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

Socialism and the so-called “middle class”. - Part 2 (1925)

From the February 1925 issue of the Socialist Standard

(Continued from January issue.)

The property holdings of the “middle class,” unlike those of the capitalist, do not free their possessors from worry, and do not give them command over the lives and destinies of other men. They represent deductions from present income for future needs; they are therefore not capital in the sense of being “wealth used for the purpose of gain” (the definition of capital used by a Conservative, Sir William Ashley), the receipt of a return on them being only incidental, and not the object of their existence. Unlike Topsy, they have not “just growed.” On the contrary, these reserves, for the future of themselves and their children, can only be accumulated by deliberate and self-denying effort. Failure to make such saving against the future is followed by a fall to a lower level of life, either in this or the succeeding generation. The effort to retain their “nest egg” occupies so large a part of their lives that it becomes the basis of the political philosophy of the more highly paid workers, and, like the bird in the Mediaeval romance, they are so busy sitting tight on their eggs so that they shall not be stolen, that they do not see they are being robbed by the opening of the nest from below. To secure their savings from “predatory Socialists” who are supposed to have raiding designs on their women and children, they hitch their wagon to capitalism. But what security does capitalism offer even for their savings ?

Savings can be held in one of the following forms—in currency or in bank balances which represent claims to a definite amount of currency, in government bonds, or in titles to property of various kinds, such as title deeds of land, shares in industrial and commercial undertakings, etc. Of the two main kinds of shares, debentures represent a claim to a fixed annual interest and the repayment of a definite sum of money. Therefore debentures, government bonds, currency holdings, and bank balances can be lumped together as being holdings of money, and it follows that the value of these holdings depends on “the value” of money. But there is no guarantee under capitalism that the value of money measured in the commodities it will purchase for its possessor will remain constant, or even that it will fluctuate only within narrow limits. Wherever there has been money economy there have been violent fluctuations. (For an example in the Ancient World, see Gibbons’ “Decline and Fall,” Chapter 11.) The recent happenings in Europe provide an instructive illustration of the lack of security in all currency holdings. In Germany the value of money has fallen to such a degree that the internal debt has been wiped out. In France pre-war holdings of Government Stock have lost seven-eighths of their real value; in Italy, eleven-twelfths; and in England, one half.

  “Throughout the Continent pre-war savings of the middle class, so far as they were invested in bonds, mortgages, or bank deposits, have been largely or entirely wiped out” (“A Tract on Monetary Reform,” J. M. Keynes, page 16).

Mr. Keynes adds : 

  “What was deemed most secure has proved least so. He who neither spent nor ‘speculated,’ who made ‘proper provision for his family,’ who sang hymns to security and observed most straightly the morals of the edified, and the respectable injunctions of the worldly-wise—he, indeed, who gave fewer pledges to Fortune, has yet suffered her heaviest visitations” (page 17). 

And this lack of security proceeds not from natural causes such as make uncertain the life of the savage—that is, famines, plagues, earthquakes, floods, etc.—but from a defect in the organisation of society based as it is on money economy. If it be argued that these fluctuations were the product of war, which is an abnormal condition, it need only be pointed out that where there is production for profit there will be struggles for markets and raw materials, and where there is a clash of interests there is an ever-present danger of war. And, moreover, price fluctuations before the war were considerable over a period of years. Here it is sufficient to note (see Keynes) that between 1896 and 1914 the capital “value of the annuity of any investor in Consols fell by about one-third, and the purchasing power of his income from them by about the same amount.” Consols are chosen as representing a class of investment free from ordinary speculative risks of trade, and therefore affording the best index to changes of the kind we are here concerned with.

There is, then, no permanent security in that class of savings which represent titles to certain sums of money. Titles to land and ordinary shares remain to be dealt with. But, first, two possible criticisms must be anticipated.

Economic Insecurity.

It may be objected that lack of security affects the capitalist as well as the small saver. It certainly does, but as all authorities admit, not nearly to the same extent. The capitalists as a class are not ruined by changes in the value of money, though some individual members may be. Their economic domination is not ended by fluctuating prices, any more than the subjection of the workers is lessened by either stable or changing prices. This is because capitalists hold goods, factories, mines, and commodities of all kinds, and not money, which is only a means to the obtaining of goods. To quote Keynes again : “Small savers have most to lose by currency depreciation” (page 66). But even if it were true that the capitalists are also insecure, this would not disprove our contention that capitalism fails to provide security for the “middle class,” and it would be additional evidence of the decay of the system.

