Beating Inflation: A Playboy Primer

common-sense suggestions for anyone who would like to see returns on his investments grow even as the value of the dollar diminishes

David Lloyd George, British Prime Minister during the First World War, once regaled Parliament with the tale of two Prussian brothers who, at the outset of the great German inflation of the 1920s, inherited equal shares of a small estate. The more prudent of the two, according to Lloyd George, invested his share in a portfolio of gilt-edged securities carefully selected by his banker. The other brother impulsively purchased a cellarful of choice wines. During the ensuing inflation, the cautious brother fretted for six years while the value of his investments diminished steadily. His brother spent the same six years cheerfully sozzled in his wine cellar. Long before the inflationary spiral had spent itself, the wines--what was left of them--were worth many times the blue-chip investments. And when the inflationary dust finally cleared, the tippling brother compounded the affront by selling his empty bottles for considerably more than the value of his brother's securities.

While the German inflationary experience was so preposterous (at one point, it took 42 billion German marks to purchase one U.S. cent--and half a trillion marks to mail a letter) that it might not offer many lessons to Americans today, the Prime Minister's story does underscore the most unusual aspect of inflation. Uniquely among the facts of economic life, inflation seems to penalize thrift and reward profligacy. It favors the borrower over the lender, the spender over the saver.

Inflation, needless to say, is a worrisome increase in prices; or, put another way, a worrisome decrease in the purchasing power of money. (The modifier "worrisome" is necessary because most everyone nowadays acknowledges that prices gradually go up as a part of the natural order of things; only when prices increase with disturbing speed do we begin to show some concern, and only at that point do we use the word "inflation.")

For most of us, the rampant inflation of two decades ago is at best a dim memory. The United States dollar lost almost ten percent of its purchasing power between the first and last days of 1941; this shrunken dollar lost an additional 15 percent in 1946, and this smaller dollar gave up seven percent more as late as 1950. But those who began accumulating a stake only in the past 10 or 15 years have never, until now, been forced to include the prospect of inflation in their economic calculus. Between 1958 and 1965, the value of the dollar declined at an average rate of only 1.35 percent a year. Then, in 1966, it declined 3.28 (continued on page 104) Beating Inflation(continued from page 101) percent. Final returns are not yet in, but in 1967 the decline was probably around four percent. Today, any investor who fails to take inflation into account is either foolhardy or stupid, perhaps both. Seasoned investors will reappraise their holdings, and the tyro about to make his first move should be aware that if inflation persists--as seems likely--then the rules of the investing game will change.

A rapid decrease in the purchasing power of money obviously favors debtors (who can pay off their bills with cheaper money) at the expense of creditors (who receive less value than they lent). For this reason, most of us, in our heart of hearts, have ambivalent feelings about inflation. Publicly we acknowledge it as a greater or lesser evil, while privately we tend to underestimate its effect on our personal lives. Publicly we decry inflation as an insidious tax on the unwary, the scourge of widows and pensioners; but privately our disapproval is less than total, because we are not widows, pensioners nor unwary and, more important, because we feel that inflation will somehow increase the value of whatever desirable things we own--from the mightiest Mercedes down to the silver dollars in our top dresser drawer. It is quite human to suspect that one's own desirable things are superior to others', so in this respect many people feel that inflation might even give them a profit. And in their fondness for the underdog, some would add their covert blessings to any events that penalize savers and reward borrowers. After all, most of us owe money in one way or another. If the prospect of inflation arms us with a valid rationalization for going into debt, so much the better.

Besides borrowing, which will be discussed in greater detail below, there are a number of ways to hedge against the prospect of inflation. Among the best known are common stocks, mutual funds, convertible bonds, real estate and precious metals such as gold and silver. Less well known are gems, art objects, foreign currencies, antiques and rare stamps and coins. As will be seen, each has its strengths--and its weaknesses. A major weakness lies in the uncertainty of inflation itself. Even John Maynard Keynes, the father of modern economics--and, to a certain extent, of modern inflation--admitted that predicting inflation requires near-psychic powers. Inflation, he once observed, "engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Ultimately, the prospective hedger must hope he is that one man. His first decision will be whether to hedge against inflation at all. That done, he must determine how to do it.

One thing to perceive at the very outset is that inflation cannot magically increase the quantity or the real value of our nation's goods. It can only rearrange the ownership of the finite number of things that already exist. (Game theorists call this a zero-sum game; for each person who profits from inflation, others must lose a similar amount.) A nation cannot profit from inflation--though it can suffer real net losses. In Germany in the 1920s, for instance, while the value of the mark was plummeting to everzanier depths, most Germans remained stubbornly convinced that rising prices were caused not by a deterioration in the value of the mark but by a war-induced scarcity of goods--while foreigners with hard currencies were buying all the German products they could, at what amounted to bargain-basement prices. Ultimately, the German economy collapsed, because a large segment of the population was forced to abandon productive activity altogether, in favor of currency speculation. This steep and cumulative deterioration in money values is called runaway inflation. For the United States today, it is all but unthinkable. A massive failure of the dollar would have such world-wide repercussions that virtually no one, no matter how well hedged, would emerge a winner.

While an attempt to hedge against such a total breakdown of the dollar would verge on insanity, there are a good many Americans--many of them quite sane, some of them apparently intelligent and more than a few of them undeniably wealthy--who are quietly doing just this. Dalliance of this nature is forgivable among the suitably rich, since if they weren't busy preserving American capitalism by illegally stashing gold bars in Beirut and Curaçao, they might be plotting worse tricks. These people purport to be hedging against the instant inflation that would occur if ever the dollar were devalued--as recently happened to the British pound. Devaluation of the dollar will be examined more thoroughly, but it's safe to say outright that it's not on the immediate horizon. Virtually all Americans concerned about inflation--from the modestly well off to the quite well to do--would more profitably arm themselves against creeping inflation: the gradual, almost unseen erosion of the value of the dollar that is the form inflation seems to take in the United States. Ideally, investment defenses are so constructed that, should the current four-percent rate of inflation prove a statistical aberration, hedgers would still emerge with a profit.

Most of the inflationary experiences in the industrialized world in this century seem to point to one general rule: The best hedges against inflation--no matter what the hedging vehicle--are those that are placed early, before it dawns on the public that inflation is actually taking place. This is because inflation feeds on itself. As soon as people become convinced that it is a fact, they try to evade it. They first spend their savings and then go into debt, all the while bidding up prices on stocks, commodities, real estate, art objects--anything they can get their hands on. By the time this self-defeating circle of events begins to take shape, the sharpest hedgers are already well entrenched.

Successful inflation hedging hinges on your income-tax bracket. Even if your income is relatively low, the tricky combination of inflation and the income tax is not easy to beat. Consider an extreme example: a single man with a very modest basic income--between $6000 and $8000 a year. He pays Uncle Sam exactly 25 cents of each additional dollar he earns. At the current inflation rate of four percent, even this lowly chap cannot make money in a bank savings account. Federally insured banks can't pay over four percent interest. A savings-and-loan account, which can pay up to 5-1/4 percent, will still prove a loser. For example: Say this fellow deposits $100 at 5-1/4 percent a year. He receives $5.25 interest, but one fourth of that, $1.31, goes to Uncle Sam. The remaining $3.94 does not match the $4 in purchasing power that his $100 lost while it was on deposit. He didn't lose much, to be sure, but the idea is not to lose at all. The idea is to win.

