William F. Warde

The Progress of Inflation

(October 1943)

Source: Fourth International, Vol.4 No.10, October 1943, Page 305-307.
(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.

On the first anniversary of the Stabilization Act of October 2, 1942 Roosevelt’s Director of Economic Stabilization Vinson solicited congratulations by boasting that prices during the first 19 months of this war advanced only 12 per cent as compared with a 29.5 per cent increase in the .last war. These government figures may be regarded with justifiable mistrust. As AFL and CIO statisticians have pointed out and as every buyer is daily reminded, they far from disclose the actual rise in retail prices. Statistics, too, have been conscripted for government service in this war. Meanwhile the inflationary process continues.

The OPA has had no success in reaching its proclaimed objective of rolling back the cost of living to September 1942 levels. Although Washington has been in ecstasy over Labor Bureau indices showing a slight decline in food prices of 1.9 per cent from May to August, any optimism that this will be sustained is premature and unfounded.

This little pause in the upward movement of some retail commodity prices is restricted and transitory. The multiple reciprocating factors pushing up the price levels do not exert equal pressure at all stages in the inflationary process. The present dip is immediately caused by a seasonal decline in the prices of fresh fruits and vegetables. These prices are considerably higher than a year ago.

But stabilization even at the present elevated levels cannot be counted upon. Once the influx of farm products abates, food prices will resume their upward climb. For the fundamental forces generating inflation, far from being weakened or removed in the past period, have been enormously strengthened and cannot fail to assert themselves with redoubled energy.

Analogous phases are to be encountered in many other spheres. For example, heat-treated steel gradually expands up to about 1,350 degrees Fahrenheit. Upon reaching this critical point and while passing through it, the steel shrinks somewhat. After exceeding the critical point, however, steel continues to expand at a more rapid rate. It appears that retail prices are passing through a similar critical phase in their process of expansion.

The consuming masses encounter inflation most directly in the form of soaring prices. But this unbridled increase in the cost of living is produced by an interlacing series of economic factors.

Among these is the relationship between the annual national income and the quantity of consumer goods on the open market. In its September 30th “boxscore on inflation,” the OWI reported that this “excess purchasing power” has now soared to a record $51,400,000,000. This represents an increase of about 20 billions over last year.

Obviously, government efforts to drain off these loose billions through bond sales, taxes, curtailment of consumer credit, etc., have proved ineffective. This is further confirmed by the results of the recently concluded Third War Bond Campaign. Although almost 18 billions were raised, from the standpoint of absorbing excess purchasing power, “it is a failure,” writes S.F. Porter, New York Post, Oct. 1, 1943. “The money has come from insurance companies, corporations, other institutions and wealthy individuals ... We’re only now creeping toward the $5,000,000,000 set for individual subscriptions.”

Administration economists concentrate public attention upon the imperative necessity for closing up this “inflationary gap.” That gap, instead of diminishing, has been constantly widening. A brief review of the relevant figures on the financial side alone will demonstrate how swift is the pace.

Money in circulation now amounts to about 19 billion dollars. During the last war, and even during the banking crisis of 1933 when demands for cash were heaviest, the United States got along with an average of about 5 billions. Money in circulation at the start of 1942 was about 11 billions. The total amount of currency in circulation by the end of 1943 will probably be four times greater than during the First World War and almost twice as much as two years ago!

However in highly developed capitalist countries like the United States and Great Britain the main vehicle of monetary inflation is not, as in most European and colonial nations, the amount of currency in circulation but the total bank deposits. This so-called “deposit currency” which constitutes the principal medium of circulation provides a highly significant index to the extent of inflation. In 1942 total bank deposits in the United States passed the 100 billion mark for the first time in American history. This amounts to almost five times the value of the Treasury’s gold which, incidentally, represents more than 70 per cent of the world’s monetary gold.

New money is being created by the billions every month. This signifies progressive inflation of the national currency.

