WHAT IS INFLATION?

Evening Post, Volume CXXI, Issue 141, 16 June 1936, Page 12

WHAT IS INFLATION?

■< JFEARS IN THE UNITED STATES f IiOW INCOMES SUFFER MOST V-- '(■/. "Evening Post," June 16. '/. President Koosevelt's objective, as '( he outlined it at the recent Jefferson 'Day banquet in New York, was epitom- , ised in the following words: "We seek ' greater purchasing ' power and _ a ' ' reasonably stable and constant priccS ' level. This objective cannot be ob- , tained in a month or a year, but results show we are on our way very definitely. Higher wages for the work- . ; ers and more income for the farmers ■ mean more goods produced, more and : better food eaten, fewer unemployed, : and lower taxes. That is my economic and social philosophy, and, incidental- ' ly. my political philosophy." . This philosophy, if it means inflation, is viewed with concern by certain • banking authorities in the united < States. The fear of inflation appears 'to be fairly general among them. The Guaranty Trust Company of New 'York, the fourth largest bank in the '.United States, for instance, remarks . that "it is evident that sentiment in favour of deliberate currency inflation still commands considerable support ,in Congress." The bank points out that "quite aside from the present or 'possible future attitude of Congress towards deliberate inflation as a means 'of raising prices, stimulating recovery, ' or benefiting agriculture, it is evident ■that, as long as the Federal Budget remains far out of balance, the dangei 'of inflation will persist." . The question "What is inflation, is ' asked. It is shown that history supports the view taken by the American : Federation of Labour,, namely, that, although no group of persons can permanently - benefit from the disrupfcon 'of a currency system, the people with low or moderate incomes are the greatest sufferers from it.. There are many ways in which the rich .can protect their wealth to some extent for a ■while, such as by investing in 'estate, common stocks, and commodities.

FAEM MORTGAGE FINANCE. : "What was designated, the FrazierJLemke Farm Mortgage Refinancing ■Bill was .opposed by. the Federation ot Labour for the reason that it implied inflation and ' that inflation would, "vitally affect the economic wellbeing and status of labour. • At a time" of inflation, according to the statement issued by .that organisation "commodity prices rise but wages S stm .. . Labour w 0 " 1 / suf ' •fer reduction in living standards, reduced buying power, and the problem oSmployment would become more Guaranty Trust explains that "those who are dependent livelihood on wages or salaries find that inflation increases their c °st °* >ving far beyond any gain m the rewards for their labour, and, if the process is carried to great lengths, the resulting hardships become very severe. "They also discover that their savings are reduced to only a fraction of their former value, or, in extreme cases, have no value at all. . ~ : "Those savings are largely in the form of savings bank deposits, lifel insurance, and other assets that represent monetary claims, rather than equities in physical property. It is this sort of investment that inflation impairs or destroys by lowering the value of the money in which it is expressed. * "If the people of the Uhitcd States are aware of the direction m which their real interests lie, they will resist with every resource at their command the conditions and the proposals that threaten to create a temporary and_ unhealthy business boom at the cost ot mitoW losses in hard-earned savings a destructive industrial and financial collapse. and a permanent impairment ot confidence in the integrity of established values.

"In the beginning of a process of inflation, the increased purchasing power, either in the form of currency or credit, or both, stimulates the demand for commodities. Prices rise, and the promise of greater profits in the future leads business men to acquire additional credits to finance expanded production schedules and to buy larger quantities of goods at the higher prices. As prices continue to advance, buying is further stimulated by the anticipation qf even greater increases. At the same time, speculative purchases of securities and other property are encouraged. "Up to this stage, business conditions usually appear to be very satisfactory. It is true that the cost of living is high; but wages have increased, there is little unemployment, and business is booming. It is this phase of an inflationary movement that is so tempting to those who favour a 'controlled' inflation. These advocates appear to believe that a moderate inflationary movement may be permitted to reach this point and, by careful regulation of credit, be maintained at this favourable stage." CONTROL OUT-OF-HAND. That this belief can still be held in the United States is surprising to the Guaranty Trust as to all those who have examined the manner in which inflation has steadily , worked in the past. ' A "controlled" inflation, it is contended, is almost a contradiction in terms. The general expectation of higher prices that characterises the earlier stages' of an inflationary movement tends to degenerate quickly into a loss of Confidence in the future value of the currency.. "Once this loss' of confidence appears, it spreads With almost explosive rapidity, and. soon assumes the proportions of a: panic.

"It< is this psychological aspect of the Inflationary process that makes the idea- of a 'controlled' inflation appear go dangerous in the light of actual experience:" ' '

The existing situation iii the United States, represents to the Guaranty Trust a curious, combination of influences, economic and political, that are .inflationary in their implications. The significance and possible effects of these influences have been obscured to a corisiderable' extent by the fact that thus far they have been almost totally ineffective in raising prices. "It would be unfortunate," states the Trust,' "if (the failure, of those various factors ;to bring about .an immediate and pronounced rise in prices should create a false sense of security." INJUSTICE TO CREDITORS. Reference is also made to the unfair 'advantage that inflation gives to the debtor as against the creditor, and this point is strongly emphasised. The Trust observes that "it is this advantage to debtors that makes the idea of . inflation popular with some groups. Many farmers, for example, believe that their position would be greatly improved' if prices ' for their crops should rise to a point that would make the discharge of their mortgage obligations a relatively easy matter. This reasoning overlooks the fact that farmers are consumers of non-farm commodities, the prices of which would also rise, and that the subsequent depression would affect them as well as all other economic classes." LAND SPECULATION. , One of the causes of trouble among farmers of the United States, as in New Zealand, was trafficking in land

[rather than in the products of husbandry. The Trust declares that during the war farmers demonstrated that they were thoroughly human in their reactions to higher prices and the promise of greater profits and speculated on an enormous scale in farm land, a practice that is responsible for many of their present difficulties. ."It 15 highly probable that farmers, in the event of inflation, would again acquire ;land at speculative and inflated prices, make mortgage commitments on those inflated values, and, when the corrective movement set in, find their mortgage position no better, and possibly worse, than it has been in recent years."