■ I 
 
 ES AND DEFLATION 
 
 mmMM^ 
 
 LTER KEMMERER 
 
 
 llUUIIIHIIHHHKHi.! 
 
 nnrM'i(htn'i!'K'MMi(.. 
 
 lltiliiHll" ■ 1 
 
 
 
 ■ 
 
 
 ' HIM ■•■-- ■ ■ ■■ l.<. 
 
 
 
 ::ill|i|||||i::; ''■'■'■■• ' ;|1|: 
 
 EE:H:;: ; ;;:E:: : :: :::::;::E::::::::r : ::: : :':: :;! : : :; '■"; r 
 
 IIMMUtHHHIHIMM-,: 
 
 lllill.HIHI II Ml 1 -. . , . ,1. .-■■ ■ , ,, .. .., 
 
 Itinli lliH.fi m MOI1 1 HI nil i.M ■ hwii F.i. run 1 
 
 1 1'" -,.■■ H-TI •■,..•....'■■■.■.■, . ■■■, IM 
 
 M(IM/'MI|n- 
 
 ' 
 
 HIM .III FMII un-l ■■; . , ,l ■ ... ...... ,, . , 
 
 ■■■■'■ ■■'■ :"■'" '■■■'• ""i v.c- ■ ■•■ ■■■li-". ri;- ■ ■ - .. m . .■■ 
 
 
Hum? 
 
 Strata, New $ork 
 
 BOUGHT WITH THE INCOME OF THE 
 
 SAGE ENDOWMENT FUND 
 
 THE GIFT OF 
 
 HENRY W. SAGE 
 
 1891 
 
The date shows when this volume was taken. 
 
 To renew this book cony the call No. and give to 
 the librarian. 
 
 .-. ii'.'a^..- ,....J.. ; .l r . HOME USE RULES 
 
 All Books subject to recall 
 All borrowers must regis- 
 
 n« ter in the library to borrow 
 
 '• ' ,i • books for home use. 
 
 fit All books must be re- 
 
 turned at end of college 
 year for inspection and 
 repairs. 
 
 Limited books must be 
 
 ■ returned within the four 
 
 *veek l«mit 2nd not renewed. 
 
 Students must return all v 
 books before leaving town. 
 Officers should arrange for 
 
 the return of books wanted 
 
 during their absence from 
 
 town. 
 
 Volumes of periodicals 
 and of pamphlets are held 
 in the library as much as 
 possible. For special pur- 
 poses they are given out for 
 a limited time. 
 
 T "- Borrowers should not use 
 
 their library privileges for 
 
 the benefit of other persons. 
 
 Books of special value 
 and gift books, when the 
 
 giver wishes it, are not 
 
 allowed to circulate. 
 
 Readers are asked to re- 
 port all cases of books 
 marked or mutilated. 
 
 Do not deface books by marks and writing. 
 
 HG229.K3 C 1 0rn H6 UniVerSi,yLibrary 
 High prices and deflation, 
 
 olin 
 
 Hill III 
 3 1924 032 510"897" 
 
The original of this book is in 
 the Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924032510897 
 
High Prices and Deflation 
 
HIGKH PRICES 
 
 AND DEFLATION 
 
 BY 
 
 EDWIN WALTER KEMMERER 
 
 Professor of Economics and Finance in Princeton University; 
 
 Author of The A B C of the Federal Reserve System, 
 
 Modern Currency Reforms, Etc. 
 
 With an Introduction by 
 FRANK A. VANDERLIP 
 
 PRINCETON UNIVERSITY PRESS 
 
 LONDON : HUMPHREY MILFORD 
 OXFORD UNIVERSITY PRESS 
 
 1920 
 
 (i H N I- 1- 1- 
 UWIVI- l^-l'i V 
 
Copyright 1920, by 
 
 Princeton University Press 
 
 Princeton, N. J. 
 
 Published 1920 
 Printed in the United States of America 
 
PREFATORY NOTE 
 
 This book represents a revision and enlarge- 
 ment of three articles published during the 
 winter of 1919-1920 by the Bankers' Statistics 
 Corporation of New York City. The subjects 
 of the three articles were respectively Infla- 
 tion, High Prices, and Deflation. In view of 
 the widespread interest shown in the articles, 
 and of the receipt of numerous requests for 
 copies of them, I have revised them for pub- 
 lication in book form. The Bankers' Statistics 
 Corporation has kindly consented to this re- 
 publication. 
 
INTRODUCTION. 
 
 The six years from 1913 to 1919 are striking 
 ones from many points of view. During this 
 period we saw the fires of the world's greatest 
 war smolder, break into flames and die away 
 again; we witnessed the overthrow of great 
 nations and the repartition of Europe along 
 new lines; countries which had not existed 
 prior to 1913 as national units sprang into 
 being and vast armies of men were drawn from 
 factories, desks and fields, trained and sent to 
 battle from which many never returned. Coin- 
 cident with these changes, problems of the first 
 importance have developed in our economic 
 life, problems which affect each of us to-day in 
 a very vital manner and which demand intelli- 
 gent study and correct solution. Chief among 
 these problems is that of the high cost of living, 
 its causes and effects, and the question of what 
 is to be done to relieve the situation as it now 
 exists. An enlightened public opinion on this 
 whole subject is an urgent national need. 
 
 The increase in general prices throughout 
 the world is the outstanding economic phe- 
 nomenon of the period included between 1913 
 and 1919. In Australasia that rise was about 
 100 per cent; in countries having a gold stand- 
 
 (vii) 
 
ard still, such as the Scandinavian nations, 
 Japan and the United States, it has varied 
 from 150 per cent to 250 per cent, while 
 in paper money countries, like Russia and 
 Austria, it has mounted to several thousand 
 per cent. 
 
 It is evident that when the price level in- 
 creases, the value of the dollar declines. To 
 double the price level is to cut the dollar in 
 half. Inflation, followed by the inevitable 
 depreciation of money, has varied during these 
 six years in different countries. Even in the 
 same country different kinds of prices, as, for 
 example, wholesale prices, retail prices, wages 
 and prices for public services responded with 
 different degrees of promptness and at differ- 
 ent rates to inflationary forces. The same 
 thing may be said of the various commodities 
 within each of these groups. 
 
 The ever-present question of the "profiteer" 
 can be traced back to the changing extents and 
 varying degrees of promptness to which whole- 
 sale and retail prices, respectively, have re- 
 sponded to the forces of inflation. The reason 
 for the high cost of living and for industrial 
 disturbances, if tracked down, will lead back 
 largely to the same cause. Increase in wages 
 has not followed closely enough the increase in 
 
IX 
 
 *,'» 
 
 price level, and the labor problem has thus 
 continued to be a very troublesome one. Fixed 
 or slowly rising rates for railroads and other 
 public utilities under governmental control 
 have not kept pace with the enormous rise in 
 the costs of materials and services. The result 
 has been retarded development of our trans- 
 portation and transmission systems. 
 
 The true value of savings accounts has been 
 cut in half by the rapidly depreciating dollar, 
 and the same is true of paid-up insurance 
 policies, of fixed incomes from bonds, mort- 
 gages, pensions and preferred stocks. Chief 
 among the sufferers have been those who least 
 deserved to be exploited — colleges, universities, 
 benevolent institutions, and the thrifty people 
 who in the past saved capital and put it to 
 some productive use. All these have been 
 penalized, and the newly rich, with extravagant 
 spending tendencies, have watched gold pour 
 into their purses. Teachers, clerks and others 
 with fixed salaries have been hard hit. On the 
 other hand, the facility with which money could 
 be borrowed, owing to the low rate of interest 
 demanded, led to dangerous speculation and 
 shameless extravagance. Widespread discon- 
 tent and extreme radicalism have resulted. 
 
In this book High Prices and Deflation, 
 Professor Kemmerer explains the process of 
 inflation and the rise in the cost of living since 
 1913, examines the degree of inflation and con- 
 siders the economic and social results flowing 
 from it. He shows why prices must ultimately 
 come down and points out the policy to be 
 pursued in order to bring about deflation. 
 There are no more important questions de- 
 manding our attention to-day than these, and 
 an effort to put them squarely before the public 
 in a simple, clear and concise manner is worthy 
 of the highest praise and the greatest success. 
 Professor Kemmerer's book is a most useful 
 contribution to a very vital subject. 
 
 Frank A. Vanderlip. 
 
 "Beechwood," 
 Scarborough-on-Hudson, 
 New York, 
 August i8, 1920. 
 
CONTENTS. 
 
 Page 
 
 Prefatory Note v 
 
 Introduction. By Frank A. Vanderlip vii 
 
 CHAPTER I. 
 
 Inflation 3-30 
 
 Scope of book, 3. Inflation defined, 3-4. Kinds of 
 inflation, 4-5. Annual growth of physical volume of 
 business, 1913-1919, measured, 5-9. Monetary cir- 
 culation of U. S., annual, 1913-1919, 10-13. Heavy 
 imports of gold from Europe and impounding of 
 gold by federal reserve banks, 13-14. Reduction in 
 legal reserve requirements, 14-17. "Taking up the 
 slack," 18. Banks found it profitable to expand loans 
 and deposits, 18-22. Bankers considered it their 
 patriotic duty to expand loans and deposits, 22. Busi- 
 ness men and public considered it their patriotic duty 
 to borrow heavily of banks in order to extend busi- 
 ness and to buy Liberty bonds, 22-23. Government, 
 to obtain funds for financing the war, encouraged 
 loan and deposit expansion by a policy of low dis- 
 count rates at federal reserve banks, 23-26. Drain 
 of gold prevented by gold embargo, 26. Expansion 
 of bank deposits, 1913-1919, 26-28. Reduction of 
 ultimate bank reserves, 28-29. Rise of prices, 30. 
 
 CHAPTER II. 
 
 High Prices 31-54 
 
 Without inflation the prices of commodities greatly 
 needed for war would have risen, 33-34. Extent of 
 rise in wholesale prices as shown by different index 
 numbers, 35. Depreciation of gold dollar during 
 period of 1913 to 1919 compared with that of Bank 
 
Page 
 of England notes during Napoleonic Wars and that 
 of greenbacks during Civil War, 36-38. Prices of 
 nearly all classes of commodities advanced greatly, 
 38-40. Not high prices but rising prices the evil, 
 40-41. Effects of rising prices on contractual rela- 
 tions between debtors and creditors, 41^44. Varying 
 degrees of responsiveness of different kinds of prices 
 and of prices of different kinds of goods, 45-47. 
 Wage increases very uneven, 47-51. Rising prices the 
 most important single cause of present widespread 
 discontent, 51-52. Inflation helped finance the war, 
 but distributed very inequitably the war's economic 
 burden, 52-53. Conclusions of chapter summarized, 
 53-54. 
 
 CHAPTER III. 
 Deflation 55-82 
 
 Inflation as a permanent policy in time of peace 
 impossible, 57-58. Evils of deflation summarized, 
 58. Deflation causes injustice to debtor classes and 
 to holders of rights to fixed money incomes, 59-61. 
 Deflation depresses business, 61-62. Deflation causes 
 unemployment, reduces wages, and weakens the hold 
 of trade unions on their members, 62-63. Deflation 
 is necessary because gold supply is inadequate to 
 maintain present high price levels on a stable gold- 
 standard basis, 63-69. Deflation if brought about 
 promptly would eliminate or mitigate some of the 
 evils of inflation, 69-70. Deflation to pre-war price 
 level not necessary, 71-75. Means of bringing about 
 deflation, 75-82. High discount rates on part of 
 federal reserve banks, 76-78. Possibly higher inter- 
 est rates on government war debt, 78-79. Discrim- 
 ination on part of federal reserve banks in making 
 loans, 79. Other means of bringing about deflation, 
 79-81. Conclusions of chapter summarized, 81-82. 
 Index 83 
 
CHAPTER I— INFLATION 
 
High Prices and Deflation 
 
 CHAPTER I 
 
 INFLATION 
 
 To what extent and why has the leve] of 
 prices in the United States risen during the 
 past seven years? What are the chief eco- 
 nomic results of this high and rising price 
 level? Will the price level decline in the near 
 future, and if so what forces will work to bring 
 about the decline? The subjects suggested by 
 these three questions may be briefly designated 
 by the terms Inflation, High Prices, and De- 
 flation- — the subjects of the three chapters of 
 this book. 
 
 Although the term inflation in current dis- 
 cussions is used in a variety of meanings, there 
 is one idea common to most uses of the word, 
 namely, the idea of a supply of circulating 
 media in excess of trade needs. In a previous 
 article 1 by the writer, upon whose detailed 
 statistics revised and extended to date many 
 of the conclusions in the present chapter are 
 based, inflation was described as occurring 
 
 1 Inflation : The American Economic Review, June, 1918, 
 pp. 247-269. 
 
 3 
 
"when, at a given price level, a country's circu- 
 lating media — money and deposit currency — 
 increase relatively to trade needs." The value 
 of money, like the value of every other com- 
 modity, is the resultant of the interaction of 
 the forces of demand and supply. An increase 
 in the circulating media (i. e., money, and 
 deposit currency supported by money in bank 
 reserve) relative to trade needs tends to make 
 the monetary unit depreciate, in other words, 
 to force down the purchasing power or the 
 market value of the dollar. 
 
 There are two kinds of depreciation — spe- 
 cific depreciation and general depreciation. 
 Specific depreciation occurs when one or more 
 kinds of exchange media are issued in such 
 relative excess that they depreciate in terms of 
 the legal standard-money unit. Good exam- 
 ples of specific depreciation are found in the 
 United States greenbacks from 1863 to the 
 end of 1878, and in the notes of the Bank of 
 England during the period of suspension of 
 specie payments from 1797 to 1821. General 
 depreciation occurs when excessive issues of 
 money, or of deposit currency which circulates 
 in the form of checks, result in the depreciation 
 of the legal standard-money unit itself. Ex- 
 amples of general depreciation are found in 
 
England during the years immediately follow- 
 ing the Australian and Californian gold dis- 
 coveries and in all gold standard countries 
 from 1896 to 1913. In these cases gold itself 
 depreciated and the prices of most goods in 
 terms of gold standard money rose. Obvi- 
 ously, general depreciation may exist either 
 with or without specific depreciation. 
 
 The United States since 1913 has had gen- 
 eral depreciation, but fortunately has escaped 
 specific depreciation, 1 for all forms of United 
 States money and deposit currency have been 
 maintained at par with the standard gold unit 
 of value. The monetary depreciation we have 
 had has not been a depreciation of paper 
 money or of deposit currency in terms of gold, 
 but a depreciation of our gold monetary unit 
 itself, and of all other kinds of exchange media 
 whose values have moved with that of gold. 
 
