"The Money Flood"


By SAMUEL B. PETTENGILL, former Congressman from Indiana

Delivered before the Rotary Club of Chicago, July 20, 1943

Vital Speeches of the Day, Vol. IX, pp. 650-654.

DURING the height of the Supreme Court fight, my old friend, John Garner, was called to the White House for a conference. He said, "Chief, do you want it with the bark on, or the bark off?" I am going to try to give it to you with the bark on. I think you can take it.

After seeing these navy motion pictures of the youth of this country in military war, I am going to summon you to another kind of fight if I can.

There were two orators in ancient Greece. When one of them spoke, the people said, "What marvelous eloquence!" When the other spoke, the people said, "Let us march against Philip of Macedon." I invite you to volunteer in a war as important as, perhaps more important than the one you have seen on the silver screen just now. I hold in my hand a draft on a bank in Berlin which I bought inmy innocence many years ago for 100,000 marks. It is made payable to me. I will offer that to anyone here at 10 per cent of its previous gold value. It was in the old days worth $24,000. If anybody wants to pay $2,400 for it, he can have it. If anybody wants to pay $240 for it, he can have it. If anybody wants to pay $2.40 for it, he can have it. And anybody can have it for 24 cents.

That shows how even a fairly intelligent American can get fooled on this question of inflation. I was fooled. It happened to me although I didn't pay any large sum of money for it. It didn't seem possible to me 20 years ago that the second most powerful nation in the world, even If it had suffered military defeat, would repudiate its obligations, but it did. And so did the victors of that war—France and Italy. And the British Empire repudiated its external obligations. And Russia did, and practically everynation in the world did. And it is going to happen again, gentlemen, in these other nations. It may happen here.

Within the past ten years we have seen 3,000 municipalities in this country and one state default on its obligations. In 1933 we repudiated the gold clause in U. S. government bonds. That was one of the first important measures of this administration that I voted against.

The grave dangers of inflation have been plainly stated by the President, Secretary of Treasury, Stabilization Director Vinson, Office of War Information, and others. They speak, however, in general terms. I will make specific application so that the peril may be more plainly understood.

I want, however, to make it plain that I am raising no question about the solvency of the United States Government today or its present ability to honor its obligations. My chief purpose in speaking is to safeguard the future capacity of our government to redeem the bonds it sells today with honest dollars tomorrow. And let me say that no one avoids inflation by refusing to buy bonds.

The cost of living has gone up about 25 per cent since the war broke out in September, 1939. This means that if you held a $1,000 life insurance policy on that date and were to die today, the policy would be worth to your family in terms of pre-war food, clothing and shelter, only about $800. As of today, your life insurance estate has shrunk about one-fifth.

The remedies for this situation are two. One is to take out 20 per cent more life insurance; the other is to take a keen interest in the subject under discussion.

For the nation, the cost-of-living dollars represented by all life insurance policies has shrunk about 25 billion dollars. This is a hidden cost of the war to be added to all known taxes.

By the same token, you are probably now under-insured against fire, tornado and all other casualties.

The same deterioration has taken place with regard to all other obligations payable at par, including government bonds. A $1,000 government savings bond in four years has accrued about $116 in interest, but in terms of what its face value would buy to sustain life, it has lost $200. Its net value today in cost-of-living dollars is less than when it was bought, despite the accrual of interest. It can be still less when it matures.

In cost-of-living dollars every savings deposit, social security card, retirement annuity, pension—every industrial, municipal, state, and government bond—is slowly melting away in the only sense in which money has value, i.e., what it will buy.

This process, if continued, means the destruction of the middle class—and by "middle class" I mean everyone who saves for a rainy day—farmers and workers. As inflation goes up, their security for old age goes down. Inflation is a species of tax and is the most cruel of all taxes. It bears no relation to ability to pay. It bears hardest on the poor and aged, on people who have passed the industrial deadline. It penalizes the thrifty and encourages the spendthrift.

