Economics, Politics and The Age of Inflation. Paul Mattick 1977

Chapter 2
Deflationary Inflation

It is popular nowadays to distinguish between the inflation of time past and a new kind of inflation, which accordingly requires a new explanation, although in its monetary aspects inflation has the same features now as before: rising prices or the diminishing buying power of money. While its opposite, deflation, was viewed as contracted demand resulting in falling prices, inflation was explained by insufficient supply, driving prices up. Since, however, in this view it is the commodity market that determines price formation, little attention was paid to monetary policy. Money was seen merely as a veil concealing real processes, obfuscating them, but altering little in their essential nature.

This theory was also accompanied by the illusion, still lingering today, that the quantity of money in circulation in the economy has an important influence on commodity prices and that price stability depends on an equilibrium between the quantity of money and the total volume of goods. The modern advocates of the quantity theory of money also attribute deflation and inflation to a too slow or too rapid growth in the supply of money, and as a remedy to these anomalies they propose the creation of money adjusted proportionally to actual economic growth.

Thus in money theory the economic cycle is represented as an expansion and contraction of the money supply and of credit not commensurate with the real situation. But it was expected that the equilibrium mechanism of the market would ultimately steer things back to normal. The crisis of the thirties, however, which seemed to have taken hold for good, put an end once and for all to any notions of such an automatic self-establishing equilibrium. In Keynes’s view, which dominated bourgeois economic theory in the years that followed, the laws of the market were no longer capable of bringing about economic equilibrium with full employment. A developed capitalist economy, claimed Keynes, made for a decline in effective demand and with it a fall-off in investments and growing unemployment. Although this theory was designed specifically to explain economic stagnation during the period between the two world wars, it was quickly given universal status and regarded as the last word in the science of economics; to avoid the deflationary state of the depression and to restore economic equilibrium with full employment, state measures were needed to stimulate overall demand.

Central manipulation of the amount of money in circulation and of the amount of credit was not sufficient for such purposes, claimed Keynes. Instead, fiscal means, e.g., deficit financing of public spending and adjustments in the exchange rates, were needed. The inflationary monetary and fiscal policies that such measures entailed would prove to be what was needed to beat the crisis. However, an inflationary course must not lead to a demand that exceeded what the production capacity could supply. It must come to a halt when full employment was achieved in a new price equilibrium.

Every capitalist crisis, no matter what its imputed causes, manifests itself in a declining accumulation of capital. The share of social production earmarked for expansion is considerably reduced or even fully eliminated, curtailing total social production in the process. Seen from the restricted view of the market, however, this process appears as overproduction of goods or insufficient demand. The depression that resulted was a deflationary process which affected both prices and production, but which at the same time brought about substantial changes in the economic structure and prepared the way for a new economic boom. The depression became an instrument for overcoming economic crisis, and although not deliberately encouraged, it was passively allowed to run its course.

Inflation implied the creation of money by the state, which impaired the price mechanism. This was seen as a violation of the laws of the market, caused not by factors inherent in the economic system but by an arbitrary monetary policy. Inflation was resorted to in order to finance wars beyond what was possible with tax revenue alone or in order to eliminate excess state debts and hence indebtedness in general. However, in economic crisis situations there had been a general reliance on the restorative effects of deflationary depression until the twentieth century.

As capital grew it created obstacles to its own further expansion. Its periodic crises became more and more oppressive and persisted long enough to create a real danger that the deflationary process would lead to social upheaval rather than to a new boom. To prevent this from happening, state economic interventions were in order in the great crisis that followed the 1929 crash; their theoretical justification came later. This interventionist policy sought to achieve by inflationary means what seemed no longer attainable by deflationary methods.

Following traditional theory, Keynes assumed that the interest rate was dependent on the quantity of money in circulation. An increase in the money supply would decrease the interest rate and spur new investments, which in turn would increase employment and raise prices and profits. Since the state had the power to create more money, it was a matter of government decision whether the way to economic recovery would be through lower interest rates. However, the profitability of capital had already fallen so far that even a reduction in interest rates would not be sufficient stimulus new investments. It would therefore be necessary to make up for the defective private demand by creating more public demand. However, since an increase in public spending by way of taxation would cut even more into the profits of the private sector, it would have to be financed through state deficits.

Deficit financing would increase the amount of money in circulation without necessarily leading to inflation. The technique, of course, was not to print more money, which would depreciate the currency, but merely to expand state credit which would absorb idle private capital and finance the increased public demand. This added demand would, it was expected, stimulate the economy as a whole sufficiently to bring it out of the depression and into a boom, which in turn would enlarge the state’s tax revenue to such a degree that it would be able to pay off its depression incurred debts in a new period of prosperity.

In the light of bourgeois economic theory, and especially its theory of money, it seemed quite plausible that by increasing the money supply and public demand simultaneously, an interrupted process of accumulation might be set into motion again. The co-ordinated employment of monetary and fiscal policies would not only counteract the deflationary trend of the crisis, they would in addition initiate a new period of upswing, which although containing inflationary tendencies, need not degenerate into a real inflation as long as unused money and real capital were still available. The specter of inflation would loom only if a new disproportionality arose between the means of payment and commodity production. But this was a real possibility only when full employment was reached, and then it could be combated by state-initiated deflationary policies. In short, it was imagined that a theory and practical policy had finally been found which would place the economic cycle under conscious state control.

Bourgeois economics begins and ends with market relations, and hence it can only obliquely touch on the production processes underlying market events. These processes it sees as being determined by demand. In Keynes’s theory it is a relatively declining demand for consumer goods that brings about a decreasing demand for capital goods. Under such conditions further investments can only reduce profits, and for that reason they are not made. The way back to full employment would require, first, improving the profit rate of private capital, and second, filling a chronic lack of investments by stated-induced production. In the light of the experience of the great economic crisis, the second of these measures seemed to be a precondition for the first, although it was still not clear whether state-induced demand was a temporary or permanent necessity in a modern market economy. Keynes himself thought that the future of capitalist economy depended on increasing state control.

