The Measurement of Inflation
Publication Date:
01 Jan 1950
eISBN:
9781451959994
Language:
English
Keywords:
SP; currency proceeds; latent inflation; center; proceeds; export; currency; ECA shipment; import restriction; ITO charter; Imports; National income; International trade organizations; Exports; Agricultural commodities; Western Hemisphere; Western Europe; Middle East; Europe; North America; Inflation; import SurplusTerms; PoliciesThe measurement; import surplus; intentional saving; budget deficit; balance of payments; gross investment; Income; Government debt management
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THE NATURE and processes of inflation have been discussed extensively in economic literature since the war.1 In the present paper a technique for analyzing quantitatively the forces making for inflation is described and illustrated. First the terms used and the procedures adopted under assumptions as to the statistics available are discussed; and then the technique is applied to data for Western Europe in the decade 1938-48.

Abstract

THE NATURE and processes of inflation have been discussed extensively in economic literature since the war.1 In the present paper a technique for analyzing quantitatively the forces making for inflation is described and illustrated. First the terms used and the procedures adopted under assumptions as to the statistics available are discussed; and then the technique is applied to data for Western Europe in the decade 1938-48.

THE NATURE and processes of inflation have been discussed extensively in economic literature since the war.1 In the present paper a technique for analyzing quantitatively the forces making for inflation is described and illustrated. First the terms used and the procedures adopted under assumptions as to the statistics available are discussed; and then the technique is applied to data for Western Europe in the decade 1938-48.

Methodology

Definition of inflation

An inflationary situation is far easier to recognize than to define. The most easily distinguishable type is one in which prices, and there-fore the national income, are rising more or less rapidly because there is an excess of potential demand over the available supply of goods and services. It is, however, possible for an inflation to be in progress without a rise in prices; for example, if prices are controlled so rigidly that the available purchasing power cannot be utilized but is dammed-up. Moreover, a rise of prices is not always a sign of inflation. A decline in output—caused, for example, by a bad harvest—may raise prices of foodstuffs without necessarily causing an inflation; and indirect taxation may have similar results. Again, while inflation implies a change in the relative position of different classes in the community, not every shift in the relative purchasing power of incomes is inflationary. For example, a successful exploitation of monopoly powers by organized labor or by organized employers may shift the proportions of the national income respectively enjoyed by these two classes without any symptoms which can be called inflationary. Taking all these factors into account, inflation may tentatively be defined as implying the existence in an economy of dynamic forces which (a) increase the national money income both in absolute terms and relative to the preceding value of available real resources (i.e., their value at the prices of the beginning of the period observed), and (b), unless offset by opposite forces, bring about an increase in the real income currently enjoyed by one or more groups in the community at the expense of another group or groups—the effect on either set of groups being either absolute or relative to income.

Ex ante, ex post

The originating cause of an inflation may thus be regarded as an attempt (conscious or unconscious) by some section of a community to improve its real income or wealth at the expense of another section or sections, associated with an increase in the national money income. Ex ante (prospectively), this attempt will be seen to be inflationary in the likely event that it is inconsistent with the plans of the remainder of the community. For example, an excess of investment over savings, ex ante, will be inflationary because the community does not plan to save as much as businessmen plan to invest. But ex post (retrospectively), this inconsistency disappears. In part, there will be an adjustment of the investment which was planned (for example, through an unplanned change in inventories); in part, an adjustment of savings, since once the amount invested has been spent it must be held by someone, and in that someone’s hands it is part of ex post savings. Ex post, therefore, investment has engendered savings of an equal amount. Intentional savings (the savings which would have been revealed by an ex ante survey) are anti-inflationary,2 but unintentional savings are merely the consequence of an inflation. Unfortunately, it is impossible, by observing the constituents of a national income retrospectively, to distinguish between these two. This means that it is impossible in practice to measure the anti-inflationary influence of savings. All that can be done is to try to draw certain inferences on plausible assumptions.

Active, repressed, and latent inflation

A net inflationary pressure (ceteris paribus, investment exceeding savings, both ex ante) must necessarily produce an inflation, but not necessarily an obvious or active one. Given sufficiently rigid and accepted controls, an inflation may show itself not in rising prices but in the accumulation of cash, bank balances, and other forms of encashable private wealth in the hands of people who would prefer to use these accumulations for consumption or investment but are prevented from doing so. Such a development has been called in recent economic literature a “suppressed” or “repressed” inflation, as distinct from “active” inflation, in which the resources coming into the hands of the public are all or mainly all spent, with the result that prices are raised. For the process by which the balances are accumulated, the term “repressed inflation,” or better “repressed spending,” seems quite appropriate—more so than “suppressed,” because “suppression” might imply abolition. But a different term seems to be needed for the accumulated results of the repressed spending; viz., the situation in which consumers’ liquid assets exceed the proportion of their current income which they would hold if there were no controls on consumption or investment. It is proposed to call the latter situation a “latent inflation.” All types of inflation tend to increase business balances (undistributed profits plus unspent depreciation reserves), but repressed spending characteristically adds also to the total of consumers’ savings, viewed ex post. These savings may collectively be described as “excess liquidity”; they include in particular holdings of cash and bank balances here termed “hoards.”

Net inflationary forces

Inflationary forces are those tending to cause an excess of current expenditure over the cost of producing currently available goods. In the government sector, this results from a budget deficit. In the business sector, it may be due to capital formation (including building up of inventories), the drawing-down of reserves to pay dividends or maintenance, or the development of an export surplus. In the private sector, capital formation also arises, though it is by convention restricted to the purchase of houses; dis-saving for consumption purposes may also be significant.

Anti-inflationary forces are those working in the opposite direction, either by curtailing the flow of money or by increasing the supply of goods, e.g., a budget surplus, personal savings, an import surplus, or a reduction of inventories. Any element in the problem can thus be either inflationary or anti-inflationary. It is, however, convenient to be able to use a standard formulation, and the convention is here adopted of regarding all magnitudes capable of measurement as positively or negatively inflationary. It will be shown in the next paragraph that where reasonably adequate investment statistics are available, this procedure leaves only intentional savings or dis-savings (including some intentional changes in undistributed profits) as positive or negative anti-inflationary elements. Using the positive forms, the net inflationary forces may then be expressed as:

  • (Government Deficit + Investment + Export Surplus) – (Savings)

all four elements being taken ex ante (i.e., as intended beforehand).

