The present day inflation is an economic expression of a social phenomenon. The gradual erosion of currency value arises from a more fundamental shift in social values resulting in changes in economic behavior. The cause is rooted in the deeper layers of the social fabric and expresses on the surface in economic terms.
Money is a symbol for time, energy, and materials with no intrinsic value of its own. It is a social convention for expressing the relative value of these different factors in common terms. Yet it has acquired a primary economic value of its own by virtue of its power to stimulate trade facilitating conversion of one commodity into another, its ease of transport compared with the cost of hauling products for direct exchange, its capacity for storage or savings without deterioration. It also derives economic value from its capacity to be lent, utilized by others, and returned in its original form which expresses as the interest rate; and from its role as a factor of production and a means for consumption.
At a deeper level the value of currency depends on the public’s willingness to accept it in exchange for goods and services based on their confidence that others will accept it in exchange for their goods and services at the same rate in future. Closely related is the value issuing from its relative scarcity, and it is this characteristic more than any other which lends to money the appearance of a commodity with an inherent value of its own.
From these characteristics or powers of money are derived the various theories and explanations of inflation. The monetarists focus on factors which affect the quantum of money and its velocity. The Keynesians emphasize the dependence of prices on the supply and demand for production and consumption. The value of money issuing from public confidence explains why inflation tends to spur further inflation by undermining faith in the future value of currency.
In addition to its economic value, money has acquired a secondary social value as well; or to put it conversely, the value of currency at any time reflects contemporary attitudes and values of the society. The utility of a product, service, process, or invention is the source of its economic value. In a social context utility confers on the possessor a certain power or advantage, and in a later stage the object is valued not only for its utility, but for its power as well. It becomes socially acceptable, important, and prestigious. For thousands of years the common man had only a utilitarian value, and little or no social position or importance; but the feudal lord, monarch or merchant who could organize and utilize labor did gain an economic and political power by virtue of his control over men that gradually conferred on him a position of social importance, social value, as well.
As a medium of exchange, currency is related to every aspect of social life. There is no social activity – commercial, educational, artistic, religious – which is not related to money in some manner. This pivotal position confers on money the social power and value of all the objects and activities for which it serves as a medium. The most obvious of these values are: the prestige, status, and power enjoyed by the wealthy; the standards of living deemed normal or acceptable by each level of the society; the expectations of labor regarding a just return for work; attitudes of and about women’s place in society; the social awareness of the environment, and attitudes toward conservation, pollution, depletion of natural resources, etc….
An examination of the known causes for inflation reveals that very few of them issue from strictly economic origins. The inflationary impact of the OPEC price hikes have their origin, not in any sudden changes in the supply and demand for oil, but rather in changing political and social attitudes among the developing countries. The contribution of government spending and deficit financing to inflation is a result of changing attitudes about the role and responsibilities of government to provide for the minimum needs of its citizens through education, health and welfare programs. Labors incessant demands for higher wages even during periods of stagnant or declining productivity reflect changes in the material expectations of the lower income groups. The inflationary expansion of consumer credit which increased five-fold from 1950 to 1970 is the result of a shift in middle class values away from the virtues of saving and moderation to an unprecedented race for ever greater consumption and accumulation.
Changes in the value of currency are certainly not a new phenomenon. In England there was a gradual and progressive rise in prices over the last seven hundred years; nearly five-fold from the 13th to the 17th century, two-fold again from the 17th to 20th, and fifteen-fold since. In the USA the cost of living more than tripled between 1820 and 1920, and has quadrupled since.
This inflationary trend reflects the evolution of the institution of currency to express new social values. The declining value of currency in recent decades arises from a correspondingly greater value now accorded to other factors such as labor, education, oil, etc. Currency is not the only institution to undergo a dramatic change, but it is the only one in which that change is readily observable and easily measured. This same process has also resulted in the radical alteration of other social institutions like family, religion, education, the role of women, government, technology, etc. The movement of social evolution which expresses today as inflation has its roots in the historical shift from monarchy to democracy which began more than five hundred years ago.
In the early centuries of this millennium, power and authority were vested primarily in a feudal system with the monarch at the top surrounded by subservient lords and the peasant at the bottom. Power arose from the land and was determined by one’s birth and blood. Wealth was the possession of the aristocracy by virtue of their authority over the people on the land under their control. The common man lived at subsistence levels receiving a meager share of the harvest, the bulk of which went to feudal lords. From the viewpoint of currency values, the social position of the king and aristocracy was all powerful; the value of the common man’s labor was defined as the cost of keeping his body and soul together.
Social power, position, status were restricted to the aristocracy, who alone were regarded as the true members of an elitist society. The aesthetic tastes, fashions, ideas, religious beliefs, social habits of the time all referred to the customs of the aristocracy. This fact was reflected even in art forms like tragedy where, according to Encyclopedia Britannica, for more than twenty-two centuries “from the time of Aristotle… the tragic hero had been an aristocrat, if not a man of royal blood”. Until late in the 18th century, tragedy told “nothing of the destinies of the mass of mankind”. Even wealth was valued only when accompanied by royal birth. In his history of the period just prior to the French Revolution, Will Durant describes the visit of a wealthy, refined and accomplished bourgeoisie lady to the house of an aristocrat where she was asked to eat with the servants in the kitchen, instead of at the table with the noble guests.
