Finance & Industry: If only prices would come down! (1961)

The Finance and Industry Column from the January 1961 issue of the Socialist Standard

If only prices would come down! 

A woman reader of the Evening News (28/11/60) wrote referring to the old saying that what goes up must come down, and asked if this applies to the cost of living; “if so I haven’t noticed it”.

About 99 per cent. of the population would say, if asked, that they “want prices to come down”. They don’t really mean this. What they mean is that it would be very nice if the prices of the things they buy went down and the price of the thing they sell went up. The worker would like to sell his mental and physical energies to his employer at a higher price (a higher wage) and at the same time get more for each pound he spends, through lower prices in the shop. And manufacturers who sell industrial products would like to see those prices go up and all other prices (including wages) go down.

One exception to this general attitude is the common practice of trade unions of associating themselves with their employers in approving higher prices. Thus the railway unions approve higher fares and the coal miners higher prices for coal.

But coming back to the question in the Evening News, would workers be better off if prices were lower? France a few months ago and Russia this month gave one kind of answer to the question, the answer being that it did not make any difference. What happened was that France cut the face value of her currency by 100, and the Russians cut their rouble by 10. At the same time all prices, wages, fares, etc., were cut in the same proportion, so everyone was in just the same position as before.

But on some occasions prices have not been reduced by this kind of government action but have fallen under the influence of trading conditions. Did the workers gain then?

It happened in 1920-1922. Between November 1920 and December 1922 prices fell on average of 35 per cent.; like being able to buy for 13/- some article which had cost 20/-.

But in the same period wage rates fell on average by the same percentage (or perhaps a little more). So the worker who could buy articles at lower prices had fewer shillings in his wage packet to buy the articles with.

It was a time when unemployment was heavy and conditions were particularly unfavourable for trade union resistance to wage cuts.

New Russian Rouble

The declaration of the Russian government that as from 1 January 1961 the official rate of exchange of the rouble will be 2.52 to the £ which will make it of higher value than the dollar and equal to about 8/-, will not mean much in practice since (unlike the dollar) it is not tied to gold and is not freely convertible into pounds or dollars. Commentators in the newspapers mostly take the line that the aim of the Russian government is prestige, the satisfaction of having at least a nominal exchange rate greater than that of the dollar. In addition however there is already the long term purpose of making the rouble eventually a gold backed world currency acceptable in inter-national trade as the pound and dollar have been.

The Daily Worker (17/11/60) anticipates that “the new exchange rates and the change in the gold content of the rouble herald the opening up of peaceful competition between the rouble and the dollar”, and “It may not be long before the rouble begins to challenge the dollar for primacy in world trade”.

There was a time when even the Daily Worker would have recognised that the trade war between capitalist states is anything but “peaceful competition “.

Rouble Millionaires

The Daily Telegraph (6/12/60) tells of a Russian woman who got into the ranks of the rouble millionaires by a piece of private enterprise that landed her in jail for three years. She ran an organisation, complete with a lawyer as secretary, a “scientific consultant”, an accountant, and a network of agents selling cure-all herbs at 45/- a packet. When arrested she had 700,000 roubles (worth about £60,000 at the old rate of exchange) and had just bought a country house for 300,000 roubles. “Her daily earnings would sometimes amount to 5,000 roubles, or eight times a worker’s monthly wage”.

The Economic Horizon

A year ago most of the political and economic forecasters were happy about the boom time ahead and still confident that if anything went wrong the government could fairly easily take the steps that would put the economy back on expansion. Now they are not so sure. The fact that they are all asking the question is itself a pointer to growing uneasiness, made greater by the foreseeable but generally not foreseen collapse of motor exports.

Now it is accepted that America and Canada are likely to have unemployment greater than in any year since the end of the war and there is the natural fear that British export trade may fall further and the jobless increase in number.

Gone is the post-war optimism based on the belief that they could always dip into the Keynesian remedies and keep everything under control. One of the current activities is the setting up of export councils to boost the sale of British goods in overseas markets, including the Export Council for Europe set up by the Federation of British Industries and manned by “some of the most prominent men in British industry and commerce ” (Financial Times, 11/11/60).

But before anyone accepts that the export problems of British capitalism can readily be solved by pushing into other markets (and thereby crowding out some other would-be sellers) it has to be remembered that other sections of the capitalist class would have had the same idea. Canada has appointed a “super salesman” to head its export drive, in the person of a new Minister of Trade and Commerce, and the American government is trying to boost their exports. Sweden, too, is aiming to solve its problems by more exports, and their eyes are fixed on the market for their goods in Britain. And to add to the troubles of all of them Russian exports are finding their way into many of the world’s competitive markets.

Paul Bareau, the new economic editor of the Daily Mail (25/11/60) argues that the present troubles in this country are due to “the excessive optimism and rashness of the years 1958 and 1959. Restrictions on hire purchase should never have been completely removed. This freedom was abused and we are now paying the price”.

So you take your choice between those who say that there is no need to worry because the government can always take action to put things right, and those who say, like Mr. Bareau, that the government did take steps but they were the wrong ones and had the effect of making things worse.

