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Nothing is changeless but change; and the nature of change is
frequently unpredictable.
People, by consequence, must live with a sizable amount of

Over the years, people have been uncertain in greater or

less degree as to where their next meal is coming from, whether or not
they will have a job tomorrow, whether they will be able to afford a
vacation, how they will be able to pay their medical bills, and what
they will live on after they retire.

People spend a good part of their

lives trying to answer these questions; these and a host of other doubts
and speculations color their actions.
Faced with the uncertainties of economic change, people have
understandably tried to protect themselves.
quest for economic security.

There has been a never-ending

This quest, as this group knows, has taken

the form of trying to eliminate or avoid or dissipate the risks of loss
that arise from unpredictable change.
Inflation since World War II introduced a persistent uncertainty
into our economic lives - uncertainty as to the future value of the dollar.
This uncertainty has generated a new quest for security.


many of the measures developed to protect against inflation are economically
and socially destructive; moreover, they are likely to be self-defeating.
Before I explain why this is so, permit me to review with you the
general ways by which we protect ourselves from possible economic loss.
These are methods that have evolved and survived over the years.

*An address by Karl R. Bopp before the First National Seminar of the
Association of Chartered Life Underwriters, University of Pennsylvania,
Philadelphia, Pa., on September 21, 1959. (The paper was read by David
P. Eastburn. Mr. Bopp was called to Washington.)


Frequently we prepare for potential adversity simply by setting
aside something from our weekly pay checks - by saving.

Saving has

traditionally been a method of preparing for the proverbial rainy day which
our pessimistic souls advise

us is inevitable.

Sometimes we can shift a risk to another individual.

Our market

economy has given rise to the professional speculator who will assume
risks on the belief that over a period of time his gains will exceed his
losses by a significant amount.
speculators of this kind.

Dealers in commodity futures are frequently

These professionals often relieve businessmen

of heavy and undesired risk burdens associated with market fluctuations.
Often we can dissipate risks of loss and thereby reduce them
by shifting them to a group.

Private insurance is a prime example.

It is

part of our institutional technology and enables the more efficient opera­
tion of business.
There axe, of course, many risks that are not insurable by private

Perhaps the odds cannot be determined; or perhaps when losses

come about, they are incurred by large numbers of people simultaneously.
The losses of income and jobs during a depression axe not insurable by
private companies.

But to a large extent the Federal Government, by its

constitutional authority to tax and regulate interstate commerce and through
methods familiar to all of us, has been able to reduce the risks borne by
individuals and to promote economic security for the unemployed, disabled,
and the aged.


Finally, I should like to mention one more method of handling
risks - that is, minimizing the hazard itself.

Speed limits on highways

and the guards in the Federal Reserve Bank of Philadelphia serve the same
general purpose - that of minimizing risks.

Public policies to promote

full employment and price stability are controls designed to reduce the
risk of loss that otherwise would have to be carried by individuals.
Now, these methods of handling risks and the losses associated
with them have, by and large and in moderation, proved to be beneficial.
Over the years the quest for security which has generated these methods has
benefited, for the most part, not only the individual but society as well.
Risk - as you in the field of insurance have impressed upon all
of us - represents a cost of doing business; the elimination or reduction
of risk decreases the costs and, in a competitive economic system, the
prices of goods and services.

Insurance, speculation, and controls to

minimize hazards contribute to this end.
Moreover, many of the ways in which risks are handled have them­
selves contributed significantly to the financing of economic growth.


savings of small savers have been aggregated into large sums by financial
institutions and invested in expanding enterprise.

The same is true of

insurance and pension funds paid for by millions of individuals.


avoidance has promoted capital accumulation.
Finally, the quest for security has given impetus to analysis of
social and economic conditions that, in turn, has permitted us better to
regulate and stabilize the operations of the free enterprise system without interfering with its essential nature.

Since the end of the war, the American economy has on the whole
acquitted itself rather well.

Our gross national product in real terms has

increased about i- per cent, or more than 3 Pe* cent a year.


has been relatively low, averaging about 1 per cent.
We have thus far won at least three battles over mass unemployment
and depression.

Our economy has dr>wn a remarkable resiliency in adjusting

to new conditions.

And today we are on the crest of another upswing in

business conditions that has already generated record prosperity.
Our chief shortcoming since World War II has been the erosion in
the value of money.

Our price level today is about 30 per cent higher than

it was in 19^7 *
Experience with a rising price level since World War II has led
individuals and groups to adopt certain methods to avoid the inherent risks.
Many of these methods, as I have mentioned, are undesirable and I think
they will prove to be abortive.
When people try to protect themselves against the risk of loss
they, understandably, take what they believe the best course available.


the case of inflation, there are some severe limitations on what people
can do.
It is not really possible for the individual to save enough to
compensate for inflationary losses.

