The Fight Against Inflation Is Becoming a Class War

Central banks have decided that heads, the rich win—tails, the poor lose.

By , a doctoral candidate at Harvard and a visiting academic at the Sheffield Political Economy Research Institute.
Governor of the Bank of England Andrew Bailey poses for a photograph with the new fifty pound (GBP) note, featuring an image of mathematician and scientist Alan Turing, at Bletchley Park in Milton Keynes, on June 21, 2021. (Photo by Joe Giddens / POOL / AFP) (Photo by JOE GIDDENS/POOL/AFP via Getty Images)
Governor of the Bank of England Andrew Bailey poses for a photograph with the new fifty pound (GBP) note, featuring an image of mathematician and scientist Alan Turing, at Bletchley Park in Milton Keynes, on June 21, 2021. (Photo by Joe Giddens / POOL / AFP) (Photo by JOE GIDDENS/POOL/AFP via Getty Images)
Governor of the Bank of England Andrew Bailey poses for a photograph with the new fifty pound (GBP) note, featuring an image of mathematician and scientist Alan Turing, at Bletchley Park in Milton Keynes, on June 21, 2021. (Photo by Joe Giddens / POOL / AFP) (Photo by JOE GIDDENS/POOL/AFP via Getty Images)

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Central banks have started reacting to inflation. In February, the Bank of England raised its base rate for the second time in two months, and the U.S. Federal Reserve is expected to do the same at its meeting in March. (Interestingly, so has the Bank of Russia—even the threat of war can’t break the dominant contemporary central banking consensus.) Alongside this shift in monetary policy, the governor of the Bank of England, Andrew Bailey, has asked workers not to push for a pay rise despite the fact that Bailey himself rakes in a rather large annual salary.

The difference between Bailey’s own income and his request is a dissonance that many have enjoyed emphasizing, in part because it smacks of class conflict: Let the workers suffer while I sit in my castle full of gold bars. The problem with this particular site of class conflict, such as it is, is that there is no way for the working class to win. It’s a case of heads, the asset holders win, tails, the working class loses.

Heads, in this case, would be central banks raising interest rates to head off inflation and achieve low, stable prices. This course of action is designed to support a strong private financial sector, something that many believe is good for everyone—no one wants another financial collapse a la 2008. Higher interest rates, however, make it harder for the working class to afford mortgages and other loans, and, most importantly, higher rates lead to lower private investment and hiring, increasing unemployment. In general, raising rates is likely to worsen living conditions.

Central banks have started reacting to inflation. In February, the Bank of England raised its base rate for the second time in two months, and the U.S. Federal Reserve is expected to do the same at its meeting in March. (Interestingly, so has the Bank of Russia—even the threat of war can’t break the dominant contemporary central banking consensus.) Alongside this shift in monetary policy, the governor of the Bank of England, Andrew Bailey, has asked workers not to push for a pay rise despite the fact that Bailey himself rakes in a rather large annual salary.

The difference between Bailey’s own income and his request is a dissonance that many have enjoyed emphasizing, in part because it smacks of class conflict: Let the workers suffer while I sit in my castle full of gold bars. The problem with this particular site of class conflict, such as it is, is that there is no way for the working class to win. It’s a case of heads, the asset holders win, tails, the working class loses.

Heads, in this case, would be central banks raising interest rates to head off inflation and achieve low, stable prices. This course of action is designed to support a strong private financial sector, something that many believe is good for everyone—no one wants another financial collapse a la 2008. Higher interest rates, however, make it harder for the working class to afford mortgages and other loans, and, most importantly, higher rates lead to lower private investment and hiring, increasing unemployment. In general, raising rates is likely to worsen living conditions.

Tails, the central bank doesn’t raise rates, allowing inflation, such as it is, to continue. This means price increases in food, energy, and housing, making for a standard-of-living crisis that will hit the poorest hardest. But don’t forget, maintaining one’s standard of living as prices rise is only seriously painful if one can’t secure a wage rise to match it.