It is patriotic to combat inflation because it increases the cost of war and destroys morale. The government today is the largest purchaser of commodities. It is probable that the money wasted by the government on this war through inflation so far, would have paid the entire cost of World War No. 1, including all of the waste of that period.

Senator Tydings, speaking before the Indiana Bar Association at Indianapolis, said that the banks will eventually have at least 120 billion dollars of their reserves in government bonds. He pointed out that if those bonds fell to 92, it would wipe out the capital and surplus of the banks. Following World War 1 government bonds fell to 83. This is thin ice to skate on. Of course the government has ways to maintain its bonds at parity and thus maintain a balance sheet solvency with dollars of continually shrinking value.

The deficit this year is estimated at 74 billion dollars. This is three times our peak debt in World War No. 1. We are, first, spending billions too much; second, not paying enough in taxes; third, not buying enough war bonds by individuals.

Out of 18 billion dollars of war bonds sold in the second war loan recently completed, only 3 billion were subscribed by individuals—or about 16 per cent. The rest were by institution buyers, chiefly commercial banks, and their buying is inflationary—it pours gasoline on the fire.

That the people are not awake to this peril is shown by the fact that sales of war savings bonds declined about 34 per cent in June, as against May—875 million dollars against 1,335 million dollars. Redemptions of bonds are increasing. This was before the new 20 per cent withholding tax. This tax is a praiseworthy measure, but it is probable that its impact on the purchase of additional war bonds by individuals will be terrific until and unless the people understand the need of Spartan swallowing of drastic medicine. What, for example, is the use of making money in war plants today if it is to be lost tomorrow because we refuse to safeguard its value? It is like picking apples and leaving them to rot.

The federal debt next July 1 is expected to be 212 billion dollars. This is more than the value of all the capital wealth in the United States. I mean wealth that is used in the production of new wealth. This is, of course, exclusive of municipal, state, corporate, and private debt aggregating about 95 billion dollars more. If the federal debt at the end of the war is 300 billion dollars, that will be equal to an average debt of $10,000 per family in the United States.

Present expenditures are running about 2 billion dollars a week—practically all of which is represented in pay to soldiers, wages to workers, and prices of commodities. The accumulating deficit is currently running at a rate equal to $1,800 per family per year—or $6 per day every working day of the year per family. Whatever value may be placed on police protection from international gangsters, the value is intangible. The debt, however, is tangible, and from an economic standpoint it is almost entirely a dead-horse debt. It is not represented by economic assets from which new wealth may come. It is represented by sunk ships and wrecked airplanes.

The greatest illusion since witchcraft is that we are getting rich from the war. In economic terms we are getting poor from the war. The capital wealth of the nation represented by millions of tons of iron ore, and barrels of petroleum, and ten thousand other items, to say nothing of priceless lives, is being destroyed as utterly as if fire consumed your barn or lightning your cattle. Over half of the wealth now being produced in this country is being destroyed as fast as it is being produced.

Britain now collects 56 per cent of its war costs in taxes; Canada 50 per cent, and we 30 per cent.

These facts are storm-flags of danger!

Let me say that I am not an expert on this subject. This ought to be presented by other men at this platform, like Dr. Haake or that great world authority on this subject, Dr. Palyi. But I am glad to say that Dr. Palyi is going to follow through on this from this same platform on August 31st.

There is hardly an important problem that is not wrapped up in this question of inflation. You cannot have a free America unless you have a solvent America. Dictators are the receivers of insolvent republics. Moreover, whatever your views may be as to the position of America in world affairs, a solvent America is necessary for any plan adopted.

