1970s >> 1971 >> no-798-february-1971

Enoch Powell on Inflation

Before he jumped on the racialist bandwagon, Enoch Powell was a man who spoke of the futility of attempts to make capitalism work other than in accordance with the economic laws of profitmaking.

Powell returned to this theme in a speech he made in Scotland on 20 November, in which he revealed that he is one of the few politicians to have some understanding of the cause of inflation.

Inflation is a currency matter. If, with the level of production and trade remaining the same, the amount of currency in circulation is increased this will inevitably lead to a rise in the general level of prices because increasing the supply of money in these circumstances is in effect to depreciate the currency.

If the government were to decree that from tomorrow all notes and coins would only be worth half their face-value, this would automatically cause all prices to be doubled. What was today priced at £1 would be priced at £2 tomorrow. When the French government decreed that from 1 January 1960 a franc would be worth a hundred times what it was before, this, in accordance with the same principle, automatically cut all prices in France a hundred times.

Doubling the amount of currency in circulation would tend to have the same effect as halving their face-values. The face-value of the notes and coins the government issues is arbitrary. They can fix them at any rate; divide them anyway (and alter this division, as they are doing with decimalisation), and call them any fancy names they choose. There is however a real relationship, which no government can alter (which we cannot go into here except to say that it can only be explained adequately on the basis of the Marxian Labour Theory of Value), between the amount of goods on sale and the money-commodity of which the notes and coins are but tokens.

A specialised means of exchange, currency (or money in its original sense) is needed so that the goods on sale can be bought and sold efficiently without having to resort to barter. If coins and notes could only be used once, the amount of currency needed would have to equal the sum of the prices of all the goods on sale. In fact the notes and coins can be used more than once and do circulate, but at any given time their “velocity of circulation” can be assumed to be constant.

This means that once the face-value of the currency has been fixed by the government there is, for a given level of production and trade, a given amount of currency needed. If the government issues more than this they will depreciate the currency already in circulation. If they were to double the amount, for instance, then the purchasing power of the currency would tend to be halved. Each note and coin would then have to cover only half the value of the transactions it did before. Everything else being equal, £1 would gradually depreciate until it would buy only what 10s. did previously. All prices, in other words, would be doubled — just as if the government had decreed a halving of the face-value of the currency.

Powell expressed this view clearly in his speech, “Inflation”, he stated, “is a matter of money”, and went on:

If, during tonight while we sleep, a nought were to be added to every sum of money, we should still wake up to be doing the same things and producing the same tomorrow as to-day—neither ten times more nor, for that matter, ten times less. We should be neither better off nor (apart from some slight inconveniences) worse off. But we should have undergone an almighty inflation, which was only painless because, in my imaginary, simplified picture, I supposed it to happen all at once and uniformly.
My example brings out another vitally important point, too. It not only shows how inflation is, as I said, to do with money and only money. It also illustrates how helpless everyone is to prevent inflation if money increases while everything else stays the same. Nobody, in short, can prevent the consequences of an increase in money.
Let us imagine that, instead of happening magically and painlessly overnight, and uniformly everywhere, the same increase of money had been injected like water flowing into a lake or cistern from a sluice or a valve at one end. Sooner or later the same result would have been arrived at in terms of prices, wages, pensions, etc. etc., but think of the wage claims and strikes and pensions increases Acts and all the rest that would have been involved in the process. That picture is close to real life; and looking at it, we realise that, whether they had liked it or not, all concerned could not have helped their incomes or their prices rising tenfold. It would have been impossible for anything else to happen, and no law, compulsion or tyranny could have prevented it.

This economic law — that the general price level will tend to rise in proportion to the extra amount of currency issued, sometimes called the Quantity Theory of Money — was known to the Classical economists of the 18th and 19th centuries and was accepted by Marx. It came to be rejected by later economists in the course of the so-called Keynesian revolution. Governments acting on the advice of these Keynesians, issued more and more currency without considering the effect. The result has been inevitable: continually rising prices as the currency depreciated.

Prices can of course be affected by other things. Individual prices are affected by supply and demand, by monopoly conditions or by changes in productivity. The general price level goes up and down in the course of the business cycle and would be affected by a change in the value of gold. But the main reason why prices have risen since the war has been the over-issue of paper currency by the government.

Politicians are not usually original thinkers and the ideas of most of them, in both parties, reflect those of their mistaken Keynesian mentors. In their ignorance they have blamed, depending on their political prejudices, either the trade unions for asking for too large wage increases or the big monopolies for using their special position to raise prices. Powell, who has often spoken out against the lies of his fellow politicians, has not hesitated to do so here:

      Wage claims, wage awards, strikes, do not cause rising prices, inflation, for one simple but sufficient reason — they cannot. There was never a strike yet which caused inflation, and there never will be. The most powerful unions, or group of unions, which was ever invented is powerless to cause prices generally to rise . . .  In the matter of inflation, the unions and their members are sinned against, not sinning. In the matter of inflation, the unions and their members are as innocent as lambs, pure white as the driven snow.

Powell would no doubt be surprised to learn that, in more poetic language, he is echoing here the views expressed by Marx in Value, Price and Profit, still an invaluable guide to trade union activity. Powell went on:

  There are millions who . . . look with bitterness and hostility on the shops, on the manufacturers, on the importers, on the shareholders, who (they imagine) are making themselves rich by putting up prices against the consumers and the poor, and thus driving the workers into fresh rounds of wage demands and wage increases. It is not so — for a very simple reason: it cannot be so. The biggest, the greediest monopoly ever created or imagined is powerless to put up prices generally . . .  In the matter of inflation, monopoly is perfectly irrelevant.

All this is very true.

There is, however, an ambiguity in Powell’s position as expressed in other parts of his speech. At times he seems to be suggesting that “government expenditure finances inflation”. In fact, as long as government expenditure is financed out of taxes it is as irrelevant as trade union action or monopoly as a cause of inflation. It would only be inflationary if it was financed by issuing more currency, and then the cause would be the extra currency not the way it was spent. Nor of course has Powell any understanding of the underlying value relationship between the money-commodity and all other commodities we referred to earlier.

In commending (at least in part) Powell’s analysis of inflation we are not in any way endorsing his policy for dealing with it. The government could cure inflation if it was prepared to face the political and industrial consequences by strictly controlling the amount of currency issued, but an end to inflation would not leave workers any better off. Their trade union struggle would have to and should continue, whatever the currency policy of the government.

We are concerned with understanding how capitalism works not with a view to suggesting what policy the government should pursue, but with a view to showing how it can never work in the interests of wage and salary earners. Like Powell, we know that capitalism can only work according to the laws of profit-making. Unlike Powell, we realise there is an alternative — Socialism. To achieve that is our policy.

Adam Buick