Socialist Studies Socialist Studies

Socialist Party of Great Britain - Capitalism In Crisis - Quantitative Easing, Keynes and Hyper-inflation.

Quantitative Easing: Another Failed Policy

The Bank of England has sought approval from the Treasury for a series of measures to increase the supply of money in the economy in the hope that this will make it easier for the commercial banks to start to increase their lending levels.

As with all past economic policies enacted either to prevent the anarchy and subsequent destructiveness of the trade crises and depression or as an attempt smooth out its consequences, “quantitative easing” will prove equally ineffectual.

There is no obligation for banks to lend and they can keep on hoarding money. Even if banks started to lend again to borrowers it will not stop the economic depression taking its course with further bankruptcies and unemployment in the future.

Anthony Hilton, the economic journalist stated that the Government looks like it’s making up its policy as it goes along. He stated what the current economic reality is just now:

It does mean bankruptcy and not just bankruptcy for small firms you have never heard of, but big household names, some with a presence on every high street. People will see their homes and house builders will go bust. Many weaker brands will have vanished from supermarket shelves in 12 months’ time. Some of the biggest names in commercial property will disappear. More airlines will collapse and probably some train companies. There will be more consolidation in the media” (Never mind Sir Fred’s pension, how is Gordon going to save us now?” EVENING STANDARD 03.03.2009)

The policy of quantitative easing was first tried in the 1930s by the US Federal Reserve and did not work then. The depression in the US only really ended with the country entering the Second World War in 1942. And the same policy was used in Japan in the 1990’s when every other economic policy had failed.

To show how desperate economists are in trying to cope with a trade depression it should be recalled that Ben Bernanke, the chairman of the Federal Reserve, won the nickname 'helicopter Ben' when he floated Milton Friedman’s idea of governments dropping large amounts of cash out of helicopters for the public to pick up and spend.

Friedman, with a penchant for dictatorships, spent the latter years of his life advising the Chinese government in its economic reforms with a promise of a stable, crisis free capitalism. China is now beset with serious economic problems.

Since the beginning of the economic crisis of 2008, the Chinese government has tried to ascertain the number of unemployed workers particularly migrants from the villages to the towns. A survey conducted by the Ministry of agriculture estimated that out of 130 million migrants, 20 million were jobless. Another study by the national Bureau of statistics raised China’s migrant population to 140 million. It further claimed that around 23 million were searching for employment (

The trade cycle is the consequence of commodity production and exchange for profit reflecting the in-built contradictions acting upon capital accumulation. Eventually trade depressions give-way to an up-turn in economic activity and period of heightened activity only then for the trade cycle to repeat itself again in a crisis.

As Marx stated:

capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation (WAGES PRICE AND PROFIT in SW1, p. 440).

One of the reasons why money and banking in particular has fallen into utter disrepute is the complete lack of understanding by politicians and economists of what constitutes money. They hold definitions of money which includes bank deposits; they believe in a “creation theory of credit” where wealth is assumed to be created at the stroke of a banker’s pen; and they believe the Bank of England can control the trade cycle through the interest rate mechanism. Since the 1920’s monetary policy in capitalism has been in an economic mental institution.

The Government, the Treasury, the Bank of England, their economists and their economic policies cannot change the way capitalism operates and the economic and social problems the anarchy of commodity production causes.

The capitalist economy controls politicians and economic policy not the other way around.

Resurrecting Keynes

With the failure of monetarism to arrest both the banking crisis and the current trade depression Keynes has come back into fashion.

Keynes was last in vogue in the 1970’s. It was the failure of Keynesian policies then to prevent the rise of both unemployment and prices that led James Callaghan’s Labour Government to embrace the equally fallacious doctrine of Monetarism.

Inflationary policy has been associated with Keynes. It is incorrect. Keynes once said that “it is better to be roughly right rather than precisely wrong” (THE LIFE OF JOHN MAYNARD KEYNES R. F. Harrod 1951).

When Keynes declared that it was no longer necessary “to watch and to control the creation of currency” (taken from E. Cannan, Currency or Limitations of Credit, THE ECONOMIC JOURNAL, March 1924 pp. 52-64) he was precisely wrong.

However, Keynes did not advocate the kind of continuous and massive inflation that has taken place since his death. In this he would have been “roughly right”. He would have opposed inflation as a policy had he lived.

For example in 1919 he wrote about Lenin's supposed statement that debauching its currency was the best way to destroy a capitalist society.

Ironically Keynes was to write

"Lenin was certainly right. There is no subtler, no surer way to overturn the existing basis of society to than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner, which not one man in a million is able to diagnose. THE ECONOMIC CONSEQUENCES OF THE PEACE (1919)

What he did advocate was that in a situation of falling trade when capitalists have to cut their costs, trade unions would resist any reduction of money wages.

So he advocated a short period of inflation, on the assumption that the trade unions would tolerate some rise in prices without pressing for higher wages.

In fact, what has happened in the current depression is that some trade unions and workers have voluntarily taken wage cuts, gone of short time working or taken enforced “holidays”.

Keynes in the 1920’s, though, completely understood and accepted the Marxist view that an excess issue of an inconvertible paper currency puts up prices. There is no evidence that he ever changed his mind.

What he did hold was that there is no need to have formal control over the note issue provided that government controlled “credit”.

A basic fallacy of the Keynesians, in and out of the Labour Government, is that they do not face up to the fact that the government cannot increase government expenditure (which Keynes advocated as a means of causing an expansion of the economy) without getting the money from somewhere.

Our late comrade Hardy (Edgar Hardcastle) often asked Keynesians in debate and in correspondence where the additional government revenues were to come from and he received several different answers.

