After 12 years of sewing the seeds of inflation, we must now reap the harvest. By examining the causes and effects of inflation we shall be able to meet the coming crisis with the minimum of hardship.

Inflation means the creation of money units without commensurate creation of wealth. The release of inflation, i.e., the affect of inflation, is to raise prices when the expanded money supply meets the goods supply in the market. We have been creating inflation for 12 years by increasing money supply out of ratio to goods supply; and during the past three years we have even diminished civilian goods supply while accelerating the increase of money supply. We have, however, as yet, released very little inflation, i.e., very little of the excess money supply has gotten into the market place. This means that we have been restraining and storing it, thus creating an explosive situation.

To understand the present political inflation, we must distinguish it from so-called bank credit inflation. When, as has been pointed out, substitute dollars are created through the banks, it is not the banks but the borrowers who create them. The borrowers in writing checks, create bank or substitute dollars; and, on the presumption that they receive full value therefore, do not create inflation, since these dollars are backed by actual wealth. All the purchases resulting from the loan are bought with bank dollars, save one. The loan provides for the purchase of everything but the banker's "service" - the interest charge; this cannot be paid, with bank-created dollars.

Thus, what we call a bank inflation is merely a boom caused by releasing exchange power which in turn releases productive power, but creates a potential absorption of government dollars by reason of the necessity, at some later date, of taking from the supply of government dollars a sum to meet the banker's interest charge. This interest charge has created nothing; and is, therefore, unbacked by wealth. When, by the calling of loans, government dollars are extracted by the creditors from the total money supply, a deflation of money supply occurs and there appears a surplus of unsaleable goods. Thus we see that the bank-loan-interest system always creates unbalance between money supply and goods supply; and that what we call the depression phase of the business cycle is but the flower of the seed that was planted in the boom phase. Interest increment is in fact money decrement. This is the termite that feeds quietly and insidiously upon the circulatory system and depletes the money supply, thus diminishing consumption and production, producing depression.

The depression or deflation phase of the business cycle always follows the boom phase by reason of ultimate loss of confidence by the creditors; and thus there is an automatic reaction and termination to bank credit inflation. Not so with political inflation.

Since the peculiar position and function of the banker in the scheme of our economy is so universally misunderstood, and even by the banker himself, a few more words devoted to clearing up the mystery may not be amiss.

The banker is the holder of a government license to speculate in money. As has been stated, he neither creates nor loans money. He permits businessmen, for a fee, to create substitute money by a "loaning" process in which he takes this position toward his "borrower": "If you will pay me a fee I will establish a credit on my books that will enable you, by drawing checks, to create businessman's money. I will take the position, with all my depositors, that they may draw either businessman's money by means of checks payable to some one else through a credit on the books of some bank, or I will deliver Uncle Sam's money on demand."

The banker's pledge is a legal fraud because it professes that all book credits established by the "borrowing" process are warehouse receipts for currency, which is true only to the extent of currency actually held or available. Thus banking has merely evolved from the original goldsmith-banker's false representation of holding gold to back all his outstanding promises to the modern method of professing to have 100% currency backing.

Under this system it follows that as businessmen's money expands through "loans" and the sum of Uncle Sam's money remains the same or diminishes or expands but slightly, the banker's undertaking grows more hazardous and in due course it becomes so manifestly impossible of fulfillment that a scramble begins for currency by banks and depositors, resulting in a money panic and depression.

To distinguish this condition from a political inflation, substitute Uncle Sam as the "borrower." Since Uncle Sam can deliver an unlimited sum of Uncle Sam's money, it is obvious that the banker has nothing to worry about and can "loan" an endless amount of money and instead of producing ultimately a panic for money, the effect is to produce a panic for goods to exchange for the plethora of money.

A political inflation can be arrested or reversed solely by government action. Here the debtor - the government - controls the situation, because, unlike a private debtor who promises to deliver more than he can create, the government can make good its promise to deliver any number of dollars. These dollars, however, grow progressively smaller, but nevertheless fulfill the government's loan obligations which are written in the simple word, dollar, without specification of power. A dollar is whatever the government issues as a dollar - it has no fixity.

A political inflation, therefore, has no automatic corrective; it is speeded, retarded or reversed entirely by government action. Action to arrest or reverse may take one or both of two forms, namely, repudiation of promises, or budgetary action to balance or create a surplus from which to retire obligations. To balance the budget means to retrieve as many dollars as put out, thus ceasing to feed the inflation further. A surplus budget means retrieving more dollars than put out, thus deflating the money supply.


