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,
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
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
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
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
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
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.
THE CONSEQUENCES OF KEYNESIANISM
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
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
THE RETREAT FROM KEYNESIANISM
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
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
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
THE CURRENT DEBATE
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 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."
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.
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
And Dr. Arthur Laffer, professor of economics at the University of
"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
- 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
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.
NOTES AND REFERENCES
 Radical Intention, Conservative Performance, in a collection of
Could Do Better, I.E.A., London l982.
 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
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
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
"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."