William F. Warde

The Roots of Inflation

(December 1942)

Source: Fourth International, Vol.3 No.12, December 1942, pp.368-370.
(William F. Warde was a pseudonym of George Novack.)
Transcription/Editing/HTML Markup: 2006 by Einde O’Callaghan.
Public Domain: George Novack Internet Archive 2006; This work is completely free. In any reproduction, we ask that you cite this Internet address and the publishing information above.

Inflation is unquestionably one of the principal economic problems confronting the Administration and the American people today. Roosevelt’s speeches, Congress’ prompt compliance with his demands for emergency legislation, and his appointment of economic czar Byrnes indicate that. What Roosevelt or any other capitalist spokesman or commentator does not and cannot give is the slightest scientific analysis of this problem and the economic processes which are producing it. For this a totally different method and class outlook are necessary.

American economy today is in the initial phases of inflation. This is substantiated by all facts and figures, to say nothing of the unconcealed alarm of the authorities and the actions they have already taken or contemplate.

The Trend Toward Fiscal Inflation

Fiscal inflation proceeds at a feverish pace. The Federal Reserve Board review for 1941 reported a record growth of bank credit, bank deposits and currency along with a 50 per cent decline in the excess reserves of its member banks.

Bank deposits are at an all-time high. For all banks in the United States they stood at 71 billions at the beginning of July. This is about 16 billions higher than in July 1929. The increase over the previous year is 8 per cent.

Bank loans increased nearly 3 billions in 1941. The demand deposits of individual partnerships and corporations were $4,935,000,000 on June 30, or 14 per cent larger than a year ago. Bank holdings of government securities on June 30 totaled $25,935,000,000, an increase of 34 per cent in one year. These holdings keep mounting week by week as the banks are obliged to absorb billions upon billions of government obligations. Estimates indicate that Federal Reserve Member banks will hold some $48,800,000,000 of government obligations by June 30, 1943, and some $74 billions a year after. That will mean a 262 per cent increase in two years.

This results in a steady depletion of bank reserves. By the end of 1941 excess reserves had declined to $3,100,000,000, a reduction of $3,500,000,000 or 100 per cent in a year! Reserves are sinking monthly; on October 21, 1942 they had dropped to $2,700,000,000. The Federal Deposit Insurance Corporation states that the ratio of capital to total assets has fallen to 9 per cent, the lowest level on record.

The burden of financing the war imposes tremendous strains upon the banking system. Adrian Massie, vice-president of the New York Trust Company, declared on May 27th:

“It is risky ... for the banking system to undertake this financing. But these are days when the American way of life (read: American capitalism) is at stake. Its preservation is worth the risk involved in this program.”

Mr. Massie avoids mentioning just what this risk is. It is the risk of unbridled inflation.

The big banking interests and financial journals keep harping upon the dangers involved.

“On the basis of the estimates already presented here,” says the July 1942 Economic Record of the. National Industrial Conference Board, “it would a year hence require a decline of less than 13 per cent in the price of government obligations to cause the loss (theoretical, if not actual) of all the capital funds of the banking system ... Two years hence less than a 9 per cent decline may be necessary to wipe out bank capital.”

In the Bankers Magazine for September 1942, W.R. Burgess, vice-chairman of the board of the National City Bank of New York, speculates:

“How will the banks get the money to buy all these securities? A year ago they had excess reserves of 5 billions. Today they have only 2 billions. How can you buy $24 billions of bonds with 2 billions of cash?”

The increasing pressure upon the banks has already required the intervention of Washington. Recently on three successive occasions the Federal Reserve System has had to come to the rescue of its big money market banks in New York and Chicago by lowering excess reserve requirements. The Federal Reserve System has also lowered its rediscount rate to one-half of one per cent, the lowest in history, so that other banks can more easily borrow the funds they need to buy more government securities.

The expansion of bank deposits and credit, the decline in bank reserves, government borrowing by tens of billions, the enormous increase of currency in circulation have the most profound and irresistible inflationary effects. Bank reserves are further depleted and inflationary pressure becomes greater as money in circulation increases, since currency withdrawn from the banks uses up their reserves, dollar for dollar.