Measuring inflationary forces

Only the first one of these four elements can in fact be directly measured ex ante (as planned), but it is possible to approximate a measurement of the ex ante values of the second and third by utilizing ex post (realized) figures. The procedure adopted below is based on the assumption that the difference between the planned and realized values of the inflationary elements is seldom large enough to be significant. A difference will, of course, exist, since the rise in consumer incomes and/or prices constituting the inflation will have repercussions throughout the economy. But these repercussions will necessarily be delayed until the inflation resulting from these elements has developed; and therefore the changes caused by them will be relatively small, except when a very violent inflation makes a period of a year too long to be meaningful for analysis anyway. Furthermore, the repercussions themselves are not all in the same direction. A price inflation tends to increase the budget deficit by adding to the cost of government purchases, but at the same time improves yields from taxation; a price inflation also reduces an export surplus. Similarly, the effect on business investment may be to decrease it, through depletion of inventories or the frustration of intended capital expansion for lack of labor, etc.; or to increase it, through encouraging business expansion and even the enlargement of inventories if price rises prevent consumers from buying. For these reasons it is believed that to identify realized with intended inflationary elements will not materially invalidate calculations.

The same cannot be said of savings, however. If the realized values of the inflationary elements do not substantially diverge from their planned values during the period of a year, it follows that inflation must alter realized savings to the necessary extent compared with planned savings. This may also be shown empirically; for example, a general effect of inflation is to increase business profit-earnings, and eventually dividends. But because dividends are paid in arrears, the effect during the year in which the inflation takes place is mainly concentrated on business reserves (savings) which temporarily increase. The conclusion is that, for purposes of the present analysis, the realized (ex post) value of the inflationary elements can be regarded as an adequately close approximation to their planned (ex ante) value; but that this is not true of savings.

Because intentional savings are not measurable and cannot be deduced from realized savings, it becomes necessary to evolve a method for approximating the value of the net inflationary forces, viz.,

  • (Government Deficit + Investment + Export Surplus) – (Savings)

without relying on the measurement of the fourth term. This method comprises

  • (a) settling upon a base year in which neither inflation nor deflation was present, and in which, therefore, planned savings were equal both to realized savings and to the ascertainable total of the inflationary elements;

  • (b) discovering an expression for changes in savings as a constant proportion of some other series in the economy (e.g., the national income). This is hereafter called the “savings function.”

If condition (a) cannot be fulfilled, a year must be chosen in which inflation (or deflation) was slight, and allowance made for the fact that the inflationary elements will in that year have been greater (smaller) than intentional savings. As regards condition (b), whatever series is adopted as a base for the savings function, the assumption of a constant proportion is necessarily an arbitrary one. It is subject, in particular, to three sources of error, which must be evaluated in the light of the particular circumstances of each area and period studied:

  • (i) The pattern of spending and saving in the base year may be influenced by prevailing political or social conditions, e.g., the proportion of economic activity devoted to the production of government services and the composition of imports. These may be abnormal, in the sense of being something to which consumers are not accustomed; in this case savings are likely to be inadequate. Or they may have been a norm from which later years depart, implying that savings in later years will be different from what they would otherwise have been.

  • (ii) There may be a long-run tendency in the country toward greater or smaller intentional savings in relation, for example, to the national income. Generally speaking, the cumulative increase of wealth in a country will tend to increase intentional savings faster than the national income. A series for the gross inflationary forces based on an equilibrium year would then overstate subsequent inflationary tendencies.

  • (iii) There may be short-run influences on savings arising out of the particular environment studied—e.g., the effects of a war, of abnormally heavy taxation, or of a building boom—which temporarily increase or (more probably) decrease intentional savings.

Subject to these limitations a value for the net inflationary forces in any given year relative to their value in the base year can be calculated as follows: Let us call the series to which savings are assumed to be proportional the “assumed series,” so that the savings in any given year are a constant proportion of the term for that year of the assumed series (the “assumed variable”). In the base year, by hypothesis, the net inflationary factors are nil; therefore the pro-portion between savings and the assumed variable for that year is equal to the proportion between the inflationary forces and the same term. In the second and subsequent years, the proportion between savings and the current year’s assumed variable will remain the same, but the proportion between the inflationary forces and the assumed variable will differ. The difference in any year between the proportion represented by the inflationary forces and that represented by savings may be called the net inflationary pressure for that year. Because the proportion between savings in the second year and the assumed variable for that year is equal to the corresponding proportion for the first year, it will also be equal to the proportion between the inflationary forces in the first year and the first year’s assumed variable. Hence, the net inflationary pressure in any year is equal to the inflationary forces for that year divided by the assumed variable for that year minus the inflationary forces for the first year divided by the first year’s assumed variable.3

Alternative savings functions

The ideal “assumed series”—i.e., the ideal series for the savings function—would be one which moved exactly parallel to intentional savings. In practice, no readily ascertainable series is likely to fulfill this requirement, because intentional savings are subject to psychological and other influences, the effects of which are not shown in any normally compiled economic series. However, apart from abnormal dislocations, there is a fairly stable relationship between intentional savings and the national income at factor cost. Using this as the assumed series, we take one per cent as the constant proportion to be applied to each year’s national income. This proportion of each successive term of the series will then represent intentional savings for the corresponding year.4 This does not imply that intentional savings are expected to equal one per cent of the national income; only that every year’s savings will be the same proportion of the corresponding year’s national income divided by 100.

To take an example, we may suppose that the inflationary forces totaled $80 million in the base year A, $110 million in year B, and $140 million in year C; and that the national income at factor cost was respectively $1,000 million, $1,250 million, and $1,400 million. Then in year B the net inflationary pressure would be measured by $110$12.5-$80$10=8.8-8.0=0.8; in year C by $140$14-$80$10=10.0-8.0=2.0. Both final figures are, of course, percentages of the national money income.

Gross inflationary factors

To show the movement of the inflationary pressure over time, it is sufficient to utilize only the first term of the expression for each year (e.g., $80$10,$110$12.5,$140$14, . . ., etc.), which is equivalent to

100(GovernmentDeficit+Investment+ExportSurplus)NationalIncome

This is termed the “gross inflationary factor.” If all the elements in the numerator of this expression are correctly defined, they may properly be combined to form a complete synthesis of the (measurable) inflationary forces, as opposed to the (non-measurable) anti-inflationary forces, i.e., intentional savings (including some changes in undistributed profits). If the gross inflationary factors increase over time, it is assumed that intentional savings will no longer suffice to offset the inflationary activity recorded; and that therefore a net inflationary pressure will be exerted. The limitations of this hypothesis will be considered below after the various concepts introduced above have been defined with greater precision.