However, Mr. Bareau is cautiously hopeful. “The coming year will provide plenty of problems; but they will not be the problems of a great slump”.

Edgar Hardcastle

Inflation and prices - Part 2 (1965)

From the August 1965 issue of the Socialist Standard

Link to Part 1

II. The influence of gold

In our first instalment, we examined the commodity’s value and we discussed two of the reasons for price fluctuations—the forces of supply and demand and the influence of monopoly conditions in supply. The examples were of fluctuations above and below what may be called the normal price and, as we have said, it would simplify matters if we could assume that the normal price is the value and that fluctuations due to supply and demand are variations above and below value.

In actual practice, the normal price is not always the same as value, and probably the great majority of commodities do not normally sell at their value, but at some point above or below it. Marx developed this question of what he called all the same thing as what the manufacturer calls his cost of production. It is arrived at from the labour theory of modifications to his theory and showed that the normal price of commodities in the market is not their value but what he called the price of production. The first thing to notice about this is that the Marxian price of production is not at value, but it takes into account the fact that there is a continuing tendency for the return on invested capital to be equalled in different industries so that if the average rate of profit for example is taken at 10 per cent, the capital invested in the oil industry or in agriculture or in shipping, will all tend to receive something approximating to the same 10 per cent average rate of profit.

The next point is that changes in the value of a commodity can cause changes in its price. The value of a commodity falls, for example, if through inventions and discoveries the amount of socially necessary labour needed for producing it is reduced. In that instance, the value would fall and the price would tend to fall with it. On the other hand, it is possible for the value of a commodity to rise because the amount of socially necessary labour required to produce it increases. This could happen to coal and other minerals. As the richer and more readily accessible seams of coal are exhausted and mines have to go deeper, more labour is required to produce a ton of coal than before, and the value rises, and as the value rises, the price will tend to rise with it. So, to take our example of 24 hours being the amount of socially necessary labour required to produce a bicycle, if it fell to 20 hours or rose to 40 hours, this would cause a fall or a rise in the price of bicycles.

So much for changes in the prices of individual commodities, but what about general changes of all prices? Why was it that in 1921 and 1922 the price level in Great Britain dropped by about a third and why is it that the present price levels are three or four times what they were in 1939? Why were prices rising at the end of the 19th century and in the early 20th century? To explain these movements, we have to come back to our example about the bicycle and the suit of clothes and one ounce of gold, which was by law cut up into four gold sovereigns each weighing about one-quarter ounce.

We have seen that gold has a value like all other commodities. So has silver or lead or brass or aluminium. The value of these and all other commodities are related to the amount of labour needed in their production. Because of this factor common to all commodities, the value of each commodity can be expressed in terms of any other commodity. In fact, historically, because of certain conveniences attaching to gold, the capitalist trading world came to accept gold as the universal equivalent, the money commodity and all commodities came to have their values expressed in terms of gold. We might imagine that the trading world could have made use of weights of gold and expressed the prices of all commodities in terms of a weight of gold—one-quarter, one-eighth or one-sixteenth of an ounce, etc., but this was obviously not so practical for purposes of internal trade as to have the gold turned into coins of legally fixed weights, although of course the particular weight differed in different countries.

In Great Britain, as already mentioned, gold coins were by law fixed at about one-quarter an ounce of gold. Actually the legal relationship was that one ounce of gold was priced at 77/10½d, but it is simpler to call it about one-quarter ounce per gold sovereign. Under the currency system as it was operated in Great Britain in the 19th century, and similarly in the U.S. with regard to the dollar, the value relationship between commodities in general and gold was preserved by what is called convertibility. Gold coins were in normal circulation alongside Bank of England notes, but there was a legal right at any time for a holder of notes to convert them into gold or to take gold bullion to the Bank of England for conversion into notes or coins. The gold bullion or coins were freely imported or exported.

Under these conditions there could never be any but minor variations between the purchasing power of Bank of England notes and the purchasing power of gold. Now we may ask how in such circumstances was it ever possible for the prices of commodities to undergo a general rise or a general fall. The answer is that, just as the value of commodities of any kind can rise and fall in certain circumstances, because more or less value is required to produce them, the same thing can happen to gold. The value of gold itself can undergo a change. If, for example, methods are devised which produce or refine gold more efficiently, then it is possible for the value of gold to fall, or, conversely, if it becomes more difficult to produce gold, then the value of gold would rise. The only thing to remember about this is that it operates in a sort of inverse direction, that is to say that a fall in the value of gold expresses itself as a rise in the price of all other commodities and vice versa.

Now let us come back to our examples of the bicycle and the ounce of gold. They had equal value because both of them take 24 hours of socially necessary labour for their production, but suppose that the labour required, to produce one ounce of gold was reduced from 24 hours to 12 hours. Twenty-four hours of labour would still be required for one bicycle, but 24 hours would now produce two ounces of gold instead of one ounce, so that one bicycle now has the same value as two ounces of gold. Under the requirements of the law in Great Britain, two ounces of gold were still divided into quarter ounces; so the bicycle now would equate with £8 instead of £4. Because the value of gold had fallen to one-half, the gold price of the bicycle would be doubled from £4 to £8, and of course the opposite could happen if the value of gold rose, that is to say, if more labour came to be required to produce one ounce of it than before.