It may surprise some thrifty types to realize that, unless they receive a very low income indeed, they are actually losing money on their savings. But this is just one trick from inflation's bottomless bag. Today's high interest rates may seem seductive to the uninitiated, but they are actually guideposts telling the cognoscenti just how sharply the dollar is declining.

When the money market sees that dollars are losing their value, interest rates will rise to the occasion. (The interest rate on bank savings accounts is not a proper index, because banks are prevented by law from hiking their rates beyond current levels.) Perceiving the prospect of increasing inflation, shrewd investors would like to borrow money--but they can't find many lenders. The would-be borrower feels--quite rightly--that he could profit handsomely from inflation, ultimately repaying his loan in cheaper dollars. And the reluctant lender feels--with equal justification--that the money he'll receive will be worth a good bit less than what he lent. No matter how high the interest rates, all fixed-income investments--from bank accounts to high-priced corporate bonds--put the investor in the position of a lender. This is a role to avoid in times of inflation.

Fixed-income investments such as corporate bonds now offer returns over seven percent. Many big-time Government bonds pay well over five percent. But neither has been deluged with buyers. At the current rate of inflation, even the best of fixed-income securities are simply not an attractive inflation hedge, and most of them get uglier as the investor's tax bracket--or the rate of inflation--increases. Common stocks, on the other hand, become ever more attractive. For one thing, they offer the tax shelter of capital-gains treatment--a maximum tax of 25 percent on profits from investments held over six months. This subtlety would be lost on the poor saver just mentioned; but for anyone in a higher tax bracket, the tax shelter of capital gains treatment can be crucially important. Partially for this reason, stocks in the past year or so have been drawing investors in unprecedented numbers--even in the face of unimpressive corporate profits and less-than-glowing economic prospects. The tax advantage also explains, in part, why the stock-market action has been largely confined to "growth" stocks--those offering the promise, no matter how remote, of substantial capital gains. Proven money-makers, like A.T. & T., no matter how good their records, have little chance of sudden improvement. They pay dividends, sure; but dividends are taxed as income. Only growth gets the capital-gains discount.

For the ordinary investor--the man who has the money but lacks the time or the expertise to explore more devious routes--common industrial stocks are certainly the best hedge against inflation. For one thing, buying or selling stocks is no more complicated than calling your broker. Their near-instant salability ("liquidity," in financial jargon) gives them a special appeal to those who might be forced by unpredictable circumstances--marriage, a job change or what not--to make a quick sale.

Precisely because stocks are such good hedges against inflation, the mere prospect of inflation creates additional demand for them, demand that by itself can spark price increases. If inflation persists long enough, it can force into the market hordes of small investors who really have no business being there and who would probably prefer to remain on the side lines. Even more significant, persistent inflation can also cause a mass exodus from fixed-income securities (corporate, municipal and Government bonds, for instance), the traditional repositories of large sums of conservative money. Banks are already putting greater emphasis on common-stock holdings in their trust funds; life-insurance companies are experimenting with annuities backed by common-stock holdings; pension funds, many of them newly liberated from restrictive laws, are buying stocks at a rate of some three billion dollars a year; even as staid an institution as Yale University now has more than 70 percent of its colossal $500,000,000 endowment invested in common stocks. The demand for stocks, already at a historic peak, will grow even greater should inflation prolong its visit.

To the extent that it represents part ownership in the physical assets of a going company, literally any stock qualifies as a hedge against inflation. Since 1941, when inflation first became a real problem in modern America, common-stock dividend increases alone have consistently bested the erosion of the dollar--not counting the enormous capital gains that have also piled up. For instance, anyone who in 1941 invested $1000 in the 30 blue-chip industrial stocks that comprise the Dow-Jones Industrial Average would this year receive close to $300 in dividends; over the years, he would already have received more than twice his original investment in dividends; and even if he never reinvested a penny of them, the $1000 he started with would still have grown to about $7500. The market as a whole did even better than the blue chips; the same $1000, spread evenly among the 500 stocks that comprise Standard & Poor's broad market index, would have grown to around $9000 today.

While in this sense all stocks seem good hedges against inflation, some are obviously better than others. It takes only common sense and a little thought to distinguish the good ones from the bad ones. In times of moderately steep inflation, for instance, an investor would be well hedged holding shares in, say, a motel chain, which consists largely of fixed assets, owns desirable, productive real estate, provides a service that will remain essential as long as the economy doesn't collapse, runs on a relatively low overhead and can quickly and painlessly raise its rates to keep pace with eroding currency and rising costs. The investor would be less well hedged holding shares in, say, a mortgage-loan company, which is in the unfortunate position of being a lender--on a disturbingly large scale.

Not many people realize that inflation favors stocks for the same reason it favors debtors. This is because common stockholders are the nation's biggest debtor group. Altogether, they own American industry, which, in toto, boasts a bonded debt approximating 125 billion dollars. As an inflation hedge, the indebtedness represented by each share of common stock is just as important as the solid assets involved. Typically, the corporations have already converted their borrowed money into productive assets--which is precisely the right thing to do in the face of inflation, since the real value of the debt will diminish while the value of the assets goes up. Investors buying stocks to hedge against inflation should always keep the debt factor in mind. Generally speaking, when the dollar is declining, the company that owes the most grows the most. Several investment-information services--Moody's, for instance, or Standard & Poor's--provide detailed figures on the debt structure of all major companies. Every respectable brokerage house subscribes to these services, and the information is available to anyone who walks in and asks for it.

Unfortunately, the companies that owe the most are usually the biggest. Bigness attracts the Government eye and often finds itself regulated. The biggest of all corporations--in terms of both assets and debt--is A.T. & T. Especially at today's prices, A.T. & T. shares would be an ideal hedging vehicle, if the company were free to raise its rates to keep pace with the cost of living. But telephone rate changes involve such a tortuous and time-consuming trek through the regulatory labyrinth that they could never keep pace with a rapid erosion of the dollar. All public utilities and railroads, to the extent that they are regulated, are unattractive inflation hedges. Since 1941, dividend increases in both have barely kept pace with inflation. Railroads have done slightly better than utilities; but the performance of both pales beside that of industrial stocks, which have good cause to be grateful for their freedom to raise prices. Those few industries whose prices are regulated--airlines, for instance--can't be certain to prosper from inflation.

Commercial banks, which wouldn't on the surface appear to benefit from currency deterioration, actually stand to do fairly well--especially if they're not tied down to long-term loans at unfavorable interest rates. This is because inflation is always accompanied by a sharp increase in money itself. More money means more transactions and more transactions mean higher profits for banks.

The traditional common-stock hedges against inflation are shares representing tangible wealth in the ground: oil companies, mining companies, lumber companies and real-estate investment firms. Investors who favor these traditional hedges are mostly older types who were active during earlier inflationary periods when these shares performed particularly well. The inflationary experiences of other nations during this century confirm that shares representing what economists call "primary products"--land and that which grows on it or is extracted from it--have proved the very best hedges against inflation.

