The shocking truth about inflation: it could do us a power of good

THE Jacobite heritage season is almost upon us. A few weeks, and it will be exactly 250 years since Prince Charles Edward raised his standard at Glenfinnan. The Forty-Five perhaps deserved to fail. But the idea of hoisting a banner that made Whigs scream and clutch their money-bags was a fine one. It's in that spirit that I want to raise another standard. It would bear a slogan so obscene that pious parents would cover their children's eyes against it. My flag will say: "Long Live Inflation, Friend of Mankind!"

How strange it is that the British should have let themselves be conquered by Whiggish zealots who believe that inflation is the deadliest sin! The British - that conspiracy of cheerful, slovenly peoples whose main tribe, the English, live under the slogan of "Go on: spoil yourself!" But it has happened, and last week Parliament trembled at the idea that the Chancellor might not be able to keep annual inflation below a mere 3 per cent.

I am not arguing for "runaway" inflation. Nobody sane can do that. I remember the 1970s, when each bottle of shampoo cost half-as-much again as the last one. More to the point, I remember when a small espresso in the Warsaw Holiday Inn cost more than a first-class return sleeper to Vilnius. What I am arguing for is recognition that moderate inflation is healthy - a sign, indeed, that the economic organism is alive and growing. What we should all ask is why a miserable, blue-nosed, canting, hypocritical, sadistic tribe of anti-inflationary preachers has captured every economic pulpit in the land.

When I first went to Germany, in the early 1960s, I was amazed to discover a nation which feared inflation more than unemployment. The Britain which I had left - the land of the welfare state - had no folk-memory of inflation, which seemed an obscure bit of banker's lore. In contrast, they regarded unemployment as an old evil, like TB, which no modern society should tolerate. Over the years, however, these attitudes changed places. The Germans have grown much more concerned about the social and political poisons spread by joblessness, while the British have been brainwashed into accepting the permanence of mass unemployment and the wickedness of almost imperceptible rises in the Retail Price Index.

Today, slogans like "Squeezing inflation out of the economy" are used, as if the faintest trace of this toxin could be fatal. People talk of a "sound money" policy, rather than a tight money policy, until "easy money" is thought equivalent to easy virtue. Anti-inflationary rhetoric is apt to use sexual references like that. It sounds a familiar note of Puritan hysteria which proclaims that the sin of uncleanness must be rooted out utterly, that the sinner should loudly give thanks for his own chastisement as the demon is thrashed out of him (ie, that the voters will support the party that cuts their earnings and destroys their bargaining power).

Like most of our problems, this one dates back to 1979. When the Tories took power that year, the British lurch into seriously destructive rates of inflation had already been brought under control. But this did not prevent Mrs Thatcher from applying a panoply of economic brakes, from monetarism through anti-union legislation to budget-cutting, which convinced a large part of the electorate that their sufferings were their own fault. They had been thoughtless in asking for more; they had wallowed in easy money which lost its value. Guilt-ridden, the British masses bowed their heads - and while the masses were not looking, the City and the yuppies made the easiest, fastest money since the South Sea Bubble. (When that bubble burst, in 1989-90, inflation bobbed up to over 9 per cent).

Since then, and especially after the "Lawson Boom", a terrible, thin- lipped orthodoxy has prevailed. There are young "analysts" strutting about the City who believe that zero inflation is a plausible target - which is like saying that the best way to regularise a heart's rhythm is to stop it. But all orthodoxies with moral pretensions are absurd, and the assumption that minimal inflation equals maximum rectitude is absurd too.

Moderate inflation - within single figures - has a complicated but stimulating impact. Its global effect is to create a society in which large, determined but usually peaceful social struggles take place, as whole sections of the population improve their lot and revise their relative standing. There is a sense of collective - as opposed to individual - opportunity. This is a context in which standards of living improve at very different rates for different groups, so that "our lot" will always be able to use the improvements won by "their lot" as the reason for demanding better pay or conditions. Times of moderate inflation can seem turbulent, but are generally optimistic.

A steady but controlled rise in prices favours certain big organisations - trade unions, but also large manufacturers. To put it crudely, moderate inflation encourages Colossus Forges Ltd to delay paying its bills for many months (the equivalent of a gigantic tax holiday) and enables it to reduce its suppliers to a condition of abject dependence. It also keeps the financial world in a state of suitable humility, with bankers sucking up to their powerful customers while attempting to bully small overdraft operators like you and me. These are times which favour the borrower, and above all him or her who can contrive to borrow long. Inflation, as the south-east English know all too well, can also enrich the home-owners, lulling them into the illusion that life with property is one long escalator. But there is nothing like a dose of inflation to revive a drooping building trade.

That economic macro-climate - slowly rising prices, a borrower's market - fostered much of Britain's old industrial growth and expansion. It was also the climate of the "Golden Years", the period between about 1950 and 1974 which brought Britain and western Europe the biggest increase of prosperity in history, when inflation ran at an average of 5 per cent. But even modest inflation has its victims and its enemies.

These are, first of all, people on fixed incomes: the old, the sick and those on forms of state welfare. Then come the savers, with diminishing nest-eggs. Small businesses have a hard time, tormented by impatient creditors and evasive debtors. These are all potential victims; in a different category are the enemies of inflation for whom rising wages and prices are merely an obstacle to accumulating wealth. These include most of the financial world and the money markets. Their interests demand stability in all things, including prices, and they like their would-be borrowers to be humble, a nervous, cap-twisting queue outside the door.

Inflation is a sort of shuffling process, constantly dealing new and unexpected cards to different social classes and interest groups. It resembles natural selection, ceaselessly experimenting, generating a continuous upward clambering which in turn leads to innovation. An economy with no inflationary dynamic is a dead economy.

But I am not optimistic about a return to inflation. The increasing age of our society means that the voice of the pensioner becomes politically stronger. The entry of Latin America, eastern Europe and China into the world economy will prove deflationary because of their abysmally cheap labour. Finally, this Government will never challenge City opinion on anything - and I doubt if a Blairite Labour administration would dare to do so either. And yet the democratic spirit needs that sense of uprising - that faint, delicious vertigo - which goes with inflation. We are all tired of being chained to the ground. Let's soar a little.