Economic Outlook: Preparing for Inflation

article image
It would be a good idea to start preparing for inflation before the ultimate crisis hits. 

As it concerns economic crises in general and preparing for inflation in particular, the name of Dr. Ralph Borsodi tends to creep into this magazine from time to time. And there are some particular reasons for that.

For one, it was Dr. Borsodi (while living on a piece of Texas land after leaving New York City during the banking panic of 1907) who personally formulated most of the economic thoughts and theories that the modern-day “back to basics” movement now calls its own.

For another, it was Borsodi (with his wife and two sons) who again left New York City during the great housing shortage of 1920, purchased seven acres out in then-very-rural Rockland County, and proceeded to build a comfortable and largely self-sufficient homestead for himself with his–and his family’s–own hands. (The payoff from this move came almost immediately. Because, during the depression of 1921–when millions suddenly found themselves tramping the streets looking for work–the Borsodi clan was feasting on eggs, meat, milk, fruits, and vegetables that they had raised themselves and was otherwise enjoying “the feeling of plenty which the city dweller never experiences.”)

And, for yet another, it was just awful hard to fool ol’ Ralph when it came to economics. Or, to put it another way: Little Jimmy Carter may really believe (as he said in a news conference last year) that he doesn’t think the federal government can do very much about inflation. And Slippery Richard Nixon may truly have thought that removing the last official gold backing from our currency in 1971 could actually “strengthen” the dollar. But Ralph Borsodi knew different at least 36 years ago.

It was back in 1943, you see–when all the knee-high “establishment” politicians and economists were still chattering about our wartime “managed” economy and price controls (which didn’t work then, either) and the “inevitable” depression which they predicted would sweep the world once hostilities had ended–that Dr. Borsodi took a squint into the future and then confidently wrote a little booklet entitled, Inflation Is Coming.

It did, of course, and it’s been with us ever since. And, just as Dr. Borsodi predicted, it’s only gotten worse and worse as time has gone on.

Furthermore, as ol’ Ralph thoroughly understood 36 years ago, that inflation has gotten steadily worse and will continue to get worse for just as long as we allow the Richard Nixons and the Jimmy Carters and the other deficit-budget buffoons in Washington to rape our currency. Now maybe you don’t yet know how that assault takes place, but Ralph Borsodi knew clear back in 1943 (when, even though the U.S. dollar was still “officially” redeemable in gold, it was illegal for U.S. citizens to own that gold) as he wrote:

At one time the holder of United States dollars would have received ten gold dollars for every paper ten-dollar bill he presented to a branch of the Treasury Department. Today there is nothing back of the paper dollars the people of the United States are using except the credit of the government.

That credit is enormous and faith in it is universal. During periods of prosperity it is seemingly justified, but it has been grossly abused over and over again in the past, and never so shamelessly as during the period of deficit financing which began with the establishment of the Reconstruction Finance Corporation.

You may ask what I mean by abusing the faith in the credit of the government. I mean the issuance of more dollars than the government is able to redeem from its ordinary revenues … I mean the appropriation by the government of agricultural products, manufactured goods, labor, and services of all kinds on the promise to pay for them in dollars which it cannot redeem, and which it must ultimately either depreciate or repudiate.

This process of issuing more money than can be redeemed at its original value or purchasing power is what inflation really is. Inflation begins when this process begins. It comes to its ultimate climax, however, only when people begin to wake up to the fact that redemption of the dollar at its original value is impossible.

In his 1943 booklet Dr. Borsodi goes on to explain how this government swindle can be covered up for some time by the issuance of municipal, state, and federal bonds … and how ordinary citizens (you and me) are really lending their money to the government when they purchase these bonds. He then illustrates the manner in which this cover-up also becomes part of the swindle:

[Government bonds] have a notoriously bad financial history. Countless people have lent their money to various governments and lost their money. This is … true of money lent by people to the government of the United States … not… so much owing to the failure of our Treasury officials to pay the interest or principal when due, as through continuous and periodic inflations of the dollar. The most notorious recent instance [EDITOR’S NOTE: Recent at the time of Borsodi’s writing, that is. We’ve since seen other examples, including New York City’s bond default–which terribly hurt many small investors–a year and a half ago and Cleveland’s bond default just a few weeks back.] … took place on February 1, 1934 [under Roosevelt] … when the United States repudiated the solemn promise contained in all of its outstanding bonds to repay them in gold and began, instead, to repay them in depreciated [paper] money.

