Inflation without the depression

6th September 1996 at 01:00
Young people often dislike economic history, yet inflation is one of the most important aspects of the 20th century. John Elliott's conversation breathes life into the subject.

Fancy a 26-day cruise to the Scandinavian capitals and St Petersburg for Pounds 21? You're joking! Pounds 21 for a cruise?

Absolutely - or what about a 16-day tour of France and Switzerland by train fully inclusive, for only a pound extra? Organised by Thomas Cook.

Must be OK then. I still can't believe it!

Well if you don't fancy foreign travel, there's a six-bedroomed house to let at Windsor for the summer - only Pounds 15.75 a week or the same in Kensington for Pounds 130 for the year? And you could rent a grand piano to go in either for Pounds 2.75 a month.

Now I know you're joking - you're not really talking about '96 prices, are you?

Well no, actually, not 1996. Those were 1896 prices, and in St Petersburg you could have gone to the coronation of the last Tsar as a side-trip. Or you could have had something even cheaper like a new 2.5m x 1.5m Persian carpet for 13s 11d (69p) or a pair of top quality four-button kid gloves for 2s 11p (15p). You could have had a seat in the first West End cinema for 1s (5p) or heard the Monte Carlo orchestra at seat prices ranging from 1s to 4s (5p-20p).

Those were real prices? Where did you get them?

From advertisements in issues of The Times newspaper in thefirst few days of May 1896 and naturally expressed in the old currency, Pounds .s.d. (20s or 240d = Pounds 1).

I know 1996 is the centenary of the first modern Olympic Games, but what was so special about prices 100 years ago?

Well 1896 saw the end of a great depression which began in the mid-1870s.

A depression sends prices down doesn't it? Look at house prices a few years ago.

Yes, although that was a recession, less severe. By 1896 prices overall had fallen to their lowest ever in the past 200 years; since 1793 as far as we can calculate.

Must have been a terrible depression.

Not really. Not as bad as the 1930s.

So why did prices fall so hard?

There were several reasons. First, prices had been generally falling since 1815. The economic collapse in the 1870s was probably just an extra push, but a big one.

But why had they been falling since 1815?

Technological innovation was pretty important, especially in the new industries such as steel, chemicals and electricals and in even older ones like agriculture and coal mining. With a free trade policy Britain bought food and raw materials from the cheapest sources anywhere in the world, the United States, Australia or Argentina. Transport costs also fell as the railway networks spread and ever larger ships were built. All these factors made production costs much lower.

Anything else?

Taxation was extremely low. Social security (that is the Poor Law), law and order and education were mostly local responsibilities and quite cheap. There were no major wars so defence spending was low.

Sounds like a golden age.

Not really. Wages were low, although higher than almost everywhere except the US. Working hours were long and factories and mines were dangerous and unhealthy. There was no job security. Diseases and poor housing were widespread. Farmers were hit by cheap food imports after 1880. Lots of people emigrated, especially to the US.

So what happened after 1896?

Prices began to rise.

Why was that?

The economy began to pick up. The Boer War broke out in 1899, followed by a naval building boom to meet the German threat. Welfare spending increased after 1906. By 1914 prices were 23 per cent higher than in 1896.

High government spending partly to blame, perhaps? So inflation must have been much worse in the the First World War?

Yes, huge price rises because everything was in demand. There was also a short-lived boom after the war. By 1920 prices were two and a half times higher than in 1914.

And they've never stopped rising since, I suppose?

Actually no. From 1920 onwards prices began falling again, especially between 1928 and 1933, the worst years of the real Great Depression. Food was particularly cheap because of great increases in agricultural productivity. Mass production drove down prices of things like cars. You could buy a new house for a few hundred pounds in the 1930s. By 1933 prices were only 40 per cent higher than in 1914.

But the cost of that was 3 million Britons unemployed?

Yes and twice that number in Germany - helping to bring Hitler to power with his promises of work for all, which he achieved.

Mostly through rearmament, I expect. How did that affect prices?

Not a lot in Germany because of tight controls. In Britain inflation was about about 3 per cent a year because rearmament was so limited until late 1938.

So by 1939 prices were still only about 60 per cent higher than in 1914?

Right, and by a wartime combination of high taxation, enforced savings and wage and price controls the government avoided the runaway inflation of 1914-1918. Also huge quantities of free American lend-lease goods helped to meet demand.

So during six years of war, which practically bankrupted Britain, prices rose by less than 30 per cent or about double in 1945 what they had been in 1914.

Yes. We are now half way between 1896 and 1996 and prices so far have increased by by less than 245 per cent in that 50 year period. Yet we know that during this last century the total increase has been 50-fold, that's 5, 000 per cent!

So when did this huge increase take place, soon after the Second World War?

Not really; there were price rises, mostly blamed on high wage increases and the government worried a lot about them. In fact the biggest price increase of 22 per cent, in 1950-1952, was caused by the Korean War and rearmament. Altogether prices doubled in the twenty years after the war.

Buts that's only 30 years ago. out of a 5,000 per cent rise, we've accounted for less than 500 so far.

Yes, the real damage was done in one decade, the 1970s.

How come?

Five things combined, two in Britain, three outside. First American involvement in the Vietnam War (1964-75) sent the price of all raw materials spiralling. Then the Soviet Union had a series of very bad harvests. This sent world food prices soaring as the Russians bought up the surpluses. Finally, in 1973 the oil producers quadrupled the prices of oil, which had been pretty low before.

What happened in Britain?

In 1967 the Labour government devalued the pound by 14 per cent making imports dearer and in 1971 we switched to decimal currency. The new penny was worth 2.5 times the old one but many people seemed to treat them the same, especially shopkeepers it was said. Also many people blamed our accession to the Common Market in January 1973 for price rises. All these factors led to huge pay increases to compensate for the price rises.

Which was the worst year?

1975-1976 when prices rose almost 27 per cent.

About the same as in the Second World War! So what has happened in the past 20 years?

More inflation, I'm afraid. Another big oil price rise in 1979 and the near doubling of VAT in 1980. Huge wage increases were given in the public sector. Inflation rose to 22 per cent in 1980. Between 1974 and 1986 prices almost quadrupled (386 per cent).

Is there no end to it? What about the past 10 years?

Prices have risen "only" another 44 per cent in the past 10 years, fortunately, although it was 11 per cent in 1990. One reason for the fall in inflation has been the rapid rise in unemployment since 1980. The government is now proclaiming that inflation has been defeated.

Has it?

Well prices have never actually fallen overall since 1933. So every year since then there has been an increase in some prices. It all depends whether they go up rapidly as in 1975-1976 or hardly at all as in 1958-1959.

So what really causes inflation?

That's a very good question.

Dr John Elliott teaches historyeducation at the University of Stirling

Index of prices in Britain (1914=l00)

1813 = 249 1939 = 158 1873 = 122 1945 = 203 1896 = 83 1956 = 310 1900 = 91 1962 = 363 1914 = l00 1974 = 754 1920 = 249 1986 = 2910 1933 = 140 1996 = 4200.

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