1920s >> 1927 >> no-273-may-1927

The Inflation Question again


Dear Sir,
Your reply to my letter on the money question, for which I thank you, has made clear that the differences which appear to mark off your school of thought on this subject from that of other Socialist parties, are more apparent than real.

For example, you accept credit-inflation as an incident of the war period.

You do not dispute that the period was an abnormal one.

Your indignation at the introduction by me, as you insist, of an “emphasis” in relation to the formula stated by you in the December issue, would indicate that you are less rigid in your adherence to a formula than I at first thought.

The real point of difference is, I think, to be found in the last paragraph of your reply. You state : “Gold was not permitted to function freely until the gold standard was restored in 1925.” That is misleading ; gold functioned freely on the open market from 1919, and it is on the open market only we can adequately measure the degree of credit-inflation by the depreciation of the circulating credit-units.

If credit is issued in excess of that justified by the goods produced at a given time, such goods assumed to be in direct contact with the newly-mined gold for exchange, then a state of inflation is made evident by the premium on gold.

If, however, gold is not permitted to measure itself against other commodities, at a time when metal is displaced by paper as legal tender, inflation and deflation become largely a matter of conjecture
During the war period the Bank of England paid for the standard gold brought to it, by its notes, and at the rate of £3 17s. 9d. per ounce. That this price in paper did not give the gold magnates a value in commodities equivalent to that obtainable under conditions of normal barter, is obvious from the involuntary closing down of the less productive mines during that period.

That the currency-note was for the first time made inconvertible in 1925, is considered by you as “enormously important.” Would it not also convey to one the unimportance of its “convertibility” previous to that year?

It is of no importance whatever to those anxious to delve below the superficialities involved in the best methods likely to ensure the smooth working of the gold standard, and which were embodied in the “Gold Standard Act, 1925.”

The question of convertibility or inconvertibility of paper into coin is entirely beside the point and absolutely useless as far as a correct understanding of this problem is concerned. The thing that does matter is the right for any individual to do what he likes with a coin in his possession. That he shall have the right to melt or even to deface or diminish, provided the intent is not present of passing it on as current coin. Deny a person the right of laying a coin at “rest,” i.e., of assuming its commodity form as a piece of metal, and you have denied him the possession of a measure of value. The principal function of money as a universal equivalent is missing, and from that moment a quantitative determination of prices will be possible, and the qualitative determination of the price-level will be relegated to the background.

I am, Sir, Yours faithfully,


In his previous letter, Mr. Nicholls admitted, in fact, that our contention with reference to the so-called “inflation” of the currency during and since the war, was correct.

His letter above deals with what are really side issues that leave the main point alone. When he talks of our difference from “other Socialist parties,” his remark is meaningless, as there are no “other” Socialist parties in this country. Neither were we “indignant” at his introduction of an emphasis and adding it to our statement. We suggested a reason for his action, and Mr. Nicholls does not deny this suggestion.

He now states that the real point of difference is over the “free functioning” of gold on the open market. Mr. Nicholls claims that this began from 1919. This statement has no bearing on the question unless Mr. Nicholls means to say that the “open market” included this country. Mr. Nicholls is careful not to say this because, as he knows, there was no “open market” for gold here till 1925. The alteration of the arrangements made between the British Empire Gold Magnates and the British Government during the war, did not affect matters here, as gold could not be exported from this country without a special permit. Hence, as stated in our previous reply, the “unpegging” of the exchange with America in 1919 did not touch the essentials of the question we were discussing.

In his paragraph beginning “If credit is issued in excess,” etc., Mr. Nicholls talks of goods being in direct contact “with the newly-mined gold.” Why “newly-mined”? As a matter of fact all the gold available will be considered in this relation — not merely the “newly-mined.”

He also asks whether our view that making the currency note inconvertible in 1925 was enormously important, would not convey the impression that its previous convertibility was unimportant. Exactly the contrary. The “Plebs” editor considered it so important that he tried to deny the existence of this convertibility till faced with the Act of Parliament.

To say that “convertibility or inconvertibility of paper into coin is entirely beside the point” is to ignore both economic theory and historical experience. The abstract “right” of a person to “do as he likes with his own” has always to be countered by the “rights” of others. The great disadvantages caused by tampering with the currency — as clipping, sweating, etc. — caused the passing of the Coinage Acts to protect the general body of traders from the depredations of the swindlers.

Like all other laws, these Acts necessarily restricted somebody’s “rights,” but the advantages are found, in practice, to overwhelmingly outweigh the theoretical points of abstract “rights” thereby lost.

It may be said in passing that a coin can be treated as a piece of metal in the exchange relation, without defacing or tampering with it; and as a matter of fact this is done daily in gold transactions where coins are taken at their weight instead of by tale.

As stated before, all these questions are beside the question at issue. That question was whether the high prices prevailing during and after the war were due to inflation of the currency. We denied this excuse of the “Plebs,” the Labour Party and other misleaders of the workers, and pointed out the facts. Neither they nor Mr. Nicholls have been able to show any error in our case.

Ed. Com.

(Socialist Standard, May 1927)

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