The Legacy of Inflation
and Land Monopoly

Vic H. Blundell

[A paper presented at the 15th International Conference on Land-Value Taxation
and Free Trade, Utrecht, Holland, July 1982]


Inflation has been at the centre of economic and political discussions over the last thirty years or so. Not just inflation itself but all the economic and social problems that it has generated. The main problems -- unemployment and industrial depression -- that inflation of the currency set out to solve in the name of John Maynard Keynes are not only still with us but are as bad as ever they were in pre-Keynesian times.

Keynesian economics has come under increasing attack in recent years and what the now enlightened economists and politicians offer us as ah alternative gives little hope that either the original problem or those that accompanied it will be solved.

Monetary inflation and its consequences are simple enough to understand if one does not get side-tracked up the monetary motor-ways designated Ml, M2, M3 etc. or led through the winding country lanes of credit creation. And as for the direct and indirect effects of inflation, these have many faces; they often appear as separate and distinct problems and the attempt to deal with these spawns still more problems which also appear to have an independent life.

This paper will attempt to look at the trend of economic and political thinking in the United Kingdom since the end of the 1939-45 war as it relates specifically to inflation, unemployment, the problems that flowed from the "remedy", and what may be called the application of Keynesian economics known as Demand Management. It will then look at the situation today and the current economic controversies.

Let me first make it clear that in using the term inflation I shall stick to the original meaning of the word, defined in the Concise Oxford Dictionary as follows:

"INFLATE: (finance) resort to inflation of the currency, raise price artificially) so INFLATION, abnormal increase of the currency, e.g. by the issue of inconvertible legal-tender notes.".

I shall disregard the corrupted meaning of the word inflation, which is now used without qualification to mean any increases in the price of goods and services however caused. These include taxes, the price of oil, and wage increases, which give rise to such semantic absurdities as "price inflation", "cost inflation" and "wage inflation", which merely describe the symptoms of inflation or independent causes of price increases.

Inflation is a purely monetary phenomenon, and I shall conform to the logical proposition that, while all inflation causes increases in prices, not all increases in prices are caused by inflation. The distinction is important because, if we are seeking an explanation of rising prices, we must look to more than one cause to identify the culprit.

No one under the age of fifty today is likely to remember what it is like to live in a society that has a stable currency. Yet after the inflation that took place during the 1914-18 war, we returned to a stable currency that lasted for sixteen years (1923 to 1939). During this period, wage rates as well as prices were stable and we had retailers who established and maintained their businesses on fixed retail prices. Among these were Woolworth's 3d and 6d Stores, The Fifty-Shilling Tailors, The Five-Shilling Shirt Company and the well known Penguin Publishers of paperbacks whose books remained at sixpence for the eight years prior to 1939.

After the (comparatively) mild inflation during the Second World War, it was feared that, if once again a return was made to a stable currency, the economic impetus for recovery would be slowed because, with military spending being very substantially reduced, the unemployment of the 20s and 3Os would be with us again. Such spending would have to be replaced by individual spending. Demand in the economy had to be maintained and it could be done, said the disciples of Keynes (who published his General Theory in 1936), by what is known as "deficit spending", "creating demand", "demand management" -- or, to abandon the euphemisms, debasing the currency, inflating the currency or quite simply printing money.

They saw the unemployed as a residue of workless people who would never get jobs until total spending was increased. The expanded money supply would stimulate demand and thus jobs.

Keynes knew the dangers of runaway inflation as well as anyone, indeed, in 1923 he wrote a tract (See Appendix 1) in which he explained quite clearly the nature and consequences of inflation. But like gamblers, alcoholics and drug takers, the disciples thought they knew just "how far to go" and how to reverse the process when the economy required it. Keynes's increased money supply would, by increasing the demand for goods on a multiplier principle, mop up the existing unemployment and no more. While inflation was running at between three and five per cent per annum, as it did through the fifties and early sixties, the people learned to live with it -- particularly as wages tended to increase each year in line with the fall in the value of money.

This policy was all part of Keynes's "demand management" and it included government manipulation of demand by various fiscal and other policies. These policies were almost universally accepted and endorsed by the press, economists and politicians alike, the U.S. matching Britain in theory, if not in such large practice. Economic management by the government was here to stay, or as President Nixon put it, "We are all Keynesians now".

There were, right from the beginning a few dissidents, who included Milton Friedman, Friedrich von Hayek, Henry Hazlitt and of course ourselves (although not for precisely the same reasons). Text books taught Keynes's theories as though they were Holy Writ and many were the variations on the theme, including some that even Keynes himself would have disowned.


