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The term " inflation " as applied to paper money may be compared with the debasement of standard coins. Debase- ment is in general a symptom of disease or disorder of the mone- tary system. It is a departure from the standard (or specific depreciation); and if, as usually happens, it is associated with an increase in the quantity of the money after a point it must lead to general depreciation of the currency. If not associated with an increase of quantity the debasement would be simply equivalent to the institution of a seigniorage. In the same way inconvertible notes may be regarded as coins with a seigniorage of 100% (Walker); in other words the amount of fine metal supposed to be attached to the paper is nil. Nothing is left of the standard coin but the name. In this case the value of the paper is determined by its quantity related to the effective demand for it.

It is clear from the foregoing discussion of the meaning of the term that " inflation " is closely associated with other monetary expressions and is sometimes loosely used as equivalent to one or more of them. We speak of inflated values (or prices) of commodities, as for example in comparing- present foreign trade returns with the pre-war figures. In periods of financial specu- lation it is usual to speak of the inflation of securities. Prof. W. R. Scott, in his History of Joint Stock Companies, constantly uses the term inflation in describing the rise in the prices of shares in the period of the South Sea Bubble (1720). It may, perhaps, be said that values of securities are inflated when they bear no proper relation to their earning capacity or to their exchange value under normal conditions.

The term " inflation " is also commonly associated with depreciation, and the terms are loosely used as synonymous. Here, however, it is necessary to distinguish between the differ- ent meanings of depreciation. A currency might be specifically depreciated as regards gold (the standard) simply through dis- credit, although there was no abnormal increase of quantity. The terms depreciation and appreciation are often applied to gold itself. Gold was said to be depreciated in the third quarter of the igth century through the gold discoveries, and appre- ciated in the last quarter through the falling-off in production. But it would be straining the use of words to speak of the infla- tion and deflation of gold in these periods. During the World War and afterwards there was a great rise in world prices (measured in gold) and in the United States there was a vast increase of the amount of gold for monetary uses. In the United States there was no specific depreciation of paper money relatively to the gold. Gold there had no premium.

The rise in American prices in terms of gold is partly accounted for by the expulsion of gold from Europe by the floods of incon- vertible paper. The question arises whether it is correct to speak of this increase in the American gold currency as inflation. There has been, no doubt, an abnormal increase of gold currency as compared with pre-war periods, but there has been no aban- donment of the gold standard. Coincidentally, however, with this great influx of gold the passing of the Federal Reserve Act enabled a given amount of gold to support a larger amount of credit, and this extension of credit facilities may be regarded as equivalent to a partial abandonment of the gold standard as compared with pre-war conditions.

At this point the general question arises as to variations in the meaning of convertibility and inconvertibility. There have been in the past all kinds and degrees of suspended and deferred convertibility. The, beginnings in Europe of the gold- exchange standard (so well described by Mr. J. M. Keynes in Indian Currency and Finance, ch. 2) show also the beginnings of inconvertibility. These incipient gold-exchange standards prepared the way for the ready acceptance of inconvertible paper on the outbreak of the World War (see " Essay on the Abandonment of the Gold Standard," by Prof. J. S. Nicholson, in War Finance, p. 34). In the same way the Federal Reserve Act may be said to have prepared the way for an inflation of credit (see E. W. Kemmerer, High Prices and Deflation).

In the preceding account of inflation it was implied that under modern conditions the term was only properly applied to cases

in which the abnormal increase of money was due to inconverti- bility or to the abandonment of the gold standard. The appli- cation, however, of the idea of continuity to convertibility and inconvertibility shows that the term inflation may be extended so as to cover the expansion of credit and currency which has taken place in the United States. And in practice most writers speak of inflation in that country as being only less in degree as compared with Europe.

In the United Kingdom during the war the transition from convertible to inconvertible paper was made by such gradual and concealed steps, both in law and in practice, that it is hardly possible to say when the virtual abandonment of the gold standard was officially recognized, if indeed it ever was. 1 It was only after the war when the foreign exchanges had been decontrolled and when war demands and war scarcities no longe seemed sufficient to account for the great rise in prices, that th abnormal increase of paper money consequent on the abandon- ment of the gold standard came to be regarded as one of the principal contributory causes of the rise in prices, and it began also to be acknowledged that the currency had been inflated.

In the United Kingdom the great use of cheques and bankers' credits concealed the progress of the inflation as regards the notes. It was commonly said that the increase in the notes was not sufficient to explain the increase in the prices, and that only sufficient notes were issued to provide the small charge for the governmental credits. In this way we arrive at the position that the inflation in the United Kingdom was primarily an inflation of credit and not of currency. In other countries, e.g. Russia, Austria, France and Germany, the enormous issue of inconvertible notes had the usual effects in a more direct manner. The case of the United Kingdom, however, is not so different when analyzed as at first sight may appear. Before the war, when the gold standard was effectively maintained, the necessity of securing the absolute convertibility of all forms of credit, and of keeping London a free market for gold, imposed rigid limits '(after a point) on the expansion of credit. If in the war the bankers had not been able to provide notes for the cheques presented (for funds for wages and other cash transactions) the whole system of credit expansion would have broken down. The notes took the place of gold for all internal payments, for many foreign payments borrowing was resorted to.

Once the notes had effectively taken the place of gold in th United Kingdom, that is to say when gold was no longer used by the public as money for cash purposes, the principle of con- vertibility was maintained as regards all the other .forms of credit and " representative " money. There was never afte the first week of the war any hint of a banking crisis. No on repudiated the notes, and the whole monetary system worked with the greatest smoothness. The only differenc was that the ultimate convertibility into gold, if required and as and when required, was no longer recognized in practice But this one exception was fatal to the stability of the monetar system. In normal times before the war the action of the goli standard was so effective and so quiet that even bankers and those engaged in high finance took it for granted, just as a per- fectly healthy man takes for granted the circulation of the blood and the other vital processes. To the present generation real working of the gold standard was only revealed when th abandonment had been effected. This abandonment gave to the monetary system the power of indefinite expansion, and th necessities of the State in the war and its extravagances afte the war made the potential expansion an actuality.

The real meaning of the gold standard and the dangers abandonment or relaxation were admirably expressed in own day by Ricardo. Ricardo was all his life engaged in hig finance, and in monetary affairs was the leading practic authority. Although he is commonly regarded as the founde of abstract economics, always at the back of his mind was the practical working of the principles which he propounded. He

1 At no time during the war would it have been definitely admitted by the governor of the Bank of England that the gold standard had been "abandoned " (Ed. E.B.).