ABSTRACT
It is popular nowadays to distinguish between the inflation of time past and a new kind of inflation, which accordingly requires a new explanation, although in its monetary aspects inflation has the same features now as before: rising prices or the diminishing buying power of money. While its opposite, deflation, was viewed as contracted demand resulting in falling prices, inflation was explained by insufficient supply, driving prices up. Since, however, in this view it is the commodity market that determines price formation, little attention was paid to monetary policy. Money was seen merely as a veil concealing real processes, obfuscating them but altering little in their essential nature.This theory was also accompanied by the illusion, still lingering today, that the quantity of money in circulation in the economy has an important influence on commodity prices and that price stability depends on an equilibrium between the quantity of money and the total volume of goods. The modem advocates of the quantity theory of money also attribute deflation and inflation to a too slow or too rapid growth in the supply of money, and as a remedy to these anomalies they propose the creation of money adjusted proportionally to actual economic growth.Thus in money theory the economic cycle is represented as an expansion and contraction of the money supply and of credit not commensurate with the real situation. But it was expected that the equilibrium mechanism of the market would ultimately steer things back to normal. The crisis of the thirties, however, which seemed to have taken hold for good, put an end once and for all to any notions of such an automatic self-establishing equi27
librium. In Keynes’s view, which dominated bourgeois economic theory in the years that followed, the laws of the market were no longer capable of bringing about economic equilibrium with full employment. A developed capitalist economy, claimed Keynes, made for a decline in effective demand and with it a fall-off in investments and growing unemployment. Although this theory was designed specifically to explain economic stagnation during the period between the two world wars, it was quickly given universal status and regarded as the last word in the science of economics; to avoid the deflationary state of the depression and to restore economic equilibrium with full employment, state measures were needed to stimulate overall demand.Central manipulation of the amount of money in circulation and of the amount of credit was not sufficient for such purposes, claimed Keynes. Instead, fiscal means, e.g., deficit financing of public spending and adjustments in the exchange rates, were needed. The inflationary monetary and fiscal policies that such measures entailed would prove to be what was needed to beat the crisis. However, an inflationary course must not lead to a demand that exceeded what the production capacity could supply. It must come to a halt when full employment was achieved in a new price equilibrium.Every capitalist crisis, no matter what its imputed causes, manifests itself in a declining accumulation of capital. The share of social production earmarked for expansion is considerably reduced or even fully eliminated, curtailing total social production in the process. Seen from the restricted view of the market, however, this process appears as overproduction of goods or insufficient demand. The depression that resulted was a deflationary process which affected both prices and production, but which at the same time brought about substantial changes in the economic structure and prepared the way for a new economic boom. The depression became an instrument for overcoming economic crisis, and although not deliberately encouraged, it was passively allowed to run its course.Inflation implied the creation of money by the state, which impaired the price mechanism. This was seen as a violation of the laws of the market, caused not by factors inherent in the economic 28
system but by an arbitrary monetary policy. Inflation was resorted to in order to finance wars beyond what was possible with tax revenue alone or in order to eliminate excess state debts and hence indebtedness in general. However, in economic crisis situations there had been a general reliance on the restorative effects of deflationary depression until the twentieth century.As capital grew it created obstacles to its own further expansion. Its periodic crises became more and more oppressive and persisted long enough to create a real danger that the deflationary process would lead to social upheaval rather than to a new boom. To prevent this from happening, state economic interventions were in order in the great crisis that followed the 1929 crash; their theoretical justification came later. This interventionist policy sought to achieve by inflationary means what seemed no longer attainable by deflationary methods.Following traditional theory, Keynes assumed that the interest rate was dependent on the quantity of money in circulation. An increase in the money supply would decrease the interest rate and spur new investments, which in turn would increase employment and raise prices and profits. Since the state had the power to create more money, it was a matter of government decision whether the way to economic recovery would be through lower interest rates. However, the profitability of capital had already fallen so far that even a reduction in interest rates would not be sufficient stimulus for new investments. It would therefore be necessary to make up for the defective private demand by creating more public demand. However, since an increase in public spending by way of taxation would cut even more into the profits of the private sector, it would have to be financed through state deficits.Deficit financing would increase the amount of money in circulation without necessarily leading to inflation. The technique, of course, was not to print more money, which would depreciate the currency, but merely to expand state credit which would absorb idle private capital and finance the increased public demand. This added demand would, it was expected, stimulate the economy as a whole sufficiently to bring it out of the depression and into a boom, which in turn would enlarge the state’s tax revenue to such a degree that it would be able to pay off its depression-
incurred debts in a new period of prosperity.In the light of bourgeois economic theory, and especially its theory of money, it seemed quite plausible that by increasing the money supply and public demand simultaneously, an interrupted process of accumulation might be set into motion again. The coordinated employment of monetary and fiscal policies would not only counteract the deflationary trend of the crisis, they would in addition initiate a new period of upswing, which although containing inflationary tendencies, need not degenerate into a real inflation as long as unused money and real capital were still available. The specter of inflation would loom only if a new disproportionality arose between the means of payment and commodity production. But this was a real possibility only when full employment was reached, and then it could be combated by state-initiated deflationary policies. In short, it was imagined that a theory and practical policy had finally been found which would place the economic cycle under conscious state control.Bourgeois economics begins and ends with market relations, and hence it can only obliquely touch on the production processes underlying market events. These processes it sees as being determined by demand. In Keynes’s theory it is a relatively declining demand for consumer goods that brings about a decreasing demand for capital goods. Under such conditions further investments can only reduce profits, and for that reason they are not made. The way back to full employment would require, first, improving the profit rate of private capital, and second, filling a chronic lack of investments by state-induced production. In the light of the experience of the great economic crisis, the second of these measures seemed to be a precondition for the first, although it was still not clear whether state-induced demand was a temporary or permanent necessity in a modem market economy. Keynes himself thought that the future of capitalist economy depended on increasing state control.In the bourgeois conception the economy appears as a circular process in which total income must equal total expenditures. It was therefore immaterial what specifically went into total income and total expenditures. The social distribution of income is presumed to be determined by the various contributions of the 30
different factors of production to total production. Since, however, not all income is consumed, the cycle can only really be completed when the saved income is reinvested. The upshot is that state-induced production, regardless of what ends it may serve, is able to reduce or eliminate completely any discrepancy that may arise between total income and total expenditures. But this requires that the state be given the power to dispose of the saved — but not invested — capital. In its hands money capital that was not being used to expand real capital could restore equilibrium to the economic cycle.With this conception the bourgeois world deprives itself of any realistic insight into the economic process in general and into the problem of inflation in particular. Just as it does not distinguish between social production as such and specific capitalist production, so too it does not distinguish between productive and unproductive capitalist production. Any kind of production for which there is a demand on the market enjoys equal status as far as it is concerned, and any kind of demand appearing on the market finds its match in production. It does not distinguish, therefore, between demand created by capitalist production for profit and demand created by public spending. The latter, too, is a demand that private capital can meet with an adequate supply and reap the profits accruing therefrom. The growing state debt aside, the economy is revived by the increased public demand, which in turn has a positive influence on private market demand. The growing amount of money in circulation and expanding income are balanced by an undifferentiated and expanding production on the expenditure side of the ledger, which could partly or wholly eliminate unemployment.The only vulnerable point in this description of events was the growing public debt; for this there is no equivalent in the production sphere, since the additional government demand consists of goods and services that enter public consumption and therewith impede the expansion of real capital in proportion to their magnitude. The mere expansion of production without a proportional increase in profit is equivalent to a partial destruction of capital, since some of the capital used ceases to be productive, i.e., ceases to produce additional capital.
