G-339 Cornell University Library HG 939.S46 Currency inflation and public debts; an h 3 1924 014 049 567 ajt "s Currency Inflation and Public Debts An Historical Sketch % Edwin R. A. Seligman, Ph. D., LL. D., McVickar Professor of Political Economy Columbia University Witha Pirefatory Note £ry Alvin W. Krech Presidtnt The EguitaUe Tru^t Company of New York THE EQUITABLE TRUST COMPANY OP>NEWYORK 1921 yd v^r '■^ Hate OlaUege of Agriculture At QlotncU llntJierBttH Jtliars, 5f. 1. Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924014049567 Currency Inflation and Public Debts An Historical Sketch By Edwin R. A. Seligman, Ph.D., LL.D. McVickar Professor of Political Economy Columbia University With a Prefatory Note By Alvln W. Krech President The Equitable Trust Company of New Yor^ THE EQUITABLE TRUST COMPANY OF NEW YORK 1921 Copyright, 1 92 1, by THE EQUITABLE TRUST COMPANY OF NEW YORK CONTENTS Page Prefatory Note by Alvin W. Krech, . . i I. Introduction 7 II. The Eighteenth Century 13 a. The American Colonies 13 b. France 16 III. Great Britain ig IV. France 22 V. United States 25 VI. Italy '28 VII. Russia 31 VIII. Austria 35 IX. Spain 39 X. The South American States 42 a. The Argentine 42 b. Chile 45 c. Brazil 46 d. Other South American States 50 XI. Japan , 52 XII. The Great War 55 XIII. Conclusion 58 APPENDIX Tables Page 1. Continental Bills of Credit. Issues 67 2. Continental Bills of Credit. Depreciation 68 3. Issues of Revolutionary Paper Money by the States . . 69 4. France. Issues of Banknotes under Law 70 5. France. The Assignats. Circulation 71 6. France. The Assignats. Depreciation ... . . 71 7. Great Britain. The Bank Restriction ... 72 8. Great Britain. The Public Debt 73 9. France. The Public Debt 74 10. United States. Depreciation of Greenbacks 75 11. United States. Price Changes under the Greenback Standard 76 12. Italy. Public Debt and Gold Premium 77 13. Russia. Paper Money. 1788-1817 78 14. Russia. Paper Money. 1844-1897 79 15. Austria. Depreciation of Paper Issues. 1796-1817 . . 80 16. Austria. Depreciation of Paper Issues. 1848-1892 . 81 17. Spain. Depreciation of Paper Currency. 1883-1910 . 82 18. Price Fluctuations of a Century 83 Bibliography 84 Prefatory Note Currency inflation and public debts form a vexing problem which has called forth the liveliest discussion not only in the ranks of economists, but also among business people who find in the fluctuations of the foreign exchanges a constant reminder of the financial difficulties which confront the world. In asking Dr. Seligman to prepare for our enlightenment an historical sketch of currency inflation and public debts, we be- lieved that a study of the past might well help us to understand better present-day conditions. Dr. Selig- man's timely paper and his conclusions drawn from the lessons of history have encouraged us to present here, under the guise of a prefatory note, a few observations. I. As is clearly pointed out, there is no such thing as a medium of exchange, money or currency which is not subject to fluctuations in value; gold, silver, cop- per, all fluctuate. Fiat money fluctuates not merely in accordance with the laws of supply and demand; the determining factor of its fluctuations is to be found in the credit of the issuing nation, and as every emission of such currency is the consequence of impaired national credit, it is, in effect, a step on the road to the possible repudiation of existing debts. As a consequence each step towards repudiation affects adversely the class which has invested its savings in obligations solvable in the forced currency, while it has a contrary effect upon the debtor class. For instance, the borrower of, say, one thousand Austrian crowns which before the war represented, we will say, one hundred days' labor, may now repay the debt with one day's labor. But if such obligations were to be ultimately re- deemed at par all the steps previously taken on the road to a possible repudiation would have to be retraced. The important thing to remember is that, in retracing the steps when the currency has been permitted to depreci- ate for the length of time and to the extent that has CURRENCY INFLATION AND PUBLIC DEBTS taken place in Europe, the debtor class is made bank- rupt through the process of reestablishing the value of the currency just as the creditor class is injured by the depreciation of the currency; but it makes a vast differ- ence in democracies, where the majority rules, "whose ox is gored." One thing seems clear, however, that, intrinsically, lands, buildings and other tangible prop- erty are only temporarily and indirectly affected one way or the other, inasmuch as their transferable or market value merely registers the corresponding do- mestic value of the medium of exchange. 2. The pound sterling would be at parity with the American dollar even though not convertible into gold (except as affected by the balance of trade), provided the British Government debt were in a fair way to pro- gressive liquidation. The same is true of the French franc. The trouble with these forced issues is that they are mere evidences of the fact that the credit of the nation is impaired, and it may be argued that the pound sterling and the franc will resume their upward trend to parity only when and so long as the national debt continues to decrease or the national wealth to increase, 3. A stable currency, that is to say, a currency based upon its interchangeable value with gold at parity, however desirable, does not seem to be essential to free commercial interchange of credits and commodities. It is within the experience of the present-day banker and exporter that business was safely and con- stantly conducted, between Colombia and Mexico, for instance, on the one hand, and the United States on the other, in spite of the fact that in the case of Colombia the value of its paper currency had fallen progressively to the extent of 99-ioo's of its gold standard, and in the case of Mexico the paper currency had been entirely extinguished. The fact is that a country which has no currency whatever, or the currency of which is totally valueless, can nevertheless conduct and engage in CURRENCY INFLATION AND PUBLIC DEBTS foreign trade just so long as it has something to export. Under such circumstances the currency used must of necessity be foreign currency, and foreign countries can deal with the nationals of countries whose currency is valueless, and deal safely, so long as the integrity of the persons with whom they transact business is sufficiently established and those persons are in control of exports sufficient to enable them to obtain foreign currency hav- ing an established value. This is precisely the method now pursued by the Austrian, German or Polish manu- facturer who is dependent upon the importation of foreign raw materials for the conduct of his business. 4. The extraordinary currency inflation of the various late belligerent governments of Europe is set- ting up new and wholly factitious channels of world trade. Temporarily at least the trade of those nations having currencies nearest to so called parity is being violently wrenched from them by the industrial nations which are recklessly hurrying along the road to ex- treme inflation and financial ruin. The reason for this lies primarily in the fact that the purchasing power of the depreciated currency is for a time much greater at home than abroad during the progress of its deprecia- tion, particularly when prices of vital necessities such as food, housing and transportation are controlled and fixed below cost of production and the government ab- sorbs the loss by the further issue of currency. In other words, the home currency will buy more labor and domestic raw material combined for export purposes than the quoted international exchange would lead one to believe.* *"Owing to the rise in cost of living, agitation for higher wages is general, but strikes are few, as 'boom conditions' enable manufacturers to grant demands of their laborers. Socialists have presented a plan for compilation of regular Federal wage statistics. At the beginning of November the average of nominal wages had risen thirteen-fold compared with 1914." — Berlin Cor- respondent New York Times, November 21, 1921. At the same time the inter- national value of the mark in which the wages are paid was but one-seventieth of its value in 1914. CURRENCY INFLATION AND PUBLIC DEBTS As to Germany, the question is frequently asked, is her progressive inflation part of a sinister scheme to avoid obligation, or, as stated by the German Minister of Reparation, a catastrophe resulting from the sale of the mark as a commodity in order to obtain the neces- sary means of affecting the reparation payments? In either case, where will it all end, and how can this miserable business be brought to a conclusion? An English economist, Mr. A. E. Zimmern, in a recent article on "Greek Political Thought," says : "France, emerging nerve-racked from a fifty years' obsession and a five years' nightmare, half dead with sorrow and suspense, yet too proud in victory to own her weakness, looks round, half defiant, half wistful, among her allies for one who can understand her un- spoken need, and longing with all the intensity of her sensitive nature to be able to resume, in security and quietness of mind, the arts and activities of normal life in which she has been, and will be again, the Athens of the modern world : Germany, tougher in fibre than her western neighbor, yet equally shaken and exhausted : a land of sheep without a shepherd, rushing hither and thither seeking a direction and a Weltanschauung, her amazing powers of industry and concentration and her rich and turbid life of feeling running to waste for lack of channelled guidance." How can any nation be expected to clean house and start afresh until certain essential conditions have been established? Dr. Seligman does not undertake to answer these questions. They belong to the realm of politics and statesmanship. How, for instance, can France be expected to relax her hold upon Germany until she, who for over forty years lived under the constant fear of invasion ; who suffered most when war occurred and invasion came ; until she feels a sense of security either through an effective international guaranty or other- wise? Are the statesmen of the Allies equal to the CURRENCY INFLATION AND PUBLIC DEBTS task? Can they lead their peoples to adopt a course of conduct which, though vitally necessary, may seem (but only at first blush) inimical to self-interest, involv- ing as it would the surrender of undoubted rights and the assumption of new and. unaccustomed obligations? The peoples of Europe are still a-quiver, but in spite of righteous anger, in spite of apprehension which cannot easily be brushed aside, deeds have been per- formed and words have been spoken which we sin- cerely hope bear the promise of better times: The Italian families welcoming, on the very morrow of the armistice; the little famished children of Austria, or M. Briand recognizing in Washington Dr. Wirth's loyalty and frankness, are gestures of widely differing character, significant in showing that real peace is far more than the mere formal signing of a treaty. Neither should it be forgotten that in Spa, in Wiesbaden, in Geneva, the first bricks have been laid for the recon- struction of what Signor Nitti so happily termed "a whole Europe." Bis vincit qui se vincit in victoria, he twice conquers who conquers himself in victory. « * * Dr. Seligman's paper is, it must be admitted, not conducive to optimism, but to our mind its austere and clear outlines convey a lesson which should not be missed. The nations surveyed have all, at various times, suffered from the most deadly financial and economic diseases, but they all survived, in fact all of them were flourishing and prosperous on the eve of the Great War. Less than one hundred years after the stupendous madness of the assignats, France becomes Europe's banker; half a century after the Risorgimento Italy develops into a power of the first rank; Germany a geographischer Begriff at the beginning of the nineteenth century, is an ironclad em- CURRENCY INFLATION AND PUBLIC DEBTS pire at the beginning of the twentieth. . . . The greatness of nations is not to be found solely in metallic reserves and balancing budgets : The iron fields of Lor- raine, the beauty of Paris, the intelligence and courage of the men and women in the fields of France, are not all these to be put down to France's credit in the Grand Livre de la Dette Publique? Italy is electrifying her railroads and ere long the water-falls of her own Alps and Apennines will give her all the power she needs and free her from servitude to the English collieries. So astounding an industrial resurrection may well lessen the hardships following in the train of the reestablish- ment of the depreciated currency. Germany is con- fronted with serious perils; given every possible con- sideration under the existing treaty, the measure of her recovery depends largely upon the qualities of order, thrift and discipline to which her nationals have been trained for generations, but to this must be added a corresponding loyalty to her new political regime which thrusts upon the people wholly unaccustomed civic responsibilities. Europe must be given a true peace capable of bring- ing back faith in the future, without which her most strenuous efforts must remain sterile. Europe cannot live without a peace full of serenity, without good-will among its several nations ; there is not one nation in Eu- rope which can live without the good-will of the other nations. Talleyrand said: "Pour mot, les vrais interets de la France ne sont jamais en opposition avec les vrais interets de I'Europe." Thus spoke the greatest master of French diplomacy, and his splendid dictum should be the motto of every diplomat, of every statesman in the world : "The true interests of my country are never in opposition to the true interests of the world." Alvin W. Krech, President of The EquitabCe Trust Company of New York. Currency Inflation and Public Debts I Introduction Among the problems of private and public finance there are three which have recently become of para- mount importance : the growing burden of taxation, the sudden changes in price levels, and the instability of the currency together with the dislocation of the foreign exchanges. The first problem is intimately connected with the growth of public indebtedness. The utilization of pub- lic credit is essentially a modern phenomenon. Public debts do not go back more than a century or two, and it is only in very recent times that they figure largely in economic life. Public credit has been utilized in in- creasing measure not only because modern business life lays continually more stress on credit, but also because under the dynamic conditions of a rapidly augmenting national wealth the weight of a given public debt tends gradually to diminish. Public credit is not only a natural, but within bounds a salutary, phenomenon. Public debts are in reality nothing but anticipated taxes, and if the distribution of the holdings of the debt were exactly equal to the distribution of the weight of taxa- tion, public debts would constitute no burden on the community: for every dollar paid by the individual in taxes would be compensated by the dollar received by him in interest. Unfortunately, however, this exact correlation does not exist, chiefly for the reason that taxes are derived in part from other sources than the income of property. The taxpayers in a community are not by any means simply the owners of government bonds. The conse- quence is that at any given time a public debt may CURRENCY INFLATION AND PUBLIC DEBTS constitute a burden on the community. Where the debts are relatively large, this burden assumes two forms : first, the interest and amortization charges may require the imposition of excessive taxes which hamper industry and check enterprise, thus diminishing the social dividend. Secondly, the public debt may, as at present in most of the European countries, consist in part of paper money, which in its depreciated state adds perceptibly to the economic burden. The second problem of urgent importance is that connected with changes in price levels. It is needless to descant here upon the evils inherent in such changes. Whether it be a period of falling or of rising prices, whether it be a period of business lethargy or pros- perity, there are always certain classes in the community whose welfare will be seriously impaired by the insta- bility of the price level. Such changes in the price level are either periodic or occasional. The periodic changes are connected with what we have become accustomed to call business cycles, that is, fat years alternating with lean in a certain rhythmical movement — a period of business prosperity culminating in wild speculation and followed by a more or less abrupt industrial depression and perhaps a panic. Contrasted with this periodic change, we have occasional or more or less sporadic changes in the price level. Such changes, again, may take the form either of protracted, long-time changes or of sudden, short-time changes. The protracted or long-time change in the price level is illustrated by the so-called revolution of prices in Europe in the