The Truth About Inflation

The Truth About Inflation
This is the text of a four-page leaflet that
was distributed by the Socialist Labor Party
of America in 1966

The Truth About Inflation

This scene took place at the checkout counter of a supermarket in upper Manhattan, but comparable scenes occur these days at supermarket checkout counters across the nation.

A woman was struggling without success to control her anger and frustration. In her hand was $3.20 -- the change from a $20 bill. Her grocery and meat purchases were being expertly packed in two paper bags.

"Look at that," she said, and there was a touch of panic in her voice. "A year or so ago you could've bought all that for $10-$12 at most. Now it's $16.80. And my husband's wages are practically the same as they were then!"

You probably know how she felt. Tens of millions of American workers, for whom the rising cost of living is a grim and inescapable fact, do. Each time the price of meat, or oranges, or clothing, or any other item of necessity, goes up, real wages -- what wages will buy -- go down. And nowadays, as every housewife knows, the prices of food, clothing and other necessities -- especially of food-are rising steadily. Indeed, in the short time since this scene occurred, your $20 bill will bring no change at all. In fact, the bags of groceries are also certain to be much smaller.

Surely if there was ever a question of legitimate concern to people who live on wages or so-called salaries, it is: Why are prices rising steadily?

Rising prices, a result of inflation

The answer, in a word, is -- inflation. But, what is "inflation"? So much nonsense has been written on the subject, some by ignoramuses posing as experts, some by people who know better but who are deliberately intent on spreading confusion, that the vast majority of the people have a very vague understanding of the term at best.

Most people, perhaps you are among them, think inflation means a general rise in prices because of high wages. But this is wrong. A general rise in prices and subsequent demands for increased wages are consequences of inflation. The cause, we shall show, is debasement of the currency.

In this connection, in the period of rapid inflation following World War II, one of the nation's biggest capitalist executives, Mr. Thomas I. Parkinson, head of the giant Equitable Life Assurance Society of the United States, laced into what he called the "professional propagandists [who] would make us believe and in fact have succeeded in making us believe that the word inflation means rises in prices and in wages...." He said:

"Rises in prices are not inflation. Consequent demands for increased wages are not inflation. The Inflation is in the debasement of the currency. The increase of this vast amount of what the people in this country use for money creates the pressure under which prices are bound to rise and, when they rise, labor is bound to demand increased means of meeting the higher price level." [Speech to the National Industrial Conference Board, Jan. 17, 1946.]

The wage-price-spiral myth

Note how Mr. Parkinson disposed of the myth -- for myth is what it is -- that increases in wages cause higher prices. The truth is that this myth has been deliberately fostered by the capitalists and their editorial flunkies in order to intimidate workers and inhibit their wage demands. The truth is that the only effect of higher wages is lower profits!

Inflation, said Mr. Parkinson, is debasement of the currency. But what does this mean? How does a country debase its currency? We do not pretend here to give a thoroughgoing answer to this question. This would involve a lengthy treatise on "money," its origin and nature, and indeed a discussion of the whole range of Marxian economics. So, in order to show in this brief essay how the currency of this country is being debased, we shall have to summarize and simplify.

From barter to gold coins

When our primitive ancestors first began to exchange their surplus products, they did so on the basis of barter -- product for product. But later, as they improved techniques and increased the products available for trade, direct barter grew cumbersome. The man with a surplus of sandals wanted an ox, but the man with an ox to trade wanted, not sandals, but something else-bars of iron, for example. The solution to such problems came when society hit on the precious metals to serve as a medium of exchange. The owner of the sandals could sell his sandals for gold, and with the gold he could buy the ox. The former owner of the ox could use the gold to buy bars of iron. Later, with the rise of strong central governments, the gold was minted into coins, and these were guaranteed as to their weight and fineness.

The reasons gold served ideally in this money role were: (1) It took human labor to extract it from the earth and refine it; it was therefore the embodiment of human labor, the essence of value, as were the other commodities for which it exchanged. (2) Gold was not too plentiful nor yet too scarce. (3) It could be divided into aliquot or fractional parts. (4) It concentrated much value into small pieces. (5) It was nonperishable, hence could be hoarded. Historically, in most societies, gold has been the real money. When paper currency appeared it functioned merely as symbols of gold. In our own country, up to 1934, gold coins circulated freely. And, even after the gold coins were called in by the Franklin D. Roosevelt Administration, the gold reserve law, under which the government was required to keep so much gold in reserve as becking for the currency in circulation, remained in force. The Gold Reserve Act has been diluted since, but it still remains the law of the land. So, when more and more currency is issued against a diminishing reserve of gold -- and this is what has been happening -- the nation's money is debased.

