Art. 4.-PRICES AS AFFECTED BY CURRENCY INFLATION.

ALTHOUGH the enormous increases in the cost of living since the autumn of 1914 have been tabulated by the Board of Trade, debated in the House of Commons, and discussed in the Press, very few serious attempts have been made to discover whether the upward movement of prices is entirely due to unavoidable causes, or whether some part of it is attributable to circumstances which it is within our power to ameliorate. The price of food is the concern of every man and woman in the country; and it is, of all subjects of pressing importance, the one which the people might themselves most easily probe to the roots. Discussions on the subject have, however, generally been based on the assumption that high prices are either absolutely unavoidable or are, at the best, only capable of such mitigation as might result from 'profiteers' being compelled to forgo a portion of their extra gains. Probably this neglect of an important subject is due in part to the fact that some of the more serious evils of high prices are mitigated in consequence of unemployment having virtually ceased to exist, and of wages having risen considerably, even if not in the same proportion as the cost of living.

In the course of the discussions which have taken place, the obvious reasons for prices rising have been fully explained. The most notable of these are restriction of production, caused by the withdrawal of great numbers of men for active service and for munition work; the necessity of feeding and clothing the fighting forces on a scale more liberal than that to which the men had, on the average, been accustomed in civil life; the narrowing of markets as a result of sources of supply being cut off; and the enormously increased difficulties of transport, particularly by sea. To these may be added the opportunities of effecting 'corners in various classes of goods, which dislocation of trade has made possible, and also increased consumption on the part of the by no means insignificant number of civilians who have benefited financially by the war. These are the ostensible causes of high prices. They have always operated in the past when war has been

waged on a considerable scale; and, just as the present colossal struggle transcends all previous wars in magnitude and intensity, so might the effects on prices of the factors named be expected to transcend the effects of the same factors on prices during other wars. But this phenomenon need not necessarily blind us to the fact that other very powerful influences may be at work. The late President of the Board of Trade was clearly not satisfied that the ostensible reasons were a sufficient explanation of the upward movement of prices. 'The currency of the world was,' he said, 'inflated, and values were not now what they appeared to be.'

Although sovereigns and half-sovereigns have now practically been superseded in circulation by Treasury notes, our currency still remains on a gold basis, as also do the currencies of all the belligerents-of nearly the whole world in fact. It is an axiom of Political Economy that the price of anything is its value in relation to money. That being the case, a general rise in prices simply means that the value of money has decreased in relation to the value of all other articles. According to Adam Smith,

'gold and silver, like every other commodity, vary in their value; are sometimes cheaper and sometimes dearer, sometimes of easier and sometimes of more difficult purchase. The quantity of labour which any particular quantity of them can purchase or command, or the quantity of other goods which it will exchange for, depends always upon the fertility or barrenness of the mines which happen to be known about the time when such exchanges are made.'

Cairnes, writing in 1859, argued the point more fully in his Essay towards a solution of the gold question.' He explained the consequences which would ensue from the increased supply of gold then being poured into the world from the mines of Australia and California, on the assumption that all other things remained the same. The consequences which he feared were not, however, realised, because all other things' did not remain the same. Expanding trade throughout the world necessitated largely increased currencies; and, commencing with Germany in 1872, followed a year later by the United States, several countries of first-class importance

changed their standards from silver to gold. For these two reasons, vast quantities of the more precious metal were required for coinage; and the anticipated surplus resulting from mining activity in California and Australia not only failed to materialise, but the output of the mines was actually insufficient to meet the world's growing demand for gold. Consequently, the general tendency was for prices to fall until 1896, when the output from the Transvaal turned the scale in the other direction. Since then prices have, in the main, always moved upwards. Bagehot, who was perhaps the most illuminating of all writers on currency, was very emphatic. 'Money,' he declared, 'is a commodity subject to great fluctuations of value caused by a slight excess or deficiency of quantity.'

