of values of the same quantities of goods at their respective prices prevailing at different dates.
Whatever form of average is used, the results are approxi- mately thesame; exactitudeisnotexpected,for the numbersare but indexesof price changes.
Useful index numbers are those of the London Economist, Sauerbeck, Dun, Bradstreet, Gibson, the United States Bureau
of LaborStatistics, theCanadian DepartmentofLabor, andthe Annalist. The following table gives some of these numbers for recent years
:
Index Numbers
English American
Date London Economist
Sauerbeck Statist
Boardof Trade
Canadian Department
ofLabor
U.S.Bureau ofLabor Statistics
Gibson Bradstreet
1896 1950 1890 1918 2145 2126 1948 2003 2197 2136 2342 2499 2310 2197 2373 2513 2586 2580 2692 2658 3329 4216 5418 6036 6226
61 62 64 68 75 70 69 69 70 72 77 80 73 74 70 80 85 8S 8S 108 136 175 198 206
92S 92.2 96.1 100.
1
108.2 107.0 109.0 no.
5
111.
4
113.
8
120.0 126.2 120.8 121.
2
124.2 127.4 134.4 135.
5
136.
1
148.0 182.0 237.0 279-7 2939
90.4 89.7 93.4 lOI7 iti5 108.5 112.
9
113.
6
1130 115.
9
122.5 1295 122.8 126.
5
131.
6
129.2 133.6 135.2 133.8 135-2 166.3 236.6 266.3 286.6
34 34.7
387 41.6 44.2 44-5 S3-S 49.0 48.3 47.2 49.8 50.9 54.2 59.2 59.3 56.0 62.6 58.1 60.8 64.0 74.9 no.
8
122.8 121.
4
5.9124 6.ns9 65713 7.2100 7.8839 7.5746 7.8759 7.9364 7.9187 8.0987 8.4176 8.904s 8.0094 8.5153 8.9881 8.7129 9.1867 9.211S 8.998s 9.8531 n.8236 15.638s 18.7117 18.6642 1897
1898 1899 1900 1901 1902 1903 1904 190S 1906 1907 1908 1909 1910 1911 1912 1913 1914 191S 1916 1917 1918 T919
100.
96.7 96.4 96.9 98.2 97.6 100.8 106.0 103.0 104.
1
108.8 109.4 114.9 116.
5
117.
2
143.9 186.S 243.0 267.4 296.3
Inflation and Its Effects
According to the quantity theory of money, most exactly statedinProfessor Fisher's"equationofexchange."'anincreasein
money and bankcreditbeyondtheneedsoftrade at agivenprice level tendstoraisethat pricelevel. Suchis the commonconcep- tion of inflation. The equal and simultaneous movements of total purchasing power and trade would result in a stable price level. Totalpurchasingpowerhasbeen sho\Mi to be the sumof
two products, namely, the quantity of money in circulation multipHed by its efficiency (or velocity of circulation; and the quantity of bank deposits multipHed by their efficiency. If this total purchasing power remains the same but the quantity oftradedeclines, there v^illbeinflation. Ifthe quantityoftrade remains the same, theninflation may be caused byincreases in the quantity of moneyor of bank credit, orin their efficiencies.
There can be gold inflation as well as paper money inflation or bank credit inflation.
Itisquiteimpossibleto determinethe actual volimieofgoods thatenter into trade duringa certain periodin a complex coun- try like ours. The relative increase or decrease may. however, be approximated from certain indexes. The best barometers of trade,measuredinphysical unitsandnotindoUarsof value, are theproductionofthe basic materials,suchascoal,iron,petroleum, copper, silver, the production of agricultural commodities, the toimage of the railroads, the tonnage of vessels entered and clearedatlakeportsandseaports,thenumberofbuilding permits, and thenumberof shares tradedonthe stock exchanges.