 In attempting to form a judgment as to the 
 extent to which our circulating media have 
 been inflated since 1913, the first problem is 
 to measure in some way the growth, since that 
 date, of the country's physical volume of busi- 
 ness. Money and circulating bank credit exist 
 
 1 During the latter days of the war it was reported that 
 a slight premium on gold appeared in a few transactions 
 in some parts of the United States. It rapidly disappeared. 
 
primarily as instruments for exchanging goods 
 and services. This exchange work is their job. 
 To what extent, if any, has the job increased 
 during the last six years? This question can- 
 not be answered with any high degree of 
 accuracy, but a rough approximation can be 
 reached through the study of certain business 
 statistics which typify business activity and 
 growth. Obviously the statistics used for this 
 purpose should be statistics of physical quan- 
 tity and not of value involving prices, since 
 movements of the price level are one of the 
 results of inflation. 
 
 Among the best items for measuring the 
 movement of business in general, because they 
 are items that enter into so many products, 
 are the production of pig iron, bituminous coal, 
 anthracite coal, petroleum, copper, and silver. 
 Other goods indices of general business are the 
 number of tons of freight carried on important 
 railroads and- the tonnage of vessels entered 
 and cleared at American ports. Representa- 
 tive of agricultural industry is the production 
 of wheat, corn, and cotton ; and representative 
 of the building industry is the number of build- 
 ing permits given in leading cities. Here are 
 twelve items, any one of which is an honest 
 witness of the growth of American business, 
 
7 
 
 but each of which has its own bias. Safer than 
 to trust any one of them is to take the testi- 
 mony of all, so that in the mouths of many 
 witnesses the truth may be established. 
 
 If we reduce the figures of these twelve 
 items to a percentage basis, taking as 100 the 
 figure for the year 1913, and if we then com- 
 bine these figures into a simple average, we 
 arrive at the following series of index numbers 1 
 which represent in a rough way the growth of 
 the country's physical volume of business since 
 1913. 
 
 1913 100 
 
 1914 99 
 
 1915 • 104 
 
 1916 109 
 
 1917 112 
 
 1918 113 
 
 Most of the data used in the computation 
 of the above series of index numbers are not 
 available for the year 1919. Fortunately, how- 
 ever, we have in the figures relating to the 
 "physical volume of trade" now being pub- 
 lished every month in the Federal Reserve 
 Bulletin data for a considerable number of 
 items that are useful indices of business 
 growth. Selecting the more important of 
 
 1 For a fuller description of the items entering into these 
 index numbers, see B. W. Kemmerer, Inflation, American 
 Economic Review, June, 1918, p. 248, note 1. 
 
these items, for which figures are available for 
 the years 1918 and 1919, thirteen in number, 
 and comparing the figures for 1918 (which are 
 taken as 100) with those of 1919, we arrive at 
 the following result: 
 
 (1) Tonnage of vessels cleared in foreign trade, . . . 113.6 
 
 (2) Total freight carried on canals at Sault Ste. 
 
 Marie, 79.7 
 
 (3) Bituminous coal, estimated production, 78.2 
 
 (4) Anthracite coal, estimated production, 87.2 
 
 (5) Total output of gasoline, 110.9 
 
 (6) Pig iron production 79.4 
 
 (7) Steel ingot production (8 months only) 86.2 
 
 (8) Lumber shipment (southern pine, western pine, 
 
 Duglas fir, eastern white pine, and North Caro- 
 lina pine), 97.0 
 
 (9) Receipts and shipments of cattle of all kinds at 
 
 15 western markets, 104.3 
 
 (10) Cotton consumption in the United States, 95.7 
 
 (11) Cotton spindles active, 101.1 
 
 (12) Wool consumption in the United States, 89.7 
 
 (13) Imports of raw silk, 137.5 
 
 Average of all 13 items, 97.0 
 
 The physical volume of business done in the 
 United States in 1919 as evidenced by the 
 above figures was therefore 3 per cent less than 
 that for 1918. This percentage decline in 1919 
 as compared with 1918 would give an index 
 number of 109.6 (in the table on page 7) for 
 the physical volume of business done in 1919 — 
 
9 
 
 an index number that is only about one-half of 
 one per cent less than that for 1916. 1 
 
 Such a decrease in 1919 is not surprising, 
 when one thinks of the decline in all kinds of 
 war industry after the armistice, the inhibiting 
 influences brought about by the process of re- 
 absorbing millions of fighting men in economic 
 activities, the transfer of millions of others 
 from war time industries to industries of peace, 
 and the large number of labor disturbances 
 that characterized the year 1919. 
 
 With a price level unchanged, a given phys- 
 ical volume of business could probably have 
 been carried on under the war conditions pre- 
 vailing in the United States during the years 
 1917 and 1918, with a smaller amount of 
 money and circulating credit than in normal 
 
 1 Professor Wesley C. Mitchell has computed a series of 
 index numbers for the years 1913 to 1918 of the physical 
 volume of business by taking the yearly production of "90 
 raw materials, including substantially all the great staples 
 and a few rather trifling imported commodities," weighting 
 them at the prices of 1917. His results are very similar to 
 those I have arrived at above by an entirely different, 
 method. Mitchell's figures are as follows: 
 
 1913 100 
 
 1914 99 
 
 1915 107 
 
 1916 Ill 
 
 1917 114 
 
 1918 116 
 
 History of Prices During the War. Summary. War In- 
 dustries Board, pp. 44, 45. 
 
10 
 
 times, because the shifting of production to 
 government account shortened greatly the 
 average distance from producer to consumer, 
 and lessened the average amount of exchange 
 or money work required to place a given 
 amount of goods in the hands of the final con- 
 sumer. On this subject Professor G. O. 
 Virtue said in a recent article: 1 "the effect of 
 this large-scale purchase by the government, 
 often in the early stages of production, and its 
 method of dispensing them without further use 
 of money, by decreasing the rapidity of circu- 
 lation of great quantities of goods, must have 
 affected the price level in the same way as 
 would a reduction in the amount of goods, or 
 a sudden resort to barter on a larger scale, or 
 to a more direct move of marketing." 
 
 Let us now turn from the demand for money 
 and deposit currency to the supply. The term 
 "money in circulation" is one that is used to 
 cover a variety of different meanings, but one 
 of the commonest meanings, and, for the pur- 
 poses of a study of inflation for the period of 
 1913 to 1919, the most satisfactory one, is to 
 make it cover all money in active circulation, 
 namely in the pockets of the people and the 
 
 1 Another Reason Why War Prices are High Prices. 
 Quarterly Journal of Economics, August, 1919, pp. 729-733. 
 
11 
 
 tills of merchants and all money in the reserves 
 of banks — actual cash reserves, not legal re- 
 serves — except such a part of that held by 
 federal reserve banks as may properly be allo- 
 cated as reserve for federal reserve notes. 
 If the federal reserve notes are counted as 
 money in circulation, as I believe they should 
 be, then the cash reserve held against these 
 notes obviously should not be counted as in 
 circulation. On the other hand cash reserves 
 held in banks against deposits are usually con- 
 sidered as money in circulation. If such cash 
 reserves, in the vaults of individual banks, serv- 
 ing as the support of bank deposits are to be 
 considered as in circulation for the years prior 
 to the complete establishment of the federal 
 reserve system, the cash reserves now held by 
 federal reserve banks against deposits of mem- 
 ber banks, cash reserves which now perform 
 indirectly the greater part of the cash reserve 
 function formerly performed for the present 
 member banks by "cash on hand," such cash 
 reserves in federal reserve banks should now 
 be counted as money in circulation. It is mis- 
 leading to adopt the practice followed by some 
 writers, of counting cash reserves (i. e., actual 
 cash on hand) in national banks as "money in 
 circulation" before the inauguration of the 
 
12 
 
 federal reserve system and to exclude from 
 "money in circulation" since that time the re- 
 serves held by federal reserve banks against 
 deposits — reserves which in the main perform 
 the same function, though indirectly, that the 
 cash reserves of individual banks previously 
 performed. 
 
 Interpreting the words "money in circula- 
 tion" in the manner above described, allocat- 
 ing the same percentage of reserve to federal 
 reserve notes and to federal reserve deposits, 
 and taking the average figures for four quar- 
 terly dates of each year as the figure for the 
 year, we arrive at the following table for the 
 monetary circulation of the United States : 
 
 MONETARY CIRCULATION. 
 
 Amount of Money Index 
 
 Year in Circulation 1 Number 
 
 (Millions) 
 
 1913 $3,390 100 
 
 1914 3,505 103 
 
 1915 3,682 109 
 
 1916 4,159 123 
 
 1917 4,914 145 
 
 1918 5,579 165 
 
 1919 5,793 171 
 
 1 In computing the total monetary circulation of the 
 United States, the following plan has been used. In order 
 to make the figures representative of the entire year, and 
 render them comparable with those for the growth of 
 business, we have taken for each year the average of the 
 
13 
 
 From 1913 to 1919 the amount of money in 
 circulation therefore increased 71 per cent, 
 while the physical volume of business increased 
 9.6 per cent. 
 
 Two important items in this great increase 
 in the monetary circulation were : ( 1 ) the heavy 
 net imports of gold from Europe resulting 
 from our large exports of war materials to the 
 belligerent countries, and (2) the policy of the 
 federal reserve authorities of withdrawing gold 
 certificates and gold coin from active circula- 
 tion, and substituting therefor so far as pos- 
 sible federal reserve notes, thereby substituting 
 for money representing 100 per cent gold a 
 form of money which required only a legal 
 gold reserve of 40 per cent. The period 
 
 circulation figures for the four quarterly dates, beginning 
 with that of March 31. 
 
 The circulation includes all kinds of money in the 
 country, except that held in the federal treasury as assets 
 of the government, and except that part of the cash held 
 by the twelve federal reserve banks and the twelve federal 
 reserve agents, that would represent the same percentage 
 of cash reserve against outstanding federal reserve notes 
 as the percentage held against deposits and notes com- 
 bined. Only net circulation of federal reserve notes is 
 therefore included in the circulation, but the net circula- 
 tion is computed on the basis of allocating to the notes the 
 same percentage of reserve as that represented by the 
 percentage of cash reserve held by the federal reserve 
 banks to deposits and outstanding notes combined. In 
 this way the figures for the period before the federal 
 reserve amendment of June 21, 1917, are made comparable 
 with those after that date. 
 
14 
 
 studied witnessed a very large expansion of 
 federal reserve notes. In 1913 there were no 
 federal reserve notes, and on November 7, 
 1919, there were $2.8 billions of federal reserve 
 notes in circulation against which a reserve of 
 45.3 per cent was held, giving a net circulation 
 uncovered by gold of $1.5 billions. At the 
 present writing (March 26, 1920) the circula- 
 tion of federal reserve notes is $3,048 millions 
 against which a reserve of 40.1 per cent is held, 
 giving a circulation uncovered by gold of 
 $1,826 millions. 
 
 The period 1913 to 1919 was a period in 
 which the country's legal reserve requirements 
 for bank deposits were enormously reduced. 
 In 1913 national banks in central reserve cities, 
 namely, New York, Chicago and St. Louis, 
 were required to keep on hand cash reserves 
 equivalent to 25 per cent of their deposits, both 
 demand deposits and time deposits. National 
 banks in the 47 reserve cities were also required 
 to maintain reserves of 25 per cent, but one- 
 half of this could be maintained as an ordinary 
 deposit with a national bank in a central 
 reserve city. Other national banks, so called 
 "country banks" were required to maintain 
 against deposits reserves of 15 per cent of 
 which three-fifths could be held as an ordinary 
 
15 
 
 deposit with a national bank in a reserve city 
 or a central reserve city. For all banks the 5 
 per cent cash redemption fund held at Wash- 
 ington against outstanding bank notes was 
 counted as part of the legal reserves against 
 deposits. 
 
 At the present time all legal reserves of 
 national banks consist of deposits with fed- 
 eral reserve banks against which deposits the 
 federal reserve banks are required to main- 
 tain only a 35 per cent lawful money reserve. 
 Time deposits, namely deposits payable after 
 notice of 30 days, which constitute about 
 one-fourth of the total individual deposits of 
 national banks, since 1913 have been treated 
 separately as regards legal reserves and in all 
 national banks are now subject to a reserve 
 requirement of only 3 per cent. The 5 per 
 cent bank note redemption fund can no longer 
 be counted as legal reserve against deposits. 
 Against demand deposits the present legal 
 reserve requirement is 13 per cent for banks in 
 central reserve cities, 10 per cent for banks in 
 reserve cities and 7 per cent for banks in other 
 cities. 1 Certain minor changes in legal reserves 
 
 ' An amendment, approved June 21, 1917, to the federal 
 reserve act, provided that a central reserve city bank or a 
 reserve city bank if located in the outlying districts of such 
 a city or in a territory adjoining to such a city by the 
 
16 
 
 have also been made since 1913, as for example 
 those relating to "the float" and to reserves 
 against United States Government deposits, 
 but the changes above mentioned are the prin- 
 cipal ones. 
 
 An idea of the extent of the reductions in 
 legal reserves of national banks since 1913 
 can be obtained by assuming three national 
 banks, each having $1,200,000 demand de- 
 posits, $300,000 of time deposits, and $100,000 
 of national bank notes outstanding, one bank 
 being in a central reserve city, one in a reserve 
 city, and one in a "country bank" city, and ask- 
 ing ourselves what ultimate legal cash reserves 
 would have been held against these deposits in 
 1913 and in 1920 respectively. The answer 
 is given in the following table : 
 
 1913 1920 
 
 Per Per 
 
 Bank. Cent. Amount. Cent. Amount. 
 
 Central Reserve city, . . 25 $375,000 4.18 $62,750 
 
 Reserve city 15.6 234,375 3.34 50,150 
 
 Country 7.4 111,093.75 2.50 37,550 
 
 Here is a reduction for central reserve cities 
 of from 25 per cent to 4.18 per cent, for reserve 
 
 extension of its corporate charter may, upon the affirma- 
 tive vote of five members of the federal reserve board, 
 have its legal reserves reduced to those of a class of 
 cities having lower requirements. 
 
17 
 
 cities from 15.6 per cent to 3.34 per cent, and 
 for country bank cities from 7.4 per cent to 
 2.50 per cent; giving a reduction for all three 
 banks of 79 per cent. 
 
