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depreciation of gold. The indirect effect of this influence was far greater in the World War than on any previous occasion owing to the vast area affected by the issues of inconvertible paper and the importance of the countries concerned. It is obvious from the experience of the United States that the mere preservation of convertibility and the effective maintenance of the gold standard are not sufficient to prevent a general rise in prices as'; measured in the gold standard. Gold prices in the sense of " world prices " depend broadly on the quantity of the gold in use for monetary purposes and on the work to be done by it. In the course of the war, paper was largely substituted for gold, and so far as trade was concerned there was less work to be done by the gold. The general effect then of the World was analogous to that of great discoveries of gold. Such a esult was not in itself a necessary consequence of the World War and of the issues of inconvertible paper. It was quite possible pointed out by Prof. J. S. Nicholson (in a paper of date g. 3 1914 rcpublishcd in War Finance, Part II. ch. i), that the destruction of credit would more than counterbalance the influences making for a rise in prices. In fact, however, instead of any destruction of credit there was a universal expansion. All governments financed their war needs by loans. The United Kingdom alone of European countries met any considerable part of its war expenses by taxation. In France and Germany the great issues of inconvertible notes directly raised prices, and prices were also raised by the expansion of governmental credits exercised in purchasing power. The nofcs displaced gold, and the gold was used for monetary purposes in other parts of the world, notably the United States and Japan. In other countries the notes took the place of gold as reserves in the banks, and the reserves were much more easily replenished and increased than was possible with gold. In that way, indirectly as well as directly, the issues of the notes tended to raise general prices. All the world over, in spite of the war, indeed in a sense in consequence of the war, there was a great expansion of credit. But this expansion of credit was only made possible by a corresponding expansion of inconvertible notes.

The evils consequent on inflation which had been exemplified in former historical cases were observed in the World War and in the boom that followed up to the end of 1920. Any general rise in prices, from whatever causes arising, brings difficulties of readjustments, and these difficulties are increased when the main causes are connected with paper money. The reason is that the changes consequent on excessive issues of paper, especially if accompanied by excessive expansion of credits, are much more rapid and intense than when the changes are due to increases in the metal or metals used for standard money. A general rise in prices gives at first a relative advantage to traders and em- ployers of labour, as compared with consumers in general and the receivers of wages and salaries. During the World War wages in industries bearing on the war rose far more rapidly than had been the case in former experiences of inflation. At first the idea prevailed in the United Kingdom that the war would be of short duration, and throughout the dangers of defeat were so appalling that monetary considerations seemed relatively of no importance. No effective restraints were put on inflation. The workers soon learned that they had only to ask in order to have. The employers added any rise of wages to the cost, and to the cost as so determined added on again the usual or unusual percentage of profit. In war contracts the general rule seemed to be to calculate the contractors' profit as a percentage of cost, and with rising nominal cost profits rose automatically. When the enormous rise in profits was observed, an attempt was mack to catch the excess above the pre-war normal by the excess profits duty. But under the inflationist conditions that pre- vailed the imposition of this tax led again in many cases to a further rise in prices. The profit-makers were also imbued with the old belief that any tax that could be evaded ought to be evaded, at any rate by all lawful means. It seemed better business to increase expenses of various kinds (e.g. by provision for bonuses, for depreciation, etc.) rather than increase profits if two-thirds had to be surrendered to the State. The " profiteer-

ing " that arose out of the war was not due entirely to inflation, but it was magnified by th(inflation. In many cases, however, the extra profit earned in the war was no more than fair economic remuneration for the services rendered, and in some cases the war profit was low compared with what might have been reason- ably expected. In the modern industrial State enterprise can- not be made a matter of routine, and the so-called unearned increment is a necessary and cheap stimulus. In the war the need for speed and quick adjustments was overwhelming. If inflation and excess profits were requisite for the sake of speed, they may indeed be considered as evils but as necessary evils.

It was only after the war when the danger to the national existence had passed away that those who had suffered from the maladjustments of inflation began to complain. Industrial unrest became rampant in every country. The rise in nominal wages in the best of cases had not much exceeded the rise in the cost of living and in some cases it had fallen below. The rise in prices came to be greater in the conventional necessaries of the various classes than in the necessaries commonly so-called. The middle classes suffered far more than the lower wage-earners. A large part of them passed into the ranks of the new poor.. It is the middle classes who provide normally the greater part of the brain power of the country in education and the professions and in the advancement of the arts and sciences. During the war they also had provided the greater part of the brain power for the armies and navies. It was galling to the new poor to observe that in the redistribution consequent on the rise in prices their position had been changed for the worse for the advancement of all kinds of " profiteers." Industrial unrest amongst the manual working classes spread to the brain-working classes. By the beginning of 1921 the new poor had been driven, partly by need and partly by disgust, to rebel against the high prices. There were new poor in all countries. A general crisis arose from the side of demand. The effect on wholesale prices was soon apparent in the fall in the index numbers. But for long there was only a partial readjustment in retail prices. In spite of the buyers' boycott retail prices moved but little. This was mainly due to the absence of bona-fide competition. The absence of competition spells the growth of monopoly.

During the war there was in the United Kingdom a great growth of trusts. The report of the Committee on Trusts tried to show that little of the rise in prices was to be attributed to the trusts, and that from the governmental standpoint in carry- ing on the war the trusts had been useful. It had been found more easy to bargain with a combine than with a number of separate bodies. This view of the trusts also found favour with people of socialist leanings, who thought that the growth of the trusts would be indirectly favourable to the socialistic ideal. When the trusts came to own the business of the nation, it would be time for the nation to own the trusts. Whether these favourable opinions of the growth of trusts were sound or not during the period of the actnal war, the popular belief is that the fall in wholesale prices after 1920 was prevented from spreading down to the ordinary consumers largely by the influ- ence of the great combines. No official information is, indeed, available to test this belief. In all times there has been a natural dislike of monopolies. This dislike, however, is largely founded on the belief that monopolies mean high prices. The growth of the trusts has been accompanied by a considerable dilution of capital and by a great rise in the rate of interest. The boom after the war was marked by excessive issues of new companies which were largely amalgamations. These amalgamations involved the payment of high interest to the constituent com- panies. New capital was attracted to provide the connective tissue for these constituent companies, and this again could only be attracted by high interest. The post-war boom was marked by a great increase of interest on industrial preferences and de- bentures. Here again was a reason for keeping up prices.

Deflation. The question how prices were to fall when inter- est had to be higher leads to a consideration of deflation. Defla- tion, as the name implies, is the reverse of inflation. With this meaning it must involve the restoration of the effective