The other objection which might be raised is that there could never be complete security under any system. This is obviously true as regards natural catastrophes like plagues, crop failures, earthquakes, etc., whose effects we can at present not guard against entirely, but it has no bearing on the kind of insecurity which is an effect of capitalism and which can be removed with capitalism.

Now let us consider titles to land. This kind of “middle class” property needs little attention, because it hardly exists. Some own their own houses, and a few own other houses as well as the one in which they live. Those that are held on lease are not a form of permanent revenue, thus only freehold house property remains, and the capital and rental values of this are by no means certain. The decay of industry in a particular neighbourhood may completely destroy the value of house property in it. Even since the war, and in spite of the Rents Restriction Acts, there have been local falls of the value of house property, and before the war fluctuation in value of house property was notorious.

As for ordinary shares, they are a type of investment not in favour with those people now under discussion. They play for safety and avoid investing in industrial shares whose fluctuations are so wide and unpredictable. Only the favoured few experienced persons “in the know” are aware of impending movements by which money can be made, and they are not members of the so-called “middle class,” whose savings, moreover, are not large enough to be widely distributed so as to minimise the risk of loss. The recent happenings in Dunlops will serve to drive home our point. Adverse trading conditions resulting in a loss of ten and a half million pounds have involved the reduction of the ordinary £1 shares to 6s. 8d. each. Yet Dunlops was regarded as one of the safest companies in that trade. Crosse and Blackwell’s, and Burberry’s, other perfectly “safe” concerns, have had to carry through similar re-organisation schemes.

There is certainly no security for small property ; is there any more security attaching to the employment of the “middle class”? The following London banks have collapsed since the war, and many of the staff are still looking for work, to be met always with the reply, even where vacancies need to be filled, younger men or boys will do:

Sir Robert McGrigors, Bart., and Sons; Hannevigs Bank Ltd. ; Alliance Bank of Simla, Ltd. ; Boulton Brothers. If it be said that these were not first-class firms, that objection cannot be raised against the Austrian Discount Bank, of Vienna, or against the Banco Disconto in Italy, or Alperin, Kisch, and Schiff, of New York—all of them first-class, old-established banks or banking companies which have recently failed. Shipping and insurance companies which have failed during the last few years and thrown thousands of men out of employment are too numerous to mention. Recall the affair of Bevan. He was a financier who gambled in a way that his kind do every day. But he was unlucky, and went to gaol, and an associated firm, the oldest-established stockbrokers in the City, was ruined. As a result, clerks of over forty years’ service found themselves suddenly out of a job.

As Mr. R. Tawney puts it (“Acquisitive Society,” page 204): The brain workers, like the manual workers, find that

  “Their tenure of their posts is sometimes highly insecure. Their opportunities for promotion may be few and distributed with a singular capriciousness. They see the prizes of industry awarded by favouritism, or by the nepotism which results in the head of a business unloading upon it a family of sons whom it would be economical to pay to keep out of it, and which, indignantly denounced on the rare occasions on which it occurs in the public service, is so much the rule in private industry that no one even questions its propriety.”

Enough has been written to show that there is no section of the working class without its problem of unemployment, and that the problem is the same for the whole class without distinction of sex or colour of skin or working coat. The problem, moreover, is not one of mere numbers. To reduce the number, as the Labour Party and other capitalist quacks seek to do, does not solve the problem. It is an effect of the social system that it cannot provide its members with the opportunity to labour in support of themselves. The only guarantee the present system gives is that certain privileged members shall be able to live in sumptuous idleness on the backs of their fellows. They do this by exploiting those they employ, and the latter, if alive to their own interest, would end the system which is based on exploitation.

The Inefficiency of Capitalism.

If the “middle class” are more foolish than the so-called manual workers, and instead of looking at social problems from the point of view of their own self-interest they wish to measure everything according to the standards set by the ruling class, they must still condemn the present system because it is grossly inefficient.

