290 



DISCOVERY 



In practice, however, Governments intervene and pass 

 some kind of Rent Restriction Act which prevents 

 landlords from raising rents to anything like the same 

 'extent as prices have risen. As a consequence, the 

 rentier who derives his income from rents is nearly, 

 if not quite, as badly off as the rentier who derives 

 his income from fixed-interest bearing securities. A 

 person whose income comes from dividends on ordinary 

 shares is in a different position, analogous to that of 

 a business proprietor, and he may best be considered 

 as such. 



(2) In a distinctly better position than the rentier 

 are the persons who earn wages, salaries, or fees, as 

 there is a probability that they wOl be able to secure 

 increases in remuneration which will more or less 

 compensate them for the rise in the general level of 

 prices. It is fairly safe to conclude, however, that 

 these increases in pay will compensate them less, rather 

 than more, for the rise in prices, as the old saying that 

 " wages follow prices " contains a very large element 

 of truth. At the very best, wages and salaries may 

 be adjusted automatically in accordance with a scale 

 based upon changes in the cost of giving, but unless 

 the calculations and the adjustments are made very 

 frequently, the increases in wages will always lag 

 behind the increases in prices, which will be a serious 

 matter where prices are advancing at all rapidly. 

 In the case of many wages and salaries, and more 

 particularly in the case of fees, it is improbable that 

 sufficiently prompt and adequate alterations can be 

 made to maintain real incomes, in terms of com- 

 modities and services, at the old level. 



(3) In the best position, in any case during the 

 earlier stages of inflation, are the proprietors of business 

 undertakings. This applies to the owners of private 

 enterprises — farms, shops, factories, etc. — as well as 

 to the ordinary shareholders of industrial and com- 

 mercial companies. Selling prices tend to rise more 

 rapidly than do costs of production, the interest 

 charges being comparatively fixed and the wages bill 

 tending to lag behind. Thus the margins between 

 costs of production and selling prices tend to grow, 

 and so consequently do the profits. Furthermore, 

 the prices of all stocks held tend to increase, which 

 helps to swell the profits. Thus inflation appears 

 greatly to benefit the proprietors of business under- 

 takings, even as it prejudices rentiers and the earners 

 of wages, salaries, and fees. In reality, inflation is 

 just as harmful to business proprietors as it is to other 

 sections of the community, only it is necessary to look 

 below the surface to discover the damage that is being 

 done. Inflation causes business proprietors to use up 

 their fixed and their working capital, but so long as 

 the capital lasts, the losses that are reafly being 

 incurred tend to be hidden by the favourable figures — 



expressed in terms of paper money — which fill the 

 balance sheets. 



We may first examuie the insidious attack which 

 inflation makes on fixed capital ; it takes the form of 

 causing the provision for depreciation to be hopelessly 

 inadequate. In a soundly conducted business, a sum, 

 based on the estimated life of the plant, is charged as 

 an expense each year against revenue, before ascer- 

 taining profits, in order to provide in due course for 

 the replacement of worn-out plant. Thus if new 

 machinery costing 1,000,000 marks had an estimated 

 life of 10 years, the manufacturer would set aside 

 each year 100,000 marks to provide for depreciation. 

 At the end of 10 years he would have set aside 1,000,000 

 marks with which to replace the machinery and thus 

 maintain his capital intact. If durmg the 10 years 

 prices rise enormously owing to inflation, the 1,000,000 

 marks accumulated in the depreciation fund will 

 prove utterly inadequate to defray the cost of replacing 

 the worn-out machines. The bulk of the capital 

 originally represented by the machines will be lost, 

 the loss having occurred through the manufacturer 

 charging his customers too little in respect of the use 

 made of the machines. 



In what concerns working capital which is employed 

 for financing stocks of raw materials or other com- 

 modities required in connection with production, it is 

 found that, owing to the great rise in prices, the money 

 realised when the stocks are disposed of is not suffi- 

 cient to pay for renewing the stocks. Thus, although 

 handsome profits are made, in terms of paper money, 

 every time goods are sold, in reality a loss is being 

 incurred, and the firm's real capital, in terms of com- 

 modities, is being reduced. 



Living on capital is not a course which business 

 firms can follow indefinitely, though the evil day of a 

 collapse can be postponed for a time by issuing new 

 shares or by raising loans. If inflation continues to 

 grow, the new capital will be lost like the old, and a 

 time must come when people will no longer be wiUing 

 to invest money in industrial undertakings, assuming 

 they have any to invest ; this will certainly not be the 

 case so far as the rentier class is concerned, which 

 normally does a considerable share of the national 

 saving. 



For a time, successive doses of inflation cause trade 

 to be brisk and employment good at the expense of 

 ruining the rentier class, of prejudicing wage-earners 

 and seriously prejudicing the salaried and fee-earning 

 classes, and of gradually undermining the position 

 of business proprietors by causing them to live on 

 capital. " Good trade " based on this kind of rake's 

 progress cannot continue indefinitely, (i) The most 

 prompt reaction will be brought about by the adoption 

 of a policy of currency deflation. Czecho-Slovakia 



