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credit. The effect of credit expansion is the same whether
the Government, business, or the ultimate consumer goes
into debt. During wars, governments typically go into debt
and finance a substantial part of their borrowings through
the absorption of Government obligations by the credit
system. Recently, consumers, business and the Government
have all been increasing their debts, with the result that
bank credit has been expanded sharply. If this situation
persists, further inflation will be inevitable. Fear of
inflation has been intensified currently by the widespread
belief mentioned earlier that a Federal Government policy
of large spending financed by a deficit and combined with a
labor policy which encourages annual wage increases would
tend to raise costs and prices even without the excesses of
full-scale war.
 
      The objective of protection against inflation is, of
course,
to own assets or earning power which will expand in
sympathy with an increase of the general price level and
thereby provide the investor or businessman with funds with
which to meet the higher cost of living or the higher cost
of doing business. The extent to which an asset will
provide protection against inflation depends not only on
the nature of the asset but also on the price at which it
is acquired. Obviously, there is no advantage to be gained
in the way of inflation protection through the purchase of
an asset which is already fully reflecting the effects of
an upward change in the price level. It is also important
to consider the question of how serious an inflation is to
be expected, for inflation can range all the way from the
complete wiping out of currency values, as in Germany after
the first World War and as in China in the recent past, to
a gradual increase in the price level over a period of
several decades. Since 1913, for example, our price level,
as measured by cost of living indexes, has risen by 150%.
This reflects a substantial increase in the quality and
complexity of goods consumed by a typical family, as well
as so-called depreciation of the dollar.
 
       As the situation now stands, we believe that extreme
inflation is likely to develop only as the possible
aftermath of another World War. We have said in the
discussion above that during another war severe taxation
and other restrictions would
limit commodity prices, profits and dividends. It is,
therefore, quite possible that the first impact of war on
stock prices might be deflationary rather than favorable. A
more moderate inflation might be induced by the heavy
rearmament program, i.e., alternative (3) above, extending
for several years. In contemplating this possibility,
however, it is well to remember the tremendous productive
ability of our industry and the probability that it can
support a big armament program and satisfy in large measure
our important civilian demands at the same time. Shortages
of specific commodities, such as copper, can limit
production of some products and cause allocations, but the
broad supply of goods seems to be sufficiently ample to
represent an effective brake to runaway prices unless the
Government, business and consumers act with complete
recklessness in anticipating their needs.
 
       A discussion of curbs to higher prices would not be
complete
without reference to our price support program for farm
products
which a few months ago was in danger of breakdown due to
accumulation of surpluses and was becoming politically
untenable due to high cost. Although surpluses are viewed
more favorably at
the moment, a relaxation of war fears, as discussed in
alternative (2), could make agriculture once more a serious
source of deflationary pressure.