Investing to Dodge Inflation
W. J. JEFFERS
PROBABLY two billion dollars of expatriated money are churning here and there about the earth, in response to changing ideas of uneasy owners who desire to escape or avoid countries where inflation of
currency and credit is likely to be forced by circumstances, or to be adopted as a policy. A large number of Canadians are also very greatly concerned as to the effect which inflationary measures, either in Canada or elsewhere, may have on their savings and investments. They have been asking into what form of wealth they should change their present holdings so that depreciation of currency will not harm them unduly.
These letters speak varyingly of inflation as a possibility, a probability or a certainty throughout the world, but for the most part do not define what they mean by inflation. They take for granted that inflation is an easy policy to put into effect, and that even if it is not easy to control it is sure of affecting the level of prices definitely in an upward direction.
There are as many definitions of inflation as there are economists, but in this article are included as inflationary all those measures which cause a greater increase in bank money (inflat ion of credit) and a greater increase in currency notes issued (inflation of the currency) than is justified by a preceding or accompanying increase in commercial, industrial and financial activity. Farmers, miners, lumbermen, owners of projx>rty and producers with products whose Prices can be easily moved up or down, are appealed to by advocates of inflationary measures with the promise that prices are sure to move up in response to such measures and that, therefore, inflation would automatically cut down all indebtedness fixed in terms of dollars. They are told that it is economic justice that debts contracted when prices were higher should be paid for when prices regain the old height.
It is not the purpose of this article to examine into the merit of the arguments for inflation, but only into the fact that serious talk of inflation always causes a flight of capital from the dollar, pound, franc, mark or any other currency that might be affected if the talk were translated into action. Investors, small and large, are very directly concerned in anything which tends to cast doubt on the continuing value of the currency and bank credit which they have become accustomed to regard as a safe and stable storehouse of wealth until needed. If they fear inflation on a wide scale, it upsets the whole financial applecart for them and throws into the waste-paper basket the most widely accepted maxims as to what constitutes sound investment.
The man who distrusts speculation of all kinds can afford to ignore minor fluctuations in price levels so long as these are not engineered by theorists believing in higher prices and trying to bring them about by tinkering with currency and credit. Such a man, aiming at a competency rather than wealth and choosing to secure his end by the processes of saving and sound investment, is by self-interest the uncompromising enemy of anyone or anything tending to debase the value of the only currency medium in which he can be paid. Inflation, he knows, takes sides with the debtor as against the creditor. It aims at automatic reduction of the income of the lender on mortgages, on bonds, on goods. It helps the owner of property or goods as against those who have helped finance the owner.
Supposing the United States dollar and the Canadian dollar were to take the same path as the German mark did after the war. when it went to one-trillionth of its former value. By that route would be wiped out the entire debt of the Dominion Government, the provincial governments, the municipalities, the Canadian National Railways, all companies and all individuals.
No statesman and no prominent advocate of inflation on this continent anticipates any such wholesale destruction of currency as Germany experienced. Once embarked on, however, inflationary measures are difficult to control, though France was successful in stopping the downward plunge of the franc by very strenuous exertions.
Inflationists in the United States are continually asked to study what happened to Germany, and are told that a similar fate may be experienced in the United States if inflationary measures are persisted in. There are radical differences in the situation of Germany when inflating and the situation of the United States today. Germany was then having huge sums exacted from her by her former enemies, and it was to her advantage to get rid of all her internal debt SÍ) as to be able to meet the indemnities. She was, moreover, operating in a world where there was a great shortage of raw materials, finished materials, and of productive capacity. It was easy to raise prices in Germany and to secure competitive advantages in world markets in the process under such circumstances while other currencies were dependable.
The United States attempts inflation in a world where there is an excess of productive power and huge surpluses of many of the world’s most essential rawmaterials. The United States administration is, therefore, trying artificially to reduce production at the same time that it tries to get prices higher. It is producing unsettlement in other exchanges and making world buyers afraid to purchase goods for fear they may miss some greater advantage which might be gained by waiting longer. The mark-up of goods is immensely more difficult for the United States than it was for Germany as a result, and especially so because Mr. Roosevelt must intend somewhere to stop the process. Partial and even striking success may be possible for a time as a result of huge spending programmes by public authorities, but if these are financed eventually by fiat currency and dollar devaluation, the long-distance investor should wait a long time before sending his money for safe storage into the United States. Speculative opportunities there will be, but the investor must approach the problems from another angle.
j 'HE INVESTOR, aware of daily changes in exchange -*■ values of principal currencies of the world and fearing that world-wide inflation may develop, asks in effect:
“Where on earth is there a covert, hole or burrow where our savings will be safe? If bonds, mortgages, bank deposits, life insurance policies, pensions, salaries and any security revenue fixed in terms of dollars fall greatly in purchasing power, that would steal from us much of the benefit we expected to gain from past thrift. What measures can we take now to protect ourselves in greatest measure against such losses?”
In answer to those who think that the danger from inflation has been exaggerated, these investors point to the series of events following Great Britain’s going off the gold standard. They note that the United States and most other countries have followed Great Britain’s example in this respect, and that France and its cohort of gold bloc countries are placed in a vulnerable position by the present inflationist policy of the L nited States. They see a whole host of declarations emanating from the United States to the effect that President Roosevelt is definitely determined to restore the price level of 1926. They have seen a considerable increase
in prices come while credit inflation was practised on a wide scale, and they have heard the President declare over the radio that whatever measures are necessary to secure the resumption of the upward trend will be taken. The United States has become a world trader in gold with the intention of increasing its value in United States dollars - another way of announcing its intention to devaluate the dollar. They are afraid that if France does go off gold the action will be taken just as suddenly as England’s was, and the consequences may be incalculable.