The principal cause of the enormous expansion in the money supply is of course the government’s war expenditures. For the first quarter of the 1944 fiscal year, government expenses will total over 22 billions – a third higher than for the corresponding period the year before. Only about 45 per cent is covered by federal revenue. The remainder has to be obtained by borrowing from the banks. By the end of this year the national debt will top 200 billions which is approximately $1,500 for every man, woman and child in the country.

Bank holdings of government obligations for the week ending September 18 are over 35 billions compared with 20 billions for the previous year. The banks are buying these bonds not with their capital or excess reserves but with credit extended them by the Federal Reserve System. Their excess reserves keep dwindling; they amount to $2,050,000,000, as compared to $3,-039,000,000 a year ago; and are replenished only through infusions from the Federal Reserve System. These methods tend to undermine the solvency and stability of the entire banking system.

As E.J. Condlon points out in the New York Times, September 26, 1943:

“The old rule-of-thumb that a bank should have total capital funds equal to at least 10 per cent of Its total deposits is a wartime casualty ... The ratios of bank capital to deposits are declining steadily ... Just two years ago the ratio for all member banks of the Federal System averaged approximately 10 per cent. The figure now is about 7.5 per cent.”

These facts and figures are impressive evidence of the greatly strengthened inflationary trends in the United States, notwithstanding any slight momentary drop in a few retail food prices. The growing disparity between available consumer goods and purchasing power, the progressive multiplication of the monetary supply, the government’s war expenditures and bank borrowings, the abolition of restrictions upon the banks’ creation of credit are all bound to manifest themselves in mounting prices.

The people know from personal experience what the high cost of necessities means in terms of reduced standards of living. But all the agencies of capitalism work in unison in order to prevent them from grasping the connection between the high cost of living and the financial policies of the government. When new money is issued without any corresponding backing, the gold value of all the money in circulation is decreased. This means that each unit of the currency, each dollar, can buy less goods. But since the dollar appears to remain what it was, people have the illusion that the value of the dollar is the same while the value of the commodities has risen. They do not say: We have been deprived of half our income by this monetary manipulation. They say: The cost of living has gone up.

In other words, they feel and notice the effect without really understanding the cause of price rises. This enables the government to mask its fleecing of the people by camouflaging its operations behind the high cost of living. If the administration told the workers: “We’re going to cut your wages by issuing more money,” the workers would react very vigorously to such an attack upon their income.

Instead the government slashes into the real income of the workers by its monetary measures and policies while the reactionary press tells the workers that they are creating the high cost of living by demanding wage increases or spending too much money.

A gauge of the extent of depreciation in the value of the dollar is provided by the price of gold in dollars in Bombay, India, one of the free gold markets. There gold recently sold at the equivalent of $74.80 an ounce compared with the American fixed price of $35. This means that in Bombay the dollar is rated at less than 50 per cent of its nominal value.

What is happening in the United States today is only part of an economic process as global as the war from which it emanates.

The world sweep of inflation strikingly demonstrates the interdependence of the nations under capitalism. Every one of the factors of inflation noted in the United States operates with greater or lesser force in all other countries. Even the neutral nations have been unable to escape the plague; Turkey has been among the hardest hit.

These facts are now frankly admitted in bourgeois financial circles. Here, for example, is how the Bulletin of Rockefeller’s National City Bank for June 1943 discusses The Trend Towards World Inflation:

“Always great wars have brought about inflationary price increases. For war means, on the one hand, great expansion of purchasing power in the form of bank deposits and currency created by war financing, and, on the other, tremendous dislocations of production and distribution caused by the mobilization of huge armies and their insatiable demands for equipment and supplies of all kinds.

“That the Second World War is proving no exception to past experience is amply revealed by the following charts and tables, showing wartime movements of commodity prices, note circulation and bank deposits in different countries ... The rise of commodity prices has been pretty much a worldwide phenomenon, but with great variation in the degree and timing of the advances, depending upon the (particular circumstances of each country – the extent of self-sufficiency, the Inflationary Pressures, the efficiency of controls, etc.