However, younger investors, who perhaps wisely acknowledge that the events of the past need not provide infallible clues for predicting the future, tend to discount the value of earth assets per se. They view technological skill, represented (continued on page 150) Beating Inflation (continued from page 106)in such growth stocks as IBM, Polaroid and Xerox, as a tangible asset of equal or greater importance. The profit prospects of future-oriented companies like these, the reasoning goes, are almost limitless--not only for what they are currently producing but for discoveries they have yet to make; in the event of inflation, these companies simply adjust their prices and continue to grow. Considering past performance, it is difficult to fault this thinking. There is also some precedent: In the inflationary period that followed World War One, among the best performers were the growth industries of that era--autos, aircraft and chemicals. But as old-timers who once invested in such promising companies as Auburn Motors can attest, growth stocks may not keep growing indefinitely. And if the price level of today's growth shares continues to reflect unmade discoveries, declines will be inevitable should these discoveries prove undiscoverable. There's also something about bigness itself--perhaps the bureaucratic process--that is often hostile to major scientific breakthroughs. The vast resources of the Eastman Kodak Company--one of the most research-minded of all corporations--were incapable of producing either the Polaroid camera (which Edwin Land invented while he was an undergraduate at Harvard) or the Xerox process (which was devised by a patent attorney who was annoyed with the difficulties involved in copying sketches).

Yet, Kodak did produce the Instamatic camera--an important technological breakthrough. And today's fast-changing world does seem to favor technology over simple assets in the ground. A limitless deposit of anthracite coal, for instance, is hardly a good hedge against inflation if its use is rendered obsolete by oil or atomic power. As long as technology continues to provide us with new and desirable items, the unknown will continue to be more glamorous than the known.

A very reasonable compromise would be to place one investment foot in each camp; and, fortunately, there are a number of companies combining technological prowess with vast holdings of natural resources. Their innovative skill can be counted on to provide them with evergrowing product outlets--and even if it doesn't, they can always fall back on their assets. A few examples, all listed on the New York Stock Exchange, are Standard Oil of New Jersey, Kerr-McGee Corporation (which also dabbles in uranium), International Paper and GeorgiaPacific (both own huge timber reserves), American Metal Climax (the world's largest producer of molybdenum, essential in manufacturing carbon steel), Phillips Petroleum (also big in synthetics) and Standard Oil of California. None of these companies has the growth potential of an IBM or a Xerox; but all can be expected to keep abreast of change, which, considering their other virtues, is quite enough for the inflation hedger.

Most of these companies, especially the oils, have the added advantage of labor costs that are relatively low compared with sales. The wage-earning public is uniquely sensitive to inflationary pressures. When the purchasing power of the dollar diminishes, workers know it just as soon as economists. Workers quickly demand, and generally receive, compensatory pay increases. Firms with an unusually high ratio of labor costs to sales--those in the aerospace, airline, office-equipment, railroad, steel or telephone businesses, for example--can be expected to suffer proportionately as wage rates increase. As we have seen, airlines, railroads and telephones might suffer all the more, since they probably won't be able to raise their rates quickly enough to cover higher costs. Industries with relatively low labor costs (in addition to oil, these would include firms in distilling, drugs, food processing, gas and tobacco, to name a few) can be expected to prosper. The technology-oriented major oil companies--considering the comparatively low prices for which their shares now sell, and projecting what they stand to gain from inflation--seem just about the best common-stock hedge.

If inflation is to remain a fact for the next few years, then it might appear logical to borrow money and invest it in stocks such as oils or in whatever other good inflation hedges the investor might locate on his own. But this is really not a good policy, because inflation itself is less than a certainly and, more important, because lenders have already adjusted their interest rates to account for what they guess the near-term effects of inflation will be. You can purchase common stocks on margin (you put up 70 percent of the purchase price and your broker lends you the rest, at interest, keeping the shares as collateral), but the relatively steep interest cost makes margin purchases unadvisable for a long-term hedging commitment. Unless you have an impeccable connection with a bank willing to give you a long-term loan at a very low rate, you'd be safer confining yourself to your own cash.

Within this stricture, you ought also to spread your money around. Diversification is a time-honored investment principle and, like most time-honored principles, it deserves consideration. The idea is that a deep plunge in any one stock, no matter how well selected, might not work out. The chances of total disaster are considerably reduced if you hedge in a dozen equally well-chosen stocks. Ideally, these should represent not just different companies but different industries as well. One drawback to this is that you pay more in commissions when you buy in smaller dollar amounts--sometimes much more. Brokers' commissions are based not on your total purchase but on how much you spend in each company. Commissions on small purchases (under $100) are around six percent; at current inflation rates (heroically assuming that no other factors will affect the price of the stock you buy), it would take 18 months to regain the commission loss on such a purchase and another 18 months to cover the fees on its sale. Brokers' charges drop to around three percent for a $300 purchase and diminish irregularly from there.

Another drawback to diversification is that by spreading your money around, you miss the big pay-off that would accrue if you were lucky or prescient enough to sink all your funds into one big winner. But this is like going to Monte Carlo to ride one number for one spin. It may be exhilarating and it could be dazzlingly rewarding, but it is certainly not the course of prudence, which should dominate the emotions of a prospective inflation hedger. The man with $1000 to invest in stocks would be well advised to divide his money equally among two or three attractive companies--perhaps in the oil, food and tobacco industries. If he were to spread his cash any thinner, he would give up too much in commissions. A chap with $2500 might buy four companies in as many promising industries, and so on. As a general rule, stock transactions under $250 a shot are not advisable; the commissions are just too steep.

Mutual funds give you the chance to set up a broadly diversified portfolio without much hard thought or heartache. As almost everyone knows, a mutual fund buys shares in a wide spectrum of companies: anyone who purchases shares in the fund is actually buying a fraction of all the shares the fund owns. But the man who would use mutual funds to hedge against inflation faces some grave problems. Though in the long run a good mutual fund can provide exemplary protection from inflation, no fund is set up solely to beat the declining dollar, and none of the funds confine their investing to those companies and industries that stand to profit most from inflation. Most funds--especially the larger ones--pursue a wide variety of investment goals. They have to or they couldn't sell their shares to a wide array of investors. So even if good fortune and diligence were to unearth a fund whose holdings seemed largely devoted to inflation-hedging stocks, you would have no guarantee that the fund had any intention of keeping them for the long pull.

To the extent that all stocks are good hedges against inflation, so are all mutual funds. For the investor who has neither the patience nor the predisposition to do his own dirty work, an intelligent commitment in mutual funds might be a painless and worthwhile hedge against inflation. For the investor who likes to select his own stocks but is still realistic enough to admit the possibility of his botching the job, a partial investment in funds, augmenting his personal hedging program, would seem just as worth while.

