Deflation disaster (1980)

From the October 1980 issue of the Socialist Standard

Who hasn’t heard (and seen) Maggie rabbiting on about “suitcase money”? Or dolorous Geoff drooling mournfully on “getting inflation down”? If only they did they wouldn’t talk so much about it. But what would actually happen if ever they did'! Answer: Very little—or nothing much!

In other words, we’ve all been here before. Most modern politicians and “economists” seem utterly unaware of recent history. World War I started it all. In 1917, the British Army was dropping over four tons of shells on every yard of German front line. This, and everything else, had to be paid for, which meant that Britain accumulated massive debts to the United States. It was then—in 1915—that the government issued ten- shilling notes. Here is an account of the situation in 1924 by James Joll:

With unemployment mounting and confidence in the currency and the financial institutions ebbing fast, the orthodox response of Governments was to adopt a policy of deflation, and to attempt to restore confidence by balancing budgets, exercising economy, cutting expenditure, reducing the wages of State employees and dismissing redundant workers. This had the effect of diminishing purchasing power still further, and increasing unemployment still more.

(Europe Since 1870: an International History) 

This view is echoed by the economic historian, David Landes: “Deflation may have been a triumph of ideology and virtue; but it was an economic failure” (The Unbound Prometheus: Technology from 1750 to the Present).

Britain’s return to the Gold Standard in 1924 sparked off the miners' strike, the General Strike, three million unemployed, and the collapse of the Labour government in 1929. The Sixth Congress of the Communist International announced that capitalism was once again heading for its collapse, and the by-ways of Britain echoed to the thud of the Hunger-Marchers’ tatty army boots.

In 1931, appalled by the apparent frightful havoc of deflation, “experts”, publicists and politicians turned to inflation for a change. Witch-doctor John Maynard Keynes wrote in his boring General Theory of Employment, Interest and Money:

The world will not much longer tolerate the unemployment associated with capitalist individualism . . . But it may be possible to cure the disease . . .  whilst preserving efficiency and freedom.

And what was the cure? Obviously, if “lack of purchasing power” was the cause, then the remedy was more paper money—inflation.

The chief self-appointed guru of the Labour Party in those days, G D H Cole, was not the only “expert” to nip smartly on the band-waggon; Sidney Pollard and all the other Lefties joined in the Hallelujah Chorus. “When resources are idle, additional purchasing power will bring them into play” pontificated Cole (What Everybody Wants to Know about Money), and the TUC General Council, understanding slightly less about it (as now) than they did about Einstein’s General Theory of Relativity, submitted Memoranda to the Government with the same refrain. Ever ready to oblige, Stanley Baldwin’s Government confirmed the protection duties started during the War, and went off the Gold Standard.

This gave some, who did not understand the cause of slumps in capitalism, the mistaken notion that inflation really was doing the trick. The Locarno Conference cancelled the Allied and German war debts; re-investment from America followed; world trade picked up; and Germany experienced a boom under Hitler. The Second World War duly arrived and the whole ridiculous business started all over again: inflation-deflation-reflation. Currency manipulation is not the cause of capitalist crises, but its effect. Inflation is like the froth on a glass of Guinness—increased by pouring fast but always dependent on the liquid (world trade) which holds, or  releases, the gas (paper money).

Slumps are caused by the anarchic nature of capitalist production. A slump in cars, say, spreads like the plague—to steel, rubber, glass and components. In housing, to bricks, timber, plaster, cement, paints and equipment. Inflation only affects the working class to the extent that it devalues (lowers) real wages, thus restricting the goods that the watered-down money will buy (or, more likely, not buy). Deflation brings demands from the employers for wage reductions because “deflated” money buys more. When prices are falling, as they did on the Gold Standard in the twenties, the mine owners demanded wage reductions, and got them, on the grounds of the workers’ “increased purchasing power”.

A knowledge of the economics of capitalism gives the only satisfactory explanation of inflation; but merely a slight acquaintance with the facts of recent history is needed to realise that deflation under Thatcher would be about as much use to the workers as it was to their grandfathers under Stanley Baldwin in 1925.

Horatio.