This leaves us in a dilemma. Even if we all agreed we want to do whatever is best for the working class, what course of action should we support? We don’t simply want to let inflation run wild, but “doing something about inflation” seems to be synonymous with raising interest rates, which would harm the worst off among us.

So, what should central banks do? Some have suggested jettisoning the conventional interest rate mechanism and embracing price controls. This has caused a lot of aggressive, demeaning chatter in the economics community. But why? If Bailey can ask workers not to push for wage rises, why is it so ludicrous to suggest that the government ask firms not to raise prices—particularly in light of recent record-breaking profits? As the economist Dominik Leusder put it, “The message seems clear: price controls are fine, but only for labor.”

At the moment, central banks’ primary concern is avoiding the wage-price spiral. The idea is that, supposing workers have enough power, in the face of rising prices they will ask for rising wages to maintain their standard of living. When wages rise, prices will rise again, which will lead to wages rising more, and so on the spiral goes. In other words, dangerous runaway inflation is the workers’ fault for asking for higher wages. Hence, Bailey’s comments.

But if we go back to basics, we can quickly see how weird a story this is. Inflation is commonly understood as a general rise in prices. This doesn’t just happen. Prices rise when firms decide to increase them. The relationship, then, between inflation and firms’ decisions is much clearer and tighter than the relationship between inflation and workers asking for higher wages to meet rising living costs. So, again, why is the default reaction to inflation to ask workers to suffer the pain of prices rising faster than wages rather than asking firms to sacrifice some of their record profits?

What the strength of the wage-price spiral story and the vehement rejection of the suggestion of price controls reveal is simple: Our current limited monetary policy framework serves the interests of one group in society—private finance.

The dominant contemporary monetary policy regime is dedicated to preserving the stability of the private financial system, via securing stable prices (in the form of 2 percent inflation) and, since 2008, through financial regulation. From a historical perspective this should be no real surprise, because that is what it was designed to do. In the United States, the Fed was established after the financial panic of 1907 to secure the stability and success of the private banking system. In the United Kingdom, the Bank of England has been a private, profit-seeking institution for most of its history, created to serve the private banking industry and to finance war.

Today the Fed and the Bank of England are the monetary policy authorities in their respective countries, designing and executing public policy to govern the money supply. As the sharp end of democratic politics, public policy should be by, for, and of the people—all the people. However, in gaining their public policy powers, neither the Fed nor the Bank of England shed their foundational infrastructural connection with, or fundamental aim to serve, the private financial system.

This is what makes for such a tricky situation. What we have today are independent central banks designed to serve the interests of one sector of society, private finance, using the immense powers of public policy. That’s why Bailey is asking workers not to push for wage rises rather than asking firms not to raise prices. It’s also why, when it comes to the contemporary monetary policy system, we have a heads, the rich win, tails, the poor lose, situation.

What would monetary policy look like if it served all parts of society equally? The short answer is that such monetary policy would look a lot more like other kinds of public policy—it would be more political. Implementing such an approach to monetary policy would mean expanding the set of possible policies beyond the current binary—high inflation or high interest rates—to incorporate policies that might not prioritize the interests of asset holders.

Some find it hard to imagine that there are policy options other than traditional short-term interest rate adjustments. This is, in and of itself, evidence of the power of the dominant monetary policymaking framework. But, of course alternatives do exist: price controls, credit guidance and credit provision, and public banking (of various flavors), just to name a few.

Embracing a more democratic approach to making monetary policy doesn’t necessarily require adopting any one of these specific policy alternatives. However, a democratic approach to policymaking does require that the process is not rigged such that, whatever the outcome, the resulting policy will serve the interests of one (minority) group in society. Just as a fair coin toss—heads, I win, tails, you win—offers us both the chance to promote our own interests, establishing a fair, democratic approach to conducting monetary policy will require considering alternatives beyond the contemporary heads, the rich win (high interest rates), and tails, the poor lose (high inflation).

Leah Downey is a doctoral candidate at Harvard and a visiting academic at the Sheffield Political Economy Research Institute.

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