Inflation and
unemployment
IN
THE LAST QUARTER of the nineteenth century, during what was known at
that time as The Great Depression, and again in the depression between
the two world wars, an increasing number of workers — and even some
professional economists — were paying attention to the analysis of
capitalism made by Karl Marx in his work Capital. Marx showed that
unemployment, and its rise to peak levels in periodical phases of trade
depression, arise put of the structure of capitalism itself, and are
therefore inevitable while capitalism lasts.
This growing
interest in Marx was all but extinguished with the publication in 1936
of J. M. Keynes' The General Theory of Employment, Interest and Money.
According to the new doctrine it only needs that the government "manage
the economy in such a way as to maintain demand" for full employment to
be created and trade depressions to be abolished.
Keynes
described Marx's Capital as "an obsolete economic textbook, which I
know to be not only scientifically erroneous but without interest or
application for the modern world" ("A Short View of Russia", J. M.
Keynes, 1925. p 14). Keynesian doctrines were accepted by most
economists, political parties and the trade unions. Writing in 1957
(Remedies for Inflation) Mr. (now Sir Harold) Wilson stated that the
Labour Party and all other "major parties" were Keynesian. As late as
1974, in spite of the evidence that Keynesian techniques had been a
failure, the Tory M.P. Mr. Peter Walker called his party "the party of
Keynes and Disraeli"; while the Liberal M.P. Mr. John Pardoe said that
the Liberal Party is "the party of Keynes and William Beveridge".
Alone
in this country the Socialist Party of Great Britain insisted from the
outset that Marx was right; that the new doctrines were fallacies; that
full employment cannot be maintained; that trade depressions cannot be
eliminated, that the remedies proposed were only disguised inflation
and would do nothing to serve working-class interests.
The
Labour Party adopted the new policy at its Annual Conference in 1944,
in a Report on Full Employment and Financial Policy, which declared:
"If
bad trade and general unemployment threaten this means that total
purchasing power is falling too low. Therefore we should at once
increase expenditure .... We should give people more money and not
less, to spend."
The Tory Party was committed to a similar view;
but such was the confusion created by Keynes' theories that neither
Party recognised that this is a policy of the crudest inflation. So at
every general election in the post-war years they continued to declare
their opposition to inflation. Both parties pledged themselves to
maintain "full employment", defined in the Labour Party's 1945 General
Election programme as "Jobs for All".
In the history of
capitalism, as Marx had explained, periods of good trade and low
unemployment alternate with periods of bad trade and high unemployment.
One such period of low unemployment occurred in the years immediately
following the second world war (helped by work on making good war
damage); but Labour and Tory Governments both claimed this to be
evidence of their success in "managing the economy". From 1955 onwards,
however, unemployment has been on a sharp upward trend, each peak of
unemployment rising to a higher level — to 747,000 in 1963, to above a
million under the Heath Government in 1972, and to 1,500,000 in 1976
under Labour Government, and to over 1,600,000 in July 1977, This was
capitalism operating in its normal way; but it led many who had wrongly
believed that Keynesian techniques would abolish unemployment to reach
the false opposite conclusion: that it was those techniques that had
been the cause of unemployment. The Times,13 February 1976, told its
readers that "unemployment ... will decline as fast and as soon as we
all forget Keynes".
But if Keynesian policies did nothing for
unemployment, their effect on prices was that by 1977 the general level
was ten times what it had been in 1938, and was rising fast.
Inflation
is caused by governments going on year after year printing and putting
into circulation hundreds of millions of pounds of additional paper
money.
Wherever and whenever currency has been issued in excess,
the price level has risen; and wherever and whenever currency has been
restricted, prices have stabilised or fallen. In the period 1920-23,
the printing presses of the German central bank were busy day and night
pouring out notes, and prices were rocketing upwards. In Britain in the
same three year period the Government had decided to halt inflation;
the note issue was restricted and prices were falling fast.
Inflation
is not the only factor affecting prices. In Britain, in the 90 years
before 1914 when there was no inflation (the price level in 1914 being
below that of 1820), prices rose moderately in trade booms and fell
again in periods of bad trade, a process also explained by Marx.