seven- teenth century, which was due to the opening up of the new world and the ensuing immense increase of gold and silver. It may be illustrated again by the rise of prices that took place in Japan a generation or two ago when the old-time economic system was supplanted by modern industry and the growth of banks. On the other hand, short-time or sudden changes in price levels CURRENCY INFLATION AND PUBLIC DEBTS are engendered by such convulsions as war as well as by the use of paper money, itself frequently associated with the demands of war. Of these three forms of price changes, the periodic, the protracted and the sudden, only the last interests us in this place. For it is primarily in connection with this topic that there arises the problem of inflation and of deflation. This brings us to a consideration of the connection between inflation and instability of the currency. In considering then, in the third place, the question of currency instability, we must distinguish between inflation and the rise of prices. The one is not neces- sarily synonymous with the other. Since by the price of anything we mean its money value, the general price level denotes the values of goods, commodities, and services, expressed in terms of money and the medium of exchange. An alteration in the general price level accordingly means a change in the relation between goods (including commodities and services) on the one hand and money (including credit) on the other. Obvi- ouslv, however, such a change in the relation may be ascribable, in its origin, to either of the two elements, he goods or the money. Fluctuations in the general price level, in other words, may be due to causes origi- nating with the goods or, on the other hand, to causes originating with the media of payment. Our recent experiences have made us familiar with the fact that wars in themselves engender a rise in prices through changes in the conditions of production and consump- tion. In the Great War, for instance, the ordinary pro- duction of commodities was suddenly curtailed by the drafting of the workers into the army and by the diver- sion of capital and enterprise into the production of war materials. On the other hand, the demand for the basic products in the metals and the textiles was immensely enhanced by the stupendous needs of the government CURRENCY INFLATION AND PUBLIC DEBTS and by the gigantic outlay for the unproductive pur- poses of war. This diminution of supply coupled with the en- hancement of demand was the fundamental factor in the rise of the price level. But this could of course not have been accomplished without a corresponding increase in money and the media of payment. To the extent that the increase of money and credit kept pace with the dislocation in the conditions of production and consumption, there was a rise of prices without there being any inflation. As soon, however, as this correla- tion was disturbed, and the amount of money and credit exceeded this point, inflation occurred. For inflation means the existence of a currency in a quantity larger than is actually needed to carry on business transac- tions at a normal price level.* But not only must we distinguish between expan- sion and inflation; we must also distinguish between inflation and depreciation. Where, as in the United States during the recent conflict, the increase in the media of payment assumed the form first of the growth of coin due to the great influx of gold from abroad, and later of the expansion of credit rendered possible by the adoption of the Federal Reserve system, there was inflation without depreciation of the currency. But where, as in Europe, the printing presses were utilized and paper money was issued in continually greater quantities, the inflation associated with the immense ♦The familiar distinction between expansion (or rise of prices) and inflation is well put by Paul Warburg: "As long as reserve balances are created and circulation is issued only against self-liquidating paper, which represents things in course of production, and as long as this process is kept within a safe relation to gold, there may be more or less acute banking expansion, but there would not be any cause to call it inflation. It is when bank loans, reserve balances or circulation are being created against things that do not represent any tangible value, and gold reserves are disregarded, that we face inflation in its classic form." P. M. Warburg "Inflation and High Prices" in Proceedings of the Academy of Political Science in the City of New York, vol. ix, no. 1, 1920, p. 119. 10 CURRENCY INFLATION AND PUBLIC DEBTS rise of prices was signalized by a depreciation of the currency. Several points, however, deserve emphasis here. We must distinguish between paper money proper and paper currency. A paper currency may be com- posed of convertible bank notes, like our national bank notes, or Federal Reserve notes. Paper money proper, on the other hand, is government money or so-called fiat money. Where government paper is redeemable in coin, it does not diflferj in essen- tial respects (except in the matter of elasticity) from convertible bank notes. When, however, government notes are irredeemable, they constitute real paper money or fiat money, especially when they are invested with the quality of legal tender. In the same way, when bank notes become inconvertible and are similarly in- vested with the quality of legal tender, they are virtu- ally indistinguishable from paper money proper. The Continental countries make a more precise distinction than we do, in differentiating between what they call legal tender and forced tender (cours legal or corso legale as compared with cours force or corso forzoso). By the cours legal or legal tender of a note they mean its legal receivability for taxes or public dues; by cours force, or forced tender, they mean the compulsion of receivability in payment of private debts. True paper money always involves what they call cours force (what we call for short legal tender), and this quality may apply both to the irredeemable government note and to the inconvertible bank note. In so far as inflation of the currency with its at- tendant excessive rise of prices is due to the issue of paper money in the form of either irredeemable gov- ernment notes or inconvertible bank notes, inflation is equivalent to depreciation of the paper money. This depreciation may register itself either in a positive premium on gold in the internal transactions of the II CURRENCY INFLATION AND PUBLIC DEBTS country, or in an alteration in the rate of foreign ex- changes, whereby more units of the internal paper are required to purchase a given quantity of the foreign unit. The difficulty of the problem, however, is found in the fact that fluctuations in the rate of exchange are due not only to currency inflation but also to alterations in the balance of trade. In fact there is often a recipro- cal influence between the two. Moreover, the rate of depreciation or the amount of the gold premium is frequently affected by the psychology of the situation involved in the general economic prospects of the com- munity and the credit of the government. It may therefore be said that while inflation, so far as it is reflected in the depreciation of paper money, is due primarily to the relative quantity of the issue, the depreciation is also influenced by the changes in the balance of trade and by alterations in the general eco- nomic conditions, including the budgetary situation and the balance of revenues and expenditures. This last point again is intimately interwoven with the facts of the public debt; for it is primarily the increase of the public debt, due to the inability of establishing an equili- brium between government income and outgo, that is responsible for the issue of paper money and therefore in part for the inflation. While we must distinguish, therefore, between a rise of prices and a depreciation of paper money, in the sense that a rise of prices may be due to a fall in the value of gold, which may occur^ where there is no paper money at all, it yet remains true that where recourse is taken to the issue of paper money the dangers of inflation and of depreciation are much accentuated. Because of this close connection between currency inflation and public debts, we propose to present a short sketch of the history of these phenomena, in order to form a basis for conclusions applicable to the present world situation. 12 CURRENCY INFLATION AND PUBLIC DEBTS II The Eighteenth Century A. The American Colonies The two earliest examples of inflation are those of America and France. The American colonies were so ill provided with coin, as a result of the economic con- ditions of a primitive community, that each in turn experimented with issues of bills of credit or so-called banks of paper money. The resulting depreciation engendered such a dislocation of trade and commerce that the mother country prohibited the further issue of these paper bills, in 1751 for the northern colonies and in 1764 for all the rest. The prohibition, justifiable in itself, was one of the contributing causes of the Revolution. When the colonies declared themselves independent, the reluctance to even self-imposed taxation and the inadequacy of the help afforded by France and Spain led to the resumption, by both the Continental Con- gress and the separate states, of the old practice of paper issues. The continental bills of credit soon appeared in such large quantities that, although invested with the legal-tender quality and reenforced by an attempted limitation of prices, there soon ensued great inflation and a corresponding depreciation. As appears from tables 1-3 in the appendix, within a few years over 241 million dollars had been issued by the Continental Con- gress and a little later the state issues amounted to almost 210 millions, making a total of over 451 millions. In 1780 the Continental issues had depreciated to such an extent that they were now redeemed in new bills at the rate of 40 for i. The "new-tenor" bills, how- ever, soon went the way of the old notes, undergoing a progressive decline until by August, 178 1, they were worth only 4 for i silver dollar, making the old bills 13 CURRENCY INFLATION AND PUBLIC DEBTS worth only i6o for i. The old bills continued to circu- late for a time at rates of from 500 or 1,000 for i. In the words of an eloquent contemporary: "Like an aged man expiring by the decays of nature, without a sigh or a groan, it gently fell asleep in the hands of its last possessors."* But as Horace White tells us : "A truer figure of speech would be that they passed out of the world like a victim of delirium tremens."! The ravages committed by the paper money were so overwhelming as almost to beggar description. In the words of a remarkable contemporary: |"Thus fell, ended and died, the continental currency, aged six years ; the most powerful state engine and the greatest prodigy of revenue and of the most mysterious, uncon- trollable and almost magical operation ever known, or heard of in the political or commercial world. . . . Of all things which have ever suffered dissolution since life was first given to the creation, this mighty monster died the least lamented." And as he puts it in another place : "If it saved the state, it has also polluted the equity of our laws; turned them into engines of oppression and wrong; corrupted the justice of our public administration; destroyed the fortunes of thousands who had most confidence in it; enervated the trade, husbandry, and manufactures of the country; and went far to destroy the morality of our people." Another contemporary writes in 1789 as follows: "The evils of depreciation did not terminate with the war. They extend to the present hour. . . That the help- less part of the community were legislatively deprived of their property, was among the lesser evils which resulted from the legal tender of the depreciated bills *David Ramsay, History of the American Revolution, 1789, vol. ii, chap. xvii. tHorace White, Money and Banking. Illustrated by American History. Fourth edition, 1911, p. 103. tPelatiah Webster, Political Essays, 1791, p. 17S, note. 14 CURRENCY INFLATION AND PUBLIC DEBTS of credit. The iniquity of the laws estranged the minds of many of the citizens from the habits and love of justice. The nature of obligations were so far changed that he was reckoned the honest man who from princi- ple delayed paying his debts. The mounds which gov- ernment had erected, to secure the observance of hon- esty in the commercial intercourse of man with man, were broken down. Truth, honor, and justice were swept away by the overflowing deluge of legal iniquity, nor have they yet assumed their ancient and accustomed seats."* And as a later writer adds : "The news gazettes were filled with complaints of injustice: ruin and lamenta- tion brooded over one portion of the community un- heeded by the remainder, which had become enriched at their expense. . . America entered upon its career of a nation, bankrupt, faithless and perjured ; crowned with the ruin of her best friends. At the distance of nearly a century the wrongs committed at the Revolu- tion have not yet ceased to bear their fruit."t The spurious prosperity occasioned by the high prices during the war soon vanished and turned into the contrary after the collapse of the paper money. During the eighties the suffering was extreme. Only with the greatest difficulty could the Revolution be brought to a successful close; while the ensuing business de- pression and universal distress well - nigh destroyed the very fabric of the state. So alarming was the situa- tion that almost the first thing accomplished by the convention which framed the new constitution was to prohibit the issue of bills of credit by the states and to adopt a provision which was supposed to apply the same inhibition to the Federal Government as well. And when the national debt was funded in 1790 the remnants of the old paper money were accepted at the rate of ♦David Ramsay, Op. cit., vol. ii, chap. xvii. tH. Phillips, Jr., Historical Sketches of American Paper Currency, vol. ii ^iafifi\ T^n ISO iTn 15 CURRENCY INFLATION AND PUBLIC DEBTS too for I. Thus came to an end an inglorious chapter in our fiscal history. B. France In France the eighteenth century witnessed two epi- sodes of money inflation. The first was in connection with the famous Mississippi scheme of the audacious speculator, John Law, who succeeded, in the second decade, in securing control of the public finances. The paper bills which he issued soon degenerated from convertible bank notes into legal tender, irredeem- able government paper ; and there were issued of these, as appears from table 4 in the appendix, in progres- sively larger batches a sum which finally amounted to over 3,070 million livres. When, after a period of a most unexampled speculation, riotous extravagance, and illusory prosperity, the crash came in 1720, France was brought to the brink of bankruptcy and multitudes were precipitated into the abyss of ruin. As one of the con- temporaries puts it: My shares which on Monday I bought Were worth millions on Tuesday, I thought. So on Wednesday I chose my abode; in my carriage on Thursday I rode ; To the ballroom on Friday I went; To the workhouse next day I was sent.* The second episode occurred during the revolution. When Montesquieu made his famous report in 1789 he estimated the public debt of France at about 1,186 million livres. In the face of this situation and the pressing needs of the treasury, Lecouteulx de Canteleu proposed the creation of the famous assignats or paper money based on the security of the lands of the clergy, which had just been confiscated. Although the original issue was restricted to 400 million livres, the fiscal pres- sure, due to the outbreak of the war, led to continually *C}. A. MacFarland Davis, "An Historical Study of Law's System" in Quarterly Journal oj Economics, 1887, p. 452. i6 CURRENCY INFLATION AND PUBLIC DEBTS greater emissions. The forced loan of 1 793 of one billion which was imposed, as the law read, "upon the selfish and indifferent rich," proved to be so inadequate that the limit of the assignats was now raised in the same year to 3,100 millions. Shortly thereafter, however, the limit was removed and by September, 1796, the issue of assignats had reached the prodigious sum of over 45^ billions. As in the United States, they had been made legal tender and had been accompanied by a limitation of prices, known as the maximum. But so great were the inflation and the corresponding deprecia- tion that when they were replaced by the new bills, known as mandats territoriaux, they were redeemed at the rate of 30 for i. The new notes, however, soon went the way of the old and by the end of the year their value vanished completely and they disappeared from circulation. The figures of issue and depreciation will be found in tables 5 and 6 of the appendix. As in the case of the United States, the suffering was incalculable and the real burdens were borne by the honest and patriotic. In the words of the most recent historian of the epi- sode : "It was now that there appeared in all their gravity the innumerable calamities, political, administrative, economic, military, moral and social, which inevitably follow the ever-growing issue of an irretrievably de- preciated paper money: the ruin of the Treasury, crushed on the one hand by the insignificance of the revenues paid in paper of a nominal value, and, on the other, by the growth of the expenditures necessarily met ( at least in large part) in actual values ; the increas- ing difficulty of procuring food, the commodities more and more fleeing from a paper sunk so low; impotence and inertia of the administration, deprived by the worthlessness of this paper of all its means of activity; the melting away of the army, gradually destroyed by the misery into which it is plunged by the impossibility 17 CURRENCY INFLATION AND PUBLIC DEBTS of Utilizing the money, and by the wholesale desertion which inevitably follows: the upsetting of fortunes; the sudden enrichment of all debtors, except the state, and the ruin of all creditors through the payment, in illusory values, of sums contracted for and expressed in real values; universal demoralization; fever of gambling and stock-jobbing taking the place of the love of work and the practice of thrift."