Page 6, 4th October 1957

4th October 1957
Page 6
Page 6, 4th October 1957 — THE BANK BATE

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What Should Happen Next?


ALMOST inevitably, the recent rise in the Bank Rate has produced in the columns of the Press a spate of technical talk centered round the problem of inflation.

One result has been to confuse still further the minds of many people who are already quite confused as to the basic issues underlying a seemingly intractable problem. I do not blame them one bit for this. On the contrary, they have my sympathy; so much so that I would like to apologise in advance for this attempt to strip down the problem of inflation to its essentials in the shortest possible space.


WE have all been told till we

are sick of it that inflation means too much money chasing after too few goods. Nevertheless, that is as good a definition as any and it invites the immediate thought that the way to halt its progress is either to cut down the amount of money or increase the quantity of goods. If there is a lone man with a shilling in his pocket wanting desperately to buy the single loaf of bread that there is in existence, it is pretty clear that the price of that loaf will be a shilling. You could bring down its price to sixpence by cutting his supply of money in half or by increasing the number of loaves to two instead of one. That, I imagine, is obvious enough and it is obvious. also, that the second way is the best — on the principle that it is better to have two loaves instead of one. Generalising on the basis of this very rough example, it is pretty clear that it is better to cure inflation by producing more goods than by decreasing the amount of money which people have in their pockets to spend. Both courses of action may lee necessary; but the second without the first leaves a lot to be desired — once again, on the prirteiple that it is better to have more goods than less at the same cheap price. If you cut weekly wage packets and salaries in half, people on the whole will be no worse off because the prices of things they buy will fall by half.

If you leave weekly wage packets and salaries alone and produce twice as many goods as before, prices will fall by half, but peemle will have twice as many goods as befote.

There are two paths, then, to this business of curing inflation. They should not be thought of as mutually Exclusive. The second is better than the first; but both may have to be tried.

First wag

NOW'the thing to notice about the Government's recent action in pushing up the Rank Rate is that it represents the first way. It is an attempt to cut down the amount of money in existence to match the quantity of goods produced.

It is not an attempt to increase the quantity of goods produced to match the amount of money in existence.

The operation works in this fashion — a rise in Bank Rate (for reasons we need not go into) sends up all interest rates. so that borrowing money becomes a more expensive business for all sorts of people, We can think of a couple taking out a mortgage on a new house, of various hire-purchase deals, of people borrowing to meet the cost of setting up a new business, etc.

We can think very specially of the kind of job — like building a channel tunnel, making a great new highway, setting tip a vast industrial plant -le hich can only be done by those who are prepared to borrow a huge amount of money and wait a long time to get something back on their invested capital.


A BIG capitalist would be willing to see through this kind of operation if he could borrow at two per cent. or four per cent., or even, perhaps, at five per cent, But what about eight per cent. which he will probably have to pay now for his money?

And even if he were willing to pay 8 per cent., the fresh credit squeeze which is accompanying the use in Bank Rate, may well mean that the Ciovernment would not give him permission to raise the money even at the new, very high rate of 8 per cent.

Very probably, therefore, big capitalists will tend to put off that kind of huge job because it is too expensive from the borrowing point of view and/or the Government does not allow them to do it. Therefore — so goes the theory on which this Government is


working — once you postpone this range of operations, there is a slackened demand for the labour of those (wage and salary earners) who would otherwise have been working on them.

Consequently. wages and salaries tend to fall. Consequently the prices of things bought by wage and salary earners tend to fall.

In this way, therefore, the amount of money in existence tends to be brought down to match the quantity of goods people are %Ming to produce.

You might put the present position this way by saying that, as a people, ‘.%e are trying to use the too much money in our pockets to consw : more goods than we are willing to produce. So prices are rising.

What the Government is trying to do through the process just described is to cut down the amount of money in our pockets so that we no longer have the wherewithal to fry to consume more goods than we are willing to produce. So, the Government hopes. prices will tend to fall. They may well do so (though there are snags here which I cannot go into without losing for the reader the thread of this argument).

And then..