A very great increase in what Adam Smith rather quaintly called 'the fertility of existing gold mines would, according to that writer, inevitably result in the cheapening of gold, and, therefore, in a general rise of prices. It is perfectly certain that there has been no great increase in the fertility' of the gold mines since the autumn of 1914; but it is equally certain that there has been, since then, an output of gold substitutes vastly exceeding in nominal value the wildest dreams of the possibilities of mineral production. By force of law, these gold substitutes, in the shape of British, Russian, French, Italian, and German paper money, rank in the countries of issue on the same footing as gold, and have had almost exactly the same effect on prices as the introduction into the currencies of the world of an equivalent amount of gold. Since the autumn of 1914, paper money in excess of the gold held in reserve for it has been issued by the belligerent States to the extent of over 1,500,000,000l. The gold won from nature during the last 500 years is estimated to be slightly less than 3,600,000,000l., of which all but 700,000,000l. has been produced since 1850. Actual gold coin now in existence could not possibly exceed 2,000,000,000l., so that the effect of the paper money recently brought into circulation has been to increase the gold currency of the world by something like 75 per cent. During the last thirty-three years the Rand has produced gold to the extent of 515,000,000l., or very little more than the

nominal value of one-third of the gold substitutes placed on the world's markets since August 1914. In the light of these figures no investigation of the causes of existing high prices can be of much value if so important a factor as the output of paper money be ignored.

Prices were at their lowest in 1896. By that time Germany and the United States had completed the conversion of their standards from silver to gold; and the fresh supplies of the more precious metal which they required had become normal. Austria and India had begun, in 1892 and 1894 respectively, an active demand for gold for conversion purposes; but after 1896 that demand very considerably decreased, and, from the same year, the output of the Transvaal mines began to grow rapidly. This combination of circumstances gives us a unique opportunity of testing by the historical method the theory of Adam Smith, Cairnes, and Bagehot, that prices will rise if the supply of gold increases at a more rapid rate than trade in general. I append tables showing the world's output of gold and the index numbers of prices in the United Kingdom from the year 1896. The latter is taken from returns published by the Board of Trade. It will be seen that from 1896 to 1914 there was a fairly steady and, in the aggregate, a considerable rise in general prices.

INDEX NUMBERS (BASED ON THE WHOLESALE PRICE OF COMMODITIES).

So far, we have not considered rapidity of circulation. It is obvious, however, that if, during any given period, a sovereign changes hands a dozen times it performs twelve times as much work as another which only changes hands once. There is also the question of credit. It is well known, not only that modern trade is conducted to a far greater extent on a credit than on a cash basis, but also that credit documents can be, and are in fact, created to such an extent that they overwhelmingly exceed in amount the total money issued in the form of coin and notes. Because of the growth and development of the modern banking system, these two factors have acquired enormous importance since the middle of last century. So great is the capacity of banks to create credit that, for the last fifty years at least, writers on Political Economy have tacitly assumed that the amount of the currency has had very little effect upon prices, since it is nothing but a relatively small part of a circulating medium which is principally composed of credit documents. Acceptance of this view has probably led us, and not only us but our Allies and enemies also, to view without apprehension the enormous masses of practically inconvertible paper money which have recently been placed on the markets. It has also blinded us to the fact that some at least of the increase of prices from which we are suffering is due to currency inflation.

Few people nowadays desire to keep in their own pockets more money than is required for immediate needs; and all shopkeepers of any importance have banking accounts into which they pay surplus cash received from day to day. The result is that the great bulk of a nation's money is stored in the banks. The primary object of bankers can be summed up in a few words: it is to borrow money from the public and to lend it out again at a higher rate of interest. No one wants to borrow money from a banker except with the object of paying it to some one else; and, when the borrower pays it away, the receiver promptly places it in his own bank. It may not be the same bank as the one which advanced the loan to the original borrower, but, whether it is or not, the net result is that the aggregate amount of cash actually held by banks remains Vol. 228.-No. 452.

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