by Eric Englund
early 1980s, Harry E. Figgie, Jr. (the founder of Figgie International,
Inc.) became concerned that the United States’ government
was following the same destructive path that lead countries
such as Argentina, Bolivia, and Brazil into hyperinflationary
economic collapse. In the 1980s, each of these South American
countries were running massive annual deficits, were accumulating
unmanageable national debts, and each respectively had a central
bank creating money, out of thin air, at a reckless pace.
In looking at the frighteningly similar profligate behavior,
on the part of the U.S. Government, Mr. Figgie became concerned
that hyperinflation could emerge in the United States as well.
the opening paragraph, and the balance of this essay, in January
of 2004. Since then, the national
debt has grown from $6.9 trillion up to $11.4 trillion
– an increase of about 65%. Uncle Sam’s unfunded
liabilities now exceed $100 trillion. Per the Federal
Reserve’s own data, the United States’ monetary
base has skyrocketed from $735 billion, in January of
2004, to over $1.7 trillion today. To believe that the paper
tickets in my wallet, Federal Reserve Notes, will somehow
gain value over time has always struck me as absurd. In my
opinion, the stage has been set for an explosion in the prices
of everyday goods and services. Economists Robert Murphy and
Thorsten Polleit have recently written essays (linked here
and here) affirming
my trepidation. To be sure, I firmly believe tough economic
times, marred by harsh inflation, lie ahead of us.
NOW, BACK TO THE ESSAY
businessman and an entrepreneur, Harry Figgie was concerned
that his business enterprises may not survive if his management
teams were not prepared to operate under the unstable conditions
wrought by heavy inflation. Since little had been written
about managing a business under hyperinflationary conditions,
Mr. Figgie initiated a research project to find out what a
business must do to survive the ravages of inflation. So,
in his own words, here is what he decided to do:
a result, we initiated research of our own, and chose our
target South America – specifically Bolivia, Brazil and
Argentina – as the best available examples of economies
suffering high inflation rates.
put together a three-person team headed by Dr. Gerald Swanson,
a University of Arizona economist and director of the Academy
for Economic Education.
team went to South America four times over a two-year period
to study the development of inflation and its impact on
businesses, individuals and governments. They interviewed
80 leading bankers and industrialists and a considerable
number of ordinary citizens throughout Argentina, Brazil
result of this research, Dr. Swanson wrote The
Hyperinflation Survival Guide: Strategies for American Businesses;
which was first printed in 1989. The superb content of this
book can be attributed to Mr. Figgie’s foresight and to the
outstanding research and writing of Dr. Swanson. What follows
are a brief "Austrian" perspective about this book
and then specific details regarding the book’s content.
Hyperinflation Survival Guide: Strategies for American Businesses
is a book that provides sound business strategies for business
managers and entrepreneurs to implement when operating a business
under economic circumstances in which monetary calculation
becomes increasingly difficult due to a rapid decline in money’s
purchasing power. Although the term "monetary calculation"
is not found anywhere in this book, it is crucial to understand
monetary calculation is a method of thinking for a businessman.
As the extraordinary economist Ludwig von Mises explains in
his magnum opus Human
calculation is the guiding star of action under the social
system of division of labor. It is the compass of the man
embarking upon production. He calculates in order to distinguish
the remunerative lines of production from the unprofitable
ones, those of which the sovereign consumers are likely
to approve from those which they are likely to disapprove.
Every single step of entrepreneurial activities is subject
to scrutiny by monetary calculation. The premeditation of
planned action becomes commercial precalculation of expected
costs and expected proceeds. The retrospective establishment
of the outcome of past action becomes accounting of profit
businessmen use to determine the success or failure of past
actions is a financial statement – which includes a balance
sheet and an income statement. It is important to understand
that all entries in the balance sheet and income statement
are expressed in terms of money. Under conditions in which
money’s purchasing power is stable, a businessman can directly
correlate whether his company’s capital base (i.e. the company’s
net worth as reflected in the balance sheet) is expanding
or contracting depending upon if the company turned a profit
or made a loss. Such monetary calculation assists a businessman
in deciding to maintain or change a business plan based upon
satisfying the ever-sovereign consumer.
happens to monetary calculation under conditions of inflation?
