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later stages. During a single year, ending early in 1923, the world's note circulation outside of Russia increased ten times. In a single year Austria's note circulation increased seventeen times, Germany's thirtyfive times, and Russia's forty times. At one period, Germany doubled her note circulation in a single week. This rapid rate of inflation destroyed the last shreds of public confidence in the paper marks, rubles, and kronen. The events of the period brought out clearly that the rate of inflation has a great deal to do with the consequences of inflation. Slow inflation may work injury, but it can be endured and coped with. Swift inflation works disaster, and can neither be endured nor coped with.



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It is possible to measure the evil that flows from rapid inflation by determining the total purchasing value of the currency as a whole from period to period. In the early stages of inflation, the value of each unit of paper money depreciates, but only in approximate proportion to the number of new units issued. In the later stages, the value of each unit of paper money falls much faster than the number of units increases. In the final stages of the process, the purchasing power of each unit becomes almost infinitesimal, and the purchasing power of the whole currency becomes too small to handle the business of the country. In January, 1919, the dollar value of the total mark circulation at the current rate of exchange was about $4,000,000,000 but by the end of 1923 the dollar value of the total mark circulation was less than $100,000,000. In the latter year sextillions of marks were in circulation, but the purchasing power of each mark had fallen so much faster than the supply of marks from the printing presses had risen that the total value of the currency shrank to insignificant size. A note circulation worth less than $100,000,000 was utterly inadequate to carry on the business of the German nation. The decline in the value in dollars of the total circulation of marks is shown in the diagram on

page 549.16

Under similar influences, the value of the total circulation of paper rubles in Russia fell to a low point of less than $20,000,000 in 1922. Austria, Hungary, and other nations met the same financial fate. Inflation could not go on endlessly. It came to a point where it defeated itself. This point was one of diminishing returns. Additional increments of paper money yielded less total purchasing power than the currency of the country possessed in the first place. If France, Eng. land, and various other countries of Europe failed to reach this final stage of inflation, it was solely because they called a halt to their note issues before it was too late. They stopped issuing additional paper notes, and this self-restraint alone averted the complete money collapse which eventuated in Russia, Germany, and other countries.

The financial collapse brought untold social suffering in Germany and Russia, but these human costs need not be discussed at this point. It is sufficient here to make clear that as a source of government revenue, inflation eventually dissipated itself. From the first we have stressed the fact that war inflation was a means of raising purchasing power for the governments. The new money eventually failed even of this fiscal purpose. For example, when during a single week in Germany quintillions of marks were issued and the total number of marks was doubled, the revenue so raised was equivalent to only $15,000,000. When doubling the money circulation would yield only this meager amount of revenue, the last bitter drops had been drained from the revenue possibilities of inflation. Ultimately, inflation collapsed as a revenue measure. addition to all its other havoc, inflation finally failed utterly even as a form of fiscal policy.

The reaction from inflation did not occur at the same time or in the same degree in different countries. One group of countries, consisting of England and of the European neutral countries, began a genuine process of deflation in 1920. They contracted their currency issues, and experienced a positive fall in prices. This fall did not, however, bring prices down to the level reached by the United States. The first return to gold convertibility by any European country occurred April 1, 1924, when the Swedish Riksbank resumed redemption of its notes in gold. Great Britain returned to the gold standard at pre-war parity in May, 1925. Her return was accompanied by similar action by Australia, New Zealand, the Netherlands, the Dutch East Indies, and South Africa. A second group of countries is illustrated by France and Italy. In 1920 and 1921, these countries arrested the expansion of their cur. rencies, and brought about a mild recession of prices. However, their price levels remained from 400 to 600 per cent above the pre-war point. If such countries were to return to gold convertibility, they would be

16 From data of the Federal Reserve Bank of New York.


obliged to do so at new rates of conversion whereby several paper francs or lira would be exchangeable for one pre-war gold unit.

A third group of countries includes such extreme examples of inflation as Germany, Austria, Hungary, and Russia. Austria and Hungary were salvaged by the aid of the League of Nations. Under the auspices of the League, a loan of $125,000,000 was raised from outside countries for Austria and a loan of $50,000,000 for Hungary. These loans served to cover deficits until budgets could be balanced, and to strengthen bank reserves. Balancing of budgets was further facilitated by sharp cutting of government expenditures and by increasing taxes. New banks of issue were created, independent of the governments of these countries, and endowed with sole powers of note issue. Foreign exchanges and internal price levels were stabilized by proper limitation of the quantity of note issue. An impartial commissioner from the outside was brought in to supervise the whole plan of financial reconstruction. By balancing the budgets and stabilizing the currencies of these countries, the League plan restored a more normal activity in business and a fair degree of prosperity in both foreign and domestic trade.