We are at present in a political inflationary movement which during its life, and probably forever, has ended the menace of bank credit inflations and deflations. This is due to a radical change in political policy, adopted in 1933 after the depression beginning in 1929. In previous bank credit deflations the government did not intervene but allowed the depression to run its course and the cycle to renew itself. In this instance, however, the government took over the banking function by expanding the money supply. There is now no way by which the banks can recapture their function because there is no way by which the government can let go of it. The banks are now mere pensioners on the government's hands; and, as previously explained, it is politically expedient to keep them alive by the sham process whereby the government professes to borrow from them. As an example of their reduced position, we may compare the average interest rate of 4 1/2%, paid by the government for financing the last war, with the average rate of 1 3/4% at which this war is being financed.

Another index that points the same trend is the fact that total private debt - corporate, farm mortgage, urban real estate mortgage and state and local government - rose from $72.4 bns in 1916 to $90.8 bns in 1919, an increase of 25.5% while in this war there has been a rise in the same brackets from $125.3 bns in 1939 to $129.2 bns in 1942, or only 3%. On the other hand, the Federal debt rose from $1.2 bns in 1916 to $25.6 bns in 1919 and then declined, while in this war it rose from $47. bns in 1939 to $112.5 bns in 1942, and rose to $171.2 bns in 1943. At the end of the last war (1918) the Federal debt was only 19% of the combined private and public debt, whereas, today, in the middle of the war, it is above 60%. Since private and state and local debt are practically standing still, and public Federal debt is rapidly expanding, the relative positions of the two classes of debt will undoubtedly be reversed, with Federal debt being 80% of the combined total of private and public debt, instead of 19% It the end of the last war.

Banks no longer have any influence upon monetary matters; the government now controls the situation completely; and in forecasting we have to consider, therefore, only political expediency and political action. This is an entirely new condition in America, and we therefore have no precedent to guide us. Many persons will be misled by using old guides and therefore expecting deflation to follow this inflation as deflation has always followed previous inflations. This is total inflation; there will be no deflation.

The banking system is being used now, not to create substitute or bank dollars, but to create government dollars, because the government is the borrower-creator. The supply of government dollars is now so great that the admixture of substitute dollars offers no hazard whatever, and the day of bank panics is past. Banks will no longer fail; they may, however, liquidate and retire from business. This depends upon whether the increase in their expenses, due to the inflation, will be counterbalanced by increased income from government loans. Such increased income will probably come automatically without a rise in the interest rate. Banks are now taking about 40% of the government's securities and private investors, 60%. As the inflation progresses this latter percentage will diminish and the former will correspondingly expand. Private investors will show increasing resistance to bond selling, and the banks will absorb what the public doesn't take. Thus increased volume of loans will produce increased income for the banks, without increase in the interest rate.


So much misconception exists on the meaning of the so-called government debt that it needs to be analyzed. It is not properly called government debt; it is a taxpayers' debt. It arises solely out of a postponement of tax levies to balance the budget. It means that the citizen has been getting government service and disservice at a cost that in part has been on the cuff. By the borrowing process the government has been inducing its security holders to advance the unpaid cost to the taxpayer; and, for his thus "holding the bag," government pays the security holder an interest which is added to the taxpayers' obligation. The government is only a middleman between the creditors and the taxpayer-debtors. How it will serve their respective interests depends upon political expediency and the reactions of both classes. To be sure, the security holder and the taxpayer are often the same person, but not always - and rarely in the same degree. Also the taxpayer consciousness may be keener than the creditor consciousness or vice versa. We shall speak of the two as investor interest and taxpayer interest.

There are two ways that the taxpayer interest can be made to pay its debt to the investor interest. One is the bald and bold way of levying taxes to create a budgetary surplus out of which to pay the security holder. The other is to pay the security holder on demand while continuing a deficit policy. The latter is undoubtedly the way it will be paid as the former is politically a dangerous method. This latter course means of course, releasing funds from Government securities and increasing the pressure of liquid funds on the diminished goods supply.

