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Fighting Inflation from the Grassroots

Every modern civil government has three ways to raise funds. A government can tax, borrow, or print money. The last two are really extensions of the first.

  • Timothy D. Terrell,
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Every modern civil government has three ways to raise funds. A government can tax, borrow, or print money. The last two are really extensions of the first. Borrowing is a promise to tax the population later (and by a larger amount, in order to cover the interest payments). Printing money is really a tax on people who hold money, because inflation reduces the value of the currency and transfers that value to the creator of the new money — the state.

Governments that resort to massive inflation to raise funds are generally those that have been unable to use conventional taxation or borrowing. Russia’s high inflation in the early 1990s, for example, was brought on by the country’s inability to tax effectively, being an unstable candidate for borrowing, and its failure to cut spending to a level within its means.

The worst inflation rates in the world today are in countries that have corrupt taxation systems, poor credit ratings on international lending markets, and little other recourse than the printing press. As of 2004 (the most recent data I have available), the worst inflation rate worldwide was in Zimbabwe, at 133%. Others on the top ten list are similarly troubled countries: the Dominican Republic (55.0%), Angola (43.8%), Iraq (25.4%), Suriname (23.0%), Venezuela (22.4%), Haiti (22.0%), Zambia (18.3%), Guinea (18.0%), and Belarus (17.4%). Even these rates are mild compared to the occasional outbreak of hyperinflation. Yugoslavia in January 1994 produced an inflation rate of 313 million percent, and the Hungarian hyperinflation of 1946 resulted in the largest-denomination bank note ever issued by any country—the 100 Million Bil-Pengo, a whopping 100,000,000,000,000,000 units.

The worldwide acceptability of the dollar has softened the impact of inflation on the U.S. economy, as many of the dollars created by the Federal Reserve have been exported to dollar holders in other countries. As long as the dollar remains in high demand overseas, inflation’s effects will be moderated somewhat. But lately the dollar has weakened against other key currencies in the world, such as the euro. If foreign dollar holders should decide that they would rather hold euros, and those foreign dollars start flowing back into the U.S. in large quantities, it could produce a more severe inflation here. A backlog, so to speak, of inflation would be unleashed.

Inflation is really promise-breaking on the part of the state, a breach of faith. This may be why Isaiah compared the Israelites’ faithlessness with debased coinage in Isaiah 1:22. In Leviticus 19:35, 36, God commands the use of honest weights and measures. Governments that break their promise to keep the currency stable will break other promises. That is why some of the countries on the “Top Ten” list of the worst inflation rates are countries that have abrogated the rule of law, have terrorized their citizens, and have produced mass misery.

The best long-term strategy for a Christian faced with inflation is to work through the political system to encourage promise-keeping, and to reduce the influence and reach of a promise-breaking state by strengthening the family and church. This is an arduous business, and after a lifetime of effort a faithful worker may see a state more expansive and intrusive than ever before. But a long-term strategy may have short-term components, not least of which is guarding (and expanding) one’s assets when inflation threatens to erode them.

In the short run, there are several tactics a family, business, or church may use to fight the effects of inflation. Here are several, not in any particular order:[1]


This is one of the tried and true hedges against inflation, a favorite (one might say a fetish) of some investment advisers. And not without reason. Gold tends to rise in price as general inflation rates rise, and a few who invested in the 1970s were in a very good position by the early 1980s. The $35 per ounce price in 1970 had been driven to nearly $850 an ounce by January 1980.

Gold, however, does not tend to do as well as alternative investments in normal economic circumstances. Long-term, it will tend to keep up with inflation, but other investments like stocks, bonds, real estate, or a family business will often produce far better returns. Gold, for the average investor, is a kind of lifeboat investment — very good to have if normal economic conditions turn abnormal, but otherwise not what you expect to get you to your financial destination. For that reason, most advisors recommend that a small percentage of one’s portfolio be invested in gold.

Investing in gold can be cumbersome, especially if one intends to take physical possession of it. It has to be shipped, at no small cost in money and hassle, there are commissions to pay, and some arrangement has to be made for secure storage. In normal circumstances, dealing with physical gold is more difficult than handling stocks, bonds, or other financial assets.

