It is pretty hard these days to avoid advice on protecting yourself and loved ones from the coming inflation. I hate to sound like Alfred E. Neuman, but the more I think about the problem the more I am moved to ask: "What, me worry?"
Let's begin by agreeing that inflation is an evil and immoral strategy of the State. Let us also admit that inflation may, in an extreme case, have unpleasant political consequences, as crowds lynch price-gouging merchants and generals on horseback boot out lily-livered politicians.
But if you're not a price-gouging merchant or lily-livered politician, how important is the problem?
As we all know by now, those on fixed dollar annuities or private pensions are in for a rough time. On the other hand, in a world in which all values are in a constant flux, why should we demand that one value—the dollar—remain constant. It might be nice if it did, just as it might be nice if the price of potatoes were a constant, but then it might also be nice if all girls were pretty and all boys handsome. We can live with things as they are.
If we don't get upset when the value of potatoes falls, why should we tear our hair when a particular money unit does likewise. If a person holds a potato contract in a falling market, we would simply advise him to sell his potatoes and buy frozen orange juice or commercial real estate or something else that wasn't declining in value. Our private annuitant or pensioner should do likewise. If his rights are not marketable, he simply made a bad contract and he must bear the consequences, as it always is in the free market.
The same is true of bond holders, mortgagees, persons with savings accounts, and creditors in general. If they are still holding 4% obligations, they have no one to blame but themselves.
This brings us to the problem of interest rates and inflation. As we know, the political benefits of inflation are the consequence of the true rate of inflation exceeding the expected rate. This is what makes the extra money work its magic: people think the inflated money is worth more than it really is.
From this we would assume that the real rate of inflation will tend to exceed the expected rate (at least in the early period of the inflationary cycle) and that interest rates would consequently underestimate the true loss in purchasing power.
Do the facts bear this out? Perhaps not. In an as yet unpublished study done by a University of Chicago economist, it appears that the market rate of interest shows a high correlation with the actual rate of inflation. If this is correct, then it would seem that a sufficiently rapid turnover of market rate lending (e.g., 90 day paper) might make it possible to earn an adequate rate of return on interest transactions.
It is true, of course, that the small saver cannot get the market rate on his savings, but that is the result of government interference rather than the economics of inflation.
Another complaint about inflation is that wages always lag behind. This is an empirical question and the evidence suggests that this perceived lag really doesn't exist. Alchian and Allen, a couple of good free-marketeers, in their book University Economics, discuss this misconception, which they attribute to a number of causes, among them the fact that while the individual's earnings per unit increase at intervals over time, his expenses, being an average, appear to continually increase. The fact is, they assert, that the wage earner lags behind for awhile and then gets ahead for awhile, with the average for the individual over time working out about even. Interestingly enough, the only employee who may not be keeping up may be the government worker, although here the data are unclear.
Another objection to inflation is that it is a form of covert wealth transfer. While this is undoubtedly true, it is not all that clear who's getting it. The political intent is quite likely to give it to the unionized workers and they undoubtedly are among the recipients. But the overall wealth transfer from creditors to debtors, inflation's Robin Hood effect, is much more confused. It appears that there are no significant class lines to be drawn between debtors and creditors, and therefore no predictable inter-class transfers resulting from inflation.
The fact is that to most people dollar savings are not a significant aspect of their financial survival. For most people, their principal security lies in their earnings potential and savings accumulated in a home, education of their children, and, to a lesser extent, equity investments. If equal proportions of their cash and debts were wiped out, they might consider it inconvenient for the short term but recognize it as a long term net benefit.
In summary, a serious inflation can be a very disruptive phenomenon, but it appears upon inspection that it should be moderately easy for most people to get out of the way. No one is forced to hold bonds or mortgages or cash. It is unsettling and probably unfair that people, particularly retired persons, cannot depend on a constant value for the dollar, but then what else in the world has a constant value?
Inflation can get to the point that the crowds riot and the generals take over; a lot of things can happen. The point is that even our relatively certain "double digit" inflation does not necessarily lead to a breakdown of civil order. The premise of such a theory is that under those conditions "the market will not work"; we've heard that cry of "wolf" so often in the past (mainly from the statists) that our presumption ought to be against it.
Davis Keeler's Money column alternates monthly in REASON with John J. Pierce's Science Fiction column. Copyright 1974 by Davis E. Keeler.