* In the same way the American historian. President White, after recounting in detail the various stages which led through apparent prosperity to economic collapse and utter ruin, describes the final and more subtle consequences as follows: "Just as dependent on the law of cause and effect was the moral development. In city centers came a quick growth of stock jobbers and speculators; and these set a debasing fashion in business which spread to the remotest parts of the coun- try. Then, too, as values became more and more uncer- tain, there was no longer any more motive for care or economy but every motive for immediate expenditure and present enjoyment. So came upon the nation the obliteration of the idea of thrift. Luxury, senseless and extravagant, set in, and this, too, spread as a fashion. To feed it, there came cheating in the nation at large, and corruption among officials and persons holding trusts; and while the men set such fashions in business, private and official, women set fashions of extravagance in dress and living that added to the incentives to cor- ruption. Faith in moral considerations, or even in good impulses, yielded to general distrust. National honor was thought a fiction, cherished only by enthusiasts. 'Patriotism was eaten out by cynicism."t The memory of this ill-fated experiment was des- tined to preserve France for over a century from the repetition of any such scheme. *M. Marion, La vie et la mart du papier-monnaie. Paris, 1921, p. 8. tAndrcw D. White, Paper Money Inflation in France; How It Came, What It Brought, and How It Ended. 1876. New ed., 1882, p. 44. I8 CURRENCY INFLATION AND PUBLIC DEBTS III Great Britain When the war with France broke out in 1793, the situation in England was fairly satisfactory. The pub- lic debt, due primarily to the Seven Years' War and the American Revolution, was some £2393^ millions, and the paper currency which amounted to only £11 mil- lions in bills of £5 and over, consisted of the well- secured notes of the Bank of England and the country banks. In the early years of the war, however, the revenues failed to keep pace with the greatly augmented expenditures and the deficit (£32 millions in 1795 and £36 millions in 1796) was made good by borrowing, largely from the Bank of England. In 1797 the poor crops at home, coupled with the commercial crisis which started in Hamburg, created such an apprehension of the loss of gold as to lead to the so-called bank restric- tion, that is, the Order in Council which restricted or restrained the bank from redeeming its notes in specie. Thus started the regime of inconvertible paper. During the next few years three phenomena dis- closed themselves. First, there was an annual budgetary deficit which had to be met by the contraction of fresh loans. Second, there was a rise of prices due primarily to the war which amounted to over fifty per cent by the year 1801. The index number, taking the year 1782 as par, rose, as appears from table 7 in the appendix, from 93 in 1792 to 153 in 180 1. Thirdly, notwithstand- ing the suspension of specie payments, there was no very great increase in the paper currency, so that no deprecia- tion appeared. The inflation, such as it was, was not primarily due, as yet, to the over issue of paper. A few years later, however, the situation changed. By 1808-09 an era of speculation ensued and in the next few years the deficits were so great as to lead not nnlv to a resort to fresh loans, with a consequent rise 19 CURRENCY INFLATION AND PUBLIC DEBTS in prices, but also to an increase in the Bank of England note circulation, which soon amounted to more than double the original issue. By the middle of 1810 the note issues were almost £25 millions. The index-num- ber of prices now reached the high-water mark of 164 in 1 8 10. Now also for the first time there appeared a premium on gold or, technically speaking, an increase in the price of gold. In 1809 the price of gold advanced to 90 shillings, which is equivalent to saying that one £ of notes would buy only about 107 grains of gold instead of the normal i23j4- The excess of the market price of gold over the mint price naturally reflected itself in the alteration of the foreign exchanges. This altera- tion in the rate of exchange was first ascribed by Ricardo to its true cause. The famous Bullion Report of 1810 clearly expounded the relation between the foreign ex- changes, the depreciation of the currency and the sus- pension of specie payments. Although the government did not formally acknowledge the truth of this expo- sition, it did henceforth observe a measure of caution in the increase both of debt and of paper currency. The price of gold, indeed, again advanced in 181 3, as well as after the escape of Napoleon from Elba. After Waterloo, however, the depreciation of the paper was slight. With the gradual recession in the high level of prices after the war — the index number falling from 135 in 181 8 to 106 in 1820 — and with the return of more normal conditions in the equilibrium of the bud- get, it became possible to prepare for the resumption of specie payments. This was finally effected in 1821. The period of deflation, however, which followed the war was inevitably a painful one and, with the excep- tion of the year 1818, the five-year period from 1 816-21 was marked by the usual symptoms of business depres- sion and discontent. The situation would have been far more unsatisfactory had it not been for the transition 20 CURRENCY INFLATION AND PUBLIC DEBTS of the economic life to the modern factory system which was now fast proceeding in England, and augmenting the surplus of production. Great Britain, as a result of the war, was saddled with an immense debt of over £86 1 millions. An earnest efifort was made to provide for the gradual payment of the debt, but the history of the nineteenth century showed that whatever little progress was made toward the sinking of the debt was almost completely counterbalanced by the resort to fresh loans as the result of successive wars. As appears from table 8 in the appendix, the debt which had been slowly reduced to £769 millions by 1854, shortly before the Crimean War, rose to over £808 millions as a result. In the same way, while the debt had again fallen to £628 millions by the end of the century, the Boer War caused it to rise to £770 millions by 1904. In 1914, just before the out- break of the Great War, the debt of Great Britain stood at £661 millions, or only about one-fifth less than at the conclusion of the Napoleonic wars. Owing to the fact, however, that Great Britain had long since learned the desirability of financing its wars, to a certain extent at least, by taxation, there was never any occasion to take recourse to the further issue of inconvertible bank paper or irredeemable notes. There were, indeed, periods of speculation and high prices alternating with periods of depression and low prices. But these changes in the general price level were due to the cyclical price movements and not to any inflation or depreciation of paper currency. From the passage of Peel's Bank Act in 1844 up to the outbreak of the Great War the cur- rency issues remained on a stable and satisfactory basis. 21 CURRENCY INFLATION AND PUBLIC DEBTS IV France France during the nineteenth century did not forget her sad experience with the assignats. Napoleon de- frayed the expenses of all his wars by levies upon the conquered peoples, while the new system of taxation, adopted after the revolution, just about sufficed for the ordinary expenditures of government. The conse- quence was that the public debt increased only very slightly. The rentes (i. e. the annuities on the perpetual debt inscribed in the grand livre of the debt) amounted in 1799 to the insignificant sum of a litle over 46 million francs. By 18 14 the debt had grown only slowly to a little over 63 millions. At that time, however, a series of deficits occurred and the Treaty" of 18 15 imposed upon France a considerable indemnity, payable to the foreigners. The result was that the debt amounted by 1 815 to almost 1,300 million francs. From that time, notwithstanding occasional efforts at repayment, the debt gradually increased. In 1825 a billion francs were added as an indemnity to the emigres of the revolution. The deficits in the ordinary budgets accumulated and the war with Spain occurred, while Algiers became continually more of a burden. The consequence was that in 1830 the capital of the debt stood at over three billion francs. From the revolution of 1830 to that of 1848 the situation improved, the debt being increased by only I2j4 millions. Then came, however, the revolution of 1848 and the expenses con- nected with the abolition of colonial slavery in 1850. Moreover, with the advent of the second empire, the debt was now largely increased. At first there were a series of deficits. Then followed in succession the Cri- mean, the Italian, and the Mexican wars. During the reign of Napoleon III no less than 199 millions of rentes were issued, corresponding to a capital sum of 22 CURRENCY INFLATION AND PUBLIC DEBTS almost by2 billions. Finally came the sad experiences of the Franco-Prussian War, with the 5 milliards in- demnity ; and this was now followed by a comprehensive plan of outlays for canals and railways, so that by 1884 there had been borrowed within about a decade over 361 millions of rentes, corresponding to over 7 billions of capital. These figures do not indeed represent the net increase of the debt, as the various sinking funds were continually in operation. But, despite this fact, both the funded and the unfunded debt of France steadily increased, so that by 1914, just before the out- break of the Great War, the French debt amounted to over 325^ billion francs. Only a comparatively small part of this represented productive investments, almost the whole being due to war or to the accumulation of annual deficits. During this entire period France was compelled to resort to paper money only twice. During the revolu- tion of 1840 the temporary embarrassment of the gov- ernment led to the suspension of specie payments by the Banque de France and the notes of the nine then-exist- ing departmental banks were made inconvertible and legal tender. In 1849 the Banque de France was given the monopoly of note issue, but the limit of issue was now fixed at 350 millions. By the end of the year this was increased to 525 millions. The depreciation which ensued, however, together with the successful quelling of the revolution, induced the government in August, 1850, to abolish the legal-tender provision and to restore the convertibility of the notes. From that time on, the paper currency consisted of the convertible notes of the Banque de France. The Franco-Prussian War caused a more serious situation. In August, 1870, after the government had borrowed large sums from the Banque, the bank notes were made legal tender. A moratorium was introduced and the limit of the notes issued by the bank was gradu- CURRENCY INFLATION AND PyBLIC DEBTS ally raised. By the end qf 1871 it was fixed at 2,800 million francs and by July, 1872, at 3,200 millions. Owing to the skill, however, with which the finances were managed in the matter of both loans and increased taxes, coupled with the marvelous recuperative power shown by the French people and the generally satis- factory economic situation, the depreciation was verv slight, never amounting to more than about two or three per cent. The gradual improvement of the finances, moreover, made it possible to curtail the paper-money regime; and in 1878 the legal-tender quality was abol- ished and the convertibility of the bank notes restored. However, although the cours force (or what we call legal tender) was removed, the cours legal, or receiva- bility for public dues, was continued. France, therefore, emerged from its troubles with comparatively few scars. Although, as appears from table 9 in the appendix, the public debt grew con- tinually larger, its increase was not greatly out of pro- portion to the growth of public wealth. As a con- sequence, while the future was not entirely without concern, the situation at the outbreak of the Great War was on the whole well in hand. France, like Great Britain, had traversed periods of speculation and de- pression, of cycles of high prices and low prices: bu* with the insignificant exceptions of the revolution of 1848 and the period of the Franco-Prussian war, French commerce and industry have had to suffer little from the evils of inflation or of deflation. France and England are the only important coun- tries which were substantially free from such evils dur- ing the middle and end of the nineteenth century. For almost all other nations have at one time or other suc- cumbed. We shall now endeavor to pass in review the experiences first of the United States, then of the Eur- opean continent, and finally, of South America and Japan. 24 CURRENCY INFLATION AND PUBLIC DEBTS V United States After the sad experiences with the continental bills of credit, it was generally believed that the dangers of irredeemable paper money had been averted by the new Constitution. Nevertheless, toward the end of the war of 1812 with England, the proposition was made in Congress to issue bills of credit; and had the war con- tinued, it is not at all certain what the result would have been. In the Civil War, as is well known, the difficulties that confronted Secretary Chase in the mat- ter both of taxation and of foreign loans were such that he saw himself compelled to resort first to the issue of demand notes and then at the opening of 1861, after the suspension of specie payments by the banks, to the irredeemable legal-tender bills soon known as green- backs. Although he recanted later on, when he deliv- ered his dissenting opinion in the celebrated legal- tender cases as Chief Justice of the Supreme Court, Secretary Chase succumbed to the usual temptation of improvident financiers and at the time declared the issue of the greenbacks a necessity. Inasmuch as more and more of these were issued and as, above all, it was not until much later that an adequate system of taxation was provided, depreciation soon set in. Chase, like many others, ascribed the premium on gold to the machinations of the speculators in Wall Street and it was not until later, when the passage of the bill to pro- hibit speculative dealings in gold suddenly forced the gold premium up to 285, that the futility of the gold law was recognized. The great rise of prices during the war was, as in all such cases, due to three diflferent sets of causes. In the first place, we have to note the dislocation of in- dustry with a decrease in the number of laborers, many of whom had been called to the ranks. To this was 25 CURRENCY INFLATIO N AND PUBLIC DEBTS added the sudden demand for munitions of war. This revolution in the conditions of supply and demand would alone have explained a great rise in prices. Now, in the second place, came the immense war loans and the subscription to the public funds by the banks. The third reason is to be sought in the issue of the green- backs and the consequent depreciation which, as will be seen from table lo in the appendix, varied not only with the quantity outstanding, but also with the chang- ing fortunes of war and the alteration in the general credit of the government. The net result was a very considerable inflation which, as in every period of rapidly rising prices, temporarily masked the evil re- sults of irredeemable paper. $ioo in currency were worth only $76 at the end of 1862, $62 by February, 1863, and $39 in July, 1864. The index number of wholesale prices, as appears from table 1 1 in the appen- dix, rose from 100 in i860 to about 168 in 1863, to 215 in 1864 and to 219 in 1865. As soon as the war was over, however, these evils became so manifest that Secretary McCulloch was able to outline his plan of rapid repayment of the debt and of thorough deflation. The debt of the United States which had virtually disappeared by 1835 and which then — owing to the Mexican War, the acquisition of Texas, and the panic of 1857 — had increased to well- nigh $75 millions in 1861, now stood in September, 1865, at the high-water mark of $2,846 millions. The government paper of the United States consisted not only of the greenbacks to the extent of $433 millions, but also of $830 millions of seven-thirty notes and $218 millions of compound-interest notes, not to speak of the temporary certificates. In his famous Fort Wayne speech of 1866, Secretary McCulloch discussed the five objections usually advanced against deflation. These were that it would (i) produce a financial crisis; (2) reduce the public revenues; (3) endanger the funding 26 CURRENCY INFLATION AND PUBLIC DEBTS operations; (4) embarrass the national banks; and (5) affect the rate of exchange and reduce exports. Not- withstanding the triumphant manner in which the Sec- retary refuted each of these objections, the fall in prices which now rapidly ensued and which considerably em- barrassed the business community, was ascribed, in part at least, to the policy of deflation or, as it was then called, contraction of the currency. Had it not been for the wise limitation of credit, which was practiced by most of the far-sighted business men at the close of the war, the drop in prices would have been far more catastrophic, perhaps leading even to a great panic. As it was, the suffering was notable, with the result that during the next few years the sound-money men were fully occupied in fighting the "rag-money" or fiat- money plans of the inflationists, who soon proved to be a formidable political force. The ensuing decade may be divided by the panic of '73. During the first half, the boom times and the speculation which prepared the way for the crisis ren- dered possible the rapid reduction of the debt ($612 millions) and the remission of war taxes, with a re- sultant strengthening of the public credit and a fall in the gold premium to i lo-i 12. During the second half, comprising the lean years after the crisis, the green- backs which had been limited to the fixed sum of $346 millions slowly approached par as the wealth and re- sources of the country gradually increased. Finally, when a succession of good harvests toward the end of the period rendered possible the accumulation of an adequate gold reserve, the resumption of specie pay- ments was effected in 1879. Thus came to an end one of the most unfortunate chapters in our history, in which the United States was ultimately able to extricate herself from a path upon which she need never have entered, and escape from which was due in the main to the gradual development of our immense natural resources. 