Part
II: The Mechanism of the Classical Ideal
CHAPTER II
THE
NATURE OF PRICE
IN the foregoing chapter we have endeavoured to establish two
important propositions in generalised terms. The first of these
is: -
(1)
That the collective prices of the goods available for sale at
any moment in a given community, if they have been produced
by ordinary commercial methods, cannot be met by the money available
through the channels of wages, salaries, and dividends, at one
and the same moment. They can be exported in return for purchasing-power,
or they can be destroyed, or they can be bought by purchasing-power
which is created and distributed in respect of a separate
cycle of production. This situation is worsened by what
is called saving, but is independent of saving at the present
time.
It
may be noted that both in Europe and America, there are numerous
endeavours being made, and theories propounded, to explain this
fact; which was, until recently, denied as a fact. The foreword
to a work by H. B. Hastings,* published in America, remarks:
"By
an accounting method of analysis, the conclusion is reached
that the value, at the current retail price-level, of goods
produced far exceeds the flow of purchasing-power from permanent
sources. In other words, recurring periods of business depression
are shown to be the result of present financial and business
policies.
"The
importance of this new method of approach to the most important
of modern economic problems is self-evident."
*
"Costs
and Profits."
(2)
This situation would be almost immediately destructive to the
working of the business system, if the financial technique did
not provide a source of purchasing-power, or new Money, in the
form of bank loans and credit instruments, which does not arise
out of wages, salaries, or dividends, paid for past production.
By the exercise of this technique, however, industry becomes
mortgaged to the banking system.
While
there are good, sound, and fairly obvious reasons why, in any
case, the stupendous power of creating and destroying the major
portion of the purchasing-power in the world should not be vested
in the hands of private and irresponsible persons, it is probable
that such considerations would fail to produce any very radical
alteration in the system if they formed the only basis on which
criticism could rest. It is probable that chattel slavery as
an institution would be more or less permanent if every slave
had been perfectly comfortable. That is to say, the objection
to the situation is that it does not work, rather than that
it is immoral. While the power of creating effective money has,
up to the present time, enabled banks to mask a good many of
the defects of the financial system, it has, particularly in
the last few years, failed definitely to remedy some of the
more vital of them. The financial mechanism has acquired a considerable
control over the rate and the manner of issue of money and purchasing-power,
and to a large extent, this power has become unified and centralised
so that it forms an international organisation of the most stupendous
power, but it has to a lesser extent only, achieved control
of the other aspect of finance which is exhibited in the form
of prices. It is true enough that widespread efforts have been
made on the part of the large Joint Stock and International
Banks to control general price levels by increasing or decreasing
the amount of money available in the pockets of the public.
But these efforts may be said quite definitely to have failed,
or at any rate to have fallen far short of the expectations
of those who have put them into operation.
The
reasons for this failure are not far to seek. The financial
mechanism has a positive and negative aspect, the positive aspect
being represented by the issue of money, and the negative aspect
being represented by the exchange of the money thus issued for
goods and services, through the medium of prices. It is obvious
that if money is the only claim upon goods and services, the
less money there is available, the more goods and services each
unit of this money will command, if there is always a willing
seller. This is merely one method of stating the well-known
quantitative theory of money. It results from this that if there
were no other factors involved, a contraction in the amount
of available money would result in a fall of prices, since each
unit would buy more goods and services. And it is on this simple
principle that, since 1920, the banks have endeavoured to control
the general price levels, more especially in Great Britain.
While prices have not fallen from this cause to anything like
the extent that they rose under a contrary policy, the restriction
of credit which has been in operation since 1920, did undoubtedly
tend to arrest the spectacular rise in prices which was in progress
at the time of its initiation. The reason for the limits which
are set to the reduction of general price levels by "deflation"
is simple; when prices are reduced to approximately the equivalent
of costs, the willing seller disappears.
Even
this modified success has been achieved at the cost of widespread
distress arising out of unemployment and bankruptcy, results
which must inevitably accompany such a policy. The natural and
mathematical result of the operation of a financial and costing
system, which requires that all the costs, or issues of purchasing-power,
distributed during the production of an article, shall eventually
be recovered in prices, is a continuous rise in the cost
of production of any article produced by a given process. This
rise can be, and is, temporarily offset by improvements
of process, but only temporarily.
Now
any attempt, by current financial methods, to reduce prices
(or even to stabilise them, as the phrase goes) is a mathematical
absurdity unless the cost of this stabilisation, or lowering
of prices, is met from some extraneous source. Or to put the
matter another way, the margin of profit which makes it possible
for a producer to go on producing, disappears unless the financial
cost, and consequently the price of production, is allowed to
rise steadily in relation to direct labour cost. As a result
of this, if prices are forced down, production stops, and stocks
are sold only at prices which mean loss, and ultimately bankruptcy,
to the manufacturer and distributor. This is the situation produced
by the fall of prices again initiated in 1928.
To
put the matter in a form of words which will be useful in our
further consideration of the subject, the consumer cannot
possibly obtain the advantage of improved process in the form
of correspondingly lower prices, nor can he expect stable prices
under stationary processes of production, nor can he obtain
any control over the programme of production, unless he is provided
with a supply of purchasing-power which is not included in the
price of the goods produced. If the producer or distributor
sells at a loss, this loss forms such a supply of purchasing-power
to the consumer; but if the producer and distributor are not
to sell at a loss, this supply of purchasing-power must be derived
from some other source. There is only one source from which
it can be derived, and that is the same source which enables
a bank to lend more money than it originally received. That
is to say, the general credit. In spite of the immense strides
made in the direction of improved process since 1914, prices
are still nearly double those obtaining at that date, while
industrial profits are much less.
