The cost of living is not rising—it is the value of money which is going down.
To understand this statement it is necessary to be clear about the origins and function of money. The first trading was undoubtedly in the form of barter, that is, an exchange of one kind of desired produce for another. The restrictive nature of this form of trading hardly needs explanation. The finding of someone who has a surplus of what you want and at the same time is in need of what you have to spare would be difficult enough even today. Moreover, the system of barter makes it almost impossible to exchange a large surplus of one commodity for a variety of different items for which the trader has a need.
The invention of the idea of “money” solved both these problems. Bushels of corn, for example, could now be exchanged for coins of a precious metal which could subsequently, and at convenient times, be exchanged for a variety of items such as clothing, tools and jewellery. The important thing to remember is that the metal used for the coins had an intrinsic value every bit as much as the corn, the clothing, the tools or the jewellery.
Gold and silver coins were early adopted as convenient units of value for exchange with other items of value. Gold in particular was suitable because it was durable, unaffected by time or ordinary chemical agents and so precious that large values were easily portable. Silver, of rather lower value per unit of weight, was adopted for the exchange of items of smaller value or in conjunction with gold to arrive at a more exact evaluation. The word “pound” originally meant a pound weight of silver.
Debasing the Coinage
The first requirement of “money” is that the recipient can be assured that the coins he is receiving in exchange for his goods are of a known weight and purity. This soon became the responsibility of the sovereign ruler of the country of origin of the coins—the king or emperor. Our word “sovereign” for gold coins is a reminder that they bore a relief of the monarch’s E head—his “seal of approval”. Coins were produced at the Royal Mint to a controlled weight and purity. A small amount of base (inferior) metal was normally used in the making of coins to produce a more durable alloy but from time to time monarchs abused their control over the money supply by increasing the proportion of base metal to their own advantage or to meet their debts. The most flagrant example of this came to light quite recently when Roman coins minted in the third century AD were discovered in a field in Lincolnshire [1]. Analysis of some of the coins revealed that their silver content varied from 18 per cent to rather less than one per cent. As recently as the reign of James I gold coins were debased from 11/12 pure gold to 8/12 in order to meet debts incurred by the exchequer [2].
For most of the 19th century the gold content of the "sovereign” was fixed by law at just over a quarter of an ounce and it should be noted that from 1815 to the beginning of the First World War prices remained more or less stable [3]. However, by that time there had been a further development: the general substitution of paper money for coins.
Paper Money
The idea of paper money really had its origin in the receipts or “notes of hand” given by goldsmiths as early as the 17th century to those who wished to deposit their gold with them for safe-keeping. These receipts came to be accepted as a means of payment and, when banks were formed, they too issued “notes” against the deposit of gold in their vaults. Such notes also had the advantage of being light compared with gold coins (gold is almost twice as heavy as lead) and for large sums this was a consideration.
The important thing to notice in this context is that these bank notes were readily “convertible” into gold coins on presentation at the bank. This was still the case when the issue of notes became a government monopoly along with coins— in this country by the Bank of England. The first such notes were for £5—the “fivers” which the modern reader may come across in the literature of the period. These bore the words: “I promise to pay the bearer on demand the sum of five pounds”—that is, five gold sovereigns—and the signature of the Governor of the Bank of England. Later, £1 notes were also issued and for a time these also were fully convertible into gold. Then at the outbreak of the First World War convertibility was suspended, resumed in 1925, and abandoned during the depression of 1931 [4].
Released from the obligation to redeem notes for gold coins, the Bank of England could issue bank notes to meet the demands of the exchequer—well beyond the amounts collected in taxes. Printing money became an easy source of finance, not only in wartime but when in peacetime the call for increased public expenditure could not be resisted. This action on the part of successive governments was “currency inflation” and inevitably resulted in increases in prices.
Currency Inflation
By the operation of the market—if, for example, the number of pound notes in circulation is by this means doubled, the price of commodities will also be doubled. The pound notes will be worth only half their previous value so that twice as many will now be required to purchase the same good or services. This increase in prices docs not occur immediately; there is a time lag while the effect of currency inflation works its way through the system.
