D is for Depression. And for Deflation. Two words economists and journalists tried to banish. The first they replaced by the more innocuous-sounding "recession" while the second was confined to history books. But now they are having to use them again.
The Penguin Dictionary of Economics defines "depression" as "a business cycle in which there is unemployment" and then adds:
"Only the period 1929-33 in the United Kingdom is usually referred to as a depression (see Recession)".Well, it looks as if they may have to add "and the period 2008- ", especially as even the Bank of England has raised the spectre of “deflation”, by which they mean a period of falling money prices.
The Bank of England's remit is to keep the rate of the rise in the general price level (popularly called the rate of inflation, misleadingly since the rise in the general price level is an effect of inflation properly so called) down to 2 percent a year. The main cause of its non-stop rise since 1940 has been the overissue, or "inflation", of the currency, which has gone on incessantly since then, and which will have increased with the government's recent bail-out of the banks and attempt to spend its way out of the coming depression.
When, however, in November the Bank dramatically slashed the bank rate from 4.5 percent to 3 percent it justified this, in terms of its remit, on the ground that the members of its Monetary Policy Committee felt (actually, took a gamble or guessed) that a rise in the general price level as a result of the inflation of the currency would be outweighed by a fall in it as a result of the depression, so that it still wouldn't increase by more than 2 percent.
If there is no inflation of the currency then, in a depression, the general price level will tend to fall because paying demand falls (due to bad business conditions and to less income from employment) relative to supply (saturated markets following overproduction). This is what happened throughout the 19th century at the time that Marx was writing and, again, in the depression of the 1930s. In fact, one of the proposals that brought down the 1929 Labour government in 1931 was to cut the salaries of civil servants as well as the dole in line with falling prices. But this was not deflation in the proper sense since this is a cut-back in the issue of the currency, such as was done in 1920 when £66 million worth of currency notes were taken out of circulation and the general price level fell by 30 per cent.
Keynes in his The General Theory of Employment, Interest and Money that came out in 1936 offering an explanation for the depression, devoted a whole chapter to "Changes in Money-Wages". While rejecting the view of other capitalist economists that pushing wages down was the way-out of a slump, he accepted that in a slump real wages (what they can buy) would go down but argued that it was better to do this by keeping money-wages stable while allowing the general price level to rise (through inflating the currency). As he put it:
"A movement by employers to revise money-wage bargaining downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices".If there really is a fall in the general price level that outweighs the effects of inflation, then wages, as a price (that of workers' ability to work, or labour-power), will tend to fall too. If they didn't fall, or not as much as prices, then workers in employment would be better off since they could buy more with their money than before. Some commentators have mentioned falling money-wages as a possibility, but have not dwelt on this too long.
If it does happen, then workers will have to struggle to limit the damage, which as Keynes pointed out, they will do "more strongly" than otherwise. A time of intensified class struggle can be expected.