Gross inflationary quanta

Unfortunately there are comparatively few countries for which a reliable series for the national income is available. This difficulty is encountered particularly when the technique is applied to relatively undeveloped countries (e.g., Latin America). In some of these, national income estimates have been made for individual years, but their reliability is not always very great, and they scarcely ever include a comprehensive series showing the distribution of expenditure between consumption and investment. An alternative possibility is to approximate the national income by combining indices of production and of monetary turnover; but although such calculations have, in several cases, shown a promising degree of comparability with national income statistics where the latter were available, adequate production data are also lacking for most countries. An entirely different substitute series has, therefore, to be used for less statistically-equipped countries. This is prepared by adjusting an index of the volume of currency and bank deposits for changes in the velocity of circulation of the latter, as measured by the ratio of bank debits or bank clearings to deposits. This series may be called an “index of financial activity.” It probably moves nearly parallel to the national money income in most countries with a fairly simple economy, and therefore yields a roughly proportional series by which to measure changes in savings. It has, however, the disadvantage that the net inflationary pressures resulting are not internationally comparable. This follows from the fact that the use of index numbers instead of money flows as denominators for the net inflationary pressures produces a series which is expressed in national currencies instead of in percentages. Thus, if the inflationary forces were as assumed above and the indices of financial activity were 100, 125, 140 . . ., the net inflationary pressures in years B, C, . . ., would be

$110mn.125-$80mn.100;$140mn.140-$80mn.100…,i.e.,$80,000,$200,000.…

Because it appears undesirable to use the same name for series derived by the use of different denominators, especially as one set is monetary and the other nonmonetary, this alternative series is called the “gross inflationary quanta.” For inter-temporal comparisons within one country, the quanta can be used just like the gross inflationary factors, any increase in the quanta implying an inflation. But for international comparisons, the best that can be done is to express each country’s gross inflationary quantum for each year as a percentage of its mean quantum for the period studied. The subsidiary series thus derived give no indication of the relative intensity of the inflationary forces in any two countries at any one time.5 They do, however, indicate roughly the relative trend over time of the inflationary forces in the different areas; if in one case the index numbers are tending to grow more rapidly than in another, it is probable that inflation is becoming more intense in the former than in the latter.

Government deficit

The government deficit is here taken to mean the excess of expenditure over receipts (other than borrowing) for all taxing authorities. It includes, therefore, the deficit (or surplus) on the national (cash) budget, plus any net outlays by the state for nonprofit investment or reconstruction outside the budget, plus the corresponding deficits and investments of local authorities, plus the net operating deficits (or minus the profits) of state and nationalized industries and monopolies, minus any increase in state-operated funds such as social security reserves. Profit-seeking investment expenditures of state and nationalized enterprises may theoretically be included either with the government deficit or with business investment. However, in view of the different extent to which nationalization of industries and the government monopoly of development outlays has progressed in different countries and at different times, better comparability is achieved if all profit-seeking investment is brought together as “investment” rather than divided between that category and “government deficit”; the former course has been adopted here.

Exceptions to the general definition above are the following: (a) Government expenditures and receipts must exclude the counterpart of grants to or from other countries (e.g., UNRRA and ECA) or of international loans if exports or imports financed in this way are included in the country’s balance of international payments; otherwise their inflationary/deflationary effect will be counted twice, (b) Government expenditures and receipts must similarly exclude capital transfers to or from the private sector, since these do not affect the current flow of income. Examples of (b) are amortization of the public debt, grants to industry for purposes of investment, war damage compensation payments, payments of taxes out of capital (e.g., death duties, capital levy), and refunds of government loans or grants.

Indirect budget influences

It is arguable that the appropriate budget figures are not those of cash receipts or payments but of commitments. For it may be considered that an individual’s expenditure is influenced by an unpaid bill for taxes in the same direction, if not as much, as by the actual payment of the tax. Similarly, individuals or businessmen due to receive monies from the government will probably determine their expenditure in much the same way as if the amounts were already received. This point may be important in a country where the government’s net balance of unpaid bills changes from year to year at a rapid rate. Very similar considerations arise in connection with death duties and a capital levy. The anti-inflationary influence of such a tax in a given year is rarely equal to the actual amount paid in that year. On the one hand, a once-for-all tax is exceedingly likely to be paid out of savings, even where the amount levied is not so large as to be beyond the capacity of the individual to pay out of income anyway. On the other hand, the imminence of a capital levy, even if it is not yet payable, may have a deterrent effect on spending similar to that engendered by an unpaid income tax bill. In all these cases a penumbra of secondary psychological effects surrounds the direct anti-inflationary influence of taxation, and it is impossible to postulate a priori the net influence which will result. The problem can be tackled only by considering the detailed circumstances of each case; if that is impracticable, recourse must be had to rule of thumb.

Investment

An inflationary pressure is exerted by enterprises, whether private or nationalized, when they make a net addition to the current flow of purchasing power. The most important though not the only case is where a business makes a planned investment. More strictly defined, the inflationary force consists in the difference between (i) business-men’s current expenditure and (ii) their current recovery through prices of the costs (including depreciation and profit-loading) of previous output. In practice, however, information about business activities is not available in this form. The nearest available approximation is usually “net capital formation,” derived by combining estimates of (i) gross investment, including new buildings and plant, additions to inventories, and outlays on repairs and replacements, with (ii) an “offset” comprising the gross intake each year into reserves for depreciation, repairs, and replacements. There are discrepancies between different countries’ practices as regards the extent to which current upkeep is charged to gross investment instead of to current outlay. These hamper inter-country comparisons of the gross figures, but are not of serious consequence provided the “offset” can be correspondingly calculated. Unfortunately, the latter element is sometimes not directly available and use has to be made of an approximation, such as income tax depreciation allowances, or the assumed economic costs of maintaining capital intact, or even actual expenditures on repairs and replacements.

For the purposes of this study, the concept of net capital formation is defective in two respects even if the correct “offset” figure is available. Within the field of investment, concentration on visible changes may overlook the fact that increases in circulating capital, due to increases in wages or other prices, add to the aggregate costs of work in progress; if so, an estimate for these influences must be added, at any rate in countries where wages and prices have been rising sharply and these influences are therefore important. The increase in wages may be due to pressure from labor to restore real wages, adversely affected, e.g., by a crop shortage and a consequential rise in prices; if so, it will stop when crops are again normal. In any case, the “investment” in additional wage bills is only to a small extent decided upon by the entrepreneur for “investment” motives. It is arguable, therefore, that it should be treated separately. However, as the factor is important only in highly unusual circumstances, this discrimination has been judged unnecessary.

More generally, net capital formation figures fail to cover the inflationary or deflationary influence of the payment, out of reserves, of dividends higher or lower than current earnings. In those cases where the only known “offset” to gross investment is actual expenditure on repairs and maintenance, changes in the size of depreciation reserves are necessarily ignored; in such cases the figure for net capital formation obtained fails to reflect the inflationary or deflationary effects of changes in these reserves. To omit such changes in reserves from the inflationary forces is tantamount to treating them as changes in savings; however, it is unlikely that the savings function will accurately reflect them, and a source of error is therefore introduced.

So far as individuals are concerned, net capital formation is usually, by convention, limited to increases in the ownership of houses; all other changes in personal indebtedness (whether spending above one’s income or the purchase on deferred terms of, e.g., an automobile) must therefore be reckoned as changes in savings.

