The century that is now ending had a characteristic that the future may consider to be as notable as its blood- thirstiness. That characteristic was inflation. In two prolonged periods, during the first world war and its aftermath and again in the 1970s and 1980s, the world’s moneys were debauched to a degree that is sure to stick in the historical eye. In the course of the 20th century, even a “strong” money such as sterling lost 98 per cent of its purchasing power.
In the first of the inflations, which was launched by the belligerents in 1914 to finance the Great War, the civilisation of the 19th century – the world of joint-stock investment, triple-decker novels, side-whiskers and bustles and social propriety – came bitterly to grief. Of the second, as we look back from the vantage point of 1999, we can only say that it was an era of blind confusion. From the late 1960s to the summer of 1990, relations between debtor and creditor, indeed all conceptions of value, reward and profit, were so thoroughly confounded that nobody knew what he or she was doing. In the fog of fluctuating values, business people blundered to windfall profits or the bankruptcy court, workers starved or swanned, and the last shreds of independent British influence in the world were dissipated. Nobody, not Wilson nor Callaghan nor Barber nor Healey nor Thatcher nor Lawson nor Lamont, had the faintest clue what he or she was talking about. To dip into the memoirs of that period is like reading some antique manual of alchemy composed by candlelight in the deep countryside in a time of plague.
Since 1990, inflation has been mild. In February, shop prices measured by the retail price index (RPI) rose at a rate of 2.4 per cent a year. (We learn from the Financial Times that malt vinegar, which I was brought up to regard as a necessary supplement to fish and chips, has been displaced from the index of indispensable household goods by exercise bicycles. Next year, no doubt, the RPI will consist exclusively of chanterelles and methadone.) The supermarkets, which after all actually do the retailing, say their prices are going up at a rate of only about 1 per cent a year, with many products falling in price, of which the most striking is butcher’s meat. If the supermarkets cannot conspire to achieve price rises of over 1 per cent, then the weight on prices must surely be heavy.
In the land of the euro, prices are said to be rising by under 1 per cent a year. In the United States, where business is booming, the general increase is about 2 per cent. In Japan and parts of eastern Asia and possibly Switzerland, prices are falling. On a recent visit to Iran, which for domestic reasons still has hyperinflation and where men collect on street corners counting off immense bundles of banknotes, I was baffled by the exotic monetary conditions and had to control myself from gawping like a tourist.
Will inflation, which was the capital experience of the 20th century, come back to haunt the 21st? Or will prices be more or less stable over a long time as in the 19th century? Or will prices fall, God forbid, a condition known as deflation?
Since very few people in this country have experienced a deflation, I should explain what happens. Money, instead of falling in value in relation to commodities for sale, rises in value. People become reluctant to part with money. Businesses cease to invest for they despair of recovering their investment from rock-bottom product prices. Bankers see the value of their loan collateral falling and so cease to lend, which causes the supply of money further to dry up and prices to fall further. Slump and unemployment follow. Farmers and other debtors are ruined while the owners of money, the despised social category known as the rentiers, prosper.
If an inflation is hard to control, a deflation is a runaway horse. In Japan, interest rates are effectively zero. Other people’s money can be used for free and yet nobody will borrow. The Bank of Japan is papering the country with yen and still people will not spend it. Keynes thought that of the two evils, inflation and deflation, “deflation is the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier”.
Speaking generally, all moneys are heading towards worthlessness; the only question is whether they walk or run. The reason for this devaluation is that money can be created much more easily than any other object of value, especially nowadays. Money, which once had to be mined or minted, clipped, debased or counterfeited or printed, is now created at the moment a bank makes a loan.
The chief inflationists are governments, and they debase the money so that their debts, for which they received hard money, can be paid back in worthless paper; it is a form of indiscriminate taxation that needs no parliamentary approval. The first inflation of the century was set in train so that the British, German and French governments could capture the property and labour of their peoples and throw them into bloody battle. The second, in Britain at least, was pursued by both Tory and Labour governments to provide an image or simulacrum of prosperity for all classes so that the country did not need to face up to its new mediocrity in the world.