The
reason there was no inflation in Britain in the century before 1914,
was that through the operation of the gold standard the note issue was
controlled. Beyond a fixed low limit the Bank of England could not
issue additional notes without adding an equivalent amount of gold to
the reserve in its vaults. Also the notes, by law, were freely
convertible into a fixed amount of gold — one pound or a sovereign
being fixed at about a quarter of an ounce of gold. Gold coins and Bank
of England notes both circulated; but because of legally enforced
convertibility a Bank of England note "was as good as gold", and the
combined circulation of notes and gold coins was equivalent to the
circulation of a total amount of gold.
Marx showed that if that
total amount of gold is replaced by inconvertible paper money, and if
the amount of that paper money is then issued in excess, prices are
pushed up accordingly.
"If the quantity of paper money issued
is, for instance, double what it ought to be, then in actual fact one
pound has become the money name of about one-eighth of an ounce of gold
instead of about one quarter of an ounce .... The values previously
expressed by the price £1 94 will now be expressed by the price
£2"
(Capital, VoL 1.
Allen & Unwin Edition, p. 108).
Governments
since 1938 have followed the policy of continually increasing the
amount of currency in circulation, from under £500 million in
1938 to
over £7,000 million in 1977, an increase far beyond any increase
that
would have been necessary because of the expansion of total production
and trade. In 1976 and 1977 when the Government claimed that its "wages
and incomes policy" would curb inflation the flood of additional paper
money went on without interruption.
The man, more than any
other, who was responsible for abandoning the nineteenth-century policy
of controlling the amount of paper money was J. M. Keynes, who declared
that it was no longer necessary "to watch and to control the creation
of currency".
So for 40 years the major British political
parties and the trade unions have been misled by the Keynesian policy
of inflation into believing that capitalism could be rid of
unemployment and trade depressions. It failed as it was bound to do
with the market conditions and 'free' labour conditions of the western
world.
Marx showed, and subsequent events have confirmed his
analysis of capitalism's economic laws, that, arising from capitalism's
inescapable anarchy of production, its progression is the cycle of
moderate expansion of production and sales, then boom, then crisis,
then depression. But just as there is no Keynesian device which will
secure conditions of permanent boom, so there is no such thing as a
permanent depression or "collapse of capitalism". (In the middle of
"The Great Depression" Frederick Engels, three years after the death of
Marx, did temporarily hold that Marx's cycle had ceased to operate and
put forward a theory of "Permanent Depression"; but events soon showed
this to be wrong and he returned to Marx's view — Preface to Capital
1886.)
In a depression, with bankruptcies which remove
competitors, stocks of unsold goods disposed of, wages restrained by
unemployment, and raw material prices and interest rates forced down,
sooner or later conditions return restoring prospects of making a
profit and capitalism expands again: but only to repeat the cycle.
There is, however, one kind of 'collapse' that can occur, a collapse of
the currency if the excess issue is expanded to the point where the
currency as Marx put it "falls into general disrepute", and nobody
wants to hold or receive paper money.
Although he only half
understood the problem, such a situation was foretold by Herman Cahn in
his Collapse of Capitalism published in 1919. What he foretold as
inevitable, like an "Act of Nature", was that "within a few years" (or
within a year if the war continued), there would be collapse and
"social chaos"; out of which, though the workers were not prepared for
it, Socialism would arise.
A currency collapse was at that time
on the way in the great German inflation (by contrast the British
Government had decided in that year to halt it). By December 1923
inflation in Germany had reached fantastic proportions and unemployment
had risen to 30 per cent of workers registered as unemployed, an
unknown number not registered, and 42 per cent on short time. There was
indeed "social chaos" while a new currency was issued and conditions
got back to normal. But chaos does not produce Socialism. In Germany it
helped to prepare the way for the rise to power of the Nazi Party under
Hitler.
The situation in Britain in 1977 is that, although
Keynesian inflation has lost many of its adherents, the Keynesians have
not given up the struggle. Under the name of 'reflation' it is still
being pushed by the T.U.C., by some professional economists, by Labour
Party leaders and by some of the Tories and Liberals. (Most of the
'Left-wing' organisations are all for it.) If the inflationists have
their way they could produce a currency collapse here. The dilemma of
all parties is that if they abandon the Keynesian belief that
unemployment and depression can be eliminated under capitalism, what
can they do except face the alternative — fearful for them — of getting
rid of capitalism?
Some politicians and economists are now
urging a return to the nineteenth century gold standard in order to get
rid of inflation.
It only needs to add that getting rid of
inflation is not the answer. Capitalism without inflation, as in the
nineteenth century, no more solves working class problems than does
capitalism with inflation, as in the years since the end of the second
world war. |
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