Why prices go up
It is not the purpose of this article to go into the basic questions of the relationship of value and price. It is sufficient to remind the reader that there are underlying factors which determine why different articles have different prices; why, for example, an ounce of gold sells for more than an ounce of silver, or a pound of bread, or a ton of coal.
This article will only explain why prices and the general price level change from time to time, apart from the underlying value factors.
There are a number of popular beliefs about prices, all of them wrong. One is that prices go up because trade unions ask for higher wages. Another is that prices are determined by manufacturers, wholesalers and retailers having a free hand and being able to charge what they like. Another is that high prices are caused by taxation. Lastly there is the belief that prices always go up.
The last can quickly be disposed of. After the first World War, prices reached their peak in 1920 and then came down with a run. Within a few months they dropped by a third, and the decline went on more slowly for several years. And during the nineteenth century there were several periods of falling prices.
Pinning the responsibility for high prices on the trade unions is just as easily disproved by the facts. Trade unions are always “asking for” higher wages, so if this belief were correct prices too would always go up; which they don’t. In 1921 when trade unions were forced to accept wage cuts of about 33 per cent., the members were still passing resolutions asking for wage increases.
“Asking” isn’t the same as “getting.” When trade is bad and prices are falling, employers fight trade union demands and stand up to strikes and resort to lock-outs. If they didn’t, their profit would disappear and they would go out of business. Under Labour Government, from 1947 to 1951, wage rates were not even keeping up with the rise in prices, partly of course because many workers were influenced by government appeals to them not to strike for higher wages. The rise of prices then obviously could not be explained by what the unions were doing.
If, in all the years since the war, it has been easier for trade unions to get higher money wages than it was before the war, this is due partly to low unemployment but also because, for other reasons which will be explained later, employers have been able to count on a more or less continuous rise in the prices of what they were selling.
The people who think that price rises are caused by the trade unions say that they know this to be true because they can see it happening: a rise of wages, then a rise of prices. What they overlook is that when two events happen more or less at the same time it does not have to be true that one thing causes the other. They can both be the result of some other change, and this is often the correct explanation of price rises and wage rises. When a period of slack trade, falling production and heavy unemployment is followed by a recovery of sales, expanding production, and falling unemployment, manufacturers and retailers are in the position of being able to put up their prices, and at the same time the unions are better able to press for higher wages. It just happens that sometimes one comes first and sometimes the other. This has been given striking proof in the recent increase of engineering wages and the way the employers have reacted to it.
The manufacturers have, it is true, used the increase of wages as their justification for putting up their prices, but as has been pointed out by those in a position to know, many of the price increases have been larger than the additional wage costs which are supposed to have caused them.
The President of the Purchasing Officers’ Association, in a recent letter to the Daily Telegraph, complains that while the wage increase on an annual basis represents a rise of 3.9 per cent., members of his Association “have reported demands for increases in the prices of many goods varying from 2½ per cent. to 8 per cent. Our inquiries show that the average wage claim is in the order of 7 per cent.” What in fact has happened is that the market for their products has improved and the manufacturers are able to take advantage of increased demand by putting up prices; the wage increase is just a handy excuse.
But not all of them are in this favourable situation. The Birmingham Small Arms Company which makes motor cycles, scooters, machine tools, etc., is not putting up its prices. This isn’t because it has not the same excuse as the others, but because its particular market won’t bear it. The engineering wage increase will add over £300,000 a year to B.S.A.’s wages bill and according to the Chairman other costs are rising too. So why not put up their prices? The Chairman, Mr. Eric Turner, thought of this but found it could not be done. He told his shareholders at their Annual Meeting on December 5th last that for B.S.A. “almost all the additional costs would have to be borne out of profits, as it was not possible to increase the majority of their selling prices.” (Daily Telegraph, December 6th, 1963.)
This, of course, is the answer to those who think that manufacturers can fix what prices they like. A year earlier the Chairman of B.S.A. had reported that the firm’s profit had dropped to nearly half what it had been because of shortage of orders.