In the bourgeois conception the economy appears as a circular process in which total income must equal total expenditures. It was therefore immaterial what specifically went into total income and total expenditures. The social distribution of income is presumed to be determined by the various contributions of the different factors of production to total production. Since, however, not all income is consumed, the cycle can only really be completed when the saved income is reinvested. The upshot is that state-induced production, regardless of what ends it may serve, is able to reduce or eliminate completely any discrepancy that may arise between total income and total expenditure. But this requires that the state be given the power to dispose of the saved -but not invested – capital. In its hands money capital that was not being used to expand real capital could restore equilibrium to economic cycle.

With this conception the bourgeois world deprives itself of any realistic insight into the economic process in general and into the problem of inflation in particular. Just as it does not distinguish between social production as such and specific capitalist production, so too it does not distinguish between productive and unproductive capitalist production. Any kind of production for which there is a demand on the market enjoys equal status as far as it is concerned, and any kind of demand appearing on the market finds its match in production. It does not distinguish, therefore, between demand created by capitalist production for profit and demand created by public spending. The latter, too, is a demand that private capital can meet with an adequate supply and reap the profits accruing therefrom. The growing state debt aside, the economy is revived by the increased public demand, which in turn has a positive influence on private market demand. The growing amount of money in circulation and expanding income are balanced by an undifferentiated and expanding production on the expenditure side of the ledger, which could partly or wholly eliminate unemployment.

The only vulnerable point in this description of events was the growing public debt; for this there is no equivalent in the production sphere, since the additional government demand consists of goods and services that enter public consumption and therewith impede the expansion of real capital in proportion to their magnitude. The mere expansion of production without a proportional increase in profit is equivalent to a partial destruction of capital, since some of the capital used ceases to be productive, i.e., ceases to produce additional capital.

The inability, whether conscious or unconscious, of bourgeois economic theory to understand this point forces it to entertain the ungrounded and empirically unverifiable expectation that the acceleration principle, as it is called, and the multiplier effect of new investments can bring about the desired economic revival in which total production will grow more rapidly relative to state-induced production, so as ultimately to bring state-induced demand back down to its normal level. In any event, the growing public debt entailed no risks as long as total production increased more rapidly than did the public debt.

In contrast to the autonomous expansion of capital, however, state-induced expansion of total production is characterised by the fact that a portion of the profits on which it is based derives from public loans rather than from increased production.

If this kind of economic pump priming has become a necessity, it is still limited by the limitations of state credit. As state-induced production goes into public consumption, it cannot serve accumulation; and as the profits accruing to private capital from state loans are not newly created but merely represent already existing money capital, only the share of total profits obtained in the private sector is available for capital accumulation. Not only is the profit accruing to private capital from state-induced production a part of total production, but the share of total production that appears to generate this profit is also lost to capitalist accumulation by being allocated to public consumption.

Thus public spending means a growing public debt, which ultimately can only be financed and paid off by profit-creating capital. The profits of earlier production periods, which in the sterile form of money capital have lost their function as capital, are eaten up by state-induced production and appear to the entrepreneurs and creditors engaged in state-induced production as profits and interest. This process is both real and illusory. It is real for individual capitals but illusory from the standpoint of the social capital, since the profits that fall to the individual producer do not owe their existence to production itself but to the consumption of money capital placed at the disposal of the state. Thus in bourgeois theory the elimination of a state budget deficit is feasible only on the expectation of some future surplus, i.e., a prosperity that would allow the state debt to be paid off. This would require future profits that must not only be adequate to the further demands of accumulation but, in addition, large enough to replace the money capital used up in public consumption. If this capital is not replaced, it would mean that some capital had been expropriated by the state for public ends. From the standpoint of capital as a whole, this would mean that some existing capital had been swallowed up by the crisis, and state deficit financing would therefore have achieved the same result as capital destruction achieved by deflationary depressions in the past.

In contrast to deflationary depression, however, this process appears outwardly as expanding production The more production expands, the more must the profitability of capital be backed up by state deficits, i.e., by more loans. But since idle money capital is a given finite magnitude, the process breaks down at the point where the state must be refused further loans. At this point the process could be continued only through an arbitrary proliferation of paper money, until it finally erupted into open inflation.

Deficit financing is also an inflationary process, although it can be held in check by the limitations imposed on the state debt. It is inflationary because the social profit corresponds to an increased production only apparently; in reality it is insufficient. Capital that lies idle because of insufficient profitability enters capital circulation through the monetary effects of the public debt, where it helps to expand production, but not profits, proportionately. In relation to the total capital, of which money capital is a part, the increased amount of money in circulation stands in contrast to a profit mass out of proportion to it, since a portion of accrued profits derives not from production but from a transfer of already existing capital to the profits column.

Since, however, capitalist economy is production for profit, which must be measured in terms of total capital and must be adequate to the needs of capital accumulation, for the individual capitals the discrepancy between expanded total production and the total profits actually produced manifests itself as a fall in the rate of profit, which, however, can be offset by commensurate price increases as long as production is expanding and competition is hence not as sharp. While neither profit nor interest accrues from state investments, as a part of total production, the individual capitals, participating in state-induced production, do yield both; this contradiction resolves itself, on the one hand, through a different redistribution of total profits among individual capitals, and on the other hand insofar as the competitive averaging of rate of profit still asserts itself through a fall in the general rate of profit, which then is offset by rising prices. The social costs of state-induced production are then distributed over the population at large in the form of price inflation.

The rise in commodity prices occurring hand in hand with expanding production is thus the capitalist response to the pressure put on the general rate of profit by state-induced demand. State intervention is, of course, itself a crisis phenomenon and would not occur were capital capable of expanding on its own. But like the crisis itself, this “crisis solution” is marked by the reduction of profits, although it manifests itself in rising, not falling, prices.