 State banks and trust companies entering 
 the federal reserve system have generally 
 experienced substantial reductions in legal re- 
 quirements so far as actual cash reserves are 
 concerned. 
 
 The reduction of legal reserve requirements 
 was a statutory recognition of the fact that 
 smaller cash reserves are needed under a bank- 
 ing system possessing a group of central banks 
 of issue and rediscount than are needed under 
 a highly decentralized system of banks like our 
 American banking system prior to the federal 
 reserve act. It was perfectly proper that with 
 the establishment of the federal reserve system 
 the legal reserve requirements of the banks 
 should be reduced. Whether the reduction 
 was too great or not, only experience will tell. 
 In the writer's judgment the reduction was 
 excessive, and it was a mistake to discontinue 
 all cash-in-vault legal reserve requirements of 
 member banks. The important fact, however, 
 to note here is, that this reduction of reserve 
 requirements taking place at just the time 
 when the country was being flooded with gold 
 
18 
 
 from the belligerent countries of Europe 1 
 created the possibility of a tremendous loan 
 and deposit expansion. 
 
 This potential expansion was quickly turned 
 into an actual expansion under the pressure of 
 four important forces. They were: (1) the 
 natural desire of bankers and business men for 
 profit; (2) the patriotic impulses of bankers 
 and business men to render the nation the best 
 possible services in its time of emergency; (3) 
 the desire of the Government to finance itself 
 with the minimum disturbance to legitimate 
 business ; ( 4 ) the desire of the Government to 
 float its war securities in large volume at the 
 minimum possible rate of interest. Let us 
 consider these forces briefly. 
 
 (1) Take the case of a bank in a central 
 reserve city which had been normally carrying 
 a cash reserve in the neighborhood of say 25 
 per cent, because that was the minimum per- 
 centage required by law, or because experience 
 had shown that a reserve of about that size was 
 best suited to its particular type of business, 
 
 1 From August 1, 1914, to April 1, 1917 (practically the 
 period of the war prior to our entrance as a belligerent), 
 our net importations of gold amounted to $1,109 millions 
 and this enormous increase in our supply we maintained 
 throughout the remainder of the war. We have most of 
 it to this day, although there have been substantial losses 
 since the armistice. 
 
19 
 
 or for both of these reasons. Such a bank we 
 will assume after the establishment of the 
 federal reserve system, of which it became a 
 member, found that the legal reserve require- 
 ment against demand deposits was cut to 13 
 per cent and that the greater liquidity of its 
 assets brought about, through the facilities for 
 rediscount and collateral loans offered by the 
 federal reserve system would apparently make 
 it safe for it to reduce its reserve to 17 per cent 
 (namely, 13 per cent legal reserve in the form 
 of a deposit with its federal reserve bank and 
 4 per cent cash in vault). What would be 
 such a bank's probable course of action under 
 these circumstances? The answer is obvious. 
 It would reduce its normal reserve percentage 
 from 25 to 17 1 because by so doing it would 
 increase its profits without materially weaken- 
 ing its financial position or impairing its 
 efficiency. The most likely method of doing 
 this and the method that would probably be 
 used, if possible, would be for the bank to 
 extend its loan and deposit accounts. To do 
 
 1 Of this 17 per cent, 13 would be in the form of a 
 deposit with its federal reserve bank -against which a 
 cash reserve of only 35 per cent would be legally required, 
 and of the 4 per cent till money held by the bank the 
 greater part would probably consist of federal reserve 
 notes against which the federal reserve banks would be 
 legally required to hold only 40 per cent cash reserve. 
 
20 
 
 this it might well reduce its discount rates, ex- 
 tend the credit limits of its best customers, and 
 possibly extend credit to others whom it had 
 previously refused out of what might appear 
 to it now to have been an excess of caution. 
 In this way the loan account would be ex- 
 panded, deposits would be increased, and the 
 reserve percentage (legal reserve plus till 
 money) would be reduced from 25 per cent to 
 the new norm of 17 per cent, the bank thereby 
 probably realizing for its stockholders substan- 
 tially increased profits. 
 
 If this reduced reserve requirement were 
 limited to one bank, the possibility of deposit 
 expansion thereby created would be small be- 
 cause the enlarged deposits resulting from the 
 increased loans would tend to give the bank an 
 unfavorable clearing house balance, and to 
 draw quickly away thereby a part of its reserve 
 money. Under the conditions, however, exist- 
 ing during the war period this opportunity 
 and this motive for reserve reduction, or in 
 other words for loan and deposit expansion, 
 were open to all of the national banks in the 
 country and to large numbers of state banks 
 and trust companies. It was but natural 
 therefore that they should all endeavor to ex- 
 pand, in order to take advantage of the oppor- 
 
21 
 
 tunity to increase their profits. The last few 
 years have been highly profitable years for 
 commercial banks. 2 
 
 Much of this potential loan and deposit 
 expansion appeared in the early years of the 
 war, when the demands of European belliger- 
 ents for our products assumed tremendous 
 proportions and offered high profits to Ameri- 
 can producers of war materials, so high as to 
 call for a large expansion in the production of 
 these materials. Labor was shifted from "non- 
 essential industries" to "essential industries," 
 and while many of the former lagged, the 
 latter were greatly stimulated. Here then was 
 a great demand for increasing bank credit at 
 just the time that the establishment of the 
 federal reserve system, the reduced cash re- 
 serve requirements of commercial banks, and 
 the heavy imports of gold from Europe were 
 making a larger loan and deposit expansion 
 possible. The new federal reserve law and the 
 
 2 In each of the fiscal years 1917, 1918 and 1919, the 
 national banks of the country showed a higher percentage 
 of earnings on their capital stock than in any previous 
 year in their history. The average earnings on capital 
 stock in 1917 -were 17.96 per cent, in 1918 19.33 per cent, 
 and in 1919 21.46 per cent. In his annual report for 1919 
 (page 7) tne Comptroller said: "The increase in the net 
 earnings which has taken place in the past five years thus 
 amounts to $91,095,829, which exceeds by $4,491,778 the 
 total increase in net earnings shown in the entire 40-year 
 period from 1874 to 1914." 
 
22 
 
 heavy gold imports created a potential supply 
 of new circulating bank credit, the war stimu- 
 lated the demand. It was to the banker's 
 financial interest to expand credit, and to the 
 interest of many groups of business men to 
 seek these newly available funds. 
 
 (2) As a matter of patriotic duty bankers 
 were expected to expand their loans and 
 deposits. Long before the United States 
 enter d the war, the sympathy for the Allies 
 in this country became so pronounced and the 
 conviction that they were fighting our battles 
 became so strong, that production for the 
 Allies and the granting of loans to finance such 
 production were felt to be patriotic acts. 
 After the United States entered the war, the 
 extension of bank credit to the maximum limit 
 consistent with safety to "essential industries," 
 and to the buyers of liberty bonds was looked 
 upon as the paramount duty of banks. 
 
 (3) The demands of patriotism were looked 
 upon as requiring the public to avail them- 
 selves to the limit of the liberal loan facilities 
 made available by the banks. Nearly every- 
 where the belief prevailed that with the loans 
 thus available, war industries should expand 
 their production and the public should buy 
 bonds to the maximum. "Borrow and buy" 
 
23 
 
 was a widely used slogan in the first three 
 liberty loan campaigns, and was strongly, 
 although more quietly, urged upon the public, 
 in the fourth liberty loan and the victory loan 
 campaigns. 
 
 (4) In their laudable desire to keep interest 
 rates low on bank loans to essential war indus- 
 tries, and more importantly, to make possible 
 the flotation of large government war loans at 
 excessively low rates of interest, the federal 
 reserve authorities adopted a policy of low dis- 
 count rates for the federal reserve banks and 
 of preferential rates and great liberality for 
 advances made on the security of government 
 war obligations. Throughout the entire period 
 of our belligerency the loan and discount rates 
 of the federal reserve banks were below the 
 market rates, and "the market was in the fed- 
 eral reserve banks." Funds received by banks 
 for the government through the sale of liberty 
 bonds and short-time certificates were usually 
 left for a time on deposit with these receiving 
 banks at the low rate of of 2 per cent interest 
 and without reserve requirement. This policy 
 greatly expanded deposit credit. When the 
 deposits were called by the government the 
 funds for meeting the calls could readily be 
 obtained by the bank's borrowing from its 
 
24 
 
 federal reserve bank either by the rediscount 
 of war paper, or by a direct loan collateraled 
 by government security ; and the rates charged 
 for these loans were usually enough lower than 
 the rates paid to the banks by the customer for 
 his advance used in buying the bonds to yield 
 the bank at least a small net profit. The result 
 was the piling up of many billions of dollars, 
 of liberty bonds and certificates of indebted- 
 ness in the commercial banks of the country 
 and the federal reserve banks, particularly the 
 latter, in the form of collateral for loans. 
 Federal reserve banks loans so collateraled 
 provided member banks with a continuously 
 increasing supply of legal reserves for further 
 loan and deposit expansion; and the expan- 
 sion of federal reserve loans, with resulting in- 
 crease in federal reserve deposits and issues of 
 federal reserve notes was continually reduc- 
 ing the percentage of reserves held by federal 
 reserve banks. We bought our low interest 
 rates on government paper at the price of very 
 high prices for commodities. We kept interest 
 rates down by a policy that kept pushing the 
 price level up. 
 
 The fundamental economic law which makes 
 the interest rate the resultant of the inter- 
 action of the forces of demand and supply in 
 
25 
 
 the capital market was forcing up the real in- 
 terest rate under the influences of a world wide 
 destruction of capital and an unprecedented 
 demand. "Present goods were at a large and 
 ever-increasing premium over future goods." 
 The fundamental economic law determining 
 the real interest rate could not be annulled by 
 the policy of the federal reserve board of arti- 
 ficially depressing the market rate of discount 
 through inflating the country's supply of bank 
 notes and deposit currency. When the dis- 
 count rate was artificially pushed down prices 
 bulged up. The government, it is true, paid 
 lower rates of interest on its bonds, but it was 
 compelled to pay higher prices for the war sup- 
 plies it bought, and was therefore compelled to 
 float more bonds. It paid lower interest rates 
 by reason of this policy, but it paid and will 
 pay more interest. 
 
 Because of the observation that the more 
 money and deposit credit an individual has 
 the more goods he can buy, the inference 
 was popularly drawn that the more money and 
 deposit credit the government could get, the 
 more war goods and services it could buy. 
 
 The forces above described favored loan and 
 deposit expansion. Such expansion was prof- 
 itable to the banks and profitable to business 
 
2G 
 
 men, while to the banker, the business man, 
 and the ordinary citizen, the acts which were 
 resulting in this expansion appeared to be acts 
 of patriotic duty. 
 
 The heavy drain of gold which such a con- 
 dition of affairs would normally have brought 
 about was prevented by the gold embargo, 
 which was in effect from September 7, 1917, 
 to June 10, 1919, by the government's giving 
 wide publicity to the doctrine that the use of 
 gold coin or gold certificates in circulation or 
 the holding of them in one's possession was an 
 unpatriotic act, that all gold should be im- 
 pounded in the federal reserve banks where it 
 would serve the country with maximum effici- 
 ency, and by the further fact that most of the 
 leading countries of the world were inflating 
 their currency and bank credit at even more 
 rapid rates than we were. 
 
 The result was an expansion of bank loans 
 and, in consequence, of deposit currency such 
 as this country and probably no other country 
 ever saw before in an equal space of time. In 
 the following table the expansion of bank de- 
 posits is shown. The figures cover individual 
 and government deposits in commerical banks 
 and government deposits in federal reserve 
 banks. 
 
27 
 
 BANK DEPOSITS 1913-1919. 
 
 Deposits in State Govt. Deposits 
 Deposits in Banks and Trust in Federal Total 
 
 National Banks 1 Cos. 2 Reserve Banks 3 Deposits 
 
 Amount Index Amount Index Amount Amount Index 
 
 Year 
 
 (Millions) Numbers (Millions) Numbers ( Millions )( Millions )N 
 
 imber 
 
 1913, . 
 
 $6,020 
 
 100 
 
 $6,658 
 
 100 
 
 
 $12,678 
 
 100 
 
 1914, . 
 
 6,248 
 
 104 
 
 7,182 
 
 108 
 
 
 13,430 
 
 106 
 
 1915, . 
 
 6,912 
 
 115 
 
 7,499 
 
 113 
 
 
 14,411 
 
 114 
 
 1916, . 
 
 8,288 
 
 138 
 
 9,504 
 
 143 
 
 $48 
 
 17,840 
 
 141 
 
 1917, . 
 
 9,923 
 
 165 
 
 11,194 
 
 168 
 
 156 
 
 21,273 
 
 168 
 
 1918, . 
 
 11,540 
 
 192 
 
 12,099 
 
 182 
 
 132 
 
 23,771 
 
 188 
 
 1919, . 
 
 13,113 
 
 218 
 
 14,708 
 
 221 
 
 107 
 
 27,928 
 
 220 
 
 Here we have within a period of six years 
 an increase in our national bank deposits of 
 approximately 118 per cent, or over seven 
 billion dollars, and an increase of state bank 
 and trust company deposits of over 121 per 
 cent, or over six billion dollars. The two 
 together represent an increase of over 120 per 
 cent of 6ur deposits in commercial banks since 
 1913, or an increase of over 13 billion dollars. 
 
 Probably 80 to 85 per cent of the country's 
 business is conducted through the instru- 
 mentality of bank checks. It is through checks 
 
 * Average for dates of five or six comptroller's calls each 
 year. 
 
 a Computed from figures published each year by the 
 Comptroller of the Currency and referring to a date about 
 June 30. 
 
 3 Figures are averages for the government deposits on 
 the approximate dates of the comptroller's calls for na- 
 tional banks each year so as to correspond as nearly as 
 possible 'with the figures for deposits of national banks 
 given in the first column. 
 
28 
 
 that deposits circulate and that the bank's 
 depositor gives expression to his demand for 
 goods. The war period has been one in which 
 deposits have circulated at a more rapid rate 
 than usual and the doubling of deposits has 
 therefore probably resulted in an even greater 
 increase in the country's deposit currency 
 circulation. 
 
