[PDF]Money and Inflation

MONEY AND
INFLATION


by

Emile Burns


1968

LAWRENCE & WISHART
London


Copyright © Emile Burns 1968


Printed in Great Britain by
Clarke, Doble & Brendon Ltd.
Cattedown, Plymouth







CONTENTS


Money “on” and “off” gold

5

How Money is “made”

17

The Influence of Monopoly

25

“Too Much Money...

33

Taxes and Prices

40

Too Little Money?

47

The Basic Causes of Inflation

56














“The objective ... is to reduce the nation’s
standard of living ...”

The Times leading article on the devaluation of the
pound, 20 November 1967








MONEY “ON” AND “OFF” GOLD


Money is a general title to the ownership of goods. The title
deeds of a house give the ownership only of a particular house;
but as a medium of exchange, money (in appropriate quan¬
tities!) enables the holder to buy food, drink, clothes, cars,
houses, and pretty well everything else—provided it is there
to be bought.

Money has had various forms in different countries in dif¬
ferent periods. But as civilisation and trade developed, shells
and cows gradually gave place to metal coins and later on gold
coins took the place of silver as the basis for the standard unit
of currency. Notes came into use alongside gold coins, and
other “promises to pay” (bills of exchange, etc.) were accepted
as money. But the unit of currency remained the standard
gold coin of the country: all other forms of money were
expressed in terms of that gold coin, and could (in principle
if not always in practice) be transformed into the correspond¬
ing number of gold coins.

That was the position in the advanced countries before the
first world war—Britain had its £ sterling in the gold sovereign,
a coin whose weight and fineness was laid down by law; the
United States had its dollar, France its franc, Germany its
mark, and so on, each embodying a certain weight of gold laid
down by law. All other forms of money were expressed in
these gold units, and could normally be exchanged at a bank
for an equivalent number of these units.

But what was it that determined how many gold units had
to be exchanged for other things? In other words, what deter¬
mined the value of commodities made for sale in terms of the
country’s gold unit?

As Marx pointed out, there had to be something in common
between commodities and gold if one was to be measured
against the other; the only thing that they had in common

5









was that they were products of human labour; the compara¬
tive quantity of labour-time involved in the production of
gold and of other things was therefore the basis on which they
exchanged with each other.

The production of gold involved an amount of labour-time
which, although not fixed, was fairly constant. It is true that
the finding of new sources of supply which were easier to
work, together with new methods of mining and refining gold,
meant a certain reduction in the amount of labour-time re¬
quired for newly-mined gold; but the quantity of newly-mined
gold that came onto the market each year was only a small
fraction, as a rule, of the existing gold stock in the world.
This meant that the lower quantity of labour-time embodied in
the newly-mined gold hardly affected the average amount of
labour-time embodied in the gold units of currency in the
world. For all practical purposes, therefore, the quantity of
labour-time embodied in these gold units remained stable, and
could be used at any time as a measure in exchange for other
products of labour.

The exchange value of products, that is, the number of
standard gold units for which they could be exchanged, was
determined by the amount of labour-time used in making
them, compared with the amount of labour-time used in pro¬
ducing the standard unit of gold. The price (in gold units)
was therefore roughly based on this comparison, with Various
modifications noted by Marx.

The price at which anything is sold may vary from its
value, although it is ultimately based on its value. The price
may fall below its value, because there is a surplus and the
seller must accept a lower price to get rid of it. If there is a
shortage and demand is high, the seller gets the chance to raise
the price above its value. If a monopoly is established, or a
price agreement reached between manufacturers, the price of
a product will be raised above its value. Or if the govern¬
ment imposes a tax or duty on a product, its price will naturally
be raised above its value.

Nevertheless, whatever the fluctuations in price, the basis on
which the fluctuations take place is always the value of a

6




product, that is, the relative amount of labour-time used in
making it (including the raw materials and wear and tear of
the machinery, etc.). Thus a new motor car always costs more
than a pedal bicycle, a motor launch more than a rowing boat.

Purchase and sale, the exchange of products for money,
developed in this way in practice, since merchants had to
depend on someone using labour-time to produce what they
wanted to exchange or sell. The early English economists,
Adam Smith and Ricardo, examined value, and found that
the real basis of value was the relative amount of labour¬
time used in producing things, and Marx later developed the
labour theory of value in a more exact form.

The Value of any product of labour depends, in Marx’s view,
on the “average socially necessary labour-time” embodied in
it—not the labour spent by one worker on an individual
product, but the average spent on that kind of product at any
definite period in a country’s technological development. This
applies directly, of course, only to things which are products of
human labour and are regularly made for sale. Other things, such
as land, company shares, etc. have a derived value, based mainly
on the amount of income which they are expected to bring in.

For example, the buying and selling of shares on the Stock
Exchange is carried out by means of money. What exactly is
it that is bought or sold in such transactions ?<■ If £100 shares
in a company with a share capital of £100,000 is bought, it
can be said that one-thousandth part of the property of the
company has passed into the buyer’s hands. But although this
may be true in the legal sense, no one will exchange money
for the mere ownership of something which he cannot use.
What the buyer is really concerned with is a proportionate
share in the future profits of the company; he hopes that in the
future he will receive a dividend warrant paying him a part
of the money which the company has “made” during the
previous year. (In the next chapter we shall see how a com¬
pany “makes” money.) What is important is that Stock
Exchange operations of this kind do not have any direct
reference to goods, but merely transfer from one person to
another claims to future money.


7







The fact that claims to future money are constantly being
bought and sold, and that the price for these claims is con¬
stantly changing according to the profit record and prospects
of the company concerned, makes it possible for money to be
used in speculation, the buying and selling of shares not with
a view to drawing future profits from a company, but with the
aim of selling the shares later on, at a higher price than was
paid for them.