But the independent investor who decides to buy mutual funds to cover the possibility of his own investment mistakes may change his mind when he sees what's involved in selecting a fund. Mutual funds are like orchids. To the outsider, they all look pretty much alike. But within, you'll find yourself surrounded by a profusion of genera and subgenera, species and subspecies, types and subtypes, all discussed in a language that seems to make sense only to those who speak it themselves. To attempt a comparison of the value offered by several different funds is like trying to nail jelly to the wall. The usually commendable objectivity of a stockbroker--through whom you purchase fund shares--tends to break down when he is asked to appraise or recommend a particular fund, because he has greater commission interest in some funds than in others. (This is not to fault stockbrokers but simply to relate a predictable human trait.) Privately compiled, factual comparisons of the best-known funds are regularly advertised in the financial papers, and many investment magazines (Forbes, for instance) periodically reappraise the whole industry. But even the best of these comparisons is difficult to interpret. And though there are some funds that don't charge steep commissions, the price of admission to most is quite high; 8.5 percent commissions are typical. Hedgers should scrupulously avoid any deal (usually set up through fund salesmen) committing them to buying more shares in the future. Such a purchase contract would sacrifice well-needed flexibility.

Only a few of the arcane subcategories of mutual funds deserve the special consideration of those whose primary concern is beating inflation. "Closed-end investment companies"--funds with a fixed number of shares outstanding--circumvent the commission barrier, since they neither issue new shares nor buy back old ones. The shares in these companies are traded like stocks, with normal stock-market fees. Because the market sets the price of these shares, they sometimes sell at a discount from the actual value of their holdings. Frequently, a share representing $25 in assets will sell for around $20. Such profits are illusory because the discounts remain fairly persistent, and when the time comes to sell, you might find yourself giving up a comparable amount. If you have a limitless bank roll, a relatively ambitious means of getting full asset value would be to gain control of the fund and then sell its holdings. But even short of liquidation, the closed-end investment companies selling at a discount seem to offer the best buy for hedgers who want to place some of their chips in mutual funds. The Wall Street Journal thoughtfully publishes a list of the popular closed-end funds each Monday, giving their market value, their actual asset value and the percentage difference. For those who want to avoid study altogether (never an advisable road to riches), the following six closed-end funds are all sold on the New York Stock Exchange. All have assets over $90,000,000, all have been in business since 1929 or earlier, all have at least doubled in market value in the past decade and all sell at a discount from their actual asset value: Adams Express Company, General Public Service Company, Lehman Corporation, Niagara Share Corporation, Tri-Continental Corporation and U.S. & Foreign Securities Corporation. The last two usually sell at discounts around 20 percent.

Tri-Continental is an especially interesting fund, because its holdings are mostly in real estate and high-powered stocks. As such, it is replete with what market analysts fondly call "leverage." If inflation or anything else should cause the value of its holdings to take off, the price of Tri-Continental shares themselves--since they sell at a discount from their real value--would move up even more rapidly. This leverage can be compounded through a purchase of Tri-Continental warrants. Each warrant represents the right to buy 2.54 shares of Tri-Continental common, whenever the warrant holder cares to, at $8.88 a share. Thus, each dollar increase in a share of common will mean a $2.54 increase in the value of each warrant. A heavily margined purchase of Tri-Continental warrants--financed with borrowed funds--should represent a sort of ultimate hedge against inflation. The only drawback would be that a minor downward price adjustment in Tri-Continental stock, caused by the evaporation of inflation or by anything else, would conceivably wipe you out.

A special subspecies of closed-end investment companies pays dividends that are largely tax-free. This is a complicated situation growing from their having made a distressing number of bad investments in the past; on the face of it, not an attractive recommendation, but the companies have converted it to the investor's advantage. Since these funds still own stocks in which substantial losses have piled up, each year they sell enough losers to offset their current profits. The funds still pay dividends, but the dividends are tax-free until their total equals the amount of your original purchase. After that, dividends are taxed at the favorable capital-gains rate: no more than 25 percent. Some of these funds boast diversified holdings that promise to grow as our economy grows, thus qualifying them as reasonable inflation hedges. Obviously, you'll want to think twice before sinking your money into an investment company with a past history of bad choices; but if your tax bracket is very high, the tax-free rewards may justify the risk. The best known of these tax-sheltered inflation hedges are Abacus Fund, Standard Shares and United Corporation. Standard Shares sells on the American Stock Exchange and the others trade on the big board.

Many types of mutual funds, including all those mentioned, let you reinvest your profits. This is an important point in beating inflation. Investors in securities, especially in bonds, often fail to recognize that part of the income they receive is actually a return of their original investment. For tax purposes, the Government doesn't see it this way, but it's still a fact. The chap who today lends a company $1000 at six- or seven-percent interest a year is actually being paid two or three percent as "real" interest and another three or four percent to compensate for the inroads inflation will make on the $1000 he lends. Unless he reinvests the inflation-related proportion of his interest, the real value of his $1000, in terms of its buying power, is declining. In practice, dividends on stocks and bonds, generally paid quarterly or semi-annually, are too small to justify reinvesting. All too often, they'll hardly buy a respectable dinner. But cumulatively, they can make the difference between a successful and an unsuccessful inflation-hedging program. Most mutual funds solve this problem nicely by automatically reinvesting any dividends, no matter how small, at very reasonable commission rates--sometimes for nothing. Many will reinvest capital gains as well. Hedgers who elect to shun the funds should scrupulously emulate their reinvestment policies. Without reinvestment, even the best of dividend-paying hedges may not stand up under inflation.

One investment that over the years has demonstrated an inability to beat the declining dollar is United States Savings Bonds. Virtually everyone who has had any experience with them, and that probably includes the majority of investing Americans, will attest that they are a very bad hedge against inflation. (As an example: $18.75 invested in Savings Bonds in February 1941 would have fetched you $25 ten years later; but in 1951 that $25, according to the Bureau of Labor Statistics, had a purchasing power, in terms of 1941 dollars, of $13.75. The net loss after ten long years was around 27 percent, not counting taxes on the $6.25 "interest.") The entire Savings Bond program has been a sorry chapter in our nation's financial history. It is all the more poignant because those who suffer most by "investing" in such bonds are generally the ones who can least afford it. In times of potential inflation, the Government invariably beats the patriotic drums for Savings Bonds, because they're the only Government borrowing device that directly reduces individual purchasing power. Thus, they work to counteract inflation. But amid all the fanfare, the Government, for reasons best known to itself, is reluctant to take the one course that might make the bonds genuinely attractive: raise their interest rates. If the Federal Government were to offer big investors the same paltry rate if pays on Savings Bonds, the pharisees would laugh it right out of the temple. On its highpriced bonds for big investors, the Government now pays close to six percent; but Series "E" Savings Bonds pay a lower rate than most bank accounts--4.15 percent, even less if you turn them in early. At the current four-percent rate of inflation, anyone in a tax bracket low enough to profit by purchasing an "E" bond probably wouldn't have the money to buy it.

Solid corporate bonds now offer the highest interest rates in 100 years, but--as with all fixed-income securities, where the investor puts himself in the precarious position of a lender--there's no reason to believe that regular corporate bonds are a good means of beating inflation. Convertible corporate bonds, however, are another story. These are bonds, usually sold in $1000 increments, that, in addition to fixed interest rates of up to six percent, can be exchanged, whenever the bondholder cares to, for a fixed number of shares of the issuing company's common stock. The holder of a convertible bond has the security of a fixed income: He knows, year after year, just how much interest he will receive. He also has the prospect of profits, should the price of the company's common stock increase.

