Letter – Inflation and crises

In the article ‘Brave New Tory World?’ (Socialist Standard, July) your writer mentions that governments can control inflation. Can you explain how they do this and how inflation relates to the crises and depressions mentioned which governments cannot control?
P. J. Simmons (Hayling Island, Hants)

Reply
Governments cause inflation by putting into circulation an excess amount of currency (notes and coin). This was prevented in nineteenth century Britain by the gold standard, which linked Bank of England notes to gold. By law, the notes were convertible on demand at a fixed rate (£1 represented about a quarter of an ounce of gold). At a given level of production a certain amount of gold-linked currency is needed; if it is replaced by inconvertible paper currency of a large amount, prices rise accordingly. Wherever and whenever such excess issue has taken place inflation has resulted; wherever and whenever governments have restricted the issue of currency, prices have stabilised or fallen. A rise in the general price level is not synonymous with, but the result of, inflation.

Crises and depressions, on the other hand, are endemic to the capitalist mode of production and unrelated to monetary factors; they are the consequence of conditions in the field of production and marketing, or basically, of the class ownership of the means of production and of production for sale and profit. While every company is planning to sell its products in the world market, so are similar companies and governments in every country. They do not know the size of potential world demand for all their products, and they know still less about the total supply there will be when these unrelated plans for expanded production are completed. They hope for a profitable share of the market, but they cannot know. They all gamble on the future. And every now and then the gamble produces chaotic conditions that disorganise all markets and slow down all production.

Governments have thought, mistakenly, that printing more money (inflation) could reduce unemployment and avoid slumps . .. but that’s another question.

Editors