 This tremendous increase in bank deposits 
 has resulted in a great decline in the average 
 percentage of actual cash reserves held against 
 deposits — namely the ratio of deposits (as 
 above computed) to actual cash held by 
 national banks, state banks, trust companies, 
 and federal reserve banks (exclusive of re- 
 serves held against federal reserve notes). 
 This average percentage for the country as a 
 whole has varied as follows since 1913 : 
 
 PERCENTAGE OF CASH RESERVE TO TOTAL 
 
 DEPOSITS. 
 
 Year Percentage 
 
 1913, 11.7 
 
 1914 11.7 
 
 1915, 11.9 
 
 1916 10.7 
 
 1917 10.6 
 
 1918, 7.0 
 
 1919, 6.6 
 
 The proportion of gold in our total circula- 
 tion has likewise materially declined. On July 
 
29 
 
 1, 1914, our stock of monetary gold (namely, 
 gold coin, plus gold bullion in the treasury) 
 was equivalent to 55.3 per cent of our total 
 monetary circulation (as computed by the 
 Treasury Department) ; and on June 1, 1920, 
 it was equivalent to 43.6 per cent. On 
 June 30, 1914, the stock of monetary gold was 
 equivalent to 29.7 per cent of our national 
 bank deposits (exclusive of bankers' balances) , 
 and on December 31, 1919 (the date of the 
 last Comptroller's call for which figures are 
 available), the stock of monetary gold, less 
 that held by the federal reserve system as re- 
 serve against issues of federal reserve notes, 
 was equivalent to only 14.1 per cent of the 
 national bank deposits. 
 
 Briefly summarizing the evidence as to in- 
 flation during the period 1913 to 1919, we find 
 that for those six years the physical volume of 
 business increased approximately 9.6 per cent, 
 the monetary circulation 7> per cent, and bank 
 deposits 120 per cent. The percentage of 
 actual cash reserve held against deposits mean- 
 while declined from an average of 11.7 in 1913 
 to 6.6 in 1919. There was contemporaneously 
 a large decline in the ratio of gold to the 
 country's total cash and to its total supply of 
 exchange media. 
 
30 
 
 Is it surprising under the circumstances that 
 the level of prices during this period much 
 more than doubled, that scarcely any com- 
 modities of importance can be found whose 
 price are not at least 60 per cent higher to-day 
 than in 1913, and that the public is up in arms 
 against the high and rising cost of living? But 
 this is the subject of the next chapter. 
 
CHAPTER II— HIGH PRICES 
 
CHAPTER II 
 
 HIGH PRICES 
 
 The great increase, noted in the preceding 
 chapter, in the available supply of currency 
 and circulating credit taking place at a time 
 when the physical volume of business was in- 
 creasing but slowly, naturally led to a price 
 bidding contest for supplies and labor between 
 individuals on the one hand and individuals 
 and the Government on the other under the 
 spur of war needs— a price bidding contest that 
 pushed prices up to heights previously un- 
 dreamed of in this country since the greenback 
 days of the Civil War. 
 
 Of course even without inflation the prices 
 of those commodities for which the war made 
 most urgent demands, such as munitions, ship 
 building materials, and the like, would have ad- 
 vanced greatly, but these advances would have 
 been compensated for by declines in the prices 
 of other goods. If an individual with a given 
 income spends more for articles A, B and C^ 
 he will, of necessity, spend less for articles D, 
 E and/or F, unless he draws on his capital, in 
 which case someone else will have less to spend 
 on these or other articles. A shifting of the 
 country's economic demand from one kind of 
 goods, say the goods of peace, to another kind, 
 
 33 
 
34 
 
 say the goods of war, will force up the prices 
 of the latter, and, vice versa, force down those 
 of the former. If more of the circulating 
 media is used in exchanging the war goods less 
 will be available for exchanging the peace 
 goods, and the demand for them will fall off 
 with a consequent reduction in their prices. 
 The rise in the prices of the one group, how- 
 ever, would be compensated for by the fall in 
 the prices of the other and little or no change 
 in the general price level would result. When, 
 however, this shift of the economic demand 
 from peace commodities to war commodities is 
 accompanied by a large inflation of the media 
 of exchange, no such compensating effect is 
 necessary. There may be an upward move- 
 ment of practically all prices although of 
 course the prices of those commodities upon 
 which the war demand is concentrated will 
 advance most. 
 
 We have in the United States several differ- 
 ent series of price index numbers, each cover- 
 ing a different number and combination of 
 commodities and each being computed on a 
 different base, but they all tell essentially the 
 same story. That story for the period 1913 
 to 1919, as regards wholesale prices, may be 
 briefly summarized as follows : 
 
35 
 
 Last 
 
 Number Date 
 
 (if Com- YEAR. Avail- 
 
 NAME. modlties. 1913 1914 1915 1916 1917 1918 1919 able. 
 
 Bureau of Lab. Stat., 328 100 100 101 124 176 196 212 265 
 
 Apr. 1920 
 
 Annalist 25 1 100 104 106 126 187 205 211 235 
 
 June 12, 
 1920 
 
 Bradstreet 96 100 97 107 128 170 203 203 216 
 
 June 1920 
 
 Dun, 200 100 101 105 123 169 190 190 217 
 
 June 1920 
 War. Indus. Board, . . 1366 100 98 101 125 173 192 (*) 201 
 
 Dec. 1918 
 
 All these general index numbers show an 
 increase in average prices for the most recent 
 dates in 1920 for which figures are available of 
 more than 115% over those of 1913, while all 
 but one (Dun) show prices throughout 1919 to 
 have averaged more than double what they did 
 in 1913. Taking the index numbers of United 
 States Bureau of Labor Statistics as the most 
 comprehensive and most scientifically pre- 
 pared of the index numbers covering the entire 
 period 1913 to 1919 inclusive, we may say that 
 the wholesale price level increased from 1913 
 to April, 1920, 165%; in other words, if 
 one calls the dollar of 1913 a 100% dollar in its 
 purchasing power over commodities at whole- 
 sale, the dollar of today is approximately a 
 38% dollar. 
 
 The extent of this depreciation in the mone- 
 tary unit will perhaps better be realized if it is 
 
 1 Foods only. 
 
 2 Not computed for 1919. 
 
36 
 
 compared with the two most striking cases of 
 monetary depreciation in Anglo-Saxon coun- 
 tries of the last century. I refer to the 
 depreciation of the Bank of England notes 
 during the period of the Napoleonic Wars, 
 and the depreciation of our American green- 
 backs during the period 1862 to 1878. 
 
 Although the Bank of England suspended 
 specie payment February 27, 1797, and did 
 not resume redeeming its notes in coin until 
 May 1, 1821 ; and although the notes were at 
 a discount in terms of gold and silver during 
 the greater part of this twenty-four-year 
 period — a discount reaching a maximum of 
 about 41 fo 1 for the year 1814 — the greatest 
 increase in wholesale prices for the period of 
 suspension (using 1797 as the base year) was 
 49 % 2 . This price advance is equivalent to only 
 about two-fifths of the price advance that has 
 taken place in the United States since 1913. 
 Stated in another way, the purchasing power 
 of the United States dollar declined about 62% 
 from 1913 to February, 1920, while that of the 
 
 'See N. F. Silberling; British Financial Experience 
 1790-1830. The Review 01 Economic Statistics, October, 
 1919, pages 286-289. 
 
 ' Jevons' Index Numbers covering wholesale prices of 
 forty commodities converted to a paper basis. Ibid., page 
 283. 
 
87 
 
 irredeemable bank note of the Bank'of Eng- 
 land declined but 33% during the entire period 
 of the Napoleonic Wars. 
 
 The maximum depreciation of the American 
 greenback in terms of gold during our period of 
 suspended specie payments was registered on 
 July 11, 1864, when gold dollars were quoted at 
 a price of $2.85, giving the greenback dollar a 
 gold value of only 35.09. 1 We hear much of 
 the greatly inflated paper money prices of the 
 Civil War period, and yet despite this decline 
 of the gold value of the dollar to a low 
 point only slightly more than one-third of 
 par, the maximum increase in wholesale prices 
 during the period of suspension, 1861-1878, 
 was but 116%. 2 This is a smaller advance 
 than that represented by the present whole- 
 sale prices in the United States, as com- 
 pared with 1913, the average increase to April, 
 1920 — the latest date for which Government 
 figures are available — having been 165 per 
 cent. In purchasing power over commodi- 
 
 J W. C. Mitchell, Gold, Prices and Wages under the 
 Greenback Standard, page 295. 
 
 'This figiire is based upon wholesale prices of ninety- 
 two commodities, and represents the maximum which was 
 reached in January, 1865. See A Comparison of Prices 
 during the Civil War and Present War. Price Section. 
 Division of Planning and Statistics, United States War 
 Industries Board, 1919, pages 8-9. 
 
38 
 
 ties at wholesale, our gold currency is therefore 
 more depreciated today relative to 1913 than 
 was the inconvertible greenback of the Civil 
 War days at its worst; namely, in 1865 as 
 compared with 1861. 
 
 Our war and after war rise in prices has not 
 taken place in the form of a great rise in the 
 prices of a comparatively few important com- 
 modities needed for war and immediate recon- 
 struction purposes accompanied by a decline 
 in the prices of other kinds of commodities. 
 On the other hand, price increases since 1913, 
 like those of the greenback period, have 
 covered almost every class of commodities — 
 war commodities and peace commodities, "pro- 
 duction goods" and "consumption goods," 
 absolute necessities and rank luxuries. No one 
 can make a study of price movements of recent 
 years without being struck by the wide range 
 of commodities affected and the similarity of 
 the price curves, shown by widely different 
 groups of commodities, both among themselves 
 and with the "all commodities" group. 1 Of 
 the 1437 commodities whose price movements 
 
 1 The few commodities whose prices were controlled hy 
 the government during the latter part of 1917 and during 
 1918 rose much less in price than the uncontrolled com- 
 modities. P. W. Garrett, Government Control over Prices. 
 War Trade Board, Washington, 1920, pages 495-500. 
 
were studied by the War Industries Board, 
 only 41, or less than .29 of 1% were lower in 
 1918 than in 1913, and only 23, or .16 of 1% 
 were more than 10% lower. Less than .22 of 
 1% of the total were 400% or more higher in 
 1918 than in 1913, and of these 31, 11 belong 
 to one of the 50 classes of commodities studied 
 — the small class labeled "coal tar crudes, 
 intermediates, and dyes." 2 Of the 1437 differ- 
 ent commodities studied by Mitchell, 834 or 
 58% showed price increases in 1918, as com- 
 pared with 1913, of from 50 to 150%, of which 
 431 showed increases of from 50 to 90%. 
 Forty-two out of the 50 classes of commodities 
 studied embracing 1268 out of the 1437 com- 
 modities, or 88% of the total, showed average 
 price increases of over 75% above the pre-war 
 level. 3 
 
 The 50 charts summarizing these war-time 
 price studies, made under the direction of 
 Professor Mitchell for the War Industries 
 Board and published in the Summary volume 
 previously cited, are most illuminating. The 
 similarity in the movements of these curves is 
 striking, and forcibly suggests the conclusion 
 
 ' See Wesley C. Mitchell, History of Prices During the 
 War, Summary, pages 5 and 20. War, Industries Board, 
 Washington, 1919. 
 
 3 Ibid., page 85. 
 
40 
 
 that the dominant lorces at work in causing 
 the rise of prices in most classes, namely, all 
 but a few like those of the "heavy chemicals," 
 "essential oils," and "explosives" groups, have 
 been forces acting on the money side of the 
 price ratio, and not those acting on the com- 
 modity side ; in other words, that, in the main, 
 general prices have shown their phenomenal 
 rise of recent years because money and credit 
 have been becoming increasingly plentiful 
 rather than because commodities have been 
 becoming increasingly scarce. 
 
 There is nothing intrinsically bad in high 
 prices. A high price level, when once com- 
 pletely established, that is when prices of all 
 kinds of commodities, and when wages and 
 contracts of all kinds have been adjusted to the 
 new level, assuming an adequate metallic base 
 and a similar level of prices in other countries, 
 such a high price level is, with two minor quali- 
 fications, to be noted later, no better and no 
 worse than a low price level. A sudden 
 doubling of prices throughout the world, if 
 only the doubling process applied uniformly 
 and at once to the prices of all classes of goods, 
 wholesale and retail, to all kinds of wages, all 
 debts, all rates and fees, all annuities, etc., 
 would not be materially harmful except in the 
 
41 
 
 inconveniences arising from the necessity of 
 using larger figures in all accounts and busi- 
 ness operations, and in the inconvenience of 
 handling a bulkier money. 
 
 The trouble is not with a high price level but 
 with a rising price level (and for that matter, 
 also, with a falling price level), and with the 
 widely different rates of speed at which the 
 prices of different kinds of goods and services 
 become adjusted to the new level. It is in the 
 transition to the new price level that the diffi- 
 culties arise. 
 
 The economic and social results of a great 
 currency and bank credit inflation, like that 
 we have been experiencing in recent years, are 
 large and far-reaching. To adequately de- 
 scribe them would require volumes. The limits 
 of a small book will only permit a brief men- 
 tion of the more important. These may be 
 considered under two broad heads: I. Those 
 results that are concerned with the contractual 
 relations between debtors and creditors. II. 
 Those results that are concerned with the 
 varying degrees of responsiveness of the prices 
 of different kinds of goods and services to the 
 inflationary forces. 
 
 I. Contractual relations between debtors 
 and creditors. Money is good for what it will 
 
42 
 
 buy — no more and no less. If we assume that 
 broadly speaking the purchasing power of the 
 dollar has been cut in half since 1913, then all 
 existing debts that were outstanding in 1913 
 have been cut in half, just as truly as if they 
 were made payable in a fifty-cent dollar, at the 
 price level of 1913. Measured in purchasing 
 power we have had negative interest and nega- 
 tive interest with a vengeance, for the annual 
 interest payments (which likewise have grown 
 smaller in purchasing power each year) have 
 not begun to compensate for the depreciation 
 of the principal. The creditor has actually 
 been paying the debtor for using his money, 
 when the matter is viewed from the standpoint 
 of purchasing power. Think what it means as 
 regards the distribution of America's wealth, 
 to cut in half these billions and tens of billions 
 of long time obligations! This applies, with 
 minor qualifications, to all bonds and deben- 
 tures that were outstanding in 1913 and have 
 not yet matured; and likewise to vast quan- 
 tities of preferred stocks; it applies similarly 
 to real estate mortgages, to savings deposits 
 accumulated in 1913 and still held, to the paid- 
 up value as of 1913 of billions of dollars of life 
 insurance ; and to our present day military and 
 service pensions of all kinds that date back to 
 
43 
 
 1913 or earlier and whose amounts were per- 
 manently fixed at that time. This fifty per 
 cent debasement of the value of these billions 
 of dollars in bonds and other funded incomes 
 or income rights has taken place equally, 
 whether the owner were a highly prosperous 
 individual or money-making corporation, an 
 endowed university, library or charitable in- 
 stitution, or a widow living upon a pension or 
 upon a fixed income derived from insurance or 
 from other invested funds. 
 