A fall in the value of gold caused by new and more efficient production processes was in fact going on at the end of the 19th century and the beginning of the 20th century and, in accordance with the explanation already given, it showed itself as a general rise in the prices of other commodities. There is another circumstance in which, even with a convertible currency, you could have a general rise or general fall in prices. This is when booms and slumps occur. In a boom, every manufacturer is trying to buy raw materials, machinery and so on, with the result that the price of these things would rise and there would be a general rise in prices. In a slump on the other hand, the reverse takes place. Manufacturers and traders in a slump are all trying to sell goods at cut prices in order to get hold of money, and in these circumstances, you could have a more or less general fall in the price level.

Edgar Hardcastle

(To be continued.)

The ABC of Inflation (1972)

From the October 1972 issue of the Socialist Standard

The Labour Party and the Tory Party accuse each other of being responsible for the continuing rise of prices, but there is absolutely nothing to choose between the records of the two parties. Measured by the government’s own Retail Price Indexes, the Labour government 1945-51 scored a 28 per cent rise and the Labour government 1964-70 another 30 per cent (of the 1964 level); while the Tories marked up 50 per cent between 1951 and 1964 and another 17 per cent (of the 1970 level) between 1970 and June 1972. Added to the 32 per cent rise recorded between 1939 and 1945 under the National government (admitted to be an understatement), the present price level is at least four times what it was before the war.

In 1944 the three parties—Tory, Labour and Liberal—in the National government committed themselves to do what they could after the war “to stabilise prices”, and at each of the eight general elections Labour and Tories both repeated the promise —and it hasn’t meant a thing.

Individual prices can rise (or fall) for several different reasons. Good harvests will reduce prices and bad harvests will raise them. Booming trade increases demand and sends prices up, bad trade will send them down again. Even against the present trend of rising prices metal prices fell heavily last year as demand slackened off—the price of copper fell by 40 per cent. Improved methods of production, by reducing the amount of labour required, will operate to lower prices, while the exhaustion of easily accessible seams of mineral ores (coal and metals) will operate the other way because mining at greater depths or in less rich seams requires more labour to produce each ton.

During the nineteenth century when all of these price factors operated the general price levels in Britain went up in some periods and down in others, or remained nearly stationary, but the extent of the movement up and down was always within a range of about 25 per cent either way—nothing like the 300 per cent added since September 1939. Wages also rose and fell during the nineteenth century; sometimes in line with the movement of prices, sometimes by more or less, and occasionally wages moved in the opposite direction to prices.

Fallacies         

All sorts of explanations have been offered for the abnormal rise of prices since 1939 as compared with the up-and-down movements of prices in the nineteenth century. Most of the so-called explanations take the form of blaming some group or other for being “greedy”; bankers, or manufacturers, or retailers or trade unionists. It is an explanation that a glance at certain facts will show to be nonsense. Did the copper companies reduce their prices by 40 per cent in 1971 because they had suddenly become less greedy? Between 1948 and 1968 prices rose by 100 per cent in Britain, but only by half that amount in America and Switzerland: are the British twice as greedy? In the nineteenth century did the whole population go through alternating phases of being more greedy and less greedy? Between the end of 1920 and the middle of 1933 prices fell by over 50 per cent. The fall was continuous for thirteen years. What had happened to greed?

The fact is that sellers always try to get as big a price as they can, “as much as the market will bear”, and if they can get more or are forced to take less it is because external circumstances over which they have little or no control determine that it shall be so.

Two popular beliefs are that prices go up because wages go up, or vice versa. It does not occur to those who hold one or the other view that wages are prices—the price the worker gets for the sale of his labour-power, his mental and physical energies, to the employer. So, properly stated, their two propositions become the single useless assertion that prices go up because prices go up.

If they re-stated it in the form that one group of prices (wages) go up because the other group of prices go up—or vice versa—they overlook the truth that both groups of prices go up because of common external factors which affect both of them, more or less to the same extent. To illustrate this we can note that in summers when more Londoners visit the country the harvests are good. Nobody asks whether it is the London visitors who make the corn ripen, or whether it is the ripened corn which attracts the visitors. It just happens that a long hot summer both produces the good harvest and attracts visitors to the country — the sun is the common cause of both.

Paper & Prices

The new factor which has operated to push up prices abnormally since the war—the “sun” in relation to prices and wages—has been the continuous and accelerating “depreciation of the currency”. In the nineteenth century the amount of notes and coin in circulation was controlled by the device, enforced by law, that the pound sterling was a fixed weight (about a quarter of an ounce) of gold, and Bank of England notes were always convertible on demand into the corresponding weight of gold. Nowadays the pound is an inconvertible paper currency and enormous additional amounts have been printed and put into circulation. In 1939 the total of notes and coin in the hands of the public was £454 million. It is now over £3,500 million and rising steadily, an amount far in excess of whatever increase would have been necessary in line with the actual increase in production and sales of goods.