A good example is the 4 1/2-percent convertible bond issued by R.C.A. last summer. Holders of each $1000 bond receive $45 a year until 1992, the distant date on which they get their $1000 back. Holders of this bond may also exchange it, whenever they wish, for 17 shares of R.C.A. common. At the time the bonds were issued, R.C.A. common was selling at around $52 a share, so conversion wouldn't have been profitable (17×$52=$884). But even then, the bonds began changing hands on the New York Bond Exchange at around $1050 each--showing that investors valued the conversion factor enough to pay hard cash for it. Subsequently, R.C.A. common increased and the bonds moved up even more rapidly, since for each dollar R.C.A. increases, the bond, convertible into 17 shares, will go up $17. Last fall, the bond sold for as high as $1235, though it subsequently declined, as the value of R.C.A. common decreased. If for some reason R.C.A. should fall on very hard times, holders of its convertible bonds would still be relatively well off. If R.C.A. common were to plummet from its current level to, say, two dollars a share--a highly unlikely event--the conversion value of the bonds would be negligible. But the convertibles would still pay a steady $45-a-year interest and they'd still return $1000 in 1992. Thus, even though the conversion factor would be worthless, they would still have considerable value as straight bonds. At current interest rates, a straight bond in a stable company such as R.C.A., paying $45 a year and returning $1000 in 1992, would be worth about $700. The chap who purchased this bond at $1000 would lose $300 if he elected to sell out, but he would be a lot better off than the investor who had simply sunk $1000 into an equivalent amount of R.C.A. common and the--in this hypothetical situation--watched it diminish to $34.

Convertible bonds, in other words, are a hedge against many economic possibilities. If you can find an attractively priced convertible in a company that seems a good bet to prosper from inflation, then you're hedged not only against inflation but against the stock-market setback that could occur at any time and against the unlikely prospect of deflation as well (since all bond values increase whenever the value of the dollar increases or whenever the interest rate falls).

Considering the unique combination of profits and protection that convertible bonds offer, it's really surprising that more small investors don't buy them. Perhaps they're intimidated by the steep purchase price, or perhaps the convertibles just seem too complicated. But in reality, they're no more complicated than stocks. The popular convertible bonds are sold on the New York and American Stock Exchanges. You buy them through your broker just like stocks. The broker's commission on each $1000 bond is a flat $2.50--another nice plus. Bonds don't necessarily sell at $1000 each, of course, since they are traded in an open market and bring whatever the traffic will bear. As with stocks, bond prices are quoted in the financial pages of any good daily paper. But, unlike stocks, prices are given as a percentage of the face value of the bond. If the quoted price for a convertible bond is over 110 or so (that is. if each $1000 bond is selling for $1100 or more), you can be fairly certain that the common stock into which the bond is convertible has risen above the conversion point. The man who buys a bond whose price primarily reflects the value of the common stock itself obviously faces the possibility of a loss, should the price of the common decline. Often it's worth the risk, because the bond might pay better interest than an equivalent amount of common and because of the extra protection it provides. But a better bet, especially for the long pull, is a convertible bond whose common stock is selling below the bond's conversion point. Such bonds sell at a discount--sometimes a substantial one--from their face value. If they are in one of the industries that stand to profit from inflation, then they will be exemplary hedges--with the added incentive of solid protection (or even solid profits), should inflation end. A number of investment services offer more data than anyone would want on all the important convertible bonds. Moody's loose-leaf Bond Survey, which you can thumb through at any brokerage house, gives weekly bond news and a monthly statistical comparison of the major convertibles. This study is brief and, relatively speaking, easy to read.

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Real estate is often touted as an ideal hedge against inflation; but those doing the touting, you'll find, are usually real-estate salesmen. The ownership of real estate has so many drawbacks that for many inflation hedgers, especially younger men who value mobility, it's just not worth the effort. This is not to say that real estate doesn't offer tremendous potential--it does, either as a straight investment or as an inflation hedge, or as a combination of the two. But in most cases, investment in real estate, especially in productive real estate, entails considerably more involvement than most hedgers are willing to tolerate.

This is because real-estate ownership is fraught with problems that the investor doesn't face in dividend-paying hedges such as stocks, convertible bonds or mutual funds. Comparative statistics--the sort of information that's readily available to any would-be purchaser of stocks or bonds--are simply unavailable for real estate. Buying real estate and--more important--selling it are both time-consuming and difficult, especially in just those times of stress when circumstances might force a sale. And, of course, undeveloped land pays no dividends at all. Often it pays negative "dividends" in the form of taxes--money the owner must cough up year after year, in proportion to the value of the property. If the land is yielding rent, well and good--except that a long-term lease, in a period of steep inflation, is as undesirable from the landlord's point of view as any fixed-income security. Short-term leases, while they bring the freedom to raise rents to keep pace with inflation, may also keep the landlord scrambling for new tenants.

According to Dr. Leo Barnes, an economist and investment advisor who knows about such things (his fact-filled Your Investments, at $4.95, is one of the best purchases the inflation hedger can make), only waterfront and resort properties are first-class hedges against creeping inflation--presumably because they are scarce and always desirable. Barnes rates farmland, timberland and industrial and commercial properties as "good" hedges. Home or residential properties are only fair.

Productive land--property that yields an income--has proved in past inflationary periods to be a better hedge than unproductive land. But the owner of productive land, unless he is willing to give up some of his profits to a manager, faces all the problems mentioned above. Past experience also indicates that while property taxes tend to rise with prices, rents do not rise as quickly, because they are tied to long leases or because, in times of extreme inflation, Government acts to control rents--as happened in the U. S. during World War Two. Perhaps for these reasons, productive agricultural land has proved a better bet than urban or suburban real estate; though in the U. S., agricultural land, especially if it's within driving distance of a big city, is highly subject to speculative fluctuations. Of course, undeveloped land closer to cities is even more volatile. It can cause visions of shopping centers, super-highways and stucco bungalows to dance in the head of even the most unimaginative real-estate speculator.

To give real estate its due, there are a number of persuasive arguments in its favor. Not the least of these are the tax advantages, which permit the wily property owner to write off much of what he does to his holdings, deduct whatever interest he pays, depreciate the rest, perhaps even take a depletion allowance, and generally make our tax laws stand up and whistle The Star-Spangled Banner. For this reason, intelligent property investing on anything beyond a modest scale requires not only the services of a good real-estate lawyer but those of a good tax accountant as well. Such advice comes high and further militates against the purchase of real estate solely as an inflation hedge.

Even at the uncomplicated level of home ownership, anyone who buys residential property just to beat inflation is probably ill advised. In the relatively uninflationary years between 1960 and 1967, the average cost of landsites covered by Federal Housing Administration mortgages, mostly in suburbia, rose from $2470 to $3725. Superficially, one might guess that if the value of such land rises in periods of little inflation, it stands to do even better when inflation is steep. Unfortunately, this is sometimes not the case. In times of steep inflation, the value of an undeveloped homesite is less than certain. Inflation makes banks less and less willing to lend long-term mortgage money, which may ultimately be repaid in much cheaper dollars. Bankers first raise the interest rate on mortgage loans to make up for what they think inflation will cost them. If inflation continues to increase, so will bankers' expectations of it. Eventually, the interest rate on mortgage loans will reach a prohibitively high level--a situation we're precariously close to now. Beyond this point, bankers and borrowers alike will simply avoid making mortgage loans, preferring to sit on their hands and wait for the inflationary dust to clear. A little over a year ago, new-home construction in the U. S. had fallen sharply, to its lowest level since World War Two. Subsequently, the housing market revived somewhat, but it's still far from robust. And if interest rates go much higher, home building may effectively cease. Obviously, in times when it's impossible to finance or build a new home, the value of a homesite, no matter how attractive, is at least subject to debate.