 This was fundamentally not a destruction of 
 values but a transfer of them. If the wealth 
 of the United States to-day were valued at 
 1913 prices it would probably considerably 
 exceed the values of 1913. Inflation has not 
 directly destroyed property, but has taken it 
 from some and given it to others. In general 
 it has taken it from the creditor and given it 
 to the debtor. Specifically it has taken from 
 the bondholder and given to the stockholder. 
 Practically all excess profits and all accretions 
 to the value of plant arising from inflated 
 prices have gone to the stockholder, while 
 the bondholder has been entitled only to a 
 fixed amount of rapidly depreciating dol- 
 lars. Inflation has taken from the mort- 
 gagee and given to the mortgagor; it has 
 
44 
 
 taken from the recipient of military pensions 
 and given to the Government; it has taken 
 from the saving banks depositor and given to 
 the savings bank borrower; it has taken from 
 colleges and universities and given to the stu- 
 dents' parents (through a cutting in half of 
 tuition charges, as measured in purchasing 
 power), and given also to the debtors (stock- 
 holders or governmental units) who are obli- 
 gors on the bonds in which the endowments of 
 these educational institutions are invested. 
 
 Of that which has been given to the debtor, 
 in this period of upheaval in the relations be- 
 tween debtor and creditor, it should be added, 
 much has been taken by the Government in 
 war taxes. That which has been taken from 
 the holder of railroad bonds, and the bonds of 
 some other public utilities; the rates for whose 
 services have been unduly held down by gov- 
 ernment action, while expenses have been 
 rising, has not to any extent been given to the 
 stockholder, but to the shipper, the merchant, 
 and the ultimate consumer in varying degrees. 
 
 Much that has been given to the public has 
 been used up in extravagant living, because 
 many of the recipients have not been a capital 
 saving and investing class. 
 
46 
 
 II. Varying Degrees of Responsiveness of 
 Prices of Different Kinds of Goods. The 
 second broad group of economic results com- 
 ing from inflation comprises those that are 
 concerned with the varying degrees of respon- 
 siveness in different kinds of prices, and in the 
 prices of different kinds of goods in each class, 
 to the stimulus of inflation. 1 
 
 It has long been recognized by economists 
 that as a general proposition, both on a strong 
 upward movement of the general price level 
 and on a strong downward movement, whole- 
 sale prices as a class normally move faster than 
 retail prices, and retail prices as a class nor- 
 mally move faster than wages. This conclu- 
 sion is well supported both by economic theory 
 and economic history. A striking illustration 
 of the principle may be found in our experience 
 during the greenback period, from 1862 to 
 
 1 Strictly speaking, the subject of debts and funded in- 
 comes, previously considered, is but a sub-division of this 
 subject, for the market values of these debts and incomes 
 are but one form of price, although the fact that they 
 embody rights to definite amounts of the same kind of 
 depreciating money in which the prices are quoted, and 
 that their market prices represent to a considerable extent 
 a capitalization of fixed money incomes at market rates 
 of interest that the inflationary movement itself greatly 
 influences — these facts make long time debts and other 
 funded incomes such a particular class of "commodities" 
 as to justify their separate treatment. 
 
46 
 
 1879. The careful studies of Mitchell 2 show 
 that following the Civil War wholesale prices 
 in terms of greenbacks reached their maxi- 
 mum in 1865, retail prices in 1866, and wages 
 in 1871. The evidence concerning price and 
 wage movements of the last six years on the 
 whole seems to support such a conclusion, 
 although the evidence is not by any means as 
 yet all in, and although that available is some- 
 what contradictory. There are of course 
 numerous individual cases where retail prices 
 rose earlier and to greater heights than whole- 
 sale, and likewise numerous cases of particular 
 trades or industries or particular localities in 
 which wages rose earlier and farther than retail 
 prices. 
 
 Wholesale prices, we have seen, have in- 
 creased on an average 165% from 1913 to 
 April, 1920. Government figures show that 
 the group of food commodities increased for 
 the same period 170% ; that the commodity 
 group of "cloths and clothing" increased 253%, 
 while "metals and metal products" increased 
 only 95 per cent. The Government figures for 
 the retail prices of 12 important articles of 
 food show an average increase for the same 
 
 2 W. C. Mitchell, Gold, Prices and Wages under the Green- 
 hack Standard, chart facing page 280. 
 
47 
 
 period of 111%. Retail prices, as exemplified 
 in the budgets of 12,000 laboring men's fam- 
 ilies in 92 localities, covering food, clothing, 
 fuel, light, and house furnishings, show an 
 average increase from 1913 to October, 1919, 
 of 83.1%,* and to December, 1919, of 99%, as 
 compared with a general wholesale price in- 
 crease to December, 1919, of 138%, and an 
 increase in the retail prices of food of 97%. 
 
 Another group of price maladjustments 
 resulting in large part from inflation is that 
 relating to railroads and other public utilities, 
 the prices of whose services and products are 
 prevented by government regulation from 
 moving upward with the general price level 
 under the stimulus of inflation, but whose costs 
 for materials, equipment and wages, continu- 
 ally advance under that stimulus. 
 
 We have as yet no very comprehensive 
 figures for wage movements throughout the 
 country for the period since 1913, and such 
 figures as are available for different kinds of 
 labor, and even for the same kind in different 
 localities, show widely different results. Of 
 course it is well known that wages in certain 
 industries for whose products the war demand 
 was great, and likewise all classes of wages in 
 
 1 Monthly Labor Review, Jan., 1920, pages 97-98. 
 
48 
 
 centers of great war industrial activity rose 
 rapidly and often to extravagant heights ; it is 
 likewise well known that the wages in certain 
 other industries rose very slightly. Contrast 
 the case of the powder mill worker and the 
 public school teacher, the mechanic in the ship- 
 building center and the street car conductor in 
 the interior town removed from any great war 
 industry. Regardless of what figures, yet to 
 be prepared, may show as to what happened 
 to that much-talked-about but rather indefinite 
 thing we call "average wage" since 1913, 
 there is no question at all but that many 
 laborers received wage increases far in excess 
 of the rise in their cost of living — increases 
 that have found expression in all sorts of 
 much-heralded extravagances, — and that on 
 the other hand, the wages of many millions of 
 workers have not begun to increase as rapidly 
 as their cost of living — a fact that has found 
 expression in great and widespread hardship. 
 Generally speaking, the pay of government 
 officials and clerks has not begun to keep pace 
 with the rise in the cost of living, and the gov- 
 ernment service, civil and military, is badly 
 suffering as a result. The salary situation 
 among teachers, both in public schools and col- 
 leges, has become notoriously bad and our 
 
49 
 
 whole American educational program is being 
 jeopardized. Public schools are closing for 
 lack of teachers, and colleges are losing their 
 faculties. 
 
 The industrial survey recently conducted by 
 the United States Bureau of Labor Statistics 
 covered eight industries. For these eight in- 
 dustries respectively the average percentage 
 wage increases were as follows: 
 
 Cigars, 52; men's clothing, 71; furniture, 
 54 ; hosiery and underwear, 84 ; iron and steel, 
 121; lumber, 94; mill work, 51; silk goods, 
 91. If the cost of living increase for the same 
 period is taken as 83.1 per cent, it will be seen 
 that the average rate of wage increase in three 
 of the eight industries was greater than the 
 increase in the cost of living; in four of them 
 less, and in one of them practically the same. 1 
 
 I have before me, given on the same page, 2 
 two tables, one containing the union scale of 
 wages by rates per hour for boilermakers in 
 manufacturing and jobbing shops, for the 
 years 1913 to 1919, in twenty-five widely scat- 
 tered American cities; and the other contain- 
 ing similar figures for bricklayers in forty 
 
 1 Monthly Labor Review, February, 1920, page 116. 
 "Bureau of Labor Statistics, Monthly Labor Review, 
 November, 1909, page 173. 
 
50 
 
 cities. 1 In a few cities the man in these trades 
 have received wage increases since 1913 appar- 
 ently more than sufficient to compensate for 
 the rise in the cost of living. In Baltimore, 
 for example, the rate for boilermakers in- 
 creased from 30.6 cents per hour in 1913 to 80 
 cents in 1919, an increase of 161%; while in 
 Charlestown, S. C, the rate for bricklayers 
 increased from 40 cents per hour in 1913 to 
 75 cents in 1919, an increase of 88%. On the 
 other hand, the rate for boilermakers in 
 Chicago which was 40 cents an hour in 1913, 
 was only 42 cents in 1917, 52 cents in 1918, 
 and 60 cents in 1919. The rate for bricklayers 
 in Jacksonville, Florida, was 62.5 cents from 
 1913 to 1918 and then rose to 75 cents in 1919. 
 The average rate for boilermakers in the 
 twenty-five cities was 39.5 cents per hour in 
 1913, and 72 cents per hour in 1919 (the latest 
 date in the year for which figures are available 
 being taken for the year), representing an 
 average increase of 82%, or just about enough 
 to meet the estimated increase in the cost of 
 
 1 The descriptive matter accompanying the tables says : 
 "The union wage scale figures here published represent 
 the minimum wage of union members * * * but these 
 figures do not always represent the maximum wage that 
 is paid, as in some instances part or even all of the organ- 
 ized workers in the trades receive more than the scale " 
 This was true both in 1913 and 1919. Ibid., page 172. 
 
51 
 
 living. The average rate for bricklayers in the 
 forty cities in 1913 was 67.1 cents per hour, 
 and in 1919 it was 90.2 cents per hour, repre- 
 senting an average increase of 34.4 per cent, or 
 probably much less than half enough to com- 
 pensate for the increase in the cost of living. 
 
 These two groups of figures are typical. 
 Scores of similar comparisons might be made 
 that would tell essentially the same story. The 
 wage adjustment to the new price level has 
 been very incomplete and very uneven. The 
 adjustment to a new and stable equilibrium 
 will require the wages of some kinds of labor to 
 be relatively decreased and those of others to be 
 increased. Many adjustments will need to be 
 made in the relative wage scales for the same 
 kinds of labor in different localities. The 
 adjustment to a new wage equilibrium in har- 
 mony with the new price level will require 
 much hardship, much bitter feeling, and prob- 
 ably much labor trouble. Of course as eco- 
 nomic conditions improve wages must rise rela- 
 tively to the cost of living, if labor is fairly to 
 participate in the country's economic progress. 
 
 Probably the most important single cause 
 of the widespread discontent existing through- 
 out the country to-day, and one of the prin- 
 cipal causes of the rapid spread of economic 
 
52 
 
 radicalism is the rising cost of living with its 
 grossly unequal effects upon the economic wel- 
 fare of different economic classes and of differ- 
 ent groups within each class. In connection 
 with the discontent that usually results from 
 inflationary movements, the French have a 
 saying "the guillotine follows the paper money 
 press — the two machines are complementary 
 one to the other." From the standpoint of 
 the discontent and hardship resulting, it would 
 seem to make little difference whether the 
 rising cost of living due to inflation took place 
 through the depreciation in terms of gold of 
 paper money issued to excess or through the 
 excessive uses of circulating notes and deposit 
 currency which are kept at par with gold. 
 
 Inflation through boosting the cost of living 
 for millions of people at rates more rapid than 
 it boosted wages forced these people to rigid 
 economies that released labor and capital for 
 the economic conduct of the war. In doing 
 this it performed a useful service ; but its bur- 
 dens were grossly unequal and ill-propor : 
 tioned to the shoulders that were called upon 
 to bear them. The war's economic burden fell 
 heavily upon those wage-earning and small 
 salaried people whose incomes lagged far be- 
 hind prices on the upward move. It was they 
 
53 
 
 who did the lion's share of the real economizing 
 that released the labor and capital needed for 
 the production of the sinews of war. 
 
 Briefly summarized the conclusions of this 
 chapter are as follows: 
 
 Our inflationary policy has been chiefly re- 
 sponsible for the great rise in the cost of living 
 since 1913, representing a reduction of some- 
 thing over 50% in the value of the dollar. A 
 high price level in itself is neither good nor bad, 
 but a rapidly rising price level carries in its 
 wake many economic and social evils. Inflation 
 is a tremendous engine of wealth redistribution. 
 It acts powerfully but blindly. It is no re- 
 spector of persons or needs. It takes from the 
 creditor, whoever he may be, and whatever his 
 economic position in life, and gives to the 
 debtor, regardless of who he may be, or what 
 may be his needs. It takes from one class of 
 laborers and gives to another. It often takes 
 from the thrifty and gives to the extravagant. 
 
 Our present price level is in unstable equilib- 
 rium. Adjustments are uneven and incom- 
 plete. Wages in particular are poorly and 
 unequally adjusted to the new level of prices. 
 The problem of eliminating these maladjust- 
 ments and of bringing prices and wages again 
 into equilibrium, both national and inter- 
 
64 
 
 national, will be a difficult one and will demand 
 for its solution exceptional intelligence, cour- 
 age, and tolerance. 
 
CHAPTER III— DEFLATION 
 
CHAPTER III 
 
 DEFLATION 
 
 In the preceding two chapters the process of 
 inflation was explained, the degree of inflation 
 existing in the United States was statistically 
 examined, and some of the more important 
 economic consequences of the resulting high 
 prices were considered. These were questions 
 of fact and of causation. The present chapter 
 is chiefly concerned with the question of 
 policy. Assuming the essential soundness of 
 the reasoning in the preceding two chapters, it 
 asks: What should we do about it? Should 
 we continue to inflate, stay where we are, or 
 deflate? 
 
 Whatever may be said in favor of a policy 
 of inflation as a means of financing a great 
 war, little can be said in favor of continuing 
 such a policy after the close of the war. The 
 evils of inflation are very real and we know 
 that although the bubble may at times appear 
 to be full of rainbows it must burst if we 
 continue to blow it. Let us pass at once, there- 
 fore, to the other two possibilities, namely, that 
 of maintaining the status quo and that of 
 deflating. 
 