In some less statistically-advanced countries, the only available clue to the magnitude of domestic investment is the increase in bank advances. These, of course, include a certain amount of personal dis-savings, but exclude business investment from liquid funds or from private lenders; on balance, therefore, they tend to understate business investment. Moreover, they exclude investment financed out of foreign assets, which may be important, especially in the case of direct investments. In such cases the nearest approximation to the desired figures of investment is provided by utilizing the increase in bank advances for the domestic figure and correcting the balance of payments data for capital imports.

Balance of international payments on current account

Other things being equal, a “favorable” (active) balance of international payments on current account is inflationary because it increases the money income within a country without any simultaneous increase in the goods available there for purchase. Correspondingly, an “unfavorable” (passive) balance is per se anti-inflationary, though this effect may of course be offset if the imported goods are used to facilitate an expansion of investment.

The terms “export surplus” and “import surplus” are used for convenience in the present study to indicate an active or a passive balance, respectively. International capital movements are not themselves of inflationary significance. Thus, a dollar loan to Europe influences the inflationary situation in Europe only as and when the additional imports which it permits actually flow into use. It has been seen above6 that, if some of the imported goods are obtained by a government through grants, loans, or the dissipation of foreign assets or reserves, and the proceeds of their sale at home are appropriated toward reducing the budget deficit, these proceeds appear both as an import and as a government receipt. There is, therefore, a danger of double-counting their deflationary effect. Since the government receipt is equivalent to domestic currency absorbed, the correct course would be to adjust the import surplus by deducting therefrom the value of these goods as shown in customs figures (which may be artificial). Data for this adjustment, however, are not readily available, whereas the contribution to the government budget of the sale of imports is usually an accessible figure. It is for this reason that this contribution, where it exists, has been deducted from the government receipts. Correspondingly, where a government incurs domestic expenditure on goods sent abroad as a grant or loan and the goods appear among exports, the expenditure has been deducted from the government deficit in order to avoid double-counting the inflationary effect. To enable both cases to be treated similarly, the “import surplus/export surplus” recorded hereafter has been calculated by omitting the off-setting item “donations” provided, in the case of grants, in the Fund’s Balance of Payments Yearbook (viz., Table I, items 9.3 and 9.5 for the various countries).

Where no direct statistics of the balance of payments are available, the change from year to year in the country’s published monetary reserves has to be used instead. Although this is defective, in that it does not cover changes in the reserves of private firms, it has the advantage of eliminating imports due to imports of capital. Where, therefore, the only figures for investment relate to investment that is domestically financed, the change in monetary reserves is in fact a better figure to use than a balance of payments deficit or surplus figure would be. There are possible sources of error left, in that borrowed foreign balances may be hoarded (in which case they are not inflationary) or used as a basis for new bank loans (in which case their inflationary effect will be counted twice); but it is not likely that these will be serious in the kind of economy for which this technique has to be used.

National income

The choice of the national income figure to be used as a divisor is difficult. The normal international standard of comparison is national income at factor cost. But the financial aspect of the problem here considered would seem to suggest as the appropriate figure “private income” (viz., national income at factor cost less government income from property plus transfer incomes), since this is the income from which personal savings are built up; or national income at market prices, since this is the source of business savings (including undistributed profits). On the other hand, if the real aspect is considered, still another conclusion seems to be suggested, for the real resources out of which investment, for example, is undertaken correspond not to national income at factor cost but to total goods and services currently available for use at home (viz., gross national product plus the import surplus or minus the export surplus). Since some countries in 1946 and 1947 had import surpluses amounting to as much as 15 per cent of the domestically-produced income, compared with 1 per cent or 2 per cent in 1938, the choice of definition will considerably influence the size of the denominator of the gross inflationary factor. It is clear that no universally correct solution of the problem can be found. However, the relation between national income at factor cost and gross national product tends in general to be fairly constant, so that the choice of one or the other—apart, at least, from the abnormal cases just cited—scarcely affects inter-temporal comparisons. Nor does the fact that the denominator will include the incomes created by any inflationary influences, whether or not caught by the numerator.7 And even the significance of the exclusion of an import surplus from the denominator is in practice less than might appear, since the inclusion of any considerable figure on this account would mean that a similar figure would appear as a negative element in the numerator, substantially lessening the value of the total fraction.8 In the circumstances, the balance of advantage appears to lie with the choice of an index most generally available, viz., national income at factor cost, although it will be appropriate to consider in special cases whether this does not misleadingly inflate the value of the fraction in postwar years.

Application to Western Europe, 1938-48

Introduction

In what follows, the attempt is made to calculate the gross inflationary factors for Western European countries for the period 1938-48. For this area, the technique is subject to all the qualifications set out on pages 21-22, but to some extent their effects tend in practice to cancel out.

  • (a) The base year, 1938, was chosen more for statistical convenience than because it had any peculiar suitability as an equilibrium year. In fact, 1938 was a somewhat depressed year in Western Europe; for example, recorded unemployment ranged upward from 2½ times its 1947 level. Intentional savings were, therefore, almost certainly subnormal, which means that the gross inflationary factors for the subsequent years overestimate the actual inflationary pressure.

  • (b) The long-run tendency in Western Europe toward increased wealth per head should, other things being equal, increase intentional savings and, therefore, again cause the gross inflationary factor to overestimate the inflationary pressure. On the other hand, the parallel long-run tendency toward greater equality of incomes works in the opposite direction. So, too, may the long-run tendency to expand the area of government activity, if it reduces relatively the sphere in which the consumer has free choice. Any net offset arising is likely to be submerged by the greater intensity of the temporary phenomena next considered.

  • (c) The dominant factor in the past ten years in the economy of Western Europe has, of course, been the war, with its accompanying reduction of real incomes, intensified taxation, and accumulation of unsatisfied desires. In some cases there has also been a fear of currency depreciation. All these factors tend to reduce savings, and therefore to make the gross inflationary factors underestimate the actual inflationary pressure.

The net effect of these conflicting influences is not easy to assess quantitatively, but it seems clear that in fact the last-mentioned predominates. Individuals appear, on balance, to have dis-saved in recent years; and apart from the influence of institutional savings (insurance premiums and contributions to social security funds) they would probably have dis-saved even more noticeably. Although actual business hoards (ex post) have tended to increase, this has been due mainly to restrictions both on investments and on dividends. It may accordingly be concluded, as a broad general rule, that the gross inflationary factors in Western Europe in recent years tend to under-estimate the inflationary forces present.

National income

Lack of essential statistics has made it necessary to confine the present study to Belgium, Denmark, France, the Netherlands, Norway, Sweden, and the United Kingdom; for all these countries national income data are available. The figures used are given in Table 1; they are expressed as index numbers (1938 = 100) in Table 2. The progress recently made by the UN Statistical Office in standardizing the statistics for various countries has considerably facilitated the preparation of these tables. However, there are still some areas in which no figures corresponding to a standard definition are available; and some where no official estimates are available at all. For most of the latter, ad hoc guesses have been made; these are indicated in Tables 1 and 2 by being shown in italics. Further details of the computations are given in the Appendix below.

