IN WHAT are turning out to be "the old days," a special
kind of advertisement appeared regularly in many magazines. It pictured
an attractive, gray-haired couple, attired in sports clothes, and
smiling happily. The caption said, in effect, "I retired with $250 a
month, for life". The clear implication was that, with the proper plan
for prudence and thrift, the reader could provide for a comfortable
lifetime income.
As years went by, the $250 a month became $350, and
then even higher. Obviously, the idea of a future income inadequate to
meet future expenses has little appeal. If the ad is still being run
today, it is doubtful that any monthly income figure is mentioned at
all. No one knows what it will cost to live for a month in 1985, or
1995. The price level, ten or twenty years hence, is anybody's guess.
For many people, the future has arrived. Those who have
retired from their working careers are now relying upon whatever sources
of income their previous planning provided. It is a fair guess that very
few of those who are now dependent on the fruits of their early planning
could have envisioned how little their money would buy. An income figure
which might have seemed abundant twenty years ago might today be less
than adequate.
A money income is almost essential in a modern economy.
Dreams of happy self-sufficiency on a picture-postcard farm are dreams
of the young and energetic. For almost everyone else, an income of money
is the sine qua non of survival. With enough money, it is generally
believed, people can buy what they need. Such a premise, however,
contains one fallacy, and one disquieting uncertainty. Money cannot buy
what is not produced and made available for exchange. And it is highly
uncertain how much money will be "enough." While we may have a good
grasp of current prices, no one can predict, with any degree of
assurance, what prices will prevail even one year from now, much less
ten or twenty.
Planning for a future income is seriously hampered by
one crucial fault of our money: it is not a store of value. Despite the
faith and the law which give the Dollar currency as a medium of
exchange, the Dollar has shown a pronounced tendency to lose its
purchasing power. Anyone who seriously considers, and tries to plan for
his needs for a future money income, must take that phenomenon into
account.
There is little evidence to suggest that the adequacy
of future income is a prominent concern of the majority of people. Those
who think of it at all are subject to continuing reassurance that
inflation will soon be controlled, and that prices will not rise at
previous rates. Added to the hopes and promises of a more stable price
level ahead are built-in programs for the production of future income:
Social Security, Pension Plans, and Retirement Programs. Further
opportunities for future income lie in the individual's ability to save
and invest: bank savings accounts, corporate stocks, life insurance
programs, Government bonds, real estate, and so forth. With careful
planning, and reasonable thrift, an individual can provide for a future
income in Dollars. But the nagging question remains: how many Dollars
will be enough? The problem, whether or not we prepare for it, will
arise for all those who live to see the future.
Inflation Eats the Principal
It is an obvious, but shocking, fact that, with an
inflation rate of 10%, the break-even point on a tax-free investment is
a yield of 10%! And even such a remarkable return on a municipal bond,
for example, would not provide future income; it would only offset
inflation's 10% erosion of capital.
Given the same inflation rate, a person in the 50% tax
bracket would require a yield of 20% on a Government bond, just to stay
even. If inflation rose to 15% he would need a 30% return, and would
still have no real income.
While someone in the 50% bracket may neither solicit
nor merit public sympathy, the problem he f aces is even more severe for
those in lower tax brackets. The scissors - like effect of inflation and
taxes inevitably destroys the adequacy of a money income. Planning for
the future becomes a scramble to assure the largest possible Dollar
income, in the hope that that amount will prove to be enough.
Recognizing the problem, and seeking countermeasures,
many people have tried to identify, and acquire, a store of value. They
strive to convert capital and income not currently essential for
survival into some thing which will at least retain its value into the
future. A list of things considered by some to be stores of value would
include rare stamps, rare art works, rare porcelain pieces, rare
firearms, rare books, rare coins, and rare metals.
Yet, even those who have the means and the inclination
to acquire rare collectibles must do so with considerable reluctance.
Aside from the downside risks involved, such "investments" have many
drawbacks. A rare stamp, or painting, or book can never yield an income.
Nor can it, with any certainty, appreciate in value. What is usually
construed as appreciation is most often only the reflection of money's
reduced purchasing power. While a calf or a lamb should appreciate in
value as it matures, a rare coin or rare metal remains precisely what it
always was.
Perhaps equally regrettable to some who seek the
shelter of stores of value is the non-productive deployment of assets. A
rare and valuable painting represents, to some, capital which might
under more favorable circumstances be employed in enhancing the
productivity of an expanding and successful enterprise. The argument may
not hold water, but the feeling may be there, nonetheless. Unfortunately
for the general welfare, those who have proven their ability to
contribute to productivity through successful investment may be the very
ones whose attention is diverted to an emphasis on stores of value.
Inflation, coupled with taxation, diminishes the incentive to engage in
customary forms of investment.
One can only imagine with horror the devastating impact
upon our entire economy if a substantial number of traditional investors
were to divert their assets into what they considered superior stores of
value. Yet, the ravages of inflation upon the real return available
through traditional forms of investment tend to direct attention to
stores of value. Considerations of future income are of increasing
urgency in a period of anticipated inflation. When no traditional form
of investment can yield a real income after inflation and taxes, prudent
people will look for a way to preserve capital. They will seek merely a
store of value; some thing that will hopefully provide the equivalent of
a future income.
A Better Store of Value
Every citizen has a stake in securing future income.
The question of how many Dollars will be needed to assure an adequate
standard of living in the future is not one to be left for future
consideration; it is of vital importance now, when plans can be made,
and when suitable action can be taken. Hope, or even confidence, that
"things will work out" are an unreliable hedge against an uncertain
future value of money.
What are becoming, in a restricted sense, popular forms
of a store of value are largely beyond the experience, if not the means,
of the public at large. Few people could distinguish between the genuine
and the counterfeit. What is sorely needed, by everyone who will require
future income, is an ideal store of value, equally available to all.
Fortunately, the creation of an ideal store of value is within the
capabilities of an informed and active electorate: a better money.
Historically, money has served well as a store of
value. Indeed, that characteristic has been an essential aspect of a
good money. With disappointing regularity, however, governments have
either caused or permitted money to be deprived of that characteristic.
Through either debasement of coinage or inflation through legal tender
paper currency or bank credit, money has periodically been divested of
its intrinsic or representative value. The Dollar is presently in that
condition.
For more than a generation, fashionable economic theory
has held that a money devoid of intrinsic value is not only the equal
of, but superior to money which serves as a store of value. Legal tender
and credit are defended as being "more flexible," and free of the
"tyranny" of precious metals. Despite these supposed "advantages",
however, our money continues to lose its value. As history has shown so
often in the past, an intrinsically worthless money not only reduces the
adequacy of present income, but jeopardizes the reliability of future
income. Equally serious are the inescapable attendant problems of social
and political discord.
While it would be incautious to predict the economic
future for this or any other country, it is safe to say that the future
is, at best, uncertain. Past experience of others would strongly suggest
that the best money is one which serves not only as a medium of
exchange, but as a store of value. Those who are concerned about the
adequacy of future income might best prepare for that future by asking
the Government to restore the value of money.
At the time of the original publication, Mr. McAdoo
was an investment advisor residing in Nevada.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
January 1976, Vol. 26, No.1.
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