supply and demand, and that, if the price of any particular article rose owing to increased demand, there was an immediate tendency for supply to overtake demand, and, therefore, for the price to go down again. The theory was developed and put into more scientific order by Marshall. Both Mill and Marshall argued, however, as though money was a non-variable. It is, on the contrary, liable to tremendous fluctuations; and, although Mill's theory is accurate as regards the proportionate level which the value of any one class of goods, except money, bears to other classes, the value of all goods in relation to money changes with each variation of the amount of the currency and the structure of credit raised upon it. Mill's theory is, in fact, merely a subsidiary one.

It does

not explain the great movements of price; all that it does is to explain how the values of different articles, except money, tend to maintain the same proportion to one another both before and after great changes in the general level of prices have taken place.

Competition among banks is keen, and this leads to uniformity of method. An examination of the accounts of any of the leading banks will show that the credits created generally amount to from three to four times the total of the cash actually in hand. That is to say, through the agency of the banks, a given amount of cash is the basis of a structure of credit approximately three and a half times as great as itself. Any increase of the currency automatically results in the creation of fresh credit to the amount of three and a half times that of the new currency. Money is immediately cheapened in relation to other articles, and prices go up. Seeing that the world's currencies have recently been swollen to the extent of 75 per cent. by the issue of paper money, a very considerable rise in prices from that cause alone must have occurred, unless the issue of the new money coincided with a drastic curtailment of credit. At the commencement of the war, credit did of course contract. Banks were compelled to keep in hand a much larger amount of cash in proportion to their liabilities than formerly. This sudden and stringent curtailment of credit rendered new currency necessary if business was to be carried on satisfactorily. The only course open was to issue paper money; and the plan was immediately

adopted by all the belligerent States. As, however, public confidence was restored, credit began to grow again; and its new growth was not on the basis of the previous gold currencies, but on the basis of currencies inflated by masses of paper money and swelling from time to time by the issue of successive batches of similar paper money.

It is sometimes argued that, even if the effects of Bank credit upon prices can be gauged almost as accurately as the effects of the actual currency itself, there still remain several forms of credit which are subject to no law. Book debts, promissory notes and bills of exchange are cited as examples. The argument is, however, entirely fallacious. Such forms of credit are merely vehicles for transferring the immediate control of money from one person to another. They are, in fact, nothing more than an extension of the system of paying by cheque. If I pay an account by cheque, all that I do is to transfer to the payee the control of money which a bank is holding for me. The cheque adds nothing to the currency; it merely saves me the trouble of fetching notes from a bank and taking them to my creditor. If I buy goods on credit, the shopkeeper may replace them in his stock by means of his own reserve of money; in which case he virtually transfers from himself to me the immediate control of the money represented by the goods. If, however, he has no reserve funds on which he can draw in order to replace the goods, he either borrows from a wholesale dealer by getting other goods on credit, or raises a loan from a bank on the security of the bookdebt which I have been the means of creating. Similarly, the wholesale dealer either replenishes his stock of goods through the agency of his own reserve of money or by borrowing from his banker. Thus the inevitable effect is that, at one of the stages of the transaction, the control of money is transferred from some one else to me, or a Bank credit is raised.

And, as we have already seen, the amount of the Bank credits which it is possible to create varies with the amount of the currency. No shopkeeper will sell me goods on credit unless he believes that I will pay for them at some agreed or tacitly understood date. Virtually, therefore, I give him an unwritten and undated

promissory note or bill of exchange. If the transaction be a large one, the shopkeeper will proceed on more methodical and more business-like lines. He will want his promissory note or bill of exchange in writing, and he will want the date at which payment is to be made exactly stated. Having secured the document, the shopkeeper will follow almost precisely the same course as in the previous case. He may himself discount the bill by drawing on his own reserve of money; he may discount it at a bank; or he may replenish his stock of goods by buying on credit from a wholesale dealer. In any case the inevitable effect is, as before, that either the control of money passes from a person who had no immediate use for it to another who wants it at once, or a bank credit is raised.