The first week in November, the amount of currency in circulation in the United States reached an all-time record of $14,312,000,000. There is today almost 30 per cent more money per person in circulation than a year ago. There is twice as much money in circulation today as during 1929 and 1933! The previous high levels attained during the peak of prosperity and the depth of depression have been surpassed.

The rate of increase mounts month by month. After jumping $3,891,000,000 in a single year, currency in circulation increased $230,000,000 during the first week in November, the biggest jump since the banking crisis of 1933. The increase is sure to continue until Christmas which is always the high point of the year; currency in circulation should soon pass 15 billions.

“Months ago,” concludes the NY Times, “it was thought that the time was at hand when the saturation point for money in circulation had been reached, but the rise has continued and is likely to do so.”

While all these billions are pouring into consumers’ hands, the production of consumer goods keeps dwindling. Over one-half of the nation’s productive forces is now devoted to war production. As a result there is 20 to 30 billions of dollars more purchasing power than the amount of goods available for civilian consumption. Far from decreasing, this disproportion between consumer goods and purchasing power is expected to be doubled in the following year with the further diversion of productive capacity to war production. The magnitude of this “inflationary gap” equals Great Britain’s national income in 1940.

On one hand, there is twice as much money as ever before ; on the other, no more goods on the market than there were in 1932. Said Randolph Paul, Treasury General Counsel, on September 7:

“One out of every two wage-earners will be receiving income for contributing to the production of goods that he cannot purchase ... The excess of purchasing power over the volume of consumer goods must lead to a rise in prices.”

It must also lead to a 50 per cent slash in living standards. In fact, the rise in prices is well under way. Fiscal inflation is inescapably producing price inflation.

The Rise in Prices

A general rise in the prices of commodities accompanies inflation, just as deflation is marked by a general drop in the price levels. The rise of prices provides a gauge of the inflationary process. Before Roosevelt’s price-fixing orders, the Governor of the Federal Reserve System pointed this out on May 26, 1942.

“The US has already passed through the first stages of an inflationary development. Two-thirds of this [price] increase occurred during the past-twelve months. Retail prices of food, clothing and house-furnishings had risen since September 1939 by 25 per cent.”

Since that time, five months ago, prices have continued to mount. The September 1942 Economic Record of the National Industrial Conference Board stated:

“The annual food bill of the average wage-earner’s family was $170 higher at August 1942 prices than at August 1939 prices ...”

It estimated that the average family had to pay $214 more for food, clothing and shelter in August 1942 than two years earlier.

Price-control regulations and bureaus, speeches and promises have not stopped the rise in the cost of living. Says the CIO Economic Outlook for September 1942:

“Since the price-freeze order went into effect in the middle of May ... the over-all cost of living ... increased 1.2 and all food prices increased 3.7.”

This labor paper estimates that since January 1941 the increase in the over-all cost of living has been 17 per cent; food prices have gone up 30 per cent; and this increase in prices has cost the consumers, the bulk of them wage workers, nine billions of dollars.

In September Roosevelt applied sweeping measures for price regulation and appointed Byrnes economic dictator to enforce price ceilings. With what results? According to the Division of Industrial Economics of the National Industrial Board (Nov. 7), food costs went up 2.5 per cent in the single month of October, while the over-all cost of living continued to climb skyward, rising 0.9 per cent.

It is superfluous to demonstrate by more extensive citation of statistics what every worker and his wife can verify daily from direct contacts with the market.

American and World Inflation

The problem of inflation, like other economic problems posed by this war, cannot be correctly understood by itself or from a purely national standpoint.

The United States is in the midst of a war that represents the gravest crisis in the entire history of world capitalism. Washington is not simply the capital of the United States; it is today the directing economic, political and military center of the world and the World War. International factors determine not only the course and conduct of military and political affairs; they likewise dominate our national economy and the economic policies of the government.

Inflation is only one of the many disastrous economic consequences of the war which include the disintegration of the world market, that prime achievement and foundation of progressive capitalism; the pauperization of the peoples; the sweeping ruin of the middle classes; overwork and forced labor; the destruction of productive forces and national resources; the unsettlement of the monetary units and financial systems in all countries; the monstrous growth in natibnal debts, unbalanced budgets, intolerable taxation, etc. All these are signposts along the road which leads to bankruptcy and ruin.