“The greatest price disturbance has been in the Axis-exploited countries of Continental Europe, in certain of the Latin American countries, and in countries like Turkey, India and China. ... At the outset of the war, the impetus to rising prices came mainly from the disruptions of normal channels of trade, currency depreciations – as in the case of sterling, the French franc and the Canadian dollar – and greatly increased transportation costs, particularly shipping. Later, as the war continued, spread and intensified, new forces appeared, more powerful than those earlier. One of them, the increased purchasing .power put in circulation, stems from the enormous war expenditures. Loss of confidence in currencies, flight into commodities, and hoarding have lecome more manifest in many areas.”

These general features of inflation can be observed in all countries, regardless of their political regime, economic development, and relation to the war. Let us make a rapid survey of the world economic conditions, beginning with die Axis countries and their satellites, going through the colonial and semi-colonial lands, and ending with the United Nations.

World Inflation

Germany has spent over 100 billion dollars for military purposes since Hitler came to power. The national debt rose from 34 billions in June 1939 to over 167 billions of Reichsmarks last August. Reichsmarks in circulation have increased 196 per cent from 1938 to 1942, according to official statistics. Commercial bank deposits increased two and a half times from 1938 to 1941. Despite the loot from conquered and despoiled Europe, Germany is being terribly impoverished. As long ago as last Christmas there was

“... an unparalleled superfluity of cash awaiting spending, but nothing on which to spend it because of the famine of holiday goods of every variety ... Out of the impoverished Christmas markets there has sprung up a system of barter ... Family heirlooms, plate, rugs, electric utensils, sewing machines, cutlery and old clothing are indiscriminately offered in exchange for more seasonable goods, chiefly toys.” (New York Times, December 24, 1942.)

Since then things have worsened considerably.

Inflation had progressed so far in France a year ago that the French are collecting antiques, pictures, furs, silverware, canes at prices often 500 per cent higher than the year before. Rare postage stamps which are so compact that they can be carried in a matchbox are selling at fabulous prices. Boys go in for collecting bottles, because even an empty medicine bottle is worth five francs at any drug store.

Italy has been utterly bankrupted by the fascist regime and the war. Before Mussolini was overthrown, inflation had mounted to such heights that 39 per cent of all revenue was needed merely for payment of interest on the public debt. It remains to be seen what value, if any, the Italian lire still possesses.

According to the New York Times correspondent,

“The Finns are fighting inflation even harder than they are the Russians ... but whereas they seem to think that somehow they can eventually get the best of the Russians, they have already begun to despair about inflation.”

The Bank of Finland has little foreign credit while its note circulation has jumped eightfold. Shoes retail for 1,000 marks a pair instead of 150 marks as formerly. Meanwhile Finns are wearing shoes made of wood and cardboard. Such are the fruits of Mannerheim’s war.

The Balkan states are in a similar financial condition. In Rumania the prices of vital commodities rose between 125 to 740 per cent between 1939 and 1942. During 1942 alone the increase was 50 per cent! The Norwegian price index was up 79 per cent in March this year; that of Portugal was up 90 per cent last October. In Franco’s Spain real living costs as reflected in the black market are estimated to be three hundred per cent higher than in 1940. Everybody from the poorest beggar to the richest aristocrat and highest government official deals in some way or another with the black market. Almost everything – from bars of gold to food culled from city garbage pails – is bought or sold through illegal channels. In many countries the black market operations rival those on the public market. Punishments and executions have failed to stop its growth anywhere. Economic necessity and greed override the law and its enforcers

The Orient

In Japan, Nichi-Nichi, leading organ of the military clique, writes:

“The lowering of the people’s standards and increased savings are of vital importance. Taking the people of Japan as a whole, each one must live on one-third of his monthly income, allocating the remaining two-thirds for taxes, savings and other important fields.”

Why? Because the new war program calls for a total expenditure of 30 billion yen in a year. This is two and a half times as large as Japan’s whole national income in 1930 and is still larger than her already inflated income in 1940. Only 11 billion yen out of a total national income of 42 billion for 1942 are left for living expenses; this represents a decrease of 12 per cent compared to the previous year. It amounts to only 100 yen per person a year. This is about $40 in American money.