However, in abnormal circumstances it is nice to have something portable and private that does not depend on an extensive network of distant firms to maintain its liquidity. Currency fits that description too, but when those abnormal circumstances also involve high inflation rates, gold rather than currency may be desirable. It is somewhat surprising that the dense value and the privacy of gold have not made it more attractive than currency to drug dealers and other criminals who make large financial transactions. Perhaps as inflation continues to erode the value of our highest-denomination bill — the $100 — criminals will turn to gold to make large transactions. And then, just as our current legal system has attached the presumption of guilt to those who carry large amounts of currency, those who hold large amounts of gold may be presumed guilty as well. Confiscation could be a threat.

If physical gold is being held as security against general financial calamity, a safe deposit box may not be the best place to keep it. These boxes can be frozen, if not seized outright, in a financial emergency. On March 9, 1933, Franklin D. Roosevelt began the process of forcing the exchange of privately held gold for Federal Reserve Notes, and shut Americans out of their banks by executive order. There is no reason to believe this could not happen again.

Silver also responds well to inflation, though it seems to have been influenced more by industrial demand than gold has. Its lower per-ounce value means that if the dollar ever utterly collapses it would be of more use in everyday exchanges. However, the history of hyperinflations shows that people will continue to use the inflating currency or exchange it for a more stable foreign currency. If the dollar ever hyperinflates, I believe a return to gold and silver coinage in daily exchange is less likely than a flight to the euro or some other reasonably stable currency.

Conventional Investments

Over time, the stock market has provided a rate of return that has beat inflation. Investments in the stock market can be set up specifically to provide a hedge against inflation. Gold stocks tend to rise, often faster than gold itself, when inflation is a threat. In the bond market, there are inflation-adjusted Treasury bills that can provide a mix of liquidity (compared to physical gold), security, and compensation for inflation.

An alternative would be investing in foreign currencies, if the inflation in the United States is expected to be worse than in other countries. The euro has done very well against the dollar in recent years, and holding euros in a bank account in the United States is feasible.

Real estate can also hold value well through an inflation. There have been some concerns lately about a possible real estate bubble in the United States, but it is not clear that real estate is any more prone to bubbles than stocks. Even gold could be said to have gone through bubbles, as the decline in gold prices after 1980 seems to indicate. Many American homeowners are already invested heavily in real estate through their own homes, although not in a very diversified way. Though home values will fluctuate with local demand and supply conditions, and the deterioration or improvement in the condition of the building, homes will also tend to appreciate with inflation.

Debt and Inflation

In my economics classes I teach that unexpected inflation favors the debtor. That is, as the value of the dollar falls due to inflation, the value of a fixed loan payment also falls. That being said, I believe it is still a good idea to get out of debt. Many loans, including some home loans, car loans, and of course credit cards, have adjustable rates. As interest rates go up with inflation, the payments will tend to go up as well. Adjustable rate loans do tend to have lower rates than fixed-rate loans. That is because a lender who offers a fixed rate is taking the risk that the market rate will rise, whereas a lender offering an adjustable rate is handing that risk over to the

For some of us, inflation will carry our wages and salaries up along with the prices of the things we purchase. But this is not always the case, and anyway the price of your labor may not rise as rapidly as your obligations on adjustable rate loans.

Inflation and Recession

In some ways, preparing for inflation should be like preparing for a recession. According to some economists, inflation leads to recession because of the massive economic distortions inflation produces. When the central bank increases the money supply, the money does not enter the economy evenly, and not all prices will increase at the same rate. Those firms closest to the source of the new money (the government) will benefit. By analogy, the friends of a producer of undetectable counterfeit currency, and merchants who sell to that person, would benefit. Those who shop at the same store as the counterfeiter and his friends would be worse off, as the counterfeiter bids up the prices in the store. As the Austrian economist Ludwig von Mises wrote, “[W]hen inflation starts, different groups within the population are affected by this inflation in different ways. Those groups who get the new money first gain a temporary benefit.”[2] Later, Mises wrote that the inflation during World War II benefited munitions workers and put teachers and ministers (who were relatively far from the source of inflation) at a disadvantage.

[T]he teachers and ministers were among those who were most penalized by inflation, for the various schools and churches were the last to realize that they must raise salaries. When the church elders and the school corporations finally discovered that after all, one should also raise the salaries of those dedicated people, the earlier losses they had suffered still remained.[3]

Practically speaking, this means that it helps to have a job in an industry that is recession-resistant. Some industries, like construction or auto sales, seem to have a worse time during a recession, while others, perhaps health care or grocery stores, seem to be a little better off.