Table 1.

National Income at Factor Cost1

(Billions of national currencies)

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Figures in italics are ad hoc estimates; certain other figures have been adapted from series differing slightly in content. See notes below and Appendix. In this and following tables dots indicate that data are not available and a dash indicates either that a figure is zero or less than half the final digit shown, or that the item called for does not exist.

Not required.

Sources: Belgium: 1938, 1939, 1941, 1943, 1946, 1947, UN, National Income Statistics, 1938-1947, p, 123; 1948, estimate by Prof. Baudhuin.Denmark, France (a), Netherlands, 1938, 1939, 1946, 1947, 1948, Norway, except 1944, United Kingdom, except 1948: UN, Monthly Bulletin of Statistics, July 1949, pp. 4-5.France: (b) 3eRapport semestriel, Commission du Plan, Paris, Annexe 8, p. 119, adjusted.Netherlands: 1942, UN, National Income Statistics, 1938-1947, p. 72, adjusted.Sweden: 1938-39, 1943-47, UN, National Income Statistics, 1938-1947, p. 121; 1948, GNP, at factor cost as given in Meddelanden från Konjunkturinstitutet, Serie B:9, deflated (cf. UN, National Income Statistics, 1938-1947, pp. 95, 120).United Kingdom: 1948, Cmd. 7649, adjusted to UN standard series.
Table 2.

Indices of National Money Income1

(1938 = 100)

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For notes and sources see Table 1.

Not required.

The purpose of the national income figures in this context is, of course, to provide a frame of reference which will permit comparative studies to be made of other magnitudes, expressed as percentages of national income. A small error in the national income assumed will usually make no significant difference in these percentages, and the approximate nature of the estimates used—especially for the war years—is therefore not of very great importance. Nevertheless, even where precise figures for the magnitudes to be compared are available (which is not very often), the uncertainty about the national income figures must introduce an element of doubt into the statistics in the tables. It must, therefore, be re-emphasized that these statistics claim no more than to indicate orders of magnitude.

Government deficit

The most important single factor making for inflation in the countries studied has probably been the government deficit. The effects of occupation costs, military expenditures, investment, and reconstruction have been sufficient to dislocate the economic systems, even where they were not superimposed upon current deficits of appreciable size, such as those recorded in France.

For the greater part of Europe, the major factor in the wartime expansion of the national income was the costs of occupation. This is an elastic term, but the broad concept is the sum put at the disposal of the occupying power and spent by it. Inter-country comparisons are difficult because national income and exchange rate figures for the war years are frequently sketchy. Table 3, however, gives such information as is available.

Table 3.

Occupation Costs (Including Exports), 1940-44

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Based on exchange rate prevailing January-May 1940.

Under the assumption that the clearing debt (64 billion francs) was amassed at a rate proportional to the remainder of the occupation costs, whose time-distribution is known.

At current official exchange rates.

Based on exchange rates prevailing January-June 1940 (costs incurred 1940-43), and June-December 1944 (costs incurred 1944).

Approximation made by assuming an even spread of the total costs over 1940-44.

Sources: Belgium: National Bank of Belgium.Denmark: Danmarks Nationalbank.France: Inventaire Financier, p. 230.Netherlands: Ad hoc estimate.Norway: Vedlegg nr. 11 til Statsbudsjettet, 1945-46.

A substantial part of occupation costs represented expenditure in the country by the occupying power; but a further part involved exports of requisitioned supplies, which are not necessarily reflected in the government deficit. Thus, in Belgium, Denmark, and the Netherlands, exports to the occupying power accounted for some 45 to 60 per cent of the total costs of occupation. In Belgium and the Netherlands, and also in Norway, the cost of these was originally recorded as a debt due by the occupying power to the Central Bank, and therefore did not affect the budget, except that the Norwegian Government paid to the Bank slightly over 3 billion kroner in the years 1941 through 1944. Expenditure similar to occupation costs was also incurred after liberation, partly in the form of outlays by the local government for the support of Allied troops. In Norway, 0.7 billion kroner were spent in 1945, Constituting the largest part of the total deficit. The sharp inflation in Belgium between October 1944 and December 1945 appears to have been due mainly to a similar cause. In Denmark, expenditure on refugees in 1945 accounted for most of the budget deficit in that year.

Apart from the costs of occupation, the government deficits have varied widely. For instance, in Norway during the later war years there was a small surplus, at least as far as concerned the Government in Norway. In Denmark, the ordinary budget (excluding costs of occupation and refugees) was balanced each year. In France, the corresponding budget deficits during the war were substantially less than in 1938. In the Netherlands, on the other hand, heavy deficits were recorded each year.

In arriving at figures of government expenditure, a distinction has been attempted between “nonprofit-seeking” investments by governments and government agencies (e.g., roads, schools) and “profit-seeking” investments (e.g., railways). The former have been included in the figures from which Table 4 has been calculated; the latter have been added to the figures for private investment to make Table 6. For Denmark and Norway, no such distinction is feasible, and all public investments are included in Table 4.

Table 4.

Inflationary Forces Originating in Public Finances

(Deflationary forces in italics)

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National currency.

Central government only.

Figures unadjusted except for occupation costs (see p. 35).

See note 2, Table 3.

Data are for fiscal years beginning April 1.

Average 1940-44. See note 5, Table 3.

Data are averages of each two successive fiscal years (July 1 to June 30).

Sources: Belgium: Ministry of Finance.Denmark: Danmarks Nationalbudget for Aaret 1948.France: 1938, 1946, 1948, ad hoc computation covering all public authorities; 1940-45, Inventaire Financier, p. 230; (this series is not comparable with the remaining figures, since it relates to central government only, and moreover is incomplete, covering generally only the ordinary and extraordinary budgets; the discrepancy may be as high as 25%); 1947, Inventaire Financier, p. 559.Netherlands: 1938, Statistiek der Rijks Financiën, 1938; other years based on Nota betreffende de Toestand van’s Rijks Financiën, September 1948.Norway: Statistisk-Økonomisk Oversikt over Året 1948; Nasjonalbudsjettet, 1949, p. 146; UN Document E/CN.8/31, Annex 3 (November 9, 1948).Sweden: Statistisk Årsbok.United Kingdom: 1938, 1946-48, Cmd. 7649; 1939-43, Cmd. 7099; 1944-45, Cmd. 7371.