Karl Marx, whose study of the subject has never been rivalled, enunciated the economic law in the form that if the amount of inconvertible paper currency exceeds the amount of gold that would be needed if gold coins circulated, the excess simply operates to push up prices. Before Keynesian doctrines were swallowed by most of the modern economists and politicians, this relationship between excess issues of inconvertible notes and the price level was generally accepted by economists (including Keynes). In 1919 the government deliberately put a stop to the issue of additional notes and this played a large part in the subsequent fall of prices. Now the political parties and the trade unions have deceived themselves, against all past experience, into the belief that what they call increasing “money supply” leads to greater production and the maintenance of “full employment”.

Facing Facts

Not quite all of the economists and financial authorities have swallowed the “new economics”. One exception is the First National City Bank of New York which, in its Monthly Bulletin for January 1970, ridiculed the notion that rising prices are due to greed or to the wage demands of trade unions :

“Most of the blame for inflation is misplaced. For although inflation has a hundred faces, it has but one essential cause : overly expansive and erratic monetary policy that has pushed up the quantity of money more swiftly than the quantity of goods and services.”        

Governments, even if they perceived the truth of this, are afraid to repeat the restrictive policy applied in 1919 because they think it might lead to a big depression and much heavier unemployment. The economist Lord Robbins, speaking in the House of Lords on 5th July, said:

“I know of no case in history where inflation of the order of magnitude of that from which we are now suffering has been stopped by measures of this sort without that sort of effect.”

The government’s view, according to Patrick Jenkin, Chief Secretary of the Treasury, is that while curbing the money supply would affect prices it would do so only after a considerable time lag: –  “The immediate effect would be increased unemployment and reduced output. As a solution, it was politically, wholly unacceptable”. (Financial Times 17 July)

They, Lord Robbins and Jenkin, are equally afraid that continued and accelerating depreciation of the currency may end with the kind of monetary collapse that Germany experienced between the wars.

Most workers believe that if only prices came down or were at least stabilised their chief troubles would be over. They should remember that while it is true that at present hundreds of thousands of workers cannot afford to buy a house on mortgage, exactly the same was true between the wars when prices of houses and prices in general (and wages) were only a fraction of what they are now. For the workers capitalism means hardship whether prices are high or low or falling or rising.

Edgar Hardcastle

Letter: Do High Prices Prevent Unemployment? (1957)

Letter to the Editors from the August 1957 issue of the Socialist Standard

We have received the following letter. Our reply follows:

Editorial Committee.

Welwyn Garden City, Herts.

The propaganda of the Labour Party is to the effect of trying to bring down the Tory Government because of rising prices and the Tories' election promises. The Labour Party say that if returned to power, then their policy would reduce the cost of living and the workers would be better off.

Article “Mystery of Rising Prices" says “a fall in prices might mean a really big rise in unemployment, which would lose them votes"; can this be explained more fully, please.

Yours faithfully,

Thos. W. Creswick.

Reply

As we have seen Labour Governments at work, it is not necessary to wonder what they would be likely to do about prices for in 1945 they promised to keep prices down, but during their six years of office retail prices rose by over 30 per cent.

It is erroneous to assume that the workers would gain from a fall and lose by a rise of prices: it depends on whether conditions are relatively favourable for resisting wage decreases or pressing for wage increases (i.e., whether there is little unemployment), and whether the workers take full advantage of those conditions. Sometimes wages have risen more than prices (as during the past few years); sometimes wages have risen less than prices (as between 1947 and 1951); sometimes when prices have fallen wages have fallen less than the fall of prices, and sometimes they have fallen more than the fall of prices.

Our correspondent is wrong in thinking that the article from which he quotes asserted that “a fall in prices might mean a really big rise in unemployment” The article said that that thought is in the minds of Labour and Tory governments: it is what they think, not what we think.

Their belief about low prices and high prices making for high and low unemployment probably owes its existence as much as anything to confused memories of prices and unemployment between the wars, when falling prices and heavy unemployment existed together. The idea grew in their minds that falling prices are the cause of unemployment and, therefore, high prices must be a way to keep unemployment at a low level. So during all the succeeding years when governments have argued the need to keep prices down, they have had the uneasy feeling that if they really did this (or worse still if they reduced prices) they might be increasing unemployment or even starting a trade depression.

Current opinion on the question of a steady price level can be seen from an article by Mr. Alan Day in the Observer (23/6/57) dealing with prices and unemployment in U.S.A. He wrote: “It seems justifiable to think that price stability in a free enterprise economy can be combined only with levels of unemployment which are politically unacceptable.” In other words, you can have very low unemployment and rising prices or a steady price level but with heavier unemployment, and that will lose the government votes. Lord Brand had the same idea in mind when be challenged Mr. Harold Wilson, M.P., to say whether he would still be in favour of measures to stop inflation “if it involved an appreciably higher level of unemployment here for the time being than that which has ruled since 1946—say three per cent. instead of, as now, between one per cent, and one and a-half per cent . . (Letter to Times, 5/7/57.)

The above statements are concerned with the supposed effects of keeping prices level. Much more alarming views are held as to what would be the effect of actually reducing prices. As a Daily Mail editorial (12/7/57) said: “Better to have inflation and everyone at work than deflation and 3,000,000 unemployed.”

