The Great Inflation Hoax

Wallace Crompton

[Reprinted from ESSRA, Autumn, 1974]

In the pre-Keynesian era, there was no dispute as to the nature of inflation and its cause. Students of economics learned the quantity theory of money, accepting its logic as they did its counterpart Gresham's Law (that bad money drives out good money). Dictionaries had had no difficulty in describing it and the Concise Oxford Dictionary 1971, has not seen fit to alter its definition which is as follows:

"Inflate v.t. ... (Finance) resort to inflation of currency, raise price artificially. So Inflation n. undue increase in the quantity of money in relation to goods available for purchase."

This was succinctly translated colloquially as "too much money chasing too few goods" (more accurately the same amount of goods.)

Governments, recognising that it would be political suicide to admit its own responsibility for inflation, sought not only to conceal its origin but to put the blame for it elsewhere. The first step was to corrupt the word "inflation" so that it was no longer strictly defined (confined), and it was opened out to include any condition where prices were rising, no matter what the cause was. This meant that price increases due to increased taxes, import duties, higher costs of imported raw materials, monopolistic practices or anything else, were all dubbed as "inflationary" and as causing inflation.

No one would accept the proposition that because all cows were animals therefore all animals were cows. Equally there is no justification for reasoning that because inflation causes prices to rise that all price rises are caused by inflation.

This is no mere semantic quibble, it is fundamental to any discussion on the cause and cure of inflation. We must be far less concerned with the independent increases in some prices (and the fall in others) which must always be a feature of economic life, than with the general increase in all prices -- or, more accurately, the steady decline in the value of money used to buy all goods and services.

Using a wide and open-ended definition of inflation means that in seeking a cure we are led along false trails into irrelevant arguments and irrelevant solutions.

Debasement of the currency, a proper synonym for inflation, is as old as the hills. At all times and in all places where inflation has taken place there has been one common feature -- a large increase in the money supply.

Thus to attribute inflation to purely local causes or to the then current economic circumstances, however novel or unprecedented, while ignoring the only common feature - increases in the money supply -- is to fly in the face of logic. Confusion was aggravated by the concepts of "cost-push" and "demand-pull" as causes of inflation, when the former was merely the other half of the latter -- both effects, not causes. As confusion spread and as inflation spread, various effects and side effects were seized upon as causes in themselves, one economist in his enthusiasm listing no less than fourteen different causes of inflation!

As inflation proceeded various euphemisms were devised to conceal rather than reveal what governments were doing. When in obedience to the Keynesian theory of stimulating the economy they increased the money supply, they called it "increasing demand", "a touch of the throttle (or tiller)", "deficit financing", "implementing a policy of expansion", "increasing the borrowing requirement" -- borrowed of course on the strength of irredeemable i.o.u.'s lodged with the Bank of England -- and so on.

When this inflation showed signs of being overdone and side effects became embarrassing (fall in the exchange rate of the pound, etc.) then the economy was described as being "overheated" and requiring "a touch of the brakes". Further, governments spoke of the people going on a "consumer spree" as though somehow they were responsible for inflation. And they spoke of "mopping up the demand" when they resorted to various measures of restricting loans. So "fighting inflation" was attempted, not by a reversal or cessation of inflationary policy, but by trying to curb the effects of it. Controls on hire purchase, on bank lending, on interest rates, on the banks' deposits with the Bank of England, etc. were the order of the day.

Thus a touch or stamp on the brakes or throttle became necessary every now and then because predictions were always wrong and the swings got wider. So began the notorious "stop-go" policies.

So as not to be too obvious in what they were doing when engaged in a "go" phase of "expansion", governments refrained from speaking of starting to inflate again. They were shy of using the word "re-inflate" which would have given the game away, revealing they did the inflating, and so resorted to that non-word "reflate".

When some wiser economists either woke up or succeeded in making their voices heard above the babel, and pointed to the real and only single cause of inflation (Professor Milton Friedman, USA, Alan Walters, LSE, Samuel Brittan, Financial Times, and a group of eleven eminent economists*, Enoch Powell and now Sir Keith Joseph), the inflationists dubbed them all "monetarists" which is no form of description whatsoever, but implies that they are some new school of thought when in fact of course they are traditional in their views. And to muddy the waters still further they devised Ml and M3 as descriptions of the money supply so as to confuse the issue. The only real indication of the money supply is of course what was once known as the fiduciary issue which was regularly published without any query whatsoever. The fiduciary issue consisted simply of the additional paper money put into circulation by the government.

The stage we have now reached is where the inflationists are fighting a rearguard action. "Yes, all right, the money supply has been increased but we couldn't help it -- the unions made us do it". Or: "Money supply does not really matter, we must concentrate on growth and if it is high enough it will soon soak up the money".

Now the inflationists have shifted their ground yet again. From "we must continue with inflation in order to maintain full employment", it became "we must not stop inflating or we will cause unemployment." Then "unemployment must not be used as a weapon against inflation." And finally, the triumphant cry "Eureka, we have found the solution to inflation; for good or for ill it is ... unemployment!"

George Bernard Shaw once said that if people having an argument were first to agree on the meaning of the words they are using, the argument itself would disappear.

NOTE

To revert to the dictionary definition of inflation: we can see that inflation is a noun describing the act of inflating the currency. The consequent condition created is one where the value of money is falling. Confusion arises when this condition is described as inflation. Thus we are in danger of saying that inflation causes inflation!

However, it is too late to insist that the word should denote only the cause and not the effect; usage has taken over. We are now obliged to say that an increase in the money supply causes inflation when in fact an increase in the money supply is inflation. One can only look at the context in which the word is used to get the sense required and this is true even in the foregoing article, where the condition resulting from the act of inflating is described as inflation in deference to current usage.


* Dear Prime Minister, Economic Radicals, 26 West Square, S.E.ll