27 CURRENCY INFLATION AND PUBLIC DEBTS VI Italy No sooner had Italy achieved its unity in 1861 than it proceeded to put its fiscal house in order. The most urgent tasks were to provide for the construction of railways (of which only some 1,600 miles were then in existence) and to prepare for the inevitable war with Austria. A loan of 500 million lire was accordingly negotiated in 1861, calling for an annual interest pay- ment of 35% millions. Notwithstanding the increase of taxation, it is not surprising that this debt had to be contracted on a basis of over seven per cent. A few months later, the debts of the former constituent Italian states were assumed so that the new Italian common- wealth started on its fiscal career with an annual interest charge of 144^ millions of lire, representing a capital of a little less than 3 billions (milliards). During the next few years large deficits were in- curred. In 1863 a loan of some 700 millions was issued on a 7.34 per cent basis, followed in 1864 and 1865 by still further loans, the last of which had to be contracted on an eight per cent basis. In 1866 the im- pending war with Austria created a crisis. A decree was issued, authorizing the national Bank of Rome to make a large loan to the government and directing the Bank of Naples to redeem its notes, including the so- called fedi di credito or certificates of deposit. On this basis the government now took over the paper and declared it legal tender, at the same time augmenting the issue to such an extent that by March, 1868, over a billion lire were outstanding. The consequence was a very considerable depreciation. As a result of the war with Austria and the assumption of a part of the papal debt, public loans and inconvertible paper in- creased from year to year. By 1874, the total issue of the notes of the six leading banks invested with the 28 CURRENCY INFLATION AND PUBLIC DEBTS privilege of issue amounted to over 1,560 millions. Moreover, as a consequence of the fall in the price of silver, there was now added to the depreciation of the bank notes a further depreciation of the legal tender silver money against gold. In 1874 ^ determined effort was made to improve the situation. The six banks now formed a consortium or union which issued unified consortial notes {biglietti consorziali) . These were loaned to the government at interest and were made legal tender to the limit of one billion lire. The six banks were also given the privilege of issuing their own notes to the extent of three times the amount of their capital, and of these notes 754 million lire were soon issued. These notes, although not having the corso forzoso, as had the con- sortial notes, nevertheless retained the corso legale or receivability for public dues and taxes. During the next few years the fiscal situation im- proved only slowly. The debt actually increased. By 1870, as appears from table 12 in the appendix, the capital value of the debt was almost 8 billions and by 1876 almost 9 billions, the annual interest charge being respectively 394 and 438 millions. This increase represented, however, to no inconsiderable measure, productive investments; so that there was no greater net burden on the community. Moreover, by 1 88 1, although the capital of the debt had been augmented still further, the annual interest charge was only 478 millions, or less than five years before. The government now resolved, in 1881, gradually to convert the consortial notes into government paper {biglietti di stato). Especially in 1883 it proceeded with its en- deavor to secure currency reform and to introduce a gold standard. The confident expectations of the government were, however, not realized and the conditions both of foreign and domestic politics, coupled with an economic situa- 29 CURRENCY INFLATION AND PUBLIC DEBTS tion which reacted unfavorably on the foreign ex- changes, made it impossible to carry out the reforms. By 1892 the public debt had increased almost to 12 billions, with an annual interest charge of 573 millions. The government now even saw itself compelled to decree the irredeemability of the government notes and the inconvertibility of the bank notes. This fact, coupled with the recurrence of the annual deficits, caused a renewed depreciation of the paper money, the premium on gold again rising in 1893 to sixteen per cent and causing much uncertainty in business conditions. From 1893 on, however, the situation began to im- prove. Three of the banks of issue were amalgamated to form the great Banca d'ltalia so that henceforth the only banks of issue were the Italian bank, the bank of Naples, and the Sicilian bank. The new bank notes, adequately covered by gold, were deprived of their legal-tender quality in 1897, and the situation of the foreign exchanges was such that the premium on the government notes gradually diminished. At the end of the century the public debt was smaller than it had been in 1894, standing in 1899 at I2j4 billions of capi- tal value and 580 millions of annual interest charge. By 1902 the gold premium had vanished entirely. Italy had now finally come into her own and the economic outlook became continually more promising. Although the capital of the public debt had increased to over 13 billions by 1907, the annual interest charge had decreased, as a result of the fall in the rate of interest, to i,'yj millions. By the outbreak of the Great War of 1 9 14, the public debt of Italy amounted to about the same sum — only slightly over 13^ billions, while the general economic conditions had materially improved and the currency conditions had been on a stable basis for over a decade. 30 CURRENCY INFLATION AND PUBLIC DEBTS VII Russia The history of Russian paper money begins in the second half of the eighteenth century. It was in 1768 that a paper issue known as assignat first appeared. At that time, under Catharine the Second, there was noth- ing but copper money in circulation. The new paper, of which only 20 millions of rubles were issued, without any legal-tender quality, was at first received with great favor. Shortly thereafter, however, came the war with Turkey and by 1790 when 100 millions of rubles were outstanding, depreciation began. By 1796, when 150 millions were issued, the silver ruble had risen, as ap- pears from table 13 in the appendix, from 100 to 147 kopeks in paper, i. e., the paper suffered a depreciation of almost twenty-five per cent. ' During the Napoleonic Wars continually more paper was issued and although it enjoyed neither the cours force nor the cours legal, the paper ruble at the close of the period was now worth only 25 kopeks. The legal-tender quality was first affixed to the paper money in 181 2 and by 18 15 there were over 826 millions out- standing. After the resumption of peace the govern- ment decided, in 18 17, to set to work to restore currency stability. It accordingly issued a loan payable in assig- nats. In other words, the government transformed a non-interest-bearing debt into an interest-bearing debt. By 1824 the outstanding paper was lessened by about one-third, and as a consequence, the depreciation which had been as much as eighty per cent was now reduced to about seventy-five per cent. In order to defray the interest on the new debt, however, the government was compelled to contract fresh foreign loans. The Minister of Finance, Cancrin, seeing the dan- ger in these successive foreign loans, now resolved to take some energetic steps. In 1827, the paper ruble was 31 CURRENCY INFLATION AND PUBLIC DEBTS made receivable for taxes at the rate of 3.6 for i silver ruble, thus involving a virtual repudiation of the public debt and causing widespread distress in all its custom- ary forms, especially when in 1829 this principle vi^as ex- tended to private debts and the value of the silver ruble was definitely fixed at lY^ paper rubles. Finally, in 1834, it was decided to replace these ruble assignats by new government notes known as rubles credits, based on the public domain and with a reserve fund in silver. During the next few years 596 millions of the old assignats were accordingly exchanged for 170 of the new credits. By 1848 there were in circulation about 289 millions of these new government notes, guaran- teed by over 100 millions of coin. The consequence was a diminution and final disappearance of the gold premium. With the outbreak of the Crimean War, however, the government was compelled on the one hand to trench upon the metallic reserve, and on the other to increase the issue of notes. By 1858 the circulation of govern- ment notes amounted to 735 millions and the metallic re- serve had fallen below 100 millions. The result could have been foreseen — a monetary crisis and the reappear- ance of a gold premium. The government now resolved to attempt to put an end to its troubles by the creation of a great state bank, with a monopoly of note issue and an ample reserve. The bank began operations in 1861, its capital being secured through a large foreign loan, as well as through the sale of state domains. As a result, the situation looked more favorable. But when the Polish Revolution broke out in 1863, it became neces- sary to suspend the further redemption of old rubles for the new bank notes. The value of the paper ruble consequently fell to 83J/2 kopeks, and it seemed to be impossible "for Russia to extricate herself from this maze of uncertainty. 32 CURRENCY INFLATION AND PUBLIC DEBTS During the next decade the further issues of paper money fluctuated largely, depending upon the crops and the fiscal conditions. Although the paper issues had increased to 797 millions in 1875, the coin reserve had also grown to 231 millions, so that the paper ruble was still worth about 85 kopeks. Then, however, ensued the Turkish War, and by 1879, as appears from table 14 in the appendix, the issue of paper rubles had grown to 1,188 millions, and the paper ruble was now worth only 63 kopeks. The public debt had also been enor- mously increased and the budgetary balance seemed impossible of achievement. It was not until about 1 887 that the financial authori- ties endeavored to reestablish currency stability on the basis of i>^ paper rubles for i silver ruble, that is, a repudiation of one-third of the value. But even then it took almost a decade to complete preparations ; and it was not until the advent of Count Witte that the plans were perfected. In the meantime, the protectionist policy had put Russian industry partly on its feet, and a favorable balance of trade with a continual excess of exports enabled the Minister of Finance to amass a large metallic reserve. As a result of some rather adroit manoeuvering, designed to prevent speculation on the exchanges. Minister Witte was able to carry through his plans and in 1896 a ukase was issued, making all the old paper rubles convertible into coin after 1898 at the rate of 13^ for i. Thereafter there were to be fresh issues only of bank notes, with a guarantee of gold. By the end of the century, the growing pros- perity of the empire made it possible to reduce the outstanding paper to 630 millions, and to provide for a marked increase in the specie reserve. The adoption of the monetary reform of the nineties introduced .such stability into the whole situation that, when the Japanese War broke out in 1904, the govern- ment wisely decided, with a lively recollection of its 33 CURRENCY INFLATION AND PUBLIC DEBTS old troubles, to supply its needs through the contraction of foreign and domestic loans, rather than through the further issue of paper money. As a result, although the public debt of Russia continually increased, the im- provement in the general economic situation and the stability of the foreign exchanges were such as to render possible the maintenance of a metallic standard. At the outbreak of the Great War in 1914, the public debt of Russia amounted to 3,800 millions of rubles, repre- sented in no small part by productive assets like the railroads. The currency situation, moreover, gave the country no further concern. 34 CURRENCY INFLATION AND PUBLIC DEBTS VIII Austria Austria was the first of the European countries to issue paper money in the eighteenth century. In 1761, the Minister of Finance desired to afford the small in- vestors an opportunity to participate in the public loans. He accordingly issued certificates of 25 and 100 florins (a florin being worth then about 50 cents) bearing six per cent interest. These Treasury certifi- cates soon entered circulation as money. Additional issues were made in 1769 and 1771 and the interest- bearing certificates, having no legal-tender quality, circulated at par. In 1795, however, when the war with France broke out, the issues were largely in- creased. In 1796, when a slight depreciation made its appearance, the government thought that this might be prevented by declaring the notes legal tender. Nat- urally, however, the consequence was just the reverse. By 1800, with an outstanding circulation of about 200 millions, the depreciation now amounted to about fif- teen per cent. From now on, the necessities of the war caused matters to go from bad to worse, until by 181 1, as appears from table 15 in the appendix, the circula- tion amounted to 1,061 millions, and a silver florin was worth SVs paper florins. The outlook was now so dark that after the con- clusion of peace in 181 1 Emperor Francis I summoned a commission to devise methods of reform. A sug- gestion was adopted to replace the outstanding bills by new notes called redemption-certificates {Einlos- ungsscheine), on the basis of one new note for five old ones. This meant, of course, a virtual repudiation of eighty per cent of their value. But when the war broke out afresh in 18 12, such large issues of these new notes had to be made that by 18 16 they also had lost two-thirds of their value. After the final declaration 35 CURRENCY INFLATION AND PUBLIC DEBTS of peace in 1815, the conditions of the market were reflected in such an extreme depreciation that 100 florins of the old paper money, now known as WW {Wiener Wdhrung or Vienna paper money), were declared equal to only 8 florins of the so-called MC (monnaie conventionelle or metallic money) — that is at a ratio of i to 12^. After this virtual repudiation, with all the usual concomitants of distress and injustice, the national Aus- trian bank was founded in 1816 and the outstanding government paper was converted into bank notes, 250 of the WW being receivable for 100 of the MC. The process of conversion went on for a few years until the troubles in Naples arose. Then, unfortunately, the con- version operations had to be suspended and the gov- ernment debt to the bank grew rapidly. From 1830 to 1848 there was a period of compara- tive peace, so that by the latter date over 669 million florins of the WW had been retired, leaving less than 10 millions outstanding. The whole paper circulation was thus by this time composed almost entirely of bank notes, which stood at par. Now, however, came the revolution of 1848, with the affixing of legal-tender quality to the bank notes and with the issue of several kinds of new paper money, known as Munzscheine (metallic notes) and Salinenscheine (salt-mine notes), some with legal-tender and some without. During the next decade, the political situation was such as to pre- vent much improvement in the finances and the public debt, borrowed primarily from the bank, increased to over 315 millions in 1855. A monetary conference was now called in 1857 and a great project of reform was initiated. But the outbreak of the war with Italy in 1859 dashed all these hopes to the ground. The legal- tender clause was reestablished, immense loans were contracted, and great issues of paper money followed. 