Montana farmer-stockman. [volume], May 15, 1950, Page 6, Image 6

About Montana farmer-stockman. [volume] (Great Falls, Mont.) 1947-1993

Image provided by: Montana Historical Society; Helena, MT

                
Signs Show Moderate Deflationary Trend
OPINIONS ON THE price out
look for the next few years held
by economic forecasters now in
eruption run the complete gamut.
One warns of a coming scramble
for cash with unsold goods piling
up, prices plummeting down and
about one business out of three
being forced to the wall.
Another was shouting from the
housetops a little while back that
wild inflation was coming and ad
vised immediate flight from the
dollar by converting currency, bank
deposits, bonds and life insurance
cash values into tangible productive
goods and real estate;
Businessmen also hold quite di
vurgent views on what's ahead. One
leading mail order house has been
shortening sail, building up cash
reserves, 'getting ready for the ax
to fall." Another has been expand
ing, opening new outlets and main
taining full stocks, in expectation
of continued large sales and reason
ably stable prices.
The public shows no indica
tion of great concern either
way. There is no widespread
flight from the dollar into
things in expectation of soaring
prices. Indeed, on balance, peo
ple have been adding to their
saving deposits, savings bonds
and life insurance policies.
On the other hand, the continued
high rate of consumer spending for
autos, homes, home furnishings and
appliances as well as consumers'
soft goods betokens no fear that the
bottom is going to drop out of prices.
This observer does not pretend to
be able to set everyone straight on
the matter, but hopes to throw a
little light on some of the issues.
He will tread water in spots where
he is beyond his depth.
What Are Inflation, Deflation?
First, what are inflation and de
flation? You will find many defini
tions. One of the best defines in
flation as an increase in the money
supply accompanied by a rise in the
general price level. Deflation, in
turn, is a reduction in the money
supply that is accompanied by a
fall in the general price level.
Prices are likely to rise when the
money supply increases faster than
the volume of goods or trade and
are likely to fall if goods supplies
increase relative to the money sup
ply. An increase in the rate of turn
over of money has the same effect
as an increase in the supply. Within
limits, however, prices can rise with
out an increase in money and the
money supply can increase without
a rise in prices.
During the war, the government
greatly increased taxes, but also
borrowed a vast amount of money
to finance the war effort. Part of
it was borrowed from individuals
where it absorbed purchasing power,
but a large amount was obtained by
using the credit and money-creating
powers of the banking system.
Much of the money eventually
went into the pay envelopes of
workers producing munitions, none
of which were sold. The result was a
great increase in the money supply
or means of payment .in the hands
of people, with a decrease during
the war in the supply of ordinary
consumption goods.
This led to extreme competition
for the available supply of goods,
;
Price Declines Will Be Limited;
Less Than Other Postwar Drops
By GILBERT GUSLER
upward pressure on prices during
the period of ceilings and a pro
nounced price rise when ceilings
were removed while goods were
still scarce.
Money Supply
The money supply as defined
above increased from an average
of $36.2 billions in 1939 to an aver
age of $109.6 billioqs in 1948, the
high year. That was a rise of 202
percent. The supply of goods in
creased more than half as industrial
production rose about 75 percent
and agricultural production about
30 percent.
But, the money supply increased
considerably faster than goods. Con
sequently, wholesale prices ad
vanced 114 percent and the cost of
living about 75 percent.
The money supply has
dropped 1 or 2 percent from the
peak. Rate of turnover also is
slightly lower. Industrial goods
surpluses have piled up. Whole
sale prices of farm products
have dropped over 20 percent
from the peak and industrial
products about 5 percent. Prices
have declined much less since
the end of the war than in the
corresponding intervals after
World War 1. the Civil war and
the War of 1812.
With this background, you can
see that prospects for inflation or
deflation depend largely on future
changes in the money supply com
pared with the output of goods.
Let's take a look from this view
point at some of the leading in
fluences to see what their effects
are likely to be.
Inflationary Influences
First the influences likely to be
inflationary:
1. Deficit spending by the gov
ernment and increase in the federal
debt tends to increase the money
supply. The deficit is expected to
be over $6 billions in the year end
ing this June and about $5-6 billions
in the year ending June 1951. Some
of this probably will be borrowed
from the banks where it has the
effect of increasing total deposits,
or the money supply.
If the government borrows from
you or me through our purchase of
savings bonds, we reduce our cur
rency or bank deposits by the
amount the government receives so
that no new purchasing power is
created. If we borrow money from
the bank to buy bonds, however,
the money supply is increased.
The federal debt is now about