If an “excess” of capital unable to find profitable employ-ment appears as a general shortage of money, and hence as deficient demand, then profits fall along with commodity prices. The fall in prices can be arrested and its course reversed by state interventions. In the past the approach was to reduce supply, i.e., use-values were not produced or were simply destroyed. However, since it is not supply and demand which, along with prices, determines the level of profits, these measures proved ineffective. The problem had to be tackled from the profit side.

At any price level enterprise profits represent the difference between costs and market prices. Every firm seeks to reduce costs to maintain its profits. The costs a firm can influence directly are the costs of wages: it may simply lower them, or it may try to improve the productivity of labor. The magnitude of the average rate of profit is determined by the total surplus value created by labor in relation to total capital. A crisis implies a decline in the general rate of profit, which for the time being renders the further growth of total capital inadmissible. Under such conditions every enterprise intensifies its efforts to maintain, and where possible to increase, its profits by reducing costs. This sharpens competition, which in turn further obstructs restoration of the required level of profitability and prolongs the depression and the destruction of capital. Nonetheless, even as capital as a whole is contracting, the strivings of individual capital entities bring about an expansion, if at a slower pace, of total surplus value. The larger mass of surplus value relative to the reduced value of total capital raises the rate of profit, and further accumulation becomes possible. Firms that cannot enlarge their profits stand on the brink of bankruptcy. On the other hand, surviving capital entities have a broader field over which to range. This process effectively amounts to the concentration of capital and is itself an instrument for expanding profits.

These so-called microeconomic changes have their repercussions at the macroeconomic level, and through the instrumentality of crisis they restore the profit rates needed for further capital accumulation. If this were not so, the crisis cycle would be incomprehensible. State interventions into the economy, on the other hand, are applied directly to the macroeconomic level, to find a shortcut to the slow-paced regulatory results of the micro-economic process. Their aim, too, is to increase profits, but they hope to achieve this through the circulation process. Keynes himself saw that to reduce wages by inflationary means was not only easier, it could also be accomplished more generally than if one had to rely on the independent action of numberless individual firms.

A general price rise, along with a slower rise in wages, must increase profits so long as at the same time the general demand is also increased through deficit financing of public spending. Without this last measure, designed to blunt the edge of competition, the wage reductions might readily prove to be unsatisfactory and the economic pinch grow worse.

Otherwise commodities (including labor power) would only be tagged with higher prices without the profitability of capital having been changed in the least. Since, however, not all commodity prices rise at a uniform rate, and moreover, it is extremely difficult if not impossible for the price of labor power to keep pace with the general price rises, price inflation ultimately results in an improvement in capitalist profitability.

Thus by means of an inflationary money and pricing policy, both production and income distribution are modified, because the ratio of wages to profits shifts in favor of the latter. This is controlled inflation when the determination and limitation of the amount of money in circulation is left to the discretion of the state. Controlled inflation, originally conceived as a means to get through a crisis, soon became, at least for economists, a precondition for economic growth as such. Even if a steady state of full employment were achieved, demand could be further expanded, they said, by a “dampened inflation,” with the effect that debts would suffer a steady devaluation, thereby spurring investment.

The English economist Phillips undertook some statistical investigations in an attempt to demonstrate that a close empirical correlation existed between the employment level and inflation; the result of his efforts subsequently became one of the bulwarks of bourgeois economic theory under the name of the Phillips curve.[1] This curve shows that a rising level of employment was always accompanied by a rise in prices, while growing unemployment was accompanied by a price decline. Thus it seemed that full employment went hand in hand with inflation. Since the employment level depended on demand, it would follow that inflation was a consequence of rising demand, which drives prices, along with wages, upward. Demand-induced or wage inflation would rule out full employment with price stability, although it should allow the option between combating inflation by means of unemployment or combating unemployment by means of inflation.

Although the significance of these questionable statistical findings, for which no theory was ever offered in explanation, was disputed, they did, however, offer a demonstration, if a somewhat troubled one, of the efficacy of state economic controls. The goal was no longer economic equilibrium with price stability but the restoration of an “inflationary equilibrium” in which inflation rode the back of full employment.

Still economists considered the social costs thereby incurred to be a small price to pay for a growing, full-employment economy, especially if inflation could be kept within socially optimum bounds by skillful manipulation of the labor market. It could not, however, be determined whether the wage increases that were so evident a part of prosperity were matched by price rises. But no statistical demonstration is needed to show that wages improve as the demand for labor increases. Wage increases, however, are kept within limits by the industrial reserve army, which never completely disappears, and by the need for adequate profitability – an indispensable condition for accumulation and hence for a rising demand for labor. The simple fact that capital accumulation will take place during a period of prosperity is proof in itself that capital has maintained its profitability despite rising wages.

An economic boom not only drives prices up, it also improves the productivity of labor, which actually should lower prices. According to bourgeois theory, under conditions of general competition, if production costs are reduced, prices, including the price of labor, should fall as well, without real wages necessarily being diminished in like measure. More consumer goods should mean lower prices, so that, although money wages should decline, buying power would remain intact. If wages did not decline, or if they declined more slowly than the general price level, this would be at the expense of other factors of production. But then economic equilibrium, supposedly sustained by the price mechanism, would be upset, and either wages would have to be forced downward or the prices of goods raised to restore it. In this view, therefore, price inflation is ultimately the result of a faulty wage policy.

But the illusion of a pricing mechanism kept in equilibrium by general competition was soon discarded, to be replaced in the bourgeois camp by theories of monopoly price fixing and state intervention. Yet monopolies themselves were held only partly to blame for monopolistic price formation, namely, where price fixing exceeded the average level of profit. But because monopolies were able to reap excess profits through price fixing, they could also afford to accept monopolistically fixed wages, which increased costs. In this way monopoly capital and monopolized labor worked together to drive prices up. Once this demand, wage, or cost-induced inflation had taken root, it would accelerate steadily unless it was arrested by state intervention. The answer to inflation was thus a price and wage policy that would restore stability.

