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No. 103 "Inflation and Our Gold Reserve" Radio Address by Dr. Edwin Walter Kemmerer, Walker Professor of International Finance in Princeton University, February 27, 1936. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_103 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 103 "Inflation and Our Gold Reserve" Radio Address by Dr. Edwin Walter Kemmerer, Walker Professor of International Finance in Princeton University, February 27, 1936. American Liberty League. American Liberty League. Washington, D.C. 1936. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. AN INVITATION TO JOIN THE AMERICAN LIBERTY LEAGUE We extend to every American citizen who believes in the fundamental principles which gave birth to the Constitution of the United States an invitation to become a member of the American Liberty League. You may indicate your acceptance of this invitation by filling in the necessary information as to your name and address on the enrollment blank below and mailing it to American Liberty League, National Press Building, Washington, D. C. There are no fees or dues. If you are willing and able to give monetary help for the League's support your contribution will be appreciated, as our activities are supported entirely by the voluntary gifts of our members. ENROLLMENT BLANK Date_ I favor the principles and purposes of the American Liberty League and request that I be enrolled as a | regular ^ * contributing Signature_ â– member. Name (Mr. Mrs. Miss) County *As a contributing member I desire to give $_ to help support the activities of the League: Cash here- . Installments as follows: Inflation and Onr Gold Reserve â˜… â˜… â˜… Radio Address by DR. EDWIN WALTER KEMMERER Walker Professor of International Finance in Princeton University; President, Economists National Committee on Monetary Policy Member, National Advisory Council of the American Liberty League AMERICAN LIBERTY LEAGUE National Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. (103) Document No. 103 February 1936 W HEN you have finished with this pamphlet please pass it on to some friend or acquaintance who might be interested, calling his attention to the membership blank on page 12. Inflation and Our Gold Reserve * The Growing Deficit The deficit in our national budget which will average about 3,000 million dollars a year for the three years ending June 30, 1936, will be substantially increased next year by the recent passage of the Veterans' Bonus Act, which authorizes the prompt payment to the veterans of about 2,250 million dollars in baby bonds that are convertible into cash at par on demand. Congress has not yet provided the means for meeting these enormous cash payments. The entire nation is now wondering how Congress will get the required cash. With these bonus payments piled up on top of the heavy deficits already in prospect for next year, the nation faces a situation for 1937 which the Chamber of Commerce of the United States has recently epitomized as "(1) the largest revenue, (2) the largest expenditure, and (3) the largest deficit in the peace-time history of the country." This maximum deficit will occur in spite of the fact that the tax revenues of the national government have increased every year since 1932 and are expected to be about 50 per cent larger next year than this. In the boom year 1929 one dollar out of every eight of our total national income went into taxes of all kinds; by the depression year 1935 the proportion had increased to approximately one dollar out of every five. At the present time the total annual expenditures of government (Federal, state, and local) in the United States are equivalent to between one-third and one-fourth of the nation's entire national income. The Opposition to Increasing Taxes Wholesale prices in general are today about 35 per cent higher than they were three years ago and the cost of living is about 18 per cent higher. They are both advancing. With this rising cost of living and the recent large advances in the costs of government, the public is naturally becoming increasingly resistant to additional taxation. 3 A national election is approaching, and elected officials at Washington who vote for additional taxes this year will have to do some explaining to their constituents before next November. In a situation like this there is a great deal of running to and fro in Washington in search of a method of obtaining the money that will not antagonize the folks at home. An "Opportunity" for the Inflationists Here is the opportunity of the radical inflationists. They are now unusually active in Congress and ready, as always, to solve all our financial problems by the old-time paper money panacea, a panacea concerning which a great American patriot, Pelatiah Webster, shortly after the American Revolution, said: "We have suffered more from this than from every other cause of calamity; it has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemies." The reasoning of the inflationists is all so simple. The Government needs more money so it prints more, or it may authorize the Federal Reserve banks to issue more on the security of the Government's bonds, while the bonds in turn are payable in the same money which they secure. Other more devious ways for accomplishing the same purpose are possible. In each case the Government gets the money and for the time being it doesn't seem to cost anybody anything. The rain of checks can continue on the folks at home and they need not be called upon, before election, at least, to pay more taxes. Financing by Greenbacks Instead of by Interest-Bearing Bonds One age-worn fallacy now being advanced by many inflationists is the claim that it is cheaper for the Government to pay its expenses by printing paper money than it is to borrow money for paying them by selling Government bonds to the public. For the bonds, they say, cost the Government interest, while the paper money does not. A moment's thought will show that in this reasoning the inflationists are confusing two very different things, namely, money and income-bearing investments. A government bond is an investment to the owner. Since it pays interest it gives the owner an income. It is something to be kept and the longer the owner keeps it, the more interest income he receives. Money, on the other hand, is a medium of exchange. It performs