IS INFLATION A BOGEY?
Very few people ever learn form the experience of others. It seems to be one of the laws of life that, whatever misfortunes may have happened to others as a result of certain policies or circumstances, we still hug to ourselves the delusion that it cannot happen to us.
It is no doubt for this reason that most Australians appear to be comparatively unmoved by the thought of currency inflation. It is safe to say that they are not unmoved in Germany where, up to the time of the war at any rate, and no doubt during it, constant safeguards against inflation were adopted by those in financial control. But then of course Germany knows what inflation means, having been bankrupted by it some years after the last war.
The French people know all about it, having in modern times seen the franc fall in value from about a shilling to, at one stage, about a penny.
Mammoth British financial efforts in this war have been conducted with due regard to the avoidance of inflation, for the British people were sufficiently near to France and Germany to know almost at first hand what a ruinous and devastating thing inflation can be.
We read from time to time in the financial journals of the sustained effort in the United States to avoid inflationary finance; and this is not to be wondered at, for during the civil war millions of American citizens got to know to their cost what depreciation of the currency could do to them.
Are we awake to these matters in Australia, or must we learn from our own bitter experience?
Broadly speaking, inflation occurs when the supply of purchasing power outruns the supply of goods and services to be bought, with the result that costs and prices are forced up and the value of the pound is correspondingly reduced.
An understanding of the problem depends essentially upon getting to appreciate one central fact, which is that a pound note is intrinsically worth only the paper and ink used in its manufacture, and that its real value is expressed purely in terms of what it will buy.
If in the course of the next twelve months prices in Australia rose one hundred per cent, that would be merely another way of saying that the value of the pound had been reduced by fifty per cent, £1 at the end of the year being needed to buy what 10/- would have bought at the beginning of the year. In other words, inflation of the currency means devaluation of the pound.
It was admirably described once in my presence as a "flat rate tax upon everybody's pound note, whether the owner of the pound note is rich or poor." So the first point to be observed about inflation is that it is inequitable taxation, since it is imposed upon everybody at the same rate.
The second thing to be noted about it is that, by reducing the value of money, it reduces the value of money claims such as savings, bank credits, insurance policies, investments on mortgage, preference shares and the like. Competent observers have contended that the German inflation after the last war practically wiped out the middle classes, and thereby paved the way for the rise of national socialism.
I have had occasion before to say something to you about the damaging effect of too many of our policies on those thrifty and frugal people who are the backbone of the nation. What I want to point out to you tonight is that these are of all people the ones who would be most grievously injured by inflation.
My experience suggests that some big business men are indifferent to the danger of inflation. I think I understand some of their reasons, and I shall not take up your time tonight by discussing them, except to say that great wealth and selfishness are not always strangers to one another.
At the other end of the financial scale one finds many thousands of wage-earners who appear to think that inflation will not touch them, because, they say, inflation will raise prices and therefore the cost of living, and their wages will be adjusted to the cost of living, so that in effect nominal wages will rise and the wage-earner will still be safe.
Let me say quite plainly that this is a most dangerous illusion. Once inflation really gets going and the price level really begins to go up quickly, no periodic adjustments of wages will ever catch it up.
Continental experience showed that, when the full effect of inflation became felt, adjustments in the value of money were taking place weekly, and then daily and then hourly. You just cannot adjust wages as rapidly as that, and consequently - as the German wage-earner discovered - the worker's pay is overwhelmed by the price level, and he is involved in the same ruin as the other people in the community.
Now, to all this some wise man will reply, "Oh, yes, inflation got out of hand in Germany, but we better; we know how to handle these things."
Well, do we? I should be very surprised to learn that the leading financiers of Germany in the last twenty years were any less competent than the leading financiers of Australia. The truth is that real inflation - I am not talking of some strictly limited use of credit and currency expansion - is in its nature almost impossible to control. It grows, so to speak, on itself.
A Government, in order to provide for its expenditure, may rely upon taxation, public loans and central bank credit. For political reasons it comes to the conclusion that it is unwilling to tax beyond a certain point, and unlikely successfully to borrow beyond a certain point. It then turns to the central bank and says, "All right, you must find the difference." In the case of the present Commonwealth budget that difference may very well be a staggering sum of the order of £200,000,000.
Such a volume of central bank credit must, on the view of any expert in this country, produce marked inflation, and do it on an already inflated foundation, for I remind you that the Commonwealth note issue, which was a shade under £50,000,000 when the war began, is now itself £110,000,000, and the central bank credit used last financial year and unprovided for in this budget was not less than £80,000,000.
When inflation takes effect prices rise, costs rise and wages, though more slowly, rise also. The result is that the cost of all defence works is increased. The result of that is that the deficit is increased. The result of that is that, to meet the deficit, still more central bank credit has to be obtained. The result of that is further inflation. The result of that is further increases in prices and costs, further deficits, further borrowing, further inflation, the whole thing proceeding in a spiral which inevitably mounts upon itself until it touches the skies.
The only real answer to the inflation danger is to divert purchasing power from the citizen to the Government. Our resources must more and more be spent on the war, and not on civil goods or services. Our civil consumption must be taxed down, borrowed down, and rationed down.
Some of us think that compulsory borrowing would in the long run be the best thing for most of us, because it would reduce civil spending, be a great check upon inflation, and at the same time provide a sort of readjustment fund for hundreds of thousands when the war is over.
But let us avoid inflation at almost any cost, for it may be a pleasant drug while war is on, but its reaction is disastrous.
11 September, 1942