State control of prices and wages could, at least in theory, curb inflation without thereby relieving the conditions that had led to inflation. For if capital is to have a free hand to expand itself, it must have sufficient profits. in a monopoly-dominated capitalist economy, capital accumulation must take place through the monopolies. Monopoly profits reflect the need for profits higher than those obtained under conditions of competition. Monopolies are the outgrowth of progressive concentration and centralization of capital through competition, but neither they nor competition can alter the given mass of profit. Neither form of competition, monopoly or pure, does more than distribute total social profit. A price and wage policy that made monopolistic profit impossible would also undermine capital accumulation.

Monopoly profits come from circulation, not from production. Of course, capitalist excess profits come from processes in production sphere as well, when there is an above-average rise in labor productivity; the reduced costs then enable firms to earn higher than average profits on their products. But this form of excess profits is only temporary and disappears again when the improved production methods become more general. Monopoly profit differs from this form of continually vanishing and reappearing excess profit in that under monopoly, competition has been largely abolished. A monopoly profit rate is achieved through control of prices. in order, however, for profits to multiply of themselves, the production relations between values and surplus value must shift in favor of the latter. Profits must be produced, and it is only those profits actual produced that determine capital accumulation and accordingly the state of the economy in general.

If the progressive monopolization of capital is a reflection of and response to the increasing profit difficulties of accumulation, it is clear that the partial elimination of competition can hardly be expected to increase social profit. Monopoly profits are created at the expense of individual capitals still caught up in competition, which forces them also to raise prices to avoid losses. Thus all prices become in a sense more or less monopoly prices, although the degree to which this is so will vary widely, which indeed provides the whole process with some “sense"; namely, the reapportionment that it effects in social production in favor of capital expansion. Nor is any of this contradicted by the observation, often heard, that monopolies impede rather than promote capital accumulation, as supposedly evidenced by all the idle production capacity. But this argument says no more than that during periods of economic stagnation, monopolies strive to keep themselves alive at the expense of weaker capital entities and at the expense of the population at large. To reproduce itself as capital, monopoly capital must also accumulate; and it therefore endeavors, through a monopolistic price policy, to effect a further division of profit and wages in circulation to add to the primary separation between wages and profit in the production process.

Although monopoly price formation must, like capital accumulation, arrive at a dead end, it has at first some positive effects. Like the spurious profits generated by production induced by public spending, monopoly profits stimulate the economy precisely because they are obtained by the roundabout way of price inflation. Thus, on the one hand, we have state-induced production, and on the other, the need to promote capital accumulation by way of further monopolization: in either case the result is inflation.

After World War II bourgeois economics deluded itself that it not only had discovered the secret of crisis, but also that it possessed the means to nip any further crisis in the bud; the expansion of capital, therefore, which was taking place largely on its own momentum, certainly was not designed to undermine the conviction that any economic recession could be countermanded with the proven anti-cyclical measures. This conviction persisted until the advent of deflationary inflation, where growing & unemployment was accompanied by an accelerating rate of inflation.

The first response to this situation was almost automatic: the Keynesian tactic of a wage freeze. Together with high interest rates, this freeze artificially maintained prices, reduced the profitability of capital, and hindered its expansion. The frozen wages of depression stood in contrast to the rising wages of the “full-employment” period, which were blamed for the “wage-price spiral.” It had, indeed, been acknowledged for some time that full employment could have inflationary effects, but they were, it was argued, the signs of prosperity and should be seen in a positive light. That things had actually developed differently was due not to the system itself but to factors stemming from outside it, namely, the irrational mania of the workers to get more out of the system than was in it.

This understandable and widespread nonsense,[2] which of course from the viewpoint of capital makes quite good sense, would not even be worthy of special comment were it not often encountered in supposedly “leftist” explanations of the crisis.[3] Under conditions of full employment, whether brought about by the autonomous movement of capital or by state-induced production, or both simultaneously, it is obviously more difficult to cut back wages or prevent their rise. It is also clear that the organized workers are able to improve their wages through economic struggles. Finally, it is evident that under such conditions capitalists seek in some cases to avoid conflicts by granting pay raises, which they can then recoup by raising prices correspondingly. Nor is there need to dispute that the successes of organized labor in this domain also often enable unorganized workers to improve their situation as well: in a period of boom wages are generally able to follow prices upward.

But in a period of recession profits decline. If wages do not fall in pace with profits, the depression deepens. To get out of depression it is not enough to bring the fall in wages in line with the fall in profits; profits must be augmented at the expense of wages. In the past in crisis situations, the heightened competition among workers for jobs led to a reduction in wages. The institutionalization and monopolization of economic labor organizations, it is claimed, has now made this impossible. For the bourgeoisie, even the defense of existing wage levels is sufficient to explain both crisis and inflation.

It is quite possible and indeed undoubtedly also often the case, that a wage policy favorable to capital cannot be put through. In any event, bourgeois statisticians have no difficulty proving that both money wages and real wages increased and often exceeded the increase in productivity. But other statistics exist as well showing that what workers gain in wages is taken from them again later in the circulation process.[4] Whatever else such statistics may mean, they are no acceptable empirical demonstration that inflation is due to wages, or that the opposite is the case. First, price relations tell us nothing about the value and surplus value relations underlying them; yet in the end they determine the state of the economy. Second, profits may actually be higher when wages are also up than when they arc low if the share of surplus value in the total value of production is sufficiently large. Indeed, this surplus value rests not only on the extremely limited statistically discernible increase in labor productivity, it also depends on the total surplus value produced on a world scale in proportion to world capital as total capital and for this there are no statistics available even apart from these considerations, however, the very existence of an economic boom demonstrates that however wages go profits increase more rapidly than he share of labor in the social product. True, the postwar boom was accompanied by creeping, though uneven, inflation[5] from the very outset But the reason for this lay not with rising wages which went beyond the increase in labor productivity, but with the fact that the boom and its continued existence were possible only because of inflationary price policies, which, moreover, had over a relatively long period of time been used liberally and effectively to maintain the wage profit relation necessary for economic expansion. But why has this accumulation period, in contrast to earlier booms, been so consistently inflationary? In the economic cycles of the past century, every crisis was preceded by the inflationary phenomena of a heated up economy. Wages, prices, and interest rates rose. A wide expansion of credit concealed a decline in profitability that had already begun, thereby delaying the end of the boom.