An admirable theoretical argument in favor of land as an inflation hedge appears in the opening pages of almost any college economics textbook. The supply of land is fixed, while demand for it increases with the population. This means that the real value of land must increase in the long run. But, as Keynes was fond of pointing out, in the long run we are all dead. And in the short run, the demand for land is notoriously fickle. It moves one generation out to the suburbs, the next to the exurbs, the next back to the city. It creates a market many times more volatile than the stock market, without published statistics to guide the uninitiated. In sum, while the investment potential of real estate is well known, there are no persuasive arguments to support the notion that a plunge in real estate is the best way to hedge against inflation. Especially for the younger man, who simply wants to preserve (or increase) the real value of his capital during a period of creeping inflation, securities offer a much less bothersome route.

However, if you are determined to invest in real estate, you can, without all the concomitant fuss, by purchasing shares in real-estate investment trusts. These are to real estate what mutual funds are to common stocks. They are unincorporated associations that sell shares to investors and use the money to purchase real estate, usually rent-producing property. Profits (or losses) are passed on to the shareholders, who thus partake of the myriad tax benefits that generally accrue to property owners. Like the closed-end investment trusts, REITs do not redeem their own shares, because the assets involved are entirely in real-estate holdings and there's no way to get accurate daily (or even annual) estimates of the shares' actual value. Thus, shares in REITs are sold in the open market. You purchase them, like stocks, through your broker. A few of the largest, such as the Continental Mortgage Investment Company, are traded on the major stock exchanges.

There are two basic types of real-estate investment trusts: those that buy real property and those that buy mortgages on property. The latter are safer investments, especially if the mortgages are guaranteed by Federal agencies such as the FHA. But in periods of inflation, the real value of fixed-income mortgages, especially longer ones, would suffer seriously, like any other fixed-income security. REITs that buy rent-producing properties, even though they're riskier, would be a better hedge against inflation. But, as with mutual funds, they are investing to pursue a wide variety of goals, to which inflation hedging might be peripheral. A few of the larger REITs that invest in property itself, rather than in mortgages, are American Realty Trust, Denver Real Estate Investment Association, Park Avenue Realty and Trust and U. S. Realty Investments. Your broker can buy all of these and many others on the over-the-counter market. Obviously, as with any investment--but all the more so in a wheeler-dealer card game like real estate--the prospective hedger should closely examine what he's buying before he does so. Real-estate ventures such as syndicates, condominiums and high-rise cooperatives offer the prospect of tidy profits or breath-taking losses (through speculation, mismanagement or outright fraud); but, in any event, they are not primarily inflation hedges.

Nor are commodity futures. The buying and selling of agricultural and mining goods for delivery some time in the future, which is what commodity trading is all about, is much too speculative and ephemeral to qualify as a sound hedge against inflation. Those who are interested in the staggering profit potential of commodities should read this writer's Playboy Plays the Commodities Market, which appeared in these pages in August 1967. The rest can content themselves with the knowledge that commodity prices seem to drift downward during periods of inflation. The average price of 30 sensitive commodities indexed by the New York Journal of Commerce has been moving steadily downward for over a year. Recently, this index stood at its lowest point since 1947, when the figures were first compiled. In fact, if you looked only at basic food prices (the banshee wail of housewives notwithstanding), you would hardly guess that we're having inflation at all.

Speculating in metals, which are also traded on the commodity futures markets, could conceivably be a better hedge. The value of copper, zinc and tin all more than tripled during World War One, partly because of inflation and partly because of their unavailability during the disruptions of war. But nowadays, supply sources are more dispersed and total war, and the rampant inflation that usually accompanies it, seems less likely. On a more prosaic level, contracts in the futures market are too short to take advantage of long-term swings (though you can maintain a position if you're willing to give up more commissions periodically) and the action is much too hectic. It's possible to contract to receive a technologically oriented metal you think might increase during inflation--silver, platinum, copper or zinc, for example--and then actually take possession of the goods. But such a course is hardly recommendable for the ordinary hedger, because it involves considerable cash (receiving a standard 10,000-ounce silver contract, for example, would cost you over $20,000) and imposes the extra headaches of insurance and storage. Among sophisticated investors, platinum has recently become a very popular hedging medium. There is a pressing world shortage of the metal and demand (mostly from electronics firms) is constantly increasing. The price of platinum is now around $250 a troy ounce, up $100 an ounce in the past year. The metal is sold in ultraportable 50-ounce bars, so the investor with $12,000 or so can easily take delivery of a bar and stash it in his safe-deposit box.

As was mentioned earlier, most people who hold precious metals (silver, platinum and, especially, gold) do so to hedge not against creeping inflation but against official devaluation of the dollar, comparable to what was done in November to the British pound. Devaluation of the dollar would occur if our Government decided it would no longer redeem foreign holdings of dollars at the rate of one troy ounce of gold for each $35 in U. S. currency offered it. Because foreign governments can redeem their dollars in gold, the dollar--being more portable--is used as a substitute for gold in international transactions the world over. Those who own gold point to America's persistent international trade deficit (we spend more overseas than foreigners spend here), which has resulted, in the past decade or so, in a mass exodus of gold from our national coffers. If this trend keeps up, the reasoning goes, we'll ultimately be forced to devalue our dollars (in effect, raising the price of gold); otherwise we won't have enough gold with which to redeem them. This is all well and good, but, unlike most countries and certainly unlike England, our balance-of-trade deficit is largely a matter of national will. Since the 1890s, we have always sold more to foreigners than we've bought from them. Our current trade deficit is caused almost exclusively by non-mercantile expenses: costly overseas wars, foreign aid and tourism. If the dollar were seriously threatened, all three could be curtailed by Government decree. These would be extreme measures, but so is devaluation. And at this point, the trade balance would shift dramatically in our favor and our technological exports would keep it there.

Moreover, the ownership of gold--"hoarding," as it's less charitably called--is illegal for Americans, except those, such as dentists and jewelers, who have a legitimate use for it. Since 1961, Americans have been prohibited even from storing gold overseas. It may seem unfair that our Government will trade gold for the dollars of qualified foreigners but won't even let us near the stuff, but this juggling act does seem to keep the international money market functioning. The law does permit Americans to maintain a "collection" of gold coins, but this loophole, plus the coins' value to collectors, has created such a premium for gold coins that they can hardly qualify as good inflation hedges. (A U. S. $20 gold piece contains $33.84 worth of gold; you would be lucky to purchase one for under $50.) The Treasury Department also acknowledges, somewhat reluctantly, that it's perfectly legal for Americans to own gold in its "natural" state--unrefined dust or nuggets.