One of the worst things about this easy money, "we-owe-us" charge-it-on-the-cuff philosophy, is that it is getting into our blood—like opium or strong drink. We are acquiring habits which are going to be very difficult to break. Despite Mr. Roosevelt saying in 1932, "We must have courage to stop the deficits," the fact is that we are now in our 13th consecutive year of deficits, with at least four more to come. This idea that we can get rich by going into debt is promoting vast plans for the reconstruction of the entire globe at our expense! dismissal pay to soldiers; bonus demands—not by four, but by eight or ten million veterans; severance pay to war-workers for six months post-war; fantastic dreams of building personal security on insolvent government by insuring everybody from "womb to the tomb," costing 10 to 20 billion dollars annually—all this to be added to the immense tasks involved in retooling our factories for peace; and providing jobs for 10 million men when they take off their uniforms, as well as 30 million or more demobilized from munition plants. We hear of enormous blueprints for the government owning and controlling stock interests in American aviation; the government grub-staking drillers for petroleum; a public-private Board of Directors to operate huge investments in government munition factories; the government becoming practically the sole source of credit; national socialism, which we are fighting abroad, taking the place of our free enterprise system at home; the expense of all of which is to be blithely superimposed on a war debt of 300 billion dollars or more.

Even if the size of the debt were of slight importance, from a fiscal standpoint, nevertheless, deficit financing should be strongly opposed on other and more readily understood grounds.

Whether we go on to state socialism and the loss not only of the Four Freedoms but of the greater freedom of constitutional liberty depends, in major part, on breaking the illusion of prosperity from deficit financing; that government can "create" purchasing power; that we are getting rich from the war.

Every government activity that competes with any segment of American enterprise, was, is, and will be financed in large part by borrowed money. We would not enter these programs in state socialism except by the easy-money route of public debt. If they were to be entirely financed by current taxation, a tax rebellion would stop them in their tracks. These friends of modern Caesars cunningly advance their program by avoiding the tax brake—the only tool by which freedom from big government can be defended.

It is worth your notice that real Americans do not rationalize the notion that huge debt is a blessing. That comes entirely from the Pinks who would make America over. We cannot save free enterprise or freedom itself in this country unless some time before it is too late we compel our government to live within its means. For example, the National Resources Planning Board suggests that as part of a vast post-war program of public works the government should buy the rights-of-way, terminals and bridges of the railroads, rehabilitate them with deficit money to be added to a war debt of 250 to 400 billion dollars and then lease them back to the railroads—a long and perhaps irretrievable step toward complete government ownership.

Not only does the removal of the tax brake provide the means to advance socialism and crush free enterprise, not only does it wipe out the middle class and destroy their independence by changing the citizen into a sycophant dependent upon the State, but it operates to displace the very bases of our free institutions. It strengthens the power of the Executive and weakens the power of Congress. It promotes the Fuehrer principle and weakens the representative principle. It does so by making it possible (for a while) to carry on government programs without resort to taxation. This takes "the control of the purse" which has been called "the surest safeguard of freedom," from the representatives of the people, the Congress. It thus impairs government by the consent of the governed and makes the State master, and not the servant of men.

Second, it strengthens the Federal government and weakens the state and local governments. This is so because states and cities are forbidden to print or coin money to pay their debts. They cannot make the money markets their creature nor depredate interest rates at their caprice. When states, counties, cities and towns undertake to borrow money, they have to pay interest rates established in a free market, and have to satisfy the lender that the loan is sound and secure. To pay interest and principal of debt, states and municipalities have to get the cash the hard way—by taxing the people. This puts some brake on their borrowings, some resistance to socializing the business of their taxpayers. You see this force at work in every municipal ownership election.

The Federal government, however, is under none of these restrictions. It can force interest rates down, borrow huge funds cheaply, pay its obligations of interest and principal by converting more of its promises into Federal Reserve notes, or by devaluing its gold and silver hoardings—"clipping the coins" to pay its bills—or by outright greenbacks.

The Federal government has a printing press; the states do not. This easy money route promotes the extension of federal power and subtracts from state and local self government, which we thought for centuries to be necessary to prevent the return of Caesar.