Taking it for granted for the moment that the fears of inflation are fully justified, there are only five ways in which such inflation policies in any country can be avoided.
First, the fixed interest security can be sold, and the currency can be promptly exchanged for the currency of some country where either a gold standard obtains or where stable and sound management of currency can, under all circumstances, be expected.
Second, one can use his money to buy gold in any country where private individuals are permitted to make such purchase.
Third, one may buy commodities whose rising values, as shown in a depreciating currency, would offset the dropping value of that currency.
Fourth, one can buy common stocks of companies which are not bound down to specific rate agreements, which are soundly conducted and apt to do a good business whatever the currency policy of a country may be.
Fifth, one can invest in revenue-producing properties or other material assets.
The change of funds from one country to another is subject to the objection that the state of affairs in any other country is also subject to change. Governments may change ; business trends may change; war may come; or some newpolitical demagogue may be hailed as the savior of his land, sw'eep the people off their feet and carry them forward to policies and acts which would be more surely destructive of the foreign investor’s money than if he had left it at home.
If he looks to the United States, he will find in active operation a Rooseveltian programme whose ends no one yet can see and which has strong critics both at home and abroad. This is not to say that it may not achieve many excellent things, but it is safe to say that at this juncture no one can point to the United States as a haven for foreign funds.
If one sends his money to France because it is a country which is still on gold, there is the danger, feared by many, that France may be driven off gold. In such case his situation w-ould not be better, and there would be the difficulty of getting the funds back to Canada.
If the investor’s funds were sent to England, there would still be the necessity over there of putting it out at low interest in a sound bank, of choosing securities unfamiliar to the investor, and of not having as quick control of his funds as though they were nearer home. It may be pointed out, how-ever, that England’s 400 years of financial experience have brought a stability and a coherence to currency and credit policies which have inspired great confidence in many United States capitalists, who have, therefore, sent large sums of money to that country. Canada’s “watchful waiting” in recent years, coupled with the results of recent elections which have been interpreted abroad as showing Canada among the safer nations for capital, have led in recent months to much buying of Canadian bonds and stocks for foreign account, and it is to such a transfer of foreign money here that Canada’s dollar, for the first time
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Investing to Dodge Inflation
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in years, has been quoted at a premium in the United States.
If the investor sent his money to England and bought gold which was placed in a safe depository against his time of need, he would be taking much the same action as Chinese peasants do in a troublous time, when they bury their gold and silver in a spot known only to themselves. The idea of putting his money into gold is the same as the peasant’s idea in burying it; that is, to have it safe until all the social and economic troubles of the present era have flown away, and he can bring it out and exchange it for some currency that has become stable again. This device is subject to the objection that at any time a government may order people to tum in all their gold and accept currency. That has already been done in a number of countries. It is, of course, an excellent repository for the time being because of the ideas of value which have attached to gold in men’s minds ever since civilization began. Gold and silver had value to men and women before they were used as money, and many economists believe that that is why they eventually were used as money. Even if every country in the world went off gold, people believe that gold would still have value in men’s minds and be thought of as the one stable value to cling to.
Keep Funds in Canada
THE FAULT with hoarding is that the buried talent yields nothing. This hoarding tendency is one of the obstacles to economic recovery. What is needed are confidence and investment of idle funds, according to accredited authorities.
Purchase of commodities places the buyer in the position of having to keep the goods from depreciating. This is not always convenient. And in many cases, this time factor in connection with commodity investments makes them unsatisfactory to the average individual.
Investment in stocks is widely advocated as a guard against inflation. But shares of organizations like public utility companies would perhaps not benefit the holder much in the event of inflation because, rates being more or less fixed, the utility might not be able to take advantage of the inflation to get more money for its services. There is the added difficulty in stock investments of trying to keep them from going bad. For a comparatively short period, however, shares in successful organizations producing and marketing commodities might afford some protection against inflation.
Investment in properties or other material assets may mean inconvenience to the investor. Nevertheless, such a policy might
ensure the owner of having land from which to produce his food, a home to live in or a rentable property, no matter what happened. But after all, what is this but ordinary investment, except that the investor in these cases may be tending to use his funds to buy a share in various ventures instead of lending his money?
To conclude, there is so much world-wide unsettlement that the Canadian with funds to invest should keep his funds in Canada if he intends to live in Canada all his life. So far there is no immediate danger threatening Canadian money and credit which does not threaten the money and credit of other countries in equal or greater measure. He has, as well, the great investment advantage of having his money readily accessible and of understanding the securities, banks, trust companies and properties with which he decides to entrust it.
In Canada he would do well to stay by the old maxims of savings and sound investment. | He should leave to the specialist speculation j in commodities with the object of avoiding I inflation, because there he will meet new and unaccustomed dangers. He can avoid the worst results of increasing prices by investing equally in fixed income securities of first grade and common stocks of companies which can adjust prices of products rapidly to changing conditions. If prices went down, his bonds would gain what his stocks lost, and if prices went up, his stocks would gain what his bonds lost.
Price rises which are not deliberately engineered have the most hope of holding their own. There are many economists who contend that much more is to be gained for the individual and society at large if an attempt is made to stabilize at the present j lower level of prices than by an imposing j but questionable attempt to regain the 1926 level.
Even if that be attained, the moment stability of currency and credit is established —if it can be—the working of potential supply and effective demand would begin to start changes in price levels again. The only advantage would be in a wholesale removal of wealth from creditor to debtor, but even that would not be constant necessarily. ! The holder of long-term securities might see such a period come and go, and still get at maturity that value in currency which he had expected when he invested.
In the meantime, let him avoid securities j of governments, provinces and municipali; ties which embark on extensive schemes beyond their means; of companies which are not soundly conducted and financed. He has to be careful, but the old order has not yet passed away in Canada and the old rules still hold out most hope.