Before the inflationary effect of the government deficit can be assessed, numerous adjustments are necessary. In particular, there must be added the net deficit (if any) of public authorities other than the central government (including autonomous social insurance funds), plus that portion of the occupation costs which was originally charged, as an accounting device, to the Central Bank. On the other hand, there must be removed, from both receipts and expenditures, items which do not in fact represent withdrawals from or additions to current incomes. The assumption has been made that none of the following receipts was deflationary: death duties, capital levy (including the U.K. “special contribution”), capital increment tax, war damage duty (when levied postwar), and part of stamp duties (U.K.). It has also been assumed, conversely, that neither of the following items of expenditure was inflationary: redemption of loans, subsidies to colonial governments. Where details of the items in these groups are available, they have been deducted from the gross receipts and expenditures, respectively. It should be noted that while the deductions are often defective for the war years, the increased size of the crude deficit during those years was usually sufficient to reduce to insignificance such minor adjustments, so that their omission is comparatively unimportant. It has also been necessary to exclude from budget receipts (where included therein) the counterpart fund set up under ECA, since the corresponding imports appear in the balance of payments and their deflationary effect is included there. Table 4 shows the budget figures after adjustment.

It will be seen that the inflationary effect of public financial operations reached during the war was a very large percentage of the national income. To some extent this produced a rise of prices, but probably more important was the growth in liquidity. Except in the Netherlands and Norway, the postwar “deficits” do not differ widely from those of 1938. If some part of the capital levy imposed in Denmark, the Netherlands, and Norway, or the corresponding special taxation in the United Kingdom, was paid out of income, the inflationary effect is correspondingly overstated. Against this, in the case of the United Kingdom, must be set the probability that a part of the proceeds of the sale of government surplus stocks was derived from capital funds, and was thus not anti-inflationary.

Important contributions to the deficits have been made throughout the whole period since 1939 by subsidies, especially of food, and military expenditures; and since the end of the war by government investment, primarily in reconstruction. Details of the budgets of the war years are difficult to interpret, but Table 5 analyzes three main elements in the prewar and postwar situation, two of which are on current and one on capital account. Military expenditures, subsidies (including losses on state enterprises), and government investment (including reconstruction and capital transfers to the private sector) go far toward explaining the postwar difficulties of European treasuries. The data in Table 5 (column A) show that after 1945 military expenditures in most countries tended at first to absorb a higher proportion of the budget than prewar. Subsidies and losses on state enterprises (column B) have accounted for substantial and generally increasing fractions of the total postwar budgets. This is indicative of the difficulty of restraining the inflationary spiral—the cost of lessening the pressure for wage increases being an increase in government expenditure, itself prima facie inflationary. Investment expenditures by the government, including war damage compensation and other capital transfers to the private sector, plus expansion of nationalized industries (column C), have also heavily weighted recent budgets. To the extent that they overlap with profit-seeking investment they have been omitted in Table 4, and have been included instead in Table 6.

Table 5.

Special Budgetary Expenditures1

(As percentages of total government expenditures)

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Series A: Military expenditures.

Series B: Subsidies and losses on state enterprises.

Series C: Government investment and capital transfers to the private sector.

Series C excludes war damage payments.

Data are percentages of all public authorities’ expenditures. Series C, 1946-48, includes investments of all public authorities and excludes war damage payments.

Series B, 1946-48, covers subsidies only. Series C represents budget deficits on capital account, plus credits to Netherlands East Indies and other capital transfers.

Data are averages of each two successive fiscal years. Series B includes interest on capital advanced by the Government to state enterprises. Series C includes all public investments plus repayment of government debt plus war damage compensation.

Data are averages of each two successive fiscal years. Series B represents profits on public enterprises less subsidies. Series C represents 75 per cent of public gross investments; for this series, the figure shown for 1938 covers 1938-39.

Data are for fiscal years beginning April 1. Series C represents nonprofit investment by the Government plus capital transfers to the private sector (including war damage compensation).

Sources: As in Table 4, with the following exceptions:Denmark: Statistisk Aarbog; Forslag til Finanlov for Finansaaret, 1948-49.France: Ad hoc computations.Sweden: Meddelanden från Konjunkturinstitutet, Serie B:9.
Table 6.

Net Profit-Seeking Investment1

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Figures in italics are disinvestments.

National currency.

Gross investment figure deflated by deducting each year 9 per cent of national income at factor cost (cf. depreciation element in U.K. 1946, 8.9 per cent, and 1947, 8.8 per cent of national income).

Excludes all public investments.

Includes ad hoc estimates of the effect of wage increases on working capital: viz., 1946, 160 (6%); 1947, 180 (5%); 1948, 375 (6%).

1939 figure.

Gross investment figures deflated by deducting each year 10 per cent of national income, as recommended by UN, National Income Statistics, 1938-1947, pp. 95, 121. These figures still seem too high, but the relationship between 1938-39 and later years is presumably consistent.

1938-39 figure.

1943-45 figure.

Sources: Belgium: Ministry of Economic Coordination.Denmark: Statistiske Meddelelser, 4 Raekke 129 bind, 5 Hefte; Danmarks Nationalbudget for Aaret 1948; Ministry of Finance, Statistical Appendix.France: Ad hoc estimate based on 2eRapport semestriel, Commission du Plan, Paris, p. 75, Table II C; ECA (Paris Mission} Report on France, Tables 120 to 124.Netherlands: 1938, 1948, ad hoc estimates; 1946, 1947 based on Statistisch Bulletin van het Centraal Bureau voor de Statistiek, March 24, 1949.Norway: Nasjonalbudsjettet (annually).Sweden: 1938-39, 1943 through 1947, UN, National Income Statistics, 1938-47, p. 121; 1948, Meddelanden från Konjunkturinstitutet, Serie B:9.United Kingdom: As in Table 4.

Because of the complexities of government accounting, and the varying nature of the data available, comparability in Table 5 is considerably less between countries than over time in each country separately. The investment figures are particularly heterogeneous, and the significance attaching to the wide disparity between those shown, for example, for Denmark, the Netherlands, and Norway cannot be fully analyzed within the limits of a summary table.

Investment

As stated above, nonprofit investment by public authorities is in most cases included in the figures in Table 4. In Table 6, the attempt has been made to bring together statistics of profit-seeking investments by the government, nationalized industries, business enterprises, and private individuals (housebuilding only). Only Denmark and the United Kingdom, however, have a complete series of investment figures since 1937, and for the former all public investments (profit-seeking and otherwise) are grouped together (Table 4). For the remaining countries, partial figures are available. In some cases the data are for gross investment and therefore adjustments to eliminate depreciation and maintenance elements have had to be made; the resulting estimates, summarized in Table 6, are shown in round numbers to avoid any appearance of exactitude. For some countries (notably the United Kingdom) the allowances for depreciation and maintenance, deducted from gross investment, may understate the actual amounts expended in that direction. The figure shown for net investment will then be an overestimate. There is, however, no reason to suppose that the degree of overestimation will change significantly from year to year.

