Are We Heading For A 20-Cent Dollar?

Kicked around by economists, consumers and the Kremlin, our inflated dollar is a danger to our democracy. Here’s a revealing summary of the errors and intrigues which caused our No. 1 domestic headache — and what we can do to check it

BRUCE HUTCHISON January 1 1951

Are We Heading For A 20-Cent Dollar?

Kicked around by economists, consumers and the Kremlin, our inflated dollar is a danger to our democracy. Here’s a revealing summary of the errors and intrigues which caused our No. 1 domestic headache — and what we can do to check it

BRUCE HUTCHISON January 1 1951

EVERY Canadian family talks wistfully of the 1939 dollar, wondering when it will return. We might as well discuss the return of the dinosaur, the dodo and the bison. The 1939 dollar has gone forever.

The only practical question today is whether the dollar—now worth less than 60 cents in 1939 terms —is to shrink still farther, whether in a few years we shall have a 40-cent, a 20-cent or a 10-cent dollar.

This question—apart from the crisis of war and peace with which it is inextricably bound up—is the most important question before the Canadian people.

By inflation this country and other free countries can wreck themselves, destroy their present economic systems and lose the struggle against Communism. Inflation can become our Achilles heel and Stalin’s secret weapon. He knows that, but so far we don’t.

Inflation has not occurred by accident or act of God. It was deliberately planned and executed. Like the origins of money itself, the origins of inflation are always the doing of men acting on the will of men.

In his history of the decline and fall of the Roman Empire, Gibbon tells us that an early Roman citizen once had a cow for sale. Tired of dragging the animal through the streets he drew a crude picture of it and sold that. The buyer had a claim to a cow but, probably lacking a stable, he sold the picture, which thus passed from hand to hand while the cow itself remained unclaimed. Thus from the Latin word for cattle, pecu, came the word pecunia or money. That was the forerunner of our modern dollar bill—a claim for goods which may or may not be purchased.

This system worked all right so long as only one picture was painted for one cow. When some bright entrepreneur sold several pictures for the same cow and there were more pictures than cows in circulation, or more money than goods, man had achieved one of his largest and most dangerous inventions.

When the Canadian Government needs extra money Douglas Abbott does not paint a cow’s head on a piece of paper and peddle it along Sparks Street. But modern governments accomplish the same result through a banking system so complex that the public seldom suspects what is going on.

Sound governments, like that of Canada, resort to such legal sleight of hand only when they are in a tight spot. During a war, for example, they invariably breed more money without breeding any more cows or creating any more goods. Since there is then more money seeking the same amount of goods or even fewer goods—more people bidding higher for the same goods—prices naturally rise by the law of supply and demand. The value of money falls.

The Time Bomb Blew Up

That precisely is what has happened to the Canadian dollar in the last 10 years. Roughly speaking, if you consider the prices and the taxes he must pay, the Canadian who owned a dollar in 1939 actually owns 58 cents today. Every man who put his money into government bonds, life insurance, annuities or any fixed gilt-edged investment in 1939 has lost nearly half his estate and his widow will enjoy half the income she expected.

While in North America we have bitterly denounced the Socialists of Britain whenever they proposed a capital levy we have already enforced a ferocious levy of our own. We have selected as our helpless victim the man who has saved his money, taken less goods than he could have taken out of the total supply, bought Victory Bonds at the Government’s request, prepared to keep himself in old age instead of living on the public treasury and generally behaved as a good citizen.

We have exempted from the capital levy the speculator who was smart enough to buy physical goods like real estate or the claim to goods in the form of common stocks. The value of these things in money has risen as the value of money has fallen.

We have robbed the saver, the pensioner and the widow while the investor, the speculator and the organized wage earner (who in the main has kept his money wages abreast of the rising cost of living) have gone virtually scot free.

Thereby our Government has committed legally an act for which an individual would be put in jail—and has committed it at our command.

Inflation began at the very moment when we thought we had it beaten. By an interesting paradox it became inevitable when the Government was enforcing the wartime price ceiling. We are not witnessing a process unforeseen and unpreventable but a foreseeable process absolutely assured by our apparent attempt to prevent it. During the war we planted a time bomb in our economic system and it has exploded. By what we do now, or fail to do, we can provide another and larger explosion later on.