It was not until the early seventies that the whole concept began to be questioned. Things had simply not worked out as planned. Government stimulation of demand via the printing press was not only not producing the expected results, it was producing unexpected results. These were treated at first as mere local difficulties but they developed into a whole series of government measures to counter the inevitable effects of inflationary policy. These measures began with a fairly successful attempt to put the blame for inflation on to excessive wage increases. So we had the "pay pause" of Selwyn Lloyd, followed by a continued "prices and incomes policy". These incomes policies were continued throughout the late sixties and the seventies under various other names calculated to sound like new policies, so we had "wage restraint", "declaration of intent" (to keep wages down) and the "social contract" (or "compact" as the unions called it). When the Labour Party was in power there was much cooperation with the trades unions, who were conned into accepting that excessive wage settlements caused, or at least contributed to, inflation. During this period -- indeed up to the time of Mrs. Thatcher's government -- the stop-go policies became a feature of fiscal policy because when they stopped, or slowed down, the rate of monetary inflation, unemployment began to rise and production fall. This was countered by a new injection of "demand" until the warning signals of faster rising prices indicated a slowing-down was again necessary. Thus developed the stop-go language of "a touch of the tiller", "overheated economy", "easing of the throttle", "a touch of the brake", etc.

Meanwhile this was playing ducks and drakes with exchange rates and interest rates so that these in turn had to be controlled or manipulated. This was followed by import surcharges and a whole paraphernalia of controls and schemes designed to counter the effects of previous interventionist policies. Even when the pound was set free to find its own value in the world market the government continued to interfere with exchange rates by what has become known as "dirty floating".

This is not a strict chronicle of economic events but rather a broad survey of the period under discussion, but it is interesting to note that from the early 1950s right up to 1979, when the Wilson/Callaghan Government ended and Mrs. Thatcher's Conservative Government took over, there was little if any difference in the fundamental approach to the "management of the economy". Both parties were interventionist and Edward Heath presided over one of the biggest bursts of inflation the country has known, despite his virtuous intentions upon taking office.

Roy Harrod in his Life of John Maynard Keynes says:

"The history of economic science has largely been the history of the formation of appropriate concepts. Our thinking about economic matters was revolutionised, for instance, when it was pointed out that all the multifarious costs of production could be grouped exhaustively under the three heads of land, labour and capital. This made immense progress possible, and the whole of classical economics was based upon this classificatory improvement."

This was ignored. Land was rarely, if ever, mentioned in the economic debates. The three factors of production had become labour, capital and credit or, to listen to many politicians, government, unions and employers.


This was the background against which Mrs. Thatcher's Conservative Government came to power. A break with past policies was her avowed aim. Expansion of the money supply was to come to an end and a stable currency achieved. This, with free market policies (including a free market in wage bargaining), reductions in direct taxation, cuts in public expenditure, withdrawal of support for lame ducks in industry, lower interest rates and less state intervention in the economy was to bring stability and prosperity to Britain. Though there was to be no incomes policy as such, the Conservatives persisted in the idea that lower pay settlements were a necessary factor in the reduction of inflation. Mrs. Thatcher and her supporters returned to the pre-Keynesian notion that full employment depended upon the workers accepting lower wages.

The idea that high wage settlements caused inflation or aggravated it was encouraged, perhaps because it was a weapon to be used in getting workers to keep their wage demands down. The notion persists today, even among the workers themselves, that high wages lead to inflation and not the reverse (See Appendix II).

The motivation for government debasement of the currency during the two world wars had some political and economic justification - more political, perhaps, than economic, since the additional money required could have been raised by taxation. Wars are paid for out of a country's production or a friendly country's production. Money is the medium used to acquire this production (and this money is raised partly through taxation, partly through borrowing and the rest by currency debasement).

The motivation of governments in peace time has simply been either to cover budget deficits or, where rulers are despots, to satisfy a desire for extravagance. And of course debasement of the currency, whether by the adulteration of the precious metals of exchange or by increasing the supply of promises to pay, goes far back into ancient history.

The Keynesian motive was basically different as we have seen. Nonetheless debasement of the currency, for whatever reason, does not put more spending power into the hands of government beyond that raised by current taxation or borrowing and this extra spending power is a bonus which Keynesian governments are free to spend on "extras" if their budget is already in balance. Once governments have tailored their political promises to absorb these bonuses, by spending on extended welfare measures giving subsidies to ailing industries and support to nationalised loss-making industries, it is difficult to withdraw this largesse when, by virtue of sound money policy, the money becomes no longer available. This is only one of the problems of attempting to return to a sound currency that Mrs. Thatcher faced and still faces -- note the uproar over government "cuts" when the Government is not actually cutting down on state expenditure but is merely not increasing it so fast!