Nor does he have any real incentive to

The value of his savings declines as inflation proceeds.

There is,

as we all know, an incentive not to save.
Uor is the risk involved in inflation privately insurable - no
more so than the risk involved in depression.


Nor can all the potential victims of inflation look with much
hope to the Government for benefit payments.
The individual cannot protect himself against the economic
devastation of a rising price level in any of the above ways.

The only

method the individual has to fall back upon - since he cannot exert
significant control over the inflationary process - is to try to shift
the risk to someone else.
Shifting the inflationary risk in our economy can take several

Let’s examine them carefully.
The classical way to shift the risk of loss associated with

inflation is to shift out of that asset which threatens to decline in
value into assets that don’

Individuals tend, under inflationary

pressures, to shift out of money into goods, common stock, and any other
asset they feel will maintain or increase its value.
If I am afraid that the dollar I possess will be worth less next
month than it is today, I have a real incentive to make next month's pur­
chases this month.

If the rest of you feel and act the same way I do,

prices are certain to rise - not next month but this month, and by more
than you and I originally expected.
Such a flight from money to goods has not yet occurred in the
United States.

But it is, nevertheless, a distinct possibility.

countries have had inflationary responses of this sort.


And such a response

may well come p,bout in the United States if we permit our inflationary record
to accumulate depth.


There has developed in recent years a rather popular notion as to
"how to beat the inflation."

Individuals and organizations seem to have

increasingly come to the conclusion that investment in common stocks
represents a good inflation hedge.

Organizations and individuals with

large amounts of investable funds have been tempted to purchase equities
by the prospects of inflation on the one hand and the rapid increase in
stock values on the other.
As I have mentioned elsewhere, it is primarily the earnings of
corporations that give value to their stock.

Of course it is not past but

prospective earnings that the investor is concerned with.

Now, the earnings

of corporations have been increasing over the past 15 years, but it is
interesting to note that corporate profits after taxes are today a smaller
fraction of gross national product than they were 30 years ago.

How can

we be sure what their relative importance will be 30 years from now?


can we be sure that they will keep pace with increases in the general price
level, and thereby provide a sound basis for rising stock values that pre­
serve real incomes?
Even if earnings do expand rapidly, demand for equities may still
force up the so-called price-earnings ratio, or the number of dollars an
investor pays for one dollar of earnings.

As more and more investors attempt

to hedge against inflation by purchasing equities - as fewer people are
willing to hold money or fixed-income obligations for any length of time the price-earnings ratio will rise still more.

If this persists, is it not

likely that a stage will come when neither actual nor hoped-for returns on
the investment will be sufficient to offset the decline in the value of the


dollar that they anticipate?

When this stage is reached the only reason

people have to invest in equities is the hope that stock prices will rise
still further.

For a time they may.

Eventually, however, the idea that

speculators are merely fooling one another is likely to take hold.


other words, there will be few people left willing to assume the risk
that stock prices will continue to rise.

When this occurs, at the very

least we can expect a significant downward readjustment in stock values.
Investment in equities has much to commend it.

Is has made

possible much of our phenomenal, industrial and commercial growth.


have a place in the portfolios of the- individuals and organizations.
But we mustn't close our eyes to the danger.
is not a hedge of which all can avail themselves.

The stock market

Some must accept the

risk of holding money, and bonds, and of real income deterioration if others
are to benefit by stock market investment.
Some, of course, may accept the risk.
who "suffer from inertia or ignorance"?

What about the group of savers

"Must all skilled artisans and

theoretical physicists," Robert C. Sprague, Chairman of the Board of the
Federal Reserve Bank of Boston, has asked, "be forced to hire investment
advisers or stock market operators (in an effort) to maintain their

Can we, in good faith, permit such a condition, or must all

these people be advised that bond, life insurance, and other fixed-income
investments are of limited value when prices are rising?
Nor can we close our eyes to the implications of acting as if
the stock market were a perfect hedge.

We have lived in a world in which

fixed.-income obligations have been considered relatively safe and equities
relatively uncertain.


Savings invested in the fixed-income obligations have

but regular returns.

Savings invested in

equities have had the opportunity to enjoy the profits of enterprise.
As the well-known English economist, Dennis H. Robertson, has stated:
"What a perversion of true principle, what a 'worst corruption of the best'
when gilt-edged and equities change hats. . . . "
Yet this is the inevitable result - in the United States, England,
and other western countries - when colleges, churches, and a host of others
climb on the equity band wagon to hedge against inflation.
Let's look at equity purchases from another point of view - that
of the demand for funds.