It must be remembered that private investment figures are particularly uncertain. The impression derived from an examination of the data, however, is that activity in this field was, relatively, at a low ebb during the war and in 1945, but that since then there has been a steep upward movement. In most of the countries, private investment in 1946 and 1947 was substantial; in four countries, activity in 1948 was greater than in 1947, and in five countries, 1948 activity exceeded that in 1946. The principal urge in these years has been for reconstruction, including a rebuilding of inventories, although two other forces may be noted. On the one hand, the loss of overseas markets and the growing tendency toward economic nationalism have led in most of the countries to some reorganization of their domestic industries. On the other hand, the loss of overseas investments and their replacement by overseas debts have necessitated the encouragement of export industries. Both forces have inevitably involved increases in investment activity.

Balance of payments

A complete analysis of the causes and magnitudes of the export and import surpluses of each country studied would involve a study too detailed to be possible here. In Table 7, a summary of the balances on current account (goods, services, interest, etc.) is presented. The figures for the war years have been adjusted to eliminate the export surpluses due to occupation, since their inflationary effect has been included in Table 4. Credits for the restitution of looted gold have also been removed.

Table 7.

Export and Import Surpluses1

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Figures in italics indicate import surpluses.

National currency.

1937 figure.

Assuming national income in 1937 was approximately the same as in 1938.

Excluding earnings of merchant fleet outside Norway.

Sources: For the following countries and years, the data are taken from the Fund’s Balance of Payments Yearbook, 1938, 1946, 1947: Denmark, 1938, 1946, 1947; France, 1946, 1947 (converted from dollars, at the following rate: 119.30 francs = $l); Netherlands, 1938, 1946, 1947; Norway, 1938, 1946, 1947; Sweden, 1938.Other sources used are as follows: Belgium—Ministry of Economic Affairs; Denmark—Statistisk Aarbog; France—Ministère de l’Economie Nationale (Statistique de Commerce Exterieur); Netherlands—1948 ad hoc estimate; Norway—Statistisk Årbok, 1948; Norges Bank Bulletin, No. 4, 1948; Nasjonalbudsjettet, 1949; Sweden—Statistisk Årsbok, 1948; Meddelanden från Konjunkturinstitutet, Serie B:9; United Kingdom—as in Table 4.

It is apparent at once that the inflationary situation in all the countries studied has been alleviated, in many cases very materially, by postwar import surpluses. The position in the Netherlands and in Norway is particularly striking, the import surplus largely balancing respectively the budget deficits (Table 4) and private investment (Table 6), which in Norway included a good deal of shipping. Even apart from these special cases, however, the dependence of Europe on the Western Hemisphere has afforded substantial relief from the inflationary pressure. In 1946 and 1947, the import surplus added some 7 or 8 per cent to the real income of Belgium (facilitated by a repatriation of capital) without adding simultaneously to its money income. For France,-the corresponding figures for 1946, 1947, and 1948 averaged 7 per cent; for the United Kingdom just over and for Denmark just under 4 per cent; for Sweden over 3 per cent. In the Netherlands, the outflow of government capital to the Netherlands East Indies reduced the import surplus by around 200 million guilders a year. The figures shown in Table 7 are the reduced ones; in order to avoid double-counting the inflationary effect, equivalent deductions have been made in Table 4.

Obviously, such import surpluses are highly abnormal and can be maintained only by external aid, by liquidating overseas investments, or by drawing on monetary reserves. The extent to which Europe’s import surplus has depended upon external assistance is indicated in Table 8; most, though not quite all, of the amounts shown in columns (2) and (5) represent grants and loans by the United States and Canadian Governments. Columns (3) and (6) show the extent to which Europe’s overseas assets have been depleted by sales in the Western Hemisphere. The important fact emerges that a very large proportion of the anti-inflationary effect generated in the balance of payments is essentially temporary, and will in fact weaken Europe’s future position. Indeed, as far as loans are concerned, the effect will, of necessity, presently have to be reversed in order to achieve repayment. This factor must be borne in mind in assessing the aggregate result.

Table 8.

Nonrecurring Financing of Balance of Payments with the Western Hemisphere

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Including gold loan of £0.08 billion from South Africa.

Sources: Ad hoc compilations.

Summary

Charts 1 and 2 and Table 9 summarize the gross inflationary factors in each country, insofar as information is available; the approximate nature of much of the data must, however, always be borne in mind. Probably the most surprising thing about the data is the magnitude of some of the figures. Since prices in 1938 were, generally speaking, tending to fall except in France, the sum of the gross inflationary factors elsewhere can scarcely have exceeded intended savings. These savings may accordingly be assumed to have averaged around 15 per cent of national income (less in Denmark and the United Kingdom; more in Sweden). During the postwar period, the gross inflationary factors have in some cases (notably France) been considerably in excess of this average; but in others (e.g., Denmark, Netherlands) they have been appreciably smaller. Other things being equal, this fact would suggest an inflationary tendency in the former cases and a deflationary tendency in the latter.

Chart 1.
Chart 1.

Total Gross Inflationary Factors as Percentages of National Income

Citation: IMF Staff Papers 1950, 001; 10.5089/9781451959994.024.A002

* Not known
Chart 2.
Chart 2.

Inflationary (+) or Deflationary (−) Factors as Percentages of National Income

Citation: IMF Staff Papers 1950, 001; 10.5089/9781451959994.024.A002

Table 9.

Gross Inflationary Factors1

(Percentages of national income)

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Series A: Inflationary forces originating in public finance (Table 4).

Series B: Net profit-seeking investment (Table 6).

Series C: Export (+) or import (—) surplus (Table 7).

Some totals differ from sums of preceding columns because of rounding.The expressions “+0, –0” indicate positive and negative quantities arithmetically smaller than 0.5.For notes and sources, see Tables 4, 6, and 7.

This, however, is an untenably rough conclusion, for despite the initial assumption of a linear relation between incomes and intentional savings, there is reason to expect that the proportion of the national income intentionally saved has in fact fallen.9 The deprivations suffered during the war have disposed everyone to seek to restore consumption standards as opportunity has offered itself. To form any view about the magnitude of this change in savings habits would require a substantial degree of further analysis, including in particular a study of latent inflation, which cannot be undertaken within the limits of this paper. For the moment, all that can be said is that it is impossible to conclude, even from the lowest figures given in Table 9, that there have been net deflationary tendencies acting in any country since the war; but that it seems clear that in certain countries (especially France) a considerable—though possibly diminishing—inflation has persisted.

Finally, it may be noted that the indications of inflationary pres-sure in the war years, although fragmentary, are sufficient to suggest that the technique adopted is capable of giving a meaningful summary of even so disturbed and abnormal a period. It highlights, for example, the inflationary significance of the failure to cover a higher proportion of government expenditures by taxation. The analysis also emphasizes that, even in present circumstances, a substantial proportion of the national income must be saved if inflation is to be avoided; once the transition period of external assistance is ended, this need will be heavily increased.

