What You Should Know About Inflation

One of the worst consequences of inflation is that most of its mischiefs and injustices are irreparable. They cannot be cured by deflation. This merely brings about its own hardships and injustices, which are just as likely to fall upon the previous victims of inflation as upon its beneficiaries. We cannot, for example, cure the inflationary erosion or wiping out of the purchasing power of savings-bank deposits, government bonds and insurance policies by a deflation which may bring about the unemployment or bankruptcy of the very people who suffered from the inflation. So when an inflation has gone beyond a certain amount, the best we can do is to try to stabilize at the new level. When an inflation has gone to the lengths of that in Germany in 1923, for example, or that in France today, a return to the pre-inflation level is inconceivable.

Just what should be attempted, therefore, after an inflation has passed a certain point, becomes an awkward practical problem to which there simply cannot be any completely “just” or satisfactory solution.

We have seen in the preceding chapter what happened in Britain when it tried to go back to the gold standard at the old parity in 1925. But there are many who believe that our own resumption of gold payments on January 1, 1879, at the prewar parity, after the paper money inflation of the Civil War, was an unalloyed success. The fears of a gold drain, they argue, proved quite unfounded. And they attribute the subsequent American recovery of 1879 largely or wholly to gold resumption.

A closer examination of the whole inflationary and deflationary period from 1862 to 1879, however, tells a different story. As soon as the government started issuing irredeemable “greenbacks” in 1862, gold went to a premium on the open market and commodity prices started to soar. In 1864, the greenbacks fell as low as 35 cents on the dollar in terms of gold. From 1860 to 1865, inclusive, though the average of European prices rose only 4 to 6 per cent, average prices in the United States advanced no less than 116 per cent.

But immediately after the end of the war, American prices started downward. At first this was politically popular, because wages had not yet advanced as much as the cost of living. But after 1866 wages had more than caught up with prices. The continued fall in prices soon began to cause bankruptcies and unemployment. Finally came the panic of 1873 which, in the measured judgment of some economists, “left the country’s financial and commercial structure almost a ruin.” The causes of the panic were complex. But one of them was certainly the continued fall of commodity prices that accompanied the rise of the greenbacks toward parity. By 1873 the greenbacks were only about 15 per cent below parity, and wholesale prices were down to about 30 per cent above prewar levels.

The result of the panic of 1873 was greatly to increase inflationist sentiment. It is true that the Resumption Act was passed on January 7, 1875, but by a repudiated lame-duck Republican Congress that had nothing more to lose. Even more ironic, it was passed, the economist J. Laurence Laughlin tells us, “only under the delusion that it was an inflation measure,” because “on its face it looked like a bill to expand the national bank circulation.”

Many commentators today think it was foolish and needless for the Resumption Act to put off the actual day of resumption to January 1, 1879—four years after passage of the act. They forget, however, that time, skill, and determination were required to accumulate a gold reserve which would inspire so much confidence that gold would not be demanded when the day of redemption came. And they forget, too, that returning to gold at the original parity involved a still further decline (of about 30 per cent) in American commodity prices to bring them into line with world gold prices. This decline actually took place between 1875 and 1879, and the whole period was one of “economy and liquidation.” In 1878, for example, the record of insolvencies far exceeded even that of the panic year 1873.

Many commentators today attribute the recovery that came in the second half of 1879 to the return to gold redemption. The facts do not support them. “With hardly an exception,” writes the economic historian, Alexander D. Noyes, “the country’s staple industries sank, during the early months of 1879, into complete stagnation.” What suddenly turned the tide was an unparalleled coincidence: Europe suffered the worst crop disaster in many years, whereas the American wheat crop reached a new high record. This meant high prices and crop exports unparalleled up to that time.

All this is not to argue that after the greenback inflation of the Civil War this country should have returned to gold at a lower parity for the dollar. It is simply to point out that we had to pay a heavy price for the course we actually took, even though our economy was far more flexible then than now, particularly as regards wage-rates. We must take care that when we return to gold this time we do so at a rate that involves neither inflation nor serious deflation.