[Now that gold no longer backs our currency] the real value of bonds tends to decline [during an inflationary period] in precisely the same ratio as the decline in the purchasing power of money. It the purchasing power of the dollar declines one-half, the purchasing power of the money represented by a bond also declines one-half. Holders of government bonds–including depositors in banks and policy holders in life insurance companies which hold large quantities of government bonds –[therefore] are living in a fool’s paradise.

As inflation proceeds and the government issues more and more paper dollars, as banks and the [other] holders of government bonds redeem or liquidate [those bonds] and obtain paper money in [their] place, the purchasing power of the dollar will steadily decline.

Salaries and wages may be raised, but they will always lag behind the decline in the purchasing power of the dollar. Farmers may receive higher prices for their cash crops, but they will be able to buy less merchandise, equipment, and supplies with the money received for them. Families dependent upon savings, pensions, or social security payments will find that the money received from these sources will not enable them to obtain the necessaries of life.

Most people… [upon] being victimized by this process, complain about the rise in prices and the rise in the cost of living but they do not complain about what Washington is doing to create these conditions.

The rise in prices, however, is merely an effect caused by what the government in Washington has done and is doing. As Washington proceeds with its present fiscal policy, the purchasing power of the money people receive for their work, and the money they receive from any other source, will continue to decline.

Labor unions will fight for higher and higher wages, salaries will be raised, already plans are under foot to increase social security payments, but no matter how much these may be raised, they will not solve the problem so long as the government’s own budget is unbalanced and the printing presses in Washington continue to print more paper money than the government is able to redeem out of its current revenues.

The money which Washington is now issuing, and which people are receiving from day to day, is technically known as fiat currency. [This means that it] is not redeemable in any precious metal. A ten-dollar bill [carries the inscription]: “The United States of America will pay to the bearer on demand Ten Dollars.” If you go to the Treasury Department in Washington [however] and demand the Ten Dollars, all that will happen is that you will be given ten dollars in paper money, [each bill of which] makes exactly the same promise as that made on the original bill.

[This issuance of fiat currency and its subsequent cover-up by the issuance of fiat bonds] works quite smoothly [for a while]. But it is not working now. It is not working now because the government hasn’t balanced its budget for fifteen years [EDITOR’S NOTE: That was in 1943. Add 36 years to Borsodi’s 15.] and because it has sold over 260 billion dollars worth of bonds to fill the gap created by its excess of expenditures over tax collections. [EDITOR’S NOTE: As of December 31,1978, the U.S. national debt covered by government bonds had mushroomed from 1943’s 260 billion dollars to 789 billion dollars, and almost 100 billion of that total was added in 1978 alone! The spiral–just as Dr. Borsodi also predicted in 1943–does indeed quicken as time goes on.]

As soon as there is a demand for the money locked up in these bonds either by the bondholders, or by bank depositors whose deposits the banks have invested in government bonds, or there is any decline in the open market price of the bonds, or any loss or confidence in the stability of the dollar or the bonds, the process of converting bonds into dollars will begin to take place by the billions. The printing presses in Washington will then begin to roll out billions in paper dollars to take the place of the billions in bonds. When this begins to happen in a big way –up to the present it has happened only in a small way–the volume of currency in circulation will rise to fantastically higher levels, and prices will rise equally fantastically.

After [World War I], when this happened in a very mild way, sugar rose to 25 cents a pound. But this time it will not happen in a mild way. Sgar might well rise to $2.50 a pound when the process really gets underway.

Friend, this is a very good time to make a mental note to read this particular article over daily for at least the next two months. Because you’re never going to find a more lucid explanation of both the origins and the results of inflation than these excerpts taken from Dr. Ralph Borsodi’s booklet on the subject. And remember! That booklet–which accurately predicted the labor unrest, rising salaries, increased social security payments, and even the cost of sugar during the last period in which our government almost “lost the game” for sure–was written in 1943 … 36 years ago!

It kinda makes you wonder just how much longer it’s going to take the miscreants and buffoons in Washington to catch on to what’s really happening to our currency, doesn’t it?

(Little Jimmy’s current boast, in case you’ve missed it, is that this year’s federal budget will add “only” 29 billion dollars to the national debt. Which is an absolutely horribly inflationary boost for the economy to absorb during the fourth year of an economic expansion and a doubly horribly inflationary boost when you realize that the $29 billion figure actually means something closer to $50 billion once all the “hidden” government spending is added in. Jeeze! But that’s all OK, of course. Because after giving the economy this tremendously inflationary kick in the pants, Little Jimmy is going to make everything all right again by ramming wage and price controls down YOUR throat to keep–he thinks!–a comfortable lid on the economy. These guys never seem to learn!)