its principal function in being passed from hand to hand in the purchase of goods and services. Most pieces of money in doing their money work change hands many times a year. In terms of money we express prices. If you hoard it, it yields you no income, for it bears no interest. A bond is a commodity, an income-bearer, which is bought and sold with money, while money is a medium of exchange by means of which bonds and other commodities are bought and sold. More Money Means Higher Prices Not More Purchasing Power In the study of money the most fundamental principle to be remembered is, that the law of supply and demand applies to money as it does to the value of every other commodity. When the supply of money and of bank deposits that circulate through checks increases faster than the demand for them, as that demand is expressed in the physical volume of goods and services to be exchanged, money gets cheaper. In other words, it takes more dollars to buy the same amount of goods. Prices rise. A country becomes prosperous by increasing its supply of useful goods. Increasing the supply of money does not increase the supply of goods; it merely makes the prices of everything one buys and sells higher everything but debts, and of them we shall speak later. Let us illustrate by an extreme case. In Germany where the paper money in circulation, which after the War was "backed" nearly 100 per cent by government bonds, rose from about 2% billion marks in 1913 to 497 quintillion marks by the end of 1923, the cost of living during this period increased one trillion, 247 billion fold and wages of skilled labor on the average rose 694 billion fold a little over half as fast as the cost of living. The "Backing" Argument A striking fact about the experiences of the world with paper money inflation covering many generations is that those responsible for the inflation policies in each country nearly always argued that the usual results of inflation would not occur in their country because they said, "with us conditions are different than they were in other countries where inconvertible paper money got out of control with disastrous results." In repeated instances, the respects in which conditions were supposed to be so different are the very ones that are being proclaimed so widely by the inflationists in the United States today as reasons why we cannot have a serious inflation in this country. The principal argument of the inflationists an argument which takes a variety of forms is the so-called "backing" argument. In France, at the time of the French revolution, government officials declared that the paper money assignats could not depreciate because they were backed by millions of acres of the best lands in France, lands that had been seized by the Government from the Church and from the old landed aristocracy and had been pledged to secure this paper money. Yet in a few years' time, despite the penalty of the guillotine for people who refused to accept the assignats at their par value, this money became worthless. The prices of the land itself as well as of everything else rose to such fantastic figures, that the peasants absolutely refused to accept the money, saying, "We would take it if the horses would eat it." At the time of our American Civil War, when we issued our inconvertible greenbacks, it was widely argued by the paper money advocates that the greenbacks could not depreciate because they had the backing of the unlimited resources of the greatest country in the world. A member of the inflation bloc then in Congress, Senator T. O. Howe, said: "There is no probability that a currency based upon the resources of a great nation, the whole of which will be demanded once in each year for payment of dues to the government and . . . which may be loaned to the nation upon interest . . . will depreciate 50 per cent, or even 5 per cent. No such paper ever did depreciate, and none such, I venture to predict, ever will." Well, within three years of this prophecy the greenback had declined to a low of 35 cents gold to the dollar and, despite the fact that the maximum amount ever outstanding was only 431 million dollars, 17 years were required to bring them back to parity with the gold dollar. During the entire time that Germany's currency was going down the toboggan slide until it was ultimately stabilized at the rate of one trillion paper marks to one gold mark, the German central bank held substantial gold reserves. At the end of 1923 the gold value of Germany's 1,900 million gold marks reserve was equal to over four times the gold value, at current foreign exchange rates, of the 497 quin-tillion marks of paper money then in circulation. How long would 1,900 million gold marks have lasted if the German central bank had offered to redeem on demand paper marks at par in gold marks? Not a split second, for obviously at a par rate a single one trillion mark note, then worth at current foreign exchange rates about 24 cents United States gold, would have required a gold payment amounting to a sum over 500 times as large as Germany's entire gold reserve. The fellow who presented the first note would have gotten all the gold but would have received only one-fifth of one per cent of the par value of his note. On the other hand, of what value was a gold reserve in maintaining the gold parity of this vast circulation of paper money if the gold was kept, as it actually was, buried in the vaults of the banks and not paid out in redemption of the currency? When the United States went off the gold coin standard in the spring of 1933 and started down the skids towards our present "fifty-nine cent dollar," it had by far the largest gold reserve of any country in the world. Next to the United States, France today has the largest gold reserve. Yet there is now widespread anxiety that France may be forced off the gold standard at almost any time. Leaving out of account our accumulated Treasury hoard of silver, which as a monetary reserve is dead and useless in a gold standard country, our present ten billion dollar gold reserve in the United States must support not only about six billion dollars of money in circulation, of which 93 per cent consists of various kinds of paper money, but must also support something like fifty billion dollars of bank deposits with which, through the use of bank checks, we do over 90 per cent of our American