When we embarked fully on World War II we were producing in Canada a certain quantity of goods and services. Because a large part of this production had to go into armaments which we could not consume ourselves it was obvious that less goods would be left to the consumer, unless we greatly increased our total production. We did increase our production but at the same time we increased still faster our diversion of materials, manpower and machinery into armaments. No matter how we fooled ourselves, we were left with less goods for our own use.

We could reduce our consumption of goods voluntarily, by buying less or by letting prices rise to a point where we could no longer afford to buy.

The Government tried the first method. It began to tax us and to borrow from us so that we would have less to spend. It sought to prevent us rushing into the market to bid up prices. For the time being it succeeded. But even after taxing us and borrowing from us the Government still was short of money to pay the cost of the war.

Convinced that we wouldn’t face the facts of our situation the Government did not dare to tax or borrow enough from us to reduce our purchasing power to the level of the goods available. So, like all governments, it resorted to the oldest financial trick in the world and printed some more money.

I say printed some more money for that is what it did. But nowadays we have slicker methods than the printing press to conduct legal counterfeiting. The modern government does not have to set printers to work in the basement as the French Government did on the eve of the Revolution or as Hitler did in the last war.

Instead, it went to the private banks, by an elaborate fiction, and borrowed from them money which they really did not possess. The Government gave the banks a bond or some other short-term security and the banks credited the Government with a deposit of the same amount. The Government could then write cheques against this deposit to pay its bills, and its cheques, in the hands of private individuals, could be cashed at any bank. By this means new money in the form of figures on a ledger was created out of thin air.

If the total goods available to the consumer had risen at the same rate as the money supply nothing serious would have happened. There would have been a cow for every picture, no excessive bidding for scarce goods and hence no rise in prices.

Unfortunately, while this nation performed an unprecedented economic feat in almost doubling its production in one decade, the total money supply more than tripled. In 1939 our production of goods and services was worth $5.5 billions. By 1949 it had risen, in terms of prewar dollars, to almost $9.5 billions. But our total medium of exchange—coins, bills, bank deposits, which are money in active circulation, and the Government’s outstanding bonds, which can be turned into cash and released on the market—had risen from $5.8 billions at the beginning of 1939 to $18.3 billions in the autumn of 1950.

By the Skin of Its Teeth

That was inflation. It didn’t show during the war for several reasons. By heavy taxes, by selling Victory Bonds and by compulsory savings the Government was whittling off large chunks of purchasing power before we could use it. In the patriotism of wartime the bulk of the nation voluntarily restrained buying and postponed until peacetime the purchase of a new house, car, refrigerator or living room rug. Besides, many of the semi-durable goods the public desired had disappeared from the market as raw materials went into guns.

But those huge supplies of money were not disappearing. Apart from the amounts drained off in taxes and living costs the' public was saving its money to spend later on.

Under these conditions—high taxes, voluntary saving, compulsory saving, some rationing and a general patriotic willingness to go without thing? for the moment—the Government could impose a price ceiling and make it stick temporarily. On the highest authority, however, it can be said now that if the war lasted another year the force of excessive money pushing against an inadequate supply of goods would have smashed the ceiling completely. Price control came through the war by the skin of its teeth.

We entered the peace with a huge backlog of public savings ready to sweep down on the supply of goods like an avalanche. Curiously enough, U. S. Government economists, haunted by memories of the 30’s, refused to see this. They persuaded President Truman that a rich but parsimonious public wouldn’t spend money quickly enough to buy available goods, the goods would pile up unsold now that the Government was no longer turning them into guns, and another devastating depression would follow by the spring of 1946.

This was perhaps the largest and most garish blunder in the history of economics —a science which has the distinction of being almost always wrong.

They Expected a Recession

Fearing a deflation when the fires of inflation were already alight the U. S. Government pumped out more purchasing power by virtually compelling employers to raise wages, by spending hugely itself, by collecting in taxes less than it spent and by creating more money in the process. Faced with a conflagration the firemen of Washington industriously poured gasoline on the flames.

The firemen of Ottawa were a little sceptical of these methods but they too were beset by ghosts of the lean years. In the White Paper of 1945 they stoutly promised to resist the threatened deflation by the Keynsian machine called a cyclical budget. In any case they were powerless to isolate Canada from the economic lunacy and inflationary tide which were flowing by daily trade across the 49th parallel.