36 CURRENCY INFLATION AND PUBLIC DEBTS The notes which had reached par in 1859 very shortly lost twenty-five per cent of their value. New efforts that were later made to reestablish sta- bility were frustrated by the political situation. The war of 1866 again caused immense issues of paper, amounting to some 300 millions of ordinary legal- tender notes and 100 millions of notes secured by real-estate mortgages. The result, as appears from table 16 in the appendix, was a renewed deprecia- tion of about fifty per cent. The public debt of the empire in 1866 amounted to 3,024 millions, over one- half being due to the wars, but a large part also being a consequence of the current deficits in the budget. From 1 83 1 to 1847 the accumulated annual deficits amounted to 143 millions, and in the period 1848- 1859 to 1,232 millions. In 1865 alone the deficit was almost 60 millions. With the comparatively lenient treatment which Austria received at the hands of victorious Prussia in 1866 the situation began to improve. The fiscal affairs of Austria and Hungary were separated and Austria assumed seventy per cent of the debt, or 2,317 millions. The increasing economic prosperity now fortunately led to surpluses instead of deficits, and the progress was only temporarily arrested by the crisis of 1873. After 1878, however, both foreign and domestic poli- tics proved to be troublesome and we again enter upon a period of deficits, lasting to 1888. Now, finally, appeared a marked change for the better. From 1889 on, the prosperity of the country was unexampled. Continual surpluses were accumu- lated and a favorable balance of trade, with a great surplus of exports, enabled the government not only to refrain from any increase in the circulation of paper money, but also to prepare for a currency reform and the adoption of the gold standard, the free coinage of silver having already been suspended in 1879. 37 CURRENCY INFLATION AND PUBLIC DEBTS The currency reform was carried out by the law of 1892, the old florin being halved and the new stand- ard being declared a gold crown (Krone). As the existing market ratio of silver to gold was 18.22 to I, this was accepted as the basis of the conversion. The entire paper circulation outstanding at that time amounted to 379 million florins of ordinary govern- ment notes and 32 millions of Salinenscheine. Of the former, Austria assumed as its quota seventy per cent or 214 millions. At the accepted rate of conversion, this amounted to about 283 J^ millions of gold; and in order to provide a gold fund for the conversion of this paper, a loan of 150 millions was contracted. Hungary also borrowed 90 millions for its share. The process of resumption was rudely interrupted by the crisis of 1893. This proved, however, to be only a temporary setback, and during the next few years the provisions of the law of 1892 were carried out and the paper money was gradually reduced. Paper currency was henceforth provided by a well-covered issue of the National bank of Austria-Hungary. By 1903 all but 3 millions of the government notes had been redeemed and there were left in addition only the well-secured Salinenscheine. Within a few years these also were all retired. Austria had thus finally extricated herself from her financial troubles. From that time until the outbreak of the Great War, Austria-Hungary remained on a stable gold basis and the debt, which amounted in 1914 to 18% billion Kronen, proved to be no insupport- able burden. 38 CURRENCY INFLATION AND PUBLIC DEBTS IX Spain Spain has the distinction of being the first country to start a bank as well as to issue paper money. The bank began operations in Barcelona in 1401, while paper money was first issued in 1483 by the Duke Ten- della at Alhama to pay the troops. The modern his- tory of paper currency dates, however, from 1780, when Charles III issued paper notes under the name of vales reales in preparation for the war with England. In 1783, when the national bank was established, these vales became convertible bank notes, and enjoyed such confidence that they circulated for a time at a premium. Unfortunately, the necessities of the war with France caused Charles IV in 1793 to change these vales into irredeemable government paper, which he now issued in such quantities that they soon were received only at a discount. By 1799 over 2%. million pesetas had been issued and in that year an attempt was made to bolster up their fading value by declaring them legal-tender. This device naturally proved to be unavailing and by 1808 the depreciation amounted to fifty-eight per cent, and by 191 1 to ninety-six per cent. Confronted by the prospect of almost total collapse in the value of the paper, the ministry now decided that something energetic must be done. After much dis- cussion the government declared itself responsible for the payment of the notes as a part of the national debt, in the meantime making them receivable for taxation. The consequence was a considerable improvement, so that by 18 13 the depreciation amounted only to fifty- six per cent. Finally, after various changes in the legal-tender quality, the advent of peace made it possible to attempt a definitive solution. In 18 17- 18 the vales were de- clared convertible, to the extent of one-third, into con- 39 CURRENCY INFLATION AND PUBLIC DEBTS solidated six per cent certificates. Five vales in paper were made receivable for one in gold, and the same rule was applied to the amounts due for taxes. In other words, resumption of specie payments was effected by what amounted to a virtual repudiation of four-fifths of the outstanding paper debt. The consequent suffer- ing was intense, and it took several years to establish a new equilibrium of economic life. After the recovery, things went along smoothly for a time. The old national bank was liquidated in 1829 and was reconstituted as the Spanish bank of San Fer- nando, which received a monopoly privilege of note issue. In 1844, however, a few other banks were per- mitted to issue notes. The revolution of 1848 caused a suspension of specie payments and the bank notes were declared inconvertible. The government, however, now assumed responsibility for the note issues, declar- ing them receivable for taxes and making an endeavor gradually to contract the issues. The political troubles of the next few years prevented any very marked im- provement in the situation. But the remainder of the old issue of government notes, which had circulated concurrently with the bank notes, were finally redeemed in 1 85 1 on the basis of eighty per cent of their value, the vales being exchangeable for three per cent con- solidated bonds. From this time on, therefore, the paper currency consisted exclusively of bank notes. In 1856 a free- banking law was enacted and during the next decade large issues of bank notes of various degrees of excel- lence were made, so that by 1864 the. twenty-one banks had 263 million pesetas of notes outstanding. The po- litical troubles had in the meantime caused a great increase in the public debt and especially in the foreign debt; and in 1864 the crisis was such that the converti- bility of the notes of the bank of Spain was suspended. It was especially, however, in the next decade that 40 CURRENCY INFLATION AND PUBLIC DEBTS the situation became very much worse. . In 1874, when the bank of Spain was again made a central bank, the outbreak of the Civil War led to a great increase in the maximum limit of note issues, which were now declared receivable in all payments to the state. By 1882 over 750 millions were outstanding. In the meantime a stupendous increase in the public debt had taken place, betyyeen 1868 and 1873. No less than 3,054 million pesetas were borrowed from abroad; and in 1877 the foreign debt amounted to 4,379 millions, almost all of it having been wasted in the ruinous civil war. From that time until the end of the century, both the political and the economic situation was exceedingly unsatisfactory. Between 1850 and 1899 there were only three budgets without an annual deficit. The value of the peseta accordingly, as appears from table 17 in the appendix, continually fell. Above all, the Cuban troubles and the outbreak of the war with the United States in 1898 led to an immense increase in the note issues of the bank and to prodigious fluctuations of foreign exchange. It was not until the beginning of the present century that an improvement was perceptible. The economic condition of the country now slowly bettered itself. The industries multiplied in the north and the regulation of the budget as well as the stabilization of foreign ex- change was gradually achieved, so that the depreciation of the peseta slowly diminished. By the time of the outbreak of the war of 1914, when the Spanish debt amounted to almost 9^^ billion pesetas, the situation had become fairly satisfactory; and the currency diffi- culties might well have been considered a thing of the past. 41 CURRENCY INFLATION AND PUBLIC DEBTS X The South American States The fiscal developm.ent of the South American states constitutes an interesting chapter in economic history. Confronted with the necessity of winning a continent and faced with the endeavor, for a long time unsuccessful, to secure political stability, the South American states form an instructive example of the dangers of undue resort to public credit and of cur- rency inflation. We shall limit ourselves here to a survey of the three most important commonwealths. A. The Argentine Immediately upon the declaration of independence in 1820 the junta at Buenos Aires issued paper notes. In 1822 a bank, of discount was founded, succeeded in 1826 by a national bank. The issues of bank notes, at first moderate, were soon greatly multiplied by the out- break of the war with Brazil and in 1826, by which time 2,694,000 pesos had been issued, they were declared in- convertible, although now guaranteed by the govern- ment. Within a few years the continual increase of issues caused a depreciation. By 1828 an ounce of silver, whose normal value was 16 pesos, was now quoted at 116 paper pesos. But the flood of paper money went on unchecked. By 1835, over 15 million pesos were outstanding, and by 1840 a silver ounce was worth 514 paper pesos. Things now went from bad to worse. In 1854 there were outstanding 204 millions and by 1865, 298 millions. The fluctuations in the foreign exchange and in the depreciation of the paper became extreme. In 1866-67, however, an efifort at bettering the situa- tion was made. The law of 1866 gave the provincial banks power to issue notes and provision was made for 42 CURRENCY INFLATION AND PUBLIC DEBTS the gradual redemption of the outstanding paper money. In 1867 there was instituted the exchange bureau {offi- cina di cambio) which provided for a conversion of the paper pesos into coin at the rate of 25 for i — a discount almost as great as that of the French assignats or the American bills of credit of the Revolution. The next few years witnessed an improvement and the gradual accumulation of a gold reserve, which amounted, by 1873, to over 16 million pesos. But in 1874 the Civil War broke out afresh, soon followed by a political and economic crisis. The gold reserve of the exchange bureau was drawn upon, some of the banks failed, and the notes were finally declared inconvertible. Thus there was ushered in the second period of paper money which lasted from 1876 to 1883. The situation was so bad in 1881 that an attempt to remedy the troubles became imperative. There were over 882 millions of notes outstanding and the troubles were further aggravated by the land boom and by the issue of paper money in each province. Various laws were now enacted, requiring the Bank of Buenos Aires to contract its note issue and to replace the old incon- vertible legal-tender bank notes by new metallic or coin notes within two years at the rate of 25 for i. The out- look now appeared more promising and the effort at reform was initiated with vigor. By 1884 the 882 mil- lions of old notes had been replaced by 61^ millions of new notes. Unfortunately the embarrassments con- nected with sudden deflation became so acute that by the end of the year a fresh panic occurred and in 1885 the process of conversion had to be suspended. The bank notes now again became inconvertible. Thus the third period of paper money was intro- duced, and a succession of bad years followed. By 1889 the gold premium even amounted to one hundred per cent. In 1887 a free-banking law was enacted, based on the principle of guaranteed circulation, which promised 43 CURRENCY INFLATION AND PUBLIC DEBTS fairly well. In 1890, however, the revolution took place, followed by the crisis in the next year ; and the premium on gold rose to 346. In 1890, indeed, a conversion office (caja de conversion) was opened but in its practical operation it turned out to be simply a machinery for emitting more paper money. By 1895 the paper in circulation amounted to over 296 millions, while the public debt had been continually increased to make good the annual budgetary deficits. In 1891 the debt amounted to 476 millions and as a consequence the premium on gold suffered the most erratic oscillations. By the end of the century, however, the economic situation took a turn for the better, and the government prepared to put its house in order. Owing largely to the efforts of Senor Tornquist a remedy was now found in the new conversion law of 1899. The premium on gold at that time was 125, the paper peso being worth at the market rate forty-four cents in gold. It was accordingly provided that all the outstanding notes were to be converted into gold at the rate of forty-four centavos for i gold peso; or, in other words, at the ratio of i to 2.27. More exactly, gold was taken in the new law at a premium of 127.27 per cent, but, as it was popularly expressed, the price of gold was fixed at 227.27 per cent in paper. The conversion fund {caja de conversion) or gold redemption fund, which was later on fixed at 30 millions in gold, was to be ali- mented from the import duties, the bank profits, the sale of certain railways and various minor sources. The favorable conditions of foreign trade permitted the gradual execution of the law and thus was accom- plished the conversion of all the paper at a premium. The ensuing political stability and economic prog- ress of the Argentine enabled the government to main- tain the gold fund and to ensure the convertibility of the paper. Although there was imminent danger of a relapse in 1902 -1903, the troubles were soon over- 44 CURRENCY INFLATION AND PUBLIC DEBTS come. As a consequence of a persistently favorable bal- ance of trade, the Argentine remained in a relatively satisfactory situation up to the outbreak of the Great War. The public debt had indeed largely increased, amounting in 1914 to over 645 millions. But it is to be noted that while the debt was due largely to the early political troubles, it was ascribable in part at least to the construction of railways. The currency situation had, however, so improved that the old era of instability may be said to have been definitely surmounted. B. Chile. The currency troubles of Chile were chiefly of a later date. In i860 a bank of issue was chartered, but failed to persuade the public to take its notes. Grad- ually, however, the issues were accepted. When the war with Spain occured in 1865, the government, which was largely dependent upon the Bank of Chile for sup- port, permitted the bank to suspend specie payments. In 1866, moreover, the privilege of note issue was con- ferred on other banks as well. Although specie payments were resumed at the close of the war, this condition did not last long. . The troubles broke out afresh with the crisis of 1878 and the bank notes were made not only in- convertible but also legal tender. At this time there were in existence eleven banks with over 15 millions of pesos outstanding. The outbreak in 1879 of the war with Peru and Bolivia, moreover, led the government to is- sue its own paper money {billetes fiscales). And no sooner had the gountry started to recover from these troubles than the Civil War occurred in 1891, with ad- ditional large issues of paper including the so-called vales de tesoreria. The situation was now so bad that an earnest effort was made in 1892 to contract. From 1892, when the gold peso was adopted as the standard, to 1895 some 4? CURRENCY INFLATION AND PUBLIC DEBTS progress was made. The resumption act