The Conservative Government has now been in power for three years and, although it inherited a 10 per cent inflation rate, there was more inflation in the pipeline bequeathed and generated by the last socialist government. After rising to around the 15 per cent mark, the figure is now back to 1O per cent again. But interest rates are still high, and there are three million unemployed.

Has the pursuit of prosperity via Mrs. Thatcher's "Monetarism" failed? The Opposition Labour Party is quite certain that it has. So are the Liberal Party and the new Social Democratic Party (SDP). But these are not the only critics of Mrs. Thatcher's policies. Within her own party, there are the so-called 'wets" who have been urging a "U-turn" back to the old discredited policies of the last three decades. Mrs. Thatcher's Conservative critics want a large injection of money into the economy "to get things going again". The Liberals and SDP want the same thing but more of it and the Labour Party want more still. There are, however, some critics within the Government who consider Mrs. Thatcher's policies too mild and urge more stringent measures. They condemned the Government for pouring money into British Steel and British Leyland, and for conceding too much to the public sector.


It is not the purpose of this short paper to cover all the ramifications of the economic policies that are currently being debated, nor to discuss the implications of interest rates, Government borrowing, trades unions1 policies, make-work schemes, Budget policy, trade figures, the value of the pound or the price of oil. But broadly, here are the different proposals of those who oppose Mrs. Thatcher's policies and of those who support them.

The opposition think the Government should spend more not less; there is no self-correcting mechanism in the economy, they say, and the Government must intervene at all levels to restore competitiveness. It must boost industry by tax cuts and engage in selected public-spending projects. Further, it should seek the cooperation of the unions and adopt an incomes policy or a wage-inflation tax that would penalise firms who granted claims beyond the norm.

Those who support the Government's policies point to the failure of Keynesian policies. They argue that unemployment was rising fast during the 70s despite the fourfold increase in expenditure in money terms. The recession cannot be blamed on to the Government, they say, because the slump is worldwide, and the price of oil has contributed significantly to the recession. The employers' national insurance charge, which is a tax on employment, should be abolished to help employers to engage more labour. The abolition or substantial reduction of value-added tax and the lowering of real wages would help to reduce employers' costs. This in turn would lead to higher output and eventually to the employment of more labour. Cuts in public expenditure must be persisted in if the money supply is to be kept under control. More financial aid and financial service should be given to small firms. Reductions should be made in taxation, and changes in its incidence. And finally firm control on the public sector borrowing requirement should be exercised.

To remain strictly within the context of the current economic discussion (which either ignores land as a factor of production or regards it simply as a form of capital) Mrs. Thatcher's purely monetary policies are right only to the extent that they have been applied -- and that is very little.


On the academic side the new "in phrase" is "supply-side economics" which describes Mrs. Thatcher's economic philosophy. It is anti-interventionist and classical economy theory with a new jacket. It comes with the various modifications that happen to suit the particular economist expounding the theory. In general terms, supply-side economics relies on incentives and Adam Smith's "invisible hand" to manage economic activity -- with the aid of a shove or two from the government in the field of taxation. Cutting taxes is an important part of the philosophy as this provides incentives for production. The supply-side programme aims to reduce government-inspired demand and replace it with consumer demand, so that "growth" becomes industry's business and not government business. Under this laissez-faire scheme of things, those who fall by the wayside - the deserving and the undeserving poor -- will be taken care of by welfare, and of course some of the now low-income workers will benefit from the crumbs that fall from the more heavily-laden tables of the rich.

No mention is made of the part monopolies play in the "new" philosophy nor of course of land.

However, this being said, the supply->side economic philosophy, if carried to its logical conclusion and interpreted correctly, can provide the real answer to our economic and social malaise. The theory emphasises the role of supply rather than that of demand. It is the inputs that give rise to the outputs. Say's law (criticised by Keynes), that supply creates its own equivalent demand, was supplanted by the theory that demand comes first and causes supply. Plausible as this may sound to some, this is not so. Supply may indeed follow demand but that demand roust be effective demand, i.e. backed by prior production in the first place. A trader will not respond to demand for his goods unless something already produced is offered in exchange. The simple illustration of barter confirms this point. The use of money does not change things -- that is until paper money, the normal evidence of prior production in the hand of the spender, is specially manufactured and offered in exchange without prior production having taken place. The very nature of Keynesian theory is that it creates artificial demand, the long-term response to which is not more production but higher prices. The new money competes for the goods and services available. One may well now ask: What is the very first prerequisite to production of any kind? The answer will be land. This is where production begins and where supply starts. Anything that inhibits the use of land inhibits supply. This forgotten, ignored or deliberately obscured self-evident truth is the Achilles heel of supply-side economics as expounded today.

