CURRENCY INFLATION AND HIGH PRICES.
ONE of the most difficult problems in the whole range of political economy is the connexion between the volume of currency and the range of prices. Yet, partly perhaps because this problem is so difficult, there are few questions upon which writers and speakers are more habitually dog- matic. Where the monetary system is comparatively simple, consisting either of coin or of officially printed paper, dog- matism is more or less excusable. For example, when the French. Revolutionary Government in the eighteenth century, finding themselves short of money, proceeded to print assignais or assignments on the Church lands which they had confis- cated, and to issue these assignees as the equivalent of money, the effect on prices soon became apparent. Tempted by this easy method of meeting their obligations, the Revolutionary Government proceeded to issue more and more asst. g fiats as fast as they could be printed, with the result that after a time prices of ordinary commodities expressed in assignees rose to ten, twenty, and even fifty times their previous figure. Here the relation between cause and effect is quite obvious. It is equally obvious 'in the case of the paper roubles now
being minted by the Russian Government. The Russian
rouble has fallen, as compared with the pound sterling, to about a quarter of its previous value, which means that everything which the Russians buy from abroad is four times as dear as it was before, expressed in roubles. We are glad to note that this question is now being discussed in Labour circles, and the Russian example of currency inflation is utilized by the Fecierationist, the organ of the General Federation of Trade Unions, to impress upon its readers the importance of the currency question as affectingprices. The crude view which so many Socialists put forward, that the rise in prices
is' entirely due to " profiteering," is politically pernicious, and absolutely unsupported either by current facts or by economic theory. The difficulty of estimating the results of currently inflation under modern conditions arises from the fact that our currency no longer possesses the sweet simplicity of metallic coins and officially printed pieces of paper. In substance the greater part of the currency of the United Kingdom consists of bankers' cheques. At the back of these cheques are the deposits entrusted to the bankers by their customers. But the banker knows by experience that he need retain only a portion of these deposits to meet calls upon them. The rest he invests, and it is from those investments that he gains a living for himself and his staff. Nor is the proportion of cash that he holds ready to meet his obligations a fixed one. He has it at his option to invest or lend a larger proportion of his deposits if he thinks that the general state of trade, or the business prospects of a particular customer, justify him in doing so. Consequently bankers by lending freely are able to increase the effective currency of the country by increasing the amount which their customers can draw in cheques. Stress is laid upon this point because it has a very direct bearing on the allegation that there is an inflation of currency at the present time due to Government borrowing. We do not for a moment dispute that allegation, but we do wish to emphasize the fact that the amount of currency in the country is a fluctuating quantity, dependent to a considerable extent upon the option of individual bankers, and that that option is in normal times utilized either to meet the growing demands of trading, or to stimulate trade by enabling an enterprising individual to embark on expenditure which would be impossible for him without the use of ready cash in the shape of a well- hacked cheque-book. Bearing this in mind, it will be seen that it is theoretically possible that the large increase in cheque currency now existing in the country nught have been due to purely business considerations, and in that case probably would have had no effect on prices. As a matter of fact, however, all the evidence available shows that there has been, owing to the methods of borrowing adopted by the Government, an artificial increase in the volume of bankers' credits, and that an appreciable part of the present increase in prices is due to that cause.
How the matter operates can best be made clear by looking at the problem, not in any abstract manner from the point of view of the total volume of money and the total volume of goods, which may lead us into endless difficulty, but from the direct and concrete point of view of the individual demand for goods or services. We all of us know perfectly well that if we have more money in our pockets we tend to spend more freely. That is a factor in human nature which will never disappear. But spending more freely means increasing the demand for goods and services, and if that increased demand is unaccompanied by an increased supply of goods it is abso- lutely inevitable that prices should rise. In the present circumstances, not only has there been no increased supply of geode,' generally speaking, but in the case of many of the most important commodities we consume there has been a very greatly diminished supply. Thus, while our means for making purchases have expanded, the supply of the goods we demand has declined.