 57 
 
Why not accept the present situation as 
 regards currency and credit inflation with its 
 resulting high price level as an established fact, 
 and frankly adjust our economic life to this 
 new level? There is much to be said in favor 
 of such a policy, particularly in a country like 
 the United States that has maintained itself 
 during the inflation period on a gold standard. 
 The chief desideratum in a sound currency 
 system is stability in the value of the monetary 
 unit. We have heard much since 1896 of the 
 evils of a depreciating monetary unit or, in 
 other words, of the rising cost of living, but 
 these were not our monetary troubles of a 
 generation ago. Then the evils were those 
 resulting from falling prices — evils that led 
 to a world-wide agitation for bimetallism. 
 Among the evils of falling prices so strongly 
 featured in the monetary discussions of the last 
 two decades of the 19th century three stood 
 out prominently, they were: 
 
 ( 1 ) The injustice of a falling price level to 
 the debtor classes. 
 
 ( 2 ) The depressing effect of a falling price 
 level upon business. 
 
 (3) The influence of a falling price level in 
 reducing the demand for labor and thereby in- 
 creasing unemployment and depressing wages. 
 
59 
 
 The general wholesale price level expressed 
 in terms of gold fell about 41 per cent in the 
 United States from 1872 to 1896. In other 
 words, if one calls the gold dollar of 1872 a 
 100 per cent dollar in its purchasing power, the 
 dollar of 1896 was a 170 per cent dollar. 
 Debtors, therefore, whether they were farmers 
 paying money on farm mortgages, house- 
 holders trying to pay off mortgages on their 
 homes, corporations or governmental units 
 with bond issues of some years' standing, were 
 being called upon to meet their obligations, 
 principal and interest, in money of greater 
 value than that which they had originally bor- 
 rowed. The purchasing power of a gold dollar 
 was increasing on an average about 2% P er 
 cent a year (measured geometrically). The 
 farmer's mortgage remained unchanged in the 
 amount of dollars called for, principal and in- 
 terest, but the rise in the value of the dollar 
 caused the farmer to receive continually declin- 
 ing prices for his wheat, cattle, and other 
 products. Appreciation in the value of the 
 dollar, therefore, or a falling level of prices 
 worked much injustice to the debtor classes and 
 this injustice was the most important item in 
 the indictment bimetallists brought against the 
 gold standard. 
 
60 
 
 The same principle, although with mitigat- 
 ing circumstances to be noted later, would 
 apply to-day should we pass through a period 
 of deflation and falling prices. Many people 
 who borrowed "cheap dollars," namely, dollars 
 of low purchasing power, during the period of 
 inflated prices would suffer hardship in being 
 required to pay their indebtedness, principal 
 and interest, in dollars of high and increasingly 
 high purchasing powet. Debts would remain 
 fixed while the prices of the articles that pro- 
 ducers had to sell, and earned incomes, would 
 decline to lower levels. 
 
 The greatest long-time borrower during the 
 period of the war was the Government. Our 
 net war debt deducting the amount due us 
 from the Allies is approximately ten and one- 
 half billion dollars. Most of these dollars, 
 when the Government received them, were 
 dollars of low purchasing power. If we should 
 deflate rapidly and substantially the Govern- 
 ment would repay dollars of high and contin- 
 ually higher purchasing power. It would get 
 these higher purchasing power dollars by 
 taxes. In the light of modern tendencies in 
 federal taxation it appears probable that those 
 who held the bonds would be the ones who 
 would be called upon ultimately to pay the 
 
61 
 
 lion's share of the taxes which would provide 
 the Government with the funds for interest 
 payments and amortization. But the public 
 would not realize this; particularly in view of 
 the tax exemption privileges enjoyed by these 
 bondholders. It does not require much imagi- 
 nation therefore or political acumen to see 
 visions of attempts at deflation being countered 
 in the near future, as they were about half a 
 century ago, by the charge that "the great 
 moneyed interests, the tax exempt bond- 
 holders, who had manipulated the market so 
 as to get most of the bonds into their own 
 hands, had artificially depressed commodity 
 prices and were exploiting the public by forc- 
 ing up the value of the dollars the Government 
 owed them." These words will have a familiar 
 ring to persons acquainted with the demands 
 of the Greenback Party of 1876 and with the 
 charges later made concerning the "Crime of 
 1873." 
 
 , Inflation for a time has a stimulating effect 
 upon business. Things boom, and many 
 classes of people feel prosperous when prices 
 are rising, but this stimulant, like alcohol when 
 taken in excess, always has its "morning 
 after." A falling and prospectively falling 
 price level is depressing to business. It throws 
 
62 
 
 a wet blanket over industry. When the pros- 
 pects are strong for a period of declining 
 prices consumers postpone purchases, retailers 
 and wholesalers let their supplies run down, 
 manufacturers "play safe" both in running 
 their plants and in purchasing raw materials. 
 New buildings and other new capital equip- 
 ment are postponed for the day of lower prices. 
 The business world refuses to capitalize in- 
 flated prices. The expectancy of heavy price 
 reductions breathes a spirit of uncertainty 
 into the economic atmosphere. A falling price 
 level therefore would not be universally popu- 
 lar however much most of us at the present 
 time think we would like to see it. 
 
 The third evil result of a substantial and 
 continuing decline in the price level is its harm- 
 ful effect upon the welfare of labor. This is 
 a natural result of the depressing effect upon 
 business just described. When business holds 
 back in anticipation of falling prices the de- 
 mand for labor declines and men are laid off. 
 Increasing unemployment causes hardship and 
 is a potent factor in forcing down wages and 
 weakening the hold of trade unions on their 
 men. Labor naturally resists wage reductions 
 even though the price level is falling, and this 
 
63 
 
 means that a period of falling prices is likely to 
 be characterized by many labor troubles. 
 
 The hardships therefore and the resulting 
 political difficulties of carrying through a pro- 
 gram of price level reduction through deflation 
 are so serious that we should enter upon such 
 a program, if at all, only after careful delibera- 
 tion and under the pressure of strong reasons. 
 Are there strong reasons why we should 
 deliberately suffer these hardships and adopt 
 a program of deflation? I believe there are, 
 provided the deflation be not excessive, and 
 that the program be carried through with firm- 
 ness, moderation and reason. 
 
 Why then is deflation necessary? The 
 strongest reason for deflation is that our pres- 
 ent gold base is altogether inadequate safely 
 to support the present paper money and de- 
 posit currency circulation. While this is true 
 of the United States it is true to a much higher 
 degree of most other advanced countires of 
 importance. The safety and security of our 
 economic organization demand that there be a 
 reasonable relationship between the size of the 
 metallic base and the size of the superstructure 
 of circulating media it supports. Long ex- 
 perience gave each country a rough idea of 
 what that proportion should be under the con- 
 
64 
 
 ditions existing prior to the great war. Of 
 course there were variations in this proportion 
 from season to season but there was in each 
 country a fairly recognized norm about which 
 these seasonal movements fluctuated. A sug- 
 gestion of how far some of the leading coun- 
 tries have departed from that ratio of metallic 
 reserve to note and deposit currency circula- 
 tion that pre-war experience had shown to be 
 the wise one will be found in the figures given 
 in the following paragraphs. Unfortunately 
 the metallic reserve ratios of many countries 
 of pre-war days and those of to-day as officially 
 published are not strictly comparable because 
 of changes wrought by the war in currency and 
 banking organization, in methods of comput- 
 ing reserves, and in the character of the pub- 
 lished statistics. The figures given below 
 therefore should be considered only rough 
 approximations. Where they err, they are 
 more likely to err on the side of understating 
 the decline in the metallic ratio since pre-war 
 days than in overstating it, for in belligerent 
 countries the war strain encouraged the mak- 
 ing of as good a showing as practicable. 
 
 The bank notes outstanding from the issue 
 department of the Bank of England on May 
 20, 1914, were £52.6 millions against which 
 
65 
 
 the issue department held a gold coin and 
 bullion reserve of £34.2 millions or 65 per 
 cent, which was a fairly normal percentage. 
 On March 3, 1920, the outstanding bank notes 
 of the issue department were £131.4 millions, 
 and there was outstanding in addition (March 
 4) government currency notes to the amount 
 of £327.5 millions. The combined outstand- 
 ing note circulation was therefore £458.9 
 millions. Against these notes there was a 
 combined gold coin and bullion reserve on 
 March 3 and 4, 1920, of £141.4 millions, or 
 31 per cent. On May 20, 1914, the Bank of 
 England was carrying a reserve of 43.6 per 
 cent against its deposits, which was a fairly 
 normal percentage, and on March 3, 1920, 
 this reserve had fallen to 19.6 per cent. 
 
 On December 26, 1913, the Bank of France 
 was carrying in its vaults a metallic reserve of 
 62.10 per cent against its notes and deposit 
 liabilities combined, which was about a normal 
 reserve; and on March 4, 1920, this reserve 
 had declined to 9.3 per cent. The metallic 
 reserve against notes and deposits of the Bank 
 of Italy declined from 71.2 per cent on May 
 20, 1914, to 11.2 per cent on October 31, 1919. 
 That of the National Bank of Belgium de- 
 clined from 31.7 per cent on June 11, 1914, to 
 
68 
 
 5.1 per cent on February 26, 1920. The Bank 
 of Japan held a metallic reserve of 43.2 per 
 cent on June 30, 1914, and one of 38.0 per cent 
 on March 6, 1920. 
 
 The metallic reserve of the German Reichs- 
 bank was 42.72 per cent December 31, 1913, 
 and 2.17 per cent February 23, 1920. For the 
 Austro-Hungarian Bank the metallic reserve 
 declined from 73.6 per cent on June 25, 1914, 
 to 0.53 per cent December 31, 1919. In Russia 
 the condition is much worse, where the situa- 
 tion is aggravated, as it is in Germany, by huge 
 issues of paper money in addition to ordinary 
 bank notes. 
 
 The neutral countries of Europe are gener- 
 ally supposed to have had their banking 
 positions strengthened by the war. These 
 countries are mostly countries of compara- 
 tively small populations (Spain being the 
 largest with less than 21,000,000), and of 
 secondary importance as factors in the world's 
 market for gold. 
 
 For the Bank of Spain the ratio of the 
 metallic reserve to circulation and deposits in- 
 creased from 46.76 per cent on December 27, 
 1913, to 62.4 per cent on February 28, 1920. 
 For the Netherlands Bank there was an in- 
 crease from 52.4 per cent on March 31, 1914, 
 
67 
 
 to 55.79 per cent on February 28, 1920. For 
 the National Bank of Switzerland there was a 
 decline from 62.9 per cent on June 11, 1914, 
 to 60.5 per cent on February 23, 1920. The 
 Bank of Norway showed a decline from 39.7 
 per cent on June 15, 1914, to 31.0 per cent on 
 February 23, 1920; and the Bank of Sweden 
 a decline from 36.8 per cent on June 13, 1914, 
 to 31.9 per cent on February 21, 1920. Every 
 one of these neutral countries has experienced 
 a great increase in the volume of metallic re- 
 serve in its national bank, but three out of the 
 five national banks have expanded their bank 
 notes and deposits more than proportionately 
 with a consequent reduction in the percentage 
 of reserve; and one of the other two has not 
 improved its reserve position very much. 
 
 Taken as a whole the above figures point to 
 the conclusion that unless Europe's metallic 
 reserve percentages were vastly in excess of 
 her needs during pre-war times — and there is 
 no evidence that they were — they are to-day 
 altogether inadequate to support on a par gold 
 basis Europe's present volume of notes and 
 circulating deposit credit. 
 
 Let us now turn to the United States, the 
 country that is supposed to have absorbed the 
 larger part of the gold lost by the belligerent 
 
68 
 
 countries of Europe. Unfortunately a change 
 made some time ago in the form of compiling 
 the bank figures published by the Comptroller 
 of the currency makes it no longer possible to 
 tell how much gold is held by reporting banks 
 in their own vaults. This fact together with 
 the complete reorganization of our legal re- 
 serve requirements, brought about by the 
 establishment and development of the federal 
 reserve system, renders a comparison of the 
 exact percentages of gold reserve held in the 
 United States before the war and now, imprac- 
 ticable. Some idea of our changed position 
 since June, 1914, however, may be found by 
 comparing for that date and the present the 
 ratios of our stock of monetary gold to the 
 total amount of money in circulation and to 
 total individual deposits in national banks. 
 These figures have been previously given, 1 and 
 need only be summarized here. 
 
 Our stock of monetary gold on July 1, 1914, 
 was equivalent to 55.3 per cent of our total 
 monetary circulation, and on June 1, 1920, it 
 was equivalent to 43.6 per cent. On the 
 former date it was equivalent to 29.7 per cent 
 of our national bank deposits (exclusive of 
 
 1 Pages 28 and 29. See, also, the author's article on Infla- 
 tion in American Economic Review, June, 1918, pages 
 251-252. 
 
69 
 
 bankers' balances), and on December 31, 1919, 
 the stock of monetary gold, less that held by 
 the federal reserve system as reserve against 
 federal reserve notes, was equivalent to only 
 14.1 per cent of the national bank deposits. 
 Ultimate cash reserves, against deposits in 
 commercial banks, declined from an average of 
 11.7 per cent in 1914 to 6.6 per cent in 1919. 
 
 Our gold position is thus far below that of 
 pre-war times and we have been losing gold on 
 net balance almost continually since May, 
 1919, our net loss for the period January 1, 
 1919, to June 10, 1920, having been in 
 round numbers $386 millions. To us, however, 
 more than to any other country, belligerent 
 Europe ultimately will look for the replenish- 
 ment of her gold in order to return to a specie 
 basis. 
 
 A second reason in favor of deflation, 
 although one that grows weaker the longer de- 
 flation is postponed, is found in the fact that 
 inflation's work has not yet been completed 
 and that therefore some of the otherwise evil 
 results of our inflation experience would still 
 be avoided or mitigated by deflation. There 
 are still outstanding in this country many 
 billions of dollars of long-time obligations 
 which date from the pre-war period, have still 
 
70 
 
 some years to run before maturity and which 
 continue in the hands of their pre-war owners. 
 Probably most of the bonds and mortgages 
 owned by savings banks, 1 insurance companies, 
 educational, charitable, and other endowed in- 
 stitutions belong to this class, as do also many 
 of the non-war bonds to-day held in the strong 
 boxes of individual investors. If these bonds 
 were sold to-day or were to mature with com- 
 modity prices at their present high level they 
 would be paid for or paid off in greatly depre- 
 ciated dollars; but if we should have a period 
 of substantial deflation with falling prices the 
 owners of these bonds, the depositors in the 
 savings banks, the beneficiaries of the insur- 
 ance policies, etc., would benefit, and to the 
 extent that they were the same persons who 
 held the bonds, owned the deposits, etc., in the 
 pre-war times, they would get back, in part 
 at least, what they now appear to have lost 
 through inflation. 
 
