Inflation – Causes And Meaning

Rise in prices and in cost of living is the result of an unbalanced and unwise increase in the supply of money, and not so much on account of shortage of goods or on account of the demand of higher wages by workers.

     In the United States, for instance, charts have been prepared by economist experts showing how the cost of living and commodity prices have steadily kept rising along with the volume of the currency, and quite independently of the volume of production of commodities. The Newsweek charts show that between 1939 and 1959 consumer prices increased by 113 per cent and wholesale prices increased by 136 per cent, the supply of money during that period having increased by 270 per cent. The index of industrial production was 177 per cent higher in 1959 than in 1939. In spite of the rate of production of goods being nearly three times greater, wholesale prices more than doubled themselves, rising by 136 per cent during the same period. It is thus clear the villain of the piece is not shortfall of production but excess of money supply.

     To attribute inflation to higher wage demands is also wrong. it would be a fallacious reversing of the cause-and-effect sequence. Higher wage demands are only another name for higher price of labour. All prices rise as a result of the increased supply of money owing to government budget policy, and increase in wage demands is only one example of rising prices, labour being a ‘commodity’ like other commodities for which a price has to be paid. Unless the demand for higher wages is altogether an unreasonable one, not based on higher cost of living, a higher wage demand cannot be included among the inflationary causes.

     When a political party in command of the State spends increased amounts on schemes intended to bring in more votes from particular groups and help to perpetuate its rule, the supply of additional currency to fill the gap caused by increased public expenditure raises the prices of all the goods which the community purchases. The doles and subsidies are given at the cost of those who pay direct and indirect taxes, including the very people who imagine they get special benefits.

     Those whose money-incomes have not been raised by the government are forced to pay higher prices. Previous savings are all reduced in value, wherever they may have been deposited or held. The victims of inflation resent the gain which some sections make as a result of the same inflation. The new distribution of incomes is felt not to be the result of merit or effort but of political favouritism or Speculation. Class and group hatreds increase in consequence. And this is further accentuated by the classes who gain by inflation, spending their gains ostentatiously. The quick and easy gains resulting from inflation tend to increase the indulgence in speculation, display and corruption.

     Inflation is not an evil visitation from without. It is the result of deliberate governmental policy. As a result of inflation, even gilt-edged holdings go down in value, and men are cheated without their knowing it. The U.S. Government today is paying off in dollars worth 47 cents each, what it borrowed in 1940 in 100 cent dollars. The same, or worse, is the case in India where the rupee has fallen nearly five times below the old value.