From the February 1972 issue of the Socialist Standard
Whatever happens elsewhere there is one industry the output of which never falls off in a depression. Other peoples’ troubles are its golden opportunity, it booms when others stagnate. Its operators are the professional politicians and economists who tell a bemused public how things got where they are, what is happening now and what the stars foretell for the future of what they call the “economy”. What they are dealing with is capitalism though they hardly ever call it by that name and, with a few exceptions, their actual understanding of how capitalism works is minimal.
They are not a united band—indeed much of their effort is directed to exposing each others’ errors—but almost all of them subscribe to one article of faith; that if governments did the right thing at the right time crises, trade depressions, a million unemployed, balance of payments deficits and devaluation need never happen.
At the turn of the year they showed no unusual degree of unanimity in urging us all to take our eyes off present troubles and look ahead to the good time that is coming, provided that no discordant elements such as trade union “greed” or “unfair” competition from abroad or a general world recession upsets harmonious development. “I believe that this year we have a unique chance to begin a sustained period of more rapid expansion with steadier prices”. (Chancellor Barber). “1972 can be the first of four years’ rapid growth”. (Times). “The year that the economy could really take off”. (Sunday Times). “All set for a boom”. (Sunday Telegraph).
In part the optimism has as its basis the belief that if consumers spend more money because of tax reductions, increases of wages and pensions etc. this must lead to a corresponding increase of the quantity of goods produced, and a reduction of unemployment. A glance at what has been happening shows how naive this belief is. Between 1965 and 1971 consumers’ expenditure increased continuously, by an average of upwards of £1600 million a year, but at the end of it unemployment was higher by more than half a million. Most of the increased expenditure merely meant paying more for the same amount of goods, and if workers’ productivity is increasing (fewer workers needed to produce the same quantities), the total output of industry needs to be continually rising in order to absorb the unemployed.
Some economists are of course aware of this and their forecasts have therefore to assume that they know how trade will go this year and afterwards, that they know that price rises will lessen, that they know manufacturers will increase output and expand their factories and that when the goods are produced they will be sold at a profit here and overseas. They “know” all these things because their “Keynesian” article of faith tells them so, but in face of past refusal of events to behave as predicted confidence in Keynes is waning. In the House of Commons on 23 November Chancellor of the Exchequer Barber admitted that the government were taken by surprise by the rise of unemployment and Robert Carr, Minister of Employment said:-
We may be entering a period when the old principles of demand management based on Keynes and the rest may no longer be operating as Government here of all parties and governments in many countries had come to expect them, with justice, to work hitherto.
The government holds that the principle key to recovery is restricting the rise of prices and that their policy will achieve this. A leading economist, Alan Walters, Cassel Professor of Economics at the London School of Economics, says that they don’t understand the problem and are doing precisely the wrong thing. (Financial Times 1 Jan. 1972). He sees the fundamental cause of the recent abnormally rapid increase of prices in “the vast expansion of the money supply in 1967-8”, an increase that the present government has continued. He rejects the explanation given by Keynesians that the price rise is due to pressure by trade unions and others. He notes that company profits in real terms have been falling while prices rose and he does not expect manufacturers to expand investment while this continues. He thinks the competitiveness of British exports has been worsened by the agreement to up value the pound against the dollar and sees the likelihood of another devaluation of the pound. His own proposal is that the price rise should be curtailed by a gradual restriction on the money supply, but confesses that he does not know whether such a policy “would increase or even decrease the rate of unemployment”.
So much for both the Keynesian and the non-Keynesian beliefs in the possibility of managing capitalism in a way which would obviate booms, crises and depressions, which are not caused by “inflation” (though it can be an additional spanner in the works) but by the normal function of capitalism.
The government and the rest of the forecasters all agree that the discussions with America over international exchange rates will play a part in the ability of British manufacturers to compete in world markets, at least in the short run, but this condemnation of American policies is very much a case of the pot calling the kettle black.
British governments (like many others) have for years been depreciating the currency and putting up prices by excess printing of notes, thereby practising a form of legal swindling on purchasers of national savings certificates and other government securities, since the eventual repayment is in depreciated currency. This is much the same as the American government has been doing extensively in the past few years. The smooth running of trading operations and other financial transactions needs a comparatively stable currency and a means of preventing depreciating. This was achieved first by using gold coin of standard weight and fineness and, as a development of this, using notes convertible by law into gold of fixed amount. This was the 19th Century British system and under it currency depreciation was impossible. Gold functioned as the money commodity because, like other commodities, it has value, proportional to the amount of labour socially necessary to produce it. (It was a writer in the Financial Times 22 Dec. 1971 who came out with the staggering observation that “gold is no longer the symbol of security”)
Notes, British Bank of England notes, or American dollar notes became acceptable, "as good as gold”, because they were by law convertible into a fixed weight of gold.
Britain first, and much later America, abandoned convertibility between the wars. As regards the dollar it was a process of gradually limiting convertibility until, two years ago, it was confined to Central Banks in other countries, who alone could demand gold at $35 an ounce. C. Gordon Tether (Financial Times 17 Dec. 1971) describes how obstacles were put in the way of convertibility so that in the past two years some $20,000 million of paper dollars were unloaded on the world with the loss of only $1,500 million of gold through actual conversion. Then in August last convertibility was ended at the same time that the 10 per cent levy was imposed on many imports into America in order to put pressure on other governments and make them upvalue their currency. Now in return for an average upvaluing of 10 per cent of other currencies against the dollar the import levy is to be withdrawn but the question of gold convertibility of the dollar is yet to be settled. According to Tether the American government’s idea was to keep the dollar as a widely used world currency without convertibility at all. They wanted other governments and banks to accept the dollar as “common denominator by some kind of divine right —and not merely as a stand-in for gold’. Needless to say the French and other governments reacted sharply to this and the latest suggested settlement is that dollar convertibility may be restored but associated with a very big depreciation of the dollar in terms of gold.
To put the matter in perspective in relation to the present depression it should be recalled that crisis and depressions happened just as normally in the 19th Century when the then world currency, the pound, was fully convertible.
Some forty years ago when unemployment reached 2½ million (under a Labour government) many workers were being attracted to a study of Marx precisely because the Marxian explanation fitted the facts of the situation. Then along came Keynes with his glib proposals for running capitalism with guaranteed continuous full employment and Marx was pushed into the background.
Now that the Keynesian myth has collapsed perhaps Marx will come into his own.