First, they said additional government revenues could come from increased taxation. But, obviously, if you raise more money by taxation it enables the government to spend more but it reduces the spending power of the people who have to pay the increased taxes.

Second, they replied that the revenue could be obtained by selling government securities to investors. But this also reduces the ability of investors to spend just like increased taxation.

Third, they stated that the revenue could come by the government borrowing from the banks by selling treasury bills. But to pay for these Treasury Bills the banks have to call in loans they have made in the money market. The money market then has a traditional “right” to go to Threadneedle Street and to borrow from the Bank of England.

Remember that when the Government borrows from the banks it spends the money, thus increasing the bank balances of companies and individuals unlike what happens when the Government increases taxation and spends that money.

Some of these increased bank balances are withdrawn from the Bank of England in cash, so the Bank correspondingly prints more notes to meet the increased demand. So it ends up with an increase note issue.

It is just the same as if the Government cuts out the intervening stage of borrowing from the banks and directly prints more notes and spends them. All additions to the note issue are credited to the government account at the Bank of England. It is a form of non-tax government revenue which costs only the cost of printing the notes.

What of the Monetarists in and out of the Tory Party? It is a basic principle of the monetarists that they flatly deny that printing more notes has any affect whatsoever in raising prices (Unlike Keynes).

When the Monetarists say “we are not printing money” they do not mean “not printing notes” (which they think has no effect on prices). Of course they are wrong. They mean “not selling Treasury Bills to the banks” which they do think effects prices.

If, however, the government raises all its revenue by taxation (a balanced budget) the mechanism through which additional notes get into circulation ceases because the Government then does not need to borrow from the banks. But that precludes the Keynesian “expansion” policy pursued by the Brown Government.

Of course, the Keynesian “remedy” does not work; it simply produces inflation and does not create “Full Employment”. In the history of capitalism, as Marx explained, periods of good trade and low unemployment alternate with periods of bad trade and high unemployment.

In fact Quantitative Easing is in many respects an admission by the Bank of England and the Treasury, like the Japanese government of the 1990’s that they have run out of policy options. Or as one econo0mic journalist put it “throwing the kitchen sink at the problem”. The experience of all past crises and depressions is that Governments are ineffectual. However, as Benjamin Franklin once wrote “experience runs an expensive school, but fools will learn in no other

What of the fools? They are busy penning articles along the lines of “As capitalism stares into the abyss, was Marx right all along” (Stephen King, INDEPENDENT 02.03.08).

Mr King, director of economics at hsbc wrote that:

We’re facing a collapse on a truly Marxist scale. It is difficult to imagine the world’s love affair with free markets being sustained under this onslaught. The extreme nature of this down-turn will change our lives for decades to come”.

It is noticeable that in his article all his quotations from Marx came from the COMMUNIST MANIFESTO. If Mr King really wanted to understand Marx he should have read CAPITAL where he would have read a sound account of money and inflation rather than the fictional account taught by the Monetarists and published weekly in magazines like the ECONOMIST. And Marx never held a collapse theory of capitalism. He summed it up with the words “There are no permanent crises” (THEORIES OF SURPLUS VALUE Vo II Part 2 p 269).

The Socialist case against capitalism is neither the existence of periodic high unemployment per se nor the recurrence of crises and trade depressions but the fact that the working class does not own the means of production and, as a consequence, they are exploited by the capitalist class by producing more wealth than they receive in wages and salaries.

Obviously, if mass unemployment does force the working class to question capitalism and consciously and politically seek a Socialist alternative then they would have learnt a hard lesson from experience. There have been numerous economic crises since the 1820’s but the working class still refuse to free themselves from the capitalist class.

And this brings us on to the relationship of governments in the volume of currency in the economy. Inflation is caused by governments continually printing and putting into circulation more money than is needed for trade. It is governments which debase currency. Money under such conditions, as Marx put it, would be in “danger of becoming universally discredited” (CAPITAL VOLUME I ch. 3 Penguin ed. p. 225). In short nobody would want to hold or receive the money.

And such occurrences can pertain under conditions of hyperinflation.

Discredited Currencies and Hyperinflation

Weimar Germany experienced hyperinflation in 1923. When hyperinflation took hold in Germany prices went up quicker than people could spend their money.

In 1922, a loaf of bread cost 163 marks. By September 1923, this figure had reached 1,500,000 marks and at the peak of hyperinflation, November 1923, a loaf of bread cost 200,000,000,000 marks. By December 1923 unemployment had risen to 30% of workers registered as unemployed with 42% on short time.

The impact of hyperinflation was devastating. There was social chaos. Workers were paid by the hour and rushed out of their places of employment to pass wages and salaries to their families so that it could be spent before its depressed value meant it was worthless. Workers also had had to shop with wheel barrows full of money.

Bartering became common - exchanging one commodity for another commodity but not accepting money for it. The elderly on fixed incomes suffered as pensions became worthless.

Restaurants did not print menus because by the time the food arrived the price had gone up! In the winter of 1923 many workers lived in freezing conditions burning furniture to get some heat.

Not all suffered. The very rich suffered least because they had sufficient wealth to get food and other necessaries while the land owners could produce food on their own estates.

The group that suffered a great deal - proportional to their income – was the more well-off workers. Their savings disappeared overnight and many became pauperized. It is not surprising that many of these non-socialist workers, who suffered the social consequences of hyper-inflation in 1923 and mass unemployment in 1930, were to turn to Hitler and the National Socialists.

In conclusion, Keynes said that “ideas shape the course of history” (loc.cit). In many respects he was right. Socialist ideas can shape the course of history but only if they are reflected in the conscious and political action of a socialist majority.

Back to top

Socialist Studies

email: |