Muddled Thinking

It is, however, an example of muddled thinking. It treats two quite different causes of general rise and fall of prices as if they were the same. The first is the result of manipulating the currency When the pound sterling was freely convertible into gold and was by law fixed at a certain weight of gold, the Government, by altering the law, could have reduced the amount of gold in the pound (the sovereign) and thus could have increased prices; or could have increased the amount of gold in the coin and thus could have lowered prices With a currency that is not convertible a government could increase or decrease the number of notes in circulation and similarly raise or lower the price level.

After the first world war many governments inflated their currency and thus raised prices (sometimes to an enormous extent), and later on withdrew or cancelled the note issue and replaced it by a smaller issue of a new currency, and thus lowered prices again. Russia carried out the latter operation in 1947 and Germany in 1948. The German Government withdrew and largely cancelled a Reichsmark issue estimated to have been as much as 100,000 million and replaced it with D marks to the amount of under 11,000 million; with consequent reduction of high black market prices to normal market prices at lower levels.

Continuously for nearly 20 years the British Government has followed the opposite policy, of excessively increasing the note issue. The other kind of general rise or fall in the price level that concerns us here is that which operates in booms and slumps. At the start of a boom keen competition among the capitalists to secure materials needed for expanding production sends up prices, while during a slump the holders of commodities are glad to turn them into money at heavily reduced prices. But booms and slumps do not occur because of currency changes, and there is no evidence that price movements through currency changes have any material influence on the course of booms and slumps, though they may have a temporary stimulating or depressing effect while adjustment takes place.

When capitalism is set on an expanding course currency changes may interrupt it, but will not hold it back; and when, through serious disproportion of production and dislocation of markets, capitalist production is contracting, currency changes will not reverse the tide.

After the first world war the British pound had fallen in relation to the dollar from 4.86 dollars to about 3¼  dollars. By stages to April 1925, it was brought back to its original level in relation to gold and the dollar. Although it was the Labour Party’s official view that “a precipitate return” to the gold standard “may aggravate the existing grave condition of unemployment and trade depression” (Labour Year Book, 1926, p. 160), this did not happen. The amount of unemployment which in the three years before 1925 had averaged 12.1 per cent. was actually a little lower (11 per cent) in the three years after 1925. And when the world-wide slump came in 1930 all countries were involved, irrespective of the changes they had made in their note issues and the price levels they happened to have.

Experience since 1945 likewise fails to support the popular belief that inflation and rising prices are responsible for low unemployment. Britain, with a big rise of retail prices (about 50 per cent. since 1948), has had continuously low unemployment, but Italy, with a price rise of about 30 per cent., has had continuous heavy unemployment, at a percentage at least five times as high as in Britain. In Germany, where prices have risen much less since 1948 (about 15 per cent.), unemployment, which was at first very heavy, has been declining, at first slowly, but later on quite rapidly.

The evidence points to the conclusion that there is no truth in the belief that rising prices (through continual gentle doses of inflation) have been responsible for the low unemployment in this country since the war, and that there is no truth in the hope of those who hold this belief that continuing the same policy will prevent further crises and depressions.

In conclusion, it need only be added that deflation and a falling price level would not benefit the workers unless and to the extent that conditions enabled them to resist wage reductions and that they made use of whatever opportunity offered.

Edgar Hardcastle

Inflation and Deflation (1956)

From the July 1956 issue of the Socialist Standard

“In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity. This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crises occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own independent form. On the eve of the crisis, the bourgeois, with self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity. As the hart pants after fresh water, so pants his soul after money, the only wealth.”  

(‘Capital” pages 154-155, chapter 3, on “Money or the Circulation of Commodities.” Kerr edition.)

Letter: A discussion of the Money Question. (1927)

Letter to the Editors from the February 1927 issue of the Socialist Standard

To the Editor,

“Socialist Standard.”

Dear Sir,

In reply to A.W.S. in the December issue of the Socialist Standard, on the question of currency, you deny that inflation had taken place during the war period, and, presumably during the years immediately after. In support of that contention you employ a formula which, as you insist, requires for its validity, “any given period under normal conditions” (italics mine).

2) It would be interesting to know by what line of reasoning, or by what stretch of imagination, the war period, and the post-war period up to the resumption of the gold-standard by this country, could be regarded as normal, and treated as such by you.

3) Gold was at no time during the actual war period allowed to function freely as a commodity. The whole supply of the British Empire representing upwards of 60 per cent. of the total gold output of the world, was commandeered by the Government for the use of the Bank of England. Consequently the possibility of measuring the depreciation of paper-currency, relative to gold-currency, which obtains during normal times, by the excess of the market-price of gold over its mint-price, was denied us.

4) No person was permitted to melt or export gold. Those who defied the law were known to make large profits; and thus the depreciation of the paper-pound could be gauged roughly by inference.

