Edgar Hardcastle

Inflation and prices (concluded)

Source: Socialist Standard, October 1965.
Transcription: Socialist Party of Great Britain.
HTML Markup: Adam Buick
Copyleft: Creative Commons (Attribute & No Derivatives) 2007 conference "Be it resolved that all material created and published by the Party shall be licensed under the Creative Commons Attribution-NoDerivs copyright licence".

In this last instalment it may be useful to make a few brief comments on the subject which we have been discussing.

A great many people think that higher prices are caused by higher wages; they look at what has been happening in the last 20 or 25 years and they think this proves their point. One fact is enough to dispel this belief. Between 1945 and 1951 the retail price index was more or less continually rising faster than wage rates, it was not a question of wages going up and prices following, but the reverse. Secondly, it has to be remembered that in a period of continuing inflation, when manufacturers can more or less confidently expect that there will be a steady rise of prices of, say, five per cent a year because of inflation, they would often prefer to give a wage increase when it is demanded than to risk a strike. And, of course, they never fail to represent the price rise which would take place anyway as having been due to the wage increase. They will often time their price increases to follow a wage increase to give this impression, although if market conditions are against them, they cannot put up their prices whether they want to or not and whether wages have gone up or not.

At the present time the Government in Great Britain talks in terms of having no more inflation, even if this might mean fighting the trade unions over wage claims and risking big strikes. It remains to be seen whether they will. While relatively full employment lasts, the trade unions are in a fairly strong position, rather different from the situation between the wars when there was always at least a million unemployed. Governments do not always prefer inflation. In certain countries they carry out the reverse—a deflationary movement—as the British Government did after the First World War. On that occasion prices went down by about one-third, and wages came down with them. Russia since the Second World War has twice up-valued the rouble, replacing the old currency by a new and much reduced quantity of notes. France did the same in 1960. One of the reasons why in Great Britain the Government is unlikely to try to reduce prices to anything like their former level is that its obligation to pay hundreds of millions of pounds on the National Debt would become an enormously increased real burden, if they had to pay it in currency, the purchasing power of which was being increased by the deflationary fall of prices.

During the last 25 years the holders of Government securities have found that the real value of their holdings and the purchasing power of the interest they received on them are steadily being reduced by the falling value of the pound. This has suited the interests of the general body of capitalists in Great Britain.

When Russia in 1947 up-valued their rouble they got over that particular difficulty by simultaneously reducing the amount of bond holdings. A Russian, for example, who had Government bonds to the value of 1,000 roubles, found when the up-valuing of the rouble took place, that his holding of Government bonds was cut by one-third or one-half.

No city editor or orthodox economist accepts the Marxian view that the increase of a non-convertible note issue is a cause of inflation. Some of them, including some of the followers of the late Maynard Keynes, deny that the note issue has been excessive, and say that it has merely kept pace with the currency needs required by expanding trade. It is, however, for them to explain why it was necessary to multiply the note issue in Great Britain by nearly five times in face of the fact that the actual physical volume of production in Great Britain is now not more than about five per cent above the pre-war level. Obviously, these two facts do not square with the interpretation put on the note issue. It is a reasonable assumption that the excess issue has only been made necessary by the multiplied price level, which has itself been largely caused by the note issue. Another group of economists deny that the note issue matters any more, one way or the other. It is for them to explain why the Government troubled to multiply the note issue if it is not of sufficient importance to have any effect.