In other words, capital now “accumulates,” though profits are inadequate, without this at first being evident owing to the mechanism of the state debt. There is no direct pressure to reduce wages, since the profitability of capital can remain at a steady level even as wages rise as long as as demand is sufficiently inflated by state-induced production.

If capital were unable to increase its profitability on its own, the state-induced upswing would soon have to come to an end. An autonomous expansion of profit, however, is possible only by way ‘of an increase in labor productivity, i.e., a higher rate of exploitation of labor, which relatively depreciates labor’s value. As this is difficult to achieve under full-employment conditions, capital attempts to obtain the profits it requires for accumulation by way of price formation. The result is the same: a growing share of total production falls to capital, while proportionately less goes to the work force.

Not only does the relationship between wages and profits change, the distribution of the social product generally shifts in favor of capital accumulation. The social layers with fixed incomes, which find it difficult, if not impossible, to adjust to the inflationary trend, must give up more of their income to capital. The savings of the “little man” are eaten up progressively as the value of productive capital rises in pace with inflation. It was this process of creeping inflation which contained the secret of prosperity. The disadvantages of inflation seemed for the time being to be offset by the advantages of economic boom.

Although the dependence of capitalist prosperity on capital accumulation is immanent to the system, it is not recognized by bourgeois economic theory. For bourgeois economists inflation is caused by a demand in excess of production, or even by the immoderate claims of the workers, although the very universality of inflation is a patent contradiction of this view; indeed, inflation plagues even countries with extremely low wages, where there is no monopoly of labor and where demand lags far behind supply. Inflation occurs in depressions, where one would expect deflation. The international character of inflation is proof enough that inflation involves more than merely the erratic consequences of high wages in a few countries.

Now, however, ‘when inflation and crisis exist side by side in the leading capitalist countries, the contention that inflation is a consequence of full employment and demand outstripping supply is no longer tenable. The only thing left to blame, therefore, is high wages. And despite all the monopolization of labor, or perhaps even because of it, the bourgeoisie still finds rising unemployment a good taskmaster. Wage contracts, often long term, have with a few unimportant exceptions made it impossible to counteract the burden of steeply rising prices or to make up for past omissions through wildcat strikes; all the more reason, therefore, to take advantage of the all-pervasive depression to reap inflationary profits. One must, so one hears in quite a number of trade unions, face the facts: inflation eats away at any wage rise, making continued demands meaningless. What is now necessary to get out of the depression is a responsible wage policy, i.e., capital must be given the chance to regain its lost profitability.[6]

It is of course clear that if wages are down, prices can be reduced; but although possible, this need not become a reality. Prices depend on other things besides “market relations” and “factor costs,” e.g., indirect taxes, subsidies, stabilization programs, and monopolistic manipulations. Even where production is steadily declining, where there is mass unemployment, and where wages are at starvation levels, prices can still continue to climb into the blue beyond; and indeed in the past they have done so, with the ultimate result that inflation degenerates into hyperinflation. Even before inflation gets out of control, depression, which drives wage costs down, is not sufficient to put an end to rising prices. In any event the most recent anti-inflationary policies have had very disappointing results, which moreover are all the more questionable in tat they have led to situations compelling a recourse to inflation to keep the social fabric intact.

State deflationary or inflationary policies are not measures to control the economy so much as reactions to processes that are already beyond control. The real development of capital is determined by the law of value, i.e., capital profitability and capital accumulation. State interventions are aimed merely at superficial market phenomena whose root causes are to be found in the production sphere, that is, in production relations. State reactions are therefore just as blind as these processes themselves; if they coincide at all with the events underlying developments on the market, it is by pure chance.

State interventions may fail to measure up to expectations, or they may lead even to adverse results. Whatever the case, the theories associated with them are discredited and therefore lose their ideological function. With no explanation for the present inflation forthcoming, the only thing left in store is a regression to an earlier standpoint, already abandoned once: namely, the empty hope that the equilibrium mechanisms of the market will turn out after all to have some clout left in them. Specifically, it is now asserted by some that all state intervention into the economy should be rejected, with perhaps the exception of “correct” monetary policy, such as advocated by Milton Friedman, and to opt, once again, for a cure “by way of depression in order to reach a new boom. It is said the idea that the prevailing inflation finds no explanation in economic theory is pare nihilism. Likewise, the idea that it cannot be ended. All that is here required is a consistent monetary and fiscal policy, which curtails for a considerable length of time economic activity. Here of course lies the difficulty, namely, the necessary political determination. The responsible authorities have to make up their minds as to whether or not the majority of the population is ready to make the required sacrifices.[7]

Thus all the old disproven and discredited theories are revived to explain inflation and are expected to provide the key to its solution. The facts of the present inflation must be completely overlooked in the process, however; this inflation, like each of its predecessors, is no accident hut the result of a quite definite economic policy. Inflation must be created, even if under the pressure of economic and political processes that originate not in conscious acts but from a compulsive need to accumulate capital.

World War I destroyed the customary world market relations as well as the relations among the national currencies, which were based on the gold standard. Under the gold standard fluctuations in the value of each individual currency were held within very narrow limits. If a nation elected to adopt inflationary means to combat an economic downturn, it had to free itself from these restrictions. Once the gold standard was abandoned, a monetary policy relatively independent of the world market could be adopted. But inflation remained withal a national affair that could be dealt with or not by individual governments as they saw fit. The different nations have thus tried to solve their profit problems in different ways, and inflation acquired a distinctly international character only after World War II.

