1920s >> 1927 >> no-274-june-1927

“Inflation” once more


Dear Sir,
It was not my intention to again encroach on your space, but the last few lines of your reply to my letter in May issue of “S.S.” invites, with your kind permission, a further contribution from me.

You introduce an innuendo which is uncalled for by implying that those who differ from you as to whether the currency of this country was inflated or not from 1914 to 1925 are “misleaders of the workers.”

You admit the possibility of credit-inflation, but object apparently to the term currency-inflation. On that point I am in agreement with you, and consider it would add to clarity if temporary movements of the price-level were studied from the angle of credit manipulation, and currency, as an effect, relegated to its rightful subordinate position.

Is it not, however, rather a play with words, and a waste of time, to differ greatly from those who insist on using that term, especially when we consider the mass of material available to justify their point of view?

For instance, credit necessitates a legal-tender currency backing, and 15 per cent. cash, to liabilities, is generally considered more than ample. When war broke out, metal was replaced by paper as legal tender. Bank obligations could now be met in currency notes to any amount, and so accommodating was the British Treasury in this respect, that provision was made for the supply of legal tender currency straight from the printing press to the banks up to 20 per cent. of their total liabilities. Currency notes could be loaned to banks at the bank rate of interest, or alternatively bought outright by the transfer of securities, Treasury Bills, etc. The method by which Treasury Bills were acquired by the banks, and which in turn enabled them so easily to become possessed of legal tender on which ultimately a mountain of credit was based, needs no labouring here.

Consequently, it is maintained, the Government’s action in so freely granting legal tender facilities invited and made possible credit inflation.

Hence, currency inflation was the primary cause of high prices.

That undue inflation of credit was responsible, to an extent, for the high prices that obtained during the war period, and after, goes without saying.

The Cunliffe Committee admitted inflation, and demonstrated how it had been brought about.

The heavy buying of gold on the open market and its exportation, mainly on American account, may have been a factor in forcing it to a premium, i.e., appreciation of the metal may have been unaccompanied by a corresponding depreciation of the paper currency.

Unfortunately for those who hold to that point of view, too insistently, the premium persisted right up to the return to the gold standard in 1925; and as late as 1922 it still required nearly £1 10s. in currency notes to purchase the gold contained in one sovereign. If that was not inflation, then, words have no meaning.

That inflation was not the sole reason for the high price-level previous to the reversion to the gold standard, as compared with the pre-war period, is made clear by the fact that now, with no suspicion of inflation, prices still remain considerably above the 1914 level.

That is due to one thing, and one thing only : a fall in the value of gold, and not as stated by many of the Labour Party, to the conscious action of trusts and combines.

Your stricture on my statement re “newly-mined gold,” warrants more attention than it is possible to give it on this occasion. Suffice to say, that the axioms “socially necessary” and “cost of reproduction,” have for me a significance, and one feels that they should be treated as something- more than mere empty phrases to conjure with.

I am, Sir, Yours faithfully,


Despite all his previous admissions and evasions, Mr. Nicholls still struggles to maintain his lost cause of “Inflation.” In the present letter he stresses two points.

One is that our charge against the Labour Party, the Plebs League, Bernard Shaw, etc., of being misleaders of the working-class when they supported the lie that high prices were due to “inflation of the currency,” is “uncalled for.” The only defence of their position Mr. Nicholls can bring forward is to ask us to consider “the mass of material available to justify their point of view.” Out of this “mass of material,” wherever it may be, Mr. Nicholls takes one piece—the introduction of the currency note—and elaborates on the technical points connected with this introduction. This forms his second point. Yet he has only to turn to the December, 1926, issue of the SOCIALIST STANDARD, which was the starting point of his controversy, to find his whole elaborate case and his deduction— “Hence, currency inflation was the primary cause of high prices”—completely smashed by one simple fact. We will quote this fact from page 63 of our December issue :—

“War was declared on Germany by Great Britain on Sunday night in the fateful August of 1914. On Monday morning people rushed to buy up supplies and prices began to rise at once, before any inflation could take place. As a matter of fact the new currency notes were not issued till some little time after. Prices continued to rise and more currency was, therefore, required to circulate the goods. All through the war the rises in prices preceded the increases in currency. In fact, as shown by the Cunliffe Committee, the total increase in prices was greater than the total increase in currency. These facts prove beyond dispute that no ‘inflation’ of the currency had taken place.”

It is a pity that as, according to Mr. Nicholls, the Cunliffe Committee had “demonstrated” how the inflation had been brought about, he did not quote this “demonstration.” It would certainly be interesting to see how they tried to do it.

That the fall in the value of gold is not the “only” thing that maintains high prices has been shown in certain investigations and reports; a glaring instance being that of the Light Castings Trust, who deliberately raised prices afresh when the subsidy was given to builders of working-class houses.

Unless the “new-mined gold” has been produced by some new method, or discovery, that materially lowers the value of that gold, the existing available gold will, obviously, be taken into account with it.

Ed. Com.

(Socialist Standard, June 1927)

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