they are not fixed. A given quantity, M, will have more or less effect on P according as people's minds are oppressed with fear or inspired with faith. The human equation is fully as important as the algebraic equation. In cyclical movements, the human equation has to be reckoned with.9

Additional applications of value theory will be made in each of the three following chapters, and details of the theory will be elaborated more concretely.

The Importance of Price Fluctuations.-Price movements are important chiefly because they affect different business classes and interests unequally. If such movements were uniform in the various lines of production and trade, they would offer little harm to business. If they occurred at the same time, and at the same rate, and to the same degree,

The index of prices used is the United States Bureau of Labor Statistics all commodities index. The index of bank credit is derived from quarterly reports on total loans and investments of all member banks. The relations between M, i.e., bank credit, and P, i.e., prices, may be summarized as follows:

Beginning of price decline, May, 1920.

End of price decline, January, 1922.

Per cent of price decline, 44.2 per cent.

Beginning of bank credit decline, November, 1920.

End of bank credit decline, March, 1922.

Per cent of bank credit decline, 9.6 per cent.

Lag of bank credit behind prices, 6 months.

Prices turned upward in January, 1922, but bank credit did not turn upward until March, 1922. The lag of bank credit was two months. The analysis usually seeks to find whether a rise in M causes a change in P or vice versa. It may be more significant to inquire whether M permits a change in prices. A rise in prices would be called to a halt if bank credit were adequately restrained. Even in those cyclical movements where M does not cause P, it nevertheless may permit P to change. In that case, a control of M would make possible a control of P.

See Federal Reserve Bulletin, Volume IX, 1923, pp. 1-4.

9 See also below, pp. 587-89, in a discussion of business cycles.

in all branches of the economic system, they would be a minor problem. But the cardinal feature of price movements is precisely that they move with glaring inequality, that they are never uniform for different trades, and that they affect scarcely any two branches of industry in the same way. In short, price changes are important mainly because of their inequality.

This inequality may be measured from the standpoint of various business interests. Debtors and creditors are affected unequally by price changes. If a creditor lends today $1,000 and prices rise 100 per cent, when the loan is paid back the same number of dollars will be paid back but only one-half the purchasing power. The creditor will lose in terms of purchasing power one-half of the value of his money at the time he loaned it. What the creditor will lose, the debtor will gain. In times of rising prices, all lenders stand to lose, whereas all borrowers stand to gain. Conversely, in times of falling prices, borrowers stand to lose whereas lenders stand to gain. Inasmuch as an essential feature of capitalism is that nearly all business is done by borrowing and lending, this inequality of price changes as between debtors and creditors is of basic importance. If all business were done on a strictly cash and carry basis, there would be little to worry about. But the very fact that the bulk of all business is done on a credit and loan basis makes the inequality of price movements of the greatest concern.

When prices are rising, all people who practice thrift tend to lose. As savers and investors they are lenders of capital, and during rising prices lenders lose. The dollar is steadily depreciating in value. All depositors in savings banks lose. All buyers of life insurance lose. All buyers of bonds lose. The reward for their prudence and thrift is loss through depreciation of the dollar. If a working man had saved $1,000 in 1913 and had put it in a savings bank for safe keeping, in 1924 the purchasing power of the principal would have been barely two-thirds what it was in 1913. If a prudent man had left to his family at his death in 1913 a bequest calculated to give them a net income of $3,000 annually, the family would have received in 1924 an income which in purchasing power would have been only two-thirds that amount. If a man bought bonds in 1896 and held them until 1920, the value of the principal was less than one-third in the latter year what it had been at the start. What savers and lenders lose through inflation, borrowers gain. People fall into the belief that they can buy "gilt-edged bonds, "fixed incomes," conservative investments of permanent value. They are utterly deluded. The most conservative investments are the worst sufferers when inflation sets in. All over Europe, the pre-war savings of the middle classes, invested in bonds, mortgages, or bank deposits, were wiped out almost entirely, as a direct result of the violent inflation in the continental countries. Inflation made a bitter tragedy in the lives of all those who had worked the hardest and saved the most conscientiously. Against the ravages of inflation, property savings have no protection. There is no such thing as security of property in the

face of inflation. The guarantees of the Constitution that no person shall be deprived of property without due process of law are absolutely without avail when people are deprived of their property on a gigantic scale by changes in the value of money. People excoriate the Bolsheviki for confiscation of property in Russia, but the confiscation of the property of all capitalistic savers by the hand of inflation is no less damaging. The injustice and disaster that ensue from the inequalities of inflation are nowhere more poignant than in the lives of those who save and invest.

The enterpriser in business tends to gain while savers lose. He borrows what they lend. During rising prices, business profits tend to increase. Business expenses are incurred on the level of today's low prices, but receipts are gathered in at tomorrow's high prices. Corporations borrow capital today, and when they pay back the capital tomorrow, they return the same number of dollars, but not the same amount of purchasing power. In the meantime each dollar has depreciated in value. Materials bought low today are sold high a few months later. When inflation becomes extreme, business men amass fortunes by borrowing to the limit on today's price scale, and repaying on tomorrow's price scale with depreciated money units worth a slight fraction of their former value. The famous fortune of Hugo Stinnes in Germany was built up in large measure by just this process of borrowing in good marks and repaying in practically worthless marks. Owing to the inflationary gains of business, the charge of profiteering is fastened upon the heads of business men during rising prices. Prosecuting attorneys try to suppress rising profits by legal restraint. Legislators try to pass stringent laws to curb the profiteers. Demagogues and agitators inflame the minds of the people against business men generally. But what they all fail to grasp is the fact that profiteering so called is not a sign of special avarice or wickedness but is merely a sign of the depreciating value of the dollar. The so-called profiteer is a consequence, not a cause, of the hated rise of prices. Even his extra profits are often profits extra in name but not in fact. If business makes twice as many dollars of profit, but each dollar has only half its former purchasing power, business has made no gain in real profits. When deflation occurs, on the other hand, profits dwindle and business men lose. Bankruptcies and failures increase. The inequalities of price changes increase the business man's risks enormously and unsettle his calculations. Stability of money value is therefore of fundamental importance to the business. men as a class.