But the fact that there are shares to be bought, whether as
investments bringing in money in future years or purely for
speculation, is due to the fact that money has previously been
used in yet another way. When a company is first formed, as a
rule it offers shares to the public (public companies) or to some
restricted group of people (private companies). People hand
over money in exchange for those shares—which are claims to
future profits, future money. The company then uses the money
to buy or rent land and buildings, machinery, equipment, raw
materials, etc., and to pay wages and salaries to workers needed
to produce actual things. This is the real process of investment,
the transformation of money into capital, into something whose
use will employ labour-power to produce new things and more
money, profit over and above the costs of production.

All the dealings in shares of existing companies merely trans¬
fer the claim to this profit from one person to another.

In the days when Britain was “on gold” and a £ was a gold
sovereign, the general level of prices was more or less stable.
The prices of individual things might go up for reasons affect¬
ing them only, such as a new tax on them, or a temporary
shortage of supply in relation to demand; or if a monopoly was
established; or, if they were imported, because the price on the
world market went up for any reason. On the other hand, the
price of any particular product might go down because of a
surplus of supply over demand, or because a new method of
production was introduced, involving less labour-time and
therefore reducing the exchange value of the product with gold.

As for the rates of exchange between the currencies of
different countries, these too were more or less stable. The £,
dollar, franc, mark, each was equivalent to a specific weight

8






of gold, and all that was necessary was to take this, in com¬
parison with the gold in the standard units of other countries,
as the basis for the exchange rate with other currencies. If
debts between countries could not be simply set off against
each other, the balance on either side could be settled by a
shipment of gold coins or of bullion of the same weight as the
coins.

When Britain and the United States were “on gold” the
standard rate of exchange was : £1 = $4.86, which registered
the fact that the United States gold dollar contained rather
more than one-fifth of the gold in an English sovereign. A
British miller who bought wheat from a United States farmer
for $486 could settle the account by sending him 100
sovereigns. But freight and insurance on a shipment of gold
was costly, and it was cheaper to buy a draft for $486 from a
bank in England and send it to the American fanner in pay¬
ment of the bill.

How could a bank in England be in a position to give the
miller a piece of paper which would be exchanged in the
United States for $486? Because at the same time as the English
miller was buying wheat from an American farmer, all kinds
of other transactions were taking place between the people of
the two countries. An American merchant, say, had bought
£100 worth of whisky in Scotland, and wanted £100 to pay
for it. Instead of sending $486 in gold dollars, he too Would
go to a bank in the United States and buy a draft for £100.

The American bank would then have $486 (paid by the
American merchant for the £100 draft payable in Britain) :
the English bank would have £100 (paid by the miller in
Britain for the $486 draft payable in the United States). So the
American bank could pay out the $486 to the farmer, and the
British bank could pay out the £100 to the whisky producer,
without any gold £s or $s crossing the Atlantic.

Of course such neat transactions do not take place in prac¬
tice. What happens is that there is always a continuous series
of purchases and sales by different firms between the two
countries, and the moneys involved in these transactions are
brought together through the banks and the dollars set off

9







against the pounds. When over a period the amount of dollars
owed to the United States was greater than the equivalent in
pounds owed to Britain, and the difference could not be settled
by using the currency of a third country, British banks might
have to send a shipment of sovereigns or of gold bullion to
square the account.

Although the exchange rate of the £ with the American $
fluctuated a little from the exact equivalent in gold, the fluctua¬
tions were due to particular causes (like big shipments of
cotton or wheat, for which dollars had to be paid at certain
times of the year), and the exchange rate remained close to
“par”—which was the relative content of gold in the standard
units. So too the prices of goods that were imported remained
relatively stable in £s, fluctuating in general only with prices in
the world market owing to temporary shortage or over-supply.

Similarly, prices in £s for goods manufactured in Britain
were relatively stable. But since the exchange value of an article
depended in the first instance on the human labour embodied
in it, the long-term trend in prices was downward, because new
methods and new techniques of production, both of raw
materials and of finished goods, meant a reduction in the
amount of labour contained in particular articles. This trend
can be illustrated by the fact that, taking industrial output per
head in 1850 as 100, by 1900 it had risen to 197, or nearly
double. The comparison, of course, only roughly illustrates the
point, because of the many other factors that had changed be¬
tween 1850 and 1900, but it does show the trend towards less
labour being used per unit of product and therefore the trend
towards lower prices.

Such were the conditions in which, before 1914, the general
level of internal prices, rates of exchange with other currencies,
and the balance of payments, were so relatively stable that very
little attention was paid to them except by experts and foreign
currency gamblers.

But from 1914 on, countries have gone “off” gold as the
direct basis of their currencies, and at one time or another
have “devalued” their standard unit—that is, declared that it
is equivalent to a smaller quantity of gold (or of dollars) than

10





before. More of the standard unit is therefore needed to form
the equivalent of other products of labour; which is another
way of saying that the prices of these other products have gone
up in terms of a devalued £ or $.

On the other hand, this upward movement of prices after
devaluation is not automatic or immediate. It first shows itself
in the prices of products imported from countries whose cur¬
rency has not been devalued. The prices of these products to
importers, say in Britain after devaluation of the £, rose at
once, because more pounds were needed to pay for them, owing
to the changed rate of exchange. But the prices for goods which
are made and sold in Britain remain more or less unchanged
for a time, until the higher prices for imports seep through
industry, raising the cost of raw materials and finished goods
and therefore leading by degrees to a general rise in prices.

For example, the £ was devalued in 1949, so that the ex¬
change rate with the United States dollar, which had previously
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