It will be seen that major increases in the money supply in 1968, 1973 and 1978 were followed by increases in prices of the same order in 1971, 1975 and 1980. Below the graph we indicate the governments in office and responsible for currency inflation which was seldom below 5 per cent and topped a staggering 25 per cent in 1973. It should be noted also that the term “inflation” is these days used to describe increase in prices. This is quite incorrect and confuses the issue. In the writer’s dictionary the monetary definition of “inflation” is:
increase in the amount of money, especially paper money, in circulation leading to an increase in prices [6].
This mis-use of terms, whether intentional or not, opens the door to the suggestion that there are other causes for the major increase in prices in recent years—the most insidious being that of an increase in wages.
This reason for price increases was favourite with the last Labour government in spite of all evidence to the contrary. It is still being repeated in some quarters, most notably by leaders of the Confederation of British Industries. A recent report in The Times states that:
In informal talks with ministers, CBI leaders have underlined their strong belief that a tight rein on pay increases in the coming round (of pay negotiations) is vital if inflation is to be reduced to the single-figure target the Government has set . . . [7].
Inflation and Wages
It cannot be over-emphasised that increased wages do not cause a general increase in prices. There is no such thing as the “wages-prices spiral”. Nor is it a “chicken and egg situation” in which no-one knows which comes first. The sequence is quite clearly: currency inflation by the government-general increase in prices—demands for increased wages, as prices rise, and final wage settlements.
In an article headed “Prices and Taxes Rising Faster than Earnings” a contributor to The Times reports that:
Prices and tax stoppages are now rising faster than pay. Although the typical worker has seen his average earnings rise by about 14 per cent over the last year, he would have needed an increase of 15.7 per cent in order to maintain the real purchasing power of his pay packet [8].
This is based on the Government’s tax and price index published on May 22 1981. It hardly looks from this as if wages are pushing prices up. Again, the Treasury seems in no doubt about the sequence of events. In a recent study entitled The Role of Money in Determining Prices, the conclusion is:
Generally we could accept the strict monetarist proposition that a 1 per cent change in money would lead to a 1 per cent change in prices in the long run, with the main effect coming after a lag of between six quarters and three year [9].
If the reader still has any doubts as to the truth of the statement at the head of this article he has only to enquire about the present day value of a sovereign, or a quarter of an ounce of gold. He will find it is about £55. If our wages were today paid in sovereigns we would have no need to worry about the cost of living.
Why then Inflation?
The expenditure by governments in the industrially more advanced countries has reached colossal proportions. In the financial year 1979-1980 in this country, total “public spending” was little short of £80,000 million and rising [10]. Such expenditure was on defence, housing, education, health, social security and similar areas of government responsiblity.
When this country was on the gold standard the money had to be collected in the form of taxes of one kind or another—or borrowed. Borrowing normally only postponed the day of reckoning when the money plus interest would have to be found by increased taxation. Taxes are of two kinds; those related to income (direct taxation) and those unrelated to wealth (indirect taxation). Income tax is an example of the former and tax on beer an example of the latter.
Currency inflation opened up another source of finance. In the House of Commons recently Keith Joseph made the .matter quite clear:
The Government had to obtain the money it spends from taxing, borrowing or printing. There is no other source [11].
From a capitalist point of view the problem with increases in income tax is that they reduce profits. Even those taxes apparently paid by wage-workers are actually indirectly paid by their employers. In the last analysis, pay negotiations are based on “take-home pay”.
This is not to say that governments are unaware of the dangers inherent in currency inflation. Their hope has been that by this means the economy could be stimulated by the additional demand created by the increased money supply. The failure of this policy has led to what has become known as the “monetarist” school of thought by which the attempt is made to reduce the increase in the money supply by economies in public spending. But such economies can have no effect on the current trade recession— another dilemma which cannot be resolved within the economic framework of capitalism.
John Moore
REFERENCES
[1] Daily Telegraph 24/6/1980
[2] Harmsworth Encyclopaedia
[3] Socialist Standard Feb. 1979
[4] Socialist Standard Mar. 1980
[5] Daily Telegraph 29/12/1980
[6] Universal Dictionary of the English Language 1932
[7] Times 12/6/1981
[8] Times 23/5/1981
[9] Times 29/6/1981
[10] Times 18/6/1981
[11] Times 27/1/1981
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