Do High Prices Prevent Unemployment?

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,

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.


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