The ABC of Inflation

The Labour Party and the Tory Party accuse each other of being responsible for the continuing rise of prices, but there is absolutely nothing to choose between the records of the two parties. Measured by the government’s own Retail Price Indexes, the Labour government 1945-51 scored a 28 per cent rise and the Labour government 1964-70 another 30 per cent (of the 1964 level); while the Tories marked up 50 per cent between 1951 and 1964 and another 17 per cent (of the 1970 level) between 1970 and June 1972. Added to the 32 per cent rise recorded between 1939 and 1945 under the National government (admitted to be an understatement), the present price level is at least four times what it was before the war.

In 1944 the three parties –Tory, Labour and Liberal –in the National government committed themselves to do what they could after the war “to stabilise prices”, and at each of the eight general elections Labour and Tories both repeated the promise –and it hasn’t meant a thing.

Individual prices can rise (or fall) for several different reasons. Good harvests will reduce prices and bad harvests will raise them. Booming trade increases demand and sends prices up, bad trade will send them down again. Even against the present trend of rising prices metal prices fell heavily last year as demand slackened off –the price of copper fell by 40 per cent. Improved methods of production, by reducing the amount of labour required, will operate to lower prices, while the exhaustion of easily accessible seams of mineral ores (coal and metals) will operate the other way because mining at greater depths or in less rich seams requires more labour to produce each ton.

During the nineteenth century when all of these price factors operated the general price levels in Britain went up in some periods and down in others, or remained nearly stationary, but the extent of the movement up and down was always within a range of about 25 per cent either way –nothing like the 300 per cent added since September 1939. Wages also rose and fell during the nineteenth century; sometimes in line with the movement of prices, sometimes by more or less, and occasionally wages moved in the opposite direction to prices.


All sorts of explanations have been offered for the abnormal rise of prices since 1939 as compared with the up-and-down movements of prices in the nineteenth century. Most of the so-called explanations take the form of blaming some group or other for being “greedy”; bankers, or manufacturers, or retailers or trade unionists. It is an explanation that a glance at certain facts will show to be nonsense. Did the copper companies reduce their prices by 40 per cent in 1971 because they had suddenly become less greedy? Between 1948 and 1968 prices rose by 100 per cent in Britain, but only by half that amount in America and Switzerland: are the British twice as greedy? In the nineteenth century did the whole population go through alternating phases of being more greedy and less greedy? Between the end of 1920 and the middle of 1933 prices fell by over 50 per cent. The fall was continuous for thirteen years. What had happened to greed?

The fact is that sellers always try to get as big a price as they can, “as much as the market will bear”, and if they can get more or are forced to take less it is because external circumstances over which they have little or no control determine that it shall be so.

Two popular beliefs are that prices go up because wages go up, or vice versa. It does not occur to those who hold one or the other view that wages are prices –the price the worker gets for the sale of his labour-power, his mental and physical energies, to the employer. So, properly stated, their two propositions become the single useless assertion that prices go up because prices go up.

If they re-stated it in the form that one group of prices (wages) go up because the other group of prices go up –or vice versa –they overlook the truth that both groups of prices go up because of common external factors which affect both of them, more or less to the same extent. To illustrate this we can note that in summers when more Londoners visit the country the harvests are good. Nobody asks whether it is the London visitors who make the corn ripen, or whether it is the ripened corn which attracts the visitors. It just happens that a long hot summer both produces the good harvest and attracts visitors to the country — the sun is the common cause of both.

Paper & Prices

The new factor which has operated to push up prices abnormally since the war –the “sun” in relation to prices and wages –has been the continuous and accelerating “depreciation of the currency”. In the nineteenth century the amount of notes and coin in circulation was controlled by the device, enforced by law, that the pound sterling was a fixed weight (about a quarter of an ounce) of gold, and Bank of England notes were always convertible on demand into the corresponding weight of gold. Nowadays the pound is an inconvertible paper currency and enormous additional amounts have been printed and put into circulation. In 1939 the total of notes and coin in the hands of the public was £454 million. It is now over £3,500 million and rising steadily, an amount far in excess of whatever increase would have been necessary in line with the actual increase in production and sales of goods.

Karl Marx, whose study of the subject has never been rivalled, enunciated the economic law in the form that if the amount of inconvertible paper currency exceeds the amount of gold that would be needed if gold coins circulated, the excess simply operates to push up prices. Before Keynesian doctrines were swallowed by most of the modern economists and politicians, this relationship between excess issues of inconvertible notes and the price level was generally accepted by economists (including Keynes). In 1919 the government deliberately put a stop to the issue of additional notes and this played a large part in the subsequent fall of prices. Now the political parties and the trade unions have deceived themselves, against all past experience, into the belief that what they call increasing “money supply” leads to greater production and the maintenance of “full employment”.

Facing Facts

Not quite all of the economists and financial authorities have swallowed the “new economics”. One exception is the First National City Bank of New York which, in its Monthly Bulletin for January 1970, ridiculed the notion that rising prices are due to greed or to the wage demands of trade unions :

“Most of the blame for inflation is misplaced. For although inflation has a hundred faces, it has but one essential cause : overly expansive and erratic monetary policy that has pushed up the quantity of money more swiftly than the quantity of goods and services.”        

Governments, even if they perceived the truth of this, are afraid to repeat the restrictive policy applied in 1919 because they think it might lead to a big depression and much heavier unemployment. The economist Lord Robbins, speaking in the House of Lords on 5th July, said:

“I know of no case in history where inflation of the order of magnitude of that from which we are now suffering has been stopped by measures of this sort without that sort of effect.”

The government’s view, according to Patrick Jenkin, Chief Secretary of the Treasury, is that while curbing the money supply would affect prices it would do so only after a considerable time lag: –  “The immediate effect would be increased unemployment and reduced output. As a solution, it was politically, wholly unacceptable”. (Financial Times 17 July)

They, Lord Robbins and Jenkin, are equally afraid that continued and accelerating depreciation of the currency may end with the kind of monetary collapse that Germany experienced between the wars.

Most workers believe that if only prices came down or were at least stabilised their chief troubles would be over. They should remember that while it is true that at present hundreds of thousands of workers cannot afford to buy a house on mortgage, exactly the same was true between the wars when prices of houses and prices in general (and wages) were only a fraction of what they are now. For the workers capitalism means hardship whether prices are high or low or falling or rising.

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