business. If our six billion dollars of money in circulation and our fifty billion dollars of bank deposits were convertible on demand into gold coin or gold bars, and if, as a result of inflationary measures the public, through losing confidence in their money or for other reasons, should demand gold on a large scale in exchange for paper money and bank checks, for exportation and for hoarding, the first ten billion dollars of notes and checks presented for payment in gold would take the country's entire gold reserve, leaving forty-six billion dollars of notes and deposits with no gold whatsoever supporting them. If, on the other hand, the government should refuse to pay out the gold in exchange for notes and deposits, as it almost certainly would when the demand for redemption became strong and threatened to turn into a dangerous run on the reserve, then our gold reserve, like the previously mentioned gold reserve in Germany, would be dead and would have practically no effect in maintaining the value of the country's paper money and bank deposits. It would have ceased to provide a means for relieving the country of a supply of currency that was becoming redundant and so the paper currency would depreciate. While a large gold reserve fund may be a great help in maintaining the gold parity of a currency, it offers no certain guaranty of the gold parity against the onslaughts of increasing inflation. Under Inflation Who Pays the Bill? Any one of the many radical inflation proposals now being urged upon Congress by the inflationists of the greenback, the silver, the bank note or the bank deposit inflation group, if carried out on any large scale, would smash confidence in our currency, cause runs on our gold reserve and, either by exhausting the reserve or by causing the government to refuse to pay out gold or permit its exportation, would break down our present monetary standard and drive the country into the throes of serious inflation. How far such an inflation would go, and how long it would last before it was stopped, no one knows. The answer is more a question of politics and mass psychology than it is of economics. If we arbitrarily assume, merely for illustration, that our present dollar would depreciate 50 per cent before it was again stabilized remember the dollar has already been reduced 41 per cent in its gold value then the present government debt would be cut in half by the process and likewise all of the other domestic debts in the United States. Among those debts that would be cut in half would be all of our one hundred billion dollars of outstanding life insurance, all of our savings bank deposits, most of the nation's pension funds, and the greater part of the endowment funds of our colleges, universities, hospitals, and other public welfare institutions which are, for the most part, invested in bonds and mortgages. If the Congress of the United States, in order to avoid cutting down extravagant expenditures and to avoid imposing taxation adequate to meet public necessities, continues to pursue a strongly inflationary policy, and if the resulting inflation gets out of control, as it almost certainly would, it will be these savings, these great public welfare endowments, and this life insurance that will be drawn upon for meeting our extravagant government expenditures. If you believe, as I do, that such a shortsighted policy would bring gross injustice and lasting harm to the American people, then Fight Inflation. PAMPHLETS available Â£OPIES of the following pamphlets and other League literature may be obtained upon application to the League's national headquarters. Statement of Principles and Purposes American Liberty League Its Platform The $4,880,000,000 Emergency Relief Appropriation Act The Bonus Inflation The Thirty Hour Week Bill The Holding Company Bill Price Control The Labor Relations Bill The Farmers' Home Bill The TVA Amendments The Revised AAA Amendments The President's Tax Program Expanding Bureaucracy Lawmaking by Executive Order New Deal Laws in Federal Courts Potato Control Budget Prospects Dangerous Experimentation Economic Planning Mistaken But Not New Work Relief The AAA and Our Form of Government Alternatives to the American Form of Government A Program for Congress The 1937 Budget Professors and the New Deal Wealth and Income The Townsend Plan The President Wants More Power (leaflet) The Townsend Nightmare (leaflet) The National Labor Relations Act Summary of Conclusions from Report of the National Lawyers Committee Straws Which Tell The Constitution What It Means to the Man in the Street By John W. Davis How to Meet the Issue -Speech by W. E. Borah The Duty of the Church to the Social Order Speech by S. Wells Utley The American Bar The Trustee of American Institutions Speech by Albert C. Ritchie PAMPHLETS available (continued) Two Amazing Years Speech by Nicholas Roosevelt Legislation By Coercion or Constitution Speech by Jouett Shouse The Imperilment of Democracy Speech by Fitzgerald Hall The Spirit of Americanism Speech by William H. Ellis Today's Lessons for Tomorrow Speech by Captain William 11. Stayton The Duty of the Lawyer in the Present Crisis Speech by James M. Beck The Constitution and the Supreme Court Speech by Borden Burr The Economic Necessity in the Southern States for a Return to the Constitution Speech by Forney Johnston The National Lawyers Committee of the American Liberty League Speech by Ethan A, H. Shepley Our Growing National Debt and Inflation Speech by Dr. E. W. Kemmerer Inflation is Bad Business Speech by Dr. Neil Carothers The Real Significance of the Constitutional Issue Speech by R. E. Desvemine Arousing Class Prejudices Speech by Jouett Shouse The Fallacies and Dangers of the Townsend Plan^Speech by Dr. Walter E. Spahr What of 1936? Speech by James P. Warburg Americanism at the Crossroads Speech by R. E. Desvemine The Constitution and the New Deal Speech by James M. Carson The American Constitution WhoBe Heritage? Speech by Frederick H. Stinchfield The American Form of Government Let Us Preserve It Speech by Albert C. Ritchie The Redistribution of Power Speech by John W. Davis Time to Stop Speech by Dr. Neil Carothers The President Has Made the Issue Speech by Charles I. Dawson The Facts In the Case Speech by Alfred E. Smith The Townsend Utopia Speech by Dr. Ray Bert Westerfield Shall We Plow Under the Supreme Court Speech by Jouett Shouse