Is there a defense against this insanity? Is there some way you can protect yourself and your family against this rape of the dollar? Must we all just stand idly by while the “something for nothing” politicians and economists in Washington turn our gold into paper and then scatter the worthless lOU’s to the four winds?

Yes, yes, and no! The scoundrels, poltroons, blackguards, and cutpurses that have been watering our currency for the past 51 years may still be dealing the cards in Washington, but that doesn’t mean that you have to play their game. As MOTHER EARTH NEWS has been telling you for years, there is another way: Exchange those increasingly worthless paper dollars for REAL wealth. Or, as Dr. Borsodi put it back in 1943:

[A family] should invest all its surplus cash in tangible and productive property . [By this] I mean that it should invest in such things as:

[1] Productive land [that can] be cultivated by the members of the family with their own labor, and from which they [can] produce enough surplus or crops of some kind to raise the cash to meet taxes and to pay for other necessities which they cannot produce for themselves. This land should, if possible, include not only garden and plow land but also wood land, for fuel, and pasturage for livestock. A farm family should have a larger acreage than a family which ordinarily obtains its cash from wages or salaries, or from business or a profession. Land on which the family’s home is erected or on which its business is conducted, is productive land in the first instance because it helps to produce the family’s “shelter” and in the second because it helps produce what otherwise would have to be paid in rent to a landlord.

[2] Investments in the improvement of its land: in fencing, drainage, fruit trees, reforestation, roadways, fish ponds, the prevention of soil erosion, and the building up of the topsoil with manure, compost, and humus.

[3] A home and other buildings to complete and increase the productivity and efficiency of the homestead: barns, chicken houses, pig houses, granaries, root cellars, and other buildings in which to store produce and feed, or in which to process food tor consumption.

[4] Productive home equipment such as efficient ranges, food mixers, refrigerators, freezing units, washing machines, ironers, sewing machines, looms, flour mills, and furniture including plentiful supplies of linens, bedding, staple clothing, fabrics of all kinds, and any other household equipment which stores wet for a long period of time. The family should also invest in tools of all kinds and machinery for woodworking, metal working, leather working, and painting … including lathes, drills, circular and band saws, welders, etc. Books, pianos, musical instruments, and equipment for photography, home movies, stamp collecting listening to the radio, and other hobbles should also be stockpiled. in fact any thing tangible which can be used sooner or later for producing food, clothing, shelter, or entertainment upon which money would otherwise have to be spent.

[5] Agricultural equipment such as small tractors for the garden and full-sized ones for the farm, including plows, cultivators, trailers, sprayers, mowers, and all the other appliances to go with them. If horses and mules are used, draft machinery, harness, wagons, etc. should be stockpiled. Investments should also be made in automobiles, trailers, and trucks.

[6] Horses, mules, cows, oxen, sheep, goats, pigs, chickens, ducks, turkeys, and other livestock.

[7] Commodities that can be stored on the homestead and, if necessary, in public warehouses and elevators. This can include lumber, cotton, wheat, corn, coal copper, lead, or anything else that will not deteriorate before it can be used and which can be stored at an acceptable cost.

[8] If the family has a business or a profession of its own, investments should be made in the buildings, equipment, machinery, and staples used in the operation. Such investments, however, should be counted not in dollars but in physical units. The value of an inventory can soar in dollars during an inflationary period–giving you a false sense of prosperity–while the tangible worth of the property measured in units, remains static.

[9] Investments in education including the acquisition–by every member of the family, both old and young–of new technical skills which can be used on the homestead and in the earning of money.

[10] If the family is wealthy and has more money than the above program will absorb, it might make real estate investments (outright purchases, preferably of farm property, rather than loans on mortgages). Or it might invest in spot commodities traded on produce exchanges or–last of all–it could invest in stocks selected on the recommendation of reputable investment counsellors. Under no circumstances, however, should it invest in bonds–especially government bonds–of any kind.

Take it or leave it, but there’s never been any better advice written about preserving your family’s freedom and independence during the kind of inflation that we’ve experienced for the past 36 years, the even worse inflation that most surely lies ahead, and the terrible deflationary crash which is bound to follow boom or bust. Real wealth that you can eat and wear and otherwise use will always be worth something to you. Paper lOU’s can never make that statement. Dr. Ralph Borsodi knew that. Do you?