It
may now be possible to see with some degree of clearness the
difficulties in which those institutions and organisations which
control the general credit at the present time find themselves.
It is true enough that they can manufacture "money" to an almost
unlimited extent; this power resting on the general willingness
of the public to accept anything which will function as money.
But the psychology which has grown up on the basis of the theory
of rewards and punishments forbids the exercise of this power,
except in return for services rendered. The financial equivalent
of all services rendered in the production of an article, forms
the cost of that article, and conversely, nobody will furnish
any services in connection with the article which are not represented
by cost, and therefore go into price. The old fable of the Fairy
Gold which disappeared as it was grasped, can thus be seen in
its every-day embodiment; and the result of these creations
of credit granted to producers only, instead of to consumers,
is to produce a rise of prices which nullifies the additional
purchasing-power thus created.
There
is, as a result of the problems created in Great Britain by
a restriction of credit, a quite considerable body of persons,
more especially among manufacturers, who are openly demanding
a large increase in the volume of credit to be issued to manufacturers.
It is hardly denied that such a process would cause prices to
rise, and in fact it is frequently argued in quarters which
might be expected to know better, that a rise of prices would
be an advantage, because it would decrease the burden of the
National Debt, since the amount of money represented by the
National Debt would have a decreased purchasing-power in goods
and services. There could hardly be a more vicious example of
the classical or static method of thought and argument.
It
is true that the National Debt was created and appropriated,
by methods, subsequently to be explained, which are indefensible
from almost any point of view, more especially as the greater
part of the Debt is held by financiers and financial institutions.
But a considerable, if minor, proportion of the Debt has been
sold to members of the public in return for money which they
obtained by legitimate methods, and in addition to this, it
is of course impossible to reduce the purchasing-power of the
National Debt without reducing, pro rata, the purchasing-power
of other descriptions, however small in amount, of credit-instruments
held by the general public. Now to a man who has one million
pounds, it may be a theoretical hardship or "punishment" to
reduce the purchasing-power of his one million pounds to that
of five hundred thousand pounds, but the practical effect on
his scale of life and on his personal freedom of his movements
and initiative is nil. But to reduce the income of the
man who has two hundred pounds per annum to one hundred pounds
per annum, is the difference between simple comfort and practical
starvation. And the number of persons who would be adversely
affected by a rise of prices is incomparably greater, so far
as numbers are concerned, than those who are hit by a fall of
prices. The appropriation of large blocks of public credit is
buccaneering; but the filching of the widow's mite by a "gradual"
rise of prices is pocket-picking of the meanest type. It is
not necessary to condone the monopoly of Public Credit, or to
acquiesce in it, in order to agree that inflation is the very
core of the evil. There is almost nothing to be said for a policy
of deflation, as defined by the average banker, except that
it provides a breathing space in which to consider what to do;
the real argument against it is not that it reduces prices,
but that it only does so at the expense of the producer; but
a policy of inflation, that is to say, a policy of increasing
issues of money or credit in such a manner that it can only
reach the general public through the medium of costs, and must,
therefore, be reflected in prices, has one thing and one thing
only to be said for it at this time; that it is absolutely and
mathematically certain to reduce any financial and economic
system to ruins. It is in fact a Capital Levy of the meanest
and most one-sided description, since it taxes the purchasing-power
of those who obtained it by work for the benefit of those who
obtain it by financial manipulation.
The
condition which is produced by a policy of restricting the amount
of money in circulation can be grasped without difficulty, if
it be remembered that it must involve a numerical decrease in
both the total figures of cost and the total figures of price
for a given period of production. The only portion of the total
costs which can be decreased without loss to the producer are
those represented by wages and salaries, the remainder being
fixed charges based on the capital costs already incurred. Wages
and salaries costs are purchasing-power, and collectively are
much less than collective prices. Imagine both collective wages
and collective prices to be diminished by an equal amount x.
This may be written:
An
addition to both the numerator and denominator of the fraction,
such as is brought about by a rise of wages, accompanied by
a rise in price, has, of course, the opposite effect; it brings
the ratio of purchasing-power to prices nearer, though never
to unity, with the result, seen in Germany in the inflation
period, of immense, though unstable, economic activity, accompanied
by great hardship to the professional and rentier classes, both
of whom have claims to consideration, and a most undesirable
concentration of economic power, resulting infallibly in the
enslavement of the artisan.
Even
without demonstration, therefore, it is easy enough to see the
effect of either deflation or inflation by the exercise of analytical
methods; but nothing of the sort is now necessary. A full-scale
demonstration of both of them has taken place since Chapter
XIII of Credit Power and Democracy was written; and the
course of events in Germany, under a policy of reckless inflation
of credit, reappearing in prices, followed with some exactness
the sequence, both economic and psychological, which was explained
therein, and can be considered and compared with the contemporaneous
restriction of credit in Great Britain. During a few months
of 1923 a condition of fairly steady, though high, prices was
maintained at the cost of increasing industrial stagnation;
and the fact that this situation changed into an era of rising
prices, accelerated by every effort to grapple with the "unemployment"
problem by orthodox methods, should be conclusive proof of the
inability of the existing financial system to carry out the
policy of "Stabilisation."
The
efforts to control prices by manipulating credit along orthodox
lines culminated in the unmanageable fall of prices which began
in 1928, a fall which complicated, although it did not cause,
the financial crisis of 1929 in which the world is still (1933)
involved.