policy was ineffective. Over-issue resulted everywhere, and over-issue led inevitably to inflation. The value of paper money depreciated because its scarcity was not adequately controlled. Inflation and Deflation in the United States Since 1913.-The United States differed from other countries in that her inflation due to the war was gold inflation whereas theirs was paper inflation. The United States adhered to convertibility of notes into gold. This was at all times a drastic check upon over-issue of notes and over-expansion of bank credit. It was not a perfect check. It was not an adequate check. It was not a check which prevented inflation. But the inflation which came in the gold standard United States was less severe and less disastrous than the inflation which came in the paper standard countries of the world. Gold inflation was bad enough, but paper inflation at its mildest was worse and at its severest was infinitely worse. The reasons why the check of gold convertibility did not prevent inflation altogether in the United States were threefold. First, gold was withdrawn from circulation as much as possible and concentrated in the reserves of the banks as a basis for credit and note expansion. Second, gold was imported from European countries, in payment for the heavy shipments of war and post-war goods which they were buying from the United States. Both movements served to swell the gold reserves as they had never been swollen before. Third, the ratio of gold reserves to credit was made thinner than ever before. The reserve ratios required of national banks in central reserve cities had been 25 per cent of all deposits, in reserve cities 25 per cent, in other cities and towns 15 per cent. The new reserves against demand deposits in banks in these three classes of cities were 13, 10, and 7 per cent, respectively. The reserves against time deposits were 3 per cent for all cities alike. The threefold forces worked strongly in the direction of gold inflation. The banks were flooded with greater supplies of gold than ever before, and each dollar of gold would support more dollars of credit than ever before. The foundation for gold inflation was firmly laid in these underlying changes. The actual price history of the United States from 1913 to 1923 is shown in the following index of wholesale prices as compiled by the Bureau of Labor Statistics. The monthly indexes for 1920 are given because that year marked the turning point from rising prices to falling prices, from inflation to deflation. Year INDEX OF WHOLESALE PRICES IN THE UNITED STATES From this table it is apparent that the rise of prices started before the United States entered the war, accelerated while she was in the war, and reached a climax two and one-half years after the war. The turning point from rising to falling prices was reached in the middle of 1920. By 1921 the price level was down to 147 as compared with 247 in May of 1920 and with 100 in 1913. Following 1921, the price index fluctuated moderately above and below a point about 50 per cent above the pre-war level. . The close relationship between the inflation which culminated in 1920 and the expansion of notes and bank credits is indicated by the following table: *See E. W. Kemmerer, High Prices and Deflation, pp. 7, 12, 27, and George R. Davies, Introduction to Economic Statistics, pp. 88, 90, 99. To summarize the inflation from 1913 to 1920, we find that during these seven years the physical volume of business increased approximately 11 per cent, the monetary circulation 78 per cent, bank deposits 139 per cent, and the wholesale price level 126 per cent. The striking fact is that in the midst of the many abnormalities of the period, the price level corresponded roughly and approximately to changes in the volume of money and credit. The rise in prices was made possible by the rise in the quantity of media of exchange. WHOLESALE PRICES COMPARED WITH NOTES IN CIRCULATION IN VARIOUS COUNTRIES FOLLOWING 1913 * Compiled from Memorandum on Currency, 1913-1923, issued by the League of Nations; from the London Economist, Monthly Supplement; and from European Currency and Finance, Commission of Gold and Silver Inquiry, United States Senate, 1925. The causes of the deflation which began in 1920 were closely interwoven with the causes which bring about crisis and depression in any business cycle. The general nature of these causes is discussed separately in the chapter dealing with business cycles. This particular period of deflation was, however, sharply aggravated by the extraordinary inheritance of war-time influences which was carried over into the years 1919 and 1920. The deflation of 1920 was due to the forces of the business cycle plus the left-over forces of the war. These forces were international as well as domestic. An abnormal export demand for American products had been sustained after the war by the reckless extension of credit to European buyers. An abnormal domestic demand for goods had been stimulated by a wave of extravagance and speculation when men were released from active service in the Army and Navy and when the psychological reaction from war-time thrift had a chance to assert itself. This abnormal foreign and domestic demand was supported by a great expansion of bank credits. The credit strain led to advances in Federal Reserve discount rates in December, 1919, and further advances during 1920. Rising interest rates acted as a check upon abnormal market demand. Large accumulated stocks of goods had to be thrown upon the markets, producing a general commodity liquidation. Orders both at home and abroad were cancelled on a tremendous scale. Production declined, markets were disorganized, and prices fell from 247 in May, 1920, to an average of 147 for the year 1921. The deflation was the inevitable reaction from the war-time and cyclical inflation. WHOLESALE PRICES COMPARED WITH NOTES IN CIRCULATION IN VARIOUS COUNTRIES FOLLOWING 1913 (Cont.) Reliable price indexes for Russia throughout this period are not available, and indexes for this country are therefore omitted. Price inflation, however, is known to have been extreme, having been exceeded only by that of Germany. World Inflation and Deflation Since 1913.-The price movements of various leading countries are traced in the following table. Side by side with the price movements are traced the fluctuations of notes in circulation. Note issues are not a perfect measure of the rate of change in bank deposits, but in a rough and general way, they do reflect the changes in such deposits and in the total medium of exchange. Comparisons of price and money movements are here made not for the sake of proving an exact and precise correspondence between the two but for the sake of showing the general and fundamental correspondence. The table makes clear the fact that the great war and post-war inflation was made possible by the great increase of the supply of money. This money was fiat money, inconvertible and irredeemable in gold. Interwoven with the increase in paper notes was a corresponding increase in bank credits. Each fresh expansion of notes and credits raised prices. Each rise of prices called for more notes and credits with which to do business. A vicious spiral of inflation was the result. Each rise of prices called for more money issue. Each rise of money issue called forth a further rise in prices. WHOLESALE PRICES COMPARED WITH NOTES IN CIRCULATION IN VARIOUS COUNTRIES FOLLOWING 1913 (Cont.) *September, 1924. † Reichsmarks in December, 1924. One reichsmark equals one trillion old paper marks. These estimates show that English, French, and Italian prices rose more severely than United States prices in 1920 and failed to fall to the same level as those of the United States after 1920. The worst disasters of inflation occurred in Russia and Germany. In these countries. inflation became steadily more and more disastrous 'after 1920. Not until 1923 and 1924 did these countries curb their issues of fiat paper, and reconstruct their currency systems. The reconstruction in each case was some form of return to gold backing as a check upon the issue of paper money. The early stages of inflation were very mild in comparison with the |