MONEY AND THE CITY
The inflation bogey
The new base for a Stock Exchange rise collapsed because it was phoney. It was based on make-believe — thc idea that the British people, faced with an accelerating mtlation and an industrial crisis, would behave rationally. They don't. A rational Mr Heath would have asked the TUC — on the strength of their offer — to go ahead, get some little compromise out of the miners and then settle, which would actually have helped — on productivity lines — the counter-inflation policy. A rational miners' executive would have dropped their absurd threat to break Mr Heath and smash our free society by the use of naked force, which is what a coal strike means.
The Opposition alas! has nothing to offer as a counter counter-inflation policy. Their election programme would cost an extra £2,000 million, Mr Healey proposes more taxation in the Jenkins manner to cure the immediate balance of payment deficit. As Messrs Wynne Godley and Francis Cripps of the London and Cambridge Economic Service have pointed out in two remarkable and scarifying articles in the Times, much heavier taxation today would not be very helpful seeing that the extra bill for oil — oil prices have quadrupled — is equivalent to a tax deflation of domestic demand by £1,500 million. Mr Barber was right in telling the House there was no need yet for new monetary curbs.
When will the TUC realise that the threat to employment comes from a runaway inflation? Let us see how far our inflation has got. Last year retail prices rose in the UK by 94 per cent, which followed on a rise of 7 per cent in 1972. Last year the externallygenerated inflation was greater than the domestically-generated inflation, for commodity prices rose by 40 per cent and sterling depreciated by 20 per cent. But this year, according to Messrs Wynne Godley and Cripps, domestically generated inflation may push up retail prices by a lot more for the following reasons. It will be recalled that the more flexible Phase 3 allowed pay increases for groups up to 7 per cent (or an average of £2.25 a week per head for the group) with an individual maximum of £350 a year. Allowing for anti-social hours and other fringe benefits the rise in wages this year could be 11 per cent. And a 'threshold' protection was offered, namely, an extra rise of up to 40p per week if the retail price index reached 7 per cent above its level at the beginning of Phase 3 (end-October) plus another 40p per week for each percentage point the index may rise until the end of Phase 3 (twelve months on). Messrs Wynne Godley and Cripps estimate that after allowing for the rise in import prices the retail price index will be 7 per cent above its last October level by April this year, so that "an accelerating process of inflation on an alarming scale is likely to develop." In their view the cost of living pay increases plus the Phase 3 increases, could push up the rise in retail prices, even without more devaluation, to about 17 per cent or even 20 per cent by October. They may be exaggerating a little but not by much.
I am not suggesting that we are yet running into a hyper-inflation but the figures quoted by Messrs Wynne Godley and Cripps are, as I say, somewhat scarifying. They make you think of the hyperinflation which destroyed the Weimar Republic in the 'twenties. That, thank Heaven, cannot be repeated here, but it is just as well to state the reasons why in case some reader is beginning to get alarmed. After the defeat in war the German Government was quite unable to meet its heavy expenditure on reconstruction, reparations and interest on war loans. As it could not tax its impoverished people it could place no check on public demand for the few consumer goods available. So prices soared and by 1920 they had risen over twenty times. The government simply had to print notes to meet its mounting budget deficits and by 1923 the hyperinflation had got completely out of hand. Over 130 additional printing firms were mobilised to print the notes and thirty paper manufac turering firms were working round the clock to provide the paper for them. Each day prices doubled or trebled and the housewife had to use a wheelbarrow to carry the notes to do her daily shopping. A loaf of bread might cost a million paper marks. The nightmare end
ed when Dr Schacht was appointed Commissioner of Currency in 1923 with unlimited powers. He called in all the dud notes and issued a new rentenmark equivalent to an old 1000 million reichsmarks. The new note was exchangeable for a like sum in mortgage bonds secured on the whole of German landed property which, of course, had soared in value with the inflation. This fantastic hyperinflation, which wiped out all the savings of the middle class — the upper and moneyed class which owned land -and bought up the raw materials were the profiteers — should be read as a cautionary tale by all governments who resort even in a small way to the pronting press.
It has been said by the fanatical Friedmanites that Mr Barber resorted to the printing press when he presented a budget in April last with a borrowing requirement of over £4,000 million. This was when he was going all out for growth with the backing of the TUC. But it need not have been inflationary if he had brought in a two-tier system of interest rates — a high one for the foreigners payable through the banks, the 'authorised depositaries', receiving their money, and a lower one for the home market. He could have financed most of this £4,000 million by sales in the gilt-edged market which would have risen buoyantly on the two-tier system. And any budget short-fall would have been met by the 'fiscal drag' (i.e. extra revenues from growth) and by cutting
opecLator February 2, 1914 government expenditures (whr.,ch, was done belatedly). But I fear ivn Barber bungled the whole Or' edged operation and the mone.Y supply shot up. Having removed all quantitative control over credit, as well as quality control, which I have always regarded as an act of madness, he did in effect dpervineitopmerosnuenyd for theftihnuenpcireorspewthtro made a killing in the stock bmoaormkets out of the brief Heathia0 d Messrs Wynne Godley ail Cripps had a vital point of CD: ticism when they pointed out the the growth of personal consunir don would have to be.held beloW the growth of national output ,.r° prevent a sharp increase in tr'ef deficit on the balance ° payments. By their definition the current balance of payments; measured in money terms !_ current prices, is equal to tri' difference between the gross na." tional product and total domestic expenditure (including investine.„111 and public expenditure). But mr Barber did not hold consumPt0 down; he kept pushing it up hoping by this to encourage 10" dustrial investment — so that all" went bounding uf foreign gn up and d w o rusrea vnbi Ine; the deficit on the balance 0 payments. Then he ran into tW°, unexpected troubles: the terms 0' trade worsened sharply and fnialbri the Arabs quadrupled the price 0, oil. Poor Mr Barber was down° before the militant miners arl' flounced their coup de grace. No for the doom-watch on inflation.