The laboring classes suffer from price changes as heavily as any single group. While prices are rising, they find that wages lag behind. The cost of living becomes harder to meet. Strikes occur to force wage increases. While prices are falling, wages tend to fall more slowly. Employers, in order to reduce expenses, propose cuts in wages. Strikes then occur to resist wage decreases. Labor has to be on the war path the whole time, whether prices are going up or down. If prices are going

up, labor strikes to bring wages up. If prices are going down, labor strikes to keep wages up. Continuous unrest and discontent surround the entire process. But even more serious than wage difficulties is unemployment. When prices are rising, labor tends to be fully employed. But when the reaction comes, and prices are falling, labor is thrown out of employment. When the reaction of 1920 came, upwards of six million laborers were unemployed in the United States. An army of unemployed tends to become an army of discontent, an army of radicals. Statesmen lecture to the masses upon the wickedness of radicalism and warn the public that revolution is a menace of the hour. But one thing they neglect, and that the most important thing, namely, that the evils which cause their alarm largely flow from the changes in the value of the dollar, the changes in the cost of living, the changes in the purchasing power of wages, the changes of employment which accompany the reaction from inflation. A great part of labor unrest is due, not to the alleged wilful greed of labor, but to the inequality of price changes which falls with heavy hand upon the working classes. Stability of the value of money is, therefore, of the utmost importance to labor.

When prices are rising, farmers like other business classes feel prosperous, but when deflation comes they are among the heaviest sufferers. A farmer who took out a mortgage on his farm in 1896 found it easier and easier to pay off principal and interest as the dollar steadily depreciated up to 1919. But a farmer who took out a mortgage in 1919 lost heavily in the drastic deflation which occurred during the next five years. Farmers all over Europe who were loaded down with pre-war mortgages threw off their burden of debt by payment to the landlords in depreciated franes, marks, or other fiat money units. On the other hand, farmers tend to suffer from taxation what they occasionally gain from inflation. Land values are assessed at high levels when prices rise. Later when prices fall, assessments tend to remain high and the burden of inflated taxation is severe.

Another class of business interests which suffers from inflation is public utilities. These industries have their rates regulated by public service commissions and such bodies as the Interstate Commerce Commission. Private industries may raise their prices ever so much, but public utilities cannot exceed what public regulation will allow. Meantime, all their expenses tend to rise just as fast as do the expenses of private industries. Since they cannot recoup their rising expenses by equally rising prices, they are unable to make a profit. All public utilities face a crisis when prices are rising. Bankruptcies multiply, and losses mount high. On the other hand, when prices tend to fall, public utilities are favorably situated since their rates tend to lag behind the fall of other prices. While deflation lasts, they improve their position at the expense of other industries.

The volume of production tends to increase when prices increase and to decrease when prices decrease. Inflation of a mild sort acts as a

stimulant to production. Deflation of a mild sort acts as a deterrent to production. This cause and effect connection often leads to the supposition that inflation is good for business and ought to be deliberately brought about. The difficulty occurs when inflation reaches an advanced form and brings on the reaction of deflation. After production reaches its maximum limit, the issuance of more money and credit does not in any way increase the output of wealth. It simply creates a fluctuation in the value of the dollar, a change in the measuring rod of value. More money thereafter cannot possibly increase production, but it can and does increase prices. The reaction to deflation eventually occurs, and is marked by unemployment, closed factories, and under-production. Consequently there is no net increase of wealth in the long run from the stimulant of inflation. Inflation is not a permanent basis of fundamental prosperity and production, but is only a fleeting show of these desirable ends. Production can be sustained at a normal maximum capacity only by approximate stability in the value of money itself.

All classes and groups which suffer from the inequalities of price changes are constantly faced with the necessity of adapting themselves to price maladjustments in all departments of business. Wholesale prices tend to move earlier, faster and further than retail prices. Wages and rents tend to lag behind commodity prices. Capital prices, in the form of interest rates, tend to move slowly and to move later than commodity prices. Taxes and property values move unequally. Commodities used by producers for further manufacture fluctuate differently from commodities used by consumers. When the price level is moving, the unequal changes in all these different lines destroy any normal balance between prices. Maladjustment ensues. Disturbance prevails. Price balance is utterly impossible as long as the value of money itself is unsteady.

Finally, it remains to be observed that the inequalities set in motion by inflation and deflation are influenced by the rate of the price movements. Very slow changes in price levels exert the same kind of influences as very fast changes, but to a much less degree. If prices rise only 1 to 2 per cent year, business can adjust itself to the change. If prices rise 5 to 10 per cent a year, business is seriously affected. If prices rise 50 to 100 per cent a year, business is critically affected. If, as in Germany, and other countries they rise thousands of per cent a year, business is disastrously affected. The speed of inflation or deflation is of vital importance, and the inequalities which flow from price changes are at their worst when the speed of such changes is at its highest.

From the illustrations that have been given, the vital importance of prices and of money value in the affairs of business should be evident. The inequalities of the effects of price changes are everywhere apparent. The inequalities as between debtors and creditors, as between investors and enterprisers, as between those who work for profits and those who work for wages, as between private industries and public utilities, as