Thus planted in the war and manured in the peace, real inflation began its rank and poisonous growth.

The price ceiling—a Canadian achievement unequalled in other countries—had postponed it but had not cured it. At some point the postponed rise in prices was bound to come into the open. The supply of money and the supply of goods had to equate themselves in higher prices. By the beginning of 1950 this equation apparently had been reached.

We seemed to be securely on a flat price plateau some 60% above the plateau of 1939. We had lost part of our dollar. The costs of the war not covered by current taxes and real borrowing had been paid for by the usual method of devaluing the currency. But no one had been hurt too much. It was incredible, all things considered, that we had come through so well. With perfunctory apologies to those who had seen much of their savings confiscated we could go on from there.

In the minds of the Washington economists, indeed, the danger no longer was inflation but deflation. Early in 1950 these prophets announced that by autumn we would face another recession probably worse than the brief shakeout of early 1949 which Canada had miraculously escaped.

Alas, no economist can calculate in advance the buying or saving habits of the public or the gambling instincts of investors. Least of all can he read the mind of the Politburo. In June, 1950, the Politburo ordered the invasion of South Korea and instantly shattered every economic calculation in America. As the Communists moved down the Korean peninsula the price level moved up in America.

The public probably imagines to this day that the increased cost of living last summer and autumn was due to North American rearmament, that governments were again turning butter into guns, reducing the supply of civilian goods and bidding up prices. Nothing of the sort occurred.

At this writing the rearmament program has hardly begun to touch North American economy. Only a fraction of production is going into guns.

What happened to prices in the summer of 1950 was not economic but hysterical. Fearing war and shortages, businessmen rushed to buy goods for their inventories, housewives rushed to buy every kind of gadget and in this scramble of so-called “anticipatory buying” prices surged up just when economists had expected them to fall.

Meanwhile another thing had happened to pour more gasoline on the fire. In Canada and the U. S. taxes had been drastically reduced since the war. The Canadian Government, with one eye on the danger of a recession and the other on the pending election, had abandoned its anti-inflationary revenue surpluses and slashed the income tax in the spring of 1949. The U. S. Government, with taxes similarly cut, was spending far more money than it was collecting.

When the buying spree of 1950 got under way neither government was collecting enough taxes to drain off excess purchasing power before it could bid up prices.

In Canada still another thing had happened which few Canadians have begun to grasp. Last summer American investors concluded that the Canadian dollar would soon be worth 100 U. S. cents and they started to buy Canadian dollars. Gamblers’ money rolling over the border reached $600 millions in three months — a hemorrhage without historical precedent. The potential money supply of Canada increased automatically by the same amount at a time when the Government’s primary aim was to reduce it.

This was unavoidable. When the American brings a U. S. dollar to Canada and buys Canadian investments he must be paid for his dollar with a Canadian dollar. The Government looked around desperately for money to meet these demands, sold off the long-term bonds held by the Bank of Canada (both to raise cash and to keep bond prices from going through the roof), used its accumulated revenue surpluses but still was about $200 millions short.

Those $200 millions were created by bank borrowings out of thin air. They were new and extra money. Moreover, money formerly held sterile in the treasury was released to individuals who could spend it later on goods.

At this writing about two thirds of the extra $600 millions is still in private hands, is not being used to buy goods, but one third is in circulation and is helping to push up prices.

That is how we got where we are now —a postponed inflation after the war, another inflation in the Korean hysteria even before rearmament began and the inflationary pressure of the rearmament program ready to hit next summer.

How bad is all this? At least in economic theory not as bad as you might think when you pay your grocery bill.

The economists aren’t always right about the future but they do know current facts. The best economists agree that the inflationary gap in the U. S. -- the excess of money over goods --is only $10 billions, not a staggering amount in an economy producing nearly $300 billions.

If economics operated free of human nature it could be argued that the worst inflationary pressure passed last summer in the buying spree, that the armament pressure of next summer will be somewhat less and that before then we may even suffer a mild brief recession and find the cost of living dropping.

This assumption could be correct IF: 1, The U. S. armament program does not rise above the annual cost of $30 billions which it will reach in six months; 2, Labor unions don’t insist on large wage increases which would increase prices; 3, The production of goods is not interrupted by industrial warfare; 4, Governments hold down non-defense expenditures and their own demand for scarce civilian goods; 5, Governments levy taxes to drain off excess public purchasing power; and most important, 6, Another international incident does not set off another buying spree.

