Many observers are beginning to worry about the long-term implications of inflation, not only for the U.S. economy, but for our society. Great Britain may provide some clues: Not only is the inflation disease more advanced there than in most developed countries, but its institutions are in many respects similar to ours.
Perhaps the most striking lesson to be learned from the British experience is that high rates of inflation are likely to be very unstable. Unexpected increases in the inflation rate have ravaged stock as well as bond values and have made it difficult for transactors to recognize relative price changes in the real economy. Corporations, uncertain about both profit trends and how the capital market will value them, have emphasized short-term payoffs in their decisions.
The most obvious consequence of these trends has been obsolete, outmoded plant and slowed secular growth. But a second important consequence has been a shift in the concentration of economic power away from private industry toward government as lagging private investment is replaced by public investment, and arbitrary transfers of wealth that foster a fragmented and contentious society. Over the long run, it would be hard to say that inflation has resulted in any major benefits to anyone.
Britain’s experience with inflation has led the Thatcher government to administer some bitter medicine in the form of restrictive policies. Unemployment has swelled rapidly. The rise in the value of the pound in response to restrictive monetary policy has reduced exports, even as it has produced very high interest rates. The resulting decline in corporate profitability and severe liquidity pressures have raised widespread fear of corporate bankruptcies.
Despite class antagonisms and trade union skirmishes, socially cohesive Britain can probably tolerate this kind of adversity longer than the United States. If the British are successful in their battle, it will be because they have experienced enough of the pain of inflation to be desperate enough to do something about it. If Americans following the British path are not yet desperate, they should be.