How much currency the Japanese have issued at home in the occupied countries nobody knows. But Finance Minister Kaya this year announced to the Diet that Japanese currency had been divorced from gold and the President of the Bank of Japan warned that “Public confidence in Japanese currency is a vital question of the future.”

Nichi-Nichi also warns the Japanese people not “to entertain optimistic views as to our future. The people must endure more hardships in their daily lives.” These words portend the typhoon of runaway inflation. If such is the state of affairs in a conquering power, what must it be like in the conquered countries?

China, said Mrs. Wellington Koo, wife of the Chinese Ambassador to Great Britain, is near economic collapse. “The relentless pressure of war ... makes itself felt in hunger and cold and worthless money, the grinding burden of increasing scarcity and rising prices.” The Chinese, she said, do not worry much about rationing because there is little or nothing to ration. In the last year prices have gone up from five to fifty times.

“My stepdaughter is in the interior of China, working for the Red Cross. She gets a salary of $50 a month, which is above that of most salaried workers. However, a meal costs her $3, a yard of cloth $10. A one-room hut, made of mud and straw, costs $3,500. People cannot afford to buy coal which cost 1,000 Chinese dollars a ton.”

If such is the economic situation of the favored upper classes, what must be the lot of the Chinese masses?

Ruin, poverty, famine, disease rage throughout the Orient. The fatal trio of food scarcity, monetary inflation and ever-mounting prices are at work in India. The wholesale price indices which had been increasing at a rate of 3 or 4 per cent monthly up to January of this year have since been jumping at an accelerated rate. The Bank of India’s statement shows a continuous and heavy increase in note circulation. It is now three times as great as when the war started and is increasing faster than the rate of production. “The suffering of the masses,” remarks the New York Times reporter, “is genuine and great.”

Recently in Iran a three-year-old Buick sold in Teheran for $18,000. Eggs are five for a dollar in an agricultural country. A rebuilt Russian typewriter costs $1,400. And good Persian rugs sell for more in Persia than in New York.

Neutral Turkey, which has to maintain an army at the cost of more than a million lire a day, shows “all the characteristic indications of a classical inflation.” Its Treasury’s paper money in circulation is seven times greater than the pre-war circulation of about 100 million lire. The flight from the lire into goods, real estate or gold is proceeding rapidly. In nearby Palestine the cost of living has tripled since 1939.

On September 16 the Bank of England reported a record high of £981,089,000 of notes in circulation. Bank deposits stand at £209 billions as against £179 billions in 1941. Food prices show a 75 per cent rise since 1939, if one can credit the official statistics.

Across the Atlantic in the Caribbean Islands, in Mexico and Latin America the same story can be told. In Chile wholesale prices have gone up over 200 per cent since 1939. While production in the past 14 years has increased only 21 per cent, the note issue has jumped 340 per cent. The demonstrations of Mexican workers against the high cost of living have been duplicated throughout Latin America.

These are the economic consequences of the costliest war in history. Military expenditures of all the belligerents will exceed half a trillion dollars by the end of 1943, the Department of Commerce estimates. This sum is nearly three times the total monetary cost of the four years of the First World War. The New York Times, February 6, asserted:

“It amounts to $231 for every living person. It could buy an automobile for every family, including those of Darkest Africa. It could provide humanity with 100,000,000 homes costing $5,000 each.”

These enormous expenditures are driving one country after another into bankruptcy via the road to inflation. The financial editor of the New York World Telegram nonchalantly confessed on June 15, 1943:

“It is rather obvious that most of the countries engaged In the war already are bankrupt, the cost of the conflict having increased their debts to points where they exceed their wealths. They can become solvent again only by raising the values of their assets in terms of their own currencies. The only alternative is to default on part of their debt payments ... Their currencies will have to be devalued to a point where other nations will be willing to accept them at their face values.”

“Most of the countries engaged in the war already are bankrupt!” Meanwhile the war goes on. Its full effects are yet to be felt in the economic life of the peoples of the world. The rapidly developing inflation within the United States indicates that this disease will assume more and more malignant forms and lead to disastrous consequences in the strongest sector of world capitalism as well as in its weaker parts.


Last updated on: 5.2.2006