But great inflations have tended to be followed by great deflations. The Napoleonic wars, when prices often fluctuated by 20 per cent annually, were followed by drastic falls in prices in 1821-22 and then by the long, long summer of the Victorian rentier. British retail prices in 1914 were pretty much what they had been in the year of Waterloo. The Great War inflation gave way in the US, at least, to a wholesale collapse in product prices. Between May 1920 and August 1921, prices in the US fell by 44 per cent. In Britain, prices did not regain their 1920 level until the late 1940s.
The chances of a new inflation seem to me quite small. The British inflation of the 1970s and 1980s was made easier by the wide control the government enjoyed over business and trade, which was a belated legacy of the mobilisation for the second world war. The wartime economy has now been largely dismantled and the Blair government shows no sign of re-erecting it.
Meanwhile, world trade is not exactly prospering. The economies of Japan, Switzerland, Italy, Germany and the UK are either stagnant or shrinking. The impulse to world economic growth comes entirely from the US, which is enjoying the sort of business expansion we associate with backward economies – 6 per cent per year in the last quarter of l998 – yet without prices rising. Equally, just as governments have less control of money, so business people have less control of prices in internationalised markets in which prices, by way of computerised telecommunication, are more and more clearly posted.
Where prices are rising, it tends to be in commodities (first-growth Bordeaux, for example) that have reached the absolute outer limits of their supply. The bizarre notion that a small rise in the price of crude oil – to the average price of last year – heralds a return to the 1970s shows how deeply entrenched are the public’s fears of inflation. In fact, the prices of other basic commodities – copper, scrap, soybeans, gold – are pointing towards deflation.
The reality of the present “low-inflation” environment is actually a moderate but consistent downward pressure on prices and wages brought on from technical advances, as in the 19th century. Technical goods, as far as I can tell from my dreary experience of consumer electronics, halve in price every year as if in a commercial version of Zeno and the tortoise. (I buy cooking oil for my family in ten-litre drums from a young Italian who brings it from his village near Siena, which still operates an oil mill. It used to rise annually in price; for two years it has been the same price and had I the will to exploit the strength of sterling against the euro – which I haven’t – should this year be cheaper.)
For the deflation to spread westward from Japan, we would require a repetition of the Japanese experience in the US; that is, a stock market crash followed by a bank collapse and borrowing strike, political paralysis and a radical loss of faith in all property except money. That is precisely what happened in the world in 1929-32, and we should do well to remember that, and also its consequences. However, I have another prognosis. In an article entitled “The Rentier’s Return”, which I published in the early 1990s, I proposed that prices would be steady or fall slightly for some years; and that would cause the creation in Britain of an idle propertied class of 19th-century character. I advised readers to prepare for that world by buying an antique and long-discredited British government security called Consols, which was certainly the best investment advice ever given gratis by anybody, anywhere, ever.
More generally, I tried to show that stable consumer prices and runaway stock markets were compounding the savings of the British propertied class to the point where it would soon be very, very rich; but even I did not predict that half a decade later the British public would be sitting on two trillion (million million) pounds in financial wealth, net of all its mortgage and other debts. That sum depends on retirement provisions that could be wiped out in a stock-market fall. Yet already Britain has the texture of a rentier society. With our tourism and health fads and obsessions with security and long books and foreign wars and television and spectator sports, we are a nation of premature retirees.
When governments abandon inflation, they are powerless to prevent the creation of perpetual fortunes. For what is a mere government against the alliance of parental love and compound interest? Those who are frustrated by the Blair government’s instant seizure of all that is eye-catching and trivial in a social issue – the hereditary rights of peers, fox-hunting – should not be, because it is understandable and even inevitable: it is difficult even for new Labour openly to admit it has accepted the aristocratic principle. For what it’s worth, I believe the revolutions of the inflation era are coming to an end. British society will congeal around its new rich; and I shall live to see Lords Gallagher and Beckham and Amis -so game at their age, don’t you know – totter down the aisle of St George’s Chapel, Windsor, on Garter Day.
James Buchan’s philosophy of money, “Frozen Desire”, is published by Picador
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