World War II put a temporary end to capital accumulation. Half of international production was production for public consumption, which devoured both men and materials. Profits were written as state debts. To avoid an inflationary surge, rationing and forced saving were the policies adopted, although the rigor with which such measures were applied varied from one belligerent country to another. At war’s end the world was not only a different place, it was totally impoverished. Only the United States, which was the least touched by the ravages of war and which even before the war had already assumed the number one position among the world’s capitalist powers, was able to resume the accumulation process on the basis of an essentially unchanged capital structure. The other industrial countries had to resume again from a much lower level and had to go through a long period of accelerated accumulation before they once again regained their ability to compete. The restoration of the world market and of currency convertibility forced a series of currency reforms, often quite radical, and the Bretton Woods agreements, concluded while the war was still in progress, introduced a modified gold standard.

The postwar period witnessed a growing internationalization of capitalist production, which picked up steam rapidly and stimulated world trade. The autarchic tendencies of the pre-war period, when each country endeavored to find a way out of its own problems at the expense of others, even to the point of imperialist wars of conquest, came to a temporary end in post-war events when the United States assumed hegemony over the world market. The “free world market"’ was reborn out of the expanding American economy, helped along by the Marshall Plan and the export of private capital. Capital that could not be invested with adequate profitability in the United States itself found better conditions for value expansion in the nations engaged in reconstruction.

Until August 15, 1971, the international monetary system was based on the dollar, which was itself linked to a fixed price for gold, and the parities of other currencies were based on it. With other currencies tied firmly to the dollar and the dollar a reserve currency, the United States could settle its international payments obligations by expanding the dollar reserves of other countries. As long as the dollar’s gold backing was felt to be secure, the export of dollars stimulated the world economy. Although the Americans acquired whole industries and national concerns developed into multinationals, these corporations were not only tolerated, they were even coveted as a means to get the European economy moving again. Between 1950 and 1970 direct U.S. investments increased tenfold, and in value terms the output of the multinational corporations exceeded total American exports by more than three times. This was part of the process that, together with the high accumulation rates attained in Europe, produced the long period of Western prosperity.

Since U.S. production made up approximately half of the total production of the capitalist world, changes taking place in its domestic economy were bound to make themselves felt throughout the rest of the world. To attain profit rates adequate to the needs of further accumulation, the share of American capital in total world production and in world trade had to be enlarged. This, of course, was true of all capitalist countries. At issue was how the surplus value produced worldwide was to be divided up. The postwar situation offered American capital a special opportunity to increase its share in world profits and at the same time put the devastated world economy back on its feet.

The war had also created new state capitalist countries that were very difficult to bring into the “free market economy” and in any case were anything but conducive to the expansion of private capital; hand in hand with the restoration of Western capital, therefore, went the attempt to contain the expansion of state-capitalist countries. The postwar period evolved in the atmosphere of the cold war, inaugurated by the first test of power, the Korean War, whose outcome remained indecisive.

The cold war laid claim to a large portion of public consumption. State debt, which had already grown to extreme proportions, grew further, if now more slowly and within narrower limits, and placed the profitability of capital under pressure. Originating in the United States, inflation pursued its onward course, until it finally embraced the entire world. It is impossible to say whether the postwar boom was responsible for the full, or near-full, employment achieved in the different countries, or to what extent this had continued to be dependent on state-induced production. In the United States, in any event, production capacity was never fully utilized at any time throughout this entire period, and unemployment stabilized at around 4 percent of wage earners. World-wide, however, private capital expanded rapidly thanks to the rapid increase in labor productivity, an accelerating capital concentration worldwide, and an inflationary price policy.

However, one element contributing to the economic boom, the accompanying inflation, also revealed an inner weakness behind the outward prosperity, a weakness, moreover, that also emerged in the fact that this prosperity did not take hold in equal measure in all countries. It is of no importance, if it can be ascertained at all, whether it was the extremely high costs of imperialist policy which put the accumulation rate in the United States behind that in the other expanding countries, or whether this would have occurred in any event. However it may be, it is useless even to pose such a question, since imperialism cannot be separated from nationally organized capital. Since, however, public consumption always detracts from accumulation, the continuation of vast public spending necessitated by imperialist policy only made inflation worse.

How true this is becomes evident when we note how the average rate of inflation has accelerated since 1965. Because the American economy was already relatively stagnant, the only means of financing the costly war in Indochina and the ever growing demands of an imperialist world policy was more deficits and hence more inflation. As long as exchange rates were fixed, the growing inflation rate had to extend itself to other countries. The American balance-of-payments deficit continued to grow, enlarging the dollar reserves of other countries, and with it came more inflation.

Since a U.S. deficit meant a surplus for other countries, they initially felt no pressing concern to counter the accompanying inflationary tendencies, although American deficits in large measure meant a reduction in American, and hence in world profits. The growing dollar reserves of European countries helped to finance the American deficit, which meant an internationally accelerating inflation rate, but also a steady depreciation of monetary reserves. Under these conditions international competition, which also is fought out by way of monetary policies, could affect the diverse inflation rates, but not inflation itself.

For a capitalist economy the ideal state would be simultaneous domestic and external equilibrium, with stable prices and an even balance of payments. Keynes’s theory essentially retained this ideal picture, except that it proposed to achieve this equilibrium through state interventions. While, however, domestic equilibrium is dependent on national monetary and fiscal policies, the external equilibrium of all countries would depend on the national monetary and fiscal policies of the U.S., as long as the world monetary system was based on the dollar with fixed currency exchange rates. Of course, this meant that the economic independence of every other country’ was largely undermined. Attempts to check inflation domestically would be at the price of impairing a nation’s capacity to compete at the international level and hence could not be very extensively undertaken. Thus economic control at the national level was greatly impaired by the capitalist integration on the international scale.

As a world wide phenomenon inflation was evidently a product of the accumulation difficulties due to the peculiarities of capitalist postwar expansion. The inflationary course concealed these difficulties, but it did not eliminate them; and although it was largely caused by the specific situation in the United States and was further tied in with the dollar’s status as an international reserve currency, the breakdown of the Bretton Woods system and the return to free or floating exchange rates has demonstrated that there was more to inflation than the disintegrating effect of an international monetary system made obsolete by the growth of the world economy. Indeed, the system of flexible exchange rates has had no effect at all on the inflationary course.