What are the retards and the inducements to this process of liquidation? We have price ceilings and rationing. These are restraints to price rises but they are effective only as long as the people remain under the illusion that non-spending means savings. The price rises have as yet (May 1944) not been large enough, and the continuity of the rise has not been long enough, to destroy this illusion. Some people are already aware that money saved, declines more in principal than it accrues in interest; but they have another illusion, namely, that there will be a deflation as has been the case with every drastic price rise before in our history. On the other hand the inducement to the security holder to liquidate is the persistent and henceforth accelerating price rise - forcing some to sell to meet current expenses, and causing others to become panicky.

What are the indices that the liquidation trend is approaching? One is that shown in the increasing amount of refunding that becomes necessary; and the best example of this is Series E Savings Bonds. In January 1942 the redemption as compared to sales was less than 1/2%. This has risen until in December 1943 it was 25% and in March 1944 it was 42%. Another index is the comparative percentage of securities held by banks to the total. Comparing July 1942 with December 1943, we find the former date showed 38% held by banks and the latter 43%. As private individuals and corporations take less, the banks must take more and thus the increasing percentage of bank holdings is a reflex of the increasing public sales resistance.

There is no power that can reverse this trend toward liquidation except a drastic increase in taxes; and the government, having lacked the courage to adopt this policy thus far, will of course not regard it as politically expedient in this critical stage of the war and an election year, nor will the next administration whether Democratic or Republican be super-human. Rather, the incumbent administration will beat its breast, make many demagogic pronouncements of its faithful effort to protect the consumer and many denouncements of "profiteers," "black markets," "chislers," "racketeers," and 'bootleggers;" and this will in large measure deflect criticism from itself to defenseless tradesmen who will be the objects of the thus aroused public wrath. If we have a Republican administration next year, it will blame its predecessor.

What are the evolutions and culmination of the above stated liquidation trend? As more security holders, for various reasons, convert into cash it will, of course, be for the purpose of buying. This, with the greater spending of the cash and bank deposits already available, will force prices up with increasing speed - and this, in turn, will force greater liquidation and greater price rises. Thus, by the diminishment of the power of their dollars, the taxpayer interest will pay against its tax delinquency and the investor interest will take a loss. The debt claim will be paid in full, dollar for dollar, but the dollars will buy less and less.

The process of liquidation implies that the public holding of securities will diminish and bank holdings will expand not only commensurately but plus because the government will be obliged to issue not only refunding securities but additional amounts to cover its current deficits which will expand as prices rise. To illustrate; the public now (May 1944) holds about $110 bns of government securities. Assume that the saturation point is $150 bns after which public holdings will decline through liquidation. Such liquidation implies more money in the market places, with consequent price rises. The government must therefore, make added appropriations to cover its scheduled purchases. Assume the price rise during a year averages 50% while the government's expenditure is planned to be $100 bns. By the price rises, the total expenditures would be upped to $150 bns and if the tax receipts were 40 bns, the deficit would be $110 bns; and this sum, plus the refunding of say $50 bns of the public's liquidated holdings, would mean that $160 bns would be thrown upon the banks. Assuming that they already held $75 bns, their total would then be $235 bns.


At this point the inflation would have gained its momentum and we will assume that in the next year the public would liquidate its remaining $100 bns, and the price rise may be estimated at 1,000%. If the government's expenditure is planned at $150 bns it would thus be boosted to $1 1/2 trillions. Its income might be planned at $75 bns and rise to say $225 bns making a deficit of 1 trillion, 275 bns which would have to be absorbed by the banks - bringing their total to 1 trillion, 500 bns, which would be the total of all securities outstanding. There would then be approximately this sum of money in private hands, either as bank deposits or currency in circulation. These figures would continue to mount until the end.

While this fanciful outline is only a skeleton, it is not overdrawn for a total inflation such as we anticipate. It is not irrational to up the government's planned expenditures by 10 to 1 while estimating an increase in its planned income by 3 to 1 because there is a lag in the income tax which is the main tax levy. The irony of the tax measure against inflation is that it is a preventative and not a cure, since it cannot overtake the inflation once it gets its momentum. In the insipiency of an inflation statesmen do not lay sufficient taxes and in the flood they cannot. The picture also does not ignore the fact that about 20% of all securities privately held are held by insurance companies which are not so apt to liquidate as individuals and other corporations. They will however, be obliged to pay out vast sums for loans and cash surrenders, especially to the white collar workers whose income will not keep up with the price rises. Thus these companies will be compelled to liquidate to some extent and will choose to some extent to do so for investment in real estate to preserve their reserves. Their new business will also virtually disappear and their current income will fall short of current outgo.