Is it efficient to have millions of workers seeking employment while the machinery of production is standing idle? Is it efficient to put checks on Nature because she yields too generously of her bounty? And yet this is what happens in the production of rubber, tea, jute, etc. Is it efficient to have trawlers dumping cargoes of fish into the sea in order to keep prices up? Is it efficient to fatten and pamper a select and useless few while half the people are on the verge of starvation? Is it efficient to be doing jobs which are not necessary for the ordering and use of society? Yet nearly the whole of the clerical profession are thus occupied. What need of insurance clerks in a world where risks are borne by society instead of by a special section with a view to making a profit. Solicitors’ clerks, what need of them except to haggle over private property? Abolish money economy, and what a reserve labour is made available for production from the ranks of the bank staffs. Whichever way you look at it, this system is rotten, inefficient, and destructive of the best potentialities in man. Social progress demands its overthrow, a task which only the working class can perform. The workers alone can break the chains that bind them, and replace a class system based on production for profit by a classless system producing for use. Chains are still chains though they are gilded, and the “middle class” being in reality merely a section of the workers, must join with the rest of their class in breaking those chains.

A. L. T.

(Conclusion.)

Blogger's Note:

'A.L.T.' could have been Albert L. Torr, who joined the Manchester Branch of the SPGB in October 1916 (alongside a William Torr). It makes sense that a bank clerk,  a 'brain-worker', would seek the anonymity of a pen-name in the pages of the Socialist Standard.

Letter: International Exchange. (1923)

Letter to the Editors from the February 1923 issue of the Socialist Standard

Dear Comrades,

Re answer to Mr. Hart concerning rate of exchange in, I think, the November issue, would you be good enough to make it clear how the total figures are arrived at of the prices of goods exchanged between two countries; also to whom is the gold settlement made, to balance any difference there may be? The principal difficulty to me is the fact that it is individuals who trade and not countries. Also, would your explanation cover the fall of the mark in Germany?

Yours fraternally, 

Enquirer.

Answer to Enquirer.

When using the terms “two countries enter into commercial relations,” we were using the terms in common use. Actually, of course, it is the private merchants, or firms, who enter into these relations and carry through the exchange of goods.

The difference between what is bought and what is sold is shown by the demand for Bills of Exchange in the market of the country under consideration. If the demand in England for Bills on French mediants was greater than the demand in France for Bills on English merchants, this would show, under normal conditions, that more goods had been sold to English merchants, than had been bought from them. From this it is easy to see that the total figures are not of prime importance. It is the difference between the two sets of accounts that matters.

The gold balances are paid, usually, through the Banks holding the Bills mentioned. If the Bills have been bought by the Banks, the gold is placed to their own reserves. If the Bills are 'merely held for customers the amount of the gold is credited to those customers' accounts.

The goods passing into or out of two countries have to pass through the customs departments of those countries. The quantities, weights, and values, of the articles have to be declared on forms drawn up for that purpose. These “returns” give the total figures of the trade between those countries.

All these factors apply to trade under normal conditions. At present Germany is not under such conditions. The fall of the paper mark is due to loss of credit of Germany.

So long as people believe that the paper will be “honoured”—that is, exchanged for gold upon demand, or at a specific date —the paper will circulate at approximately its face value. If this belief begins to decline, the exchange value of the paper will begin to fall at a similar rate. This process may continue until, as in Austria, the paper falls to its value as actual paper, or waste paper. The German mark is nearing the same position, owing to the great uncertainty of the future.

It must, of course, be understood that we have only dealt with the main points of the question. To cover the details of the matter, particularly in the present exceedingly complicated circumstances, would take a huge volume. If, however, Enquirer wishes to raise any other detail question we shall be pleased to deal with it.

Editorial Committee

Economic meltdown in Argentina (2002)

From the February 2002 issue of the Socialist Standard

We look at the economic background to the rioting and looting in Argentina, and the factors which led to the social crisis there

Argentina, the one time darling of the IMF, held up as an example of how a country should stringently adhere to structural adjustment programmes, is presently standing as a shining example of how the capitalist system cannot be made to work in the interest of the majority.