If some further deflation rather than renewed inflation is in prospect,
what should the farm producer do?
1. Although the additional decline probably will be less drastic than
after previous wars, it is likely to be severe enough to pinch people
who are overextended. Hence, the first thing is to gel out of debt as
far as possible, build liquid reserves of cash or bonds, and avoid or
limit expenditures for land, improvements or equipment unless debts
can be kept to conservative amounts.
2. The utmost efficiency in use of land, buildings, equipment and
labor should be sought to reduce costs as prices go down in order to
maintain returns for the owner's investment, labor and management.
$256 billions. It was down to $251.5
billions in April, 1949, after reaching
a peak of $279.2 billions in Febru
ary, 1946. It is equal to a mortgage
of about $8,000 on each family.
It is already a staggering load.
But, the trends of government pro
grams and taxation indicate that
sizable deficits are almost certain to
continue and the national debt to
grow bigger for several years.
Heavy expenditures for defense
k* mrnu prices n miens cooitmb
nn utosced suies 1939
20.000 ~
Jtptn IC/ttO
10,000
8,000
7,000
6.000
5,000
4,000
8,000
Italy 4,588
2,000
Fran«« 1,906
1.000
-•
ro
coo
500
too
M«rioo 289
»00
"Netherlands 291
United 234
OC
»00
Switzerland 192
United State« 191
Sweden 190
1939» 100
100
1« B
Dee.
UM I
Source: Federal Re*err* Bulletin
and foreign aid, veterans, price sup
port, interest on the debt, social
welfare and security and other gov
ernment functions and proposals
for expansion of some of these acti
vities indicate that outlays will con
tinue extremely high.
Some folks high in government
councils even make a virtue of a
chronically unbalanced budget as
a means of stimulating growth of
industry and employment while
most people deplore the unbalanced
budget and heavy debt, each group
insists on retaining or increasing its
special benefits from government
spending and no one wants to pay
more taxes.
These tendencies create an
uneasy feeling as to the ultimate
outcome if they persist for
many years. However, a fair ap
praisal leads to the conclusion
that deficits of the current size,
large as they seem, are a very
long way from an amount that
would cause extreme price in
flation.
They are only about 15 percent of
the federal receipts and 2 to 3 per
cent of the national income. Fur
thermore, they will make only
small additions to the money sup
ply since the government will be
able to borrow most of its require
ments to cover the deficit from
sources other than banks.
The combined federal, state, local
government, corporate and private
debt only equals about 60 percent
of the national wealth at present
price levels and the current federal
deficit is equal to only about 15 to
20 percent of the yearly increment
in wealth through savings and in
vestment.
Barring Another War
Barring another war, we face no
risk of currency inflation, printing
press money, or a decline in the
value of the dollar relative to gold
or the price upheaval that would
follow, as predicted by a few ex
tremists.
While convertibility of the cur
rency to gold is denied to the indi
vidual, the treasury department
maintains parity with gold by freely
buying and selling gold bullion in
transactions with foreign govern
ments and banks at the established
price of $35 an ounce. Only the en
ormous cost of another war piled
on top of the present large debt
would be likely to cause the dollar
to lose on gold.
The
accompanying
chart
shows the price changes since
prewar which have accompanied
or been caused by the money
supply changes in fl) different
countries. The United States and
Switzerland maintained prewar
gold values of their currencies.
Canada devalued 9 percent, Un
ited Kingdom, Sweden and Nether
lands, 30 percent, and Mexico, 42
percent. France, Italy and Japan in
flated to varying degrees with paper
money. New values of their currency
units are only a small fraction of
prewar in terms of the dollar or
gold.
2. Home mortgages and install
ment buying and other private and
corporate borrowing, in so far as
they depend on bank credit, tend
to expand the money and current
purchasing power and to speed turn
over. Aided by large bank reserves
and low interest rates, some fur
ther expansion of credit is probable,
but the amount probably will have
only a minor inflationary effect.
3. Union pressure for increases in
wage rates and pensions exceeding
the gains in productivity of labor
per man hour tend to put more pur
chasing power in the hands of con
sumers and raise unit costs and
prices of industrial goods and serv
ices. Increasing unemployment, due
to growth in the population and la
bor force, will partly and perhaps
wholly neutralize this
pressure.
Deflationary Influences
Now for the forces likely to be de
flationary:
1. The supply of industrial goods
and services is likely to increase at
present prices. Those levels are
generally quite profitable as shown
by corporation earnings. Labor and
raw materials are plentiful. Large
expenditures for new plants and
equipment in the last four years
have substantially increased indus
trial capacity, raised the productiv
ity of labor and lowered unit costs.
2. Surpluses of farm products
probably will pile up in spite of
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