If in these processes you cannot see the American way of life (which in 150 years made us the greatest nation in history) disintegrating before your eyes, you are blind indeed. If you do see it, and do nothing about it, you don't deserve to be the sons of your patriot fathers, or the fathers of your soldier sons.

The Difficulties

The difficulties in checking this disease are immense. They must be clearly faced. Among them are the following:

1. The "we-owe-us" nonsense; the idea that it makes little difference how great the debt is. Therefore, why deny ourselves by paying taxes? It is probable that in no. decade since the Mississippi Bubble has so much mumbo-jumbo filled the air as in the last ten years. Part of this Voodooism is the notion that the government can "create" purchasing power. We were not inflicted with this Magi-Yogi in World

2. We are fighting two wars at once—one against foreign nations, and the other a class war against ourselves* This double burden is not borne by any of our antagonists to the same degree. One aspect of this class war is the determination to oppose all taxes below certain limits of income, and to use the war to level down all other income. In 1941 those who received 36 billion dollars of national income, or 38 per cent of the total, paid no income tax at all. However, if the government takes all incomes over $10,000, it would pay for the war for only five days; if everything over $25,000,

one day. So, pay day is on the way. Heavy government costs are always taken from the wages of workers and producers. No political charlatan seeking a safe way to be dishonest, can change that law, nor its impact. It is like the law of gravity in its implacable sequence.

3. The notion that the Alladin's lamp of modern science and the Papa State can exorcise all evil and remove all want without effort or sacrifice.

4. The notion that "full employment" solves all problems, even if it consists in digging holes and filling them.

5. The inflation potentials due to our gold policy has brought to this country 70 per cent of the world's yellow metal. Our supply has increased five times since 1929. This is something we did not have in World War I.

6. The devaluation in 1933 and the notion that the government can do so again—another easy way out.

7. Paying inflated prices for silver.

8. The vast increase of the debts before Pearl Harbor.

9. The competition between leaders of large voting groups to get more for their followers, or lose their following to more aggressive rivals. These pressures on government exist today to a degree we did not dream of in World War I. The idea is to win your economic battles not in the open competition of a free market, but in legislative halls. This makes government an immense prize, the possession of which enables one group to fatten themselves at the expense of the republic. This led to the downfall of France.

10. The time-and-a-half doctrine carried over from a spread-the-work period to a time of manpower shortage. This is today one of the great inflationary forces. It seems incredible that the standard week was permitted to be reduced from 42 hours to 40 after Dunkirk and the fall of France without a word of protest from anyone in authority.

11. The idea that we are going to have limitless prosperity after the war and so why worry. This idea is based on a huge deferred demand for automobiles, houses, etc., plus large savings with which to buy. There are many favorable factors in this situation, but it must be pointed out that some of them will add to inflation pressures. For example, as workingmen cash in their war bonds after the war, they get currency, which is more inflationary than the bonds; and second, the government will have to sell more bonds to the banks to get the money to pay the workers, which adds to the money supply represented by bank deposits. In short, in the very process of releasing funds to workers to spend, you get a double dose of inflation dynamite.

12. Finally you have to fight the underground Communist effort to destroy national credit, banking and money systems. They know correctly that "there is no subtler or surer means of overturning the existing basis of society than to debauch the currency," as was said of Lenin.

If I were asked whether Hitler or inflation were Public Enemy No. 1, I would answer "inflation." Hitler is on the way out; inflation is on the way in. It can do infinitely more damage to us than Hitler shows any present ability to do. Hitler might destroy property on our sea coasts; inflation, unchecked, will put out the hearth fires in homes in the remotest village.

If we don't accept the necessary sacrifices willingly, they will be exacted of us brutally. You can't resign from this contest.

The malady spreads as the dollars going into the pockets of the people exceed the goods available for purchase. This inflationary gap this year will be around 45 billion dollars. It is like flood water rising against the levees of the Mississippi.

What To Do!