As Murray N. Rothbard explains in his fabulous book Man,
Economy, and State, businessmen may be "tricked"
into making poor decisions thus causing consumption of capital:
inflationary process inherently yields a purchasing-power
profit to the businessman, since he purchases factors and
sells them at a later time when all prices are higher. The
businessman may thus keep abreast of the price increases
(we are exempting from variations in price increases the
terms-of-trade component), neither losing nor gaining from
the inflation. But business accounting is traditionally
geared to a world where the value of the monetary unit is
stable. Capital goods purchased are entered in the asset
column "at cost," i.e., at the price paid for
them. When the firm later sells the product, the extra inflationary
gain is not really a gain at all; for it must be absorbed
in purchasing the replaced capital good at a higher price.
Inflation leads him to believe that he has gained extra
profits when he is just able to replace capital. Hence,
he will undoubtedly be tempted to consume out of these profits
and thereby unwittingly consume capital as well. Thus, inflation
tends at once to repress saving-investment and to cause
consumption of capital.
inflation can lead to entrepreneurial error and, thus, to
FROM THE BOOK
Hyperinflation Survival Guide provides excellent strategies
for businessmen to adopt and act upon should hyperinflation
emerge. Although this book is geared more toward owners/managers
of manufacturing companies, operating under inflationary conditions,
any businessman (and any individual) can garner sound advice
from this insightful book. The four chapters in this book
cover financial management, marketing strategies, manufacturing
decisions, and industrial relations.
one of this book – titled "Financial Management"
– can be summed up as follows: "Cash management is the
difference between profits and bankruptcy. The single fact
that influences every decision is: Time eats money."
The following list highlights a few of the important financial-management
issues covered in this chapter:
absolutely certain your managers understand the time value
allow your cash to remain idle.
cash management can provide a major source of profit, while
poor cash management can destroy a company in a matter of
prepared to convert dollars into a stable foreign currency.
aware that the stock market may become an uncertain source
prepared to maintain more than one set of books.
valuation should be based on NIFO (next in first out) rather
an appropriate inflationary adjustment for capital replacement
or the value of your capital will disappear.
two is titled "Marketing Strategies." Pertaining
to the "4Ps" of marketing (price, promotion, place,
and product), this book concentrates on pricing and product.
government intervention and regulation inevitably become more
oppressive during bouts of high inflation, it is important
for businesses to sell products with the largest profit margins.
As Dr. Swanson points out:
of life in a hyperinflationary economy is the disappearance
of products whose controlled price does not cover the cost
of production. In Brazil, for example, dairy products such
as milk, eggs and cheese became unavailable when the regulated
price was set below their production cost.
in the United States, high volume products with extensive
competition – characteristic of many consumer products –
may be the first to disappear should inflation begin to
rise, because they tend to have low profit margins.
respect to pricing, the book conveys that pricing "…policies
undergo a dramatic transformation during hyperinflation. Fluid
pricing becomes an absolute necessity, and prices must change
frequently and sharply to accurately reflect the impact of
inflation. True costs become increasingly difficult to track,
even as the need to do so grows more important."
it is hard to imagine products disappearing from the marketplace
let alone having to cope with hyperinflation. Just imagine
the nightmare Bolivian businessmen went through, in 1985,
when inflation hit 50,000% annualized. Upward price adjustments
would have to be made by the hour. These upward adjustments
accumulate to the point of seeming absurd. For example, under
50,000% inflation, a $25 necktie would cost $12,525 one year
3 (titled "Manufacturing Decisions"), Dr. Swanson
emphasizes that management must be flexible and innovative.
Corporate survival, furthermore, may require radical decisions.
For example, during "…periods of high inflation, manufacturing
operations are particularly hard hit. In fact, in some extreme
cases in South America, corporate attempts to survive have
led some companies to shut down their manufacturing operations
in favor of speculation, which can be a more profitable use
of capital." The cold reality here is that the rates
of return on speculating in commodities and currencies, under
conditions of severe inflation, may exceed the rates of return
on capital projects. Correspondingly, this means laborers
will lose their jobs.
important points, covered in this chapter, include the following:
that your purchasing department will assume a more important
role in the long-run survival of your firm.
aware that hyperinflation creates increased opportunities
cost control requires that you develop methods for estimating
your internal rate of inflation.
difficulty in maintaining capital expenditure programs.
