Welcome Back to the 19th Century

By Buchan, James | New Statesman (1996), April 2, 1999 | Go to article overview

Welcome Back to the 19th Century


Buchan, James, New Statesman (1996)


The century that is now ending had a characteristic that the future may consider to be as notable as its bloodthirstiness. 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 mined 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 home. In Japan, interest rates are effectively zero. Other people's money can be used for free and yet nobody will borrow. …

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