of 1895 pro- vided for the redemption and incineration of the paper at the rate of 10 millions annually; and from 1895 to 1898 no further paper was issued. From that time on, the situation at least did not deteriorate; but on the other hand there was no distinct improvement, and it was found impossible either to liquidate the largely augmented public debt or to provide for a resumption of specie payments. In 1898, however, the troubles with the Argentine broke out, followed by a run on the bank and the dec- laration of a moratorium. New government notes {billetes fiscales) were now issued to the extent of 50 millions. The general revenue conditions, however, owing to the acquisition of the guano territories, proved to be so satisfactory that no additional issues became necessary. In 191 2, indeed, a conversion scheme was proposed with a gold fund {caja de emission) to en- sure the conversion of outstanding notes at the rate of 1 2d. per peso (the gold peso being worth i8d.). The date fixed for the resumption of specie payments was soon, however, deferred to 1917 and the outbreak of the great war in 19 14, with its consequent disarrange- ment, prevented the consummation of even this pro- ject. In the meantime the public debt of Chile had grown in 1914 to almost 156 millions pesos, internal debt, and to well-nigh £34 millions of foreign debt. Chile therefore had not been able to extricate herself from her currency troubles, and the fluctuation of foreign exchange continued almost unabated. C. Brazil The currency history of Brazil begins in 1808 when the bank of Brazil was created, providing the only cur- rency in addition to the existing copper coins. Up to 18 13 these bank notes remained convertible. But from 1814 46 CURRENCY INFLATION AND PUBLIC DEBTS on, over-issues led to depreciation. The note issues amounted by 1820 to over 83^ million milreis (milreis means a thousand reals) . As a consequence, whereas the par of exchange on London had been 6yy^d. per milreis, the rate of exchange after the suspension of specie pay- ments in 1 82 1 fell to 47d. When independence was de- clared in 1822, the outbreak of the civil war seemed to render great additional issues imperative. By 1828 there were outstanding over 2134 millions. Moreover, large foreign loans had been contracted from 1825 to 1828 at a ruinous rate, the five per cent loan having been issued at 52. In addition, the troubles with the copper coinage multiplied. As a result, the government in 1829 assumed responsibility for all the bank notes and in 1833 transformed them into government paper {paga- reis thesouron nacional). This paper money, although receivable for taxes, was not invested with the legal- tender quality until 1835. In 1833 a theoretical reform had been attempted, with a gold coinage based on a par of exchange equal to 43>^d. The regional paper currency was to be with- drawn and new paper on a gold basis issued in exchange for the old notes as well as for the copper. But the project did not succeed. In 1838 a new bank at Rio de Janeiro was granted the privilege of issuing notes known as vales, bearing two per cent interest, and this was soon followed by other bank issues. As a conse- quence during this third period, up to 1853, the paper currency was composed of a multiplicity of bank-note issues together with the government paper money. In 1846 another attempt was made to relieve the situation, the law providing for the gradual redemption of 'the old paper at the rate of 27d. per milreis, i. e., conversion at a discount. As a matter of fact, however, there was little if any contraction or conversion. In 1853 a new period was ushered in by conferring on the Brazilian bank a monopoly of note issue. This 47 CURRENCY INFLATION AND PUBLIC DEBTS lasted until the crisis of 1857. At that time there were outstanding 43^ millions of government notes and 513^ millions of bank notes, or a total of 95^ millions. The crisis of 1857, with the attendant great fall in the ex- change, led to the adoption of a free-banking law. As a result, we have the era of the so-called plurality of note issue, which lasted until 1866. The sad conse- quences, however, of this experiment led to the act of 1866 which prohibited the further issue of bank notes and provided for a gradual retirement of the outstand- ing issues. As a result, from now on until 1889 the currency was composed only of government paper money in various stages of depreciation. We thus have the new period of exclusive fiat money which lasted over three decades. In the interval the emancipation of the slaves became a burning issue and in 1871 the so-called emancipation fund, designed to render possi- ble the abolition of slavery was created. By 1888 this reached the figure of 24 millions. In this year 1888 a new currency system was in- augurated by a second free-banking law, which pro- vided for a covering of the notes, either in coin or in commercial paper. The proclamation of the republic of 1889 led to some changes. The law of 1890 per- mitted a decided rise in the limit of note issues, of which immediate advantage was taken. As a consequence there ensued a depreciation so great that by the end of 1891 exchange on London stood at about ii^d. in- stead of the normal 67^ d. The panic of 1892 led not only to the reintroduction of a monopoly of bank note issue, but also now again to large emissions of government or fiat money. This, together with the troubles of the Civil War, brought exchange on Lon- don down to 9j4d. By 1894 there were outstanding about 367 million milreis of government notes and 345 millions of bank notes, or a total of 712 millions. The situation had now become almost intolerable and, when 48 CURRENCY INFLATION AND PUBLIC DEBTS in 1896 the government decided to replace all outstand- ing bank notes by fresh issues of fiat money, a panic followed and exchange on London dropped to yd. From 1896 on, therefore, we have a currency issue composed exclusively of government paper. Since then, several efforts have unavailingly been made to amelio- rate the situation. In 1899 provision was made for a fund designed to serve for the purposes both of guar- antee and of redemption; but the crisis of 1900 ren- dered this effort abortive. In Brazil, as in the other South American states, the political difficulties had made it impossible to bal- ance the budget, and the deficits, together with the military expenses, had caused the accumulation of a large debt. Now, however, with the beginning of the new century, a gradual improvement in both the political and the economic situation ensued and the reestablish- ment of the budgetary equilibrium enabled the govern- ment to turn its attention to an effort at contraction of the currency. By 1903 113 millions of paper had been retired and in 1906 an important project of reform was adopted. In that year, when there were still outstand- ing about 670 millions of paper and when the foreign debt stood at £70 millions and the internal debt at over 552 million milreis, a so-called conversion fund {caisca de conversao) was inaugurated. The rate of exchange was fixed at i^d. per milreis. The redemption fund which was alimented by the proceeds of the import duties was designed to redeem only notes issued by the caisca itself, differing in this respect from the analo- gous Argentine fund, which operates to redeem all outstanding paper currency, of whatever character. The Brazilian redemption fund did not have quite such a successful career as that of Argentine. After 1908 excessive issues of paper were again made, fol- lowed by a depreciation in the foreign gold exchange. In 1910, as a consequence, the exchange rate of the 49 CURRENCY INFLATION AND PUBLIC DEBTS caisca was raised to i6d. per milreis, although the caisca was directed to accumulate a gold fund equal to the difference in the value of the notes resulting from the increase in this rate from 15 to i6d. By 191 2 the convertible notes amounted to almost 333 millions, covered by a gold fund of 1253^ millions; but the in- convertible outstanding paper still amounted to 607 millions. Moreover, the public debt had constantly increased so that it amounted in 19 14 to 979 million milreis internal debt, and to £105^^ millions foreign debt. The situation therefore at the outbreak of the Euro- pean War, although far better than in the nineteenth century, was still not so satisfactory as in the Argentine. D. Other South American States Of the other South American states there is room to say only a word. Peru started on its career of mingled fiat money and inconvertible bank money {vales and billetes) in 1815. They soon lost almost their entire value. The experiment was repeated in 1822 and not infrequently in subsequent decades. In 1875 when 10 million soles (a sol equals 2S.) of bank notes were out- standing, specie payments were again suspended". Then came the war with Chile and the assumption of responsi- bility for the paper currency by the government, which now proceeded in addition to issue large sums of its own. In 1889 an effort was made to put an end to the old troubles by issuing new government notes {bonos del gobierno) at the rate of ic, of the old for i of the new. Uruguay also has had a sad experience, the details of which it is unnecessary to give here. It may be remarked, however, that in 1875 the legal-tender notes were issued in such profusion that gold stood at a premium of 857 per cent. The worst situation perhaps is found in Colombia where the War of Independence in 181 1 led to the issue 50 CURRENCY INFLATION AND PUBLIC DEBTS of fiat money which soon lost all its value. After many mutations a national bank was created in 1880 with a monopoly of note issue; but a few years later the notes were all declared inconvertible. The Civil War in 1899 led to immense issues of paper, as well as to great foreign debts, so that in 191 3 when the debt, amounted to almost £4 million, foreign, and over 2]/^ million gold pesos internal, the value of the paper had fallen to the extent of 99-100; that is, the paper peso or dollar was worth only one cent in gold. 51 CURRENCY INFLATION AND PUBLIC DEBTS XI Japan A history of currency inflation would not be com- plete without a short reference to Japan. Although paper money issues were known in Japan in the four- teenth century, as in China still earlier, it was not until the revolution of 1868 that the modern history begins. When the Emperor dismissed the Shogun and civil war ensued, the government was confronted by a war ex- penditure of 25 million yen and an ordinary revenue of 3.6 million. While loans and other extraordinary revenues brought the revenues up to somewhat over 9 millions, there still remained a deficit of over 15 millions. The suggestion was therefore made to issue paper money on the alleged security of land, the paper to circulate for thirteen years and then to be redeemed. On May 25, 1868, this plan was adopted and authority to issue 49 million yen was granted. No sooner, how- ever, was the paper put in circulation, than it began to fall in value and the progressive depreciation was not checked by the familiar expedient of declaration of legal tender. Nor was the situation much improved in the next year when the legal period of redemption was reduced from thirteen to five years, in default of which the notes were to bear six per cent interest. In the meantime, the various warring clans had also issued large quantities of irredeemable paper known as clan notes, amounting by 1869 to almost 25 million yen. Moreover, in addition to the government legal tender proper, of which by 1869 there was now outstanding 50 millions of yen, various other kinds of paper were put in circulation, such as the civic department notes and convertible notes and certificates issued either by the, treasury or by the colonial department. The consequence was an unexampled rise of prices and a period of seeming prosperity upon which the 52 CURRENCY INFLATION AND PUBLIC DEBTS new government floated into power. But the ministry soon recognized the dangers involved and, after the successful outcome of the insurrection, proceeded to convert all the outstanding paper, including the clan notes, into so-called "new paper notes." A system of national banks, based on that of the United States, was inaugurated in 1873 ^^'^ the banks were permitted to issue convertible notes on the deposit of government bonds, which were received in exchange for paper money. In 1877, however, the Satsuma insurrection broke out and it became necessary to issue additional legal tenders. By the end of 1878 there were outstanding altogether 1 19.8 million yen of government notes. The natural consequence was a great depreciation, a marked rise of prices, a considerable excess of imports and a corresponding efflux of coin. Things now rapidly went from bad to worse. The premium on silver rose to twenty-five per cent in 1879, to fifty-four per cent in 1880, and to seventy-nine per cent in 1881. All the familiar earmarks of a period of inflation became visi- ble. As we are told by the American consul, T. R. Jernigan: "In the year 1881 nearly everything in Japan had greatly risen in price, and as the great majority of the people considered only price, and not value, and ignored the wholly fictitious nature of the advance, it is not surprising that they imagined it both solid and likely to endure, and thought themselves very pros- perous and quite justified in launching into much ex- travagant expenditure. Accordingly new farmhouses sprang up in every province, new clothes and ornaments were freely purchased, land property became in great demand and capital was inconsiderably borrowed at high rates of interest (and as inconsiderably lent by the national banks), and in general everybody rejoiced in hope, and a sense of prosperity."* *Vnited States Consular Retorts, no. 68, Sept., 1886, p. 6S3. 53 CURRENCY INFLATION AND PUBLIC DEBTS Japan was, however, now fortunate in having at the helm a great financier, Count Matsukata, who had a lively sense of the dangers. He decided upon a triple program: an immediate contraction of outstanding notes, the accumulation of a gold reserve, and the re- placement of the old system of national banks, based on the American model, by a central bank, of the German type. This policy was, at once inaugurated. The bank was started in 1882, the gold reserve was strengthened and. the outstanding irredeemable notes were from 1 886 on gradually exchanged for silver. The gold premium began to fall in 1884 and by 1886 it had completely disappeared, not, however, without the usual symptoms of distress. As Mr. Jerriigan tells us : "Prices, of course, fell as precipitately as they had risen. With this fall in prices, distress and desolation extended over the land, and millions of people who had supposed themselves on the high road to wealth suddenly found poverty staring them in the face, while exacting credi- tors on all sides demanded the liquidation of debt. De- pression and a sense of adversity naturally followed; bankruptcies became common and misery was every- where present. . . For the present the people appear stranded upon a hard and dismal shore. . . But necessity is pressing many to exertion, and with an enforced return to frugality and diligence, production and trade will doubtless gradually revive and prosperity finally return."* Count Matsukata, however, persisted in his policy, and within a few years Mr. Jernigan's prophecies were fulfilled, normal conditions returned and Japan entered upon its modern era of progress. But the experiences of this unfortunate episode were not for- gotten and Japan has since then been preserved from the evils of currency inflation. *0p. cit., p. 6S4. 54 CURRENCY INFLATION AND PUBLIC DEBTS XII The Great War It is not the design of this paper to trace the cur- rency history of the war further than to point out that the exigencies of the situation compelled virtually all the European belligerents to repeat the errors which were committed by Europe during the Napoleonic Wars, by the United States in the Civil War, and by the South American countries during their various periods of tribulation. Everywhere we find the amass- ing of gigantic debts and the issue of irredeemable or inconvertible paper money, which operated to accentu- ate still further the rise of prices and to add the woes of inflation to the other evils of war. The United States alone was saved from the perils of fiat money, not only by its late entrance into the contest, but also and more particularly by the fortunate opportunities of currency expansion afforded by the new and hitherto unutilized Federal Reserve system. Both the United States and Great Britain were also in the happy posi- tion of being able to rely somewhat more largely than the other belligerents on the revenues from taxation to defray a small part of the war costs. The result has been that while the United States entirely escaped the evils of inconvertible paper, Great Britain has suffered a somewhat less degree of depreciation than has fallen to the lot of the other countries. A summary view of the pre-war and post-war public debts of currency inflation and of the consequent rise of prices in the principal countries is contained in the three tables annexed : 55 CURRENCY INFLATION AND PUBLIC DEBTS /. Public Debts *In million dollars Pre-War Post-War Most recent date 1914 1919 United States 1,190 2S,J22 June 30, 1921 23.977 Great Britain 3,l6s 37,221 June 4, 1921 37,520 France 6,291 32,322 March I, 192 1 48,205 Italy 2,621 15,009 October 31, 1920 18,928 Russia 4,623 tz5,383 Belgium 722 1,888 April i, 1921 4,706 Germany 1,126 -48,552 October 10, 1921 71,007 Japan 1,292 1,289 March 31, 1920 i,397 Argentine 645 823 April 30, 1921 968 Brazil 1,025 1,190 June i, 1921 1,580 Chile 198 June I, 192 1 219 *Foreign currencies converted into dollars at pre-war normal rates. This involves exaggerated figures for some of the foreign countries. tAs of 1917. //. Paper Currencies* (In Millions) 1913 1920 1921 United States $1,060 Oct. i $4,899 Oct. i $4,035 United States Notes Federal Reserve Notes Federal Reserve Banknotes National Bank Notes Great Britain £29 Aug. 1 1 £464 Aug. 20 £426 Bank Notes Currency Notes France fr. 5,565 Aug. 30 fr.38,066 Aug. 30 fr. 36,783 Bank Notes Germany mk. 1,990 Aug. 30 mk. 77,087 Oct. 31 mk. 92,347 Banknotes Reichskassenscheine Darlehnskassenscheine Italy li- 499 Sept. 30 Banknotes 1919 IJ. 16,356 May 31 li. 11,768 Government notes Japan yen 426 March yen. 1,368 May 31 yen. 1,053 Banknotes *Derived from tables furnished by the League of Nations,United States Treasury Reports, and The Financial and Economic Annual of Japan. 