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No. 29 "How Inflation Affects The Average Family" Speech by Dr. Ray Bert Westerfield, Professor of Political Economy, Yale University, April 18, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_29 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 29 "How Inflation Affects The Average Family" Speech by Dr. Ray Bert Westerfield, Professor of Political Economy, Yale University, April 18, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. 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. Pamphlets Available â˜… Copies of the following pamphlets may be obtained upon application to the League's national headquarters: Why, The American Liberty League? Statement of Principles and Purposes Recovery, Relief and the Constitution Speech by Jouett Shouse American Liberty League Its Platform An Analysis of the President's Budget Message N. R. A. Its Past, and Recommendations for the Future Analysis of the $4,880,000,000 Emergency Relief Appropriation Act. Economic Security A Study of Proposed Legislation The Bonus An Analysis of Legislative Proposals The Constitution Still Stands Speech by Jouett Shouse Inflation Possibilities Involved in Existing and Proposed Legislation The Thirty Hour Week Dangers Inherent in Proposed Legislation The Pending Banking Bill A Proposal to Subject the Nation's Monetary Structure to the Exigencies of Politics The Holding Company Bill An Analysis of Proposed Legislation "What is the Constitution Between Friends?" Speech by James M. Beck Where Are We Going? Speech by James W- Wadsworth Congress at the Crossroads Speech by Jouett Shouse Price Control An Analysis of Experiments and Recommendations for the Future Yesterday, Today and Tomorrow A Review of Factual Analyses issued by the American Liberty League and a discussion of the Legislative Situation. The Labor Relations Bill An Analysis of an Undesirable Measure Government by Experiment Speech by Dr. Neil Carothers â˜… AMERICAN LIBERTY LEAGUE NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… How Inflation Affects The Average Family â˜… â˜… â˜… Speech of DR. RAY BERT WESTERFIELD, Professor of Political Economy, Yale University, and member of the National Advisory Council of the American Liberty League, over the Red Network of the National Broadcasting Company, April 18, 1935 AMERICAN LIBERTY LEAGUE National Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… Document No. 29 How Inflation Affects the Average Family â˜… Because I believe we are on the threshold of a devastating inflation, it took no effort to persuade me to embrace this opportunity to address the radio audience tonight. Indeed I am deeply grateful to the American Liberty League, under whose auspices I speak, for giving me this chance to make the American people more conscious of the peril of inflation and of what it will mean to the average family. The American Liberty League, for the seven months of its existence, has vigorously striven to arouse the nation and to make it sensible of the momentous current changes which unless impeded spell the breakdown of our traditional institutions, our system of government, and our economic philosophy. It has been challenging the need and wisdom of Executive encroachments on the legislature and demanding that Congress awake from its complacent self-effacement and resume its role of law-making. For want of an aggressive and well-organized minority in Congress to force debate and discussion of the New Deal proposals, it has seemed wise and expedient for it to study and report on important legislation under consideration by Congress, not in a narrow partisan way attacking the present Administration, but rather commending or criticising fearlessly in the public interest. Among these efforts is its presentation of the dangers of inflation and its support of the President in using as little as possible the inflationary powers given him in May, 1933. In such service the League deserves the support of the American people. It welcomes to membership any American citizen, man or woman, who believes in the principles enunciated in our Constitution and the Declaration of Independence, and who wants to continue our traditional form of government and our economic and social system. In order to join all one needs to do is to write to the American Liberty League, at the National Press Bldg., 3 Washington, D. C, for memhership blanks and free literature. Although it is supported by subscribing members, no money payment is required and all are welcomed to membership. My remarks this evening Importance will be directed to the of The American home and fam- Family ily. This relationship still dominates our social and economic life. It is the welfare of the individual as a member of a family rather than as an individual that is significant. More than four-fifths of consumers' outgo centers on family life and only a minor fraction consists of spendings for strictly individual enjoyment. In most families the incomes of the various earning members are consolidated and used as a unit to maintain and advance the welfare of the group. The current depression has resubstantiated the financial bonds and responsibilities of the family group. If inflation comes, dependence upon paternal, filial and fraternal relations will grow even more, in the mad effort to sustain social security. Time does not permit nor is it my purpose to develop at any length the reasons why it seems that inflation is inevitable in our country, why the monetary, banking, budgetary and other policies of the Administration are driving us fast toward this inevitable outcome, and why it is improbable that inflation can be stopped or controlled; or to estimate how high the price level will rise and when the ascent will start and when it will reach its height. I intend rather to dwell on the economic and social havoc wrought by inflation in the American home and family. Let us use this term in-What flation to mean an in- Inflation crease in the general Means level of prices caused by an increase in total expenditures at a time while the goods available for purchase are not correspondingly increased in amount. These larger expenditures may be effected by a greater supply of money or credit or simply by a more rapid turnover of the existing supply of money and credit; and the higher rate of turnover may be caused either by greater confidence in the business situation, or by fear of the currency itself the desire to spend one's money or bank balance for goods or services before it loses value. The expenditure for anything means, of course, a greater demand for that thing, and a consequent boost of its price. Not all