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The Christian Faith and the Financial Crisis
Part Two: The Financial Crisis (7)
INFLATION IN 1976
In 1976, Griffiths published what I think is his most impressive book - Inflation: the price of prosperity (since he is arguing that prosperity can be had without inflation one feels there should be a question mark at the end of the title, but there isn't). (7) It is an argument for the 'monetarist' view of inflation as opposed to what he calls in the Mexican book the 'structuralist' view. Put very crudely, the structuralist view is that inflation is an increase in prices that is caused by an increase in costs which might, for example, be an increase in oil prices such as occurred spectacularly in October 1973 when OPEC raised oil prices and cut production in response to US support for Israel in the Yom Kippur war - rather strangely this seems to go unnoticed in Griffiths's book. But of course another source of increase in the costs of production is an increase in wages and in the 1960s and 1970s there was a widespread feeling that the problem lay in the power of the unionised workforce to impose wage increases almost at will, thereby increasing the cost of production, thereby increasing prices. The problem then was seen as a social problem and the solution was a social solution - prices and incomes policy negotiated at national level between the government, the trade unions and employers' organisations. In my Llaneglwys talk I gave a brief account of my own political involvement at the time and in particular my support for the Bullock Report on Industrial Democracy, predicated on the view that unionised workers would never again accept to be just a factor in the cost of production regulated by the 'labour market' and therefore that in everyone's best interest the working class had to develop the skills necessary to manage individual industries and the economy as a whole in its own best interest.
(7) Brian Griffiths: Inflation: The price of prosperity, New York, Holmes and Meier, 1976.
The monetarist argument on the contrary sees the problem as an increase in the money supply which, by the normal laws of supply and demand, reduces the value of money so that more money is needed to get a given result. In the case of the inflation which became such a radical problem in the 1970s, Griffiths sees its origin in the policy of the US President Lyndon Johnson of printing more money to pay for the social support policies of the 'Great Society' and for the Vietnam war without raising taxes. Under the post war 'Bretton Woods' agreement, the exchange values of all the currencies in the countries affiliated to the International Monetary Fund were pegged to the value of the dollar and the value of the dollar itself was pegged to the value of gold. The aim was to facilitate international trade through fixed exchange rates. Instead of succumbing to the temptation to devalue their currencies, countries in financial difficulties could seek help from the IMF - as the United Kingdom did in 1956 and in 1976.
As a result of the centrality of the dollar Johnson's inflation had consequences throughout the world, especially when, in August 1971, Nixon took the dollar off the gold standard. By that time, Griffiths tells us, the nominal value of the dollars available in the world was already four times the value of all the gold in Fort Knox.
Griffiths argued that it was this international inflation triggered by the increase in dollars needed to pay for the Vietnam war that had caused the British working class to become more militant in its demand for higher wages. But the problem was exacerbated by the reaction of the Heath government which had tried to respond to this pressure by going for rapid growth in the economy by pumping in yet more money, thereby increasing the inflation yet further.
The monetarist explanation of inflation had been, Griffiths tells us, the universally agreed view of all major economists until Keynes, in the General Theory, argued that, in Griffiths' words: 'a free market economy had no inherent properties which would continuously provide full employment for the labour force. As a result, the government had a responsibility to maintain total spending at a level which would provide work for all who actively sought it' (p.4). So it was the political need - very acutely felt of course in the Depression - to maintain full employment that caused governments to abandon the prudent monetary policies that had been recommended by classical economics. In his Mexican book he says that the success of the Mexican government in keeping a relatively low level of inflation was helped by the fact that they did not have a commitment to maintaining full employment.
Of the British economy Griffiths says:
'the unrelenting inflation of the post-war years is the result of the commitment of successive governments to the concept of full employment, which was first put forward in the employment policy White Paper of 1944. It was a concept of full employment defined in a rather special way. In Full Employment in a Free Society Beveridge defined full employment to mean 'having always more vacant jobs than unemployed men' so that 'the labour market should always be a sellers' market [rather] than a buyers' market.' In such a world as this the dice are necessarily loaded. If the labour market is to be a sellers' market, then regardless of the structure of the trade-union movement, the militancy of trade unions, the degree of unionisation in society or the particular framework of the collective bargaining process, inflation must result. In fairness to Beveridge it should be said that he recognised the inflationary potential of his ideas but claimed that it could be avoided by a responsible attitude on the part of trade-union leaders.' (p.96)
In further fairness to Beveridge it may be said that his expectation that trade union leaders would have a responsible attitude was not unreasonable at a time - Full Employment was published in 1944 - when the greatest of British trade union leaders, Ernest Bevin, was running the economy and had long been arguing that the trade union movement should be concerned with the interests of the working class - and therefore to a large extent the society - as a whole and not just of the sectional interest of any particular trade union organisation. In later articles written for the IEA, Griffiths, himself of course from a working class background in Swansea, turned his attention more to trade union matters and a recurring argument was that trade union action could only succeed at the expense of other members of the working class. Either the union is an obstacle to workers who would be willing to do the same work for lower wages, or a wage increase in one section of the economy will result in decreases in other sectors of the economy.
What had happened in the post-war period was that governments - both Labour and Conservative - had felt a commitment to the interest of the working class as a whole (I think that is almost how we could define the commitment to full employment) so that, to use Marx's term, labour power was no longer being treated as a commodity, subject to the laws of supply and demand - where there's a shortage the price goes up, where there's a glut the price goes down. In Griffiths's view, this had worked fine in the period of corporate rebuilding that was necessary in the immediate aftermath of the war, but from the 1960s onwards it was producing a sclerotic economy that could only be maintained by government subsidy that was fuelling inflation. The solution was to limit the amount of money that was available in the economy and, so far as possible, to restore the disciplines of the competitive market, including the competitive market in labour. The worker was again to become a unit of production. The result would be a severe increase in unemployment but this would be temporary. As the 'lame duck' enterprises were shaken out and the overall economy adjusted to supplying the genuine needs of the society - that is, the needs people were willing to put their hands in their pockets and pay for - so the market would eventually pick up again and new sources of employment would be found. Once government stopped interfering with the market mechanism there would certainly be fluctuations between periods of low employment and periods of high employment but these should generally be shortlived.
To put it in other terms: the natural tendency in a competitive market is to drive down prices. Employers have little influence over the prices of the raw material they use or the machinery needed to process it. Wages however are flexible and can be negotiated downwards. If they sink too low, however, the workers cannot afford to buy the products of industry and the result is a depression. Keynes advocated interfering with the pure market mechanism to enable workers to become consumers to provide a market for the goods they produce. Keynes believed this could be done through government expenditure. This would entail government debt but that would be viable so long as the government continued to be creditworthy, so long as people were willing to lend to it, which was feasible so long as the economy was sufficiently buoyant to allow the government to service its debt. In the circumstances of the late sixties and early seventies, however, this system was cracking at the seams and government expenditure, instead of stimulating demand and therefore stimulating the economy, was simply fuelling inflation and thereby undermining the value of the higher wages. Griffiths was advocating that this scheme should be abandoned, full employment should no longer be regarded as a legitimate policy objective of governments and the old logic of a competition in prices should be reinstated despite its necessary tendency to drive down wages - something which, as we shall see, was largely achieved through opening the national economy up to competition from low wage economies in other parts of the world.