These phenomena and processes are as universal as the war itself of which they are the offspring. They can be modified temporarily by administrative measures but their fundamental trends cannot be arrested or reversed. The inherent tendencies in capitalist war economy lie beyond the control of all governments, no matter what their political character, fascist or democratic, or the level of their economic development. They sweep like a plague through colonial countries like China as well as over the most advanced imperialist powers, like Germany and the United States. They are inevitable consequences of imperialist decay, accelerated and aggravated in the extreme by the war. The economic dislocations and distress already generated by the war are only the first installments of more fearful convulsions ahead.

What is now taking place in American economy is a refraction of these international developments through our specific national conditions. All the concomitants of war economy, including inflation, are appearing somewhat later here because the United States entered the war a little later than the other belligerents and is considerably wealthier than any other power. But the American people will have to pay heavily for their previous privileged position. All the economic consequences of war are now asserting themselves in the United States with extraordinary rapidity and on a gigantic scale.

The factors at work behind the current inflationary process are numerous and complex. In order to grasp all the links in the chain of causes, and consequences which in turn become causes, we must start with the place where capitalist economy is anchored: the world market.

The world is no longer an economic capitalist unit. It has been torn to pieces by the war. The normal processes of exchange have been broken up. Trade between the belligerents is virtually nil, The vast commerce carried on by the neutrals in the last war has dwindled to insignificance in this war. Those few channels of trade which might still be maintained are constricted by the shortage and sinkings of cargo ships together with the disruption of other forms of communication and means of exchange.

Sections of world economy are relapsing step by step into the most primitive modes of exchange. A dispatch to the NY Times on October 29 reports that “trading throughout the Middle East gradually is moving back to primitive forms of merchandise and barter.” With the continuation of the imperialist war, conditions in the Middle East today anticipate world conditions of tomorrow.

Paralleling the disruption of the world market is the disruption; of domestic economy among the respective belligerents, as well as the few remaining “neutral” countries. Agricultural and industrial production everywhere are being plunged into chaos.

Society rests on the foundation of labor, no matter what its form. The war is taking tens of millions of workers into the armed forces; it is concentrating tens of millions more in unproductive military production; it is propelling huge masses of capital, which is essentially accumulated labor, into the sphere of war production.

This process of the redistribution of productive forces has been most dramatically exemplified in the United States by the conversion of auto plants into the leading arms industry. The induction of ten millions into the armed forces and the swelling of a million-headed bureaucracy to serve the war administration are facets of the same process. Similar shifts have taken place, though at different rates and in differing degrees, in virtually all branches of our national economy as well as in all other countries.

There is only a certain definite quantity (and quality!) of capital and labor, only a limited amount of natural resources at the disposal of humanity. Limited shares of these productive forces and resources are available to each of the warring camps and to each of the countries within them. Hitler in his frantic search for labor throughout occupied Europe has discovered this. American capitalists are likewise beginning to find this out.

The economic disorders resulting from this diversion of capital and labor are multiplied by the devastation and destruction directly caused by the war. Cities and nations are ravaged; countries choked by blockade, division and invasion; workers, farmers, technicians – the flower of the nation – are slaughtered on the battlefields; the efficiency of those at home is lowered by starvation, overwork, loss of morale. The wealth of the world becomes progressively reduced; the scramble for the remainder in each country and on a world scale becomes fiercer.

The inflationary process is rooted in this derangement of world economy and devastation produced by the war. The fundamental driving forces behind inflation are to be found, not in the sphere of circulation but in the realm of production, and not simply in American but in world production. The redistribution and deterioration of productive forces on a national and international scale expresses itself through fiscal inflation and sharp upward shifts in commodity prices. Rising prices are today a universal phenomenon. The President of Turkey defensively remarked upon this in a recent speech: “Soaring prices are part of the world situation and are not limited to Turkey atone.”

So long as these basic conditions endure – and they will not only endure but must become aggravated as the war is prolonged – the inflationary process will not simply continue but must become accelerated. Capitalism is helpless to stop the further unfolding of these processes emanating from the war and its own decomposition.


Last updated on: 5.2.2006