchasing power. In the 23 years prior to 1969 alone, foreign aid expenditures totaled 138 billion dollars — paid for largely through inflation. By the late 60’s, foreigners held some 70 billion of our rapidly depreciating dollars overseas; and, seeing the dollar’s value skidding, they accelerated their run, with our own cash, into United States gold reserves. So we stopped redemption of gold for dollars, but not till half the gold was gone. Now, only $11 billion in gold remains at our “official” devalued price of $42.22 per ounce.

When we stopped selling gold for dollars, there was only one course of action left to the holder of dollars abroad: come back in and buy us out. This they did either on the United States stock exchanges or, directly, by setting up their own companies on our soil. We have made all this a little more expensive to do by devaluing. Still, the number of dollars held out against us beyond our shores is staggering. For a failing currency, Washington‘s only answer was devaluation. There is never, of course, any serious talk there about stopping inflation — the real cause of our recent dollar crises.

Cutting the Tie with Gold

Our monetary crisis has its roots in a decision of some 40 years ago to cut the ties with gold. At that point, the ultimate end of silver redeemability in our currency, and the legislative actions removing all legal ratios of circulating currency to gold reserves could easily have been predicted When our currency was no longer directly convertible by a citizen into gold, the bars were down; government was free to inflate at will, and has done so ever since The 1933 dollar is worth about 30 cents as of 1973, and the decline goes on.

The recent dollar debacle was not the result of any interaction: between wages and prices as tausative elements in inflation; wages and prices rise in response to government deficits and Federal Re serve System expansion of money and credit and are symptoms of the disease, but not the causes Some economists link the dollar crises to faith in the free market as a substitute for a “managed’ solution. But there has not been free market money for years, and the so-called “managed” solutions have brought us to the current sorry state of muddlement and monetary chaos. Then, grasping at straws, some blame a lack of advance planning in economic activity to insure predictable relationships among world currencies Planning cannot accomplish this Elimination of inflation as a root cause would in itself impart the basic stability required to insure workable international currency relationships, particularly if currencies were tied to something of value, like gold and silver. Somewhere along the line the perspective became tilted. Noted economists advocate more controls — control of the divergency of wage/price behavior internationally, control of the so-called, but non-existent, wage/price inflation. To further confuse issues, the inconsistency of control policies from nation to nation has been cited as clouding the situation in world monetary affairs.

The implications are clear: more controls, plus more uniform application as a solution. This is merely to be blind to the results of long tears of political control and distortion to currencies and economies in the so-called “free” world. The controls, and let us acknowledge the vast quantity imposed within the United States, have brought us to the present stage of near monetary collapse. At this point we are being assured, by some, that more of the same will solve the modern monetary dilemma.

What is needed is no controls, before the economic structure collapses or “blows out” from the weight of the load. The United States economy has survived a lot of dead weight and meddling with he underlying currency system hat supports us all. But the economy has never had the invincible strength to survive long-term monetary depreciation through inflation, in spite of its productive gains. Today, as a result, values are “out of whack” for goods and services — and, ultimately, hard economic reality will restructure those values.

Scapegoats Sought

There are other common errors in addition to that of trying to lay blame for inflation on the wage/price spiral. Convenient scapegoats are found, often labeled as “other divergent factors”; fixed rates of conversion, and currency conversion rates which were tied to the dollar. This continues to ignore the underlying result of inflation at home and overseas, the lack of convertibility in the dollar to anything of value, and failure to keep our currency tied to some commodity with high market value: gold or silver.

Balance of payments deficits seem to be recognized by most economists as a major item in currency crises, which indeed they are. Erroneously, however, both the export of private capital and goods and military expenditures take the blame. This distortion is crucial. The private sector of United States trade has been highly productive in creating its own surplus. The problem of backbreaking deficits has arisen only after the addition of military and foreign aid costs to the trade equation. When these foreign aid and military expenses are added to domestic social programs, the total load cannot be met by direct taxation; inflation has been the literal evil alternative. And the plight of the dollar worsens. By 1974, some sources estimate the Euro-dollar holdings have risen to $100 billion. We can only envision a long, continued siege of foreign buy-out in our own land — the exact reverse flow, dollarwise, of what took place immediately following World War II. As the old saying goes, “It comes back to haunt us.”

Another weak solution offered, and now in use, was the scuttling of fixed rates of exchange—letting rates “float.” But a floating currency, by itself, is just as vulnerable to crisis when destroyed by inflation as any “fixed rate” currency. Until the last several years, the world had fixed rates. Yet, inflationary crises took their appropriate toll, making mockery of rates which were mythical. Surely the most foolish of times in the past few years must have been when the United States declared the dollar to be worth $35, then $38, to the ounce of gold while the free market in gold stood at twice that level. This kind of wishful thinking continues today with the Treasury gold level at $42.22 per ounce while the free market in gold is well over the $100 per ounce mark and continues to move upwards.

Inflation Must End

The economic instability caused by floating currency values will not be resolved until inflation is mastered. International currency fluctuations will not be brought under control until inflation is halted. Currency speculation, on all levels, will subside only when inflation is ended world-wide. Inflation will stop only when governments limit expenditures to within reasonable levels of taxation. Currently, most industrial Western countries take between 35 per cent and 45 per cent of personal income in taxes, and even then cannot run a balanced budget at the national level.

One of the most damned, least understood aspects of currency crises is that of speculation in and against various monetary units. Speculation is cast as both a villain and a cause. Overlooked is the fact that speculation is a legitimate function and a stabilizing force in world-wide money matters. If a government refuses to protect or stabilize the value of its own currency, why shouldn’t the speculator guarantee a level, at s price, in order to impart that stability to future business transactions? And why deny business and trade the right to speculate for their own needs relative to future money dealings?