APPENDIX

Origin of National Income Figures in Table 1

Belgium. UN figures are available only for 1938, 1939, 1946, and 1947 both in the standard form and in an unrevised version. For 1941, 1943, and 1948, there are estimates by Professor Baudhuin (of which the first two are reproduced by the UN). These appear to be comparable to the unrevised UN figures; the latter have therefore been used in preference to the standardized ones. For the other years it has been necessary to hazard a series of guesses based on known trends in population (through deportations, etc.) and output, but the absence of price indices for the war period has prevented any check being made.

Denmark. The standardized UN series has been used for each year.

France. Estimates of national income at current prices (series (a) in Table 1) are available only for 1938, 1946, and 1947. For the other years there is an estimate of national income at 1938 market prices; for 1939 through 1945, this has been deflated by the ratio between national income at factor cost and at market prices in 1938, and then inflated by the average of the indices (1938 = 100) of wages and of wholesale prices for each year. This yields series (b) in Table 1; it is thought that this will approximately produce the effect of translating the 1938 price figures into current prices, and in fact the 1947 figure obtained is practically identical with the direct estimate. For 1948 the figure deflated in the same way has been inflated by the index of wholesale prices only, no index of wages being available. But in 1947 the indices of wages and of wholesale prices were identical, so that it is not thought that the difference between this figure and the rest of the table will be considerable. However, the resulting series can be regarded only as giving the approximate order of magnitude of the national income sought.

Netherlands. The standardized UN figures are available only for 1938, 1939, 1946, 1947, and 1948. For 1938 and 1942 independent estimates by Dr. Derksen exist; in Table 1, Dr. Derksen’s 1942 figure has been deflated in the proportion which the standardized UN figure for 1938 bears to Dr. Derksen’s estimate for that year. For 1940, 1941, and 1943 an ad hoc estimate has been made by inflating an index of physical production (1938 = 100) prepared by the Central Statistical Bureau, by a series composed of wages and wholesale prices weighted 4:1. In view of the controls exercised in the Netherlands, it is believed that this reasonably reflects the adjustment required; at any rate, the 1942 figure so obtained agrees closely with Dr. Derksen’s as revised. For 1944 and 1945, however, the figure derived from this formula is obviously too low in comparison with government expenditures. The economic disorganization in the Netherlands in these years makes it impossible to expect to obtain a reliable figure, but for 1944 an estimate has been hazarded upon a consideration of the size of the budget, and the developments in the national income of countries in a similar position in that year.

Norway. A complete series is available in the UN standardized form, except for the year 1944. An ad hoc estimate has been made for that year, based on converging indications afforded by series of statistics for national income at market prices and for real national income, both of which include 1944.

Sweden. The UN publication National Income Statistics, 1938-1947 gives an adjusted series for 1938-39 (fiscal year) and 1943 through 1947, annually. For Table 1, estimates have been made for the years 1940 through 1942 by inflating the 1938-39 figure by the product of the indices for the cost of living and industrial production, both taken with the average of 1938 and 1939 as a base. Crude as this method is, it gives results within about 3 per cent of the actual figures for each of the years 1943 through 1947, and may therefore be regarded as producing a reasonable approximation for the earlier years. For 1948, an estimate of gross national product is available; this has been deflated by 10 per cent, which is the estimate put forward by the UN Statistical Office of the proportion constituting depreciation and maintenance.

United Kingdom. The standardized series is available for 1938 through 1947; an estimate has been made of the corresponding figure for 1948, based on the unstandardized figure given in U. K. statistics.

1

This study owes much to this literature, and even more to discussions within the International Monetary Fund which have helped to clarify and refine the concepts used. A technique somewhat similar to the one here used appears to have been first adopted in the United Nations study, “Survey of Current Inflationary and Deflationary Tendencies” (1947.II.5). The statistical data presented in this paper were provided by the staffs of the Western European, British Commonwealth, and Statistics Divisions of the Research Department of the Fund.

2

The terms “inflationary” and “anti-inflationary” (rather than “deflationary”) are used to emphasize the antithetical nature of the concepts, and because most of the situations analyzed in the present study exhibit degrees of inflation. It would, of course, be equally correct, and in a depression more meaningful, to call savings “deflationary” and investment “anti-deflationary.”

3

Let Ft = inflationary forces in year t

St = international savings in year t

Zt = assumed variable in year t

Nt = net inflationary pressure in year t

t = 1 in base year

Then condition b states

(1)St=cZtt=1,2…

where c is a constant.

The net inflationary pressure is expressed by

(2)Nt=Ft-StZt=FtZt-c,t=1,2…

using (1).

For t = 1 we have Nt = 0, or

(3)0=F1Z1-c.

Subtracting (3) from (2), we have

(4)Nt=FtZt-F1Z1.
4

In the usual notation the series may be written Ya, Yb . . . so that intentional savings will be represented by

f(Ya)=Ya100;f(Yb)=Yb100…
5

If the quantum in the first year of the series could be used as the base of the percentages, a comparison of the percentages for two countries would enable the intensity of the inflation to be directly compared, year by year. But it has been found in practice that because of erratic imperfections in the statistics, for the first as well as other years, this procedure sometimes gives nonsense results. By using as a base the mean quantum instead of the quantum for the first year, the effect of these erratic imperfections is substantially reduced, though at the expense of limiting the international comparability of the quanta in the way described in the text.

6

Pages 25-26.

7

An inflation will to some extent increase the national income in the course of the year in which it develops. A more nearly correct formulation than that given in the text would utilize as the denominator for the gross inflationary factor not the national income of the year for which it is calculated, but the annual rate of national income at the beginning of that year. However, this can in practice only be guessed. A sufficient correction will be made if it is borne in mind that the method actually used tends somewhat to underestimate the size of the gross inflationary factor, especially when inflation is most active.

8

If the deficit is 8, investment 12, the import surplus 15, and gross national product 100, the gross inflationary factor becomes

100(8+12-15)100or100(8+12-15)115

according to the denominator selected; the difference (0.65) is unimportant in relation to the inevitable margin of error in the figure for investment. This argument is indeed invalid in the case of an export surplus, where the numerator grows as the denominator shrinks; but in practice export surpluses have been important in the last decade only for the United States and some Latin American countries. And for the latter, the absence of national income statistics precludes, in any event, the use of this particular technique.

9

Cf. p. 31.

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Cover IMF Staff Papers
IMF Staff Papers: Volume 1, No. 1
Author: International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1950: Issue 001
Publisher:
International Monetary Fund
ISBN:
9781451959994
ISSN:
1020-7635
Pages:
184
DOI:
https://doi.org/10.5089/9781451959994.024
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    Total Gross Inflationary Factors as Percentages of National Income

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    Inflationary (+) or Deflationary (−) Factors as Percentages of National Income

Total Gross Inflationary Factors as Percentages of National Income

Inflationary (+) or Deflationary (−) Factors as Percentages of National Income