With the emergence of worldwide sea trade in the 15th and 16th centuries, a gradual shift began and a new set of values emerged. The landed aristocracy found themselves in competition with a new class of powerful merchants whose overseas commerce brought them not only vast wealth, but an increasingly influential political position as well. Kings were forced to accept and adopt this new bourgeois class for the sake of their money, which was needed to maintain power in a world of values where blood and birth were no longer the sole determinants of authority. What took place was a devaluation of hereditary power, i.e., a redistribution of the relative value of various factors in the hierarchy of social power, a waning of the importance of aristocracy, the emergence of wealth as a power freed from the confines of heredity. Money was coming into its own. A middle class gained in importance, social position, and political power. The French and American Revolutions were both supported by this new center of power.
The industrial revolution knelled the beginning of the end of hereditary power and the rise of wealth to the pre-eminent position in society. The early captains of industry enjoyed an economic power in almost every way equivalent to the power of the aristocracy in earlier centuries. They commanded huge masses of people craving for means of support and abundant natural resources, of which many had little value aside from their industrial applications. Every factor of production was cheap. The price of labor in the factories differed little from the subsistence scale on feudal lands. Coal, iron ore, oil and many other raw materials were priced only at the labor cost of extracting them and the cost of transport to the factory. The fruits of production were distributed according to a law of economic justice which granted all the benefits to the possessor of capital, the industrialist, and all the drudgery but no reward to labor.
The latter half of the 19th century was the heyday of capitalism when money had the power to multiply itself five, ten or a hundred times in a single year. Money came to enjoy, not only economic power, but social value as well. The social power, privileges, and prestige which were the native right of the aristocracy in previous centuries, now attached themselves for a time to the possessor of wealth. The rich became respectable and important for the sake of their wealth, whereas earlier it was only wealth in the hands of the aristocracy that was valued.
But the process of evolution did not abate at this stage. When royalty enjoyed a unique position, the entire aristocracy envied the monarch and aspired for his throne. As a result, democracy was born. Today hundreds of senators sit in place of a single king and mourn the loss of the monarch’s prestige and absolute power. So, too, the reign of the kings of capitalism, of men who attained the highest social positions irrespective of their social origins, awoke in the common man a yearning for advancement along the same lines.
The social process of the last hundred years has brought a further shift in values, eroding the power and prestige of the wealthy, affirming the social value of the individual, and raising the expectation of the lower classes. The fundamental values of human rights and human dignity inscribed in our constitution have gained a new prominence, and from them other social values have derived greater importance – man’s right to a more equitable share of political power, a more comfortable standard of living, a greater share in the prosperity of the nation, and a more equal place in society.
These basic human values and the attitudes and expectations that arise from them are by no means new. What is new is their translation from philosophical ideals into practical realities and their extended application to every level of society. Progressive idealism and social reform have been on the platform of upper class liberals since the turn of the century; but it was only the desperate conditions of the Great Depression that awoke in the working classes, raised for generations on the virtues of hard work and self-sufficiency, a demand for government intervention that led to the abolition of child labor, establishment of minimum wage and maximum working hours, and full legal sanction for the information of unions. Only in the last thirty years has the black population in the US begun to demand the full social rights guaranteed by the constitution and confirmed by the outcome of the Civil War more than a hundred years earlier. More recently women too have raised the demand for equal opportunity and equal status.
As the value of the aristocracy was superseded in the 18th and 19th centuries by the value of money, the 20th century has been the era of man superseding money.
The power of the early industrialists has been seized and divided among innumerable aspirants to his position – the technocrat, the bureaucrat, the labor leader, the businessman, and finally the common man himself. The seats of power stolen by the bourgeoisie from the aristocracy did not retain their former element of absolute authority. Power was diluted as it was distributed. So too, the wealth torn from the hands of greedy industrialists bears only a vestige of its former value, both functional and social. The value of currency at any time reflects the social as well as the economic value of the individual, the human value of labor. The social value of man and the value of currency are inversely related. The rising status of the individual in modern society is the root cause of the declining value of currency.
Today the urge for upward social movement embraces the entire society from top to bottom. The laborer, who has lost his sense of resignation and acquiescence, now insists on higher wages to rise from subsistence into moderate comfort, even while his productivity is declining and his work week shrinks. The middle class which has abandoned its traditional moderation and restraint now consumes on an unprecedented scale and supports present consumption by credit purchases to be repaid from future income, which will presumably be higher. Even the wealthy have arisen from complacency and self-satisfaction. The old ideal of a leisurely existence at a respectable distance to a new dynamism and drive to achieve more, to earn more. Economically this change expresses as a shift from security-oriented to profit-maximizing investment. Government too has adopted new attitudes and new behavior. It seeks to play a greater role in uplifting or protecting the poor and controlling use or misuse of the environment. It is even prompted to an unprecedented sense of responsibility for events outside the country, and seeks the power to control them.
Every expression of this pursuit – higher wages without increased productivity, greater consumption without proportionate increases in income and supply, more profitable investment and more rapid movement of money – is inflationary in nature, because it seeks to obtain more without a proportionate increase in real wealth. The demands for greater welfare measures by the poor and the increase in oil prices by OPEC have the same underlying character.
So long as attitudes and values remain relatively constant, these social factors tend to function within and through the market mechanism and according to strict economic law. But during times of rapid change in social values, concepts, and policies, these factors become of over riding importance and do not lend themselves to either analysis or control by a strictly economic approach. It is for this reason that efforts to control inflation by manipulation of fiscal and monetary policy have not succeeded more than very temporarily in arresting currency fluctuations and have been fought with social consequences, not the least of which is the recent outbreak of violence among the urban poor of Great Britain.