4 of this book is titled "Industrial Relations."
It could just as easily be titled "Employee Relations."
As Dr. Swanson and his team discovered in South America, the
impact of hyperinflation on wages and benefits was stunning.
For instance, "…Brazilian employees who were not given
raises in the first three months of 1988 watched their buying
power plummet 64 percent. Even worse was the spring of 1985,
when Bolivians saw their real income drop 90 percent in only
three months." Such bouts of inflation become especially
difficult for businessmen to cope with as inflation is inflicted
upon society by a government’s reckless monetary creation
(out of thin air) while, in turn, government regulations –
for the alleged purpose of controlling inflation – prevent
employers from granting raises to employees. Employers, unfortunately,
take the brunt of the blame for the declining living standards
(that employees experience during bouts of severe inflation)
when government is the real culprit.
of living decline, Dr. Swanson found that "…individuals
tend to seek the support of a group to represent them in order
to survive constantly rising prices." He further articulated:
is certainly true in Bolivia, Brazil and Argentina, where
the union movement is very strong in both the public and
private sectors. Some South American business leaders go
so far as to complain that union leaders actually use hyperinflation
to their own advantage, recognizing it as a major source
of their power. Because wages continually lag behind rising
prices during hyperinflation, there is a near-constant need
for negotiations, as union members press their leaders to
push for higher wages.
notable labor-relations issues covered in this book are summarized
relations staffs should be prepared to face stronger unions
and virtually continuous negotiations.
is a high likelihood that wages will at some point be frozen,
and labor will apply pressure on management to circumvent
to shorten pay periods.
morale problems among middle management, which often bears
the greatest burden during hyperinflation.
the type of index you will use for cost-of-living adjustments,
and be prepared to make adjustments often.
benefits must be adjusted to reflect inflation or they can
book’s appendix provides a nice bonus as it covers the disastrous
results of the wage and price controls President Nixon implemented
to "combat" the United States’ 4.7% inflation rate
and its 5.8% unemployment rate. Two of the most notable actions
President Nixon undertook on August 15, 1971 included an immediate
90-day freeze on wages, prices, salaries and rents and of
course, the reprehensible floating of the dollar; by severing
the last vestige of the dollar’s linkage to gold. For a president
to assert that severing the dollar’s link to gold will help
reduce inflation completely defies logic. In reality, what
President Nixon "accomplished" was to enable the
federal government to create money without limit. How such
an irresponsible action can be construed to be anti-inflationary
is a sad testimony to the economic illiteracy of the American
the point, about economic illiteracy, here is an excerpt from
this book’s appendix:
reaction to Nixon’s proposal was overwhelmingly positive.
Leaders of the nation’s corporate giants, believing that
some sort of action was overdue, responded with general
enthusiasm, and opinion polls showed broad support among
markets reacted with unprecedented gains, as trading on
the New York Stock Exchange hit a record 31.72 million shares,
and the Dow Jones Industrial Average set a one-day record
by climbing 33 points. Bond prices also rose sharply in
President Nixon implemented four phases of wage and price
controls, with the final phase ending in April of 1974; and
the results were predictably terrible. There were, for example,
shortages of beef and textiles. Prices rose, moreover, at
an average annual rate of 6 percent while the controls were
in place, yet in the eight months following the end of Phase
IV, prices climbed at an annualized rate of over 12 percent.
books published regarding hyperinflation, this may be the
only one that provides effective strategies for operating
a business under conditions of a rapidly depreciating currency.
To reiterate, The
Hyperinflation Survival Guide: Strategies for American Businesses
was written by Dr. Gerald Swanson – an associate professor
of economics at the University of Arizona. Harry E. Figgie,
Jr. sponsored the research and the original production of
this book. As it was originally printed in 1989, it was way
ahead of its time. This, however, does not change the fact
that Dr. Swanson’s book will prove to be an excellent resource
for businessmen and individuals once the Federal Reserve's
destruction of the U.S. dollar enters its terminal stage.
close with a little bit of sobering humor:
are 10^11 stars in the galaxy. That used to be a huge number.
But it's only a hundred billion. It's less than the national
deficit! We used to call them astronomical numbers. Now
we should call them economical numbers. ~
Richard Feynman (1918–1988)