56 CURRENCY INFLATION AND PUBLIC DEBTS ///. Index Numbers of Wholesale Prices* igiS as 100 192 1 1914 191S 1916 1917 1918 1919 1920 Aug. United States 100 loi 124 176 196 212 f^So 'S^ Great Britain loi 126 159 206 226 242 1298 183 Canada loi no 135 177 206 217 246 174 Australia 100 141 132 155 170 180 1236 §159 France loi 137 187 262 339 357 {526 331 Italy 95 133 202 299 409 364 3:655 542 Germany 100 ti)S6o i,777 Sweden 115 159 233 341 34s 322 I42S §300 Japan 95 97 117 147 192 236 259 199 *From Federal Reserve Bulletin, October, 1921, p. 1225. fAugust. jSeptember. IJuly. 57 CURRENCY INFLATION AND PUBLIC DEBTS XIII Conclusion From the above survey certain conclusions are reasonably clear. In the first place most of the existing public debts are due, as they always have been due, primarily to war. Moreover, the sudden outbreak of war has almost inevitably brought about recourse to paper money, in the shape either of irredeemable government bills or of inconvertible bank notes. The temptation to overissue these notes has generally been found to be irresistible and has consequently led to inflation with its attendant evils. Furthermore, public debts have been increased by the accumulated budgetary deficits which have in themselves often led to paper money and inflation. The inference from these considerations is that fiscal progress now everywhere imperiously demands a rees- tablishment of the budgetary equilibrium. Unless every country is willing or able to provide a revenue from taxation which will suffice not only for its ordinary expenditure but also for the interest and amortization of its public debt, we must expect to see a further in- crease of the public debt, a renewed emission of irre- deemable or inconvertible paper, and a consequent per- petually growing inflation. In the second place, our survey brings out plainly that the issue of inconvertible or irredeemable paper money always ends in depreciation. It is true, as was pointed out in the introduction, that a distinction must be drawn between a general rise of prices and that particular rise of prices implicit in the term deprecia- tion. But it is none the less true, as our historical sketch has shown, that the latter helps to influence the former, and that the depreciation caused by the undue resort to paper money is no inconsiderable explanation of the exaggerated rise of prices that we call inflation. More- 58 CURRENCY INFLATION AND PUBLIC DEBTS over, it must be remembered that under modern con- ditions of international trade, inflation registers itself primarily in the rate of foreign exchange and that these fluctuations of foreign exchange cause perturbations and embarrassments from which the whole economic life of the country severely suffers. In the third place, we have learned from our history that the worst evils of inflation are often of a subtle character. During the period of rapidly rising prices we have all the appearances of a phenomenal prosper- ity. Not only, however, is this prosperity illusory, but it creates it own nemesis in the inevitable reaction that is sure to ensue. The prosperity, we have said, is illusory. With the rapid rise of prices, those who have no commodities to dispose of suffer severely. The creditor is in an un- happy position and the recipients of fixed incomes are compelled to resort to all manner of unworthy ex- pedients in order to make both ends meet. The con- tinual fluctuations of price introduce an uncertainty in business which is only temporarily masked by the ad- vance. The opportunities of a sellers' market irresisti- bly lead to profiteering and its attendant evils. The sudden increase of the paper income produces private extravagance and public prodigality. The extravagant rise of wages, even though it lags behind the general rise of prices, coupled with the unceasing demand for labor, engenders a demoralization, which soon returns to plague the industry. The habits of thrift, painfully built up during a lifetime, are abruptly discarded. The kaleidoscopic mutations of paper fortunes, amassed al- most over night, beget a spirit of speculation and of peculation. The feverish activity of the market de- stroys the habits of orderliness and sobriety, and the brilliant prospects of suddenly acquired wealth create in the public a delirium of improvidence and the sense of living in a veritable golden age. 59 CURRENCY INFLATION AND PUBLIC DEBTS The day of reckoning, however, soon follows. When the wave rises to a crest, it breaks with an overwhelming force; when the fever subsides, the resulting weakness is intense. As the paper finally loses its value, fortunes are now suddenly wiped out, and many of the sup- posedly wealthy find themselves beggared. With the collapse of demand, unsalable stocks deplete the busi- ness inventory and failures are the order of the day. Those who have habituated themselves to an extrava- gant mode of life are faced with the grim necessity of immediate retrenchment. The laborer resists to the uttermost any lowering of his wages, however neces- sary it may be to the reestablishment of the new equili- brium. The government finds itself embarrassed by the drying up of the sources of its revenue. The pru- dent and the patriotic, who have undergone sacrifices in order to invest in government paper, suffer for their patriotism. The splendors of the former prospects are now seen to have been only a mirage. The golden age of inflation turns out to have been after all nothing but a gilt-paper age. Where the abuses have not been so excessive, the consequences are not so painful. But the tendency is everywhere the same, and the evils are always present in some degree. The fourth conclusion from our survey refers to the disappearance of, or escape from, inflation. This, as we have seen, can be accomplished only in two ways : through a reduction of the debt or through the contrac- tion of the paper issues which we have become accus- tomed to call deflation. The only possible methods to re- duce a debt are to pay it or to repudiate it. Not a few countries, as we know, have resorted to what is virtual repudiation by converting a part of the existing paper currency at a discount. When the United States finally exchanged the remnants of its continental revolution- ary bills of credit at lOO for i ; when France took up 60 CURRENCY INFLATION AND PUBLIC DEBTS the assignats at 30 for i ; when Russia and Austria, Spain and the South American states converted a part of their outstanding paper at a fraction of its original value : these were all examples of virtual repudiation. On the other hand, with the notable exception of the United States which was in an especially fortunate situation after the Civil War, no country during the nineteenth century has made a successful endeavor to sink its public debt. At the present time, only a few of the recent bel- ligerents are dealing seriously with their public debt. Italy and Germany, as well as Austria and Czecho- slovakia, have adopted the project of a capital levy, designed to wipe out a substantial part of the public debt by the collection of a large revenue from property. Even here, however, the efficacy of the plan has been much inipaired by the provisions for spreading the burden over a long term of years, thus converting the capital levy into what is virtually an additional income tax. Unless all signs fail, there is little prospect of these gigantic debts being paid. As with the nineteenth century war debts, they are likely to remain a perpetual burden on the community, the weight of which will be lightened only by the gradual increase of wealth and prosperity. Unless, however, the greatest care is taken, there is serious danger lest the actually existing debts be further increased in time of peace, with the probable result of total or partial repudiation. The second method that has been employed is to overcome the evils of inflation by contraction, deflation, or conversion. The experiments that have been made with contraction in the nineteenth century, however, are not such as to inspire us with great confidence. For, as we have seen, contraction or deflation, carried beyond a certain reasonable point, almost always spells commercial embarrassment and business disaster. The early effort at contraction in the United States after 61 CURRENCY INFLATION AND PUBLIC DEBTS the Civil War was, as a consequence, soon checked. The most that can be hoped for at present is a cessation of further inflation and a prudent conduct during the years of gradual recuperation until a measure of re- established confidence and prosperity may render pos- sible a conversion of the existing paper money and a reintroduction of specie payments. This conversion, as we have seen, sometimes takes place at par, after a periodof probation, as in England in 1821, in the United States in 1879, or in Japan in 1886. In other countries, as we have learned, the conversion has taken place at a discount which, as we have just pointed out, involves a virtual repudiation. Again, conversion has some- times been made possible through the adoption of an entirely new unit, as in Austria in 1892. Finally, con- version has occasionally been aided by an institution for special conversion or by a redemption fund, as-in the Argentine and in Brazil, Above all, however, the success of the conversion and the possibility of maintaining it in unimpaired ac- tivity has been due in almost every case to an improve- ment in the general political and economic conditions. Just as the public debts, when paid at all, have been reduced by an excess of revenues, so inflation to the extent that it is connected with the depreciation of the rate of foreign exchange has been lessened by a more favorable relation between exports and imports. It is undoubtedly true that there is a fallacy underlying the often accepted doctrine of a favorable balance of trade. The old Mercantilist theory that an excess of exports is necessarily a benefit and an excess of imports a detri- ment is no longer accepted by any careful thinker. For an excess of imports may be an indication of prosperity, not of adversity. In the first place, imports may represent the profits of the commercial transactions, the profits being re- ceived in the shape of goods rather than of coin or 62 CURRENCY INFLATION AND PUBLIC DEBTS credits. While the other party to the transaction will presumably also make profits, a surplus of profits ac- cruing to any one party to the exchange will frequently register itself in an excess of imports. In the second place, the imports may represent the so-called invisi- ble balance, such as insurance premiums, banking com- missions, travelers' outlays, sums belonging to immi- grants and, above all, interest on foreign investments. Before the war, for instance, Great Britain had a normal excess of imports amounting to several hundreds of mil- lions annually. On the other hand, some of the poorest countries had an excess of exports, the exports repre- senting in large part the interest on the indebtedness to foreign nations, and thus betokening economic weakness rather than economic strength. Students of the prob- lem have accordingly long been familiar with the dis- tinction between the balance of trade and the so-called equilibrium of commerce, the latter meaning such a relation between imports and exports as to enable the national debits and credits to balance each other. In one country the commercial equilibrium may mean an excess of exports, in another country an excess of im- ports, and not only a temporary but a permanent excess. While this is undeniably true, it is none the less true, however, that an excess of exports beyond this equili- brium point may denote a prosperous condition, and that an excess of imports beyond the same equilibrium point may imply an unprosperous condition. Such an excess of imports may mean the incurring of a foreign debt or the necessity of parting with either securities or gold. An excess of exports beyond that point, on the other hand, may render possible the accumulation of foreign credits, the repayment of foreign indebtedness, the repurchase of home securities held abroad or the amassing of a gold reserve — all of which may be wel- come signs. Making due allowance for this distinction between the balance of trade and the equilibrium of CURRENCY INFLATION AND PUBLIC DEBTS commerce, it is therefore a fact that an excess of ex- ports may mean increasing strength and an excess of imports growing weakness. In the last instance, there- fore, the disappearance of inflation depends not so much upon actual deflation as upon the relative deflation which is so closely connected with the growth of gen- eral prosperity and which is reflected in the relation be- tween exports and imports and the rate of foreign exchange. The final conclusion from our study is that just because of the interdependence of all great commercial countries in modern times, debt payment and currency reform have become international problems. It is not by impoverishing Germany, or preventing Poland from buying raw materials at what is to them grossly inflated prices, that any recovery is to be expected. No one can improve his own condition by impoverishing his cus- tomers. Nor can countries like Great Britain and the United States expect to benefit by an insistence on the immediate payment of the debts due to them by the Allies. Whatever arguments for the retention of these obligations may be advanced from the point of view either of possible political pressure or of a guarantee against some conjectural economic necessity of the future, it is obvious that such gigantic debts can be paid at present only through the medium of exports of goods from the debtor nations, a process which is bound to react disastrously upon the creditor nations by cur- tailing their exports. What has already happened to Great Britain in the shipping and coal industries is symptomatic of the perils attendant upon our pressing for immediate or speedy payment of the Allied debts. Two things only will make it possible for the world to get on its feet again. One is for each country which has fallen into the quagmire of fiat money to set its face resolutely against further temptations, to reduce as far as possible its military and naval expenditures and 64 CURRENCY INFLATION AND PUBLIC DEBTS to put its fiscal house in order by a prompt and vigorous application of taxation with a view of reestablishing budgetary equilibrium. But a taxation as excessive as that encountered today even in the United States, not to speak of the rest of the world, cannot be continued without hazard. No country can long endure the appli- cation of so large a part of the social income for purely unproductive consumption without sufifering a marked retardation in the tempo of its economic progress. For it is only out of the setting aside of an appreciable sur- plus of annual production that a nation's capital can be replenished and the economic resources strengthened. Where this surplus is destroyed, or even nibbled into, by the conversion of the productive consumption of a nor- mal economic life into the unproductive consumption of government outlay for military or naval purposes, the results are sooner or later bound to be disastrous. In the long run, political security cannot be purchased at the cost of economic debility. The beginning of wisdom is thus obviously some method of limiting arma- ments, a result that can clearly be achieved only by inter- national agreement. In such an agreement even a coun- try like the United States must be prepared for a policy of give and take and, if necessary, must be willing to recede from its old-time political policy of aloofness and isolation. But, in the second place, the necessary budgetary equilibrium will be made possible only and concur- rently with a stabilization of the exchanges. This is also from the very nature of the case an international problem which must be met by international methods that it is not our function here to discuss. It is clear then that in the solution of the world's present economic and fiscal problems the United States must also play its part. The solution can be achieved only by a realization of the fact that as this gigantic con- flict was universal in its scope and in its effects, so the 65 CURRENCY INFLATION AND PUBLIC DEBTS remedy must be equally universal in character. Whether we desire it or not, we have all become integral parts of a stupendous world mechanism, no portion of which can cease to function without inevitably affecting the activity of the rest. The slogan of economic and fiscal reform must be: "Set your own house in order, but join with your neighbors in setting the world house in order." To this imperious demand practical policies must be adjusted ; for the sake of this economic neces- sity old shibboleths must be discarded and outworn political programmes relegated to the dust heap. Not aloofness, but constructive cooperation in both politics and economics must henceforth become the watchword of the United States. 