The volumeofmoney in circulationand thatofbankdeposit currency, as well asthevelocityofbothof these,can bestatistically determined with a fair degree of exactne s. Professor Ir\-ing Fisher publishes annually the data for his "equation of ex- change." ProfessorKemmerer recentlypublished' the following indexesbearingupon warinflation:
*American EconomicRevirx,June1918.
RELATION OF BANK CREDIT TO PRICES Indexes Bearing on War Inflation
169
Money Gold
Total Clearings Cash Wholesale Union in &Gold Bank
Bank ReserveReserve Year Trade
Prices Wage Circu- Cer- Depos-
Clear- ofNew of Percent- Rates la-
tion
tifi-
cates its
ings York City Banks age
1910 93 99 96 95 92 90 100 94 9i 12.5
1911 95 97 98 98 98 94 97 96 98 12.6
1912 102 lOI 100 100 lor 102 106 103 lOI 12.0
1913 los 102 102 102 los 104 103 106 lOI II.
7
1914 104 lOI 105 106 105 no 94 102 106 II.
7
191S 108 102 106 III 119 118 114 109 116 II.
9
1916 113 125 109 125 150 147 159 144 130 10.7
1917 l2^ 178 117 148 18S 174 186 182 153 10.6
Undoubtedly the velocity of the circulation of money and that of deposits also increased during thisperiod. Combining the factors of purchasing power, itis very evidentthattheyin- creased faster than trade and explain the decided inflation of prices.
Inequalities of Inflation
Increases of money and bank credit, if used, tend to price inflation, buttheydonotinflateallpricesequallybecausethereis
notanequaldemandforallkindsofthingsorservices. Theinfla- tion comes not simply from an increase in the quantity of pur- chasing power, but from the increasing competitive efforts to exchange the money or credit for things and services; if no at-
tempt were made to use the enlarged purchasingfacihties there would be noeffectupon prices.
An abnormal demandformunitions,forinstance,and the use of almost unlimited supplies of money and credit incompetitive bidding during the years 1914-1919, caused a great increase in their price. Butthe price ofrealestatedidnotrisebecauselittle, ifany,ofthenewcreditwasused forpurchasingreal estate. The high profitin the manufacture of munitions tended to cause the transfer of capital from the development of real estate to the
manufactureofmunitions. Thisdriftofcapitalwas accompanied by a drift of laborers eager to earn the higher wages paid in munition factories. Employers in other lines of business then foundthat theyhadtogivetheiremployeeshigherwagestohold them;theyhadtobidforcapitalin likemanner. The demandfor
manyproductswasincreased by the higherpurchasingpower of the munition workersand manufacturers. In consequencethere followedanequalizationof wages andprices in thevariouslines;
thatis, theinflationbecamequite general.
It has been previously stated that in 1914-1918 real estate prices did not rise with the inflation because capital fimds were devotedlargely tootheruses. Nordidwages andsalariesrespond with suchuniformrapidityas the pricelevel ofgoods. This un- responsiveness was due to the same fact, viz., that, relatively speaking,lesswas spentupontheseitemsthanupongoods. The wage-earner lacks the ability to foresee the depreciation in the purchasingpower of hisearningsas theprices ofhisbudgetrise;
and even whenhe does foreseeit, histimidity oftenpreventshim fromwrestinga just advance from his employer. The simulta- neous advances ofwages and pricesisprevented bylack offore- sight, orbycustom,or contract, orunionwagebargain. Salaries respondstillmoreslowly. In timesofrising pricesthe employer
of labor is thereforeat an advantage and the employee finds his realearningpowerdeclining paripassuwiththerise.
InterestRate andInflation
Nor doesthe interest rate risein proportion to the inflation.
Theloaningclassislessshrewd andaptinsensing conditionsand
is usually content for a time to loan at, say, 3 per cent to bor- rowerswho wouldbewilling, ifnecessary, topay 5percent. The
enterprisers enjoy, therefore, the furtheradvantageof borrowing
moneyat theformer lowrates. This encourages borrowing, and thereby the creation of more deposits; and these in turn swell prices still higher and make borrowing still more advantageous.