Devaluation of the pound showed how much confusion there is in the minds of government ministers and their economic advisers; subsequent events have added to it. It was carried out in November 1967 by the present Chancellor of the Exchequer, Roy Jenkins, only four months after his predecessor James Callaghan had denounced such a measure on the ground, among others, that it would lower real wages by raising prices. Naturally Jenkins had to claim that it was a very good thing and that it would give a golden opportunity to cure the balance of payments. He was confident that, as he put it, "of one thing we can be sure: 1968 will be different” (Article in Financial Times, December 30, 1967).
Apart from the fact that devaluation, as anyone could have foreseen, produced a big increase of profits for exporting companies, 1968 has been just like 1967—crises, government attempts to keep wages down, and a balance of payments deficit very little less than in the previous year. On the first anniversary of devaluation the financial columns were full of articles by economists and financial experts trying to explain why their forecasts had gone wrong. Some of them, influenced by American economists, have begun to question the validity of their own theories about money. This has been helped on by the disquiet of the International Monetary Fund and other bankers who lent the British government large sums of money to support the pound. They want to be sure that their loans will be duly repaid, and not in a currency depreciated by still further devaluation. The IMF insisted that 'the money supply' should be kept under control and from time to time they come over to ask Jenkins what about it. They are well aware that the prevailing theories held by the government and its advisers reject the idea that there is any need to control money supply and that, on the contrary, it should be expanded.
It is true that every Chancellor in the past quarter of a century has proclaimed his intention of stopping inflation, but this was merely a sop to electors, not to be taken seriously. George Brown recently admitted that inflation was government policy, but that it was to be kept to 'a minimum' (Sunday Times March 31, 1968).
The consequence has been a full-scale controversy about money itself. In the autumn of 1968 scores of articles appeared attacking or defending accepted theories; confused however by the fact that the writers could not agree among themselves what it was they were discussing. A typical statement appeared in The Times (September 28, 1968) from a correspondent who pointed out that while the International Monetary Fund defines money as currency (notes and coin) plus the money on current account in the cheque issuing banks, the British government’s Central Statistical Office defines it as also including money in deposit accounts of banks, and also money on deposit in other financial organisations—a difference running into something like £400m.
Still another school treats money in the much more limited sense of notes and coin only, which the last official committee on the question, the Radcliffe Committee, in its Report in 1959 airily dismissed as only “the small change of the monetary system".
The controversy was brought a stage further by an article in the Evening Standard (March 11, 1968) by Prof. Victor Morgan who demands a return to the Quantity Theory of Money. Unfortunately he too omits to say which definition of money he is using. His meaning is thrown more in doubt because he writes of the Quantity Theory having won general acceptance in the late 18th century and having continued to be accepted until the 1930s; the fact is that there have been several quite different theories under the same name, differing from each other in how they defined money. One of the earliest held that the price level is raised or lowered according to whether there is a large or small amount of precious metal in the country. (This was dealt with by Marx in Capital, Vol. I. p.139, in the Kerr edition).
Other quantity theories have been based on notes and coin; on those plus bank deposits on current account; or plus all deposits. It is possible that Prof. Morgan means one of the two last-named.
By contrast it is clear that when Lord Cromer, former Governor of the Bank of England, attacks the government for unduly increasing the money supply he means the note issue.
Prof. Morgan gives a description of the Quantity Theory which would fit several variations of it, saying for example that there is a strong connection between the growth of the money supply and the price level, and he cautiously adds that “no-one has yet demonstrated conclusively the precise ways in which monetary influences are transmitted” (meaning transmitted into changes of the price level).
He made no reference to Marx’s study of the subject. Marx did however supply the missing link. He showed that gold functions as the money commodity, the universal equivalent for all other commodities because, like them, it is an embodiment of value, the socially necessary labour required to produce it. When a certain total quantity of gold in the form of coins functioned as money in this way, to meet market needs corresponding to a given volume of production and buying and selling transactions, it represented a total quantity of value. Marx showed that if gold coin is replaced by inconvertible paper money and if the issue of paper money is increased (the note issue in Britain is about six times what it was in 1938 though production has less than doubled) the result is a corresponding rise of the price level, in addition to any other factors pushing prices up.
The crux of the matter is that if the notes in circulation are doubled they still represent only the same total amount of value, so that each note represents only half the value represented by each note before the doubling took place. It takes two notes to buy what formerly one note would buy: prices are doubled.
Unlike other theories, Marx’s explanation does in fact explain the big increase of the general price level and this is the answer to the economists (including Keynes) who dismiss Marx as of no account. The re-appearance of quantity theories of money marks the growing disillusionment about Keynes and his theories.
The body of opinion behind the views of Prof. Morgan is growing in this country and it is possible we may see a shift of official opinion in that direction, particularly if the Tories come into power. Prof. Morgan outlines what he considers to be the advantages of so doing:
If the Quantity Theory is right, then so long as the money supply is unchecked the combined efforts of Mrs Castle, Mr Jones, and Mr Woodcock will be powerless to control inflation; only an effective control of the money supply could achieve this end, and if this control were made effective both incomes policy and the present interference by the Bank of England would be unnecessary.
Someone thinking on similar lines is Sir George Bolton, chairman of the Bank of London and South America, but he takes a gloomier view. He told his shareholders that "if the capitalist system is to survive, confidence in paper money must be restored”.
If such a shift of government monetary policy takes place it should not be forgotten that we have had it all before; both the long periods in which there was no excess currency issue and other periods (as at present) when it is the rule. Capitalism works just as evilly for the workers whichever way it goes. It is a capitalist problem, not a working-class one.