 1 The writer estimated in 1918 on the basis of figures 
 collected through a questionnaire of the American Bankers 
 Association that the 622 mutual savings banks of the 
 country held bonds and other securities, -with maturities 
 later than ten years, of $1,680 millions. It is doubtful 
 whether these securities have to any extent been since 
 disposed of. Bankers Convention Section, Commercial and 
 Financial Chronicle, October 12, 1918, p. 207. 
 
71 
 
 Although the situation seems to make defla- 
 tion necessary, it does not by any means follow 
 that an effort should be made to deflate to the 
 pre-war price level. From 1896 to 1913 our 
 American wholesale price level rose about 50 
 per cent, representing an average annual in- 
 crease (measured arithmetically) of approx- 
 imately 3 per cent. Even without the war, 
 therefore, we might reasonably have expected, 
 as the result of a continuation of pre-war 
 forces, an increase in prices from 1913 to 1920 
 of something like 20 per cent. 
 
 But much more important than this is the 
 fact that the war period has probably wrought 
 important permanent changes in our cur- 
 rency and banking systems — changes which 
 will greatly improve the efficiency of these 
 systems and thereby enable a given amount of 
 gold to carry on its shoulders a larger load 
 of exchange work than in pre-war days. This 
 is a large subject and only a few phases of it 
 can be suggested here. 
 
 It appears likely that in the future the 
 world's supply of monetary gold will be found 
 to an increasing extent in the vaults of central 
 banks and will be used to a decreasing extent 
 for purposes of hand to hand circulation. This 
 will greatly increase the monetary efficiency 
 
72 
 
 of the average ounce of monetary gold. Fur- 
 thermore the establishment and development 
 of our federal reserve system, the increasing 
 movement for bank consolidation in Europe 
 and America, the reduction of gold shipments 
 both national and international through the 
 creation of such devices as our gold settlement 
 fund, and the increasing use of funds located 
 abroad for making international payments 
 through debits and credits without the neces- 
 sity of shipping gold — these changes and others 
 of a similar character are resulting to an ever 
 increasing degree in economizing the use of 
 gold and in thereby reducing the ratio of the 
 gold base to the credit superstructure it sup- 
 ports. We can do a given amount of money 
 work with less gold because gold is being made 
 to work harder and more efficiently. 
 
 A factor which may possibly reduce the 
 structure of circulating credit in proportion 
 to the gold base is the debasement of the gold 
 units of value in certain foreign countries. 
 When one notes the tremendous depreciation 
 to-day in the gold values of the paper money 
 units of many belligerent countries, at a time 
 when the value of gold itself in terms of com- 
 modities has been more than cut in half in six 
 years, and when he notes the staggering bur- 
 
73 
 
 dens of debt these countries are carrying he 
 need not be surprised to hear increasing de- 
 mands among their peoples for debasing the 
 legal gold unit of value. Advocates of debase- 
 ment will point out that the government in 
 floating its domestic debt received its pay 
 largely in greatly depreciated paper money. 
 They will show that even if it were possible 
 for the government ultimately to pay these 
 domestic debts in the old monetary units, at 
 a parity with gold, such payment would in- 
 volve an oppressive burden of taxation that 
 would be grossly unjust in that it would give 
 to the bondholder a much more valuable money 
 than he originally loaned to the Government. 
 They will stress the depressing influences on 
 all kinds of business of a currency contraction 
 that would bring the value of the present paper 
 monetary unit back to par, a contraction in 
 some countries as, for example, in Germany, 
 Austria and Russia, of thousands per cent. It 
 appears probable that we shall witness in the 
 near future widespread and vigorous move- 
 ments in many countries in favor of the adop- 
 tion of new gold units of value somewhere in 
 the neighborhood of their de facto paper 
 money unit of to-day, or at least much lower 
 than their pre-war gold units. Monetary his- 
 
74' 
 
 tory is full of examples of such debasement. 
 If the existing paper money unit should 
 appear to be of an inconveniently small value, 
 its name might be continued and also its legal 
 power in settlement of domestic debt, while a 
 new unit might be superimposed upon it of 
 which the old unit would become merely a 
 division. Suppose, for example, the mark 
 should be stabilized at a gold value of 2.5 cents 
 United States currency, retaining its name and 
 its present domestic debt-paying powers, and 
 suppose this mark should be made the "dime" 
 of a new German unit worth, say 25 cents, 
 United States currency, and called perhaps a 
 "Hindenburg." Obviously by such a process 
 a given weight of gold in Germany would have 
 its efficiency for reserve purposes multiplied 
 approximately ten times, and the return to a 
 gold basis would be greatly expedited. That 
 this would be a form of domestic debt repudia- 
 tion and be open to many serious objections 
 is of course obvious. Here we are neither 
 arguing for or against such a proposition, but 
 merely pointing out that to a large number of 
 people in the most debt-burdened and paper 
 money-ridden countries of Europe such a 
 course is likely to appear, with all its difficul- 
 ties, to be the least objectionable road to day- 
 
75 
 
 light. The adoption of such a program by 
 some countries would obviously reduce the 
 amount of deflation necessary in other coun- 
 tries to bring the structure of circulating credit 
 down to a reasonably safe multiple of the gold 
 base. 
 
 How should deflation be brought about? 
 This is a large question in itself and the limits 
 of this book will prevent anything more than 
 the mention of a few points. In general, it 
 may be said, we must reverse the process by 
 which we inflated. By maintaining official 
 discount and loan rates at federal reserve 
 banks below the market rates and by granting 
 rediscounts liberally, we placed "the market 
 in the federal reserve banks," we encouraged 
 a "borrow and buy" policy for war bonds and 
 certificates of indebtedness, and made borrow- 
 ing that resulted in a rapid expansion of our 
 circulating bank credit — deposit-credit and 
 federal reserve notes — appear to be both 
 profitable and a matter of patriotic duty to all 
 parties concerned. 
 
 The fact that these two kinds of circulating 
 credit were interchangeable to the public 
 on demand, by the deposit of federal reserve 
 notes or by the cashing of checks for notes, 
 
76 
 
 enabled the public to decide what proportion 
 of this increased supply of circulating credit 
 it should hold in the form of deposits and what 
 proportion in the form of federal reserve 
 notes. We inflated by expanding circulating 
 credit. The public decided the form in which 
 this newly created credit should circulate. 
 
 Preferentially low discount rates on war 
 paper were an additional factor in this deposit 
 and note expansion, and one that explains in 
 part the large holdings of such paper by our 
 banking instituions, holdings that are esti- 
 mated to amount to something in the neigh- 
 borhood of six billion dollars. 
 
 Now that the war is over this sort of expan- 
 sion clearly should be stopped. War patriot- 
 ism and progressive bank-credit expansion can 
 no longer buoy up the prices of billions of dol- 
 lars of war securities to artificially high levels. 
 The real market rate of interest must now 
 emerge and dominate the situation. There is 
 no question but that the real rate is much 
 higher than the camouflaged war rate. To an 
 increasing degree Government war bonds and 
 certificates of indebtedness must stand upon 
 their own bottoms as investments. 
 
 The market should be "outside of the fed- 
 eral reserve banks." In other words, the 
 
77 
 
 federal reserve bank rate should rule as it 
 did before our entrance into the war, and as 
 does usually the Bank of England's official 
 discount rate, higher than the market rate so 
 that recourse by banks to the discount and loan 
 facilities of the federal reserve banks should 
 be only an emergency recourse for temporary 
 needs, not a recourse for permanent funds. ^ 
 In the future preference should be shown to 
 short-time loans of a self -liquidating character, 
 as originally contemplated by the federal re- 
 serve system ; and to an increasing degree, 
 loans on the security of government debt 
 should be discriminated against by federal 
 reserve banks, both as to discount rates and 
 in the matter of the banks' discretion, as to 
 how much they shall loan and to whom. Grad- 
 ually but firmly government paper should be 
 forced out of the federal reserve banks and 
 out of the commercial member banks and into 
 the strong boxes of the investing public, in ; 
 eluding the vaults of savings banks, insurance 
 companies, and endowed institutions. To this 
 end, in my judgment, the federal reserve 
 banks should follow up their recent advances 
 in discount rates, gradually raising the rates 
 higher until they become effective in forc- 
 ing contraction. The present preferentially 
 
78 
 
 low rate on loans secured by certificates of 
 indebtedness should be discontinued. If an 
 artificially and preferentially low rediscount 
 rate is necessary in order to enable the govern- 
 ment to float these securities at their present 
 low interest rate, then we are paying the price 
 of further inflation for a low interest rate on 
 the certificates. In that case why not frankly 
 recognize the fact that in an unsupported 
 market the present rate is too low and should be 
 raised, if further issues become necessary. 
 
 The same principle applies to government 
 bonds. If the market rate for these bonds, 
 unsupported by an inflationary loan policy on 
 the part of the federal reserve banks, proves 
 to be much higher than the par rates they pay 
 (when due allowance is made for the tax 
 exempt privileges of these securities and for 
 the government's program of gradual debt 
 reduction), and if resulting heavy declines in 
 bond prices work hardship to innocent bond- 
 holders who bought their bonds in good faith, 
 then the government might well consider plans 
 of refunding at a fair market rate of interest. 
 We should not be under the necessity of seri- 
 ously impairing our banking system and of 
 perpetuating highly inflated and unstable cir- 
 culating media, with consequent high prices, 
 
79 
 
 in order to buoy up the market prices of bonds 
 that were floated at abnormally low interest 
 rates on waves of war patriotism. 
 
 The federal reserve banks might well be 
 decreasingly receptive to applications for loans 
 and rediscounts from banks which they know 
 are lending their own funds heavily in the 
 speculative market, or are extending credit 
 unduly for the production and marketing of 
 luxuries, and from banks whose borrowings 
 from their federal reserve banks are dispro- 
 portionately large as compared with their 
 capitals. 1 Although the law already gave the 
 federal reserve authorities large discretion- 
 ary powers in such matters, it is well that 
 the government has just strengthened their 
 hands by passing the "Phelan Act" which 
 authorizes them to charge progressively higher 
 rates of discount on paper rediscounted for any 
 banks in excess of what may be considered a 
 normal line. 
 
 Federal reserve banks whose gold reserves 
 against federal reserve notes fall below 40 
 
 1 By using capital or capital and surplus as the criterion 
 instead of deposits, much needed pressure would be 
 exerted to force many of our banks to increase their cap- 
 ital funds to a safer percentage of their deposit liabilities. 
 See the author's article on The Ratio of Bank Capital to 
 Deposits. Bankers Statistics Corporation Service of May 
 4, 1920. 
 
80 
 
 per cent, after allowing for a 35 per cent law- 
 ful money reserve against deposits, should be 
 promptly subjected to the tax on deficiency 
 reserves provided for in Section 11, Paragraph 
 (c) of the Federal Reserve Act. 
 
 The federal reserve banks are the strongest 
 central banking system in the world to-day. 
 For some time their reserve position has been 
 growing progressively weaker. Much of the 
 "slack has been taken up." These banks will 
 be the world's greatest financial conservator in 
 the trying times of reconstruction confronting 
 us. They must keep strong and highly liquid 
 so as to be prepared to meet their responsi- 
 bilities to America and to the world. 
 
 If deflation is to be accomplished, obviously 
 governments must stop meeting current ex- 
 penses by printing paper money and by issu- 
 ing bonds to be hypothecated in large quan- 
 tities at banks. Governments must practice 
 most rigid economy, keep their current ex- 
 penses well within their current incomes, and 
 proceed promptly as the United States is 
 doing, to a gradual reduction of the war debt. 
 
 We should not permit our commercial banks 
 to be loaded up with European public debt or 
 other long-time foreign obligations. How- 
 
81 
 
 ever good and desirable such investments may 
 be, their place is not in our commercial banks. 
 
 The principal conclusions of this chapter 
 may be summarized as follows: 
 
 Deflation is a painful economic process. By 
 raising the value of the monetary unit in which 
 debts are expressed it places unjust burdens 
 upon many debtors to the advantage of 
 creditors. It depresses business, and tends to 
 reduce the demand for labor thereby increas- 
 ing unemployment, forcing down wages, and 
 causing labor troubles. 
 
 Despite these evils, world deflation is abso- 
 lutely necessary, although less deflation is 
 needed in the United States than in most ad- 
 vanced countries. The existing gold base is 
 altogether inadequate safely to support the 
 present paper money and deposit currency 
 circulation at a parity with existing gold 
 monetary units in a free gold market. Fur- 
 thermore, inflation's work has not yet been 
 completed and therefore some of the otherwise 
 evil results of our inflation experience could 
 still be avoided or mitigated by deflation. 
 
 There is no need of deflating to the pre-war 
 price level. Even without the war the price 
 level would presumably be considerably higher 
 to-day than in 1913. The war period has 
 
82 
 
 taught many lessons and brought about many 
 improvements in currency and banking that 
 will render a given amount of monetary gold 
 more efficient than before, making it support a 
 larger superstructure of circulating credit and 
 thereby permanently raising the world's gold- 
 standard price level. Considerable contraction 
 may occur through the debasement of mone- 
 tary units in bankrupt countries. 
 
 Deflation may be aided by a vigorous dis- 
 count policy on the part of federal reserve 
 banks, that will take "the market out of bank" 
 by keeping the federal reserve bank rates well 
 above the market rates. To an increasing 
 degree the federal reserve banks and commer- 
 cial banks should discriminate, in making 
 advances, in favor of short-time self -liquidat- 
 ing commercial paper, and against war debt 
 paper and loans that directly or indirectly pro- 
 vide funds for speculation. 
 
 Finally, we should preach and live the 
 slogan "work, save and pay up." 
 
INDEX. 
 
 American Economic Review, cited, 3n; 7n. 
 
 Annalist index numbers, cited, 35. 
 
 Bank deposits, growth of, since 1913, 27; increase of, an 
 important cause of inflation, 27-28. 
 
 Bank of England, notes of, from 1797 to 1821, an example 
 of specific depreciation, 4; extent of depreciation of, 
 notes of, during period of Napoleonic Wars, 36; re- 
 serves of, in 1914 and 1920; discount policy of, 77-78. 
 