Many important institutions, such as governments,

schools, etc., cannot issue equitites, and yet these institutions must be

The Federal Government has already run into problems in financing

its huge debt and has found it necessary to pay more and more interest to
sell its obligations.

This is, of course, in part due to the general

shortgage of capital, w . find in any period of prosperity.

Yet we may

well ask how much of it is due to the pressures exerted by the fear of
price inflation.

We argue about paying higher interest rates today; but

if we do not, and inflation is not halted, will we not have to pay even
higher interest rates tomorrow, if Government obligations are to be sold.
Finally, some have tried to prepare for inflation by devising
schemes designed to protect their real incomes.

Devices to protect the

purchasing power of groups injured by inflation - workers, public utility
stock holders, Government bond holders, and others - have been adopted
and proposed here and in foreign countries.


I approach these schemes without enthusiasm.
unfair impact of inflation on certain groups.

I recognize the

But exemptions based upon

superior bargaining power or political influence are not the answer to

Perhaps small groups of people can be protected in this way.

But it is the public in general that needs protection.

If large numbers

of people are protected by such means, the result once an inflation gets
started is to push up costs of production and prices substantially - the
result, in other words, is an upward spiral of prices in which cost-ofliving adjustments become merely a temporary palliative for a condition they
themselves tend to aggravate.
From an ethical point of view, I believe all groups should be pro­

From an economic point of view, this type of defense against in­

flation can only be effective so long as most groups are not.
I think it is clear from what I have said that all individuals
cannot protect themselves individually from inflation.

To the extent that

they can shift the risk and the losses to others because of the inferior
bargaining power, political, influence, ignorance and inertia of others, the
others of course bear the burden.

To the extent shifting cannot take place,

because all can shift equally well, there is no protection.

Put the mere

attempt to shift promotes inflation, and this is likely to result in economic
hardships for all.
The error here is one that the individual is not likely to see, but
one which we who deal in public policy are likely to see - it is an error of

In the case of inflation, when each individual tries to obtain

security for himself, the entire society turns its fears into reality and
defeats its own ends.


The individual, then, cannot satisfactorily protect himself against

There remains, by elimination, only one way to handle the problem

effectively - by reducing or eliminating the hazard itself.
Looking back on the price inflation of the postwar period, I get
the feeling that we have been rather inflexible in our demands.

As consumers,

we have demanded more and better consumer goods and thereby encouraged higher
levels of expenditures by producers; as citizens we have required our state
and local governments persistently to increase their expenditures to accommodate
our expanding populations and our improving tastes.

As citizens we have also

sanctioned our Federal. Government continually to increase expenditures to
meet the ever-growing demands of national security and other seemingly vital
Because our economy has been operating at levels approximating full
capacity since the end of World War II, overly rapid expansion of our demands
has resulted in increases in prices as well as output.
The key to preventing inflation is to prevent demand from exceeding
our capacity to produce.

We can do this by keeping demand in check and also

by encouraging the expansion of capacity.
The Federal Government should not contribute to excessive demand
by incurring deficits during periods of prosperity.
have the highest standard of living in the world.

We in the United States
It stands to reason that

if we want our Government to produce more goods and services, we should be
willing to give up some goods and services produced by others.
Monetary restraint is never popular; but during periods of economic
expansion it is a necessity.

Some borrowing must be restrained if we are to

keep demand in bounds and the price level stable.


Let me emphasize that it is not demand we wish to keep stable, but
the price level.

One of our basic goals is to promote the economic expansion

of production, capacity, and demand.
I do not believe, however, that we can achieve this goal by permitting
the price level to rise.

Inflationary excesses in the past have typically

resulted in economic crises that have created unemployment, and other severe
hardships and which have checked economic development.

Moreover, I do not

believe there can be moderate inflation over a period of years - the devices
and schemes people invent to shift the costs of creeping inflation, inevitably
spur inflation on to a trot and a gallop.
Inflation interferes with the accomplishment of fundamental
economic objectives - growth and full employment.

In this sense, preventing

inflation is a means to an end.
Preventing inflation is also an end in itself.

I do not believe

that a majority of us wish to live in the kind of society where everyone is
continually trying to shift the risk and the loss burden of rising prices to
everyone else - where, through force and by evasion, the strongest are
successful in shifting the burden and the weakest members of society axe
compelled to carry the load.
The alternative is a society of restraint - restraint by the monetary
authority, by our Government, and above all, by all of us as individual
citizens, for the Government and the monetary authority axe ultimately
responsive to the citizenry.

I do not believe that restraint is too high

a price to pay, in the richest country in the world, for reducing the hazard
of inflation.