Before paper currency came into use kings inflated the money by mixing base metals with gold in coins. Later, governments simply printed paper currency -- fiat money. But nowadays, the process is more subtle though no less devastating in its effects, especially its effects on workers' living standards. The debasing process starts when governments run deficits -- spend more than they collect in taxes -- as our capitalist government has been running deficits for years. The deficits are the consequence of the endless crises that beset the outmoded capitalist system, of the waste and inefficiency of the bureaucratic political State, of boondoggling efforts to pacify the unemployed and poverty-stricken through work projects and relief programs, of subsidies to shore up the economy, of the need to maintain huge military machines to defend capitalist interests and fight capitalism's wars, etc. The source of the inflation is the policy adopted by the capitalist government to cover these deficits. This policy, which consists of borrowing from commercial banks on the government's notes, has the same effect that the printing of greenbacks -- fiat money -- would have. This was explained by Robert B. Anderson, when he was President Eisenhower's Secretary of Treasury, to an Associated Press luncheon, April 20, 1959. Mr. Anderson, speaking to a visitor who didn't understand the process, said:

".... Suppose I wanted to write checks of $100,000,000 starting tomorrow morning;, but the Treasury was out of money. If I should call up a bank and say, "Will you loan me $100,000,000 at 3% percent interest for six months if I send you over a note to that effect," the banker would probably say, "Yes, I will." But when I send him the note, where would he get the $100,000,000 with which to credit the account of the United States Treasury? Would he take from your account....? Certainly not. He would merely create that much money, subject to reserve requirements, by crediting our account in the sum and accepting the government's note as an asset. And when I had finished writing checks for $100,000,000, the operation would have added that sum effectively to the money supply. Now certainly that approaches the same degree of monetization as if I had called down to the Bureau of Engraving and Printing and said, "Please primt me up $100,000,000 worth of greenbacks...."

This is the way inflation -- debasement of money -- is accomplished today. It is a process from which capitalism-in-crisis cannot escape. The capitalists, of course, understand the process and manipulate their wealth to take advantage of it. As Karl Marx put it more than a century ago: "All past history proves that whenever such a depreciation of money occurs, the capitalists are on the alert to seize this opportunity for defrauding the workman."

In this, they are aided and abetted by the faker-led unions that make time contracts that freeze wages -- while prices are rising. The result amounts to a cut in real wages. When finally such contracts expire, the workers, driven by necessity, demand a raise in wages to meet the increased cost of living. After much struggle, they may get some of their demand and catch up momentarily. More often they do not catch up at all.

To understand what "inflation" means is to realize that, under capitalism, workers can't win! Once they have gone that far in their education they are but a step from classconscious enlightenment -- the knowledge that a decent, secure and bountiful life for the people who perform the useful functions of society requires a new social system, one in which the means of production are owned socially, administered democratically and used to produce abundance for all. That system is Socialism.

Here in the United States we have all the material requirements for establishing Socialism. It is common knowledge that we have developed the most productive machine in the world -- one capable of producing an abundance for everyone. Once this machine is socially owned, controlled and administered, such problems as inflation, the high cost of living, etc., will be completely eliminated. No longer will we work for wages, which represent but a small fraction of the total social wealth that we, the workers, alone produce. Instead, we shall all be useful producers, each contributing his or her fair share to the total product. In return, each of us will receive directly and indirectly the equivalent of all that we have produced. We say "indirectly" because we shall get part of our product back through social services-public health, education, recreation, etc.

In Socialist society we shall be able to enjoy the material well-being our productive capability makes possible. We shall be secure, healthy, happy human beings living in peace, harmony and freedom, in marked contrast to the capitalist jungle of strife, misery and insecurity in which we live today.

The task confronting the American workers is to organize their political forces into a Party of their class, and to consolidate their economic power into one mighty Socialist Industrial Union-not to demand higher wages, but to demand the abolition of the wage system and effect an orderly Socialist reconstruction of society. For additional information about this program use the coupon below.


The Socialist Labor Party, founded in 1890, advocates an Industrial representative government based on social ownership of industry and production for social use. It has no ties whatsoever with other parties or group* calling themselves Socialist or Communist.