5) During the sterling exchange slump in 1915, the Bank made a gallant attempt to maintain the sanctity of the gold-standard and exported a considerable quantity of the metal over a short period. The pace was found too hot, however, even for a Bank that could monopolise for its exclusive use the major part of the newly mined gold, in the world, and the Government was compelled to come to its assistance and by the mobilisation of American securities held in this country, and by their subsequent sale abroad, managed to peg the dollar-exchange at a rate that made it more profitable to settle adverse balances by the purchase of bills, or drafts, than to export bullion.

6) The phenomenon of rising prices preceding the increases of currency during the war period you cite as proof evident that inflation could not have been the cause of high prices. A little consideration, however, will convince one that such precedence is quite in harmony with excessive issues of bank credit. The total credit-units, i.e., legal tender—currency, plus cheque currency, operating at a given time being conditioned by, and strictly limited to, the mass of credit entered on the books of the banks.

7) Thus in the sense that currency is merely an effect, the terms inflation, and deflation, of currency, are meaningless. The amount of currency employed being that needed to allow commodities to circulate at their prices ; which may, however, be paper prices.

The war-time inflation was a credit inflation which in its turn necessitated additions to the currency to give effect to it.

8) For example, as late as 1920 the Government still owed the Bank of England the sum of £400,000,000, which it had borrowed from time to time on “ways and means” account. Is it reasonable to suppose that when the Bank created that mass of credit (purchasing-power) goods of a gold value equivalent to the nominal amount of the loans, were actually available for exchange? And if not then rank “lawism” was being indulged in.

9) It is a matter of common knowledge that on the unpegging of the exchange in 1919, and when gold was again permitted to function freely on the open market it immediately commanded a premium ; thereby pricking the bubble of pretence of non-inflation.

I am, sir,

Yours faithfully,

William Nicholls.

Reply to W. Nicholls. 

For ease of reference we have numbered our correspondent’s paragraphs, but before dealing with his letter in detail it may be as well to note that the only place where he attempts to deny, definitely, our case is in the last line of his letter. All his other objections are in the form of suggestions and inferences.

1) This paragraph reads rather strangely. Mr. Nicholls introduces an emphasis not to be found in our reply to A.W.S., when he says we “insist” upon a certain formula, We did not “insist.” We merely stated the facts in ordinary terms. Why does Mr. Nicholls introduce the emphasis? Perhaps the second paragraph will supply the answer.

2) Neither in the reply to A.W.S., nor anywhere else, have we stated that the war period, or the post-war period, could be regarded as normal. This is a deliberate misrepresentation of our statements. When this is noticed the emphasis of his first paragraph may be explained as a stepping stone to the misrepresentation of his second.

3) This paragraph is just journalistic claptrap. For some time after the war had started gold was still in use as currency, but neither then, nor at any subsequent period would a sovereign purchase more commodities in the ordinary market than a £1 currency note. The two circulated as equals, proving there was no depreciation of the paper currency here.

4) This paragraph displays an ignorance of the economic basis of money. Outside of currency, gold is a commodity—a paper note is not. The only place where they can be compared accurately is in the country issuing the paper. (See June, 1922, S.S.)

5) This paragraph shows the confusion that arises from merely looking at the surface. The Government had to make huge purchases abroad, chiefly in America, and, with the issue of the war in doubt, the paper of every belligerent country was either only accepted with reluctance or entirely refused. But this has nothing to do with “inflation” here. If the amount of paper currency had been reduced to one tenth of the quantity then existing, it would have made no difference to the reluctance to accept this paper abroad. Hence the paying for the goods ordered by the securities called in.

6) Here Mr. Nicholls has to abandon his case. The careful reader will notice that he does not deny our statement of the facts. Neither does he say that the rise in prices was due to excessive issues of bank credit. He only suggests it by a non-sequitor. The question is not whether a rise in prices could

result from an excessive issue of bank credit, but whether the particular rise we are dealing with did so result. Mr. Nicholls does not definitely claim that this was the cause.

Although it is a side issue in the present discussion we may point out that there is no such thing as “cheque-currency.” Currency consists solely of legal tender. Cheques are not legal tender and therefore cannot be currency.

7) This paragraph gives us our case once more. That the wartime inflation was a “credit inflation,” we had already explained in our June, 1922, issue. But a credit inflation is not a currency inflation. Neither are additions to the currency necessarily inflation, as we have already explained.

8) This paragraph really has nothing to do with our case, but it shows once again how Mr. Nicholls has missed the essentials of the problem. For what purpose did the Government borrow the £400,000,000 “from time to time”? Firstly, for munitions of war. Secondly, to pay interest falling due on the loans. In the first case it is not only “reasonable to suppose,” but an actual fact, that goods of a gold value to the amount of the loans were available—and delivered—to the Government to be consumed in war operations. In the second case it is simply an alternative to raising taxes to pay this interest. Ultimately these loans will be liquidated by operations with the taxes.

9) This paragraph mixes two things—the so-called unpegging of the exchange, a Government manipulation—with the restoration of the gold standard. Gold was not permitted to “function freely” until the gold standard was restored in 1925 and only then if the “bull” may be permitted, under certain restrictions. That there was no such thing as “the bubble of pretence of non-inflation,” was shown by the fact that neither then nor now will a sovereign purchase more than a £1 currency note. And this despite the enormously important fact that, along with the so-called restoration of the gold standard, the £.l currency note was, for the first time, made inconvertible.