Stated in this way, the proposition is indisputable that the increase in prices is partly due to the increased currency. People who have not followed the controversy on this question in the financial papers will naturally ask what exactly it is that the Government have done in the matter of borrowing that has artificially increased the currency. The answer is that the Government, instead of relying upon individual savings to provide the money for War Loans, have themselves appealed to bankers to provide that money either by lending to their customers or by taking up floating securities such as Treasury Bills. Without going into details, it is sufficiently clear that if Jones lends the Government £50 out of his own savings which he withdraws from his bank balance, he thereby transfers his power of spending front himself to the Govern- ment, and there is consequently no increased purchasing- power in the country, and therefore no general increase in the demand for goods, and therefore no pressure to raise prices. If, on the other hand, Jones borrows money from his bank in order to lend the same to the Government, fresh credit is created by the bank in order to make the advance to Jones, and that fresh credit means additional purchasing- power, and consequently an additional pressure upon prices. It is true that there are limitations to the amount which bankers can thus advance without taking too great risks, but it is notorious that, largely under pressure from the Goyernment, they have increased the credits given to their customers, and have thus effectively increased the currency. It is necessary to add that this consideration also affects the purchases of the working classes, even though they are not directly made by cheques. For the manufacturer, having a larger credit with his banker, is able to use that to draw a larger weekly sum to pay in wages. The bank supplies the notes and coin on Friday to the manufacturer, and by Monday most of it has come back again to the bank through the local shopkeepers. A comparatively moderate addition to our note and silver currency has sufficed for this rapid move- ment. The really important addition to our effective currency is the expansion of bankers' credits. Our Government have indeed, through the agency of the bankers, manufactured currency in effectively the same way as the French Govern- ment in the eighteenth century manufactured assignors, and the Russian Government are now manufacturing paper roubles.
Assuming these statements to be accepted, it may still be asked whether the Government could have acted otherwise than they have done. That no Government could suddenly have imposed sufficient taxation to meet the daily expenditure of the war we fully admit, even though we have constantly urged in these columns that a greater proportion should have been raised by taxation, and should now be so raised. We are inclined to think that it is necessary also to admit that it would have been impossible to raise the whole sum needed by what we may call bond-fide borrowing ; that is to say, by borrowing available savings. An attempt to raise the whole sum by taxation would have involved such a heavy burden on individual businesses as to ruin them altogether, and thus destroy the source of revenue. It is almost equally true that similar consequences would have followed if an attempt had been made to provide all that has been borrowed out of individual savings. These savings did not, in the first place, exist to the amount necessary; and, in he second place, the complete diversion of all available savings to war expenditure would have handicapped, or even ruined, many businesses requiring capital.
These admissions, it will be noted, carry us a long way. They carry us to the point that probably some inflation was necessary to finance the war. What has to be remembered is that money has a psychological value ; that it not only liquidates current transactions but stimulates future wants. To take from individuals all their available money beyond what is required for the barest necessaries of life, whether it be taken by taxation or by borrowing, leaves them dis- contented, and almost probably less enterprising. On the other hand, to tickle their fancy by a partly fictitious appearance of prosperity may, and in practice does, stimulate fresh effort, while avoiding present discontent. This is the ease for the policy which the Government have followed, and we put it forward with the desire to be as fair as possible to a policy which we have frequently criticized. But having stated this defence with full frankness, we revert to our main position that the policy is an extremely risky one, and ought to be followed with the utmost caution. The aim should be to get back to the solid ground of goods and services, and to escape from the risks of aerial flight upon inflated paper. The practical conclusion is that the Government ought more and more to avoid borrowing from bankers, and to Ain't at borrowing from individuals out of their savings. It is to this end, of course, that economy oampaigns are started throughout the country, and every patriotic citizen ought to support them to the utmost of his endeavour. In addition, however, the Government must have the courage to play their part.. The country can now bear a scale of taxation which it certainly could not have borne in the early stages of the war, and it is the duty of the Government to recognize that fact without further delay, so that the nation may be compelled, even against its will if need be, to provide a larger proportion of our daily expenditure upon the war by economy in personal expenditure.
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