Then we have the belief that high prices are caused by taxation. The firms which use wage increases as an excuse for putting up prices will just as glibly use the excuse of high taxes. The cinema proprietors are a case in point. The Daily Mirror on January 3rd announced that Ranks are putting up prices of admission by 3d. or 6d. Granada are doing the same. But the interesting thing about it is that although rising costs are given as the reason, something which must affect all of them, Ranks are putting up prices only at 190 out of their 390 cinemas and A.B.C. “have no plan for a rise in prices.” The reason for this selective treatment was indicated in the Financial Times on January 4th. It is that while in the industry as a whole the trend is still in the direction of falling attendance at cinemas, “Many cinemas have been doing better business in recent weeks, stimulated by a run of popular films.”
In short, where the proprietors can hope to be able to get more revenue by higher charges they are putting up the prices and where they can’t they leave them alone in spite of their rising costs. In some areas the closing down of some cinemas enables the others to charge more.
Before I960, when the cinema tax was abolished, the cinema proprietors used the existence of the tax as an excuse for their prices. This is worth looking into. In 1956, the year in which Government revenue from the cinema tax was at its peak, it reached £34 million, but with the rapid decline of audiences (largely caused by the competition of television) hundreds of cinemas were closed. The Government then progressively reduced the tax before eventually ending it. And according to the Ministry of Labour, this is what happened to cinema prices. In 1957 tax reduced; cinema prices go up. In 1958 tax reduced again; cinema prices unchanged. In 1959 cinema tax again reduced; cinema prices go up. In 1960 cinema tax abolished; cinema prices unchanged but go up in 1961 and 1963 and now again in 1964. Just before its abolition in 1960 the tax was bringing in revenue to the Government of £8 million a year.
When it was ended in the 1960 Budget the Daily Herald (April 5th, 1960) had two news items. One was “prices will stay the same.” The other was a statement by Rank’s managing director: “I’m absolutely delighted,” as well he might be. £8 million might be hardly worth the cost and trouble of collection to the Government but was a godsend to the companies. In the years after the war the cinemas had a near monopoly of popular entertainment and where there is monopoly control of supply together with a big demand, prices can be pushed up to produce abnormally high profits. In such a situation the Government can step in with a tax to skim off all or much of the excess profit. It was not the cinema tax that caused prices to be high in the boom years, but the near monopoly. When the cinemas lost their appeal and much of their audiences, they were no longer getting abnormally high profits capable of providing a worthwhile special item of Government revenue.
Many of the aspects of prices so far dealt with applied in the nineteenth century and apply today, but there is one factor operating now which was absent then. In the nineteenth century the currency was by law fixed at a constant relationship with gold, a gold sovereign contained approximately a quarter of an ounce of gold. Bank of England notes were freely convertible into gold and notes could be obtained for gold. The general price level was in consequence affected by changes in the value of gold. A rise in the value of gold (assuming that the values of other commodities remained unchanged) would show itself in a corresponding fall in the general price level, and a fall in the value of gold (due to the discovery of more easily worked deposits, or improved methods of extraction) would show itself in a rise of the general price level, as happened round about the beginning of the century.
But in the past thirty years the note issue has not been convertible into gold and the gold equivalent of the currency notes has been progressively reduced.
The stages in this process have been the devaluing of the pound from being the equivalent of $4.86 to $2.80; the reduction of the gold content of the dollar itself to about one half in 1934; and the steady and enormous increase of the number of pound notes in issue that has gone on since 1938. In effect the pound now represents about one-twelfth of an ounce of gold in place of approximately one-quarter of an ounce at which it was fixed in the last century. The effect has been a more or less continuous rise in the general price level so that retail prices are now over three times what they were in 1938.
This is the major cause of rising prices: not the trade unions, or the unfettered will of manufacturers, or the amount of taxation, but the currency policy of successive governments.