Editorial Committee.

Inflation: the Endless Farce (1990)

From the April 1990 issue of the Socialist Standard

Every Prime Minister since the War has pledged himself or herself to tackle inflation as a top priority but rising prices have been with us continuously for half a century. Every year since 1938 prices have gone up and are still going up. The price level on average is about 24 times what it was before the war.

It was not always so. From 1850 to 1914 prices were stable; there were moderate fluctuations but the price level in 1914 was almost exactly the same as it had been 64 years earlier. And in 1919 the government decided to bring prices down and there was a fall of over 30 per cent between 1920 and 1925.

One of the rules of the game is that the party in opposition blames the government; that is, until it becomes the government itself, when it blames someone else, the greedy workers or the greedy shopkeepers and manufacturers; or the lenders of money not being greedy enough (according to the Chancellor of the Exchequer it is low interest rates that cause inflation).

There is a short answer to these glib excuses. Between 1850 and 1914 average wage rates went up by nearly 90 per cent, more than keeping up with the steadily rising productivity in industry – but no inflation.

If shop-keepers and manufacturers have the power, as well as the will to push up prices, why no inflation before 1914? And how come they allowed prices to fall heavily between 1920 and 1925?

As for interest rates, compared with the present 15 per cent bank minimum lending rate, the rates before 1914 were mostly between 3 per cent and 5 per cent – but no inflation.

Control of currency issue the key

It was not an accident that governments before 1914 and in the year 1919 knew how to stabilise prices, how to raise them and how to lower them. They, or their advisers, knew that the key to the situation is the amount of currency (notes and coins) in circulation. If this is kept in line with the needs of the growth of production, population, etc. prices will be stabilised. If currency is arbitrarily increased prices will go up. If arbitrarily reduced, prices will go down.

Before 1914 stability was maintained through the gold standard which closely controlled the issue of currency by the Bank of England. In 1920-25, on government instructions, the currency in circulation was cut. (The Bank burned £66 millions worth of notes).

Since 1938 there has been no control. Additional notes and coin have been issued in a continuous stream. The amount of currency in circulation with the public in 1938 was £442 million. It is now more than thirty times as much, at £14,388 million, and is still steadily increasing. The bath has been slopping over for fifty years and one dotty thing the Labour and Tory plumbers have been agreed about is that they need not turn off the tap. So why couldn’t they ask their professional advisers what to do? They did, but those advisers had all picked up the same dotty notion from the same original source. As early as 1923, in his Monetary Reform, the economist J. M. Keynes had argued that it is not necessary to have direct control of the amount of notes and coin.

Degeneration of Monetary theory

How monetary theory degenerated was told by Edwin Cannan, at that time Emeritus Professor of Political Economy at the University of London, in his Modern Currency and the Regulation of its Value [1931). Referring to what he called “the bank-deposit theory of prices”, he wrote (p.88):

  Within, I think, the last forty years a practice has grown up among the people who talk and write on such subjects, of regarding the amount which bankers are bound to pay to their customers on demand or at short notice as a mass of ‘bank-money’ or of ‘credit’ which must be added to the total of the currency (of notes and coin ) whenever variations in the quantity of money are being thought of as influencing prices. This is one of the most obstructive of all modern monetary delusions.

Cannan went on to show that this alleged mass of “bank-money” does not exist:

  with the exception of a small amount of currency which they keep ready to meet any likely demands on the part of their customers, the banks have . . . paid away money as they receive it, buying land and buildings for the conduct of their business with some of it, and investing or lending all the rest.

Cannan’s warning was not listened to. In the same year, 1931, the bank-deposit theory of prices received official endorsement from the MacMillan Committee (Report of the Committee of Finance and Industry, p.34). In its report the Committee rejected the idea that deposits in banks are cash deposited by customers, and argued that:

  the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on overdraft … a bank creates a credit in its books which is the equivalent of a deposit.

Keynes was a member of the Committee and was credited with having drafted that section of the Report.

The Committee “proved” that, on a deposit of only £1,000 cash, a bank could lend £9,000. Their method of proof was a masterpiece of rigged argument. They assumed that only one bank existed. This, they argued, really made no material difference. But also, and without saying that they were doing so, they assumed a prolonged series of lending operations which would take several months and in all that time no-one ever withdrew cash from the bank. Cash was assumed to go into the bank but no depositor or borrower took any cash out. It was a kind of bank that never existed in the real world.

If the doctrine had been based on reality its significance in relation to prices would be obvious. If an individual with £1,000 spent it or lent it the measure of its influence on prices would be just £1,000. If lent to a bank which re-lent it, its influence on prices would be multiplied by nine. What is more the MacMillan Committee’s arithmetic was related to the 10 per cent cash reserve banks ordinarily maintained at that time. As the bank cash reserve is now only about 1 per cent of total deposits the multiplier now would be not nine, but ninety-nine.

In recent years there has been a seeming conflict of views on inflation between the followers of Keynes and their rivals, the so-called monetarists. It is a phoney war. The high-priest of Monetarism, Professor Milton Friedman, suffers from the same delusion about the mystical powers of the banks as did Keynes, as will be seen in Free to Choose (by Milton and Rose Friedman, p.298).

