Letters: What causes inflation?

Dear Editors,
Since the 1960s this country, and indeed the rest of the world, has been in the grip of rising inflation. The government attributes this phenomenon mainly to the level of wage demands; keep wages to a minimum they tell us and inflation will be brought under control.

The Socialist Party, on the other hand, holds that inflation is brought about by the printing and putting into circulation of an excess amount of paper money, and that it is this excess which causes prices to rise. This in turn starts a fresh demand for wage increases and the whole inflationary cycle continues to spiral.

If inflation is caused by an excess of paper money in circulation the question I would like to ask is: why doesn’t the government cure inflation at one fell swoop by ceasing to print excess paper money? Inflation between the two world wars, with a few exceptions, was to all intents and purposes zero. What has changed to make inflation the rule rather than the exception?

Governments presumably print excess money in order to help finance the management of the economy—paying for the social and health services, defence spending. etc. But it did all these things between the wars, perhaps not on such a lavish scale, nevertheless the amounts would not be much greater if this expenditure was taken as a proportion of gross domestic production. In any event socialists maintain that all government expenditure is met from taxation, and in the last resort only the capitalist class pays taxes.
PUZZLED, Belfast

REPLY
We suggested some reasons why all Labour and Tory governments since the war have inflated the currency in the article on Thatcher’s Economic Policy in the May Socialist Standard. First, sheer ignorance of the economic laws governing the circulation of paper money: the universities which turn out those who fill the top posts in the Treasury. Bank of England, etc. teach that the amount of notes and coins in circulation makes no difference to the general price level. Second, inflation tends to favour borrowers and the government itself is a major borrower. It would, however. not be true to say that governments have printed excess currency in order to help finance their spending. Government expenditure on social services, health, education and so-called defence is way in excess of the face-value of the extra paper money that is printed: expenditure in these fields is overwhelmingly financed from taxation and borrowing.
EDITORS