On the face of it the 'monetarist' explanations of inflation do seem to have a lot more going for them than those who believe wage increases are the source of inflation. There is no doubt that the period since the second world war has seen both a huge extension of bank and other forms of credit and a massive increase in state expenditure. This has created vast increases in the supply of money-for example in the boom of 1972-73, which led to the present inflation, the supply of money in the economy increased by around 30 per cent a year. In this boom production only increased at a maximum of 4-5 per cent a year. To use a text book phrase, 'too much money was chasing too few goods', and inevitably led to soaring inflation.
If it is to all forms of expansion of the money supply that the 'monetarists' attribute inflation, nevertheless it is for the expansion of the public sector of the economy that they reserve their worst venom. Papers such as the Financial Times rant on day after day about "excessive public expenditure. Once again on the question of the extension of public expenditure the 'monetarists' appear to have a point. If the post war period of soaring inflation has seen a fall in the proportion of wages in the economy it has also seen a huge extension of state and public spending. In 1938 in Britain the share of the state in the economy (including all forms of state production, wages of employees, defence and social service expenditure) was 31 per cent. By 1948 this had risen to 37 per cent, by 1964 it was 43 per cent. Today the public sector now accounts for around 56 per cent of the economy.
Even the 'monetarists' admit that this expenditure in itself is not inflationary. The vast bulk of it is paid for through sales of goods, rent, state loans, taxation, etc. This is not inflationary, as everything put into the economy in one form is balanced by finance taken out in another. What does cause inflation however is where money is pumped into the without being paid for either in sales of goods, loans to the state, or taxation. It is this which creates the situation of too much money chasing too few goods' and does drive up prices. There is no doubt that this difference between what the state pays out and what it receives in revenue - this difference being the budget deficit and today running at around £9,000-£12,000 million is the prime cause of inflation today. The 'monetarists' are quite correct when they say that if tnis aeficit were massively cut inflation would drop dramaticallv.