From the May 1993 issue of the Socialist Standard
In the mid-1970s workers had to be put up with double digit price rises and falling real wages. Is this coming back?
Among those with the least understanding of the capitalist system are invariably those who are appointed to “manage” it. This looks like being amply demonstrated in the coming months as the present Conservative government resorts to the ill-conceived trick of capitalist politicians of currency inflation. True, inflation of the currency in Britain has been accruing since the onset of the Second World War or thereabouts. but it looks likely to be given an added impetus.
With a Public Sector Borrowing Requirement (PBSR) projected to run to around £50 billion, or over 3 percent of GNP (Sunday Times, 21 March), the government is looking for ways of financing its massive debt. The normal way to do this is for the government to sell gilts and bonds to private investors and institutions like pension funds. However, with such a huge government debt, which is currently consuming £17.5 billion in net interest payments, the government is wary of crowding out investment from the slump-ravaged private sector of industry. In the March budget Chancellor Lamont nodded in the direction of the obvious option of tax increases to wipe out some of the debt, but has made provision to finance it in another way—by printing money to pay for some of it.
Massive government debt
In the budget Lamont announced that the Treasury had dropped its “full funding" rule whereby all government debt in a financial year had to be fully funded by sales of bonds and gilts to investors. Now the government can resort to the practice of financing part of the PSBR through sales of 90-day Treasury Bills to the banks.
In this situation what is likely to happen is that a point will arise when the government is selling Treasury Bills to the banks at a time when the cash reserves of the banks are depleted and they don't have the liquid assets available to buy all the Bills the government wants to sell to finance its deficit. The Bank of England, as the bankers’ bank and the lender of the last resort, will in these circumstances passively make more currency available to them. They are then effectively in a position to buy the Treasury Bills offered for sale, and can thereby lend to the government. It is in this way that the Bank of England tends to make available enough cash for the banking system to be always able to lend the government the amount it requires. Through this rather roundabout manner an excess issue of notes helps to finance part of government borrowing and, ultimately, government expenditure.
Governments have previously gone in for this tactic and there is every indication that the Tories may do the same again. In the mid-70s in an earlier slump the Labour government under Wilson and Healey financed part of its budget deficit and helped to increase its expenditure in this way. During the financial year 1974-5 it inflated the currency by a post-war record of 17 percent, amounting to about £700 million worth. This additional £700m financed almost half its additional real expenditure for the year.
The temptation for the present Conservative administration is just as great. Re-elected with the mission of reducing the amount of tax taken out of capitalist profit, and with limits to the extent of genuine government borrowing, the printing presses may yet seem like an attractive option. There is an important additional reason for this in that the present government—like all the other post-war governments before them—do not realise that expanding the note issue beyond that amount warranted by increases in production and trade will cause price rises. The fact is that prices have risen wherever and whenever currency has been issued in excess; the note issue has risen from £450 million before the war to about £16,000 million now while the price level has increased almost thirty- fold.
Instead the government has continued to blame price rises on a multitude of erroneous factors including wage rises (when wages are themselves prices) and low interest rates (when interest rales are prices too). The government has also recently reverted to its previous idea that inflation is caused by increases in the level of bank deposits in the economy. In this theory bank deposits are viewed as money, and when deposits increase this is seen as having the same effect as an excess note issue.
However, this theory ignores several important factors, principally that when there is an excess note issue this causes an artificial bloating of monetary demand in the economy as a whole. Prices then rise in response to buyers offering larger amounts of money in the same way that, say, prices of accommodation and other things rise in holiday resorts during the summer season when holidaymakers arrive in large numbers. With an increase in bank deposits nothing of the sort happens. There is no artificial bloating of demand since bank deposits add nothing additional to it, being monetary transfers of demand rather than a spurious injection of it as with excess currency. So when the government resorts to blaming price rises on increasing bank deposits. as it surely will if prices take off once more, it will be again demonstrating its own ignorance of the subject.
None of this gives justification to the view of Chancellor Lamont that the government has defeated inflation. Since governments don't understand the causes of inflation and are periodically influenced by factors which make large-scale inflation look attractive, price rises are again likely to become centre-stage politically in the coming months.