66 APPENDIX TABLE 1 Continental Bills of Credit. Issues* In Millions of Dollars 1775 June 22 2 July 25 I November 29 3 $6,000,000 1776 February 17 4 May 9 5 July 22 5 November 2 5 19,000,000 1777 February 26 5 May 20 5 August 15 I November 7 i December 3 i 13,000,000 1778 January 8 i January 22 2 February 16 2 March 5 2 April 4 I April II 5 April 18 Yi May 22 5 June 20 5 July 30 5 September 5 5 September 26 10 November 4 10 December 4 10 63,500,000 1779 February 3 5 February 19 5 April I 10 May 7 50 June 4 10 July 17 :•• 15 September 17 15 October 14 5 November 17 10 November 29 15 , 140,052,380 Total 241,552,380 Nourse, to House of Representatives, January 67 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 2 Continental Bills of Credit Scale of Depreciation, as fixed in the Massachusetts Act of September 29th, 1780.* $100 in coin rated as equal in Bills of Credit to 1777 January $ 105 I779 October 2,030 July 125 December 2,593 1778 January 325 j^gg January 2,934 July 425 February 3,322 1779 January 742 March 3)736 July 1,477 April 4,000 After April i, 1780, i Spanish mill'd dollar was equal to 40 of the old emission. By the Massachusetts Act of November i, 1781, one dollar was to be equal in dollars of the new emission to 1781 Feb. 27 $1^ June 15 3 May 1 1% Oct. i 4 May 25 214 ♦From an old Broadside in the possession of the author. 68 CO w pq < CO H <; H w a n >^ a o Pi w < Oh t Pi < o H t3 o > Ik O CD u CO to 13 4-) f2 o o o o o o O O »^ O vo lo P) 00 T(- vo 11 OC vo HH M vo 1 00 t^ >-n 11 vo en M M M VS. o o o o O vo o o o o 5 N O lo O O O ov u^ vo O 1 "1 00 N tI- u^ Th M iTi en M Ov "^ en -^ ■^ 00 en en Cj en en VO O t-^ 00 1^ en ^ P) N "-> (VI (N VO m (~- O w en 00 M O O 8 8 m O 00 O ■Wl en ■ i v cr a 00 1-4 moo " o O M O en Th 00 en ffl. _ 8 8 o o O m ■^ ^ 8 8 2 8 8 8 8 O o o o O O "^ "1 N 00 en t-~ ■+ tn 00 <: 1 — Pi . c > 1— • < ' p. 1— 11 -t. c ! 69 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 4 France Issues of banknotes under Law. * (In Millions of Livres) 17 1 8 148.6 1719 January 5 18 February 7 20 April I 20.9 April 22 51 June 10 50 July 20 220.7 September 22 120 October 24 120 December 29 359-7 980.5 1720 February 6 200 March 26 300 April 5 396 April 19 436.6 May I 362.4 June 26 99.9 September 2 37 September 19 50 September 23 59.9 2,940.7 3,070.8 ♦From A. Courtois, Hisloire des banques en France, p. 302. 2d ed., Paris, 1881. 70 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 5 The Assignats in France* (Circulation in Million Livres) 1791 June I 912 Oct. I 1,151 1792 Sept. 22 1.972 1793 Jan. I 2,826 Aug. I 3,776 1794 May I 5.891 July I 6,082 Oct. I 6,618 1795 Jan. I 7,229 Apr. I 8,327 July I 12,338 Oct. I 17.879 1796 Jan. I 27,565 Apr. I 36,672 July I 34,509 Sept. 7 45.579 TABLE 6 The Assignats in France Depreciation t A Louis d'or of 24 livres was worth in assignats. 1789 Aug. 31 24.4 1795 Feb. 24 - 137 Dec. 29 .. 25.1 Mar. 26 200 1790 May 25 Dec. 25 25.5 26.1 Apr. May June 23 15 10 242 ... 360 690 1791 Jan. 29 .. 26.2 July 16 ... 750 une 28 .. 28 Aug. 15 ... 868 )ec. 27 .. 35-3 Sept. 15 ... 1,145 Oct. T5 ... 1,560 1792 Jan. 31 .. June 29 38 Nov. 15 ... 3,096 40 Dec. T5 ... 4,100 Nov. 30 34.8 1793 Jan. 29 .. 1796 Jan. 15 ... 5,068 43.8 Feb. 15 ... 6,610 une 28 Oct. 8 .... 72 81 Mar. Apr. 15 15 ... 7,100 ... 5,950 1794 Jan. 12 .. 59-3 May 15 ... 8,300 June 9 .. 80 May 25 ...12,000 Nov. 28 ... 98 June 3 •• -14.775 Dec. 30 120 June 5.... ...17,950 ♦From A. Courtois, Histoire des banques en France, 2d ed., 1881, p. 329. tFrom A. Bailleul, Tableau complet de la valeur des assignats, des rescriptions et des mandats jour par jour depuis leur imission, 11th ed., Paris, an V (1797). 71 792 793 794 795 796 797 798 799 8oo 8oi 8o2 803 804 805 806 807 808 809 11-3 II-9 10.7 14.0 10.7 9-7 I3-I 13-0 16.8 16.2 15-2 15-3 I7-I 17-9 17-7 17.0 18.2 18.5 810 21.0 TABLE 7 Great Britain The Bank Restriction Bank of Eng- land Notes in Circulation (in Price of Gold Million Pounds) * per oz. t £3-i7s-6d Public Debt in Million Pounds? 239.6 247.9 263-3 321.5 363-9 388.9 427.5 444-3 470.9 517-5 537-7 547-7 571. 1 599-9 621. 1 633-8 643-5 654-5 662.2 678.2 706.3 708.1 813. 1 861.0 845.9 839-4 840.6 836.5 834-9 827.9 ♦As of February in each year. From the Bank-Charter Committee Report, 1831-1832, appendix No. S. tFrom Tooke and Newmarch, History of Prices. tFrom W. S. Jevons, Investigations in Currency and Finance, 1884, p. 144. Prices of 1782 as 100. §From Report on Public Income and Expenditure from 1688-1801, 1869. Vol. n, appendix No. 12, National Debt., p. 298. 811 812 813 814 815 8r6 817 818 819 820 821 -23-4 -23-4 .23.2 .24.8 ■27-3 .27.0 .27.4 .27.8 .25.1 •25-3 ■23-9 3-17-6 3.17-6 3.17-6 3-17-6 3-17-6 3-I7-IOJ4 3-17-9 4-5-0 4-4-0 4-3-6 4-0-0 4-0-0 4-10-0 4-13-6 4-14-0 4-15-0 5-8-0 4-9-0 4-2-0 4-0-0 4-1-0 3-18-0 3-i7-io>^ 3-17-6 Index No. of PricesJ 93 99 98 117 125 no 118 130 141 153 119 128 122 136 133 132 149 161 164 147 148 149 153 132 109 120 135 117 106 94 72 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 8 Great Britain Public Debt* showing influence of wars. (In Millions of Pounds) War 1691 3.1 War 1793 247.9 " 1697 14-5 " 1815 861. 1 Peace 1698 15.4 Peace 1816 845.9 " 1700 12.6 " 1830 784.8 War 1702 12.8 " 1840 788.6 " 1712 34.9 " 1850 787.1 Peace 1713 34-7 " 1854 769.0 " 1717 40.3 War 1855 775.2 War 1718 40.4 " 1856 803.9 " 1721 54.4 Peace 1857 808.1 Peace 1722 54.2 " 1869 749-3 " 1739 46.6 " 1878 767.9 War 1740 47.1 War 1879 770.1 1748 75.8 " 1880 771.0 Peace 1749 77.5 Peace 1881 769.9 " 1755 72.5 " 1900 628.0 War 1756 74.6 War 1901 628.9 1763 132-7 " 1903 745-0 Peace 1764 133.3 Peace 1904 770-8 " 1774 127.2 " , 1914 661.3 War 1775 126.9 War 1916 1,108.9- 1783 231.8 " 1919 5.871-9 Peace 1784 243.0 Peace 1920 7)434-9 1792 239-7 " 1921 7.831-8 .. ♦Figures to 1869 from Report on Public Income and Expenditure from 1688-1801, 1869, vol. ii. Figures from 187S from Return on the National Debt, cd. 240, 1921. 73 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 9 France Public Debt * (In Million Francs) Annuities (Rentes Perpetuelles) Capital Total Debt 1801 35.7 1810 56.7 1820 172.8 1830 204.7 1840 195-9 1850 229.6 i860 338.3 1870 358.1 1875 748-4 1879 746.8 1890 730.4 1900 693.9 22,001.9 30>o55-4 1910 657.7 21,922.2 32,864.2 1914 "July 1 657.7 21,922.2 32,579.3 1917 Dec. 1 124,338.4 1919 Jan. I 147,472.4 1920 Sept. 30 285,750.3 Interest 1921 March 31 9.795-7 302,303.6 ♦Arranged from the Bulletin de Statistique et de Legislation comparie and especially from La France financihe et iconomigue, 1919. 74 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 10 United States Depreciation of Greenbacks * Average Price of Gold Average Price of in Greenbacks Greenbacks in Gold 1862 II3.3 88.3 1863 145.2 68.9 1864 203.3 49-2 1864 Maximum 285.0 Minimum 30.92 1864 157.3 63.6 1866 140.9 71 1867 138.2 72.4 1868 139.7 71-6 1869 133. 75- .I 1870 114.9 87 1871 111.7 89.5 1872 1 1 2.4 89.0 1873 113.8 87.9 1874 III. 2 89.9 1875 II4-9 87 1876 III. 5 89.8 1877 104.8 95.4 1878 100.8 99.2 1879 100 100 ♦From W. C. Mitchell, Gold Prices and Wages under the Greenback Standard, 1908, p. 4. 75 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 11 United States Price Changes under the Greenback Standard * Wholesale Prices Retail Prices i860 100 100 1861 107 94 1862 131 109 1863 168 148 1864 215 225 1865 219 224 1866 208 203 1867 193 177 1868 190 180 1869 177 172 1870 166 156 187I 155 144 1872 151 138 1873 148 143 1874 145 144 1875 140 134 1876 135 120 1877 134 117 1878 127 99 I879-- 123 93 1880 127 107 ♦From W. C. Mitchell, Gold Prices and Wages under the Greenback Standard, 1908, p. 76. 76 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 12 Italy Public Debt and Gold Premium * (In Millions of Lire) Public Debt Interest Gold Premium on the (Rendite) Capital Paper Currency 1861 148 3,092 1866 7.81 1862 149 3,109 1867 7.37 1863 186 3,832 1868 9.82 1864 225 4,613 1869 3.94 1865 262 5,347 1870 4.50 1870 394 7.999 1871 5.35 1875 438 8,829 1872 8.66 1880 479 10,114 1873 14.21 1885 520 11,143 1874 12.25 1890 561 11,800 1875 8.27 1895 609 12,257 1876 8.47 1900 579 12,645 1877 9.63 1905 566 12,705 1878 9.42 1879 II. 19 1915 May 13,636 1880 9.49 1919 May 31 77.763 1881 1.88 1920 Oct. 31.. 98,072 1882 2.65 *From J. Tivaroni, Storia del debito pubblico del regno d'ltalia, vol. ii, appendix. 77 CURRENCY INFLATION AND PUBLIC DEBTS 1788.. 1790.. -1791.. 1792. 1793- 1794- 1795- 1796. 1804., 1805.. 1806., 1807., 1808., 1809., 1810.. 1811.. 1812.. 1813.. 1814.. 1815.. 1816.. 1817., TABLE 13 Russia Paper Money, 1788-1817 * Assignats in Circulation (In Millions of Rubles) • 40 .100 .III .117 .120 .124 .124.5 .150 .261 .292 •319 .382 ■477 •533 •579 .581 .646 •749 •798 .826 •831 .836 Value of SUver in Paper 1.03 1. 15 1.23 1.26 1-35 1.41 1.46 1.47 4.00 ♦From P. Cahen, L'abolition du cours ford en Russie, 190S, p. S23. 78 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 14 Russia Paper Money and Public Debt, 1 844-1 897 Circulation in Million Rubles 1844 30-7 1845 121. 8 1848 289.6 1850 300.3 1855 356.3 1858..; 735-3 i860 678.2 1865 679.6 1870 721.8 1875 797-3 1877 790.1 1878 1,039.9 1879 1,188.1 1880 1,162.5 1890 1,046.2 1897 1,121.4 * Public Debt in Value of Paper Ruble Million in Coin Kopeks Rubles 98.5 98.1 95 98.7 93-0 134-8 93-1 134-3 92.5 219 81.5 378.6 76.8 592.9 84.8 970.0 67.2 1,051.0 64.6 1,045.0 63.1 1,040.0 64.4 1,190.0 72.6 1,490.6 66M 2,128.8 ♦From E. Lorini, La riforme monitaire de la Russie, 1898, appendix. 79 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 15 Austria Paper Money, 1796-18 17 * Circulation in Value in Paper of Million Florins 100 Florins Silver 796 46.8 100.25 797 74.2 102 798 91.9 lOI 799 141 107 800 200.9 115 801 262 116 802 337-2 120 803 339.2 133 804 337-6 135 805 337-31 146 806 449-8 175 807 487.6 202 808 524.2 222 809 650.9 315 810 995 552 811 1,061 833 812 212. 1 137 813 295.6 183 814 457-6 228 815 610.1 351 816 638.7 328 817 428.7 333 ♦From A. de Mulinen, Les finances de I'Autriche, 187S, p. 124. 80 CURRENCY INFLATION AND PUBLIC DEBTS TABLE 16 Austria Gold Premium, 1 848-1 892 J 1848 17* 1872 9-8t 1849 .27 1873 10. 1 1850 50 1874 9.9 1851 34 1852 25 g ! " I'.-V. ^^Ve 19.6 1854 46-50 1877 21.2 1878 16.8 ^855 29-25 1879 ,....: 14.8 1856 13-50 '^ 1857 9-33 1858 6.75 1880 15.9 1859 53-20 1881 15.3 1882 17.3 i860 44-33 1883 17.5 1861 50.03 1884 19.4 1862 38.67 1863 18.34 1885 22 1864- 19-3^2 jgg^g .22.3 1887 23.7 1888 , 23.3 1889 • 17. 1 1865 14.28 1866 29.75 1867 30. 1868 18.75 1869 22.38 1890 14. 1870 25.40 1891 14.4 1871 20.02 1892 00.00 ♦Figures from 1848-1871 represent the maximum premium. tFigures from 1872-1891 represent the average premium. JFrom P. Cahen, L'abolUion du cours force en Russie et en Autriche, 190S, pp. 570, S71, S77. 8i CURRENCY INFLATION AND PUBLIC DEBTS TABLE 17 Spain Depreciation of Paper Currency, 1883-1910 * (In Million Pesetas) Bank Note Issues Value of 100 f r. Specie in Million Pesetas in Paper Pesetas 1883 270 102 1884 383 lOI 1885 469 102 1886 526 102 1887 612 lOI 1888 120 102 1889 735 103 1890 734 104 1891 8x2 107 1892 884 115 1893 928 119 1894 910 120 1895 994 115 1896 1,031 121 1897 1,206 130 1898 1,444 154 1899 1,518 125 1900 1,592 130 1901 1,639 138 1902 1,623 136 1903 1,608 135 1904 •■ 1,597 138 1905 1,550 131 1906 1,524 113 1907 1,556 112 1908 1,642 113 1909 1,670 1 10 19 10 1,715 107 ♦From F. Riihe, Des Geldwesen Spaniens, 1912, p. 291. Cf. Gil y Pablos, Estudios sobre la moneda y los cambios, 1906, appendix, pp. 366-367. 82 z < ^' <^ ---:. ~~— --, 3oi ^",1 J i iti CO a. — < 1- OJ =£ / CIVIL NA/ PAYMEN U.S. 186 ^ w Z o — 0- 5' ) % -•:^' is it: 1 ^^J- -^ -- -WAR OF 5USPENC TO 1821 TO 1816 ■ U I *"^"" ""^c:^ ^ 15 NAPOLEO SPECIE P/ ENGLA U.S. — « o o o CVJ o in o o o in o ^ -S o o 5 P^ 83 CURRENCY INFLATION AND PUBLIC DEBTS BIBLIOGRAPHY* The American Revolution Webster, Pelatiah — Political Essays on the Nature and Operation of Money, Public Finance and other Sub- jects. Philadelphia, 1791. Phillips, Henry, Jr. — Historical Sketches of American Paper Currency. 2 vols. Roxbury, 1 865-1 866. France in the Eighteenth Century Levasseur, E. — Recherches historiques sur le systeme de Law. Paris, 1854. McFarland, Davis A. — An Historical Study of Law's System. In Quarterly Journal of Economics. 1887. pp. 289 and 420. Marion, M. — Histoire financier e de la France depuis 1715- Tome ili, La vie et la mort du papier monnaie. Paris, 1 92 1. White, A. D. — Paper Money Inflation in France : How it came. What it brought, and How it ended. New York, 1876. Great Britain Cannan, Edwin — The Paper Pound of 1897-1821. Lon- don, 19 19. Wolter, Johannes — Das staatliche Geldwesen Englands zur Zeit der Bank-Restriction, 1797-1821. Strassburg, „ 1917- Report of the Secretary and Comptroller General of the Proceedings of the Commissioners for the Reduction of the National Debt from 1 789-1 890. London, 1891. United States Mitchell, W. C— A History of the Greenbacks with es- pecial Reference to the Economic Consequences of their Issue. Chicago, 1903. Mitchell, W. C— Gold, Prices and Wages under the Greenback Standard. Berkeley, 1908. *Only the two or three best works on each country are given. 84 CURRENCY INFLATION AND PUBLIC DEBTS France ViJHRER, A. — Histoire de la dette publique en France. 2 vols., Paris, 1886. GuTMANN, F. — Das Franzosische Geldwesen im Kriege, 1 870-1 878. Strassburg, 19 13. Italy Plebano, a. — Storia della finanza Italiana. 3 vols. Turin, 1889-1901. TiVARONi, J. — Storia tiel debito pubblico del regno d'ltalia. 2 vols. Pavia, 1908-10. SupiNO, C. — La carta moneta in Italia. Turin, 1921. Franz, E. — Die Verfassung der staatlichen Zahlungsmittel Italiens seit 1861. Strassburg, 191 1. Austria LoRiNi, E. — La questione della valuta in Austria-Ungheria. Crowned by the Austrian and Italian Governments. Rome, 1893. Spitz-Muller, a. — Die Oesterreichisch-Ungarische Wah- rungsreform. Leipsic, 1902. Russia Cahen, p. — L' abolition du cpurs force en Russie et en Autriche. Paris, 1905. LoRiNi, E. — La reforme monetaire de la Russie. Trad, de R. Ledos de Beaufort. Paris, 1898. Spain Gil y Pablos, D. Francisco — Estudios sobre la moneda y los cambios. Madrid, 1906. FocHiER, E. — La circulation fiduciaire et les crises du change en Italic et en Espagne. Paris, 1905. RtJHE, F. — Das Geldwesen Spaniens seit dem Jahre 1772. Strassburg, 19 12. r 85 CURRENCY INFLATION AND PUBLIC DEBTS Argentine Williams, J. H. — Argentine International Trade under Inconvertible Paper Money. Cambridge, 1920. Arias, D. M. — Historia del papel moneda de Argentina. Buenos Aires, 191 2. PiNERO, O. M. — La conversion del billete. Contribucion al estudio de nuestras reformas monetarias. Buenos Aires, 1899. Wolff, J. — Die Argentinische Wahrungsreform von 1 899. Strassburg, 1905. Chile SuBERCASEAUZ, G. — El papel moneda en Chile. San- tiago, 1908. SuBERCASEAUZ, G. — Le papier monnaie. Paris, 1920. Brazil Calogeras, J. P. — La politique monetaire du Bresil. Rio de Janeiro, 19 10. SouTO, V. — Caixa de conversao. Rio de Janeiro, 1906. Cavalcanti, a. — O meio circulante nacional. Rio de Janeiro, 1893. Other South American Countries Garland, A. — La moneda en el Peru. Lima, 1908. Solano, A. — ^Apuntaciones sobre el papel moneda. Bogota, 1907. AcEVEDO, E. — Contribucion al estudio de la historia econ- omica y financiera de la republica oriental del Uruguay. 2 vols. Montevideo, 1903. Japan Takaki, a. — The History of Japanese Paper Currency. In Johns Hopkins University Studies in Historical and Political Science. Series xxi. Baltimore, 1903. Jernigan, T. R. — United States Consular Reports, no. 68, Washington, 1886. 86 Other Works by the Same Author Principles of Economics. 9th Ed. 1921. Russian Translation, 1907; Japanese Translation, 1907 ; French Translation, 1921. Essays in Taxation. 9th Ed. 1921. Japanese Translation, 1909; French Translation, 1910; Mahratti Translation, 1910. The Shifting and Incidence of Taxation. 4th Ed. 1921. Italian Translation, 1906; French Translation, 1911; Japanese Translation, 1910. The Income Tax. 2nd Ed. 1914. French Translation, 1913. The Economiclnterpretation of History. 2nd Ed. 1907. Japanese Translation, 1905; Russian Translation, 1906; Spanish Translation, 1907; French Translation, 1910; Armenian Translation, 1921. Progressive Taxation in Theory and Practice. 2nd Ed. 1908. French Translation, 1900; Spanish Translation, 1913. Railway Tariffs and the Interstate Commerce Law. Owen and the Christian Socialists.