The worldwide economic integration of national economies, and particularly of their capital markets, internationalized capital movements and price relations. World trade and the creation of international capitalist corporations made inflation a worldwide phenomenon. The increase in surplus value by way of inflation is facilitated by state monetary policy without being directly determined by it. No simple and obvious relationship exists between a country’s monetary policy and that policy’s economic repercussions, which may be modified extensively by relatively independent, autonomously unfolding economic processes. Once inflation gets started, however, it continues its course in relative independence of anything governments may consider doing, not only by way of price rises, which accelerate it further, but also by means of the greater involvement of international capital markets, the creation of additional sources of money and credit – such as the Euro dollar market – or even by the simple expansion of commercial credits. In this way inflation disguises itself as a shortage of investment capital, an insufficient liquidity, which seemingly cannot be satiated despite the inflationary increase in the money supply.

The large capital concerns still try to increase their share in total world profits by acquiring direct control of major shares of world production in addition to the profits they secure for themselves by the inflationary route. Such procedures are no more than capital concentration by way of international competition. In the process, however, capital markets are also internationalized, which means that they are no longer under any government’s control.

For instance, government restrictions on the export of capital to firm up the American payments balance were largely ignored because capital could be gained in the Euro-money and Eurocredit markets.

The Eurodollar market arose initially from the activities of U.S. banks outside of the United States. Over the last ten years their deposits abroad have grown from $10 to $185 billion. Other currencies were also traded, but the dollar predominated, representing 70 percent of total deposits. Apart from private credit transactions, the central banks of a number of countries also invest excess or unwanted reserves in the Eurodollar market or borrow from it to bridge over payments difficulties. The Eurodollar is preferred because it is under no government controls and operates with no reserve regulations, and hence can offer better terms to both borrower and lender.

Although significantly smaller than the American capital market, the Eurodollar market is still larger than the capital markets of other countries and is therefore able to avoid or find ways around government monetary and credit policies. Since it consists mainly of dollar deposits, there is of course a close correlation between the creation of money in the United States and the expansion of Eurodollars. While in the national banking systems the extent of the multiplier effect of any additional supply of money is twofold or threefold at most because of reserve regulations, the Eurodollar is under no such restrictions. The multiplier effect of the Eurodollar thus permits a much broader expansion of credit and contributes further to the purely speculative character of capital movements, as well as to the inflationary trend.

With inflation the price of money also rises. Since interest rates, however, are dependent on the rate of profit, they are able to contribute to inflation only slightly. Higher interest rates are not a sign that money has become dearer; rather they indicate that money has depreciated in value. The real interest rates usually remain unchanged, augmented only by the existing and expected inflation rates due to general price rises. Nonetheless even relatively stable interest rates are a burden for capital when profits are declining. Committed capital, which does not have the power to set prices monopolistically, can also find a steady interest rate intolerable. Thus under both inflationary and deflationary depression, bankruptcies multiply.

The cost of credit, whether high or low, should not be ascribed too much significance. Interest rates, which are included in capital production costs, constitute only a small percentage of total costs. In addition firms have long financed their own capital formation from their own proceeds. This presumably cuts into dividends, but it only means that a larger share of the accrued profits is used for accumulation purposes while a correspondingly smaller share goes to capitalist consumption. This tells us nothing about the absolute size of either of these shares, which, if profits are sufficient, may both increase together. If profits are inadequate, both can also be amassed by means of increased prices, whereby “internal financing” becomes a form of accumulation by means of inflation.

But it is not genuine accumulation. As this type of “self-financing” expands, the ability of other capitals to accumulate is correspondingly impaired. The total mass of profit available to the world economy remains where it is Capital self financing like capital monopolization, implies then no more than a redistribution of total profits by way of price manipulations. Although high rates of profit may be achieved by means of arbitrary pricing policies, they imply an increasing rate of inflation, which sooner or later will also affect the privileged capital unfavorably. This does not mean that inflation stops, but only that henceforth it will not be a direct aid in expanding the privileged capitals. It will, at best, serve the maintenance of their profits under conditions of stagnation and decline.

Competition destroys capital, but it also improves the profitability of the capital that comes out on top in the struggle. Yet this does not mean that total social profits have grown in any significant measure – that is only possible through an increase in surplus value. Surplus value, however, can grow in only two ways:

through an increase in the rate of exploitation, and by increasing the number of workers. But these two ways proceed along parallel courses only under certain conditions; their inherent tendency is to develop in opposing directions. Greater exploitation means that more products are produced with less expenditure of labor, i.e., there is an increase in the productivity of labor achieved through improved means of production and better methods of capitalist accumulation. Under these conditions the absolute number of workers may increase as well, but their number relative to accumulating capital decreases. Since surplus value is really only surplus labor, surplus value also decreases relative to the increase in capital and leads to a tendential decline in the rate of profit and the reduction of the pace of capital accumulation.

Under capitalism nothing in this situation can be changed, no matter how many other modifications are made elsewhere in the system. Like any previous boom, the most recent one also contained the seeds of its own decline. But whereas previously the decline was due mainly to a decrease in the mass of surplus value relative to the accumulated total capital, in the present period labor productivity in the industrial countries has increased to such an extent as to increase the costs of circulation disproportionately to production, and thus to accelerate the reduction of the rate of profit. Since production cannot be separated from distribution, only the total reproduction process of capital can tell us anything about its actual profitability. But in the past the proportion of workers engaged in production relative to those employed in circulation was more favorable to profit than it is today. As productivity in the production sphere has increased vastly, the number of workers employed in production has declined, while the number of those employed in distribution has risen disproportionately. But because so far it has not been possible to increase labor productivity in circulation to the same extent as in production, the tendential decline in the profit rate accompanying capital expansion has accelerated. The shift from capitalist productive labor to capitalist unproductive labor has been an important factor in the inflationary process.