Germany, after preliminary attempts at financial reconstruction, finally adopted in 1924 substantially the policies which were formulated by the Dawes Commission. A loan of 800,000,000 gold marks was floated abroad. This fund aided in meeting the budgetary deficit until the budget could be properly balanced, and meantime supplied reserves for the central bank. A new central bank was created, the Reichsbank, independent of the government, and endowed with a monopoly of note issue. Borrowing by the Treasury from the central bank, which had been the principal occasion for the issue of paper marks, came to an end. A new money unit, the reichsmark, was adopted, equivalent to one former gold mark, and exchangeable for outstanding fiat marks at the ratio of 1,000,000,000,000 (one trillion) paper marks per new reichsmark. The old paper marks were required to be withdrawn from circulation. The new bank was required to maintain 40 per cent reserves against notes in circulation, in the form of gold and foreign exchange. A substantial part of the reserves was allowed to remain in foreign financial centers, principally London and New York. This form of redemption of note issue in gold or gold exchange on foreign countries amounted substantially to the adoption of the gold exchange standard until such time as the complete gold standard might prove feasible. Stabilization of the currency was the objective, and as in the case of Austria and Hungary, such stabilization was closely interwoven with the balancing of the budget.

Russia chose her individual way of escape from the coils of inflation. Two kinds of notes were allowed in circulation side by side. State notes of limited quantity were issued mainly for hand to hand circulation in retail transactions. They were supplemented by new copper and silver coins. The standard money in domestic business and in foreign trade was a new unit, the chervonetz, equivalent to ten pre-war gold rubles. In February, 1924, the issue of Soviet paper rubles was prohibited, and outstanding rubles were to be withdrawn from circulation at the ratio of 50,000,000,000 original Soviet rubles per gold ruble. A new State Bank was created, with the power to issue chervonetz notes. The required backing for these notes was 25 per cent gold and gold exchange, and 75 per cent commercial paper. The gold cover, although not at first restoring the full gold standard, nevertheless served as a definite check upon note issue. This check put a stop to inflation, introduced stability into the currency, and laid the foundation for business confidence and expansion of production. Simultaneously, plans were formed for reducing the public deficit and balancing the budget as rapidly as possible.

Certain common features of reconstruction appear in the third group of countries, where inflation worked its severest ravages. First of all, each country had to stop the printing of paper money. No recovery was possible until the printing presses were stopped. Secondly, each country provided some form of gold cover as a means of restricting the future issue of notes. Gold backing was looked upon as the only adequate check upon excessive note issue. This gold backing was looked upon in each case as a preliminary step toward the ultimate restoration of the gold standard. Thirdly, the budget in each case had to balance. Inflation started as a fiscal measure to meet deficits in the budget. Inflation ended by making note issue independent of fiscal policy and by balancing the budget through economy of expenditure and adequacy of taxation.


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The World's Monetary Problems.
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- The Purchasing Power of Money.
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The Classes of Banking Institutions.—The commercial banks are the most numerous and in many respects the most important of all banking institutions. In the United States, there are in the vicinity of thirty thousand commercial banks in active operation. Their primary activity is the making of short time loans to individuals engaged in some branch of industry or trade. The short time loans supply business with circulating, or working, capital. Although this is the primary work of commercial banks, it is not the only important work. They supply a certain amount of investment credit to business. Recent tendencies have increased the investment services of such banks. A considerable portion of their resources is tied up in long term loans for fixed capital purposes. They buy large quantities of securities.

Four incidental activities of commercial banks may also be mentioned. First, they provide vaults for the safe keeping of important papers, money, or valuables of any sort. Second, many of them perform the functions of a trustee, and act as administrator, executor, registrar, transfer agent, assignee, receiver, or guardian. Third, many of them issue bank notes, under government restrictions, to serve as part of the circulating currency of the country. Fourth, they provide facilities for the care and handling of money. They receive deposits, keep checking accounts, pay out money where due, and deal in drafts and bills of exchange. The tendency has been for commercial banks to broaden their functions, and instead of specializing in purely short time loans, to enter upon the duties of trustees and of investment bankers.

However, when long time loans are involved, the main institutions are investment banks. These banks are specialists in providing fixed capital for modern industry. They take over the bonds and stocks of corporations, and sell them to the investing public. Some of the larger commercial banks have established subsidiary corporations to carry on an investment banking business.

Savings banks and insurance companies gather the relatively small savings of individuals into an aggregate fund which can be invested in safe long time securities. Many commercial banks conduct a savings department.

Trust companies assume the duties of trustee, administrator, executor, receiver, and the like. These duties have become indispensable under the modern régime of corporate property and complex legal restrictions upon the management of property. Many commercial banks incidentally

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