The astronomical increase in bank loans as shown is not unlikely - for it must be remembered that so-called loans to the government are not like private loans, and have no limit of safety. A loan to the government means merely placing two figures on the books of a bank, each offsetting the other and each being of the same quality, and varying equally in weight. As we have pointed out, the process is but an empty gesture whereby the government subsidizes the banks through the interest payment. Whether the government orders the bank to mark on its books a million or a billion or a trillion is but a matter of adding cyphers; but these added cyphers are very welcome to the bank, since each is an egg that hatches more interest income for the bank. It is quite possible that in the general demoralization of runaway inflation, the banks may even recklessly extend private loans, seeing that there would be no hazard in spewing some substitute dollars in the flood of government dollars. The base of government dollars is now so broad that there is no danger in adding a structure of substitute dollars.

What is the end? The end is what is called stabilization or official ending of the inflation. This will be accomplished by exchanging a new unit for the existing dollar at a ratio of one new for some multiple of the old. This multiple may be from 100 to 1,000 depending on when the government chooses to end the agony without probability of the malady carrying over into the new unit. If the total bank deposits and currency outstanding prior to the stabilization were, say, $2 trillions and the conversion under the stabilization were at the rate of 1 to 200, the total money outstanding after the stabilization would be 10 bns of the new unit and prices would come back to about 1/200 of the pre-stabilization level. The slate would be wiped clean. Nobody would owe anybody because all public debt and all private debt would be wiped out.

The public will have sold all securities back to the government and the $2 trillion mentioned in the hypothesis would be the aggregate of bank deposits and currency. Only the banks would hold government securities and all would be equivalent to cash and would be wiped out with the currency by the stabilization decree. Thus the government would begin a new fiscal era without a dollar of debt, and the taxpayer obligation and the security holder claim would be liquidated. The complete obliteration of debt with a complete new shuffling of the cards is a consummation that may have a popular appeal and therefore make total inflation welcome to a large number of our people.


This is a cold mathematical picture of a coming collapse. It lacks all the colorings of human reactions of reason and emotion but in reality the experience will be anything but cold; it will be wrought and fraught with passions. Men cannot calmly watch their fortunes fade - especially when others are profiting by the fade-out - and broadly speaking, the entire debtor class will benefit by the depreciation of their debts and many men, foreseeing this, will pile up debt as a means of thus acquiring property cheaply. Trust funds visualized by their testators as permanent, will be wiped out; and not only private individuals dependent thereon but educational institutions, hospitals and charity institutions will find themselves bankrupted. Insurance companies may weather the storm, but their benefit payments will decline to a small fraction of what the insured paid in and the companies will emerge emaciated and shrunken, if indeed they survive. Government's entire social security benefits, with soldier bonuses, will likewise be reduced to the vanishing point unless the government sees fit to increase payments as the dollar declines, thus feeding the already raging flames of inflation.

Many businesses, following the normal markup on costs without anticipating replacement costs, will be wiped out and their owners added to the unemployed. Social unrest will intensify race problems. Drinking, dissipation and immorality will increase. The climate will be riotous, rebellious and dissolute. America will be tried as she never has been tried before - but the whole experience will be bearable if we prevent exchange from breaking down. If we fail in this we will not only paralyze production and consumption at home but will also be obliged to withdraw from the war if peace has not been previously signed. The end of the war may precipitate the runaway phase of inflation; but inflation may force the end of the war. The one will not necessarily wait upon the other.

The first crisis will come when the rapid rise in prices will make it impossible for our credit practice to continue. The seller will not be able to bill goods on credit terms when the dollar on payment date will be worth an uncertain amount less; and when it will be to the advantage of the debtor to delay payment to take advantage of further decline. This breakdown of our credit practice will be a serious inconvenience - more so than in any other country that has gone through or will go through inflation, because credit practice exists hereto a much greater degree than elsewhere. We will be forced to a cash basis, which does not mean a currency basis. We will continue to use our checking system, but there will be a great increase in currency.

The Supreme test of whether we can avert the decline to barter - and possible riot, rebellion and revolution - lies in our ability to provide a stable money unit and thus preserve our money exchange. The time will come when the dollar will decline so rapidly that it will no longer be feasible to conduct trade in terms of it - with barter the only visible alternative. Simple barter is extremely difficult for a society that has been as highly specialized as ours is, and that has grown away from the soil. Farmers will not ship food to the cities if, before they can buy with the money they receive, it has declined to some uncertain or perhaps vanishing point. On the other hand, while they would barter, they are so far removed from the city dweller that contact is impossible without transportation. But railroads could not operate on a barter basis; they must stop rolling when the dollar stops rolling. With transportation broken down, city people will face starvation and with such a threat, order cannot be maintained and violence may ake any course.