When Economy Minister Domingo Cavallo pegged the Argentinean peso to the dollar ten years ago – on a one-to-one basis – he envisaged that this would end hyperinflation. Three years ago, when neighbouring Brazil devalued its real, this seriously began to upset Argentina's foreign investments and exports, as buyers of Argentinian products found they could get the same next door and far cheaper.

Argentina is now in debt to the tune of $132 billion – attributable largely to far-reaching borrowing carried out during the second term of the Carlos Menem government, prior to the election of President Fernando de la Rua. The effect of the domestic and foreign borrowing was to send domestic interest rates spiralling upwards. As the debt increased, so did the interest rates, which had a knock on effect for many businesses reliant upon credit.

In the 1990s, Menem introduced mass privatisation as a way of increasing economic efficiency. This resulted in many workers being made redundant, with them being surplus to requirements and unprofitable to employ.

So, back in 1999, the Argentinean recession began, a product of Argentina's relative economic inefficiency and the measures taken to tackle it. The recession began increasing in ferocity as domestic demand declined and unemployment increased and, because the government's tax revenues started shrinking, Argentina's burden of debt became all the more heavier.

In November all of Argentina's economic woes came to a head when people, fearful their pesos would be devalued, began hurrying to the banks to exchange them for dollars whilst the one-to-one rate was still in existence. Cavallo, fearful the banks would be drained of money, issued a decree which limited withdrawals to $1000 per person per month. The effect of this was to create mistrust in the government and widespread uncertainty with people rioting and protesting on the streets, with looting reported in many cities.

One week before Christmas the riots had spread to Buenos Aries. The president declared a state of emergency and brought troops onto the streets. But his government offered no remedy for the economic crisis and this only brought larger numbers of protestors back on to the streets within 24 hours, the unemployed being joined by "middle class" professionals – all taking part in the looting. When thousands of protestors congregated in Congress Square, banging pots and pans, the resignation of the president, his economic minister and the entire cabinet was almost immediate. De la Rua was determined to make one impassioned speech before he left, but with an angry crowd having none of it, he was instantly whisked to safety by a helicopter.

Tensions rose. People poured in from outlying districts, blockading motorways and erecting barricades, destroying banks and multinationals, looting supermarkets and fighting with almost 40,000 police who had been drafted into the city. When the violence had subdued, 26 had been killed.

Many Argentineans blame de la Rua for the crisis, citing the fact that he was the president when the crisis was deteriorating more alarmingly – as if he could control the economy! As the economy was controlling him, he had little option but to cut public spending to service debt repayments. De la Rua, however, did enter office foolishly promising to kick-start the economy and end high level corruption yet by early 2000 he had introduced £650 million worth of spending cuts and forced through eight unpopular austerity plans, which included a 13 percent cut in state workers' wages. Just prior to the unrest, the government planned to further cut public spending from £34 billion to £27 billion in a further attempt to service the crushing loan repayments.

The current president is one Eduardo Duhalde, a former left-wing senator and once upon a time investigated for the corruption his predecessor promised to stamp out. At present he plans to freeze the prices charged by foreign-owned utilities companies and put a tax on foreign owned oil companies. To protect the better off from currency devaluation he has offered to convert dollar loans under $100,000 into pesos, at the one-to-one rate – placing a hefty burden on banks, not borrowers – and he has further promised that cash will be set aside for the unemployed. All of which amounts to a timely game plan to placate the more volatile sections of Argentinean society.

Meanwhile, IMF top brass are in Argentina demanding, on behalf of the US and Europe, that the country does not default on its loan obligations. Outside markets are watching events carefully aware of the fact that economic crisis have tended in the past to lead to military coups and all their implications and are now mindful of granting further loans to the region.

There has been much analysis of recent events in Argentina. The general mood is that the IMF is to blame, that its structural austerity programmes are socially and politically unsustainable and that its rule-book needs tearing up. What has not been said is that, like the Argentinean government, the IMF is simply a body trying to make capitalism work. And in this regard they cannot entirely be faulted, because as events in Argentina have revealed, capitalism is working perfectly well, for this is the only way it can work in an anarchic and chaotic manner, negligent and oblivious to the misery and suffering it creates. If a few get rich while millions lose out big style, then this is capitalism working as it only can work. If there is recession followed by boom followed by recession, then capitalism is working healthily. Argentina, therefore, is another example of capitalism functioning normally.

John Bissett