prices will rise simultaneously or by equal amounts, because increased expenditures for different things are not made at the same time and to the same extent; it is possible indeed that the price of some things may not rise at all or may even decline; but the average of all prices will rise, and one measure of the inflation is that average price, or the index number based upon it. The effect of inflation on the family, as upon everything else, be it economic, social, political, religious, international, or what not comes by way of price change. Changes in the price of different economic categories affect the family's earnings, its expenditures, its savings and properties owned, and its debts; and even personal relationships within the family and between families, as well as with other social institutions, feel the disrupting hand of price. The etrength and havoc of this disruptive force varies with four features which characterize it: 1. The extent to which the price level rises. The price level in the United States during the late war rose to 247 per cent of the 1913 base; that of France reached 854 per cent in 1927; while that of Germany soared to a trillion times the 1913 level; and the damage in the different countries was somewhat proportionate to this depreciation of money. 2. The rapidity with which prices rise. If prices rise slowly, it is possible for the parties to contracts of debt or purchase to anticipate and avoid the worst damage and for consumers to change their standards of living without utter collapse; but if the price level jumps say 50 per cent a year, only the most astute and facile can save themselves from ruin. 3. The degree to which prices of all kinds of goods, wages, rents, interest rates, and other forms of income move together. Probably the most paralyzing and destructive feature of inflation is that these items move at different rates and times and directions. These disparate movements break the regularity, synchrony, and equality of receipts and expenditures; all contracts are vitiated to the favor of one of the parties, and one group loses its purchasing power over another. 4. The consistency and steadiness with which prices rise. If prices move by a well-defined and measurable trend, the parties to contracts of loan or sale can partially protect themselves against loss; for instance, if the price level is rising 5 per cent a month and this rate of rise can be depended upon, a lender of money for 30 days can ask of the borrower a sufficiently high rate of interest to cover foreseen depreciation of principal and interest. And similarly wage, salary, and rent agreements can anticipate the depreciation of purchasing power of money, and the buyers and sellers of goods can adjust their prices to fit the prospective changes of value. But if the inflation proceeds by jumps and reactions, without apparent rhyme and reason, utterly unpredictable, all business relations are reduced to gambling and losses mount and are inescapable. In actual fact inflation utterly disrupts business and industry, breaks down all traditions, stabilizers and codes of normalcy, and raises the psychological factor to the delirium height. The shift from boom to panic to boom is evanescent. In this topsy-turvey state, defense of fortune through forecasting is all but impossible. The listing of these four Foundation features of inflation that Has Been measure its strength and Laid havoc helps us to con- ceive how inflation will react on the average American home. The reaction is seen to depend, among other things, on the extent to which the price level rises. I do not know how high it will rise, but I can confidently say that the basis is laid for the greatest expansion in the history of American banking and currency. The total monetary gold stock of the United States on April 5, 1933, was $4,-283,000,000; from that date to April 1, 1935, through gold importations and the devaluation of the dollar, these holdings were jumped to $8,563,000,000, or almost exactly doubled. The reserves of the member banks are also now more than double the required legal reserves, and there is no abatement in the growth of these excess reserves. This in spite of the fact that on March 27, 1935, the deposits of member banks were only 3.3 per cent below their figure on March 27, 1929, when business was at the top of the boom. Since May, 1933, when Mr. Roosevelt first allowed reports of condition, the deposits have expanded 27 per cent. There are clearly present today, therefore, the elements of a credit inflation of an explosive and dangerous character. The mere existence of this vast inert body of credit wiU not of itself produce inflation. It must be made to circulate through the development of a mass psychology of great fear or great confidence. Whenever the public psychology changes, either through fear of inflation or of government credit or through sanguine forecasts of business activity and profits, the basis exists for a tremendous expansion of bank credit. The Federal Reserve Bank of New York in its last annual report estimated that existing reserves would support $80,000,000,000 of deposits. Professor J. F. Ebersole of Harvard University, estimates that if business does not recover, the monetary expansion can run to $65,000,000,000, and if it does recover, to $93,000,000,000. The figure of $65,000,000,000 is confirmed by Professor Hudson M. Hastings of Yale University, who declares "that we can finance full business activity at about 314 times the present level and still maintain" the legal reserves. Moreover, if the velocity of circulation rises, as it always does during inflation, and if we continue to buy gold and silver, and still more if we devalue the dollar further, this potential inflation is multiplied accordingly. It appears, therefore, that unless some unforeseen preventives are originated, we are faced with an inflation that will exceed anything our country ever experienced. If it is allowed to run its course and merely controlled when it reaches the maximum expansion possible within the existing legal reserve limitations, the inflation will apparently approach that of France in the post-war period. In default of such control, the experience of Germany will be more comparable to what we may expect. The most profound re-Dispersion suit of inflation is the of Property redistribution of wealth and Income and income among the different classes of income recipients. This redistribution is effected through the differences in extent, time, and direction with which different prices and rates move. Economists call this phenomenon the "dispersion" of prices. The reasons why prices disperse greatly during