Since the devaluation of the British pound and the resultant pressure on the U. S. dollar, illegal gold operations on the part of American citizens have reached epic proportions. A Treasury spokesman now rates gold smuggling as "more urgent for us than the marijuana problem." Anyone familiar with the Treasury's zeal in ferreting out pot smugglers will recognize from this statement that gold smuggling nowadays must be Brobdingnagian. In fact, it's estimated that between one third and one half of the recent wave of European gold buying--which reduced U.S. gold reserves by over $500,000,000-- represented clandestine purchases by American citizens, people willing to risk a contretemps with the law to hold onto what they consider is rightfully theirs. The law seems to look the other way when facing gold smugglers of the non-Mafioso variety. Many people caught with small amounts of the metal profess ignorance of the law--and apparently get away with it. Professional smugglers occasionally wind up in jail; but for ordinary citizens, the law calls for confiscation of the gold and a fine of twice its value. Even this is rarely enforced, because gold hordes have a habit of coming to light only after their owner has passed on to his last audit. In such instances, the Government is faced with the unpleasant prospect of penalizing widows and orphans for the sins of their late-lamented. Frequently, the Feds allow the heirs to sell the gold back to the Treasury--at $35 an ounce. Needless to say, such a transaction hardly qualifies as an inflation hedge.

Those willing to risk the penalties have located several devious ways to buy gold. The most straightforward is to fly to Canada, get a hotel room, buy a bar of gold (giving the hotel address), secure the gold in a Canadian sale-deposit box and return home. Gold purchases can also be made in absentia if the buyer has a foreign-currency account in any of the countries where gold ownership is legal--Argentina, Belgium, Canada, England, France, Mexico, Panama and Switzerland, to name a few. Many bankers in these nations do not feel it their role to point out to American customers that gold ownership violates U.S. law. In the matter of preserving capital, bankers often believe that limited civil disobedience is quite justifiable.

But even the largest of gold hordes doesn't pay quarterly dividends. It just lies there, year after year, tying up capital that might otherwise be put to productive purposes. There's also another difficulty that hoarders of gold don't usually anticipate. The current world shortage of gold isn't simply a matter of our having taken it all out of the ground. The main problem is that at current prices it's not profitable to mine, because gold mining is a time-consuming process greatly dependent on manual labor. If the gold-brickers' dream were ever to come true and the U.S. lifted its "ceiling" on the value of gold to let the metal seek its own free-market price, we would probably see a massive reopening of the world's gold mines. A conceivable result would be the sudden appearance of a superabundance of gold and, ultimately, a glut of gold on the market--and a drop in its price. This is all very iffy, but so is gold hoarding. To be sure, if the dollar ever is devalued--as last happened in 1933, at the depths of an unprecedented Depression and a world-wide financial crisis--then the value of gold would instantly increase. But so would the value of most other well-placed inflation hedges. And though a devaluation of the dollar is all but certain at some point in the future, political realists view it as an impossibility before the November elections and as an unlikelihood in the next few years. In the meantime, while other hedges can perform admirably in the creeping inflation that now exists, gold is a dubious hedge. Even when devaluation is imminent (if you're astute enough to spot it), the best way to hedge will be not through gold but directly--by short-selling dollars on the European currency futures markets. Short sellers borrow something and sell it, in hope of a price decline, at which time they profit by replacing what they owe at cheaper levels. A few months back, before the devaluation of the British pound, a short sale of £10,000 (at $2.77 a pound) on a six-month contract required an investment margin of only $2500. The profit, when the short sale was covered with pounds worth only $2.40, was well over $3000. Shrewd short sellers appear to have made millions on the devaluation of the pound.

As long as the dollar remains redeemable in gold to foreigners--and it's difficult to imagine world trade surviving without it--Americans are largely preempted from another traditional inflation hedge: foreign currencies and foreign speculations in general. Even today, it's quite natural for Europeans to maintain bank accounts in two or three currencies in as many nations. If something goes wrong with their own money, they still have their Swiss franc or their Deutsche marks--and perhaps their investments in Swiss and German companies -- to fall back on. But generally, whenever the U.S. dollar suffers, virtually all other currencies do worse. In the decade between 1956 and 1966, according to an extensive study conducted by the First National City Bank of New York, the dollar lost less in purchasing power than any other major currency in the world. Of the 45 currencies surveyed, the only ones that did better were the Guatemalan quetzal, the Venezuelan bolivar and the Honduran lempira. Since South American nations led the bottom of the list as well as the top (the Brazilian cruzeiro was dead last, losing an average of 31 percent a year for ten years), investors would want to think carefully before rushing south of the border to buy quetzales of lempiras.

This also makes one wonder whether investment in foreign companies is worth the effort. Once again, European investors have frequently found exemplary inflation hedges in growth or earth-asset companies in neighboring nations with stabler currencies. But an American might be legitimately doubtful about buying shares in a promising company in Guatemala. In addition, four years ago our Congress, in a vain attempt to shore up the U.S. balance-of-payments deficit, imposed a tax of 15 percent on American investments in stocks or bonds issued by companies in any of the more stable nations of the world. There are ways around this law (you're exempt from the tax if you buy the shares from another American or if you buy Canadian shares), but by and large, it's hardly worth circumventing. You can more easily get a piece of the foreign action buying stock in the many American companies (Standard Oil of California, for instance) with vast overseas holdings. The best U.S. growth companies--IBM and Xerox, for instance--also have huge foreign operations. Hedgers who still insist on buying un-American might investigate the prospects of such sound inflation shelters as Nestlé's (the huge Swiss chocolate maker); Unilever (worldwide British soap cartel); and Philips Lamp and Royal Dutch Shell (vast Netherlands "growth" firms). Some of these are even available on the New York Stock Exchange. One factor supporting the purchase of foreign shares is that stock prices on most of the Old World markets are at five-year lows and many insiders think they are preparing to move higher.

Very infrequently, you can find a foreign bond that pays dividends in a reasonably hard, non-dollar currency such as Swiss or Belgian francs (both backed by solid gold) and is convertible into common shares of a good foreign growth company. But the problems here are intimidating--not only because of the foreign-exchange headaches but because overseas companies refuse to publish the detailed financial statements to which U.S. investors are accustomed. Foreign hedges such as this would give you a questionable measure of protection against devaluation of the dollar and some defense against the more palpable prospect of creeping inflation. But for most investors, they're a doubtful commitment. Also, they're subject to the overseas-investment tax, though for bond investments it's generally less than 15 percent.

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At this point, the world of straight investment hedges evaporates and we enter a nether world of techniques and gimmicks that may or may not prove worth while in a period of inflation. Insurance, for instance, is a nice thing to have if you own something valuable and would like cash compensation in the event of unpredictable misfortune. It's also comforting, though the rewards are entirely cerebral, if you have people depending on you who might suffer if you died. But the preponderance of insurance programs, no matter how convoluted, are simply not good hedges against inflation. Both buyers and sellers of insurance are by now quite aware of this. Twenty years ago, insurance absorbed 52 percent of U.S. savers' dollars; today, it takes only 19 percent. Many major insurance companies are about to start their own mutual funds, ignoring the fact that insurance salesmen for decades have been emphasizing the frightful riskiness of such investments. The insurance companies are also experimenting with variable-income annuities--policies that promise a guaranteed cash income that will increase as the purchasing power of the dollar declines. For those who are primarily concerned with life rather than with whatever follows it, this is the most promising program the insurance industry has offered in 200 years. Unfortunately, most of these annuities are available only on a group basis, and it's too early to assess their value.

