The price and wage spiral…

…is a very common explanation of inflation. The reasoning goes like this: Prices are rising. (Why are they rising? Because of the businessmen’s greed, of course!). Now the workers (usually though their unions) demand and get compensation for this, so wages rise as well. Now, there will be too little money in the economy to catch up with the rising prices and wages, so the government and the central bank step in and print more money. But now (presumably again because of businessmen’s greed) prices will rise again, and the process is repeated; and then this goes on and on.

I hardly have to tell you what is wrong with this theory – after all, only people with some common sense read this blog. But I cannot resist quoting what Rudolf Havenstein, then head of the German Reichsbank, said in a speech in August 1923, at the height of the German hyperinflation:

The wholly extraordinary depreciation of the mark has naturally created a rapidly increasing demand for additional currency, which the Reichsbank has not always been able fully to satisfy. A simplified production of notes enabled us to bring ever greater amounts into circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the means of payment, which has just recently attained an absolutely fantastic level, especially as a result of the extraordinary increases in wages and salaries.

The running of the Reichsbank’s note-printing organization, which has become absolutely enormous, is making the most extreme demands on our personnel. (Quoted by Murray Rothbard in The Mystery of Banking, p. 73.)

A similar (but fictional) speech can be found in a play called Exit the Dragon:

Another thing: as the use of energy is curtailed, commodities become more scarce and luxury goods should disappear altogether, leaving more ample room for the bare necessities of life. Now, in order to get those necessities, people need money. Money is the one thing that must never be scarce. It is obvious that the less energy a shoe factory can consume, the fewer shoes it can produce, the more expensive become those shoes, and the more money people will need to buy them. The Government has therefore adopted the tenets of monetarism, but with the important proviso that the money supply must at all times be sufficient for everybody to buy everything he needs. This policy is still in its beginning stages, but you have already seen a foreshadowing of its results in an unprecedented rise in the general wage level.

But this, too, is threatened by the emergence of a motley of counterfeit money: gold coins, silver coins, precious stones, sea-shells, glass beads, old stamps, even screws and nails are sometimes used as media of exchange. Whence do they come? The Government does not mint; it prints. Again, the answer is to be found on the Black Market. This so-called money has to be managed by a group of very irresponsible men, in­deed!

Now we are just waiting for a similar speech by Ben Bernanke.

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One Response to The price and wage spiral…

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