If total inflation, as outlined, cannot be seen as a probability, it should be contemplated as a possibility and a preventative of chaos adopted. The solution of the problem lies in switching business from the unstable dollar to a new unit that will remain stable regardless of the decline of the dollar to the vanishing point. This would not save past dollar contracts from going through the inflationary process, but it would permit new contracts to be made covering the current business of life in terms of the new unit. If we can keep money exchange operating we can avert all the chaos of decline to barter which for us would be virtually impossible. Under such conditions the inflation could run its full course without destroying orderly life. No country that has gone through total inflation has had the opportunity of utilizing this unique escape from the chaotic phase.

The valun concept is the result of studies begun 10 years ago and is not presented as a mere emergency measure. It is presented as a true money system, to serve in place of the existing political money system at all times and places. It happens, however, to come now as a salvation from chaos in the impending crisis. The valun can step into the breach and save the American people from severe misery and bloodshed; and, after the crisis can remain to assure equitable and stable exchange - and preclude all future inflations, deflations and other evils that beset us under the existing money system.

Disastrous inflations as the result of political efforts to subsidize the economy by means of deficit financing are common in history - always followed by continuation of the political money system which breeds the malady. The American people have now the opportunity to demonstrate to the world that America's first political inflation shall be its last, and may also be the last in the world if other peoples follow our leadership in setting up the private enterprise money system.

In the second half of this course of studies the valun and the valun system - the proposed private enterprise system - are described in detail. The purpose of this study is to point out the seriousness of our present monetary situation and the urgent need for the adoption of the valun system now to avert untold miseries.


As an example of a stabilized bond and in contrast to those now prevailing, we have been privileged to copy from the private collection of Mr. Farran Zerbe, the following indenture of a bond of the revolutionary era:

No. 6025
£373-3-9 The First Day of January A.D. 1780
In Behalf of the State of Massachusetts-Bay, I the Subscriber do hereby promise and oblige Myself and Successors in the Office of Treasurer of said State, to pay unto Charles Steward or his Order, the Sum of Three Hundred and seventy three Pounds 3/9 on or before the First Day of March, in the Year of our Lord One Thousand Seven Hundred and Eighty one with interest at Six per cent per Annum: Both Principal and Interest to be paid in the then current Money of said State, in a greater or less Sum, according as Five Bushels of Corn, Sixty-eight Pounds and four-seventh parts of Beef, Ten Pounds of Sheeps Wool, and Sixteen Pounds of Sole Leather shall then cost, more or less than One Hundred and Thirty Pounds current Money, at the then current Prices of said Articles - This Sum being Thirty-Two Times and an Half what the same Quantities of the same Articles would cost at the Prices affixed to them in a Law of this State made in the year of our Lord One Thousand Seven Hundred and Seventy-seven, intitled, "An Act to prevent Monopoly and Oppression." The current Prices of said Articles, and the consequent Value of every Pound of the Sum herein promised, to be determined agreeable to a LAW of this State, intitled, "An Act to provide for the Security and Payment of the Balances that may appear to be due by Virtue of a Resolution of the General Assembly of the Sixth of February One Thousand Seven Hundred and Seventy-nine, to this State's Quota of the CONTINENTAL ARMY, agreeable to the Recommendation of CONGRESS, and for Supplying the Treasury with a Sum of Money for that Purpose."
M. S. Dawes                    Witness my Hand
R. Cranch                      H. Gardner, Treasurer
Observe the fidelity of this bond. It is payable in "the then current Money of said State" regardless of whether that be the English pound or revolutionary money, provided, however, that the holder should receive either more or less as may be required to purchase the commodities in the quantities named. (The reason the second sum stated is different from the first is because the latter was a fixed unit printed in the bond as the basis for computation, while the first amount is the actual loan and is written in by pen.) Another interesting revelation is that at the time the bond was issued, inflation had carried prices 32 1/2 times the level fixed by a futile price control law, ("An Act to prevent Monopoly and Oppression") passed just three years before.
[Contents] - [Next section: IV. MONEY FREEDOM]

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