Harold Rose, Visiting Professor of Finance, London Business School, in an essay[1] which discusses Mrs. Thatcher's policies, writes:

"We might by now have been seeing a revival of private buildings for renting. Total housing building in Britain in recent years accounted for a smaller share of capital formation and gross domestic production than in other major industrial countries. Rent and other controls are responsible for reducing the elasticity of supply in housing in Britain, and tax incentives to home ownership are partly dissipated in rising land prices." (My italics)

The inadequacies of supply-side economics as currently presented have been demonstrated again and again in the post-war economies of the Western world. You do not need the absence of Keynesian policies to put it to the test. That this is so was admitted by two economists participating in a symposium on supply-side economics last year.[2] Irving Kristol, co-editor of The Public Interest, a scholarly U.S. journal, commented:

"I don't think anyone ever claimed supply-side economics in and of itself is a solution to inflation. If the government wants to inflate, it can still do so even if it adopts supply-side policies."

And Dr. Arthur Laffer, professor of economics at the University of Southern California:

"As far as I can tell there is nothing libertarian about the supply-side program. It can be run as a state enterprise just as well as a private enterprise."

"A supply-side programme", if not actually run by state enterprise, can at least be promoted, encouraged and sustained by government intervention as part of the supply-side philosophy. So we have the (local) tax-free and planning-free "enterprise zones" (which sent up land values within them immediately), and aids to industry extended (as announced by the Government on May 6 1982). These have increased from 25 per cent to 33 1/3 per cent, the aid for research and development projects costing up to E26O million a year. An example of this kind of government assistance can be found in newspaper advertisements as follows:

"Any company going places could grab all this for a start:
  • A new factory which can be rent/rate free initially.
  • Heavily subsidised workforce training
  • Consultancy study for your project.
  • Substantial government grants.
  • Loans at reduced rates.
  • Flexible services and support."

It is argued that the Budget must be balanced by raising taxes instead of relying upon monetary expansion which inhibits economic growth in the long run. Further, that such taxes should not discourage production. However the one tax that would positively encourage production is ignored and this is the weakness in the whole supply-side argument as at present propounded, for while workers and capitalists lose by inaction, land-owners are actually able to gain by it and only a substantial land-value tax can reverse their incentive.

The taxes that fall on the rent of land have not merely a different effect from those that fall on production, they have the opposite effect.

There is no need to spell out here the arguments with which we are all familiar. Supply-side economics, though right in conception, is not fully understood. It is all very well for the supply-siders to sneer at Keynes and quote him as saying that government and business were too often guided by the "writings of some defunct scribbler", and that Keynes himself is now that defunct scribbler. It is one thing to back-track from the wrong road - another to find the right one.

Keynesianism has failed by producing alarming inflation with equally alarming unemployment. A return to a stable currency (if it can be achieved) will only bring us back to square one where we were in the 2Os and 3Os and where Keynes began. And a supply-side programme is no real substitute for a Keynesian programme as long as its catalyst - land - is left out of the formula.


[1] Radical Intention, Conservative Performance, in a collection of essays entitled Could Do Better, I.E.A., London l982.

[2] Organised by the Morgan Guaranty Trust Company, New York and reported in Economic Impact No. 37, 1982.


(From a Tract on Monetary Reform by John Maynard Keynes, Fellow of Kings College, Cambridge. Macmillan 1923.)

A government can live for a long time by printing paper money. That is to say, it can by this means secure the command over real resources - resources just as real as those obtained by taxation. The method is condemned, but its efficacy, up to a point, must be admitted. A government can live by this means when it can live by no other. It is the form of taxation that the public finds hardest to evade and which even the weakest government can enforce when it can enforce nothing else. Of this character have been the progressive and catastrophic inflations practised in Central and Eastern Europe, as distinguished from the limited and oscillatory inflation experienced, for example, in Great Britain and the United States.