It also helps to have some savings set aside for a possible job loss, though of course it will need to be in some form that will increase in value as inflation rises. Savings instruments with a fixed interest rate (as with some bonds and CDs) will not adjust for inflation. A regular bank account might be better, since it is highly liquid and the interest rate is somewhat linked to inflation. Less liquid and more variable investments, like your home or stocks, may not be the best insurance against unemployment. The time of unemployment may coincide with a downturn in the stock market, and you do not want to have to sell stock at low prices. Selling a house is expensive, time-consuming, and traumatic, and again, the time of unemployment may coincide with a time when many homes are being sold at distress prices for similar reasons.

The Church and Inflation

The church has a responsibility to condemn inflation as a form of theft. But its responsibilities extend beyond making pronouncements — the church has to pay attention to how inflation is affecting those who minister in the church. Pastors who are receiving pay “raises” of one or two percent a year are really receiving pay cuts, as inflation erodes the real value of their paycheck faster than the small nominal increase. Maybe the finances of the church require a pay cut, or perhaps the rise in value of fringe benefits like health insurance more than compensate for a small salary increase. However, we should not pretend that a small nominal increase in pay translates into a small real increase in pay.

Foreign missionaries can suffer even more, because when the inflation rate in the United States is higher than the inflation rate in the mission field, the purchasing power of their support can fall dramatically. I know a missionary to the Czech Republic whose support was effectively cut by about a fourth several years ago by the dollar’s loss in value. Missionaries are often ill-prepared for these monetary fluctuations, and their work can be seriously curtailed when their income is slashed. As I have suggested in another article for Chalcedon, it may make more sense to pay missionaries in the currency they will be using in the mission field, adjusting as well for the foreign inflation rate. For churches, this may mean occasionally increasing the missionary budget when the value of the dollar falls relative to foreign currencies, and maybe reducing the budget when the value of the dollar rises. It may require the diaconate or mission committee to pay more attention to the Wall Street Journal, but linking the budget to inflation rates at least takes the burden off the missionary family.

The Government’s Response to Inflation

When governments cause inflation, it is typical for them to try to conceal inflation’s effects. When prices go up, thanks to the central bank, the government blames businesses and slaps price controls on the economy. This was President Nixon’s approach, and if severe inflation returns, we should expect more of the same. The shortages that result — and the time people spend waiting in line — is a kind of hidden inflation. Consumers may not pay in dollars, but they do pay in lost time. Last year, when gasoline prices rose dramatically after Hurricane Katrina, some suggested that price controls would be the best government response. Thankfully, the federal government did not impose price caps, and the shortages only appeared in states that imposed their own controls (like Hawaii).

It is hard to know how to best prepare for the shortages that develop when there are price controls. Stockpiling is expensive and probably not the best response, though when certain shortages appear imminent it can make perfect sense to stockpile. (Last September, I joined many other Americans and filled up my gas tanks and two five-gallon cans as well. How was anyone to know whether price controls would appear the next day, creating massive shortages?)


Ben Bernanke, the new chairman of the Federal Reserve, faces a number of serious challenges. He recently expressed concern for the large federal deficit, in response to the projected $423 billion deficit for the fiscal year ending September 30. Bernanke has shown some consistency with the Alan Greenspan Fed’s pattern of raising interest rates lately, but some are concerned that Bernanke faces more fallout from the Greenspan days than he can handle.

Greenspan tended to supply ample new money when the market faced a crisis, and this can produce serious problems. MSN Money columnist Jim Jubak has argued that this practice encourages risky behavior. “If the Fed will bail out the market, why worry about the consequences of very risky financial behavior?”[4] Bernanke might reap the consequences, which might include rising inflation, a derivatives market crisis, and a deflating housing bubble. Rising gold prices testify to the market’s concerns about future inflation. For Christians who want to be wise stewards in a changing economic environment, taking steps to avoid inflation seems advisable.

[1] As a disclaimer, I am not making financial recommendations in this article, but am merely providing information and my own opinions. Please invest at your own risk.

[2] Ludwig von Mises, Economic Policy: Thoughts for Today and Tomorrow, 2nd ed. (Irvington-on-Hudson, NY: Free Market Books, 2002), 62.

[3] Ibid., 64.

  • Timothy D. Terrell

Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.

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