Economists who decry speculation overlook, conveniently, the fact that currencies rise and fall in relative value to one another because of governmental sponsorship of inflation. Eliminate inflation, and currency speculations will abate. Sadly, when some governments prove unable to master their own currency, not only do banks and businesses move to speculate against falling monetary units, but other nations holding the falling unit jump in to liquidate any weakening position.

We hear it said that gainers in monetary crises are the international money speculators who thrive on and create the crises. Gainers there are in speculative movements and crises, but it is not true that speculators and their actions create a monetary crisis. The monetary crisis is the child of inflation, born out of governmental muddling and national banking mismanagement of currency and credit. The seeds of crisis and destruction are sown in government’s initial decision to remove value from the monetary unit. When gold and silver backing and convertibility are repudiated by government, money ceases to be a commodity in which citizens can have faith. At that point the inflation begins, the crises are foreordained, and speculators ultimately will ply their trade.

Foremost economists of the day indicate that the solutions to international currency problems lie in national policies. How true. But which policies? Floating currency rates versus fixed rates have nothing to do with the problem or solution. Again, either a fixed or floating currency may be destroyed by governmental inflation. Neither can government policies in price and wage controls, union legislation, capital flow control, or increasing of tax levels be effective in the foray. Existing taxation levels are today taking over 43 per cent of personal income in the United States. Taxes on personal incomes and corporations are squeezing out all conventional sources of capital funding for the business community. The question is: Where will the investment money come from when earning levels are insufficient to provide? And at what interest cost on the borrowing?

Devaluation Is a Curse

The devaluation “solution” relieves the pressure and penalizes the consumer by increasing the costs of imported goods. But devaluation is a curse in itself. Government assumes this to be a cure to the crisis and then, feeling the pressure reduction, begins inflating again, usually at a higher rate than took place before devaluing. Thus, the stage is set for the next currency crisis and a future devaluation. With inflation rampant in the Western nations we may indeed see an era of competitive international currency devaluations in response to repeated monetary crises — but only providing that the world somehow staggers on without major economic/monetary collapse. The international upheaval and its effects are increasing as inflationary rates rise across the globe.

The nonsense of the age is embodied in the statement that today no monetary solution exists. We are told that we must look to coordination of national economic policies for our salvation in the forming of stable, predictable exchange rates. But such coordination of policy is unlikely unless forced, and force is not a moral solution. Central banking monetary gyrations and manipulation by government, resulting in inflation, are at the root of the approaching catastrophe.

There is a monetary resolution now, just as there has been always. Any nation on earth can stand alone, relatively aloof from the world of monetary crisis, by returning to a monetary standard backed by and convertible into gold and silver — and by living within its means of direct taxation. It will always be this simple, though price would have to be paid to re turn to this position. That price is the liquidation of inflates values.

Sound Monetary Policy

In reality, everything depends upon monetary solutions. As a fu tile response to crisis, the United States has called for a world monetary system scrapping gold as peg, with Special Drawing Right: based on “average value” of a cross section of currency values, the SDR to become the world-wide unit of financial accounting. This is a play at the creation of an international monetary house o cards based on the false premise that gold is no longer a realistic standard of value. Valueless monetary systems are predoomed to fail.

On our own national level w don’t even need a predictable economic policy. Rather we must have a fixed, predictable monetary poi icy which, by itself, will provide economic stability. Wage and price controls of either permanent o temporary nature will be, and are self-destructive. Higher taxes will similarly destroy an economy by draining away capital availability in an inflation. Policies of public service employment to increase utilization of the unemployed, another proposed stabilizer, become merely one more element of instability and inflation; the public payrolls are now larger than we can afford to carry.

Rather than monetary “restraint,” this nation will find ultimately there can be no stability without monetary restructuring on a basis of real value. Our house, monetarily, will be put in order for us if we choose not to do so voluntarily. Economic forces will at some point oblige the adjustment. There is the possibility of the Federal Reserve System precipitating the collapse by turning off the money/credit flow; this would be a repeat performance of actions taken in the latter part of 1928. Our inflation will have to end.

No so-called “cosmetic” surface paint job — continued demonetization of gold, patching up of Bretton Woods machinery, or Special Drawing Rights — will lead to other than continued economic chaos world-wide. Restraints on capital movements, whether instituted against individuals, banks, or multinational corporations, will also serve only to tie world economics and trade in knots. United States policy will be effective on the international scene only when our currency once again has “hard” value and we choose to exist, nationally, within our means. At that point the rest of the world could follow the lead or not, nation by nation, to its own liking. At least, under these conditions, we would stand for something worthwhile in the international limelight: financial stability and responsibility.

For what does this country stand now? Our government sponsors our own self-destruction through inflation. This is the era of planned expansion of money and credit through the Federal Reserve System to support massive Federal deficits. The resultant inflation is destructive of all social, moral, and spiritual values. Historically, no national sense of unity has ever withstood the corrosive and erosive effects of inflation. In the end, the national brickwork crumbles, the nation’s social fabric is ripped and torn apart. If a country’s currency has no fixed value, then for those citizens, neither does anything else in life. Prosperity and economic stability can be achieved in any country on earth through the exercise of strict monetary control and the establishment of a hard currency which is convertible into gold or silver. Less than this will only produce more of the same: national and international crises, monetary upheaval, economic chaos, and moral decline.