The Quantity Theory of Money states that the amount of cash that the community requires, assuming certain habits of business and of banking to be established, and assuming also a given level and distribution of wealth, depends on the level of prices. The aggregate real value of all the paper money in circulation remains more or less the same, irrespective of the number of units of it in circulation, provided the habits and prosperity of the people are not changed, i0e. the community retains in the shape of cash the command over a more or less constant amount of real wealth, which is the same thing as saying that the total quantity of money in circulation has a more or less fixed purchasing power.

Inflation in Germany

The collapse of the currency in Germany, which was the chief contributory cause to the fall of Dr. Cuno's government in August 1923, was due not so much to taxing by inflation -- for that had been going on for years -- as to an increase in the rate of inflation to a level almost prohibitive for daily transactions and quite destructive of the legal-tender money as a unit of account. What concerns the use of money in the retail transactions of daily life is the rate of depreciation, rather than the absolute amount of depreciation as compared with some earlier date.

It is common to speak as though when a government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer duty or an income tax. What a government spends the public pays for. There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the people, for a time at least, by giving them in return for the taxes they pay finely engraved acknowledgements on water-marked paper.



Inflation and Wages

In spite of the repeated assertion by some economists and some politicians that higher wages lead to inflation, this is not so and a simple illustration will establish the point.

According to the "wage inflation" or cost-push theory, an inflationary wage/price spiral can be caused simply by each section of workers in turn demanding and receiving a wage increase.

Let us take a simplified example. Suppose that at the beginning of the spiral, the general rate of wages for workers was £100 per week and that after all workers in the community had had their wages increased, this figure was now £150 per week. Pay packets which previously contained £100 in notes now contain £150 in notes. If wages were paid through a bank or by cheque, wage earners would still have a claim on the extra £50 of money to draw on for their weekly or monthly expenditure.

The question now is: where does this extra money come from? 50 per cent more is now required to do the job. The extra money has been put into circulation "in response to demand" says the exponent of "wage inflation". But how? Employers are not able to demand money from their banks as though it were a gift from the Treasury. The Bank of England does not hand out cash to industry simply in response to "demand" while receiving nothing in return. Put simply, the government does not give money away. Nor can the commercial banks ask the Bank of England for money for nothing, to give to their customers for nothing.

If then, there is no increase in the money supply, it is quite impossible for all wage earners to have a £50 increase -- the money is simply not there to be had! Wage increases, whether excessive or mild, within the confines of an undiluted currency, can be obtained only by others having less. But, it may be argued, it has happened; wage earners have had and are continually having more money in their wage packets. And of course they are. But to get a real picture of the process we must reverse the spurious reasoning that leads us to the apparent contradiction. Since wage increases in themselves cannot force or produce an increase in the supply of actual money to pay for them, the only explanation is that the money supply was increased first through government action, and spent into circulation by the government. (See Table of increases in money supply.) The presence of this new money in the community - "too much money chasing too few goods" - causes prices to rise and then wages. Now the money is there to pay higher paper wages but not of course higher real wages.

Finally let us take another look at the situation we have described as impossible, i.e. higher wages all round without an increase in the money supply.

When a group of workers gets an increase in wages, where can and does the money come from? The answer is from other workers by way of higher prices paid for the goods or services supplied. The employer simply passes the increases on to his customers. Clearly, however, if people have to pay more for some goods or services they must spend less on others. In short, there is competition for the fixed amount of money in circulation. They cannot all have it. The strongest will win but in many instances the demand for the higher priced goods and services will decline and unemployment will follow. Many workers who sought a bigger share in the cake will have priced themselves out of a job.

Put another way, if everyone is seeking a wage increase and the money is not there except by taking from others, prices cannot be forced up as the relationship of total money to goods will not have been changed, the demand (money) remaining at equilibrium with supply (goods and services).

Eventually, prices and wages will settle to an equilibrium because a wage/price spiral without monetary inflation is impossible.

The original text includes a chart listing the quantity of notes in circulation unbacked by gold (i.e., Fiduciary issue) from 1939 thru May 1982, adjusted using 1938 as the base year value of the pound.

Note that in the United Kingdom prices are now twenty times what they were in 1938 and that the money in circulation is likewise twenty times what it was in 1938.

The Counter-Revolution in Monetary Theory
Milton Friedman

"The basic idea of the quantity theory, that there is a relation between the quantity of money on the one hand and prices on the other, is surely one of the oldest ideas in economics. It goes back thousands of years. But it is one thing to express this idea in general terms. It is another thing to introduce system into the relation between money on the one hand and prices and other magnitudes on the other. …This equation (MV*PT, money multiplied by the volume of transactions), every college student of economics used to have to learn, then for a time did not, and now, as the counter-revolution has progressed, must learn again."