 Bondholders, how affected by inflation, 43; how affected by 
 deflation, 58-61; 69-70. 
 
 Bradstreet's index numbers, cited, 35. 
 
 Bureau of Labor Statistics, wholesale price index num- 
 bers of, 35; studies of, concerning budgets of laboring 
 men's families, 47; index numbers of, for retail prices 
 of food, 46-47. 
 
 Cost of living, rise of, since 1913, 47. See also Prices. 
 
 Creditors, how affected by inflation, 41-45 ; how affected by 
 deflation, 58-61; 69-70. 
 
 Debasement of legal gold monetary unit, possible in certain 
 belligerent European countries, 72; arguments that 
 may be advanced in support of, 72-75. 
 
 Debtors and creditors, how affected by inflation, 41-45; how 
 affected by deflation, 58-61; 69-70. 
 
 Debts, outstanding since pre-war times, relation of, to 
 deflation, 69-70. See also Debtors and Creditors. 
 
 Deflation, evils connected with, enumerated, 58; evil re- 
 sults of, to debtor classes, 59-61; and government war 
 debt, 60-61; will be unpopular, 61; temporarily de- 
 presses business, 61; causes unemployment and tends 
 to depress wages, 62-63; necessary, because of in- 
 adequacy of gold supply to support present structure 
 of circulating credit, 63-69; if started early might 
 eliminate or mitigate some evils of inflation, 69-70; 
 to pre-war price level not necessary, 71-75; how to be 
 brought about, 75-82; would be helped by high federal 
 reserve discount rates, 76-77; would be helped -by dis- 
 count rates discriminating in favor of short-time self- 
 liquidating paper, 77; would be furthered by govern- 
 ment's living within its income, 80. 
 
 (83) 
 
Demand and supply, law of, in Its relation to prices, 4-6; 
 33-34. 
 
 Deposit credit, forces encouraging expansion of, enu- 
 merated, 18; expansion of, profitable to banks, 18-21; 
 expansion of, encouraged by Europe's heavy demands 
 for our products, 21; expansion of, appeared to bank- 
 ers to be a patriotic duty during war, 22; borrowing 
 resulting in expansion of, appeared to public to be a 
 patriotic duty, 22-23; expansion of, encouraged by 
 low discount rate policy of federal reserve authorities, 
 22-25. 
 
 Deposit currency, growth of, during war period, 27; rate 
 of turnover of, increased during war period, 28. See 
 also Deposit credit. 
 
 Depreciation of money, specific, defined, 4; general, de- 
 fined, 4-5. 
 
 Depreciation of U. S. gold dollar from 1913 to 1920, 35; 
 compared with that of Bank of England notes during 
 Napoleonic Wars, 36; with that of greenbacks during 
 Civil War, 36. 
 
 Discount rates, policy of federal reserve authorities of 
 keeping low, an important factor in inflation, 22-24; 
 should be kept higher by federal reserve banks than 
 market rates as a means to deflation, 76-77. 
 
 Dun's price index numbers, cited, 35. 
 
 European public debt, not a desirable investment for our 
 commercial banks, 80-81. 
 
 Federal reserve banks, loans of, to member banks should 
 be only for temporary and emergency needs, 76-77; 
 should discriminate in making loans and rediscounts 
 against banks lending heavily in the speculative 
 market, against banks extending credit unduly for 
 the production of luxuries, and against banks whose 
 borrowings are disproportionately large in comparison 
 with their capital funds, 79; tax on deficiency reserves 
 of, should be enforced, 79-80. 
 
 Federal Reserve Bulletin, cited, 7. 
 
 Federal reserve notes, circulation of, 14; gold reserves 
 against, 14. 
 
 Federal reserve system, economics in the use of gold, 
 effected by, 71-73. See also Federal reserve banks. 
 
 Garrett, P. W., cited, 38n. 
 
85 
 
 Gold, heavy imports of, during early years of war, a cause 
 of inflation, 13; impounding of, by federal reserve 
 banks, 13; circulation of, discouraged, 26; embargo 
 laid on export of, 26; percentage of, in total monetary 
 circulation of U. S. declines, 28-29; amount of, in 
 monetary uses in U. S., prior to war and now, 67-69; 
 smaller percentage reserves of, needed than formerly, 
 71-72. See also Reserves. 
 
 Government debt, how related to inflation, 23-24; should 
 be forced out of commercial banks as rapidly as pos- 
 sible, 77-78; question of refunding at a higher rate 
 of interest, 78-79. 
 
 Government expenditures, economy in, needed for defla- 
 tion, 80. 
 
 Greenbacks, an example of specific depreciation, 4; extent 
 of depreciation of, during Civil War as compared with 
 depreciation of gold dollar during Great War, 37. 
 
 Inflation, defined, 3; forces contributing to, 12-18; caused 
 by low federal reserve discount rates, 22-25; effects 
 of, on debtors and creditors, 41-45; on savings de- 
 posits, 42; on life insurance policies, 42; a tremendous 
 engine of wealth redistribution, 41-44; 53; an im- 
 portant cause of widespread public discontent, 51-52; 
 distributed the war's financial burden inequitably, 
 52-53; affects different kinds of prices and the prices 
 of different kinds of goods differently, 45-47. See also 
 Prices and Deflation. 
 
 Index numbers of prices in U. S., 34-35. 
 
 Interest rates, kept down by inflationary foTces that 
 pushed prices up, 22-25. See also Discount rates. 
 
 Mitchell, W. C, cited, 9; 37; 46; 39. 
 
 Monetary circulation of U. S., annual amounts and Index 
 numbers of, 12; increased 71% from 1913 to 1919, 12. 
 
 "Money in circulation," defined and estimated, 10-12. 
 
 Mutual savings banks, long-time securities held by, in 
 1918, 70n. 
 
 Phelan Act, 79. 
 
 Physical volume of business for years 1913 to 1919 meas- 
 ured, b-9. 
 
 Price-fixing by Government, 38n. 
 
 Prices, individual compared with general, 33-34; of many 
 commodities would have risen during war even with- 
 
86 
 
 out Inflation, 33-34; extent of rise of, in U. S., since 
 1913, as shown by index numbers, 34-34; advance for 
 nearly all classes of commodities during war period, 
 38-40; high, not intrinsically bad, 40-41; rising, have 
 important economic results, 41; wholesale, retail, and 
 wages, respond differently to inflationary forces, 45- 
 51; why they cannot continue at present level, 58; 
 63-71; rising, artificially stimulate business activity, 
 61. See also Wages. 
 
 Public debt, its relation to inflation, 23-24; its relation to 
 deflation, 60-61. See also Government debt. 
 
 Public utilities, how affected by inflation, 44; 47. 
 
 Railroads, how affected by inflation, 44; 47. 
 
 Reserves, bank, legal requirements concerning, in TJ. S., 
 greatly reduced between 1913 and 1919; 14-17; re- 
 duction of, a factor in inflation, 17; against deposits, 
 decline during war period, 28; against notes and de- 
 posits, amount of needed, 63-64; percentages held 
 against notes and deposits prior to war and since, in 
 England, in Bank of France, in Germany, in Austro- 
 Hungarian Bank, in Russia, in Bank of Spain, In 
 Netherlands Bank, in National Bank of Switzerland, 
 in Bank of Norway, in Bank of Sweden, in U. S., 66-69. 
 
 Savings deposits, how affected by inflation, 42; how 
 affected by deflation, 69-70. 
 
 Stockholders, how affected by inflation, 43. 
 
 Wages, how affected by inflation, 47-51; of different classes 
 of labor affected differently by inflation, 47-49. 
 
 War Industries Board, price index numbers of, 35. 
 
 War. See Inflation — Prices — Government debt. 
 
■ 
 
 ■ 
 
 HI >!i i 
 
 >mmhhimihi«iiii< 
 
 1 1 1 J ) 1 1 j I M j 
 
 iiUmr-- 
 
 1 1 iijDlii i Jit 11 ill 
 
 MiiiiiniiiilKHIllltJIlHIill... 
 
 MiiiinniiniiniiHiiiMmiiDii 
 iiiniiiiiHDHniiMliMlilliiitui 
 
 1 l.llllllllllJlMlllllMIt 
 
 .'lilinMJIiJHIIIIlinHHDJM 
 .'HMHlJMMHMJi.ljmilllllN.... 
 
 '."HHmhmi ■■!. > MU v 
 
 MlitllHHIIIH 
 
 ' lU'rtii'Ni't 
 
 ■ 
 
 ii'i i 
 
 <>»}>•> 
 
 ■ 
 
 ijjii 
 
 H ! ' J 1 1 } I! i 1 1 11 1 H .' J ) 
 
 ■ 
 
 IUIHmm) 
 linn 
 
 Mini: 
 
 ■ ■ 
 
 U'.IU'. 'Mil 
 
 mi nun ul 
 iiiiuiiim 
 
 fMIMIIMM 
 
 UtiiiKiili" 
 
 I II i 1 1 1 ' H i H 
 1 1 1 1 1 1 1 1 ' ! J 1 1 
 
 lllHllliniUlllllltllDMIIlllllJ 
 HIMMIMlMHMMJMIlMtMllllMlillllMMIIl! 
 
 (■MHMMIIIHMi il I Illlllll 
 
 """•""< H|IMHHIIMIIIMI>HIIHMMI 
 
 »!H.iiMiM;)iiiMi.Miiii|i>i!Jitninsi"nii(iiu 
 
 '»'•'»■' KIHdlll •>• J J< 
 
 '■' MiiiiiiiJJMii.iiin.iii 
 
 M>iiiiiJii.iiiiMni>»*iiiiiiiiiiii)iiuii 
 
 <"' |H..IMII<",)|IIIIIIM 
 
 nii.iiiiiiiiniiiiliiuiiiiiMViii/Miinj 
 Miininiiiijj.iiHiDiMiiitiiiiiotuii 
 " * iiiiiuiiiiiimiiijjijiiii 
 
 Mii.iinMiuniiiiKjiiii )i)jtninni; 
 
 MUliNllililttnuinMlmilHiiJIIH 
 UllllinjflflHIIirjJHIIHIIininHH 
 
 i)iMiii»lMi)i}illui)iliJiiiirii.iniii 
 
 ""'I'M '""MmmimIIHMIImH 
 
 IIIHIIflJIIlHIMllMlllllMIUMMMlt. 
 
 ii)ii.miiiiiiinnnjiiiiiri)Hil!iii"i) 
 'I'MN'Mf 
 
 Hllit) I II Ml 
 
 HiillMiinj 
 niilMiHii) 
 
 IIMMllllll Mllllli ,,,, 
 
 ilMI.IIHliMI: I 
 
 "" "'Il Illllllllllll 
 
 ">" •' " 
 
 liMIJ 
 
 iiimmii- 
 
 ■ in 
 
 111 Hill 1 1 
 
 iiiiitn'iioni 
 pu.h!ij'tiii')i"i 
 
 njjn 
 
 HHUUHlimi 
 ,. ,'IMHHIlK IM 
 
 ..iM.i.M.niiiiiiiiiKiiimi 
 
 HiNllmJllMMIlHl/lMMlf 
 *>')Htl,Hl|l|IU)(lhl,.N,i)M ' 
 
 luiniMiiiiiMiiuMtiiiHii 
 ..,..„..,,„ ,n), uiiDiiiinni'; 
 ii 
 
 Hill HJMItOll tlMIMI 
 
 '■ DIM .illMlilli Hill ill 
 
 iihim.miim liiiu u , iimiih ,,. 
 ■ I II I ■ ■ ■■ ■ 
 
 ■ 
 
 '■"'■.J.UUtl 
 
 IlillllllllllllHflHIUlilM I !JMI' J II M '' > I ' 'I'. 1 '""".". 
 
 ll'IMIIIIII Ml ITIIIIJITI III 
 
 !■! !!!!!! ! WtWffi 
 
 IIIIIIIIIIMIIM) 
 
 iiiniiiiniMiii 
 iiniiiiiMiiiMi 
 huiiihimhhi 
 
 Hill! .nMllhli 
 
 1 
 
 MiM)iiMiM)Mniin 
 
 >M I IIMIMlnHU! 
 
 ' Ml llMUMMMMIM)).tnMM!liM 
 HI. H)l Ml .mIIMM.-M. 
 
 ■ MMMHN M.lMiliiJIIMIM I! .:, 
 
 HllHMII MllMMHIISl H 
 
 ■ 
 IMIIIlllllllMMlMIIM .... 
 
 ■ 
 
 ijitjimrti 
 
 ■ Hi IM.IHlMIIIMHMt 
 
 ' HMMMIIJ.MMHi MHI. bl 
 
 IIIIIIMHIrllli . ,111.1, i'.'.mmY 
 
 !!!!!![! ' "Mm 
 
 h ii.MII MIM 
 
 1 ..lllilllllll 
 
 ■ ' '' lllfniHMM 
 
 ! t - . tlMMIlM.HIJti.llnllllli n MIMlNlijHIfl 
 
 MH.HMI.IM.il' 
 
 II! 
 
 .. It.ljllDI 
 "'Illlllll.- 
 
 niMliniiii 
 
 HliittlHHilin 
 MIHHHHIIHtf 
 
 iHiiiMiinHniMHin 
 
 HIHHHIIIMiHIMHIl 
 
 IIHMINIIUMHI'IHHI 
 
 ■■■-HJllliilt 
 
 HIMniMIMMHIHHIl 
 
 ' ■ " i r ■ m j i 
 
 IMIMllllli! 
 
 MMiiiinnHiiMf---- 
 
 IlillHMIIIlMJIil 
 
 1 'IMMlHIHll'uJJfU 
 
 MMHHII.MHiHlM 
 
 ■ 
 
 lHHHJnill;MHIil(li!l(l;i 
 IMIIIMIMMMMII.MillliiH 
 
 Ml 
 
 HlHiHll'IMH 
 IIHMHIMlMll 
 IHIiHJHIHHt 
 IHlHrMIHHIl 
 IHIIHIHIHIII 
 
 ., HlltlillllllHIDI 
 
 inn iiiiiHiiiiHiininii 
 
 llMHllllMHIHlHIMHH) 
 lllllHHIIlHMHIflltiilll 
 
 inmniHiMHHiilllniii 
 
 tlllHH'l 
 
 illlll. 
 
 iMi.l.MI 
 
 ■ ■ ■ 
 
 HIMIHlil 
 11)11.1111)11 
 
 IIIIHHIHHHI 
 IHIHIHIIHIII 
 
 ll-IIMMIIIM.I