Unlike the politicians and many economists, the professional bankers ridiculed the Keynes-MacMillan Committee monetary doctrine. They knew that banks do not have this fanciful power to “create deposits”. One banker, Walter Leaf, Chairman of the Westminster Bank, had this to say:

 The banks can lend no more than they can borrow – in fact not nearly so much. If anyone in the deposit banking system can be called a ‘creator of credit’ it is the depositor; for the banks are strictly limited in their operations by the amount which the depositor thinks fit to leave with them. (Banking, Home University Library, p.102).

Walter Leaf’s Westminster Bank is now the National Westminster. In the Financial Times (9 April 1984) it published as an advertisement a survey of its operations during 1983. Under the heading “Financial Highlights 1983” the following item appeared:

Money Lodged £55,200 Million
Money Lent £45,200 Million

No nonsense about receiving £55,000 million from depositors and lending 9 or 99 times as much.

Confusion about money supply

Government monetary policies have gone through several phases. From 1945 to the 1970s the Labour and Tory Parties both believed, with Keynes, that the cure for unemployment is for the government to run a budget surplus. (The present Tory government policy of using a big budget surplus to pay off the national debt is what the former Labour Prime Minister Lord Wilson specified in 1957 as the cure for inflation).

In 1977 the Callaghan Labour government, faced with prices and unemployment both rising fast, and the obvious impossibility of running a budget deficit and a budget surplus at the same time, threw overboard the Keynesian doctrine and adopted as their price policy studying the movements of what they call “money supply”.

The favourite for several years was the index called M3 which is made up predominantly of bank deposits though it also included the relatively minor element of the currency. The latest M3 figures are:

Bank Deposits £225,260 millions
Currency              14,384 millions
Total                 £239,644 millions

Eventually the Thatcher government lost confidence in the usefulness of M3 and the Treasury has just decided to stop publication. The Thatcher government’s interest was then transferred to M0, which, unlike M3, is predominantly made up of the currency. But the government and its advisers have quite failed to see the point of the achievement of stable prices by the gold standard, and the reduction of prices in 1920-1925. It is not a question of just “watching” M0 but of actually restricting the issue of notes and coin, something the government is not doing and has not indicated the intention of doing. The amount of currency in circulation is still going up.

The politician who has for years taken an active interest in inflation is Enoch Powell. His line has been to criticise governments for their refusal to recognise that they and they alone are responsible for inflation. He argues that the prime cause of inflation is that government expenditure is too high:

  Nobody knows so well as the Bank of England … that the expenditure of Government itself is the prime factor in causing mounting inflation” (from a speech on 11 November 1966).

He resigned from the Tory government in 1958 over that issue, though he served as a Minister again from 1960 to 1963. And during all the period 1955-1963 the government was pumping out more and more currency, pushing up prices. So Powell was just as much responsible for inflation as any other Minister. He has never understood the real cause of inflation. He shares the same delusion about banks’ supposed power to create deposits as Keynes and Professor Milton Friedman. He claims to see a difference between the government borrowing from “the public” and borrowing from the banks. In an article in Intercity (July/August 1989) he wrote:

  Only the banking system can provide purchasing power to one section of the public without the equivalent purchasing power having been transferred to it by another section.

This is nonsense. The banks can’t create purchasing power. As Walter Leaf rightly pointed out, the only way the banks can be enabled to lend is to persuade “the public” to lend to the banks, in the form of deposits.

Why inflation started

The question arises why do governments go in for inflation. In this country the three big inflations have started in wars, the Napoleonic wars and the two world wars.

It is a mistake to think that the British government’s interest in inflation is to provide revenue by printing notes, though this could happen as it has in some other countries. What happened in the three wars was that the government had to call in all the gold in circulation and in bank vaults to pay for desperately needed imports of food and war materials, which made continuation of a gold-backed currency impossible. The amounts of revenue the government actually gets from increasing the note issue is too trivial to count in relation to government expenditure. In the current year the £800 million from additional notes in circulation is less than one half of one per cent of Government expenditure of £181,000 millions.

Another issue of interest is who gains by inflation and who loses. Long experience supports the view that borrowers, including the industrial capitalists, gain under inflation by repaying loans in depreciating currency, and lenders do well from deflation. Bankers being both borrowers and lenders, generally prefer stable prices. Some property-owners to whom inflation has been disastrous are those who bought and held certain government and local government stocks the market price for which is now only £30 for each £100 nominal.

It is an error to suppose that inflation is bad for the workers. It is no harder (and no easier) for organised workers to raise their standard of living when prices are rising than when they are falling or stable: it all depends on the varying conditions in the labour market. In the great majority of years in the half-century of inflation wage rates have risen more than prices. And it happened when prices were falling sharply between 1920 and 1925 that wages fell more than prices. The workers were worse off.

One last word about the supposed evils or benefits that will flow from ending inflation. It will not have the effect either of causing unemployment and trade depression or of preventing them. Capitalism goes its own way irrespective of governments’ monetary policies.

Edgar Hardcastle

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.