Stagflation here we come?

CHANCELLOR SET TO PRINT MORE CASH AS INTEREST RATES HIT RECORD LOW headlines the Times on its front page today. The article reports:

“Alistair Darling is considering printing more money in an attempt to ease the credit crunch. As interest rates appear certain to fall to an historic low today, the Chancellor and Mervyn King, the Governor of the Bank of England, are looking at expanding the money supply by billions and using the extra cash to buy assets ranging from government or commercial debt to private equities. . . . The policy of increasing the money supply to relax monetary conditions is being looked at as a “sensible contingency plan”, a senior government source told The Times last night.”

Actually, it’s already started. Inflating the currency in this way won’t end the depression or stop it deepening but it will lead to a rise in the general price level (popularly but misleadingly called “inflation” - whereas it is the result of inflating the currency).

In today’s Times also, their resident economic guru, Anatole Kaletsky, accuses David Cameron and the Tory Party of lining up with Marx against Obama, Gordon Brown and Keynes. In fact Marx did have something very relevant to say on the matter.

In his A Contribution to the Critique of Political Economy, which was published 150 years ago this year, Marx discussed what happens when there is “inconvertible paper money issued by the State and having compulsory circulation”, which is the case in all countries today. Since inconvertible paper money has “compulsory circulation” there is nothing to stop States issuing as much of it as they like. In fact governments are faced with the same temptation here as over debasing the coinage: to print paper money is an easy way of raising revenue at least in the short run.

In Capital (the first three chapters of which are largely a re-write of the A Critique of Political Economy) Marx explained what would happen if governments gave into this temptation - the general price level would rise:

“The issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols ... If the paper money exceed its proper limit, which is the amount of gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of ¼ of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2” (Capital, Vol I, Moscow,1961,pp.127-8).

If the government does give into thios temptation, as it seems it will, then we’ll soon find out who’s right - Marx or Keynes. Past experience, as of the 1970s, suggests it would be foolish to bet on Keynes. The slump will contine, but with “inflation” as well.

ALB