Hedging Inflation

This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.


INFLATION is the process of injecting an indefinite amount of nothing into a definite amount of something. Distension is the result. Unless the owner of the something manages to do some distending also, he finds himself with a lump of substance of the same size and shape as his former one but with more pores and less weight.

So far as money is concerned, inflation always springs from the abuse of credit, public or private. It makes little difference who is the injector, the people organized as a government, or the people as so many different entities guided by laissez-faire.

By chance these paragraphs are being written amid conditions as nearly inflation-proof as are likely to be found in the United States to-day. They are almost precisely analogous to those which Assistant Attorney General John Dickinson uses for the purpose of contrasting a state of self-sufficiency with what he calls the cash nexus in his book, Hold Fast the Middle Way.

I am with friends on a small farm. My host and his wife are educated people. He is an ex-employee of a widely and favorably known railroad, and was furloughed early in the depression, lie then gave himself a job at home on less than forty acres of land which he had retained as a second line of defense. Having grown up close to the soil, he had the feel of the land, and for several years has been thinking and planning directly in terms of a standard of living instead of indirectly in the wherewithal to buy it. He rents his home from himself, and it matters little to him whether the real-estate men tell him that he occupies a $5000 or a $15,000 home, or whether his rent is 6 per cent on the former amount or 15 per cent on the latter. He is not in the market as a home seller or a rent buyer. He is a shelter user. The rent-purchasing power of the dollar does not affect him.

As for food, his wife plans not in terms of jelly glasses but in twenty-gallon crocks of apple butter, and thinks of bread not in terms of loaves but in the potential loaves in a barrel of flour. She saves $88 a year by doing her own baking for her family of seven. Cereals are cracked from highgrade wheat at a local gristmill, and cost three cents a pound with nothing added for advertising Overhead.

Much of the rest of the living comes off the forty acres, and what does not is bought with the proceeds of the sale of milk from a small dairy herd. The standard of living thus achieved differs little from that which the city dweller purchases — and it is far more secure.

As I write, my friends are sitting on their front porch telling my wife of their plans for the future. Their major concern in getting ahead in the world is not primarily money, as such, but savings enough to acquire additional land to extend an already well-advanced self-sufficiency. They are both comparatively young, and the few wrinkles apparent come from work directed toward an achievable end and not from worry over how they can make the contents of a pay envelope meet a mounting cost of living.

This manner of life raises the question: Has agriculture been truly served by those who have persuaded the farmer to purchase all the land that adjoins him on mortgage and borrowed capital, and to equip it with machinery and stock for which he has not the money to pay? In spite of the emphasis which has been placed upon the farmer’s need of more ample credit machinery, the fact remains that more farms have been sold to satisfy mortgages than have been sold to pay taxes.

Such security from the dangers of inflation as I have described is not open to all, for the reason that not all have the background and experience to achieve it in this particular fashion. But the security inherent in such a situation has been abandoned by many a farmer to whom it might have remained open. Moreover, it has not been taken advantage of by many an urban dweller to whom the opportunity need never have been closed. These made the fatal mistake of not keeping open a line of retreat.

Much fun has been poked at the subsistence homesteads on grounds of impracticability, waste in construction, and poor management, yet there is in the idea something which deserves respect and careful consideration. Evidence is not lacking that others than the government have been dealing realistically with this question for some time — and saying little about it. Urban wealth is seeking rural investment, to an extent unrealized by many. As a result, land values, which have been dead for decades, are beginning to stir and are slowly creeping upward.

The rough draft of this paper was carried past lands recently purchased by a wealthy citizen of a neighboring city. The purchase is understood to have been made for the purpose of founding a summer home. But the house is too small and the acres too broad to warrant full credence in this report.

A quarter of a million dollars is a good deal of money even for a wealthy man to pay for the luxury of a summer home. One is led to suspect that income taxes, inheritance taxes, and the fear of inflation have had something to do with the transaction. An inexperienced man, who has n’t the feel of the soil, ought somehow to be able to make a living on an unencumbered $2.50,000 farm, in the event that inflation should reduce to zero itself that portion of his fortune represented by the promises of others to pay him money.

Few are able to buy a quarter-of-a-million-dollar farm as a hedge against inflation or as a retreat in ease of unemployment. But many still possess the land they left. More can acquire acreage within reach of their city jobs. Such a holding will maintain one farm family in any case, and if worst comes to worst, either through inflation or unemployment, such a holding will also support the city family on a scale far superior to that purchasable with a salary ravaged by inflation.

Suburban dwellers who are in the process of acquiring their homes, and city dwellers who would like to do so, also have their means of hedging, but within the past few years high-pressure salesmanship and bogus economies have done much to dissuade them from following a policy which would afford protection. There is an evident fallacy in the belief that it is wiser to own half of a house than to own all of it; better to carry a mortgage than to pay it. Compare what happens to two neighbors when inflation strikes: —

Smith and Jones live side by side in houses built according to the same blueprint, and get the same salary. Smith owns his home outright; Jones owes for three quarters of his. Smith is his own landlord and moves out upon his own direction. Jones is not and moves out upon the orders of another. Then comes inflation and dries up the purchasing power of money. Smith holds out as long as his salary will buy food, and still has a place to sleep. Jones holds out only so long as his salary will buy food and pay interest; after that he is without food and has no place to sleep.

The foregoing are examples of individuals who are so situated that they can seek refuge from inflation long before it comes, planning in part for real rather than money income. Obviously there are millions, on the other hand, who must achieve their safety through common resort to financial and industrial institutions which go to make up what we ordinarily speak of as business.

As an example of successful hedging of this type, successful both from its own standpoint and certainly from that of its customers, I cite the experience of a bank with whose policies I have some familiarity. It now has something over twenty-two hundred deposit accounts, most of them of moderate size. Its clientele is largely salaried workers in a city of some half a million people.

Its loans are numerous, but few of them are large. Most of them are secured by collateral, but the bank has never looked primarily to the collateral as the real security behind the loans. It has looked to the borrowers themselves, their integrity and their earnings. Neither before nor since the bank holiday did it have to sell the collateral securing a single loan to effect collection.

It was among the first group to open its doors after the holiday, and no depositor lost money. It was successful in hedging the inflation of the 1920’s both for itself and for its customers because it staked success not upon the price of securities but upon the earnings and income of human beings.

So it comes back to this in the end: inflation results from the abuse of credit and appears whenever too many people make too many promises to pay too much money. Whenever the link breaks which joins promises and earnings, we see these inconsistencies: banks pouring millions into the market, raising the prices of stocks which they advise their clients not to buy because they are too high; corporations selling securities to stockholders at low yields to raise money they do not use for expansion, but for loans at higher rates to others for the purpose of repeating the process; individuals borrowing, investing, and hoping that enhancement in price will more than repay the loan.

This takes place in the field of the cash nexus, not in the field of self-sufficiency. The road from self-sufficiency and safety to that of the cash nexus, like that to Avernus, is broad and easy. Many take it, but all too few mark it as they go.