J. Enoch Powell on Rees-Mogg's golden calf
This entertaining book* may be divided into three parts, which sustain three separate and mutally independent propositions. With one I agree; from the other two I dissent. They are, respectively: (1) that the scourge of inflation is always and necessarily caused by an increase in the money supply, which in modern times is always due to the deliberate action of national governments; (2) that, as The Times (though not under the editorship of the author) declared on a notorious occasion, "it is a moral issue," because the propensity of governments to create inflation and of their misguided subjects to demand it is a manifestation of the tendency towards that 'inordinacy' which from time to time afflicts societies; and (3) that this 'inordinacy' is most likely to be quelled, with all kinds of beneficial consequences, by adopting *The Reigning Error: The 'Crisis of Woad Inflation William Rees-Mogg (Hamish Hamilton £3.25) as money either gold itself or currency convertible on demand into a fixed quantity of gold.
It is only to be expected that I would agree with the first of these propositions, since I have been wearisomely expounding it these last sixteen or seventeen years. Mr Rees-Mogg casts his exposition of it into the form of an imaginary dialogue between a resuscitated Judge Jeffreys and a prisoner accused of the crime of being an economist. The crucial 'point of the exchange for my purpose is the following:
Jeffreys: In that case, the question of inflation is surely a very simple matter; stabilise the supply of money and you stop the inflation? Prisoner: That is what Mr Enoch Powell says, nflud. Jeffreys: But do you not agree with him?
Prisoner: I do not wholly agree with him. .. I do not think he gives adequate attention to the prior question of why the supply of money was increased in the first place.
The alleged reason "why the supply of money was increased in the first place" which I am accused of ignoring proves to be that "unions can and do use monopoly power in such a way that it is extremely difficult for governments to avoid an inflationary Monetary policy." I do not ignore this; I deny it, and it is thus that I come adrift from all prices-and-incomes policies (from statutory control to ear-stroking) and also from Mr Rees-Mogg's assertion that the whole community shares in the moral guilt of the 'inordinacy' which is inflation.
If some trade unions possess growing monopoly power — it -has to be 'growing', because the effect of constant monopoly power' would already have been exhausted in the past — then the result of their using that power must be a real transfer to their members from the rest of the community; in other words, a shift in real differentials. If this does happen, it cannot be altered by creating inflation: the new differentials assert themselves just the same whether they are expressed in terms of constant-value money or depreciating money. It is a fallacy to suppose that a real wage increase and its effects can be neutralised or obliterated by inflation. If that were so, we need not worry about higher world prices of food or fuel — all we would have to do would be to inflate them out of existence'.
We are therefore left with those reasons for governments debasing their currencies which 1 do accept. One is antecedent: the desire — in wartime, for instance — to spend more money without being seen to tax correspondingly. The other is subsequent: the fear of the side-effects if inflation ceases to escalate. Mr Rees-Mogg explains very well how those side-effects come about. If the money supply is increased, this results after a lapse of time in prices in general increasing accordingly. Suppose, however, that The author asserts the same fallacy conversely when he writes that "inflation takes from the weak trade unionists and gives to the strong." What takes from the weak and gives to the strong is strength — whether market strength or monopoly strength.
during this time-lag the increase in the supply of money is reduced, ended or even reversed. The consequence will be that people find themselves short of money; there is a crisis of liquidity, and prices beat the money supply, as it were. Unless inflation is speedily resumed, this effect will manifest itself in bankruptcies and rising unemployment. So governments for fear of these manifestations resort to more inflation as the lesser evil. The behaviour of the Conservative Government in 1972, when Roy Jenkins's operations of 1969/70 on the money supply were coming home to roost, is the recent classic case. How then to escape? Clearly by government and governed deciding, later if not sooner, to accept the side-effects when the inflation can be driven no further (as in Germany in 1923) or when it inflicts even less eligible consequences, in shortages, strikes, etc, upon the public. At this point the decision to stop inflating may be marked by a change of currency; but the actual effect is produced through the political determination to debase the currency no turther. Whether we keep our present pounds, or replace ten old pounds by one 'new' pound, or substitute a unit convertible into an ounce of gold for as many existing pounds as an ounce of gold is currently worth in the market — what matters is whether the government has decided to stop issuing more money and whether people feel convinced that it will hold to its decision.
Mr Rees-Mogg is mistaken in supposing that gold can be made to take that decision for us and to inculcate that conviction. If governments want to inflate, and their subjects want them to inflate, they will 'come off' a fixed gold equivalent more easily than they went on to it. The author admits this himself when he suggests that "the IMF should have the power to devalue all currencies in terms of gold" in order to avert "a major world depression." Moreover, going on to gold at the current market price and staying there produces exactly the same side-effects as any other mode of ceasing to inflate: the side-effects are no less painful if it is the quantity of gold in circulation that is no longer increasing than if it is the quantity of irredeemable paper pounds. Maybe going on to gold makes the fullstop to inflation specially sharp. If so, it is likely to make the side-effects specially sharp also.
The old riddle of quis custodiet? remains unsolved. If we will not save ourselves from 'inordinacy' by our own political act, the golden calf will not do it for us.
Previous page
