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gradually withdrawn from circulation by gentle persuasion and the voluntary action of the banks (not by compulsion). Under these conditions it was not possible to discover if there was in fact any specific depreciation of the notes relatively to gold within the country. Spasmodic cases occurred of sovereigns being bought at a premium in 1916, and both buyers and sellers were prosecuted, but at the time the cases were considered as of no practical importance, and it was generally believed that the notes were not depreciated as regards gold. In a paper read by Prof. Foxwell to the Institute of Actuaries March 26 1917 he stated that he was not aware of any depreciation of this kind in Great Britain, though he had been on the look-out for it incessantly. The police-court cases noted above must have escaped his vigilance, but it is quite clear that there was no recognized depreciation in the sense of a premium on gold in terms of the notes during the war.

A specific depreciation of British currency might have been evidenced by the course of the foreign exchanges, especially with countries such as the United States which had preserved the gold standard effectively. But the course of the foreign exchanges is influenced especially in war-time by other factors, and we cannot at once argue from a fall in the American exchange to a depreciation of British currency. In Sept. 1915 there was a considerable fall in the sterling exchange on New York, but after that time the exchanges were controlled and an artificial stability at 4-765 dollars to the pound sterling was maintained until the control was taken off after the war (1919). It may be observed that the test which the framers of the Bullion Report (1810) thought of the most importance was not applicable owing to the artificial control. It may be added that this artificial control necessitated the incurring of large indebtedness to the United States by England. After the control of the exchanges was taken off there could be no question that the pound ster- ling depreciated in terms of the dollar, and this old method of estimating the depreciation was revived.

To the great mass of the people of a country, the specific depreciation of the currency, whether measured by the price of bullion or by the course of the foreign exchanges, is of little inter- est except in so far as it may be a sign of general depreciation or a fall in the purchasing power of the actual currency. The point was well put in a speech by Mr. Reginald McKenna to the shareholders in the London Joint City and Midland Bank on Jan. 29 1921. In discussing the variations in the meaning of inflation he said that one idea runs through all the meanings, namely that inflation is always associated with rising prices. As already explained, a general rise in prices is not in itself inflation, but it is, as experience shows, always associated with it in the sense of abnormal issues of inconvertible paper.

In considering the effects of the inflation (or abnormal issues) of inconvertible paper on general prices two questions must be carefully distinguished: (i) What is the effect in the country of issue; and (2) what is the effect indirectly on general world prices measured in terms of gold (the old standard).

Under normal conditions, when convertibility of all the forms of currency and credit is effective in the great commercial coun- tries (as before the World War), the level of prices in any one country depends partly on causes operating in that country, e.g. tariffs, demand and supply, and partly on the relation of that country to the rest of the commercial world. When the link between gold and paper is broken in any one country, after a point the local issues become of predominant importance. Russia furnishes an example in an extreme form.

In the United Kingdom during the war there can be little doubt that a rise of prices followed on the issues of the cur- rency notes, as shown by Prof. J. S. Nicholson in a paper to the Royal Statistical Society June 1917 (republished in War Finance). It was not implied that the rise was simply caused by throwing the new paper into circulation (as in the case of issues of notes in countries where credit is relatively little devel- oped), but account had to be taken of the effect of the issues on the abandonment of the restraining influence of the gold stand- ard. In the paper referred to it was shown that every kind of

currency and of credit had expanded. There had been, example, a very great increase in the silver and bronze coin put into circulation, and on the other side a great expansion the use of cheques. Within the country the principle of con- vertibility had been maintained, and the relative amounts legal tenders of the various kinds and of bankers' credits I increased more or less in like proportions (not exactly for rea sons given in Nicholson's War Finance, p. 92). As already explained, once the gold standard was abandoned the not took over the function of gold in restraining or not restrainir advances of credit. A comparison with the United Stat shows also that the rise in general prices began sooner and ad- vanced more rapidly in Britain than in America.

In other countries roughly the local rise was proportionate the expansion of the local currencies (and bank credits). The differences are best seen and most exaggerated in Russia and Austria-Hungary, but also in France and Germany.

Broadly speaking during the war (and after the war up to the middle of 1920) general prices in most countries were related to the inflation of their respective currencies and the credits based on them. Prices in particular countries, were determined to a greater extent by local causes on account of the restrictions placed on international trade in consequence of the war. Account must be also taken of the efforts, of governments to maintain control over prices of important commodities, which, though by no means completely successful and in general undertaken too late, had on the whole considerable effect. That is to say, the level would have been higher but for the control. Local prices were also to some extent kept down by the government of the country concerned buying in the foreign markets instead of allowing unfettered competition. This attempt to establish a buyers' monopoly amongst the allied belligerents was applied too late, and was not very effective as against the great trusts which established sellers' monopolies. Still, no doubt, this part of governmental control also affected the price levels of particular countries. The general result was in accordance with former experience namely that governmental control is a feeble rem- edy against a rise of prices consequent on the abandonment of the standard. The fundamental difficulty is that a government can only attempt control in its own country in so far as in combination with other buyers it may establish some kind of buyers' monoply. In other words, world prices still govern world markets, and the local prices have to be adjusted to the world levels. This consideration leads up to the effects of infla- tion (in the sense of abnormal issues of inconvertible paper and the consequential expansion of other representative money) in particular countries on world prices. In dealing with this second question it must be observed that in the past this influ- ence had to be considered in estimating changes in world prices (or the purchasing power of gold).

The substitution of paper for gold (or the precious metals when there was de facto a link between gold and silver) liberates a certain quantity of the gold which can be used for monetary purposes in other countries. In the American Civil War the displacement of metallic money, no doubt, had some influence in raising the general level of prices in European countries. In the World War the vast accumulation of gold in the United States tended, 'no doubt, both directly and indirectly to raise prices in that country and in that way to affect world prices measured in terms of gold. Similar effects were observed in Japan 1 whilst in Sweden precautions were taken against this

1 In Japan in 1914 the balance of bank-notes issued over the amount withdrawn was 385,000,000 yen against gold coin and bullion of 218,000,000 yen. In 1919 the balance of bank-notes war I 555,000,000 yen against 951,000,000 yen of gold coin and bullion In Dec. 1920 the ratio of gold to notes in Japan was 85-6, the highest of any of the 17 principal countries.

It is stated in the official Financial and Economic Annual o Japan for 1920 that in order to make up for the deficiency of sub- sidiary silver coins caused by the war a large number of paper notes of small denominations were issued of an aggregate value of nearly 20,000,000. Elsewhere the demand for silver for coinage raised t price greatly (maximum 8gd. per oz. in 1919). In England the standard of fineness was lowered.