1920s >> 1927 >> no-270-february-1927

A discussion of the Money Question

To the Editor,

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,


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.

Ed. Com.

(Socialist Standard, February 1927)

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