inflation are easy to see. The use of more money and credit in the purchase of certain things means a greater demand for them, and if it is not possible to increase their supply equally fast, their prices rise. The more perfectly the market is organized and the freer is competition, the quicker is the response of price; for this reason the basic raw materials lead the way and real estate lags, and wholesale prices rise sooner and more than retail prices. Some prices are lethargic on account of tradition or contract, for instance, rents, wages, and salaries, interest on bonds, and bank balances, public utility rates, hospital fees and university tuitions, and insurance premiums. The welfare of any family in this melee of changing prices depends upon the sources of its income and the distribution of its expenditures. To the degree the income is in the form of dividends and profits, it is likely to expand fast and the equities owned in real estate, corporate stocks, commodities, and trading or servicing lines will grow in dollar value. If the income is in the form of rent or interest or salary, it will not rise much or soon. The wage earner may not be able through private or collective bargaining to advance his hourly wage rate com-8 parably with his cost of living, but the deficit may be in whole or part offset by the steadier employment and extra over-time. Some of the family's expenditures will not rise as fast as income, others will go skyrocketing. The landlord will not advance the rent at once and never adequately; the insurance premiums will stay constant; the rates for streetcar, bus, railroad, gas, telephone and electricity service will lag; the taxes will rise dilatorily; the interest payment on the mortgage on the home will remain fixed. On the other hand, the cost of food, clothes, and luxuries will rise quickly and much. Since debts are in fixed amounts, higher money incomes make it easier to liquidate debts. On the other hand, all receipts of interest and principal are in dollars of declining purchasing power, and all bank deposits, bonds owned, and insurance policies are losing in purchasing power faster than interest is accumulating on them. It is painful to see these objects of thrift dissipated in thin air through no fault of the saver. The whole picture is a Disheartening disheartening one of Picture unearned and undeserved Presented riches of a newly rich class, who were so circumstanced or were able to put themselves into such circumstance that they received forms of income which were rising faster than their expenditures the industrialist, the speculator in stocks and commodities, the profiteer who monopolized some commodity or service! And on the other hand, a picture of undeserved losses and descending standard of living for people who had always been regarded the very backbone of the nation! The outstanding economic and social result of currency depreciation is the sudden and expensive change produced in the distribution of wealth and income. The gains of the agriculturists, industrialists, speculators, and profiteers are almost entirely at the expense of other people. Those who receive rents, salaries, pens sions, interest, wages, and other forms of fixed income, suffer, and those who pay them profit 9 because they are paying less and less real value as the general price level rises. Similarly the people who own bonds, mortgages, insurance policies, bank balances, and other evidences of indebtedness stand helplessly by while the value of these sinks; and meantime the corporation, the mortgagor, the insurance company and other debtors gain in proportion as the creditors lose. The industrialist loses least, because his income is largely in the form of profits and his outgo is for wages, salaries, rents, interest, payments of principal, and taxes, all of which are laggards. The result is a tendency to the concentration of wealth in the hands of industrialists, agriculturists, borrowers, and speculators in stocks and commodities and an expropriation of all other classes. In general payrolls lag Salaried far behind the rise in Employes general prices and in the Suffer cost of living. In Ger- many, for instance, during the years 1922-4 the working class, despite full and steady employment, was chronically underpaid and half-starved. The middle-class in urban centers suffers most because they are least able to defend themselves, composed as they are largely of people with small fixed incomes, such as salaried officials and clerks, recipients of pensions, and little investors living on interest and rent. Their savings disappear, their pensions and interest or annuities evaporate, and their salaries rise but little. The depositors in German savings banks who failed to withdraw their deposits lost all but an infinitesimal part of their savings; those who were astute and quick rescued some of their savings by withdrawing and investing them frantically in anything whatsoever whether they needed it or not. Similarly Austrian savers who failed to buy goods and services with their accumulations lost all but 0.7 per cent, and the French all but 23 per cent. By the end of 1923 the assets of German life insurance companies contracted to 4.5 per cent of their 1913 value, and the French to about one-fourth. University endowments in Germany shrank on an 10 average 86 per cent in value in the years 1923 and '24, and many were extinguished. The professor's yearly salary fell to a fraction of a cent. The total endowment of the Pasteur Institute after inflation and stabilization was less than 40 per cent of its prewar amount. The purchasing power and salary-paying power of all charitable, religious, and other foundations were scaled in similar proportions. The real income of the German industrial population by November, 1923, was about 40 per cent of the 1913 level despite heroic efforts of the government to boost wages and salaries. But why repaint this terrifying picture with which the civilized world is already too familiar? Whether one thinks in terms of the so-called moderate inflation in France or the utter inflation in Germany, can sane people deliberately and wilfully flirt with such a dangerous instrumentality? Is the Governor of the Federal Reserve Board justified in branding the apprehensive as "silly" when they see our country proceeding on exactly the same course as France? Can we be reassured by the head of NRA that there can be no inflation for six years under Mr. Roosevelt when his every banking and monetary policy is inflationary? To be indifferent and complacent under current conditions seems like the height of folly for those who love our American home and other institutions. 11