With the steadily growing pressure on the profit rate, due to a variety of causes, the postwar expansion had to come to a halt despite all its inflationary props. The high profits that had been amassed down to the very last have turned out to be largely phantom profits deriving more from inflation than from production. Over the last two years, or instance, the high profits of many American firms have consisted of “inventory profits,” i.e., profits stemming from the difference arising between the previous lower costs of the materials used in production and the current price of the finished product, which effects the present price of the materials used. According to U.S. Department of Commerce statistics, these “inventory profits” reached more than $37 billion in 1974, or 60 percent of the total profit increment.[8] But this process is non-repeating unless the rate of inflation increases steadily, and even then it is so only for goods that require quite long production times. But whatever the case, the rate of accumulation is the indicator of profitability, and in its terms even the high profits turn out to be inadequate.

Inflation has no future; during an economic upswing it can add fuel to the process, but it must be kept within certain limits if the profits it makes possible are not to vanish again into thin air. If an accelerating inflation rate gets out of control, its “positive” effect turns into its opposite. The chaos so characteristic of capitalism then becomes even more chaotic; internationally this shows up as recurrent monetary crises, with a resulting disintegration of world trade. Although the average annual world inflation rate was recently estimated at 12 percent, it affects each country quite differently depending on its competitive position on the world market. Persistent fluctuations in national currencies, said to make the squaring of international payments balances easier, miscarry, not only on the world market but also with regard to the continuing erosion of the national economies. The allegedly anti-inflationary Special Drawing Rights (SDR) of the International Monetary Fund, were designed to remedy a purported lack of liquidity; they were a system for squaring payments balances by means of uncovered mutual obligations; but it also proved to be merely one more inflationary measure, just like the dollar after its gold convertibility was abolished. As international economic relations become more and more difficult to see through and defy attempts to calculate business activity, capital is flowing across borders on a colossal scale in an attempt to glean profits from the monetary chaos and the particular difficulties of each country, insofar as they are not attainable by any other means.

Even under the best conditions, a steadily rising inflation rate leads eventually to economic stagnation. Inflation must then be halted at the point where it begins to have a negative effect on the economy. Just as governments add steam to inflation by their monetary and fiscal policies, contrary measures can slow its course. However, it is not within the power of governments to bring inflation totally to heel, since price inflation will continue despite deflationary government measures. This being the case, depression is aggravated in two directions: on the one hand, because of a stepped up general economic decline, and on the other, because of the multiplying social conflicts generated by the inflationary distribution of income.

Depression, like an upswing, sets limits to inflation. But any limit can be overstepped if one is willing to accept or is unable to avoid the attendant social risks; the hyper-inflations of the past are ample testimony to this. But the risk is far greater when inflation is worldwide than when it is isolated within individual countries, as has been the case in the past. The bourgeoisie therefore tries to check it, but it can only do so by accepting lower profits, reducing public spending, and allowing depression to deepen. In 1974, for instance, total U.S. production fell by 10.4 percent, utilization of production capacity fell to 68 percent, and the official unemployment rate was 8.7 percent.

The economic situation of the last five years, which has been less serious, still required a 50 percent increase in public spending and budgetary deficits in excess of $100 billion. Without this public spending the economic decline would probably have been more considerable. As the depression spreads, the only way remaining to counteract its political consequences will be new state loans, which are even now beginning to dominate the capital market. Deficits of $125 billion for 1975 and 1976 are being considered, which will inevitably expand the money supply further. As the hopes that the depression will have a deflationary effect fade, they are replaced by prospects of a new boom contrived by inflationary means. Where all this will lead cannot be forecast with certainty, but at least one thing is sure: the present crisis, with its peculiar deflationary inflation, will keep the world in a perpetual state of unrest that could easily lead to catastrophe.


1. A. N. Phillips, “The Relation between Unemployment and the Rate of Change of Money Wages in the United Kingdom, 1862-1957,” in Economica, vol.25, no.100, December 1958, pp.283-99

2. From the extensive literature on this topic, see John Hicks, The Crisis in Keynesian Economics, Oxford, 1974, especially the chapter “Wages and Inflation"; also, Aubrey Jones, The New Inflation, Harmondsworth, 1973.

3. Z. B. A. Glyn and B. Suteliffe, Bntish Capitalism, Workers and the Profit Squeeze, London, 1972.

4. According to B. Jackson, H. A. Turner, and F. Wilkinson (see Do Trade Unions Cause Inflation?, Cambridge University Press, 1972), the total income of American workers in money wages rose by 4.7 percent annually between 1966 and 1970. The increase reduced to 0.8 percent in real income terms, and after tax deductions there turned out to be an annual decrease of 0.3 percent. in August 1974 A. F. Burns, Director of the U.S. Federal Reserve Board, observed that “over the last year the real income of workers in the United States fell by 5 percent” (The New York Times, August 16, 1974).

5. "From 1950 to 1960 the annual depreciation of money was 2.1 percent in the United States, 3.9 percent in England, 2.1 percent in Germany, 5.4 percent in France, 10.8 percent in Israel, 17.6 percent in Brazil, 36.6 percent in Bolivia, etc. There was no county whose money did not depreciate, although the rate of inflation varied widely from country to country” (First National City Bank, Monthly Economic Letter, New York, July 1974.

6. In this capital once again finds grounds for a cautious optimism, e.g., in the view of Ernst Wolf Mommsen, chairman of the board of F. Krupp GmbH, who states, “since I now all those concerned, in particular the trade unions and corporations, have learned the lesson of the past two or three years, it would be wrong to keep putting through new nominal raises in prices and wages and to act as if alongside these nominal rises real rises are still possible in previous measures. The new wage statistics in the Federal Republic are a responsible step in the direction of keeping the nation’s economy healthy and sound. The readiness of the trade unions to act, and finally after three years of stagnation to re-stimulate the investment capacity of German industry, must be evaluated positively. This has strengthened the willingness of German industry to invest and improve again our job security” (Frankfurter Allgemeine Zeitung, April 14, 1975).

7. Monthly Economic Letter; New York, First National City Bank, July 1974, p. 3.

8. New York Times, August 4, 1974.