There are probably very few people who are willing or able to channel their careers into pursuits that by themselves will help them hedge against inflation; but in the interest of comprehensiveness, we must note that persons in the professions, from lawyers to prostitutes, are obviously more capable of controlling the wages they receive than are those, such as teachers and Government workers, who are tied to contracts, fixed salaries or political considerations. Other noninvestment ways of beating inflation are to avoid contact with just these professionals (because their rates tend to advance even more rapidly than inflation) and to pay bills as slowly as possible--especially long-term college loans, which are usually granted at very low rates and generally impose no penalties on overdue accounts. But anyone who would adjust his whole life style solely to accommodate inflation would probably be flirting with paranoia.

Somewhat less paranoid, though still a trifle eccentric, are the collectors. These good souls have uncovered a whole spectrum of non-dividend-paying investments that seem adequate inflation hedges for those who know something about them; but they are less than desirable for the rest of us, who couldn't care less. In almost every case, the people who have beaten inflation by buying rare stamps, rare coins, rare books, antiques, art objects, autographs, paintings, vintage autos and the like, have collected simply for the pleasure of collecting. They have assembled their holdings not to beat inflation but because they get a kick out of them. Their expertise makes them very difficult to compete with, and noncollectors are urged not to risk it. Noncollectors are also advised to discount heavily whatever a given collector says about the investment or hedging advantages of his particular pursuit. In their hearts, most serious collectors, whether they're infatuated with French Impressionists or Coca-Cola bottles, tend to suspect that others think they're a bit loony. They weave an intricate fabric of economic rationalizations--a few of them valid but most of them mythical--to justify what is really only a hobby.

Few people collect diamonds, but they, too, fall into this category. An investment rationale is a handy way of explaining the purchase of a bijou that otherwise would constitute a colossal extravagance. Diamonds and other rare gems are frequently touted as excellent hedges against inflation, but it's mostly jewelers and diamond owners who are doing the drumbeating. The only stones that have the vaguest claim to investment value are the legitimate gems: diamonds, emeralds, rubies and sapphires--and then only if they are relatively large (over a carat or two) and unmounted (in a mounted stone, 25 percent of your "investment" may be in labor). Even rare gems that meet these prerequisites, while they are relatively easy to buy, are difficult to sell quickly at a fair price. There's also some doubt about just how rare they are. A world-wide syndicate (which even the Russians, when they recently discovered diamonds, quickly joined) controls virtually all the mines where the stones are unearthed. Each year the syndicate mines gems enough to all but satisfy world demand; and the extra increment of unfilled demand, year after year, supports the gems' price level. Another doubt is that sooner or later a way will be found to manufacture them artificially, as has already been done modestly with industrial diamonds and some other stones. (Those who "invested" in pearls in the 1920s subsequently lost up to 90 percent of their money, due to the combined forces of world-wide depression and the discovery of pearl culture.) The prospective hedger in gems would probably be better off in gold, for whatever that's worth. As the alchemists eventually discovered, gold is one of the basic elements. Unless someone upsets the atomic tables, its wholesale manufacture is not immediately forthcoming. Gems, on the other hand, are compressed forms of fairly cheap substances. Generally, their investment potential is one of those areas in which no one can make a definitive pronouncement. But until the final returns are in, would-be hedgers--while they may well want to give their lady fair a dazzling token of their everlasting devotion--should best look elsewhere in the lessromantic matter of beating inflation.

Of all the non-dividend payers, only valuable paintings and truly rare postage stamps deserve our special consideration. Fine paintings, whose value has been clearly established over the years, have traditionally been excellent hedges against inflation. Many of the best are fine investments in their own right, gaining value as rapidly as the faster-moving growth stocks. But it takes both a collector's instincts (backed by the advice of a good art dealer) and a hefty bank roll to make sound investments in fine art. Intangibles such as the quality of the painting itself must be weighed against that most protean of all variables, public taste. The old masters, bearing the imprimatur of generations of critical and popular approval, are probably the safest art investment, but not too many of us can afford them. It's difficult to generalize about prices, but one reliable auction study indicates the value of old masters rose around 15 percent in 1966 and a comparable amount in 1967. Occasionally, the trained eye can detect a real bargain--as did J.Paul Getty with what he describes as an "unprepossessing" canvas "in somewhat poor condition" that he purchased for $200 at a London auction in 1938. After restoration, it proved to be Raphael's long-lost Madonna of Loreto--worth over $2,000,000. French Impressionists have also proved excellent investments in the past few decades, though the boom seems to be slowing down a bit. The prices of American paintings have been relatively stagnant since 1965, but there are early indications of improvement. Pop, op and nonobjective works are still question marks. Only time will tell whether they'll produce fortunes or disappointment.

Truly rare postage stamps--the sort that not one stamp collector in a million would ever think of buying--are in a class by themselves. Pound for pound, rare postage stamps are the most valuable substance known. The rarest of all stamps, the famous one-cent British Guiana of 1856, would probably sell for well over $100,000 if it were to come onto the market today. A million dollars could be tied up in 40 or 50 rare stamps of this ilk, tucked in an envelope the size of a business card. The same value in gold would weigh well over a ton. Even in diamonds, it would be too big to hide easily. Rare postage stamps thus have a particular appeal to wealthy residents of unstable countries. These people enjoy the prospect of reducing huge sums of money into light and ultraportable bits of paper, in case they ever have to disguise themselves as beggars and sneak across a border. For good reason, stamp collecting at this high level is still "the hobby of kings." The impetus of big-time stamp buying, which usually increases when the value of solid currencies such as the dollar begins to decline, makes truly rare postage stamps supersensitive to inflation. Auction prices of some of the more elusive items have quite literally doubled in the past three years.

But unless you are an exceedingly wealthy stamp collector yourself, or a Latin-American dictator hedging not against inflation but against revolution, such evasive tactics are largely futile. Rare stamps--and almost all the other big-time collecting hedges--are difficult to buy and just as difficult to sell. Intelligent purchase is complicated by a lack of frequent sales and published prices, and selling is best done at auction, at a commission cost between 10 and 20 percent. In fact, all the collecting hedges are subject to the vagaries of markets more fickle and volatile than the stock exchanges. Most people aren't aware of the violent price fluctuations, because they don't often see the figures at which these objects change hands. And like all the offbeat hedges, they don't pay cash dividends.

The hedger against inflation, especially if his collecting instincts lean toward hard cash, is well advised to confine himself to dividend-paying investments--and he should be careful to reinvest a reasonable proportion of what he receives. If he's confident of his investing expertise, he's probably best off putting his hedging capital in well-chosen common stocks. If he's less confident, he may want to place some of his money in a mutual fund that will make the investment decisions for him. And in either event, he should certainly consider the unique hedging advantages of convertible blonds. If he confines himself to a combination of thoughtfully selected investments in these three general areas, he will have the satisfaction of knowing that he is solidly protected, even if inflation should disappear. And assuming our currency continues to erode, he will receive occasional reminders, in the form of checks whose value should increase as the purchasing power of the dollars of others diminishes, that he has succeeded in beating inflation.