There is no one remedy. This is a job for the banker, housewife, worker, farmer. And we have all got to take

part of the medicine. Josh Billings said he was past 50 before he learned of the only good place for a boil—on the other fellow. That won't work with inflation.

Taxes come first. They must be levied where the money is—income taxes or sales taxes. The argument against sales taxes in peace time is an argument for them now—they lower the money flood.

Sell war bonds to individuals and stop forcing them on bankers. Voluntary sales are of course preferred, but we may have to resort to compulsory savings before we are through—i.e., a withholding tax repayable in part after the war. It should be noted, however, that compulsory savings simply postpones inflation unless the repayment is made in installments over a period of years.

In every possible way we should keep down the costs of war production; i.e., keep down the debt. We should apply the principle of the incentive wage wherever possible, paying men for what they do rather than for hours spent. This will reduce unit costs.

"Educate and inform the people" as Jefferson told us to do. Make plain the difference between real wages and money wages. As Disraeli said, when the suffrage was more widely extended in England, "We must educate our masters,"—the American voter. The evil of inflation will be overcome, if at all, only at the ballot boxes of a free and informed people.

Corporate management should stop all efforts to cash in on the war, thus setting an example to their men.

Cut out every dollar of unnecessary expense, whether war or non-war. Support Senator Byrd's Committee. While war is itself economic waste, there is no sense rolling in it in an orgy of phoney patriotism. The true patriot will conserve his men, his materials and his money even in time of war. Senator Truman says that the armed services "know how to waste money better than any organization I have ever had anything to do with." If you want to know how colossal our waste is, read Chapter 21 of "Men in Motion" by Henry J. Taylor, North American Newspaper Alliance world reporter. It will make you see red and mad enough to do something.

If we stop tossing billions of dollars around in countries that have not sent a single soldier to the front, as if dollars were confetti, we would have more civilian goods at home, thus easing the pressure on prices.

Adopt policies that will step up production of scarce items; for example, food, and stop wasting them. Food Administrator Jones estimates that we waste 40,000,000,000 pounds of food annually. Enough, I have heard it said, to support life in the French nation. Any man or woman, not sick, who leaves food on his plate, should be cut in polite society.

It seems probable that we are conscripting soldiers beyond any necessity and that some can be demobilized back to the farm and factory—thus checking inflation by easing the scarcity of goods.

We must loyally support necessary rationing and refuse to buy on the black market.

We must resist political pressure groups, even if we are a member of the group.

We should pay all personal debts and home mortgages and enter the post-war period as debt free as possible—however heavy the federal debt may be.

We should buy life insurance. This protects both you and your country, as the life insurance company will probably invest most of your premiums in government bonds anyway.

We should bring all federal spending under the audit of the Comptroller General, the agent of your agent, Congress. This includes RFC, TVA, BEW, government corporations and all others now exempt. Support Congressman Howard Smith's Committee and the sub-committees on appropriationdesigned to prevent Washington bureaucrats from spending money or exceeding the powers granted them.

We should, I think, restore the convertibility of paper money into gold coin at the earliest possible date.

We should get behind the proposal to place a ceiling on the power of the Federal government to tax incomes under the 16th Amendment—a proposal which has already been adopted by the legislatures of fifteen states.

We should consider the proposal of Senator Tydings for a constitutional amendment making it obligatory upon Congress to levy taxes whenever it appropriates beyond existing revenues—in time of war the taxes to be sufficient to amortize the debt in one generation.

As a hedge against inflation, I give you the only one thatwill weather the approaching storm. It is to elect the right kind of men to Congress! And to state legislatures and city halls, where the earnings of the people are subject to public appropriation or expropriation.

As Professor Kemmerer of Princeton says, "What we need above all else is patriotic courage in Washington—and the strong support of all patriotic citizens of the public men who exhibit such courage."

In short, to combat inflation we must "cease being residents, and become citizens," as Thomas Jefferson said.

Thank you very much.

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