There are too many ifs in the theory that the worst has passed. Should any or all of them fail to materialize the real crisis of inflation may be still ahead of us.

Further serious inflation, by causing another unfair capital levy, wage-price spiral and public turmoil, would under, mine our morale and our entire defense program, exactly as the Politburo hopes.

Slithering Into Socialism

Obviously we need strong new policies to prevent a slide toward economic chaos. What policies?

The easiest and most popular is a return to wartime controls. Millions of Canadians feel that if prices could be controlled in wartime they can be controlled in peacetime and what is the Government waiting for?

Prices can be controlled in peacetime —for a little while anyway—if we are ready to accept wartime taxes and compulsory savings, scarcities, rationing, frozen wages and frozen jobs, patriotic restraint in buying—a completely regimented and government-managed society.

Actually none of the conditions essential to a price ceiling exists today. American people are not ready for a regimented state. Above all—and this is the fact which could lose us the cold war—they are not ready, voluntarily and individually, for sacrifices and restraints that make a price ceiling work.

That being so, it’s absolutely certain that price controls, erected like a dam of tissue paper against the flood, would soon be swept away and engulfed in black markets, law evasion and economic disorder.

We could attempt something still more dangerous. We could attempt to regulate the flood with a system of partial controls which would only shift the pressure to some other price and some other article, force us to impose still more controls until in the end .we would have to impose complete controls after prices already had risen. That might be locking the stable door lifter the horse had fled.

Yet it is toward this course that we in North America appear to be moving.

The Canadian Government is determined to avoid total or partial controls it can, but the U. S. is slithering into them day by day while declaring it will do nothing of the sort.

If the U. S. goes that way Canada will almost certainly follow. A desperate and bemused Canadian public, imagining that the U. S. is really controlling inflation, may insist on the Canadian Government doing the same thing. U. S. controls are politically irresistible here.

Unless this slide is soon arrested the American economy, while ostensibly free, will be actually under wartime government controls within a year. And rigid controls seldom succeed in a free society except in actual war, when people will accept them in the clear knowledge that they will soon disappear.

Thus the greatest danger of all is that we shall repeal the free society of America for a temporary emergency when we face in fact years and perhaps decades of cold war; that, having established a totalitarian economy under the name of democracy, we shall be unable to liquidate it in 10 or 20 years when everything and everybody is geared to it.

That would be the highest irony of all history a free society going forth to struggle for freedom against tyranny and adopting under other labels the economic system of its enemy. At this prospect—now facing us—the Politburo doubtless is breaking out its best barrel of vodka.

Such a travesty can be avoided only by the concerted efforts of individual people like the readers of this magazine. It will not be avoided by democratic governments which do only what the public demands. Left to themselves, governments will take the easy course. If costs rise high enough they won’t dare to levy the taxes needed but will finance—as they financed the last war —by printing more money. They will create more inflation and attempt to disguise or postpone it by outright or by creeping controls.

If that is to be avoided, public purchasing power will have to be kept down somehow to the level of production.

Since all governments—federal, provincial and municipal—have too much purchasing power and are huge consumers of our goods, they must reduce non-defense expenditures.

Since such reductions, while helpful, will not be nearly enough for our purpose, taxes will have to be drastically increased (perhaps with compulsory savings as well) to reduce spending power and upward pressure on prices.

Since low interest rates encourage people to borrow and spend excessively, the going rates may have to be increased, even though that would raise the cost of servicing the public debt.

Since too easy credit encourages people to buy excessively on the installment plan, consumer credit may have to be curbed still further.

All these fiscal weapons are at hand but the Government cannot use all or any of them without our consent as consumers and voters.

If as consumers we demand more goods than the system can produce we shall bid up prices no matter what the Government does to hold them down.

If as voters we resist taxes and disagreeable curtailments in civilian government services we shall prevent the Government from using any weapons at all.

And if we imagine that we can arm ourselves to the point of safety (which is years away yet) and still enjoy as many goods as ever; if we try to have our cake and eat it; if our hands continue, in Lloyd George’s phrase, to drip with the fat of sacrifice--if we are not ready to pay the price of freedom then assuredly we shall lose it. ★