A ND then, so what That, 1-‘indeed, is the sixty-milliondollar question. Supposing the Government does pull off its policy so that prices fall, are we to rest content with that ? Surely, we must think also and at once not merely of measures to decrease the amount of money, but also of measures to increase the quantity of goods produced — again. on the simple principle that, though it is a good thing to have a cheap loaf of bread, it is better to have two cheap loaves than one. What measures, then, must we take to increase the quantity of goods?

At this point, in some minds, a snag seems to arise. Haven't the very measures. they ask, which you hare sketched out above and which the Government is using to bring down the price of goods, made it impossible, also, to increase their quantity 7 Does it not look as if the means chosen to bring down the price of a single loaf of bread are such of their very nature as to make it impossible for two to be produced instead of one 7 Does it not follow, therefore, that the whole process sketched out above is self-defeating 7 For consider—what it comes to is that you raise interest rates so as to make people unwilling to borrow money to build factories to produce goods. Consequently, they don't want workers so badly; consequently wages fall; consequently prices fall. etc.

The price

IN other words, you bring prices down at the price of stopping the building of factories to produce the very goods whose quantity you now want to increase.

Consequently, it would seem that, if you use the means described above to cot down the amount of money to match the quantity of goods, you thereby make it impossible to increase the capital equipment (factories, etc.) necessary to produce the extra goods you want, The one thing you need to prode more goods is more capital investment and that is just what this present policy of cutting down prices seems to make impossible.

In other words, all this present policy amounts to is the old business of pulling down prices through lowered wages and salaries (and, for reasons I cannot go into, some unemployment as well).

That, think, would he true:

that is what the present policy of the Government would Amount to. if it were content to leave things at that; if it were to content itself merely with h reducing industrial activity through raising interest rates all round.


BM it has no business to leave things at that. What this Government must do is to realize that what this country needs if it is to produce more goods is not so much to build new factories, but, primarily, to work efficiently those which are already in existence.

Thus, it is possible to pull down prices by cutting down investment and, at the same time, to increase the number of goods produced by using existing equipment more efficiently. This means, in fact, that this Government must do two things.

In the first place, it must break in pieces the restrictive and monopolistic" practices of British business, industry and trade.

The industrial community of this country is full of monopolistically minded employers who make it their business in life to sell a little for a lot rather than a lot for a

littiehey must be forced now to this latter course and the best way to force them to it is to impose competition on them. Instead of banding together against the public to hold up prices, employers must be made to compete with each other for the public's favour and et-, forced to bring them down.

To the extent that they are forced in this direction not only will prices fall, but there will be an increase in the quantity of goods produced from factories which are now being efficiently used.

If the restrictive practices of monopolists prevent industrial plant from being used full out, the unrestrictive practices of competing employers will cause it to be used full out.

Consequently. the number of goods will increase and their prices will fall. There is no mystery here. Go back to our early example. If you have a lone man with a ' shilling in his pocket and one producer of one loaf of bread, the price of that loaf will be a shilline, I If a competing producer turns out another loaf, there will be two loaves in existence and their price will stand at sixpence.

Competition Competition

rrHE first thing the Govern meatmust do, therefore, to increase the quantity of goods, to force competition on the business community. To the extent that it is successful in so doing, the quantity of goods produced will increase and the demand for labour to make the increased goods will likewise be pulled Upt to counter the fall off in demand due to the original cutting down of capital investment (which comes from the original policy of raising Bank Rate).

Consequently, the second thing that Government has to do to increase the quantity of goods, is not only to force competition on employers, but to see to it that the more brisk demand for labour consequent on the increased production, which follows from this policy, is maintained. The Government must go all out to maintain full employment; to see to it that. within reason, there are always more jobs about than men to fill them. To the extent that it does this it will prevent competing employers from pushing down wages in an endeavour to lower prices. They will be forced, instead, to substitute efficiency for a policy of wage cuts; to produce more and cheaper goods by improving the productivity of their workers, instead of producing the same number of goods at the expense of their wages. There is no reason why you should not have high wages and low prices, provided that industrial efficiency is top-class. To secure this. you must have competition imposed by Government on the busi nets comm unity. Monopoly must be broken if inflation is to be broken and our economy put on a basis of solid strength. This Government should he judged, therefore, not by the ability of its present measures to force down prices; but by the courage with which it supplements them with others designed to eradicate monopolistic inefficiency from this country's industrial structure.

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