When paper money is issued against a gold reserve, no impression whatever is made upon the currency. An instance of this is afforded by Bank of England notes. Under the Bank Charter Act 18,450,000l. worth of notes can be issued without reserve, but, in respect of all notes in excess of that amount, an equivalent value of gold must be withdrawn from circulation. Another instance is that portion of the issue of Treasury notes-about one-fifth of the whole-for the redemption of which the Government has earmarked gold coin. Treasury notes to the value of over 120,000,000l. have, however, been issued without any gold backing whatever. They are, therefore, a real addition to the currency, and they are, for the present at any rate, inconvertible in fact if not in name. So long as a country retains its commerce with the rest of the world, the issue of inconvertible paper is bound to have world-wide effects on prices. Naturally these effects are most marked at home; but they spread in diminishing degrees of intensity, just as a stone thrown into a pool of water creates a disturbance which in a modified form ultimately extends to opposite edges of the pool.

A mass of inconvertible paper introduced into the English currency increases bank reserves, thence credit, and so purchasing power. That purchasing power is translated into demand, and its application in the markets forces prices up. At once it becomes more and more difficult for English manufacturers to produce goods at

prices which will command a sale abroad; and exports decline. On the other hand, the higher prices ruling in England stimulate the sale here of foreign-made goods; and imports increase. An adverse balance of trade accumulates against England; English bills of exchange fall to a discount, and foreign bills rise to a premium. Gold has to be exported. If no further batches of paper money were placed on the market, the withdrawal of this gold would lower prices; on the other hand, it raises them in the countries to which it is sent. The movement of gold has, therefore, a twofold effect: by tending to lower prices here and by increasing them in the countries to which the 'gold is sent, it stimulates exports from, and checks imports into, England.

All the Allied countries in Europe have placed on the market successive batches of inconvertible paper money, which aggregate considerably over 1,000,000,000l. Each issue of paper money has forced up prices in the country of issue. An adverse trade balance has followed. In order to meet it, gold has been exported in large quantities to America and the neutral countries where, as a direct consequence, general prices also rose. That prices did not fall in the countries from which the gold was exported is attributable to the fact that fresh paper money was constantly being issued in more than sufficient quantities to replace the exported metal, so that, despite successive withdrawals of gold, there was still a constant tendency towards currency inflation. In consequence of this, prices are abnormally high everywhere. The currencies of all nations are glutted, those of America and the neutral nations with gold, and those of the belligerent nations with paper money.

In

The United States alone now holds considerably over one-fourth of the gold supply of the whole world. the period from Aug. 1, 1914 to Oct. 1, 1916, she increased her stock by 150,000,000l., i.e. by 40 per cent. Russia has issued more 'war' paper money than any other nation; and restriction of facilities for transporting goods is not, therefore, the whole explanation of the exchange difficulties with which Russia has had to contend. In normal times it takes 9 roubles to pay a debt of 11. in London; in January of this year no less than 17 roubles were required. Since Germany and Austria

are cut off from foreign trade, issues of inconvertible paper by those States have very little effect on the world's prices. On the other hand, Germany and Austria cannot export gold in bulk; and, in their cases, the constant tendency towards equilibrium of price all the world over is non-existent. Our enemies have, therefore, to bear the whole brunt of the consequences of their paper issues. If prices are higher in Germany and Austria than anywhere else, one of the principal reasons is that the currencies of those countries have been inflated to a greater extent by German and Austrian notes than the combined currencies of the Allied and neutral States have been inflated by the paper money issued by the Allied countries.

The problem of prices is twofold. On the one hand there is a marked diminution in the supply of food and all kinds of materials in consequence of military requirements and restriction of output; and, on the other hand, there is an increase of demand due to currency inflation. Following the German lead, serious attempts are now being made in England to control supply; and the organisations set up by the Government have the matter well in hand. Limitation of demand is, however, just as necessary as, and ought not to be more difficult of accomplishment than, control of supply. The gradual withdrawal of the 120,000,000l. worth of Treasury notes issued in excess of the 28,500,000l. for which the Government holds a reserve of gold is the first step to be taken. But, since the currencies of the world act and react on one another in the most intimate manner, and since Treasury notes form less than one-eighth of the whole of the inconvertible paper money issued by the Allies, not even the withdrawal of the whole of the 120,000,000Z. worth of Treasury notes would be sufficient. It is essential that our Allies-particularly Russia, who has issued inconvertible paper money to the extent of about 600,000,0007.-should cooperate. And, even though we secure the full cooperation of all our Allies, we must not allow our hopes to be raised too high. Reduction of note issues by all the Allies would most certainly have excellent results. Demand would be reduced and prices would fall; but the problem of supply would remain untouched. There are not now goods enough to go